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

203k loans for investors: A special use case

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

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

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

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

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


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FHA 203k loan for investment properties

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

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

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

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

Benefits of the FHA 203k loan for investors

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

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

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

Drawbacks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About the FHA 203k rehab loan

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

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

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

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

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

Limited vs. Standard 203k mortgage

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

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

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

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

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

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

FHA loan requirements

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

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

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

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

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

What repairs can you do with a 203k loan?

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

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

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

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

Maximum rehabilitation loan budgets

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

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

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

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

What you can spend your rehab budget on

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

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

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

The Standard 203k is very different.

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

The 203k loan process

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

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

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

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

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

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

Rehab loan alternatives for investment properties

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

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

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

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

But investors have other renovation loans to choose from.

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

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

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

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

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

Explore all your options

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

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

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

Verify your new rate (Feb 23rd, 2021)

Compare top lenders

Source: themortgagereports.com

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

How to apply for a mortgage and get approved: 5 steps to success

How to apply
for a mortgage

Applying for a mortgage is pretty straightforward.

You’ll choose a lender, start the application (typically online), and provide supporting documents like tax returns and bank statements to verify your finances.

After that, it’s mostly a waiting game. Underwriters will check your credit and documentation, then decide whether to approve you. If everything checks out, you’ll set a date to close the loan — usually within 30-40 days.

The most important thing is to apply with more than one lender. You should apply with at least 3-5 mortgage companies to make sure you’re getting the best deal.

Luckily, many lenders now offer
online applications, so the process is much faster and simpler than it used to
be.

Start your mortgage application today (Feb 11th, 2021)


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5 steps to a
successful mortgage application

When you apply for a mortgage,
you’ll be assigned a loan officer to guide you through the application process
and paperwork — so you don’t need to worry about navigating everything on your
own.

As the borrower, your main job is
to set yourself up for success.

You want to provide your mortgage
lender with the strongest application possible in order to widen your loan
options and lower your interest rate.

To apply for a mortgage in the
right way and improve your chances at getting a great deal, you should:

  1. Check your credit report for errors and raise your score if possible 
  2. Apply with multiple lenders to find the lowest rate and fees
  3. Get pre-approved for a mortgage before making an offer on a house
  4. Avoid late rent payments; these can affect your mortgage eligibility
  5. Avoid financing expensive items before closing, which can reduce your home buying budget 

Here’s what you need to know at each stage of the process.

Check your mortgage eligibility (Feb 11th, 2021)

1. Check your credit before you apply for a mortgage

If you’re waiting until you apply
for a mortgage to check your credit, you’re waiting too long.

That’s because mortgage interest rates
— and mortgage qualification — depend on your credit. And the stakes are pretty
high.

If you check your credit when you apply and
find out it’s lower than you thought, you’ll likely end up with a higher interest
rate and more expensive monthly payment than you were hoping for.

If you find out your credit score
is really low — below 580 — you might not qualify for a
mortgage at all. You’ll likely be out of the home buying game for another year
or more as you work to boost your score back up.

Small changes can make a big difference

Keep in mind, a higher credit score usually means
a lower mortgage rate. So if you check your score and learn that it’s strong,
you might still want to work on improving it before you buy.

Consider that mortgage rates are based on credit “tiers.” A higher credit tier means a cheaper mortgage.

If your credit score is currently 719, for example, raising it just one point could put you in a higher tier and earn you a lower rate.

Check your credit early

Ideally, you should start checking
your credit early. It can easily take 12 months or more to reverse serious
credit issues — so the sooner you get started, the better.

You’re legally entitled to free
copies of your credit reports each year through 
annualcreditreport.com. These
reports are vitally important because they’re the source documents on which
your credit score is calculated.

Yet one study found that as many
in one in five
reports contain errors that are serious enough to affect a consumer’s
creditworthiness.

So you need to crawl yours, making
sure they’re 100% accurate. The Consumer Financial Protection
Bureau has useful advice for disputing errors.

Raise your credit score before you apply if possible

If your reports are accurate but
your score is lower than it could be, work on it. There are three things you
can do immediately to become a better qualified borrower:

  1. Keep paying every single bill on time
  2. Reduce your credit card balances — If they’re above 30% of your credit limits, you’re actively hurting your score. The lower the better
  3. Don’t open or close credit accounts — Wait until after closing

Those three action points should
help your score over time. You can also read our Guide to improving your credit score.

Check your mortgage eligibility (Feb 11th, 2021)

2. Apply for a mortgage with multiple lenders

It’s a huge mistake to accept the
first mortgage quote you get.

Many first-time home buyers don’t
know it, but mortgage rates aren’t set in stone. Lenders actually have a lot of
flexibility with the interest rate and fees they offer.

That means a lender you’re looking
at might be able to offer a lower rate than the one it’s
showing you.

In order to get those lower rates, you have to shop around and get a few different quotes. If you get a lower rate quote from one lender, you can use it as a bargaining chip to talk other lenders down.

Shopping around for mortgage rates
also lets you know whether you’re getting a good deal.

For example, a 3.5% rate
and $3,000 in fees might sound all right if it’s the first quote you’ve gotten.
But another lender might be able to offer you 3.0% and
$2,500 in fees.

That makes the first offer a lot
less appealing — but you won’t know it until you look around.

Get at least three mortgaeg quotes

Compare personalized rate quotes from at least three lenders (but more’s fine) to make sure you’re getting the best deal. A mortgage broker could help you compare multiple quotes at once.

And make sure you’re comparing apples-to-apples quotes. Things like discount points can make one offer look artificially more appealing than another if you’re not watching out.

Different down payment amounts, loan terms, loan amounts, and
mortgage loan types will skew loan estimates, too.

For example, an FHA loan would require mortgage insurance
which will increase borrowing costs. A conventional loan with a 20% down
payment lets you skip the mortgage insurance.

Make sure all your mortgage quotes include the same loan type
and terms so you know you’re comparing rates on even footing.

3. Get pre-approved before you make an offer on a home

Many first-time home buyers make the mistake of applying for a
mortgage too late, and not getting pre-approved before they begin house hunting.

How late is too late to start the pre-approval process? If you’re already seriously looking at homes, you’ve waited too long.

You really don’t know what you can
afford until you’ve been officially pre-approved by a mortgage lender. They’ll
look at your full financial portfolio —bank statements, tax returns, pay
stubs, credit reports — and determine your exact home
buying budget.

Even if you think you know what
you can afford, you might be surprised.

Existing debts can reduce your
home buying power by a startling amount. And you can’t be sure how things like
credit will affect your budget until a lender tells you.

By not getting pre-approved for a
mortgage before you start shopping, you run the risk of falling in love with a
house only to find out you can’t afford it.

A
pre-approval letter gives you leverage

Worse, you might find yourself
negotiating for your perfect home and being ignored. Imagine you’re a home
seller (or a seller’s real estate agent) and you get an unsupported offer from
a total stranger.

For all you know, the prospective
buyer stands zero chance of getting the financing they need.

If the seller gets another offer
from someone who has a pre-approval letter on hand, they’re
bound to take that offer more seriously. They might
even accept a lower price from the buyer they know
can proceed.

So getting pre-approved gives you
credibility and leverage in negotiations. And those are two things every
homebuyer needs.

Start your mortgage pre-approval (Feb 11th, 2021)

4. Don’t be late on rent payments

Being late on rent is a bigger
deal than you might think — and not just because it’ll land you with a late fee
from your landlord.

Late rent payments can actually
bar you from getting a mortgage.

Your rent history is the biggest
indicator of whether you’ll make mortgage payments on time. Late or missed rent
checks can prevent you from buying a home.

It makes sense when you think
about it. Rent is a large sum of money you pay each month for housing. So is a
mortgage loan. If you
have a spotty history with rent checks, why should a lender believe you’ll make
your mortgage payments on time?

When you apply for a mortgage, the
lender will check your rent history over the past year or two.

If you’ve been late on payments,
or worse, missed them, there’s a chance you’ll be written off as a risky
investment. After all, foreclosure is an expensive hassle for lenders as well as
for homeowners.

Rent is especially important for
people without an extensive credit history.

If you haven’t been responsible
for things like credit cards, loans, or
car payments, rent will be the biggest indicator of your creditworthiness.

5. Don’t take on any new debts  

You may have heard that you
shouldn’t finance an expensive item while applying for a mortgage.

But most people don’t know it’s a
mistake to buy something with big payments even years before applying for a new
loan.

That’s because mortgage underwriters look at your “debt-to-income ratio” (DTI ) — meaning the amount you pay in monthly debts compared to your total income.

The more you owe each month for
items like car payments and loans, the less you have left over each month for
mortgage payments. This can seriously limit the size of the mortgage you’re
able to qualify for.

For example, take a scenario with
two different buyers — they earn equal income, but one has a large car payment
and the other doesn’t.

  Buyer 1 Buyer 2
Income $75,000 $75,000
Existing debt $100/month $100/month
Car payment $500/month $0
Qualified mortgage amount $300,000 $390,000

In this scenario, both buyers
qualify for a 36% debt-to-income ratio. But for Buyer 1, much of that monthly
allowance is taken up by a $500 monthly car payment.

As a result, Buyer 1 has less
wiggle room for a mortgage payment and ends up qualifying for a home loan worth
almost $100,000 less.

That’s a big deal:
$100,000 can be the difference between buying a house you really want
(something nice, updated, in a great location) and having to settle for a
just-okay house — maybe one that needs some work or isn’t in the location you
wanted.

So if home buying is in your
future, examine your priorities. Consider a car with inexpensive payments or
one you can pay off quickly.

And try to avoid making other
big-ticket purchases that could compromise your home buying power.

Keep credit card balances low, too

If you’ve already taken out a big loan, there’s not a lot you
can do about it now. But you can still look out for
shorter-term credit purchases. Try to avoid financing or refinancing
anything before closing, if you can.

Of course, it’s tempting. You’re
going to need a ton of stuff for your new home — and you might want to start
stocking up on furniture, decorations, etc.

But loan officers nowadays
routinely pull your credit score in the days leading up to closing. And any new
account you open or any significant purchase you make on your plastic could
drag that score down enough to re-open your mortgage offer.

It may only be enough to increase
your mortgage rate a little. But in extreme circumstances, it could see your
whole approval pulled and your journey to homeownership stalled.

So avoid making those purchases until after you close. If it helps, imagine the shopping spree you can go on the moment you become a homeowner.

Find a low
mortgage rate and save

If you plan to buy a house any
time soon, now is the time to start thinking about the
mortgage application process.

Take a look at your credit, get
your debts in check, and start shopping around for rates.

Try to see your financial life the way a lender’s underwriter
sees it before starting your loan application.

Remember, the most important thing you can do before house hunting is to get pre-approved and determine your budget at today’s rates.

Verify your new rate (Feb 11th, 2021)

Compare top lenders

Source: themortgagereports.com

What is amortization? How a mortgage amortization schedule works

What is mortgage loan amortization?

“Mortgage loan amortization” is the process of paying a home loan down to $0. 

A mortgage — or any other type of loan — is “amortized” if it’s paid in regular installments and will be fully paid off after a set period of time. 

Your mortgage amortization schedule determines when your home will be paid off and how quickly you build home equity. It also comes into play if you want to pay off the loan early. So it’s important to understand how your amortization schedule works. 

Check your mortgage loan options (Feb 3rd, 2021)


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How mortgage amortization works

If the amount you borrow for a mortgage loan is scheduled to be repaid in installments, your loan is amortized.

“Loan amortization is the process of calculating the loan payments that amortize — meaning pay off — the loan amount,” explains Robert Johnson, professor of finance at Heider College of Business, Creighton University.

“On a fully amortizing loan, the loan payments are determined such that, after the last payment is made, there is no loan balance outstanding.”

Amortization also determines what portion of your monthly loan payment goes toward principal or interest.

At the beginning of your amortization schedule, a larger percentage of each monthly payment goes toward loan interest; at the end, you’re paying more toward principal. 

Note: this affects only the breakdown of your payments. If you have a fixed-rate mortgage, the total payment amount will always stay the same.

This background math might not seem like it matters, especially since most mortgages have fixed payments.

But actually, the payment breakdown is very important because it determines how quickly you build home equity — which in turn affects your ability to withdraw equity, refinance, or pay off your home early.

Are all mortgage loans amortized? 

Almost all mortgages are fully amortized — meaning the loan balance reaches $0 at the end of the loan term. 

The exceptions are uncommon loan types, like balloon mortgages (which require a large payment at the end) or interest-only mortgages.

Most lenders don’t offer these — and most home buyers don’t want them — because these loans are riskier and don’t help the borrower build equity as quickly. 

With an amortized loan, your mortgage is guaranteed to be paid off by the end of the term as long as you make all your payments over the full life of the loan. 

How amortization affects your loan payments

Your amortization schedule doesn’t just determine when your mortgage will be paid off. It also determines how each monthly mortgage payment is divided between interest and loan principal. 

“Even though the loan payment every month will likely remain the same total amount, the proportion of interest and principal will differ with each subsequent payment,” explains Johnson.

“In the first payment you make on an amortizing loan — month one — you’ll pay the largest percentage devoted to interest and the smallest percentage devoted to principal.

“Conversely, in the last payment you make — month 360 on a 30-year mortgage loan — the largest percentage of your payment will go toward principal, and the smallest percentage will be devoted to interest,” Johnson notes.

The longer the term of your loan, the longer it takes to pay down your principal amount borrowed, and the more you will pay in total toward interest.

That’s why a shorter-term loan, like a 15-year fixed-rate mortgage, has a lower total interest cost than a 30-year mortgage.

Check your mortgage loan options (Feb 3rd, 2021)

Amortization schedule example

Here’s an example of how an amortization schedule would look for the following loan:

  • Loan amount: $250,000
  • Loan term: 30 years
  • Fixed interest rate: 3.5%
  • Fixed monthly P&I payment: $1,123

Mortgage amortization table

Each payment is the same total amount ($1,123). But note how more than half the payment goes toward interest in the first year, while only $3 goes to interest at the end of year 30.

Year  Principal Payment Interest Payment Principal Remaining Interest Paid
1 (Payment 1) $393 $729 $249,607 $729
5 (Payment 60) $467 $655 $224,243 $41,599
10 (Payment 120) $556 $566 $193,567 $78,281
15 (Payment 180) $663 $460 $157,035 $109,105
20 (Payment 240) $789 $333 $113,527 $132,953
25 (Payment 300) $940 $183 $61,711 $148,494
30 (Payment 360) $1,121 $3 $0 $154,144

Mortgage amortization chart

As you can see on the chart below, it’s not until year 19 that the amount of principal the homeowner has paid surpasses the amount of interest.

Examples generated using The Mortgage Reports mortgage calculator

Amortization affects only principal and interest

Note that your amortization schedule affects only the principal and interest (P&I) portion of your mortgage payment.

Regular payments include other homeownership costs, too; like homeowners insurance, property taxes, and if necessary, private mortgage insurance and/or homeowners association (HOA) dues.

Payments for these other expenses will not be affected by your amortization schedule. Although, they may be subject to change throughout the loan term — for instance, if your property tax rates or homeowners insurance premiums change.

Why your amortization schedule matters

“Amortization matters because the quicker you can amortize your loan, the faster you will build equity and the more money you can save over the life of your loan,” says real estate investor and flipper Luke Smith.

Look closely at your amortization schedule, and you’ll likely find that your loan will amortize a lot more slowly than you think.

“Many borrowers have a hard time grasping just how little of their monthly payment early on in the life of their loan goes toward repaying principal, and how much of the monthly payment late in the life of their loan is devoted toward repaying principal,” says Johnson.

Homeowners might not pay attention to their amortization schedule, because their total payment does not change.

But if you want to tap home equity or pay off your loan sooner, those principal-versus-interest numbers start to matter.

Building home equity

At the end of a fully-amortizing mortgage loan, you’ll own your home outright. Its value will be 100% equity.

But because of the way mortgage loans amortize, that equity is built up slowly.

For example, you can’t assume that completing half the loan term means you’ll own half the home.

Consider the example above. Although the full loan term is 30 years, it will take the homeowner 19 years — nearly two thirds of the term — to pay off half their loan principal.

If you took out the same loan amount ($250,000) with a 15-year term instead of a 30-year term, you will have paid off half the loan’s principal in year 9.

So a shorter repayment schedule doesn’t just help you save money on interest — it also helps you build tappable home equity more quickly.

Remember, you need more than 20% equity to draw on your home’s value via a cash-out refinance or home equity loan. Your amortization schedule will help you understand when you can reach the magic number to become eligible for home equity financing.

Paying off your mortgage

Some homeowners decide to pay off their mortgage early as a way to save on interest payments.

One way to do this is by refinancing into a shorter loan term, like a 10-, 15-, or 20-year mortgage.

But for homeowners who don’t want the hassle and cost of refinancing, an alternative is to make extra or “accelerated” payments toward the loan principal. Early payments can be in the form of:

  • One extra payment each year
  • Extra money added to each monthly payment
  • A one-time, lump sum payment

Early payments toward your loan’s principal balance can help shorten your amortization schedule. You’ll save money because you won’t have to pay interest on the months or years eliminated from your loan term.

You can use an amortization calculator with extra payments to determine how quickly you might be able to pay off your remaining balance, and how much interest you’d save.

Should you pick a long or short amortization schedule?

Before deciding on a mortgage loan, it’s smart to crunch the numbers and determine if you’re better off with a long or short amortization schedule.

The most common mortgage term is 30 years. But most lenders also offer 15-year home loans, and some even offer 10 or 20 years.

So how do you know if a 10-, 15-, or 20-year amortization schedule is right for you?

Benefits of a short-term loan

The obvious benefit of a shorter amortization schedule is that you’ll save a lot of money on interest.

For example, consider a $250,000 mortgage at a 3.5% interest rate:

  • A 30-year fixed loan would cost you $154,000 in total interest
  • A 15-year loan would cost you only $46,000 in total interest

“Short amortization schedules tend to be a sound financial decision if you are buying a starter home and want to build equity more quickly,” says Nishank Khanna, chief financial officer for Clarify Capital. “It means you’ll be paying more toward the principal upfront.”

Khanna continues, “Borrowers who make a large down payment or plan to make accelerated payments, or those who secure loans with low annual percentage rates can shorten their amortization schedule — thereby paying less money over the life of their loan and accruing home equity much faster.”

However, a shorter amortization schedule isn’t for everyone.

Drawbacks of a short-term loan

The biggest drawback to shortening your loan term is that monthly payments will be much higher.

Using the same example of a $250,000 loan at 3.5% interest:

  • Monthly P&I payments on a 30-year loan are $1,200
  • Monthly P&I payments on a 15-year loan are $1,600

The steep increase means many homeowners simply can’t afford a short-term mortgage.

In addition, choosing a shorter-term loan locks in your higher monthly payments — you’re obligated to pay the full amount each month.

With a longer-term loan, on the other hand, you can pay more to accelerate your amortization schedule if you wish. But you’re not committed to a higher monthly payment.

Check your mortgage options (Feb 3rd, 2021)

Can you change your amortization schedule? 

The good news is that even if you opt for a longer repayment schedule — such as a 30-year fixed-rate mortgage — you can shorten your amortization and pay off your debt more quickly by either:

  1. Refinancing to a shorter-term loan; or
  2. Making accelerated mortgage payments

Smith recommends making extra principal payments over choosing a 15-year loan.

“Get the most favorable rate and terms for yourself. Then, if more funds are available in your budget, pay your loan down more quickly than scheduled,” he says.

Smith explains you can “treat your mortgage like a 15-year mortgage rather than a 30-year loan by making accelerated payments, which most mortgage loans and lenders allow you to do without fees or penalties.

“This way, if a financial challenge occurs and you need the funds, you can temporarily or permanently stop making accelerated payments without any problems or repercussions.”

Should you shorten your amortization schedule?

“When interest rates are low and the majority of your payments are going toward principal, there may not be a strong case for paying off a mortgage more quickly,” Khanna suggests.

“If you think you can earn a higher return on your money through other investments like the stock market, avoid a shorter-term amortization schedule.

“Also consider that, when you pay off your mortgage earlier, you will lose out on tax breaks you may qualify for, such as the mortgage interest tax deduction, which can negate savings.”

Mortgage amortization: A personal decision

The decision between a short- or long-term loan should depend on your personal finances.

If you have a lot of monthly cash flow, and you want to save on interest, choosing a 15-year loan or shortening your amortization schedule with extra payments could be a smart strategy.

If you have a tighter budget — or you want to invest your money elsewhere — the traditional 30-year amortizing mortgage makes a lot of sense.

Compare all your loan options before buying a home or refinancing. And make sure you understand how amortization will affect your monthly payments, as well as your home equity options further down the line.

Verify your new rate (Feb 3rd, 2021)

Compare top lenders

Source: themortgagereports.com

Where to find bank statement loans for self-employed mortgage borrowers

Bank statement loans are harder to find

The home loan process looks a little different when you have self-employed income.

Self-employed borrowers sometimes have to consider bank statement loans, which let you qualify based on bank statements rather than tax returns.

This is a great way to get approved for a loan if you don’t have traditionally-documentable income. But not all lenders offer bank statement mortgages — and it can be harder to find a low mortgage rate.

There are still good deals to be had for self-employed mortgage borrowers. You just might need to search a little harder to find them.

Find a bank statement loan (Feb 1st, 2021)


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How to find bank statement loans

Not all lenders offer bank statement loans. So your options might be narrower than someone applying for a ‘traditional’ mortgage or refinance.

Below we list a few mortgage lenders that explicitly offer bank statement loans.

However, you shouldn’t limit your search to these companies.

A lender might be perfectly happy to approve loan applications based on bank statements — even if it doesn’t advertise ‘bank statement loans’ or ‘non-QM loans’ on its website.

So if there’s a mortgage lender you’re interested in, it’s worth reaching out to ask about its lending requirements.

You’re likely to have more luck with a non-bank mortgage lender or a credit union. Big-name banks are typically less keen to offer non-QM products.

The wider you cast your net, the more options you’ll have for comparing loan terms and interest rates.

Just because you’re self-employed, doesn’t mean you can’t shop around and find a great mortgage deal like everyone else.

Find a low-rate bank statement loan (Feb 1st, 2021)

A few bank statement loan lenders

If you’re already eyeing some mortgage lenders, ask whether they can approve you based on your bank statements. As we said, not all lenders advertise the fact that this is an option.

If you’re not sure where to start looking, we’ve compiled a list of lenders that do explicitly state they’ll approve bank statement loans.

As always, you should compare at least 3-5 loan offers to make sure you’re getting the best terms and lowest mortgage interest rate available to you.

Each self-employed mortgage lender is listed next to its Better Business Bureau (BBB) rating, which run from F to A+.

  • A & D Mortgage — A+
  • Athas Capital Group — A+
  • First National Bank of America — A+
  • Griffin Funding — A+
  • HomeLife Mortgage — A+
  • Luxury Mortgage — A+
  • New American Funding — A+
  • NewRez — A+
  • North American Savings Bank — A+
  • NorthStar Funding — A+
  • NP, Inc — A+
  • Paramount Residential Mortgage Group (PRMG) — A+
  • Caliber Home Loans* — A
  • Fidelity Home Group — A
  • Mortgage Equity Partners — A
  • AmeriSave — B+
  • Sprout mortgage — B

*Caliber Home Loans doesn’t include bank statement loans in its official portfolio. But at least one of its loan officers says they can originate them

If none of those is able to help you, cast your net wider. There are plenty of other lenders of bank statement loans that didn’t make our list.

Do your due diligence as a mortgage shopper

Understand that this is not a list of the ‘best’ mortgage lenders. Rather, it’s a list of lenders that definitely do bank statement loans — a place to get started.

It’s up to you to check out the companies that make your shortlist.

Run internet searches for regulator actions and customer reviews to get a pulse on how reputable a lender is.

Federal regulator the Consumer Financial Protection Bureau also maintains a consumer complaint database that you can search by company name to see if any official complaints have been filed.

Note, most companies have at least a few complaints, so this shouldn’t be a deal-breaker. But look at the reasons for the complaints to see if there are serious red flags.

Remember, you can always walk away

Bank statement loans are a type of ‘non-qualified’ or ‘non-QM’ mortgage.

‘Non-QM’ means a loan doesn’t meet the ‘qualified mortgage’ standards for most conventional loans. Since bank statement loans do not use traditional income verification, they fall into this category.

Non-qualified mortgages are less regulated than most other mortgage loan programs. So you won’t get some of the consumer protections that apply to other loan types. 

That means you need to make sure the lender you choose is reputable and that you fully understand the mortgage agreement you sign.

If you’re in any doubt over any issue, keep looking or seek professional advice.

Remember, a home loan agreement is not binding until you sign the final closing papers. So if anything seems amiss at any point in the mortgage process, you can always walk away.

What is a bank statement loan?

Roughly 44 million Americans are self-employed, including freelancers and contract workers, according to a 2020 Gallup report.

So it’s no surprise that there special mortgage programs to help self-employed people buy a home or refinance their current home.

Bank statement loans are a popular option. These don’t require W2s or previous years’ tax returns.

Instead, underwriters verify your monthly income by looking at deposits on your recent bank statements.

You’ll typically need to provide the past 12-24 months’ bank statements, along with other supporting documentation.

Pros and cons of bank statement loans

Many business owners, contract workers, and others in the gig economy minimize their tax liabilities by maximizing their deductibles for business expenses.

These write-offs can make their income look much smaller than it really is.

Some self-employed mortgage borrowers use bank statement loans to get around this obstacle, by counting most or all their income while ignoring expenses.

Bank statement loans come in several flavors. We found self-employed mortgage lenders offering:

  • 30-year fixed-rate mortgages
  • 5/1 adjustable-rate mortgages (ARMs)
  • 7/1 and 10/1 ARMs
  • Jumbo loans with loan limits in the millions

As an added benefit, many bank statement loans require no mortgage insurance.

Since non-QM loans can’t be sold to Fannie Mae or Freddie Mac, lenders aren’t required to charge the (borrower-paid) private mortgage insurance that so many home buyers try to avoid.

Disadvantages of bank statement loans

Non-QM loans aren’t regulated like other mortgage programs. That means each lender sets its own criteria or “underwriting standards” for approving these loans.

And, interest rates are typically higher on these mortgages. So you should expect to have to shop around even more than usual for a good deal.

Don’t be put off if you’re turned down by one or more lenders. Keep looking, and you may well find one that’s eager to help you.

Some experts recommend that you find at least five self-employed mortgage lenders for your shortlist and then compare their offers side by side.

Do you need a bank statement mortgage?

As a self-employed borrower, you’re not required to use a bank statement mortgage.

You have the option to apply for mainstream loan programs just like everyone else, including conventional, FHA, VA, and USDA loans.

These major loan programs can be easier to qualify for and typically offer lower rates than non-QM mortgages.

However, you’ll have to verify income using your tax returns rather than your bank statements. This could reduce your “qualifying” income since you have to use your after-expenses income for the year.

Many self-employed people write off most of their income in expenses. A great strategy for paying less taxes, but not for getting a mortgage.

For example

  • $100,000 gross income
  • $60,000 in claimed expenses on tax returns
  • $40,000 taxable income and the only portion usable for mortgage qualifying

Write-offs can put a huge dent in your income as a lender sees it. But if you can qualify using the lower amount, you’ll get a better deal on your mortgage through a traditional program.

Think about your home buying or refinancing goals: Do you want the lowest rate? The biggest loan amount? The cheapest monthly payment?

Knowing your goals will help you compare options and find the best loan program for you.

Check your mortgage loan options (Feb 1st, 2021)

Bank statement mortgage requirements

Because these are non-qualified mortgages, every lender gets to make up its own rules. And sometimes a lender will tailor the rules it applies to the applicant.

For example, a lender may normally ask for only 12 months of bank statements. But, if you’re borderline in some way (perhaps you have a low credit score), it may ask you for statements going back 24 months. Others want two years of bank statements for all applications.

The following common requirements are just a rough guide of what you might need to qualify as a self-employed mortgage borrower:

  • Bank statements — Typically for the past 12 or 24 months
  • A worthwhile down payment — Often 10% of the purchase price or more
  • Cash reserves — Enough savings or quickly accessible assets to cover several months of mortgage payments. Expect to have to document these
  • A decent credit score and clean credit report — Some lenders will approve FICO scores as low as 580. But you’ll likely need a score of 620 or higher. And remember, the higher your credit score is, the lower your rate will likely be
  • A debt-to-income ratio (DTI) below 55% — Many non-QM mortgage lenders have more lenient DTI requirements than those doing conforming loans
  • A profit & loss statement (P&L) — Typically for your business’s last 12 months of trading, prepared by your licensed tax professional. Most often required if you mix your personal and professional finances
  • A business license — Only if one is required in your line of work

You will also need a letter from your accountant or licensed tax professional that confirms that you file your taxes in an appropriate self-employed category. He or she may also have to confirm that your expense deductibles are in order.

Don’t be put off if you’re worried you’ll fall short on one or two of these. Some lenders are more flexible than others.

Bank statement loan rates

Bank statement loan rates are higher than traditional mortgage rates, since non-QM loans are considered a bigger risk.

For entrepreneurs and many in the gig economy (the ones most likely to choose bank statement loans), financial life can be precarious.

So lenders have to expect more loans to go bad. And the only way they can cover that additional risk is to charge higher interest rates.

Every lender assesses risk in its own way. So it’s hard to come up with a helpful average for how much higher bank statement rates really are.

But when we sampled a few bank statement loans on the day this was written, we found a number quoting rates of around 4.5% for a 30-year fixed-rate mortgage (FRM).

Compare that with an average rate of 2.8% for mainstream 30-year FRMs on that same day. Bank statement mortgage rates were nearly 2% higher.

That’s not to say you can’t find a good deal. But it should underscore the importance of shopping around for your best offer.

You might see a wide variety in the rates you’re offered, and you want to be sure you’re getting the most affordable loan you can.

How to choose the best mortgage lender for you

Mortgage pros and financial advisers are forever urging mortgage seekers to comparison shop for their loans. And they’re right.

Borrowers can easily save thousands or tens-of-thousands of dollars over the lifetimes of their loans, simply by investing a few hours in getting and comparing quotes from several lenders.

These quotes come in the form of “Loan Estimates.” And they’re all in the same format. So they’re very easy to compare side by side.

You’re obviously looking for a low mortgage rate. But don’t forget to also compare the following information, which will be on every quote:

  1. Annual percentage rate (APR) — This is a better guide to the actual cost of a loan than a raw mortgage rate. It includes the total loan cost spread over the life of your mortgage
  2. Estimated closing costs — How much you’ll pay in loan costs
  3. Estimated cash to close — The amount you’ll need on closing day: closing costs plus down payment and any other liabilities
  4. The total amount you’ll have paid after five years — A good way to compare the intial cost of two different loans
  5. The amount by which you’ll have reduced your debt (the “principal” you’ll have paid off) after five years — A key indicator of value for money

This is vital stuff. And it’s your opportunity to select the loan that suits you best.

Remember, you’re likely to see a wider range of loan types, loan terms, and interest rates from bank statement mortgage lenders. So it’s really in your own interest to spend some time shopping around.

Verify your new rate (Feb 1st, 2021)

Source: themortgagereports.com

Getting a mortgage without your spouse: What are the benefits and drawbacks?

Do you have to apply for a mortgage with your spouse?

Married couples buying a house — or refinancing their current home —
do not have to include both spouses on the mortgage.

In fact, sometimes having both spouses on a home loan application causes mortgage problems. For example, one spouse’s low credit score could make it harder to qualify or raise your interest rate. 

In those cases, it’s better to leave one spouse off the home loan.

Luckily, there are a wide range of mortgage programs including low- and no-down payment loans that make it easier for single applicants to buy a home. And today’s low rates make buying more affordable.

Verify your mortgage eligibility (Jan 23rd, 2021)


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Benefits of having one spouse on the mortgage

There a several reasons a
married couple might want to purchase a home in one spouse’s name only:
to protect the buyer’s interests, to plan their estate, to save money, or to
qualify for a mortgage.

Avoid credit issues on
your mortgage application

Serious mortgage problems can arise when one person
on a joint application has poor or damaged credit.

That’s because mortgage lenders pull a “merged” credit report with history and scores for each applicant, and they use the lowest of two scores or the middle of three scores to evaluate applications. The score they use is called the “representative” credit score.

Unfortunately with two applicants, lenders don’t
average out the representative scores. They discard the better applicant’s FICO
score completely and make an offer based on the lower one.

This could easily result is a
higher interest rate. Or, if your spouse’s credit score is low enough, you might
have trouble qualifying for a loan at all.

Credit scores below 580 will get
denied by most lenders. If one spouse has a score that low, the other should
think about going it alone.

Save money on mortgage
interest

If one spouse has passable credit
but the other has exceptional credit, the higher-credit spouse might consider
applying on their own to secure a lower mortgage rate.

This could save you thousands on
your home loan in the long term.

A few years ago,
the Federal Reserve studied mortgage costs and found something
startling. Of over 600,000 loans studied, ten percent could have
paid at least 0.125% less by having the more qualified buyer apply alone.

In addition, another 25
percent of borrowers could have “significantly reduced” their loan costs
this way.

It may pay to check with your
loan officer. For instance, if one borrower has a 699 FICO and the other has a
700 FICO, they’d save $500 in loan fees for every $100,000 borrowed due to
Fannie Mae fees for sub-700 scores.

The main drawback to this
strategy is that the sole borrower must now qualify without the help of their
spouse’s income. So for this to work, the spouse on the mortgage will likely
need a higher credit score and the larger income.

Verify your new rate (Jan 23rd, 2021)

Preserve assets if one spouse
is debt-challenged

Your home is an asset which
can be liened or confiscated in some cases. For instance, if your spouse has
defaulted student loans, unpaid taxes or child support, or unpaid judgments, he
or she might be vulnerable to asset confiscation.

By buying a house in your
name only, you protect it from creditors. Note that if your spouse incurred the
debt after marrying you, this protection may not apply.

This also applies if you’re
buying the place with money you had before marrying. If you purchase the house
with your own sole-and-separate funds, you probably want to keep it a
sole-and-separate house.

Simplify estate planning

Having the home in your name
simplifies estate planning, especially if this is your second marriage. For
instance, if you want to leave your house to your children from a previous
union, it’s easier to do when you don’t have to untangle the rights of your
current spouse to do it.

Head off divorce battles

Of course, you don’t plan on divorcing when you
marry. But if the state of your union is a little shaky, and you’re the
one doing the heavy lifting on the purchase, you might want to maintain control
by buying in your name only.

Verify your loan eligibility as a single borrower (Jan 23rd, 2021)

One
spouse on the mortgage: Drawbacks

If both spouses have comparable credit and shared estate planning,
it often makes sense to use a joint mortgage application.

That’s because leaving a creditworthy spouse off the mortgage can
sharply decrease your borrowing power.

Less income means less
buying power

The biggest drawback of leaving a spouse off your mortgage is that
their income typically can’t be counted on the application. This could have a
big impact on the amount you’re able to borrow.

In simple terms, more income means you can afford a larger monthly
mortgage payment. This increases your maximum loan amount.

As a result, couples applying for a mortgage jointly can often
afford larger and more expensive homes than single applicants.

Potentially higher
debt-to-income ratio

Leaving a spouse off the mortgage can also affect your debt-to-income ratio (DTI).

DTI is a key number lenders use to determine how much house you can
afford. By comparing your gross monthly income to your monthly debts —
including student loans, auto loans, and credit card payments — lenders can
determine how much money is ‘left over’ in your budget for a mortgage payment.

The higher your income, and the lower your debts, the more house you
can afford.

If one spouse is going it alone on the mortgage application and they have high debts, they could have a harder time meeting a lender’s DTI requirements. Or they may qualify, but for a smaller loan amount than expected. 

Then again, if one spouse has a lot of debt and does not earn the bulk of the income, it might make more sense to leave them off the application as it could ease up on the other spouse’s debt-to-income ratio.

What
if one spouse has high income but bad credit?

What if one spouse had great credit but can’t afford the home one
their income alone — and the other spouse has good income but poor credit?

In this case, a good solution could be the HomeReady loan from Fannie Mae.

This mortgage program allows you to count extra household income
toward your mortgage, without adding the other person as a full co-borrower on
the application.

That means the spouse with good credit could apply for the home loan
on their own and supplement their income with a portion of their partner’s
income to boost their borrowing power. Since the low-credit spouse is not on
the application, their poor credit score would not affect the loan eligibility
or interest rate. 

The HomeReady loan requires a minimum FICO score of 620 and a 3%
down payment.

In addition, the couple must prove they’ve been living together for
at least 12 months prior to the application in order for the non-applicant’s
income to be counted toward the mortgage.

Check your HomeReady loan eligibility (Jan 23rd, 2021)

Can
one spouse refinance a mortgage without the other?

If only one spouse is on the existing mortgage — for instance, if
they bought the home before getting married — that person is free to refinance
the mortgage in their name only. 

If both spouses are on the current mortgage, your options depend on
your refinance goals.

In situations where both spouses want to remain on a joint mortgage,
they must both apply for the new home loan, go through underwriting, and sign
the mortgage papers. It is not possible to refinance with only one borrower on
the application and still keep both your names on the mortgage.

Other times, a couple or divorced couple might want to refinance to remove one person’s name from the mortgage. This is possible, but the borrower being removed needs to agree to the arrangement.

It is not possible for one spouse to refinance a joint mortgage
without the other borrower’s knowledge or consent — that would be mortgage
fraud.

In addition, the spouse remaining on the mortgage needs to be able
to qualify for the loan on their own. That includes meeting credit score,
employment, income, and DTI requirements. And the person on the loan will have
to pay closing costs, as well.

Verify your refinance eligibility (Jan 23rd, 2021)

Can
one spouse be on the mortgage but both on the title?

If the main reason for
purchasing a house in your own name is to have a cheaper mortgage, or to
qualify for a mortgage, you can always add your significant other to the home’s
title after the loan is finalized. This would officially make you
“co-owners” of the home.

Just note, the person on the
mortgage loan is solely responsible for repayment.

The co-owner’s name listed on the title does not give them any legal responsibility to help with mortgage payments. And in the event of a foreclosure, only the spouse whose name is on the loan will have their credit damaged.

Can
both spouses on the mortgage but only one on the title?

There aren’t
too many times when you’d want to do this, because you’re on the hook for the
loan without the protection of any ownership interest. But there are instances
in which it would be appropriate.

For instance, if you needed
the property in just your name for estate-planning purposes, but could not
qualify for a mortgage on your own, your spouse might co-sign on the mortgage
for you. Or you could both be co-borrowers, because legally, only one mortgage
borrower has to be on title to the property.

However, many lenders prefer
that all borrowers also take title. That’s because technically, a borrower not
on title is not a borrower — just a guarantor.

Guarantors are not legally responsible for making monthly payments. They are liable only for loan balances if the primary borrower defaults. Lenders have to take an extra step and sue the guarantor if the borrower defaults, and they don’t like this.

Taking title as your “sole
and separate property” means that you both still get to live in the house — however,
only you have an ownership interest. Only your name is on the deed.

But this arrangement is not
always 100 percent straightforward.

You will probably have
to “quitclaim”

In community property states,
just taking title as sole and separate is not enough. That’s
because it shows you intend
the home to be yours and only yours, but it
does not indicate your spouse’s
wishes.

In community property
states, it’s assumed that anything acquired by either spouse during the
marriage is the property of both. That includes real estate.

A quitclaim deed, which your
spouse signs and you record with your county, identifies the grantor (the spouse
relinquishing rights to the property) and the grantee, who remains on title.

Community property states are
as follows:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

In other states, you may also
have to quitclaim, so you can’t secretly buy real estate without your
spouse’s knowledge. And many lenders also require it for the same reason.

Government-backed
loans in community property states

One advantage of having the
mortgage and ownership in your name only doesn’t apply in community property
states. If you get a government-backed loan like FHA, VA or USDA financing,
your spouse’s separate debts still count in your debt-to-income ratios.

For these mortgages, the lender
may pull the non-borrower’s credit report to verify their debts. However, that
person’s credit score doesn’t count toward the application.

HUD guidelines state:

“The Lender must not consider
the credit history of a non-borrowing spouse. The non-borrowing spouse’s credit
history is not considered a reason to deny a mortgage application.

The lender must

  • Verify and document the debt of the non-borrowing spouse
  • Make a note in the file referencing the specific state law that justifies the exclusion of any debt from consideration
  • Obtain a credit report for the non-borrowing spouse in order to determine the debts that must be included in the liabilities”

Fortunately, other loan
programs don’t necessarily carry this requirement.

What are today’s mortgage rates?

Today’s mortgage rates are
excellent for both home purchases and refinancing. And you may
be able to reduce what you pay by only putting the most qualified applicant on
the mortgage. Check all your options to see what makes the most sense for your new
home loan.

Verify your new rate (Jan 23rd, 2021)

Source: themortgagereports.com

What to do when your CARES Act mortgage forbearance ends

Is your mortgage currently in forbearance?

Mortgage forbearance provided a lifeline for millions of homeowners during the difficult months of the pandemic.

But with the six-month end date for many forbearance plans rapidly approaching, homeowners will have to decide how to move forward.

Do you need to extend your COVID forbearance plan for another six months?

Or, are you ready to exit? If so, what are your options?

Here’s what you need to know if your mortgage forbearance plan is ending soon.

Millions of COVID forbearance plans are about to end

The CARES Act offered much-needed mortgage relief for U.S. homeowners.

Under the Act, if you have any mortgage backed by the federal government— including conventional, FHA, VA, and USDA loans — you can pause your mortgage payments for up to six months with no penalties.

As shown in the chart below, millions of homeowners opted in for CARES Act mortgage forbearance in March and April, when the economy took its first hard hit.

Chart showing the number of new forbearance plans over time. New forbearance plans spiked in March and April, then leveled off in May through August. Source: Black Knight

To date, the majority of homeowners who opted for mortgage relief are still in their forbearance plans.

But with the initial six month deadline nearing, many will be approaching their forbearance deadlines in September and October.

Chart showing the number of active forbearance plans for U.S. mortgages, which has hardly dropped since the initial spike in March and April. Source: Black Knight

So, what are you supposed to do if your forbearance plan is ending?

You’re free to exit forbearance if you’re able to resume making mortgage payments. If not, you might be able to extend your forbearance plan.

We’ll walk you through your optinos below.

Most forbearance plans can be extended for 6 more months

Six months of forbearance may have provided you a welcome buffer period to get back on solid financial ground.

But if you continue to experience money problems due to lack of employment, medical bills, or otherwise, you’re probably worried about how you’re going to pay the mortgage.

The good news? You can get a six-month extension on your loan forbearance.

That means a total mortgage forbearance period of 12 months on your government-backed loan if you need it.

Conventional, FHA, VA, and USDA loan holders can opt for another 6 months of mortgage forbearance if necessary, for a total of 12 months of mortgage relief

“From the date you seek to have forbearance, you will be entitled to that forbearance for up to one year, with an extension after the first six months of your forbearance,” explains David Shapiro, president and CEO of EquiFi Corporation.

“Forbearance plans are based on when you requested them. So if a homeowner requested forbearance in March or April at the beginning of the pandemic, September or October would be the end for the first 180 days.”

How do you request an extension?

Dongshin Kim, assistant professor of finance and real estate at Pepperdine Graziadio Business School, says your loan servicer should provide you an option to extend forbearance another 180 days if you need it.

“Loan servicers are supposed to reach out to borrowers 30 days before the forbearance plan is scheduled to end to help them understand what options they have for repayment,” says Kim.

Your loan servicer should reach out 30 days before your forbearance plan ends to discuss your options

But you shouldn’t necessarily wait for your lender or servicer to contact you about this option.

“If you need to continue your forbearance, contact your mortgage servicer well ahead of your forbearance end date,” recommends Jackie Boies, senior director of housing services at Money Management International.

“You need to prepare for relief to end now. Do not wait until you get your statement to ask a lender for help. Instead, contact them now, let them know your financial situation, and see how they can help.”

Strategies for exiting mortgage forbearance

If you are ready to exit your forbearance on time, after six months, be prepared for what happens next.

“Forbearance is not loan forgiveness. Borrowers will still owe the principal and interest that they didn’t pay during the forbearance period,” notes Kim.

“Borrowers will need to make both the regular mortgage payments and also all the payments they missed while the loan was in forbearance.”

You will typically have several options for repayment once forbearance expires:

  1. Full repayment, which is a one-time lump sum payment. It’s possible to pay back all the missed payments at once. But lenders are NOT allowed to require this. “If you are unable to pay the lump sum, you have other options,” says Boies
  2. Intermittent payments, where you arrange repayment with your servicer over three, six, nine, or 12 months –—whichever makes the most sense — on top of your regular payments
  3. Lengthen your loan term and pay off the missed amount at the end of the extended loan term, with additional mortgage payments
  4. Defer your repayment. This option lets you pay off the missed amount at the time the home is sold, refinanced, or the mortgage term ends
  5. Pursue a loan modification. “This helps borrowers who are at risk of default change their mortgage terms – usually including a lower interest rate, reduced length of the loan, or reduced monthly payment,” adds Boies

The right option for you depends on your current finances, employment status, and ability to resume mortgage payments.

When your loan servicer contacts you, be sure to discuss every option in detail so you know exactly what to expect with the repayment plan you select.

The experts warn that you should anticipate a few possible snags and setbacks post-forbearance, especially when it’s time to contact your loan servicer.

“Borrowers should expect very long delays and may experience inconsistency in customer support representatives,” cautions Shapiro.

“Loan servicing organizations are not all properly staffed for the expected volume of forbearances, and they can’t train support agents fast enough to meet their needs.

“Also,” Shapiro continues, “be prepared for process changes, as regulators react to the crisis in real-time and create new rules or modify existing rules.”

Even if you can’t get through on the first few contact attempts, don’t give up.

“Be patient, but be persistent. Mortgage servicers have struggled to keep up with calls during the COVID crisis, but many have made online options easy and added staffing,” says Boies.

Keep a close eye on your credit report and score

Also, if your mortgage has been in forbearance, check your credit report carefully.

CARES Act rules state that mortgages in forbearance should not be reported as having late or missed payments. And the forbearance plan should not harm your credit score.

But this is another area where mistakes can happen.

“Sometimes there can be mistakes and issues with credit scores that can pop up around forbearance,” Kim says.

Remember, lenders and servicers have never before had to deal with mortgage forbearances on this scale. So it’s up to the borrower to be extra-vigilant and make sure nothing slips through the cracks.

Check your loan statements every month and stay on top of your credit report.

Remember, you get one free credit report per week through April 2021. So you can keep a closer eye on it than usual.

What if you still can’t afford your mortgage payments after forbearance?

The worst-case scenario: Forbearance ends and you still can’t pay your monthly mortgage. What can you do?

“You’ll probably need to consider disposition options,” says Boies.

“This may include selling your home if you can no longer afford it. Foreclosure, short sale, and deed-in-lieu are other ways of disposing of a home you can’t afford.”

Boies warns, “These options may be damaging to your credit and should be reserved until you’ve exhausted all other solutions.”

You can end forbearance early, too

You don’t have to wait for a six- or 12-month forbearance period to come to an end. Instead, you can opt to exit forbearance earlier than expected.

Just be prepared to pay back the amount you weren’t able to pay while forbearance was in place, cautions Kim.

“The best time to end forbearance is when the borrower is comfortable and able to make payments, including the additional money for repayments they owe,” Kim adds.

If you’re ready to end forbearance, contact your loan servicer and request this.

“But be sure your financial foundation is strong enough, meaning you have some type of emergency fund to back up your ability to pay your mortgage,” suggests Shapiro.

Low rates can make mortgage payments more affordable

For those exiting mortgage forbearance in the next few months, there may be an opportunity to lower your mortgage payments below pre-pandemic levels.

Rates have hit record lows nine times in 2020, and are set to remain low for months — if not years — to come.

Some options for exiting mortgage forbearance would allow homeowners to secure a new, lower rate and make their monthly payments more manageable.

Ask your servicer about loan modification and refinancing.

If these options are avaialble to you, you might be able to exit forbearance much more confidently, knowing that you’ll have a more affordable mortgage payment on the other side.

Verify your new rate (Jan 20th, 2021)

Source: themortgagereports.com