Despite signs that the economy might be slowing, mortgage rates crept higher for the second week in a row.
The interest rate on a 30-year fixed-rate mortgage averaged 6.43% in the week ending April 27, according to Freddie Mac. That’s up a little from last week’s 6.39%, and up a lot from last year’s 5.10%.
These rising rates, combined with higher home prices, have taken a toll on homebuyers’ budgets, with the cost of financing a typical house costing $611 more per month than it did a year ago, according to the Realtor.com® March housing trends report.
Yet homebuyers might find that the crushing affordability crisis they’re facing may soon ease up a little, particularly if the economy and inflation continue cooling.
“With the rate of inflation decelerating, rates should gently decline over the course of 2023,” predicts Sam Khater, chief economist of Freddie Mac. “The prospect of lower mortgage rates for the remainder of the year should be welcome news to borrowers who are looking to purchase a home.”
We’ll explore what it all means for hopeful homebuyers and prospective sellers on this latest edition of our column “How’s the Housing Market This Week?”
The latest trend in home prices
In addition to the prospect of lower mortgage rates, home prices—currently hovering at $424,000 in March—might also soon be on the wane. For the week ending April 22, listing prices were just 2.4% higher than a year ago. That’s the slowest growth rate we’ve seen since May 2020.
Plus, listing prices are simply what home sellers hope to get, and cash-strapped buyers these days are driving a harder bargain than ever.
“Even though potential sellers are still listing homes at higher prices, they aren’t necessarily getting what they’re asking for,” notes Realtor.com Chief Economist Danielle Hale in her weekly analysis.
In fact, the national median sale price of homes that actually reached the closing table declined on a yearly basis for the second straight month in March, the National Association of Realtors® said last week.
But that data is a bit deceptive, Hale points out, because the March decline “was driven entirely by declines in the West,” where prices have grown so much that many homebuyers set their sights elsewhere.
“Median home sale prices actually rose modestly in the Northeast, Midwest, and South,” Hale adds. This reflects migration to areas that remain relatively affordable by comparison.
Is it still a seller’s market?
Yet until mortgage rates start falling, homeowners who are thinking of selling seem to be stuck in wait-and-see mode. For the week ending April 22, the number of homeowners who’ve just listed their homes for sale is down by 21% compared with a year earlier.
“We are not seeing as many new home sellers as one year ago,” says Hale.
The reason for this standoff is yet again mortgage rates, with 82% of home sellers who hope to buy admitting that they feel “locked in” by the mortgage rate they have on their current property, which is often several percentage points lower than what they’d get now.
Granted, there are more homes for sale in total—39% more, to be exact—but much of that supply is either new construction or stale listings, which have been lingering on the market for months with no takers.
Plus, the pace of home sales has been slowing for the past 38 weeks, with homes spending an average of 17 days longer on the market for the week ending April 22 than at this time last year.
However, now that spring is slowly giving way to summer, the homebuying season is bound to pick up.
“We expect to see a growing number of home sellers, consistent with typical seasonal trends,” Hale predicts. And as supply expands, this translates into “better opportunities for buyers.”
With mortgage rates nearly double what they were in 2021, homebuyers are getting hit with a double whammy.
Higher interest rates have increased home-financing costs. At the same time, homeowners are hesitant to move and give up their low mortgage rate, which contributes to the housing inventory shortages keeping home prices high.
One potential solution is assumable mortgages, where the buyer takes over the seller’s existing loan and keeps its interest rate and repayment terms. Approximately 85% of properties have loans with a mortgage interest rate below 5%, according to Redfin. This represents a potential for significant savings for buyers and could make it easier for owners to sell their homes — but assumable mortgages also come with some catches. Let’s take a look at how they work and when this home-financing strategy could make sense for you.
How do assumable mortgages work?
With an assumable mortgage, the buyer takes over the seller’s mortgage and keeps its interest rate, remaining payment schedule and loan balance. When rates are increasing, assuming an older mortgage loan can be a great way to secure a mortgage rate that’s far below what you could qualify for if you applied for a new home loan.
To assume a loan, the buyer must meet the lender’s qualification standards. This process is essentially the same as applying for a standard mortgage — the lender reviews the buyer’s credit history, debt-to-income ratio (DTI) and other financial information. Because an appraisal of the home isn’t typically required, the application process usually moves quicker than normal and can be less expensive in terms of fees.
However, you have other factors to consider before building your homeownership dreams around assuming a mortgage with a 3% interest rate. For one, most mortgages aren’t assumable. Typically, only government-backed loans are assumable and the majority of mortgage loans are conventional. During the past three years, government-backed loans have only accounted for roughly 18% to 26% of residential loan applications, according to the Mortgage Bankers Association’s Weekly Applications Survey.
If you want to assume a mortgage, the seller needs to have one of the following types of mortgages:
Pros and cons of assuming a mortgage
Assuming an existing mortgage means balancing the benefits with the tradeoffs. On one hand, assuming a mortgage can be a cost-effective way to finance a home purchase. But It can also significantly increase your down payment.
Pros
A potentially lower mortgage rate
Can have lower fees
Easier to find a buyer (when you’re ready to sell)
For a buyer, the advantages of an assumable mortgage are obvious, especially when rates are rising. And if the loan has lower upfront fees, it’s an even better deal for the buyer.
Sellers with an assumable loan carrying a favorable interest rate may attract a larger pool of potential bidders. It’s like having an extra bedroom, says Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center. “It’s something that differentiates you from the marketplace.” And to get a hold of that cheaper mortgage loan, buyers may make higher offers on the property.
Cons
May need a second mortgage with its own upfront fees
May require a bigger down payment
Aside from the fact that most home loans aren’t assumable, there’s another big reason why assumable loans aren’t more popular — the down payment.
Government-backed loans usually have smaller down payment requirements. VA loans and USDA don’t require any down payment and you can get an FHA loan for as little as 3.5% down. But you’ll need to make a much larger down payment — at least 15 %, according to Tozer — when assuming one of these loans.
The reason is, an assumable loan rarely covers the full purchase price of the house. That means the buyer needs to come up with the difference. Part of the price difference could be covered by a second mortgage, but second mortgages are riskier for lenders (because if you default, the first mortgage gets paid before the second). So a second mortgage will typically only cover up to 85% of the value of the home. That means the buyer will have to pay the rest out of pocket.
An easy way to think of it is, when you combine the assumable loan, second mortgage and down payment, they need to equal the home’s purchase price. For example, if you assumed a $200,000 mortgage on a home that sold for $350,000 and then took out a second mortgage of $97,500, you would need to pay a down payment of $52,500 (350,000 – 200,000 – 97,500 = 52,000) to seal the deal.
Another factor to pay attention to is the cost of a second mortgage. These types of loans typically have higher interest rates than the first home loan that’s attached to a property and have additional upfront closing costs. So you’ll want to make sure the closing costs, monthly payment and mortgage rate on a second loan don’t outweigh the potential savings from assuming an existing mortgage. Also, it’s more difficult to qualify for a second mortgage because the lender assumes more risk than they would with a first mortgage.
How to find the best deal regardless of what mortgage you go with
It’s always important to shop around for a mortgage and compare offers from multiple lenders. That’s true whether you’re assuming a loan and shopping for a second mortgage or getting a brand new home loan.
When it comes to home loans, there’s a tradeoff between mortgage rates and fees. You may be able to get a lower interest rate if you pay higher fees and vice versa. Pay close attention to both and consider the best fit for your goals and budget. One way to potentially save on upfront costs is to compare quotes with lenders that don’t charge origination fees, like PenFed Credit Union or Ally Bank (although other fees apply).
Ally Bank Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, HomeReady loan and Jumbo loans
Terms
15 – 30 years
Credit needed
Minimum down payment
3% if moving forward with a HomeReady loan
Terms apply.
PenFed Credit Union Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loan, VA loan, FHA loan, Jumbo loan and adjustable-rate mortgage (ARM)
Terms
Not disclosed
Credit needed
Minimum down payment
3.5% if moving forward with an FHA loan
Keep in mind, not all lenders offer second mortgages. So if you’re looking for a second home loan to supplement an assumed mortgage, you may have to search more than you expected. But comparing a large number of lenders has other benefits as well because each one offers different types of mortgage loans.
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Bottom line
Mortgage loans backed by the government, like VA loans or FHA loans are usually assumable. When interest rates are rising, assuming an existing mortgage loan can allow buyers to secure lower-cost financing.
However, the buyer may need to secure a second mortgage on the property and make a larger down payment to close the deal. These extra upfront costs may not be in your homebuying budget, especially if you’re a first-time buyer relying on a low- or no-down-payment loan.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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Rutherford / Cannon County, TN – WGNS has an update from FEMA and the Small Business Administration about assistance that is available for home and business owners that suffered any damage caused by storms on March 31 and April 1, 2023.
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If you filed an application for assistance with FEMA to receive financial help, they’ll send a FEMA Home Inspector to your property. Media Relations Specialist Kim Keblish said to make sure you verify the inspector is with FEMA…
In addition to the low interest loan rate, there is a secondary perk to receiving an SBA loan. That perk comes in the form of a 12-month 0% interest deferment program. Adera explained…FEMA and / or SBA websites – or you can visit the Rutherford County Courthouse where SBA officials are temporarily stationed. The SBA has also set up an office in the same building as FEMA officials in Woodbury at the East Side Elementary School at 5658 McMinville HWY.
Again, to apply for FEMA assistance if damage was caused to your home during the storms that hit Rutherford and Cannon Counties on March 31, 2023 or April 1, 2023, you can visit the disaster recovery center in Cannon County. You can receive in-person support from a FEMA specialist or from a SBA specialist. The SBA officials can help you in-person at East Side Elementary School in Woodbury (5658 McMinville HWY in Woodbury.) They are open Mon. – Sat. From 7AM to 7PM and Sunday from 1PM to 7PM.
There is also a temporary disaster recovery center in Macon County, TN. It is at the 911Call Center (898 TB-52 Scenic Route in Laveyette, TN).Because it is a temporary center, it is only open now through Sunday, April 30th. On Friday or Saturday, it is open from 8AM to 7PM and on Sunday from 1PM to 4PM.
FRAUD: If you suspect fraud from someone impersonating a FEMA worker, call the FEMA Disaster Fraud Hotline at 866-720-5721. FEMA suggests, you should also contact local law enforcement.
Popular WGNS News Article Headlines:
More News from FEMA – Debris Removal: Debris removal from private property is the responsibility of property owners and is usually ineligible for reimbursement under FEMA’s Public Assistance Program. Sometimes, FEMA may determine that debris removal from private property is eligible for program funding. But there are factors that affect that decision. Those factors are based on the severity of the disaster and whether debris on private property is so widespread that it threatens public health and safety or the economic recovery of the community. In such cases, FEMA works with state and local governments to designate specific areas where debris removal from private property is eligible for funding. In those cases, debris removal must be in the public interest, not merely benefiting an individual or a limited group of individuals.
Removing debris can be a challenging job for residents, business owners and governments. Owners may remove debris themselves or get help from insurance settlements and/or assistance from citizen volunteers, the private sector and voluntary organizations. Often, local or state governments dispose of disaster-related debris that private property owners place at the curb for pickup on a scheduled date.
Tips for cleaning up debris on private property (Below)
Stay safe. Wear protective gear such as gloves and masks when handling debris. Contact your local emergency manager if your property is littered with storm-related debris that poses a threat to public health or safety and must be removed. Emergency managers know which government agency to contact about having hazardous debris removed. As you clear debris, look carefully for any visible cables. If you see any cables, wait for professionals to handle them.
Toxic substances. If you suspect the debris contains dangerous ingredients, seal them in plastic bags to prevent them from becoming airborne. Never burn debris; it can be toxic.
Contact your insurance company early to file a claim. Photograph/videotape the damage and debris and keep all receipts for the work performed.
Check with local officials before placing debris for collection to determine where and when pickups will be conducted.
Separate debris into six categories when disposing along the curb:
Electronics (such as televisions, computers, phones)
Large appliances (such as refrigerators, washers, dryers, stoves or dishwashers. Be sure to seal or secure the doors so they are not accessible)
Vegetative debris (such as tree branches, leaves or plants)
Construction debris (such as drywall, lumber, carpet or furniture)
Household garbage, discarded food, paper or packaging
Place debris away from trees, poles or structures including fire hydrants and meters.
Don’t block the roadway with debris.
For the latest information on Tennessee’s recovery from the severe storms, straight-line winds and tornadoes, visit FEMA.gov/Disaster/4701. You may also follow TN.gov/TEMA; Twitter.com/TEMA, Facebook.com/TNDisasterInfo, @FEMARegion4/Twitter and Facebook.com/FEMA.
Knowing where you stand before applying for a mortgage is key to negotiating a better interest rate. Yes, you can negotiate your rate!
But if you don’t know what type of risk you present to a bank or lender, how can you be sure you’re getting a good deal?
While it may seem obvious to those in the industry, many prospective and existing homeowners don’t seem to know when they have the easiest approval on their hands, or the trickiest deal in the history of man.
Let’s take a look at some common loan scenarios to help you better understand your position.
Vanilla
This is your full doc
800 FICO score
W2 borrower
With a conforming loan amount
And no obvious red flags
This is the most common mortgage “flavor” you’ll hear about. When someone says the loan is “vanilla,” they’re basically saying it’s a flawless loan scenario.
In other words, the borrower has great credit, good income and assets, and plenty of home equity (or a sizable down payment).
The property is also an owner-occupied, single-family residence, meaning there should be no pricing adjustments whatsoever.
As a result, this type of mortgage presents very little risk to the originating lender, and pricing should be very favorable.
Expect mortgage rates at or below those advertised and fight for the lowest rate out there. Shop your rate with confidence, knowing everyone and their mother should be fighting tooth and nail over your loan.
For the record, the mortgage rates you see advertised assume your loan is premium, imported french vanilla…
Mint Chip
This borrower might have excellent credit
But display one or two nagging issues
Such as limited assets or occupancy concerns
Or perhaps they’re just self-employed
Most people like mint chip, and it’s a pretty common flavor, but it also means something isn’t exactly right, even if seemingly minor.
It could be that the borrower has good credit, but not a lot of money to put down, or very little equity.
Or it could be that the borrower has marginal credit, despite having a great job and tons of assets in the bank.
[What credit score do I need to get a mortgage?]
Perhaps they’ve changed jobs recently or have some other funky income structure (paid seasonally, on commission, self-employed), or their assets aren’t too impressive.
Maybe there are occupancy issues – think the homeowner buying a house down the street, but claiming they’re going to rent out the old property, even though the new house is smaller.
Whatever it is, the issue presents some difficulty, and as a result, some lenders may not want to touch it.
Put simply, the fewer banks willing to do the deal, the less you can shop around. And you may be stuck submitting the loan with a lender that offers less favorable interest rates.
You can still go nuts looking around for the best deal, but you may not have access to every bank out there. There may also be more snags along the way…so working with a reputable lender is more important.
Rocky Road
This is the flavor of subprime
And perhaps layered risk
But I’m not referring to nuts and marshmallows
We’re talking low credit score, low down payment, and other questionable stuff
Mint chip ain’t so bad when there’s Rocky Road around. While some people like the heavenly mix of chocolate ice cream, nuts, and marshmallows, not everyone will be so enthused.
In other words, you may have a hard time getting your deal to close with ANY bank or lender, even so-called subprime lenders (if they still exist).
This is your “bad news” loan scenario, one where multiple things are going wrong all at once.
Think poor credit score, minimal assets, low down payment/equity, funky job situation, and maybe even more serious issues like previous late mortgage payments or a short sale/foreclosure.
Long story short here is that approval is more of a concern than the mortgage rate you ultimately receive.
Your first priority is finding a lender that is willing to work with you. You should certainly shop around, but expect rates much higher than those advertised for the significant risk you present.
Bubble Gum
This is a special edition flavor
Dedicated to those who took out mortgages right before the bubble burst
Many are now in underwater positions (owe more than the mortgage is worth)
Thanks to those zero down home loans they used to buy homes at the height of the market
Here’s a bonus flavor in light of the ongoing mortgage crisis. Post-housing bubble, there are a ton of good homeowners out there with negative equity.
In other words, their loan-to-value ratios exceed 100%, making their loans very high-risk, even if they’ve got a great job, stellar credit, and plenty of money in the piggy bank.
Fortunately, there are numerous options for severely underwater homeowners, including the popular HARP Phase II.
So all hope is not lost, even if it’ll take you a decade or two to get back in the black…
You can even snag a super low mortgage rate when refinancing, so again, be sure to shop around with a variety of banks, credit unions, and mortgage brokers.
The moral of the story, regardless of your flavor, is to know it before you apply for a home loan.
This can help you prepare for the road ahead, and better align your expectations with reality.
As an active-duty service member or veteran, you have access to one of the best mortgage products on the market — the VA home loan. It requires no down payment, no monthly mortgage insurance premiums, and has lenient credit requirements.
As of October 2020, five percent of all home-purchase loans were VA home loans.
— Ellie Mae’s Origination Insight Report
This VA home loan calculator shows your overall buying power, including today’s current VA funding fees, estimated property taxes, and HOA dues. With zero down payment and no private mortgage insurance (PMI), you may be surprised at how much you can afford.
Check your VA home loan eligibility today.
VA Loan Calculator
Determine your VA loan payment
A VA loan calculator can help you determine what your potential VA loan payment might be and, in turn, what home purchase price you can afford.
VA home loan rates for 2023
Mortgage rates for VA home loans are currently at historic lows. In fact, VA mortgage rates today are generally lower than other loan types like conventional and FHA. For example, Ellie Mae October 2020 Origination Report shows that the average interest rate for VA home loans is 2.75%, while the average interest rate for both conventional loans and FHA loans is 3.01%.
Interest rates vary and depend on multiple factors like credit score, down payment amount, and interest rate type, so every home buyer’s rate is unique to their situation.
Qualifying for a low-interest rate is important for VA home buyers.
Qualifying for the lowest possible rate gives home buyers three distinct advantages:
Lower monthly payments
Lower overall interest costs over the life of the loan
More buying power (lower mortgage payments mean you can afford a more expensive home)
Each lender offers different interest rates and terms, it’s best to comparison shop with multiple lenders. Not only will this ensure you’re getting the best rate, you may be able to negotiate better terms and fees for your loan as well.
VA mortgage calculator definitions
Down payment. This is the amount you put towards the purchase of your home. The VA requires no down payment, unlike other loan types, which generally require at least 3 to 10 percent.
Funding fee. The VA requires an upfront, one-time funding fee payment to help sustain the program. It’s why lenders are able to offer zero-down loans with low rates. The fee is either wrapped into the loan amount or paid in cash at closing.
Funding fee percentage. The percentage you’ll be charged will depend on your down payment and whether you’ve used a VA loan before. The most common funding fee is 2.3% of the loan amount — or $2,300 for each $100,000 borrowed.
HOA/other. If you’re buying a condo or a home in a Planned Unit Development (PUD), you’ll likely be responsible for homeowners association (HOA) dues. Lenders factor in this cost when determining your debt-to-income ratio.
Homeowners insurance. Lenders require you to insure your home from damages like fire. The fee is generally added to your monthly mortgage payment and paid for you by the lender.
Interest rate. The mortgage rate your lender charges for the loan. Pro tip: Shop around with multiple lenders to find the best rate for you.
Loan term. The number of years you have to pay off the loan (assuming you haven’t made additional principal payments). Typical loan terms are 30 or 15 years.
Principal and interest. The principal is what you’ll pay every month towards the loan balance, while the interest is the amount you pay your lender for lending you the money.
Property tax. You’ll owe the county or municipality where the home is located yearly taxes. Your lender will collect this as part of your monthly mortgage payment — the yearly cost is split into 12 installments. (Calculator estimates are based on averages from tax-rate.org.)
Service type. The funding fee percentage changes based on the type of military service. Servicemembers in the Reserves have slightly higher fees than those who are active-duty.
VA loan use. If you’ve used a VA loan to purchase or refinance a property previously, then higher funding fees will apply.
VA mortgage eligibility
Interested home buyers should confirm their eligibility for the loan program with a VA lender as each service member’s situation is unique. That said, there are general eligibility guidelines, including:
VA funding fees
Type of Veteran
Down Payment
First-time Use
Subsequent Use
Regular Military
0%
2.3%
3.6%
5-10%
1.65%
1.65%
10+%
1.4%
1.4%
Reserves/ National Guard
0%
2.3%
3.6%
5-10%
1.65%
1.65%
10+%
1.4%
1.4%
Source: U.S. Department of Veterans Affairs
VA loan limits
As of January 1, 2020, VA-eligible borrowers can get any size loan with no down payment. There are no official limits.
But remember, you’ll still have to qualify for the mortgage.
Apply for a VA loan
If you’re a homebuyer with military experience, then see if a VA loan is the right mortgage loan product for you. Many active-duty servicemembers and veterans are eligible to purchase a home with zero down payment and a low monthly payment — many just don’t know it yet.
Coppell-based Mr. Cooper Group is buying a large player in the mortgage business, adding a quarter of a million new customers.
Mr. Cooper, formerly known as Nationstar Mortgage, has agreed to buy Rushmore Loan Management Services LLC’s residential mortgage servicing platform. The deal adds loans for 250,000 customers totaling $37 billion in unpaid balances. Terms of the deal were not disclosed.
Fort Worth firm sells to company managing 16,000 rental houses and apartments
This will grow Mr. Cooper’s existing servicing business of 4.1 million customers and $853 billion in unpaid loan balances as of March. The company is one of the largest loan servicers in the country.
D-FW Real Estate News
Get the latest news from Steve Brown and the business staff.
Mr. Cooper previously agreed to acquire Roosevelt Management Company LLC, Rushmore’s New York-based parent company, for its mortgage investment business.
The company hopes to close on the subservicing platform by the end of May and the rest of the Roosevelt transaction by the end of June, depending on regulatory approvals.
“We are delighted to welcome Rushmore’s talented team to our family, and we are committed to providing a seamless experience for their important clients,” Jay Bray, chairman and CEO of Mr. Cooper Group, said in a statement. “Working together, we will bring to market one of the leading special servicers in the industry.”
The deal will add “several hundred people” to the company, Chris Marshall, vice chairman and president of Mr. Cooper, said in a first-quarter earnings call Wednesday.
Rushmore leased 78,000 square feet of office space in the Freeport Business Center in Irving in 2021, a move from a smaller location in Irving. The company also has offices in Irvine, Calif., Fort Lauderdale, Fla., Oklahoma City, Nashville and San Juan, Puerto Rico, according to its LinkedIn page.
Homebuilder D.R. Horton shakes off high interest rates with strong start to spring selling
Rushmore CEO Terry Smith said the company has had several months of discussions with leadership at Mr. Cooper and that he has become increasingly impressed with the strength and breadth of Mr. Cooper’s platform.
“Our combined entity will provide an unparalleled offering to a broader base of clients and customers,” Smith said in a statement.
Marshall said in the earnings call that the deal will position the company for revenue growth as the credit environment changes. He also said the company has been told another company’s servicing platform is coming to market, so the timing was right to bring on a well-recognized brand and combine it with its existing servicing business.
“We think there’s a real opportunity to win business,” Marshall said.
Growth in Dallas-Fort Worth home prices falls to decade low
Mr. Cooper’s net income dropped dramatically to $37 million last quarter from $658 million a year before as higher interest rates crushed demand for home loans.
Through the rapid rise in mortgage rates last year, mortgage originations dropped from $689 billion in the first quarter to $398 billion in the last, with the refinancing market hit the most, according to the Mortgage Bankers Association. The group forecasts a rebound in the industry throughout 2023 but not quite a return to 2022′s figures.
Mergers and acquisitions in the mortgage industry surged in 2022 due to industry challenges and owner retirements, according to an October report from mortgage industry analyst Stratmor Group. Another example of this came earlier this year when Dallas-based Town Square Mortgage merged with Illinois-based American Portfolio Mortgage Corp.
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Your debt-to-income ratio, or DTI, is your total monthly debt payments divided by your total monthly gross income. DTI ratio is one of the criteria lenders use to determine whether you can realistically pay back a loan. As a general rule of thumb, you want to have a DTI ratio between 35% and 50%.
Save more, spend smarter, and make your money go further
If you’ve been shopping around for a mortgage, then you’ve probably run into the term “debt-to-income ratio”. This can be a confusing term for someone with limited knowledge when it comes to finance. But, when you apply for a major loan, your debt-to-income ratio can have a significant impact on whether or not a lender approves your application.
So knowing what a debt-to-income ratio is, and how to calculate debt-to-income ratio, is essential if you plan on taking out a mortgage or any other major personal loans in the near future. In this article, we’ll cover the following questions and topics:
What is a Debt-to-Income Ratio?
How to Calculate Your Debt-to-Income Ratio
What is an Ideal Debt-to-Income Ratio?
What is the 43% Rule?
Does Your DTI Ratio Impact Your Credit?
How to Improve Your DTI Ratio
What is a Debt-to-Income Ratio?
A debt-to-income ratio, or DTI ratio, is a metric that measures an individual’s gross monthly income against their total monthly debt payments. What your DTI ratio ultimately represents is the percentage of your monthly income that is used to pay off your outstanding debts.
This ratio is commonly used by lenders to evaluate potential borrowers, determine whether or not they’re able to take on additional debt, and assess the likelihood that they will be able to repay a loan. While a low DTI ratio indicates that you have been able to manage a healthy balance between debt and income, a high DTI ratio indicates the opposite—namely, that you owe a high amount of debt relative to your income, likely aren’t able to save much money each month, and are essentially living paycheck to paycheck.
Now that you have a foundational understanding of DTI’s meaning and application, let’s dive a bit deeper.
What Factors Make Up Your DTI Ratio?
The sum of your monthly debt payments includes credit card payments, your mortgage, child support, alimony, and any other loans you may have taken out. However, some recurring monthly payments aren’t included in your DTI ratio. According to moneyfit.org, you shouldn’t factor in non-debt payments such as:
Insurance premiums
Phone bill
Childcare expenses
Home utilities, such as your electric, heating, water, sewer, and trash bills
Gym membership
Music, cable, and streaming subscriptions
Internet bill
Landscaping costs
Storage unit rent
Income tax
Your gross monthly income is just your monthly pay before things like taxes and other deductions are taken out. Some common types of income that are factored into your DTI ratio, are as follows:
Gross income, whether hourly or salaried
Tips and bonuses
Any income earned from a side gig
Pension income
Rental property income
Self-employment income
Social Security benefits
Alimony received
Child support received
How to Calculate Your Debt-to-Income Ratio
Learning how to figure out your debt-to-income ratio is a valuable skill that can help you with more than just your mortgage applications. We’ve provided step-by-step instructions for how to calculate your DTI below.
You can calculate your debt-to-income ratio by dividing the sum of your monthly debt payments by your gross monthly income. Once you figure out your total monthly debts payments and add up your gross monthly income, you’ll be ready to divide those numbers and calculate your DTI ratio.
Dividing your monthly debt payments by your gross monthly income will give you a decimal number. In order to view your DTI as a percentage, you’ll have to multiply the decimal outcome by 100.
Example Calculation
To get a better understanding of how to calculate your DTI ratio, let’s take a look at a fictional example.
Here’s the situation: Mike has a gross monthly income of $5,000. He pays $1,000 on his mortgage, $400 for his car, $400 in child support, and $200 for other debts.
So, following the equation above to calculate Mike’s DTI ratio, we end up with:
$1,000 + $400 + $400 + $200 = $2,000
Therefore, Mike’s DTI ratio = $2,000 / $5,000 = 0.4 x 100 = 40%
What is an Ideal Debt-to-Income Ratio?
In general the lower your debt-to-income ratio is, the more likely it is that you’ll be approved for a loan you’re applying for. According to incharge.org, DTI ratios that fall between zero to 35% are considered healthy according to the standards of most major lenders, since they indicate that your debt is at a manageable level relative to your monthly income.
So what is a bad DTI ratio? Having a DTI ratio of 50% and above is considered an unhealthy level of debt in most cases, and can severely limit the kinds of loans you qualify for. Such a high ratio indicates that you likely don’t have much money to save or spend each month after making your current debt payments.
What is the 43% Rule?
The 43% rule is a rule of thumb used by banks and lenders to determine who is able to be approved for a Qualified Mortgage. Generally speaking, 43% is the highest DTI ratio you can have in order to be approved for a Qualified Mortgage by a lender.
If you’re unfamiliar with what a Qualified Mortgage is, it’s a category of loans that meet a particular set of standards and certain safety features that protect both the borrower and the lender. In order for a lender to offer you a Qualified Mortgage, they must adhere to certain requirements and make a good faith effort to evaluate your finances and determine whether you’ll be able to repay the loan or not.
The upside of a Qualified Mortgage is that it has a number of parameters in place that are supposed to help prevent you from taking out a loan you can’t afford. Some of the requirements for a Qualified Mortgage include:
The restriction of risky loan features, such as interest-only periods and balloon payments
A limit on your debt-to-income ratio, the maximum typically being 43%
Caps—dependent on the size of your loan—on the amount of upfront points and fees a lender is able to charge
Legal protections for lenders, since it’s assumed that they did their due diligence to ensure you had the ability to pay back your loan
Maximum loan term is required to be no longer than 30 years
All of this isn’t to say that you can’t take out a mortgage at all if your DTI ratio exceeds 43%. You may still qualify for other mortgages with a high DTI ratio, but you generally won’t be able to get approved for a Qualified Mortgage.
Does Your DTI Ratio Impact Your Credit?
While your DTI ratio has no direct impact on your credit score and won’t show up on your credit report, it can affect your ability to secure loans from banks and other lenders. A low DTI ratio increases the likelihood that you will be approved for the loans you apply for. That’s because lenders take a low DTI ratio as a sign that you are competent when it comes to money management and they can rely on you to pay back any debt you accrue according to the agreed-upon terms. Lenders also take a loan applicant’s DTI ratio into consideration because they want to ensure that borrowers aren’t taking out more debt than they can realistically pay back.
Although a lower DTI ratio typically makes it easier to get approved for a loan, keep in mind that it’s only one out of many factors that lenders take into consideration. When evaluating a mortgage loan application, lenders will also take a look at a potential borrower’s gross monthly income, the amount they can afford on a down payment, their credit history, and their credit score.
How to Improve Your DTI Ratio
There are two variables that go into calculating your DTI ratio—your total monthly debt payments and your gross monthly income. Therefore, to improve your DTI ratio you’ll need to either reduce your total monthly debt payments or increase your gross monthly income.
Reduce Your Monthly Debt Payments
Completely paying off debts is a great way to lower your monthly debts payments, but of course this is much easier said than done. Your first step should be to take a look at any loans you’ve already taken out and your current credit card debt and come up with a comprehensive repayment plan. For example, check out our money tips for recent college grads to get some advice on how to formulate a repayment plan for your student loans.
To avoid going further into debt, you should also make an effort to work on your personal finance skills. Try creating a monthly budget for yourself that can help you prioritize essentials, track your spending, and save money, made easy when you use the Mint app.
If you’ve already done some research on how to lower your monthly debt payments, you may be asking yourself, “Is debt consolidation a good idea?” Debt consolidation is when you combine all of your various debts together into one monthly payment with a fixed interest rate, and it may be a good idea depending on your circumstances.
If you don’t think you’ll be able to make a payment on one or several debts, then you can potentially avoid a late payment by consolidating that debt. However, you must have good credit to get approved for a debt consolidation loan and you should be certain that your financial situation will improve in the near future. If you don’t think you’ll be able to pay back your debts, even with debt consolidation, then you’d likely be better off trying to settle the debts directly with your creditors.
Increase Your Gross Monthly Income
Just like reducing your monthly debt payments, increasing your gross monthly income is a lot easier said than done. After all, it’s not every day that you’re given a raise or offered a job with a high-paying salary. Nevertheless, there are still ways to potentially increase your gross monthly income. Research passive income ideas or check out these examples of things you can do to make a little extra money:
Take up a side hustle, such as driving for a ride share company, taking on freelance writing projects, babysitting, etc.
Rent out an extra room in your home (if you have more than one property, consider turning one of them into a vacation rental)
Get a relevant certification or license that would either increase the salary of your current position or help you find a new, higher-paying job
If possible, try to pick up more shifts or get extra hours at work
If you’re in the market for a sizable loan, such as a mortgage loan, you’ll have an easier time securing financing with a lower debt-to-income ratio. If your DTI ratio is higher than 43%, then you might consider waiting to purchase a home until you can lower that number and qualify for a better loan. You should generally try to keep your DTI ratio as low as possible even when you aren’t shopping around for loans. This means minimizing your monthly debt payments and maximizing your gross monthly income—two things that can be hard to achieve, but not impossible. Having a well-thought-out personal finance strategy will make it easier to achieve these goals, keep your DTI ratio consistently low, improve your overall financial health, and provide both you and potential lenders with a sense of financial security.
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Bonus at the workplace or an unplanned income from family members are usually substantial. However, receipt of such substantial money can always create a dilemma of whether to invest the sum into SIP or pre-pay home loan. In the case of a lack of a home loan, the answer is pretty straightforward. But, if there’s the burden of a home loan, it can lead to a dilemma. And, the answer differs from person to person, however, the variable to determine the category could be the same. Thus, let us study what these variables are that decide the optimum outcome of this dilemma.
Age: First, age is a huge determining factor, since it decides the earning capacity of an individual. Say you are in your mid-30s and hold a secured job, you can opt for a lump-sum investment subject to other variables. However, if your age is in the late 40s or early 50s, you may want to close your home loan and reduce the liability before your income source extinguishes.
Liquidity or emergency fund: An absolute must in today’s date, but again a home loan can cause a serious hole in your financial planning. This indirectly deters the creation of any sort of emergency fund or liquidity. Thus, this surplus income can act as a stop-gap solution, and help you create a temporary fund in case of emergency. However, this option must be utilised keeping in mind other variables covered in this article.
Risk appetite: Investing in mutual funds always carries a risk to the stock market. Therefore, risk-averse investors might not want to test the double loss in mutual funds along with home loans hanging on their heads. In case of limited risk, it is appropriate to close the outstanding loans before going for investment in even moderately risky opportunities.
Tenure of investment: When there are multiple loans – car, personal, education, etc – apart from the long outstanding home loan, the surplus fund might be better utilised in closing one of these instead of pre-payment of the home loan. Since a home loan is the cheapest among all loans, investors can sustain it for a longer term. Even when there are no loans apart from home but the investor might need money for say renovation or a wedding, then also these surplus funds could be utilised.
Income Tax: Possibly the greatest benefit against pre-payment of home loan. It can help you with up to Rs 1.5 lakhs allowable deduction for principal repayment and an additional up to Rs 2 lakhs of benefit for interest repayment. Thus, the aggregate tax benefit per borrower goes up to Rs 3.5 lakhs. Now, if you are in a 30% tax bracket, with a gross income of Rs 15 lakh per annum, you will be saving almost a lakh in tax. However, since the limit of Rs 1.5 lakhs under 80C is available through other options such as PPF, school fees, life insurance premium, etc., the additional Rs 2 lakhs for interest benefit could be the actual benefit.
Psychology: With many risk-averse investors do not like the burden of huge liability on their heads. Lack of job security, single earning members, risky business nature or even lack of investment knowledge could lead individuals to pre-pay home loans instead of investing in mutual funds. Even an absence of sufficient life cover coupled with a sole source of income should opt for pre-payment of a home loan. While some investors even without any deteriorating conditions opt for pre-payment simply to retain sound sleep. Thus, psychology could play a major deciding factor in the dilemma.
Returns: This variable gives the most practical answer among all. To put it simply, one should only opt for a mutual fund over the pre-payment of a home loan if the post-tax income from a mutual fund is higher than the effective cost of a home loan. Effective cost is the total EMIs of a home loan reduced by tax saving subject to the tax slab of every individual. To see it through a macro perspective, an outstanding loan of Rs 70 lakhs at 9.5% interest brings to Rs 6.65 lakhs now after deducting the Rs 2 lakhs benefit of interest repayment it comes down to Rs 4.65 lakhs. So, a Rs 4.65 lakhs interest on a Rs 70 lakhs loan generates an effective interest of about 8.64% even for Rs 30 lakhs tax-bracket individual. In addition, these figures could change if the loan is jointly shared and both can enjoy the Rs 2 lakhs tax benefit. However, if the total loan outstanding goes below Rs 20 lakhs, then you may not be able to fully utilise the Rs 2 lakhs interest benefit, since the maximum interest paid in the whole year will be less than Rs 2 lakhs. In such a case, it is not advisable to pre-pay the loan and instead opt for a mutual fund.
To conclude, whether pre-pay a home loan or invest could vary from person to person given the above factors. Hence, it may be wise to evaluate each variable and then decide the factor.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
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Becoming a homeowner doesn’t necessarily require a large down payment. The conventional wisdom is that buyers need 20 percent down, but there are options to help you get the keys without giving up every dollar in your savings.
How to get a mortgage with no money down
Here are three possibilities:
See if you qualify for a zero-down mortgage option. Bank of America’s zero-down program aims to help buyers purchase property in minority neighborhoods. USDA and VA loans allow you to get a mortgage without a down payment. To qualify, though, you’ll need to meet certain criteria related to where the property is located, how much money you earn, or whether you or a spouse has served in the military.
Explore low-down payment mortgage options. Both conventional mortgages and government backed mortgages are available for people putting down less than 20 percent.
Ask family or friends for help. Many lenders allow you to use gift funds from a family member — and in some cases, a close friend, labor union or an employer — for your down payment. You’ll need to provide a letter from the source of the gift that shows you don’t need to pay the money back.
Zero-down mortgage options
The easiest way to avoid a down payment is to qualify for one of the two no-down payment government-backed mortgage programs: USDA and VA loans. In addition to government options you may be able to get a zero down loan through your local credit union, especially if it’s one based on membership in a professional organization. These are relatively rare but are worth looking into if you can find one.
USDA loans
The U.S. Department of Agriculture (USDA) backs USDA home loans, a mortgage guarantee program for those buying a home in a designated rural area. USDA loans don’t require a down payment, but borrowers must meet credit and income requirements to qualify, and, in some cases, be a first-time homebuyer. You can verify your eligibility via the USDA website.
Although there’s no down payment with a USDA loan, there is an upfront guarantee fee, which borrowers can roll into the cost of the mortgage. While you won’t pay any money initially if you choose to roll it into the loan, keep in mind that it adds to the balance and will accrue interest over the loan term, which means you’ll pay more overall.
VA loans
If you’re a military servicemember, veteran or surviving spouse, you could be eligible for a VA loan backed by the U.S. Department of Veterans Affairs (VA) with no money down. There is no mortgage insurance with this type of loan, but like a USDA loan, you do have to pay an upfront funding fee, which can be rolled into the mortgage. (Note that you can reduce the funding fee by making a down payment, but no down payment is actually required.)
Another perk of VA loans is that many lenders offer more competitive rates for these products, which helps you save quite a bit of money over the life of the loan.
Low-down payment mortgage options
If you don’t qualify for one of the no-down payment home loans, you might still be able to buy a home with the next best thing: a low-down payment mortgage. Here are some of the options available:
FHA loans – Backed by the Federal Housing Administration (FHA), an FHA loan requires only 3.5 percent down with a credit sore as low as 580. (If you have a credit score between 500 and 579, you might be able to qualify with a higher down payment of 10 percent.) It’s a popular option for homebuyers with less-than-perfect credit. Like other government-insured programs, FHA loans are offered by private mortgage lenders, so you might also have to meet a lender’s criteria in order to qualify. Additionally, you have to pay for FHA mortgage insurance, which adds to your monthly payment and the cost of the loan.
HomeReady mortgage – The Fannie Mae HomeReady mortgage, available through many mortgage lenders, is backed by Fannie Mae. The down payment requirement on a HomeReady loan is 3 percent, and the loan itself offers flexible underwriting. While you’ll have to pay mortgage insurance to compensate for the low down payment, it’s often at a lower price tag than what you might see with a conventional loan.
Home Possible mortgage – Backed by Freddie Mac, Home Possible is a similar mortgage program to HomeReady, with a 3 percent down payment requirement. Borrowers do have to pay for mortgage insurance — again, at potentially a lower rate — but also enjoy the same credit flexibilities.
Conventional 97 mortgage – A Conventional 97 mortgage is another GSE-backed program, available from Fannie Mae and Freddie Mac, that only requires a 3 percent down payment. It’s important to note that conventional mortgages require a higher minimum credit score of 620. As with other low-down payment programs, you need to be financially prepared to pay for mortgage insurance each month.
Good Neighbor Next Door – The Good Neighbor Next Door (GNND) program is for borrowers who work in select public service professions — teachers, firefighters, law enforcement and emergency medical technicians — and are planning to buy a home in a qualifying area. The program, sponsored by the U.S. Department of Housing and Urban Development (HUD), provides a discount of up to 50 percent on a home with a down payment of just $100. Through the program, the borrower must qualify for a first mortgage, and the discounted portion of the home comes in the form of another loan. As long as the borrower continues to meet program requirements, the second mortgage won’t have to be repaid.
Pros and cons of a no-down payment mortgage
The ability to buy a home with no or very little money down can be appealing, but there are drawbacks, too.
Pros
You can buy a home sooner. When you don’t have to come up with a substantial down payment, it’s easier to buy a home sooner, especially if you’re in an area where home prices are spiking. Alternatively, if you want to take advantage of a good deal or a dip in the market, you can move fast without having to spend time saving for a down payment.
You can keep more cash on hand. Even if you have enough to make a sizable down payment, you might want to keep cash on hand for remodeling or to reach some other goal. With a zero- or low-down payment mortgage, that extra cash remains available to you.
Cons
You’ll have no or little equity. When you start with a no-down payment home loan, you don’t have much or any equity in your home at the outset because you’ll owe nearly 100 percent of the home’s value. That means you won’t be able to tap into your equity in an emergency, and during a downturn in the real estate market, you could end up owing more on the home than it’s worth, making it difficult to sell and move if that becomes necessary.
Your interest rate might be higher. In some cases, you might have to pay a higher mortgage rate for a no- or low-down payment loan. That’s because with less money tied up in the home, a mortgage lender might view you as more of a risk. Of course, the higher your interest rate, the more you’ll pay overall.
You’ll need a bigger mortgage, which translates to higher costs. The less you put down, the more you’ll need to borrow, which means you’ll pay more in interest over the life of the loan.
Your offer for a home might not look as compelling. It’s a competitive housing market in most places around the country. If someone else makes an offer on a house with a large down payment, that buyer might look like a better bet for a smooth transaction in the seller’s eyes.
You might have to pay extra fees. Some no-down payment home loans come with extra fees, which add to the cost of the loan.
FAQs about no or low-down payment mortgages
Calculate your budget. When you’re applying for a mortgage, lenders will take a deep look at your finances, so determine how much house you can realistically afford. Once you have an idea of your monthly budget, you can do the math to figure out your target goal for a down payment.
Cut costs everywhere possible. Saving money isn’t just about earning more; it’s about spending less. As you start growing a down payment fund, scrutinize your monthly spending and think about how to shrink some expenses. Can you stop buying coffee each morning? How much can you save if you stop eating out and only cook at home? Even if you’re on a tight budget, you can still identify ways to save.
Consider adjusting your other financial goals in the short term. If you’re 25 and want to buy a home, for example, consider reducing or pressing pause on your retirement contributions to shift those dollars toward your goal. Just remember that once you move in, you’ll want to focus on catching up on your retirement savings as soon as possible.
Find savings matching programs. Saving for a down payment doesn’t have to all fall on your shoulders. Some mortgage lenders such as Lower offer a boost that matches your savings up to a certain dollar amount. There are also some dollar-matching programs through state housing finance agencies.
Make sure your savings are also earning. While you’ll be hard-pressed to find a lucrative interest rate on a no-risk savings account, there are banks and credit unions that pay an above-average yield on your deposits. When you’re saving up to buy a house, every dollar counts.
There are down payment assistance programs in all 50 states. Some programs are available for particular counties or cities and some are limited to special populations like nurses or school teachers. Most are restricted to first time homebuyers and have income restrictions but income limits are higher in areas with higher housing costs.
Bottom line
As home prices rise, hitting that oft-quoted 20 percent down payment is becoming increasingly difficult for many homebuyers. Don’t let the need for a huge sum of money discourage you from trying to own a home. There are a range of programs that can help you buy a home with no money down or just a fraction of the purchase price. Compare all your loan options, and, more importantly, compare multiple lenders. By comparison-shopping for a mortgage, you’ll be able to land the best deal that makes sense with your savings and budget.
The GI Bill offers veterans, military members, and their loved ones many benefits. But one thing it doesn’t cover? That’d be buying a house.
Fortunately, if you’re looking to purchase a new home as a veteran or active-duty service member, you still have options. While there may not be a specific GI Bill home loan out there, there is a mortgage program designed just for military home buyers — and it’s one of the best home loan programs on the market.
Are you interested in using the VA loan program to buy a house? Let this VA home loan info guide the way.
Check your eligibility for a VA home loan here (Apr 30th, 2023)
Mortgage program for military home buyers
Dubbed the VA loan program, these military-only mortgages are some of the best financing options available. They’re backed by the Department of Veterans Affairs and offer low interest rates, come with no loan limits, and require zero down payment at all.
So while there is no official “GI home loan,” military borrowers have access to a VA home loan benefit, a great mortgage program intended to put homeownership into reach for veterans, active-duty service members and their families.
Benefits of a VA loan
VA loans come with countless benefits, but the biggest perk is that they require no down payment.
Unlike other mortgage programs, which ask for anywhere from 3% to 20% down, VA loans require no down payment at all. This can offer significant savings right off the bat. (A low-cost FHA loan requires at least $7,000 down on a $200,000 house, for example, while a VA loan requires $0 down).
Some other benefits of VA loans include:
Competitively low interest rates
No credit score requirements
Limits on closing costs
Loans are assumable, meaning future buyers can take over the loan (and the favorable rate and term it comes with)
No private mortgage insurance (PMI)
No loan limits
Can be used multiple times
VA loan mortgage rates 2023
When compared to other loan types — conventional loans and FHA loans, for example — VA home loans offer consistently lower rates than for the average consumer.
VA
Conventional
FHA
March 2023
6.18%
6.54%
6.44%
February 2023
6.04%
6.26%
6.30%
January 2023
5.96%
6.27%
6.22%
December 2022
6.17%
6.36%
6.36%
November 2022
6.56%
6.81%
6.66%
October 2022
6.62%
6.90%
6.73%
Source: Economic Research Federal Reserve Bank of St. Louis
A lower interest rate translates to a lower monthly mortgage payment and substantial savings over the life of your loan.
Qualify with GI Monthly Housing Allowance (MHA)
One last advantage? If you qualify for GI Bill benefits, you can actually use your GI Monthly Housing Allowance (MHA) to qualify for a VA loan. If you’re considering this option, talk to a VA lender. They can give you an idea of what your MHA qualifies you for.
VA loan eligibility & guidelines
For eligible borrowers, VA loans are usually the best mortgage option available. To qualify, borrowers must meet eligibility requirements set by the U.S. Department of Veterans Affairs and by the individual lender.
VA loan service eligibility requirements
VA loans are only for active-duty military members, veterans, and their families (including surviving spouses), so there are strict service requirements you’ll need to meet to qualify.
The exact standards depend on when you served, but generally speaking, you’ll need to have one of the following:
90 consecutive days of active service during wartime
181 days of active service during peacetime
6 years of service in the National Guard or Reserves
A veteran/service member spouse who died in the line of duty or due to a service-related disability or injury
Qualifying for a VA loan
The VA doesn’t set specific financial standards for its loans, though private mortgage lenders — the companies who actually issue the loans — do. These vary from one lender to the next, but in most cases, borrowers need at least a 620 credit score and a debt-to-income ratio of 41% or less.
If you fall short of these requirements, you still might qualify. Just make sure to shop around for your lender, work on improving your credit, and consider making a down payment. These steps can all help you better qualify for a mortgage loan (VA or not).
VA loan property requirements
The VA home loan program is intended to help veterans and active-duty service members become homeowners. That means, with some rare exceptions, these homes are reserved for single-family homes that the borrower plans to use as a primary residence.
A VA appraisal will ensure the property meets the VA’s Minimum Property Requirements, to ensure the home is livable and worth the value of the loan.
See if you’re eligible for a VA home loan (Apr 30th, 2023)
Types of VA loans
You can use a VA loan to either purchase a property or refinance an existing one. In both cases, there are a few options.
These include:
VA Purchase Loans: These can be used to buy a home (up to four units), an approved condo, or a manufactured home. You can also use VA purchase loans to build a new construction property or purchase a home and renovate it
VA Streamline Refinance: Also known as a VA Interest Rate Reduction Refinance Loan (IRRRL), these streamlined refinance loans allow existing VA loan borrowers to lower their interest rates or get more favorable terms quickly and affordably.
Native American Direct Loans: These are VA loans reserved just for veterans of Native American descent. They can be used to buy, build, or renovate properties on federal trust lands or to refinance.
VA Cash-out Refinance Loans: These are VA loans that let you tap your home equity. They replace your existing VA loan with a larger-balance one and give you a lump-sum payment in return. Cash-out refinancing can be a good choice if you need to make repairs on your property or if you have unexpected or looming expenses to cover.
VA funding fee
The VA funding fee is a one-time fee you’ll pay at closing. It helps subsidize the VA loan program and keeps costs low for future VA borrowers. The exact fee depends on your loan type, the number of times you’ve used your VA loan benefits, and your down payment size.
VA home loan FAQ
How much is a typical GI home loan?
There is no GI Bill home loan, but VA loans have no loan limits. As long as you have your full entitlement, you can borrow as much as you need to purchase a property. Keep in mind, though, lenders have their own criteria for evaluating borrowers. These tend to be stricter on higher loan amounts.
What are the benefits of a VA home loan?
The VA housing loan is one of the most beneficial financing products out there. The VA guarantee means private lenders can afford to pass along valuable benefits to eligible veterans, active-duty service members and their families. These loans come with no mortgage insurance or down payment, they have low interest rates, and there are no credit score requirements or loan limits either.
How much house can I afford as a veteran?
That depends on your budget, the interest rate you qualify for, and the down payment you’re willing to make. You can use this VA home loan calculator to point you in the right direction.
What is a Certificate of Eligibility (COE)?
A Certificate of Eligibility is an official document from the VA that details your military service. Lenders use it to determine whether you meet the VA loan program’s service requirements, which are detailed above. You can retrieve your COE yourself through your eBenefits portal, or you can ask your chosen VA lender to request the document on your behalf.
Can I get a COE as the spouse of a Veteran?
You can get a Certificate of Eligibility as the spouse of a veteran in some cases, but not all. To qualify for a COE, your spouse will either need to be missing in action, a prisoner of war or have died while in service from a service-connected disability. There are some other nuances, too — especially if you’ve remarried, so be sure to check out the VA’s detailed rules here.
Can I get a Certificate of Eligibility (COE) for a VA direct or VA-backed home loan?
Certificates of Eligibility are required for all VA mortgages, including Native American Direct and VA-backed purchase and refinance loans.
How much is the VA funding fee?
Your VA funding fee will depend on a few factors, including the type of loan you’re using, whether you’re a first-time home buyer, and whether you’re making a down payment. Fees range anywhere from 0.5% to 3.6% of the total loan amount and is typically well-worth the VA loan savings it allows you to access. This money allows the U.S. Department of Veterans Affairs to continue to offer this valuable VA home loan benefit to qualified veterans, active-duty service members and their families.
GI home loans: The bottom line
While there is technically no such thing as a GI home loan, veterans and active-duty service members do have access to excellent VA mortgage program, which offers significant benefits including:
Zero down payment
Competitively low interest rates
No credit score requirements
Limits on closing costs
Loans are assumable, meaning future buyers can take over the loan (and the favorable rate and term it comes with)
No private mortgage insurance (PMI)
No loan limits
Can be used multiple times
If you’re ready to buy a home (or refinance one), a VA loan might be your best option.
Ready to buy a home with a VA loan? Start here (Apr 30th, 2023)