A 15-Year Mortgage Can Save You $190K … But Can You Get One?

Sure, it will keep your monthly payments low, but it will end up costing you a lot in the long run. Here are the pros and cons of a 50-year mortgage.

You may wonder, Is a 15-year fixed mortgage worth it? Our answer: absolutely. It’s one of the best ways to eliminate your mortgage debt, and you can save thousands on interest payments.

For instance, consider the staggering difference between a 30-year mortgage and 15-year mortgage, both for $400,000. At an average of 4% interest on a 30-year mortgage, you’ll pay an extra $287,487 over the life of the loan. But with a shorter 15-year mortgage, you’ll pay only $97,218 of interest. That’s a shattering savings of $190,269!

We’ve listed a handful of pros and cons for getting a 15-year mortgage instead of a 30-year mortgage, and we’ll also discuss how to determine if a 15-year home loan is a smart move for you.

Pros and Cons of 15-Year Mortgages over 30-Year Mortgages

Pros

+ Faster to pay off

+ Less accumulated interest

 

Cons

– Higher monthly payments

– Decreased mortgage interest tax deduction

 

Should I Get a 15-Year Mortgage?

The concept of the 15-year mortgage for most is I’m going to bite, chew, and claw my way through a short-term, higher mortgage payment to get to a brighter future.

In today’s interest rate environment, a 15-year mortgage has undeniable mass appeal. We’ve already discussed the difference in interest costs between 30-year and 15-year mortgages. But you should also consider what being mortgage-free will mean for your future.

Consumers who are in a financial position to handle a higher loan payment—while continuing to grow their savings—are well-suited for a 15-year mortgage. Some people whose income is poised to rise or whose debt will soon decrease are also good candidates for a 15-year loan.

A specific demographic that can benefit significantly from a 15-year mortgage is those who will retire in under 30 years. Carrying a mortgage into retirement isn’t ideal. So these consumers might opt to pay off a mortgage faster than someone buying a house for the first time.

To sum it up, consider a 15-year mortgage if any of the following apply to you:

  • You don’t want this debt hanging over you in the future.
  • You have a strong income.
  • You will soon see an increase in income.
  • Your debt will soon decrease.
  • You’re planning to retire in less than 30 years.

How Do I Know I’m Financially Ready for a 15-Year Mortgage?

In most cases, you’ll need a strong income for an approval. When you switch from a 30-year mortgage to a 15-year fixed-rate loan, you’ll pay down the loan in half the amount of time. But doing so can also double your monthly payments during the 180-month term—and it can also lower your mortgage interest tax deduction.

So how much income are we talking? Well, your income will have to support the larger carrying costs of a home. And if you have other debts with a monthly payment, like cars, installment loans, or credit obligations, you should factor those in as well.

If you’re interested in a 15-year mortgage but don’t feel financially stable enough to take on the higher monthly premiums, don’t give up hope. There are things you can do to improve your finances to take on a 15-year mortgage.

How Can I Improve My Financial Stability for a 15-Year Mortgage?

There are at least three ways to improve your capacity to take on a 15-year mortgage: pay off your debts, borrow less, and generate extra cash.

1. Pay Off Your Debts

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

For a preview on how they’ll see your application, take your proposed total monthly payment for a 15-year mortgage payment and add that to the minimum monthly payments for all your other consumer obligations. Divide the sum by 0.45.

(total monthly mortgage payment + consumer obligations) ÷ 0.45 = minimum income

This formula will give you the minimum monthly income you’ll need to offset a 15-year mortgage. If you make anything less than that, you probably won’t qualify for a 15-year home loan.

But because your current debt factors into this formula, paying off debt can easily reduce the amount of income necessary to qualify. And getting rid of debt can also cut down how much you need to borrow because you can save up a larger down payment at a faster rate.

2. Borrow Less

Borrowing a smaller home loan is a guaranteed way to keep a lid on your monthly outflow. You’ll maintain a healthy alignment with your income, housing, and living expenses.

Got extra cash in the bank? If you don’t have an immediate purpose for the money in your bank account beyond your savings reserves, use the funds to put down a larger down payment and reduce your mortgage amount.

With a bigger down payment, your monthly payments will be more manageable, so you’ll pay less in interest expenses over the life of the loan. Borrowing less and putting down a larger down payment are great ways to make your money work for you.

3. Generate Extra Cash

Accessing additional cash can improve your financial situation. Do you have assets like stocks you can sell or a money-market fund you can trade out of? With extra money, you can pay off debts or apply for a smaller mortgage—as we discussed above.

You can also get additional funds from selling another property. If you have a property you’ve been planning to sell, like a previous home, any additional cash generated from selling that property could put you in a better position when moving into a 15-year mortgage.

What Alternative Options Are There?

Borrowing a 15-year home loan isn’t realistic for everyone. You may want to consider a 25-year or 20-year mortgage as an alternative option.

Another school of thought is to simply make larger payments on a 30-year mortgage every month. This is a fantastic way to save substantial interest over the term of the loan, since larger-than-anticipated monthly payments will go to your principal payments, so you’ll owe less in interest in the end. You can even start with a 15-year mortgage and refinance your home at a later date to a 30-year home loan should your finances change.

Keep in mind that to qualify for the best interest rates on a mortgage (which will have a big impact on your monthly payment), you need a great credit score as well. You can check your credit scores for free on Credit.com every month, and you can get your credit report at no cost to you.

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How to Determine Your House Payment: The Quick Formula

mortgage payment

When you’re shopping for a house and considering a mortgage loan, establishing what you can afford for house payments can be a lengthy process. You have to run calculations, get updated payment scenarios from your mortgage company, and determine whether or not you can qualify.

With all these moving parts, we hope it comes as a relief to hear there’s a simpler way to calculate a home payment. This simple solution will be a huge help in a competitive market that doesn’t allow for extended number crunching.

Terms to Know

Before we get into the nitty-gritty, it will be helpful to know these two key terms when using our easy house payment formula.

1. House Payment or PITI

PITI is an initialism used to reference the four factors that influence your monthly house payment:

  • Principle is the amount borrowed, specifically how much of your loan you’re scheduled to pay off each month.
  • Interest is how much it costs to use your loan, and your monthly payment is based on your interest rates.
  • Taxes refer to the property taxes rolled into your monthly house payment and are sometimes called an escrow or impound account.
  • Insurance is the amount of the mortgage payment that goes toward hazard and fire insurance.

2. Debt-to-Income Ratio (DTI)

Important for determining how easily you’ll be able to pay off your debts, the DTI is the percentage of your total monthly debt against your monthly income. In math terms, it looks like this:

(PITI + monthly liabilities) ÷ monthly income = DTI

Most lenders prefer your DTI stays at or under 45%, so it’s important to consider your other monthly liabilities alongside your PITI when getting a mortgage.

The Basic House Payment Calculations Most Lenders Won’t Share

Now that you’re familiar with PITI and DTI, you’re ready for this simple truth: for each $100,000 you borrow, expect a monthly mortgage payment, or PITI, of $725.

It’s true! In most cases, your principal, interest, property taxes, and home insurance for $100,000 will come out to about $725 each month. Here’s a handy table for reference:

Amount Borrowed Approximate PITI
$100,000 $725
$200,000 $1,450
$300,000 $2,175
$400,000 $2,900
$500,000 $3,625

 

You can easily add half of $725 (that’s $362.50) if you’re trying to calculate for an extra $50,000. Or you can divide the loan amount by $100,000 and multiply the result by $725 to get the estimated PITI for your loan.

The Ins and Outs of Calculating PITI

Let’s look at an example. Say you want to buy a $350,000 home. You want to know whether the payment is affordable and whether you’ll meet your lender’s debt ratio thresholds.

Pretend you already have a 20% down payment ready, which is $70,000 for a $350,000 home. So in total, you’ll be borrowing $280,000. Divide that by $100,000 and you get 2.8. Using this information, the basic house payment formula will look like this:

$725 x 2.8 = $2,030

To spell it out, we know that when you borrow $100,000, your PITI will be about $725 per month. When we divide $280,000 by $100,000, we get 2.8. Similarly to how multiplying $100,000 by 2.8 will result in the full loan amount, multiplying $725 by 2.8 will give us the total PITI amount. So the total PITI would be $2,030 per month.

The Ins and Outs of Calculating DTI

Once you’ve calculated the PITI, make sure you’ve got a debt-to-income ratio a lender will approve of. Remember, the highest DTI most lenders will allow is 45%. Continuing with our example and using an income of $4,750, here’s how to find the DTI for a $2,030 PITI if you have no other monthly liabilities:

$2,030 ÷ $4,750 = 42.74%

As you can see, you simply divide the PITI by your income. In this case, the result is 42.74%, which is low enough to possibly qualify for a loan.

The Application of Monthly Liabilities

Remember to include any other monthly liabilities you have when you calculate your DTI. Let’s see if you can still reasonably afford the house with hypothetical monthly liabilities.

Pretend you have a car lease payment of $300 a month and credit card payments of $80 a month. This changes our previous DTI formula like so:

($2,030 + $300 + $80) ÷ $4,750 = 50.74%

With those debts, you would have a 50.74% DTI, which means you likely wouldn’t qualify for that large of a loan. That’s a rather different situation, so don’t forget to include your monthly liabilities when calculating DTI.

Personalizing Your DTI

Your monthly income and expenses may be very different from our hypothetical scenario. Try plugging in your PITI with the formula below to get your personal DTI, and make sure it’s below 45%:

(PITI + monthly liabilities) ÷ monthly income = DTI

Remember, even if your DTI is below 45%, you need to consider your lifestyle and other living costs when deciding on a home. Are you willing to be house poor for a large mortgage, or will you be just as happy with less home and more spending money each month? The choice is up to you!

Factors Beyond the Formula

Our formulas for PITI and DTI are best for a solid estimation, but they’re not exact for every unique situation. Here are some other factors that will affect your monthly house payments:

  • Private mortgage insurance (PMI) comes into play when you have a down payment under 20%. PMI helps lenders offset the risk of you defaulting on the mortgage.
  • Large down payments, on the other hand, will positively influence your borrowing power.
  • Assets and reserves need to be disclosed to most lenders, and you’ll need two months or more of PITI in the bank to meet their requirements.
  • Credit scores can influence interest rates, and if your score is below 620, you may not qualify for a home loan. Every month, check your credit scores for free on Credit.com to see where you stand.

If you’re thinking of buying a home or are currently preparing to purchase one, check out some of our other mortgage tips and tricks.
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Should You Get an FHA Loan or a Conventional Mortgage?

which-mortgage-is-right-for-me

Federal Housing Administration (FHA) loans and conventional loans remain the most popular financing types for today’s mortgage borrowers. But which program makes the most financial sense for you?

FHA Loans vs. Conventional Loans

The key to deciding which loan you should get is understanding the characteristics of both programs and how they relate to your financial picture. You could be a good candidate for either program, so select the loan that aligns with your payment and cash flow expectations.

  FHA Loans Conventional Loans
Credit Score Usually requires 500+ credit score Usually requires 620+ credit score
Credit History Shorter wait times after derogatory credit events like foreclosure, short sale, bankruptcy, and divorce Longer wait times after derogatory credit events, though some lenders may be flexible depending on circumstances
Down Payment As low as 3.5% As low as 3%, though there are advantages for a larger payment
Mortgage Insurance Requires both a 1.75% upfront premium and 0.45%–1.05% annual premiums Either a one-time payment or monthly fees from 0.55%–2.25% depending on credit, though these could be waived with a 20% down payment
Interest rate Tends to have lower interest rates than conventional loans Tends to have higher interest rates than FHA loans
Debt Ratio Allows higher debt ratios than conventional loans Allows lower debt ratios than FHA loans
Time for Approval Often takes longer to process Often takes less time to process

The Nuts and Bolts of FHA Loans

FHA loans are insured by the Federal Housing Administration, and borrowers must pay for mortgage insurance. The program requires two mortgage insurance payments: an up-front premium calculated at 1.75% of the loan amount and an annual premium that’s somewhere between 0.45% and 1.05% of the loan amount—depending on the length of the loan.

These mortgage insurance payments make FHA loans pricey. However, the program is flexible for homebuyers with credit scores as low as 500. Additionally, cosigners are permitted, and the wait time requirements for approval after short sale and bankruptcy tend to be shorter than they are for conventional loans.

Should You Get an FHA Loan?

The FHA program makes sense when you have little equity to work with or a unique financial situation. You’ll need at least a 3.5% down payment to purchase a home using an FHA Loan.

The program will go as high as the maximum loan limit for the county where the home is located. For example, in Sonoma County, California, you can get a loan of up to $554,300 for a single-family home.

The Nuts and Bolts of Conventional Loans

Conventional loans represent the lion’s share of the mortgage market. These loans, while the most popular, also contain tighter qualifying guidelines than FHA loans, including a minimum credit score of 620. And with a conventional loan, wait times after short sales and bankruptcy tend to be longer than those for FHA loans.

The trade-off for these strict guidelines is you don’t have to pay for private mortgage insurance if you have a high enough down payment. So even though conventional loans tend to have higher interest rates, you’ll save more over the life of the loan.

Should You Get a Conventional Loan?

If you have a credit score over 620 and a 5% down payment, you have the bare minimum required to apply for a conventional loan. Combine those with a strong employment history and payment-to-income ratio, and you’re a good candidate for the loan.

Remember, if you’re considering applying for a mortgage, it helps to know not only how much house you can afford but also where your credit stands before you begin the process. That’s because your credit scores help determine what types of rates and terms you may qualify for. You can get two free credit scores, which are updated every 30 days, on Credit.com.

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How to Get a Mortgage With Bad Credit

Get a Mortgage With Bad Credit

While a 20% down payment and a great credit history are commonly recommended for buying a home, there are still ways you can be approved for a mortgage without them. The secret is finding your personal strengths as a potential homebuyer and overcoming your weaknesses.

Good and Bad Credit for a Home Loan

Getting a home loan with bad credit can be daunting. But even credit scores traditionally thought of as “bad” won’t stop you from being approved for a mortgage.

Credit Score Scale for Mortgage Approval

740–850 Outstanding
720–740 Great
700–720 Good
680–700 Mediocre
620–680 Less than perfect, but still approvable for a home loan
550–620 Needs improvement before applying
300–550 Unlikely to be approved for a home loan

If you have a score lower than 620, it’s unlikely you’ll be approved for a home loan. Take some time to improve your credit by paying debts on time before you apply for a loan. And while you may be approved for a mortgage with a credit score between 620 and 680, such a score will affect your loan program and pricing.

Effects of Bad Credit on a Home Loan

Your credit score determines two major things for a mortgage company: the loan program and pricing.

Loan Programs

There are various types of loan programs, including conventional, Federal Housing Administration (FHA), and Veterans Affairs (VA) loans. There are advantages and disadvantages to each of them. But unless you’re a US veteran or service member, or married to one, you won’t have access to VA loans.

Conventional loans are best for borrowers with good to outstanding credit, but if you have a large down payment, you might be approved for one even with bad credit. On the other hand, FHA loans are accessible to people with less-than-perfect credit scores, but these loans tend to come with higher expenses.

Pricing

When it comes to pricing, your mortgage interest rates will most likely be higher than those of someone with good credit. You may also face additional premiums and more expensive insurance.

Your credit history is another determining factor in whether your loan will be approved or not. Derogatory items, or negative indications on your credit report, such as patterns of previous credit delinquencies and balances on closed-out accounts will negatively affect your mortgage loan approval.

Lenders will look at credit scores first to determine which home loan you’re eligible for. Next, your complete credit overview, including credit history, will be taken into consideration to determine what the lender will look for in the underwriting process. This is when the lender tries to figure out what happened in your credit history and why, as well as if there’s a chance credit issues will occur again in the future.

Overcoming Common Credit Red Flags

These derogatory items will be a cause of concern for lenders—but may not be total deal breakers:

  • Patterns of Delinquencies: Lenders can work around a record of late payments, but they’ll likely require you to have a larger down payment and lower debt-to-income percentage.
  • Student Loan Late Payments: A late federal student loan payment within the past 12 months will make approval less likely for an FHA because government financing doesn’t take kindly to delinquent federal debt.
  • Mortgage Late Payments: Lenders usually overlook one late payment in the past 12 months, so long as you can explain and provide necessary documentation.
  • Foreclosure: After a foreclosure, it takes 36 months to be eligible for a 3.5% down FHA loan and 48 months for a no-money-down VA loan. However, it takes seven years to qualify for a conventional loan approval, no matter the size of the down payment.
  • Short Sale: Mortgage eligibility after short sale is 36 months for a 3.5% down FHA loan and 24 months for a no-money-down VA loan or a 20% down conventional loan.
  • Bankruptcy: With normal Chapter 7 bankruptcy you have 24 months until you’re eligible for a 3.5% down FHA loan and 48 months for a VA loan or conventional loan.

To determine which red flags to overlook, lenders use investor overlays. These are the guidelines mortgage brokers and banks follow to prevent potential mortgage losses.

Investor overlays vary from lender to lender, so while one lender might not approve your loan because of poor credit and a minimal down payment, another may in some instances. The key is to find a lender with minimal overlays who can work with your situation.

Not sure where to start looking for a mortgage? At Credit.com, we offer a helpful list of mortgage rates from lenders in your area.

Homebuying Takeaways

First, know your credit score. Obtain a copy of your free annual credit report to help you select an appropriate lender, and monitor your score for free through Credit.com’s Credit Report Card.

Second, gather documentation to explain your credit challenges. If you can explain derogatory items in your credit history to a lender, you’re more likely to receive a mortgage.

Finally, be very specific when speaking to a potential lender. Don’t be afraid to share every detail of your needs and concerns. You’ll save yourself a lot of headache later by finding out up-front if they have any investor overlays that could prevent them from lending to you.

You don’t have to have perfect credit to buy a home. Just be prepared and search carefully for the lender who can make your dream home a reality.

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Why You Should Still Talk to a Lender Even if You’re Not Ready to Buy a Home

A mature couple receives an application at a bank.

If you’re a first-time homebuyer, you might think you’re not ready to purchase a house. Perhaps you’re concerned about your job situation, your previous credit history, or your high monthly expenses. Whatever the circumstances, every borrower and financial situation is unique.

Unless you’re a financial expert, it’s best not to self-diagnose your financial problems. You wouldn’t skip out on the dentist to fill your own cavities, so don’t try to solve your financial troubles yourself either. A loan officer can walk you through your options—and they won’t try to drill your teeth!

When you apply for home loans, mortgage loan officers look at your credit score, credit history, monthly liabilities, income, and assets. These officers see the entire financial picture, not just the investable funds. A reputable loan officer with experience can get you on the right track for buying a home.

Here are three common reasons people don’t want to apply for a mortgage and what you should do if you’re really serious about buying a home.

A Less-Than-Ideal Credit Report

The reality is that mortgage companies are required to pull a copy of your credit report, which includes scores from all three credit reporting bureaus. Your credit report is the most accurate representation of your credit available. Don’t let your messy credit report keep you from talking to a lender. After looking at your credit report, the lender can actually tell you what debts are the biggest drain on your borrowing power so you can start making smart financial decisions to improve your score.

Not Enough Income

Let the mortgage company review your paystubs, W-2s, and tax returns for the last two years. If you were self-employed, let the loan officer look at your tax returns and evaluate your credit to determine what down payment you can afford and what you can buy. The lender can give you an idea of what you need to do to qualify, including how much more money you need to make to offset a proposed mortgage payment. With an action plan and a strategy in place, it may just take you a matter of months to button up your financial picture to qualify.

Too Much Debt

Debt and liabilities definitely impact spending power. Every dollar of debt you have requires two dollars of income to offset it. So for example, if you have a car loan that’s $500 a month, you will need $1,000 a month of income to offset that monthly liability. If more than 15% of your income currently goes toward consumer debt, you’ll have to either pay off debt or get more income—perhaps via a cosigner—to qualify for mortgage financing. Again, let the lender look at your financial picture so they can tell you what it takes to make it work.

If you’re planning to buy a house in the future but aren’t financially ready, talk to a professional. Meet with them face-to-face, provide them with all of your financial documentation, let them run a copy of your credit report, and go through a pre-homebuying consultation so they can either preapprove you or tell you what to do to become preapproved in the future.

Many times, potential buyers are not ready, but having a conversation with a professional—so you know where you stand and where you are going—can be tremendously beneficial. You can also take a look at your financial health with a free credit report from Credit.com.

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How to Choose the Low-Down-Payment Mortgage That’s Right For You

Coming up with 20% down isn't always necessary. Here's what you need to know about lown-down-payment mortgage programs.

Low down-payment mortgage loans have been around much longer than most people realize. The Federal Housing Administration  loan requiring just 3.5% down re-emerged in 2008, but today, loans backed by the government requiring even less down are becoming popular. Here are the different kinds of low-down-payment loans available and what you should know about each.

1. FHA Loans

These are loans insured by the Federal Housing Administration that require just a 3.5% down payment and are incredibly flexible on financial history, credit history, and debt-to-income ratios. It is the most widely known low-down-payment program available in the market, is incredibly popular, and is virtually limitless in terms of the property type, income and location. Learn more about FHA loans here.

2. Conventional Loans

Some conventional loans require just 5% down, and in some cases as little as 3% down based on the per-capita-income in the area in which the property is located.

3. USDA Loans

This loan requires no down payment whatsoever and has income limitations and specific area locations. The program is only available in certain areas that are deemed agricultural by the U.S. department of agriculture.

4. VA

The U.S. Department of Veterans Affairs guarantees loans for up to 100% loan-to-value with absolutely no money down. This is hands down the best program in the low-down-payment arena. The program is available to U.S. military veterans and their spouses only.

5. Down Payment Assistance

Some state-specific programs allow homebuyers to put as little as $500 down to purchase a home. For example, in the state of California, a grant is provided for up to 5% of the loan amount, which can go toward the down payment and closing costs.

6. One-Percent Loans  

Some lenders are starting to offer mortgages for as little as 1% and, in some cases, even no money down with grants that need not be repaid. These loans are backed by Fannie Mae, and the lender bears the risk. You can bank on income limitations and needing good credit scores for such programs.

Keep in mind that the better the loan program you have, and the more down payment you have, the better your chances of getting into contract. Plus, most of the low down-payment loan programs available in the marketplace today, except for FHA and a traditional 5% down conventional loan, have income limitations. Income limitations mean your borrowing power in a certain geographic area is limited. Whereas, if you could use a 3.5%-down FHA loan or a 5%-down conventional, for example, your odds of getting into contract would be far greater because your borrowing power would be kicked up a couple of notches.

Here Is some homework to consider:

  • Do you have a down payment? If yes, where do those funds come from? Have you talked to your family about the possibility of getting gift funds for a down payment? You might be surprised by how generous your family could be.
  • If your down payment is very limited, get an honest answer from your real estate agent and lender about your ability to perform in this marketplace and what it would take to make you stronger on paper.
  • Get your financial house in order. That means checking your credit scores — you can see two for free on Credit.com. (the better your credit, the more home you can typically qualify for and the lower your interest rate will be), compiling your recent W-2s, pay stubs, and bank statements so you have enough information to provide to a lender.

Do not accept a lender giving you a just a pre-qualification letter. You want to be pre-approved. Any lender that will not give you a pre-approval letter is a lender that is more concerned about their policies than they are getting you into a home.

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Here’s What You Need to Know About Getting a Mortgage With ‘Paper Losses’

If you're tax returns show a net loss, you may have a tough time getting a mortgage. Here's what you need to know.

You probably already know qualifying for a mortgage requires an acceptable credit score, sufficient assets and stable income. All of these show you can support a mortgage payment, plus other liabilities. But what if you have “paper losses” on your tax returns? The mortgage process can get a little trickier. Here’s what you need to know.

You Have Rental Income Losses

On almost every mortgage loan application this can come back to bite the borrower. This is because rental losses usually represent more expenses going out than there is revenue to cover the property. Lenders use a special Fannie Mae formula, which in most instances makes losses look even worse. This is because the expenses are added back into the mortgage payment, then deducted from it over a 24-month period.

It is important to note that, when purchasing a rental for the first time, some lenders use an exception basis. The exception they are going to use is 75% of the projected market rentals. This is to help offset the mortgage payment as long as you are specifically purchasing a rental property.

You Have a Schedule C

This is a biggie. No one wants to pay an excess amount of taxes, especially self-employed individuals. You may be aware taxation is higher for self-employed individuals. So it goes without saying: Every accountant wants to be a hero by saving you money when helping with your tax returns. They could, however, be doing this at the expense of you refinancing or buying a home.

Writing off all your expenses, or worse, showing negative income means the lender has less income to offset a proposed mortgage payment. Even if you own a home already, have excellent credit and have an impeccable payment history, it does not matter. The income on paper is what lenders look at.

You Have Entity Losses

The following scenario is a common one where borrowers pay themselves a W-2 wage along with a pay stub, at the expense of bleeding the company dry. This will become problematic, because there almost certainly will be lower income figures. The same income figures the borrower is trying to qualify with.

Any negative income being reported on personal or corporate tax returns, will hurt your chances of qualifying for financing. As a result, one of these may be an offset, but they are not limited to the following:

  • Waiting until the following year – Depending on the severity of how much income loss there is, you may need to do a two-in-one. This means showing two years of income in one year. This is to offset the two year averaging lenders use when calculating your income.
  • Changing loan programs – This could be an array of different things, but it may mean going from a conventional mortgage to a FHA mortgage for example.
  • Investigating more – You might need to put more money down to purchase a home than you otherwise thought. You would do this if your income is lower than what your purchase price expectations are.
  • Paying off debt – Depending on your financial scenario, paying off consumer obligations is always a smart and healthy approach, and can improve your overall credit scores, even if it requires some of your cash. (You can check two of your credit scores free on Credit.com.)

What should you do if you know you want to qualify for financing and you currently have tax returns that contain losses? First and foremost, consult with your tax professional. Learn what your options are. Once armed with those options, talk to a lender skilled enough to help you understand how much financial power you may have in the marketplace.

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5 Things to Know if You’re Trying to Get a Mortgage With Bad Credit in 2017

hopping for the right mortgage lender is key to getting the best loan terms, especially if you have less-than-stellar credit.

Believe it or not, your credit doesn’t have to be stellar to get a mortgage. Many banks and lenders will extend a mortgage to applicants with at least a 640 credit score. However, not all lenders are created equal — and, even if you can score a home loan, bad credit is going to seriously cost you in interest.

What Credit Score Do I Need to Get a Mortgage in 2017?

There are two main types of mortgages: conventional and Federal Housing Administration, or FHA, loans.

Some lenders will offer conventional mortgages to consumers with a credit score of just 620. Other lenders will go even lower, but the process for getting that mortgage will be difficult and involve thorough explanations of your credit history.

For FHA loans, some lenders will go as low as 580, with just 3.5% in equity. However some folks can get a new mortgage or even do a cash-out refinance with a credit score as low as 550 — but there’s a catch. You’ll need at least a 10% equity position. This means you need 10% down when buying a home or 10% equity when refinancing.

Keep in mind, though, not all lenders will extend a mortgage to someone with a bad credit score — it has to do with their tolerance for risk. (From an underwriting perspective, poor credit indicates a higher risk of default.) The more risk a bank is willing to take on, the higher your chances of getting approved with a not-so-hot score. You can see where you currently stand by viewing your two free credit scores on Credit.com.

Here are some things to keep in mind if you have a low credit score and are shopping for a mortgage.

1. It’s a Good Idea to Rebuild Your Credit

If you are looking to increase your credit score to have an easier time getting a mortgage, you’ll need to be able to clear the 620 mark to see any significant difference. Hitting that threshold (and beyond) will likely make better mortgage rates and terms available to you, plus keep you from going through the type of scrutiny a lower tier credit score bracket often requires. You can generally improve your credit score by disputing errors on your credit report, paying down high credit card balances and getting any delinquent accounts back in good standing.

2. Down Payment Assistance Will Be Hard to Come By 

Down payment assistance programs are currently quite scarce. Beyond that, to be eligible for down-payment assistance, a borrower would typically need at least a 640 credit score. You can expect this across the board with most banks and lenders. It is reasonable to assume you are ineligible for assistance if your credit score is under 640.

3. Previous Short Sale, Bankruptcy or Foreclosure Are Subject to ‘Seasoning Periods’

If you have one of these items on your credit report, it’s going to impact your ability to get a mortgage. There’s typically a three-year waiting period — also known as a “seasoning period” — before you can qualify for a mortgage after you’ve been through a foreclosure or short sale. The waiting time after a bankruptcy is two years. Note: There are some loan programs that have shorter seasoning periods. For instance, VA loans can get approved at the two-year mark following a foreclosure.

4. Higher Debt-to-Income Ratios Make it Harder

It’s no secret that FHA loans allow debt-to-income ratios in excess of 54%. In order to be eligible for this type of financing, your credit score should be around 640 or higher. That’s not to say your credit score of 620, for example, will not work. It’s almost a guarantee, though, that if your credit score is less than 600 you’re going to have a difficult time getting a loan approved with a debt-to-income ratio exceeding 45%.

5. Cash-Out-Refinancing Is On the Table

This is a big one. If you already own your own home, you could use your equity to improve your credit. How? You could do a cash-out refinance with your home. This would allow you to pay off installment loans and credit cards, which often carry a significantly higher rate of interest than any home loan. Wrapping them into the payment could end up saving you significant money, and it’s still an option for borrowers with lower credit scores. (As I mentioned earlier, some lenders will do a cash-out refinance for borrowers with a credit score as low as 550, so long as they’re in a at least 10% equity position.) However, if this is something you’re considering, be sure to read the print and crunch the numbers to determine if you’ll come out ahead. Cash-out re-fis require you to pay closing costs and your bad credit might not merit a low enough interest rate to make this move worthwhile. You’ll also want to make sure the new monthly mortgage payment is something you can handle.

Remember, just because you can technically get a mortgage with bad credit, doesn’t mean it’s the best move for you. You may want to improve your standing, lower your debt-to-income ratio and bolster your down payment funds before hitting up the housing market. Still, it can be done and if you’re currently looking for a home loan, be sure to ask prospective lenders or mortgage brokers lots of questions to find the best deal you can get. To help you through the process, good credit or bad, here’s 50 full ways to get ready for your house hunt.

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What You Really Need to Know About Today’s Mortgage Lending World

You're not going to be able to skip steps in the mortgage lending process. Here's the reality of what it takes to get a mortgage.

Are you trying to qualify for mortgage financing? Telling your story to a lender without providing thorough financials and pulling credit is a recipe for disappointment.

The mortgage industry is a bureaucratic environment. Consumer protection and compliance remain supreme with mortgage lenders and banks. Financial institutions are under tight scrutiny from the Consumer Financial Protection Bureau and as a result, must be specific about what they can and cannot do in regard to credit decisions. Loose underwriting in the mortgage industry was blamed for helping cause the financial crisis in 2008. The pendulum has swung 180 degrees and, as a result, getting a mortgage these days requires playing by the rules.

Consumers, on the other hand, want information quickly so they can make a decision. Unfortunately, mortgages do not work like that for the lion’s share of mortgage loan applicants. If you’ve had financial difficulties, and you think you may not qualify for financing, you might go to a lender thinking, “I don’t want to waste your time so, I am only going to provide the bare-bones information and then you tell me if you can do the loan.” Any lender who says they can make a loan based on bare-bones information is doing you a disservice (here’s a quick guide for understand mortgage lingo).

No moral lender has the ability to give you a “what if” scenario without seeing your entire financial picture. This includes your financial documents and credit report. Based on this information the lender can tell you the exact loan amount you qualify for, the purchase price you qualify for, what is hurting or helping your file, how your cash-to-close comes into play and how your file can be put into a workable loan with a chance of closing.

But I Don’t Want to Pull My Credit

If you don’t want to pull your credit because you don’t want the inquiry, you’re out of luck. The lender is required to pull your credit to decide whether they can put together your loan. Keep in mind: Credit reports are not transferable between financial institutions, so you can’t use one lender’s reports to take to another.

A credit pull will show up as an inquiry on your credit reports and could have a temporary impact on your credit scores. In most cases, though, as long as you’re not shopping for other forms of credit, applying for a mortgage does not adversely affect your credit score (if you don’t know where your credit stands, you can check your absolutely free credit scores right here on Credit.com).

Why Can’t I Just Find Out the Terms Up Front?

You may not want to provide your full financial documentation until you know what a lender can offer. It doesn’t work that way. Rates, fees, the loan amount, the loan program and the entire basis for the loan can change based on your financial supporting documentation. A lender requires these documents and a credit report to give you numbers they can actually deliver on.

But I Just Want to Know About Loan Programs & Rates

The lender needs to evaluate your income, credit score, liabilities on your credit history and financial profile to tell you what you qualify for now, and what you could qualify for in the future. Again, the lender needs a full financial picture to tell you what you can borrow.

But I Was Already Denied Once Before

Not all lenders have the same appetite for risk. One might make your loan while another could refuse. Some banks have more aggressive underwriting. As a result, you have to provide financials to get different scenarios run for your financial profile.

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Is a 50-Year Mortgage a Good Move?

Sure, it will keep your monthly payments low, but it will end up costing you a lot in the long run. Here are the pros and cons of a 50-year mortgage.

Are you looking to afford a new mortgage? A 50-year mortgage may be an option, but here are some things to consider when looking at a long mortgage term.

These loans are not bought and sold by Fannie Mae or Freddie Mac. They are smaller banks and portfolio lenders that offer unique financing and, as a result, will charge an additional premium. You can expect your interest rate and fees to be above market. By above market, we mean at least three quarters of a discount point higher in rate than the Freddie Mac mortgage market survey. This type of loan effectively is an interest-only mortgage that is similar to the interest on the loans that were available before the financial crisis.

The 50-year mortgage is pretty much what it sounds like — your loan is amortized over 50 years, similar to the way a 30-year, fixed mortgage is amortized over 30 years. At the end of the loan term, the loan is paid in full. A 30-year, fixed-rate mortgage typically translates to paying double the amount of money you originally borrowed. With a 50-year mortgage you will pay almost four times the amount of interest on the amount originally borrowed. Yes, such a loan term would be incredibly expensive — the cost of having a lower monthly mortgage payment.

Are You Biting Off More Than You Can Chew?

If you are comparing a 30-year mortgage to a 50-year mortgage, you might be trying to purchase more than you can handle — not a prudent move if you’re trying to take on something affordable. While the mortgage payment might be affordable, it would also be an incredibly expensive financing vehicle. For all intents and purposes, this is practically an interest-only mortgage

Interest-only loans can be beneficial for a consumer who has big liquidity in the bank, excellent credit and is otherwise sophisticated in mortgage finance, while looking for cash flow. (Don’t know where your credit stands? You can get your two free credit scores, updated every 14 days, right here on Credit.com.) For everyone else, a 30-year fixed rate mortgage is substantially less expensive than its 50-year counterpart.

If you were thinking about this type of financing, you may want to reconsider and speak with a professional — someone who can guide you on what type of income may be needed to qualify for the purchase of a home.

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