What it’s Really Like to Get a Mortgage Completely Online

getting a mortgage online

Drew and April Olanoff had great jobs in Silicon Valley, but even they were discouraged by the house hunting process in the San Francisco Bay Area: all-cash offers, bidding wars, two-bedroom condos listed for $1.5 million. They quickly decided to move their search to Drew’s hometown of Philadelphia — and they conducted the whole process online, from settling on a home to nailing down a mortgage.

The Olanoffs are just two of a growing number of homeowners who obtain a mortgage completely online, uploading documents and e-signing forms with no in-person meetings required. Online direct lenders — that means companies like SoFi, Better Mortgage and Rocket Mortgage by Quicken Loans — typically eschew costs like origination and applications fees. And they focus on speedier processes, which can lead to quicker closing times compared with more traditional mortgages. (Disclosure: MagnifyMoney’s parent company, LendingTree, offers homebuyers an online tool they can use to compare quotes from mortgage lenders.)

These upstart players are pushing the mortgage industry to innovate and become more transparent, experts say. But, they add, a fully online experience isn’t for everyone — and online lenders may not necessarily offer a homeowner a better rate than a traditional lender would.

“I can’t even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,”

In the Olanoffs’ case, they even selected their home unconventionally, at a distance. From the West Coast, they directed a ReMax real estate agent to visit about 10 homes, shoot video and upload the footage to YouTube. They chose their 1916-built South Philadelphia home based on these videos.

Then their agent directed them to GuaranteedRate, one of the largest mortgage lenders in the U.S., which offered them a fully online experience, with the ability to upload and digitally sign documents. The Olanoffs were approved for an Federal Housing Administration (FHA) loan for about $260,000 in July 2016, and closed on the home that September.

“It was way less stressful doing it online,” says Drew, 38, vice president of communications at venture equity firm Scaleworks.

“I can’t even imagine going into an office, dropping off paperwork, seeing people, and not getting the house at the end of the day,” he adds. “The process leading up to and bidding on a home is so stressful, it’s almost like we were automatically removed from the intensity of it by doing it online. And we knew if we got outbid, all of our paperwork would still be there ready to go, which is genius.”

That ease and transparency is attractive not only to smartphone-loving millennials, but to homebuyers of all ages who are tired of complex and confusing mortgage-application processes, says Keith Gumbinger, vice president of the independent consumer-loan site HSH.com.

“The push to online has been underway for years, and it’s finally coming to the forefront with consumers’ widespread adoption of technology,” Gumbinger says.
“The market has now grown into it, too. You don’t think about it as a homebuyer, but there are lots of backend processes and entities involved in a mortgage. The industry has worked to come up with standards and it’s finally gotten there.”

Here’s a look at three of the major online mortgage players, all of which are direct lenders and can complete 100 percent of the process online.

SoFi

SoFi’s mission and advantages: “SoFi’s target market is high-earner, not-rich-yet,” says Helen Huang, its senior director of product marketing. That reflects SoFi’s unique applicant-assessment philosophy: The company looks beyond the traditional factors like credit report and savings, taking into account the borrower’s earning potential.

SoFi gives a lot of weight to job history and career prospects. So a high-demand software engineer who has restricted stock units at Facebook and her choice of Silicon Valley jobs might be more attractive to SoFi, compared with the person with good money saved for a down payment. (It’s no surprise, then, that Huang says a “significant” portion of SoFi customers work in the technology industry.)

SoFi has another edge over traditional lenders: The company requires only a 10 percent down payment with no private mortgage insurance requirement. Most lenders require 20 percent down to skip over PMI. SoFi issues mortgages up to $3 million, and the company has originated $2.2 billion in mortgages since 2014.

SoFi is short for Social Finance — the company offers lots of other services, like student loan refinancing and wealth management — and it lives up to its name with its SoFi Members Facebook page. The group is extremely active, with SoFi customers frequently posting to solicit advice and tips from fellow borrowers or SoFi’s customer service team.

Potential cons: SoFi won’t originate loans below $100,000, so it’s not a good choice for customers in areas where real estate is relatively inexpensive. Borrowers must put down a minimum of 10 percent for new loans. And it takes 72 hours to receive a decision from SoFi, which — while quick — isn’t as speedy as some competitors.

SoFi mortgages also aren’t available nationwide. The company only originates mortgages in 29 states: Alabama, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Maryland, Minnesota, Montana, Nevada, New Jersey, New York, North Carolina, North Dakota, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Washington, Wisconsin, Wyoming and Washington, D.C.

SoFi’s mortgage application, step by step

getting a sofi mortgage
Screenshot of SoFi mortgage application.

Get started: First, you’ll set up a SoFi account by entering your name, state of residence, email and a password. Next comes the “Basic Info” screen: your mailing address, phone number, date of birth, citizenship and current living situation.

Next is School Info, where you’ll fill out information about post-high-school degrees. (SoFi notes on the screen that a “college degree is not required to qualify for a mortgage. While education is not used in mortgage underwriting, this info helps SoFi better understand our members.”) Then it’s time to add Employment Info: your employer name, job title, start date and annual income. For now, you’ll do this just for your current employer, and at the bottom of the page, select your total years of professional work experience.

Mortgage eligibility: Here you’ll complete several questions about what you’re looking for: Do you need a mortgage for a new property, a refinance, a student loan cash-out refinance or a cash-out refinance? You’ll also enter information about where you are in the buying process, and information about your desired area or specific property. You can also add information on this screen about your marital status and whether you have a co-applicant. Check the box to grant SoFi the right to do a soft credit pull to preapprove you for a mortgage. Remember: A soft pull won’t harm your credit score.

Get your rate: Hopefully, the next screen will announce: “Congratulations! You’ve pre-qualified for a SoFi mortgage.” If so, you can calculate your loan amount by entering the home’s price and your down payment. Then you can choose loan terms: 30-year fixed, 15-year fixed, or adjustable rate. To move forward, click “continue with pre-approval.”

Next you’ll fill out employment information for any previous jobs you may have held in the past two years, and if you currently hold two or more jobs you’ll add that information too. Then itemize any non job-related income, like Social Security or rental properties, and finally add any assets you want SoFi to consider in your application (checking, savings, brokerage or retirement accounts; second homes; etc.) and click “continue.”

Get approved: Finish up by answering a series of yes-or-no “declarations,” like whether or not you’re involved in a lawsuit. Finally, add your Social Security number and consent to SoFi’s credit disclosure. The final screen will confirm that SoFi is reviewing your application, and it will ask you to upload income validation documents (two most recent years’ W-2s or the last two years’ year-end paystubs), as well as your two most recent paystubs. You’re done; SoFi says applicants can expect to receive their application decision within 72 hours.

Rocket Mortgage by Quicken Loans

Rocket’s mission and advantages: As the online lender arm of Quicken Loans, Rocket is like a startup backed by a long-established, well-known parent. The company is named for its speed (its 2016 Super Bowl ad used the now-defunct, controversial tagline “Push button, get mortgage”).

One of the reasons for that speed is a unique, refreshing lack of paperwork. Rocket pulls from private and public sources to automatically fill in information like employment history and income, as well as financial statements (from the “vast majority” of institutions) — drastically cutting down on the need for uploaded documents or line-by-line typing of information. It’s somewhat similar to how budgeting apps like Mint pull your financial data from several institutions at once.

“Whether it’s car rides or takeout, these days we expect everything to happen immediately with the push of a button,” says Regis Hadiaris, Rocket’s product lead. “The mortgage industry has to catch up to that.”

On average, 60 percent of people using Rocket are doing so on a mobile device, Hadiaris says. Rocket originated $7 billion in loans in its first year, and the company now has nearly two million user accounts. Unlike many of its competitors, Rocket originates loans in all 50 states.

Potential cons: While mortgage consultants are available to help, including via phone or online chat, Rocket is clearly designed more for customers who want a fully digitized experience.

Rocket’s application process isn’t quite as streamlined as some of its competitors. Once you move past the preapproval process, you’ll need to sign into Quicken Loans’ MyQL site to download the preapproval letter and complete any necessary tasks for a loan purchase.

Rocket Mortgage application, step by step

getting mortgage with rocket mortgage by quicken
Screenshot of Rocket Mortgage application.

Start by creating an account with your name, username and password. Then you’ll answer questions about your current situation: where you live now, when you started living there, and how much you pay in rent or mortgage. Next, provide information about the home you want to buy, or your desired location. Add information for anyone else who will be a co-signer on the loan, if applicable.

The next section is where Rocket’s automatic filling of information comes in. The system asks for assets and income, which you can choose to type in manually – or you can click “Find My Account” to add the data automatically. Quicken/Rocket connects with the majority of financial institutions, but double check to make sure everything is complete and accurate.

Below that, it’s a similar process for employment data and income: Either add it manually, or let Rocket fill it automatically. The company’s primary source for this employment information is third-party verifier The Work Number, and Hadiaris says it covers just over half of Americans – so again, this is one you’ll want to double check.

Finish up by answering government questions like whether you’re a U.S. citizen, and authorize a soft credit check by entering your birth date, Social Security number and phone number. A countdown clock pops up (“T-Minus 00:06 Seconds”) and then you’ll be sent to a screen with your mortgage options.

Mess around with loan terms and down payment percentages to get different choices, and Rocket will categorize them by lowers monthly payment, lowest upfront costs and balanced costs and payments. You’ll be directed to MyQL.com to download an your pre-approval letter, or to move forward to purchase the loan.

Better Mortgage

Better’s mission and advantages: Better’s tagline is “The status quo is broken.” The mortgage industry operates as if the Internet doesn’t exist, the company argues, with opaque and overly lengthy practices. So Better’s goal is to provide transparency during every step of the loan process — from crystal-clear FAQs and online resources to a streamlined application and speedy approval.

“We don’t want to just disintermediate for the sake of it,” says Taylor Salditch, Better’s vice president of marketing. “We really are trying to tackle the whole process and rebuild it in a holistic way.”

Better offers a single application platform that borrowers can access anytime to e-sign documents, link bank accounts and securely upload files from any device.

Borrowers can work on the application for a bit, then save their progress and come back later to finish up. It takes three minutes to receive a basic preapproval confirmation, and 24 hours for a “cash-competitive” verified preapproval letter. The entire process is personalized to each user, with different questions popping up based on responses. The company has funded more than $600 million in mortgages.

Customers can chat with a loan consultant as early in the process as they would like, to ask questions or get more information even before they begin. Once borrowers are approved for a loan, they are assigned to a “Loan Ranger” who serves as their point of contact.

Better offers home purchase loans for as little as 3% down, as well as a variety of loan types. Borrowers can play around with different fees and discount points to see how it affects their rate. Better also guarantees its loan estimate will be at least $1,000 less in closing costs compared with a competitor offering the same rate and loan terms — or they’ll pay you $1,000.

Potential cons: Better originates mortgages in only Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, North Carolina, New Jersey, Oregon, Pennsylvania and Washington, plus Washington, D.C. The company says it’s working to expand into more states soon. Better won’t offer loans for manufactured mobile homes, cooperatives or multifamily units.

Also, Better doesn’t service mortgages. As a direct lender the company processes the application and underwrites, closes and funds your loan. Once the loan is funded, however, Better’s servicing partner LoanCare services the loan for a temporary period of about 30 days. Then it’s transferred to a “reputable, quality investor that provides the right type of loan and servicing for your situation.”

Better’s application, step by step

getting a mortgage with better mortgage
Screenshot of the Better Mortgage application.

Better’s super-simple preapproval questionnaire is designed to help even customers who might be interested in buying a home sometime soon but don’t know where to start. First, Better asks if you already have an accepted purchase offer. If you do, you’ll enter the address and then Better will prompt you to create an account.

If you don’t have an accepted offer, then you’ll share the zip code where you’re looking and when you plan to make an offer (there’s an option to say “not sure”). Next, select which type of home you’re interested in — primary residence, second home or investment — and the property type (single family or condo/townhouse). At this point Better will ask you to create an account.

Then you’ll give Better permission to do a soft credit check that won’t affect your score, providing your name, current address, phone number and Social Security number. After a moment, Better will present your credit score from TransUnion and ask for a few more details: how you earn money, whether anyone else will be on the home’s title, if you’re working with a real estate agent, whether you currently pay rent or own properties, other assets available and the estimated purchase price of your home plus your maximum down payment percentage.

You’ll find out in a few moments whether you’re preapproved. If you are, you can look at rate options — terms include 30-, 20- and 15-year fixed, as well as a variety of adjustable rates — and select the one you like. Better says that basic preapproval takes about three minutes, and you can receive a verified preapproval letter within 24 hours.

Better wasn’t able to provide a demo after this point, because the rest of the process to loan purchase is a “personalized Q&A” that changes depending on the answers you provide. But Better says you can expect to need two years’ worth of the following documents: personal tax returns, business tax returns (if you own more than a quarter of the business) and W-2s or 1099s; plus two months of bank statements and proof of any alimony or child support payments.

Should you get an online mortgage?

A fully online mortgage process is great for buyers like the Olanoffs, and people who don’t want the hassle of meetings and phone calls. But other homebuyers might be unsettled by a “low-touch experience,” says Gumbinger, the HSH.com vice president.

A recent survey of about 2,000 U.S. adults conducted on behalf of the American Bankers Association showed that 60 percent use the Internet to research their home loans but would rather apply for a mortgage in person.

It’s important to ask yourself which of those groups you fall into. Are you a high- or low-touch shopper? Can you get your financial paperwork in order, or is it much more attractive to you to choose a lender who can automatically fill in that information? Is the ease and speed of the online process more valuable to you than the ability to have in-person meetings with a loan officer?

Whatever you do, shop around first

Even if your comfort level with a fully online experience is high, it’s paramount to do your homework when it comes to a decision as major as a mortgage. Compare experiences between both traditional and online lenders, be honest with yourself about your personal needs — and, though it goes without saying, we’ll say it anyway: Always shop around for rates. You can ask individual lenders for quotes (so long as you do them over a short period of time they should only count as one hard inquiry on your credit account) one at a time, or you can compare mortgage rates online from many lenders at once on sites like LendingTree.

“Just because someone has an electronic platform that’s easy and nice-looking, it doesn’t mean you’ll get the best possible price,” Gumbinger says. “On the flip side, the mortgage lender your aunt recommended may not have the best price, either. The fact of the matter is, you always need take a cross-cut of the marketplace to find where you can get the best deal for you.”

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APR vs Interest Rate: Understanding the Difference

When you’re shopping for a loan, don’t let your research end with a comparison of lenders’ interest rates. While a low interest rate is appealing, it’s important to also look at each loan’s annual percentage rate (APR), which will provide a clearer picture of how much the loan will cost you when fees and other costs are factored in.

APR vs Interest Rate: Understanding the differences

The difference between APR and interest rate is that APR will give borrowers a truer picture of how much the loan will cost them. While APR is expressed as an interest rate, it is not related to the monthly payment, which is calculated using only the interest rate. Instead, APR reflects the interest rate along with fees and other one-time costs a borrower will pay for a loan.

“You can find a mortgage that has a 4-percent interest rate, but with a bunch of fees, that APR may be 4.6 or 4.7 percent,” said Todd Nelson, senior vice president-business development officer with online lender Lightstream. “With all of those fees baked in, they are going to swing the interest rate.”

For example, one lender may charge no fees, so the loan’s APR and interest rate are the same. The second lender may charge a 5 percent origination fee, which will increase the APR on that loan.

How the APR is calculated

Lenders calculate APR by adding fees and costs to the loan’s interest rate and creating a new price for the loan. Here’s an example that shows how APR is calculated using LendingTree’s loan calculator.

A lender approves a $100,000 at a 4.5 percent interest rate. The borrower decides to buy one point, a fee paid to the lender in exchange for a reduced rate, for $1,000. The loan also includes $900 in fees.

With these fees and costs added to the loan, the adjusted balance being borrowed is $101,900. The monthly payment is then $516.31 with the 4.5 percent interest rate, compared with $506.69 if the balance had remained at $100,000.

To find the APR, the lender returns to the original loan amount of $100,000 and calculates the interest rate that would create a monthly payment of $516.31. In this example, that APR would be 4.661 percent.

APRs will vary from lender to lender because different lenders charge different fees. Some may offer competitive interest rates but then tack on expensive fees and costs. Lenders with the same interest rate and APR are not charging any fees on that loan, and lenders that offer APR and interest rates that are the closest will charge the least-substantial amount of fees and extra costs.

What can impact my APR?

While APR will change as interest rates fluctuate, lenders’ fees and costs will have the greatest impact on APR. Here are some of the fees that will affect the APR.

Discount points: Buying points to lower a loan’s interest rate can have a significant impact on APR. Lenders allow buyers to purchase “points” in return for a lower interest rate. A point is equal to one percent of the mortgage loan amount. For example, a buyer approved for a $100,000 loan could buy three points, at $1,000 each, to lower the interest rate from 4.5 to 4.15.

Loan origination fees: Loan origination fees typically range between 1 and 6 percent, according to Nelson. This can be especially significant for larger loans.

Loan processing: This fee, which some lenders will negotiate, pays for the cost of processing a mortgage application.

Underwriting: These fees cover an underwriter’s review of a loan application, including the borrower’s income, credit history, assets and liabilities, and property appraisal, to determine whether the lender should approve the loan application and what terms should be applied to the loan.

Appraisal review: Some lenders pay an outside reviewer to make sure an appraisal meets underwriting standards and that the appraiser has submitted an accurate report of the home’s value.

Document drawing: Lenders often charge a fee for creating mortgage documents for a loan.

Commonly not included in APR are notary fees, credit report costs, title insurance and escrow services, the appraisal, home inspection, attorney fees, document preparation and recording fees.

Because APR includes a loan’s interest rate, rising interest rates will increase APR for mortgages, auto loans and other types of loans and credit.

Interest rate vs APR: What should I focus on when shopping for a mortgage?

While lenders often push their low interest rates when they advertise loans, Nelson said it’s vital that consumers check loans’ APR when shopping around and pay attention to how loan advertisements are worded.

“Look for a lender that’s transparent about disclosing all of those fees,” he said. Lenders may advertise “no hidden fees,” he said, but that might mean there are other fees that simply aren’t hidden.

Here’s how two loans for the same amount can have different APRs.

Loan amount

Fees and costs

Fixed interest rate

APR

$200,000

$1,700

4.5%

4.572%

$200,000

$2,600

4.5%

4.61%

The Truth in Lending Act requires lenders to disclose APR in advertising so that consumers can make an equivalent comparison between loans. If two loan offers have similar APRs, request a Good Faith Estimate (GFE) or Loan Estimate from each lender.

Lenders are required to provide this document, which shows all expenses associated with the mortgage, within three business days of the loan application date. Some lenders may be willing to supply a loan estimate for consumers who are shopping for a loan.

APRs on Adjustable Rate Mortgages (ARMs): What to know

It’s important to remember that the APR on ARMs will not apply for the life of the loan, as the payment on the loan will change as the economy fluctuates. APR on ARMs is calculated for the interest rate during the loan’s introductory period, and no one can predict how much the rate will increase in years to come.

A loan with a 7/1 ARM, for example, will have a fixed rate for the first seven years that is determined by the current economic conditions on the day the loan was approved. After seven years, the lender will begin to adjust the rate based on movement of the economic index, which likely will not be the same as it was when the loan was approved. Rates fluctuate daily, and no economic forecaster can predict where the index will be in 20 or 25 years.

Understanding mortgage interest rates

A mortgage rate is another term for interest rate, which is the rate that a lender uses to determine how much to charge a customer for borrowing money. Mortgage rates can be either fixed or adjustable.

Fixed mortgage rates do not change over the life of a loan. For example, if you take out a 30-year loan at a 4.25 percent interest rate, that rate will stay the same regardless of changes in the economy and market index, through the entire lifetime of the loan.

Adjustable rate mortgages (ARM), on the other hand, will change as the market changes after an introductory period, often set at five or seven years. That means your interest rate could go up or down depending on economic conditions, which will in turn raise or lower your payments.

ARMs, which are a common type of mortgage loan with an adjustable rate, often start with a lower interest rate than a fixed mortgage — but only for that introductory period. After that, the rate could go up as it adjusts to market conditions, which could raise your payment accordingly.

If you are considering an ARM, it’s important to talk to your lender first about what the adjustable rate could mean for your loan payment after the introductory period. The federal government’s Consumer Financial Protection Bureau (CFPB) recommends researching:

  • Whether your ARM has a cap on how high or low your interest rate can go.
  • How often your rate will be adjusted.
  • How much your monthly payment and interest rate can increase with each adjustment.
  • Whether you can still afford the loan if the interest rate and monthly payment reach their maximum under your loan contract.

How is your mortgage rate calculated?

Don’t be surprised if a lender offers you a mortgage interest rate that is higher than what is advertised. Each loan’s interest rate is primarily determined by market conditions and by the borrower’s financial health. Lenders take into account:

  • Your credit score: Borrowers with higher credit scores generally receive better interest rates.
  • The terms of the loan: The number of months you agree to pay back the loan can make a difference. Generally, a shorter term loan will have a lower rate than a longer term loan but higher monthly payments.
  • The location of the property you are purchasing: Interest rates are different in rural and urban areas, and sometimes they can vary by county.
  • The amount of the loan: Interest rates can be different for loan amounts that are unusually large or small.
  • Down payment: Lenders may offer a lower rate to borrowers who can make a larger down payment, which often is an indicator that the borrower is financially secure and more likely to pay back the loan.
  • Type of loan: While many borrowers apply for conventional mortgages, the federal government offers loan programs through the FHA, USDA, and VA that often offer lower interest rates.

How often do mortgage rates change?

Mortgage rates fluctuate on a daily basis. Because the market changes so often, lenders typically give borrowers the opportunity to lock in or float your interest rate for 30, 45, or 60 days from the day your lender approves your loan. That way you won’t get burned if rates rise soon after you secure a loan.

If you choose to lock in your rate, lenders will honor that rate within the agreed-upon time period before closing regardless of market fluctuations. Floating your rate will allow you to secure a lower interest rate before closing, should rates drop during that period.

How do mortgage rate changes impact the cost of borrowing?

Small differences in the interest rate can cost a borrower thousands of dollars over the life of the loan. Here’s an example for a 30-year, fixed-rate mortgage using our parent company LendingTree’s online mortgage calculator tool:

Mortgage (30-year)

Fixed interest rate

Monthly payment

Total borrowing cost

$200,000

3.65%

$914.92

$129,371.20

$200,000

3.85%

$937.62

$137,543.20

$200,000

4.25%

$983.88

$154,196.80

What’s a good rate on a mortgage?

While mortgage rates change daily, Nelson noted that mortgage rates have stayed low for several years now and don’t show signs that they will increase drastically in the nearly future.

LendingTree’s LoanExplorer tool recently showed interest rates for a 30-year, fixed-rate mortgage as low as 3.625% for borrowers with excellent credit.

Shop wisely

When shopping for loans, you can best compare loans by getting mortgage quotes from lenders at the same day on the same time. Online marketplaces such as LendingTree also can provide real-time loan offers from multiple lenders, which makes it easier to compare mortgage APR vs. interest rates.

Don’t be dazzled by low interest rates. If the loan’s APR matches its low interest rate, you likely have a good deal. Otherwise, investigate the costs and fees behind a loan’s APR to best determine which loan offer is the best deal.

Learn more about how you can compare quotes from lenders at LendingTree.com.

LEARN MORE

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Capital One Is Exiting the Mortgage Business: Here’s What it Means for Borrowers

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Capital One announced Tuesday that it would shutter its profit-losing mortgage and home equity origination businesses.  

As a result, the banking and financial services company will cut about 900 mortgage-related jobs in three states, a Capital One spokesperson told MagnifyMoney via email.  

In addition to its mortgage loan business, the banking and financial services company offers a variety of products that includes credit cards, checking and savings accounts and auto loans.  

But the company has struggled to make its mortgage business as profitable as the competition. Capital One originated $901 million in home loans in the third quarter of 2017, but that wasn’t enough for the bank to make the list of top 40 mortgage providers, according to Inside Mortgage Finance, a trade publication. 

“Given the challenging rate environment in this space, we are structurally disadvantaged and we are not in a position to be both competitive and profitable,” the company’s spokesperson said. 

Ted Tozer, senior fellow at the Milken Institute (a nonprofit, nonpartisan think tank focused on global prosperity) and former president of Ginnie Mae, told MagnifyMoney that Capital One’s exit should not have a negative impact on the home lending business because it has not been an effective player since it entered the space some eight years ago.  

“It’s come to light that they don’t have a cost-effective operation because they really haven’t invested in technology,” Tozer said. 

In fact, he said, this will be good news for the industry because other financial institutions will then absorb Capital One’s customers in an increasingly competitive business. 

The competition in the home lending business has grown fiercer as interest rates rise, driving fewer homeowners to refinance, Tozer noted. The country is also still experiencing historically low homeownership rates.  

Nonbank financial institutions that have sprung up since the Great Recession are taking an increasingly big slice of the business. Legacy banks such as Capital One are losing customers to industry disruptors, like Quicken Loans, that have invested heavily in technology to streamline the lending process, experts say. 

“Everyone’s trying to compete for the fewer borrowers out there and you have to really have a cost-effective infrastructure to be able to compete in this kind of cut-throat environment we are going through right now,” Tozer said.  
“Capital One is hamstrung by old technology, whereas the new nonbanks are doing this 21st-century technology, and they are able to get the consumer a better experience for a cheaper price.” 

So how will the end of Capital One’s mortgage business actually affect consumers?

If you were hoping to get a Capital One mortgage …

You’re out of luck. Capital One is not going to take additional home loan applications effective immediately.  

If you have a Capital One mortgage or home equity loan already …

Not much will change for you. The bank will continue to service the loans in its portfolio. The company’s spokesperson told MagnifyMoney that consumers who have a loan in process or whose loan is being serviced by Capital One can continue to access their accounts the same way they’ve done so far – through digital means, by phone or by visiting a bank branch. 

If you are the middle of processing a Capital One mortgage application … 

The spokesperson said Capital One would close all open mortgage applications soon. If a loan cannot be closed promptly, the financial institution will refund any fees would-be borrowers have paid so that they can find another lender. 

Capital One will continue to provide specialized multifamily financing to the real estate development and investment community through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), according to to the company. 

Capital One will also continue lending activities for affordable housing supporting the low- and moderate-income markets. 

Experts suggest consumers reach out to their loan officer or customer service to receive an update on their loan if they have questions.   

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The 5/1 ARM Mortgage: What Is It and Is It for Me?

5/1 ARM mortgage
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Finding the right mortgage can be a confusing process, especially for first-time homebuyers. There are so many options that it can be hard for a consumer to know how to get the optimal rate and terms.

One way to get a better initial interest rate is by taking out a 5/1 ARM mortgage. Small wonder that many potential borrowers want to know what makes a 5/1 ARM mortgage so unique and whether it might be the right loan for them.

Below is a guide to how 5/1 ARM mortgages work, how they are different from traditional 15- and 30-year mortgages, and what pros and cons consumers need to understand.

How a 5/1 ARM works

A 5/1 ARM mortgage, as explained by MagnifyMoney’s parent company, LendingTree, is a type of adjustable-rate mortgage (hence, the ARM part) that begins with a fixed interest rate for the first five years. Then, once that time has elapsed, the interest rate becomes variable. A variable rate means your interest rate can change. Consequently, so can your payment.

The number “5” in “5/1 ARM” means that your interest rate is fixed for five years. The number “1” in “5/1 ARM” means your interest rate could change each year after the first five years have passed.

Interest rates are based on an index, which is a benchmark rate used by lenders to set their rates. An index is based on broad market conditions and investment returns in the U.S.. Thus, your bank can adjust its interest rates at any point that the benchmark rate changes or if there are major fluctuations in the U.S. stock market.

What’s fixed? What’s adjustable?

Fixed-rate mortgages have the same interest rate for the duration of the mortgage loan. The most common loan periods for these are 15- and 30-year.

Because a 15-year fixed rate mortgage is, obviously, for a shorter term than a 30-year fixed rate mortgage, you will likely pay much less interest over time. However, as a result, you will have a higher monthly mortgage payment since the loan payoff period is condensed to 15 years.

Adjustable-rate mortgages like the 5/1 ARM loan mentioned above have a fixed interest rate for the beginning of the loan and then a variable rate after the initial fixed-rate period.

The chart below shows an example of the same house with three different types of mortgages.

As you can see below, the 15-year fixed rate mortgage has a lower interest rate, but a much higher payment. The 5/1 ARM has the lowest interest rate of all, but once that interest rate becomes variable, the lower rate is not guaranteed. This is one of the cons of a 5/1 ARM mortgage, which will be outlined in the next section.

Mortgage snapshot

Here is an example of three different types of mortgage payments for someone taking out a $200,000 mortgage. The chart below makes the assumption that the fictional person this is for has a high credit score and qualifies for good interest rates.

 

Interest Rate

Monthly payment

Principal Paid
After 5 Years

Total Interest Cost
After 5 Years

30-year fixed

3.625%

$912.10

$20,592.12

$35,046.14

15-year fixed

3.0%

$1,403

$57,987.88

$26,263.08

5/1 ARM

2.875%

$829.78

$22,595.20

$27,191.90

The pros and cons of 5/1 ARM mortgages

The pros

The biggest advantage of a 5/1 ARM mortgage is that interest rates are typically lower for the first five years of the loan than they would be with a typical 15- or 30-year fixed-rate deal. This allows the homeowner to put more of the monthly payment toward the principal balance on the home, which is a good way to gain equity in the property.

The 5/1 ARM mortgage commonly has a lifetime adjustment cap, which means that even though the rate is variable, it can never go higher than that cap. That way, your lender can tell you what your highest monthly payment will be in the future should your interest rate ever reach that point.

The cons

As mentioned above, the con of a 5/1 ARM mortgage is the whole “adjustable” component. Once you get past the five-year term, there will be uncertainty. Every year after the fifth year of your mortgage, the rate can adjust and keep adjusting.

There is a way around this. You can refinance your mortgage after the five years and secure a new mortgage with a fixed rate. But be warned: Refinancing comes with fees. You will have to calculate on your own whether or not the savings you derive from a lower payment for five years is worthwhile as you measure it against the cost of refinancing to a fixed-rate loan.

That’s why it’s important to know how long you want to live in your home and whether or not you’ll want to sell your home when you move (as opposed to, say, renting it out).

A 5/1 mortgage is right for …

“For certain people, like first-time homebuyers, 5/1 ARM mortgages are very useful,” Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry, tells MagnifyMoney.

Here are the types of people who could benefit from a 5/1 ARM mortgage:

  • First-time homebuyers who are planning to move within five years.
  • Borrowers who will pay off their mortgages very quickly.
  • Borrowers who take out a jumbo mortgage.

Crouse explains that with some first-time homebuyers, the plan is to move after a few years. This group can benefit from lower interest rates and lower monthly payments during those early years, before the fixed rate changes to a variable rate.

Mindy Jensen, who is the community manager for BiggerPockets, an 800,000-person online community of real estate investors, agrees. “You can actually use a 5/1 ARM to your advantage in certain situations,” Jensen tells MagnifyMoney.

For example, Jensen mentions a 5/1 ARM could work well for someone who wants to pay down a mortgage very, very quickly. After all, if you know you’re going to pay off your loan early, why pay more interest to your lender than you have to?

“Homeowners who are looking to make very aggressive payments in order to be mortgage-free can use the 5/1 ARM” to their advantage, she explains. “The lower initial interest rate frees up more money to make higher principal payments.”

Another group that can benefit from 5/1 ARM mortgages, Crouse says, is those who take out or refinance jumbo mortgages.

For these loans, a 5/1 ARM makes the first few years of mortgage payments lower because of the lower interest rate. This, in turn, means that the initial payments will be much more affordable for these higher-end properties.

Plus, if buyers purchased these more expensive homes in desirable areas where home prices are projected to rise quickly, it’s possible the value of their home could soar in the first few years while they make lower payments. Then, they can sell after five years and hopefully make a profit. Keep in mind that real estate is a risky investment and nothing is guaranteed.

The 5/1 isn’t right for …

Long-term home buyers who plan to stay put for the long haul probably won’t benefit from a 5/1 ARM loan, experts say. “An adjustable-rate mortgage loan is a bad idea for anyone who sees their home as a long-term choice,” Jensen says.

Crouse echoes the sentiment: “If someone plans to stay in their home for longer than five years, this might not be the best option for them.”

Jensen adds that homeowners should consider whether or not they want to be landlords in the future. If you decide to move out of your home but keep the mortgage and rent a property, it won’t be so beneficial to sign up for a 5/1 ARM loan.

Questions to ask yourself

If, after reading this guide, you think a 5/1 ARM mortgage might be right to you, go through this list of questions to be sure. Remember, you can also consult with your lender.

  • How long do I want to live in this home?
  • Will this home suit my family if my family grows?
  • Is there a chance I could get transferred with my job?
  • How often does the rate adjust after five years?
  • When is the adjusted rate applied to the mortgage?
  • If I want to refinance after five years, what is the typical cost of a refinance?
  • How comfortable am I with the uncertainty of a variable rate?
  • Do I want to rent my house if I decide to move?

Hopefully these questions and this guide can aid you in reaching a sensible decision.

The post The 5/1 ARM Mortgage: What Is It and Is It for Me? appeared first on MagnifyMoney.

FHA Mortgage Insurance: Explained

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Mortgages with the Federal Housing Administration (FHA) can be especially attractive to credit-challenged first-time homebuyers. Not only can your down payment be as little as 3.5 percent, but FHA loans also have more lenient credit requirements. Indeed, you can qualify for maximum funding and that low percentage rate with a minimum credit score of 580.

On the negative side, the generous qualifying requirements increase the risk to a lender. That’s where mortgage insurance comes into play.

FHA mortgage insurance (MIP) backs up lenders if you default. It’s the price you pay for getting a mortgage with easier underwriting standards. If you put down 10 percent or more, you’ll pay MIP for 11 years. If you put down less than 10 percent, you’ll pay for MIP for the life of the loan. But there are ways you can get MIP removed or canceled, which we’ll also explain in a bit.

MIP can be bit confusing, so we’ll break down exactly how it works and how much it can add to the cost of a mortgage loan in this post.

Upfront and ongoing MIP: Explained

All FHA borrowers have to pay for mortgage insurance.

MIP is paid upfront, when you close your mortgage loan, as well as through an annual payment that is divided into monthly installments. Not all homebuyers have to pay MIP forever, and we’ll get into those specifics, so hang tight.

When you make your upfront MIP payment, the lender will put those funds into an escrow account and keep them there. If you default, those funds will be used to pay off the lender. As for your ongoing MIP payments, they get tacked onto your monthly mortgage loan payment.

How long you have to pay MIP as part of your mortgage payments can vary based on when the loan was closed, your loan-to-value (LTV) ratio, and the size of your down payment. Your LTV is simply how much your loan balance is, versus the value of your home, which our parent company LendingTree explains in this post.

Upfront Mortgage Insurance Premium (UFMIP)

UFMIP is required to be paid upon closing. It can be paid entirely with cash or rolled into the total amount of the loan. The lender will send the fee to the FHA. The current upfront premium is 1.75 percent of the base loan amount. So, if you borrow a FHA loan valued at $200,000, your upfront mortgage insurance payment would be $3,500 due at closing.

UFMIP is required to be paid by the FHA lender within 10 days of closing. The payment is included in your closing costs or rolled into the loan. A one-time late charge of 4 percent will be levied on all premiums that aren’t paid by lenders within 10 days beyond closing. The lender (not the borrower) must pay the late fee before FHA will endorse the mortgage for insurance.

With ongoing premiums, your lender will collect your MIP and send it to HUD. The lender, not you, be penalized for any late MIP payments.

Annual MIP payments are calculated by loan amount, LTV, and term. To help estimate your cost, the FHA has a great What’s My Payment tool.

Here’s an example of monthly charges based on a $300,000, 30-year loan at 4 percent interest, with a 3.5 percent down payment and an FHA MIP of 0.85 percent. (This does not include any money escrowed for taxes and insurance):

  • Principal and interest: $1,406.30
  • Down payment: $10,500
  • Upfront MIP at 1.75 percent: $5,066
  • Monthly FHA MIP at 0.85 percent: $203.42
  • Total monthly payment = $1,609.72

Penalties and interest charges for late monthly payments are similar to those levied on the UFMIP.

Base Loan Amount

LTV

Annual MIP

Less than or equal to $625,500

≤ 90.00%

0.80%

> 90.00% but
≤ 95.00%

0.80%

> 95.00%

0.85%

Greater than $625,500

≤ 90.00%

1.00%

> 90.00% but
≤ 95.00%

1.00%

> 95.00%

1.00%

Source: HUD

Base Loan Amount

LTV

Annual MIP

Less than or equal to $625,500

≤ 90.00%

0.45%

> 90.00% but
≤ 95.00%

0.70%

Greater than $625,500

> 90.00% but
≤ 95.00%

0.45%

> 95.00%

0.70%

> 90.00%

0.95%

Source: HUD

How long does MIP last?

The length on MIP requirements also depends on when you closed the loan and the size of your down payment. The rules changed dramatically in July 3, 2013. Until then, you could cancel your MIP after your LTV ratio dropped to 78 percent. Under the new rules, the MIP on loans closed after June 3, 2013, will last either the life of the loan or for 11 years, based on the amount of the down payment.

For loans that were closed before June 3, 2013, you can still request that MIP be dropped after your LTV ratio drops to 78 percent — after five years of payments without delinquencies.

Here’s the breakdown:

Loan Term

Original Down Payment

MIP Duration

20, 25, 30 years

Less than 10%

Life of loan

20, 25, 30 years

More than 10%

11 years

15 years or less

Less than 10%

Life of loan

15 years or less

More than 10%

11 years

Source: FHA

 

Loan Term

Original Down Payment

MIP Duration

20, 25, 30 years

Less than 10%

78% LTV based on original purchase price
(5 years minimum)

20, 25, 30 years

10-22%

78% LTV based on original purchase price
(5 years minimum)

20, 25, 30 years

More than 22%

5 years

15 years

Less than 10%

78% LTV

15 years

10-22%

78% LTV

15 years

More than 22%

No MIP

Source: FHA

How to Eliminate MIP

NOTE: About endorsements

According to the MIP Refund Center, the HUD endorsement on FHA loan is the date your MIP is approved. When you pay your upfront MIP with the lender, the loan is closed.The clock starts ticking on your MIP on the endorsement date.

More on MIP cancellation:

Most of today’s FHA borrowers will have but a few options to end their insurance payments. If you’re hoping to get out of paying FHA mortgage insurance, you’re going to either have to pay off the loan or do some refinancing. The FHA policy allowing borrowers to cancel annual MIP after paying for five years and reaching 78 percent LTV was rescinded with the new regulations in 2013 requiring payments for the life of the loan.

The good news about the FHA policy is that you can retire your loan earlier by making additional payments. If you closed your loan after June 2013, you can cancel MIP by refinancing into a conventional loan once you have an LTV of at least 80 percent.

Here are two strategies to get your MIP canceled:

Replace/refinance with a Streamline FHA Mortgage

If you have a current FHA mortgage and have no late payments, you may qualify for a Streamline FHA mortgage to refinance your existing loan with a better rate. You’ll still need to pay MIP but the savings generated by the lower interest rate can offset your insurance costs.

Replace/refinance, with conventional PMI

Want to switch to conventional refinancing? Credit requirements are tougher and interest rates may be higher on conventional PMI. The minimum qualifying credit score for conventional fixed-rate loans is 620.

PMI is similar to MIP in that both protect the lender’s investment. The MIP is determined by the LTV and term. The PMI is calculated on the size of your down payment.

A minimum of 5 percent down is required and the PMI can be paid in a lump sum or monthly installments — not both. If you put down 20 percent or more, the requirement for PMI on conventional financing can be waived. In conventional refinancing, you may be required to have an appraisal to determine property value. This is essential since the PMI insurance requirement on conventional loans ends once the borrower’s LTV drops to 78 percent. The Consumer Financial Protection Bureau says that the lender is required to cancel PMI once your payments reach the “midpoint of your loan’s amortization schedule” — no matter the LTV. That’s if you’re current on your payments.

A good way to determine the value of refinancing is to complete an analysis through LendingTree’s Refinance Calculator.

LEARN MORE:

FHA announcements and changes

HUD announces changes in MIP requirements from time to time in reaction to risks such as foreclosures, deficits in the Mortgage Insurance Fund or downturns in FHA lending.

For example, in January 2015, HUD reduced the annual MIP insurance rate by 50 basis points. Another announcement was released this year after President Trump took office when HUD canceled a plan to lower MIP premiums proposed by the Obama administration. According to the National Association of Realtors, the cancellation of lower rates means “roughly 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers will be left on the sidelines in 2017 without the cut.”

Consumers should check with lenders or with HUD to stay up to speed on changes that could affect their mortgage.

Am I eligible for a HUD refund?

If you acquired your loan prior to Sept. 1, 1983, you may be eligible for a refund on a portion of your UFMIP. Or, if you refinance your home with another FHA loan, the insurance refund is applied to your new loan.

HUD rules specify how long you have to refinance before you lose your refund:

  • For any FHA-insured loans with a closing date prior to Jan. 1, 2001, and endorsed before Dec. 8, 2004, no refund is due the homeowner after the end of the seventh year of insurance.
  • For any FHA-insured loans closed on or after Jan. 1, 2001 and endorsed before Dec. 8, 2004, no refund is due the homeowner after the fifth year of insurance.
  • For FHA-insured loans endorsed on or after Dec. 8, 2004, no refund is due the homeowner unless he or she refinanced to a new FHA-insured loan, and no refund is due these homeowners after the third year of insurance.

The refund process goes into motion when the mortgage company reports the termination of your insurance on the loan to HUD. You may receive additional paperwork from HUD or receive a refund directly in the mail. You can find out if you’re owed a refund by entering your information at the HUD refund site. If you’re on the list, call HUD to get the ball rolling at: 1-800-697-6967?.???

Final thoughts

If you’re trying to get into a home with less-than-optimal credit, an FHA-backed loan could be your best option. You’ll pay for the benefit of landing the mortgage through MIP over much of the loan’s lifetime, if not all of it. You may save money after you’ve built some equity (or improved your credit) by refinancing to a conventional mortgage that drops the mortgage insurance requirement after you reach the 78 percent LTV milestone.

The post FHA Mortgage Insurance: Explained appeared first on MagnifyMoney.

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

A mature couple receives an application at a bank.

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

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

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

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

A Less-Than-Ideal Credit Report

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

Not Enough Income

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

Too Much Debt

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

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

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

Image: dcdebs

The post Why You Should Still Talk to a Lender Even if You’re Not Ready to Buy a Home appeared first on Credit.com.

How Can Baby Boomers Tackle Their Housing Debt Faster?

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Unlike people of her father’s generation, Lauren Beale, 60, said she never expected to own a house outright at retirement. 

Beale, a former journalist who retired in 2015, pays $2,063 a month for a mortgage for her home in Palos Verdes Estates, Calif., in Los Angeles County, where she lives with her husband. The couple bought the house for $800,000 in 2002.  

They now owe $268,000 on the mortgage. And Beale said she had no plans to double up on her payment and pay it off faster. “What if you need that money for some kind of emergency down the road?” she asked. “We are comfortable with some mortgage payment. It doesn’t make sense to draw from the nest egg, the retirement accounts, to pay it down soon.” 

Beale, now a freelancer and novelist, said she would rather keep her savings as a safety net: “I think boomers are feeling less secure about our medical futures.” 

Retired with a mortgage 

The Federal National Mortgage Association, known as Fannie Mae, recently released an analysis concluding that baby boomers — those born between 1946 and 1965 — were 10 percentage points less likely to own their homes outright than pre-boomer people who were the same age in 2000.  

The report says the rise in housing debt among older homeowners is increasingly worrisome. There are concerns that having mortgage obligations could weaken seniors’ financial security in retirement and put them at greater risk for foreclosure, among other potential problems. 

Still, Beale is not concerned. Her family’s monthly mortgage bill is just roughly 20 percent of the total household income. They have no other debts, nor do they have major monetary needs. Her financial goal at this stage is to have enough money to live comfortably in retirement, pay all the bills and be able to travel. 

To be sure, not every boomer is as financially confident as Beale. Nationwide, boomers carried an average housing debt of about $68,400 in 2016, according to Federal Reserve data analyzed by MagnifyMoney. National statistics also revealed that a hefty 2.5 million people ages 55 and older became renters between 2009 and 2015, up 28 percent from 2009, the biggest jump among all age groups. RENTCafe.com, a nationwide apartment search website, said the notable change in renter profile could be that empty-nesters changed lifestyles, got hit hard by the housing slump or can’t afford to own homes. 

How to pay off your mortgage faster 

For those who do care about paying mortgages off before retirement, here are some ways to handle those debts faster and stay motivated to reach your goals: 

Paying off debt? It’s like earning more money 

Leon LaBrecque, a Michigan-based certified financial planner, said roughly half of his clients — mostly middle-class Americans — are able to pay off mortgages approaching retirement. A boomer himself, he is all for paying off mortgages as soon as possible to achieve  better cash flow. 

“Debts are an anti-asset,” said LaBrecque. “Removing an anti-asset is the same as having an asset. So If I got a 4 percent mortgage, I pay it off, I made 4 percent.” 

He added: “It’s very hard to make 4 percent now. The fixed-income market is so constrained that there are not a lot of good alternatives to debt reduction.” 

Pay off other debts. High-interest debt, in particular. 

Before paying down a mortgage or paying it off, get rid of other high-interest-rate debts first. Think student loans and credit card balances.  

LaBrecque offered this example:  Say you have a 4 percent rate on your mortgage and an auto loan with a $350 payment and a 5 percent interest rate — you should pay the car note off first. Then you can put an extra $350 toward your mortgage each month. 

Find money from other sources 

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If you have cash idling somewhere, with no particular purpose, pay off your mortgage. Remember: If you go and pay off a loan, there is an immediate return for what you’ve repaid. 

“You got $125,000 sitting in the bank, making nothing, and you owe $80,000 on the mortgage; pay the mortgage off,” LaBrecque has been telling his elderly clients lately. 

Also, if you have money in the market, consider getting rid of a sub-performing investment and put the resources into the mortgage, he said. 

Improve the cash flow 

Be conscious of how you spend your money. If paying off housing debts is your primary goal, prioritize it and allocate your money accordingly.  

“We always talk about having a good cash-flow management system for our younger population, but we don’t get a lot of that on the older population,” said Juan Guevara, a Colorado-based certified financial planner. “We always think that, ‘Well, those guys have figured it out.’ Well, maybe not.” 

Take a look at your cash flow holistically. When you track your spending, you can watch for opportunities to put more money toward your mortgage. For example, if you were helping your children pay student loans, see if they can take on the responsibility and redirect that budget toward your housing debt. As you approach retirement, consider using any bonuses or pay raises you receive to pay down debt.  

Break down big goals. Baby steps. 

It’s easier to make big goals and separate them into little pieces, experts say. Guevara advises that boomers divide their monthly house payment by 12 and add that amount to their payment each month.  

If your monthly payment is $1,500, for instance, “now you’re looking at a goal of having to add another $125 to each payment every month, instead of having to come up with $1,500 at the end of the year,” Guevara said. 

Refinance your mortgage 

Once you’ve managed a good cash flow, it’s likely that you are able to apply extra funds to your mortgage every month. This is when you may to consider refinancing the mortgage to get a lower rate or a shorter term. 

LaBrecque said he suggests that clients take out 30-year mortgages but pay them off sooner.  

“You can always turn a 30-year mortgage into a 15 but you can’t turn a 15-year mortgage into a 30,” he said. “I’m a big fan of having the obligation as low as possible on a monthly but also have the flexibility to pay it off.” 

Shorter home loans generally have lower interest rates, so you’ll not only pay off your mortgage faster, you’ll also pay less in interest.  

Beale has refinanced her mortgage twice to lower the monthly payment. Her current 20-year mortgage now carries an interest rate of about of 3.88 percent, significantly lower than the original 30-year loan. (It came with a rate above 5 percent.) 

You can learn more about this tactic in our guide to refinancing your mortgage. 

Educate your children  

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Guevara said he has seen an increasing number of parents spending beyond their means for their children: They’re taking on student loans, supporting sons and daughters after they finish school or offering other assistance. Those expenses chew up a significant amount of the money they could be putting toward the mortgage.  

“It’s not my place to tell them to stop,” he said. “It’s my place to show them, ‘Look, this is what happens if you don’t stop or if you continue on the path that you are on now.’” 

If you want to own your house outright earlier, Guevara said it’s worth starting to teach your children about the value of money and helping them become more financially responsible in an early stage. 

“Money is a taboo in our society, and it shouldn’t be,” Guevara said. “It should be something that we talk about at the dinner table.” 

Look forward to financial freedom

Beale and her husband will be debt-free in 13 more years if they stay in the same house and continue making payments as they’ve been doing. But she doesn’t seem to look forward to that day. 

“I think as we age, things that might seem like a happy occasion might be more of a sense of finality,” she said. 

But she also finds a silver lining — the financial freedom that comes when debt is paid off. 

“Who knows at that point; what if I have grandkids?” she said. “Maybe I’ll say: ‘Hey, my bills are paid. Maybe I’ll start taking that $2,000 and putting it into a college fund or something.’” 

The post How Can Baby Boomers Tackle Their Housing Debt Faster? appeared first on MagnifyMoney.

Can I Get a Home Equity Loan with Bad Credit?

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A less-than-perfect credit score isn’t necessarily a barrier between you and a home equity loan (definition courtesy of MagnifyMoney’s parent company, LendingTree). Why? Because unlike unsecured debts, such as personal loans or credit cards, you actually have some valuable collateral to offer the lender — your home. So while you may still face a difficult road ahead in pursuit of such a loan, for many it’s more than doable.

When applying for a home equity loan (HEL), you’re essentially leveraging the equity you’ve built up in your home. By equity, we mean the difference between the value of the home and whatever’s currently left on your mortgage. If, for example, an appraisal finds that your home is worth $150,000, and your mortgage balance is $100,000, then you have $50,000 of equity. (You can find a handy LendingTree equity calculator here.)

Generally speaking, more equity translates to more robust financing options, even if you have poor credit. That’s not to say you’ll get the best terms and interest rates. (We’ll get back to that.) But even if you’re squarely in this camp, there are options out there.

The application process for a HEL, which isn’t unlike that of a mortgage, can be lengthy. Get ahead of the game by gathering up all the relevant financial documentation. This includes your latest tax returns, proof of income and employment, home insurance documents, your home value estimate and the like. Any co-applicants ought to do the same.

What’s considered a “bad credit score” for a home equity loan?

Getting a home equity loan with bad credit is possible, but as with any other type of financing option, a good score is bound to work in your favor.

“Anything under 680 is going to be where things get a little difficult,” Nathan Pierce, a certified residential mortgage specialist and vice president of the National Association of Mortgage Brokers (NAMB), tells MagnifyMoney.

Of course, this isn’t a hard and fast rule Discover, for example, offers HELs to consumers with credit scores as low as 620.

If your score is on the lower side of the 600s, you aren’t necessarily out of the game. Lenders look at other factors besides your score. They also consider whether you have a history of responsible credit use, solid employment and income, and sufficient equity in your home.

Other factors that can impact your quest for a HEL

Debt-to-income ratio: Aim for 43 percent or less

Qualifying for a home equity loan with bad credit is about more than just your credit score. During the process, a number of factors come into play. Your debt-to-income (DTI) ratio is a biggie. This basically provides a snapshot of what you owe versus what you earn.

Many lender sites specify the 43 percent threshold. According to Pierce, a DTI that exceeds 45 percent will likely work against you when applying for a home equity loan.

“You may see some lenders that may go up to 48 percent or 50 percent, but that’s on the rare side,” he adds.

In general, lenders tend to lean more conservatively here. And, as we said, 43 percent is a big number for many lenders. The maximum DTI for applying through both Chase and TD Bank, for example, is 43 percent.

Let’s say your monthly gross income stands at $4,000 and all your monthly debt payments (from your mortgage to credit cards to student debt to auto loans) adds up to $3,000. When we divide your debt by your income, it reveals a 75 percent DTI. That is an amount that’s considered high by HEL standards, which will probably impact your ability to qualify for a home equity loan in spite of bad credit.

Loan-to-value ratio: Aim for 85 percent or less

How much equity you have in your home is another big piece of the puzzle, as it affects how much money you’ll be able to borrow. Since you’re using the home itself as collateral, owing less makes you more desirable to lenders.

It’ll also help you get approved for a larger loan amount. If your mortgage debt exceeds 85 percent of the home’s value, qualifying for a home equity loan with bad credit might prove tricky. This calculation is called the loan-to-value ratio. (You may encounter the acronym LTV.)

“For most lenders, that’s the bottom number,” says Pierce. “When you get up to 90 percent, it gets a little bit thinner, but there are some institutions out there that are going to 100 percent these days.”

Most of these will be credit unions and small community banks, as opposed to traditional banks and mortgage companies. The big guys, according to Pierce, are usually limited to 85 to 90 percent.

Low equity, when coupled with poor credit, is likely to make qualifying for a HEL an uphill battle. That’s not to say you’re out of options; you just might have to take a different financing route.

Your credit report: Getting it right

That said, you’ll definitely want to take a good look at your credit report before applying for a HEL. According to a 2012 Federal Trade Commission report, roughly one in five Americans has potential errors on his or her credit report. If you’re one of these people, disputing errors with credit bureaus can give your credit score a nice boost in the right direction. Indeed, 13 percent of consumers experienced a change in score due to their dispute, the report said.

Legitimate red marks on your report, like delinquent accounts or a past bankruptcy, could indeed makes things harder, but every lender is different.

How to shop for a HEL with bad credit

Before making any big financial decision, it’s in your best interest to shop around. Don’t let having poor credit score or disempower you or make you feel like you need to jump at the first offer. Instead, leverage what equity you have in your home to negotiate multiple offers and try to score the best terms you can.

“With a home equity loan, there could be large variations between lenders, so I’d definitely suggest checking with multiple places, as you could get pretty different options from each,” says Pierce.

Just remember that the qualifying criteria for one lender might not match another’s. But that’s all the more reason to do your homework. (Oh, and by the way: if you sign loan papers and then change your mind, the Federal Trade Commission says you have the right to cancel the deal for any reason, without penalty, within three days.)

Additionally, Pierce says that large banks and mortgage brokers might not be your best option. So check out your local community banks and credit unions, which will likely be more open to working with people who have less-than-perfect credit.

What to expect during the HEL application process

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After submitting the necessary paperwork, the application process typically takes a few weeks. This may vary depending on the complexity of the application, underscoring the importance of being prepared. If a lender needs to dive deeper to verify your income or look into other properties or assets you have, it’ll draw out the timeline.

That said, folks with good credit are more likely to snag financing options with better terms and lower interest rates. This doesn’t mean you’re out of luck if your credit score is on the lower end, but applying for a home equity loan with bad credit may result in being offered less or paying a bit more in the long run because of higher interest rates. This is when you really need to compare your options, which is why shopping around can pay off big time.

You also need to think about why you’re seeking the loan in the first place. For example, a home equity loan with a 10 percent interest rate that’s used for a home renovation — which could ultimately boost your home value — might make sense if you have room in your budget to easily absorb the monthly payment. But the same loan doesn’t add up if you’re looking to consolidate lower-interest debt. Sure, you might boost your credit score a bit, but you’ll pay more over the long haul.

Either way, be sure to really pay attention to the loan terms, especially the monthly payments. The good news is that HELs come with fixed rates, and the repayment window seem to fall in the five- to 30-year range. But if the payments are going to strain your budget, you might be better off going with an unsecured line of credit. You’ll pay more in interest, but defaulting on a HEL could result in you losing your house — no small thing.

The application process for someone with poor credit might also involve lenders limiting the amount of money they’ll let you borrow. And while hashing out loan terms and interest rates, Pierce adds that many lenders will set minimum loan amounts as well.

“You may have lenders that say they want a $25,000 minimum loan amount [if] they’re not interested in $10,000 or $15,000, which may be another factor that stops somebody from getting it,” he tells MagnifyMoney.

How to improve your chances of a HEL approval with bad credit

Reduce your DTI

If you’ve got a few strikes against you, rest easy; there are a number of things you can do to improve your odds of qualifying for a HEL. As we mentioned, reducing your debt-to-income ratio is a big one. Take a look at your monthly budget to see where you can free up extra cash to redirect toward your debt. Minor tweaks, from shrinking your cable bill to eating out less, can make a big difference; $50 here and $25 there, when used to accelerate your debt payments, will supercharge your efforts to improve your score.

While it may not be as easy to dramatically increase your salary, you can give your income a nice boost by picking up a side gig or taking on a roommate to reduce your monthly mortgage burden. The idea is to get creative and find something that works for your lifestyle. The freed-up cash can help dig you out of debt faster, which will also improve your credit score and bolster your chances of being approved for a HEL.

Bring on a co-signer

As with applying for a student loan or a traditional mortgage, introducing a co-signer can be a game changer.

Pierce says bringing a co-signer with good credit on board is a good move because lenders will feel a little safer taking a chance on you. Just do your homework, as different lenders have different qualifying options.

Wait until you have more equity

This might take a bit more time, but remember: More equity translates to a higher LTV (loan-to-value) ratio, which tips the scale in your favor when shopping around for a home equity loan.

Just as we discussed upping your take-home pay and trimming your budget to accelerate your debt payments, the same can be said for fast-tracking mortgage payments. Hacking away at the principal balance will cut the loan down quicker — and grow your equity at a faster clip. This tactic may prove tricky if you’re also tackling high-interest debt, but if you have the wiggle room in your budget, it could help reduce your timeline.

Alternatives to a HEL

Marcus Personal Loan Review: Goldman Sachs Takes on Online Lenders with Exclusive New Loan

If you’re having trouble qualifying for a home equity loan with bad credit, you also have some other financing options to explore:

Cash-out Refinance

  • What it is: A cash-out refinance lets you start over with a new mortgage that replaces your old one while letting you borrow extra that you can use as you wish.
  • Why might it be a good alternative? You’ll have one new monthly mortgage payment. If you refinance to a longer-term mortgage, that’ll also improve your credit utilization ratio, which can help boost your credit score.
  • Would someone with bad credit qualify? It depends on the situation. You may qualify, but with a higher interest rate. Pierce adds that, when compared with a HEL, there may be more limits in terms of how much cash you can take out

Personal loan

  • What it is: A personal loan is an unsecured loan. If you qualify, a lender will deposit cash right into your account that you can use any way you wish. It can be a good way to consolidate and pay off debt, so long as you can afford the monthly payment.
  • Why might it be a good alternative? No collateral. If keeping up with HEL payments means stretching your budget (and potentially defaulting), this option has an advantage: You won’t risk losing your home.
  • Would someone with bad credit qualify? Probably, but think carefully. Interest rates for people with bad credit can in some instances be upward of 35 percent. Lenders may also tack on an origination fee and/or prepayment penalty

Home equity line of credit (HELOC)

  • What it is: A little different from a HEL, a home equity line of credit (HELOC) is a revolving credit line extended to you by the lender.
  • Why might it be a good alternative? Your equity level dictates your credit limit, but you can borrow against a HELOC as much as you need to during what’s called the “draw period,” which usually lasts five to 10 years. (Side note: you’ll be on the hook for making interest payments during this time.)
  • Would someone with bad credit qualify? If you don’t have a lot of equity and/or you have a spotty credit history, getting approved for a HELOC is apt to be as challenging as snagging a HEL, Pierce says.

Last words

Getting approved for a home equity loan with bad credit is tough, but it is not impossible. The most powerful tool in your arsenal: to gradually improve your score by making consistent, on-time payments. This, in turn, will reduce your debt while improving your debt-to-income ratio. Keeping up with your mortgage payments will also help you steadily build more home equity.

Plus, you’ve got other options. Aside from potentially bringing on a co-signer, a cash-out refinance, personal loan or HELOC all represent viable alternatives, depending on what you need the money for and what terms and interest rates you can snag.

The post Can I Get a Home Equity Loan with Bad Credit? appeared first on MagnifyMoney.

What is PITI? 

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If you’re getting ready to buy a home, you might hear the term “PITI” from your real estate professional. You might also come across it in emails with your lender or read it in your mortgage paperwork.

So what is PITI? Simply put, it’s an acronym that describes the four key components of your monthly housing costs as a homeowner. 

Specifically, PITI stands for: principal, interest, taxes and insurance.

Many people make the mistake of comparing the cost of their monthly rent and utilities with a monthly mortgage and interest payment. In this kind of flawed comparison, owning a home can often seem like the better deal. 

However, as evidenced by PITI, there is more to owning a home than paying a mortgage plus interest. Not even addressing utilities, you also have to factor in property taxes and insurance, which can definitely increase your monthly payments.  

That’s why it’s important to use a PITI loan calculator, like this one from our parent company LendingTree, and speak to your lender to find out what your actual PITI payments will be. Only then will you have a comprehensive idea of the true cost of homeownership. 

To help you get there, we’ll go into more detail below about each of these four components of a mortgage and what to consider before you buy a home. 

Principal 

Your home’s principal is the base amount of money you borrowed to buy it. So, if you financed $200,000 for a home, you have $200,000 of principal left to pay off. 

It’s very important to note that your entire mortgage payment will not be applied to your principal balance. Only a portion of it will. The rest of your mortgage payment will go toward interest, taxes and insurance. If you want to pay down your mortgage faster, you’ll have to send in extra payments and instruct your mortgage company to apply that cash to the principal, not toward future interest. 

Interest 

Interest is the cost you pay for taking out a loan. The bank charges you for lending you money in the form of interest. After all, if it lends you X dollars, that’s X dollars it can’t use itself. So there is a cost associated with lending. You’ll normally see interest in percentage form. (The interest rate on this loan is 4 percent.)  

Still, it can be difficult to understand how to calculate your interest rate and how that affects your mortgage payment. Here are some of the ways to determine your interest costs: 

There is also a difference between your mortgage interest rate and your APR. According to the Consumer Financial Protection Bureau, your APR (annual percentage rate) includes your mortgage interest and other charges like fees. So be sure to ask your lender to see your APR so you can get a sense of the total cost of your mortgage. Knowing APR is also a good tool to use to properly compare lenders, because some lenders charge higher fees than others even if they’re offering the same loan amount. 

Lastly, your interest payment will not be the same every month. This is called amortization, the gradual reduction of a debt by regular scheduled payments of interest and principal. Many first-time homeowners are surprised at how much of their mortgage payment goes toward interest and not principal. In order to plan ahead, ask your lender for a sample amortization schedule so you can get an idea of how much of your monthly payments will go toward interest and how much will apply to principal over time. As you pay down your interest costs, you’ll start to see the principal balance reduce more and more. 

Taxes

As a homeowner, you pay property taxes on your home. These funds are used to fund your local communities, including your local public schools, fire departments, police forces, libraries and more. 

Here is some information on property taxes and how your city determines them: 

  • Property taxes vary from one state to the next. 
  • A local tax assessor will determine your local property tax, but has no control over your state tax rate. You can also look up how to calculate property taxes to find out more information about your own home. 
  • You can check your property tax assessment every year to make sure there are no errors on it. In some areas, you’ll have an updated assessment every year, but in others, it could be every few years. 
  • There are many factors that impact your property tax rate. Some of these factors include improvements to your property, the price of similar homes in your area, and even things not related to your home, like state and local budget cuts 

Luckily, the property taxes you pay are often an income tax deduction, so that is one benefit to homeownership. 

Insurance 

The amount of insurance you pay as a homeowner really depends on where you live, how  much of a down payment you gave your lender, and what type of coverage you want or need. Below are three examples of common types of insurance that homeowners carry:  

  • Homeowners insurance: Homeowners insurance typically protects your home against damage caused by things like a house fire. Most homebuyers put their insurance payments in an escrow account ahead of time. Then, your bank uses the funds you put in the account to pay the insurance on your behalf. 
  • Flood insurance: Not all homeowners buy flood insurance. This will really depend on where your home is, and whether there’s a risk of flooding from hurricanes or being in a low-lying area. It’s important to do your research and get a flood certificate to find out if the property is located on a floodplain.  
  • Private mortgage insurance: If you can’t put 20 percent down on your house, some banks (but not all) will require you to pay for private mortgage insurance, also known as PMI. Some types of mortgages, like FHA loans, require such insurance.

    What is not included in PITI payments? 

Although PITI is comprehensive when considering how much it will cost you to own and operate your home, there are some other costs that aren’t factored in.

Below are some examples.

  • Utilities: Your utilities might include electricity, natural gas, water, trash collection and the like. 
  • Recurring subscriptions: Have you factored in things like cable, phone, internet, Netflix, etc. 
  • Homeowners association fees: If you live in a condo or in a neighborhood that shares the costs associated with common spaces or services, you might have to pay an HOA fee on top of your PITI costs. 
  • Home improvements: If you want to upgrade some part of your home, this will be an added cost. 
  • Home maintenance costs: You can predict basic home maintenance costs, like cutting the grass or fixing a leaky faucet. You can’t predict some of the larger expenses, like those arising from termite damage or a broken hot water heater.This is why it’s important to have an emergency fund before buying a home.

    Ryan Inman, a Las Vegas based financial adviser, often works with young families and potential homeowners. He says it’s important to pay attention to the non-PITI costs mentioned above. “My best advice to first-time homebuyers is to compare the amount of rent and utilities you are paying now with how much PITI, HOA fees and utilities will be on a home,” he tells MagnifyMoney. 

“Save the difference for three to six months, and see how your lifestyle is affected. 

The key to Inman’s strategy is figuring out if you can maintain a comfortable lifestyle (no dramatic changes or sacrifices) on your mock homeowner’s budget. If it’s no problem, then you might be ready for homeownership.  

“Also, factor in that you will now be responsible for maintaining the home,” he adds. “There is no rule for how much this can be,” since it really depends on the age and quality of the home, “but it could be costly.” 

Next steps: 

Now that you understand more about what PITI stands for and represents, it’s time to do your research. Remember, you can calculate your total mortgage PITI payment by using a PITI payment calculator 

When you get your results using the PITI payment calculator, don’t forget to add in the uncounted items mentioned above, like home maintenance costs and utilities. 

It’s also important to have a cash buffer for unexpected emergencies so you don’t go into debt fixing a flooded basement or addressing significant damage from a storm. 

If you do all of this, you’ll have an excellent idea of what your cost of homeownership will be. If you feel comfortable with this cost and are convinced you’re set to handle anything unexpected that might pop up, then you’re well on your way to becoming an owner. 

The post What is PITI?  appeared first on MagnifyMoney.

A Guide to Home Loans for Bad Credit

Getting a mortgage with bad credit isn’t easy. Banks and credit unions became ultraconservative with mortgage lending following the 2008 housing market crash. However, these days, tighter lending standards don’t have to force you out of the mortgage market. If you have a stable income, you may qualify for a mortgage, even with bad credit. We’ll explain the best home loans for people with bad credit, offer tips for cleaning up your credit histories and point out scams to avoid.

Quick guide to checking your credit score

If you’re just starting to shop for home mortgages, it pays to know if banks think you have bad credit or not. Here’s how FICO, the main credit score provider in the U.S., breaks down credit scores:

  • 800-plus: Exceptional
  • 740-799: Very good
  • 670-739: Good
  • 580-699: Fair
  • 579 and lower: Poor

A credit score above 740 is optimal for finding the best mortgages, but you can often secure a mortgage with a much lower score. You might find an FHA mortgage with a credit score as low as 500 (albeit with a 10 percent down payment rather than 3.5 percent rate for scores above 580), but a credit score of around 650 gives you a decent chance of qualifying for a home mortgage. Getting a mortgage with a truly bad credit score will be difficult, and improving your credit to “fair” status could make it much easier.

Where can you check your credit score? Banks and credit unions use the FICO Scores 2, 4 and 5. These are not the same scores you will find through a free credit scoring site. Unfortunately, we haven’t found a free option for checking your FICO Scores 2, 4 and 5. The best option for checking these is checking them on MyFICO, which costs $59.85.

If you don’t want to pay for a credit score, consider using a free scoring site. But don’t put too much stock in the number it offers. It may overestimate your credit score (for mortgage shopping), especially if you’ve paid off debt in collections recently, and some free scores don’t use the 300-850 scale FICO often uses. Instead, focus on the information about what’s helping and hurting your credit score, if the tool offers those insights, and use that knowledge to make improvements where you can.

You can get a free credit score through our parent company LendingTree.

Home loan programs for people with bad credit

FHA loans

FHA Loan Details

Credit score required

500, but banks have minimum underwriting
standards

Down payment required

Credit score between 500-579: 10 percent
Credit score above 580: 3.5 percent

Upfront financing fee

1.75 percent, which can be financed

Mortgage insurance

0.45 to 1.05 percent

Mortgage limits

Generally, $275,665 for single-family units, but it
varies by location and you should check the limits in your area

Fine print

Mortgage insurance premiums are paid for the life of the loan,
except when putting 10 percent or more down. If your down payment is
less than 20 percent but 10 percent or more, you must have
mortgage insurance for 11 years.

Quick take

If you have bad credit, an FHA loan offers a more accessible mortgage. While credit standards vary by lender, you may qualify for the FHA loan with a credit score as low as 500. With a credit score above the 580 threshold, you may qualify for the 3.5 percent down payment.

Unfortunately, an FHA loan can be expensive because of mortgage insurance fees. In addition to paying ongoing mortgage premiums for the life of the loan, you’ll have to pay a 1.75 percent upfront financing fee.

Pros:

  • 3.5 percent down payments (for those above the 580 credit-score mark)
  • Credit scores as low a 500
  • Can buy up to four units

Cons:

  • 1.75 percent upfront mortgage premium
  • Ongoing mortgage insurance
  • Smaller loan limits

Where to get an FHA loan

You can use the comparison tool on LendingTree or Zillow to find offers from FHA-approved lenders in your area willing to work with people with bad credit. If an online search doesn’t yield the results you want, you may need to work directly with a mortgage broker who specializes in finding mortgages for people with bad credit. You can use a site like Find A Mortgage Broker or Angie’s List to find brokers in your community.

Be sure to check the National Multistate Lending System (NMLS) to see if your broker has had any regulatory action filed against them. Regulatory actions against the broker are red flags that indicate you may want to take your business elsewhere.

Fannie Mae HomeReady Mortgage

HomeReady Mortgage Details

Credit score required

A minimum requirement of 620 generally applies
to Fannie Mae products.

Down payment required

3 percent for credit scores above 680
(for single family homes). 25 percent for credit scores
between 620-680 (for single family homes).

Upfront financing fee

None

Mortgage insurance

0.125 to 3 percent

Mortgage limits

Generally, $424,100, though it varies by location

Fine print

You must earn less than the median income in
your ZIP code to qualify,
or buy a home in a low-income zip code.
You must take a homeowner’s education class to qualify for the mortgage,
mortgage insurance can be canceled when you reach a
loan-to-value ratio of 80 percent.

Quick take

If you’ve got a fair credit score but a big down payment, the Fannie Mae HomeReady mortgage is the best conventional mortgage for you. With a 620 credit score and a 25 percent down payment, you meet HomeReady eligibility requirements, and you’ll pay no mortgage insurance. Fannie Mae offers a 3 percent down payment option, but you need a credit score of at least 680.

HomeReady mortgages also allow for cosigners who won’t live at the address with you. That means a parent or grandparent with a high credit score could help you purchase the property by co-signing. If you can find a cosigner, you may qualify for the 3 percent down payment even if your credit score falls below 680.

Pros:

  • Can qualify with credit score as low as 620
  • A low 3 percent down payment if you have a 680 credit score
  • Down payment doesn’t have to come from personal funds
  • Mortgage insurance premiums are cancellable
  • Non-occupant cosigners are permitted

Cons:

  • Up to 25 percent down payment required in some instances
  • Not all lenders offer Fannie Mae HomeReady mortgages, so you might struggle to find a bank with this offering.

Where to get a Fannie Mae HomeReady mortgage

Fannie Mae doesn’t publish a list of lenders who offer the HomeReady mortgage, so you will need to work with your lender specifically to see if they offer it. Most major banks and credit unions will be approved to underwrite Fannie Mae mortgages, but the specific product offering will vary by bank.

Consider using an online mortgage comparison engine including LendingTree or Zillow to compare offers in your area. However, once you find lenders that will work with you, you’ll have to ask them about the HomeReady mortgage, especially if you want to use the 3 percent down or co-signing feature.

The Housing and Urban Development office of housing counseling may also help you connect with lenders who offer the HomeReady Mortgage.

VA loans

VA Loan Details

Credit score required

Credit standards set by lender

Down payment required

None

Upfront financing fee

1.25 to 3.3 percent, which can be financed

Mortgage insurance

None

Mortgage limits

Generally, $424,100, though it varies by location

Fine print

Must obtain a certificate of eligibility
(for military members and spouses)
before applying for a VA loan

Quick take

For people with a military background, the VA loan is a top mortgage option. The upfront financing fee can be hefty, but it’s a good deal if you plan to live in the house for several years. That said, not all VA lenders work with buyers with bad credit, so you may struggle to find a reputable lender in your area.

Pros:

  • No down payment required
  • No mortgage insurance
  • No firm credit minimums
  • Can buy up to four unit multi-family property.

Cons:

  • Upfront funding fee
  • Not all lenders issue VA loans to borrowers with bad credit
  • Must buy home with the intent to occupy for at least 12 months

Where to get a VA loan

To take out a VA loan, you must get a certificate of eligibility (COE) through the Veterans Administration eBenefits platform. Once you get the COE, you can use the Consumer Finance Protection Bureau’s interest rate data to learn about interest rates for VA loans.

To find a VA lender who works with bad-credit clients, you’ll probably want to work with a mortgage broker. You can find mortgage brokers online or through your state’s housing finance agency. Be sure that your broker has no regulatory action filed against them before you commit to working with them.

USDA loans

USDA Loan Details

Credit score required

As low as 580, but generally 640

Down payment required

None

Upfront financing fee

1 percent (can be financed)

Mortgage insurance

0.35 percent annually

Mortgage limits

No limits, but must meet standards of affordability based on moderate incomes

Fine print

You must meet income eligibility requirements,
and the property must be in a qualified rural area

Quick take

If you’re planning to buy in a rural area (and you may be surprised what qualifies, so check), a USDA loan offers a low cost, low money down loan. Technically, the absolute minimum credit score for this loan is 580, but most lenders won’t issue USDA loans to borrowers with scores below 640. USDA loans tend to be a better deal than FHA loans, but they may have higher costs compared to VA or conventional loans. If you’ve got fair credit, but you don’t have a big down payment, the USDA loan makes sense for you.

Pros:

  • No down payment
  • Only 1 percent upfront mortgage fee

Cons:

  • Ongoing financing fee cannot be canceled
  • Finding lenders who work with bad credit borrowers can be difficult
  • Must meet location and income criteria

Where to find USDA loans

If you meet the USDA eligibility requirements, you can start shopping for USDA loans through LendingTree, but you may not find many offers if you have a credit score below 640. If you can’t easily find a lender, you’ll want to work with an independent mortgage broker who will have insider access to multiple lenders in your city. You can find reputable brokers online through Find A Broker, Angie’s List or the Better Business Bureau (search for mortgage brokers, your city). Before committing to a broker, check that your broker has no regulatory action filed against them.

Manufactured home loans for bad credit

Manufactured homes are houses constructed off-site, transported and anchored to a permanent foundation at a new home site. On average, manufactured homes cost 80 percent less than site-built single family homes, but taking out a mortgage for a manufactured home can be expensive, even if you have good credit. According to the Consumer Financial Protection Bureau, almost 68 percent of all loans for manufactured home purchases were considered higher priced mortgages. On top of already high rates, bad credit will drive your interest rate even higher. However, thanks to the lower upfront price, people with bad credit may have an easier time finding home financing for manufactured homes than for site-built homes.

FHA Title I loans (Chattel loans)

FHA Title I Loan Details

Credit score required

No credit score minimums, but
must meet ability to pay criteria

Down payment required

5 percent down for credit scores above 500,
otherwise 10 percent down

Upfront financing fee

Up to 2.25 percent

Mortgage insurance

Up to 1 percent

Mortgage limits

  • Home only: $69,678

  • Lot only: $23,226

  • Home and lot: $92,904

Mortgage term limits

  • 20 years for home only

  • 20 years for single-section home and lot

  • 15 years for lot only

  • 25 years for a multi-section home and lot

Titling requirements

Manufactured homes can be titled as personal property.

Fine print

Manufactured homes must be situated on a lot that meets
FHA property standards (such as hookups for water and electricity,
and foundation anchors) that is owned or leased by the primary
mortgage holder. Manufactured home must be at least 400 square feet.

Quick take

The FHA Title I loan is an obvious choice for people with bad credit looking to buy a manufactured home, but you need to do your research before you commit to this loan. According to the CFPB, Chattel loans had 1.5 percent higher APRs than standard mortgages. These loans also come with expensive mortgage insurance fees that can be passed on to you.

However the Chattel loan makes sense if you’re buying a used manufactured home or if you plan to rent the lot where your home sits.

Pros:

  • No credit standards
  • Flexible terms for land ownership
  • Can title home as personal property

Cons:

  • Maximum loan is $92,904
  • Some lender restrictions
  • 5-10 percent down payment requirement
  • Must be a fixed term mortgage

Where to find Chattel loans

Chattel loans are a niche product that few banks and credit unions offer. Half of all Chattel loans are issued by five banks: 21st Mortgage, Vanderbilt Mortgage, Triad Financial Services, U.S. Bank, and Credit Human (formerly San Antonio Federal Credit Union), according to a 2014 report from the CFPB. You can also find local lenders through the Manufactured Housing Association’s lender search.

FHA loan

FHA Loans Details for Manufactured Homes

Credit score required

500 (varies by bank)

Down payment required

Credit score between 500-579: 10 percent
Credit score above 580: 3.5 percent

Upfront financing fee

1.75 percent, which can be financed

Mortgage insurance

0.45-1.05 percent

Mortgage limits

Generally $275,665

Titling requirements

Manufactured homes must be titled as real
property and you must own the lot.

Fine print

All manufactured homes must meet standards set by the
FHA including foundation anchors, water and electrical hookups and more.

Quick take

A standard FHA loan makes sense if you’re planning to buy a manufactured home and land. While credit standards vary by lender, you may be able to qualify for the FHA loan with a credit score as low as 500. If you can raise your credit score to 580, you may even qualify for the 3.5 percent down payment.

This loan isn’t as easy to get as the Chattel loan, but some people with bad credit may qualify. If you want to use an FHA loan for a manufactured home, work with your loan officer closely, so your financing is in place before your home is completed.

Pros:

  • 3.5 percent down payments
  • Credit scores as low a 500
  • Up to $275,665 in financing

Cons:

  • 1.75 percent upfront mortgage premium
  • Must pay ongoing mortgage insurance
  • Must buy owner-occupied home

Where to get an FHA loan

The Manufactured Housing Association’s lender search will also provide a list of lenders who may offer FHA loans for manufactured homes in your state. If that list doesn’t provide the results you need, work with a HUD office of housing counseling center to learn about lenders who offer FHA loans for manufactured homes.

USDA

USDA Loan Details for Manufactured Homes

Credit score required

580 and below is considered a no-go;
generally 640 and up

Down payment required

None

Upfront financing fee

1 percent, which can be financed

Mortgage insurance

0.35 percent annually

Mortgage limits

No limits, but must meet standards of
affordability based on moderate incomes

Titling requirements

Home must be titled and taxed as real estate

Fine print

You must own the lot where your home is located and meet
income eligibility requirements and the property must be
in a qualified rural area

Quick take

If you’re purchasing a new manufactured home in a rural area, the USDA loan may make sense for you. The manufactured home must be new, and you have to own the site where the home is located. However, with the lowest acceptable credit score being at the 580 threshold, USDA loans aren’t suited for bad-credit borrowers. Improving your credit to “fair” could be the difference between rejection and approval..

Pros:

  • As low as no money down
  • Low financing fees
  • Competitive interest rates

Cons:

  • Higher credit underwriting standards
  • Must own lot
  • Must buy new manufactured home

Where to get a USDA loan

If you meet the USDA eligibility requirements, connect with the HUD office of housing counseling in your state. If the USDA loan is a good fit for you, staffers there will help you find lenders who work with USDA borrowers that want in on manufactured homes.

VA loans

VA Loan Details for Manufactured Homes

Credit score required

Credit score standards set by lender

Down payment required

None

Upfront financing fee

1.25-3.3 percent depending on your military status,
home buying experience and down payment.
This fee can be financed.

Mortgage insurance

None

Mortgage limits

$424,100

Titling requirements

The house must be titled as real property,
and you must own the lot where the house is located.

Fine print

Must obtain a certificate of eligibility
(for military members and spouses) before applying for a VA loan.

Quick take

The VA loan offers a down payment of 0 percent (even for manufactured homes) as long as you own (or will buy) the lot where the home is located. The drawback to the VA loan is that most lenders set their credit score standards in the 600-range, which means that people with bad credit might not qualify. On top of that, not every VA lender offers loans for manufactured homes. Those two factors mean the you may struggle to find a lender in your area who will work with you.

If you find the lender, the VA loan is a great choice, but if you can’t, consider an FHA loan instead.

Pros:

  • No down payment required
  • No mortgage insurance
  • No firm credit minimums

Cons:

  • Upfront funding fee
  • Not all lenders offer VA loans for manufactured housing
  • Must buy home with the intent to occupy for at least 12 months
  • Must own lot

Where to get a VA loan

To take out a VA loan, you must get a certificate of eligibility (COE) through the Veterans Administration eBenefits platform. Once you get this, find an independent mortgage broker who specializes in VA loans for manufactured homes or VA loans for people with bad credit. These brokers work with multiple banks and can help you find better deals than you might find on your own. Before committing to a particular broker, check for regulatory action filed against them. You don’t want to work with a broker who fails to meet the standards set by your state.

Conventional mortgages

Conventional Mortgage Details for Manufactured Homes

Credit score required

620

Down payment required

5 percent (10 percent for people with insufficient
credit for traditional scoring)

Upfront financing fee

None

Mortgage insurance

0.5 percent annually

Mortgage limits

Generally, $424,100

Titling requirements

Must own land, and home must
be titled as real property.

Fine print

You’ll have to pay mortgage insurance until your
home reaches at least an 80 percent loan-to-value ratio.

Quick take

If you’ve got a 20 percent down payment and at least a 620 credit score, and your home meets underwriting standards, the conventional mortgage is the best choice for you. This loan has competitive interest rates and no mortgage insurance for people with a loan-to-value ratio of at least 80 percent. Your home must be at least 600 square feet and meet HUD standards for manufactured homes, and you must own your lot. However, you can use this loan to purchase an existing manufactured home (built after 1976) if it is permanently affixed to an approved foundation.

Another advantage to this loan is that they do accept borrowers with thin credit files, provided they don’t have derogatory marks on their credit file.

Where to find conventional mortgages

Before you start shopping, you can use the Consumer Finance Protection Bureau’s interest rate data to learn about interest rates in your state. Compare real offers from local lenders using LendingTree, or work with your state’s housing finance agency to find reputable lenders in your area.

Other common financing deals

Aside from those mortgages, manufactured home buyers with bad credit might consider two other options. First, you might consider a retail installment contract. A retail installment contract is issued by the manufacturer (or installer) or your home. If you’re working directly with the manufacturer to take out a loan, you should take the time to understand upfront and ongoing fees, APR and what happens if you miss a payment. The Manufactured Housing Institute provides detailed information on buying and living in manufactured houses and on how to find manufacturers and lenders who can help you finance a manufactured home.

Borrowers with bad credit might also consider owner-held financing option. Owner-held financing is a readily available form of credit, but it is risky. Before signing a lease to own agreement, find a real estate lawyer who can help you uncover title issues and explain the loan. To learn more, you can either find a lawyer through your employer (who may offer legal benefits), the American Bar Association or by contacting HUD office of housing counseling in your state.

Clean up your credit before mortgage shopping

In 2016, the average new home cost $372,500, but that’s before paying interest. According to Informa Market Research, the average interest rate for a person with a credit score between 620 and 639 is 5.115 percent, but a person with a score of at least 760 gets a 3.527 percent rate. Does just a point and a half translate to much cost difference? Absolutely. If both people finance $298,000 on a new home, then the person with great credit will pay $1,343 per month. The person with lesser credit will pay $278 more, $1,621 per month. That translates to more than $100,000 more over the life of the loan.

Tips to improve your credit score

To repair your credit before taking out a mortgage, and qualify for better terms and more options, start with these three simple steps:

  1. Pay all your current debt accounts on time, each month.
  2. Reduce your credit card utilization by paying down your credit card debt.
  3. Stop applying for credit six months before mortgage shopping.

These three factors alone account for 75 percent of your credit score.

As you take care of those items, you’ll want to check your credit report from the three major credit bureaus through AnnualCreditReport.com.

You want to be sure that you recognize all the information on your credit report, and that there are no duplicate entries. Dispute any errors or duplicates. For further guidance, use the Federal Trade Commission’s free guide to disputing errors on your credit report. If you believe you’ve been a victim of identity theft, follow the Federal Trade Commission’s advice on identity theft recovery.

Disputing errors on your credit report may prevent a bank from issuing you a mortgage, so start disputes at least 90 days in advance of applying for a mortgage. While the credit bureaus should clean up the errors within 30 days, the process sometimes takes longer

Getting a mortgage after bankruptcy or foreclosure

Bankruptcy stays on your credit report for up to seven or 10 years, depending on the type, and foreclosures stay on your credit report for up to seven years, but you don’t have to wait that long to take out a mortgage. If you take steps to improve your credit, you can qualify for some mortgages one to four years after your bankruptcy is dismissed, or two to four years following foreclosure.

 

Conventional

FHA

VA

USDA

Chapter 7

Four years from discharge or dismissal (except in extenuating circumstances)

Two years (or one year in extenuating circumstances)

Generally, two years (though it is not a disqualifying standard)

Generally, three years

Chapter 11

Four years from discharge or dismissal (except in extenuating circumstances)

Must meet credit standards

Generally, two years

Must meet credit standards

Chapter 13

Two years after discharge or four years after dismissal

Two years (or one year in extenuating circumstances)

One year of payments

Generally, one year

Foreclosure

Seven years, except if foreclosure was discharged in bankruptcy (then use bankruptcy limits)

Three years except in extenuating circumstances

Generally two years

Generally, three years

Even if you can get a new mortgage just a year or two after bankruptcy or foreclosure, it makes sense to wait longer in most cases. By waiting around three or four years, the damage of the bankruptcy and foreclosure fades, and you’ll have that extra time to revive your credit score.

To get your credit in shape after bankruptcy or foreclosure, you’ll want to continue to make bankruptcy payments as agreed and consider opening a secured credit card to rehabilitate your damaged credit. Use the credit card for daily expenses, and pay it off in full each month.

Improve your shot at approval even if you have bad credit

If you’ve got bad or fair credit, and you don’t have a lot of time to improve it, you can still take out a mortgage in some cases. These are a few things that can help you get approved with a low credit score.

  • Choose a house well within your budget. If you’ve got a strong income and a low monthly payment, the bank may be more likely to approve your loan.
  • Come up with a larger down payment. While the median down payment is just 5 percent, a person with bad credit may need quite a bit more (up to 25 percent) to get a loan.
  • Work with your loan officer: Give them paperwork in a timely manner, and follow their instructions regarding credit repair, collection repayments and debt repayments. If you’re close to gaining approval, the loan officer can help you take the last few steps to meet the bank or government’s underwriting criteria. Loan officers may take advantage of manual underwriting provisions for FHA, VA, USDA and conventional loans, but that requires more information and participation from you.
  • Ask for rapid rescoring if you’re disputing errors on your credit report, or paying down credit card debt.

Rapid rescoring

A rapid rescore is a method for “re-checking” your credit score on an accelerated time scale. Banks usually only check your credit score once when they’re considering your for a loan, but they may pay a fee to see a new score if you’ve paid down debt or removed negative information from your report, according to Experian. The bank will use the new information to recalculate your credit score to see if you qualify for a loan.

Should I keep renting?

A bad credit score by itself shouldn’t stop you from buying a home. You’ll pay more in interest costs over the life of the loan, but you’ll also start building equity sooner. Plus, a few years of paying on a mortgage will help you raise your credit score, so you can refinance later on.

However, a bad credit score can be a symptom of a bad financial situation. If you’re struggling to pay your bills on time, buying a house isn’t usually a good idea. During financial stress, a new mortgage bill is more likely to be a curse than a blessing.

Watch out for these scams targeting people with poor credit

Financial scammers are always on the prowl for desperate people who might become their next victims. These are a few pitfalls that all homebuyers need to avoid as they shop for homes and mortgages.

Mortgage closing scams

Mortgage closing scams are pernicious schemes that involve falsifying wiring instructions, the FTC warns. In a mortgage closing scam, a hacker poses as a title closing agent. He or she may email you fraudulent information about where to wire the money, or claim that there’s been a last-minute change to the details.

Closing for a home is an incredibly busy time, especially if you’ve struggled to qualify for the mortgage in the first place. To prevent mortgage closing scams, ask your title agent to send the wire information in an encrypted email. You can also request a call with the details.

Anyone who has been a victim of a mortgage closing scam should report it to the FBI immediately, and log a complaint in the FBI’s Internet Crime Complaint Center.

Complex lease-to-own deals

Owner financing isn’t necessarily a scam, but it can be complex. Many owner financing deals don’t put the title into your name until you’ve paid off the entire loan, and some deals require balloon payments after a few years, the FTC warns. If you can’t cover the balloon payment, you lose every cent of equity you’ve paid.

Even worse than difficult loan terms are situations when the owner can’t legally issue a first-lien loan. If the owner has used the house to secure any other loan, then the bank has a first-lien position on the loan.

Don’t sign an owner financing agreement until a lawyer explain the details of the loan to you. You must take steps to protect yourself from owner fraud if you want to own the house in the end.

Hard money loan scams

Hard money loans are real estate loans for investors interested in flipping a property. Hard money loans come with high interest rates, hefty down payments and short payback periods. Most of the time, hard money lenders evaluate project quality rather than investor credit when issuing loans.

If you’re considering a hard money loan at all, you should have plans to flip a property for a profit. If you can’t earn a profit on the house, then a hard money loan doesn’t make sense.

If you are considering a hard money loan because you can’t find traditional financing, be careful. There’s little oversight of hard money loans, so it’s important you know what you’re getting into with these products. You can check out this guide to hard money loans if you want to learn more.

FAQs

If a bank turns you down for a mortgage, you can ask for an explanation. When you ask, the lender has 30 days to prepare an answer in writing, as required by the Equal Credit Opportunity Act and the Fair Credit Reporting Act. A few common responses include:

  • We don’t think you can afford the payment (for instance, you’ll have to high of a debt-to-income ratio).
  • Your credit score’s too low.
  • You have an insufficient down payment.

Anyone struggling to find a mortgage should consider working with a licensed mortgage broker in his/her county. Mortgage brokers work with multiple local banks and credit unions, and they can often help if a banker cannot.

The best credit score to get a mortgage is any score above a 740, but most people with credit scores above 620 will qualify for some mortgages. And yes, it’s possible to qualify for a mortgage if you have a score of 500-620.

Yes. If you took out a loan when you had bad credit, you may qualify for a much better rate by improving your credit after just one to two years of on-time payments on all your lines of credit, according to research from VantageScore Solutions. However, if your bad credit score is the result of foreclosure or bankruptcy, your credit score may not fully recover for seven to ten years, so don’t count on a massive rate drop right away if those are the reasons for your bad credit score.

Given how much easier it is to qualify for a mortgage and how much you can save when you have good credit, waiting to buy often makes sense.

VA loans don’t require a down payment, and they have no firm credit minimums, but you’ll still need to meet a bank’s underwriting standards (which could be as high as a 640 credit score). If you have a credit score of 580-640 and you meet other qualifying standards, you may qualify for a no-money-down USDA home loan..

Outside these options, the only no-money-down mortgages for people with bad credit include owner-held mortgages or rent-to-own deals. Do your homework.

Not all mortgages allow cosigners, but a cosigner could help you qualify. Asking someone to cosign essentially means asking that person to pay your mortgage if you’re ever unwilling or unable to pay the bill. We generally don’t recommend becoming a cosigner unless you plan to live in the house.

An adjustable-rate mortgage makes a lot of sense if you have bad credit and you are confident you can improve your credit score within seven years before your interest rate adjusts (in the case of a 7/1 ARM). If your credit improves, you may be able refinance at a lower, fixed rate before the interest rate adjustment takes place. However, this option is risky. You may be stuck with higher interest rates if your credit doesn’t improve or if interest rates rise by the time you need to refinance.

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