Lender credits: How a mortgage lender can pay your closing costs

What are lender credits?

Lender credits are an arrangement where the lender agrees to cover part or all of a borrower’s closing costs. In exchange, the borrower pays a higher interest rate.

Lender credits
can be a smart way to avoid the upfront cost of buying a house or refinancing.

Getting
closing costs to $0 means you can put more of your savings toward a down
payment — or, in the case of a refinance, lock in a lower interest rate without
having to pay upfront fees.

But lender credits aren’t always the right
choice. For some borrowers, it makes sense to pay more upfront and
get a lower interest
rate. 

Here’s how to negotiate the best mortgage deal for you.

Check your no-closing-cost mortgage options (Feb 25th, 2021)


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How lender credits work

Lender credits are a type of ‘no-closing-cost mortgage’ where the mortgage lender covers all or part of the borrower’s closing costs.

Of course, lenders don’t pay borrowers’ closing costs out of generosity. In exchange for absorbing closing costs, the lender charges a higher interest rate. The ‘extra’ interest paid by the homeowner over time eventually repays any fees covered by the lender. 

Lender credits can be structured a few different ways, depending on what the lender agrees to cover and how much the borrower is willing to increase their mortgage rate.

For example:

  • The lender might cover all the borrower’s closing costs
  • The lender might cover its own fees and third-party services (like the
    appraisal) but not prepaid items (like property taxes and homeowners insurance)
  • The lender might cover only its own
    fees and none of the third-party services or prepaid items

The more of your closing costs a lender pays via lender credits, the higher your interest rate will be, and vice-versa.

Mortgage
pricing is flexible, and you can take advantage of tools like lender credits to
negotiate a rate and fee structure that works well for you.

Check your no-closing-cost mortgage options (Feb 25th, 2021)

How to compare mortgages
with lender credits

If you’re
considering a home loan with lender credits, it’s important to weigh the
short-term savings versus the long-term cost.

You might
eliminate your upfront cost with lender credits. But accepting a higher
interest rate means you’ll pay more interest in the long run. You’ll also have
a higher monthly payment.

If you keep
your loan its full term — typically 30 years — the amount of ‘extra’ interest
you pay could far exceed the amount you would have spent on upfront closing
costs.

However, most
home buyers don’t keep their mortgages for the full term. They sell or
refinance within a decade or so. And if you’ll only keep your loan a few years,
having a slightly higher interest rate might not matter as much.

So you need to
consider how long you plan to keep the mortgage before selling or refinancing
to decide if lender credits are worth it.

You should
also compare no-closing-cost loans from a few different mortgage lenders.

Each lender
structures lender credits differently — so you might find one that covers the
same amount of closing costs, but charges a lower interest rate than
another. 

And be sure to compare offers on equal footing.

If you look at
one lender quoting a zero-cost mortgage, and another that’s only covering origination
fees, for example, you’re going to see very different rates. So make sure all
the lenders you compare are covering the same amount and types of closing
costs.

You can find you total closing costs and how many lender credits are included on the standard Loan Estimate you’ll receive after applying with any lender. These documents make it easy to compare home loan offers side-by-side to find the better deal.

Are lender credits worth
it? An example

Typically, the
less time you keep your mortgage, the more you’ll benefit from lender credits.

Here’s an
example:

  No Lender Credits With Lender Credits
Loan Amount $250,000 $250,000
Interest Rate* 3.0% 3.75%
Upfront Closing Costs $9,000 $0
Interest Paid In 5 Years $35,500 $44,500
Interest Paid In 30 Years $129,500 $166,800

*Interest
rates are for sample purposes only. Your own interest rate with or without
lender credits will vary.

This home
buyer can take a 3% interest rate on a 30-year fixed-rate mortgage, with $9,000
in closing costs (3.6% of the loan amount). Or, they can accept a 3.75%
interest rate with $0 in upfront closing costs.

If the
homeowner keeps the mortgage 5 years or less, lender credits are likely worth
it.

At the end of
year 5, they will have paid $9,000 in ‘extra’ interest due to their higher
rate. But they saved $9,000 upfront. So if they sell or refinance any time before
the end of year 5, the savings from lender credits outweigh the added cost.

This point —
where the upfront savings level out with the long-term cost — is known as the
‘break-even point.’

If this
homeowner stays beyond the break-even point, they end up paying their
lender more in added interest than they saved upfront. So it’s easy to see how
lender credits don’t make as much sense if you plan to keep your loan a long
time.

However, there
are some scenarios where lender credits are worth it even for long-term
borrowers.

Lender credits in a rising interest rate environment

Even if you’ll
spend more in the long run, there are still scenarios where lender credits can
make sense. That’s especially true in a rising rate environment.

For example:

  1. A first-time home buyer wants to buy at today’s low interest rates, but
    only has enough saved for a down payment — not closing costs. This person could
    take a small rate increase, and may still lock in a lower rate than the one
    they’d get if they had to save another year or two and rates rose during that
    time  
  2. A homeowner bought their home a couple years
    ago and has an interest rate 2% higher than today’s rates. They want to
    refinance at today’s low rates but can’t afford closing costs. They could
    likely take a rate above the current market, get their closing costs paid by
    the lender, and still save money every month compared to their old loan

In these
cases, the higher interest rate is relative. Some homeowners can take a rate
increase on their lowest offer and still ‘save’ money overall.

Often, lender
credits are a matter of timing. They allow homeowners and home buyers to lock
during a low-rate environment, even if they don’t have the cash to cover
upfront fees out of pocket.

And remember,
lender credits aren’t all-or-nothing.

You don’t need
to take a big rate increase and get closing costs to $0. You can have the
lender cover part of your closing costs and take only a slight rate increase.

Make sure you
talk to lenders about all your options. And if one lender doesn’t offer the
right combination of rate and fees for you, shop around for another company
that will.

Compare no-closing-cost loans (Feb 25th, 2021)

Lender credits vs. discount points

Lender credits
work the opposite way, too. Instead of paying less upfront and taking a higher
rate, you can pay more upfront and get a lower interest rate.

This strategy
is known as ‘points,’ ‘mortgage points,’ or ‘discount points.’

Whereas lender
credits save you money upfront but increase your long-term cost, discount points cost you more
at closing but can save you a huge amount of money over the life of the loan.
Having a lower interest rate also reduces your mortgage payments.

Take a look at
an example:

  With 1 Discount Point No Points Or Credits  With Lender Credits
Loan Amount $250,000 $250,000 $250,000
Interest Rate* 2.75% 3.0% 3.75%
Upfront Closing Costs $11,500 $9,000 $0
Interest Paid In 5 Years $32,500 $35,500 $44,500
Interest Paid In 30 Years $117,500 $129,500 $166,800

*Interest
rates are for sample purposes only. Your own interest rate with or without points
or credits will vary.

One discount
point typically costs 1 percent of the loan amount and lowers your rate by
about 0.25%.

In this case,
one point costs the borrower an extra $2,500 at closing and lowers their rate
from 3% to 2.75%.

By the end of
year 5, the homeowner has already saved $3,000 in interest compared to the
original rate quote. And the longer they keep their mortgage, the more that
discount point will pay off.

By the end of
year 30, they’ve saved $12,000 compared to the original rate — and nearly
$50,0000 compared to the no-closing-cost mortgage.

This is just
another example of how borrowers can use mortgage pricing to their advantage.

The homeowner
staying long-term can pay for discount points and save themself tens of
thousands of dollars over 30 years. The person buying a starter home or a
fix-and-flip can eliminate their upfront cost and sell before the higher
interest rate starts to matter.

It’s up to you
to decide what makes the most sense based on your home buying or refi goals,
and your personal finances.

Your loan
officer or mortgage broker can help you compare options and choose the right
pricing structure.

Negotiating your interest rate

Both lender
credits and discount points involve negotiating with your mortgage lender for
the deal you want.

You’ll be in a
better position to negotiate low closing costs and a low rate if lenders
want your business. That means presenting yourself as a creditworthy borrower
in as many areas as you can.

Lenders
typically give the best rates to borrowers with a:

Of course, you
don’t need to be perfect in all these areas to qualify for a mortgage. For
instance, FHA loans allow credit scores as low as 580. And if you qualify for a
USDA or VA loan, you can buy with 0% down.

But making
improvements where you can — for instance, by raising your credit score or
paying down debts before applying — can make a big difference in the rate
you’re offered. 

Today’s mortgage rates with lender credits

Today’s rates are still at historic lows. Many
borrowers can get their closing costs paid for and still walk away with a great
deal on their mortgage.

The trick is to compare mortgage loans from a
few different lenders.

If you want a zero-cost mortgage, make sure
you ask specifically for quotes with lender credits so you can find the lowest
rate on the mortgage you want.

Verify your new rate (Feb 25th, 2021)

Compare top lenders

Source: themortgagereports.com

6 First Time Home Buying Mistakes I Made When I Bought My First House

Are you thinking about buying a house? Do you want to avoid common home buying mistakes?

I bought my first house when I was only 20 years old. Even though that was a little over 11 years ago, I have looked back many times and wondered how I did it.first time home buying mistakes

first time home buying mistakes

I made so many first time home buyer mistakes!

Of course, I was young and had a lot to learn. But, I definitely could have done more research to avoid many of the home buying mistakes I made, like not comparing interest rates or understanding the total cost of buying a home.

I’m not alone in how I approached buying a house. There are many people who simply do not understand everything that goes into buying a house, and that’s something that can negatively impact your finances and cause stress. 

Over the years, I have received many emails about buying a house in your early 20s or when you’re young. I also get lots of questions from people who have been renting and are thinking about buying their first home.

I thought it would be interesting to look back on the home buying mistakes I made and explain how to avoid the same mistakes I made. Hopefully you can be a better prepared home buyer than I was!

The mistakes first time home buyers make can cost you money and may even lead to regret. Perhaps you’re wondering why you even bought your home!

One thing you may not know about me is that the first house I ever lived in was actually my own. Growing up, we always lived in small apartments and rented. I wanted to have a home of my own – moving so often as a child was tiring.

Buying a house and being a homeowner was a completely new thing for me.

I had never done yard work, had to deal with house maintenance, home repairs, or anything like that.

I was as new as could be when it comes to living in a house!

It was a buyer’s market when we started searching. It was back in 2009, so the housing market was coming down. This meant that a monthly mortgage payment wasn’t too much more than rent at an apartment.

I felt like I was ready to buy my first house, and I needed a place to live.

So, buying a house seemed like a logical decision.

I made many home buying mistakes, like I said. While I made it through everything, my mistakes could easily have led to major financial trouble.

Read on below to learn more about mistakes home buyers make and my first-time home buyer tips.

Related content on home buying mistakes:

Here were some of my home buying mistakes.

 

first-time home buyer mistakes

This was our first house.

I didn’t prepare.

I was only 20, so I didn’t really understand how things worked, even though I thought I did at the time.

I found an online mortgage lender, and back in 2009, that was kind of a new thing. The company ended up doing a bunch of odd things and made a bunch of paperwork mistakes. It almost seemed scammy because online mortgages were so new at the time.

While my realtor was great and a family friend, she recommended a mortgage loan officer to me, and I just used that person.

The loan officer was great and very friendly.

But, I didn’t compare interest rates at all, I didn’t try to raise my credit score before I started looking at homes, and more.

Instead, I should have been paying attention to my credit score and worked to increase it before I started looking at rates. Then, I should have applied with multiple mortgage lenders and found the best interest rate.

Basically, I didn’t prepare.

Had I spent time increasing my credit score and shopping around for better rates, I could have gotten a better interest rate and saved money on mortgage payments.

While a small percentage difference in interest may not sound like much, it makes a big difference in how much you pay each month and how much you pay over the course of your loan.

For example, here’s the difference in two 30-year mortgages on a $200,000 home (this is before annual taxes being added in to the monthly payment):

  • With an interest rate of 3.25% your monthly payment would be $870, and you would pay $313,349 over the course of your loan.
  • With an interest rate of 4% your monthly payment would be $955, and you would pay $343,739.

That’s a difference of $85 a month, and you will have paid $30,000 more once your mortgage is paid off.

Looking back, I would have done more research on the home buying process and the factors that impact interest rates.

One of the easiest things you can do to avoid this mistake is to start paying attention to your credit score. You can receive free credit reports and credit scores, and I recommend reading Everything You Need To Know About How To Build Credit to learn more.

I avoided adding up all of the costs because it was scary.

Okay, so I knew that having a house could/would be expensive, and luckily we were fine, but wow, are there a lot of costs!

I avoided adding them all up for a while because I knew they would be higher than I thought. Eventually I did, and I was right – adding everything all together was a doozy.

We didn’t start adding up these costs until we were farther along in the buying process, and this is one of the home buying mistakes many people make. 

There are lots of people who only think about their mortgage payment, but there are so many more costs associated with buying a home

Before we purchased a home, we should have gone through all of the typical costs of owning a house and compared it to our housing budget. Comparing your current budget to your new homeowner’s budget will tell you whether or not you can actually afford to buy a home.

Here are some of the homeownership costs you want to consider:

  • Gas/propane.  Many homes run on gas in order to have hot water, to use the stove, and so on.
  • Electricity. Generally, the bigger your home then the higher your electricity bill will be.
  • Sewer. On average, your sewer bill may cost around $30 a month from what I’ve seen.
  • Trash. This isn’t super expensive either, but it’s still a cost to include.
  • Water. Water bills can vary widely. I know many who live in areas where the average water bill is a few hundred each month.
  • Property taxes. Property taxes can vary widely from town to town. You may find yourself looking at two similar houses with similar price tags, but the property taxes may differ by thousands of dollars annually. That is a LOT of money. While it may seem small when compared to the actual home purchase price, remember that you have to pay property taxes annually and a difference of just $3,600 a year is $300 a month for life.
  • Homeowners insurance. Homeowners insurance can be cheap in some areas but crazy expensive in others. Don’t forget to look into the cost of earthquake, flood, and hurricane insurance as well as that can add up quickly depending on where you live – not thinking about these was one of the home buying mistakes I made.
  • Maintenance and repairs. Even if your home is brand new, you may have to pay for repairs, which is something that will come up eventually. No matter how old your home is, repair and maintenance costs will eventually come into play.
  • Homeowners association fees. This can also vary widely. You should always see if the house you are interested in is in an HOA because the fees can be high and there may also be rules you don’t like.
  • Home furnishings. Furnishing your home can be done cheaply, but I know some who buy huge homes but can’t afford to put anything in them, such as a table, a bed, and so on. Why own a $500,000 house if you don’t have any furniture?

 

I probably should have spent less on the actual house.

While the house we bought was less than the amount we were pre-approved for, I definitely think that we could have found a house for even less.

We bought at the top of our budget, and this is one home buying mistake that can really get you in trouble.

Thinking back on it, the amount that we were pre-approved for, as young 20 year olds, was pretty insane. I am very glad that we did not buy a house that was that expensive.

It’s not uncommon to be approved for much more than your budget realistically allows for. Just because the bank approves you for a $350,000 mortgage, for example, does not mean you can afford to buy a house at that price.

We bought at the top of our budget thinking that we would get better jobs eventually. While that worked out in our favor since we were each barely making above minimum wage, it was a decision that could have ended quite badly.

 

We were living paycheck to paycheck and didn’t have an emergency fund.

We were young and didn’t have high paying jobs when we bought our house. In fact, we were barely making more than minimum wage at our jobs.

While we never racked up credit card debt, I did accrue student loans and we were living paycheck to paycheck.

Had one major (or even minor) thing happened with our new house, the only option would have been taking on debt. This is not where you want to be if you have just taken out a big mortgage. 

The best way to avoid this first time home buyer mistake is to set some money aside for emergencies before you buy, and to buy a house that fits in your budget. You want to be able to continue saving while making your new monthly home payments.

 

Make sure your home insurance covers what you need.

While I never had to use my home insurance, there were a few things that it did not cover, and I should have at least thought about them beforehand.

One of the biggest coverage issues was flooding. Flooding is a common problem where we lived in Missouri, yet I didn’t realize until a few years after I had already lived in the house that flooding was not covered unless you signed up for an additional policy.

Now, we weren’t in a floodplain – your lender may require you to buy special flood insurance if you live in a floodplain – but basement flooding was still a fairly common issue where we lived. 

Another special insurance consideration are earthquakes. Many normal home insurance policies do not cover earthquakes.

You can avoid this home buying mistake by researching what is the best kind of insurance policy for where you live. Floods and earthquakes aren’t a problem everywhere, but in some places you may want to have that kind of coverage.

 

Have a larger down payment.

We were 20, and we didn’t have a lot of money saved up before we bought our house.

Therefore, we did not put down a 20% down payment. That might sound like a lot, but 20% is the recommended amount to put down if you want to avoid PMI (private mortgage insurance).

A lender charges PMI because putting less than 20% down makes the loan look like a riskier investment for them. PMI protects lenders from borrowers who default on their loans.

PMI is normally around 0.5% to 1% of the mortgage annually, and it’s added to your monthly payment. If you borrowed a $200,000 mortgage, you would likely pay between $1,000 to $2,000 a year until you paid down enough of your mortgage principal to remove PMI.

We put less than 5% down towards our house purchase, and this led to us having PMI.

I don’t remember exactly how much we paid each month for PMI, but looking back, I could have used that money to pay off my student loans faster, save more, and so on.

While having a larger down payment isn’t one of the home buying mistakes I could have easily changed back then, in general, just saving more money instead of frivolously spending it in the beginning would have been a good decision.

Related content: Can You Remove PMI From Your Mortgage?

 

So, what’s going on with the house now?

As many of you know, we sold our house over 5 years ago. We wanted to travel more, and selling our house made more sense than keeping it.

We actually sold it for quite a loss, as the market was further down than when we bought it.

I’m happy that we bought the house – it taught us a lot, gave us responsibility, and gave us a place to live! And, it taught us how to avoid home buying mistakes in the future.

One of the things I haven’t mentioned is what we paid each for our mortgage. Our monthly payments were just under $1,000. 

Where we lived in the midwest is known for being a low cost of living area. I can’t imagine how we would have bought a house in some other parts of the U.S.

But, the low cost of living meant that buying a house at 20 was more doable.

Is it normal to regret buying a house? Is it normal to have buyers remorse after buying a house?

I don’t know what the statistics are on home buyers remorse, but it does happen. Hopefully with the tips before buying a house above, you can avoid that as much as possible.

Also, being realistic when it comes to what to expect when buying a house can help greatly as well.

What home buying mistakes did you make when you purchased your home?

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Source: makingsenseofcents.com

Mistakes I Made When I Bought My First House At The Age of 20

Are you thinking about buying a house? Do you want to avoid common home buying mistakes?

I bought my first house when I was only 20 years old. Even though that was a little over 11 years ago, I have looked back many times and wondered how I did it.first time home buying mistakes

first time home buying mistakes

I made so many first time home buyer mistakes!

Of course, I was young and had a lot to learn. But, I definitely could have done more research to avoid many of the home buying mistakes I made, like not comparing interest rates or understanding the total cost of buying a home.

I’m not alone in how I approached buying a house. There are many people who simply do not understand everything that goes into buying a house, and that’s something that can negatively impact your finances and cause stress. 

Over the years, I have received many emails about buying a house in your early 20s or when you’re young. I also get lots of questions from people who have been renting and are thinking about buying their first home.

I thought it would be interesting to look back on the home buying mistakes I made and explain how to avoid the same mistakes I made. Hopefully you can be a better prepared home buyer than I was!

The mistakes first time home buyers make can cost you money and may even lead to regret. Perhaps you’re wondering why you even bought your home!

One thing you may not know about me is that the first house I ever lived in was actually my own. Growing up, we always lived in small apartments and rented. I wanted to have a home of my own – moving so often as a child was tiring.

Buying a house and being a homeowner was a completely new thing for me.

I had never done yard work, had to deal with house maintenance, home repairs, or anything like that.

I was as new as could be when it comes to living in a house!

It was a buyer’s market when we started searching. It was back in 2009, so the housing market was coming down. This meant that a monthly mortgage payment wasn’t too much more than rent at an apartment.

I felt like I was ready to buy my first house, and I needed a place to live.

So, buying a house seemed like a logical decision.

I made many home buying mistakes, like I said. While I made it through everything, my mistakes could easily have led to major financial trouble.

Read on below to learn more about mistakes home buyers make and my first-time home buyer tips.

Related content on home buying mistakes:

Here were some of my home buying mistakes.

 

first-time home buyer mistakes

This was our first house.

I didn’t prepare.

I was only 20, so I didn’t really understand how things worked, even though I thought I did at the time.

I found an online mortgage lender, and back in 2009, that was kind of a new thing. The company ended up doing a bunch of odd things and made a bunch of paperwork mistakes. It almost seemed scammy because online mortgages were so new at the time.

While my realtor was great and a family friend, she recommended a mortgage loan officer to me, and I just used that person.

The loan officer was great and very friendly.

But, I didn’t compare interest rates at all, I didn’t try to raise my credit score before I started looking at homes, and more.

Instead, I should have been paying attention to my credit score and worked to increase it before I started looking at rates. Then, I should have applied with multiple mortgage lenders and found the best interest rate.

Basically, I didn’t prepare.

Had I spent time increasing my credit score and shopping around for better rates, I could have gotten a better interest rate and saved money on mortgage payments.

While a small percentage difference in interest may not sound like much, it makes a big difference in how much you pay each month and how much you pay over the course of your loan.

For example, here’s the difference in two 30-year mortgages on a $200,000 home (this is before annual taxes being added in to the monthly payment):

  • With an interest rate of 3.25% your monthly payment would be $870, and you would pay $313,349 over the course of your loan.
  • With an interest rate of 4% your monthly payment would be $955, and you would pay $343,739.

That’s a difference of $85 a month, and you will have paid $30,000 more once your mortgage is paid off.

Looking back, I would have done more research on the home buying process and the factors that impact interest rates.

One of the easiest things you can do to avoid this mistake is to start paying attention to your credit score. You can receive free credit reports and credit scores, and I recommend reading Everything You Need To Know About How To Build Credit to learn more.

I avoided adding up all of the costs because it was scary.

Okay, so I knew that having a house could/would be expensive, and luckily we were fine, but wow, are there a lot of costs!

I avoided adding them all up for a while because I knew they would be higher than I thought. Eventually I did, and I was right – adding everything all together was a doozy.

We didn’t start adding up these costs until we were farther along in the buying process, and this is one of the home buying mistakes many people make. 

There are lots of people who only think about their mortgage payment, but there are so many more costs associated with buying a home

Before we purchased a home, we should have gone through all of the typical costs of owning a house and compared it to our housing budget. Comparing your current budget to your new homeowner’s budget will tell you whether or not you can actually afford to buy a home.

Here are some of the homeownership costs you want to consider:

  • Gas/propane.  Many homes run on gas in order to have hot water, to use the stove, and so on.
  • Electricity. Generally, the bigger your home then the higher your electricity bill will be.
  • Sewer. On average, your sewer bill may cost around $30 a month from what I’ve seen.
  • Trash. This isn’t super expensive either, but it’s still a cost to include.
  • Water. Water bills can vary widely. I know many who live in areas where the average water bill is a few hundred each month.
  • Property taxes. Property taxes can vary widely from town to town. You may find yourself looking at two similar houses with similar price tags, but the property taxes may differ by thousands of dollars annually. That is a LOT of money. While it may seem small when compared to the actual home purchase price, remember that you have to pay property taxes annually and a difference of just $3,600 a year is $300 a month for life.
  • Homeowners insurance. Homeowners insurance can be cheap in some areas but crazy expensive in others. Don’t forget to look into the cost of earthquake, flood, and hurricane insurance as well as that can add up quickly depending on where you live – not thinking about these was one of the home buying mistakes I made.
  • Maintenance and repairs. Even if your home is brand new, you may have to pay for repairs, which is something that will come up eventually. No matter how old your home is, repair and maintenance costs will eventually come into play.
  • Homeowners association fees. This can also vary widely. You should always see if the house you are interested in is in an HOA because the fees can be high and there may also be rules you don’t like.
  • Home furnishings. Furnishing your home can be done cheaply, but I know some who buy huge homes but can’t afford to put anything in them, such as a table, a bed, and so on. Why own a $500,000 house if you don’t have any furniture?

 

I probably should have spent less on the actual house.

While the house we bought was less than the amount we were pre-approved for, I definitely think that we could have found a house for even less.

We bought at the top of our budget, and this is one home buying mistake that can really get you in trouble.

Thinking back on it, the amount that we were pre-approved for, as young 20 year olds, was pretty insane. I am very glad that we did not buy a house that was that expensive.

It’s not uncommon to be approved for much more than your budget realistically allows for. Just because the bank approves you for a $350,000 mortgage, for example, does not mean you can afford to buy a house at that price.

We bought at the top of our budget thinking that we would get better jobs eventually. While that worked out in our favor since we were each barely making above minimum wage, it was a decision that could have ended quite badly.

 

We were living paycheck to paycheck and didn’t have an emergency fund.

We were young and didn’t have high paying jobs when we bought our house. In fact, we were barely making more than minimum wage at our jobs.

While we never racked up credit card debt, I did accrue student loans and we were living paycheck to paycheck.

Had one major (or even minor) thing happened with our new house, the only option would have been taking on debt. This is not where you want to be if you have just taken out a big mortgage. 

The best way to avoid this first time home buyer mistake is to set some money aside for emergencies before you buy, and to buy a house that fits in your budget. You want to be able to continue saving while making your new monthly home payments.

 

Make sure your home insurance covers what you need.

While I never had to use my home insurance, there were a few things that it did not cover, and I should have at least thought about them beforehand.

One of the biggest coverage issues was flooding. Flooding is a common problem where we lived in Missouri, yet I didn’t realize until a few years after I had already lived in the house that flooding was not covered unless you signed up for an additional policy.

Now, we weren’t in a floodplain – your lender may require you to buy special flood insurance if you live in a floodplain – but basement flooding was still a fairly common issue where we lived. 

Another special insurance consideration are earthquakes. Many normal home insurance policies do not cover earthquakes.

You can avoid this home buying mistake by researching what is the best kind of insurance policy for where you live. Floods and earthquakes aren’t a problem everywhere, but in some places you may want to have that kind of coverage.

 

Have a larger down payment.

We were 20, and we didn’t have a lot of money saved up before we bought our house.

Therefore, we did not put down a 20% down payment. That might sound like a lot, but 20% is the recommended amount to put down if you want to avoid PMI (private mortgage insurance).

A lender charges PMI because putting less than 20% down makes the loan look like a riskier investment for them. PMI protects lenders from borrowers who default on their loans.

PMI is normally around 0.5% to 1% of the mortgage annually, and it’s added to your monthly payment. If you borrowed a $200,000 mortgage, you would likely pay between $1,000 to $2,000 a year until you paid down enough of your mortgage principal to remove PMI.

We put less than 5% down towards our house purchase, and this led to us having PMI.

I don’t remember exactly how much we paid each month for PMI, but looking back, I could have used that money to pay off my student loans faster, save more, and so on.

While having a larger down payment isn’t one of the home buying mistakes I could have easily changed back then, in general, just saving more money instead of frivolously spending it in the beginning would have been a good decision.

Related content: Can You Remove PMI From Your Mortgage?

 

So, what’s going on with the house now?

As many of you know, we sold our house over 5 years ago. We wanted to travel more, and selling our house made more sense than keeping it.

We actually sold it for quite a loss, as the market was further down than when we bought it.

I’m happy that we bought the house – it taught us a lot, gave us responsibility, and gave us a place to live! And, it taught us how to avoid home buying mistakes in the future.

One of the things I haven’t mentioned is what we paid each for our mortgage. Our monthly payments were just under $1,000. 

Where we lived in the midwest is known for being a low cost of living area. I can’t imagine how we would have bought a house in some other parts of the U.S.

But, the low cost of living meant that buying a house at 20 was more doable.

Is it normal to regret buying a house? Is it normal to have buyers remorse after buying a house?

I don’t know what the statistics are on home buyers remorse, but it does happen. Hopefully with the tips before buying a house above, you can avoid that as much as possible.

Also, being realistic when it comes to what to expect when buying a house can help greatly as well.

What home buying mistakes did you make when you purchased your home?

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Source: makingsenseofcents.com

Can closing costs change on the closing disclosure?

What to expect on your Closing Disclosure

The Closing Disclosure (CD) is one of the most important loan documents you’ll receive during the mortgage process.

You should read the CD very carefully, as it lists the final terms and closing costs for your home loan.

Many of these numbers will be the same as what you’ve seen before, but some elements on the CD may have changed since you initially applied. Certain closing costs may even increase.

Here’s what you should look out for when you read your CD, and how to know if the numbers you’re seeing are correct.

Verify your mortgage eligibility (Feb 24th, 2021)


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What is a Closing Disclosure?

The Closing Disclosure is a 5-page document your lender or mortgage broker will provide at least three days prior to your closing date.

Also known as a ‘CD,’ the Closing Disclosure is a standard document that all lenders are required to provide all mortgage applicants. It lists the final terms, mortgage rate, and closing costs for your new loan.

The counterpart to the CD is the Loan Estimate (LE), a document you receive after applying which outlines the initial terms and costs of the mortgage you’ve been approved for.

Today’s standard Closing Disclosure replaced the HUD-1 settlement statement as the final document that mortgage borrowers are given before signing closing documents.

What information is on the Closing Disclosure?

As you review the Closing Disclosure, you’ll find important details about your mortgage loan.

Many of the key figures appear on the first page of the disclosure form, including:

  • Loan information — Your loan length, loan product (e.g. conventional or FHA), interest rate type (fixed or adjustable), and loan purpose (purchase or refinance)
  • Loan terms — This is where you’ll find your loan amount, interest rate, principal and interest (P&I) payment, and whether or not the loan comes with a prepayment penalty or balloon payment (most don’t)
  • Projected payments — Here you’ll find a breakdown of your full monthly mortgage payment, which includes principal and interest as well as mortgage insurance, property taxes, homeowners insurance premiums, and (if applicable) HOA dues
  • Costs at closing — Lists your total closing costs as well as ‘cash to close,’ which is the total amount you’ll need to pay on closing day including your down payment

You’ll also find a breakdown of your longer-term loan costs — including the annual percentage rate (APR) and total interest cost — on page 5 of the CD.

Generally, the terms and closing costs listed on your Closing Disclosure should very closely match the ones listed on the Loan Estimate you received after you applied.

In fact, there are some items that cannot change on the CD by law. But some closing costs can increase before closing.

It’s important to understand which items can and can’t change on the CD — and by how much — so you know you’re getting the deal you were promised before you sign off on the mortgage.

Here’s what you should know.

What can change on the Closing Disclosure?

According to TRID — the set of fair lending rules that regulates Loan Estimates and Closing Disclosures — some of the costs for your loan may not increase at closing. Others may change, but only by 10 percent or less. Some other closing costs can increase without limit.

Closing costs that cannot change

Certain fees may not change. These fall into the “zero tolerance” category for any increases whatsoever. Such costs include:

  • Lender fees
  • Appraisal fees
  • Transfer taxes

Lender fees, including origination charges and underwriting fees, make up a big chunk of your closing costs.

These are not allowed to change, so if you see a difference between lender fees on your LE and CD, that should raise a red flag.

Closing costs that can increase 10% or less

Unless there is a “change in circumstances,” some closing costs may be permitted to change as long as the total does not increase by more than 10 percent.

These items include recording fees, and fees for lender-required third-party services you’ve chosen, such as:

  • Title search
  • Lender’s title insurance
  • Survey fee
  • Pest inspection fee

Note, the cost of these items cannot change at all if the service provider is an affiliate of your mortgage lender.

Closing costs that can increase by any amount

Certain closing costs are not controlled by the lender, nor do they go to the lender. They can increase by any amount at any time. These include:

  • Prepaid interest
  • Prepaid property taxes
  • Prepaid homeowners insurance premiums
  • Initial escrow account deposits
  • Real estate-related fees

Can my interest rate change before closing?

Unless your interest rate is locked when you receive your Loan Estimate, it can change before closing.

Your rate can change even if it has been locked, too.

For instance, if your credit score has fallen since applying, or if you don’t end up closing during the specified rate-lock timeframe, your rate can change.

Or, if your mortgage has a ‘float down option,’ you might pay an additional closing cost for the chance to lower your rate if current interest rates fall before closing.

What happens when closing costs change?

Closing costs can change dramatically if your application has a “changed circumstance” — meaning you no longer qualify for, or no longer want, the loan you originally planned on.

If your loan application has changed circumstances, you will likely receive a revised Loan Estimate and later, a revised Closing Disclosure.

A changed circumstance could be for a number of reasons. For example:

  • You or your lender decide on a different loan program
  • You make a different down payment
  • Your home under appraises
  • Your credit score or credit report changes
  • Your income or employment can’t be verified as expected

If closing costs have increased more than the allowed limits and your application has not had a “changed circumstance,” you are entitled to a refund of the amount above the allowable limits.

If a changed circumstance is required, the Closing Disclosure will need to be redone.

This could delay your closing, so you’ll want to contact your lender to make any of the necessary changes immediately.

How to use your Loan Estimate to check the Closing Disclosure

When you started your loan, your lender issued a Loan Estimate.

The Loan Estimate (LE) is another product of the TRID rule. This disclosure replaced what was formerly known as the ‘Good Faith Estimate’ or GFE.

Your Loan Estimate highlights the most important features of the loan and makes it easier to compare different lenders.

The numbers on your LE and CD should be similar, but might not be exactly the same. The Loan Estimate shows what you may pay. The Closing Disclosure shows what you will pay.

To make an accurate comparison between your LE and CD and make sure you’re getting the mortgage you were offered, pay attention to a few key points:

  • Make sure your loan type, loan term, and monthly payment are what you expect
  • Check that your interest rate is the same one you locked in, provided you’re closing within the rate lock period
  • Make sure the closing costs that cannot change on the CD exactly match what’s shown on the LE
  • Make sure the closing costs that can change have only increased within the 10% allowable limit, if applicable (see above)

You should also look closely at the more mundane details on your CD. Even small errors, such as the misspelling of your name or address, can create significant problems later on.

Look at your CD with a close eye and if anything seems amiss, contact your lender immediately to get the issue sorted out.

For a full breakdown of the Closing Disclosure form and tips on how to read each page, see this example from the Consumer Financial Protection Bureau (CFPB).

Why the Closing Disclosure is important

Thanks to TRID, also known as the “Know Before You Owe” rule, all lenders are required to issue a Closing Disclosure three business days prior to closing.

This important disclosure was meant to protect mortgage borrowers by preventing surprises at closing.

When you receive your Closing Disclosure, be sure to read each item on the disclosure. Take note of whether there have been any changes since you received the Loan Estimate.

Do you understand the fees and have any of them changed? Do you have an escrow account and do you understand how it works?

If you’re uncertain, ask your lender to help you go over everything.

You should fully understand the terms and cost of a home loan before signing on — and you should be sure you’re getting the deal you expected.

Verify your new rate (Feb 24th, 2021)

Compare top lenders

Source: themortgagereports.com

How to Calculate Your Debt-to-Income Ratio

Lenders use your DTI ratio to determine how much of a loan you qualify for.

This article shows you how to calculate your DTI ratio and provides tips on how you can lower it to increase the loan amount you can get.

Rate search: Check Today’s Mortgage Rates

What is the Debt-To-Income Ratio?

Your debt-to-income ratio (DTI ratio) is the amount of your income that goes towards your monthly debt obligations. There are two types of DTI ratios lenders look at when determining the loan amount a borrower qualifies for. The back-end and front-end debt-to-income ratio. 

  • Front-end DTI Ratio – The front-end ratio is your debt-to-income ratio looking at just the monthly housing expenses. The principal and interest payments, property taxes, mortgage insurance, and homeowners insurance.
  • Back-end DTI Ratio – Your back-end debt-to-income ratio factors in total monthly debt obligations such as auto loans, credit card payments, and housing costs.

How to Calculate your DTI Ratio?

“total monthly debt payments” divided by “monthly income” = debt-to-income ratio

1. Take your annual income and divide it by 12 to get your monthly income.

2. Add up your reoccurring monthly expenses such as:

  • Minimum monthly payments on credit cards
  • Auto loans
  • Student loans
  • Personal loans

Note: To find your back-end DTI ratio add your monthly mortgage payment

3. Divide your monthly debt obligations by your monthly income to get your DTI ratio

For example: If your yearly income is $60,000 and your total monthly debt payments come to $1,000

$60,000 divided by 12 = $5,000

$1,000 divided by $5,000 = .2

= 20% debt-to-income ratio

Debt-to-Income Ratio Needed for a Mortgage

The maximum debt-to-income ratio lenders require depends on the type of mortgage loan you’re applying for. For a conventional loan, the maximum DTI ratio is 43%. Government home loans such as FHA and USDA loans allow for DTI ratios as high as 50%.

Maximum DTI Ratio by Loan Type

  • Conventional loans – 43%
  • FHA loans – 50%
  • VA loans – 50%
  • USDA loans 50%
  • 203k loans – 45%

How to Reduce Your Debt-to-Income Ratio

If your DTI ratio is too high to get approved for the loan amount you’re looking for, you need to take some steps to lower it. Such as choosing a longer loan term that will lower your monthly payment by stretching out your payments over a longer timeframe.

Ways to Lower Your Debt-to-Income Ratio

  • Get a 40-year fixed-rate mortgage
  • Get a second job
  • Refinance your loans
  • Pay off credit card debt

Source: thelendersnetwork.com

Does Homeowners Insurance Cover Power Outages?

Workers repairing an electrical line during a power outage
Photo by ND700 / Shutterstock.com

Losing electrical power in your home is more than inconvenient and potentially hazardous; it can also lead to serious expenses. Fortunately, some of those are probably covered by your homeowners insurance.

That could be good news to more than 3.5 million Americans who are currently without power due to storms in Texas, Oregon, Kentucky and elsewhere. But whether all of your out-of-pocket costs will be covered depends on the insurer and your policy.

Already, there are reports of homeowners in affected states contacting their insurance company, only to find they aren’t covered in ways they expected or hoped.

Here’s what to expect in coverage for two common financial impacts of a power outage, and some options to make up the difference if you aren’t actually covered. Consider this a rough guide to prepare you; if you’re directly affected, check with your insurance company for the details of your own coverage.

Frozen pipes

Prolonged winter power outages — like the current ones, which have already lasted for days — come with the added risk that water will freeze inside the home’s pipes. That can cause the pipes to crack, and lead to flooding damage and plumbing bills once the heat returns and the water begins to flow again.

It doesn’t take long for such freezing to occur. According to Hope Plumbing in Indianapolis, pipes may freeze if the outside temperature is below 20 degrees for at least six consecutive hours, as it has been during recent days in many of the states with outages.

The process is faster still if you live in a geographical location that usually does not suffer from cold winters, Hope Plumbing writes, since your water pipes are less likely to have much insulation to protect them from extreme temperatures.

Here, homeowners in Texas and elsewhere are probably covered, according to property insurance lawyers VossLaw.

“If your pipes froze because of an unusual cold snap,” causing water damage, your claim will likely be approved,” the company writes. They do, however, add a few caveats. Your claim may be denied, the lawyers warn, if your pipes were in poor condition due to age. “If a pipe burst simply because it was worn out, you may be out of luck.”

Negligence on your part could also be a reason to deny a claim, VossLaw warns, mentioning as an example shutting off the power when leaving your home, causing its interior temperatures to drop.

Less clear is whether a failure to leave water running at a trickle through the pipe in a cold house — a step that reduces the chance of frozen pipes — might be deemed negligent. At any rate, this step is recommended by home experts as a way to mitigate the disruption and inconvenience of pipes freezing.

Ruined food

While food spoiling (or at least thawing) in a warm refrigerator is most associated with power outages in warmer months, it’s possible in any season, especially when outages are prolonged.

Homeowners policies usually cover reimbursement for food losses due to an outage in their standard coverage, according to the Insurance Information Institute — although some companies instead make it an extra-cost add-on to the policy.

However, it’s unlikely that claiming the value of ruined food is worthwhile, especially if it’s the only financial loss you incurred from the power going out.

For starters, many insurers cap the covered loss at $250 or $500, according to Allstate. That figure is likely at or below the deductible for your policy, which means you could collect little or nothing on the claim.

If you suffered other financial setbacks from the outage, such as the cost to replace cracked pipes, a potential claim might exceed your deductible. And if you already made a claim on the policy within the last year, your deductible has likely already been paid regardless.

In any case, talk with your insurers before submitting a claim, especially one that is fairly modest. Insurers keep track of claims, and you’ll need to consider the possible effect of one for a power outage on your future premiums.

You might also want to check with your electricity provider. While most electric companies do not offer their customers reimbursement for food spoilage caused by long-term power outages, according to the Insurance Information Institute, programs are sometimes offered. (For example, Con Edison allowed reimbursements of up to $500 per homeowner for spoiled food after Hurricane Isaias last year.)

It’s unclear if any such programs have yet been launched due to the current outages in the South. For what it’s worth, none were implemented in areas of Louisiana and Texas affected by Hurricane Laura last year, according to the Insurance Information Institute.

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Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.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)


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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

What is mortgage loan modification, and is it a good idea?

Trouble paying your mortgage? You have options

You might be wondering about mortgage loan modification if you’re:

  • Experiencing financial hardship due to the coronavirus
  • Having trouble making your monthly mortgage payments
  • Currently in mortgage forbearance but worried about what will happen when forbearance ends

The good news is, help is available. But mortgage relief options are not one-size-fits-all.

Depending on your circumstances, you might be eligible for a loan modification. Or, you might be able to pursue another avenue like a refinance. Here’s what you should know about your options.

Check your refinance eligibility (Feb 17th, 2021)


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What is loan modification?

Loan modification is when a lender agrees to alter the terms of a homeowner’s mortgage to help them avoid default and keep their house during times of financial hardship.

The goal of a mortgage loan modification is to reduce the borrower’s payments so they can afford their loan month-to-month. This is typically done by lowering the mortgage rate or extending the loan’s repayment term.

“A mortgage loan modification does not replace your existing home loan or your lender,” explains Karen Condor, a finance and insurance expert with Loans.org.

“However, it restructures your loan in the interest of making it more manageable when you experience difficulties in making your mortgage payments.”

How mortgage loan modification works

With a loan modification, the total principal amount you owe won’t change.

“But the lender may agree to a lower interest rate, reduced loan length, or a longer payoff period,” says Elizabeth Whitman, attorney and managing member of Whitman Legal Solutions, LLC.

Any of these strategies could help reduce your monthly mortgage payments and/or the total amount of interest you pay in the long run.

Modification can also include switching from an adjustable-rate mortgage to a fixed-rate mortgage and rolling late fees into your principal, adds Condor.

Note, loan modification is intended to make a mortgage more affordable month-to-month. But it often involves extending the loan term or adding missed payments back into the loan — which may increase the total amount of interest paid.

Refinancing into a new loan, on the other hand, often reduces the monthly payment and the total interest cost.

Loan modification vs. refinance

A refinance is typically the first plan of action for homeowners who need a lower mortgage payment.

Refinancing can replace your original loan with a new one that has a lower interest rate and/or a longer term. This may offer a permanent reduction in mortgage loan payments without negatively affecting your credit.

However, borrowers going through financial hardship might not be able to refinance.

They may have trouble qualifying for the new loan due to a reduced income, lower credit score, or unexpected debts (such as medical expenses).

In these cases, the homeowner might be eligible for a mortgage loan modification.

Loan modification is usually reserved for homeowners who are not eligible to refinance due to a financial hardship.

Mortgage modification is usually reserved for borrowers who do not qualify for a refinance and have exhausted other possible mortgage relief options.

“With a loan modification, you work with your existing bank or lender on modifying the terms of your existing mortgage,” explains David Merritt, a consumer finance litigation attorney with Bernkopf Goodman, LLP.

“If you’ve defaulted on your existing mortgage, chances are your credit has been negatively impacted to the point where a new lender would be wary to give you a new loan.”

“Typically a refinance is not possible in this situation,” says Merritt.

That means there’s no real contest between loan modification vs. refinancing. The right option for you will depend on the status of your current loan, your personal finances, and what your mortgage lender agrees to.

Check your refinance eligibility (Feb 17th, 2021)

Loan modification vs. forbearance

Forbearance is another way servicers can help borrowers during times of financial stress.

Loan forbearance is a temporary plan that pauses mortgage payments while a homeowner gets back on their feet.

For example, many homeowners who lost their jobs or had reduced income were able to request forbearance for up to a year or more during the COVID pandemic.

Unlike forbearance, mortgage loan modification is a permanent plan that changes the rate or terms of a home loan.

Forbearance and loan modification can sometimes be combined to make a more effective mortgage relief plan.

For instance, a homeowner whose income is still reduced at the end of their forbearance period may be approved for a permanent loan modification.

Or, a homeowner approved for mortgage modification may also have part of their unpaid principal forborne (put off) until the end of the repayment period.

Who is eligible for a loan modification?

To qualify for a loan modification, a borrower usually must have missed at least 3 mortgage payments and be in default.

“Sometimes, a borrower who has experienced financial setbacks, which makes a default imminent, can qualify for a loan modification. But not everyone in default under their mortgage is eligible for a loan modification,” explains Whitman.

“Borrowers whose financial setback is so severe that they will never be able to repay their mortgage won’t receive a modification, nor will borrowers who have the ability to make mortgage payments either from their income or savings.”

“Borrowers whose financial setback is so severe that they will never be able to repay their mortgage won’t receive a modification” –Elizabeth Whitman, attorney & managing member, Whitman Legal Solutions, LLC

In addition to providing a hardship letter or statement, prepare to provide proof of income, two years’ worth of tax returns, and bank/financial statements, says Condor.

Be aware, however, that your lender is not obligated to provide a loan modification.

“Once a lender has an executed contract — meaning the loan — they don’t have to change it. Many [homeowners] are denied a mortgage loan modification,” Gallagher explains.

“If the lender desires to modify the terms, per your request, then you have a starting point.”

How to request a loan modification

The process for requesting a loan modification will vary depending on who manages your loan.

The first thing you need to do is contact your loan servicer. This is the company to which you send payments, and the one you need to work with to determine your options for loan modification.

Some mortgages are managed, or “serviced” by the original lender. But most home loans are serviced by a separate company.

For instance, you may have received the loan from Wells Fargo, but now make payments to U.S. Bank.

The loan servicer is the company that takes your monthly mortgage payments; you can find yours by checking the name and contact information on your latest mortgage statement.

Many borrowers begin the process by sending a ‘hardship letter’ to their servicer or lender. A hardship letter is simply a note that describes the borrower’s financial difficulties and explains why they can’t make payments.

The lender will likely request financial information and documentation, including bank statements, pay stubs, and proof of your assets.

These documents will help your lender understand the full scope of your personal finances and determine the correct path for mortgage relief.

Mortgage loan modification programs

Your loan modification options will depend on the type of loan you have and what your lender or loan servicer agrees to.

Conventional loan modification

“Fannie Mae, Freddie Mac, and private lenders of conventional loans have their own modification programs and guidelines,” says Charles Gallagher, a real estate attorney.

In particular, Freddie Mac and Fannie Mae offer Flex Modification programs designed to decrease a qualified borrower’s mortgage payment by about 20%.

Flex Modification typically involves adjusting the interest rate, forbearing a portion of the principal balance, or extending the loan’s term to make monthly payments more affordable for the homeowner.

To be eligible for a Flex Modification program, the homeowner must have:

  • At least 3 monthly payments past due on a primary residence, second home, or investment property
  • Or; less than 3 monthly payments past due but the loan is in “imminent default,” meaning the lender has determined the loan will definitely default without modification. This is only an option for primary residences

Certain hardships can trigger “imminent default” status; for instance, the death of a primary wage earner in the household, or serious illness or disability of the borrower.

Unemployment is typically not an eligible reason for Flex Modification.

Borrowers who are unemployed are more likely to be placed in a temporary forbearance plan — which pauses payments for a set period of time, but does not permanently change the loan’s term or interest rate.

In addition, government-backed FHA, VA, and USDA loans are not eligible for Flex Modification programs.

FHA loan modification

The Federal Housing Administration offers its own loan modification options to make payments more manageable for delinquent borrowers.

Depending on your situation, FHA loan modification options may include:

  • Lowering the interest rate
  • Extending the loan term
  • Rolling unpaid principal, interest, or loan costs back into the loan’s balance
  • Re-amortizing the mortgage to help the borrower make up missed payments

In some cases where extra assistance is needed, FHA borrowers may be eligible for the FHA-Home Affordable Modification Program (FHA-HAMP).

FHA-HAMP allows the lender to defer missed mortgage payments to bring the homeowner’s loan current. It can then request that HUD (FHA’s overseer) further reduce the monthly payment by opening an interest-free subordinate loan of up to 30% of the remaining loan balance. The borrower only pays principal and interest based on 70% of the balance, and can pay back the remainder upon a sale or refinance of the home.

Deferring this extra principal amount can help make it easier for FHA borrowers to get back on track with their loans.

FHA-HAMP is typically combined with one of the loan modification methods above to lower the borrower’s monthly payment.

Eligible FHA borrowers must complete a trial repayment plan to qualify for either loan modification or the FHA-HAMP program. This involves making on-time payments in the modified amount for 3 months straight.

VA loan modification

Veterans and service members with loans backed by the Department of Veterans Affairs can ask their servicer about VA loan modification.

VA loan modification can roll missed payments back into the loan balance, as well as other delinquent homeownership costs like unpaid property taxes and homeowners insurance.

After these costs are added to the loan, the borrower and servicer work together to establish a new repayment schedule that will be manageable for the veteran.

Note, VA modification is unique in that the interest rate might actually increase. So while this plan can help veterans bring their loans current, it won’t always reduce the homeowner’s monthly payments.

“For VA loan modification, several requirements apply,” notes Condor. She explains:

  • “Your VA loan must in default
  • You must have since recovered from the temporary hardship that caused the default
  • You must be able to support the financial obligations of the modified VA loan
  • And you must not have modified your VA loan in the past three years”

Some homeowners with VA loans may qualify for a ‘Streamline Modification.’

Streamline Modification does not require as much documentation as the traditional VA modification plan, but includes two extra requirements:

  • The combined principal and interest payment must drop by at least 10%
  • The borrower must complete a 3-month trial repayment plan to prove they can make the modified payments

Talk to your loan servicer about options for your VA loan.

USDA loan modification

USDA loan modification is for homeowners whose current loans are backed by the U.S. Department of Agriculture.

A USDA loan modification allows missing mortgage payments (including principal, interest, taxes, and insurance) to be rolled back into the loan balance.

USDA modification plans also allow a term extension up to 480 months, or 40 years total, to help reduce the borrower’s payments. And the servicer can lower the borrower’s interest rate, “even below the market rate if necessary,” according to USDA.

Servicers may cover up to 30 percent of the homeowner’s unpaid principal balance using a mortgage recovery advance.

Contact your loan servicer to find out whether you’re eligible for a USDA loan modification.

Is mortgage loan modification a good idea?

A mortgage loan modification is worth pursuing for the right candidates.

“A modification can give you a second bite at the apple and get you out of the default or foreclosure process, allowing you a chance to remain in your home,” says Merritt.

But caveats apply.

“Typically, a modification will take all of your missed payments and add those to the outstanding principal balance,” Merritt says.

Say your current mortgage has an outstanding balance of $300,000. Assume you missed $50,000 in payments. In this example, your modified balance would be $350,000, which is called ‘capitalization.’

“But imagine your home’s value is only $310,000,” adds Merritt. “Here, a modification would allow you to stay in your home and avoid foreclosure, but you would owe more than your house is worth. That would be a problem if, say, two years after modification you wanted to sell your home.”

Refinancing and other alternatives to modification

Loan modification isn’t your only option, thankfully.

Possible alternatives include refinancing, forbearance, a deed-in-lieu of foreclosure, or Chapter 13 bankruptcy.

Refinancing

As mentioned above, you should first check if you’re eligible to lower your interest rate and payment with a mortgage refinance.

You’ll have to qualify for the new mortgage based on your:

  • Credit score and credit report
  • Debt-to-income ratio
  • Loan-to-value ratio (your loan balance versus the home’s value)
  • Income and employment

It may be difficult to qualify for a refinance during times of financial hardship. But before writing this strategy off, check all the loan options available.

For instance, FHA loans have lower credit score requirements and allow higher debt-to-income (DTI) ratios than conventional loans. So it may be easier to refinance into an FHA loan than a conventional one.

Streamline refinancing

Homeowners with FHA, VA, and USDA loans have an additional option in the form of Streamline Refinancing.

A Streamline Refinance typically does not require income or employment verification, or a new home appraisal. Even the credit check might be waived (though the lender will always verify you have been making mortgage payments on time).

These loans are a lot more forgiving for homeowners whose finances have taken a downturn.

Note, Streamline Refinancing is only allowed within the same loan program: FHA-to-FHA, VA-to-VA, or USDA-to-USDA.

Check your Streamline Refi eligibility (Feb 17th, 2021)

Other mortgage relief options

Refinancing typically requires a loan-to-value ratio of 97% or lower, meaning the homeowner has at least 3% equity.

However, “borrowers who have less than 3 percent equity in their homes may qualify for Fannie Mae’s HIRO program,” suggests Whitman.

This ‘High-LTV Refinance Option‘ is intended for homeowners with Fannie Mae-backed loans who owe more on their mortgage than the property is worth.

“Other choices for borrowers with little or no equity in their homes include a consensual foreclosure or a short sale, which involves selling the property for less than the outstanding mortgage amount.”

What should you do?

Whitman continues, “Any borrower who will struggle to repay their mortgage and other debts after a loan modification should consider whether it is better to dispose of their home and find a more affordable housing option.”

To better determine if a refinance or mortgage loan modification is the right strategy for you, consult with your loan servicer, an attorney, or a housing counselor.

Mortgage loan modification FAQ

What happens when you get a loan modification?

The goal of a loan modification is to help a homeowner catch up on missed mortgage payments and avoid foreclosure. If your servicer or lender agrees to a mortgage loan modification, it may result in lowering your monthly payment, extending or shortening your loan’s term, or decreasing the interest rate you pay.

How do I get a mortgage loan modification?

Contact your mortgage servicer or lender immediately to alert them of your financial hardship and ask about loan modification options available. Be ready to provide all documentation requested, which can include financial statements, pay stubs, tax returns, and more.

How long does loan modification last?

Expect your loan modification process to take anywhere from one to three months, according to finance and insurance expert Karen Condor. Once your loan modification has been approved, the changes to your interest rate and/or loan terms are permanent.

Does loan modification hurt your credit?

A mortgage loan modification under certain government programs will not affect your credit. “But other loan modifications may negatively impact your credit and show up on your credit report. However, since your mortgage usually must be in default to request a modification, your financial difficulties are probably already on your credit report,” explains attorney Elizabeth Whitman.

Can you be denied a loan modification?

Yes. A mortgage loan is a contract, and the mortgage lender isn’t obligated to agree to a loan modification. “Borrowers whose financial situation is such that they will never be able to repay their mortgage loan, as well as borrowers who do not cooperate with lender requests, are likely to be denied a modification,” says Whitman.

How much does mortgage modification cost?

While there are no closing costs for a mortgage modification, your lender may charge a processing fee. “If your modification involves extending your loan’s term, that means you’ll pay more interest over the life of your loan,” explains attorney Charles Gallagher.

Do you have to pay back a loan modification?

Paying back a loan modification will depend on the type of modification you are given. “Your lender can apply a reduced interest amount to your loan’s principal on the backend that you must later pay back,” says Condor. “With a principal deferral loan modification, your lender reduces the amount of principal paid off with each payment. But the amount of principal your lender deferred will be due when your loan matures or the home is sold.”

Understand your options

Mortgage loan modification is typically reserved for homeowners who are already delinquent on their loans.

If you’re worried about mortgage payments, get ahead of the issue by checking your eligibility for a refinance or contacting your loan servicer about options before your loan becomes delinquent.

Many homeowners are facing financial hardship right now, and many lenders and loan servicers are willing to help. But help is only available to those who ask for it.

Verify your new rate (Feb 17th, 2021)

Source: themortgagereports.com