Loan-to-Value (LTV) Ratio – What It Is & How It Affects Your Mortgage Rate

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In the fourth quarter of 2021, the median home sold for just over $408,000. 

Could you afford to pay that out of pocket? Probably not. That’s why most homebuyers wind up applying for mortgage loans.

Getting a mortgage can be a long process and lenders look at a lot of factors when deciding whether to approve your application. You also have to go through a similar process when refinancing.

One thing that lenders look for when making a lending decision is the loan-to-value (LTV) ratio of the loan.


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What Is a Loan-to-Value Ratio?

The loan-to-value ratio of a loan is how much money you’re borrowing compared to the value of the asset securing the loan. In the case of a mortgage, it compares the remaining balance of your loan to the value of your house. On an auto loan, it compares the balance of your loan to the value of your car.

Lenders use LTV as a way to measure the risk of a loan. The lower a loan’s LTV, the less risk the lender is taking. If you fail to make payments and the lender forecloses, a lower LTV ratio means the lender has a higher chance of fully recovering their losses by selling the foreclosed asset. A higher LTV means more risk the lender loses some money.

Lenders may have maximum LTVs that they’ll approve. For example, FHA loans require at least 96.5% LTV. Conventional loans require at least 97% LTV, but only for the best-qualified borrowers — most require 95% LTV or lower. Your loan’s LTV can have other important impacts on your borrowing experience, including your interest rate and monthly payment.


Calculating the Loan-to-Value Ratio

Because LTV plays a big role in the overall cost of your loan, it’s a good idea to calculate it before you apply. 

LTV Formula

To calculate the LTV ratio of a loan, you divide the balance of your loan by the value of your home.

The formula is:

(Loan balance / Home value) = LTV

LTV Calculation Example 

Imagine that you want to purchase a home that appraises for $300,000. You apply for a mortgage and get approved for a $270,000 loan.

The LTV of that loan is:

$270,000 / $300,000 = 90%

If you choose to make a larger down payment and only borrow $240,000, your mortgage’s LTV will be.

$240,000 / $300,000 = 80%

As you pay down your mortgage or as your home’s value changes, the loan’s LTV ratio moves away from this initial value. Typically, as you pay off your mortgage, the LTV ratio drops.


How LTV Affects Your Mortgage Rates

Lenders use LTV as a way to measure the risk of a loan. The higher the LTV of a loan, the higher its risk.

Lenders compensate for risk in a few ways. 

One is that they tend to charge higher interest rates for riskier loans. If you apply for a loan with a high LTV, expect to be quoted a higher interest rate than if you were willing to make a larger down payment. A higher rate raises your monthly payment and the overall cost of your loan.

Another is that lenders may charge additional fees to borrowers who apply for riskier loans. For example, you might have to pay more points to secure an affordable rate, or the lender might charge a higher origination fee. A larger down payment might mean lower upfront fees.

One of the most significant impacts of a mortgage’s LTV ratio is private mortgage insurance (PMI). While PMI does not affect the interest rate of your loan, it is an additional cost that you have to pay. Many lenders will make borrowers pay for PMI until their loan’s LTV reaches 80%. 

PMI can cost as much as 2% of the loan’s value each year. That can be a big cost to add to your loan, especially if you have a large mortgage.


LTV Ratio Rules for Different Mortgage Types

There are many different mortgage programs out there, each designed for a different type of homebuyer.

Different programs can have different rules and requirements when it comes to the LTV of a mortgage.

Conventional Mortgage

A conventional mortgage is one that meets requirements set by Fannie Mae and Freddie Mac. While these loans are not backed by a government entity, they must meet Fannie or Freddie’s minimum credit score and maximum loan amount thresholds, among other criteria. Otherwise, they can’t easily be repackaged and sold to investors — the fate of most mortgage loans after closing. 

Conventional mortgages have a maximum LTV of 97%. That means your down payment will need to equal at least 3% of the home’s value. If your LTV is higher than 80% to begin with, you’ll have to pay PMI until your LTV drops below 78%.

Refinancing Mortgage

Refinancing your mortgage lets you take your existing loan and replace it with a new one. This gives you a chance to adjust the interest rate or the length of your loan.

Most lenders aren’t willing to underwrite refinance loans above 80% LTV, but you might find lenders willing to make an exception.

FHA Loans

Federal Housing Administration (FHA) loans are popular with homebuyers because they allow low down payments and give people with poor credit the opportunity to qualify.

If you’re applying for an FHA loan, the maximum LTV is 96.5%, meaning you’ll need a down payment of at least 3.5%. If the LTV value of your mortgage starts above 90%, you’ll have to pay PMI for the life of the loan. If your LTV is less than that amount, you can stop paying PMI after 11 years.

VA Loans

VA loans are secured by the Department of Veterans Affairs. They’re only available to veterans, service members, members of the National Guard or Reserves, or an eligible surviving spouse.

These loans offer many benefits, including the option to get a loan with an LTV as high as 100%. That means that you can borrow the full amount needed to purchase your home. The only upfront costs you need to pay are the fees associated with getting the loan.

USDA Loans

USDA loans, guaranteed by the US Department of Agriculture, are designed to help people purchase homes in designated rural areas. Borrowers also have to meet certain maximum income requirements.

USDA loans can have LTV ratios of 100%, letting borrowers finance the entire cost of their home. The LTV of the loan can exceed 100% if the borrower chooses to finance certain upfront fees involved in the loan.

Fannie Mae & Freddie Mac

Fannie Mae and Freddie Mac are government-backed mortgage companies. Neither business offers loans directly to consumers. Instead, they buy and offer guarantees on loans offered by other lenders.

Together, the two companies control a major portion of the secondary market for mortgages, meaning that lenders look to offer loans that meet their requirements.

For a single-family home, Freddie Mac has a maximum LTV of 95% while Fannie Mae sets the maximum at 97% for fixed-rate loans and 95% for adjustable-rate mortgages (ARMs).


Limitations of LTV

There are multiple drawbacks to the use of LTV ratios in mortgage lending, both for borrowers and lenders.

One disadvantage is that LTV looks only at the mortgage and not the borrower’s other obligations. A mortgage with a low LTV might seem like it has very little risk to the lender. However, if the borrower has other debts, they may struggle to pay the loan despite its low LTV.

Another drawback of LTV is that it doesn’t consider the income of the borrower, which is an essential part of their ability to repay loans.

LTV ratios also depend on accurate assessments of a home’s value. Typically, homeowners or lenders order an appraisal as part of the mortgage process. However, if a home’s value increases over time, it can be difficult to know the home’s actual worth without ordering another appraisal.

That means that you might be paying PMI on a loan without realizing that your home’s value has increased enough to reduce the LTV to the point that PMI is no longer necessary. You can always order another appraisal, but you’ll have to bear the cost — typically around $500 out of pocket.


LTV vs. Combined LTV (CLTV)

When looking at a property, lenders often use combined loan-to-value (CLTV) ratios alongside LTV ratios to assess risk.

While an LTV ratio compares the balance of a single loan to the value of a property, CLTV looks at all of the loans secured by a property and compares them to the home’s value. It’s a more complete way of assessing the risk of lending to someone based on the value of the collateral they’ve offered.

For example, if you have a mortgage and later get a home equity loan, CLTV compares the combined balance of both the initial mortgage and the home equity loan against your home’s appraised value.


LTV Ratio FAQs

Loan-to-value ratios aren’t easy to understand. If you still have questions, we have answers. 

What Is a Good LTV?

What qualifies as a good LTV ratio depends on the situation, the loan you’re applying for, and your goals.

An LTV over 100% is pretty universally seen as bad because you wouldn’t be able to repay your loan even if you sold the collateral asset.

In general, a lower LTV ratio is better than a high LTV ratio, especially if you want to avoid paying for PMI on top of your mortgage loan payment.

The 80% threshold is a particularly important breakpoint, especially for conventional loans. If you have an LTV of 80% or lower, you can avoid PMI on conventional mortgages, saving hundreds of dollars per month early in the life of your loan. At 80% LTV, you’ll qualify for a good interest rate, though dropping to 70% or even 60% could drop your rate further.  

How Can I Lower My LTV?

There are two ways to lower the LTV of your mortgage: pay down your mortgage balance or increase the value of the property.

Your loan’s LTV will naturally decrease as you make your mortgage payments. You can speed up the process by making additional payments to reduce your balance more quickly.

If you make improvements to your home, it can increase your home’s value. Real estate prices may also rise in your area, bringing your home’s value up too. However, to formally update the value of your home, you’ll need to pay a few hundred dollars to get it appraised again.

What Does a 50% LTV Ratio Mean?

A 50% LTV ratio means that you have 50% equity in your home. In other words, the total loan balance secured by the home — whether it’s a first mortgage, home equity line of credit (HELOC), home equity loan, or some combination of the three — is half the appraised value of the property.

As an example, your loan-to-value ratio is 50% if your home is worth $200,000 and you still owe $100,000 on your mortgage.

What Does a 75% LTV Ratio Mean?

A 75% LTV means that your loan balance is three-quarters of your home’s value. For example, if your home is worth $200,000 and your remaining mortgage balance is $150,000, your LTV is 75%.


Final Word

LTV ratio is one way that lenders look at the risk of making a loan based on the value of the collateral securing it. In the real estate world, LTV is a very important measure because it impacts things like private mortgage insurance and mortgage interest rates.

If you’re looking to avoid paying PMI or trying to get out of paying PMI on your loan, you’ll want to take steps to lower your mortgage’s LTV ratio. You can do this by investing in home improvements that increase the value of your home, then ordering a professional appraisal, or by paying extra principal each month to reduce your mortgage balance faster.

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Source: moneycrashers.com

Conventional Mortgage Loan – What It Is & Different Types for Your Home

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The mortgage industry is rife with jargon and acronyms, from LTV to DTI ratios. One term you’ll hear sooner or later is “conventional mortgage loan.”

It sounds boring, but it couldn’t be more important. Unless you’re a veteran, live in a rural area, or have poor credit, there’s a good chance you’ll need to apply for a conventional mortgage loan when buying your next house.

Which means you should know how conventional mortgages differ from other loan types.


What Is a Conventional Mortgage Loan?

A conventional loan is any mortgage loan not issued or guaranteed by the Federal Housing Administration (FHA), Department of Veterans’ Affairs (VA), or U.S. Department of Agriculture (USDA). 


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Most conventional loans are backed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). These government-sponsored enterprises guarantee the loans against default, which lowers the cost for borrowers by lowering the risk for lenders.

As a general rule, stronger borrowers tend to use these private conventional loans rather than FHA loans. The exception concerns well-qualified borrowers who qualify for subsidized VA or USDA loans due to prior military service or rural location.


How a Conventional Mortgage Loan Works

In a typical conventional loan scenario, you call up your local bank or credit union to take out a mortgage. After asking you some basic questions, the loan officer proposes a few different loan programs that fit your credit history, income, loan amount, and other borrowing needs. 

These loan programs come from Fannie Mae or Freddie Mac. Each has specific underwriting requirements.

After choosing a loan option, you provide the lender with a filing cabinet’s worth of documents. Your file gets passed from the loan officer to a loan processor and then on to an underwriter who reviews the file. 

After many additional requests for information and documents, the underwriter signs off on the file and clears it to close. You then spend hours signing a mountain of paperwork at closing. When you’re finished, you own a new home and a massive hand cramp.  

But just because the quasi-governmental entities Fannie Mae and Freddie Mac back the loans doesn’t mean they issue them. Private lenders issue conventional loans, and usually sell them on the secondary market right after the loan closes. So even though you borrowed your loan from Friendly Neighborhood Bank, it immediately transfers to a giant corporation like Wells Fargo or Chase. You pay them for the next 15 to 30 years, not your neighborhood bank. 

Most banks aren’t in the business of holding loans long-term because they don’t have the money to do so. They just want to earn the points and fees they charge for originating loans — then sell them off, rinse, and repeat. 

That’s why lenders all follow the same loan programs from Fannie and Freddie: so they can sell predictable, guaranteed loans on the secondary market. 


Conventional Loan Requirements

Conventional loans come in many loan programs, and each has its own specific requirements.

Still, all loan programs measure those requirements with a handful of the same criteria. You should understand these concepts before shopping around for a mortgage loan. 

Credit Score

Each loan program comes with a minimum credit score. Generally speaking, you need a credit score of at least 620 to qualify for a conventional loan. But even if your score exceeds the loan program minimum, weaker credit scores mean more scrutiny from underwriters and greater odds that they decline your loan. 

Mortgage lenders use the middle of the scores from the three main credit bureaus. The higher your credit score, the more — and better — loan programs you qualify for. That means lower interest rates, fees, down payments, and loan requirements. 

So as you save up a down payment and prepare to take out a mortgage, work on improving your credit rating too.  

Down Payment

If you have excellent credit, you can qualify for a conventional loan with a down payment as low as 3% of the purchase price. If you have weaker credit, or you’re buying a second home or investment property, plan on putting down 20% or more when buying a home.

In lender lingo, bankers talk about loan-to-value ratios (LTV) when describing loans and down payments. That’s the percentage of the property’s value that the lender approves you to borrow.

Each loan program comes with its own maximum LTV. For example, Fannie Mae’s HomeReady program offers up to 97% LTV for qualified borrowers. The remaining 3% comes from your down payment. 

Debt-to-Income Ratio (DTI)

Your income also determines how much you can borrow. 

Lenders allow you to borrow up to a maximum debt-to-income ratio: the percentage of your income that goes toward your mortgage payment and other debts. Specifically, they calculate two different DTI ratios: a front-end ratio and a back-end ratio.

The front-end ratio only features your housing-related costs. These include the principal and interest payment for your mortgage, property taxes, homeowners insurance, and condo- or homeowners association fees if applicable. To calculate the ratio, you take the sum of those housing expenses and divide them over your gross income. Conventional loans typically allow a maximum front-end ratio of 28%. 

Your back-end ratio includes not just your housing costs, but also all your other debt obligations. That includes car payments, student loans, credit card minimum payments, and any other debts you owe each month. Conventional loans typically allow a back-end ratio up to 36%. 

For example, if you earn $5,000 per month before taxes, expect your lender to cap your monthly payment at $1,400, including all housing expenses. Your monthly payment plus all your other debt payments couldn’t exceed $1,800. 

The lender then works backward from that value to determine the maximum loan amount you can borrow, based on the interest rate you qualify for. 

Loan Limits

In 2022, “conforming” loans allow up to $647,200 for single-family homes in most of the U.S. However, Fannie Mae and Freddie Mac allow up to $970,800 in areas with a high cost of living. 

Properties with two to four units come with higher conforming loan limits:

Units Standard Limit Limit in High CoL Areas
1 $647,200 $970,800
2 $828,700 $1,243,050
3 $1,001,650 $1,502,475
4 $1,244,850 $1,867,275

You can still borrow conventional mortgages above those amounts, but they count as “jumbo” loans — more on the distinction between conforming and non-conforming loans shortly.

Private Mortgage Insurance (PMI)

If you borrow more than 80% LTV, you have to pay extra each month for private mortgage insurance (PMI).

Private mortgage insurance covers the lender, not you. It protects them against losses due to you defaulting on your loan. For example, if you default on your payments and the lender forecloses, leaving them with a loss of $50,000, they file a PMI claim and the insurance company pays them to cover most or all of that loss. 

The good news is that you can apply to remove PMI from your monthly payment when you pay down your loan balance below 80% of the value of your home. 


Types of Conventional Loans

While there are many conventional loan programs, there are several broad categories that conventional loans fall into.

Conforming Loan

Conforming loans fit into Fannie Mae or Freddie Mac loan programs, and also fall within their loan limits outlined above.

All conforming loans are conventional loans. But conventional loans also include jumbo loans, which exceed the conforming loan size limits. 

Non-Conforming Loan

Not all conventional loans “conform” to Fannie or Freddie loan programs. The most common type of non-conforming — but still conventional — loan is jumbo loans.

Jumbo loans typically come with stricter requirements, especially for credit scores. They sometimes also charge higher interest rates. But lenders still buy and sell them on the secondary market.

Some banks do issue other types of conventional loans that don’t conform to Fannie or Freddie programs. In most cases, they keep these loans on their own books as portfolio loans, rather than selling them. 

That makes these loans unique to each bank, rather than conforming to a nationwide loan program. For example, the bank might offer its own “renovation-perm” loan for fixer-uppers. This type of loan allows for a draw schedule during an initial renovation period, then switches over to a longer-term “permanent” mortgage.

Fixed-Rate Loan

The name speaks for itself: loans with fixed interest rates are called fixed-rate mortgages.

Rather than fluctuating over time, the interest rate remains constant for the entire life of the loan. That leaves your monthly payments consistent for the whole loan term, not including any changes in property taxes or insurance premiums.

Adjustable-Rate Mortgages (ARMs)

As an alternative to fixed-interest loans, you can instead take out an adjustable-rate mortgage. After a tempting introductory period with a fixed low interest rate, the interest rate adjusts periodically based on some benchmark rate, such as the Fed funds rate.

When your adjustable rate goes up, you become an easy target for lenders to approach you later with offers to refinance your mortgage. When you refinance, you pay a second round of closing fees. Plus, because of the way mortgage loans are structured, you’ll pay a disproportionate amount of your loan’s total interest during the first few years after refinancing.


Pros & Cons of Conventional Home Loans

Like everything else in life, conventional loans have advantages and disadvantages. They offer lots of choice and relatively low interest, among other upsides, but can be less flexible in some important ways.

Pros of Conventional Home Loans

As you explore your options for taking out a mortgage loan, consider the following benefits to conventional loans.

  • Low Interest. Borrowers with strong credit can usually find the best deal among conventional loans.
  • Removable PMI. You can apply to remove PMI from your monthly mortgage payments as soon as you pay down your principal balance below 80% of your home’s value. In fact, it disappears automatically when you reach 78% of your original home valuation.
  • No Loan Limits. Higher-income borrowers can borrow money to buy expensive homes that exceed the limits on government-backed mortgages.
  • Second Homes & Investment Properties Allowed. You can borrow a conventional loan to buy a second home or an investment property. Those types of properties aren’t eligible for the FHA, VA, or USDA loan programs.
  • No Program-Specific Fees. Some government-backed loan programs charge fees, such as FHA’s up-front mortgage insurance premium fee.
  • More Loan Choices. Government-backed loan programs tend to be more restrictive. Conventional loans allow plenty of options among loan programs, at least for qualified borrowers with high credit scores.

Cons of Conventional Home Loans

Make sure you also understand the downsides of conventional loans however, before committing to one for the next few decades.

  • Less Flexibility on Credit. Conventional mortgages represent private markets at work, with no direct government subsidies. That makes them a great choice for people who qualify for loans on their own merits but infeasible for borrowers with bad credit. 
  • Less Flexibility on DTI. Likewise, conventional loans come with lower DTI limits than government loan programs. 
  • Less Flexibility on Bankruptcies & Foreclosures. Conventional lenders prohibit bankruptcies and foreclosures within a certain number of years. Government loan programs may allow them sooner. 

Conventional Mortgage vs. Government Loans

Government agency loans include FHA loans, VA loans, and USDA loans. All of these loans are taxpayer-subsidized and serve specific groups of people. 

If you fall into one of those groups, you should consider government-backed loans instead of conventional mortgages.

Conventional Loan vs. VA Loan

One of the perks of serving in the armed forces is that you qualify for a subsidized VA loan. If you qualify for a VA loan, it usually makes sense to take it. 

In particular, VA loans offer a famous 0% down payment option. They also come with no PMI, no prepayment penalty, and relatively lenient underwriting. Read more about the pros and cons of VA loans if you qualify for one. 

Conventional Loan vs. FHA Loan

The Federal Housing Administration created FHA loans to help lower-income, lower-credit Americans achieve homeownership. 

Most notably, FHA loans come with a generous 96.5% LTV for borrowers with credit scores as low as 580. That’s a 3.5% down payment. Even borrowers with credit scores between 500 to 579 qualify for just 10% down. 

However, even with taxpayer subsidies, FHA loans come with some downsides. The underwriting is stringent, and you can’t remove the mortgage insurance premium from your monthly payments, even after paying your loan balance below 80% of your home value.

Consider the pros and cons of FHA loans carefully before proceeding, but know that if you don’t qualify for conventional loans, you might not have any other borrowing options. 

Conventional Loan vs. USDA Loan

As you might have guessed, USDA loans are designed for rural communities. 

Like VA loans, USDA loans have a famous 0% down payment option. They also allow plenty of wiggle room for imperfect credit scores, and even borrowers with scores under 580 sometimes qualify. 

But they also come with geographical restrictions. You can only take out USDA loans in specific areas, generally far from big cities. Read up on USDA loans for more details.


Conventional Mortgage Loan FAQs

Mortgage loans are complex, and carry the weight of hundreds of thousands of dollars in getting your decision right. The most common questions about conventional loans include the following topics.

What Are the Interest Rates for Conventional Loan?

Interest rates change day to day based on both benchmark interest rates like the LIBOR and Fed funds rate. They can also change based on market conditions. 

Market fluctuations aside, your own qualifications also impact your quoted interest rate. If your credit score is 800, you pay far less in interest than an otherwise similar borrower with a credit score of 650. Your job stability and assets also impact your quoted rate. 

Finally, you can often secure a lower interest rate by negotiating. Shop around, find the best offers, and play lenders against one another to lock in the best rate.

What Documents Do You Need for a Conventional Loan?

At a minimum, you’ll need the following documents for a conventional loan:

  • Identification. This includes government-issued photo ID and possibly your Social Security card.
  • Proof of Income. For W2 employees, this typically means two months’ pay stubs and two years’ tax returns. Self-employed borrowers must submit detailed documentation from their business to prove their income. 
  • Proof of Assets. This includes your bank statements, brokerage account statements, retirement account statements, real estate ownership documents, and other documentation supporting your net worth.
  • Proof of Debt Balances. You may also need to provide statements from other creditors, such as credit cards or student loans.

This is just the start. Expect your underwriter to ask you for additional documentation before you close. 

What Credit Score Do You Need for a Conventional Loan?

At a bare minimum, you should have a credit score over 620. But expect more scrutiny if your score falls under 700 or if you have a previous bankruptcy or foreclosure on your record.

Improve your credit score as much as possible before applying for a mortgage loan.

How Much Is a Conventional Loan Down Payment?

Your down payment depends on the loan program. In turn, your options for loan programs depend on your credit history, income, and other factors such as the desired loan balance.

Expect to put down a minimum of 3%. More likely, you’ll need to put down 10 to 20%, and perhaps more still.

What Types of Property Can You Buy With a Conventional Loan?

You can use conventional loans to finance properties with up to four units. That includes not just primary residences but also second homes and investment properties. 

Do You Need an Appraisal for a Conventional Loan?

Yes, all conventional loans require an appraisal. The lender will order the appraisal report from an appraiser they know and trust, and the appraisal usually requires payment up front from you. 


Final Word

The higher your credit score, the more options you’ll have when you shop around for mortgages. 

If you qualify for a VA loan or USDA loan, they may offer a lower interest rate or fees. But when the choice comes down to FHA loans or conventional loans, you’ll likely find a better deal among the latter — if you qualify for them. 

Finally, price out both interest rates and closing costs when shopping around for the best mortgage. Don’t be afraid to negotiate on both. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.

Source: moneycrashers.com

10 Ways to Get a Bigger Mortgage: With Home Prices On the Rise You May Need One

With home prices on the rise, and only expected to go higher this year, you might be wondering how to get a bigger mortgage.

After all, you might need one if the purchase price is above than your original estimate, or if you’re short on down payment funds.

These days, bidding wars are the norm, and it’s likely you’ll have competition when making an offer on a property.

The good news is mortgage rates remain super low, despite some recent headwinds due to inflation concerns.

This means you can borrow more for relatively cheap, which is a good thing. And enjoy a low fixed rate for 30 years or longer.

1. Improve Your Credit Scores

Want a bigger mortgage? Improve your credit scores so you can qualify for a mortgage at a lower interest rate.

A lower rate equates to a smaller monthly payment, which will increase your purchasing power.

For example, if your three FICO scores average 660, your rate might be a half point higher than someone with a 740 FICO.

That could save you more than $100 per month on a $500,000 home purchase with 20% down.

As a result, you’ll be able to borrow more at the lower interest rate. You’ll also save money in the process by paying less interest.

You should always aim for high credit scores whether affordability is an issue or not.

2. Shop Around for a Lower Rate

To that same end, anything you can do to lower the mortgage rate you receive will up your purchasing power.

If you take the time to shop with several lenders, instead of just one, you may increase your chances of finding a lower rate.

With that lower rate, you’ll be able to borrow more based on your income and debt-to-income (DTI) ratio restraints.

Surveys prove that those who comparison shop save money, with even one additional quote producing savings between $966 and $2,086 over the loan term.

While you’re at it, you can consider alternative loan programs like a 7/1 ARM that could come with a lower rate and thus increase affordability/max loan amount.

3. Pay Off Debt

While it’s not always practical to make more money, especially on the fly, you can make whatever income you earn go further.

How? By paying off any debt you have, which will lower your DTI ratio.

When a mortgage lender pre-approves you, they’ll pull your credit report and tally up your monthly liabilities.

The more liabilities and costlier they are, the less purchasing power you’ll have.

For example, if you have a $500 car lease and $1,000 in aggregate minimum credit card payments, you’ve just eaten into a good chunk of income.

To rectify this, pay down/off those debts before you apply for a home loan. Just make sure you have money left over for the down payment and reserves to cover a few monthly mortgage payments.

Imagine you make $75,000 a year, or $6,250 per month gross. That might allow you to borrow roughly $2,700 per month for a mortgage.

But once we factor in the $1,500 in monthly liabilities, you’re down to $2,100 or so per month.

In other words, two people making the same amount of money could have vastly different degrees of purchasing power.

Tip: Pay off charge cards (like American Express cards) in full to avoid a high monthly payment being assigned as underwriters will often use the full balance as the minimum payment.

4. Make More Money

Yes, I said this wasn’t easy, or something you could do overnight, but it’s a consideration if you want a bigger mortgage.

And these days, it’s actually getting easier thanks to the gig economy. Lots of people are moonlighting and taking on side hustles to bring in more dough.

The caveat is that in order to use this income, it needs to be relatively stable and expected to continue into the future.

So you can’t work for GoPuff for a month and try to add that income to your mortgage application.

But if you worked a gig economy job for the past 12 months, or better off two years, you should be good to go.

And now that there are so many gig economy type jobs, you might even be able to piece together different roles to create a consistent employment history.

For example, if you worked for Uber for a year, then GoPuff the next year, it could be considered the same line of work and enough to satisfy any seasoning requirements.

5. Add a Co-Signer to Borrow More

If money is a little tight, or a bidding war drove the purchase price higher than you expected, a co-signer could also be helpful.

You could look to the Bank of Mom and Dad for some assistance, or simply add your spouse if it’s beneficial to do so.

This also hammers home the importance of all potential borrowers taking good care of their credit and keeping debt low.

Veterans may qualify for a $0 down VA loan

That way any additional borrowers will only bring good to a loan application, without any baggage that could jeopardize approval.

A co-signer could also make your offer stronger to a home seller if they see that Mom or Dad have a lot of money and really want to make the deal work for their beloved child.

6. Get a Loan That Requires Little or Nothing Down

Maybe you have the income, but not the assets. If that’s the case, you’ll want a home loan with a smaller down payment. Or no down payment at all.

Some common choices are VA loans and USDA loans, both of which allow 100% financing if you’re military or buying in a rural area, respectively.

There’s also the FHA loan, which requires just 3.5% down, or a 97% LTV loan from Fannie Mae or Freddie Mac, which require just 3% down.

You should know the many options available to you beforehand so you can budget accordingly and shop for homes in your actual price range.

It’s also possible to get a grant from a state housing finance agency where little or nothing down is required.

7. Seek Out a Jumbo Loan Lender

Some types of mortgages have maximum loan limits you can borrow, such as conforming loans backed by Fannie Mae and Freddie Mac, and FHA loans.

If you want a larger mortgage than they allow, you’ll need to find a jumbo loan lender.

The good news is many banks, mortgage lenders, and mortgage brokers offer jumbo loans too.

These limits will range from company to company, and can be $5-10 million dollars or even more, depending on the institution in question.

Assuming a lender can’t or isn’t willing to give you what you want, shop around and find a lender that offers higher loan amounts.

Along these same lines, find a lender that is willing to accept a higher DTI ratio if affordability is an issue. Not all lenders have the same risk appetites.

8. Come in with a 20% Down Payment

While this might sound counterintuitive, it’s possible to increase purchasing power by putting down at least 20%.

You may have heard that you’re required to put down 20% when buying a home, or that it’s the typical down payment. While it’s certainly not compulsory, it can be beneficial for several reasons.

By putting down 20%, you will avoid private mortgage insurance (PMI) on conventional loans, which can be a big monthly cost.

For example, it could add $200-$300 or more onto your monthly PITI payment, deceasing your affordability significantly in the process.

Additionally, you will qualify for a lower mortgage rate in most cases, which as explained above, will allow you borrow more.

Lastly, your offer will be that much stronger to the home seller, especially if other offers are on the table.

They’ll want the 20% down offer versus the 3% or 3.5% down offers every day of the week.

Note that lender-paid mortgage insurance could also work to keep costs lower and let you borrow more.

9. Pay Discount Points

If you have the assets, but not the income, you can also pay discount points to obtain a lower mortgage rate.

These are a form of prepaid interest that are paid along with your other closing costs when you fund your loan.

If affordability is tight at the higher loan amount you desire, paying these points could get you the approval you’re looking for.

For example, if the par rate on your loan is 3.625%, but your desired loan amount is pushing you beyond the allowable DTI, simply buy down your rate.

You may need to pay a couple points at closing, which may not be cheap, but it could send your rate down to say 3.125% instead.

And that lower rate and monthly payment could be enough to qualify. You’ll also save money each month via lower interest.

Just make sure you hang onto the loan long enough to hit the breakeven period and reap the rewards.

10. Use a Mortgage Broker

Want the largest loan amount possible. Consider using a mortgage broker, an individual who can shop your loan scenario with dozens of wholesale lenders at once.

Aside from potentially finding you a lower interest rate, they may also have partners with more flexible underwriting guidelines.

For example, they might be able to place your loan with a lender that allows a higher max DTI ratio, or one that only requires one year of tax returns, instead of two.

So if you had a better year in 2020, that could increase your borrowing capacity versus averaging income from 2019 and 2020.

At the same time, they might have additional options like a 40-year mortgage or a cheaper ARM, or an interest-only loan.

Ultimately, you’ll have greater choice with a broker over a captive loan officer, and that may allow you to borrow more.

Source: thetruthaboutmortgage.com

Owner-Financed Homes: What You Need to Know

Looking to get into a home but can’t qualify for a traditional mortgage? You may want to look at owner financing.

Owner-financed homes aren’t very common, but they have some benefits for unique buyer and seller situations. Owner financing bypasses a traditional mortgage when the seller takes on the role of lender, but seller financing comes with some risks.

Let’s take a deep dive into how owner financing works and when it could make sense.

What Is Owner Financing?

Owner financing, also known as seller financing, is a transaction in which the property owner takes on the role of lender by financing the sale to the buyer. This type of financing bypasses traditional mortgages and means the seller offers credit to the buyer for the purchase of the home. It is typical to hire real estate professionals or lawyers to get more into the details of how to use a home contract in owner financing.

The payments for buyers are typically amortized over 30 years for a smaller monthly payment, but there’s often a large balloon payment at the end of a shorter period of time (usually one to seven years). Owner-financed transactions operate on the belief that the buyer’s finances may improve over time or the property will appreciate to a point where the buyer can get a home loan from a traditional lender.

How Does Owner Financing Work?

Owner-financed homes work much like traditionally financed homes, but with the seller acting as the lender. The seller may require a credit check, loan application, a down payment, an appraisal of the home, and the right to foreclose should the buyer default. Buyers and sellers will need to agree on an interest rate and length of loan.

The buyer and seller sign a promissory note, which contains the loan terms. They also record a mortgage (or deed of trust), and the buyer pays the seller. The buyer should also pay for homeowner’s insurance, taxes, title insurance, and other loan costs. Real estate agents and lawyers may be used to facilitate this type of transaction.

Pros and Cons of Owner Financing

For Sellers

Owner financing isn’t nearly as beneficial for sellers as it is for buyers, but there are still some upsides to consider along with the increased debt load and assumed risk.

Pros for Sellers Cons for Sellers
Attract a larger buyer pool Carry more debt
Saves money on selling costs Assume more risk
May be able to sidestep inspections, especially if the home needs work or may not pass an inspection for FHA or VA loans Buyers could default
Can earn higher returns by acting as a lender May need to act like a landlord
Faster closing occurs when buyers don’t have to go through the mortgage underwriting process Buyer may not keep up the property and the home may lose value
Not able to cash out for years
If the seller still has a fairly large mortgage on the property, the lender must agree to the transaction (many are not willing)

For Buyers

There are advantages to buying a house for sale by owner, namely that a buyer can obtain housing sooner under owner financing. A buyer may also be able to lower the down payment needed and pay lower closing costs. But it’s also riskier than borrowing from a traditional mortgage lender. If, for example, buyers are unable to finance the balloon payment, they risk losing all the money they’ve spent during the loan term.

Pros for Homebuyers Cons for Homebuyers
Opportunity to gain equity Sellers may ask for a hefty down payment to protect themselves against loss
Opportunity to improve finances May pay a higher interest rate than the market rate
Can obtain housing and financing when traditional lenders would issue a denial May pay too much for the home
No mandated credit check from a lender Fewer consumer protections available when a homebuyer purchases from a seller
No mortgage insurance Short loan terms
No minimum down payment Sellers may not follow consumer protection laws
Lower closing costs Buyers may not be protected by contingencies

To reduce risk exposure in an owner-financed transaction, buyers may want to hire an attorney.

Example of Owner Financing

Bob and Vila want to purchase a large, forever home for their family. The purchase price of the home is $965,000, but Bob and Vila can only qualify for $815,000. Part of Bob’s income is from recent self-employment, which is not accounted for by the lender but will help the couple be able to afford the house.

For the remaining $150,000, the seller offers owner financing as a junior mortgage. The buyers will pay both a traditional mortgage lender as well as the seller in this type of owner financing.

Types of Owner Financing

Land contracts, mortgages, and lease-purchase agreements are a few ways to look at owner financing. Here’s how they work and how they’re different from a traditional mortgage.

Land Contracts

Because the title cannot pass to the buyer in owner financing, a land contract creates a shared title for the buyer and seller until the buyer makes the final payment to the seller. The seller maintains the legal title, but the buyer gains an interest in the property.

Mortgages

These are the different ways to structure a mortgage with owner financing.

•   All-inclusive mortgage. The seller carries the promissory note and the balance for the home purchase.

•   Junior mortgage. When a buyer is unable to finance the entire purchase with a lender on one mortgage, the seller carries a junior mortgage (or second mortgage) for the buyer. The seller is put in second position if the buyer defaults, so there is risk to the seller by doing a second mortgage.

•   Assumable mortgage. Some FHA, VA, and conventional adjustable-rate mortgages are assumable, meaning the buyer is able to take the seller’s place on the mortgage.

A mortgage calculator can help you get an idea of what purchase price you may be able to afford.

Lease-Purchase

In a lease-purchase arrangement, both parties agree on a purchase price. The potential buyer leases from the owner for an amount of time, usually one to three years, until a set date, when the renter has the option to purchase the property. In addition to paying rent, the tenant pays an additional fee, known as the rent premium.

It’s typical to see options that credit a percentage of the purchase price (often between 1% and 5%), rents, and rent premiums toward the purchase price. If the option to buy is not used, the buyer will lose the option fee and rent premiums.

They are also known as rent-to-own, lease-to-own, or lease with an option to purchase. They can be used when an aspiring buyer has a lower credit score and needs some time to qualify for traditional financing.

Steps to Structuring a Seller Financing Deal

If you’re thinking about finding a property with owner financing, consider taking these steps to help get you through the process.

1.    Hire a professional. Because owner financing bypasses traditional lending institutions, there’s a lot more risk involved. Hiring a real estate professional and an attorney can help you structure the deal to protect your interests.

2.    Find a property where the owner offers financing. An owner must be willing and able to offer seller financing to make this type of transaction happen. It’s difficult, which is why owner financing is more common between parties that know each other very well. It’s usually required that the property is owned free and clear of any mortgage. A few other ways to look for seller-financed properties:

◦   Asking your current landlord if they’re open to selling their property to you.

◦   Looking for real estate listings with phrases like “seller financing available.”

◦   Contacting the real estate agent for a home you’re interested in. If the home has been on the market a while and the conditions are right, the sellers may be open to this option.

◦   Finding a personal connection who is able to offer owner financing.

3.    Agree to terms. Because seller financing terms are so flexible, there are a lot of details that buyers and sellers need to work out, including:

◦   Sales price

◦   Amount of down payment

◦   Length of the loan

◦   Balloon payment amount

◦   Interest rate

◦   Structure of the contract (land contract, mortgage, or lease-purchase, as described above)

◦   Any late fees, prepayment penalties, and other costs the buyer is responsible for

4.    Complete due diligence. Buyers and sellers would be wise to do their due diligence as if it were a regular purchase. Sellers may want to examine a buyer’s credit, complete a background check, and confirm that buyers have obtained homeowner’s insurance and title insurance to move forward with the transaction. On the buyer’s end, a home inspection and appraisal may be warranted.

5.    Sign and file paperwork. Much like a real estate transaction, the contracts involved in owner financing arrangements can be pretty involved. Depending on how your financing is structured, you may have a promissory note, owner financing contract and addendums, and title paperwork. You’ll also want to be sure your promissory note and deed of trust are filed with the county recorder’s office. An attorney, if you hired one, should be able to complete this process for you.

Alternatives to Owner Financing

Traditional mortgage financing may work better for your individual situation.

•   FHA loans. FHA loans have a low down payment requirement and low closing costs and maybe approved for homebuyers with lower credit scores. They are underwritten by the Federal Housing Administration. Even if you’ve had a bankruptcy, you may be able to get an FHA loan.

•   USDA loans. USDA loans are backed by the Department of Agriculture. Income must meet certain guidelines (as determined by geographic region), and the home purchased must be in an eligible rural area.

•   VA loans. Loans guaranteed by the Department of Veteran Affairs are geared toward military members, veterans, and eligible spouses. The favorable terms include a low or no down payment, lower closing costs, low interest rate, and the ability to use the VA for a home loan multiple times.

•   Conventional loans. A conventional loan simply means the financing is not insured by the federal government as it is with FHA, VA, or USDA loans. Fannie Mae and Freddie Mac provide the backing for conforming loans: those that have maximum loan amounts that are set by the government.

It’s a good idea to not take interest rates at face value but to compare APRs instead. The annual percentage rate represents the interest rate and loan fees, so even if, for instance, an FHA loan looks better than a conventional mortgage, based on just the rates, an APR comparison may tell a different story.

The Takeaway

With owner financing, the seller is the lender. Both buyers and sellers face upsides and downsides when the transaction involves owner-financed homes.

No matter who you buy your home from, SoFi’s help center for mortgages can be a great resource for navigating the mortgage and home buying process.

It might pay off to view SoFi home loans to help you get into the house that’s right for you.

Finding your rate is quick and easy.

Photo credit: iStock/KTStock


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.

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Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

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

UWM Offering No-Cost Appraisals on Home Purchase Loans

In an effort to make loan closings even faster, United Wholesale Mortgage (UWM) is offering an appraisal credit on home purchase loans submitted through March 31st, 2022.

Often times, appraisals slow down what’s already a lengthy mortgage process, a critical issue on time-sensitive transactions like home purchases.

To motivate their mortgage broker partners, they’re offering a credit for up to $600 if they utilize their “CD at Initial Underwrite” process.

This entails verifying a few details related to the property value, property taxes, and homeowners insurance upfront.

Doing so allows the lender to release the Closing Disclosure (CD) when the loan is conditionally approved, which can get borrowers to their closing date an average of eight days earlier.

How to Qualify for the No-Cost Appraisal

As noted, your mortgage broker will need to complete a few steps early on in the loan process to qualify for the no-cost appraisal.

There are three categories that require their attention, including the appraisal, taxes, and homeowners insurance.

They must upload a document in each category to satisfy these requirements.

For the home appraisal, a sales contract is good enough because the sales price is used as the preliminary value.

The taxes for the subject property can be verified simply by uploading the MLS listing.

And the homeowners insurance piece can be satisfied simply by obtaining a quote from an insurance company with the subject property’s address.

Lastly, the loan must be locked as well, meaning no floating allowed if you want to take advantage of this offer.

As you can see, it’s pretty easy to trigger the CD at Initial Underwrite, which aside from getting your loan closed faster, could save you up to $600.

Which Transactions Qualify for the No-Cost Appraisal Offer?

It’s important to note that this offer only applies to home purchase loans, not mortgage refinances.

This might be an effort by UWM to gain more purchase business as the market shifts away from a refinance-heavy environment.

And you must use a mortgage broker who is approved to work with UWM.

The good news is all loan types are eligible, including conventional loans backed by Fannie Mae and Freddie Mac, government loans (FHA loans, VA loans), and jumbo loans.

However, the property must be your primary residence, meaning second homes and investment properties don’t qualify.

Assuming you meet the requirements and close your loan, the up to $600 credit will be issued after closing.

Is This a Good Deal?

It’s always nice to get a discount, or not have to pay for something. And the appraisal can be a pricey item on a mortgage transaction.

However, the appraisal is just one of the many closing costs you’ll have to pay on your loan, along with possible fees for underwriting, processing, title/escrow, and so on.

In other words, you can’t focus solely on one item to determine if one lender is a better choice than another.

You’ll need to look at the deal holistically by considering the mortgage rate offered, the fees (ultimately the mortgage APR), and their ability to close your loan on time.

Assuming two lenders are offering an identical deal, and your broker can get the appraisal cost refunded, they might be the better choice.

This is further sweetened by the fact that doing so allows them to close eight days faster thanks to the steps required.

Of course, many lenders structure loans where borrowers don’t have to pay these costs out-of-pocket anyway thanks to lender credits.

There’s also the question of what happens if an appraisal waiver is offered. If the loan qualifies for a waiver, the borrower likely wouldn’t get the credit.

Either way, it’s nice to see a lender getting aggressive as mortgage rates rise, which could offset some additional costs plaguing borrowers today.

Source: thetruthaboutmortgage.com

Conforming Mortgage Loan Limits Rising

The steep rise in home prices nationwide has caused a significant jump in how much you can borrow with a conforming loan—that is, a mortgage that meets guidelines set by government-backed institutions Fannie Mae and Freddie Mac. For 2022, the standard conforming limit for single-unit properties is $647,200, an increase of nearly $100,000 from the 2021 cap. In areas with a high cost of living, the loan limits are higher—as much as $970,800 for single-unit homes in places including Alaska, Hawaii, Washington, D.C., and certain counties in California, Maryland, New Jersey, New York and Virginia.

Conforming loans are the most common type of mortgage, and they often have lower interest rates than other loans. To borrow more than the conforming limit, you must qualify for a jumbo loan, which usually has a higher rate and stricter underwriting requirements. You may be able to get a conforming loan with a credit score as low as 620, and a 740 or higher score can get you the best rates. Jumbos may not be available to borrowers with credit scores below the mid-to-upper 600s, and you’ll need a credit score of at least 760 for the best rates, says Keith Gumbinger, vice president of mortgage research site HSH.com. A conforming loan may have a loan-to-value ratio (the amount borrowed expressed as a percentage of the property’s value) of up to 95%, while a jumbo loan’s LTV usually can’t surpass 80%, says Gumbinger.

If you have a jumbo loan that now falls within the conforming limit, refinancing may be worthwhile if it lowers your interest rate. Using this online calculator, enter information about your current mortgage and potential new mortgage to see how much your monthly payment would change and the net savings or cost over the life of the new loan.

Source: kiplinger.com

Do You Qualify as a First-Time Homebuyer?

A first-time homebuyer isn’t just someone purchasing a first home. It can be anyone who has not owned a principal residence in the past three years, some single parents, and others.

If the thought of a down payment and closing costs put a chill down your spine, realize that first-time homebuyers often have access to down payment assistance in the form of grants or low- or no-interest loans.

‘First-Time Homebuyer’ Under the Microscope

To get a sense of who qualifies for a mortgage as a first-time homebuyer, let’s take a look at the government’s definition.

The U.S. Department of Housing and Urban Development (HUD) says first-time buyers meet any of these criteria:

•   An individual who has not held ownership in a principal residence during the three-year period ending on the date of the purchase.

•   A single parent who has only owned a home with a former spouse.

•   An individual who is a displaced homemaker (has worked only in the home for a substantial number of years providing unpaid household services for family members) and has only owned a home with a spouse.

•   Both spouses if one spouse is or was a homeowner but the other has not owned a home.

•   A person who has only owned a principal residence that was not permanently attached to a foundation (such as a mobile home when the wheels are in place).

•   An individual who has owned a property that is not in compliance with state, local, or model building codes and that cannot be brought into compliance for less than the cost of constructing a permanent structure.

For conventional (nongovernment) financing through private lenders, Fannie Mae’s criteria are similar.

You can use our Home Affordability
Calculator to get an estimate of how
much house you can afford.

Options for First-Time Homebuyers

First-time homebuyers may not realize that they, like other buyers, may qualify to buy a home with much less than 20% down.

They also have access to programs that may ease the credit requirements of homeownership.

Federal Government-Backed Mortgages

When the federal government insures mortgages, the loans pose less of a risk to lenders, so lenders may offer you a lower interest rate.

There are three government-backed home loan options. In exchange for a low down payment, you’ll pay an upfront and annual mortgage insurance premium for FHA loans, an upfront guarantee fee and annual fee for USDA loans, or a one-time funding fee for VA loans.

FHA Loans

The Federal Housing Administration, part of HUD, insures fixed-rate mortgages issued by approved lenders . On average, more than 80% of FHA-insured mortgages are for first-time homebuyers each year.

If you have a FICO® credit score of 580 or higher, you could get an FHA loan with just 3.5% down. If you have a score between 500 and 579, you may still qualify for a loan with 10% down.

USDA Loans

The U.S. Department of Agriculture offers assistance to buy (or, in some cases, even build) a home in certain rural areas. Your income has to be within a certain percentage of the average median income for the area.

If you qualify, the loan requires no down payment and offers a fixed interest rate.

The USDA has an interactive map to determine if a community is considered rural.

VA Loans

A mortgage guaranteed in part by the Department of Veterans Affairs requires no down payment and is available for military members, veterans, and certain surviving military spouses.

Although a VA loan does not state a minimum credit score, lenders who make the loan will set their minimum score for the product based on their risk tolerance.

Government-Backed Conventional Mortgages

Fannie Mae and Freddie Mac, government-backed mortgage companies, do not originate home loans; they buy and guarantee mortgages issued through lenders in the secondary mortgage market.

They make mortgages available that are geared toward lower-income, lower-credit score borrowers.

Freddie Mac’s Home Possible program offers down payment options as low as 3%. There are also sweat equity down payment options and flexible terms.

Fannie Mae’s 97% LTV program also offers 3% down payment loans.

Fannie Mae’s HomePath Ready Buyer program offers first-time homebuyers the ability to buy foreclosed properties with as little as 3% down and help with closing costs.

A Mortgage for Certain Civil Servants

If you’re a law enforcement officer, firefighter, or EMT working for a federal, state, local, or Indian tribal government agency, or a teacher at a public or private school, the HUD-backed Good Neighbor Next Door program could be a good fit. It provides 50% off the listing price of a foreclosed home in specific revitalization areas. In turn, you have to commit to living there for 36 months.

Homes are listed on the HUD website each week, and you have to put an offer in within seven days.

Only a registered HUD broker can submit a bid for you on a property.

If using an FHA loan to buy a home in the Good Neighbor Next Door program, the down payment will be $100. If using a VA loan to purchase a house through the program, buyers will receive 100% financing. If using a conventional home loan, the usual down payment requirements stay the same.

State, County, and City Assistance

It isn’t just the federal government that helps to get first-time buyers into homes. State, county, and city governments and nonprofit organizations run many down payment assistance programs.

HUD is the gatekeeper, steering buyers to state and local programs and offering advice from HUD home assistance counselors.

The National Council of State Housing Agencies has a state-by-state list of housing finance agencies, which cater to low- and middle-income households. Contact the agency to learn about the programs it offers and to get answers to housing finance questions.

Using Gift Money

First-time homebuyers might also want to think about seeking down payment and closing cost help from family members.

If you’re using a cash gift, your lender will want a formal gift letter, and the gift cannot be a loan. Home loans backed by Fannie Mae and Freddie Mac only allow down payment gifts from someone related to the borrower. Government-backed loans have looser requirements.

Want to use your 401(k) to make a down payment? You could, but financial advisors frown on the idea. Borrowing from your 401(k) can do damage to your retirement savings.

The Takeaway

First-time homebuyers are in the catbird seat if they don’t have much of a down payment or their credit isn’t stellar. Lots of programs, from local to federal, give first-time homeowners a break.

SoFi offers home loans with as little as 5% down. See how your rate and terms stack up against the competition.

It’s easy to find your rate.


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.
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.
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

2022 FHA Loan Limits: Floor Rises to $420,680, Ceiling to $970,800

Similar to the FHFA, the U.S. Department of Housing and Urban Development (HUD) announces maximum loan limits each year for FHA loans.

Today, they unveiled the 2022 FHA loan limits, which like the 2022 conforming loan limits, will be significantly higher than the limits in effect this year.

This is thanks to continued home price appreciation, and the fact that the calculation of the FHA loan limits is driven by the conforming loan limit itself.

To come up with the FHA loan limits, HUD uses a percentage of the national conforming limit to set both a floor and a ceiling.

In cities like Los Angeles, home buyers can enjoy the higher ceiling loan limit, while many less expensive cities nationwide are set at the floor. There are also limits in between these two thresholds.

FHA Low-Cost Area Loan Limits (The Floor)

One-unit property: $420,680
Two-unit property: $538,650
Three-unit property: $651,050
Four-unit property: $809,150

To calculate the FHA loan limit floor, HUD uses 65 percent of the national conforming limit, which will be $647,200 for a one-unit property in 2022.

That puts it at $420,680, up from $356,362 in 2021. That’s a big 18% increase, and enough to make many more home buyers eligible for FHA financing nationwide.

It’ll be even higher for multi-unit properties, such as duplex or triplex.

If you put down the minimum 3.5% on a home purchase, you’ll now be able to purchase a property for as much as $435,000.

FHA High-Cost Area Loan Limits (The Ceiling)

One-unit property: $970,800
Two-unit property: $1,243,050
Three-unit property: $1,502,475
Four-unit property: $1,867,275

In more expensive metros nationwide, HUD allows for even higher loan limits, known as high-cost area mortgage limits.

These are set at 150 percent of the conforming limit, which matches them up with the high cost loan limits for mortgages backed by Fannie Mae and Freddie Mac.

As you can see, a four-unit property permits a near-$2 million loan limit, which tells you just how high home prices have risen.

This means a home buyer in Los Angeles could purchase a $1.5-million-dollar triplex with just $52,500 down. That’s pretty amazing.

Aside from the floor and ceiling, there are many metros that fall between these two limits throughout the country.

For example, the maximum loan limit for an FHA loan on a one-unit property in Denver, Colorado will be $684,250 in 2022.

Similarly, home buyers in the Miami-Ft. Lauderdale area will enjoy higher loan limits of $460,000 next year.

And in Phoenix, Arizona it will be $441,600, up from $368,000 in 2021. The same goes for Atlanta, where the 2022 FHA loan limit will be $471,500.

2022 FHA Loan Limits for Special Exception Areas

One-unit property: $1,456,200
Two-unit property: $1,864,575
Three-unit property: $2,253,700
Four-unit property: $2,800,900

Lastly, there are even higher loan limits for so-called special exception areas, which include Alaska, Guam, Hawaii, and the Virgin Islands.

They are adjusted higher to account for more expensive construction costs in these states and territories.

For a four-unit property, this loan limit is nearing a staggering $3 million, which tells you the dollar just ain’t worth what it used to be.

Regardless, this means a lot more home buyers will be able to take advantage of an FHA loan vs. a conventional loan.

Note that these are all forward mortgage limits for calendar year 2022, which are effective for case numbers assigned on or after January 1st, 2022.

For reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), the maximum nationwide claim amount will rise to nearly $1 million dollars ($970,800) for all cities.

If you were on the cusp of FHA loan eligibility because of a loan limit issue, you may want to take a second look at your loan scenario.

Source: thetruthaboutmortgage.com

Understanding Property Valuations

If you’re applying for a mortgage, you probably expect the lender to take a look at your income, debt, credit history, employment, and assets.

There’s another loan element the lender will consider that may be less familiar: an objective property valuation.

What Is a Property Valuation?

Sellers may use a property valuation to determine how much their house is worth and how much they can charge on the open market.

A mortgage lender’s property valuation is slightly different. It helps the lender determine the value of the property you’re hoping to buy based on factors like size, location, condition, and demand.

Why would lenders require this type of home appraisal? They want to know that the loans they offer are backed by a sufficiently valuable property so that if a borrower were to default on the loan, they can recoup their losses.

Consider this: Sellers can choose any listing price they want — whatever they think someone is willing to pay. But if the buyer needs financing, the selling price must be supported by market value (what comparable homes have recently sold for in the area) before a lender will pony up the cash for a loan.

If the home you want to buy is appraised for less than the sales price, the seller would need to lower the price to the appraised value, you would have to make up the difference, or you’d exit the deal.

Who Carries Out a Property Valuation?

A lender’s property valuation typically will be carried out by a professional appraiser assigned by a third party.

The lender, buyer, and seller are not to have any relationship with the appraiser so that the valuation is unbiased. Buyers can hire an independent appraiser, but the valuation would not be official.

The kind of valuation required by lenders depends on factors such as the type of home you’re looking to buy, the type of loan you’re applying for, your credit score, and whether you’re buying a single-family or multifamily home.

Home Appraisals, Explained

The most common kind of property valuation is an appraisal.

How Does a Home Appraisal Work?

An appraisal is an independent estimate of the home’s value by a licensed or certified real estate appraiser.

Appraisers weigh factors like location, the condition of the home, size and layout, the year it was built, and any renovations that have been done. They also consider “comps” — what similar homes in the neighborhood recently sold for — tax records, and zoning.

The appraisal will determine a market value that is either “as is” or “subject to” certain conditions, such as completion of repairs or upgrades.

Lenders rely on the appraiser’s market value to come up with the loan-to-value ratio of a property, which influences the amount they’re willing to lend and the terms of the loan.

When Does an Appraisal Happen and What Does It Cost?

The federal government no longer requires appraisals for homes that cost less than $400,000, allowing simpler evaluations to stand in their place. That said, most mortgage lenders probably will still require an appraisal.

The appraisal typically occurs once the seller has accepted an offer and is normally performed within the loan contingency date of the purchase contract, usually 21 days.

The buyer pays for the appraisal ordered through the lender. The cost depends on the type of property, city, size, and features, but for a single-family home it averages $348, according to a national survey from HomeAdvisor, an online platform for home services professionals.

A desktop appraisal may cost much less than that.

What If You Get a Low Appraisal?

If the appraised value is as much as the agreed-upon price or more, that encourages the lender to move forward with the home loan, assuming that the other aspects of the property and your application are in order.

If the appraisal comes in under the agreed-upon price, the lender may reduce the amount of the loan it’s willing to offer.

You or the sellers can dispute the appraisal with the lender or ask for a second appraisal. If the value is still too low, there are three routes:

•   You can agree to contribute the difference in cash.

•   You can try to get the seller to reduce the price.

•   You and the seller may agree to split the difference.

Buyers can back out of the deal if the contract includes an appraisal contingency. A clean offer, one with as few contingencies as possible, caught on in the recent hot market, but buyers take risks in dropping contingencies.

Alternatives to a Full Home Appraisal

In certain situations or stages of the homebuying process, you may not need to go through a full formal home appraisal. Here are some alternative methods lenders use for home valuations.

Automated Valuation Model

Algorithms take into account the size of the home, the number of bedrooms and bathrooms, comps, and other factors to estimate property value.

Some lenders of conventional mortgages using Fannie Mae or Freddie Mac’s automated underwriting systems may receive a waiver for a full appraisal, thanks to robust sales in the neighborhood to support the purchase price, the amount of the down payment, strength of the borrower, or the type of transaction.

Some lenders also use automated valuation models when deciding whether to extend or adjust a home equity line of credit.

Drive-by or Exterior-Only Appraisal

A drive-by appraisal (also known as a summary appraisal) refers to an inspection that only looks at the exterior of a home. The appraiser will photograph the front and sides of the home, as well as the street in both directions.

The appraiser takes notes on the neighborhood and the condition of the home and looks at comps when coming up with an estimated value.

Desktop Appraisal

Never having to leave the desk, an appraiser uses property tax records, comps, and other public record data in lieu of a physical property inspection.

The Federal Housing Finance Agency made desktop appraisals, implemented in March 2020 amid lockdowns and social distancing, permanent for purchase loans starting in early 2022.

That means both Fannie Mae and Freddie Mac will allow appraisals to be conducted remotely.

Broker Price Opinion

A broker price opinion is an estimate of a property’s value determined by a real estate agent or broker, rather than a licensed appraiser. A client may request this estimate to underpin a home’s listing price.

A lender may request a broker price opinion when a borrower is behind on payments, and will use the unofficial assessment to see whether the home value is below the amount of the loan, potentially making the borrower eligible to negotiate a short sale.

Broker price opinions can also be used to buy and sell mortgages on the secondary market. Lenders prefer them in these cases because a full appraisal isn’t required, and because the valuations are fast and generally less costly.

The Takeaway

An unbiased professional appraiser determines real estate valuation based on factors like home size, condition, location, and comparable sales. When big money is at stake, a lender needs to determine the true property valuation.

Before you get to the home valuation stage, the first steps to becoming a homeowner may be getting prequalified and preapproved for a mortgage loan.

SoFi offers home loans with as little as 5% down, competitive rates, and flexible terms.

It’s quick and easy to find your rate on a SoFi mortgage.


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.

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