debt-to-income Archives - Hanover Mortgages

December 25, 2021

7 Ways to Achieve Financial Discipline

The word “discipline” can bring about some hefty connotations. Thoughts might travel to a terrifying teacher or a stint in doggy boot camp for Fido and his ever-lifting leg. But in life, there’s another instance where a little bit of discipline can bring a lot of positive gains.

While this article isn’t about how to avoid detention or save your favorite living room furniture from stains (sorry…), it is about achieving a level of money discipline so refined, it sets you up for future financial independence.

From getting clear about financial goals to building a budget, setting aside savings, slowing down spending and planning solid investment strategies, here are 7 ways to achieve financial discipline.

What is the Meaning of Financial Discipline?

Financial discipline is the act of setting specific monetary (spending and saving) goals and measuring oneself against how well they are achieved. Once that financial discipline is established, a person can take further steps to becoming financially independent.

Financial independence means having enough money to pay one’s living expenses without being dependent on people or a particular employer. It provides a financial runway that’s flexible enough for a person to make decisions based on short and long-term needs instead of the immediate state of their finances.

How Can Financial Problems be Improved?

Financial problems can bring about a level of stress that might be difficult to shake. Sitting and worrying won’t necessarily change the state of a person’s finances, but putting together a financial plan is a tangible step in the right direction.

By confronting their current financial realities and committing to practicing money discipline, a person who’s struggling with stressful financial problems can improve their overall outlook and make progress toward a more stable financial future.

7 Steps For Achieving Financial Discipline

1. Getting Clear About Financial Goals

It could be difficult to get disciplined about money without embarking on a vital first step: setting financial goals. Writing down specific short-term, mid-term and long-term financial goals can help whittle things down even further and illuminate a plan for how to proceed.

Here are some common examples of financial goals (though real goals will vary depending on a person’s individual priorities and plans):

Short-term Financial Goals

• Paying off credit cards and charge cards

• Paying off student loan debt

• Setting a spending limit for the month

• Setting up an emergency fund

• Saving a certain amount each month

Recommended: Smart Short Term Financial Goals to Set for Yourself

Mid-term Financial Goals

• Saving money for a trip abroad

• Setting aside funds for a major gift

• Putting away money to buy a big ticket item like a boat or car

• Saving up for an important home renovation

Long-term Financial Goals

• Setting aside money for retirement

• Saving for a dependent’s future college tuition

• Putting away money for a down payment on a house

• Investing in stocks and bonds for future returns

2. Creating a Convenient Budget

Building a monthly budget isn’t necessarily at the top of everyone’s bucket list, but seeing spending habits and current expenses in black and white can make it easier to get a handle on overall finances. Whether it’s written out by hand, using an online spreadsheet, or finding software that helps turn financial data into a trackable budget, there are many ways to build a budget.

Once someone finds a system that works, they can better understand how much money they’re making versus how much they’re spending, saving, and possibly investing. The transparency that comes with creating a budget can bring them closer to becoming financially disciplined.

3. Paying Down Existing Debt

Debt comes in many forms — from student loan debt to car loans, medical payments, mortgages and credit card debt. It might seem fairly obvious, but tackling existing debt as a step toward financial discipline can make it easier to start the subsequent steps like saving money, making investments and planning for a brighter financial future. Adding the debt paydown directly into the budget ensures it’s consistently covered each month.

Recommended: Paying Off Debt—9 Strategies to Try

4. Opening a High Yield Savings Account

Even if it’s as little as $20 a month, setting something aside for savings in spite of one’s current debt-to-income ratio ensures some funds will start to add up. By opening up a savings account and setting up a recurring deposit, a pivotal piece of financial discipline can practically go on autopilot.

According to the FDIC , the national average interest rate on savings accounts as of November 15th 2021 is 0.06% APY. In the case of certain high yield accounts, however, interest rates can reach 1.50% – 2.00% APY. By putting money into a high-yield savings account, it’s simple to earn even more money just by setting funds aside in the first place.

Recommended: Different Types of Savings Accounts You Can Have

5. Establishing an Emergency Fund

Just 41% of Americans would be able to cover a $1,000 emergency with money from their savings. This could include a major medical event, car accident or emergency home repair, to name a few. To help cover such expenses on the fly, 37% of Americans would have to take on credit card debt, a personal loan, or ask family or friends for financial help.

Establishing an emergency fund isn’t just a step along the path to financial independence, it’s a way to weather unforeseen expenses without having to worry about day-to-day expenses being paid for or financial goals being met.

6. Cutting Back on Spending

Despite the best of intentions, overspending happens. Whether it’s a pileup of holiday gift purchases, a particularly eventful summer, or a lavish trip overseas, spending more than what you earn is bound to occur from time to time. If it happens constantly, that’s another story.

Cutting down on spending is a tangible way to practice sound money discipline. There’s no one-size-fits-all approach to doing so, but by building a budget, hunting for bargains, creating ironclad shopping lists, using promo codes and coupons, and thoroughly tracking spending, it can be easier to cut back and get one step further to financial independence.

7. Seeking Sound Investment Strategies

If you’re searching for a head start to financial independence, familiarizing yourself with a wide variety of investment strategies can help get you on the map. Depending on your individual financial situation, weighing the risks and benefits of certain account types, penalties, fees, and the ability to access funds can help you select the right investment strategy. By researching different markets and understanding your personal risk tolerance, you can select investment strategies that directly align with your current and future financial goals.

Focusing on Financial Planning

The term “financial planning” might feel more like a unicorn you only get to meet when you’re floating high on a cloud of financial independence, but it’s actually another sound step along the way. These days, financial planning isn’t designated for the already-wealthy, it’s becoming accessible and essential for people at every stage of life. In fact, in the age of digital transformation, financial planning can even be automated.

With SoFi Money®, you can set your financial plans in motion. Whether you’re storing up cash for future investments, saving for a major purchase, or putting aside money to pay down your debt, SoFi Money makes financial discipline more achievable than ever.

The Takeaway

Financial discipline or money discipline is the act of setting specific financial goals and tracking their achievement. By practicing financial discipline, a person who’s struggling with stressful financial problems can improve their outlook and make progress toward a more stable financial future.

A few ways to practice financial discipline include setting short-term, mid-term, and long-term financial goals, building a budget, paying down debt, opening a high-yield savings account, cutting back on spending, establishing an emergency fund, setting sound investment strategies, and finding a financial planner.

Learn more about SoFi Money today.

Photo credit: iStock/shih-wei

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December 22, 2021

Summer Travel Spending: Don’t Go Overboard

I’m of the opinion FOMO (“Fear of Missing Out”) never strikes harder than during the summer months. Perhaps it’s the laid-back vibe in the air, the fact that things slow down at work, or an indescribable itch leftover from eighteen years of formal summer vacations. Whatever the reason, it’s easy to overindulge when the weather heats up.

But that doesn’t mean overspending in the summer months won’t come back to haunt you come fall. Whether it’s an expensive European sojourn, two bachelorette parties in a row, or that irresistible last-minute deal on an all-inclusive getaway, I’m here to make a handful of strong arguments for why it’s important to exercise restraint when it comes to summer spending.

Impacts to Your Credit Score

If you pay for summer frolic on a credit card (instead of in cash) and don’t pay off the balance each month, it can decrease your credit score. Here’s how:

When the amount of debt you carry increases, it impacts your debt-to-income ratio, which is what some lenders look at when you apply for a loan. Your debt-to-income or DTI, shouldn’t exceed 36% of your take-home income each month. While DTI doesn’t directly impact your credit score, it could be hazardous in the event you’d like to make a large purchase in the fall. Lenders will be looking at your credit and you want it to be in the best shape possible in order to qualify for the lowest interest rate. Splurging on summer vacation now could cost even more if you factor in the increased interest amount you’ll pay due to credit card debt’s effect on your score.

A “high” DTI also means you’ll qualify for a smaller amount in the event you do apply for a loan. Was that week in Provence worth the smaller house, car, or student loan you wanted? These are your financial decisions to make, but especially in the event of a larger purchase, you’ll need to be careful with your credit card spending in the months prior.

You can check calculate your debt-to-income ratio and credit score for free with Turbo so you can see where you truly stand financially. For each of your numbers, Turbo also gives you the “whys” behind them, key takeaways, and comparisons to people like you.

Little Time to Recover Before the Holidays

Going into debt over the summer is one thing, but if you’re not saving up for the holidays either, it could spell financial trouble long after the seasons change. Charging summer travel, not paying it off, and then relying on credit cards for holiday spending can quickly evolve into a vicious cycle of living paycheck to paycheck.

An Abundance of Free Activities

When’s the last time you tried something different? Look at what your local community has to offer in terms of free or cheap options to learn. Some town recreation centers are the perfect starting point for finding fun community activities or renting gear to have your own “staycation.”

When its warm out, there’s free parks, lakes, and beaches to enjoy without having to break the bank. Grill out in your backyard instead of dining at a restaurant. Save the higher cost activities (dinner, drinks at bar, movies) for winter when it’s necessary to be indoors.

Plenty of Time to Prepare

I’ll leave you with one last lesson: summer isn’t a surprise. What I mean by this is that you’re able to plan ahead for all of your summer expenditures by saving throughout the year. If you’ve already spent a hefty amount this summer, don’t worry. There’s still time to hustle up extra cash this fall to pay it off. And the good news is that if you want similar things for next summer, you can learn from your spending this year. Use a budgeting app like Mint to take a look at your summer spending. Then divide that number by 9 to get the amount you need to put away each month!

You can’t plan for everything, but for the things you can plan, do so. Unless you can bank on paying your balance in full during each payment cycle, see if you can save for some of those big-ticket purchases you’ll want to make for next summer. This will help you avoid dinging your credit in the first place.

Summer always feels good, but spending summer debt free? Even better. What are your best tips for having an active summer while keeping your finances afloat?

Learn more about security

Source: mint.intuit.com

December 16, 2021

A Guide to How Personal Loans Work

A personal loan works a little differently than other types of loans. Most loans specify what the money should be spent on: Mortgages are used to purchase or refinance homes, and student loans are used to pay for an education. But there aren’t as many restrictions on how you can or can’t spend personal loan funds, which allows for more flexibility than other types of loans.

Most banks, credit unions, or online lenders like SoFi offer personal loans. Read on to learn more about how personal loans work, different uses for personal loans — and simply what a personal loan is.

The Big Picture: How the Loan Itself Works

Personal loans are fairly straightforward. They are simply a borrowed sum of money that the borrower then pays back, with interest, to the lender.

How Do You Get the Money?

The first step is applying for a personal loan, which will be detailed below. After loan approval, the lender typically deposits the loan proceeds directly into the borrower’s bank account.

How Do You Pay it Back?

Personal loans are paid back in monthly installments of principal and interest. Since personal loans generally have fixed interest rates, each monthly payment is the same throughout the term of the loan.

How Interest Rates Work

The interest rate a loan applicant may be approved for will usually be determined by a combination of things like their financial history, income, debt, and credit score. Generally speaking, the better the credit score, the better the chance to receive a lower interest rate on the loan. The higher the interest rate, the more money the loan will cost over its term.

The Personal Loan Application Process

While it’s not as simple as walking into a bank, asking for a loan, and walking out with a check, the application process for personal loans is fairly straightforward.

Things to consider include how much money you want to borrow, how much you can afford to pay each month, how long you want to make payments, and whether to put up collateral. There may be other considerations for specific financial circumstances, which can vary from person to person.

Checking Your Own Credit

Because lenders will be looking at your creditworthiness as closely as you’re looking at them, it’s a good idea to give your financial health a checkup before you begin the application process. Checking your credit report at AnnualCreditReport.com , which is free, is a good way to review the report for any errors. Correcting anything that isn’t accurate means your credit report will look as good as possible to lenders.

Comparing Loans

Just like shopping around for the best prices before making any large purchase, comparing lenders’ rates and terms is a smart move before the application process actually begins.

Here are some questions you may want to ask prospective lenders:

• How much do you lend on personal loans? If the amount you need to borrow doesn’t fall within the range offered by the lender, you may need to look elsewhere.

• Do you charge any fees or penalties? Some lenders charge an origination fee equal to a percentage of the loan amount to process your application. Some personal loans also have a prepayment penalty if you pay off your loan ahead of schedule.

• How are fees and penalties charged? Some lenders may roll any fees into the loan amount, which increases the total amount you’ll owe. Other lenders may deduct the fee amounts from the loan proceeds, so the amount you receive will be lower than the actual amount of the loan. The option the lender uses will be stated in the loan agreement.

• Can I get prequalified so I’ll know what interest rate you might offer me? Prequalification involves the lender doing a soft credit pull on your credit report, which will not affect your credit score. This step will give the lender a sneak peek at your financial history so they can give you an estimated interest rate. Going through this process with multiple lenders is one way to compare rates and terms you may qualify for.

• What if I can’t make my loan payments due to financial hardship? Missed or late payments could result in late fees, affect your credit score, or lead to your account being sent to collections. Some lenders may offer protections for borrowers who have lost their job or are having difficulty making their payments for other reasons.

Applying for a Loan

When you’ve selected a lender, it’s time to submit the actual application. Lenders typically require a photo ID, proof of address, and proof of income or employment for an unsecured personal loan. Each lender has different requirements, though, so it’s important to submit information that your particular lender requests. At this stage, the lender will usually do a credit check, which could affect your credit score.

Waiting for Approval

When the application and all required documents have been submitted, it’s time to play the waiting game. Rest easy, though, because some personal loan approvals happen quickly — sometimes in just a day. More complicated applications could take up to about 10 days.

Personal loans can range anywhere from $1,000 to $100,000, depending on the lender. Once you apply and are approved for the loan, you’ll receive the amount of money you were approved for in a lump sum, minus any origination fees that some lenders may charge. Then you pay back that money in installments which are set by the specific terms of your loan.

Types of Personal Loans

There are a variety of different types of personal loans. Factors like how much money you plan to borrow, your credit and financial history, and how much debt you already have will influence which type of personal loan is right for you. Here are some different types of personal loans.

Unsecured vs Secured Personal Loans

An unsecured personal loan is the most common type of personal loan. Unsecured means the loan is not backed by collateral, like a house or car. The approval and interest rate you receive on an unsecured personal loan is mostly based on your creditworthiness. Personal loan interest rates on average typically range from 5% to 36% and the repayment terms often vary from one to seven years.

Collateralized personal loans require an asset to be pledged to “secure” the loan. Think of a house when it comes to a mortgage loan, or a car when it comes to a car loan. If you fail to repay your loan, the lender can then seize the collateral.

Some banks offer secured personal loans that allow you to borrow against the equity of your car, personal savings, or other assets. Since secured loans are backed by an asset that the lender can seize if you default on the loan, they generally have a lower interest rate than an unsecured personal loan.

Fixed Rate vs Variable Rate Personal Loans

Most personal loans are fixed-rate loans, meaning your rate and monthly payment stay the same — are fixed — for the life of the loan. Fixed-rate loans can make sense if you’re looking for something with consistent payments each month. A fixed-rate loan is also worth considering if you are concerned about rising interest rates on longer-term loans.

As the name suggests, the interest rate on a variable-rate loan can fluctuate over the life of the loan. Interest rates on this type of loan are tied to benchmark rates or indexes. Based on how the benchmark rate or index changes, the interest rate on a variable-rate loan will also change, directly affecting your monthly payment.

Generally, variable-rate loans carry lower annual percentage rates (APRs) and some have limits on how much the interest rate can rise or lower over a specific period, or even over the life of the loan. A variable-rate loan could be a good choice if you are taking out a small amount of money with short repayment terms.

Choosing between variable vs. fixed rates will come down to personal preference and what you are approved for.

Small vs Large Personal Loans

Just as personal loans are taken out for a variety of reasons, the dollar amount borrowed can vary, too.

A small personal loan, which is generally for $3,000 or less, typically has a lower APR than other types of short-term debt, such as payday loans. Many banks and other financial institutions have limits on the minimum amount they’ll lend. Some credit unions may offer alternatives to payday loans in an effort to help their members save money and avoid being stuck in a cycle of debt.

A large personal loan might be used to pay for major expenses such as home repair or remodeling, medical expenses, or an expensive life event, such as a wedding. Some lenders offer personal loans up to $100,000.

It’s important to keep in mind your ability to repay the loan when deciding how much to borrow.

Want to see if a personal loan
is the right choice for you?
Check out SoFi personal loans.

What Determines the Kinds of Loans You Can Get?

Lenders typically look at an applicant’s credit score, debt-to-income (DTI) ratio, and other factors.

Credit Score

A person’s credit score shows lenders what the theoretical likelihood of that person paying back a loan would be. Generally, the lower a person’s credit score, the more of a risk they are assumed to be. Conversely, the higher a person’s credit score, the lower a risk they are assumed to be.

Debt-to-Income Ratio

Your DTI is the amount of debt, in relation to your income, you have. It’s expressed in a percentage and, ideally, is no more than 36%. Lenders prefer that no more than 28% of your debt be housing related, i.e., rent or mortgage.

Credit History

Lenders will review your credit report for anything that might stand out as a risk for them. If there are a high number of inquiries on your credit report or if there were multiple debt accounts opened in a short time period, that might indicate high risk to a lender.

Paying Back a Personal Loan

Personal loans are repaid over a number of months or years. This is called the loan term and is typically anywhere from one to 7 years. Each monthly payment includes principal — the amount of money borrowed — and interest amounts, and the loan is amortized over the loan term.

Amortization refers to how the loan payments are divided in each monthly payment, over the life of the loan. Even though the total monthly payment remains the same, the amounts being directed to principal and interest will change each month.

An amortization schedule shows the breakdown of each monthly payment, so you’ll know exactly how much of your payment is going towards paying down the principal and how much is being paid in interest.

In the earlier part of a loan’s term, the monthly payment will be mostly interest, with a smaller amount being applied to the principal. As the loan term progresses, the principal payments become larger and the interest payments become smaller.

Personal loans with longer terms may offer lower monthly payments, but that also comes with a higher overall interest cost. A shorter-term personal loan can have higher monthly payments, but cost less overall in interest. A personal loan calculator is a helpful tool to compare loans with different rates and terms.

Explore SoFi Personal Loan Terms Today

As you compare lenders, consider personal loans with us. SoFi Personal Loan amounts range from $5,000 to $100,000.

There are no origination fees or prepayment penalties, and if you unexpectedly lose your job, SoFi Personal Loans include unemployment protection, allowing those eligible to suspend monthly payments in three-month increments for up to 12 months (though interest will continue to accrue), and receive job placement assistance in the meantime.

The Takeaway

Personal loans can offer flexibility when you’re looking for funds for a variety of uses. Depending on your financial needs and your financial circumstances, there may be a personal loan that fits. Comparing multiple lenders is a good way to make sure you’re getting a personal loan that works for you.

If you’re ready to take out a personal loan, start by taking two minutes to see what SoFi can offer you.

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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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Source: sofi.com

December 6, 2021

How to Get a Personal Loan – 7 Steps to Follow

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Dig Deeper

Additional Resources

You’ve settled on one of the many valid reasons to get a personal loan and determined that you meet basic personal loan eligibility criteria. Now it’s time for the next step: applying for your secured or unsecured personal loan.

Applying for a personal loan is a multistep process. Depending on your personal creditworthiness, your loan’s purpose, your preferred lender, and other factors, it can take anywhere from a few days to a few weeks.

How to Get a Personal Loan

This process comes with no guarantees that you’ll be given the loan in the end. But following these steps and keeping some ground rules in mind can increase your chances of success.

1. Calculate How Much You Can Afford to Pay

First, you need to determine what you can afford to borrow. This means crunching the numbers and arriving at the maximum monthly payment your budget can bear.

Your loan’s monthly payment depends on several factors:

Principal. This is your loan’s gross funding amount, or the initial balance on which you pay interest. The higher the principal amount you borrow, the higher the monthly payment.
Origination Fee. This is a fee some lenders charge to cover their operating costs and lock in additional profit upfront. If your lender charges an origination fee, your actual funding amount is smaller than the principal.
Repayment Term. This is the period over which you’ll repay your loan, usually monthly. Personal loan terms commonly range from two to five years (24 to 60 months), but terms as short as one year and as long as seven years are possible. The longer the repayment period, the higher the monthly payment.
Interest Rate. Your interest rate is a function of your perceived risk of defaulting on the loan. The lower your credit score, the higher your interest rate. And the higher your interest rate, the higher the overall cost of the loan.

Depending on your loan’s structure, your monthly payment may also include:

A prepayment penalty for making additional principal payments ahead of schedule or paying off your loan in full
One-off fees, such as fees for late or returned payments

How to Calculate Your Personal Loan’s Monthly Payment

Use a personal loan payment calculator such as the one from Credit Karma to calculate your total expected monthly payment using different interest rates, principal amounts, and repayment terms.

Your goal is to determine whether you can afford to add a personal loan payment to your monthly budget at all, and if so, the maximum payment you’re comfortable making and for how long.

You might decide that early payoff and lower total interest charges justify a shorter-term loan with a larger monthly payment — or, conversely, that lower monthly payments justify a longer term and higher interest payments.

The details matter. For instance, according to Credit Karma, you’ll pay $311 per month on a five-year, $15,000 loan at 9% APR. Shorten the term to three years, and the same loan’s monthly payment rises to $477.

2. Check Your Credit Score

For better or worse, your credit score determines your standing as a consumer. A good credit score opens doors; a bad credit score can slam them shut.

In the context of applying for a personal loan, your credit score is a crucial determinant of what’s possible — and how much it’ll cost you. The relationship between your credit score and interest rate is inverse — a higher score means a lower rate and vice versa.

So, before you apply for your loan, find out where you stand by checking your credit score and report.

Getting Your Free Credit Score and Report

By law, you’re entitled to one free credit report per year from each of the three major consumer credit reporting bureaus. Go to AnnualCreditReport.com to get yours.

For more frequent score updates, create an account with a free credit score subscription service such as Credit Karma. Credit Karma lets you check your credit score whenever you want, without restriction or cost. If you want more robust information, you can also look into products like ScoreSense.

Checking your credit score these ways requires what’s known as a “soft pull,” which is distinct from the “hard” inquiries made by any lender with whom you apply for a new credit account, including a personal loan. A soft pull doesn’t adversely impact your credit score.

What to Do With Your Credit Score

Although it’s not the only factor lenders consider — others include your household income and debt-to-income ratio — your credit score says a lot about your borrower risk profile. Your FICO score, the gold standard for consumer credit reporting, has five distinct components:

Credit utilization ratio (total revolving debt balances divided by total available revolving credit)
Repayment history (including timely and seriously late or missed payments on credit accounts going back seven years)
Length of credit history (the average age of open and closed accounts going back up to 10 years)
Credit mix (types of credit, including installment loans, credit cards, and retail accounts)
New credit (volume of recent credit inquiries and newly opened accounts)

If your number isn’t where you’d like it to be, put your loan application on the back burner and look for near-term opportunities to improve your credit score.

For instance, you might apply for a new credit card and pay it off in full each month to lower your credit utilization ratio and establish a pattern of timely payments. You can also sign up for Experian Boost which will use payment history from your cellphone and utility bills to help improve your credit score.

Getting your credit score is also a good way to set an initial expectation for the personal loan offers you’ll receive. Plenty of personal lenders issue loans to subprime borrowers, so a sub-640 credit score won’t necessarily shut you out of the personal loan market. But you should expect any loan offers you receive to carry higher interest rates, lower principal (loan amount), and perhaps less favorable repayment terms than if you had a higher score.

3. Get Prequalified

Next, use an online personal loan broker (quote aggregator) like Fiona or Credible to check your loan rates and get prequalified. Initially, you’ll need to specify:

Your loan’s intended purpose, such as debt consolidation or home improvement
Your desired loan amount (although your actual offer may be lower than your goal)
Your approximate credit rating

You may also be asked to provide general information about your income and assets. Before getting too far into the process, you’ll need to provide an email address and confirm your identity as well.

Once you’ve confirmed your identity, you’ll move into the heart of the prequalification process. Expect to answer specific questions about your identity, income and employment, educational attainment, and financial situation (assets and credit history). At part of this process, you’ll need to consent to a soft credit pull that won’t affect your credit score.

Questions About Your Identity

This section covers basic information about who you are and where you’re from. You should know most of it by heart:

Your name and any aliases or former names
Your current mailing address and past addresses, if you haven’t lived at your current address for very long
Your phone number and email
Your Social Security number

You may also need to provide additional information, such as your spouse’s name and your mother’s maiden name.

Questions About Your Income and Employment

This section covers your:

Employment Status. The list varies by lender, but you can generally specify whether you’re traditionally employed, self-employed, employed as an independent contractor, or own a formally incorporated business.
Personal Income. This is the income you earn as an individual from employment or business activities and certain other sources, such as taxable investments. You can exclude certain types of income, such as child support and alimony.
Household Income. This is your total household income. If you’re married or in a domestic partnership, you’ll generally include your partner’s income, minus any sources you’re not required to report.

Some lenders ask for more detail about your employment. For instance, traditional employees might need to provide their employer name, contact details, title, and length of service. Business owners might need to name their business, specify total revenue, and indicate how long they’ve been in business.

Be prepared to back up your answers with documentation later in the process.

Questions About Your Education

You’ll almost certainly be asked to reveal the level of education you’ve attained: high school diploma, some college, associate’s degree, bachelor’s degree, graduate degree. Some lenders ask for more detail, such as:

Your undergraduate, graduate, and professional schools, if applicable
Your graduation year(s)
Your degree
Your outstanding student loan balance (this may come up in the next step)

Questions About Your Financial Profile

This final step in the prequalification stage involves basic questions about your financial situation. To be clear, your lender will thoroughly examine your credit report and financial details after you accept a loan offer and formally apply, but you may need to give an overview before checking your rate. Expect to be asked about:

Your liquid assets, including cash reserves and taxable securities accounts
Tangible assets, such as your home and vehicles
Your credit profile, including loan types and balances
Whether you plan to use a cosigner for your loan

Depending on the lender, these questions may be cursory at this point; the real work comes during the actual application process. But it’s important to be honest because the lender will confirm these details when they pull your credit report. Any discrepancies could jeopardize your application.

4. Compare Loan Offers

Most online lenders accept or reject borrowers’ initial approval questionnaires within minutes after they’re submitted.

If you’re conditionally approved for a loan, you’ll receive one or more formal loan offers. If the information you’ve provided doesn’t meet the lender’s standards for approval, you may be:

Asked to provide additional information
Directed to apply with one of the lender’s partners, where underwriting standards may be lower or more appropriate for certain types of borrowers
Told that you don’t meet the lender’s borrowing standards

If you’re applying with a multilender network, such as Credible, you may receive:

Multiple offers from multiple lenders
One or more offers from a single lender deemed best suited to your borrower profile

In either case, research each lender to confirm that they’re on the up and up. Then, compare each offer you receive.

Reading a Truth-in-Lending Disclosure

Every personal loan offer must include a Truth-in-Lending (TIL) disclosure, a plain-English disclosure form mandated by law and regulated by the Consumer Financial Protection Bureau.

Your offer’s TIL disclosure should include:

Total Finance Charge. This is the total amount you’re obligated to pay over the life of your loan.
APR. Your annual percentage rate (APR) is your loan’s annualized cost, including interest and fees such as your origination fee. Your APR is not just your interest rate; it’s likely to be higher than this, perhaps significantly.
Amount Financed. This is the total amount you’re borrowing. Your loan’s origination fee, if any, is subtracted before your loan is funded, but you still pay interest on the full amount financed.
Total Payments. This is the sum of your finance charges, principal repayments, and non-optional fees. For example, a loan with a $10,000 initial loan amount and $2,000 in finance charges has a $12,000 total payment.
Payment Schedule. This section lays out your payment amounts and dates. Payments are always fixed and usually due monthly.
Fees. This section lays out additional fees that the lender may charge under certain circumstances, such as late payment fees.
Prepayment Policy. This section outlines any penalties you’ll incur for early payment. Many personal loans don’t have prepayment penalties, but they can be significant where they do exist.

Using the information in each TIL, you’re now ready to evaluate your options, choose the one that best fits your needs, and formally apply.

5. Gather Application Documents

The personal loan application process goes much more smoothly when you have all the necessary documentation in hand. Before putting in your application, gather everything you’ll need to back up the claims you make on your loan application. This may include:

Pay stubs and bank account statements
Recent tax returns (more likely to be required if you’re self-employed)
Other asset-related information, such as securities account statements and vehicle titles

6. Apply for the Loan

You’re now ready to pull the trigger and accept a loan offer, but don’t rush.

True, your loan offer will probably have an expiration date — a common pressure tactic — but it’s not an official cutoff date. And it could pay to wait because some lenders try to win over fence-sitters with more enticing offers — such as lower interest rates or longer repayment terms — a few days or weeks after the initial query.

What to Expect After Applying for Your Loan

First, know that accepting an offer and beginning the formal application process means consenting to a hard credit pull that will likely knock down your FICO score by a few points.

Second, know that the application process doesn’t end when you hit “Send” on your initial application. It continues until the lender officially approves your application and your loan closes.

Before approving your loan, the lender needs to run your credit and examine your finances. You can expect to be called upon to back up statements you made during the qualification process. This could mean:

Providing pay stubs, tax returns, or bank account (or credit union account) statements as proof of income and employment (self-employed applicants generally face more scrutiny than traditional employees)
Providing checking account and investment account statements as proof of liquid reserves
Providing information about your spouse’s finances, if necessary
Confirming funding account information

Again, you’ll find it much easier to address these requests if you have all your required documentation on hand.

7. Close on the Loan

Sooner or later, your lender makes an up-or-down decision about whether to approve your loan. If the news is good, you move onto the final step in the process: closing on the loan.

Closing on a personal loan is easier than closing on a house. There’s much less paperwork involved. But you still need to e-sign important documents that formalize your obligation to your lender and codify your promise to repay.

You also need to set up monthly payments — autopayments from your primary bank account work best and may qualify for an interest rate discount, usually 0.25%.

Once all that’s done, the ball is in the lender’s court. Depending on the terms of your loan and the lender’s policies, expect to receive the loan’s proceeds — less the origination fee, if any — in your funding account within a week. Some loans take as little as 24 to 48 hours to fund.

Final Word

Applying for a personal loan isn’t as tedious as applying for a mortgage loan, but it takes time nevertheless — at least several days from the moment you begin your research to the day your approved loan is funded.

The process has plenty of off-ramps. After familiarizing yourself with the best personal loans on the market and checking your credit score, you may conclude that your loan can wait until you’ve shored up your borrower profile. Following conditional approval, a close read of your loan’s Truth-in-Lending disclosure may give you pause. A last-minute 0% APR balance transfer offer may outshine the higher-interest personal loan you’re considering.

Whatever your circumstances, treat the process of applying for a personal loan with the gravity it deserves. The last thing you need, months or years down the road, is a crushing obligation you can’t afford to repay.

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Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he’s not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

Source: moneycrashers.com

November 12, 2021

What Credit Score is Needed to Rent an Apartment in 2021?

While there’s no universally required credit score needed to rent an apartment, having a solid credit score can certainly help your chances of a landlord handing you a set of keys. In general, a landlord will look for a credit score that is at least “good,” which is generally in the range of 570-739. However, that can vary by landlord or property manager, as well as the location in which you’re renting.

Read on to learn more about how your credit score can affect renting an apartment — and how you can approach renting if you have a lower credit score.

What Credit Score Do I Need to Rent an Apartment?

Truth is, the answer to what credit score you need to rent an apartment is a bit squishy. In general, you’ll have a better chance of approval if your credit score is at least deemed “good.”

What’s considered good? Credit scores are generally classified as follows per FICO® (keep in mind that different scoring models may vary):

• Exceptional: 800-850

• Very good: 740-799

• Good: 570-739

• Fair: 580-669

• Very poor: 300-579

There also are variables that can affect whether your credit score qualifies you to rent an apartment. For example, if you live in a city where there is huge demand for apartments, landlords may give preference to those with higher credit scores.

Can You Get an Apartment if One Person Has Bad Credit?

If one person has bad credit, know that it will likely make it tougher for you to get an apartment. Landlords have a lot of leeway and can follow criteria of their choosing.

Still, it’s not impossible even if it is trickier. One smart strategy in this situation is to put the lease in the name of the person whose credit and income is best. You could also offer to show your income or provide a reference.

What Landlords Look at On Your Credit Report

When your landlord reads your credit report, they will be looking for clues about your financial health and habits.

Of much importance is your debt-to-income ratio. In a nutshell, this is the amount of your monthly pre-tax income that gets spent on debt payments. It’s certainly not news to you that if you’ve filed bankruptcy that’s not going to be a negative. A landlord also may be spooked if you have hefty credit card balances.

Your credit history disclosed on your credit report also may include your rental history as some landlords and rental property managers share your business to the credit bureaus. This can be plus if you’ve been doing the right thing; if not, this can work against you.

Too many hard inquiries also can raise red flags for a landlord. This is because frequently applying for different types of credit could suggest financial instability, which increases risk in the eyes of lenders — as well as landlords.

How to Rent an Apartment with a Lower Credit Score

Just because your credit score isn’t stellar doesn’t mean you’re resigned to sleeping on a friend’s couch or living with your parents. There are ways to rent an apartment even with a lower credit score.

Pay a Higher Security Deposit

One way to show that your credit history is just history is by offering to make a higher security deposit. Say you are required to pay first and last month’s rent upfront. To sweeten the deal, maybe you tack on a couple additional months of rent.

If you want to instill confidence in your potential new landlord, this might do it. Just make sure you actually have the room in your budget to offer up the cash.

Get a Co-Signer

While getting a co-signer may put a damper on feeling like you’re finally a grownup, it may be worth sucking it up and getting a creditworthy parent or other trusted individual to co-sign for your apartment. This can give your landlord peace of mind if someone is willing to pay the rent on your behalf if you’re unable to.

Just keep in mind that your co-signer will be on the hook if you drop the ball and that co-signers generally must meet even steeper credit score and income requirements.

Play Up Your Income

Maybe your credit score is nothing to brag about, but you’ve worked hard and now have your finances in order, with solid savings and a good income. If you could show that you earn three or four times your rent on a monthly basis, that might divert attention from your lousy credit score. Additionally, if you have a solid stash in your savings account, that can also give your landlord assurance that you have the funds to cover your monthly rent.

Consider Getting a Roommate

Adding a roommate to your lease or rental agreement can increase your creditworthiness and your qualifying income. This is especially the case if you can find a roommate with good credit — and get your landlord to pull their credit first.

Benefits of Good Credit When Renting an Apartment

A landlord needs more than their gut instinct to help them determine who to rent to, which is why a credit score carries a lot of weight when it comes to getting your rental application approved. A good or — better still — an excellent score can give landlords the confidence to consider you for the apartment, especially if all other signals they get when checking on your background indicate they should give you the greenlight.

Having a solid credit score can help you to snag the apartment you want, and avoid the hassles associated with trying to secure an apartment when your credit isn’t as great, such as getting a roommate or a co-signer. Especially if you live in a city with a competitive rental market, a good credit score can be a serious edge.

How to Monitor and Keep Track of Credit Scores

Ideally, you want to check your credit and get a copy of your credit report before you start apartment hunting. It’s important to know where you stand and, if there are any errors, you want to fix them right away.

Until April 20, 2022, you can get free weekly credit reports from the three national credit reporting agencies, Equifax, Experian and TransUnion. To get your free reports, simply go to AnnualCreditReport.com .

While your credit report provides information on your various credit accounts and their balances and your payment history, it does not include your credit score. You can check your credit score by looking at a loan or credit card statement or through an online credit score checker. You can also buy a score directly through credit reporting companies. Even if you might have checked your credit score not that long ago, don’t skip doing so again — your credit score updates every 30 to 45 days.

If your score is low, consider taking steps to improve it before jumping into your apartment search. Actions like paying down credit card balances and making sure you don’t have any more late or missed payments for a stretch can show progress.

What’s Expected in 2022?

According to an outlook on the U.S. rental market published by the property management platform ManageCasa, demand for rentals will grow in the coming year. In fact, ManageCasa writes that the “rise in rents for the rest of 2021 and 2022 might be surprising to some.”

The report indicates that the U.S. rental property market is currently experiencing severe shortages, heightened demand and high property prices, while those looking to rent are competing with a wealthier pool of renters. This is driving up prices.

Further compounding the situation is the fact that housing prices are so inflated that the percentage of people who can afford a home has already dropped off and likely will continue to do so, according to Forbes’ predictions . This could lead to a rental market that is even more competitive, which may not bode well for those with less than stellar credit.

The Takeaway

You’ll want to shoot for having a good credit score — generally in the range of 570-739 — to get an apartment. While you may be able to still get an apartment if you don’t have solid credit, it will make it more challenging with the competition you’re likely to face.

If you have the luxury of time, do what’s necessary to improve your score so that when you begin your search you’ll be an ideal candidate. An online credit monitoring tool like SoFi Relay can make it easier.

Stay on top of your credit score and easily see what impacts it.

Photo credit: iStock/MixMedia

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’swebsite .
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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Source: sofi.com

October 29, 2021

Perfect Credit: How to Get an Excellent Credit Score

A perfect credit score is a bit of an elusive target, as it is challenging to figure out the formula for impeccable financial health. But is the maximum number really necessary? And if so, how frequently do people achieve it? Even though lenders generally assure that anything over 700 is a good score, many people strive for the ultimate goal: 850.

After all, a credit score this impressive has countless benefits—it’s a sure sign that you understand how to manage your money and can borrow and spend with confidence. However, reaching that brag-worthy 850 takes more than just financial wellness. You also need a complete understanding of how credit works and the math behind what affects your scores day to day. In this guide, we’ll be answering questions like “what’s considered an excellent credit score?” and “what’s a great credit score?” to help you better understand what’s needed to achieve perfection. Keep reading to learn how to get an excellent credit score or use the links to answer your questions right away.

What is Credit?

Credit is what allows you to borrow money from lenders. When you apply for a loan, lenders will either approve or deny your request by assessing factors like debt-to-income ratio, employment history, and the amount of the loan. There are several types of credit, including revolving credit, service credit, and installment credit. We’ll go over the three types of credit below.

Revolving Credit

Revolving credit is a line of credit that you can keep using even after you’ve paid off the balance in full. With this kind of credit, you’ll have a limit to the amount of money you can use. For example, if a financial institution approves your credit card for $3,000, you’ll only be able to charge that amount to your account. Like any type of credit, you’ll need to make a minimum payment each month. If you only pay a portion of the amount owed, you’ll continue to revolve your debt until it’s paid off completely.

Service Credit

Service Credit is established by those who provide a service, such as utility companies, phone and internet providers, and gyms. Essentially, it’s an agreement between you and the company offering the service. Let’s take a closer look at gyms as an example. When you apply for a membership, you’ll sign a document that’ll guarantee the use of the facility only if you pay for the service.

Installment Credit

Installment credit is a type of loan that’s used toward a specific purchase. For instance, mortgages, car loans, and student loans.

When thinking of opening a new line of credit, it’s important to take into consideration the type of credit you want to open.

Why is Credit Score Important?

So, why is credit so important? Well, maybe you want to buy a car in a couple of months. To do so, you need to apply for a car loan if you don’t have the cash in hand. Or you may be planning to purchase a house, which most people can’t afford to pay in full. When it comes to making these big purchases, you’re going to want to make sure your credit is in tip-top shape.

A credit score determines if a lender will approve or deny your loan, the interest you have to pay, and the amount due each month. The higher the credit score, the lower your interest and payments will be. The lower your credit score is, the higher your interest rate and monthly payments will be, meaning you’ll end up paying more for whatever you purchased in the long run.

But lenders aren’t the only ones interested in your credit score. Here are a few other people or organizations that take a look at your credit score before making their final decision.

Landlords may want to know your credit score to ensure your finances are in good standing and that you can afford to pay rent.
Insurance companies may use your credit score to determine the rate of your policy.
Utility companies can also look at your credit score to see whether you’re eligible to open an account.
Employers often run credit checks to make sure you’re going to be a trustworthy employee.

Your credit score is an essential factor for almost every aspect of your life, whether you realize it or not. A credit score allows you to make significant financial decisions without your wallet suffering the consequences. You’ll be able to spread the costs of big purchases over time, making it more manageable. But it isn’t enough to simply have a credit score. You need a good credit score to reap the benefits.

Credit Score Range

Credit scores range from 300 to 850. The number you see on your monthly credit report is generated by VantageScore or FICO. Each company has its own credit-scoring model to determine your credit score based on several factors, such as payment history, credit history, total debt, and more. Although the scores between the two may differ, they’ll generally follow the ranges below.

Anything below 630 is considered a poor or bad credit score
Credit scores between 630 and 689 is considered a fair credit score
Credit scores between 690 and 719 is considered a good credit score
Anything above 720 is considered an excellent credit score

So, what’s a perfect credit score? 850 is considered a perfect score. We’ll be discussing what is the highest credit score and how to reach it later on. Even though you may be content with having a good credit score, there’s always room to improve.

Excellent Credit Score

As mentioned, anything above 720 is considered an excellent credit score, but what exactly does that mean for you as a borrower? For starters, you’ll increase the likelihood of getting approved for the line of credit you want. You’ll also save money during the lifetime of your loan since your interest and monthly payments will be low.

An excellent credit score has numerous advantages for you as it increases your purchasing power and puts you in the best financial position possible. Once you reach this pinnacle of success, where do you go from there?

Perfect Credit Score

According to Nasdaq, roughly 1.2% of Americans had an 850 in 2020. The benefits of an 850 credit score may include lower interest rates, easier approval for home loans or rental applications, and even a greater chance of getting hired by your dream company. But is it essential to have a perfect credit score for these opportunities? Not necessarily. Anything from 790-719 is considered “good,” while 720 and above is an excellent score. However, there’s no harm in wanting to achieve perfection.

The path to reaching that rarely seen 850 score can seem a bit confusing. Even if you pay your bills on time, have a diverse collection of credit accounts, and maintain a clean financial record, many people plateau around the 750-800 mark. So how does one build enough credit to reach the ultimate score? Let’s go through some of the most common contributors to getting the highest credit score below.

What Affects Your Credit Score?

Before we explore how you can improve your credit score, you need to know what factors affect your credit score. If you’re set on achieving an 850 score, these determinants are important to take into consideration.

Multiple Hard Inquiries

Each time you apply for a new line of credit—whether it’s for a car, credit card, or home, for example—lenders perform what is known as a hard inquiry into your history. These are not to be confused with soft inquiries, which are made by prospective employers or lenders checking out your report for preapprovals. Multiple hard inquiries tell a story that may worry lenders.

If you choose to apply for a credit card, shop around to find the best one for you before a hard inquiry occurs.

Frequent Late Payments

On-time payments are essential to your credit score. You agreed upon a specific arrangement when you accepted a loan, and lenders would like to see that you can stick to it. However, some banks allow a pass for missing a payment by a few days once every one to two years; it’s crucial to stay on top of due dates the best you can.

History of Defaulting or Charge-Offs

When late or non-existent payments extend past six months, lenders may charge-off your credit account. This means that the bank no longer trusts you to pay the owed amount. These unfortunate notes can last between six and seven years on your credit report and may lead to lenders denying future applications for new lines of credit.

Closing Old Accounts

Remember that the length of your credit history accounts for a significant portion of your score. Just because you’ve paid off a tricky balance doesn’t mean you should close the card. If this were one of your earliest cards, your history’s length would shrink with the cancellation of your account.

Keeping it Simple

Even if you pay all your balances off each month, sometimes you may get stuck at a mediocre credit score. Reaching the highest credit score will likely require you to show off your credit knowledge. As you diversify your lines of credit, you’ll be able to prove your financial expertise. By only focusing on one line of credit—such as student loans or minimal credit cards— at a time, your credit score could plateau.

Achieving the perfect credit score is all about balance. It’s possible to get in your own way without realizing it. Check in with your finances if you’re falling into any of the common traps mentioned above that could keep your credit score stagnant. Not sure how to get your credit score for free? Mint makes it easy!

How to Raise Your Credit Score

If you’re only a few points away from reaching 850, it can get pretty frustrating seeing the number remain the same month after month. To help you reach your goal, here are five ways you can raise your credit score.

Make Timely Payments

There’s no question that making your credit payments on time each and every month is one of the most important factors for your credit score. This doesn’t necessarily mean that you can’t carry a balance on revolving credit accounts, but late minimum payments incur a fee and remain on your credit report. In the end, it all comes down to creating long-term trust with lenders.

Keep Your Utilization Rates Low

Some financial experts believe that carrying a balance above 30 percent of your credit limit can damage your credit score. Though this frequently quoted 30 percent is seen as the hard and fast rule for credit utilization, experts say it is actually a cap. Carrying a balance below this amount— preferably below 20%— is ideal for raising your credit score.

This is also a reminder that carrying a balance does not negate your chances of hitting that magical 850.

Only Open Necessary Accounts

Though account diversity can help perfect your credit score, opening accounts or cards you won’t use and that have burdensome fees and stipulations can hurt your credit. Only open lines of credit when you need them. However, if you’re tempted to accept your favorite retailer’s credit card offer, for example, be sure you can pay off each purchase in a timely manner.

At the same time, be mindful of closing accounts once they’re opened. Cutting up that credit card simply because you have a new account means lowering your overall credit limit and possibly increasing your utilization rate. A card with a long life also shows your dedication to maintaining the account.

Have a Long Credit History

It’s a little confusing to learn that you don’t begin your credit journey with a perfect score. Credit scores, however, are about building a credit reputation over time. It’s simply impossible to prove how you’ll respond to paying down debt until you do so over several years. If you’ve only just begun to build credit or have minimal accounts, your score will improve as you continue to follow your set payment schedule.

Cultivate Account Variety

Whenever you hear about someone achieving the perfect credit score, they often boast their wide range of credit accounts. Each line of credit opened speaks to a different type of spending. Things like student and car loans prove that you can pay off large sums over time, and revolving accounts, such as credit cards, verify that you’re able to manage your monthly budget with confidence.

Even different credit cards can offer a variety of perks. Some people may keep a credit card open for emergencies, while others could use it to accumulate travel points or store credit. When you see each line of credit as a unique tool, you’re more likely to approach credit spending with a healthy mindset. In turn, this shows up in your long-term credit report and helps your score grow.

Summary: How to Achieve Perfect Credit

The perfect credit score is achievable with a little strategy and plenty of patience. The ultimate number—a score of 850—is possible over time and with the proper financial knowledge. Most importantly, understand that credit scores can fluctuate as your life changes. Focus on your overall financial wellbeing and it may be within your reach sooner than you think.

Learn more about credit scores:

Here’s how you can get a free credit report.

Check out some ways to raise your credit score.

Some reasons why credit history matters.

Let’s review credit score basics.

Source: mint.intuit.com

October 25, 2021

What Is a Piggyback Mortgage Loan?

At its simplest, a piggyback mortgage can be defined as a second mortgage, typically a home equity loan or home equity line of credit (HELOC).

Piggyback mortgage loans might be a smart option for homebuyers looking to finance a home without a large down payment. They are taken out at the same time as main mortgages and may save homebuyers money over the life of their loans by not having to pay for private mortgage insurance (PMI).

Read on to learn more about what a piggyback loan is and how it works.

What Is a Piggyback Loan?

Homebuyers can use a piggyback mortgage loan to fund the purchase of a property. Essentially, they take out a primary loan and then a second loan, “the piggyback loan,” to fund the rest of the purchase.

Using the strategy helps homebuyers reduce their mortgage costs, such as by not needing a 20% down payment to qualify. It also helps them avoid the need for private mortgage insurance, which is usually required for those who don’t have a 20% down payment.

How Do Piggyback Loans Work?

When appropriate for a homebuyer’s unique situation, a piggyback mortgage might potentially save the borrower in monthly costs and reduce the total amount of a down payment.

Here’s an example to consider of how they work:

Jerry is buying a home for $400,000. He doesn’t want to put down more than $40,000 for the down payment. This eliminates several mortgage types. He works with his lender to secure a first mortgage for $320,000, then another to secure a piggyback mortgage of $40,000 and finishes the financing process with his down payment of $40,000.

Piggyback home loans were a popular option for homebuyers and lenders during the housing boom of the early 2000s. But when the housing market crashed in the late 2000s, piggyback loans became less popular, as a lack of equity proved homeowners more vulnerable to loan defaults.

Fast forward to today’s housing market and piggybacks are starting to become a viable and acceptable option again.

Recommended: Guide to Buying, Selling, and Updating Your Home

Types of Piggyback Loans

A 80/10/10 Piggyback Loan

There are different piggyback mortgage arrangements, but an 80/10/10 loan tends to be the most common. In this scenario, a first mortgage represents 80% of the home’s value, while a home equity loan or HELOC makes up another 10%. The down payment covers the remaining 10%.

In addition to avoiding PMI, homebuyers may use this piggyback home loan to avoid the mortgage limits standard in their area.

A 75/15/10 Piggyback Loan

A loan with a 75/15/10 split is another popular piggyback loan option. In this case, a first mortgage represents 75% of the home’s value, while a home equity loan accounts for another 15%. And like the 80/10/10 split, the remaining 10% is the down payment.

For example, a $300,000 75/15/10 loan would break down like this:

Main loan (75%): $225,000
Second loan (15%): $45,000
Down payment (10%): $30,000

	80/10/10 Piggyback Loan	75/15/10 Piggyback Loan
Structure:	80% primary loan 10% HELOC 10% down payment	75% primary loan 15% HELOC 10% down payment
Typical use:	Commonly used to avoid PMI and stay under jumbo loan limits	Commonly used when purchasing a condo to avoid higher mortgage rates

The Potential Benefits and Disadvantages of a Piggyback Mortgage

A piggyback mortgage may help homebuyers avoid monthly private mortgage insurance payments and reduce their down payment. But that’s not to say an 80/10/10 loan doesn’t come with its own potentially negative costs.

There are pros and cons of piggyback mortgages to be aware of before deciding on a mortgage type.

Piggyback Mortgage Benefits

Allows for retention of liquid assets. Some lenders request a downpayment of 20% of the home’s purchase price. With the average American home price at nearly $303,288, this can be a difficult sum of money to save. A piggyback mortgage may help homebuyers secure their real estate dreams with less cash.

Possibly no PMI required. In what may be the largest motivator in securing a piggyback mortgage, homebuyers may not be required to pay PMI, or private mortgage insurance, when taking out two loans. PMI is required until 20% of a home’s value is paid, either with a down payment or by paying down the loan’s principal over the life of the loan.

PMI payments can add a substantial amount to a monthly payment and, just like interest, it’s money that won’t be recouped by the homeowner when it’s time to sell. With an 80/10/10 loan, both loans meet the requirements to forgo PMI.

Potential tax deductions. Purchasing a home provides homeowners with a list of potential tax deductions . Not only is there potential for the interest on the main mortgage loan to be tax deductible, the interest on a qualified second mortgage may also be deductible.

Potential Downsides of Piggyback Mortgages

Not everyone qualifies. Piggyback mortgages can be risky for lenders. Without PMI, there is an increased risk of a financial loss. This is why they’re typically only granted to applicants with superb credit. Even if it’s the best option, there’s no guarantee that a lender will agree to a piggyback loan scenario.

Additional closing costs and fees. One major downfall of a piggyback loan is that there are always two loans involved. This means a homebuyer will have to pay closing costs and fees on two loans at closing. While the down payment may be smaller, the additional expenses might outweigh the initial savings.

Savings could end up being minimal or lost. Before deciding on a piggyback loan arrangement, a homebuyer may want to estimate the potential savings. While this type of loan has the potential to save money in the beginning, homeowners could end up paying more as the years and payments go on, especially because second mortgages tend to have higher interest rates.

To quickly make an assessment, make sure the monthly payment of the second mortgage is less than the applicable PMI would have been on a different type of loan.

Pros of Piggyback Loans	Cons of Piggyback Loans
Secure a home purchase with less cash	Only applicants with excellent credit may qualify
Possible elimination of PMI requirements	Extra closing costs and fees may apply
Could qualify for additional tax deductions	A second mortgage could cost more money over the entire loan term

Qualifying for a Piggyback Mortgage

It’s essential to keep in mind that you’re applying for two mortgages simultaneously when you apply for a piggyback home loan. While every lender may have a different set of requirements to qualify, you usually need to meet the following criteria for approval:

• Your debt-to-income (DTI) ratio should not exceed 28%. Lenders look at your DTI ratio — the total of your monthly debt payments divided by your gross monthly income — to ensure you can make your mortgage payments. Therefore, both loan payments and all of your other debt payments shouldn’t equal more than 28% of your income.

• Your credit score should be close to excellent. Because you are taking out two separate loans, your risk of default increases. To account for this increase, lenders require a good credit score, usually over 680, to qualify. A higher credit score means you’re more creditworthy and less likely to default on your payments.

Before you apply for a piggyback loan, make sure you understand all of the requirements to qualify.

Refinancing a Piggyback Mortgage

Sometimes home owners will seek to refinance their mortgage when they have built up enough equity in their home. Refinancing can help homeowners save money on their loans if they receive a lower interest rate or better terms.

But, if you have a piggyback mortgage, refinancing could pose a challenge. It’s often tricky to refinance a piggyback loan because both lenders have to approve. In addition, if your home has dropped in value, your lenders may even be less enticed to approve your refinance.

On the other hand, if you’re taking out a big enough loan to cover both mortgages, it may help your chances of approval.

Is a Piggyback Mortgage a Good Option?

Not sure if a piggyback mortgage is the best option? It may be worth considering in the following scenarios:

If you have minimal down payment resources: Saving up for a down payment can take years, but a piggyback mortgage may mean the homebuyer can sign a contract years sooner than any other type of mortgage.

If you need more space for less cash: Piggyback loans often allow homeowners to buy larger, recently updated or more ideally located homes than with a conventional mortgage loan. This advantage can make for a smart financial move if the home is expected to quickly build equity.

If your credit is a match: It’s traditionally more difficult to qualify for a piggyback loan than other types of mortgages. For most lenders, a homebuyer will need:

• 10% down payment

• Stable income and employment (proven by tax records)

• Debt-to-income ratio of 43% or less

Piggyback Mortgage Alternatives

A piggyback mortgage certainly isn’t the only type offered to hopeful homebuyers. There are other types of mortgage loans homebuyers may also want to consider.

Conventional or Fixed-Rate Mortgage

This type of loan typically still requires PMI if the down payment is less than 20% of the home’s purchase price, but it is the most common type of mortgage loan by far. They’re often preferred because of their consistent monthly principal and interest payments.

Conventional loans are available in various terms, though 15 years and 30 years are the most popular.

Adjustable-Rate Mortgage

Also known as an ARM, an adjustable rate mortgage may help homebuyers save in interest rates over the life of their loan, but the interest rate will only remain the same for a certain period of time, typically for one year up to just a few years.

After the initial term, rate adjustments reflect changes in the index (a benchmark interest rate) the lender uses and the margin (a number of percentage points) added by the lender.

Interest-Only Mortgage

For some homebuyers, an interest-only mortgage can provide a path to homeownership that other types of mortgages might not. During the first five years (some lenders allow up to 10 years), homeowners are only required to pay the interest portion of their monthly payments and put off paying the principal portion until they’re better financially situated.

FHA Loan

Guaranteed by the Federal Housing Administration , FHA loans include built-in mortgage insurance, which makes these loans less of a risk to the lender. So while it’s not possible to save on monthly insurance payments, homebuyers may still want to consider this type of loan due to the low down payment requirements.

Other Options to Consider

Some other alternatives to a piggyback mortgage might include:

• Speaking to a lender about PMI-free options

• Quickly paying down a loan balance until 20% of a home’s value is paid off and PMI is no longer required

• Refinancing (if a home’s value has significantly increased) and allowing the loan to fall under the percentage requirements for PMI

• Saving for a larger down payment and reducing the need for PMI

The Takeaway

Before signing on for a piggyback mortgage, it’s always recommended that a homebuyer fully understand all of their mortgage options. While a second mortgage might be the best option for one homebuyer, it could be the worst option for another. If a piggyback mortgage is selected, understanding its benefits and potential setbacks may help avoid financial surprises down the line.

SoFi offers a variety of mortgage loan options for homebuyers securing their first mortgage or homeowners interested in refinancing their current home. There is an easy online application process and you can keep even more money in your pocket with SoFi’s low, competitive rates.

Explore mortgage options at SoFi.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Source: sofi.com

October 21, 2021

Understanding the Different Types of Mortgage Loans

An important first step for aspiring homebuyers is to decide which type of home loan will best serve their needs. The interest rate, length, down payment, borrower qualifications, and extra fees associated with different types of mortgage loans will all play a role in the decision.

To help make the choice a bit easier, let’s talk about mortgage basics and compare the advantages and disadvantages of mortgage types.

Recommended: First-Time Home Buyer’s Guide

Fixed-Rate vs. Adjustable-Rate Loans

When it comes to understanding types of mortgage loans, the difference between an adjustable-rate mortgage and fixed-rate mortgage is the first thing to consider.

	Pros	Cons
Fixed-Rate Mortgage	Your monthly payment is fixed, and therefore predictable.	If you take out a loan when rates are high, you’re locked in unless you can refinance.
Adjustable-Rate Mortgage	The initial interest rate is usually lower, making this a good option for someone who can sell before the rate adjusts.	Rate increases could be dramatic, leading to potentially much higher monthly payments.

Fixed-Rate Mortgage

Fixed-rate mortgage loans are exactly what they sound like: The interest rate is fixed for the entire life of the loan. The term can vary.

These loans offer a steady monthly payment and relatively low interest rate. Borrowers can usually make extra payments toward the principal if they want to pay off the mortgage faster, as prepayment penalties are rare.

Quick Tip: Check out our Mortgage Calculator to get a basic estimate of your monthly payment.

Pro: The monthly payment is fixed, and therefore predictable.

Con: If you take out a fixed-rate loan when interest rates are high, you’re locked into that rate for the entire term — unless you’re able to refinance later and get a lower rate.

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate home loan is by far the most common type of mortgage, according to Freddie Mac. However, because payments are made over a relatively long period, lenders tend to see them as riskier than shorter home loans, and thus ask for higher interest rates.

15-Year Fixed-Rate Mortgage

A 15-year loan may have a lower interest rate, and you will pay less in total interest than you would on a 30-year loan. On the flipside, the shorter term means monthly payments may be much higher.

Adjustable-Rate Mortgage

An adjustable rate mortgage (ARM) has an interest rate that fluctuates after an initial fixed-rate period of months to years. The variable rate is typically tied to a benchmark index rate that changes with market conditions.

ARMs are often expressed in two numbers, like 7/1 or 5/1. A 5/1 ARM typically has a rate that’s fixed for five years and then adjusts every year, up to a cap, if there is one.

Pro: The initial interest rate of an ARM is usually lower than the rate on a traditional fixed-rate loan, so it’s easy to be drawn to the teaser rate, but it could end up costing more in interest than a fixed-rate loan over the life of your mortgage. An ARM might work best for someone who expects to sell the property before the rate adjusts.

Con: Rate increases in the future could be dramatic — though there are limits to the annual and life-of-loan adjustments — typically leaving many adjustable-rate mortgage holders with much higher monthly payments than if they had committed to a fixed-rate mortgage.

To compare two ARMs, or an ARM with a fixed-rate mortgage, it’s a good idea to read up on indexes, margins, discounts, caps and more .

Check out local real estate
market trends to help with
your home-buying journey.

Conventional vs. Government-Insured Loans

The most popular type of mortgage, a conventional loan, is originated by a bank or other private lender, and it is not backed or insured by the government. Then there are several types of government-insured loans, some requiring little or nothing down.

	Pros	Cons
Conventional Loan	A variety of property types can qualify, and there’s the option to put down less than 20% with PMI.	There are stricter qualification requirements, and a higher down payment is required.
FHA Loan	There are lower down payment and credit score requirements, plus the option to get a non-occupant co-signer.	The MIP lasts for the life of the loan if the down payment is less than 10%.
VA Loan	You don’t need to put money down or make monthly PMI payments.	You’ll owe a one-time VA funding fee on purchase loans.
FHA 203(k) Loan	You can use it to buy and rehab a property that doesn’t qualify for an FHA loan, and it requires as little as 3% down.	You must qualify for the value of the property and the cost of planned renovations. Rates can be higher, and you’ll owe MIP.
Fannie Mae HomeStyle Loan	No MIP is required, and you can cancel mortgage insurance once you meet certain requirements; rates are often lower than with the FHA 203(k).	You must meet credit score thresholds.

Conventional Loan

Conventional loans usually have stricter requirements than government-backed home loans. Lenders typically look at credit scores and debt-to-income ratio, among other factors, in evaluating conventional loan applications.

Your down payment may be less than 20%, but if so, you’ll need to purchase private mortgage insurance (PMI) that insures the lender. PMI can be paid monthly or as an upfront premium that can be paid by you or the lender. PMI needs to stay in place until your loan-to-value ratio reaches 78%.

Pro: A variety of property types qualify for a conventional mortgage, and PMI can make it possible for borrowers to qualify for a conventional loan if they put down less than 20%.

Con: Conventional loans tend to have stricter requirements for qualification and may require a higher down payment than government loans.

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FHA Loan

Federal Housing Administration (FHA) loans are not directly issued from the government. Certain lenders can issue FHA loans on behalf of the government, and the FHA insures the loans.

Qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage, so FHA mortgages can be a good choice for people with less-than-stellar credit scores or a high debt-to-income ratio.

With at least a 580 FICO® credit score, you might qualify to put just 3.5% down ; with a score of 500 to 579, you could put just 10% down.

FHA mortgages come with an additional insurance charge called a mortgage insurance premium (MIP) — upfront and annual.

Pros: FHA loans have lower down payment and credit score requirements. Additionally, FHA loans may allow a non-occupant co-signer to help borrowers qualify.

Cons: The MIP stays in place for the life of the loan if the down payment is less than 10%.

VA Loan

The U.S. Department of Veteran Affairs backs home loans for members and veterans of the U.S. military and eligible surviving spouses. Similar to FHA loans, the government doesn’t directly issue these loans; instead, they are processed by private lenders and guaranteed by the VA.

Most require no down payment. Although there’s no minimum credit score requirement on the VA side, private lenders may have a minimum of 580 to 660.

Pros: You don’t have to put any money down or deal with monthly PMI payments.

Cons: There’s a one-time VA “funding fee” on purchase loans, which ranges from 1.4% to 3.6% .

FHA 203(k) Loan

Got your eye on a fixer-upper? A 203(k) loan helps buyers finance both the purchase of a house and repairs. Current homeowners can also qualify for an FHA 203(k) loan to finance the rehabilitation of their existing home.

The generous credit score and down payment rules that make FHA loans appealing for borrowers often apply here, although some lenders might require a credit score above 580.

With a full 203(k), the lender will assign a loan consultant to ensure that the right contractor gets hired and the work gets done as promised. A limited 203(k) loan allows you to do cosmetic upgrades worth about $35,000 and is offered by more lenders.

Pros: An FHA 203(k) loan can be used to buy and rehab a property that wouldn’t qualify for a regular FHA loan. And it requires as little as 3.5% down.

Cons: These loans require you to qualify for the value of the property, plus the costs of planned renovations. The rate can be higher than that of a standard FHA loan. Additionally, you’ll pay an upfront and monthly mortgage insurance premium.

Fannie Mae HomeStyle Loan

For fixer-upper fans, an alternative is the Fannie Mae HomeStyle Loan, which requires only 3% to 5% down but a minimum credit score of 620.

Pros: No upfront MIP is required, and you may cancel mortgage insurance after 12 years or once you reach 20% home equity. The rate is often lower than that of an FHA 203(k).

Con: You must meet credit score thresholds.

Conforming vs. Nonconforming Loans

Both conforming and nonconforming mortgages are types of conventional mortgages.

	Pros	Cons
Conforming Loans	Interest rates and fees tend to be lower than for nonconforming loans.	The amount you can borrow is limited.
Nonconforming Loans	There may be no limit on loan size, and they may offer people with poor credit an opportunity to get a loan.	They can have higher interest rates and requirements due to the added risk for lenders.

Conforming Loans

Mortgages that conform to the dollar limits set by the Federal Housing Finance Agency are called conforming loans. The limit changes annually, based on federal guidelines.

As of 2021, the conforming loan limit conforming loan limit is $548,250 for a single-family home in most of the U.S. and goes up to $822,375 in certain higher-cost areas.

Pros: Conforming loans may have lower interest rates and fees than nonconforming loans.

Cons: The amount that can be borrowed is limited.

Nonconforming Loans

Non-conforming loans aren’t as standardized as conforming loans, meaning rules can vary more from lender to lender. This can include features like eligibility, rates and others.

Pros: There may be no limit on loan size, allowing you to purchase a more expensive home. They also can offer people with poor credit who may not qualify for a conforming loan access to a home loan.

Cons: Because non-conforming loans tend to be a bit riskier for lenders, they generally come with higher interest rates and can have higher requirements.

Reverse Mortgage

	Pros	Cons
Reverse Mortgage	No monthly payment is needed, and there’s choice for how payments are made.	Interest rates can be higher than with traditional mortgages, and there are fees involved.

A reverse mortgage allows homeowners 62 and older to turn part of their home equity into cash. There are several factors to weigh, including the youngest homeowner’s age, the loan rate and costs, the desires of heirs and payout type.

Pros: The homeowner doesn’t have to make any monthly payments, and they can choose a lump sum, a monthly disbursement or a line of credit — or some combination of the three.

Cons: The interest rate can be higher than traditional mortgage rates. The homeowner will also typically pay mortgage insurance, an upfront fee, an origination fee and third-party fees.

Jumbo Mortgage

	Pros	Cons
Jumbo Mortgage	Allow buyers to purchase a more expensive property, and there’s no mortgage insurance requirement.	The application requirements can be steep, and interest rates and closing costs may be higher.

Another type of mortgage loan is a jumbo mortgage, which is a home loan above the amounts set by the conforming loan limits, mentioned above. As such, it is a type of non-conforming loan. Also known as a jumbo loan, a jumbo mortgage can be obtained through private lenders.

Pros: Jumbo loans make it possible for buyers to purchase a more expensive property. Plus, there’s no mortgage insurance requirement.

Cons: The application requirements for a jumbo loan can be steep, including a larger down payment, and interest rates and closing costs can run higher.

USDA Mortgage

	Pros	Cons
USDA Mortgage	There’s zero down payment and interest rates tend to be low.	Buyers are restricted to certain areas and must be below income limits; they also must pay a guarantee fee.

A USDA mortgage is a type of mortgage loan offered to eligible rural homebuyers. The loans are issued through the USDA loan program by the United States Department of Agriculture as part of its rural development program.

Pros: There’s zero down payment required, and interest rates tend to be low due to the USDA guarantee.

Cons: Buyers are restricted to rural areas for this loan type, and there are income limits. Plus, you have to pay a guarantee fee, though it’s typically less expensive than mortgage insurance.

Interest-Only Mortgage

	Pros	Cons
Interest-Only Mortgage	Payments will be much lower during the introductory period, freeing up funds for other purposes.	The homeowner won’t be building equity without principal payments, and payments will increase significantly after the introductory period.

As its name suggests, an interest-only mortgage is a mortgage type where you only make interest payments for a certain number of years at the start of the loan term. Your principal stays the same during this time. Once the initial time frame — usually 5 or 10 years — is over, your loan becomes fully amortized, meaning you start paying interest and principal each month from there on out. These loans don’t tend to be widely available.

Pros: Interest-only loans can make monthly payments lower during the introductory period, allowing you to use the money that would have gone to principal payment for other purposes.

Cons: Because the homeowner is not making payments toward the principal, they aren’t building any equity. Additionally, their payments will increase significantly once the introductory period ends.

The Takeaway

Among the smorgasbord of different mortgage types, which is best for you? With so many types of home loans, it’s a good idea to do your homework and shop around.

As you weigh all the types of mortgage loans out there, consider getting prequalified for a mortgage with SoFi. SoFi Home Loans come with competitive fixed rates and can call for as little as 5% down.

Check your rate in two minutes.

SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

October 8, 2021

Mortgages for Doctors: Expanded LTVs and Large Loan Amounts

If you’re a doctor, resident, or even a veterinarian, getting a mortgage can be a little bit easier thanks to so-called “physician mortgages” offered by most major lenders.

Just about every bank offers a special mortgage program for doctors, including large commercial banks like Bank of America and small local credit unions as well.

The names of these programs, along with the guidelines and perks, will vary from bank to bank. They’re typically not heavily advertised, so you may have to do some digging to find all the details.

But they all seem to have two things in common; large maximum loan amounts and high loan-to-value ratios (LTVs).

My assumption is lenders are keen to offer these loans to future doctors because they’ll be good clients with lots of assets, ideally kept with the bank. In fact, you may need a prior banking relationship to get approved.

What Is a Physician Mortgage?

doctor mortgage

A mortgage designed specifically for doctors, residents, fellows, and interns
As well as dentists, orthodontists, pharmacists, and veterinarians
Offers more flexible underwriting like higher loan amounts and LTVs and no mortgage insurance
Applicants can get approved regardless of medical school debt and/or limited employment history

In a nutshell, a “doctor mortgage” is a home loan designed specifically for physicians that offers flexible underwriting guidelines and unique features a traditional mortgage loan may not offer.

But we’re not just talking medical doctors (MDs). These loan programs are often available to a wide range of disciplines, including dentists, orthodontists, veterinarians, ophthalmologists, and even pharmacists and lawyers.

If you have any of the following licenses, you might be able to take advantage of one of these specialty programs:

– MD
– DO
– DDS
– DVM
– DMD
– OD
– DPM
– PharmD

Additionally, you can often be a resident, fellow, intern, or practicing physician to qualify. So they’re pretty flexible in terms of where you’re at in your career.

This is especially true if you’ve yet to start a new job, but have an employment contract in hand.

Banks and lenders know you’ve got a lot of earnings potential if you’re going to be a doctor, even if you don’t have the down payment funds necessary to buy your first home. Or even the pay stubs to document your income.

It’s a common problem, thanks to the high cost of medical school, and the fact that doctors, like anyone else in school, don’t get paid the big bucks until they’ve completed their training.

Instead of saving for a down payment, these individuals might be busy paying off costly student loans.

Compounding this is the fact that someone who will be highly compensated in the near future might be looking at a very expensive home purchase.

This explains why physician mortgage programs tend to allow for higher loan amounts than typical loan programs, along with higher LTVs. Those are certainly the two main distinctions.

Doctors Can Get a Mortgage with No Money Down

Physician mortgages come with flexible terms including low and no-down payment options
And often allow for very large loan amounts to suit home buyers at all levels
This is necessary because doctors tend to purchase very expensive properties despite being green in their career
These tailored programs can make it easier to get approved for a home loan without additional scrutiny

Many of these programs allow doctors to get a mortgage with no money down, something most individuals can’t readily take advantage of unless they’re a veteran or buying in a rural area.

You might see something like 100% financing up to $750,000 or $850,000 loan amounts, and just 5% down for $1 million-dollar loan amounts, assuming you have a decent credit score.

That’s a non-conforming loan amount (jumbo) with zero down payment requirement. Good luck finding that elsewhere.

Additionally, doctors might be able to get that level of financing without private mortgage insurance (PMI), which is typically required for a loan amount above 80% LTV.

The hitch is that even if PMI isn’t explicitly required on high-LTV mortgages, it’s generally just built into the rate.

So instead of say a mortgage rate of 3.75%, you might pay 4% instead. You’re just charged a different way.

These Lenders Understand Your Employment Situation Better

Banks and lenders that specialize in physician mortgages will be better equipped to get you approved
They should have an easier time navigating your unique financial and employment situation
This could mean a faster loan process and one that is more likely to make it to the finish line
Conversely you might run into trouble with conventional lenders that aren’t familiar with how doctors get paid

Another perk is that the bank or lender (or credit union) offering this type of loan should have a better understanding of your situation.

After all, they’ve done it before, likely hundreds or thousands of times, so they should know how to navigate the process.

Instead of wondering what documentation they’ll need to get your loan approved, they’ll likely be familiar with paperwork requirements and the handling of student loan debt when it comes to your DTI.

Ideally, this means you’ll stand a better chance of getting approved for a mortgage with fewer snags or gotchas.

This can be really important if you’re relocating to a new city and trying to nail down living arrangements, especially in a competitive housing market.

Doctor Mortgage Loan Programs

Home purchase and refinance loans
Available on primary residences and second homes
Single-family residences, multi-unit properties, condos/townhomes
Fixed-rate options: 30-year, 20-year, 15-year, etc.
Adjustable-rate options: 5/1, 7/1, 10/1, etc.
Interest-only options to maximize cash flow

As far as loan options go, just like normal mortgages you can get a fixed-rate loan or an ARM on a home purchase or a refinance.

So if you want to play it safe with a 30-year or 15-year fixed, no problem. But if you want to save some money, an adjustable-rate mortgage could also be an option.

Some doctors may favor ARMs because of the lower monthly payment, and the fact that they may sell or refinance before the initial fixed period ends.

For example, you might buy a starter home before upgrading a few years later, all while the interest rate is fixed if it’s a 5/1 or 7/1 ARM.

And if the terms of a physician mortgage aren’t as attractive as a typical mortgage, it might make sense to go with an ARM early on.

After all, you might move up to an even larger home once you’re more established. Or you could relocate to a different city for a new position.

Perhaps you’ll be able to pay down a large chunk of your mortgage balance early, making the type of loan you go with less significant.

Consider that when deciding if mortgage points are worth it because you might not keep your loan long enough to justify the upfront front.

Veterans may qualify for a $0 down VA loan

Minimum Down Payment for a Physician Mortgage

100% financing on loan amounts up to $750,000
95% financing on loan amounts up to $1 million
90% financing on loan amounts up to $1.5 million

While these programs can certainly vary from lender to lender, there seems to be a somewhat standardized down payment structure.

From what I’ve seen, the tiers above are the most common requirements for these types of loans.

Generally, you can get a no down payment loan up to $750,000, and 5% down for loan amounts to $1 million.

At $1.5 million, you might be required to put down 10%, depending on the lender in question.

The main difference between banks might be maximum financing, with certain banks allowing much higher loan amounts than others. Or some offering up to $1.25 million with just 5% down payment.

Be sure to put in the time to shop around if you’re buying a super expensive home, as these minimums and maximums range quite a bit.

Which Banks Offer Doctor Mortgages?

As noted, just about every major bank out there has a program suited specifically to doctors and other medical professionals.

The same goes for independent mortgage brokers, who may be partnered with wholesale lenders that offer these programs.

Chances are your financial planner will have a referral or send you in the right direction. Just be sure to look beyond their preferred vendor…

In terms of specific banks, I’ve listed several below to give you an idea of qualifying criteria and options.

For example, Bank of America can close 90 days before you start a new job if you’re a resident or a fellow.

BMO Harris offers flexible debt-to-income underwriting guidelines for physicians and no income history requirement (proof of future income is required).

Fifth Third Bank allows established physicians and dentists to finance up to $750,000 with no down payment when purchasing or refinancing a home loan.

Huntington Bank allows 90% financing up to $2,000,000 if you have an active employment contract with proof of sufficient income and reserves.

KeyBank will go all the way up to $3.5 million loan amounts, and eligible property types include owner-occupied primary residences and second homes.

Both Regions Bank and Ruoff Mortgage pitch the no down payment and no PMI requirement, both of which are more flexible than standard loan programs.

Meanwhile, a TD Bank Medical Professional Mortgage can consider your overall earning potential while ignoring certain student loan debt to sidestep DTI constraints.

Finally, the Union Bank Doctor Loan Program allows loan amounts as high as $5 million if you want your dream house today instead of later.

And they offer interest-only adjustable-rate options if you’re looking to maximize cash flow and put your money to work elsewhere.

Be Sure to Consider Traditional Mortgage Options Too

You don’t necessarily need a physician mortgage if you’re a doctor
Traditional loan programs could be perfectly suitable and cheaper
Explore all home loan options to ensure you don’t miss out on a better deal
A direct lender or mortgage broker might offer a lower mortgage rate than the big banks

It should also be noted that the more flexible guidelines associated with a doctor mortgage don’t come free of charge.

While the lender is probably happy to offer financing to a well-qualified borrower with excellent earnings potential, they will often charge a higher interest rate in exchange.

Once you are able to pay down your mortgage, it could make sense to look into refinancing to a traditional mortgage, especially if your LTV is low enough to avoid mortgage insurance and most pricing adjustments.

These loans typically do not have a prepayment penalty, so you should be free to refinance almost immediately.

If you’re paying down a mortgage at 95% or 100% LTV, chances are you’re paying a lot more in interest than you otherwise would with a lower LTV mortgage, such as one at 80% or less.

Also be sure to shop both traditional and physician mortgages to determine which is the better option.

You might not need to get a mortgage via one of these special programs if you have down payment funds available, or even a gift for down payment from a relative.

Doctor Mortgage Loans in Review

Can be a resident, fellow, practicing physician (or even a veterinarian, dentist, pharmacist, or lawyer)
Ability to obtain financing before your job starts and use projected income
Can be a purchase or a refinance, sometimes second homes permitted
Multi-unit properties and condos/townhomes should be OK
Allow for large loan amounts (up to $1.5 million+)
Often do not need a down payment for loan amounts up to $750,000
Typically do not charge private mortgage insurance (PMI)
Flexible qualifying guidelines with regard to student loans and DTI
Generally need good credit (720+) to qualify
Both fixed and adjustable-rate options available (sometimes interest-only)
Mortgage rates may be higher than traditional loans
Banks may require you to open a checking/savings account
Also consider a mortgage broker who may be able to link you with a wholesale lender

Source: thetruthaboutmortgage.com

September 14, 2021

Why It’s Suddenly Harder to Get a Mortgage

With COVID-19 making it incredibly difficult to buy a home, or even to get a mortgage, home buyers and homeowners trying to refinance their mortgage have something new to keep them awake at night.
In response to increased risk to lenders from the coronavirus, in mid-April, JPMorgan Chase raised standards for mortgages and stopped approving mortgages with down payments lower than 20%. It also increased its minimum FICO credit score to 700.

Lenders Raise Scores

Flagstar raised its minimum credit score for new Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA) purchase loans to 680. For cash-out refinances, the bank now requires that borrowers have at least a minimum credit score of 700.

US Bank and Wells Fargo both raised their minimum credit score to 680 for FHA, VA, and USDA loans, and 640 for conventional loans. LoanDepot requires 620 minimum FICO score for VA and FHA loans and a higher score, 660+, for cash-out or streamline refinancing. Now, the bank requires borrowers to have a minimum FICO score of 700 with a maximum debt-to-income (DTI) ratio of 43% when any funds used for closing costs or down payment are not borrower’s funds or gift funds, according to HousingWire.

Serious millennial man using laptop sitting at cafe table, looking up mortgage related resources

Fannie Mae and Freddie Mac are adding to the new hurdles facing borrowers by asking lenders to take additional steps to verify employment status. Instead of verbal verification, lenders may obtain an email directly from the employer’s work email address that identifies the name and title of the verifier and the borrower’s name and current employment, a year-to-date pay stub from the period that immediately precedes the note date. When a borrower is using self-employment income to qualify, the lender must verify the existence of the borrower’s business within 120 calendar days before the note date from a third party, such as a CPA, regulatory agency, or the applicable licensing bureau, if possible.

Homeowners Rush to Refinance

With millions of breadwinners out of work and unemployment payments delayed, a surge of applications for home equity loans and lines of credit jumped 30% or more from a year earlier in recent weeks before stay-at-home orders cut application volumes.

Happy adult man having a video call with a laptop

Bank of America significantly tightened its standards for loans to homeowners wanting to borrow against their equity, ratcheting up an internal gauge that measures market conditions from the company’s lowest level to its highest. Its minimal credit score is now 720, up from 660.

Wells Fargo cut the maximum amount homeowners can borrow and reduced how much the bank will lend relative to a property’s value. The bank is applying stingier valuations to homes due to a lack of inspections and appraisals resulting from the pandemic.

Mortgage Credit Supply is Low

With mortgage rates at a historically low level and applications to refinance exploding, the Mortgage Bankers Association reported that the supply of available mortgage credit fell 16% in March, reaching the lowest level it has been since June of 2015.
“Mortgage credit supply decreased 16% in March to the lowest level since June 2015, with declines in availability across all loan types. There was a reduction in the availability of loans with lower credit scores and higher LTV ratios, and the largest pullback came from the jumbo and non-QM space,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

If you’re looking for more resources as a homeowner, renter, or seller during the coronavirus outbreak then visit our COVID-19 Resources page where you can find everything from DIY projects to tackle during a weekend to seller and buyer tips during the pandemic.

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Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.

Source: homes.com

What is the Meaning of Financial Discipline?

How Can Financial Problems be Improved?

7 Steps For Achieving Financial Discipline

1. Getting Clear About Financial Goals

Short-term Financial Goals

Mid-term Financial Goals

Long-term Financial Goals

2. Creating a Convenient Budget

3. Paying Down Existing Debt

4. Opening a High Yield Savings Account

5. Establishing an Emergency Fund

6. Cutting Back on Spending

7. Seeking Sound Investment Strategies

Focusing on Financial Planning

The Takeaway

Impacts to Your Credit Score

Little Time to Recover Before the Holidays

An Abundance of Free Activities

Plenty of Time to Prepare

The Big Picture: How the Loan Itself Works

How Do You Get the Money?

How Do You Pay it Back?

How Interest Rates Work

The Personal Loan Application Process

Checking Your Own Credit

Comparing Loans

Applying for a Loan

Waiting for Approval

Types of Personal Loans

Unsecured vs Secured Personal Loans

Fixed Rate vs Variable Rate Personal Loans

Small vs Large Personal Loans

Want to see if a personal loanis the right choice for you?Check out SoFi personal loans.

What Determines the Kinds of Loans You Can Get?

Credit Score

Debt-to-Income Ratio

Credit History

Explore SoFi Personal Loan Terms Today

The Takeaway

Dig Deeper

Additional Resources

How to Get a Personal Loan

1. Calculate How Much You Can Afford to Pay

How to Calculate Your Personal Loan’s Monthly Payment

2. Check Your Credit Score

Getting Your Free Credit Score and Report

What to Do With Your Credit Score

3. Get Prequalified

Questions About Your Identity

Questions About Your Income and Employment

Questions About Your Education

Questions About Your Financial Profile

4. Compare Loan Offers

Reading a Truth-in-Lending Disclosure

5. Gather Application Documents

6. Apply for the Loan

What to Expect After Applying for Your Loan

7. Close on the Loan

Final Word

Stock Advisor

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Benefits of Good Credit When Renting an Apartment

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The Takeaway

What is Credit?

Revolving Credit

Service Credit

Installment Credit

Why is Credit Score Important?

Credit Score Range

Excellent Credit Score

Want to see if a personal loan
is the right choice for you?
Check out SoFi personal loans.

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your home-buying journey.