DTI

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A couple of closely followed mortgage rates sank over the last seven days. Average 15-year fixed mortgage rates climbed, while average 30-year fixed mortgage rates shrank, while The average rate of the most common type of variable-rate mortgage, the 5/1 adjustable-rate mortgage, decreased.

As inflation surged in 2022, so too did mortgage rates. To rein in price growth, the Federal Reserve began bumping up its federal funds rate — a short-term interest rate that determines what banks charge each other to borrow money. By making it more expensive to borrow, the central bank’s goal is to reduce prices by curtailing consumer spending.

During its July 26 meeting, the Fed initiated a 25-basis point (or 0.25%) hike to its federal funds rate, marking its 11th increase in the current rate hiking cycle. The most recent increase could have an impact on mortgage rates, but experts say the markets may have already factored it into rates.

About these rates: Like CNET, Bankrate is owned by Red Ventures. This tool features partner rates from lenders that you can use when comparing multiple mortgage rates.

“Mortgage rates will continue to ebb and flow week to week, but ultimately, I think rates will stick to that 6% to 7% range we’re seeing now,” said Jacob Channel, senior economist at loan marketplace LendingTree.

The Fed doesn’t set mortgage rates directly, but it does play an influential role. Mortgage rates move around on a daily basis in response to a range of economic factors, including inflation, employment and the broader outlook for the economy. A lower inflation rate is good news for mortgage rates, but the potential for additional hikes from the central bank this year will keep upward pressure on already high rates.

Rather than worrying about mortgage rates, though, homebuyers should focus on what they can control: getting the best rate they can for their financial situation.

To increase your odds at qualifying for the lowest rate available, take the steps necessary to improve your credit score and to save for a down payment. Also, be sure to compare the rates and fees from multiple lenders to get the best deal. Looking at the annual percentage rate, or APR, will show you the total cost of borrowing and help you make an apples-to-apples comparison among lenders.

30-year fixed-rate mortgages

The average 30-year fixed mortgage interest rate is 7.55%, which is a decrease of 1 basis point from seven days ago. (A basis point is equivalent to 0.01%.) The most common loan term is a 30-year fixed mortgage. A 30-year fixed mortgage will usually have a greater interest rate than a 15-year fixed rate mortgage — but also a lower monthly payment. Although you’ll pay more interest over time — you’re paying off your loan over a longer timeframe — if you’re looking for a lower monthly payment, a 30-year fixed mortgage may be a good option.

15-year fixed-rate mortgages

The average rate for a 15-year, fixed mortgage is 6.80%, which is an increase of 1 basis point from the same time last week. Compared to a 30-year fixed mortgage, a 15-year fixed mortgage with the same loan value and interest rate will have a bigger monthly payment. However, as long as you’re able to afford the monthly payments, there are several benefits to a 15-year loan. These include typically being able to get a lower interest rate, paying off your mortgage sooner, and paying less total interest in the long run.

5/1 adjustable-rate mortgages

A 5/1 adjustable-rate mortgage has an average rate of 6.53%, a downtick of 3 basis points compared to a week ago. You’ll typically get a lower interest rate (compared to a 30-year fixed mortgage) with a 5/1 ARM in the first five years of the mortgage. But changes in the market could cause your interest rate to increase after that time, as detailed in the terms of your loan. For borrowers who plan to sell or refinance their house before the rate changes, an adjustable-rate mortgage could be a good option. Otherwise, changes in the market mean your interest rate may be significantly higher once the rate adjusts.

Mortgage rate trends

Mortgage rates were historically low throughout most of 2020 and 2021, but increased steadily throughout 2022 as the Federal Reserve began aggressively hiking interest rates. Now, mortgage rates are well above where they were a year ago. What does this mean for homebuyers this year?

“Mortgage rates have hovered in the 6% to 7% range for the past 10 months. Though home prices have softened slightly nationally, the still-high cost of borrowing means hopeful home buyers have felt little relief,” said Hannah Jones, economic research analyst at Realtor.com.

However, if inflation continues to decline and the Fed is able to hold rates where they are and eventually cut them, mortgage rates are likely to decrease slightly in 2023. However, they’re highly unlikely to return to the rock-bottom levels of just a few years ago.

The most recent housing forecast from Fannie Mae calls for the average 30-year fixed mortgage rate to close out the year at around 6.6%.

“Mortgage rates have been volatile for some time now and while they could eventually start trending down over the next six months to a year as inflation growth continues to cool, their path is probably going to be bumpy,” Channel said.

We use information collected by Bankrate to track changes in these daily rates. This table summarizes the average rates offered by lenders across the US:

Today’s mortgage interest rates

Loan term Today’s Rate Last week Change
30-year mortgage rate 7.55% 7.56% -0.01
15-year fixed rate 6.80% 6.79% +0.01
30-year jumbo mortgage rate 7.58% 7.58% N/C
30-year mortgage refinance rate 7.73% 7.75% -0.02

Rates as of Sept. 18, 2023.

How to find personalized mortgage rates

To find a personalized mortgage rate, speak to your local mortgage broker or use an online mortgage service. Make sure to take into account your current finances and your goals when trying to find a mortgage.

Specific mortgage interest rates will vary based on factors including credit score, down payment, debt-to-income ratio and loan-to-value ratio. Generally, you want a good credit score, a higher down payment, a lower DTI and a lower LTV to get a lower interest rate.

The interest rate isn’t the only factor that affects the cost of your home. Be sure to also consider additional factors such as fees, closing costs, taxes and discount points. Make sure you speak with a variety of lenders — like local and national banks, credit unions and online lenders — and comparison shop to find the best mortgage loan for you.

What is a good loan term?

One important consideration when choosing a mortgage is the loan term, or payment schedule. The loan terms most commonly offered are 15 years and 30 years, although you can also find 10-, 20- and 40-year mortgages. Mortgages are further divided into fixed-rate and adjustable-rate mortgages. For fixed-rate mortgages, interest rates are fixed for the life of the loan. Unlike a fixed-rate mortgage, the interest rates for an adjustable-rate mortgage are only the same for a certain amount of time (commonly five, seven or 10 years). After that, the rate changes annually based on the current interest rate in the market.

One thing to think about when choosing between a fixed-rate and adjustable-rate mortgage is the length of time you plan on living in your home. For people who plan on living long-term in a new house, fixed-rate mortgages may be the better option. While adjustable-rate mortgages might have lower interest rates upfront, fixed-rate mortgages are more stable over time. If you aren’t planning to keep your new home for more than three to 10 years, though, an adjustable-rate mortgage may give you a better deal. There is no best loan term as a general rule; it all depends on your goals and your current financial situation. Be sure to do your research and know what’s most important to you when choosing a mortgage.

Source: cnet.com

Apache is functioning normally

Apache is functioning normally

In July 2021 alone, more than 700,000 new home sales were processed. While that sounds like a lot, the number is lower compared to 2020, due in part to a housing shortage. Pair that shortage with plenty of people looking to make a home purchase and you have a competitive market in 2021 and beyond. 

You might think that these are just numbers—but understanding the housing market is pivotal to the mortgage approval process. If you’re considering buying a home, we’re here to guide you through the mortgage process. Get ready to be set up for success. 

In This Piece

Understand Your Credit History and Score

The home loan approval process includes a pretty thorough credit check. While you might be able to get approved for an FHA mortgage loan with a credit score as low as 500, most traditional mortgage loans require at least a 620 or higher.

While your credit score might make or break you at the beginning of a mortgage application process, once you continue the process, your entire credit history becomes important. Mortgage lenders look at issues such as delinquencies or open collections accounts on your credit history. They may also require that you make good on any open collections accounts before your mortgage approval can go through.

It’s a good idea to understand your credit history and score months before you plan to apply for a home loan. That way, you have time to resolve any issues or dispute inaccurate negative information that could be dragging your score down. 

You can get a free credit report from each of the major credit bureaus at AnnualCreditReport.com. You can also sign up for services such as ExtraCredit to get ongoing access to your credit reports and scores. ExtraCredit also includes features such as Build It that help you work on building your credit so you have a better chance at getting the mortgage loan—and rates—you want in the future.

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Prepare Your Personal Finances for the Home-Buying Process

Your credit isn’t the only financial factor that impacts your mortgage application process. Yes, your history of on-time payments to other creditors is important. But so is your ability to make payments on the mortgage loan in the future. Lenders are likely to be concerned with:

  • Your debt-to-income ratio, or DTI. This is how much of your income you need each month to pay your existing debts. The lower this figure is, the better. According to the Consumer Financial Protection Bureau, most mortgage lenders won’t approve home loans that bring a consumer above 43% DTI. 
  • Your income. In most cases, you’ll need to demonstrate that you have the income or other financial means to make your monthly mortgage payments. Your income can impact how much you can get approved for or whether you’re approved at all.
  • Your cash savings or other assets. If you need to make a down payment on your mortgage loan, you may need to demonstrate where that cash came from. You can get creative with sourcing your down payment within some rules, but you can’t always borrow it. And you can’t have cash show up in your account suddenly in the middle of your mortgage approval process without an explanation.

Understanding what mortgage lenders look at when considering you for a home loan could proactively help your case. Start early and work on reducing debt, increasing income and saving money for your down payment.

Decide What Mortgage You Can Afford

When you’re close to ready to start looking for a house and applying for a mortgage, take time to get an idea of how much mortgage you can actually afford. Start by taking a look at your budget—or create one if you don’t already have one.

Try to factor in expenses related to a new home, including savings for emergency repairs or maintenance. Once you know how much of a monthly payment you can afford, use an online mortgage calculator to test various loan and interest amounts. This helps you figure out your limits for home price, so you look for properties you can afford.

Research Potential Mortgage Options

Armed with knowledge about your budget, your credit and your overall financial status, hopefully you’re ready to do some research. Don’t apply yet—you want to apply for mortgages when you’re ready to make an offer on a home. 

In the meantime, do some research. Talk to your bank, and maybe even reach out to a mortgage broker. That way, you’ll know your options and what you might qualify for.

Gather Documents to Apply for a Mortgage

During your research, make notes about what documents and items a mortgage lender requires for the application. Gather those documents and information before you apply for preapproval or a mortgage. You’ll save major time and hassle during the home loan approval process.

Some items you might need include:

  • Identification, such as a driver’s license or other government-issued ID.
  • Documentation of your income, such as paycheck stubs, W2 forms or tax returns.
  • Documentation of assets, especially assets like savings or investment accounts that might be involved in sourcing your down payment. 
  • Your Social Security number for the credit check.
  • Documents showing you paid or settled any collections accounts or other negative issues on your credit report.

You may be asked for other items or documents throughout the mortgage underwriting process. When you apply for a mortgage make sure you’re available via email or phone, in case lenders have extra questions for you. 

Consider Getting Pre-approved for a Mortgage

Getting pre-approved for a mortgage can be a good step. Preapproval doesn’t mean you’ve successfully completed the entire mortgage approval process. However, it does mean the lender did a cursory review of your credit history and score—as well as any income information you reported—and is fairly comfortable saying you’ll be approved with a certainrate. 

Preapproval letters let you shop more confidently for a home. They also help demonstrate to sellers that you’re serious about your offer and will probably follow through without financial hiccups. In a competitive market with numerous offers on each home, this can make your offer more attractive to some sellers.

Apply for Mortgages Within a Short Period of Time

Finally, once you’re ready to purchase a home, ensure you apply for mortgages within a short period of time. Each time you apply for a loan, your credit is hit with a hard inquiry—which will bring your score down a bit. But the credit scoring models treat multiple mortgage applications within a short period of time as a single hard inquiry, because it’s assumed you may want to shop around for a good deal.

You should also be ready for the prospect of being approved with conditions. This means the mortgage lender will approve your loan as long as you meet certain conditions, which could include:

  • Providing supplemental documentation of credit history or income.
  • Satisfying the lender’s requirements for copies of banking statements or other documents.
  • Explaining an inconsistency or issue on your credit report.
  • Settling an old collections account or other debt.
  • Verifying where funds for a down payment came from.

Start Your Mortgage Application Process Today

Ultimately, being successful with the home loan application process comes down to being prepared and in good financial standing—or as in as good financial standing as you can. If you’ve gone through the above steps and are ready to apply for a mortgage, consider shopping for rates today.

Source: credit.com

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Apache is functioning normally

This correlation between the average cost of living and credit card limit continues when we look at the 10 states with the lowest average credit card limit. In the chart below, the states marked with an asterisk are also on the list of states with the lowest cost of living.

State

Average Credit Card Limit

Average Credit Score

Mississippi*

$21,676

667

Arkansas

$24,570

683

West Virginia*

$24,684

687

Alabama*

$25,621

680

Louisiana

$25,781

677

Kentucky

$25,962

692

Oklahoma*

$26,041

682

Indiana*

$26,676

699

Idaho

$26,871

711

Iowa*

$27,052

720

Source: Experian, Wisevoter

How Are Credit Card Limits Determined?

Credit card companies use several factors to determine your limit, which they review periodically over time. Some factors count more than others, varying by the credit card issuer. 

Your Credit Score

A higher credit score indicates you are more likely to pay your debts, which tells credit card issuers you are lower-risk. As a result, people with higher credit scores often have higher credit card limits. 

According to FICO®, a variety of factors determine credit scores, including:

  • Payment history: Your payment history determines 35% of your credit score, which shows how likely you are to pay your debts on time. 
  • Credit utilization rate: Your credit utilization rate is the ratio of the debt you owe to the total amount of credit available to you. You can factor your credit utilization rate by dividing your current balance by your total credit limit and multiplying the result by 100. A healthy credit utilization rate is considered anything below 30% —any higher and potential lenders may consider you overextended.
  • Length of credit history: The longer your credit history, the better picture a lender has of your risk level. A short history isn’t necessarily bad unless it contains a poor payment history and high utilization rate.
  • Recent hard inquiries: A hard inquiry is a record of a lender checking your credit. Too many hard inquiries in a short period can lower your credit score temporarily, so experts recommend six months between hard inquiries. 

Credit card companies also use your credit score to determine your interest rate, so keeping an eye on your score with free credit reports is important. 

Monthly Income

Credit card issuers want to know if you have monthly income to ensure you can pay your debts. The higher your monthly income, the more likely you are to get approved for a higher credit limit.

Monthly Expenses

Credit card companies look at your total monthly expenses, especially compared to your monthly income. Generally, they’ll look at your monthly housing costs (mortgage or rent), although they may also ask for information about other regular expenses such as utilities. Your monthly expenses are then compared to your monthly income to determine your credit card limit.

High monthly expenses won’t hurt your credit card limit as long as your monthly income is high enough to cover them.

Debt-to-Income Ratio

Credit card issuers also examine your debt-to-income ratio when determining your credit card limit. Experts consider anything under 36% to be a good debt-to-income ratio for a credit card.

To calculate your DTI ratio, divide your total recurring monthly debt (mortgage, auto loan, student loans, existing credit card debt, etc.) by your gross monthly income (how much you make before taxes) and multiply the answer by 100.

Your History with the Issuer

If you already have a positive credit history with the company issuing the credit card, they may be more likely to give you a higher credit limit. However, if they feel you have too many cards or a rocky credit history with them, they may issue a lower credit limit.

The Issuer’s Credit Approval Policies

Every credit card company wants to avoid risk and crafts a specific set of policies to determine how much credit to extend to a cardholder. Its policies may consider elements not listed here or weigh factors differently than another company, which is why credit card limits are not standard across companies.

Current Economic Outlook

When the economy is healthy, credit card companies may be more open to taking risks and offer higher credit card limits. However, when the economy is uncertain, such as during the pandemic, issuers are less likely to take risks, offering lower credit card limits for new cardholders.

How to Get a Higher Credit Limit

A low credit card limit isn’t necessarily bad, but it can make getting approval for additional loans or credit challenging if your credit utilization rate is too high. It can also put large purchases, such as an appliance or unexpected car repair, out of reach. 

To get a higher credit card limit:

  1. Call your credit card issuer and ask for an increase. Call the customer service number on the back of your card and ask the representative for a higher credit card limit. Only consider this if you are trying to lower your credit utilization rate to raise your credit score. They look for six months of on-time payments and will ask for updates on your annual income, employment status, and monthly expenses before deciding.
  2. Increase your income. Since monthly income is a factor in your credit limit, increasing your monthly income can boost your credit card limit. Ask for a raise at work, get a second job, or start a side hustle. When your credit card issuer sees you have more income, they may offer you a higher credit limit. You can update this information with them anytime by contacting them directly, or you can wait until they discover it in a periodic review of your status.
  3. Build your credit. Pay your bills on time and pay down debt to increase your credit score. Over time, your credit score should increase, which can lead your credit card issuer to raise your credit limit.
  4. Transfer the balance from one card to another. Some credit cards allow you to transfer debt from one account to another in a credit transfer. If you have multiple credit cards and one allows credit transfers, transfer the debt from one card to another. This won’t increase your credit card limit overall, but it can increase the amount of credit available on a specific card.
  5. Increase your deposit on a secure credit card. If your card is a secured credit card, your credit card limit directly correlates to your security deposit. Add more to your security deposit, and you’ll have a higher credit card limit.
  6. Open another credit card. This won’t increase the credit card limit on your current card, but it will expand how much credit is available to you. Avoid temporarily dinging your credit score by waiting six months between credit card applications.
  7. Wait. Most credit card companies annually review your account, and as long as you pay your bills on time, they can likely naturally increase your credit card limit.

You can also always pay off purchases immediately rather than waiting until the end of your payment period to gain access to more credit without increasing your credit limit.

Credit scores strongly indicate what your potential credit card limit will be, so learn more about yours today. Before applying for a new credit card, get a sense of where you stand with a credit report card. Then use the tools and features in ExtraCredit to see where you need to work toward your credit goals to qualify for a higher credit card limit.

FAQ

Here are some answers to common questions regarding credit card limits.

What Happens if I Go Over My Credit Limit?

If you try to make a purchase over your credit limit, most credit card companies will deny the transaction. Some may allow the purchase but charge a fee, although most companies have abandoned this practice.

If I Request an Increase to My Credit Limit, Will That Impact My Credit Score?

When you request an increase to your credit card limit, your credit score may drop if your credit card issuer places a hard inquiry on your credit score. This can temporarily lower your credit score, and not all credit card companies do so. 

Source: credit.com

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Apache is functioning normally

This article originally appeared on The Financially Independent Millennial and was republished here with permission.

If you’ve been paying attention to the housing market recently, you will have noticed it’s on fire. From Seattle, WA, to St. Petersburg, FL, there isn’t a market that hasn’t been affected by the low mortgage rates and high millennial demand for housing. The market hasn’t seen this much activity ever (even more so than the housing financial crisis of 2008).

Given the recent interest in home buying, we thought it would be prudent to discuss exactly how Americans can afford such large homes. And, why now?  After all these years, why are mortgages and refinances becoming popular all of a sudden? Let’s first discuss the basics of a mortgage and what its advantages are. They’re equally complex and beneficial, so it’s important to ensure we cover all the bases.

What Is a Mortgage Loan?

Simply put, your home secures the mortgage loan. It might be a house, a store, or even a piece of non-agricultural land. Banks and non-banking financial institutions both offer mortgage loans.

The lender gives the borrower cash, and charges them interest on it. Borrowers then pay back the loan in monthly installments that are convenient for them. Your property acts as security against the mortgage. And, your lender retains a charge until the borrower pays the loan in full. As a result, the lender will have a legal claim to the property for the duration of the loan. If the buyer fails to pay the debt, the lender has the power to seize the property and sell it at auction.

What Are the Different Types of Mortgage Loans? 

No matter what anyone tells you, always remember: A mortgage is a debt. Debt is a very polarizing topic to discuss with friends because many of us were raised on the premise that debt is bad. The truth is, some debt is bad, some debt is okay, and some debt is good. Many today would argue that mortgage debt is good since the rate is so low and it affords you a bigger home. 

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Some people believe that debt should be prevented at all costs. Others view it as a means of improving one’s quality of life or as a means of increasing fortune. What’s awful about debt, factually, is reckless credit usage.

Here’s a rundown of the many types of mortgage programs, along with their benefits and drawbacks, to help you determine which is best for you.

A mortgage with a fixed rate

The interest rate is fixed for the duration of the loan. These loans provide a consistent monthly payment and a low-interest rate. Borrowers who wish to pay off their mortgage quicker can typically make extra payments toward the principal, as prepayment penalties are uncommon.

Pro: It’s predictable because the monthly payment is fixed.

Con: Taking out a fixed-rate loan while the interest rates are high means you’re stuck with it for the duration of the loan. The only way out is to refinance at a lower rate.

A mortgage with an adjustable rate (ARM)

After a fixed-rate cycle of months to years, the interest rate on an adjustable-rate mortgage (ARM) varies. Lenders sometimes publish ARMs with a pair of numbers, such as 7/1 or 5/1. Usually, a 5/1 ARM has a fixed rate for five years and then adjusts every year, rounding off if that option exists.

Pro: An ARM’s opening interest rate is often lower than that of a standard fixed-rate loan, so it’s easy to get lured in by the teaser rate. But, it might wind up costing more in interest over the term of your mortgage than a fixed-rate loan. An ARM may be the ideal option for someone who plans to market their home before the rate changes.

Con: Future rate hikes might be significant, leaving many adjustable-rate mortgage borrowers with significantly elevated monthly payments than if they chose a fixed-rate mortgage.

Refinance loan or second mortgage

Sometimes, a homeowner already has a mortgage but wants to change the terms. Maybe they want a lower rate or a longer term. Or maybe, they want to take out more equity from their home. Whatever the case, many options are available! The most common would be refinancing the home mortgage. With mortgage refinance, the homeowner closes out their original mortgage, and obtains another one – ideally with more favorable terms. 

With interest rates so low these past couple of years, refinancing has become much more popular. How often a homeowner refinances is usually a personal decision, but they should consider at least these factors:

  • market interest rate vs their current mortgage interest rate
  • length/term of their loan vs the new one they want to get
  • cost of the loan (“closing costs”) vs keeping still
  • [cash-out refinance only] what to do with the funds

Pros: If you can secure a lower interest rate than your current loan, and the closing costs aren’t significant, then it could definitely be worth refinancing. On the other hand, if you need the money for home renovations, a cash-out refinance may be your best bet.

Cons: Refinancing costs money, so make sure the math works in your favor. 

Conventional loan

The standards for conventional loans are generally more stringent than those for government-backed house loans. When reviewing traditional loan applications, lenders usually look at credit history and debt-to-income ratios.

Pro: A conventional mortgage may be used for a range of property kinds, and PMI would help borrowers qualify for a conventional loan even if they have less than 20% for the down payment.

Con: Compared to government loans, conventional loans have tougher qualification standards and may demand a larger down payment.

Interest-only mortgage

The average age of home purchases has decreased, and an increasing number of millennials are now purchasing their first houses. Typically, the loan duration is determined by the debt-to-income (DTI) ratio and the sum of interest negotiated on the mortgage. For homebuyers, a longer contract means a lower payment, but a longer time to pay off that debt.

Some lenders may offer an interest-only mortgage, meaning the borrower’s monthly fees will cover only the interest. As a result, it’s best to have a strategy in place to ensure that you can have enough money to return the entire sum borrowed at the end of the period.

Interest-only loans may be appealing since your monthly payments are low. But, unless you have a strong strategy to reimburse the capital, at some point, a fixed loan could be the better option.

Pro: Interest-only mortgages allow the borrower to place their capital elsewhere, such as in dividend stocks, a rental property, or other investments. 

Con: Borrowers who aren’t careful with their budget may find themselves never being able to pay off the loan.

Read more: 15 Ways to Generate Passive Income from Real Estate

FHA loan

FHA loans and VA loans are mortgage loans insured by the government and available for potential homebuyers. FHA loans are available to lower-income borrowers and typically require a very low down payment. Also, borrowers get competitive interest rates and loan costs. 

The government does not directly grant Federal Housing Administration (FHA) loans. FHA loans can be issued by participating lenders, and the FHA guarantees the loans. FHA mortgages might be a viable option for those who have a high debt-to-income ratio or a bad credit score.

Pro: FHA loans need a smaller down payment and credit score requirements are lower than conventional loans. Moreover, FHA loans may enable applicants to use a non-resident co-signer to assist them to be qualified.

Con: Unless a borrower puts down 10%, the monthly mortgage insurance will remain a part of the payment for the loan’s life. If a borrower ever wants to remove the monthly mortgage insurance, they must qualify and refinance into a conventional loan.

Read more: How to Improve Your Credit Score

FHA 203(k) loan

An FHA 203(k) loan is a government-insured mortgage allowing funding borrowers with one loan for both home renovation and house purchase. Current homeowners may also be eligible for an FHA 203(k) loan to help pay for the repairs of their current house.

Pro: An FHA 203(k) loan can be utilized to purchase and renovate a home that would otherwise be ineligible for a traditional FHA loan. It just takes a 3.5% down payment.

Con: You must be eligible for the full property value, as well as the price of anticipated improvements, with these loans. The rate may be greater than on a normal FHA loan. You’ll also have to pay both a one-time, and monthly mortgage premium insurance payments.

VA (Veterans Affairs) loan

Home loans for veterans, reservists, and military or National Guard members, as well as qualified surviving married partners, are backed by the US Department of Veteran Affairs. 

In fact, nearly 90% of all VA-backed home loans are made without a down payment.

Pro: You won’t have to put any money down, or deal with PMI payments every month.

Con: On purchase loans, a one-time VA “funding charge” varies from 1.4% to 3.6%.

Fannie Mae homestyle loan

The Fannie Mae homestyle mortgage needs just 3%–5% down, but a credit score of 620 is an option for fixer-uppers.

Pro: You don’t have to pay for mortgage insurance beforehand, and you can terminate it after twelve years or when you have 20% equity on your house. The rate is frequently cheaper than an FHA 203(k) loan.

Con: Credit score requirements must be met.

Reverse mortgage loan

Homeowners aged 62 and above can use a reverse mortgage to convert some of their property value into cash. The age of the youngest homeowner, the loan rate and fees, the heir’s wishes, and payout type are all aspects for the lender to consider.

Pro: There are no monthly payments required, and the homeowner can select between a one-time balloon payout, a monthly payout, a line of credit, or a combination of the three.

Con: The interest rate may be greater than that of a typical mortgage. Mortgage insurance, a direct charge, an initiation fee, and third-party expenses are usually paid by the homeowner.

Final Thoughts

Mortgage loans are given to those who have enough income and assets vs. their debt. Mortgages also aid in the development of credit. They enable homeowners to invest in a home, with the advantage of having a forced-savings component. However, like with any loan, borrowers should be responsible when taking out a mortgage. It’s easy to get carried away and buy more than is necessary (and become house-poor).

Source: credit.com

Apache is functioning normally

Apache is functioning normally

Whether you’re a parent proudly financing higher education for your child or a student signing on the dotted line for your own student loans, it’s important to understand how those debts can impact your future. Do parent PLUS loans affect getting a mortgage, for example? The short answer? Yes, any student loan you’re responsible for can impact your chances of getting approved for a mortgage. Find out more below.

In This Piece:

Do Student Loans Impact Getting a Mortgage?

Student loans are a type of debt. So if they’re in your name, they can impact your chance of getting a mortgage in the future. Luckily they can have a positive impact in some situations, especially if you have good financial habits. 

It’s important to note that student loans only impact your ability to get a house if you’re the one who’s responsible for paying the loan. Parent PLUS loans affect getting a mortgage if you’re the parent who’s signed as the responsible party, for example, but they wouldn’t impact your child’s chances at a mortgage. 

But if a student took out a loan with the parent as a cosigner, the loan impacts both people’s credit. It might impact the chances of getting a mortgage for either party.

How Do Student Loans Impact Your Ability To Get a Mortgage?

Student loans are often pretty hefty. The average cost of attending a four-year college or university is $35,331, so you’re looking at total loans that are tens of thousands of dollars. That’s nothing to scoff at, nor is it a small mark on your credit report. Find out how it impacts your mortgage application below.

Student Loans Reduce How Much You Can Save for a Down Payment

You may not have to start paying back your student loans until you’re out of college or a forbearance period has passed. But the time will come when you’ll need to make those monthly payments. Depending on how much you borrowed and what your terms were, student loan payments can be a big hit to your monthly budget.

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That hit makes it harder to save money quickly for a down payment. While options do exist for mortgage loans with a lower down payment or even no down payment, not being able to save limits your choices. 

Mitigate this impact by:

  • Asking your mortgage broker for information about options with low down payment requirements.
  • Applying for down payment assistance to help you cover the costs of down payments.
  • Working to increase your income so you can save more money.
  • Keeping other types of debts and expenses low to facilitate savings.

They Increase Your Debt-to-Income Ratio

Any amount of debt you have to pay back increases your debt-to-income ratio (DTI). Mortgage lenders look at DTI to understand whether you can afford the payments on any loan you take out.

There’s not a single hard-and-fast rule for where your DTI needs to be to get a mortgage, but the Consumer Financial Protection Bureau notes that 43% is a good number to consider. That means your total debt payments monthly, including any prospective mortgage, should be no more than 43% of your total monthly income. Some lending programs may have stricter DTI requirements.

Here’s an example to demonstrate how a student loan can change DTI. If you have student loan payments of $500 a month, a car loan of $500 a month and credit card payments totaling $300 per month, you have $1,300 in debt. If you want to get a loan to pay for a home and the loan would result in a $1,200 a month mortgage, that’s a total of $2,500 per month.

If you only make $5,000 a month, your debt-to-income ratio would be 50%. That may be too high for a favorable mortgage loan to be approved. If you take out the student loan and keep all the other factors the same and the DTI is now 40%. That’s a better DTI for most mortgage loans.

Offset the impact of student loans by reducing your other debts. For example, in the above example, you could work to pay off the credit card debt before you apply for a mortgage. You might also refinance the car loan, bringing your monthly payment down to $300. That would leave you with a 40% DTI.

Student Loans Impact Your Credit Score

Most lenders do report student loans to one or more of the credit bureaus. This is actually good news, because paying your student loans on time can help you build credit and have a positive impact on your credit score. On the flip side, if you miss payments or end up defaulting on your student loans, the negative impact on your credit can bring your score down and keep you from getting approved for a mortgage. 

Keep this from being a problem by paying your student loans on time every month. Consider setting up auto bill pay so you don’t have to worry about accidentally missing a payment. You may also want to find out more about the required credit score to buy a house so you know what you’re shooting for.

Does Applying with FAFSA Effect Buying a House?

No, completing FAFSA doesn’t impact your credit at all. And it doesn’t mean you’re taking out a student loan. FAFSA simply lets you apply for any potential student financial aid that might be available for you. You’re then offered aid that you can choose from. 

More Tips for Ensuring a Successful Mortgage Application

Doing a bit of homework before you apply for a mortgage can increase your chances of success. Here are some things to do related to your student loans:

  • Consolidate multiple student loans into one if possible, which will reduce the total amount you have to pay each month. This makes it easier to save and can reduce your DTI.
  • If student loans report as deferred on your credit report, get the specific payment amounts from the servicer or a payment letter from the servicer stating an approximation of what the payments will be when they come due and payable.
  • Avoid any student loan delinquencies, especially in the last 12 months. Ignoring this could result in your application being denied for a government loan such as an FHA- or VA-backed mortgage. Government programs are strict about delinquencies on federal debt, which is what a student loan is.
  • If any student loans are paid in full but your credit report shows a current payment obligation, provide supporting documentation showing it’s been fully paid off to the mortgage company.
  • Review your credit reports before you start the mortgage application process. If there are inaccuracies on your credit reports related to student loans—or anything else—file a dispute and request the credit bureau to investigate and correct the information.  

Learn More About Mortgages Today

It’s also a good idea to learn more about how a mortgage works and read up on terms you need to know in a mortgage glossary. The more you know, the more confident you’ll be in the entire process. For the best information on your credit, consider signing up for ExtraCredit, where you can get 28 of your FICO scores and a report card that helps you understand what you need to do to improve your scores.

Source: credit.com

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Apache is functioning normally

Buying a house and getting a mortgage is a big investment– and not only for you.

When you choose a mortgage lender and are approved for your home loan, your lender is agreeing to lend you all funds necessary to cover your home purchase. Because a house is a high-cost purchase, lenders want to guarantee that you’re not a “risky borrower.” Lenders want to know that you’ll be able to make your monthly payments on time and in full.

How do lenders decide whether you’re a risk?

In most cases, mortgage lenders, or their underwriters, to be exact, will take a look at how well you’ve managed debt in the past, and how well you’re managing debt currently.

So, having debt can be a good thing. 

This may seem counterintuitive because if you’re buying a house, you’d want to save as much money as you can. And you probably wouldn’t want your money tied up in other debts, right?

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Yes, saving money is always a good idea. But having some debt before buying your house can actually be an important factor in getting approved for a mortgage.

Why Debt Matters

To see how well you manage your debts, mortgage underwriters will take a detailed look at your credit score/credit history and your debt-to-income ratio (DTI).

Generally, you’ll want to have a high credit score and a low DTI. A high credit score indicates that you manage your debts responsibly. A low DTI indicates that you don’t have too much of your income tied up in paying off those debts.

Let’s take a closer look at both factors:

Your Credit Score

Each factor in your credit score is defined by debt. And to create and increase your credit score, you need to take on debt and manage it responsibly.

Your credit score is usually impacted by the following five factors:

  • Payment history — Your payment track record is the most important factor considered in your credit score. Lenders want to know if you’re a trustworthy borrower. And so, they want to see if you make on-time payments on other debts.
  • Credit utilization (or amounts owed) — Owing money on your credit cards, in particular, is not a bad thing. But, if you’re using too much at one time, underwriters might take that to mean that you’re overextending yourself financially.
  • Length of credit history — A longer credit history is favorable. But if your credit history is limited, you won’t necessarily be disqualified from borrowing money.
  • Credit mix — Underwriters want to see how you manage different types of debt.
  • New credit — If you’ve opened multiple credit accounts at one time, this is a red flag for underwriters because it can suggest that you’re in financial distress.

For a mortgage, you’ll typically need a credit score of at least 620 for a conventional loan. But, it could be best to shoot for a credit score of 700 or above. A higher credit score increases your chances of approval, and also increases the loan amount that you’ll be approved for. But a high credit score could also help you secure a lower mortgage rate, which could save you a significant amount of money over the life of your home loan.

Your Debt-to-Income Ratio (DTI)

Your DTI is a percentage representing how much of your income is put towards paying down debts. Since a mortgage is such a large investment, and your monthly payments could be fairly substantial, underwriters want to make sure that you’ll be able to make those payments. So, the lower your DTI, the better.

In general, a DTI of 36% or lower is ideal. In fact, a DTI above 50% most likely won’t be approved (although there are exceptions).

To calculate your DTI, simply divide your monthly debts by your monthly gross income. If your resulting percentage is higher than 50%, you’ll want to work on paying off some of your debts.

Debt Management Tips

Whether you’d like to reduce your debt before buying a house or just want to maintain a solid credit score by making consistent credit payments, knowing how to manage your debt could help you qualify for a mortgage. And it can also reduce your own stress levels.

The following tips can help you manage debt before buying a house, and could also be helpful once you’ve purchased your dream home and are in the thick of making mortgage payments:

Look at Your Credit Report

Your credit health is an important qualifying factor for a mortgage. So, it can be a good idea to take a look at your credit report to ensure that everything has been reported correctly and that there aren’t any errors. You wouldn’t want your credit score to be negatively impacted because of mistakes in your credit report.

You can order your credit report from any of the three major credit bureaus: Equifax, Experian, and TransUnion using annualcreditreport.com. Or you can even get your free credit report card here on Credit.com.

Once you have your credit report it is important to look at the following:

  • Your personal information
  • Your credit accounts
  • Credit inquiries

If you see any errors or inconsistencies anywhere in your credit report, these can be challenged with the credit bureau that created the report.

Consolidate Your Debt

If you find that you’re making payments on various loans and/or credit accounts, it could save you money (and save you from stress) to consolidate your debts into one. This way, you’re only paying interest on one debt instead of multiple. Therefore, you won’t have multiple payments to keep track of.

Related Read: What Is a Debt Consolidation Loan and How Can You Get One?

Don’t Make Drastic Changes to Your Credit

It can be tempting to pay off debts right before applying for a mortgage. However, doing so could actually hurt your credit score. When you pay off a debt, your credit score will actually drop temporarily.

On the flip side, if you’re trying to build credit and try to open multiple credit cards, or take on other debt before applying for a loan, this will also take a hit on your credit score. Not to mention that seeing a lot of change and new debt before applying for a mortgage is a red flag to underwriters. It can indicate you might not be financially prepared to take on a mortgage.

Make a Budget

Whenever a financial discussion is taking place, budgets are bound to come up. While the concept of making a budget might seem obvious and over-shared, it’s a great way to track your expenses and ensure that you’re meeting all your financial expectations and needs. There are a lot of costs involved with buying a house. So, you’ll want to make sure that you can afford them.

In this case, creating a budget can help you map out your current debts and other expenses in relation to your income. This allows you to see what’s happening and adjust as needed. A budget can give you the peace of mind that you’re not overspending, and are still able to meet all your other financial responsibilities.

Build Your Emergency Fund

Building your emergency fund before getting a mortgage may be one of the most important things you can do. You never know what expenses might arise once you purchase your house, and you don’t want all your money tied up in your mortgage payment and other monthly payments if, for example, your roof needs to be repaired or you encounter water damage.

It’s often encouraged to set aside three to six months worth of expenses in an emergency fund.

The Bottom Line

Buying a house is a big purchase, and it can be daunting to think of getting a mortgage if you are trying to pay down student loans, an auto loan, credit cards, etc. To help you save money and save you from stress, work on paying down other debts so you can be confident in your ability to make mortgage payments and enjoy your new home.

However, you don’t need to be debt-free to buy a house. In fact, some well-managed debt can boost your credit score, showing mortgage underwriters that you are a responsible borrower.

That doesn’t mean that you need to dig yourself into a hole of debt that you’ll never crawl out of. By taking the time to create a budget or analyze your credit report, you can see how you’re doing financially and where some changes can be made. Perhaps you could consolidate some of your existing debt, or you could completely pay off some of your debts. 

In the end, you just want to make sure that you’re comfortable taking on a mortgage and can afford to do so. 

Source: credit.com

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Apache is functioning normally

When you’re considering starting home shopping, it’s important to put yourself in the best possible position. To do this, you’ll want to shore up your finances and increase your credit score. Follow these simple steps to get you closer to your homebuying dream.

Improving Credit for Future Homebuyers

1. Check Your Credit Score

Your credit score will be one of the main considerations in your mortgage application, so check yours to see what needs the most work. A credit score is based on a number of factors: payment history, credit usage, types of credit, age of credit, and recent inquiries. Though you can’t impact all of these in a short period of time, you can take steps to improve in some areas.

Make sure you’re paying all of your bills on time, as on-time payments have a huge impact on your score. Don’t apply for new lines of credit, but you can request a credit limit increase to current credit lines to improve your usage percentage. If you see any errors on your credit report, dispute them so that errors can be removed or corrected, and target credit usage when you make your budget.

2. Assess Your Finances

To know what you have to do to buy the home of your dreams, you need to know where you stand. Write down everything you have coming in and going out each month first. Some of these expenses, such as your car and student loan payments, stay the same over time and will come with you to your new home. Others are variable and change from month to month, including how often you eat out and your entertainment expenses, and these expenditures can most likely be shaved down or eliminated entirely with a budget.

Because homebuying comes with many expenses–a down payment, inspection fees, closing costs–your budget should be tighter in the period before you buy than normal. You’ll also want to budget for a home warranty; see if a home warranty is worth the money. When developing your budget, focus on eliminating your high-interest debt and saving for those homebuying expenses.

Lenders will also look at your debt-to-income ratio or DTI which is the amount of money you have coming in each month versus the expenses you have. Though it varies between lenders, many lenders will not give a mortgage to someone whose DTI is higher than 43%.

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3. Understand Homebuying Costs

For nearly every type of mortgage, a down payment is required. A down payment of no less than 20% is suggested to have better home options and lower monthly costs. Conventional loans allow 20%, however, you can also have a  down payment of as little as 3%; for down payments below 20%, PMI (private mortgage insurance) is required. Other types of loans, like an FHA loan, require between a 3.5-10% down payment, depending on your credit score. Make sure you understand how much you’ll be spending on your new home by using a mortgage calculator. 

Other homebuying fees can add up quickly and be more variable. You will likely have a loan origination fee, inspection fee, appraisal fees, and other fees. You may be able to control some of these by choosing your own professionals. However, others will be selected by the seller, real estate office, or mortgage company.

A brokerage commission may be paid to real estate agents on closing. Your home warranty, property insurance and taxes, and any points you wished to pay to lower your mortgage rate as well as current interest rates will all go into your final costs. Account for all of these expenses when deciding how much mortgage you can afford.

Take steps to improve your creditworthiness and your DTI, and know what you’re looking for when you begin shopping for a lender to work with so you get the best rate possible. With the right moves, you’ll be closing on your dream home in no time.

Source: credit.com

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Apache is functioning normally

Past Ginnie Mae president Ted Tozer has argued that the FHA should lower or completely eliminate its current 3.5% down payment requirement.

He discussed the controversial take during a Community Home Lenders of America Roundtable in Washington, D.C. earlier this week, per Inside Mortgage Finance.

This isn’t the first time he’s floated the idea of turning the FHA home loan program into a zero-down-payment program.

In the past while arguing this same position, he noted that the Bush administration even proposed such a change all the way back in 2004.

The question is does this invite more risk at a time when home prices and mortgage rates are already out of reach for most?

Most FHA Loan Borrowers Need a Minimum 3.5% Down Payment

At the moment, FHA loan borrowers need to scrounge up 3.5% of the purchase price when buying a home, assuming they have a 580 FICO score.

Those with scores between 500 and 579 need at least a 10% down payment.

While this is seemingly a pretty low bar, it still acts as a roadblock for many prospective home buyers, especially low-income borrowers with little savings.

According to a semi-recent Federal Reserve study, the average American household had about $42,000 in savings.

But if you break it down by age, those under 35 only had $11,250 and those 35 to 44 only about $28,000.

A home purchase, even with a small down payment, could easily wipe out these accrued savings. And remember that these numbers are an average.

Many households have much less, which is why they’re probably still renting if their desire is to own.

Tozer has argued that after accounting for rent, taxes, food, utilities, and other necessities, prospective first-time home buyers have little left to save for a down payment.

The FHA Minimum Down Payment Was Increased in 2009

If you recall, the FHA Modernization Act of 2008 resulted in the FHA minimum down payment rising from 3% to 3.5%.

It also banned seller-funded down payment assistance, which correlated with much higher default rates on FHA loans.

Ironically, these types of loans resulted in a near-$5 billion loss for the FHA and put the entire program at risk.

Around that time, some lawmakers argued for even higher down payment requirements, such as a minimum of 5% down. That didn’t happen.

Back then, the big argument was about having skin in the game, as those with little invested had no problem walking away from an underwater mortgage.

That’s why the timing of this idea is a bit of a head-scratcher, with home prices at/near all-time highs and mortgage rates more than double their early 2022 levels.

While it isn’t quite 2006 all over again, there has been a lot of speculation in the housing market and prices are certainly not cheap.

The saving grace is that most homeowners hold boring old 30-year fixed-rate mortgages at ultra-low rates this time around.

And zero down loans are generally few and far between, other than homebuyer assistance offered by some state housing finance agencies (HFAs).

What’s the Argument for a 0% FHA Loan Today?

At the moment, you need a minimum 3.5% down payment to obtain an FHA loan, slightly more than the minimum 3% required on conventional loans.

Interestingly, you used to need 5% down to get a conventional loan before they introduced 97% LTV offerings in 2014.

This 3.5% is also significantly higher than what’s required for other government-backed home loans.

Tozer pointed out that both VA loans and USDA loans don’t require a down payment (100% financing OK!).

The thing is those loans are reserved for members of the military or those buying in rural areas, respectively. Conversely, FHA loans are much more widely available.

Regardless, he argues that underwriting should focus on a borrower’s credit history as opposed to the down payment.

But if we recall from the prior mortgage crisis, credit scores got a big share of the blame for the sharp rise in defaults.

So relying on credit score alone might not be the best policy either. While defaults certainly rise as credit scores fall, a holistic approach is best when formulating underwriting standards.

This means looking at layered risk, such as credit score, down payment, DTI ratio, employment history, and more.

The Skin in the Game Is the Cost to Relocate

As for skin in the game at zero down payment, Tozer said the skin is the cost to move.

In other words, once low- and moderate-income homeowners move in, it would cost them way too much to relocate.

And this is apparently what would keep them there. While that might be true, would they continue making payments?

Tozer’s proposal is unlikely to materialize as it would require Congress to act at a time when housing supply is already dismal and affordability historically low.

However, there is other proposed legislation that would offer 100% financing to first responders who need a mortgage, via the HELPER Act of 2023.

In the meantime, other options already exist to get an FHA loan with zero down.

As noted, many state HFAs have programs that offer deferred-payment junior loans that cover the down payment and even the closing costs.

There are also private lenders that offer FHA with zero down, such as the Movement Boost from Movement Mortgage, which relies on a repayable second mortgage.

So options already exist without the need for an across-the-board elimination of the FHA’s down payment requirement.

Source: thetruthaboutmortgage.com

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Apache is functioning normally

Outspoken FDIC Chairman Sheila Bair today announced a loan modification plan for troubled Indymac borrowers who are currently behind on their mortgage payments.

The aim of the program is help struggling borrowers get back on track with affordable mortgages while increasing the value of Indymac’s mortgage portfolio for the sake of its outstanding creditors (what is a loan modification program?).

“I have long supported a systematic and streamlined approach to loan modifications to put borrowers into long-term, sustainable mortgages—achieving an improved return for bankers and investors compared to foreclosure,” said Chairman Bair.

“The program we are announcing today will provide affordable mortgages for eligible borrowers primarily in the so-called ‘Alt-A‘ market. It provides a systematic approach for modifying troubled loans with payment resets due to negative amortization and other resets — a market where we are seeing growing defaults and foreclosures.”

Under the Indymac Federal Bank loan modification program, eligible mortgages will be modified into fixed mortgages capped at the current Freddie Mac survey rate for conforming mortgages.

Monthly mortgage payments will be designed to achieve a sustainable debt-to-income ratio of 38 percent (income must be verified), which may involve interest rate reductions, extended amortization, and principal forbearance.

Mortgage rates below the current Freddie Mac surveyed rate may be made for up to five years if necessary to keep the DTI at acceptable levels, with annual interest rate caps of no more than one percent, up until the current survey rate.

Indymac will only provide loan modifications to borrowers when doing so will benefit Indymac Federal or its investors.

An estimated 4,000 modification proposals will be sent to borrowers this week, with those most severely delinquent or in default served first.

“Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes. I believe we achieve that with this framework,” Bair concluded.

Source: thetruthaboutmortgage.com