Refinancing With Your Current Mortgage Lender: Is It a Good Idea?

Should you refinance with your current lender?
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Recently, you hopped online to make your mortgage payment. On the front page of your financial institution’s website, you saw refinancing advertised at a much lower interest rate than the one you currently carry.

Your gut instinct may be to fill out an application for a refi. Who doesn’t want a lower interest rate on their mortgage?

But before you jump at the offer to refinance with your current lender, you should shop around. There may be better deals out there.

Pros And Cons Of Refinancing A Mortgage With Your Current Lender

Pros:

  • They have all of your personal information on hand, which may help the approval process go marginally faster.
  • You may be able to use your continued patronage as a bargaining chip for lowering closing costs and other fees.
  • If you like your current financial institution, there’s nothing wrong with staying with them out of brand loyalty — as long as it’s not costing you money.

Cons:

  • You will still have to provide documentation such as bank statements and W-2s, and your lender will still have to pull your credit report.
  • They may not have the best rates on the market. You’ll need to shop around to find out.
  • They may have more or higher fees than their competitors.
  • If you’re a customer service nightmare, your current institution may offer you higher rates

How to shop for a refi loan

That advertised rate you saw may not be the best option on the market. Even if it is, there’s no guarantee you’ll qualify for it.

Step 1: Compare rates from multiple lenders

Before you fall in love with the benefits of refinancing with your current lender, check to see what you can find elsewhere. A great way to do this is to use a site like LendingTree, which is MagnifyMoney’s parent company and one of the biggest online marketplaces for loans.

Without performing a hard credit pull (which saves you from dinging your score), LendingTree will ask you some basic underwriting questions via an online form. They can then match you with potential lenders who participate in its marketplace. The lenders will contact you via email or phone with quotes, which you can compare.

Of course, you can always work directly with lenders in your area as well.

Armed with this information, you can go back to your current lender to see if they can meet or beat the lowest rate you’ve been offered.

Step 2: Get all quotes the same day

“It is important to get all the quotes at the same time on the same day,” says Casey Fleming, mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage,” “because at that moment, everyone is looking at the same data, and their wholesale cost for that loan is identical.”

That’s because of the way mortgage lenders set their rates. When you take out a mortgage, your financial institution actually owns it for a very short period of time. But not for long. Eventually, they will bundle your loan together with a bunch of other loans and sell it to investors, and they continue to service your loan for a small fee.

They offer standard, wholesale interest rates to investors daily. Your financial institution needs to charge you more than that wholesale interest rate if they want to make a profit on the sale. You should apply to all financial institutions on the same day to ensure they’re all basing your quotes off of the same wholesale rate.

Step 3: Go to your lender to negotiate

When you find the best offer, use it as leverage with another lender. If they’re eager for your business, they may be willing to outdo their competitor. Remember that you’re not just negotiating interest rates but also origination fees, closing costs and appraisal report costs.

After you are offered a quote you are happy with, the lender locks it for a specified period of time before it is rescinded. Better rates merit shorter lock periods, the shortest being 15 days.

What if I find a better deal and they won’t match it?

If your current lender won’t match the outside quote, it likely makes sense to go with the outside lender. You’ll have a limited window in which to lock in your new refi rate, called a rate lock period. Be sure you know how long your rate lock period lasts so you can decide before you lose your rate.

A great rate isn’t all you should look at when comparing the costs of remaining with your lender versus choosing a new lender. Ask about origination fees, balloon payments and prepayment penalties — all of which could potentially make it more expensive to refinance.

After you have applied for the loan, you will be issued a Loan Estimate form, which outlines the proposed terms. At this point, a home appraisal will be performed to determine the value of your home.

Once final approval is issued, you will receive a Closing Disclosure form, which will tell you exactly how much you will need for closing costs. At this point you are still able to walk away from the table. After three days have passed, you’re finally allowed to sign the documentation agreeing to the loan.

How do I know it’s time to refinance my mortgage?

Whether you decide to refinance with your current lender or not, before taking the plunge you want to figure out if doing so will actually save you money.

Fleming says, to make a fair judgment, you need to look at interest and other costs over the same holding period.

“Very few people hold their mortgage until it’s paid off,” he explains. “Comparing the two for a period longer than [a few years] makes no sense, since your savings on the proposed loan will stop once you sell the house or refinance.”

For example, let’s say you currently have a mortgage with a balance of $284,020 with a 5% interest rate. You are considering refinancing to a 4% interest rate. In order to refinance you’d have to pay $4,100 in fees, including closing costs and origination fees.

Let’s look at how each of these options would pan out over an 84-month holding period:

Your current mortgage

Potential refi

Rate: 5%

Rate: 4%

Fees and closing costs: N/A

Fees and closing costs: $4,100

Total interest charges over 7 years: $92,385

Total interest charges over 7 years: $77,207

Total savings: $15,178

The refinance will, indeed, save you money even with the closing costs and fees. It’s time to refinance.

How to negotiate a refinance with your current lender

Like we mentioned before, when financial institutions issue a mortgage or refinance, they don’t typically keep it. They usually sell it off, and then continue servicing your loan for a kickback from the buyer. And they know that in order to keep getting paid that servicing fee, they’ll have to keep servicing your loan. That gives you a bit of leverage.

If you have other offers on the table, your current lender may be willing to meet or beat them.

“Call [your lender], and one of your options will be to speak with a loan officer, or mortgage adviser, or mortgage planner,” says Fleming. He notes that all of these titles are indicative of the same job description. “Tell them that you believe you can get a better rate, and that you have begun shopping and wanted to give them a shot at keeping you as a customer.”

This will only work if you can actually get a better rate elsewhere. While you can refinance with your current lender, the lender will be able to tell if you’re bluffing as they’ll have to pull your credit report and look at recent bank statements and W-2s.

“If [you] love the service of [your] existing lender, by all means ask them for a quote,” says Fleming, “but the market is very competitive today so shopping will almost certainly save you money.”

The post Refinancing With Your Current Mortgage Lender: Is It a Good Idea? appeared first on MagnifyMoney.

Can You Use a Personal Loan for a Home Down Payment?

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Scraping together the down payment on their mortgage is the biggest challenge facing many would-be homebuyers. And lots of those would probably like to use a personal loan to top up their savings so they reach their lender’s threshold. But can they do that?

The short answer is that few lenders would give their consent to a borrower looking to use a personal loan for their down payment. You would be taking on new debt and then taking on even more debt on top of that…not exactly the greatest solution.

The good news is that there are lots of different options out there for low down payment mortgages and even assistance programs that can help you get together funds for a down payment.

How Much Do I Really Need For A Down Payment?

Let’s make sure you know how big your down payment needs to be. Because, if you are a bit fuzzy on that, you are not alone. And you could be in for some good news.

A survey of professionals at a 2017 conference hosted by the Mortgage Bankers Association revealed a persistent myth: Twenty-eight percent of respondents thought “consumers still mistakenly believe that a 20 percent down payment is a requirement for purchasing a home.” And another four in 10 respondents thought that even those who knew 20 percent isn’t necessary still believed they’d find it difficult to buy a home with less.

Those consumers couldn’t be more wrong. Creditworthy buyers can usually get approved for a mortgage with a down payment as small as 3 or 3.5 percent. And some (more than you may think) who qualify for specialist mortgage programs need put down nothing. Discover more about all those options below.

Here are the minimum down payments required for a selection of mortgages.

Remember: You may get a better mortgage rate if you increase the amount you put down.

The Best Mortgages for a Low Down Payment

Type of Loan

Down Payment Requirement


Mortgage Insurance

Credit Score Requirement

FHA

FHA

3.5% for most

10% if your FICO credit score is between 500 and 579

Requires both upfront and annual mortgage insurance for all borrowers, regardless of down payment

500 and up

SoFi

SoFi

10%

No mortgage insurance required

Typically 700 or higher

VA Loan

VA Loan

No down payment required for eligible borrowers (military service members, veterans, or eligible surviving spouses)

No mortgage insurance required; however, there may be a funding fee, which can run from 1.25% to 2.4% of the loan amount

No minimum score
required

homeready

HomeReady

3% and up

Mortgage insurance required when homebuyers put down
< 20%; no longer required once the loan-to-value ratio reaches 78% or less

620 minimum

homeready

USDA

No down payment required

Ongoing mortgage insurance not required, but borrowers pay an upfront fee of 2% of the purchase price

620-640 minimum

Conventional loans (one not backed by a government program)
A conventional loan is simply a type of mortgage loan that isn’t backed by a government program. Usually these loans require a 5 to 20 percent down payment, though that can be as low as 3 percent using offerings such as Fannie Mae’s HomeReady or Freddie Mac’s Home Possible mortgages. You will need to be reasonably creditworthy.

SoFi

SoFI offers mortgage loans for minimum down payments of 10 percent. You can borrow between $100,000 and $3 million. And you will not have to pay for private mortgage insurance (we’ll talk more about PMI below), even though you have not reached the usual 20 percent down payment threshold. But you will need to have good-to-great credit and sound finances.

Federal Housing Administration mortgage (FHA loan)

FHA mortgages require a 3.5 percent down payment if your credit score is 580 or higher. This can be good if your credit score is less than stellar, but it may be more costly than other options. That is because you will be liable for mortgage insurance premiums (MIPs), which will be added to your monthly mortgage payments.

U.S. Dept. of Agriculture mortgage (USDA loan)

USDA loans require no down payment, unless you have significant assets. There are various eligibility criteria, including your having a low to moderate income. And you must purchase in an eligible area, although those areas make up 97 percent of the nation’s land mass. You can check if you and your area qualify using a tool on the USDA website.

Veterans Affairs mortgage (VA loan)

VA loans also require no down payment. These are for veterans, those still serving in the military and related groups. You can check your eligibility on the VA website. If you qualify, it is highly likely this will be the best mortgage you can get.

Learn more by checking out our guide to The Best Mortgages That Require No or Low Down Payment.

3 Ways To Get Help With Your Mortgage Down Payment

Down payment assistance programs

Before exploring ways of borrowing to top up your down payment funds, you should definitely check out your eligibility under various assistance programs. These are typically targeted at middle- and low-income buyers, and you may have to use a lender that participates in the program.

Some programs provide outright grants or gifts that do not have to be repaid. And they are often available to both first-time buyers and existing homeowners.

Many of these down payment assistance (DPA) programs are state-based. You can click through to your local offering, if any, from the U.S. Department of Housing and Urban Development (HUD) website, which has a link for each state. You should also call your city or county to see if it operates a similar, parallel program.

Others are run across multiple states by nonprofits, such as the National Homebuyers Fund. Freddie Mac recommends a look-up tool on the private Down Payment Resource website as a way of tracking down DPA programs for which you might be eligible.

Finally, do not forget to check with your human resources department. Some employers offer help.

Using a gift from family or friends

Suppose you cannot get help from a mainstream DPA or your employer. Perhaps your parents or another close relative, fiancé, fiancée or domestic partner may be willing to give you a gift toward your down payment. Your lender should normally have no problems with this arrangement. But it is very likely to apply a couple of industry-standard rules:

  1. You must meticulously document the gift process and provide copies of the donor’s withdrawal slip or check, and the recipient’s deposit slip. If appropriate, a copy of the donor’s check to the closing agent is fine.
  2. You must provide a letter or form signed by the donor declaring that the payment is a gift and not a loan. This must include certain information and statements, and you can download a sample gift letter from the NOLO legal website.

Many lenders will allow this gift to cover 100 percent of the down payment. However, some may prefer you to provide some of the funds yourself.

Expect your loan officer to be mildly suspicious of large gifts. Some applicants try to sneak through money that is actually a loan in disguise, risking jail time or fines for mortgage fraud. If you raise any red flags, your loan officer can investigate the funds in great detail, including their ultimate source.

It is generally fine to borrow money from friends or relations for part of your down payment, providing you declare the loan(s) to your lender. It can then include your repayments when it assesses your ability to afford your mortgage.

Central to that assessment is your debt-to-income (DTI) ratio. As the name suggests, that is the proportion of your monthly income that goes out in debt payments, including minimum payments on credit cards and standard payments on instalment loans, such as auto, student and personal loans, as well as your new mortgage. You should also include any regular commitments for alimony or child support.

LendingTree has a DTI calculator that can help you determine yours. If you plan on borrowing for your down payment, include the payments on the loan(s) from your family or friends when you use it. It is unlikely a lender will allow your DTI to be higher than 50 percent. Some types of mortgage require 43 percent, and many lenders prefer it to be in the 30s.

Borrowing from yourself

One way to keep your DTI low is to borrow from yourself because not all lenders count repayments of such loans in your DTI, even if you have to make them. But you need to check your lender’s policy before you proceed, and either rule out this option or find a more sympathetic source for your mortgage.

How do you borrow from yourself? By raiding your retirement pot. You may be able to make a withdrawal or take a loan from your 401(k), IRA or Roth IRA to fund your down payment.

But, unless you are a tax accountant, you should take professional advice before doing so. No, really. This is a big step with lots of potential implications.

Potential implications of raiding your retirement funds

  1. Unless you use money in a Roth IRA, you could find yourself with significant tax liabilities if the loan isn’t repaid.
  2. If you withdraw money from your 401(k), your employer could demand immediate repayment in full if you switch jobs or otherwise leave.
  3. Some 401(k) funds have rules against this sort of borrowing.
  4. Whatever you do, there is a high chance your retirement fund will take a big hit.

As previously suggested, take advice from a trusted, reputable professional.

Advantages of making a 20 percent down payment

There’s a reason that 20 percent down payment myth survives. It may well be that, decades ago, your parents or grandparents had to find that much as a minimum.

And 20 percent remains an important threshold for borrowers. Put down that much or more, and you won’t have to pay for private mortgage insurance (PMI).

You have to pay the premiums for PMI (they are mostly wrapped up in your monthly mortgage payment, but you may have to make an upfront payment too), but the only benefit you get from them is an ability to borrow with a smaller down payment. If any claim is made on the policy, probably because you have defaulted on your loan, the payout will go directly to the lender.

The biggest downside to a low down payment: PMI

Like we mentioned, most mortgage loans that come with a low down payment requirement have a big caveat — the added cost of private mortgage insurance.

The amount you pay for PMI will depend on the type of mortgage you choose and maybe your personal circumstances:

  • Conventional loan — You will get a quote from your lender. Monthly payments are typically lower than on some other types of mortgage and will depend on your credit score and the size of your down payment. Your upfront payment is likely to be small or sometimes zero.
  • SoFi loan — There is no PMI and so no MIPs on these loans with a down payment equal to or higher than 10 percent.
  • FHA loan — This is often the most expensive type of PMI. But its costs are not affected by your credit score, and the size of your down payment tends to have less impact. So this is a good bet if your credit is iffy and you don’t have substantial savings. At the time of writing, in 2017, you can expect to pay 1.75 percent of the loan value as an upfront charge, and then anything between 0.45 percent and 1.05 percent annually, depending on how much you borrowed and the sizes of your original loan and down payment. Although calculated on an annual basis, ongoing premiums are spread evenly through the year and collected through your monthly payments. If you cannot afford the upfront payment, it may be possible to wrap it up in your overall loan.
  • USDA loan — This is similar to the FHA loan’s PMI model, but typically has lower upfront and monthly payments. As with FHA loans, if you cannot afford the upfront payment, it may be possible to wrap it up in your overall loan.
  • VA loan — You do not pay ongoing monthly premiums with one of these. However, you do pay an upfront cost, called a “funding fee.” For first-time buyers in 2017, these range from 1.25 percent to 2.4 percent, depending on your type of service and the size of your down payment. For regular military with a zero down payment, it is 2.15 percent. If you cannot afford that funding fee, you may be able to wrap it up in your overall loan.

Most sorts of PMI terminate (either automatically or on request) when your mortgage balance reaches 80 percent of the contract price or the property’s appraised value when you bought your home. However, that does not apply to FHA loans. You will likely be on the hook for PMI premiums for those until you move or refinance.

Should you wait to get a mortgage until you can avoid PMI?

By now you may be pondering a dilemma: Should you jump into the market now and swallow those PMI costs? Or might you be better off holding back until you have the whole 20 percent down payment, thus avoiding PMI altogether?

Your smart choice largely depends on the real estate market where you want to buy. It might also depend on the market where you are selling, if you are not a first-time buyer. And it is mostly down to math.

A matter of math

Research home-price trends in your target neighborhood to see whether they are rising (they are in most places) and, if so, how quickly. Bear in mind that some forecasting companies expect growth to continue, but more slowly. For example, CoreLogic calculated home prices grew 6.7 percent nationwide in the year ending July 2017, but expects that to slow to 5 percent by July 2018.

It makes sense to go ahead and jump into the housing market if you anticipate that the value of your home will increase sufficiently year after year to offset the added cost of PMI.

Once you have a feel for those price trends, use a calculator like MagnifyMoney parent company LendingTree’s mortgage calculator to model your options. It will itemize your PMI as part of your total monthly payment. Work out how much you could save by avoiding PMI, and compare that with how much you stand to lose in home-price inflation if you wait to save that 20 percent.

You are now in a position to make an informed decision over whether to buy now or carry on saving. Of course, if in the meantime you find the home of your dreams, you can always choose to go with your heart rather than your head.

For more information, read What Is PMI and Is It Really That Bad?

One last thing about personal loans…

There are lots of things to like about personal loans. They are easy, quick and relatively cheap (or often free) to set up. They almost always have lower interest rates than credit cards for equivalent borrowers. And they make budgeting simple, because you know how much you will pay each month, subject to rate hikes.

However, typically their rates are noticeably higher than secured loans, such as mortgages and home equity products. And you need good credit to get a low interest rate.

Some lenders advertise personal loans for as much as $100,000. Others have more modest caps. How much you will be able to borrow will depend on many factors, including how easily you can afford to repay it and your credit score.

Find out more at Shopping for Personal Loans.

The post Can You Use a Personal Loan for a Home Down Payment? appeared first on MagnifyMoney.

How I Bought My Dream Home for No Money Down  

Source: iStock

Like many young professionals, 31-year-old Brittany Pitcher thought her dream of homeownership dream would never quite line up with the reality of her financial outlook. Pitcher, an attorney in Tacoma, Wash., earns a good salary, but a large chunk of her take-home pay goes toward paying down her debt from law school, not leaving much room to save for her dream home — especially when most experts recommend coming up with at least a 20 percent down payment. 

“With my law school student loans, I could have never saved 20 percent down for a house,” Pitcher told MagnifyMoney. “Twenty percent is an outrageous amount of money to save.” 

But Pitcher managed to find a more affordable solution, and in 2015 she was able to purchase her dream home for $0 down.

Here’s how she did it:

A loan officer suggested Pritcher look into securing a grant from the National Homebuyers Fund (NHF), a Sacramento, Calif.-based nonprofit that works with a network of lenders nationwide to make the home-buying process more affordable, offering assistance for down payments, closing costs, mortgage tax credits and more. She applied and was awarded an $8,000 grant, which covered her down payment and closing costs. 

Each lender that works with the NHF to offer downpayment assistance has different eligibility requirements for borrowers. In Pitcher’s case, she had to earn less than $85,000 annually to qualify for the grant. She also had to take an online class driving home the importance of paying her mortgage. 

There were other stipulations, too. She was required to use a specific lender and agree to a Federal Housing Administration mortgage with a rate of 4.5%. Since FHA mortgage loans require only a 3.5 percent down payment, the grant fully covered her down payment.

But like all FHA mortgage holders, Pitcher soon learned there was a price to pay for such a low down payment requirement — she had to pay a monthly mortgage insurance premium (MIP) on top of her mortgage payment, which added an additional $112 per month.  

With the grant, Pitcher successfully purchased her first home in 2015, trading up from a one-bedroom rental to a three-bedroom house. And even with the added cost of MIP, her monthly mortgage payment was still roughly $100 less than what she would pay if she continued renting in the area.  

“When I bought my house, with my student loans, my net worth was like negative $120,000 or something horrible like that,” says Pitcher. “Now my house has appreciated enough to where my net worth is only negative $60,000. It’s been an incredible investment that’s totally paid off.” 

After she moved into her home, she came up with a strategy that would ultimately get rid of her MIP and secure a lower interest rate. Within a year, her house had increased in value enough for her to refinance out of the FHA loan and into a conventional loan, which both lowered her interest rate and eliminated her mortgage insurance premium. 

Pitcher’s experience highlights how the 20 percent down payment rule of thumb might actually be more myth than a hard-and-fast rule.  

“Historically, the typical first-time homebuyer has always put less than 20 percent down,” says Jessica Lautz, Managing Director of Survey Research and Communications for the National Association of Realtors (NAR).  

According to NAR’s 2016 Profile of Home Buyers and Sellers report, the typical down payment for a first-time homebuyer has been 6 percent for the last three years.  

How to get a house with a low down payment  

There are plenty of programs out there that can help first-time homebuyers get approved for a mortgage without needing a 20 percent down payment.  

Type of Loan

Down Payment Requirement


Mortgage Insurance

Credit Score Requirement

FHA


FHA

3.5% for most

10% if your FICO credit score is between 500 and 579

Requires both upfront and annual mortgage insurance for all borrowers, regardless of down payment

500 and up

SoFi


SoFi

10%

No mortgage insurance required

Typically 700 or higher

VA Loan


VA Loan

No down payment required for eligible borrowers (military service members, veterans, or eligible surviving spouses)

No mortgage insurance required; however, there may be a funding fee, which can run from 1.25% to 2.4% of the loan amount

No minimum score
required

HomeReady


homeready

3% and up

Mortgage insurance required when homebuyers put down
< 20%; no longer required once the loan-to-value ratio reaches 78% or less

620 minimum

USDA


homeready

No down payment required

Ongoing mortgage insurance not required, but borrowers pay an upfront fee of 2% of the purchase price

620-640 minimum

The U.S. Department of Housing and Urban Development, for example, has a tool where homebuyers can search for programs local to their area. 

“There might be programs there that first-time homebuyers could qualify for that either allow them to put down a lower down payment or help them with a tax credit in their local community, or even property taxes for the first couple of years after purchasing the home,” Lautz says. “Those programs are available. It’s just a matter of finding them.” 

Case in point: Maine’s First Home Program provides low, fixed-rate mortgages that require a small, or sometimes zero, down payment. Similarly, the Massachusetts Housing Partnership, a public nonprofit, boasts its ONE Mortgage Program. The initiative offers qualified homebuyers low down payments with no private mortgage insurance. 

Generally speaking, where low- or no-down-payment loans are concerned, potential homebuyers have a number of options. An FHA mortgage loan, funded by an approved lender, is perhaps the most popular. Folks whose credit scores are 580 or above can qualify for a 3.5 percent down payment. That number goes up to 10 percent for people with a lower credit score. The catch is that you’ll have to pay an upfront insurance premium of 1.75 percent of the loan amount along with closing costs. 

Veterans, active-duty service members, and military families may also be eligible for a VA loan, which comes without the burden of mortgage insurance. They do charge a one-time funding fee, but no down payment is required, and the rates are attractive. 

Check out our guide to the best low down payment mortgage options > 

Christina Noone, 34, and her husband Eric, 33, bought their first home in Canadensis, Pa., in 2011 with a USDA loan. USDA home loans are backed by the U.S. Department of Agriculture. The couple put 0 percent down for a $65,000 loan with no private mortgage insurance requirement. 

“Putting money down makes your payments lower, but this specific type of loan, designed for rural areas, is manageable,” Christina says of their $650 monthly payment, which includes their mortgage and taxes. “I might have liked to wait until we had money to put down so we could have bought a nicer house for the same payments, but with zero down, we were able to get into a house easily.” 

The biggest downside for Eric and Christina, who own a local restaurant, is that their house is “a big fixer-upper,” something the couple hasn’t financially been able to tackle yet. This is precisely why Steven Podnos, M.D., a Certified Financial Planner and CFP Board Ambassador, stresses the importance of having a three- to six-month emergency fund before buying a house — especially since putting down less than 20 percent often necessitates paying for private mortgage insurance. He also suggests keeping your overall housing costs under 30 percent of your income. When it comes to finding a lender, he adds that shopping around is in your best interest. 

“It’s a competitive process,” he says. “I always tell people: get more than one offer. Go to more than one institution because different banks at different times have different standards, different amounts of money they’re willing to lend, and different risks they’re willing to take.”

The post How I Bought My Dream Home for No Money Down   appeared first on MagnifyMoney.

Understanding the FHA 203k Loan

Finding your dream home is hard.

Unless you have an unlimited budget, just about any home you buy will require compromise. The house that’s move-in ready might have fewer bedrooms than you’d like. The house that’s in the perfect location might need a lot of repairs.

Sometimes it feels like you’ll never be able to afford the house you truly want.

This is where the FHA 203(k) loan can be a huge help.

The FHA 203(k) loan is a government-backed mortgage that’s specifically designed to fund a home renovation. Whether you’re buying a new house that needs work or you want to upgrade your current home, this program can help you do it affordably.

Part I: Understanding the basics of 203(k) loans

What is a 203(k) loan?

The FHA 203(k) loan is simply an extension of the regular FHA mortgage loan program. The loan is backed by the federal government, which provides two big advantages:

  1. You can qualify for a down payment as low as 3.5 percent.
  2. You can quality with a credit score as low as 500, although better credit scores allow for better loan terms.

The additional benefit of the 203(k) loan over regular FHA loans is that it allows you to take out a single loan to finance both the purchase and renovation of a property, giving you the opportunity to build your dream home with minimal money down.

How a 203(k) loan works

A 203(k) loan can be used for one of two purposes:

  1. Buying a new property that’s in need of renovations, from relatively minor improvements to a complete teardown and rebuild.
  2. Refinancing your existing home in order to fund repairs and improvements.

The maximum loan amount is determined by the general FHA mortgage limits for your area, and the minimum repair cost is $5,000. But as opposed to a conventional loan, in which your mortgage is limited to the current appraisal value of the property, a 203(k) loan bases the mortgage amount on the lesser of the following:

  • The current value of the property, plus the cost of the renovations
  • 110 percent of the appraised value of the property after the renovations are complete

In other words, it enables you to purchase a property that you otherwise might not be able to take out a mortgage on because the 203(k) loan factors in the value of the improvements to be made.

And it allows you to do so with a down payment as low as 3.5 percent, which can be especially helpful for first-time homebuyers who often don’t have as much cash to bring to the table.

All of this opens up a number of opportunities that would otherwise be off limits to many homebuyers. For Pamela Capalad, a fee-only certified financial planner and the founder of Brunch & Budget, it was the only way that she and her husband could afford a house in Brooklyn, N.Y., which is where they wanted to live.

“Finding out about the 203(k) loan opened us up to the idea of buying a house that needed to be renovated,” Capalad said. “It was by far the most budget-friendly way to do it.”

Of course, the opportunity comes with some additional costs.

According to Eamon McKeon, a New York-based renovation loan specialist, interest rates on a 203(k) loan are typically 0.25 to 0.375 percentage points higher than conventional loans.

They also require you to pay mortgage insurance. There is an upfront premium equal to 1.75 percent of the base loan amount, which is rolled into the mortgage. And there is an annual premium, paid monthly, that ranges from 0.45 to 1.05 percent, depending on the size of the loan, the size of the down payment, and the length of your mortgage.

Additionally, McKeon cautioned that unlike conventional loans, this mortgage insurance premium is applied for the entire life of the loan unless you put at least 10 percent down. The only way to get rid of it is to refinance.

What renovations can be financed through a 203(k) loan?

Source: iStock

A 203(k) loan allows you to finance a wide range of renovations, all the way from small improvements like kitchen appliance upgrades to major projects like completely tearing down and rebuilding the house.

The U.S. Department of Housing and Urban Development provides a list of eligible improvements:

The big stipulation is the work has to be done by a contractor. You are not allowed to do any of the work yourself (though there is an exception to this rule for people who have the skills to do it).

According to McKeon, this is the most challenging part of successfully executing a 203(k) loan. He said the vast majority of the projects he sees go south have contractor-related issues, from underestimating the bid, to being unresponsive, to not having the correct licenses.

On the flip side, one of the benefits is that the bank helps you manage costs. They put the money needed for the renovations into an escrow account and only release it to the contractor as improvements are made and inspected.

For Capalad and her husband, this arrangement was one of the draws of the 203(k) loan.

“I liked knowing that the contractor couldn’t suddenly gouge us,” she said. “He couldn’t quote $30,000 and then come back later and tell us we actually owed him $100,000.”

Capalad suggested using sites like Yelp and HomeAdvisor, as well as references from friends, to find a contractor. She said you should interview at least four to five people, get bids from each, and not necessarily jump at the cheapest bid.

“We made the mistake of immediately rejecting higher estimates,” said Capalad. “We realized later that their estimates were higher because they were more aware of what needed to be done and how the process would work.”

Who can use a 203(k) loan?

A 203(k) loan is available to anyone who meets the eligibility requirements (discussed below) and is looking to renovate a home.

It’s often appealing to first-time homebuyers, who are generally younger and therefore less likely to have the cash necessary for either a conventional mortgage or to fund the renovations themselves. But there is no requirement that you have to be a first-time homebuyer.

The program can also be used to finance either the purchase of a home in need of renovation or to refinance an existing mortgage in order to update your current home.

3 reasons to use a 203(k) loan

There are a few common situations in which a 203(k) loan can make a lot of sense:

  1. Expand your opportunity: In a hot market, move-in ready homes often sell quickly and for more than asking price. A 203(k) loan can open up the market for you, allowing you to choose from a wider range of properties knowing that you can improve upon any house you buy.
  2. Upgrade your current home: If you want to add a bedroom, redo your kitchen, or make any other improvements to your current home, a 203(k) loan allows you to refinance and fold the cost of those upgrades into your new mortgage with a smaller down payment than other options.
  3. Increase your home equity: McKeon argued that anyone taking out a regular FHA loan should at least consider turning it into a 203(k) loan. With the right improvements, you could increase the value of your home to the point that you have enough equity after the renovations to refinance into a conventional mortgage and remove or reduce your monthly mortgage insurance premium.

What it takes to qualify for a 203(k) loan

Qualifying for a 203(k) loan is much like qualifying for a regular FHA mortgage loan, but with slightly stricter credit requirements.

“FHA may allow FICO scores in the 500s, [but] banks/lenders have discretion or are required to only go so low on the score,” McKeon said.

Here are the major criteria you’ll have to meet:

  • You have to work with an FHA-approved lender.
  • The minimum credit score is 500, though McKeon said a credit score of 640 is typically needed in order to secure the smallest down payment of 3.5 percent.
  • You have to have sufficient income to afford the mortgage payments, which the lender determines by evaluating two years of tax returns.
  • Your total debt-to-income ratio typically cannot exceed 43 percent.
  • You must have a clear CAIVRS report, indicating that you are not currently delinquent and have never defaulted on any loans backed by the federal government. This includes federal student loans, SBA loans and prior FHA loans.
  • The current property value plus the cost of the renovations must fall within FHA mortgage limits.

The 203(k) loan application process

McKeon said the process of applying for a 203(k) loan generally looks like this:

  1. Get preapproved for a mortgage by an FHA-approved lender.
  2. Find a property you want to buy and submit an offer.
  3. Find an approved 203(k) consultant to inspect the property and create a write-up of repairs needed and the estimated cost.
  4. Interview contractors, receive estimates, and select one to be vetted and approved by your lender.
  5. Obtain an appraisal to determine the post-renovation value of your house.
  6. Provide other information and documentation as requested by your lender in order to finalize loan approval.

Property types eligible for 203(k) loans

A 203(k) loan can be used for any single-family home that was built at least one year ago and has anywhere from one to four units. You can use the loan to increase a single-unit property into a multi-unit property, up to the four-unit limit, and you can also use it to turn a multi-unit property into a single-unit property.

These loans can be used to improve a condominium, provided it meets the following conditions:

  • It must be located in an FHA-approved condominium project.
  • Improvements are generally limited to the interior of the unit.
  • No more than 5 units, or 25 percent of all units, in a condominium association can be renovated at any time.
  • After renovation, the unit must be located in a structure that contains no more than four units total.

A 203(k) loan can also be used on a mixed residential/business property if at least 51 percent of the property is residential and the business use of the property does not affect the health or safety of the residential occupants.

It’s worth noting that the property must be owner-occupied, so a 203(k) loan is not an option for a pure investment property.

Within those limits, a wide variety of properties could qualify. McKeon noted that when he writes these loans, he doesn’t care about the current condition of the property. Everything is based on the renovations to be done and the future condition of the property.

Part II: Types of 203(k) loans

Standard vs. streamline 203(k) loans

A streamline 203(k) loan, or limited 203(k) loan, is a version of the 203(k) loan that can be used for smaller renovations. While there is no limit to the renovation costs associated with a standard 203(k) loan — other than the general FHA mortgage limits — a streamline 203(k) can only be used for up to $35,000 in repairs. There is no minimum repair cost.

In return, you get an easier application process. While a standard 203(k) loan requires you to hire a HUD-approved 203(k) consultant to help manage the renovation process, a streamline 203(k) does not.

However, there are limits to the kind of work you can have done with a streamline 203(k) loan. You can review the list of allowed improvements here and the list of ineligible improvements here, but here’s a quick overview of what isn’t allowed with a streamline 203(k):

  • The improvements can’t be expected to take more than six months to complete.
  • The improvements can’t prevent you from occupying the property for more than 15 days during the renovation.
  • You cannot convert a single-unit home into a multi-unit home, or vice versa.
  • You cannot do a complete teardown.

So when does a streamline 203(k) loan make sense over a standard 203(k) loan? Here is when it’s worth considering:

  • The property requires less than $35,000 in repairs and otherwise falls within the requirements for an eligible renovation.
  • You are comfortable scoping the work, gathering contractor estimates, and supervising the renovations without the help of a consultant.
  • You don’t expect the renovations to require an extensive amount of time.
  • You like the idea of minimizing paperwork and otherwise shortening the entire process.

Part III: Is a 203(k) loan the best option for you?

Alternatives to a 203(k) loan

Of course, a 203(k) loan isn’t the only way to finance a renovation. Here are some of the alternatives.

Fannie Mae HomeStyle Renovation Mortgage

The Fannie Mae HomeStyle Renovation Mortgage is a conventional conforming mortgage that, like the 203(k) loan, is specifically designed to finance renovations.

The biggest drawback is that it requires a 5 percent down payment as opposed to 3.5 percent. That can potentially require you to bring a few thousand dollars more in cash to the table.

But McKeon says that if you can afford it, it’s usually a better option. The biggest reason is that your monthly private mortgage insurance (PMI) is typically less, and it automatically drops off once your loan-to-value ratio reaches 78 percent, as opposed to a 203(k) loan where the PMI generally lasts for the life of the loan.

Home equity loan

If you’re looking to renovate your current home, one option would simply be to take out a home equity loan that allows you to borrow against the equity you’ve already built up in your house.

The advantages over a 203(k) loan would generally be a potentially lower interest rate and fewer restrictions around what improvements are made and who makes them.

The big downside is that your loan is limited to your current equity. If you purchased your home relatively recently, or if your home has decreased in value, you may not have enough equity to finance a sizable improvement. And if you are looking to purchase and renovate a new home, the 203(k) loan is likely the better option.

Title I property improvement loan

Like 203(k) loans, Title I property improvement loans are backed by the federal government. They allow you to borrow up to $25,000 for single-family homes, and up to $12,000 per unit for multi-unit properties, to improve a home you currently own.

This loan could be preferable to a 203(k) loan if the improvements you want to make are relatively small, you don’t want to refinance or don’t have the money for a down payment, and/or you’d like to avoid some of the requirements and inspections surrounding a 203(k) loan.

Personal savings

If you have the savings to afford the renovations yourself, or if you can wait until you do have the savings, you could save yourself a lot of money by avoiding financing altogether.

Of course, this may or may not be realistic, depending on the type of project you’re considering. For smaller projects that aren’t urgent, this is a worthy candidate. For larger projects or those that need to be addressed immediately, financing may be the only way to make it happen.

203(k) loans open up new opportunities

The FHA 203(k) loan isn’t for everybody. As Capalad found out the hard way, the money you save is often more than made up in sweat equity.

“I was making calls during my lunch break, and my husband was regularly stopping at the house to check in on things,” she said. “It really felt like our lives stopped for those 10 months.”

But McKeon said that if you have a creative eye and you’re willing to put in the work, you can end up with a much better home than you would have been able to purchase if you limited yourself to move-in ready properties, especially if you have a limited amount of cash to bring to the table.

In the end, it’s all about understanding the trade-offs and doing what’s right for you and your family. At the very least, the 203(k) loan expands the realm of possibility.

The post Understanding the FHA 203k Loan appeared first on MagnifyMoney.

42 States with the Highest Home Seller Profits

Home For Sale Real Estate Sign and Beautiful New House.

If you’ve been thinking about selling your home, we’ve got some good news for you. According to RealtyTrac.com, home sellers saw an average price gain of $51,000 in Q2 of 2017. That’s a 26% average return on the previous purchase price. Most homeowners who sold during Q2 this year had owned their home an average of eight years, and while it’s a great time to sell your home right now, that also means homebuyers are looking at steep competition in today’s seller’s market. Find out the average home seller profits for your state in Q2 this year.

1. California, San Jose-Sunnyvale-Santa Clara

Average Price Gain Since Purchase: $410,000

Average Return Since Purchase: 74.5%

2. Hawaii, Urban Honolulu

Average Price Gain Since Purchase: $171,300

Average Return Since Purchase: 48.4%

3. Colorado, Boulder

Average Price Gain Since Purchase: $165,320

Average Return Since Purchase: 49.4%

4. Washington, Seattle-Tacoma-Bellevue

Average Price Gain Since Purchase: $165,000

Average Return Since Purchase: 63.5%

5. Massachusetts, Boston-Cambridge-Newton

Average Price Gain Since Purchase: $150,000

Average Return Since Purchase: 57.3%

6. Oregon, Portland-Vancouver-Hillsboro

Average Price Gain Since Purchase: $129,800

Average Return Since Purchase: 58.7%

7. Nevada, Reno

Average Price Gain Since Purchase: $100,000

Average Return Since Purchase: 46.5%

8. Arizona, Prescott

Average Price Gain Since Purchase: $86,000

Average Return Since Purchase: 46.7%

9. New Jersey, Newark-Jersey City

Average Price Gain Since Purchase: $82,000

Average Return Since Purchase: 29.5%

10. New York, New York City

Average Price Gain Since Purchase: $82,000

Average Return Since Purchase: 29.5%

11. Florida, Miami-Fort Lauderdale-West Palm Beach

Average Price Gain Since Purchase: $77,900

Average Return Since Purchase: 45.3%

12. Utah, Provo-Orem

Average Price Gain Since Purchase: $76,879

Average Return Since Purchase: 44.1%

13. Texas, Dallas-Fort Worth-Arlington

Average Price Gain Since Purchase: $75,511

Average Return Since Purchase: 51.2%

14.Tennessee, Nashville-Davidson-Murfreesboro-Franklin

Average Price Gain Since Purchase: $66,750

Average Return Since Purchase: 43.8%

15. South Carolina, Charleston-North Charleston

Average Price Gain Since Purchase: $58,000

Average Return Since Purchase: 29.4%

16. New Hampshire, Manchester-Nashua

Average Price Gain Since Purchase: $56,000

Average Return Since Purchase: 28.1%

17. North Carolina, Asheville

Average Price Gain Since Purchase: $53,000

Average Return Since Purchase: 28.6%

18. Rhode Island, Providence-Warwick

Average Price Gain Since Purchase: $53,000

Average Return Since Purchase: 26.9%

19. Wisconsin, Madison

Average Price Gain Since Purchase: $50,750

Average Return Since Purchase: 26.0%

20. Idaho, Boise

Average Price Gain Since Purchase: $50,354

Average Return Since Purchase: 31.9%

21. Minnesota, Minneapolis-St. Paul-Bloomington

Average Price Gain Since Purchase: $47,000

Average Return Since Purchase: 24.4%

22. Georgia, Atlanta-Sandy Springs-Roswell

Average Price Gain Since Purchase: $39,100

Average Return Since Purchase: 24.5%

23. Michigan, Detroit-Warren-Dearborn

Average Price Gain Since Purchase: $39,000

Average Return Since Purchase: 37.1%

24. Alaska, Anchorage

Average Price Gain Since Purchase: $36,319

Average Return Since Purchase: 15.4%

25. New Mexico, Albuquerque

Average Price Gain Since Purchase: $34,458

Average Return Since Purchase: 22.9%

26. Virginia, Richmond

Average Price Gain Since Purchase: $34,050

Average Return Since Purchase: 17.5%

27. Connecticut, Bridgeport-Stamford-Norwalk

Average Price Gain Since Purchase: $34,000

Average Return Since Purchase: 9.1%

28. Missouri, St. Louis

Average Price Gain Since Purchase: $33,351

Average Return Since Purchase: 26.3%

29. Ohio, Columbus

Average Price Gain Since Purchase: $32,750

Average Return Since Purchase: 22.6%

30. Pennsylvania, Pittsburgh

Average Price Gain Since Purchase: $32,500

Average Return Since Purchase: 28.3%

31. Nebraska, Lincoln

Average Price Gain Since Purchase: $29,000

Average Return Since Purchase: 22.7%

32. Louisiana, New Orleans-Metairie

Average Price Gain Since Purchase: $27,000

Average Return Since Purchase: 18.2%

33. Indiana, Indianapolis-Carmel-Anderson

Average Price Gain Since Purchase: $26,037

Average Return Since Purchase: 22.0%

34. Maryland, Baltimore-Columbia-Towson

Average Price Gain Since Purchase $25,100

Average Return Since Purchase 12.6%

35. Mississippi, Memphis

Average Price Gain Since Purchase: $20,500

Average Return Since Purchase: 16.1%

36. Arkansas, Fayetteville-Springdale-Rogers

Average Price Gain Since Purchase: $20,240

Average Return Since Purchase: 14.0%

37. Kentucky, Clarksville

Average Price Gain Since Purchase: $20,150

Average Return Since Purchase: 16.9%

38. Alabama, Huntsville

Average Price Gain Since Purchase: $18,140

Average Return Since Purchase: 13.5%

39. Illinois, Chicago-Naperville-Elgin

Average Price Gain Since Purchase: $18,059

Average Return Since Purchase: 8.7%

40. Iowa, Cedar Rapids

Average Price Gain Since Purchase: $17,500

Average Return Since Purchase: 14.3%

41. Oklahoma, Oklahoma City

Average Price Gain Since Purchase: $17,000

Average Return Since Purchase: 13.2%

42. Kansas, Kansas City

Average Price Gain Since Purchase: $10,119

Average Return Since Purchase: 6.4

Image: Feverpitched

The post 42 States with the Highest Home Seller Profits appeared first on Credit.com.

How to Get ‘Unstuck’ From Your Starter Home

Source: iStock

Andrew Cordell bought his first home at the worst possible time — 10 years ago, right before the housing bubble burst.

He’s not going to make that mistake again.

“We had immediate fear put in us as homeowners,” says Cordell, 40. “We know how dangerous this can be.”

So the small “starter home” he purchased in Kalamazoo, Michigan back in 2007 now feels just about the right size.

“When we bought, we figured we’d get another home in a few years,” he says. “But the more we settled, the more we thought, ‘Do we really need more space?’ We don’t actually need a large chest freezer or a large yard. Kalamazoo has a lot of parks.”

Apparently, plenty of homeowners feel the same way.

It’s a phenomenon some have called “stuck in their starter homes.” Bucking a decades-long trend, young homeowners aren’t looking to trade up — they’re looking to stay put. Or they are forced to.

According to the National Association of Realtors, “tenure in home” — the amount of time a homebuyer stays — has almost doubled during the past decade. From the 1980s right up until the recession, buyers stayed an average of about six years after buying a home. That’s jumped to 10 years now.

Median Tenure in Home by Age
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

 

Other numbers are just as dramatic. In 2001, there were 1.8 million repeat homebuyers, according to the Urban Institute. Last year, there were about half that number, even as the overall housing market recovered. Before the recession, there were generally far more repeat buyers than first-timers. That’s now reversed, with first-time buyers dwarfing repeaters, 1.4 million to 1 million.

This is no mere statistical curiosity. Trade-up buyers are critical to a smooth-functioning housing market, says Logan Mohtashami, a California-based loan officer and economics expert. When starter homeowners get gun-shy, home sales get stuck.

“Move-up buyers are especially important … because they typically provide homes to the market that are appropriate for first-time buyers,” he says. When first-timers stay put, the share of available lower-cost housing is squeezed, making life harder for those trying to make the jump from renting to buying.

Getting unstuck from your starter home

There are plenty of potential causes for this stuck-in-a-starter-home phenomenon — including the fear Cordell describes, families having fewer children, fast-rising prices, and flat incomes. But Mohtashami says the main cause is a hangover from the housing bubble that has left first-time buyers with very little “selling equity.”

Buyers need at least 28 to 33 percent equity to trade into a larger home, and often closer to 40 percent, he says. Those who bought in the previous cycle might have seen their home values recover, but many purchased with low down payment loans, leaving them still equity poor.

That wasn’t such a problem before the recession, as lenders were happy to give more aggressive loans to trade-up buyers. Not any more.

“In the previous cycle you had exotic loans to help demand. Now you don’t. [That’s why] tenure in home is at an all-time high,” Mohtashami says. “Even families having kids aren’t moving up as much.”

Fast-rising housing prices don’t help the trade-up cause either. While homeowners would seem to benefit from increases in selling price, those are washed away by higher purchase prices, unless the seller plans to move to a cheaper market.

“You’re always trying to catch up to a higher priced home,” Mohtashami says.

Cassandra Evers, a mortgage broker in Michigan, says she’s seen the phenomenon, too.

“It’s not for lack of want. It seems to be the inability to afford the cost of the new home,” she says. “It’s not the interest rate that’s the problem, obviously because those are at historic lows and artificially low. It’s because to buy a ‘bigger and better house,’ that house costs significantly more than their current home. The cost of housing has skyrocketed.”

U.S. Homebuyers and Student Loan Debt (by Age)
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

There’s also the very practical problem of timing. In a fast-rising market, where every home sale is competitive, it’s easy to lose the game of musical chairs that’s played when a family must sell their home before they can buy a new one.

“Folks are concerned about selling their current house in one day and being unable to find a suitable replacement fast enough,” Evers says.

Cordell, who lives with his wife and eight-year-old son, says the family considered a move a few years ago and briefly looked around. But they quickly concluded that staying put was the right choice.

“We looked at some homes and we thought, ‘I guess we could afford that. But we don’t want to be house broke’,” he says. “We don’t want to take on so much debt that ‘What else are we able to do?’ What if one of us loses our job? I guess you could say we have a Depression-era sensibility. … Who would want to get upside down on one of these things?”

The Urban Institute says this stuck-in-starter-home problem shows a few signs of abating recently. Repeat buyers were stuck around 800,000 from 2013 to 2014. Last year, the number pierced 1 million. But that’s still far below the 1.5 million range that held consistently through the past decade.

There are other signs that relief might be on the way, too. ATTOM Data Solutions recently released a report saying that 1 in 4 mortgage-holders in the U.S. are now equity rich — values have risen enough that owners hold at least 50 percent equity, well above Mohtashami’s guideline. Some 1.6 million homeowners are newly equity rich, compared to this time last year, and 5 million more than in 2013, ATTOM said.

“An increasing number of U.S. homeowners are amassing impressive stockpiles of home equity wealth,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.

So perhaps pent-up repeat homebuying demand might re-emerge. Evers isn’t so sure, however.

“Most folks I talked with are no longer interested in being house poor and maxing out their debt to income ratios. They seem to be staying put and shoving money into their retirement accounts,” Evers says.

The Cordells are content where they are in Kalamazoo and plan to stay long term. If anything would make them move, it’s not growing home equity but a growing family.

“If we ended up with a second (kid), I suppose we’d have to look,” Cordell mused. “But we have no plans for that.”

4 Signs You’re Ready to Trade Up Your Home

  • YOU’VE GOT PLENTY OF EQUITY: Your home’s value has risen enough that you safely have at least 28 percent equity and, preferably, more like 35 to 40 percent.
  • YOU’RE EARNING MORE: Your monthly take-home income has risen since you bought your first home by about as much as your monthly payments (mortgage, interest, insurance, taxes, condo fees, etc.) would rise in a new home.
  • YOU STAND TO MAKE A HEALTHY PROFIT: You are confident that if you sell your home, you’d walk away from closing with at least 30 percent of the price for your new home — or you can top up your seller profits to that level with cash you’ve saved for a new down payment. That would let you make a standard 20 percent down payment and have some left over for surprise repairs and moving costs that will come with the new place. Remember, transaction costs often surprise buyers and sellers, so be sure to build them into your calculations.
  • YOU CAN HANDLE THE RISK: You have the stomach for the game of musical chairs that comes with selling then buying a home in rapid succession. Also, if you are in a hot market, you have extra cash to outbid others or a place for your family to stay in case there’s a time gap between selling and buying.



The post How to Get ‘Unstuck’ From Your Starter Home appeared first on MagnifyMoney.

5 Things You Shouldn’t Do Before Buying a Home

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There’s a lot more to qualifying for a mortgage than simply saving up money for a down payment. You need to find a good real estate agent, have money on hand for closing costs, and understand your budget and taxes.

But for as much as there is to do while you’re preparing to buy a home, there are also things you shouldn’t do. Taking any one of these actions can jeopardize your purchase, leaving you disappointed at best, and potentially in a financial bind.

Don’t take on new debt

Mortgage underwriters consider your debt-to-income ratio when evaluating your ability to make monthly payments. If you have too much debt, it can affect how much you can borrow or whether or not you can even get a mortgage. Neil Cannon, a mortgage loan officer at PenFed Credit Union, encourages potential homeowners to start thinking about their debt usage as soon as they start planning to save for a down payment.

“If you want to own a home in two years, but you need to buy a car now, the decision on the car can affect your home purchase in two years,” Cannon explains.

He gives the following example: If you purchase a used car for $6,000 and pay it off within two years, you’ll look much better financially than someone who bought a $50,000 car with 0% financing and still has four years left on their auto loan.

While you should carefully evaluate any decision to take on debt years before purchasing a home, it’s especially vital to do so before closing. Cannon notes that if you prequalify for a mortgage, and then take out a loan for a car or other purchase prior to closing, it can threaten the entire deal.

Don’t switch jobs

Cannon says that before closing, your lender will perform a Verification of Employment — also known as a VOE. The VOE typically occurs up to two weeks before closing, though it can happen as late as hours before you sign on the dotted line.

If you’ve resigned between prequalification and closing, you will not be able to close. If you’ve switched jobs, you must have already reported to work at the time the VOE is completed if you want your new salary to be included.

Generally, though, it’s wise to stay with the same employer for at least two years before closing on your home. This is because compensation like bonuses, overtime, and commissions are variable, and your underwriter will need two years’ worth of documentation if you want this money to be considered as income on your mortgage application.

Cannon also notes that underwriters consider bonuses discretionary, no matter how your employer may pitch them.

“I have had dozens of clients tell me they have a ‘guaranteed bonus,’” says Cannon. “If that is the case, then it is not a bonus, and your employer is torturing the English language.”

This means that your bonus may not be counted as guaranteed income on your mortgage application, even if you feel confident your bonus will come in as it has in years past. If your bonus is particularly large, this could impact how much money you qualify to borrow — or if you qualify to borrow at all.

Don’t move money around

“If we cannot track the source of large deposits, we can’t use the assets for qualifying,” says Cannon.

“I had a recently married couple have a deposit of $14,000 into their savings account. It was all wedding presents, and it was basically all cash. It could not be traced. We could not use it.”

The couple was lucky: Their parents were able to give them a documented gift of $14,000 to make up the difference. Without their parents’ generosity, the couple wouldn’t have qualified, even though they had the money on hand.

If you cannot properly document where your money came from, the best-case scenario would be that your underwriter would not allow the funds to factor into the equation — meaning you can’t count them as an asset toward purchasing or closing on the home.

The worst-case scenario is that the underwriter could assume the money is recently acquired debt. Without documentation, the lender has no way of knowing. This could negatively affect your debt-to-income ratio.

Cannon notes that while it is possible to move money around, it’s wise to do so with guidance from your loan officer — especially during the 60 days prior to filling out your mortgage application all the way through closing.

Don’t sign a contract before getting prequalified

“You always want to be prequalified before you start shopping for a home so you do not make knee-jerk emotional decisions,” says Cannon. Signing a contract puts you under legal obligation. Doing so without being prequalified is a risky move, as you’ll lose any earnest money you put down in good faith at the time you signed the contract should you not qualify. You could also end up with a lawsuit against you, depending on how far the seller is willing to go.

Even if your contract has a financing contingency clause — meaning you have a set amount of days to secure a loan or terminate the contract — it’s still in your best interest to get prequalified. You may have as little as 15 days to secure a loan with the contingency.

If you are unable to, and you do not terminate the contract in writing within the specified time frame, some contracts will still legally obligate you to purchase the home. Because you lack capital, you won’t be able to. If the seller chooses to sue, you could end up in court.

Don’t assume you know as much as your real estate agent

With so much knowledge at their fingertips, it’s easy for today’s homebuyers to feel empowered. There are calculators that tell you how much you should theoretically be able to borrow. You can easily obtain an estimate on a house’s market value versus asking price. You can even research all the first-time homebuyer assistance programs in your area from the comfort of your couch.

But don’t mistake the ease of obtaining information for professional expertise. As a buyer, using a real estate agent costs you nothing. Your agent has likely gone through the home-buying process more than you will in your entire lifetime, and their depth of knowledge — especially of your local market — is something to take advantage of.

“If you are a buyer, you likely need guidance to figure out why this home seems overpriced to you and why that home looks like a great bargain,” says Cannon. “Realtors are compensated fairly, and good Realtors create value for their clients.”

The post 5 Things You Shouldn’t Do Before Buying a Home appeared first on MagnifyMoney.

Do You Really Need a Home Warranty?

When I bought my first house years ago, my real estate agent requested that the seller purchase a home warranty to cover our home for one year from the date of sale. It didn’t cost me anything, and I only used the warranty once that year when the dishwasher started leaking water all over the kitchen floor. I called the warranty company, and for a $60 service fee, a contractor repaired the dishwasher, a service that would average somewhere between $100 and $200. Once the year was up, I had to decide whether to pay more than $500 to renew the warranty or let it lapse.

You may find yourself facing the same decision, whether you’re deciding to extend a warranty past the initial year or buy a warranty when the seller is not willing to foot the cost. So, do you need a home warranty?

Unlike a homeowners insurance policy, which is typically required by your lender, home warranties are completely optional.

A home warranty is a service contract on your home’s appliances and systems. Unlike a homeowners insurance policy, which may cover your home’s structure and belongings in the event of a fire, storm, or other accident, a home warranty covers repairs and replacement of systems and appliances due to normal wear and tear. This might include:

  • Electrical systems
  • Plumbing systems
  • Heating and air conditioning systems
  • Washers and dryers
  • Kitchen appliances

How much does a home warranty cost?

The cost of a home warranty varies by location, coverage, and provider. American Home Shield, the largest home warranty company in the country, has plans that cover appliances only starting at $360 per year. Systems plans, that cover heating, air conditioning, and electrical systems but not appliances, start at around $408 per year. Plans that cover both systems and appliances start at around $516 per year.

Cedric Stewart, a residential and commercial sales consultant at Entourage Residential Group at Keller Williams in Rockville, Md., says home warranties range in price from $400 to $650 on average but can go much higher if you opt for additional coverage options. Those options may include coverage for spas and swimming pools, additional refrigerators, water softener systems, or water wells.

How to shop for a home warranty

Your realtor may be able to recommend one or two home warranty providers that they work with on a regular basis and let you know how much the warranty will cost and what is covered. Take a look at a sample contract and read the fine print to see exactly what the warranty will and won’t cover and how much you will pay per service call.

Next, look for online reviews from reputable review sites like Consumer Reports, Angie’s List, or the Better Business Bureau. Pay special attention to the bad reviews. Did customers have to wait days for service? Does the company deny a lot of claims? Were customers happy with the contractors hired to perform the work? These can all give you an idea of whether you’ll be happy with your purchase or experience buyer’s remorse.

Benefits of buying a home warranty

Some people love home warranties for the peace of mind it gives them. “In the event your hot water heater or furnace stop working,” Stewart says, “you make a service call, pay the fee to have someone come out, and they’ll repair or replace that item. Whether it’s the first or the 365th day of the warranty, the coverage is the same. So you could end up getting a $4,000-$8,000 system replaced for $400 bucks.”

Downsides to buying a home warranty

There are many arguments against buying home warranties, especially since home warranty companies have historically been one of the “worst graded” categories on Angie’s List.

  • Your claim can be denied if the problems existed before. Stewart says you should think of a home warranty like an insurance policy. When something happens, you file a claim (referred to as a “service call”). An adjuster comes out to assess the damage and submits his findings to the home warranty company, which renders a decision. That decision could be a denial of your claim. Stewart says one of the most common reasons home warranty companies deny claims is due to pre-existing conditions, or problems that existed before you purchased the policy. The company may even require that you turn over a copy of the home inspection report to ensure that the issue wasn’t cited during the inspection.
  • You can’t pick your contractor. Warranty providers require that homeowners work with specific, pre-approved contractors. Homeowners may sometimes be disappointed in a long wait time for service or poor quality of service provided by these contractors, but they can’t fire them and pick their own.
  • You may get repairs when what you want is a replacement. The service technician will always try to repair the appliance or system first and replace it only if it is beyond repair. That can be a hassle. I found this out when I rented a townhome covered by a home warranty. Several contractors told us that the 20-year old A/C unit should really be replaced, but the warranty company wanted to keep repairing the old system. As a result, the A/C went out three times over the course of one hot summer in Phoenix.

4 questions to ask yourself before you purchase a home warranty

Rocky Lalvani is a wealth coach and rental property owner, so he is well versed in what can go wrong in your first year in a new home. He recommends asking the following questions before deciding whether to purchase a home warranty.

  • What condition are the home, systems, and appliances in? If the heating, air conditioning, and appliances are older, the greater the need to protect against failure.
  • Can you afford to repair the items yourself? If replacing the furnace or buying new appliances in the next year would cause a financial hardship, you may be better off buying a warranty.
  • Are you planning on replacing the items in the near future? If you know you are going to remodel the kitchen and purchase all new appliances shortly, it doesn’t make sense to protect them.
  • What is covered and what is excluded? Read the policy so you know what coverage it provides. Each warranty provider has their own limits, rules, and caps on repair costs. “When you couple that with long wait times to go through the process, these factors may make the warranty not worth the cost,” Lalvani says.

Also, keep in mind that a separate warranty is typically not necessary for new homes since the appliances are covered under the manufacturer’s warranty. Homebuilders usually put a warranty on system and structural defects for 10 years. But read the fine print of your purchase contract to make sure you know what is covered.

The bottom line

If your seller is willing to cover the cost of a home warranty as a condition of sale, do take advantage of the free coverage. Just realize that you will have to pay a service fee, which could range from $50 to $75 per repair.

Otherwise, consider the age of each covered item and compare that to its average life span using this chart from the International Association of Certified Home Inspectors. The older the home and appliances, the more likely it is that something will go wrong. If the systems and appliances are newer or you’re planning on replacing them shortly after you move in, you may be better off setting the money aside in a home-repair fund. That way, you won’t end up paying for something that may not provide the coverage you expect.

The post Do You Really Need a Home Warranty? appeared first on MagnifyMoney.

The Best Mortgages That Require No or Low Down Payment

 

If you’re considering buying a home, you’re probably wondering how much you’ll need for a down payment. It’s not unusual to be concerned about coming up with a down payment. According to Trulia’s report Housing in 2017, saving for a down payment is most often cited as the biggest obstacle to homeownership.

Maybe you’ve heard that you should put 20% down when you purchase a home. It’s true that 20% is the gold standard. If you can afford a big down payment, it’s easier to get a mortgage, you may be eligible for a lower interest rate, and more money down means borrowing less, which means you’ll have a smaller monthly payment.

But the biggest incentive to put 20% down is that it allows you to avoid paying for private mortgage insurance. Mortgage insurance is extra insurance that some private lenders require from homebuyers who obtain loans in which the down payment is less than 20% of the sales price or appraised value. Unlike homeowners insurance, mortgage protects the lender – not you – if you stop making payments on your loan. Mortgage insurance typically costs between 0.5% and 1% of the entire loan amount on an annual basis. Depending on how expensive the home you buy is, that can be a pretty hefty sum.

While these are excellent reasons to put 20% down on a home, the fact is that many people just can’t scrape together a down payment that large, especially when the median price of a home in the U.S. is a whopping $345,800.

Fortunately, there are many options for homebuyers with little money for a down payment. You may even be able to buy a house with no down payment at all.

Here’s an overview of the best mortgages you can be approved for without 20% down.

FHA Loans

An FHA loan is a home loan that is insured by the Federal Housing Administration. These loans are designed to promote homeownership and make it easier for people to qualify for a mortgage. The FHA does this by making a guarantee to your bank that they will repay your loan if you quit making payments. FHA loans don’t come directly from the FHA, but rather an FHA-approved lender. Not all FHA-approved lenders offer the same interest rates and costs, even for the same type of loan, so it’s important to shop around.

Down payment requirements

FHA loans allow you to buy a home with a down payment as low as 3.5%, although people with FICO credit scores between 500 and 579 are required to pay at least 10% down.

Approval requirements

Because these loans are geared toward lower income borrowers, you don’t need excellent credit or a large income, but you will have to provide a lot of documentation. Your lender will ask you to provide documents that prove income, savings, and credit information. If you already own any property, you’ll have to have documentation for that as well.

Some of the information you’ll need includes:

  • Two years of complete tax returns (three years for self-employed individuals)
  • Two years of W-2s, 1099s, or other income statements
  • Most recent month of pay stubs
  • A year-to-date profit-and-loss statement for self-employed individuals
  • Most recent three months of bank, retirement, and investment account statements

Mortgage insurance requirements

The FHA requires both upfront and annual mortgage insurance for all borrowers, regardless of their down payment. On a typical 30-year mortgage with a base loan amount of less than $625,500, your annual mortgage insurance premium will be 0.85% as of this writing. The current upfront mortgage insurance premium is 1.75% of the base loan amount.

Casey Fleming, a mortgage adviser with C2 Financial Corporation and author of The Loan Guide: How to Get the Best Possible Mortgage, also reminds buyers that mortgage insurance on an FHA loan is permanent. With other loans, you can request the lenders to cancel private mortgage insurance (MIP) once you have paid down the mortgage balance to 80% of the home’s original appraised value, or wait until the balance drops to 78% when the mortgage servicer is required to eliminate the MIP. But mortgage insurance on an FHA loan cannot be canceled or terminated. For that reason, Fleming says “it’s best if the homebuyer has a plan to get out in a couple of years.”

Where to find an FHA-approved lender

As we mentioned earlier, FHA loans don’t come directly from the FHA, but rather an FHA-approved lender. Not all FHA-approved lenders offer the same interest rates and costs, even for the same type of loan, so it’s important to shop around.

The U.S. Department of Housing and Urban Development (HUD) has a searchable database where you can find lenders in your area approved for FHA loans.

First, fill in your location and the radius in which you’d like to search.

Next, you’ll be taken to a list of FHA-approved lenders in your area.

Who FHA loans are best for

FHA loans are flexible about how you come up with the down payment. You can use your savings, a cash gift from a family member, or a grant from a state or local government down-payment assistance program.

However, FHA loans are not the best option for everyone. The upfront and ongoing mortgage insurance premiums can cost more than private mortgage insurance. If you have good credit, you may be better off with a non-FHA loan with a low down payment and lower loan costs.

And if you’re buying an expensive home in a high-cost area, an FHA loan may not be able to provide you with a large enough mortgage. The FHA has a national loan limit, which is recalculated on an annual basis. For 2017, in high-cost areas, the FHA national loan limit ceiling is $636,150. You can check HUD.gov for a complete list of FHA lending limits by state.

SoFi

For borrowers who can afford a large monthly payment but haven’t saved up a big down payment, SoFi offers mortgages of up to $3 million. Interest rates will vary based on whether you’re looking for a 30-year fixed loan, a 15-year fixed loan, or an adjustable rate loan, which has a fixed rate for the first seven years, after which the interest rate may increase or decrease. Mortgage rates started as low as 3.09% for a 15-year mortgage as of this writing. You can find your rate using SoFi’s online rate quote tool without affecting your credit.

Down payment requirements

SoFi requires a minimum down payment of at least 10% of the purchase price for a new loan.

Approval requirements

Like most lenders, SoFi analyzes FICO scores as a part of its application process. However, it also considers factors such as professional history and career prospects, income, and history of on-time bill payments to determine an applicant’s overall financial health.

Mortgage insurance requirements

SoFi does not charge private mortgage insurance, even on loans for which less than 20% is put down.

What we like/don’t like

In addition to not requiring private mortgage insurance on any of their loans, SoFi doesn’t charge any loan origination, application, or broker commission fees. The average closing fee is 2% to 5% for most mortgages (it varies by location), so on a $300,000 home loan, that is $3,000. Avoiding those fees can save buyers a significant amount and make it a bit easier to come up with closing costs. Keep in mind, though, that you’ll still need to pay standard third-party closing costs that vary depending on loan type and location of the property.

There’s not much to dislike about SoFi unless you’re buying a very inexpensive home in a lower-cost market. They do have a minimum loan amount of $100,000.

Who SoFi mortgages are best for

SoFi mortgages are really only available for people with excellent credit and a solid income. They don’t work with people with poor credit.

SoFi does not publish minimum income or credit score requirements.

VA Loans

Rates can vary by lender, but currently, rates for a $225,000 30-year fixed-rate loan run at around 3.25%, according to LendingTree. (Disclosure: LendingTree is the parent company of MagnifyMoney.)

Down payment requirements

Eligible borrowers can get a VA loan with no down payment. Although the costs associated with getting a VA loan are generally lower than other types of low-down-payment mortgages, Fleming says there is a one-time funding fee, unless the veteran or military member has a service-related disability or you are the surviving spouse of a veteran who died in service or from a service-related disability.

That funding fee varies by the type of veteran and down-payment percentage, but for a new-purchase loan, the funding fee can run from 1.25% to 2.4% of the loan amount.

Approval requirements

VA loans are typically easier to qualify for than conventional mortgages. To be eligible, you must have suitable credit, sufficient income to make the monthly payment, and a valid Certificate of Eligibility (COE). The COE verifies to the lender that you are eligible for a VA-backed loan. You can apply for a COE online, through your lender, or by mail using VA Form 26-1880.

The VA does not require a minimum credit score, but lenders generally have their own requirements. Most ask for a credit score of 620 or higher.

If you’d like help seeing if you are qualified for a VA loan, check to see if there’s a HUD-approved housing counseling agency in your area.

Mortgage insurance requirements

Because VA loans are guaranteed by the Department of Veterans Affairs, they do not require mortgage insurance. However, as we mentioned previously, be prepared to pay an additional funding fee of 1.25% to 2.4%.

What we like/don’t like

There’s no cap on the amount you can borrow. However, there are limits on the amount the VA can insure, which usually affects the loan amount a lender is willing to offer. Loan limits vary by county and are the same as the Federal Housing Finance Agency’s limits, which you can find here.

HomeReady

 

The HomeReady program is offered by Fannie Mae. HomeReady mortgage is aimed at consumers who have decent credit but low- to middle-income earnings. Borrowers do not have to be first-time home buyers but do have to complete a housing education program.

Approval requirements

HomeReady loans are available for purchasing and refinancing any single-family home, as long as the borrower meets income limits, which vary by property location. For properties in low-income areas (as determined by the U.S. Census), there is no income limit. For other properties, the income eligibility limit is 100% of the area median income.

The minimum credit score for a Fannie Mae loan, including HomeReady, is 620.

To qualify, borrowers must complete an online education program, which costs $75 and helps buyers understand the home-buying process and prepare for homeownership.

Down payment requirements

HomeReady is available through all Fannie Mae-approved lenders and offers down payments as low as 3%.

Reiss says buyers can combine a HomeReady mortgage with a Community Seconds loan, which can provide all or part of the down payment and closing costs. “Combined with a Community Seconds mortgage, a Fannie borrower can have a combined loan-to-value ratio of up to 105%,” Reiss says. The loan-to-value (LTV) ratio is the ratio of outstanding loan balance to the value of the property. When you pay down your mortgage balance or your property value increases, your LTV ratio goes down.

Mortgage insurance requirements

While HomeReady mortgages do require mortgage insurance when the buyer puts less than 20% down, unlike an FHA loan, the mortgage insurance is removed once the loan-to-value ratio reaches 78% or less.

What we like/don’t like

HomeReady loans do require private mortgage insurance, but the cost is generally lower than those charged by other lenders. Fannie Mae also makes it easier for borrowers to get creative with their down payment, allowing them to borrow it through a Community Seconds loan or have the down payment gifted from a friend or family member. Also, if you’re planning on having a roommate, income from that roommate will help you qualify for the loan.

However, be sure to talk to your lender to compare other options. The HomeReady program may have higher interest rates than other mortgage programs that advertise no or low down payments.

USDA Loan

USDA loans are guaranteed by the U.S. Department of Agriculture. Although the USDA doesn’t cap the amount a homeowner can borrow, most USDA-approved lenders extend financing for up to $417,000.

Rates vary by lender, but the agency gives a baseline interest rate. As of August 2016, that rate was just 2.875%

Approval requirements

USDA loans are available for purchasing and refinancing homes that meet the USDA’s definition of “rural.” The USDA provides a property eligibility map to give potential buyers a general idea of qualified locations. In general, the property must be located in “open country” or an area that has a population less than 10,000, or 20,000 in areas that are deemed as having a serious lack of mortgage credit.

USDA loans are not available directly from the USDA, but are issued by approved lenders. Most lenders require a minimum credit score of 620 to 640 with no foreclosures, bankruptcies, or major delinquencies in the past several years. Borrowers must have an income of no more than 115% of the median income for the area.

Down payment requirements

Eligible borrowers can get a home loan with no down payment. Other closing costs vary by lender, but the USDA loan program does allow borrowers to use money gifted from friends and family to pay for closing costs.

Mortgage insurance requirements

While USDA-backed mortgages do not require mortgage insurance, borrowers instead pay an upfront premium of 2% of the purchase price. The USDA also allows borrowers to finance that 2% with the home loan.

What we like/don’t like

Some buyers may dismiss USDA loans because they aren’t buying a home in a rural area, but many suburbs of metropolitan areas and small towns fall within the eligible zones. It could be worth a glance at the eligibility map to see if you qualify.

At a Glance: Low-Down-Payment Mortgage Options

To see how different low-down-payment mortgage options might look in the real world, let’s assume a buyer with an excellent credit score applies for a 30-year fixed-rate mortgage on a home that costs $250,000.

As you can see in the table below, their monthly mortgage payment would vary a lot depending on which lender they use.

 

Down Payment


Total Borrowed


Interest Rate


Principal & Interest


Mortgage Insurance


Total Monthly Payment

FHA


FHA

3.5%
($8,750)

$241,250

4.625%

$1,083

$4,222 up front
$171 per month

$1,254

SoFi


SoFi

10%
($25,000)

$225,000

3.37%

$995

$0

$995

VA


VA Loan

0%
($0)

$250,000

3.25%

$1,088

$0

$1,088

HomeReady


homeready

3%
($7,500)

$242,500

4.25%

$1,193

$222 per month

$1,349

USDA


homeready

0%

$250,000

2.875%

$1,037

$5,000 up front,
can be included in
total financed

$1,037

Note that this comparison doesn’t include any closing costs other than the upfront mortgage insurance required by the FHA and USDA loans. The total monthly payments do not include homeowners insurance or property taxes that are typically included in the monthly payment.

ANALYSIS: Should I put down less than 20% on a new home just because I can?

So, if you can take advantage of a low- or no-down-payment loan, should you? For some people, it might make financial sense to keep more cash on hand for emergencies and get into the market sooner in a period of rising home prices. But before you apply, know what it will cost you. Let’s run the numbers to compare the cost of using a conventional loan with 20% down versus a 3% down payment.

Besides private mortgage insurance, there are other downsides to a smaller down payment. Lenders may charge higher interest rates, which translates into higher monthly payments and more money spent over the loan term. Also, because many closing costs are a percentage of the total loan amount, putting less money down means higher closing costs.

For this example, we’ll assume a $250,000 purchase price and a loan term of 30 years. According to Freddie Mac, during the week of June 22, 2017, the average rate for a 30-year fixed-rate mortgage was 3.90%.

Using the Loan Amortization Calculator from MortgageCalculator.org:

Assuming you don’t make any extra principal payments, you will have to pay private mortgage insurance for 112 months before the principal balance of the loan drops below 78% of the home’s original appraised value. That means in addition to paying $169,265.17 in interest, you’ll pay $11,316.48 for private mortgage insurance.

The bottom line

Under some circumstances, a low- or no-down-payment mortgage, even with private mortgage insurance, could be considered a worthwhile investment. If saving for a 20% down payment means you’ll be paying rent longer while you watch home prices and mortgage rates rise, it could make sense. In the past year alone, average home prices increased 16.8%, and Kiplinger is predicting that the average 30-year fixed mortgage rate will rise to 4.1% by the end of 2017.

If you do choose a loan that requires private mortgage insurance, consider making extra principal payments to reach 20% equity faster and request that your lender cancels private mortgage insurance. Even if you have to spend a few hundred dollars to have your home appraised, the monthly savings from private mortgage insurance premiums could quickly offset that cost.

Keep in mind, though, that the down payment is only one part of the home-buying equation. Sonja Bullard, a sales manager with Bay Equity Home Loans in Alpharetta, Ga., says whether you’re interested in an FHA loan or a conventional (i.e., non-government-backed) loan, there are other out-of-pocket costs when buying a home.

“Through my experience, when people hear zero down payment, they think that means there are no costs for obtaining the loan,” Bullard says. “People don’t realize there are still fees required to be paid.”

According to Bullard, those fees include:

  • Inspection: $300 to $1,000, based on the size of the home
  • Appraisal: $375 to $1,000, based on the size of the home
  • Homeowners insurance premiums, prepaid for one year, due at closing: $300 to $2,500, depending on coverage
  • Closing costs: $4,000 to $10,000, depending on sales price and loan amount
  • HOA initiation fees

So don’t let a seemingly insurmountable 20% down payment get in the way of homeownership. When you’re ready to take the plunge, talk to a lender or submit a loan application online. You might be surprised at what you qualify for.

The post The Best Mortgages That Require No or Low Down Payment appeared first on MagnifyMoney.

It’s Now Easier for Millions of Student Loan Borrowers to Get a Mortgage

Student loan borrowers who are making reduced income-driven repayments on their loans will have an easier time getting mortgages under a new policy announced recently by Fannie Mae.

Nearly one-quarter of federal student loan borrowers benefit from reduced monthly student loan payments based on their income, Fannie Mae says. However, there’s been some confusion about how banks should treat the lower monthly payments when they calculate a would-be mortgage borrower’s debt-to-income ratio (DTI): Should banks consider the reduced payment, the payment borrowers would have to pay without the income-based “discount,” or something in between?

It’s a tricky question, because student loan borrowers have to renew their qualification for the lower payments each year, meaning a borrower’s monthly DTI could change dramatically a year or two after qualifying for a mortgage. The banks’ confusion over which payment amount to use can mean the difference between a borrower qualifying for a home loan and staying stuck in a rental apartment.

There’s even more confusion when a mortgage applicant qualifies for a $0 income-driven student loan payment, or when there’s no payment amount listed on the applicant’s credit report. Previously, in that situation, Fannie Mae required banks to use 1% of the balance or a full payment term.

As of last week, Fannie has declared that mortgage lenders can instead use $0 as a student loan payment when determining DTI, as long as the borrower can back that up with documentation.

That announcement followed another Fannie update issued in April telling lenders that they could use the lower income-based monthly payment, rather than a larger payment based on the full balance of the loan, when calculating borrowers’ monthly debt obligations.

“We are simplifying the options available to calculate the monthly payment amount for student loans. The resulting policy will be easier for lenders to apply, and may result in a lower qualifying payment for borrowers with student loans,” Fannie said in its statement.

Taken together, the two announcements could immediately benefit the roughly 6 million borrowers currently using income-driven repayment plans known as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Contingent Repayment (ICR), and Income-Based Repayment (IBR).
Freddie Mac didn’t immediately respond to an inquiry about its policy in the same situation.

What This Means for Student Loan Borrowers Looking to Buy

Michigan-based mortgage broker Cassandra Evers said the changes “allow a lot more borrowers to qualify for a home.” Previously, there was a lot of confusion among borrowers, lenders, and brokers, Evers said. “[The rules have] changed at least five or six times in the last five years.”

The broader change announced in April, which allowed lenders to use the income-driven payment amount in calculations, could make a huge difference to millions of borrowers, Evers said.

“Imagine you have $60,000 in student loan debt and are on IBR with a payment of $150 a month,” she said. Before April’s guidance, lenders may have used $600 (1% of the balance of the student loans) as the monthly loan amount when determining DTI, “basically overriding actual debt with a fake/inflated number.”

“Imagine you are 28 and making $40,000 per year. Well, even if you’re fiscally responsible, that added $450-a-month inflated payment would absolutely destroy your ability to buy a decent home … This opens up the door to a lot more lenders being able to use the actual IBR payment,” Evers said.

The Fannie Mae change regarding borrowers on income-driven plans with a $0 monthly payment could be a big deal for some mortgage applicants with large student loans. A borrower with an outstanding $50,000 loan but a $0-a-month payment would see the monthly expenses side of their debt-to-income ratio fall by $500.

It’s unclear how many would-be homebuyers could qualify for a mortgage with an income low enough to qualify for a $0-per-month income-driven student loan repayment plan. Fannie did not have an estimate, spokeswoman Alicia Jones said.

“If your income is low enough to merit a zero payment, then it is probably going to be hard to qualify for a mortgage with a number of lenders. But, with the share of IBR now at almost a full 25% of all federally insured debt, it’s suspected that there will be plenty of potential borrowers who do,” Jones said. “The motivation for the original policy and clarification came from lenders’ requests.”

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