Can you use a 203k loan for an investment property?

203k loans for investors: A special use case

The FHA 203k rehab loan can be an affordable way to buy or refinance a home and refurbish it with a single loan. 

This might make the 203k loan attractive to investors and fix-and-flippers. But there’s a catch.

These mortgages are limited to ‘primary residences,’ meaning the borrower has to live in the home full time. So they’ll only work for specific types of investment properties. 

But there are ways to legally and ethically use a 203k loan for rentals and investments. Here’s how.

Verify your 203k loan eligibility (Feb 23rd, 2021)


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FHA 203k loan for investment properties

There’s only one legitimate way to use a 203k loan for an investment property. You can buy and renovate — or construct or convert — a multifamily (2-4 unit) building and live in one of the units.

FHA allows borrowers to purchase 2-, 3-, and 4-unit properties and renovate them using the 203k loan.

To fulfill FHA’s residency condition, you’ll need to occupy one of the units yourself as your primary residence for at least 12 months.

You can rent out the other unit(s), and even use the rental income to cover your monthly mortgage payments.

Benefits of the FHA 203k loan for investors

While this might not be your first idea of an investment property, it can be a foot in the door for first-time investors who want to test out owning and renting properties.

It’s also worth noting that since you’d be buying the property as a primary residence, you get access to lower interest rates.

This means you’d have lower monthly payments and pay less interest overall compared to someone with a ‘true’ investment property mortgage.

Drawbacks

The main downside to this strategy is that you yourself need to occupy one of the units for at least one year.

After 12 months, you could rent out the unit that you live in and move on to purchase other real estate.

But FHA is not for serial investors. Once you use one FHA loan, you likely can’t get another one. You’ll have to secure other financing if you move out and buy again.

Also, keep in mind that you will be living side by side with your future tenants for those 12 months — some may consider this a downside while others won’t mind.

Another downside: FHA loans come with pricey mortgage insurance premiums (MIP) which borrowers are normally stuck with until they sell or refinance into a different loan program.

So there’s a lot to consider before going the 203k investment property route.

But for the right borrower, this could be a great strategy to finance and renovate their own home and a few rental units at the same time.

Verify your 203k loan eligibility (Feb 23rd, 2021)

Can I use a 203k loan if I already own the home?

If you already bought your home, you can use a 203k rehab loan to refinance your current mortgage. This opens up another back door for investors.

You could potentially use the 203k loan to refinance your current home, make renovations, then move after one year and rent the house out as an investment property.

FHA allows you to rent out a home you still own with an FHA loan, as long as:

  • You fulfilled the one-year occupancy requirement
  • You moved for a legitimate reason, like a work relocation or upsizing to a bigger house for a growing family

This would only work for refinancing a home you currently live in and plan to keep occupying for at least a year after the loan closes.

If you already moved and kept your previous home as a rental property, you would not be able to use the 203k rehab loan since the home is no longer your primary residence.

How does the lender know if it’s my primary residence?

Some people make good livings by buying fixer-uppers and then selling them after rehab — aka “flipping” them.

A few might be tempted to take advantage of the 203k program by lying about their intention to live in the home. After all, how can the FHA prove in court what your intentions were when you made the application?

The main argument against this strategy is that lying on a mortgage application can be a felony that could see you in federal court.

Even an email to a contractor mentioning that you don’t intend to live there or other indication of your plans could show up in the court case.

And, repeat FHA buying would not be a viable long-term strategy.

FHA only allows borrowers to have one active FHA loan at a time, except in rare circumstances (for instance, if your work required you to relocate and you needed to buy another home near your new job).

In other words, borrowers cannot move once a year and continue financing new homes with FHA loans.

If you see yourself as an entrepreneur with a rosy future in real estate investing, set yourself up for success by choosing a legitimate financing option that keeps your options open in the long run.

Check your investment property loan options (Feb 23rd, 2021)

About the FHA 203k rehab loan

The 203k rehabilitation loan is backed by the Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Urban Development.

This mortgage program lets you buy a rundown home — a fixer-upper — and then renovate it using a single loan that covers the purchase price and cost of repairs.

If that involves demolishing the existing structure down to the foundations and rebuilding, that’s fine under 203k loan rules, too.

203k renovation loans are only for necessary repairs to improve the structure or livability of the home. So the funds can’t be used to add luxuries like tennis courts or swimming pools.

And there’s one more important rule: You cannot do the construction or remodeling work yourself. The 203k loan requires you to hire a reputable, licensed contractor, unless you are one yourself and you work full-time as a contractor.

Limited vs. Standard 203k mortgage

There are two flavors of the 203k program: the “Limited 203k mortgage” and the “Standard 203k.”

The Limited 203k used to be called the “Streamline 203k.” As its new name implies, this version is more restrictive about the amount you can spend and the types of work you can do. But it’s also less complicated, hence its former “streamline” moniker.

The maximum repair budget for a Limited 203k loan is around $31,000 ($35,000 officially, but there are mandatory reserve accounts that eat into that sum). And you can’t make any structural renovations to the home.

On the plus side, these loans require much less paperwork and hassle.

The Limited 203k loan is typically best for current homeowners who want to make cosmetic repairs or renovations. It works a bit like a cash-out refinance, except you must spend the money on the home improvements you’ve listed.

A “Standard 203k loan,” by contrast, allows much higher budgets and would be better for home buyers purchasing serious fixer-uppers that need structural repairs.

FHA loan requirements

The basic requirements for 203k loans are similar to those for other FHA mortgages:

  • A 3.5% down payment — Based on your purchase price and rehab budget combined, subject to an independent appraisal
  • Minimum 580 credit score — It may be possible to dip below 580 if you have a 10% or higher down payment
  • Debt-to-income ratio of 43% or less — No more than 43% of your gross monthly income can normally be eaten up by housing costs, existing debt payments, and other inescapable monthly obligations such as child support

Although the FHA sets these minimum requirements, you’ll be borrowing from a private lender. And they’re free to impose their own standards.

For example, some mortgage lenders require a credit score of 620 or 640 for an FHA loan. If one lender has set the bar too high for you, shop around for other, more lenient ones.

Verify your FHA 203k loan eligibility (Feb 23rd, 2021)

What repairs can you do with a 203k loan?

The FHA is putting up taxpayers’ money to guarantee part of your mortgage. So it’s not in the business of writing loans for luxury upgrades.

There are strict rules about the types of home renovations you can do and the amount of money you can borrow.

In fact, the total amount you can borrow for your home purchase and renovation costs is governed by current FHA loan limits, which vary depending on local home prices.

You can find the loan limit where you wish to buy using this lookup tool.

Maximum rehabilitation loan budgets

We already mentioned that a Limited 203k loan gives you a cap of around $31,000 on your rehab budget.

A Standard 203k lets you have as big a rehab budget as you want, capped only by your local loan limit minus the home’s purchase price.

Your total loan amount can be up to 110% of the property’s future value when complete.

But an appraiser will pore over your plans to make sure the final value of the home — after your projects are completed — will match the amount FHA is lending you.

What you can spend your rehab budget on

The Limited 203k is mostly intended for refreshing a home that’s a bit tired. So you can do things like:

  • Replacing flooring and carpeting
  • Installing or replacing an HVAC system
  • Remodeling a kitchen or bathroom
  • Fixing anything that’s unsafe
  • Making the home more energy-efficient

But you can’t use the money to do structural work, such as moving loadbearing walls or adding rooms.

The Standard 203k is very different.

You can do all the above and almost everything else, including serious construction work. Heck, you can even move the house to a different site if you get the FHA to approve your plans.

The 203k loan process

Limited 203k loans are pretty straightforward. Indeed, they’re easier than most to qualify for and set up.

But a Standard 203k isn’t like that. It may be your best path to your dream home. But there will be some extra hoops to jump through compared to a traditional mortgage.

Here’s the basic process to apply for and close an FHA 203k loan.

  1. Find your best lender — You can save thousands just by comparison shopping among multiple lenders. They aren’t all the same! Make sure the ones you consider offer FHA 203k loans and are experienced in delivering them. You’ll want a lender familiar with the specifics of 203k loans to make sure the process goes smoothly
  2. Get pre-approved — Pre-approval shows you your exact budget as well as your future interest rate. And you’ll get a chance to resolve any issues that arise in your application
  3. Find the home you want — This is the fun bit. But download the Maximum Mortgage Worksheet PDF from HUD’s website because that will help you assess whether your plans are affordable
  4. Find a 203k consultant — A 203k loan consultant will visit the home site, inspect the building, and then prepare a document outlining the project’s scope and specifications, along with a detailed cost breakdown for each of the repair tasks. He or she also prepares lender packages and contractor bid packages, along with draw request forms for stage payments
  5. Find a licensed contractor — Some lenders maintain lists of approved contractors. And your consultant may help you find a reputable one. Make sure candidates have proven records for projects similar to yours and are familiar with FHA 203k jobs. Many contractors add serious delays to 203k approval because they can’t seem to complete the paperwork correctly
  6. Have the home and project appraised — The lender will set this up for you
  7. Begin work — Once the appraisal is approved, the lender should let you close. And your contractor can then begin work, drawing on funds in an escrow account

Limited 203k loans require the borrower to live in the home while repairs are completed. So if it’s a new home purchase, you’ll have to move in within 60 days, which is the norm for FHA loans.

Standard 203k loans, on the other hand, might include structural repairs that render the home unlivable while construction is going on. In this case, the home buyer is not required to move in right away.

Rehab loan alternatives for investment properties

FHA 203k loans aren’t the only way to buy and renovate a home with one loan. Fannie Mae’s HomeStyle Renovation and Freddie Mac’s CHOICERenovation products can do much the same thing.

Since the HomeStyle and CHOICERenovation loans are conventional mortgage loans, they won’t charge for private mortgage insurance (PMI) if you put at least 20% down. This can save home buyers a lot of money on their monthly mortgage payments.

However, like the 203k loan, these programs are only available for primary residences.

If you’re buying a ‘true’ investment property — meaning you won’t live in one of the units yourself — these loans aren’t an option.

But investors have other renovation loans to choose from.

Traditionally, you would buy a home with a mortgage and then borrow separately — perhaps with a home equity line of credit or home equity loan — to make improvements. Then you could potentially refinance both loans into one later on.

Another option is using a cash-out refinance on your investment property or primary residence and putting the cashed-out funds toward repairs or upgrades.

Of course, all these types of loans require you to have enough equity built up to cover the cost of repairs.

And if you choose to draw from the equity in an existing investment property, you’ll pay higher interest rates.

But the upside is that there are no rules about how the funds can be spent. So if luxury upgrades are on your agenda, this could be the way to go.

Explore all your options

FHA 203k loans are only available to a select group of investors: Those who will buy a multi-unit property and live in one unit themselves.

For real estate investors looking to fix-and-flip or build a large portfolio of investment properties, an FHA loan isn’t the right answer. But there are plenty of other financing options out there.

Be sure to explore all your loan options before buying or renovating a home. Choosing the right program and lender can help you achieve your goals and save money on your project.

Verify your new rate (Feb 23rd, 2021)

Compare top lenders

Source: themortgagereports.com

Residential Mortgage Services Review: A Home Purchase-Focused Lender in the Northeast

Posted on February 4th, 2021

Today we’ll check out “Residential Mortgage Services Inc.,” or RMS for short, which refers to itself as a leading independent purchase-focused mortgage lender.

The retail direct-to-consumer mortgage lender primarily serves the Northeast, Mid-Atlantic and Eastern Seaboard markets.

RMS said purchase loans accounted for 58% of last year’s volume, compared to an estimated 40% industry average. The rest consisted of mortgage refinances for existing homeowners.

That made them the top purchase lender in both Maine and New Hampshire, the #2 purchase lender in Rhode Island, and the #3 in Massachusetts.

Clearly they’re doing something right if so many home buyers are turning to them for what is often their most important purchase. Let’s learn more.

Residential Mortgage Services Fast Facts

  • Direct-to-consumer retail mortgage lender
  • Calls itself a home purchase-focused company (but also does refis!)
  • Headquartered in South Portland, Maine, founded in 1991
  • Licensed in 23 states and the District of Columbia
  • Employs more than 850 workers, including about 250 loan officers
  • Funded a company record $8.5 billion in home loans during 2020
  • Most active in Massachusetts, Pennsylvania, and New Hampshire
  • Named #1 lender by MassHousing and received Top USDA Lender Award in Pennsylvania

As noted, Residential Mortgage Services is a retail mortgage lender that offers home purchase loans and mortgage refinances.

While they say they’re mostly focused on helping home buyers obtain financing, they do billions in refinance volume as well.

In fact, the company just had its best year on record, with $8.5 billion in origination volume last year, a whopping 70% increase compared to the $5 billion funded in 2019, and more than double the $3.9 billion in 2018.

At the moment, they are licensed in 23 states and the District of Columbia, and have a physical presence in 14 states nationwide.

Those states include Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, and D.C.

They are most active in the state of Massachusetts, followed by Pennsylvania, New Hampshire, Maine, and Maryland.

To summarize, they have a major presence in the Northeast and Mid-Atlantic, especially with home buyers.

How to Apply for a Home Loan with Residential Mortgage Services

  • You can go to a branch or visit their website and click on “Apply” to get started
  • You’ll be asked to select your state, followed by a branch location and a loan officer
  • From there simply create your account and you can apply for a mortgage from any device
  • Their digital home loan process allows you to link financial accounts, scan/upload docs, and eSign disclosures

Residential Mortgage Services makes it easy to apply for a home loan, and gives you multiple options to get it done.

To get started, simply visit their website and click on “Apply.” This will take you to list of states where they’re licensed to do business.

Once you select a state, it’ll show you branches that serve that particular state, and when you select a branch, you’ll be able to see which loan officers work there.

While you can get started on your own from an individual loan officer’s webpage, you may want to call them first to discuss loan options and pricing.

If you’re happy with what you hear, you can begin the digital application process from any device, including a smartphone.

They even offer a smartphone app called RMS Ready that lets you complete many tasks along the way.

Like other digital mortgage offerings, you can link financial accounts, scan/upload necessary paperwork, eSign disclosures, and check loan status 24/7 via the borrower portal.

Their Loan Center is powered by Encompass from fintech company Ellie Mae.

Alternatively, you can visit a local branch if one is located nearby and you prefer to do business face-to-face. At last glance, they’ve got brick-and-mortar branch offices in 14 states.

Loans Programs Available at Residential Mortgage Services

  • Home purchase loans
  • Refinance loans: rate and term, streamline, and cash out
  • Home renovation loans: FHA 203k and Fannie Mae HomeStyle
  • Conventional mortgages
  • Jumbo home loans
  • FHA, USDA, and VA loans
  • Interest-only mortgages
  • State housing agency mortgages
  • Piggyback second mortgages
  • Fixed-rate and adjustable-rate options

Residential Mortgage Services offers a ton of different home loan programs, including stuff you won’t find with other lenders.

Aside from home purchase loans and refinance loans, they also offer home renovation financing, including the FHA 203k loan and Fannie Mae HomeStyle programs.

Additionally, you can get a jumbo home loan or an interest-only mortgage, along with a piggyback second mortgage (a home equity line of credit) if you want to extend your financing and avoid PMI.

They also partake in the many state housing agency mortgage programs available, which are geared for first-time home buyers and those with limited incomes.

You can get any type of loan, whether it’s a conforming loan backed by Fannie/Freddie, an FHA loan, USDA loan, or VA loan.

In terms of loan programs, you can get a fixed-rate mortgage (30-year fixed or 15-year fixed), or an adjustable-rate mortgage such as a 5/1, 7/1, or 10/1 ARM.

All in all, you shouldn’t be limited when it comes to home loan choice, which is a big positive for borrowers who work with Residential Mortgage Services.

Residential Mortgage Services Rates

One area where they leave us in the dark is mortgage rates. They don’t post them online so I’ve got no idea where they stand pricing-wise.

In order to get a mortgage rate quote, you’ll need to speak with a loan officer, either at a local branch or over the phone.

When you do get pricing, be sure to ask about their lender fees as well, which you also won’t find on their website.

Taken together, this makes up the home loan’s APR and can be used to shop your mortgage with competitors.

Always take the time to gather several quotes to ensure you get a good deal.

The one hint we have about their rates comes from their Zillow reviews, where a good chunk of customers indicated that the rate received was lower than expected (and often the closing costs were too!).

Given their amazing level of customer service, my hope is they’re competitively priced as well.

Residential Mortgage Services Reviews

On Zillow, RMS has an astounding 4.98-star rating out of a possible 5 from nearly 4,000 customer reviews.

That’s truly impressive given the massive number of reviews and shows how consistent they’ve been over time.

One reviewer even referred to working with them as a “wonderful experience,” which you don’t hear too often in the mortgage world.

On LendingTree, they have a perfect 5-star rating from nearly 100 reviews, with every rating a 5 out of 5.

You can find various reviews online for their specific brick-and-mortar locations as well, with many also quite positive.

Lastly, Residential Mortgage Services is an accredited business (since 2010) and currently has an ‘A+’ rating with the Better Business Bureau.

Residential Mortgage Services Pros and Cons

The Good Stuff

  • Can apply for a mortgage on their website in minutes
  • Offer a digital and paperless home loan experience
  • Lots of different loan programs to choose from including jumbos, second mortgages, and interest-only options
  • Has brick-and-mortar retail branch offices in 14 states
  • Excellent customer reviews from past customers
  • A+ BBB rating, accredited company
  • Free smartphone app (RMS Ready)
  • Free mortgage calculators and knowledge center

The Maybe Not

  • Not licensed in all states
  • Do not list mortgage rates or lender fees on their website

(photo: Paul VanDerWerf)

Source: thetruthaboutmortgage.com

Mortgage denial stats by race: What we can learn

A new report turned up big racial divides in mortgage approval

A recent report by LendingTree revealed stark inequality when it comes to qualifying for mortgages.

It showed that Black borrowers are significantly more likely to be denied for a mortgage than those from other demographics, with denial rates at 12.64% compared to 6.15% for the rest of the borrowing population.

The reasons for this disparity are complex. Housing discrimination has a long history in the U.S., the effects of which are still widely felt today.

We’ll take a brief look at that history here.

But we’ll also explain reasons for mortgage denial at the individual level — for any applicant — and what you can do to better your chances of approval.


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New data on mortgage denials by race

LendingTree’s new report analyzes data on mortgage and refinance denials, which lenders are required to report under the Home Mortgage Disclosure Act.

It found that BIPOC people were more likely than white people to be denied for a mortgage or refinance — in some cases at nearly twice the rate.

There are deeply-rooted, complex reasons for these disparities, a discussion we take up briefly toward the end of this article.

But there are also surface-level reasons for mortgage denial — the actual number(s) a lender can point to and say “this is why we didn’t approve the application.”

If you’ve had trouble getting a mortgage or refinance in the past, it helps to understand those reasons so you know how to improve your chances in the future.

Verify your mortgage eligibility (Jan 22nd, 2021)

Why do underwriters deny mortgages?

The Consumer Financial Protection Bureau (CFPB) broke down the reasons for mortgage and refinance denials in 2019 by race.

CFPB found that, across all demographics, credit history and a problematic debt-to-income ratio (DTI) are the leading reasons borrowers are denied home loans.

The numbers look similar for refinance applications that were denied in 2019.

Reasons for mortgage denial explained

It’s clear that a history of discriminatory policies created and sustained the homeownership gap among Black and white borrowers.

But it’s helpful to understand what the different denial reasons mean so you can make yourself a competitive applicant, particularly as lenders and institutions are being forced to examine their policies:

  • Debt-to-income ratio (DTI): DTI refers to how much you earn vs. how much you pay on debts such as loans and credit cards each month
  • Credit history: Your credit history shows all of your credit accounts, including credit cards, personal loans, auto loans and student loans. Lenders look for a history of on-time payments, and they like to see accounts that have been open and in good standing for several years
  • Collateral: Collateral is an asset you can use to secure a loan. When you take out a mortgage, your house serves as collateral the lender can repossess and sell if you default on your payments. If you choose to borrow against the equity in your home, the house will also serve as collateral
  • Credit application incomplete: Lenders might deny an application if you haven’t filled out all of the information on your employment history or finances. Typically, a lender will reach out and try to fill in the gaps, then deny the loan if they receive no response or an insufficient reponse. They can also deny you if they don’t have enough credit data in your file to determine your risk level as a borrower, according to the CFPB
  • Insufficient cash: When you apply for a loan, lenders look to see that you have enough cash in your accounts to cover your down payment plus closing costs and fees. If your account doesn’t show sufficient funds, they may deny your application
  • Employment history: Lenders want to see a history of consistent employment and income. Typically, they’ll want to verify that you’ve been employed for the past two years
  • Unverifiable information: Loan officers and underwriters are meticulous when they review your application. If they can’t verify details such as your income, address history and employment, they may deny your application. They’ll also be looking for discrepancies such as large withdrawals on accounts that don’t appear on your credit report. Let’s say you’re on a payment plan for a medical bill, and the payment comes out automatically each month. If that bill doesn’t show up on your credit report — and you don’t disclose it when you apply — the lender may deny you because your transaction history doesn’t align with the information they have

These are the main reasons a lender would deny a mortgage or refinance application.

With that in mind, here are a few things to do, if you’re able, that may improve your chances of success when you apply for financing.

How to improve your chances of getting a mortgage

1. Maintain a low debt-to-income ratio

Most lenders prefer to see a DTI of 36% or lower (including your potential mortgage payments) for conventional loans.

Government-backed loans, like FHA, can be much more forgiving, allowing debt-to-income ratios up to 45% or 50% in some cases.

The best way to avoid getting dinged on your DTI is to keep your debts as low as possible. Some tangible ways to do it are as follows:

  • Accept a longer term on your auto loan and/or buy a less expensive car
  • Keep credit card balances low. You will be “dinged” with the minimum monthly payment which is usually a percentage of the current balance.
  • Consolidate student loans. Get the monthly payment as low as possible.

Fortunately, lenders don’t look at utilities, cell phone bills, or other non-credit monthly recurring costs when calculating DTI.

2. Keep an eye on your credit

If you’re not sure what your credit score is, or which accounts are showing up on your report, request a copy of your credit report before you apply.

You are entitled to a free copy of your report from the three credit bureaus — TransUnion, Equifax, and Experian — every year.

But due to the strain COVID-19 has put on the economy, everyone is now entitled to free weekly credit reports through April 2021.

Even if your credit card company offers a free credit check option, you still want to request your full report. The score that appears on the report is more accurate, and you can review all of your accounts to make sure all the information a lender will see is current and correct.

If you see an account you didn’t open or any fraudulent activity, report it to the credit bureau right away.

3. Build up collateral

When purchasing a home, insufficient collateral means that the home you’re buying doesn’t meet minimum standards for FHA or another home loan agency.

For instance, the roof needs replaced or there are hazards at the property like faulty electrical system or a deteriorating back deck.

In this case, look into an FHA 203k loan, which allows you to buy and fix up the property with one transaction.

If you’re refinancing, the lender needs to see that you have enough equity to do so. Some loans require as much as 20% equity to refinance. However, newer loan types like the High LTV Refinance Option (HIRO Loan) allow you to refinance into a lower rate even if you have zero or negative equity.

If you’re looking to turn your home’s equity into cash someday, be sure you are making extra payments each year. As you pay down your mortgage, you’ll increase the equity in your home. The more equity you have, the more borrowing power you’ll have if you choose to do a cash-out refinance or take out a home equity loan or line of credit.

Avoid borrowing against your home equity unless you need to so the funds are available for major expenses, such as renovations.

4. Save up cash reserves

In addition to the money you’ve saved for a down payment, it helps to have funds in savings that show you can cover your monthly payments. The longer the money is in your account, the more secure and stable your finances appear (this is known as “seasoned money”).

5. Be thorough when filling out your application

This is an easy one: Before you turn in your mortgage application, double and triple-check that every field is filled out. And make sure that you respond to any requests from your lender for more information.

Data shows that over 10% of mortgage applications — and nearly 20% of refinance applications — across all demographics were denied simply because the credit application was incomplete.

Verify your mortgage eligibility (Jan 22nd, 2021)

FAQ: Mortgage denials and underwriting

What causes a mortgage to be denied?

Lenders deny mortgages for several reasons, but the most common are poor credit scores or a “thin file,” meaning the borrower has a limited credit history.

Sometimes a thin file is a good thing, as some people prefer not to use credit at all and instead pay for everything with cash. In other cases, they may be too young to have built up credit or have been denied loans and credit cards in the past, effectively preventing them from building a credit profile.

Depending on the reason for the thin file, lenders may be willing to use alternate documentation such as utility or rent payments to qualify you.

A high DTI is also a leading factor in a mortgage being denied, as is a history of late payments or defaults. If you’ve ever declared bankruptcy or been foreclosed on, that can hurt your chances as well.

But there are lenders who work with borrowers that are trying to rebuild after a financial crisis, so even if you’ve had these issues before, you may be able to buy a home. 

Why would a refinance be denied?

As with mortgages, refinance applications are often denied because of the borrower’s DTI or credit history. A refinance may also be denied if you don’t have enough equity in your house or you owe more than the home is worth.

What can you do if your mortgage is denied?

You can apply with other companies (and you should — it’s wise to apply with at least three lenders to ensure you’re getting the best deal).

You may want to search for lenders who work specifically with people in similar financial circumstances as you.

For instance, some lenders specialize in helping borrowers with low credit scores, poor credit histories, a history of bankruptcy or foreclosure, or people who are self-employed or seasonal workers.

If multiple lenders deny your application, ask plenty of questions about why you were denied and how you can improve your chances of qualifying within the next several months or years.

Some lenders will work with you to figure out exactly how much debt you need to pay off to reach their required DTI or hit their minimum credit score. You always want to find out the next best steps toward qualifying.

How often do mortgages get denied?

Most mortgages get approved, though about 11% were denied in 2018 according to MarketWatch. That same year, one in four refinances were denied.

Does a mortgage being denied hurt your credit?

A denial doesn’t hurt in and of itself, but lenders will do a hard credit check when they run your application, and that can lower your score. A hard credit check, or hard pull, stays on your credit report for two years.

But if all of your accounts are in good standing, you make your payments on time and your credit utilization (the amount of credit you’re using vs. the amount that’s available to you) is below 30%, the hard check should make only a small dent.

What’s a good DTI for a mortgage?

Most lenders want to see a 36% DTI for a standard mortgage. However, some will accept higher DTIs and the criteria often vary depending on the type of loan programs they offer.

What’s a good credit score for a mortgage?

Generally speaking, you’ll need at least a 580 to qualify for a government-backed FHA mortgage. Lenders may offer loans with lower credit requirements, or they can tighten lending criteria depending how the broader economy is doing.

But 580 is the minimum number to aim for, and the higher your score, the more money you’ll qualify for — and at better interest rates.

What should your credit score be to refinance?

Lenders typically look for a credit score of 620 for a conventional refinance. But as with mortgages, they may accept lower scores based on the loan options offered at their institution.

Why are there racial disparities in mortgage and refinance approvals?

The homeownership gap between Black and white Americans is caused by a number of factors, a deep study of which is beyond the scope of this article.

However, it’s unfair to look at disparities in things like credit, income, and debt, without at least mentioning the history behind them.

While the reasons for mortgage denial may look individual on the surface — one person’s credit score, one person’s debt ratio — they can’t be separated from a larger history of discriminatory policies.

Housing discrimination in the U.S.

As Wealthsimple detailed in 2019, the roots of the problem go back to the 1930s, when the Federal Housing Administration (FHA) engaged in discriminatory lending standards known as “redlining.”

The problem was exacerbated in the 1940s, when many lenders would not give low-interest mortgages to Black veterans, despite the fact that they were entitled to the benefit under the GI Bill.

Black people who were denied government-backed mortgages often sought alternative loans. But these were purposefully marketed with predatory terms and rates that made it extremely difficult to build equity and long-term wealth, according to Wealthsimple.

The disparities seen today are rooted in policies and discriminatory practices of the past, and they are perpetuated by inequalities in access to credit and other financial opportunities.

Mortgage denial rates

Today, there are fair housing and equal credit laws meant to protect home buyers from the types of discrimination codified in the past. But current laws can’t wipe out that history.

Take a look again at the rates of mortgage denial.

LendingTree’s study shows that:

  • The largest mortgage approval disparities were in the Midwest
  • Black borrowers in Milwaukee, Cleveland and St. Louis were most likely to have their mortgage applications denied
  • In Milwaukee, the denial rate for Black prospective homebuyers is 17.73%, whereas the overall denial rate is 5.57%
  • The disparities apply to refinancing as well
  • In Phoenix, the difference between denials for Black refinance applicants and the general applicant pool was more than 22%.

But the reasons behind these rates are complex.

ProPublica found that Black people were more likely to have judgments brought against them and their money seized if they defaulted on their utility bills than white people.

Not only could this wipe out someone’s bank accounts and hurt their credit scores, it could leave them without enough money to pay down other debts or save for large expenses, like a mortgage.

CNBC also reported that under current credit-scoring models, BIPOC people are often rendered “credit invisible,” perhaps because of a lack of commonly tracked credit accounts. It’s very difficult to obtain a mortgage without a documented credit history.

Black college graduates are also significantly more likely to carry student debt than their white peers, and student debt is a big reason potential home buyers might have high DTI.

These are just a few of many factors influencing the racial wealth gap in the U.S.

A note on accessible mortgage programs

There are a number of mortgage programs designed to help anyone who faces tougher credit and debt hurdles.

If you’ve had trouble qualifying for a mortgage in the past — or anticipate having a harder time when you do apply — make sure you explore all your loan options.

A traditional, conventional loan with 20% down isn’t the only thing available. Take a look at

  • FHA loans
  • USDA loans
  • VA loans
  • Freddie Mac’s Home Ready loan
  • Fannie Mae’s HomePossible loan
  • The Conventioanal 97 loan

These and other mortgage programs are geared toward borrowers with lower credit scores, and/or lower income, and/or higher debt levels.

If you face any of the issues that commonly cause mortgage denial, one of these programs could make home buying a lot more accessible.

Verify your new rate (Jan 22nd, 2021)

Source: themortgagereports.com

Understanding Upfront Mortgage Insurance (UFMIP)

There are a lot of costs associated with getting a government-backed home loan.

The down payment and closing costs can add up to tens of thousands of dollars.

But there’s one cost you need to prepare for, the upfront mortgage insurance premium (UFMIP).

This article will look at what upfront mortgage insurance is, the rate for each type of mortgage, and which mortgage loans don’t require it.

Check Rates: Check Today’s Mortgage Rates

What is Upfront Mortgage Insurance (UFMIP)

An up-front mortgage insurance (UFMI) premium is required on government home loans. The government can guarantee mortgage loans because borrowers pay an annual mortgage insurance premiums (MIP) along with an upfront MIP payment.

Upfront MIP by loan type

Upfront Fee

Conventional

Not Required

FHA loans

The Federal Housing Administration guarantees FHA home loans allowing lenders to lower their credit and down payment requirements. The FHA upfront mortgage insurance premium is 1.75% of the loan amount. Annual FHA mortgage insurance premiums are between 0.45% to 1.05%, they are typically 0.85% for loans less than $625,000 with a 3.5% down payment.

  • Upfront MIP – 1.75%
  • Annual MIP – 0.50% – 1.05% (0.85% on most FHA loans)

USDA Loans

The U.S. Department of Agriculture guarantees USDA home loans for borrowers buying a home in rural areas of the country. They offer 100% financing and have a lower mortgage insurance premium than FHA at just 0.35%. The upfront premium for USDA loans is 1.00%.

  • Upfront MIP – 1.00%
  • Annual MIP – 0.35%

203k Loans

FHA 203k loans are a home improvement loan that finances a house plus the cost of repairs or renovations. Because 203k loans ar guaranteed by the Federal Housing Administration they have the same mortgage insurance requirement of 1.75% of the loan amount.

  • Upfront MIP – 1.75%
  • Annual MIP – 0.85%

VA Loans

The Department of Veterans Affairs guarantees mortgage loans for veterans of the U.S. military. VA home loans don’t require an annual mortgage insurance premium and the upfront fee is called a VA funding fee and is 2.15% of the loan amount.

  • Upfront VA funding fee – 2.15%
  • No mortgage insurance required

Regular Military VA Funding Fee

Down payment

Fee (first-time buyers)

Fee (subsequent use)

Why is an Upfront Mortgage Insurance Premium Required?

The government guarantees home loans allowing mortgage lenders to lower their credit score and down payment requirements. Borrowers with a lower fico score who put little to money down are more likely to walk away from a mortgage because they have less invested in the home and don’t stand to lose much. Because of this, they require an upfront premium to help fund the program.

The mortgage insurance premium is put into an escrow account set up by your lender. The premium is sent directly to the U.S. Department of Housing and Urban Development (HUD).

MIP vs. PMI

MIP is similar to private mortgage insurance (PMI), required on conventional loans with a loan-to-value ratio above 80%. Once the LTV ratio reaches 78%, PMI is no longer required. However, conventional loans do not require an upfront PMI premium.

With a conventional mortgage, the PMI cancels after the loan-to-value ratio reaches 78%. This is not the case with FHA and USDA loans, which require mortgage insurance for the life of the loan. If your down payment was 10% or higher, MIP will cancel on an FHA loan after 11 years.

The annual mortgage insurance premium (MIP) is included in your monthly payment and goes into the escrow account your lender sets up for.

• Down payment of 10% or more MIP duration is 11 years 

• Down payment of less than 10% MIP is required for the life of the loan

Upfront Mortgage Insurance Refunds

You may be eligible for a refund of the upfront mortgage insurance premium if you refinance your home loan within three years.

If you get an FHA loan and refinance your loan with an FHA streamline refinance or FHA cash-out refinance within three years, you will be eligible to have a portion of the upfront MIP refunded to you. The largest refund is 80% of the premium after the first month of closing on your mortgage and decreases by 2% for each month after.

MIP Refund Chart

Months after closing

Months after closing

Months after closing

Upfront MIP Refund Requirements

  • Been less than three years since closing
  • Must be current on your mortgage
  • No late mortgage payments
  • Must refinance into another FHA loan

Source: thelendersnetwork.com