Here’s How the House and Senate Tax Reform Plans Would Affect Homeowners

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House and Senate Republicans have rolled out separate versions of tax-reform plans, aiming to cut taxes for corporations and individuals. Although the two bills diverge in a number of ways and the fate of both remains in flux, one thing’s for certain: Homeowners would be affected under both plans.

In this article, we lay out the changes to housing-related provisions under both plans and explain what they would mean for existing homeowners and first-time homebuyers.

Where are we?

The House version of the tax bill passed by a 227-205 chamber vote ahead of Thanksgiving. The Senate Committee on Finance approved the Senate’s version of the Tax Cuts and Jobs Act late on Nov. 16 with a 14-12 vote along party lines.

The Senate’s bill is to go to the full Senate for a vote the week following the Thanksgiving holiday. President Trump has called on lawmakers to pass one cohesive bill by Christmas, and Republican legislators would like to see the reforms take effect in 2018.

What are the changes?

Here’s a quick overview of housing-related changes proposed in the bills:

  • Both bills nearly double the standard deduction, while eliminating personal exemptions.
  • The House and Senate both proposed changing residency requirements for capital gains home-sale exclusions by increasing the live-in time period to five out of the last eight years. Current law allows people to write off up to $250,000 — or $500,000 for couples filing jointly — from capital gains when selling a home, as long as they have lived in it for two out of the past five years.
  • Under the House plan, mortgage borrowers can deduct mortgage interest on loans up to $500,000, for debt incurred after Nov. 2, 2017. Currently, the tax deduction cap is $1 million. The deduction for state and local income taxes would be gone. But the state and local property tax deduction would remain but be capped at $10,000. (There is no cap, currently.)
  • The Senate bill would leave the mortgage interest deduction unchanged, but eliminate all state and local tax deductions (SALT), including deductions for property taxes.

Read more about the Senate and House bills here.

Fewer people will claim mortgage interest deductions

The National Association of Realtors (NAR), a vocal critic of the tax reform proposals, expressed through statements and press briefings that both plans would negatively affect homeownership. The association has called the tax reform legislation an “overall assault on housing.”

“Simply preserving the mortgage interest deduction in name only isn’t enough to protect homeownership,” NAR President Elizabeth Mendenhall said in a statement.

Nearly doubling the standard deductions and repealing some itemized deductions would likely mean that far fewer people would itemize when they file taxes. NAR officials worry that these moves will undercut the incentives to pursue homeownership.

The standard deduction is a fixed dollar amount, based on your filing status and age, by which the IRS lets you reduce your taxable income. The itemized deduction allows you to list your various deductions, including the mortgage interest deduction. You can claim one or the other — whichever lowers your taxable income more.

The standard deduction for a married couple filing jointly is $24,400 under the House plan and $24,000 under the Senate plan. Wolters Kluwer, a global information services company, suggested in an analysis that only those taxpayers who would deduct more taxes through itemizing than taking the bigger standard deduction — the top earners — would benefit from itemizing deductions like the one for mortgage interest.

Impact under House plan

Capping the mortgage interest deduction

The good news is that the majority of existing homeowners won’t be affected by the cap on the mortgage interest deduction, because only about 21 percent of American households take the deduction under the current law, according to the Tax Policy Center.

But about 18.5 percent of new homebuyers would get hit with a bigger tax bill on their housing-related tax liabilities, according to an analysis released by Trulia, an online real estate resource for homebuyers and renters.

Many economists say the mortgage interest deduction distorts the housing market by driving up home prices and soaking up much-needed supply, and that it doesn’t necessarily help increase homeownership rates.

“Because the mortgage interest deduction skews to upper-income families, it encourages people to buy bigger homes,” Nela Richardson, chief economist at Redfin, a Seattle-based real estate and technology company, told MagnifyMoney. “It also encourages builders to also build bigger homes, so it encourages sprawl.”

Less than 10 percent of the bottom 90 percent of the income distribution receive the tax subsidy on mortgages, the Tax Policy Center said.

Richardson added that this doesn’t mean the deduction should be completely eliminated. She said she thinks putting a cap on the deduction is only to make the math work for the corporate tax cut, though it is not structured in a way to help middle-class homeowners.

“People who have the means to buy those homes” with a mortgage of more than $500,000 “would continue to buy those homes,” Richardson said. “What we’d like to see is [changes] to help buyers who wouldn’t be able to afford a house unless they got some kind of tax credit. That would be a subsidy that was progressive instead of regressive.”

A silver lining to some: Middle-class homeowners might benefit from an income tax cut, which hopefully would help them purchase a house, experts say.

“The result of that is still a little fuzzy,” Richardson said. “It’s not clear that middle-class buyers in the long run would actually receive an income tax cut.”

What does it mean to first-time homebuyers in expensive cities?

The mortgage interest deduction provides little benefit to new home buyers because many new U.S. homeowners do not itemize or are in the 15 percent tax bracket or lower, William G. Gale, chairman of federal economic policy in the Economic Studies Program at the Brookings Institution, wrote in an analysis for the Tax Policy Center.

First-time buyers are generally looking for cheaper homes. Nationally, the median sales price for existing homes is $245,100, according to the Federal Reserve Bank of St. Louis, well under the $500,000 cap, so capping the mortgage interest deduction shouldn’t affect them too much.

But for buyers in high-cost markets, where demand is high and affordability is challenging, the cap will sting, Richardson said.

“You cannot find a $500,000 home in the Bay Area,” Richardson said. “Good luck with that.”

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In San Francisco, the median home sales price is around $1.2 million, according to Redfin and Trulia.

Home prices are expected to go up next year, as the Federal Reserve is expected to increase the short-term interest rate by year’s end, economists say.

“For the first-time buyer, you are dealing with this double whammy,” Richardson said. “If you add onto the fact that really expensive states’ first-time home buyers won’t be able to deduct all of the mortgage interest, then that is an additional expense. So it really is a challenging situation to put new buyers in.”

Trulia reported that across the 100 largest markets, more than half of homebuyers in coastal California, New York and Cambridge, Mass., would experience an increase in their home-related tax liabilities if they purchased a home under the House plan.

Impact on housing supply

Real estate experts expect less movement in the housing market since people who already own homes with big mortgages can continue to deduct the interest. This would make the housing supply crunch even worse in those expensive markets because people may choose to stay in the same house, knowing they couldn’t deduct the same amount of interest on their next big mortgage.

Factor in a longer live-in requirement for capital gains exclusions of homes sales, which economists believe will result in more homeowners waiting longer before moving to a different house to save on capital gains, and it would be even trickier for first-home buyers to bid for a desirable house in higher-end markets.

“It’s definitely not going to help alleviate price increases,” Cheryl Young, senior economist at Trulia, told MagnifyMoney. “But it will also contribute to competition.”

Trulia found that roughly 10 percent or more of existing homeowners in California and the Northeast would lose the incentive to sell their homes. Nationwide, the figure is 2.5 percent.

What does it mean for homeowners in high-tax states?

People living in high-tax states, such as New Jersey, New York and California, where homes are also costly, will see a rise in their property tax liability on taxes paid above the $10,000 property-deduction cap.

Trulia estimates that more than 20 percent of existing homeowners in New York and San Francisco would experience an increase in their property tax bills. Nationally, about 9.2 percent of existing homeowners will experience an increase in their property taxes.

Impact under Senate plan

Bigger property tax liability

Although the Senate plan is in some respects seen as more straightforward than the House bill, removing all SALT deductions would have a more expansive impact on homeowners across the country. That’s because they wouldn’t be able to deduct their property taxes anymore, Trulia’s chief economist, Ralph McLaughlin, explained in an analysis.

Existing homeowners in the Northeast and the Bay Area — New Jersey, New York, Connecticut and California — would be hit the hardest, according to McLaughlin.

A study commissioned by the National Association of Realtors and conducted by PricewaterhouseCoopers (PwC) found that, for many homeowners who currently benefit from the mortgage interest deduction, the elimination of other itemized deductions and personal exemptions would cause their taxes to rise, even if they elected to take the increased standard deduction.

The study found that homeowners with adjusted gross incomes between $50,000 and $200,000 would see their taxes rise by an average of $815.

Mortgage interest deduction would be worth less

Leonard Burman, a fellow at the Urban Institute and professor of public administration and international affairs at Syracuse University, wrote in an analysis that if homeowners cannot deduct state and local income, sales and property taxes, only the very wealthy and the very generous would benefit from itemizing. As a result, he estimated that only 4.5 percent of households would itemize under the plan, compared with the current 26.6 percent.

“Even for those who continue to itemize, the mortgage interest deduction may be worth much less than many homeowners believe,” Burman wrote. “This is because net tax savings depend not only on whether mortgage interest plus other deductions exceed the standard deduction, but by how much.”

The post Here’s How the House and Senate Tax Reform Plans Would Affect Homeowners appeared first on MagnifyMoney.

25 Metro Areas with the Hottest Housing Markets

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They say a good place is hard to find, but if you’re looking to live in one of these 25 metropolitan areas, that may feel like an understatement.

Using data from ATTOM Solutions, we checked which metro areas have the lowest vacancy rates—that is to say, the fewest available residential properties—and ranked them. To make the list more relevant, we didn’t include areas with a population less than 100,000.

Believe it or not, every metro area on this list has a less than one percent vacancy rate. So if you’re a house hunter in one of the following 25 metro areas, we wish you good luck (you’ll need it).

25. Portland-South Portland, ME (0.69% vacancy for residential properties)

24. El Paso, TX (o.65% vacancy for residential properties)

23. San Diego-Carlsbad, CA (0.65% vacancy for residential properties)

Though it has the same percentage of vacancy as El Paso, TX, the San Diego-Carlsbad population is much larger (3,200,000 vs. 800,000), so it ranks twenty-third.

22. Raleigh, NC (0.61% vacancy for residential properties)

21. McAllen-Edinburg-Mission, TX (0.59% vacancy for residential properties)

20. Denver-Aurora-Lakewood, CO (0.56% vacancy for residential properties)

19. Washington-Arlington-Alexandria, DC-VA-MD (0.56% vacancy for residential properties)

Despite having the same vacancy rate as number 20, the Washington-Arlington-Alexandria metro area has more than twice the number of people (5,900,000 vs. 2,700,000), so it’s higher up on the list.

18. Ogden-Clearfield, UT (0.55% vacancy for residential properties)

17. Boston-Cambridge-Newton, MA-NH (0.54% vacancy for residential properties)

16. Los Angeles-Long Beach-Anaheim, CA (0.54% vacancy for residential properties)

Though it has the same percentage as the previous pick, the Los Angeles-Long Beach-Anaheim area has a population of more than 13 million, which is almost three times the size of number 17 on the list.

15. York-Hanover, PA (0.53% vacancy for residential properties)

14. Boise City, ID (0.52% vacancy for residential properties)

13. Bridgeport-Stamford-Norwalk, CT (0.48% vacancy for residential properties)

12. Green Bay, WI (0.47% vacancy for residential properties)

11. Oxnard-Thousand Oaks-Ventura, CA (0.45% vacancy for residential properties)

10. Austin-Round Rock, TX (0.42% vacancy for residential properties)

9. Vallejo-Fairfield, CA (0.39% vacancy for residential properties)

8. Fayetteville-Springdale-Rogers, AR-MO (0.39% vacancy for residential properties)

7. Madison, WI (0.39% vacancy for residential properties)

Madison has the same vacancy rate for residential properties as the Fayetteville-Springdale-Rogers metro area, but Madison has a higher population, so it took the number-seven spot.

6. Provo-Orem, UT (0.34% vacancy for residential properties)

5. San Francisco-Oakland-Hayward, CA (0.34% vacancy for residential properties)

The San Francisco-Oakland-Hayward metro area has the same vacancy percentage as the Provo-Orem metro area. However, when it comes to population, the San Francisco-Oakland-Hayward has four million more people, so it takes the number-five spot.

4. Manchester-Nashua, NH (0.31% vacancy for residential properties)

3. Lancaster, PA (0.26% vacancy for residential properties)

2. Fort Collins, CO (0.24% vacancy for residential properties)

1. San Jose-Sunnyvale-Santa Clara, CA (o.23% vacancy for residential properties)

Is it any surprise Silicon Valley made the number-one spot? If you’re looking for a home in the San Jose-Sunnyvale-Santa Clara metro area, good luck finding anything—less than a quarter of a percent of properties are vacant.

Image: istock

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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.   

The post Capital One Is Exiting the Mortgage Business: Here’s What it Means for Borrowers appeared first on MagnifyMoney.

Renting Is Overtaking the Housing Market—Here’s Why

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Single-family rentals—either detached homes or townhomes—are developing faster than any other portion of the housing market. These rentals outpace both single-family home purchases and apartment-style living, according to the Urban Institute.

“Almost all the housing demand in recent years has been filled by rental units,” says Sara Strochak, a research assistant with the Urban Institute. She also states that single-family rentals have gone up 30% within the last three years.

This change is unique to newer generations. But when did rentals become so popular? And why are people more inclined to rent than to buy? Below, we’ll further discuss the rise in rentals and how it affects the housing market.

When Did the Rise in Single-Family Rentals Start?

The housing bubble collapse and the recession that followed shattered the decades-old tenet of American wisdom that you can’t go wrong buying a home. Most of the housing market fallout from the Great Recession has finally receded—foreclosures and underwater mortgages are back to traditional levels and housing values have recovered in most places. But one thing hasn’t recovered: Americans’ unquestioned desire to own a home.

Today, single-family rental homes and townhomes make up 35% of the country’s 44 million rental units, compared to 31% in 2006.

Who Is Leading This Trend?

Millennials are leading the way to single-family rentals, and myriad factors contribute to this trend. Many young adults aren’t in a hurry to lay down roots, whether they’re prone to traveling or simply aren’t ready to commit to one area or one home. Student loans and stagnant incomes can also make it harder to save up for a down payment. And it’s inevitable that young people who came of age during the housing bubble would be reluctant to take a leap of faith and commit to a 30-year mortgage.

“While the age distribution of the US population suggests most millennials are reaching the age of household formation and demand for single-family homes, much of this demand is likely to be channeled into the rental market,” says Strochak.

Are Only Millennials Affected?

However, it’s not just young people. Americans over 55 have also grown more interested in renting. According to RENTCafé, the number of renters aged over 55 has grown by a whopping 28% between 2009 and 2015. Many of them want to rent homes instead of apartments. From 2010 to 2016, single-family rental households in the US increased by nearly 2 million—1.26 million of those renters were 34 to 65 years old, while just under a half million were 65 or older, according to a RENTCafé Census data analysis provided by Adrian Rosenberg. In places like Miami, Houston, and Minneapolis, more than two-thirds of new single-family renters were over 65.

What Led to This Trend?

When did home renting become so popular? The trend began with large firms buying up cheap homes during the recession and turning them into cash-generating rentals—often rented by families who’d lost their own homes or who could no longer qualify for mortgages. Institutional investors, which are organizations like banks, hedge funds, and mutual funds, gobbled up millions of single-family homes that fell into foreclosure. In Phoenix, for example, the total of single-family homes occupied by homeowners—instead of renters—dropped by 30,000 from 2007 to 2010. Two-thirds of those homes were bought by institutional investors, the Urban Institute says.

But as prices have recovered, that business model no longer works. Instead, small-time landlords now dominate the market, explains Strochak. Investors who have fewer than 10 units own 87% of all single-family rentals, while investors who have only one rental unit own 45%.

How Does This Change the Home-Building Market?

Bbig players continue to push the trend, some deploying a new build-to-rent model. Housing firms are actively building single-family homes intending to rent them rather than sell, says ATTOM Data Solutions, a firm that analyzes housing market data.

“I can buy lots in areas that I can’t sell homes, but I can rent,” real estate agent Adam Whitmire told ATTOM in a recent report. “The local economy may not have enough income or enough credit to buy but there is enough income to rent.”

While big-time rental firms are backing off in some larger cities, the single-family rental investment play is picking up in smaller markets around the country in places like Dayton or Chattanooga, according to ATTOM.

How Does Renting Affect Local Neighborhoods?

The movement to more single-family rentals is a mixed bag, says Daren Blomquist, senior vice president at ATTOM. On the one hand, the professionalization of the single-family rental industry is good for both families and neighborhoods, as there could be more standardized levels of maintenance and management services.

But there will likely be “unintended consequences as the nature of some neighborhoods change,” Blomquist warns. Renters might not be as invested in communities as owners.

“For example, people who want to own a home may no longer be as active in the typical suburban white picket fence neighborhood as properties in those neighborhoods become more prominently rentals,” he says. “That may push those homebuyers back into more urban, walkable environments, or it might push them further out to more rural areas.”

Should You Rent a Home Instead of Buying?

Renting a home instead of buying can be a sensible choice for those looking to break out of apartment life. It can even serve as a good halfway step toward owning, to make sure single-family home life is really for you before you commit to a mortgage.

The main attraction to renting is obvious: buyers don’t need a large down payment to move in. While plenty of mortgage programs give would-be buyers a break on the traditional 20% down mortgage model, skyrocketing prices in urban areas like Seattle or Washington DC mean that even 5% can be a prohibitive down payment requirement. So renting might make sense if you are ready to live in a house.

What Should You Know Before Renting a Single-Family Home?

While all rental transactions are similar, there are a few things you should consider before moving to a home rental. If you’re moving from an apartment, utilities will probably be considerably more expensive—after all, you’ll be heating and cooling an entire home much of the year. There’s also quite a few more maintenance requirements, particularly if there’s a yard. Ensure your lease has clear terms regarding who pays for upkeep of the property. Gardening might seem appetizing if you are sick of your apartment, but it can be a year-round job, so make certain you’re ready for the extra work. If you want to paint the walls or make other changes, know that you will need permission in writing.

Additionally, because you will inevitably have more possessions than in an apartment, it’s more important than ever to get renter’s insurance—your landlord’s policy likely won’t cover damage to or theft of your property. You should also consider liability insurance, in case you’re found responsible for any kind of accident at the property that causes personal or property damage.

If you’re moving to a single-family rental for more space or for monetary reasons, remember to adjust your budget to accommodate the new utility and rental costs. For resources on how to stay financially fit, check out Credit.com’s Personal Finance Learning Center.

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How to Get a Mortgage With Bad Credit

Get a Mortgage With Bad Credit

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

Good and Bad Credit for a Home Loan

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

Credit Score Scale for Mortgage Approval

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

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

Effects of Bad Credit on a Home Loan

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

Loan Programs

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

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

Pricing

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

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

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

Overcoming Common Credit Red Flags

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

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

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

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

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

Homebuying Takeaways

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

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

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

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

Image: Jupiterimages

The post How to Get a Mortgage With Bad Credit appeared first on Credit.com.

How Long Does It Take to Get Approved for a Mortgage?

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Unless you have a few hundred thousand dollars in cash handy, getting approved for a mortgage is a critical part of purchasing your new home. The mortgage approval process can take anywhere from 30 days to several months, depending on the status of the market and your personal circumstances.

Read on to learn what to expect from the process and what you can do to speed it up.

1. Mortgage Prequalification Letter: 1 to 3 Days

Before you start house hunting, apply for a prequalification letter from a mortgage lender. This will give you a rough estimate of how much a lender could offer you in a mortgage.

Don’t wait on a prequalification letter just because you’re not sure which lender to go with yet. It’s not a contract between you and a lender, so you can get your prequalification letter from one lender and your mortgage from another.

Getting a prequalification letter takes one to three days, and it’s surprisingly simple. All you need to do is provide a lender your best guess on your income, credit history, assets, debt, and down payment. The more accurate your response, the more accurate your prequalification will be, but most lenders won’t require any documentation at this phase.

However, when you’re shopping for a home, it’s important to know where you stand financially. Look at your credit reports, bank statements, outstanding debts, and credit scores. If you don’t know what your credit profile looks like, check Credit.com’s free credit report.

2. Mortgage Preapproval: 3 Days to Several Months

While a prequalification letter is handy, you’ll need preapproval for a mortgage when you’re serious about buying a home. Most home sellers will require you to have preapproval before considering your offer. Preapproval can also speed up your final mortgage approval, so if you want to get into a home quickly, don’t wait on this step.

A wide range of complicating factors means that preapproval for a mortgage could take as short as three days to as long as several months. Personal issues like a low credit scoreprevious short sales, previous foreclosures, and outstanding debt with the Internal Revenue Service can elongate the process, so be up-front with your lender about these potential problems.

To speed up the process, prepare your important financial documentation to submit to your lender. Your lender can tell you exactly what they require, but the following documents are common:

  • Driver’s license
  • Social Security card
  • Most recent 2 months of bank statements
  • Most recent 30 days of pay stubs
  • Most recent 2 years of W-2s
  • Most recent 2 years of federal tax returns

Along with these documents, your lender will also pull a credit report. All of this allows them to give you a very clear picture of exactly the type of mortgage they can provide. This will be documented in a preapproval letter, which is valid for about 60 to 90 days.

3. Mortgage Final Approval: Up to Two and a Half Weeks

Once you make an offer on a home and it’s accepted, it’s finally time to start on the final approval for your mortgage. Because you already provided your lender with your financial information, this part of the process is much less involved.

Before giving final approval, the lender will conduct an appraisal on the house, which verifies the home’s market value. House appraisals protect lenders from offering mortgages that are too exorbitant for the house’s worth.

The tricky part of an appraisal is scheduling a licensed appraiser to look at the house. It’s reasonable to assume the appraiser will already be booked out for the next two weeks, but once the house is appraised, the final mortgage approval can be processed within two days. So in total, it can take about two and a half weeks for final approval on a mortgage.

A Loan Officer’s Take

Three days is the fastest loan officer Scott Sheldon has ever seen someone get approved for a mortgage.

“He had every single iota of possible documentation you could imagine up front,” says Sheldon, who’s a senior loan officer in Santa Rosa, California. That three-day turnaround was unusual, but so was the time it took roughly two months to get mortgage approval.

“If the borrower was just a little bit more transparent up front, we probably wouldn’t have had that,” Sheldon says. “Many times, the documentation and supply opens up more questions.”

Sheldon says consumers often expect preapproval in a day, but that’s not enough time to thoroughly complete the process, especially if important documentation hasn’t been provided.

“My best advice to buyers is let your lender preapprove you—give them at least 72 hours to really preapprove you with all your financial documents, including a credit report,” Sheldon says. “It’s only as good as the information we put in there.”

You don’t want to miss out on your dream home because you were waiting on mortgage preapproval. If you’re about to start house hunting, prepare now by getting your finances organized and your documentation ready to send to your lender when the time comes.

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Why Do I Have to Pay My Real Estate Agent 6%?

buying-house-afford

When it’s time to sell your house, you may have visions of dollar signs dancing in your head, but the truth is, a lot of those dollars will never make it into your bank account. Instead, they end up in the pockets of real estate agents.

You’ve probably heard that agents, on average, take a 6% commission off of your home’s sale price. On a $300,000 home, that’s a whopping $18,000. Before handing over that chunk of change, it’s important to understand what it pays for—and if there’s anything you can do about it.

How Do Real Estate Agents Get Paid?

First, let’s take a look at the history of realtor fees. Realtor fees are usually paid as a commission, although flat fees apply in rare cases. This commission is taken right off the top of the selling price of the home, so many sellers don’t really feel the impact because they never had the money to begin with.

Since the 1950s, the National Association of Realtors has used a “suggested” commission rate for real estate agents. This rate landed at around 6% of a home’s selling price, which included commission for both the buyer’s and the seller’s agents. In 2016, that rate was closer to 5%, which provides a small amount of relief for home sellers looking to maximize their equity when they sell their home.

What Does a Real Estate Agent’s Commission Pay For?

Even at 5%, real estate agents would take home an average of about $15,000 on the sale of a $300,000 home. The total commission is split between both the listing and the buying agents, minus any fees the agents must pay to their brokerage. So let’s break down what you get for $15,000.

  • Help pricing your home. Expertise is at the top of the list of what a real estate agent brings to the party. This means they should be able to help you price your home competitively and in a manner that helps you reach your goals—whether you’re after a quick sale or a big sale price.
  • Effective marketing. One of an agent’s biggest jobs is to make your home look great and to stir up interest in the property. They may take photos, post online ads, use social media, host open houses, and anything else that puts your home in front of qualified buyers.
  • Screening for qualified buyers. It doesn’t do you any good if the people looking at your home aren’t able to buy it. A real estate agent should do all the footwork required to make sure anyone who’s interested in your house is preapproved for a home loan.
  • Closing expertise. Finally, a real estate agent should be well-versed in the art of closing a home sale. Their job is to get you the best price with the least hassle and walk you through all the steps you need to take to make sure your sale goes smoothly. This applies to showings, appraisals, inspections, and the final paperwork.

Can I Save Money on Real Estate Agent Commission?

The good news is you’re not stuck having to fork over 5% of your home’s selling price. If you don’t relish the idea of waving goodbye to that hefty sum, here are some alternatives.

1. Negotiate the commission rate. Just because 5–6% is common, it doesn’t mean that’s what you have to accept. Ask your real estate agent if they’re willing to take less.

“Offer 4%,” suggests Bob Nettleton, who successfully negotiated the commission when he used a real estate agent to sell his home. Or, he says, offer 2% if you find the buyer on your own and just need the agent to help with the standard process. Nettleton adds that other factors, such as home price and how many services you expect, can also affect how much you negotiate on the commission.

2. Sell your home by yourself. More people are opting to sell their home without a real estate agent. This saves on commission fees, but it means you have to do all the work to market your home and vet potential buyers. People who want to go the FSBO (For Sale by Owner) route can find help through services like Homie and Zillow.

Keep in mind that the buyer may have an agent who will expect a commission, so that’s another factor that will play into negotiation of the final sales price. If you opt for FSBO, you may also need to do additional homework like finding a mortgage lender who can help complete the sale.

Other Financial Considerations When Buying a Home

No matter what, you want to get the most out of selling your home. But real estate agent commission is just one part of the overall financial transaction of buying or selling a home.

Chances are if you’re selling a home, you’re probably also looking to buy another one. Negotiating how much you pay a real estate agent may pale in comparison to the extra money you’ll spend over the lifetime of a mortgage if you get locked into poor interest rates or your credit is less than perfect. Check the mortgage marketplace for interest rates and make sure your credit is in tip-top shape before you start looking for your next house. One factor many sellers overlook is the possible impact that selling their home could have on their credit.

If you’re concerned about your credit score, take advantage of a free credit report. This report lets you keep tabs on your credit, and it includes free updates every 30 days to help you proactively correct mistakes and improve your score. You also don’t need to let bad credit get in the way of refinancing your home.

Take Control of Your Home Sale

Managing big transactions like selling or buying a home can feel overwhelming, but there’s no need to panic. Just keep in mind that, ultimately, you are the one in control over the sale of your home. Weigh out the pros and cons of paying a full commission, and take the steps necessary to get a final profit out of your home that makes you happy.

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

A mature couple receives an application at a bank.

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

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

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

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

A Less-Than-Ideal Credit Report

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

Not Enough Income

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

Too Much Debt

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

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

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

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What You Need to Know about Home Equity Loans

Mortgage concept by money house from the coins

A home equity loan is a method for borrowing money for big-ticket items, and understanding the facts about these tricky loans is crucial to helping you make the right decision for your finances.

If you’re considering taking out a home equity loan, here are 13 things you need to know first.

1. What Is a Home Equity Loan?

A home equity loan—or HEL—is a loan in which a borrower uses the equity of their house as collateral. These loans allow you to borrow a large lump sum amount based on the value of your home, which is determined by an appraiser, and your current equity.

Equity loans are available as either fixed- or adjustable-rate loans and come with a set amount of time to repay the debt, typically between 5 and 30 years. You’ll pay closing costs, but it’ll be much less than what you pay on a typical full mortgage. Fixed- rate HELs also offer the predictability of a regular interest rate from the start, which some borrowers prefer.

2. What Are Home Equity Loans Best For?

A home equity loan is generally best for people who need cash to pay for a single major expense, like a specific home renovation project. Home equity loans are not particularly useful for borrowing small amounts of money.

Lenders typically don’t want to be bothered with making small loans—$10,000 is about the smallest you can get. Bank of America, for example, has a minimum home equity loan amount of $25,000, while Discover offers home equity loans in the range of $35,000 to $150,000.

3. What Is a Home Equity Line of Credit?

A home equity line of credit—or HELOC—is a lender-set revolving credit line based on the equity of your home. Once the limit is set, you can draw on your line of credit at any time during the life of the loan by writing a check against it. A HELOC is similar to a credit card: you do not need to borrow the full amount of the loan, and the available credit is replenished as you pay it back. In fact, you could pay back the loan in full during the draw period, re-borrow the total amount, and pay it back again.

The draw period typically lasts about 10 years and the repayment period typically lasts between 10 and 20 years. You pay interest only on what you actually borrow from the available loan, and you usually don’t have to begin repaying the loan until after the draw period closes.

HELOC loans also sometimes come with annual fees. Interest rates on HELOCs are adjustable, and they are generally tied to the prime rate, although they can often be converted to a fixed rate after a certain period of time. You are also often required to pay closing costs on the loan.

4. What Are Home Equity Lines of Credit Best For?

Home equity lines of credit are best for people who expect to need varying amounts of cash over time—for example, to start a business. If you don’t need to borrow as much as HELs require, you can opt for a HELOC and borrow only what you need instead.

5. What Are the Benefits of Home Equity Loans and Home Equity Lines of Credit?

Beyond the access to large sums of money, another advantage of home equity loans and home equity lines of credit is that the interest you pay is usually tax-deductible for those who itemize deductions, the same as regular mortgage interest. Federal tax law allows you to deduct mortgage interest on up to $100,000 in home equity debt ($50,000 apiece for married persons filing separately). There are certain limitations, though, so check with a tax adviser to determine your own eligibility.

Because HELs and HELOCs are secured by your home, the rates also tend to be lower than you’d pay on credit cards or other unsecured loans.

6. What Are the Disadvantages of Home Equity Loans and Home Equity Lines of Credit?

The debt you take on from a HEL or HELOC is secured by your home, meaning your property could be at risk if you fail to make the payments on your loans. You can be foreclosed on and lose your home if you’re delinquent on a home equity loan, the same as on your primary mortgage. In the case of a foreclosure, the primary mortgage lender is paid off first, and then the home equity lender is paid off out of whatever is left.

If your home’s value declines, you may go underwater and owe more than the house is worth. The rates for HELs and HELOCs also tend to be somewhat higher than what you’d currently pay for a full mortgage, and closing costs and other fees can add up.

7. How Do I Determine My Equity?

If you’re interested in learning how to qualify for a home equity loan, first you need to determine how much equity you have.

Equity is the share of your home that you actually own, versus that which you still owe to the bank. If your home is valued at $250,000 and you still owe $200,000 on your mortgage, you have $50,000 in equity, or 20%.

The same information is more commonly described in terms of a loan-to-value ratio—that is, the remaining balance on your loan compared to the value of the property—which in this case would be 80% ($200,000 being 80% of $250,000).

8. How Do I Qualify for a Home Equity Loan?

Generally speaking, lenders will require you to have at least an 80% loan-to-value ratio remaining after the home equity loan in order to be approved. That means you’ll need to own more than 20% of your home before you can even qualify for a home equity loan.

If you have a $250,000 home, you’d need at least 30% equity—a mortgage loan balance of no more than $175,000—in order to qualify for a $25,000 home equity loan or line of credit.

9. Can I Get a Home Equity Loan with Bad Credit?

Many lenders require good to excellent credit ratings to qualify for home equity loans. A score of 620 or higher is recommended for a home equity loan, and you may need an even higher score to qualify for a home equity line of credit. There are, however, certain situations where home equity loans may still be available to those with poor credit if they have considerable equity in their home and a low debt-to-income ratio.

If you think you’ll be in the market for a home equity loan or line of credit in the near future, consider taking steps to improve your credit score first.

10. How Soon Can I Get a Home Equity Loan?

Technically, you can get a home equity loan as soon as you purchase a home. However, home equity builds slowly, which means it can take a while before you have enough equity to qualify for a loan. In fact, it can take five to seven years to begin paying down the principal on your mortgage and start building equity.

The normal processing time for a home equity loan can be anywhere from two to four weeks.

11. Can I Have Multiple Home Equity Lines of Credit?

Although it is possible to have multiple home equity lines of credit, it is rare and few lenders will offer them. You would need substantial equity and excellent credit to qualify for multiple loans or lines of credit.

Applying for two HELOCs at the same time but from different lenders without disclosing them is considered mortgage fraud.

12. What Are the Best Banks for Home Equity Loans?

Banks, credit unions, mortgage lenders, and brokers all offer home equity loan products. A little research and some shopping around will help you determine which banks offer the best home equity products and interest rates for your situation.

Start with the banks where you already have a working relationship, but also ask around for referrals from friends and family who have recently gotten loans, and be sure to ask about any fees. Experienced real estate agents can also provide some insight into this process.

If you’re unsure of where to start, here are a few options to review:

  • Lending Tree works with qualified partners to find the best rates and offers an easy way to compare lending options.
  • Discover offers home equity loans between $35,000 and $150,000 and makes it easy to apply online. There are no application fees or cash required at closing.
  • Bank of America offers HELOCs for up to $1,000,000 on a primary home, makes it easy to apply online, and offers fee reductions for existing bank customers, but it has higher debt-to-income ratio requirements than many other lenders.
  • Citibank allows you to apply online, over the phone, and in person for both HELs and HELOCs. It also waives application fees and closing costs—but it does charge an annual fee on HELOCs.
  • Wells Fargo currently offers only HELOCs with fixed rates, but the bank offers discounts for Wells Fargo accountholders, as well as reduced interest rates if you cover the closing costs.

13. How to Apply for a Home Equity Loan

There are certain home equity loan requirements you must meet before you can apply for a loan. For better chances of being approved for a loan, follow these five steps:

  1. Check your current credit score. A good credit score will make it easier to qualify for a loan. Review your credit report before you apply. If your score is below 620 and you’re not desperate for a loan right now, you may want to take steps to improve your credit score before you apply.
  2. Determine your available equity. Your equity determines how big of a loan you can qualify for. Get a sense of how much equity your home has by checking sites like Zillow to determine its current value and deducting how much you still owe. An appraiser from the lending institution will determine the official value (and therefore your equity) when you apply, but you can get a good sense of how much equity you may have by doing a little personal research first.
  3. Check your debt. Your debt-to-income ratio will also determine your likelihood of qualification for a home equity loan. If you have a lot of debt, you may want to work on paying it down before you apply for a home equity loan.
  4. Research rates at different banks and lending institutions. Not all banks and lending institutions require the same rates, fees, or qualifications for loans. Do your research and review multiple lenders before starting the application process.
  5. Gather the required information. Applying for a home equity loan or line of credit can be a lengthy process. You can speed things up by gathering the necessary information before you begin. Depending on which lending institution you are working with, you may need to provide a deed, pay stubs, tax returns, and more.

If you need a loan to help cover upcoming expenses, make sure you’re prepared. Check out our Loan Learning Center for more resources on the different types of loans available.

Image: istock

Note: It’s important to remember that interest rates, fees, and terms for credit cards, loans, and other financial products frequently change. As a result, rates, fees, and terms for credit cards, loans, and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees, and terms with credit card issuers, banks, or other financial institutions directly.

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The Millennial Mortgage Problem: Down Payments and Expensive Cities

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

If you’re a millennial who’d like to buy a house before Beyoncé’s twins graduate from high school, then listen up.

The folks at Apartment List recently crunched the numbers surrounding our chances at homeownership, and they’re pretty stark. At the rate we’re going, Rumi and Sir are going to be in Freshman Comp before we get the keys to our own pads.

Why Millennials Are Waiting to Buy Homes

For its report, Apartment List surveyed 24,000 renters across the country.

Contrary to popular opinion, which says millennials are city-worshipping vagrants, 80% of respondents said they plan to buy a house or apartment. (I guess those fourth-floor walk-ups aren’t always as dreamy as they seem.)

But 36% said they plan to wait five years or more before making that purchase—a sharp increase from the 23% who had the same response in 2014.

Why? Of the reasons offered (respondents could choose more than one), here were the most popular:

  • Affordability: 72%
  • Not ready to settle down: 45%
  • Waiting for marriage: 36%

“Despite recent improvements in the labor market, millennials face a severe shortage of affordable entry-level homes in many parts of the country,” wrote the study’s authors. “This leaves millennials with difficult choices: extend their budgets and purchase at higher debt-to-income ratios, heightening the risk of mortgage default; migrate to more affordable areas; or delay buying a home altogether.”

The authors also pointed to student debt, lack of savings, and stagnant career opportunities as reasons millennials can’t afford homes.

How Long Millennials Would Have to Wait in 31 Popular Cities

After drilling into that affordability metric further, the study found that 53% of millennials cited down payments as the biggest obstacle they face in buying a home.

In fact, 68% said they’d saved less than $1,000 for a down payment—and 44% hadn’t saved anything.

One reason they might not be saving more is that they don’t realize how much they need for a down payment. In Los Angeles, the city with the biggest gap between expectations and reality, millennials underestimated the amount they’d need for a down payment by a whopping 43%.

And when it comes to the reality of home mortgages, most millennials probably aren’t going to like what they see. Apartment List determined how long it would take the average respondent to save for a 20% down payment based on how much they’ve already saved, how much help they anticipate receiving, and how much they’re saving each month. Based on those factors, Apartment List says it will take millennials between five and twenty-three years to save up enough money to afford a condo in thirty-one popular cities.

The calculations even account for increases in wages and home prices as well as returns on investment (although we doubt many people are saving for their down payment in the stock market).

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How outrageous is that?

At this rate, millennials in sixteen cities will have to wait more than a decade before they can afford a down payment—and in three cities, they’ll have to wait more than twenty years!

How to Save for a Down Payment

If you’d like to purchase a home sooner than that, the answer is simple: you have to save more.

Only 29% of the millennials surveyed are saving at least $200 each month—and as the numbers show, that’s not going to cut it.

Although you can hope the housing market becomes more affordable, you have much more control over your own financial situation.

Here are three ways to put a home in closer reach.

1. Automate Your Savings

The best way to divert money from your Starbucks addiction to your house fund is to automate the process.

To keep it simple, set up an automatic withdrawal from your checking account to your savings account. If you’re not saving anything yet, try $100 per week to start. Then, once that feels normal, increase it to $150 per week, and so on.

You probably won’t even miss it.

2. Work a Side Hustle

Thanks to the gig economy, it’s easier than ever to earn extra dough. And it’s much easier to work nights and weekends when you have a clear goal in mind—in this case, your future house.

Start a freelance writing business or drive for Uber. Whatever it is, funnel all your earnings into a special savings account that’s dedicated to your down payment.

3. Look into First-Time Homebuyer Programs

Does 20% seem totally out of reach? It might be time to look into programs for first-time homebuyers. Here are two you might not have considered.

  • FHA loans: With the backing of the Federal Housing Authority, first-time homebuyers with credit scores of 580 or above might be able to put as little as 3.5% down. For buyers with credit scores from 500 to 579, that number jumps to 10%.
  • USDA loans: If you’re buying a home in a rural area and meet credit and income requirements, you could purchase a home with no down payment through USDA loans.

You also could look into first-time homebuyer grants, which can significantly reduce the cost of a house.

One of the biggest national programs (besides VA loans for veterans) is Good Neighbor Next Door from the Department of Housing and Urban Development. With this grant, law enforcement officers, emergency medical technicians, firefighters, and teachers in “revitalization areas” can receive up to 50% off the list price of a home.

Otherwise, most grants are administered at the state or local level. To see what’s available in your area, search for “down payment assistance” or “first-time homebuyer grants” in your state. A good mortgage broker also should be able to point you in the right direction.

If being a homeowner is your dream, you shouldn’t let anything stand in your way.

Let these numbers spur you into action—and into saving! Visit Credit.com’s Mortgage Learning Center for more information on how to plan for your mortgage and your future home.

Image: monkeybusinessimages

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