A 401(k) loan allows you to borrow money from your retirement savings and pay it back to yourself over time, with interest. While this type of loan can provide quick access to cash at a relatively low cost, it comes with some downsides. Read on to learn how 401(k) loans work, when it may be appropriate to borrow from your 401(k), and when you might want to consider an alternative source of funding.
What Is a 401(k) Loan & How Does It Work?
A 401(k) loan is a provision that allows participants in a 401(k) plan to borrow money from their own retirement savings. Here are some key points to understand about 401(k) loans.
Limits on How Much You Can Borrow
The Internal Revenue Service (IRS) sets limits on the maximum amount that can be borrowed from a 401(k) plan. Typically, you can borrow up to 50% of your account balance or $50,000, whichever is less, within a 12-month period.
Spousal Permission
Some plans require borrowers to get the signed consent of their spouse before a 401(k) loan can be approved.
You Repay the Loan With Interest
Unlike a withdrawal, a 401(k) loan requires repayment. Typically, you repay the loan (plus interest) via regular payroll deductions, over a specified period, usually five years. These payments go into your own 401(k) account.
Should You Borrow from Your 401(k)?
It depends. In some cases, getting a 401(k) can make sense, while in others, it may not. Here’s a closer look.
When to Consider a 401(k) Loan
• In an emergency If you’re facing a genuine financial emergency, such as medical expenses or imminent foreclosure, a 401(k) loan may provide a timely solution. It can help you address immediate needs without relying on more expensive forms of borrowing.
• You have expensive debt If you have high-interest credit card debt, borrowing from your 401(k) at a lower interest rate can potentially save you money and help you pay off your debt more efficiently.
When to Avoid a 401(k) Loan
• You want to preserve your long-term financial health Depending on the plan, you may not be able to contribute to your 401(k) for the duration of your loan. This can take away from your future financial security (you may also miss out on employee matches). In addition, money removed from your 401(k) will not be able to grow and will not benefit from the effects of compound interest.
• You may change jobs in the next several years If you anticipate leaving your current employer in the near future, taking a 401(k) loan can have adverse consequences. Unpaid loan balances may become due upon separation, leading to potential tax implications and penalties.
How Is a 401(k) Loan Different From an Early Withdrawal?
When you withdraw money from your 401(k), these distributions typically count as taxable income. And, if you’re under the age of 59½, you typically also have to pay a 10% penalty on the amount withdrawn.
You may be able to avoid a withdrawal penalty, if you have a heavy and immediate financial need, such as:
• Medical care expenses for you, your spouse, or children
• Costs directly related to the purchase of your principal residence (excluding mortgage payments).
• College tuition and related educational fees for the next 12 months for you, your spouse, or children.
• Payments necessary to prevent eviction from your home or foreclosure
• Funeral expenses
• Certain expenses to repair damage to your principal residence
While the above scenarios can help you avoid a penalty, income taxes will still be due on the withdrawal. Also keep in mind that an early withdrawal involves permanently taking funds out of your retirement account, depleting your nest egg.
With a 401(k) loan, on the other hand, you borrow money from your retirement account and are obligated to repay it over a specified period. The loan, plus interest, is returned to your 401(k) account. During the term of the loan, however, the money you borrow won’t enjoy any growth.
Recommended: Can I Use My 401(k) to Buy a House?
Pros and Cons of Borrowing From Your 401(k)
Given the potential long-term cost of borrowing money from a bank — or taking out a high-interest payday loan or credit card advance — borrowing from your 401(k) can offer some real advantages. Just be sure to weigh the pros against the cons.
Pros
• Efficiency You can often obtain the funds you need more quickly when you borrow from your 401(k) versus other types of loans.
• No credit check There is no credit check or other underwriting process to qualify you as a borrower because you’re withdrawing your own money. Also, the loan is not listed on your credit report, so your credit won’t take a hit if you default.
• Low fees Typically, the cost to borrow money from your 401(k) is limited to a small loan origination fee. There are no early repayment penalties if you pay off the loan early.
• You pay interest to yourself With a 401(k) loan, you repay yourself, so interest is not lost to a lender.
Cons
• Borrowing limits Typically, you are only able to borrow up to 50% of your vested account balance or $50,000 — whichever is less.
• Loss of growth When you borrow from your 401(k), you specify the investment account(s) from which you want to borrow money, and those investments are liquidated for the duration of the loan. Therefore, you lose any positive earnings that would have been produced by those investments for the duration of the loan.
• Default penalties If you don’t or can’t repay the money you borrowed on time, the remaining balance would be treated as a 401(k) disbursement under IRS rules. This means you’ll owe taxes on the balance and, if you’re younger than 59 1 ⁄ 2, you will likely also have to pay a 10% penalty.
• Leaving your job If you leave your current job, you may have to repay your loan in full in a very short time frame. If you’re unable to do that, you will face the default penalties outlined above.
Alternatives to Borrowing From Your 401(k)
Because withdrawing or borrowing from your 401(k) comes with some drawbacks, here’s a look at some other ways to access cash for a large or emergency expense.
Emergency fund Establishing and maintaining an emergency fund (ideally, with at least three to six months’ worth of living expenses) can provide a financial safety net for unexpected expenses. Having a dedicated fund can reduce the need to tap into your retirement savings.
Home equity loans or lines of credit If you own a home, leveraging the equity through a home equity loan or line of credit can provide a cost-effective method of accessing extra cash. Just keep in mind that these loans are secured by your home — should you run into trouble repaying the loan, you could potentially lose your home.
Negotiating with creditors In cases of financial hardship, it can be worth reaching out to your creditors and explaining your situation. They might be willing to reduce your interest rates, offer a payment plan, or find another way to make your debt more manageable.
Personal Loans Personal loans are available from online lenders, local banks and credit unions and can be used for virtually any purpose. These loans are typically unsecured (meaning no collateral is required) and come with fixed interest rates and set terms. Depending on your lender, you may be able to get funding within a day or so.
The Takeaway
Borrowing from your 401(k) can provide short-term financial relief but there are some downsides to consider, such as borrowing limits, loss of growth, and penalties for defaulting. It’s a good idea to carefully weigh the pros and cons before you take out a 401(k) loan. You may also want to consider alternatives, such as using non-retirement savings, taking out a home equity loan or line of credit, or getting a personal loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Disability insurance is the most underrated type of insurance, and one that I routinely would see clients skip. Who ever thinks they will become disabled?
Hard truth – According to some statistics from the Council for Disability Awareness, 1 in 4 workers who are 20 years old will be disabled before they retire. That’s a shocking number for most people to consider. If you can’t perform your job, you can’t earn money, and that’s where a disability insurance plan can save the day.
The best disability insurance companies make it easy to get a quote online. Below you can quickly get a quote from top rated disability insurance companies we recommend, or keep reading to learn more about disability insurance and its uses.
Table of Contents
Quotes From Top Rated Disability Insurance Companies We Recommend
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#1
Quotes from the top disability carriers to ensure you find the best rates
Helps thousands of consumers apply for disability insurance each year
Rated Excellent on TrustPilot
Benefit terms range from 3 months to age 67
Choose your waiting period
Multiple riders add flexibility to your policy
#2
Benefit periods from as little as 2 years or all the way to retirement age
Family care benefit provides coverage for up to a year if policyholder has to take off work to care for a child, spouse, or parent
10% discount to business owners and an additional 10% to preferred occupational classes.
Offers the option of Full Coverage for Mental/Nervous disabilities or a 10% discount for a 2 year limitation.
Rated A (Excellent) by A.M. Best for financial strength
What is Disability Insurance?
The idea behind disability insurance is simple.
It operates similar to a traditional life insurance plan, but instead of paying out upon your death, it pays out if you become disabled.
Coverage for these plans can vary in the size. Just like with other kinds of insurance plans, every disability policy is different.
If you already know what you want and just want to browse different rates from several carriers, click here.
Some plans are going to replace 45 %of your income, while others are going to give more replacement at 65%.
The more replacement coverage you want, the more you’re going to pay for your plan.
The Differences with Workman’s Compensation
When an employee suffers an injury on the job, oftentimes their employer will compensate them through worker’s compensation.
It is important to understand the difference between disability insurance and worker’s compensation – because the two are not the same thing.
The key difference between workers’ compensation and disability insurance is that workers’ compensation (or workers’ comp) pays for injuries that are work-related. Employers will obtain workers’ comp insurance in order to pay for incidents that occur on the job.
If workers sustain injuries on the job, it is oftentimes up to the employer to pay for the person’s medical bills, as well as for the individual’s lost wages if the employee must take time off work because of the injury.
An employee who collects payment via workers’ comp will typically, however, not have a long-term disability, but rather a temporary injury from which he or she will soon return.
On the other hand, disability insurance pays for a percentage of a person’s earnings if the insured is not able to work due to an injury or illness – regardless of whether that injury or accident happened at work or elsewhere.
In addition, if the disability insurance policy is an individual policy (versus an employer-sponsored group plan), the insured will be covered under the policy regardless of who he or she is employed through.
According to the Council for Disability Awareness, less than 5 percent of disabling accidents and illnesses are work related.
This means that the other 95 percent are not – and that these other 95 percent are also not covered by workers’ compensation insurance.
What About Social Security Disability Benefits?
It can be extremely difficult to qualify for Social Security’s disability benefits. For example, Social Security will only pay benefits if a person is considered to be totally disabled. This means that the individual cannot do work that they did previously, nor can they do other jobs either.
In addition, the person’s disability must have lasted, or be expected to last, for at least one year or result in death.
An individual must also have collected enough work credits in order to qualify for Social Security disability benefits.
You can take a look at the 2019 Social Security Administration limits and rates for OASDI and social security here.
The number of credits will be dependent on the age that the individual is when he or she becomes disabled.
With that in mind, the importance of disability insurance becomes even more clear.
This type of insurance can provide you with the additional funds that you need to help pay living expenses – without the need to dip into savings, retirement assets, or worse yet – use credit – for the purpose of paying day to day bills until you are back on the job.
If Social Security deems that a person’s situation qualifies, there is still a five month waiting period before benefits are paid.
This, too, can create a financial hardship for many people in terms of paying living expenses – especially if there are added medical costs due to the illness or injury that has been suffered.
So, we know Social Security won’t give the money you need and workman’s comp probably won’t cover it, so now what?
This is why you should explore a private disability insurance policy.
Types of Disability Insurance
The two main types of coverage are long-term disability and short-term disability.
You can probably guess from the name, but short-term policies are designed to cover employees for a much shorter time, anything shorter than two years.
Long-term disability, on the other hand, is built for anything past two years. A long-term disability insurance policy could continue to pay out for the rest of your life if it’s needed but typically runs from 5-10 years.
Some of the common causes for short-term disability insurance include:
having a baby
a severe illness
a major injury.
Long-term disability could include a lot of things, but some common causes are:
cancer
muscular disorders
cardiovascular complications
or serious injuries
Long-Term Disability vs. Short-Term Disability
Aside from the obvious, there are a few key differences between long-term disability and short-term disability.
One of those is the waiting period for a payout.
With short-term, policyholders can start receiving weekly checks as quickly as a 1 to 7 days after you file a claim for the policy.
With a long-term disability insurance policy, on the other hand, it can be anywhere from 90 days to 180 days.
If you’re looking at the cost difference between the two plans, short-term policies are going to be significantly more affordable than its long-term counterpart. Long-term plans can give you years more coverage which could translate to thousands and thousands of additional coverage from the insurance company.
Another key difference between the two kinds of plans is how you can get the coverage.
A lot of companies offer their employees short-term disability insurance, but almost no companies have a long-term disability insurance program.
If you want to get the long-term coverage, you’ll have to purchase a plan through a private insurance company. If your company offers any type of short-term disability insurance, you should always enroll in the program.
Group, Individual, Multi-life
Inside of the two main types of disability insurance are several “sub-types” of coverage.
One of those is group coverage.
These are policies which are offered through an employer and are offered to all the employees. Group coverage could be either short-term disability or long-term disability.
Employer-sponsored short-term plans are designed to pay for any disabilities which occur outside of the workplace. Short-term disabilities are much more common than long-term disabilities which could impact you for the rest of your life.
Individual Disability Insurance
If your company doesn’t have any sponsored plans, you can purchase a private policy through an insurance company.
You’ll be required to answer some medical questions and depending on the plan, take a medical exam.
Multi-Life Disability Insurance
When you’re shopping around for a disability insurance policy, you’ll probably come across plans being sold as “multi-life plans.”
The idea of these plans is to get several key people in a business (think of several doctors in a practice) to all apply at the same time with their plan.
The insurance company markets these policies as multi-life so they can offer simpler underwriting processes and pass some of the savings onto the policyholders.
Is Group Disability Enough?
For the employees who are lucky enough to get disability insurance through their employer, you still might be lacking. Just because you have a plan through your job, it might not be enough.
Let’s say you’re not able to go to work because of an accident. You can’t get to your job and pull in your paycheck, are you going to be able to pay for all of your monthly bills without having to make any extreme sacrifices.
To determine if your group disability insurance is enough, you’ll need to do some basic math.
Look at your plan and see how much coverage it provides.
For this example, let’s say it pays 50% of your salary. Now, take a look at your bills and expenses.
If the total of those numbers is more than 50% of your income, then your group disability isn’t enough.
If you’ve crunched the numbers and came to the jarring realization your group plan isn’t enough, the best choice is to purchase an additional individual plan.
Both of the policies can work together, and your individual plan can pick up the slack left behind.
What’s the Difference Between Owner-Occupation and Any-Occupation?
One of the most important things to understand about disability insurance plans are the differences between an owner-occupation plan and an any-occupation plan.
They may sound the same, but they completely change how your plan operates and the coverage it will give you.
First, let’s look at owner-occupation (sometimes called own-occupation protection). Policies with this protection will only pay out if you can no longer to the duties and tasks required to you by your job.
If you’re an electrician, but you can not do the simple tasks required on a day-to-day basis, then an own-occupation plan will pay you the benefits.
Any-occupation policies will only pay the benefits of the plan if you can no longer perform any occupation based on your education and work experience.
As you can tell, any-occupation policies have much stricter rules on the circumstances in which they will pay the policyholder.
Type of Disability Insurance
Description of Disability Insurance
Short-term disability insurance
Provides coverage for a limited period of time, usually up to 6 months, and replaces a portion of your income if you are unable to work due to illness or injury.
Long-term disability insurance
Provides coverage for a longer period of time, typically until retirement age, and replaces a portion of your income if you are unable to work due to illness or injury.
Group disability insurance
Provided by an employer as part of a benefits package, group disability insurance offers coverage to all employees and may be offered as short-term or long-term disability insurance.
Individual disability insurance
Purchased by an individual, this type of disability insurance offers customized coverage and can be either short-term or long-term disability insurance.
Own-occupation disability insurance
Offers coverage if you are unable to work in your specific occupation due to illness or injury, even if you are able to work in a different occupation.
Any-occupation disability insurance
Offers coverage only if you are unable to work in any occupation due to illness or injury.
Residual disability insurance
Offers coverage if you are able to work but have a reduction in income due to illness or injury.
How Much Does Disability Insurance Cost?
Now for the part everyone wants to know, how much is a disability insurance plan going to cost you?
Well, there are a lot of different factors which are going to affect how much the premiums are. It’s difficult for me to give an exact number without knowing your exact situation.
For example, the age of the applicant is going to play a major role in the premium rates. If a 25-year old applies for a policy, it’s going to be significantly cheaper than a plan for a 45-year old.
The general rule of thumb for disability insurance is the premiums are going to be anywhere from 1% to 3% of your gross income.
If you are making $100,000, you can budget for $1,000 – $3,000 every year.
As I mentioned, there are dozens of different factors which will completely change how much you pay.
If you’re a smoker, then you’re going to pay much more for your plan.
If you have a riskier job, you’re going to pay more.
The rule of thumb is exactly that.
How Much Disability Insurance Do You Need?
I alluded to the amount of disability insurance earlier in this article, but now let’s take a hard look at how much coverage you should have.
Not having enough disability insurance protection could cause some serious financial strain if something were to happen.
First, let’s look at your living expenses. If you don’t already have a budget, take some time to look at all of your monthly bills (power bill, water bill, mortgage payment, etc.) and your spending (groceries, gas, etc.).
On top of those monthly expenses, add in a few “unexpected” bills as well. You never know when something is going to break or an extra bill is going to pop up.
You want to have some cushion in your budgeting. Otherwise, you end up living paycheck-to-paycheck.
After you have the monthly expenses number, you can do some subtracting.
If you aren’t working, your expenses are going to look very different than they do now. For example, if you aren’t driving to work every day, you probably won’t be spending as much on gas.
You won’t be spending money on work clothes, and you will probably cut out some additional “entertainment expenses” as well.
Now you have a new number, your monthly expenses minus some tweaks.
The next number you want to add to the equation is any income you’ll make from other sources besides your disability insurance plan.
This category can include any money from your investments, money from your spouse or partner’s job (or a second job if they decide to add another job) and any additional disability income you may qualify for.
If you’re the main income earner in your home, then having disability insurance is one of the most important purchases you can make.
Key Man
For most people, they purchase disability insurance for their family and loved ones. for others, they buy a plan to protect their business.
If you’re one of the foundational workers in your business (ex. an owner, CEO, etc.), then you should consider buying a disability insurance policy for your company.
Key man plans operate a little differently than a traditional disability policy. With these policies, the business pays the premiums for the plan, and if something were to happen to you and you couldn’t perform your job, then the business is going to get the money from the payout.
These policies are a way for the companies to protect themselves against financial struggles if a key person in the business were unable to work because of illness or injury.
The company can use this money to outsource those duties or to hire someone to replace the key person while they are out with the disability.
Disability Insurance for High Income Occupations
There is a certain group of people which disability insurance could have some serious problems.
If you are a high-income earner, the standard disability insurance policy simply may not be enough. Just about every insurance company which sells one of these plans is going to have an income limit.
Regardless of the percentage they replace, they are not going to offer more than that limit.
Typically, these are doctors or lawyers who own their own firms, for example.
Some policyholders may find the insurance company’s limit is below the 60% they offer in income insurance.
If you’re one of these people, there are some things you can do to get the protection you need, regardless of how much money you make every year.
One option is to choose a company who offers higher limits. Each company has different coverage limits on their policy. We can help you shop around until you find one with a high enough limit for your needs.
Another route is to buy two separate plans from different companies. Sure, you’ll pay more in premiums every month, but you’ll have the protection in place if you ever need it.
Where to Get a Disability Insurance Quote
You now know the basics of disability insurance coverage, it’s time to go out and find a policy of your own.
There are more than 40 insurance companies which sell these plans. As I mentioned, they are all different. Some are going to have higher limits, offer a larger percentage, or have cheaper rates.
You need to find a company which suits your needs.
Before you pick a company, compare the rates and plans from several companies. You don’t buy the first house you see, why would you buy the first policy you find?
Sure, you can use your own time to contact those 40+ companies individually, or you can use a tool which will do the dirty work for you.
If you’ve decided you want to get disability insurance or supplement the coverage you already have from work, check out PolicyGenius. They are one of the few companies out there which can gather quotes from dozens of companies for disability insurance, all in one place.
PolicyGenius allows you to tailor your quotes to exactly the kind of policy you’re looking for; the perfect amount of coverage with the proper waiting period.
They know shopping for insurance isn’t easy, but they make it as quick as possible.
FAQs – Best Disability Insurance Quotes
How can I get the best disability insurance quotes?
To get the best disability insurance quotes, it’s important to shop around and compare policies from different insurance companies. You can request quotes online or by speaking with a licensed insurance agent. Be sure to provide accurate information about your occupation, income, and health to receive an accurate quote.
What factors can affect the cost of disability insurance?
The cost of disability insurance can be affected by several factors, including your age, occupation, health status, and the type and amount of coverage you select. Policies with longer benefit periods or more comprehensive coverage may be more expensive.
How much disability insurance coverage do I need?
The amount of disability insurance coverage you need depends on factors such as your income, monthly expenses, and savings. A general guideline is to have enough coverage to replace 60% to 80% of your income, but this may vary depending on your individual circumstances.
Housing is the largest expense in the budget of most families. But how much is too much to spend on shelter? An article in Saturday’s New York Times contains a shocking example of one woman who crossed the line:
What she got was a mortgage she could not afford. Toward the $385,000 cost, [Christina] Natale made a down payment of $185,000, a little less than what she took away from the sale of her grandfather’s home. The loan that made up the difference, with closing costs, broker’s fee, taxes and insurance, meant a monthly bill of $1,873.96, about $100 less than her monthly take-home pay as an administrative assistant.
I am not unsympathetic to tales of financial hardship, but this stretches even my compassion. Ms. Natale (who has three children) took out a housing loan that left her just $100 a month for every other expense in her life. She shouldn’t need an outside voice to tell her that this was an impossible situation. (All the same, where were the outside voices?)
Although this is an extreme example, many other people buy homes only to discover they’re in over their heads, unable to make payments. How can you prevent this from happening to you?
Debt-to-Income Ratio
Fortunately, decades of financial data have produced computerized models that help to determine how much a person can afford to spend on housing and debt. To learn more about this, I recently spoke with Robb Severdia of Guarantee Mortgage in Portland. I asked him to describe how the process works. (If I have anything wrong here, it’s my fault, not Severdia’s.)
Traditionally, lenders have used the debt-to-income (DTI) ratio to estimate how much a homeowner can afford to borrow. This ratio is computed by comparing your expenses to your gross (pre-tax) income. The lower the number, the better. If you make $3,000 a month before taxes, and you pay $300 toward debt, your debt-to-income ratio is 10%.
Banks and mortgage brokers look at two numbers:
The “front-end” debt-to-income ratio, which includes total housing expenses: mortgage principal, interest, taxes, and insurance.
The “back-end” debt-to-income ratio, which includes all of the above plus other debt payments: auto loans, student loans, credit cards, etc.
When a prospective borrower submits her paperwork, the computer evaluates it, applying statistical models to be sure the proposed debt load falls within accepted ranges. After this automated process, the loan proceeds to manual underwriting, where a human screens the application and makes the ultimate determination to approve or deny the loan.
Industry-standard debt-to-income ratios drive this process.
Lending Limits
When we bought our first home in 1994, everyone involved in the transaction told us that our front-end debt-to-income ratio should be 28% or less. That is, we should pay no more than 28% of our gross income toward housing expenses. The back-end ratio was 36%, which meant that our housing expenses and debt payments combined should total less than 36% of our income.
Example: Our gross (pre-tax) income in 1994 was roughly $60,000, or about $5,000 per month. To stay under the 28% front-end debt-to-income guideline, we could afford housing expenses of no more than $1,400 per month, including insurance and taxes.Because Kris had student loans and I had credit card debt, we couldn’t get close to the 28% front-end DTI ratio because it would push us over the 36% back-end. Our high debt-load meant we had less to spend on a house. Our eventual payment was $1,086 per month.
When we bought our new home in 2004, the debt-to-income ratios had changed. “That 28% figure is old,” we were told. “Most people can go as high as 33%.” The back-end ratio had been raised to 38% — and even to 41% in some models!
From what I understand, debt-to-income guidelines have gradually become more relaxed over the years. Here’s what I could puzzle together about the history of DTI (I would love to have clarifications or corrections to this list):
Reportedly, during the 1970s (before credit-card debt became common), DTI wasn’t split between front-end and back-end. There was only one ratio, and it was 25%. If your mortgage, taxes, and insurance were less than 25% of your income, it was assumed you could afford the payment.
In The New Rules of Money, Ric Edelman writes that the lending limits “used to be” 22% and 28%. I’m guessing that this must have been the rule-of-thumb during the 1980s.
When we bought our first home in the mid-1990s, the front-end ratio was 28% and the back-end ratio was 36%.
By 2004, those ratios has increased again to 33% and 38%, respectively. (To qualify for an FHA loan, your front-end DTI is limited to 29%, and the back end is capped at 41%.)
A 5% increase may not seem like a big deal, but when you’re talking about a house payment, it’s huge. Remember: 5% of a $60,000 income is $3,000 per year, or $250 a month. Many foreclosures occur because people take on housing payments that are as little as $250 a month more than they can afford.
Afraid to Say “No”
During my conversation with Robb Severdia, I asked him about the growing debt-to-income ratios. He acknowledged that he’d seen the numbers rise during his decade in the industry. “Banks feel they need to increase the limits in order to be more competitive,” he explained.
“I think that in most cases, it’s a bad idea for borrowers to push that 41% back end,” Severdia said. “It might make sense in some instances, but it can be a recipe for disaster.” In other words, give yourself a margin for error. Instead of basing your home budget on a 33% front-end debt-to-income ratio, consider dropping that to 28%. You won’t be able to afford as big of a mortgage, but you won’t feel as pinched by the payments, either.
I asked Severdia how people like Christina Natale from the New York Times story were able to get mortgages that amounted to more than half their income. “People are afraid to say ‘no’,” he told me. “They were afraid to lose the deal.” Thus the subprime mortgage crisis.
In The Automatic Millionaire Homeowner, David Bach warns:
You should generally assume that the amount the bank or mortgage company is willing to loan you is more than you should borrow. […] Don’t fool around with this. Do the math. Be realistic about your situation. Don’t pretend you’re in better shape than you really are.
Nobody cares more about your money than you do. Your real-estate agent, your mortgage broker, and the bank all have a vested interest in encouraging you to buy as much house as possible. Their incomes depend upon it. Listen to what they have to say, but make your decisions based on your own knowledge of the situation.
Better Safe Than Sorry
Homeowners are often admonished to “buy as much house as you can afford”. There’s some merit to that statement — in general, housing prices do increase, as does personal income. As a result, your mortgage payments generally become more affordable.
The problem, of course, is that when you buy as much house as you can afford, you’re left without a buffer. What if you lose your job? What if you’re forced to sell your home, but housing prices have dropped? I think it makes more sense to buy as much house as you need, keeping the conventional debt-to-income ratios as ceilings.
Ultimately, it doesn’t matter what the guidelines are. What matters is what you can afford, what you’re comfortable paying. Just because conventional wisdom says you can take out a $1400 monthly housing payment on your $60,000 annual income doesn’t mean you have to do it.
The global COVID-19 pandemic is changing life as we know it, and nearly every industry has been forced to adapt in one way or another. The rental industry is no exception – the industry as a whole has discovered new ways to meet safety guidelines while continuing to provide essential housing services to renters across the nation.
Widespread layoffs and economic turmoil has resulted in many Americans struggling to keep up with cost-of living expenses. According to the U.S Department of Labor, the national unemployment rate is at almost 8 percent, with more than 12.5 million Americans currently unemployed. Even with federal stimulus checks and other benefits, a majority of qualifying recipients used the money to catch up on overdue bills.
Rent is often the most expensive cost-of-living expense, with one in four renters in the United States spending more than 50% of their income on housing. As a response to a climbing unemployment rate, several states across the nation have implemented an eviction moratorium to protect renters who are struggling to pay rent. Unfortunately, landlords still need to make an income in order to see a profit on their investment. The good news is that the majority of renters are still making full or partial rent payments on time. However, data from September 2020 indicates that renters are more financially burdened now than at the onset of the pandemic.
Rental payments decline as the pandemic continues
We pulled aggregated anonymous data from our Rentec Direct property management software platform, representing 620,000 rental properties nationwide. Using January and February as a baseline and considering March to be the official onset of the pandemic (when most state shutdown orders occured), our data showed that the number of rent payments received by property managers and landlords has been steadily declining over the past several months. As of September 10th, rent payments received nationwide were 35 percent lower than rent received for the same period in March, prior to the onset of the pandemic in the United States. This is the biggest drop we’ve seen in rental payments received by landlords so far, following a 29 percent drop in August.
These numbers indicate that renters are struggling financially right now more so than when the pandemic first hit the U.S. It is not necessarily surprising when you consider the fact that 16 percent of Americans have no emergency savings. The pandemic is worsening the financial hardship for many when it comes to elevated unemployment, reduced income and increased debt.
Online rental payments see little change
Interestingly, but not surprisingly, electronic rent payments in September saw a 1 percent increase compared to electronic rent payments received prior to the pandemic. When compared to the 35 percent decrease in total rent payments received, it is clear that online rent payment options increase the likelihood of on-time rent payment.
Not only are electronic payment options becoming increasingly critical for property management businesses in order to meet social distancing measures, but electronic methods also give renters the option to set up reliable automatic payments. According to a 2018 study, only 33 percent of renters who scheduled recurring monthly rent payments were charged a late fee, compared to the 47 percent of renters who were charged a late fee making manual rent payments. Of renters with no online payment options, 57 percent were charged a late rent fee.
Moving forward
It’s a true challenge to predict the future during these unprecedented times, but the continued rise of national COVID-19 cases certainly poses a threat to America’s economic future. Despite the unemployment rate decreasing slightly in recent months, this is still the highest unemployment rate our nation has seen since the Great Depression. Several states are implementing re-closures, layoffs are continuing, and federal benefits are expiring. All of these changes will absolutely impact renters across the country, potentially burdening their financial situation further.
The coming months will help us further understand the impact of the pandemic and reveal how renters will handle their cost-of-living expenses. My advice for landlords and property managers is to strongly consider implementing online rent payment options, if you haven’t already. Not only is it safer given the current social distancing mandates, but it is likely to save you money in the long run.
The California Mortgage Relief program is expanding its reach again, hoping to aid more homeowners who fell behind on their payments during the pandemic.
Program officials announced Tuesday that aid would be extended to three new groups: homeowners whose mortgages had a “partial claim” or deferral, those who missed a second mortgage payment after June 2022, and those with a primary residence that includes up to four units. It also offered more aid to homeowners who had previously received help from the state.
One reason for the expansion is that the state has yet to spend most of the $1 billion in homeowner aid the federal government provided through the American Rescue Plan last year. Thus far, about 10,500 households — more than half of them earning only 30% of their county’s median income — have received an average of $28,137 from the program, for a total of just under $300 million.
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“Many California homeowners are still recovering from the financial hardships of the pandemic,” Business, Consumer Services and Housing Agency Secretary Lourdes Castro Ramírez said in a statement. “This program expansion will enable the state to assist even more homeowners who fell behind on their mortgage payments. Our primary goal is to keep families in their homes, prevent foreclosures, and assist homeowners on a stable path to financial recovery.”
Tiena Johnson Hall, executive director of the California Housing Finance Agency, said the agency talked to borrowers and loan servicers to figure out how to evolve the program. “This expansion represents months of careful consideration and creative solutions that make sure the most in need get help,” Johnson Hall said.
Volma Volcy, founder and executive director of the nonprofit advocacy group Ring of Democracy, said the most difficult thing has been getting eligible borrowers to take the state’s offer seriously. “They tend not to believe it because it sounds too good to be true. … This time it’s true,” Volcy said.
“I am imploring you: Come get the help, because it works,” he added.
Under federal law, households earning up to 150% of the median income in their county who suffer a pandemic-related financial hardship are eligible for up to $80,000 for past-due mortgage payments and up to $20,000 for missed property tax payments. According to the federal Department of Housing and Urban Development, 150% of the median income in L.A. County last year was $125,100 for a single individual and $178,650 for a family of four.
A few caveats: If you’ve already paid off your mortgage or tax debt, you can’t recoup that money by applying for state aid. Nor are you eligible for mortgage aid if your mortgage is a “jumbo” loan bigger than the limits set by Fannie Mae and Freddie Mac. Finally, you can’t obtain the state’s help if you have more than enough cash and assets (other than retirement savings) to cover your mortgage or tax debt yourself.
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Here’s a breakdown on the new targets for mortgage assistance.
Partial claim second mortgages and deferrals. Partial claims are a technique to help people at risk of losing their homes after missing several monthly payments on a loan backed by the Federal Housing Administration, the U.S. Department of Agriculture or the Department of Veterans Affairs. Rather than demanding larger payments to cover the past-due amount, the agencies encouraged lenders to split off the past-due portion into a second, interest-free mortgage. That way, a borrower could stay current by paying just their usual monthly payment.
The partial claim second mortgage could be ignored until the house was sold, the mortgage was refinanced or the first mortgage was paid off, at which point the partial claim would have to be paid in full. In the meantime, it’s a real debt that affects the borrower’s ability to obtain credit.
Similarly, some lenders offered deferrals that bundled the missed payments into a sum that was tacked on to the end of the loan. Borrowers wouldn’t face higher monthly payments, but they would have to pay off the deferred amount (a “balloon payment”) when they refinanced, sold their house or reached the end of their loan.
The state mortgage relief program is now offering up to $80,000 to pay all or part of a COVID-related partial claim or deferral.
“Using relief funds to pay down deferred balances for homeowners who experienced COVID hardships restores home equity and puts financially vulnerable families in a stronger position to sustain homeownership,” Lisa Sitkin, senior staff attorney at the National Housing Law Project, said in a statement. “It also alleviates the anxiety of having to figure out how to pay off a large balloon payment in the future.”
More homeowners who fell behind in 2022. Previously, homeowners had to have missed at least two mortgage payments by June 30, 2022, or one property tax payment by May 31, 2022, to be eligible for mortgage or tax relief, respectively. Now, you’ll qualify if you miss at least two mortgage payments or one property tax payment before March 1, 2023.
Homeowners who need a second shot of relief. The mortgage relief program was originally seen as one-time-only assistance. Now, however, California homeowners who’ve already received help can apply for more if they have missed more payments and remain eligible. No household may collect more than $80,000 over the course of the program.
Owners of multiple-unit dwellings. Initially, mortgage relief was available only to people who owned and occupied a single-family home, condominium or non-mobile manufactured home in California. Now, aid will be available to people whose primary residence includes up to four units, such as a duplex, quadplex or a house with an accessory dwelling unit.
The program continues to offer aid to one additional group: homeowners with reverse mortgages who have fallen behind on their property tax or insurance payments.
How do you apply?
Applications are available only online at camortgagerelief.org. For help filling one out, you can call the program’s contact center at (888) 840-2594, where assistance is available in English and Spanish.
If you don’t have access to the internet or a computer, you can ask a housing counselor to assist you. For help finding a counselor certified by the federal Department of Housing and Urban Development, call (800) 569-4287. You may also get help from the company servicing your mortgage.
The online application process starts with questions to determine your eligibility. If you meet the state’s criteria, you can then complete an application for funds. Here’s where you will need some paperwork to establish how much you earn and how much you owe.
According to the program’s website, among the documents you will need to provide are a mortgage statement, bank statements, utility bills and records that show the income earned by every adult in your household, such as pay stubs, tax returns or a statement of unemployment benefits. If you don’t have access to a digital scanner, you can take pictures of your documents with your phone and upload the images.
The site provides links to the application in English, Spanish, Chinese, Korean, Vietnamese and Tagalog.
When will the program end?
The state will continue to offer help to homeowners who became delinquent because of COVID-related issues until it has spent all $1 billion from the federal government. The state estimates that an additional 10,000 to 20,000 homeowners will be helped by the remaining funds.
The money will be awarded on a first-come, first-served basis, with one important exception: 40% of the aid must go to “socially disadvantaged homeowners.” Those are residents of the neighborhoods most at risk of foreclosure, based on the Owner Vulnerability Index developed by UCLA’s Center for Neighborhood Knowledge.
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On March 29, the Federal Housing Finance Agency (FHFA) announced Fannie Mae and Freddie Mac would enhance their COVID-19 pandemic-era deferral policies which allowed homeowners experiencing hardship to defer up to six months of mortgage payments to be settled at the end of the loan. Since the pandemic began, the FHFA has enabled lenders to complete more than 1 million payment deferrals, with roughly one-third of all homeowners exiting forbearance via payment deferrals since 2020.
Smart pandemic policies like this stabilized the housing market and, by extension, the economy when it was most needed, and today’s challenging market has emphasized the need for further policy reform as servicers expand their loss mitigation toolkits to keep homeowners in their homes.
Here’s how servicers can maintain real-time compliance to keep up with real-time policymaking, all while keeping homeowners where they belong — in their homes — and executing at scale with no mistakes in our highly regulated ecosystem.
Why further loss mitigation reform and expansion is still needed
COVID-19 pandemic hardships required quick-turn regulatory shifts which ultimately provided hardship relief to approximately 7.8 million homeowners with COVID-19 pandemic forbearance programs since March 2020. Government insurers and guarantors adapted to offer new options to borrowers like forbearance, partial claim/payment deferrals and extended-term modifications.
As the Mortgage Bankers Association (MBA) noted in its recent white paper, the current high-interest-rate environment poses additional challenges that require further policy reform and expansion so servicers have simple, sustainable and standardized loss mitigation options.
The traditional options for providing payment relief for homeowners — loan modifications that either extend the loan’s maturity date or reduce their interest rate to the market rate — are not as effective in the higher-interest-rate environment and do not provide the relief many homeowners need to maintain homeownership.
Further policies should focus on reducing administrative complexity and make scalability attainable so servicers can quickly provide relief to homeowners with consistent, accessible hardship relief regardless of hardship reason or who insures or guarantees the loan.
The CARES Act and other COVID-19 pandemic-era policy developments kept servicers engaged and informed, demanding quick adjustments to accommodate homeowners experiencing financial hardship, and recent market challenges have required similarly swift adoption from servicers. So, how can servicers stay ahead of the curve?
Real-time solutions for real-time policy changes
Sagent solves these problems with cloud core, agile infrastructure. So, what are the benefits of “cloud native” or “cloud-based” platforms? Put simply: speed, security, a better experience for homeowners and servicers, real-time processing and compliance across all activities — all at scale and always aligned with real-time regulatory changes.
Servicers and their fintech partners need to be innovating incrementally by bringing real-time solutions to real-time policymaking. For example, when the CARES Act went into effect to provide mortgage payment relief as the COVID-19 cases spiked in 2020, servicers powered by Sagent were ready with push-button forbearances on day one of the CARES relief effective date.
Sagent’s default platform provides full lifecycle functionality, enabling homeowners and servicers to work together to create sustainable options for homeowners when they’re facing financial hardship. A key component of this service is the servicer’s ability to establish the workflow that fits their processes.
The benefits of this innovative programming are broad reaching in addressing all aspects of loan servicing. Homeowners, first and foremost, are provided relief and resolution. Servicers achieve improved efficiency and greater effectiveness in managing compliance throughout the process. Sagent ensures delivery ahead of the curve, with no waiting and no elevated risk surrounding the next set of changes and challenges coming our way in the servicing industry.
Real-time data standards for compliance and customer retention
Our industry has improved materially since the experiences of the Great Recession, and we’ll continue to see servicers and regulators set a new bar for compliance. The focus on helping homeowners understand their options and make an informed choice remains.
Servicers must also focus on cost, customer retention and compliance. A strong, servicing fintech partner provides critical support in successful delivery of each of these areas.
Sagent is the industry’s only mortgage servicing platform with truly real-time data. Real-time data means systems can respond to real-time policymaking without ever missing consumer and investor requirements or any compliance details.
The new standard for excellence is being established, and Sagent is leading the way. Please reach out and let us know your thoughts on these predictions or your tech stack strategy.
Perry Hilzendeger is an executive vice president of servicing for Sagent.
When it comes to purchasing a home, buyers may find it difficult to find financing beyond the conforming loan limit. In this instance, you may need to apply for a jumbo loan. Whether your sights are set on a Ranch-style home in Tulsa or a new-construction in Yukon, let’s break down what a jumbo loan is in Oklahoma, the 2023 conforming loan limits, and what’s needed to qualify for this type of loan.
What is a jumbo loan?
So what are jumbo loans in Oklahoma? They are large loans that exceed the loan limits set by the FHFA for conforming loans. Jumbo loans allow borrowers to finance homes that exceed the conforming loan limit (CLL), making it possible to buy high-end properties that may not be otherwise affordable.
If the home you’re purchasing will require you to borrow more than the CLL, you’ll need to apply for a jumbo loan. Because of the larger loan amounts, jumbo loans typically carry stricter requirements and higher interest rates than conforming loans. Lenders may require a higher down payment, a lower debt-to-income ratio, and a stronger credit score to qualify for a jumbo loan in Oklahoma.
What is the jumbo loan limit in Oklahoma?
In Oklahoma, the conforming loan limit is $726,200 across all counties. For example, if you’re buying a home in Tulsa County, where the median sale price is $275,000, a loan limit exceeding $726,200 would be considered a jumbo mortgage.
Keep in mind that the loan amount is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $50,000 down on a $750,000 home in Bixby, the mortgage would be $700,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
This FHFA map will give you more specific information related to the conforming loan limits in your county.
What are the requirements for a jumbo loan in Oklahoma?
As previously mentioned, the requirements for a jumbo loan are much more stringent than a conforming loan. The specific requirements may vary from lender to lender, but below are the typical requirements for borrowers seeking a jumbo loan.
Higher credit score: To qualify for a jumbo mortgage in Oklahoma, borrowers typically need to have a credit score of at least 720. However, some lenders may be willing to accept scores as low as 660, although less frequently. A higher credit score demonstrates a borrower’s ability to manage credit responsibly and is a crucial factor that lenders evaluate when reviewing jumbo loan applications.
Larger down payment: Jumbo loans typically require larger down payments than conventional loans. Generally, lenders require a down payment of at least 20% of the home’s purchase price to qualify for a jumbo loan. However, some lenders may require a higher percentage, depending on the borrower’s creditworthiness and overall financial situation. Don’t forget that larger down payments can help to reduce monthly mortgage payments, as well as overall interest costs over the life of the loan.
More assets: Jumbo loan lenders generally require borrowers to demonstrate a strong financial profile, including substantial liquid assets or savings. To qualify for a jumbo loan, borrowers must have enough reserves to cover at least one year of mortgage payments. This requirement ensures that borrowers have the financial flexibility to meet their loan obligations in the event of a financial hardship.
Lower debt-to-income ratio (DTI): A mortgage lender will look at a borrower’s DTI (debt-to-income ratio) to assess their creditworthiness and spending habits. For a conforming loan, a DTI as high as 50% may be acceptable to some lenders. However, jumbo loan borrowers are required to have a lower DTI, ideally under 43% and closer to 36%. This is because jumbo loans are riskier for lenders due to the larger loan amounts. Applicants with a higher DTI may still qualify for a jumbo loan, but it could result in a higher interest rate or a stricter approval process.
Additional home appraisals: When you buy a home in Oklahoma, mortgage lenders will require a home appraisal to confirm that the property’s value is equal to or higher than the loan amount. In some cases, a lender may require an additional appraisal for a jumbo loan. In places with very few comparable property sales, the cost of the appraisal may be higher than in neighborhoods with more frequent sales.
Are you planning to buy a luxurious house in Indiana or a home in an expensive market this year? If so, you might be wondering what a jumbo loan is and whether it’s right for you. Simply put, a jumbo loan is a type of mortgage loan that’s used to finance loans that exceed the conforming loan limit.
What is a jumbo loan?
What exactly is a jumbo loan in Indiana? A jumbo loan is a specialized type of mortgage that comes into play when you’re seeking financing for a home that surpasses the conforming loan limits (CLL) established by the Federal Housing Finance Agency (FHFA). Typically, this type of loan is necessary for upscale, luxurious properties or those situated in pricey housing markets.
If you’re considering purchasing a home that requires financing beyond the CLL, then you’ll need to apply for a jumbo loan. Indiana jumbo loans allow you to borrow more money to buy a more expensive home, but they also come with higher interest rates and stricter requirements than conventional loans.
What is the jumbo loan limit in Indiana?
In Indiana, the conforming loan limit is $726,200 across all counties. For example, the conforming loan limit in Marion County is $726,200, so if the loan amount needed is even $726,201, it’s considered a jumbo loan.
Keep in mind that the loan amount is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $50,000 down on a $750,000 home in Indianapolis, the mortgage would be $700,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
This FHFA map will give you more specific information related to the conforming loan limits in your county.
What are the requirements for a jumbo loan in Indiana?
Borrowers must meet stricter requirements to qualify for a jumbo loan than they would for a conforming loan. Each lender may have different requirements or processes, but below are the typical requirements for borrowers seeking a jumbo loan in Indiana.
Higher credit score: When it comes to obtaining a jumbo loan, credit score requirements are typically more stringent than for conventional mortgages. It’s possible that some lenders may be willing to accept a lower score, a credit score of at least 720 is generally required to qualify for a jumbo loan. It’s essential to have a strong credit profile and a solid financial history to increase your chances of being approved for a jumbo loan.
Larger down payment: Jumbo loans typically require larger down payments than conventional mortgages. While the exact amount varies depending on the lender and the borrower’s financial situation, down payment requirements for jumbo loans can be as high as 20% or more. That said, some lenders may offer jumbo loans with down payments as low as 10%, provided the borrower meets certain credit and income requirements.
More assets: Jumbo loan lenders generally require borrowers to demonstrate a strong financial profile, including substantial liquid assets or savings. To qualify for a jumbo loan, borrowers must have enough reserves to cover at least one year of mortgage payments. This requirement ensures that borrowers have the financial flexibility to meet their loan obligations in the event of a financial hardship.
Lower debt-to-income ratio (DTI): When applying for a jumbo loan, Indiana lenders typically look for a borrower with a debt-to-income ratio (DTI) below 43%. Ideally, a DTI closer to 36% or lower is preferred. The DTI is calculated by dividing the sum of all monthly debt payments by gross monthly income. A lower DTI signifies a borrower’s ability to manage their current debt load while taking on additional mortgage payments. It also indicates greater financial stability and the ability to make on-time payments towards their non-conforming loan.
Additional home appraisals: When you buy a home in Indiana, lenders will require a home appraisal to confirm that the property’s value is equal to or higher than the loan amount. In some cases, a lender may require an additional appraisal for a jumbo loan. In counties with very few comparable property sales, the cost of the appraisal may be higher than in markets with more frequent sales.
Federal Housing Finance Agency (FHFA) Director Sandra Thompson defended on Tuesday the recent policy changes the agency has implemented, which have been criticized by the housing industry and Republican lawmakers on Capitol Hill.
In a House Financial Services Committee hearing on Tuesday titled “FHFA Oversight: Protecting Homeowners and Taxpayers,” the committee memorandum described Thompson’s actions as director of the agency, highlighting two policies in particular.
The policies under fire include a new capital rule for the government-sponsored enterprises (GSEs), called the Enterprise Regulatory Capital Framework (ERCF), and the controversial pricing adjustments to fees the GSEs charge lenders on single-family loans, or Loan-Level Price Adjustments (LLPAs).
Thompson, however, defended the policies, contending that certain reports include incorrect or misleading information about the impact the policies could have on good-credit borrowers.
“As Representative Cleaver rightly pointed out at last week’s subcommittee hearing on this topic, housing finance is a complex issue and the pricing grids underpinning this framework are not easily digestible,” Thompson said in her written statement. “Unfortunately, certain media reports have distorted basic facts by painting an incomplete and misleading picture of these pricing updates. These media reports often make the fundamental mistake of assuming that the pricing grids previously in place were perfectly aligned with the risks faced by the Enterprises.”
Thompson characterized this as a “myth,” stating that pricing grids that were in effect prior to the roll-out of these updates had not been updated in many years, and were not “fully reflective of the capital framework with which the Enterprises are required to comply.”
Thompson also took direct aim at claims that good-credit borrowers are negatively impacted by the subsidies for lower-credit borrowers.
“I want to be very clear on one key point, and one that bears repeating: under the new pricing framework, borrowers with strong credit profiles are not being penalized to benefit borrowers with weaker credit profiles,” Thompson said. “That is simply not true.”
Instead, the updated pricing framework implemented by the agency helps to fulfill the title of the hearing in “protecting homeowners and taxpayers,” according to Thompson.
“First, the updated pricing framework supports American homeowners by eliminating the upfront fees for many creditworthy borrowers—first-time homebuyers with lower incomes, for example—and does so by increasing the fees on products that are less central to homeownership, such as second homes or vacation homes,” she said. “These targeted changes promote homeownership that is both attainable and sustainable. Second, the updated pricing framework enables the Enterprises, both of which are taxpayer-supported, to build capital in a safe and sound manner.”
Thompson’s comments also included references to the FHFA’s review of the Federal Home Loan Bank System announced in August 2022; an active review of credit score models in concert with the GSEs; technological advancements sought by the GSEs themselves; and payment deferrals for borrowers facing financial hardship.
Prior to the FHFA rescinding its plans to change the LLPA fee structure, both housing industry advocates and politicians voiced their concerns. In April, Republicans in the House introduced a bill to block the LLPA changes from taking effect.
Thompson said at the time that the agency “will provide additional transparency on the process for setting the Enterprises’ single-family guarantee fees and will request public input on this issue.”
For many individuals and families, owning a home is a lifelong dream. However, with rising real estate prices, some may find themselves seeking financing beyond the conforming loan limit. This is when you may need to apply for a jumbo loan.
What is a jumbo loan?
What exactly is a jumbo loan in Iowa? A jumbo loan is a specialized type of mortgage that comes into play when you’re seeking financing for a home that surpasses the conforming loan limits (CLL) established by the Federal Housing Finance Agency (FHFA). Typically, this type of loan is necessary for upscale, luxurious properties or those situated in pricey housing markets.
If the loan amount needed is more than the CLL, you’ll need a jumbo loan. Iowa jumbo loans allow you to borrow more money to buy a more expensive home, but they also come with higher interest rates and stricter requirements than conventional loans.
What is the jumbo loan limit in Iowa?
In Iowa, the conforming loan limit is $726,200 across all counties. For example, if you’re buying a home in Des Moines County, where the median sale price is $132,000, a loan limit exceeding $726,200 would be considered a jumbo loan.
As a reminder, the amount being borrowed is what determines whether or not you’ll need a jumbo loan, not the home price. So, if you were to put $50,000 down on a $750,000 home in Burlington, the mortgage would be $700,000, which is under the conforming loan limit for this area. In this case, your loan wouldn’t be considered a jumbo loan.
For more information on the conforming loan limit in your county, use the FHFA map.
What are the requirements for a jumbo loan in Iowa?
Borrowers must meet stricter requirements to qualify for a jumbo loan than they would for a conforming loan. The specific requirements may vary from lender to lender, but below are the typical requirements for borrowers seeking a jumbo loan.
Higher credit score: When it comes to jumbo loans, lenders generally look for a credit score of 720 or above to qualify a borrower. While some lenders may accept a score as low as 660, this is typically the lowest threshold for qualification.
Larger down payment: Jumbo mortgages typically require larger down payments than traditional mortgages. Generally, lenders require a down payment of at least 20% of the home’s purchase price to qualify for a jumbo loan. However, some lenders may require a higher percentage, depending on the borrower’s creditworthiness and overall financial situation. Keep in mind that larger down payments can help to reduce monthly mortgage payments, as well as overall interest costs over the life of the loan.
More assets: Jumbo loan lenders generally require borrowers to demonstrate a strong financial profile, including substantial liquid assets or savings. To qualify for a jumbo loan, borrowers must have enough reserves to cover at least one year of mortgage payments. This requirement ensures that borrowers have the financial flexibility to meet their loan obligations in the event of a financial hardship.
Lower debt-to-income ratio (DTI): When applying for a jumbo mortgage, Iowa lenders typically look for a borrower with a debt-to-income ratio (DTI) below 43%. Ideally, a DTI closer to 36% or lower is preferred. The DTI is calculated by dividing the sum of all monthly debt payments by gross monthly income. A lower DTI signifies a borrower’s ability to manage their current debt load while taking on additional mortgage payments. It also indicates greater financial stability and the ability to make on-time payments towards their non-conforming loan.
Additional home appraisals: When you buy a home in Iowa, mortgage lenders will require a home appraisal to confirm that the property’s value is equal to or higher than the loan amount. In some cases, a lender may require an additional appraisal for a jumbo loan. In areas with very few comparable property sales, the cost of the appraisal may be higher than in places with more frequent sales.