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.
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.
Almost lost amid all the celebrating and marching this weekend were a set of official actions the Trump administration took soon after the Inauguration. One directly impacts some consumers who are house-hunting right now.
You might have seen headlines suggesting President Donald Trump raised taxes on middle-class homeowners, but that’s not an accurate way to portray what happened. Instead, Trump signed an administrative order to halt a fee rate cut, announced just days earlier by the Obama administration, that would have saved homebuyers who don’t have big down payments and use Federal Housing Administration-backed home loans an average of about $450 annually in their monthly house payments.
The order will make home loans more costly for a large group of buyers — about 40% of millennial buyers use the program targeted by the Trump order. That, in turn, can make life harder on older owners looking to sell their homes and trade up.
What Really Happened
In the hours after he was sworn in, Trump signed an order that stopped a lame-duck step by the Obama administration that would have lowered monthly fees for consumers who buy homes with less than 20% down payments and use a government program operated by the Housing and Urban Development department known as “FHA loans” to insure their mortgages. The decrease would have saved average homeowners about $37 monthly, according to Attom Data Solutions. It would have saved homeowners much more in places where home prices are higher — averaging more than $1,000 annually in 13 counties across the United States.
FHA loan fees were raised during the recession to cover program losses, and Obama’s move would have returned them to about the level they were before the housing bubble burst. For now, they remain above their 2008 levels.
Keeping the fees higher effectively lowers the buying power of home shoppers, as money that could be spent toward mortgage payments is instead shifted to insurance payments.
Help For Less-Liquid Homebuyers
Many homeowners are familiar with the additional fees that come with low-down-payment mortgages. Buyers with less than 20% generally must pay for mortgage insurance in case they cannot make their mortgage payments. That’s because the owners will have so little equity in their homes that banks can’t be sure they’d make their money back if they foreclosed on the home and sold it.
There are several forms of this kind of insurance; the most popular is provided by the Federal Housing Administration through FHA-backed loans. For an upfront fee and an ongoing monthly cost, the FHA will guarantee a loan between a buyer and a bank — that gives banks the ability to lend money to buyers with as little as 3% down.
The program dates back to the 1930s, and helps create first-time homebuyer activity. The FHA has insured 34 million properties since its inception, and the agency says it is the largest insurer or mortgages in the world.
Low-down-payment buyers can opt for private mortgage insurance, or PMI, instead. PMI tends to be less expensive, but buyers with lower credit scores or smaller down payments might not qualify for it.
Without these kinds of insurance programs, a buyer shopping for a median-priced $185,000 home would need at least $37,000 in a cash down-payment to buy a home, or would be required to finance the down payment some other way.
FHA insurance isn’t cheap. At closing, buyers pay 1.75% of the loan in an upfront fee. For a $185,000 mortgage, that’s an extra $3,238 in cost; it’s usually financed as part of the loan. The ongoing monthly fee on that mortgage is about $126 per month — a rate of .085% of the loan annually, paid in monthly installments. The fee is known as the MIP, or mortgage insurance premium. The MIP was targeted by Trump’s order.
In the waning days of the Obama administration, the FHA announced it would drop the fee from 0.85% to 0.60% — a 0.25% drop. That would have provided $37 in monthly savings for a buyer with a median-priced home, or about $446 annually, Attom says. An FHA buyer in Santa Clara County, California, would have saved much more— $1,448 annually.
The fees collected from consumers go into the fund used to support the FHA loan program.
Before the recession, ongoing FHA fees were 0.55%. Not surprisingly, the FHA fund collapsed in the face of massive defaults during the collapse of the housing bubble. To restore the fund, FHA fees were raised steadily, beginning in January 2008, reaching a high of 1.35% in January 2013.
When the fund reached Congressionally-mandated reserve levels, the premiums were reduced, down to 0.85% in January 2015
A drop that would have returned FHA monthly fee levels to their 2008 levels, announced Jan. 9, was set to take effect on Jan. 27.
On the eve of HUD nominee Ben Carson’s confirmation hearings, Financial Services Committee Chairman Jeb Hensarling, R-Texas, was critical of the fee cut.
Greater Risk of Another Bailout?
“It seems the Obama administration’s parting gift to hardworking taxpayers is to put them at greater risk of footing the bill for yet another bailout,” Hensarling said. Carson then said he would “really examine” the premium cut at his hearing.
Daren Blomquist, senior vice president at ATTOM Data Solutions, says the rate cut two years ago triggered a short-term jump in home sales to FHA buyers. On the other hand, the impact of the rate cut wasn’t as dramatic as hoped, in part because fast-rising prices gobbled up much of the anticipated increased buying power.
“This decision not too surprisingly reflects the Trump administration’s fiscally conservative philosophical bent, favoring not putting taxpayers at risk — or at least what they perceive as risk — for the sake of a government program that helps people buy homes,” Blomquist said to me. “This is not to say that the Trump administration won’t take policy steps to help the homeownership rate rebound, but the levers pulled will more likely involve trying to allow the market to address the situation with deregulation rather than addressing the situation through government programs that potentially put taxpayers at risk.”
HUD did not immediately respond to Credit.com’s request for comment as to why the fee cut was suspended.
Buyers might be tempted to wait and see what the Trump administration does with FHA fees — some observers think they could ultimately be lowered — but that might be a mistake. If home prices continue to rise, those increases would quickly eat up any savings from lower FHA fees.
If you’re looking to purchase a manufactured home, or if you already own one and want to refinance, here are some things to keep in mind.
Manufactured homes are not the same thing as modular homes. Manufactured homes are constructed, purchased at a dealer, and then moved to their final destination where they are permanently attached to the earth. If you’re looking to purchase a manufactured home, many mortgage lenders will deny you because it is a risky financing vehicle. This is due to the fact that, technically, you could detach the dwelling and move it to another property.
If you are able to secure financing, manufactured home loans often contain higher rates and fees due to the associated risk that comes with this type of property. Some lenders will allow you to secure financing for a manufactured home without the need for mortgage insurance, meaning you can avoid a Federal Housing Administration mortgage, which contains a monthly mortgage insurance payment and can end up costing you more. An FHA mortgage can be an option for you, however, if you have no alternatives.
To get a conventional mortgage without mortgage insurance, you need to have at least 20% as a down payment (or in equity if you’re refinancing) and have a credit score of 640 or more. It can be used for purchasing or refinancing without pulling cash out under certain circumstances, but you should consult your mortgage lender about the requirements specific to manufactured homes before assuming the home will qualify for a conventional mortgage.
If you are looking to purchase a manufactured home for the first time, conventional mortgages will allow you to do that type of financing so long as you find a property with the real estate included. In other words, the house is already affixed to the earth and is being sold as real estate. Financing to secure the land and attach the unit is an entirely different animal that typically comes with higher rates and fees. These loans are more difficult to come by. If you are looking to get a manufactured home, get pre-approved to purchase a house with the expectation that the manufactured home is already attached to the real estate and is going to be sold as one property. This will give you the best outcome for success in this particular type of property arena.
Another outlet for this type of financing is FHA. FHA contains two forms of mortgage insurance; an upfront mortgage insurance fee and a monthly mortgage insurance payment that is otherwise avoided when you go with a conventional mortgage. No matter what your financial situation is, look at getting qualified for both types of financing. It is helpful to know that if you can use conventional financing and avoid PMI, you will have an easier time handling the payment. The payment will be lower which can increase your buying power while you remain under the 20% equity margins.
Remember, before you begin the mortgage lending process — or even start your search for a new home — it’s a good idea to check your credit scores to see where you stand. Doing so will let you know exactly how much loan you’ll qualify for and what terms will be associated with that loan. Also, it’s a good time to pull your credit reports to ensure there aren’t any mistakes, which could hurt your ability to get the best loan terms. You can get your two free credit scores, updated every 14 days, at Credit.com.
One of the more unique ways borrowers in the health care industry can get a mortgage is the doctor’s loan. Yes, there’s special mortgage financing options available just for doctors.
One of the benefits of being a physician is being able to get a mortgage even with a lot of debt. That’s because doctors can get a little bit more flexibility than traditional underwriting otherwise allows. This can help bridge the gap between renting and owning a home. This financing vehicle allows physicians to borrow money more easily.
Here’s how this program works.
Most mortgage loan programs take the minimum payment on a student loan and apply that into the qualifying ratios when computing the debt to income ratio for the homebuyer. This can limit borrowing power, especially if the payments are several hundred dollars per month. If you have a student loan that is in deferment for year or longer, the doctor loan allows you to have that student loan payment not count in your debt-to-income ratio, allowing you to borrow more on a mortgage. To have monthly debts not hurt your borrowing chances, you’ll need $2 of income per every $1 of monthly debt. For example, if your student loan payment is $500 per month, you need $1000 per month of income to offset $500 per month on a student loan payment or any other monthly payment other than mortgage loans.
The program also allows you use just 5% down and allows gift funds to be used for closing costs. This program is good all the way up to the maximum county conforming high balance loan limit in the county in which you’re looking to buy a home. So, in Sonoma County, California, for example, $554,300 is the maximum high balance loan limit which is eligible for this program.
The basis of the doctor’s loan is to allow doctors, specialty doctors, and dentists to have an easier time with securing financing to purchase or refinance a home.
Doctors Can Also Use Future Income
The program also allows doctors to use future income to qualify. For example let’s say you’re in your residency. Within 30 days you have an employment contract to earn substantially more. Lenders that offer the program will allow you to use the future income to qualify to buy the house. This is something FHA, Conventional, VA and Jumbo financing do not allow.
The doctor’s loan requires a minimum credit score of 680 and supporting income and asset documentation certainly will be required. If you don’t know what your credit scores are, you can get two free credit scores, updated every 14 days, on Credit.com. It’s completely free and you’ll never be asked for your credit card information.
If you’re a physician and are looking for some mortgage options, the doctor’s loan is flexible choice. Ask your lender if they have this program. If they do not offer it, find a mortgage company that does. Remember, it’s incumbent on you as the homebuyer to make sure you’ve done your research as to what’s available in the marketplace to tip the scales in your favor for securing the best type of mortgage financing available.
Buying a home is no easy feat. There’s a lot of paperwork you need to be on top of to secure the big-ticket purchase. Here’s how do determine if you should pull the trigger or wait until your finances are in better shape.
Banks will let you take on a mortgage payment at no greater than 45% of your monthly income. This means if you’re earning $8,000 per month, your lender will allow you to take on approximately half of this on a monthly basis for a mortgage payment, with other monthly liabilities. The reality is 45% of your monthly income is a huge percentage of your income going toward a housing payment and other monthly obligations, excluding childcare, college savings, savings in general, other household bills and retirement planning. So if you find you’re unable to make those ends meet, chances are you may not be ready to buy a home.
What follows are some ways to keep your mortgage payment as manageable as possible.
Pay Off Debts to Qualify
If you have a workable down payment, but you have debt payments such as a car loan that are pushing you above that 45% mark, you may want to pick the debts that have the greatest balance with the highest monthly payments, and pay those off in full. Doing so will allow you to not only buy more house but, more importantly, to afford a new mortgage payment.
Keep Your Debts in Check
Car payments, credit card payments — whatever payments you are currently making will limit your buying power. These debts should be as absolutely low as possible.
Don’t Focus on High-Interest Debts First
It’s not what you owe, it’s what you pay that counts. The minimum payment that you’re obligated to make on credit obligations independent of whatever interest rate you have is what lenders will look at to qualify you. Yes, that 0% auto loan could adversely affect your ability to borrow, especially if that payment is a few hundred dollars per month.
Just because you qualify for a mortgage does not automatically mean you should pull the trigger. The ideal approach is to purchase a house in the following way: Make the mortgage payment low enough so you can pay off other obligations, have the ability to save and contribute to retirement.
If buying a home prevents you from being able to save or from getting out of higher-interest rate debt such as credit cards, student loans, personal loans, etc., put the housing project on hold or pause and ask yourself whether buying a house is really the best financial move for you right now. In some cases, buying a house — despite the obligations — might still make financial sense. In other cases, it might make sense to just say no.
Remember, only you will be making your mortgage payment. So buy a home when it financially makes sense for you. Low rates are an attractive reason to buy a home, but exercising financial prudence should be your number one objective when buying a home.
Also keep in mind that your credit score will impact your ability to qualify for a mortgage with reasonable terms. If you’re not sure where you stand — or want to see what you need to improve — a good place to start your research is by getting ahold of your credit reports. You can view a free snapshot of your credit report, updated regularly, by signing up for an account on Credit.com.
Q. I don’t have an emergency fund, but I have always felt very secure knowing I have a zero balance, low-interest home equity line of credit that would allow me to get, on an emergency basis, close to three times my annual salary. Is this a legitimate substitute for a separate emergency fund? — Curious
A traditional emergency fund covers anywhere from 3 months to a year’s worth of expenses, depending on your personal needs. The money is usually kept in a safe and liquid account.
Chip Wieczorek, a certified financial planner with Tradition Capital Management in Summit, N.J., said it’s not advisable or realistic to keep two or three years of living expenses in a savings account with a near 0% yield.
However, he said, home equity lines have pitfalls.
“I advise clients to maintain three to six months of living expenses in a savings account in addition to establishing a home equity line of credit (HELOC) for large unexpected expenses,” he said.
Wieczorek said when using a line of credit as an emergency fund, you must be aware that lines have a draw period and a principal pay down period.
A typical HELOC has a seven- to 10-year draw period during which the client can access funds and make interest only payments based on a 20- to 30-year amortization schedule. After the draw period expires, funds can no longer be drawn from the line of credit and both principal and interest payments are required.
“You may think you have two to three years of salary accessible from your line of credit but if the draw period expires, your emergency fund has dried up, Wieczorek said. “Most people do not realize this and should review their HELOC terms on an annual basis.”
Also keep in mind that home equity lines are variable and can be frozen by a bank. The interest rate for the line is generally based on an index, such as the prime rate, Wieczorek said.
“This means that the interest rate can increase over time, which would increase your monthly payment as well,” he said.
Also, in 2008, major home equity lenders began informing borrowers that their home equity lines of credit had been frozen or restricted.
“Falling housing prices led to reduced equity for borrowers, which was perceived as an increased risk of foreclosure in the eyes of lenders,” he said. “Courts have held that a bank may freeze a HELOC in instances where a home’s value decreases substantially.”
Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, also referenced 2008 as a problem for many home equity line borrowers.
“It is very possible that the condition that requires you to tap into that credit line — you lost your job or got hurt — may make the bank close the credit line,” he said.
Lynch said a mortgage and a home equity line is not a loan on a home, but instead is a loan on your income.
“If that can be shut down, and that was your plan, you need a better plan,” he said. “Plan A never works. What’s your plan B and C?”
Consider going a more traditional route over time and build the kind of emergency fund you can always count on.
[Editor’s Note: If you plan on opening a home equity line of credit, make sure your credit score is in good shape, as it will be a major factor in determining the interest rate you’ll pay. You can check your credit scores for free on Credit.com.]
When you fill out a mortgage application, lenders look for income to offset debt. If your monthly debt payments consume too much of your income, you may have a tough time qualifying for a home loan.
Underwriting, which is the decision-making of whether or not to grant credit, determines what your income is with supporting documentation like pay stubs, W-2s and tax returns. (It also looks at your credit scores to decide whether you qualify. You can get your two free credit scores, updated each month, on Credit.com.)
Fortunately, a lender may be willing to look at more than just your regular salary when it comes time to calculate your debt-to-income ratio. Here are various forms of income most mortgage banks will sign off on.
If you’re eligible, you can purchase an annuity, a contract sold by a life insurance company that provides regular monthly income in return for an initial lump-sum deposit.
The income derived from this annuity will be used to determine how much mortgage and/or house you can qualify for. An annuity can be brand new — you need not have a long history of this income as long as it’s set to continue for the next 36 months or longer.
2. Social Security Income
If you’re eligible for Social Security, you might want to consider taking it early as this income can easily be used to help you qualify for a mortgage. You may be also able to “gross up” this income by up to 1.25%, depending on whether or not you pay taxes on it.
3. Notes Receivable
Generally, you’ll need to earn income from a note receivable (a credit extended to a business) for at least 6 months for it to count on a mortgage application. Notes receivable income has to be based on the market rate and it’s the interest on the note that is used to determine your eligibility for your desired borrowed amount. For example, if you have a note receivable at 5.5% based on a principal balance at $50,000 that income would be $229.16 per month used for a mortgage.
4. Purchasing a Rental Property
If you are looking to purchase a rental property, you’re in luck. You can use projected fair market rents to qualify for its mortgage. Lenders will use up to 75% of gross market rents to offset the mortgage payment. In other words, because the renters are making the mortgage payment, you don’t need to earn as much to get a green light on your loan application.
5. Renting Your Current Home
If you are trying to buy a new primary residence, but don’t have enough income to support two mortgage payments, you can rent out the property. A rental agreement and tenant security deposit allows you to offset the mortgage payment on your current home to qualify for a mortgage on a new home. The concept is almost identical to purchasing a rental property, with the exception of needing to have a rental agreement in place for your current home.
6. Self-Employment Income
A history of self-employment income is required for it to count on your mortgage application. Generally, Schedule C Sole Proprietor income needs to be in place for at least 12 months in order for that income to count. Note: If you have been self-employed for the past two years and you had one bad year, followed by a good year, your income will be averaged by your lender.
Adjustable-rate mortgages, where the interest rate is subject to change according to market fluctuations and terms, may make certain borrowers wary, particularly following the Great Recession. But there are times when this mortgage type may be right for you.
Here are some things to consider if you’re looking for a short-term home loan and are on the fence about what mortgage to apply for.
ARMs vs. Fixed Rate Mortgages
The mortgage king is still the plain old 30-year, fixed-rate mortgage. The payment on this mortgage type remains constant over its 360-month life, with no changes. It’s measurable and gives homeowners the ability to plan their finances around a set payment.
The 30-year fixed rate mortgage is also the most expensive mortgage. What makes the 30 year loan pricey is its 360-month term. The longer the term of a mortgage, the more interest you’ll pay over time. Conversely, on a shorter loan, you pay quite a bit less in interest.
The adjustable-rate mortgage offers a teaser rate for a certain introductory period, typically in increments of 3, 5, 7 or 10 years. The loan rate becomes variable after the teaser period ends — at that point, the interest rate is based on a fully indexed rate and changes usually about once per year.
The fully indexed rate is computed by adding an index, like the 12-month London Interbank Offered Rate, to a margin, say at 2.25. These factors vary from lender to lender. However, as an example, if you took out a 5/1 ARM, the first five years could feature a teaser rate at 2.875%, while the remaining 25 years of the 30-year term would be variable.
ARMs do contain annual caps and life caps, disclosing just how much your rate and payment could go up annually and over the term of the loan.
The Current Mortgage Market
Currently, conventional 30-year fixed rate mortgages are priced at around just .5% higher in rate than a short-term adjustable-rate mortgage.
So, for instance, if you were to take a loan at $500,000 at a 30-year fixed rate of 3.875%, you could get the same loan size on a five-year ,adjustable-rate loan at 3.375%. That is a small spread between too vastly different loan types. The relationship between ARMs and 30-year fixed rate mortgages used to be about a full 1% when ARMs were much more popular.
However, rates are always subject to change. And you should look at the big picture when applying for a mortgage, especially if you are on the fence about which route to go.
When Should I Consider an ARM?
The average 30-year fixed-rate loan typically only stays on the books for about 5 to 7 years. That’s because within that timeframe, many borrowers will refinance or buy another property.
If you know the loan that you’ll have is going to be short-lived due to your financial circumstances, an ARM may be a suitable choice. Keep in mind, you’ll generally need to be out of the ARM before the interest-rate adjustment period occurs (also called a re-cast).
The following scenarios could make an ARM worth considering:
The property with the ARM is going to be sold within the next five years or within the teaser-rate time period.
You’re selling another property, and the net proceeds will be used to pay off the property with the ARM.
You’re using the ARM as part of an accelerated principal-balance-pay-down strategy. For instance, you could be making large, radical principal-balance pay downs on your short-term ARM. With the right teaser rate period and low rate, such a strategy could accelerate your ability to pay off your home. But this strategy would only apply for disciplined homeowners.
You don’t really need the money. If you have significant liquidity and understand the market flows, ARMs can be less costly.
Everyone’s personal financial decisions are different and everyone has different reasons for needing to borrow money. If your future is unknown, a longer-term, fixed-rate loan is probably a safer bet in most circumstances. Ask questions, do your research and make sure you understand the fine print associated with whatever type of mortgage best financially suits you.
The Federal Housing Administration continues its mission to help consumers realize the dream of homeownership. In today’s mortgage lending environment, there are three buckets of loan options available for borrowers, including conventional, FHA and jumbo loans. Of the three, FHA mortgages are significantly more flexible, especially in the following areas:
The fact that the FHA raised its loan limits in 188 counties nationally speaks to a broader theme that there is reinvigorated demand for housing, both in terms of home sales and refinancing. For example, in Sonoma County, Calif., the Federal Housing Finance Agency had a maximum conforming loan limit for 2015 at $520,950. That number has been raised to $554,300 for 2016. The FHA followed suit, raising their loan limit previously set at $520,950 to match the $554,300 figure.
What this means in Sonoma County and elsewhere is that you can buy a home with 3.5% down up to the maximum local FHA loan limit. In other words, for people who have been on the fence about buying a home because they don’t have the cash, or were at a competitive disadvantage because housing prices have risen so strongly, they now have more options.
Using the Sonoma County $520,950 previous loan limit, for example, a borrower in 2016 will have the ability to borrow up to $33,000 more or spend $33,000 more buying a home than they could have in 2015’s FHA underwriting criteria.
Case in point, if you are looking for a home and your loan size was more than $520,950 in 2015, you would’ve been thrown in the jumbo loan category, requiring significantly more cash out of pocket. This is why the loan limit increases, for the right type of borrower, can substantially benefit them because they would need less cash and have more leniency in loan-to-values needed for a higher priced home.
As a refresher, FHA still offers these flexible financial thresholds:
Up to 85% cash out refinancing
Three-year waiting time post-foreclosure
Three-year waiting time post-short sale
Three-year waiting time post deed in lieu
Two-year waiting time from Chapter 7 bankruptcy
One-year waiting time from Chapter 13 bankruptcy
While FHA loans can make sense for people who want to get their foot in the door, they do come with some higher costs consumers ought to consider. FHA loans contain a 1.75% upfront mortgage insurance premium typically, financed in the loan amount (or paid for in cash), as well as a monthly mortgage insurance premium based on 0.8% of the loan amount on a monthly basis.
The FHA Loan can help a borrower accomplish financial goals while at the same time bettering their equity position and their credit score to refinance into something lower in the long term. (You can see where your credit currently stands by viewing your free credit report summary, updated each month, on Credit.com.) Like conforming conventional and jumbo loans, FHA loans still require full documentation, such as tax returns for two years, W-2s, pay stubs and bank statements. But they are flexible on using reserves and gift monies to purchase or refinance a home. You can find tips on negotiating the best price when buying a home here.