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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What You Should Know About Mortgage Paperwork

Yes, mortgages come with a lot of paperwork. Here's how to make it easier on yourself.

Getting a mortgage is every bit as arduous as you might think. While lax mortgage lending standards helped pave the path to the financial crisis a few years ago the pendulum has swung so far the other way in 2017 that getting as simple as a 30-year fixed rate loan is incredibly complex given the amount of paperwork and disclosures required.

Here is what you should expect if you plan to buy a home in 2017 or beyond.

Communication

What this means to you, as a homebuyer, is to trust your lender and expect the mortgage process, in terms of the paperwork, to be thorough. The mortgage process could be compared to an airplane ride. No ride, destination, flight attendant, captain or any aspect of each individual flight is the same. Every flight is different.

Every loan is different as well. If you have ever been on a flight and experienced turbulence, that turbulence is the equivalent of a lender coming back and asking you for documentation, even though you already provided it at the beginning. Asking you for documentation a handful of times is normal.

Remember, a good lender can do a thorough job examining your financials before you go house hunting. This will ensure you can get a loan at a good rate while intercepting future issues that may arise. Before you go to a lender for pre-approval, you’ll want to check your credit scores to see if there are any issues or errors weighing down your scores that you can quickly fix. You can get your two free credit scores on Credit.com.

Time

Time is not on your side when purchasing a home for two reasons: You might have a fee for every day you don’t close on time, which could be as much as $100 per day. If you close three days late, that’s $300 in the seller’s pocket. The other reason is your interest rate lock. If you don’t close on time, it might cost you as little as $500 or as much as a few thousand to extend your rate lock commitment to the investor.

Time is also not on your side because there is an expectation your lender and Realtor have that you to provide documentation to them within 24 hours. This means your answer to the request made Monday asking you for a paystub is expected by Tuesday, no later than Wednesday. Delays in the process can be costly and stressful, especially if everyone is counting on the transaction to close by a certain day and it doesn’t due to failure to receive documentation in a timely manner.

The best two things you can do for yourself when purchasing a home are one, get the needed documentation to your professional in a timely manner, and two, expect to be on call for each day of your 30-day purchase contract. Going into the transaction with those expectations up front will help ensure your transaction closes on time.

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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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This Common Mistake Can Kill Your Mortgage

If you're thinking about buying a home, you'll want to avoid this common mortgage mistake.

In order to qualify for a mortgage, you need to show your lender that you have a down payment and access to funds for closing. This money needs to come from documentable sources prior to moving it from your bank account to your escrow account. Unfortunately, a lot of people don’t do this, which can end up creating unnecessary challenges during the underwriting process.

Lenders are going to require at least 60 days of asset documentation from each source that your money comes from. This is required because your mortgage lender will need to verify that the money promised does exist and is eligible for use.

Let’s say you’ve put your money into escrow and, as requested, are doing your best to document the movement of money from the account going to escrow. This entails providing a bank statement specifically showing the money leaving your account and the money being accepted by escrow through an EMD (earnest money deposit).

If you can’t get a bank statement, though — say it’s the middle of the month and new statements are not out yet — the next best thing is to get a bank printout confirming the transaction and confirming the amount of money remaining in the account. (There are literally dozens of other things you also should be thinking about during the home buying process. Here are 50 ways you can get ready for buying your home.)

How a Bank Printout Can Help You Close

The bank printout must show the date of the transaction and the current timestamp of the printout, confirming that the money has been moved prior to the printout date. If the bank printout does not have this information, it will automatically halt the closing process of your loan and delay your loan contingency removal or extend your close of escrow date.

This method can be used for both your down payment and funds for cash to close. This is to provide authenticity for your account and to show clearly on paper that the account is yours and the money is yours to use. Banks and lenders require this information to be clear cut and “in your face.” Never assume that “common sense” will be enough.

Documents & Other Items You’ll Want to Avoid

Providing any of the following items in lieu of the bank printout will not work:

  • A bank statement with someone else’s name on it
  • Bank statement in trust
  • Pictures of bank statements taken from a smartphone or snapshot application
  • Bank printout with no timestamp and date

In addition, the bank printout and timestamp must show the remaining balance that is left in your account. For example, if you had $130,000 in assets and your down payment from this account was $50,000, your account statement should now show $80,000 remaining.

If you are looking to purchase a home, talk to a seasoned loan professional who can walk you through properly documenting the money required to buy your home. Also, take a few minutes to check your credit scores so you’ll know going in what kinds of terms you’re eligible for. You can get your two free credit scores, updated every 14 days, at Credit.com.

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How to Write an Undeniable Offer Letter for Your Dream Home

Want to make sure you get the home you love? Open up with a heartfelt letter to the seller.

Buying a home in a competitive market means you need to have all your ducks in a row. You can be successful by putting your best foot forward before the starting gate. One way to spruce up your offer is to write a love letter to the seller.

All sellers have different reasons and motivations for selling their home. A major life event may have caused them to rethink their life and selling the house makes the most sense. They may have found their dream home or a better rental and need to sell the one you are looking at.

No matter what has happened, the dollar amount you are offering to purchase their home is going to carry the most significance to the majority of sellers. Making a strong offer with the guidance of your real estate agent and having a solid mortgage pre-approval in place is critical for success. Those are the key components required to make sure your chances increase for getting an accepted offer. Still, a stellar offer letter can break a tie between two identical offers — or even sway the owner your way if someone slightly bests your bid. With that in mind, here’s how to craft a killer offer letter for your dream home.

1. Write the Letter Yourself

This letter should come from you, not your real estate agent. The agent cannot convey the emotional attachment you feel toward the home the way you can. If your agent wants to write a companion letter or character profile, that’s fine, but a love letter that comes directly from the prospective buyer will be most meaningful. This letter should be impactful and compel the seller to choose you.

2. Explain Why You Want the Home

The reality is that you do not know the reason why they are selling their home (though your real estate agent may be able to supply some clues) so a good strategy is to give them the reason you want it. Write a letter to the seller appealing to their emotional side along with their financial interest in your offer. Write a genuine letter about why you are interested in buying their home specifically. What about it calls to you? Do you see your family living there for a long time?

3. Be Specific

If you really liked the way the backyard “felt” and you can see your kids playing there or getting married under a well-groomed tree, put it into words. Make the sellers see you in their home. It sounds sappy, but it can appeal to the right people. A letter can evoke pride for a seller in their home and can give them the satisfaction of being able to provide a home for a young family that will create more happy memories there.

4. Get Personal 

Talk about your family. Use this letter as a way to introduce yourself and tell the seller about your long-term goals. Let them know if you’ve been raised in the area and share with them why you think their home is the fit for you and yours.

5. Assure Them You’re a Strong Buyer

A seller will want to know a buyer can make good on their offer, so be sure to let them if you have a steady source of income, what you do for a living and, even, how solid your credit score may be. (You can see how your credit is doing throughout the homebuying process by viewing two of your free credit scores, updated every 14 days, on Credit.com.)

One additional thing you should consider is having your lender call the listing agent in order to confirm your ability to purchase and willingness to perform. This is a bonus that can help push your offer over the top as this confirmation proves to the listing agent and sellers that you are serious and well-qualified. Communication in every real estate transaction is critical and this proactive approach reduces the amount of vetting that the listing agent has to do on their offers.

What’s in a Offer?

Remember all those ducks we mentioned earlier. In addition to your love letter, your offer to purchase someone’s home might include:

  • A cover letter from your agent explaining who you are and why they brought you to their home
  • The terms (total offer price, down payment, etc.) under which you would purchase their home.
  • In addition to that personal and detailed letter explaining why you would be a good fit for their home, you may also want to include a photo of you and your family.
  • A mortgage pre-approval letter from your lender showing you are dedicated to buying their home.

Keep in mind, a stellar offer letter is just one small part of the process. You can find 50 other steps house hunters can take to get ready for homebuying season here.

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Do You Need a Jumbo Down Payment for a Big Mortgage?

Having a big chunk of cash to put down on a house is nice, but it's not always required.

Most people will say you need to have excellent credit and a big down payment in order to secure a large mortgage. The reality is that while having a big chunk of cash to put down on a house is nice, it is not always an absolute requirement. Here’s what you should know if you are looking to take on a large mortgage.

Can I Get a Large Mortgage With a Low Down Payment?

It depends on where you live and how large we’re talking. Any Federal Housing Administration or FHA loan up to the maximum county loan limit can qualify for only 3.5% equity in down payment. Bonus: Back in December 2016, the FHA approved higher loan limits beginning in January 2017 for many counties across the country.

Another program known for having low down payment requirements are VA loans. VA loans are available to veterans, active duty service members, National Guard members and reservists who meet the requirements of the Department of Veterans Affairs and have acquired a Certificate of Eligibility from the VA or their lending office. VA loans will also go up to the maximum county loan limit and can even go up to or over $1 million in home values.

The idea that you need a big down payment in order to secure a larger mortgage is simply not true. FHA loans do require mortgage insurance premiums, and VA loans have a guarantee fee, which will increase your closing costs. However, your down payment will remain minimal.

What’s a Jumbo Mortgage?

Jumbo loans exceed the maximum county loan limits and are not bought and sold every day to Fannie Mae and Freddie Mac. That said, jumbo loans do require significantly higher credit scores, typically 700 or above, and at least 10% equity in down payment. Keep in mind that any loan with less than 20% equity in the property will be subject to private mortgage insurance. (Not sure where your credit stands? You can view two of your credit scores, with updates every 14 days, for free on Credit.com.)

Jumbo mortgage requirements are particularly relevant for those looking to buy a home in high-cost areas. For example, in California’s Sonoma, Marin, San Francisco, and Alameda counties, the maximum loan limit ranges anywhere from $595,000 to $729,500, but there are home that easily go for well over that.

How Can I Put Together a Down Payment?

Acceptable sources of down payment funds can include:

  • Gift funds from a relative
  • Selling of personal property that can be documented and supported by third-party value pricing (i.e. Kelly Blue Book for a car sale)
  • Withdrawals from retirement funds

Remember, you cannot use your income as a form of assets. Banks want to see that you have the ability to save money up on your own. For example, you cannot use money from your paycheck that you deposited five minutes ago as a down payment because the funds are not considered “seasoned.” In order for these funds to be considered, they must have been in your accounts for at least 60 days to show the money was “saved.”

Struggling to put together a down payment? You can find more ways to find extra funds here.

As always, if you are looking to buy a house, be sure to do some research beforehand. Figure out how much cash you really have by working with a lender and seeing what you qualify for now. Be sure, too, to carefully research how much house you can actually afford — and what a comfortable monthly mortgage payment would be. Also, work with that lender to develop a savings plan so you can qualify for your first mortgage or improve your current mortgage and financial situation.

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5 Ways to Find Extra Money for a Down Payment

Here's how to find money for a down payment.

In order to buy a home, you need to have a balance of good credit, manageable debt, stable income, and sufficient savings. Maintaining a balance between these four categories is challenging enough on its own, never mind coming up with enough cash to close on your potential new home.

If you’re worried about the credit part, you can see what you can potentially do to improve by viewing your free credit report summary, updated every 14 days, on Credit.com. And, if cash flow is your issue, here are some ways you can find extra money for a down payment.

1. Move in With Family

Having a nearby family member that will let you move in for a little while is a great way to save money on rent. It’s nice to live alone, but saving that $2,500 per month is a financial home run. In exchange for a little less privacy, you can start saving big money in a shorter amount of time than you would have by continuing to pay $2,500 per month. This can yield huge dividends for you in the future and could be the means of collecting the down payment for your new home.

2. Retirement Funds

Did you know that some retirement accounts let you draw from your reserves early in order to pay for your first home? Every retirement account is different, so it is a good idea to contact your human resources department to review your 401K, or a bank/financial adviser to review the terms of withdrawal from your investment account. In most cases, if it is a first home (i.e., you have not owned a home in the last three years), you can borrow from yourself to finance your down payment or cash to close. There can be tax penalties for withdrawing early, so be sure to review your terms.

3. Cash-Out Refinance

If you already own a home, it might be worth considering a cash-out refinance on your current home in order to pay for another one. Fannie Mae and Freddie Mac have recently taken kindly to this approach by changing the equity position in a departure residence to purchase a new primary home. Completing a cash-out refinance on your current home to purchase another is a form of leveraged debt and will allow you to purchase with a stronger offer. Just be sure this makes sense for your finances before you apply.

4. Sell a Home

In a similar scenario, by already owning a home with equity, you can sell your home in order to buy another one. For example, if you have $150,000 of equity in your current home, you can sell and use that equity as a down payment to acquire another. The challenging aspect of this is that these scenarios are contingent upon one house selling. If the buyer backs out of the deal, your ability to secure the house you are in contract for will be at risk.

This method should be approached with caution and only with a real estate agent who can walk you through the ins and outs. Education is key to a successful dual transaction like this.

5. Sell Personal Property

As much as we like our things, it is nice to have a roof over our heads we can call our own. If you have any toys or big-ticket items like a boat, motorcycle or novelty, those can be sold to generate cash for buying a home. In order to use these funds, you need to keep all documentation while selling the item. If you do not have supporting documentation, the cash cannot be used.

If you are looking to see what it takes to buy a home, we recommend talking to an experienced licensed mortgage professional. If you do not have the necessary means to acquire cash quickly or efficiently, talk to your mortgage professional about programs that require little to no down payments or lenders who have down payment assistance available. And, of course, be sure to determine how much home you can comfortably afford (more on how to do that here).

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Can Refinancing to a Higher Mortgage Rate Actually Lower Your Debts?

Are you handling your debt the smartest way possible?

Your ability to save money can become compromised by the financial obligations you are paying in your life. If you have a mortgage and other consumer debts, it’s easy to stay the course, pay your monthly bills and rely on credit cards for emergencies. But taking action — namely, refinancing your mortgage —  could actually help you get better control of your cash flow. Allow me to explain.

The nuts and bolts of a good financial plan includes having “preferred debt,” which includes debt that is tax-deductible (a mortgage) and has no consumer obligations that are non-preferred (i.e. credit cards, student loans, car payments, etc.). Non-preferred obligations will compromise your ability to save money.

Consider the following scenario:

John Borrower has a mortgage of $300,000 with an interest rate of 3.875%. His mortgage is a 30-year fixed rate loan and his monthly payments are $1,410.71. John also has a car loan of $10,000 with an interest rate of 6% and a monthly payment of $500. His credit cards total $8,000 with an average interest rate of 16% on which he has to pay $400 per month, for a total of $2,310.71.

John Borrower has a great credit score because he always carried a small balance on his credit cards, has never missed a payment, and his credit history is squeaky clean. However, John’s car just broke down and he needs a new transmission that will cost him $3,500. Unfortunately, John’s mortgage payment and other obligations take up a majority of his income and now he has very little money saved up.

What does John do? He turns to his credit cards and goes further into debt. He is reluctant to make any changes to his financial burden. He has a great interest rate on his mortgage, but is he really getting ahead financially?

A Better Approach to Debt

There is a more proactive approach John can take that will be more consistent with having a strong financial foundation that will not only make him more creditworthy, but will also give him the ability to save and plan for the future.

The first thing to look at is all of John’s interest rates. True, his mortgage rate is low but the weighted average of his interest rates on all obligations is quite high. His interest payments alone take up a lot of extra money. Let’s look at the math:

Debt Balance Interest Rate Monthly Interest Payment
Bank of Bank Mortgage $300,000.00 3.875% $968.75
Car Lots Mega Car Loans $10,000.00 6.000% $50.00
Credit Cards (BULK) $11,500.00 16.000% $153.33

The total amount John owes in debts is $321,500, which includes his new credit card debt of $3,500 from the new transmission. If you multiply John’s amount owed by each individual interest rate and add it together, John is paying a total of $14,065.00 in interest alone each year.

Broken down: ($300,000 x 3.875%) + ($10,000 x 6%) + ($11,500 x 16%) = $14,065.00

Dividing the yearly interest paid by the total amount owed ($14,065 / $321,500) results in John paying an annual average interest rate of 4.375%.

If John were to refinance his current mortgage at that average 4.375% interest rate, something really interesting would happen to his payments. John is currently paying $2,310.71 each month in debt payments while interest is being accrued on his debts. By combining his debts under one mortgage at the higher 4.375% interest rate over a 30-year fixed-rate term, his monthly payments, interest included, would drop his payments from $2,310.71 to $1,605.20 each month.

Say what?

If John refinances his mortgage for the purpose of debt consolidation, his average interest rate does not change AND his monthly payments are lowered. Of course, because John is already cash poor, he’ll want to roll his closing costs into his mortgage refinance to keep his out-of-pocket expenses down. Suddenly, John Borrower is saving $705.51 each month. John can take that money and invest it or start a vacation fund. He can also put it to the side in case something else on his car breaks down. Regardless of his plans for the savings, the fact is that he is saving money and gaining control of his cash flow.

Having low rates and high rates on multiple forms of debts probably means you are going to be paying a higher rate of blended debt on all of your preferred and non-preferred obligations over time. The reality is that you can save through consolidation and fixing on one lower rate. It might be higher than your current lowest rate, but as John discovered, he could save money by increasing his lowest rate and combining his debts.

What’s Your Ideal Scenario?

The ideal financial scenario for any borrower is to have a single mortgage payment with no debt obligations and to have at least 6 to 12 months of savings (“reserves”) to be used as “back up.” This financial platform increases your borrowing power and is optimal for having a choice and control over your funds. (You can find more tips on how to determine how much home you can afford here.)

If you are thinking about taking out a mortgage or making some financial adjustments in your life, it’s a good idea to first check your credit scores to see where you stand (you can get your two free credit scores, updated every 14 days, on Credit.com.) Next, work with a mortgage lender who has the skill set and ability to really investigate your debts and can show you the real breakdown of your debts and what you are paying over time. You might end up realizing how much control you are missing out on by having payment obligations in an ongoing debt cycle. The numbers might astonish you.

Looking to a new abode? Be sure to avoid these mistakes first-time homebuyers make.

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The post Can Refinancing to a Higher Mortgage Rate Actually Lower Your Debts? appeared first on Credit.com.

Here’s How You Can Control the Cost of Your Mortgage

Mortgages aren't cheap, but there are some ways you can keep your lending costs down when buying a home.

Mortgages are not cheap. Closing costs and interest paid over time to your lending bank will make the cost of having a mortgage very pricey over the 15-30 years that you have it. But, when it comes time to get your mortgage, you actually have more control over your loan costs than you think (even in the 2017 mortgage market).

Here are a few ideas on how you can keep costs down without cutting corners.

Remember the Rate-Lock

When you apply for mortgage loan financing and agree to move forward with the loan, there is something called a “rate lock”. Rate Locks are usually set for 15, 30, 45, or 60 days. The rate lock is a commitment; you are committing to your lender that you are going to take the mortgage interest rate and terms they have offered.

In turn, the lender is committing to giving you those terms with zero changes. The big “if” in this statement is whether this rate lock is set for a specific timeframe – 15, 30, 45 or 60 days. The average rate lock is 30 days for most mortgages. If your loan is locked for 30 days and it does not close by day 30, it will have to be extended in order to maintain that rate. If the lock is extended, the cost of your mortgage can change and your loan terms can get unnecessarily expensive. It is not uncommon for a mortgage that started with zero points to end up with pricey discount points due to a lock extension.

You can avoid this, though. The speed and momentum with which your mortgage loan is processed is directly related to how quickly you provide your lender with documentation and requested items throughout the process. The longer it takes you to gather and supply these items, the more it can cost you. You can reference the old adage, time is money.

Get Organized Before You Apply

When you first approach your loan officer and/or lender about mortgage loan financing, try to provide all of the documentation they ask for up front and before you begin. It’s also important to make sure your credit is in good standing and there are no errors on your credit reports before you begin the loan approval process. Doing so can help ensure you get the best rates and terms from your lender.

Once your loan has been underwritten and you are asked to provide additional documentation, get it back to them as soon as you can. The longer it takes for your lender to receive these items, the higher the chance that an extension will be needed. The ideal response period is 24-48 hours after the request is given. If it is going to take you more than 48 hours, or if you know you cannot get it quickly, let them know as soon as you get the request. Do not wait the 48 hours and hope that the condition will disappear. It will not.

Be Proactive & Prompt

The loan process is not always smooth. When items are requested by the lender, things can get frustrating for some consumers. These are some common comments made by consumers that come up during the process:

“I have already provided that piece of documentation multiple times.”

“Why do you need this?”

“I am waiting on my accountant and he won’t get it back for a week.”

Homebuyers can often feel frustrated because the reality of today’s lending environment was not made clear by the mortgage professional at the beginning of the process. If you are the type of consumer that understands that 5+5 will always equal 10 in any situation, prepare to be disenchanted by the mortgage loan process. In the current mortgage market, 5+5 will equal 10, 11, or 0. The environment you are entering is bureaucratic and heavily reliant on compliance to rules and regulation. These can often seem redundant and unnecessary but, remember, they were put in place to protect you.

If you can step back from the frustration and provide the items quickly, not only will you be ahead of the game but you will be saving yourself time and money. If you are prone to providing pushback to your lenders on requests, know that you are costing yourself in time, effort, and money.

Ask for clarification, call your lender, get on their calendar, bite the bullet and you will maintain control of your costs. The way to make sure you are set on the cost of your mortgage is to lock in the interest rate and terms, provide documentation within 24-48 hours, and be on call for any updates that your lender has.

There will always be circumstances beyond your control, but being proactive and on top of what your lender needs is the number one way to stay in control of your financial mortgage success.

Trying to buy your first home? Check out our roundup of first-time homebuyer mistakes you’ll want to avoid and visit our mortgage learning center for more answers to questions that come up during the process.

Image: Geber86

 

The post Here’s How You Can Control the Cost of Your Mortgage appeared first on Credit.com.