3 Things No One Ever Tells You About FHA Loan

August 19, 2018 Posted By: growth-rapidly Tag: Buying a house

Buying a home, especially as a first time home buyer, can be stressful. From coming up with a 20 percent down payment on the house to choosing the best mortgage lenders for the best rates, the home-buying process itself can be frustrating.

However, little do you know an FHA loan can make the process less frustrating and less stressful. For example, buying a home with an FHA loan does not require the traditional 20 percent down.

Related: Get Pre-Approved for a Mortgage through LendingTree.

1. The down payment is super low

The down payment using an FHA loan for buying a home is 3.5 percent. This is super low comparing to the conventional 20% down payment. While there are several advantages of putting 20 percent down on the house, it’s not always necessary.

For example, when you put more money on the house, you save more on interest payment and you will pay your mortgage earlier. However, not everyone can come up with 20% down payment on a house.

Related Resources

  • Get Pre-qualified for a Mortgage Online Now
  • Compare Mortgage Rates All in One Place
  • Check Your Credit Score For Free

2. Your credit score does not need to be perfect

Usually, you would need an excellent credit score to get qualified for a loan to finance your first home. However, with an FHA loan, your credit score needs to be at least 580. Before you apply for an FHA loan, make sure your credit score is at least 580.

We recommend using Credit Sesame . It’s completely free and it monitors your credit score and gets you updates on your credit score.

It’s important to have at least 580 credit score in order to qualify for an FHA loan. If you have less than that, work on improving your credit score.

Check Today’s Low FHA Mortgage Rates

3. Pre-approval for a loan is very easy

Getting pre-approved for buying a home with an FHA loan is quite easy. First, you will need to work with mortgage lenders who offer FHA loans.

Second, you want to make sure you have a copy of the following for the lenders: 1. your tax return. 2. Your 2 most recent pay stubs 3. A bank statement showing the funds for the 3.5% down payment.

Third, make sure your credit score is at least 580. This needs to be repeated and emphasized. If it’s less than that, you might still be qualified but you will need to come up with a larger down payment, like a 10 percent down.

Once you’re approved for the FHA loan, your pre-approval letter will show how much you’re qualified for so you can start

In conclusion, buying a home for the first time can be frustrating. But it does not have to be. With an FHA loan, you can buy your dream home.

These are some of the things you need to know about FHA loans before buying a home. 

If you are interested in comparing the best mortgage rates through LendingTree click here. It’s completely free.

Up Next: 5 Signs You’re Not Ready to Buy a House.

Related Resources

  • Get Pre-qualified for a Mortgage Online Now
  • Compare Mortgage Rates All in One Place
  • Check Your Credit Score For Free

Buy a home with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you save 100k (whether you need it to pay off debt, to invest, to buy a house, or plan for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

Source: growthrapidly.com

FHA Will Insure Mortgages in Forbearance, With a Catch

Last updated on June 23rd, 2020

The Federal Housing Administration (FHA) finally announced a new policy, which is temporary, to endorse mortgages where the borrower has requested or obtained COVID-19 forbearance.

Mortgagee Letter 2020-16 temporarily reverses the FHA’s existing policy that doesn’t permit FHA insurance for mortgages in forbearance.

The agency said the policy ensures “the safeguards of the FHA program continue to work for new homeowners facing a financial hardship due to COVID-19.”

Now before mortgage lenders get too excited about this, there is a major hitch. They must sign an indemnification agreement with the FHA that leaves them on the hook for 20% of the original loan amount if it goes bad.

What Are the Requirements for Insuring FHA Loans in Forbearance?

  • Borrower must be experiencing a financial hardship due directly or indirectly to COVID-19
  • Mortgage must have been current at time of request for forbearance
  • Mortgage must satisfy all requirements for FHA insurance at time of closing
  • Mortgagee must execute a two-year partial indemnification agreement

Aside from that pretty significant piece about lenders being liable for 20% of the original loan amount, there are also some general requirements that must be met.

First off, the borrower must be experiencing a financial hardship directly or indirectly related to COVID-19 and in a forbearance plan.

Additionally, they must have been current on the mortgage at the time they requested the forbearance.

In the letter, the FHA says “forbearance provided to borrowers experiencing a financial hardship due, directly or indirectly, to COVID-19 is not considered the provision of funds by a Mortgagee to bring and/or keep the mortgage current or to provide the appearance of an acceptable payment history.”

In other words, the loan won’t be insurable if the borrower was already behind on the mortgage before asking for a break on payments.

Like any other FHA loan, it must satisfy all requirements for FHA insurance at the time of closing.

And as mentioned, the originating lender must execute a two-year partial indemnification agreement for 20% of the original loan amount.

The somewhat good news for lenders is that they’re only on the hook for that 20% if the mortgage goes into foreclosure and results in a claim to the FHA’s Mutual Mortgage Insurance (MMI) Fund.

But it could lead to lender overlays, like higher credit scores or a max number of forborne payments, to limit the likelihood of these loans going sour.

May Have Been an Alternative to Raising Mortgage Insurance Premiums

forbearance rate

HUD Deputy Secretary Brian Montgomery said, “This policy helps address current and future capital issues for all lenders, including those who are not equipped to hold mortgages on their balance sheets for extended lengths of time.”

While maybe true, it doesn’t explain how they’ll pay those claims if lots of homes go into foreclosure in the two-year indemnification period.

However, the FHA did add that it won’t require upfront payments by lenders or an adjustment to FHA mortgage insurance premiums for such loans.

And added that it would “generally result in a reduction of the claim amount FHA would need to pay to the lender for defaulted mortgages.”

Lenders might have time on their side since the housing market is on pretty good footing and mortgage rates are super cheap, meaning housing payments should be more or less affordable.

Foreclosures also take quite a bit of time these days, so depending on when that clock starts ticking, there may not be too many claims.

Of course, I don’t know how comfortable lenders are sitting around and wondering if a home loan will go bad at some point. And it’s a two-year period to sit around and wait.

Earlier this week, the MBA said 11.82% of outstanding Ginnie Mae-backed loans (FHA/USDA/VA) loans were in forbearance, while Black Knight reported today that 12.3% of FHA/VA mortgages are now in forbearance.

But the number of homeowners in forbearance plans decreased for the first time since the crisis began, with 34,000 fewer homeowners in forbearance as of June 2nd thanks to a 43,000 decline among government-backed mortgages.

Read more: Fannie and Freddie Will Buy Loans in Forbearance

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com

FHA First-Time Home Buyer Loans: The Pros vs. the Cons

The FHA first-time home buyer loan program makes life a lot easier if you’re just starting out in the homebuying process.  The federal government and most states offer insured home loans tailored to first-time homebuyers. These loans offer attractive benefits that can make the home-buying experience less costly and less restrictive. But they aren’t for everyone.

What is an FHA first-time homebuyer loan?

FHA first-time homebuyer loans offer a low down payment, reduced interest, limited fees and the possibility of deferring payments. These types of loans are offered at a federal level by the Federal Housing Administration and by most states.

The FHA defines a first-time homebuyer as a person who has not owned a home for three years. This includes single parents and displaced homemakers who only owned a house previously with a spouse.

The FHA insures lenders against potential default and requires a minimum credit score of 580 or above for a loan with a down payment of 3.5%. Most lenders, though, require a credit score of 620 or 640 and above to approve an FHA loan. In addition to your credit score, you will need to provide full documentation of your income and assets and meet the lender’s debt-to-income ratio, which is typically a maximum of 41% to 43% of your monthly gross income that goes toward the minimum payments on all of your revolving and installment debts.

Pros of first-time homebuyer loans

The comparatively lower restrictions on these loans make them ideal for first-time homebuyers. You might want to consider these loans if:

  • You don’t have enough money saved up for a large down payment.
  • You have a limited ability to meet high interest payments and fees.
  • Your credit score is not high enough to qualify for other loan types.

But even if you do have funds saved for a large down payment, the low interest rates on first-time homebuyer loans could be too good to pass up.

Cons of first-time homebuyer loans

The downside of FHA first-time homebuyer loans is that they have higher mortgage insurance requirements than conventional loans. The mortgage insurance payments must be made for the entire life of the loan unless you make a larger down payment. However, FHA mortgage rates are comparable to conventional loans regardless of your credit score, so you won’t be stuck paying a higher-than-average mortgage rate.

If you are looking to buy a really expensive home in an affluent area, you might have to look elsewhere. On Jan. 1, the federal Housing and Urban Development department reduced the “national ceiling-loan limit” to $625,500 for most affluent of areas. Loan limits vary depending on the median income in that area, so be sure to check with your real estate agent or lender.

Another potential drawback is the requirement that the home you buy will be your primary place of residence. In other words, if you were looking to buy the property with the intention of renting it out, you probably won’t qualify for the loan.

Some other potential drawbacks include:

  • If you sell your home soon after purchasing it, you could lose some of the loan benefits.
  • If you want to refinance at a later date or otherwise change the terms of your debt or your collateral, this may not be possible with a first-time homebuyer loan.
  • While some of these loans don’t require you to purchase private mortgage insurance, you may be required to take out insurance provided by the loan program, and this insurance policy could have higher fees and longer payment terms than a private insurance option.

Despite these drawbacks, a first-time homebuyer loan could still be the most attractive type for you. Take a step back, evaluate your financial situation, consider the home you’re looking to buy and consider your options.

———

Ben Apple contributed to this article. 

Source: realtor.com

Get a no-closing-cost mortgage and a low rate, too

Out-of-pocket mortgage fees are optional

Mortgages always have closing costs, whether you’re buying a home or refinancing. But you don’t always have to pay them out of pocket.

You get to choose how your home loan is structured.

You could take your lowest rate and pay closing costs on your own dime. Or you can ask your lender to cover closing costs and pay a slightly higher interest rate.

These “no-closing-cost” mortgages aren’t always a good deal because a higher rate means you pay more in the long run.

However, today’s mortgage rates
are so low that many borrowers can get the lender to cover their fees and still
get an ultra-low rate.

Find a no-closing-cost mortgage (Feb 19th, 2021)


In this article (Skip to…)


What is a no-closing-cost mortgage?

A no-closing-cost mortgage or no-closing-cost refinance isn’t exactly what it sounds like. There are still closing costs. You just don’t pay them yourself.

What a no-closing-cost mortgage really means is that the lender covers part or all of your closing costs. In exchange, you pay a higher interest rate. The lender’s extra profit from your higher rate repays your closing costs in the long run.

Lenders can cover some or all of your closing costs in most cases, including loan origination fees, appraisal fees, title search and title insurance fees, and prepaid taxes and insurance.

Depending on the lender, a no-closing-cost mortgage loan can also be called a:

  • Zero-cost mortgage
  • No-cost mortgage
  • Lender credits
  • Rebate pricing
  • Lender-paid closing costs

All these terms refer to the same arrangement, where you’ll pay a higher interest rate in order for the lender to cover closing costs.

This is no free lunch — if you keep the loan for a long time, you could end up paying more via the higher interest rate than you would have paid in upfront closing costs. So you should think about how long you plan to keep your new loan before deciding on a no-closing-cost refinance or home purchase loan.

However, if you’re ready to buy a home or refinance but don’t have the upfront cash, a zero-cost mortgage can be a smart way to lock in at today’s low rates without having to wait and build your savings up.

Check no-closing-cost mortgage rates (Feb 19th, 2021)

Types of no-closing-cost home loans

There are several ways to
structure a no-closing-cost loan. A lender might cover all your
upfront fees or only select closing costs.

The amount and type of closing
costs your lender absorbs will affect your interest rate, so it’s important to
compare offers on equal footing.

To compare zero-cost offers,
make sure each lender covers the same items. For example:

  • The mortgage lender covers lender fees but not the third-party expenses or prepaid items (upfront property taxes and homeowners insurance)
  • The lender covers lender fees and third-party charges, but not prepaid items
  • The mortgage lender absorbs everything, including loan costs and prepaid expenses

A lender that covers all
three parts of your closing costs will likely charge a higher rate. Conversely,
a lender that charges a lower rate is likely only covering its own fees, not
fees from the appraiser, title company, or escrow service.

No-closing-cost mortgage example

For example, your
various rate and fee options might look like this:

  • 2.750% rate — The borrower pays all closing costs, including lender fees, third party fees, and prepaid costs
  • 2.875% rate — The borrower pays no lender fees, but does pay third party costs and prepaid costs
  • 3.250% rate — The borrower pays no lender or third party charges, only prepaid costs
  • 3.50% rate — The borrower pays nothing out of pocket whatsoever

None of these options are
good or bad. Borrowers should understand that lower rates cost more upfront,
and higher rates cost less upfront.

To be able to pay your
closing costs, lenders increase your interest rate and use the extra profit
from the loan to pay your costs.

It’s up to you to decide if the upfront savings are worth the higher interest rate and payment.

No-closing-cost refinancing

A no-closing-cost refinance can be a particularly good idea because it eliminates the one big drawback to refinancing — the upfront cost.

For this to work, however, your new interest rate needs to be low enough that you can accept a slight rate increase and still see your desired savings.

A higher interest rate will result in a higher monthly payment and a bigger long-term cost. So before using a no-cost refinance, you should check the numbers and determine:

  • Will your monthly payments still be reduced at the no-closing-cost mortgage rate?
  • How long do you plan to keep the mortgage before moving or refinancing again?
  • How much more will you have paid in interest by the time you sell or refinance? Is this amount higher or lower than paying closing costs upfront?

The point at which the added interest cost starts to outweigh your savings is the “break-even point.”

With a no-cost mortgage refinance, you’ll likely want to move or refinance again before you hit the break-even point.

Of course, if you need lower mortgage payments because your monthly budget is too tight, the higher long-term cost might not matter as much. You might be happy with the month-to-month savings and lack of upfront fees.

As always, the right mortgage refinance strategy depends on your current loan and your personal finances.

When you’re shopping around, you can ask lenders for offers both with and without closing costs to compare your potential interest rates and long-term costs.

No-closing-cost vs. ‘rolled’ closing costs

A zero-cost loan isn’t the only way to eliminate closing costs when you refinance. Most homeowners also have the option to roll closing costs into their new loan balance.

Rolling closing costs into your loan is not the same as a no-closing cost refi.

By rolling in closing costs, you increase your mortgage amount, which means you’ll pay more interest in the long run. But your actual interest rate stays the same.

Compare that to a no-closing-cost mortgage refinance, which keeps your loan balance the same but increases your rate.

There are pros and cons to each strategy.

Keeping your lower interest rate by rolling closing costs into the loan might save you more on interest. But it also increases your loan-to-value ratio (LTV), which could impact your refinance eligibility or your ability to cancel private mortgage insurance (PMI).

Your refinance options also depend on the type of loan you have.

For instance, FHA and VA Streamline Refinance loans only allow borrowers to include upfront mortgage insurance fees in the loan amount. All remaining closing costs need to be paid out of pocket. 

Note, including closing costs on the loan balance is only an option when you refinance — not when you buy a home. But you can get a no-closing-cost loan with a higher interest rate when you purchase real estate.

The right no-cost option depends on your particular mortgage.

You can compare both options when you’re shopping for refi offers to see which makes more sense for your financial situation.

Compare no-closing-cost mortgages (Feb 19th, 2021)

Getting a zero-closing-cost loan from a
mortgage broker

A no-closing-cost loan looks a
little different with a mortgage broker than it does when you’re working
directly with a lender. That’s because the broker is an intermediary; they can
help you negotiate the rate and terms of your loan, but they don’t control the
end lender’s pricing.

However, a no-cost loan is still
possible via a mortgage broker. You just need to know how they work.

Mortgage brokers collect a
yield spread premium, or YSP, as payment to work on your loan.

The end lender pays this fee
to the mortgage broker for delivering your loan. The YSP is the mortgage
broker’s profit.

Knowing this, you can request
that the broker use the YSP to engineer your no-cost home loan.

For instance, a broker
getting paid a 1% YSP by the lender need not charge the borrower an origination
fee. In this case, the YSP can save you one percent of your loan amount in
out-of-pocket costs. A broker getting 2% YSP can cover even more of your
closing costs.

When comparing no cost loans
between mortgage lenders and brokers, ask for the same structure
from each.

In other words, ask them all
for offers with no lender fees. Third party costs like appraisal, credit
report, title and escrow and recording fees should be fairly similar. Your taxes
and insurance should be the same regardless of which lender you choose.

This allows you to look at just one variable: the interest rate.

Mortgage rates with no closing costs

The downside to a no-closing cost mortgage is that you’ll pay a higher interest rate. Even a slight increase in your rate can cost you thousands more over the life of the loan.

However, you should consider the interest rate increase in perspective.

Today’s rates are at historic lows. And that means many borrowers can accept a slightly higher rate while still ‘saving’ compared to homeowners who bought or refinanced a year ago or more.

Imagine you’re offered a 30-year fixed mortgage rate of 2.875%. Your lender is willing to cover closing costs but will increase your rate to 3.5%.

That’s a big increase compared to your original rate offer. But 3.5% is still less than half the historic average for 30-year rates — and it’s less than most borrowers would have paid any year prior to 2020.

Yes, you should get the lowest rate you can to save money in the long run. But if a no-closing-cost loan is your only route to homeownership or refinancing, it’s not a bad deal.

The important thing is that you’re aware of the tradeoff between zero upfront costs and bigger long-term costs so you’re certain you’re making the right decision.

Tips to lower your no-cost mortgage rate

The lower your initial mortgage rate is, the lower your no-closing-cost mortgage rate will be.

To get a no-cost mortgage loan and a low rate, try to present a strong mortgage application. You’ll typically get a lower interest rate if you have:

  • A credit score above 720
  • A clean credit report with no late payments
  • A debt-to-income ratio (DTI) below 43%
  • A loan-to-value ratio (LTV) below 80% (meaning you have at least 20% home equity)

Additionally, refinancing with at least 20% equity (or buying a home with 20% down) can help you avoid private mortgage insurance (PMI) or FHA mortgage insurance premiums (MIP).

Eliminating mortgage insurance costs can go a long way toward reducing your monthly payment and making up for the increased interest rate on a no-cost loan.

But perhaps the most powerful way to lower your rate is to let lenders compete for your business. Get two or three quotes. Send the quote with the lowest rate and fee combination to one of the other lenders. See if that lender can beat it.

You may end up getting much of your closing costs paid for and get close to the full-closing-cost rate.

What are today’s mortgage rates?

Purchase and refinance rates are still at historic lows. Many home buyers and homeowners can get the lender to cover their upfront costs and still secure a great interest rate.

Make sure you compare no-cost offers from a few different lenders if you want to go this route. Check that each one is covering the same closing costs so you can make an apples-to-apples comparison of upfront costs and interest rates.

Verify your new rate (Feb 19th, 2021)

Compare top lenders

Source: themortgagereports.com

Prevention Measures and Increased Borrower Equity Lower Foreclosure Risk

The Urban Institute (UI) says the surge in
foreclosures predicted as the COVID-19 pandemic drove unemployment to the
highest level since the Great Depression may not materialize, even when the
current forbearances end. Two UI researchers, Michael Neal and Laurie Goodman,
say that even vulnerable homeowners may be spared, and they think they have identified
the reasons.

Mortgage
forbearance rates peaked at 8.55 percent of active mortgage in June 2020 and
began to fall when unemployment rates did. Since
October, however, both unemployment and forbearance rates have flattened. This
has heightened concern that many homeowners could face foreclosure later this year.

The authors say about a quarter of the 2.7 million
borrowers who remain in forbearance plans are continuing to make their
payments, but about 2.1 million are delinquent along with another 1.1 million
homeowners who are not in plans. Forbearance is now scheduled to end mid-year
and many borrowers who haven’t regained their pre-pandemic financial positions
may face the loss of their homes.

UI says this won’t necessarily
happen
, even among government loan borrowers whose risks are higher due to higher-initial-loan
to value (LTV) and debt-to-income (DTI) ratios, lower credit scores and lower
incomes than borrowers with conventional loans. They may benefit from the large
amounts of home equity that borrowers have accumulated through home price
appreciation and the loss mitigation waterfalls
put in place by Fannie Mae,
Freddie Mac, the FHA VA, and the Department of Agriculture’s Rural Housing (RH)
program.

Those
waterfalls, or forbearance off-ramps, allow borrowers options to pay back the past
due amounts
that accumulated during forbearance. The first step in the waterfall
is to repay the forborne amount in a lump sum or over a short period. But,
where a borrower is unable to increase their pre-forbearance payment, they can
revert to their pre-forbearance payment and move the forborne amount to the end
of the loan.

For an FHA mortgage, the forborne
amount becomes a “soft second” or a subordinate loan on which the borrower is
not required to make payments until the house is sold or refinanced. For a GSE
(Fannie Mae and Freddie Mac) loan, the mortgage term is extended. If the
borrower’s then current income is not enough to cover their original monthly
payment, they could qualify for a modification which would lower their monthly
payment. Loss mitigation options are also available to borrowers who did not
utilize forbearance. However, not all borrowers will qualify for a loan
modification and may have to exit homeownership.

Even where borrowers are not
financially stable when forbearance expires and do not qualify for a
modification, those with home equity could still exit the home with their
credit intact and possibly some cash in hand by selling their home and downsizing
or renting. Equity also increases the viability of the waterfall because
lenders are more likely to work out an alternative solution to foreclosure for a
delinquent homeowner who has it.

Of the 3.2 million currently delinquent
borrowers, 626,000 have government loans in Ginnie Mae securities and, because
the average LTV ratio at origination is 96.5 percent for FHA purchase
borrowers, 100 percent for VA loans, and 101 percent for USDA loans, these
borrowers will generally have less equity than those with GSE loans.

Goodman and Neal developed a
methodology to estimate the home equity for government loans that shows that
even among delinquent borrowers less than 1.0 percent have negative equity and
5.5 percent are near negative, a total of 3.6 percent. In the aftermath of the
Great Recession, the latter number was approximately 30 percent.

Further, they found the average
government loan borrower has 22 percent equity. Most of the 3,771 delinquent or
forborne borrowers in negative equity are VA borrowers (2,817), many of which
had origination LTVs of 100 percent. Another 1,000 in negative territory are evenly
split between FHA and RH. Nearly all the negative equity loans were originated
from 2018 to 2020, most in 2020.

The additional 5.5 percent of
borrowers with near-negative equity or less than 5 percent will have none left
after the transaction costs of selling. They have little incentive to sell by
themselves.  

Home price gains (60 percent from
early 2012 through late 2020) have pushed home prices up above their pre-recession
peak by an average of 19.7 percent
, but those increases have been uneven. Many areas
still have prices below the 2005-2006 levels. The share of mortgages with
negative equity range from 0.1 percent in several states to highs of 1.8
percent in Wisconsin and 1.4 percent in Illinois. The share of non-current borrowers
with negative equity or near-negative equity are mostly in the single digits,
with only Wisconsin, Illinois, and Alaska exceeding 10 percent.  These may
be the states that do see significant numbers of foreclosures.

The authors say that even as improvement in the forbearance
rates have slowed along with the decline in unemployment, they still expect far
fewer foreclosures than during and after the Great Recession. Many of today’s
homeowners in distress have both significant equity buffers and improved loss
mitigation tools. The extensions in forbearance terms announced earlier this
month will give struggling borrowers more time to benefit from improved
employment prospects as the economy recovers and to build an equity cushion;
this is particularly critical to homeowners without equity.  A further
extension in forbearance may well be necessary.

Source: mortgagenewsdaily.com

How to Refinance Your Mortgage with Bad Credit

Refinancing your mortgage can provide you with a lot of financial benefits. You can cash out on some of your home’s equity when you need a large sum of money.

signing refinance papers

You can also take advantage of lower interest rates to save on your monthly payments. It’s also possible to get rid of your private mortgage insurance if you have enough equity in your home.

If your credit has taken a dive since you first bought your house, it may be difficult to refinance. After all, you’ll essentially be taking out a new home loan and will have to go through the entire application process with a mortgage lender.

However, you’re not left without any options. Learn how to make sure refinancing is the right move for you and how you can refinance your mortgage with bad credit.

Make Sure Refinancing Makes Financial Sense

Before applying to refinance your house, analyze the total cost of the transaction to ensure it’s the right move.

Yes, you might save money on your monthly mortgage payments with a lower interest rate, but remember that you also have to pay closing costs and other fees to get a new loan.

Refinancing Usually Extends Your Loan Term

Also, consider that your newly refinanced loan usually extends the length of your loan back to 30 years, regardless of how long you have been paying down your current loan. That means it will take longer to pay off your house and you’ll also be paying that interest for longer.

If you’ve been paying on your home for 10 years, that’s a long time to add back onto your mortgage, especially while making additional interest payments. Before you refinance, make sure you consider all of the financial implications, not just your new monthly mortgage payment.

Your lender can help you estimate what expenses you’re likely to incur so have an in-depth conversation before making a decision.

Refinance a Mortgage with Bad Credit

Credit scores and interest rates go hand in hand. As with all loans, a higher credit score results in lower interest rates, saving you money every month. This really adds up on mortgages because you’re paying the loan off for so long. And even if you don’t have excellent credit, you still might be able to get approved for a home loan.

Shop Around

Start off by shopping around for lenders. You’re under no obligation to use the same lender as your initial mortgage, and it’s good to compare several offers.

Refinanced home loans can be structured in any number of ways and some may work for you better than others. For example, you might want to roll closing costs into the loan rather than paying them in cash up front.

Mortgage Points

If you plan on staying in your home for a long time, it may be worth paying an extra point at closing in order to get a better interest rate. Think about what your goals are in refinancing and talk to each lender about the different ways you can achieve them.

A good lender can also help you prepare to get approved for a mortgage refinance, even with lower credit scores. If you can, demonstrate that you have strong cash reserves by putting extra money in the bank.

You’re more likely to be approved for a loan if you have money on hand that is accessible because it shows that you’ll be able to pay for your loan even if your monthly budget is tight at times.

Pay Off Debt

Another helpful move is to strategically pay down some of your debt. Although each lender’s exact requirements vary, most like to see a debt to income ratio of less than 41%.

That means the number of recurring debt payments you make each month (like your new mortgage, your credit card minimums, and any personal loans), should only take up 41% of your monthly pre-tax income.

For example, let’s say your monthly income amounts to $5,000 before taxes and health insurance are taken out, and you pay $2,000 a month on credit cards and a car loan.

Divide 2,000 by 5,000 and you’ll get 0.4. Multiply that by 100 to find the percentage of your debt to income. In this case, it’s 40%, which is less than most lender’s required minimum.

To strengthen your application, consider making a few extra payments to lower your debt amount even more. It may take a few months for those numbers to be reflected on your credit report, so ask your lender to perform a rapid rescore if you’re in a hurry.

Getting a Co-signer

If a bad credit score is still holding you back from refinancing a mortgage, you also have the option of adding a co-signer to the loan.

This basically means that someone else with better credit can help get you approved without having to be an owner of the property title. They’ll be responsible for the loan until they’re removed, which can only be done through another refinance or selling the home.

The catch with having a co-signer is that they are also financially responsible for paying the mortgage. So if for some reason you can’t make the payments, your co-signer’s credit will also suffer — even if the loan gets all the way to foreclosure.

You definitely want a strong and trusting relationship with a co-signer and talk about what would happen in a worst-case scenario. Would the co-signer help make payments or be ok with having their credit diminished? Have an honest conversation to make sure you’re both comfortable with every possible scenario.

Required Documents

Once you’re ready to apply, you’ll need to supply the lender with similar documentation as you did when you first applied for a mortgage. This could include pay stubs, tax returns, and bank statements so they can determine your ability to repay the loan.

Another important part of the process if the home appraisal where a professional appraiser comes to your house and assesses its current value.

You’ll need to have at least 20% of the home’s value paid off, whether through mortgage payments or equity earned. So if your outstanding loan is $150,000 and the appraised value of the home is $200,000, you have 25% equity in your home and the appraisal should be good to go.

Federal Refinancing Programs

If you can’t get approved to refinance through a traditional lender, check to see if you qualify for one of these government-sponsored programs.

These options for refinancing a mortgage are specifically aimed to help people with bad credit. Each mortgage refinance option has different requirements, so read carefully before proceeding. If you qualify, you might be able to take advantage of significant savings.

Harp 2

This program is specially designed to benefit homeowners whose mortgage is greater than the value of the home, so there are no restrictions on the loan-to-value. However, you do have to meet some basic qualifications to take advantage of this program.

First, your loan has to be owned by Fannie Mae or Freddie Mac and must have been delivered to one of those entities by June 1, 2009. FHA loans don’t qualify and you can’t have already refinanced using Making Home Affordable Refinance Program (Harp 2’s predecessor).

FHA Rate and Term Refinance

If you already have an FHA mortgage, you may be able to qualify for an FHA Rate and Term Refinance. This option allows you to change the terms of your current FHA mortgage and replace them with more favorable terms. The minimum credit score to qualify is 580.

FHA Streamline Refinance Loans

If your current mortgage is not an FHA loan, you may be able to refinance your mortgage with an FHA Streamline Refinance. The minimum credit score is also 580. An FHA streamline refinance can help lower your interest rate, and you sometimes can get approved without having an appraisal performed, so it’s a speedy process.

FHA Cash-Out Refinance Loans

You can also do an FHA cash-out refinance have a minimum credit score of at least 620. The cash-out refinance allows homeowners with equity in their house to receive a lump sum of cash by increasing the principal mortgage amount (and, consequently, monthly payments).

VA Interest Rate Reduction Refinance Loan (VA IRRRL)

If you have an existing home loan backed by the U.S. Department of Veterans Affairs and you want to reduce your monthly mortgage payments, an interest rate reduction refinance loan (IRRRL) may be a good option for you. You can also move from a loan with an adjustable or variable interest rate.

Basically, a VA Interest Rate Reduction Loan lets you replace your current loan with a new one under different terms.

Improve Your Credit Score Before Refinancing

Whether your application to refinance was denied or you want to qualify for even lower interest rates, sometimes it’s worth taking the time to raise your credit score. Start by paying all of your monthly bills on time and in full. If you do that for long enough, you’ll start to see your credit score go up steadily.

You can also increase your credit card limit — as long as you don’t spend extra, you can quickly bump up your credit score.

Hire a Credit Repair Company

For people with a lot of negative items on their credit reports, a credit repair agency may be helpful in disputing those items and getting them removed altogether. Check out our reviews of the leading credit repair companies.

Credit scores are often categorized into five different ranges, from bad to excellent. If you can increase your credit score enough to boost yourself into the next category, you could automatically qualify for better refinance rates.

Don’t give up on your goal of refinancing your mortgage. There’s always room for improvement which means there’s always a way to get a better rate — even if it takes a bit of time.

Source: crediful.com

APR vs. interest rate for mortgages: Which matters more?

APR vs. interest rate for mortgages

APR and interest rate are both important numbers when choosing a mortgage loan. But which matters more?

Some experts say APR is most important because it includes your interest rate and your loan fees. It’s the ‘real’ cost of a mortgage.

But APR is often too broad to be a good comparison tool.

Today’s mortgage shoppers have a lot of flexibility to choose their interest rates and upfront fees. So you should choose the combination of short- and long-term costs that makes sense for you — rather than looking for the lowest APR or interest rate alone.

Compare mortgage options (Feb 9th, 2021)


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What is APR?

A loan’s annual percentage rate (APR) measures the total cost of borrowing money. APR is designed to represent the long-term cost of a loan, from closing day to the date it’s paid off.

Rather than looking at interest rate alone, the APR on a mortgage includes lender charges and fees like: 

  • Mortgage insurance 
  • Discount points
  • Mortgage origination fees
  • Other closing costs 

Mortgage lenders are mandated by the Truth In Lending Act to disclose a home loan’s APR as well as the interest rate each time they provide a loan offer.

APR can be found on the Loan Estimate you’ll get from any lender after being pre-approved. It is provided to enable borrowers to make a more informed decision when it comes to loan choices.

How is APR calculated?

APR is calculated by finding the total cost of a mortgage loan’s upfront fees, then spreading them over the life of the loan to estimate the yearly cost. This is added to the interest rate to find the ‘real’ annual cost of financing.

“This indicates the true amount you will pay on top of the balance of the mortgage,” says John Davis, educational ambassador for ScoreSense.

However, not all lending institutions include the same fees in their APR calculation.

“By law, the APR must include interest, points, loan origination fee, broker fee, and mortgage insurance,” says Scott Auen, senior vice president of Retail Lending for Cornerstone Bank.

“There are also third-party fees that legally cannot be included, such as notary, home appraisal, and attorney costs. And there are other fees that some lenders include while others don’t.”

This means APR is not a perfect way to compare mortgage loans apples-to-apples. You have to look at the interest rate and total upfront fees, too.

Compare mortgage loan options (Feb 9th, 2021)

What’s the difference between APR and interest rate?

A mortgage interest rate represents only the amount you’ll pay your lender each year in interest. APR includes interest as well as loan fees; it measures the total amount you’re paying above and beyond the loan’s principal. That means APR will normally be higher than your interest rate.

“The interest rate will indicate what you would expect to pay monthly for your mortgage,” explains Auen.

“The APR, on the other hand, should give you a bigger picture of what the total mortgage loan cost is over the life of your loan.”

When you ask for a rate quote from a lender, the most prominent number advertised is normally the interest rate. But APR must be included, too.

You might think APR is a better way to compare mortgage offers than interest rates alone. After all, wouldn’t you want to know which loan has a lower cost overall — not just a lower mortgage rate?

Well, not necessarily. There are pros and cons to using either APR or interest rate to shop for a mortgage loan.

Benefits of comparing APR

Interest rate is typically the first number most home buyers look at. But it can be deceiving.

For example, the interest rate quoted for an FHA mortgage could appear enticingly low. Advertised rates for FHA loans are typically below rates for a comparable conventional loan.

But because an FHA loan requires annual mortgage insurance — which costs 0.85% of the loan amount each year — its APR will often be higher than a conventional loan.

APR is often a better tool for comparing multiple loan products: For instance, an FHA loan vs. a conventional loan.

Factors like your credit score and down payment also make a difference when it comes to loan fees and APR.

“APR is often a better tool for comparing multiple loan products,” says Nishank Khanna, chief financial officer for Clarify Capital.

“If you have a low interest rate loan but tons of fees, calculating APR costs can help you better understand how much you’ll really be saving or spending.

“APR is a more complete metric for comparing mortgages with different interest rates and total fees. It levels out the playing field, allowing you to see things from an apples-to-apples perspective,” Khanna continues.

Drawbacks of using APR to compare loans

For many borrowers, though, APR is not a realistic way to compare costs.

That’s because the APR calculation makes a few big assumptions:

  • APR assumes you’ll keep your loan for its full term
  • APR assumes you won’t sell the home or refinance
  • APR assumes you won’t pay off the loan early

Most borrowers do not pay off their mortgage in full. It’s typical to sell or refinance after only a few years. So comparing loans based on their long term cost might not make sense.

And APR doesn’t account for different financial priorities.

For example, some borrowers choose to pay discount points. Points can add thousands to your upfront fees but significantly reduce your interest rate.

“In this case, having lower mortgage payments or building equity is a priority. Hence, it might be wiser to put more stock in the interest rate number than the APR number,” Khanna suggests.

On the flip side, some borrowers want or need to save money at closing.

They might accept a lender with a higher interest rate and APR if it’s willing to cover part of their upfront costs.

“In this scenario, having a higher interest rate loan with fewer upfront fees can be more affordable month-two-month,” says Khanna.

“Borrowers should consider how much liquid assets they have and what they are comfortable with paying at the get-go rather than simply pursuing a loan with the lowest APR.”

Compare mortgage loan options (Feb 9th, 2021)

When to use APR vs. interest rate

Be cautious not to overvalue the APR number. APR is most useful if you plan to keep the loan for its entire term.

“If you are purchasing a home with plans to move or refinance within 5 to 10 years, it makes more sense to pay attention to interest rates so that you can keep your monthly payments lower,” says Auen.

Remember, too, that lenders don’t include exactly the same costs in their APR calculations.

“That’s why you should ask specifically what is included in your APR so that you can make an accurate assessment when comparing offers,” Auen notes.

If you only plan to stay in the home for a few years, comparing the 5-year cost of each loan might be more helpful than APR.

The 5-year cost projection can be found on page 3 of your Loan Estimate, directly above the APR. It shows the real cost of your loan after 5 years, including loan principal, interest, and upfront costs.

This number will be more realistic for a short-term borrower than APR, which spreads loan costs over the full loan term — often 30 years.

Fixed- vs. adjustable-rate mortgage APRs

On a fixed-rate mortgage, the APR will almost always be higher than the interest rate. That’s because your rate stays the same over the life of the loan — so adding fees on top of the fixed rate will naturally increase the APR.

But what about an adjustable-rate mortgage?

If you’re comparing ARM interest rates, you may notice something odd: the APR can actually be lower than the interest rate.

This isn’t because ARMs have low or no loan fees. Rather, it’s because of the way lenders calculate APR on an adjustable-rate loan.

The annual percentage rate on an ARM is based on the index rate your loan is tied to. An index is simply a measurement of the economic conditions at the time, expressed in an interest rate.

But ARM APRs assume the index rate will stay the same over the life of the loan. Not likely.

For instance, say you take out a 5/1 ARM. Your initial interest rate is 3.5%, and your ‘margin’ is 2.25%. On the day your loan closes, the index rate your loan’s tied to is at 0.5%.

  • Initial interest rate: 3.5%
  • Index rate at closing: 0.5%
  • Your loan’s margin: 2.25%
  • APR: 2.75%

This calculation can make ARMs look incredibly attractive during a low-rate period like the one we’re currently in — especially if you’re shopping based on APR.

But this calculation makes the assumption your interest rate will fall when the loan finally adjusts. If you take the ARM out when rates are at rock bottom, this is unlikely to happen. It’s more likely your interest rate and monthly mortgage payment will increase.

So, don’t be fooled by the ultra-low APR on an adjustable-rate mortgage. It’s an estimate based on some big assumptions

And many borrowers sell or refinance before their ARM’s fixed-rate period is up, in any case.

How to find the best mortgage deal

When thinking about APR vs. interest rate, remember it’s not one or the other. You can (and should) look at both numbers.

“When deciding which mortgage to opt for, consider both the interest rate and the APR,” recommends Davis.

“You can first use the interest rate as a tool to filter down your options. Then, once you shortlist the most preferred interest rate offers, you can compare the APRs on those offers carefully to get the best possible deal.”

Also, if you have a high credit score, use it to your advantage.

“If you have great credit but are undecided between two lenders who have similar repayment terms — with one boasting a lower interest rate but higher APR and the other offering a lower APR but higher interest rate — try to negotiate terms with both,” Davis advises.

“Aim to get either the fees or interest rate reduced to match or beat the other offer.”

When in doubt, and for best results, consult a mortgage professional who can help you determine the best loan deals based on APR vs. interest rate.

Verify your new rate (Feb 9th, 2021)

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Source: themortgagereports.com

President Biden could reduce FHA mortgage insurance premiums. Here’s what it means for you

FHA mortgage insurance might get cheaper this year

“Mortgage industry abuzz with speculation of FHA MIP cut,” stated one trade magazine on January 28. And that journalist was right.

Many insiders are confidently predicting a big cut in the Federal Housing Administration’s (FHA’s) annual mortgage insurance rates.

FHA borrowers currently pay 0.85% annually in mortgage insurance premiums (MIP). That’s $1,700 per year, or $140 per month, on a $200,000 mortgage.

So it’s no wonder a possible MIP rate cut is big news. It could help new home buyers and refinancing homeowners save big on their housing payments.

Verify your FHA loan eligibility (Feb 8th, 2021)

Why experts think Biden will lower mortgage insurance premiums

Lowering FHA mortgage insurance rates isn’t a new idea from President Biden. It’s a holdover from former President Obama’s agenda.

American Banker magazine explains “The Department of Housing and Urban Development under former President Barack Obama had announced a scheduled 25-basis-point [0.25%] reduction in the FHA’s annual mortgage insurance premiums just before President Donald Trump took office.”

But Trump reversed this change at the start of his term, leaving FHA MIP rates at 0.85% per year.

Now, says American Banker, “observers expect the Biden administration to follow through on that 25-basis-point cut and potentially go even further.”

Lowering FHA MIP costs would be right in line with President Biden’s goals of expanding affordable housing opportunities for low- and middle-income families.

Of course, this is only speculation for now. No official announcements have been made.

But the pervasiveness of the rumor — and the absence of denials from the administration — mean a change seems likely.

So potential home buyers and FHA homeowners should be aware of what the (potential) change would mean for them.

What an MIP reduction could mean for you 

There’s good news and bad news.

The bad news is that if you already have an FHA loan if and when the reduction takes effect, you won’t see any savings. You would have to refinance into a new FHA loan to see the reduction.

The good news is that if you haven’t applied for an FHA loan yet if/when the cut is announced, you can likely take advantage of the new, lower fees.

But just how much would home buyers and refinancers stand to save?

A 25-basis-point reduction means MIP rates would fall by 0.25%. So you’d be paying 0.6% of your loan balance each year instead of the 0.85% that nearly all FHA borrowers now pay now.

These mortgage insurance rates are calculated annually but charged monthly.

Example: 0.25% MIP rate cut

Let’s say you plan to borrow $200,000 with an FHA loan. Your MIP rate at current levels would be 0.85%, making an annual charge of $1,700 — or $140 per month.

Now let’s assume the new MIP rate falls to 0.6%.

Your annual charge tumbles to $1,200. And your new monthly MIP cost would be exactly $100 per month.

That’s a saving of $500 a year, which few of us would sneeze at. But there’s a possibility that the savings could be even bigger.

Example: 0.50% MIP rate cut

American Banker wondered whether the Biden administration might “potentially go even further.”

So how does the math work if annual MIP rates were to be cut a little more — to 0.5%?

Assuming the same $200,000 loan, a 0.5% rate would reduce the annual payment to $1,000. And that would make the monthly payment just $83 versus $140 per month at current levels.

That would save you $700 a year over your current payment.

Rates haven’t changed yet…

Remember: this is just speculation. Unless and until an official announcement is made, you should continue to budget for your full, existing 0.85% MIP rate.

But if you’re considering a home purchase or refinance later this year, you should keep an eye out for news from the Department of Housing and Urban Development (HUD).

If a change is announced, it could be worth waiting on that application until you can secure the lower rate.

Verify your FHA loan eligibility (Feb 8th, 2021)

What happens to existing FHA loans?

Homeowners with an existing FHA loan may not benefit from lower mortgage insurance premiums right away.

An MIP rate reduction likely would not change the terms of your current mortgage.

So if a change is announced, you’d have to refinance into a new FHA loan to take advantage of MIP savings.

Keep Streamline Refinancing in mind

The good news is that FHA borrowers may well be in line for an FHA Streamline Refinance — a simplified, low-doc refi program.

FHA Streamline loans typically come with minimum paperwork, low costs, and no credit check. You likely won’t need a new home appraisal or income verification.

However, you’ll have to pay closing costs yourself — only the upfront mortgage insurance charge can be rolled into the loan balance.

And cashing out is not allowed with the FHA Streamline program. If you want cash-back with your refinance, you’ll need the FHA cash-out loan, which requires full underwriting.

How the MIP cut could contribute to the FHA Streamline “net tangible benefit” rule

Right now, FHA Streamline Refinances have a requirement that you gain a ‘net tangible benefit’ (some clear monetary advantage) as a result of using one.

This typically means you need to lower your ‘combined rate’ (mortgage interest plus mortgage insurance) by at least 0.5%.

Say the Biden administration does cut MIP rates by 0.25%. Under the current rule, you’d also need to lower your mortgage interest rate by 0.25% to be eligible for Streamline Refinancing.

But with rates trending downward through 2020 and into 2021, it’s quite likely that a 0.25% reduction is in reach.

But do keep in mind that your current FHA loan has to be at least 210 days old before you’re allowed to refinance.

When could the change take place?

Some mortgage industry insiders are expecting an announcement during President Joe Biden’s first 100 days in office. And they may be proved right.

But there’s a reason we rarely quote speculation from mortgage industry insiders. They’re often wrong.

And the fact is, nobody outside the government knows whether there will be an announcement at all, let alone its likely date. Which raises an important question: What are you supposed to do with this information?

What are you supposed to do with this information?

We wouldn’t be sharing this speculation with you if we didn’t think there was a good chance of the rate cut really happening. But there’s no guarantee it will.

So you probably shouldn’t change immediate plans to purchase a home or refinance.

Today’s FHA mortgage rates are at historic lows — and your interest rate has a much bigger impact on your total loan cost than your mortgage insurance rate.

If you wait on a rate cut and miss today’s low interest rates, it could negate your savings. You could also risk losing out on your dream home by waiting for financing.

Keep in mind, you only need to wait 210 days — about 7 months — from your FHA home purchase or refinance before you can refinance again.

If Biden does cut MIP rates, the change will be long-term. So you can always refinance if it makes financial sense for you to do so later on.

Verify your FHA loan eligibility (Feb 8th, 2021)

Will other aspects of FHA loans change?

Most people who opt for an FHA loan do so because it’s the easiest, most affordable path to homeownership that’s open to them.

American Banker describes FHA borrowers as, “traditionally first-time homebuyers and largely minorities and lower-income earners.”

And they choose FHA loans because they can get approved with lower credit scores and higher existing debts than Fannie Mae, Freddie Mac, and other conventional loans usually allow.

None of that’s likely to change if the Biden administration comes through with the rumored changes.

The only difference should be the amount these borrowers have to pay for their annual mortgage insurance.

Remember, there’s also an upfront mortgage insurance (UFMIP) fee equal to 1.75% of the loan amount. Most borrowers roll this into their loan balance so they don’t have to pay it at closing.

So far, we haven’t heard talk of the UFMIP rate changing — only the annual mortgage insurance premium of 0.85%.

The bottom line

An FHA MIP reduction would be a great win for borrowers, helping to keep monthly housing costs low.

If you plan to buy a home or refinance via an FHA loan later this year, there’s a good chance you could see lower mortgage insurance premiums.

But if you’re already in the process of buying or refinancing, we don’t recommend waiting on news of lower MIP rates. You’re likely to see bigger savings by taking advantage of today’s ultra-low mortgage rates.

Verify your new rate (Feb 8th, 2021)

Source: themortgagereports.com

Mortgage applications on the rise again

Mortgage applications jumped 8.15% from the week ending Jan. 29, breaking a two-week streak of decreases, according to the latest data from the Mortgage Bankers Association.

The refinance index also increased 11% from the previous week – up to its highest level since March 2020 – and was 59% higher year-over-year. The seasonally adjusted purchase index increased 0.1% from one week earlier, though the unadjusted purchase Index increased 8 percent compared with the prior week and was 16 percent higher than the same week in 2020.

The 30-year fixed mortgage rate did see a slight drop, down to 2.92% after hitting a three-month high last week of 2.95%.

Historically low mortgage rates became the norm in 2020 due to the COVID-19 pandemic and economic recession. As rates begin to creep up closer to 3% in recent weeks, the number mortgage applications had begun to slip before last week’s jump.

Still, rates are low enough to appeal to homebuyers, noted Joel Kan, the MBA’s associate vice president of economic and industry forecasting.


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“The one-week reversal in the recent upswing in rates drove an increase in both conventional and government refinance activity, as borrowers continue to lock in these historically low rates,” Kan said. “Average purchase loan amounts in early 2021 continue to rise across all loan types, driven by a strong pace of home sales, tight housing inventory and high home- price growth.”

The FHA share of total mortgage applications decreased to 9.1% from 9.4% the week prior. The VA share of total mortgage applications decreased to 12.1% from 12.4% the week prior.

Here is a more detailed breakdown of this week’s mortgage application data:

  • The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) decreased to 2.92% from 2.95%
  • The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $510,400) decreased to 3.12% from 3.17% – the second week in a row of decreases
  • The average contract interest rate for 30-year fixed-rate mortgages decreased to 2.94% from 2.88%
  • The average contract interest rate for 15-year fixed-rate mortgages decreased to 2.44% from 2.43%
  • The average contract interest rate for 5/1 ARMs decreased to 2.88% from 2.60%

Source: housingwire.com