How to Refinance Your Home Mortgage – Step-by-Step Guide

Deciding to refinance your mortgage is only the beginning of the process. You’re far more likely to accomplish what you set out to achieve with your refinance — and to get a good deal in the meantime — when you understand what a mortgage refinance entails.

From decision to closing, mortgage refinancing applicants pass through four key stages on their journey to a new mortgage loan.

How to Refinance a Mortgage on Your Home

Getting a home loan of any kind is a highly involved and consequential process.

On the front end, it requires careful consideration on your part. In this case, that means weighing the pros and cons of refinancing in general and the purpose of your loan in particular.

For example, are you refinancing to get a lower rate loan (reducing borrowing costs relative to your current loan) or do you need a cash-out refinance to finance a home improvement project, which could actually entail a higher rate?

Next, you’ll need to gather all the documents and details you’ll need to apply for your loan, evaluate your loan options and calculate what your new home mortgage will cost, and then begin the process of actually shopping for and applying for your new loan — the longest step in the process.

Expect the whole endeavor to take several weeks.

1. Determining Your Loan’s Purpose & Objectives

The decision to refinance a mortgage is not one to make lightly. If you’ve decided to go through with it, you probably have a goal in mind already.

Still, before getting any deeper into the process, it’s worth reviewing your longer-term objectives and determining what you hope to get out of your refinance. You might uncover a secondary or tertiary goal or benefit that alters your approach to the process before it’s too late to change course.

Refinancing advances a whole host of goals, some of which are complementary. For example:

  • Accelerating Payoff. A shorter loan term means fewer monthly payments and quicker payoff. It also means lower borrowing costs over the life of the loan. The principal downside: Shortening a loan’s remaining term from, say, 25 years to 15 years is likely to raise the monthly payment, even as it cuts down total interest charges.
  • Lowering the Monthly Payment. A lower monthly payment means a more affordable loan from month to month — a key benefit for borrowers struggling to live within their means. If you plan to stay in your home for at least three to five years, accepting a prepayment penalty (which is usually a bad idea) can further reduce your interest rate and your monthly payment along with it. The most significant downsides here are the possibility of higher overall borrowing costs and taking longer to pay it off if, as is often the case, you reduce your monthly payment by lengthening your loan term.
  • Lowering the Interest Rate. Even with an identical term, a lower interest rate reduces total borrowing costs and lowers the monthly payment. That’s why refinancing activity spikes when interest rates are low. Choose a shorter term and you’ll see a more drastic reduction.
  • Avoiding the Downsides of Adjustable Rates. Life is good for borrowers during the first five to seven years of the typical adjustable-rate mortgage (ARM) term when the 30-year loan rate is likely to be lower than prevailing rates on 30-year fixed-rate mortgages. The bill comes due, literally, when the time comes for the rate to adjust. If rates have risen since the loan’s origination, which is common, the monthly payment spikes. Borrowers can avoid this unwelcome development by refinancing to a fixed-rate mortgage ahead of the jump.
  • Getting Rid of FHA Mortgage Insurance. With relaxed approval standards and low down payment requirements, Federal Housing Administration (FHA) mortgage loans help lower-income, lower-asset first-time buyers afford starter homes. But they have some significant drawbacks, including pricey mortgage insurance that lasts for the life of the loan. Borrowers with sufficient equity (typically 20% or more) can put that behind them, reduce their monthly payment in the process by refinancing to a conventional mortgage, and avoid less expensive but still unwelcome private mortgage insurance (PMI).
  • Tapping Home Equity. Use a cash-out refinance loan to extract equity from your home. This type of loan allows you to borrow cash against the value of your home to fund things like home improvement projects or debt consolidation. Depending on the lender and jurisdiction, you can borrow up to 85% of your home equity (between rolled-over principal and cash proceeds) with this type of loan. But mind your other equity-tapping options: a home equity loan or home equity line of credit.

Confirming what you hope to get out of your refinance is an essential prerequisite to calculating its likely cost and choosing the optimal offer.


2. Confirm the Timing & Gather Everything You Need

With your loan’s purpose and your long-term financial objectives set, it’s time to confirm you’re ready to refinance. If yes, you must gather everything you need to apply, or at least begin thinking about how to do that.

Assessing Your Timing & Determining Whether to Wait

The purpose of your loan plays a substantial role in dictating the timing of your refinance.

For example, if your primary goal is to tap the equity in your home to finance a major home improvement project, such as a kitchen remodel or basement finish, wait until your loan-to-value ratio is low enough to produce the requisite windfall. That time might not arrive until you’ve been in your home for a decade or longer, depending on the property’s value (and change in value over time).

As a simplified example, if you accumulate an average of $5,000 in equity per year during your first decade of homeownership by making regular payments on your mortgage, you must pay your 30-year mortgage on time for 10 consecutive years to build the $50,000 needed for a major kitchen remodel (without accounting for a potential increase in equity due to a rise in market value).

By contrast, if your primary goal is to avoid a spike in your ARM payment, it’s in your interest to refinance before that happens — most often five or seven years into your original mortgage term.

But other factors can also influence the timing of your refinance or give you second thoughts about going through with it at all:

  • Your Credit Score. Because mortgage refinance loans are secured by the value of the properties they cover, their interest rates tend to be lower than riskier forms of unsecured debt, such as personal loans and credit cards. But borrower credit still plays a vital role in setting their rates. Borrowers with credit scores above 760 get the best rates, and borrowers with scores much below 680 can expect significantly higher rates. That’s not to say refinancing never makes sense for someone whose FICO score is in the mid-600s or below, only that those with the luxury to wait out the credit rebuilding or credit improvement process might want to consider it. If you’re unsure of your credit score, you can check it for free through Credit Karma.
  • Debt-to-Income Ratio. Mortgage lenders prefer borrowers with low debt-to-income ratios. Under 36% is ideal, and over 43% is likely a deal breaker for most lenders. If your debt-to-income ratio is uncomfortably high, consider putting off your refinance for six months to a year and using the time to pay down debt.
  • Work History. Fairly or not, lenders tend to be leery of borrowers who’ve recently changed jobs. If you’ve been with your current employer for two years or less, you must demonstrate that your income has been steady for longer and still might fail to qualify for the rate you expected. However, if you expect interest rates to rise in the near term, waiting out your new job could cancel out any benefits due to the higher future prevailing rates.
  • Prevailing Interest Rates. Given the considerable sums of money involved, even an incremental change to your refinance loan’s interest rate could translate to thousands or tens of thousands of dollars saved over the life of the loan. If you expect interest rates to fall in the near term, put off your refinance application. Conversely, if you believe rates will rise, don’t delay. And if the difference between your original mortgage rate and the rate you expect to receive on your refinance loan isn’t at least 1.5 percentage points, think twice about going ahead with the refinance at all. Under those circumstances, it takes longer to recoup your refinance loan’s closing costs.
  • Anticipated Time in the Home. It rarely makes sense to refinance your original mortgage if you plan to sell the home or pay off the mortgage within two years. Depending on your expected interest savings on the refinance, it can take much longer than that (upward of five years) to break even. Think carefully about how much effort you want to devote to refinancing a loan you’re going to pay off in a few years anyway.

Pro tip: If you need to give your credit score a bump, sign up for Experian Boost. It’s free and it’ll help you instantly increase your credit score.

Gathering Information & Application Materials

If and when you’re ready to go through with your refinance, you need a great deal of information and documentation before and during the application and closing processes, including:

  • Proof of Income. Depending on your employment status and sources of income, the lender will ask you to supply recent pay stubs, tax returns, or bank statements.
  • A Recent Home Appraisal. Your refinance lender will order a home appraisal before closing, so you don’t need to arrange one on your own. However, to avoid surprises, you can use open-source comparable local sales data to get an idea of your home’s likely market value.
  • Property Insurance Information. Your lender (and later, mortgage servicer) needs your homeowners insurance information to bundle your escrow payment. If it has been more than a year since you reviewed your property insurance policy, now’s the time to shop around for a better deal.

Be prepared to provide additional documentation if requested by your lender before closing. Any missing information or delays in producing documents can jeopardize the close.

Home Appraisal Blackboard Chalk Hand


3. Calculate Your Approximate Refinancing Costs

Next, use a free mortgage refinance calculator like Bank of America’s to calculate your approximate refinancing costs.

Above all else, this calculation must confirm you can afford the monthly mortgage payment on your refinance loan. If one of your aims in refinancing is to reduce the amount of interest paid over the life of your loan, this calculation can also confirm your chosen loan term and structure will achieve that.

For it to be worth it, you must at least break even on the loan after accounting for closing costs.

Calculating Your Breakeven Cost

Breakeven is a simple concept. When the total amount of interest you must pay over the life of your refinance loan matches the loan’s closing costs, you break even on the loan.

The point in time at which you reach parity is the breakeven point. Any interest saved after the breakeven point is effectively a bonus — money you would have forfeited had you chosen not to refinance.

Two factors determine if and when the breakeven point arrives. First, a longer loan term increases the likelihood you’ll break even at some point. More important still is the magnitude of change in your loan’s interest rate. The further your refinance rate falls from your original loan’s rate, the more you save each month and the faster you can recoup your closing costs.

A good mortgage refinance calculator should automatically calculate your breakeven point. Otherwise, calculate your breakeven point by dividing your refinance loan’s closing costs by the monthly savings relative to the original loan and round the result up to the next whole number.

Because you won’t have exact figures for your loan’s closing costs or monthly savings until you’ve applied and received loan disclosures, you’re calculating an estimated breakeven range at this point.

Refinance loan closing costs typically range from 2% to 6% of the refinanced loan’s principal, depending on the origination fee and other big-ticket expenses, so run one optimistic scenario (closing costs at 2% and a short time to breakeven) and one pessimistic scenario (closing costs at 6% and a long time to breakeven). The actual outcome will likely fall somewhere in the middle.

Note that the breakeven point is why it rarely makes sense to bother refinancing if you plan to sell or pay off the loan within two years or can’t reduce your interest rate by more than 1.5 to 2 percentage points.


4. Shop, Apply, & Close

You’re now in the home stretch — ready to shop, apply, and close the deal on your refinance loan.

Follow each of these steps in order, beginning with a multipronged effort to source accurate refinance quotes, continuing through an application and evaluation marathon, and finishing up with a closing that should seem breezier than your first.

Use a Quote Finder (Online Broker) to Get Multiple Quotes Quickly

Start by using an online broker like Credible* to source multiple refinance quotes from banks and mortgage lenders without contacting each party directly. Be prepared to provide basic information about your property and objectives, such as:

  • Property type, such as single-family home or townhouse
  • Property purpose, such as primary home or vacation home
  • Loan purpose, such as lowering the monthly payment
  • Property zip code
  • Estimated property value and remaining first mortgage loan balance
  • Cash-out needs, if any
  • Basic personal information, such as estimated credit score and date of birth

If your credit is decent or better, expect to receive multiple conditional refinance offers — with some coming immediately and others trickling in by email or phone in the subsequent hours and days. You’re under no obligation to act on any, sales pressure notwithstanding, but do make note of the most appealing.

Approach Banks & Lenders You’ve Worked With Before

Next, investigate whether any financial institutions with which you have a preexisting relationship offer refinance loans, including your current mortgage lender.

Most banks and credit unions do offer refinance loans. Though their rates tend to be less competitive at a baseline than direct lenders without expensive branch offices, many offer special pricing for longtime or high-asset customers. It’s certainly worth taking the time to make a few calls or website visits.

Apply for Multiple Loans Within 14 Days

You won’t know the exact cost of any refinance offer until you officially apply and receive the formal loan disclosure all lenders must provide to every prospective borrower.

But you can’t formally apply for a refinance loan without consenting to a hard credit pull, which can temporarily depress your credit score. And you definitely shouldn’t go through with your refinance until you’ve entertained multiple offers to ensure you’re getting the best deal.

Fortunately, the major consumer credit-reporting bureaus count all applications for a specific loan type (such as mortgage refinance loans) made within a two-week period as a single application, regardless of the final application count.

In other words, get in all the refinance applications you plan to make within two weeks, and your credit report will show just a single inquiry.

Evaluate Each Offer

Evaluate the loan disclosure for each accepted application with your objectives and general financial goals in mind. If your primary goal is reducing your monthly payment, look for the loan with the lowest monthly cost.

If your primary goal is reducing your lifetime homeownership costs, look for the loan offering the most substantial interest savings (the lowest mortgage interest rate).

Regardless of your loan’s purpose, make sure you understand what (if anything) you’re obligated to pay out of pocket for your loan. Many refinance loans simply roll closing costs into the principal, raising the monthly payment and increasing lifetime interest costs.

If your goal is to get the lowest possible monthly payment and you can afford to, try paying the closing costs out of pocket.

Choose an Offer & Consider Locking Your Rate

Choose the best offer from the pack — the one that best suits your objectives. If you expect rates to move up before closing, consider the lender’s offer (if extended) to lock your rate for a predetermined period, usually 45 to 90 days.

There’s likely a fee associated with this option, but the amount saved by even marginally reducing your final interest rate will probably offset it. Assuming everything goes smoothly during closing, you shouldn’t need more than 45 days — and certainly not more than 90 days — to finish the deal.

Proceed to Closing

Once you’ve closed on the loan, that’s it — you’ve refinanced your mortgage. Your refinance lender pays off your first mortgage and originates your new loan.

Moving forward, you send payments to your refinance lender, their servicer, or another company that purchases the loan.


Final Word

If you own a home, refinancing your mortgage loan is likely the easiest route to capitalize on low interest rates. It’s probably the most profitable too.

But low prevailing interest rates aren’t the only reason to refinance your mortgage loan. Other common refinancing goals include avoiding the first upward adjustment on an ARM, reducing the monthly payment to a level that doesn’t strain your growing family’s budget, tapping the equity you’ve built in your home, and banishing FHA mortgage insurance.

And a refinance loan doesn’t need to achieve only one goal. Some of these objectives are complementary, such as reducing your monthly payment while lowering your interest rate (and lifetime borrowing costs).

Provided you make out on the deal, whether by reducing your total homeownership costs or taking your monthly payment down a peg, it’s likely worth the effort.

*Advertisement from Credible Operations, Inc. NMLS 1681276.Address: 320 Blackwell St. Ste 200, Durham, NC, 27701

Source: moneycrashers.com

New Fannie/Freddie Refinance Option Drops Adverse Market Fee, Offers $500 Appraisal Credit

Posted on April 28th, 2021

In an effort to undo some of the damage the Federal Housing Finance Agency (FHFA) basically caused itself, it’s throwing a bone to so-called low-income families to save on their mortgage.

It all spurs from the adverse market fee the very same agency implemented back in August 2020 to contend with heightened losses related to COVID-19 forbearance and loss mitigation.

The 50-basis point fee, which went into effect on September 1st, 2020, applies to all new refinance loans backed by Fannie Mae and Freddie Mac.

While it’s not a .50% increase in mortgage rate, the fee does get passed along to consumers in the form of either higher closing costs or a slightly higher mortgage rate, perhaps an .125% increase all told.

Either way, it wasn’t well received at the time, and still isn’t today, and this announcement is a somewhat bittersweet one, as it only applies to a certain subset of the population.

Still, the FHFA believes families who are eligible for this new refinance initiative could see monthly savings between $100 and $250 on average.

Who Is Eligible for Adverse Market Fee Waiver and Appraisal Credit?

  • Applies to homeowners with incomes at or below 80% of the area median income and loan amounts at/below $300,000
  • Must result in savings of at least $50 in monthly mortgage payment, and at least a 50-basis point reduction in interest rate
  • Must currently hold an agency-backed mortgage (Fannie Mae or Freddie Mac)
  • Property must be a 1-unit single-family that is owner-occupied
  • Borrower must be current on their mortgage (no missed payments in past 6 months, 1 allowed in past 12 months)
  • Max LTV is 97%, max DTI is 65%, and minimum FICO score is 620

Perhaps the biggest eligibility factor is the borrower’s income must be at or below 80% of the area median income.

This new refinance program specifically targets what the FHFA refers to as low-income families, which director Mark Calabria said didn’t take advantage of the record low mortgage rates.

Apparently more than two million of these homeowners did not bother refinancing, even though it would have been advantageous to do so (and still is).

He noted that this new refinance option was designed to help eligible borrowers who have not already refinanced save somewhere between $1,200 and $3,000 annually on their mortgage payments.

That’s actually a requirement as well – the borrower must save at least $50 per month in mortgage payment, and their mortgage rate must be at least .50% lower.

For example, if your current mortgage rate is 4%, you’ll need a rate of at least 3.5% to qualify.

Additionally, you must currently have a home loan backed by either Fannie Mae or Freddie Mac, and your property must be owner-occupied and no more than one unit.

I assume condos/townhomes work as well, as long as it’s your primary residence.

The adverse market fee is waived as long as your income is at/below 80% of the area median AND your loan balance is at/below $300,000.

If your loan amount happens to be higher, my understanding is you can still get the $500 appraisal credit.

You’ve also got to be current on your mortgage, meaning no missed payments in past six months, and up to one missed payment in past 12 months.

Lastly, there is a maximum loan-to-value ratio of 97%, a max debt-to-income ratio of 65%, and a minimum FICO score is 620.

Most borrowers should have no issue with those requirements as they are extremely liberal.

Is This New Refinance Option a Good Deal for Homeowners?

  • It’s an excellent deal for those who haven’t refinanced their mortgages yet
  • You get a slightly lower mortgage rate and/or reduced closing costs
  • And with mortgage rates already super cheap it could be a double-win to save you some money
  • Even though who don’t qualify for this new program should check to see if a refinance could be worthwhile

As Calabria said, many higher-income homeowners probably already refinanced, or are currently refinancing their mortgages to take advantage of the low rates on offer.

Meanwhile, lots of lower income borrowers haven’t for one reason or another, perhaps because they’re not aware of the potential savings or had a bad experience with a mortgage lender in the past.

Whatever the reason, those who haven’t yet and meet the income requirement can take advantage of a refinance without the pesky adverse market fee.

That means they could get a mortgage rate maybe .125% lower than other borrowers who aren’t eligible for this program.

Additionally, they’ll get a $500 home appraisal credit from the lender, assuming the transaction doesn’t already qualify for an appraisal waiver.

Either way, eligible homeowners won’t have to pay for the appraisal, which is another plus to save on the refinance itself via lower closing costs.

It’s actually a great deal for those who haven’t refinanced yet because you might wind up with an even lower mortgage rate and reduced closing costs.

And because your new mortgage payment must be at least $50 cheaper per month, there’s less likelihood of it being a meaningless refinance.

All in all, this is good news for the so-called low-income homeowners who’ve yet to refinance, but bittersweet for everyone else.

Still, mortgage rates remain very attractive for everyone, so even if you have to pay the adverse market fee (and the appraisal fee), it could be well worth your while.

The FHFA said the new refinance option will be available to eligible borrowers beginning this summer, though it’s unclear exactly what date that is as of now.

Read more: When to a refinance a mortgage.

Source: thetruthaboutmortgage.com

Pros & Cons of Refinancing Your Home Mortgage Loan

If you purchased your home when the federal funds rate was at least 150 basis points — 1.5% — higher than today, an opportunity to profit from low interest rates is staring you in the face. In fact, there’s a good chance it’s surrounding you as you read these words.

Like millions of other homeowners paying more than necessary each month, you can take advantage of current low interest rates by refinancing your mortgage loan.

Knowing whether you should refinance your mortgage is trickier. Before you can decide, you need to know more about its upsides and downsides, including the potentially negative consequences for your personal finances and housing security.

Pro tip: If you decide that refinancing is the best option for you, Credible* will allow you to compare prequalified rates from multiple lenders in just minutes.

Advantages of Refinancing Your Mortgage Loan

Refinancing your mortgage loan could give you a financial boost by reducing your overall borrowing costs or creating low-cost financial leverage for home improvement projects and other financial goals. Many refinancing applicants realize more than one of these benefits.

1. It Could Reduce Your Lifetime Interest Costs

Reducing lifetime interest costs — and your total borrowing costs along with them — is among the most compelling reasons to refinance a mortgage. Many homeowners refinance with this objective in mind. They want to save money, and who can blame them?

Depending on the structure, type, term, and rate of your original loan, refinancing your mortgage could reduce your total interest expense in one or more ways:

  • Lowering the Interest Rate. Getting a lower interest rate is much more likely to occur if rates have fallen since your original loan’s issue and critical elements of your borrower profile — such as your credit score, income, and debt-to-income ratio — remain constant or improve.
  • Shortening the Term. A shorter term means less time for interest to accrue. The downside is the potential for a higher monthly payment.
  • Converting From Adjustable Rate to Fixed Rate. Refinancing your adjustable-rate mortgage loan into a fixed-rate mortgage loan eliminates the risk your interest rate will spike if prevailing rates rise.
  • Converting From Jumbo to Conventional. Jumbo loans generally carry higher interest rates than conforming (conventional) loans. Once your remaining balance drops below the conforming loan limit (about $485,000 in most markets), refinancing could reduce your lifetime borrowing costs.

2. It Could Lower Your Monthly Payments

Simply refinancing a higher-rate loan into a lower-rate loan with an equivalent term is likely to lower your monthly payments.

If a lower rate isn’t in the cards, a less desirable alternative is to refinance into a longer-term loan and spread your payments over a longer timeframe. The downside of this move is a higher lifetime borrowing cost.

3. It Could Increase Your Loan’s Predictability

Predictability isn’t a concern if your original loan has a fixed rate. You experience year-to-year variation on the escrow side, as your property taxes and insurance fluctuate. But your principal and interest payment remain fixed for the life of the loan.

But if your original loan has an adjustable rate, predictability is a problem, and refinancing to a fixed-rate loan is a reasonable solution. If your new fixed-rate loan prevents a costly upward rate adjustment, all the better.

4. It Could Eliminate Mortgage Insurance

The FHA mortgage loan program has helped millions of first-time homebuyers afford places of their own. Maybe you’re among them.

If so, you know that your FHA loan carries a hefty cost: high annual mortgage insurance premiums that remain in force for at least 11 years from the issue date (on loans issued after June 2013) — and permanently, in some cases.

Refinancing your FHA loan into a conventional loan could eliminate its annual mortgage insurance premium years ahead of schedule. You need only wait to accumulate 20% equity in your home, which should happen much sooner than 11 years (and certainly sooner than 15 or 30 years) after your original loan’s issue.

And as long as you have at least 20% equity when you refinance, you’ll avoid private mortgage insurance (PMI) as well.

5. It’s a Low-Cost Way to Tap the Equity in Your Home

If you plan to refinance anyway to take advantage of low interest rates, a cash-out refinance loan is a fine alternative to a home equity loan or line of credit.

Like those home equity products, a cash-out refinance loan is secured by the home’s value itself, reducing risk for the lender and facilitating rates far lower than credit cards and unsecured personal loans.

You can use this low-cost capital for basically anything, including:

  • Consolidating higher-interest debt
  • Financing major home improvements or repairs
  • Paying your kids’ college bills
  • Paying off your student loans
  • Settling medical bills and other major expenses

Disadvantages of Refinancing Your Mortgage Loan

Refinancing your mortgage is not a risk- or hassle-free endeavor.

Potential drawbacks include an arduous application process, no guarantee of approval or cost savings, the potential for a higher monthly payment, and the risk — heightened in down markets — that the required lender appraisal could actually backfire.

1. The Application Process Is a Pain

Applying to refinance your mortgage isn’t quite as involved or time-consuming as applying for a purchase loan. But it’s not a walk in the park or something to do on a whim.

As you did before your purchase loan, you must provide reams of documentation verifying your employment, income, and identity. And the deal won’t be done until you close, leaving you on pins and needles for weeks. Don’t go through with it unless you’re serious about refinancing.

2. Approval Is Not Guaranteed

The fact that you own your home doesn’t entitle you to refinance its mortgage.

If your borrower profile has deteriorated due to a drop in your credit score or income, a recent job change, or a higher debt-to-income ratio, your application could be denied outright or accepted on less favorable terms than expected.

3. You’re Not Guaranteed to Break Even

Most refinancing applicants expect their new mortgage loans to cost less than their original loans.

But there are plenty of scenarios in which that doesn’t pan out — and not just because the borrower intentionally refinances into a longer term (going from a 15-year to a 30-year mortgage, for example) or can’t find a lower rate.

If fate intervenes and you must sell your house before you break even on your refinance loan, you’ll never recoup your loan’s upfront costs.

And because all refinance loans have closing costs that push breakeven time into the future, you’ll have to wait some time — usually several years — before you sell.

4. Your Monthly Payment Could Increase

If your objective is to cash out some of your home’s equity or shorten your loan term, your monthly payment will probably increase. Nevertheless, the jump might come as a shock and can put a severe strain on your monthly budget over time.

Before taking out a loan that costs more than your current mortgage payment, be as sure as you can that it will remain affordable.

5. It Could Backfire in a Down Market

If home values in your area have declined since you purchased or last ordered a professional appraisal on your home, you run the risk of a lowball appraisal that squelches your chance of qualifying for a refinance loan anytime soon.

This outcome is likelier in areas with high (or increasing) rates of foreclosures and short sales. If you suspect an appraisal would do more harm than good and don’t urgently need to refinance, wait until the market improves.


Final Word

Refinancing a mortgage is not something to be done on a whim. Even when interest rates are low and your borrower profile is strong, the undertaking is no sure thing.

A forced relocation could compel you to sell your house years before you planned, wiping out most of your loan’s expected savings and causing you to lose money on the deal.

An unexpected job loss could threaten your family’s financial stability and put you at risk of losing your home.

A market downturn could leave you with less equity than you expected, putting your home improvement plans on hold.

Then again, you could see your refinance application approved without a hitch, reap thousands upon thousands of dollars in savings after closing costs through a lower monthly mortgage payment, and avoid the downsides of the unconventional loan that had outlived its purpose the day you first closed on your home.

There’s simply no way to predict what will happen. But as is always the case when the stakes are high, fortune favors those who know what could go wrong — and what could go right.

*Advertisement from Credible Operations, Inc. NMLS 1681276.Address: 320 Blackwell St. Ste 200, Durham, NC, 27701

Source: moneycrashers.com

How to avoid or remove PMI

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Private mortgage insurance (PMI) has been around for more than 60 years, helping make mortgages more affordable for buyers who can’t afford a 20 percent down payment. Loans with PMI certificates have often accounted for a decent percentage of mortgages issued each year. In fact, in 2019, that number was just below 40 percent.

But PMI does add an expense to your home loan, and you likely want to sidestep it if possible. Find out below if you can avoid PMI, or learn how to remove PMI if you’re already paying it.

What is PMI?

PMI is insurance, but don’t get it confused with homeowner’s insurance—that’s a different product you might need to pay for. PMI is insurance for the lender. It’s meant to be a fail-safe to help a lender recover losses if you default on the loan.

Lenders require that you purchase PMI in cases where you aren’t putting at least 20 percent down on your home. Most commonly, you pay PMI as part of your monthly mortgage payment. In rarer cases, you might pay all of the PMI as a lump sum when you close on the home or pay a partial lump sum and pay the rest in your monthly mortgage payments.

Regardless of how you pay, PMI can be an expensive addition to your mortgage. It’s important to note, however, that PMI works differently with FHA loans and certain other government-backed loans. For example, FHA loans have MIP, which is a mortgage insurance premium, instead of PMI.

What factors affect the cost of my PMI?

According to Freddie Mac, PMI can cost on average between $30 and $70 extra per month for every $100,000 you borrow. So, if you’re borrowing $200,000 for 30 years and you pay PMI for half of that term, you could pay between $60 and $140 per month for 15 years—or 180 months. That’s between $10,800 and $25,200 added to your mortgage.

The exact amount you pay for PMI depends on a variety of factors, including:

  • Size of down payment (the more you pay up front, the less risk there is to the lender because the home has some equity—or profitability—built in)
  • Credit score (the higher your score, the less risky of a borrower you appear to lenders)
  • Loan appreciation potential
  • Borrower occupancy
  • Loan type

How can I avoid PMI?

In today’s mortgage market, it can be difficult to steer clear of PMI altogether. But here are some things you can do, depending on your situation, to avoid this expense.

Make a 20 percent down payment

If you can make a 20 percent down payment, you typically avoid PMI. That’s because PMI kicks in when you owe more than 78 to 80 percent of the value of the home. Assuming the home you’re purchasing is priced at or below its appraisal value, paying 20 percent up front automatically gets you enough equity to not need to pay for PMI.

Get a VA loan

VA loans don’t require a down payment at all, and no matter what, they don’t come with PMI. These loans are reserved for qualifying veterans and their eligible beneficiaries.

Get a piggyback loan

A piggyback loan is a second mortgage or home equity line of credit that you take out at the same time you take out your first mortgage. You use the piggyback loan to fund all or part of your down payment so you can meet the 20 percent requirement. If you consider this option, make sure to do the math to determine which saves you the most money: paying PMI or paying the interest on the second mortgage.

Request lender-paid mortgage insurance

In some cases, the lender might be willing to take on the burden of the PMI cost. They would do so through lender-paid mortgage insurance, or LPMI. Typically, the lender charges a higher rate of interest in exchange for this favor. Again, it’s important to do the math to find out which one is in your best interest.

How can I remove PMI once I have it?

As a homeowner, you have some options for removing PMI once you have it. You can take some of the actions summarized below, but the Consumer Financial Protection Bureau notes that you must also meet four criteria to protect your right. Those are:

  • Asking for the PMI cancellation in writing
  • Being up to date on payments and having a generally solid payment history
  • Certifying, if required, that there are no other liens on your mortgage
  • Providing evidence, if required, that the property value has not fallen below the original value of the home when you purchased it

If you can fulfill these criteria, here are some ways you can cancel your PMI.

Get enough equity in your home

The PMI Cancellation Act, or Homeowners Protection Act, mandates PMI cancellation when your principal mortgage balance reaches 78 percent of the value of the property (or you can also think of it as you reaching 22 percent equity). At that point, lenders must remove PMI. If you want, you can ask for PMI cancellation as soon as you reach 20 percent equity, but lenders aren’t required to remove PMI at that point.

Lenders are also required to tell you when you will reach the point of PMI cancellation if you continue to pay on your loan as agreed. You can calculate where you are in the process at any time by taking your current loan balance and dividing it by the amount the property originally appraised for. For example, if you owe $170,000 and the property appraised for $200,000, you are at 85 percent.

Get halfway through your mortgage term

Values can rise and fall, but you’re not stuck with PMI forever. Lenders must remove PMI when you’re halfway through your mortgage regardless of values. So, if you have a 30-year loan, your PMI should be canceled at the 15-year mark.

Refinance your mortgage

Another way to remove PMI is to remove your mortgage altogether. If you can arrange it so you meet the 78 percent value requirement on a new mortgage, you avoid PMI.

Get a reappraisal

Perhaps your home has gone up in value substantially and you owe much less than 80 percent of the current value. If you can demonstrate this, the lender may remove PMI because there’s less risk involved with the loan.

Remodel your home

If your home hasn’t gone up in value on its own, you might be able to add value with a remodel. Certain types of remodels, such as kitchen upgrades, could add enough value to impact the loan-to-value ratio so you don’t need PMI anymore.

Getting rid of PMI can be a great way to save money on your mortgage, but always remember to follow good personal financial management. Look at all your options and run the numbers to ensure you’re not spending more than you would save. If you’re already considering a home remodel, tossing PMI to the curb is a great perk. But you might not want to put in $30,000 worth of remodel costs just to save $10,000 in PMI, for example.

Finally, while you’re dotting the i’s and crossing the t’s on your mortgage expenses, make sure you don’t lose track of other financial matters. Keep an eye on your credit report, and if you find something that looks wrong, consider working with Lexington Law on credit repair.


Reviewed by Vince R. Mayr, Supervising Attorney of Bankruptcies at Lexington Law Firm. Written by Lexington Law.

Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

Does a Foreclosure Hurt Your Credit More Than a Bankruptcy

Foreclosure and bankruptcy are both daunting to consider. However, if you are struggling to keep up with your mortgage payments, this may very well be your final option after a long financial struggle. While both will undoubtedly have an effect on your credit score, minimizing the fallout and setting yourself up for the best chance of credit repair is critical. Depending on your financial situation, one might be better than the other. If you’re facing the decision of a foreclosure or a bankruptcy, here’s what you need to know.

Lender Negotiation

Bankruptcy and foreclosure each carry a separate sense of urgency. Depending on your individual circumstance, one might be a better financial fit. Consider the status of your mortgage: Have you missed a single payment or have your progressed past the 90-day mark? Before you make a critical decision it’s important to talk with your lender first and see how they might be wiling to help. Contact your bank and explain your circumstances. If your money troubles are only temporary, it may be possible to request a period of forbearance or other available options in order to establish your financial stability. If your financial troubles are more permanent however, bankruptcy or foreclosure may be your last option.

Foreclosure vs BankruptcyForeclosure vs Bankruptcy

The Impact of Foreclosure and Bankruptcy on your Credit Score

Both foreclosure and bankruptcy carry long-term consequences and should not be entered into lightly. A foreclosure will your reflect on your credit score for 7 years, while a bankruptcy will stay on your credit report for up to 10. Although it may seem like living with impacts such as these on your credit score for a decade is devastating, it is essential if you expect to rely on your credit score sometime in the future. If you are at a crossroads in your decision-making, you’ll want to consider the impact of each option against your goals long-term.

Foreclosure vs. Bankruptcy

First and foremost, you want to keep in mind that your credit score is completely unique to you. Because your credit score is a sum of your total credit history, no two consumers will have the same financial impacts profile to profile.

That being said, FICO recently released a report that displayed the impact of various negative items on a person’s credit profile. They used a sample profile with the same credit score (680) to show the impact of a foreclosure vs. a bankruptcy. Under the circumstances of a bankruptcy, the “person’s” credit score dropped between 540 and 560. With a foreclosure? – 620 to 640.

A Chapter 13 bankruptcy’s “wage earner’s” option can in some instances bode more favorably than a property foreclosure. This can show a future lender your willingness to repay debt on a restructured scale. On the other hand, a foreclosure may illustrate a greater willingness to walk away from your property and your credit agreements.

If you plan on filing a total debt elimination, or a Chapter 7 bankruptcy, a foreclosure could very well be a byproduct of this decision. While the opportunity to obtain a clean slate may be a tempting proposal, the immediate impact to your living situation is obvious.  Although foreclosure proceedings generally render a 3-month notice before an eviction, what is your plan after this grace period ends? How will a lower credit score affect these plans?

Conclusion

As stated above, if you’ve fallen behind on your mortgage payment the first step you want to take is working with your lender to restructure payments and avoid damage to your credit entirely. Bankruptcy and foreclosure should only be considered as a last resort. If your mortgage agreement is beyond repair you may be faced with choosing between a foreclosure and a bankruptcy. Based on information released from the credit authority, FICO, a foreclosure may be less damage and less time on your credit report overall.

However, because every situation and credit profile is unique it’s important to make a decision based on your immediate and future financial needs and goals. Before making a decision, speak with a finance expert about your personal situation and what might work best for you.

Source: creditabsolute.com

FHA Short Refinance Option Coming Soon

short

A new option that should be available by fall of this year will allow borrowers current on their mortgages to execute short refinances into FHA loans, assuming the original loan is not FHA-insured.

In fact, the new loan must NOT be owned or guaranteed by the FHA, VA, or the USDA. So essentially only those with conventional loans need apply.

Loans eligible for refinancing via the FHA short refinance program include Alt-A loans, subprime loans, fixed-rate loans, ARMs, and loans of all documentation types.

The new FHA loan must have a balance no greater than 97.75 percent of the value of the home, and the total loan-to-value (including any second mortgages) cannot exceed 115 percent after the refinancing.

At the same time, the minimum write-down by the mortgage lender must be 10 percent of the unpaid balance of the original loan.

For manually underwritten loans, the total monthly payment, including any second mortgages, must not be greater than 31/50 or 35/48 debt-to-income, though the borrower should benefit from both a reduced balance and a reduced interest rate thanks to the current low-rate environment.

Borrowers who choose the FHA short refinance option can go with a fixed-rate mortgage or an ARM.

Homeowner eligibility for the FHA short refinance program is as follows:

– Homeowners must be current on existing mortgage payment (unless the borrower successfully completes a 3-month trial payment plan)
– Homeowner must occupy the home as a primary residence
– Homeowner must be underwater on existing mortgage(s)
– Homeowner must have a FICO score of at least 500
– Homeowner must meet standard FHA underwriting requirements
– Existing lenders/investors must agree to a principal write-down
– Condos and 1-4 unit properties are eligible
– Not eligible if convicted of felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage/real estate transaction within last 10 years

Borrowers who execute an FHA short refinance should expect to see their credit score negatively impacted as with any other loan forgiveness.

And the standard FHA mortgage insurance premium structure will apply to the new FHA loans.

To increase lender participation, incentives for immediate write-downs of underwater second mortgages will be offered, based on the loan-to-value.

To fund the program, up to $14 billion in TARP funds will be used – FHA will publish data on the number of short refinance loans, the average percentage written down, and the quantity of principal reduced quarterly.

If interested, contact your existing lender/servicer or any FHA-approved lender for more information. The program is expected to be offered until December 31, 2014.

Tip: If you already have an FHA loan, you can refinance an underwater mortgage via the FHA streamline refinance program.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

The Pros & Cons of Offering Owner Financing (When You Sell Your Home)

Sometimes, home sellers find a buyer eager to purchase but unable to finance the property with traditional mortgage financing. Sellers then have a choice: lose the buyer, or lend the mortgage to the buyer themselves.

If you want to sell a property you own free and clear, with no mortgage, you can theoretically finance a buyer’s full first mortgage. Alternatively, you could offer just a second mortgage, to bridge the gap between what the buyer can borrow from a conventional lender and the cash they can put down.

Should you ever consider offering financing? What’s in it for you? And most importantly, how do you protect yourself against losses?

Before taking the plunge to offer seller financing, make sure you understand all the pros, cons, and options available to you as “the bank” when lending money to a buyer.

Advantages to Offering Seller Financing

Although most sellers never even consider offering financing, a few find themselves forced to contemplate it.

For some sellers, it could be that their home lies in a cool market with little demand. Others own unique properties that appeal only to a specific type of buyer or that conventional mortgage lenders are wary to touch. Or the house may need repairs in order to meet habitability requirements for conventional loans.

Sometimes the buyer may simply be unable to qualify for a conventional loan, but you might know they’re good for the money if you have an existing relationship with them.

There are plenty of perks in it for the seller to offer financing. Consider these pros as you weigh the decision to extend seller financing.

1. Attract & Convert More Buyers

The simplest advantage is the one already outlined: You can settle on your home even when conventional mortgage lenders decline the buyer.

Beyond salvaging a lost deal, sellers can also potentially attract more buyers. “Seller Financing Available” can make an effective marketing bullet in your property listing.

If you want to sell your home in 30 days, offering seller financing can draw in more showings and offers.

Bear in mind that seller financing doesn’t only appeal to buyers with shoddy credit. Many buyers simply prefer the flexibility of negotiating a custom loan with the seller rather than trying to fit into the square peg of a loan program.

2. Earn Ongoing Income

As a lender, you get the benefit of ongoing monthly interest payments, just like a bank.

It’s a source of passive income, rather than a one-time payout. In one fell swoop, you not only sell your home but also invest the proceeds for a return.

Best of all, it’s a return you get to determine yourself.

3. You Set the Interest Rate

It’s your loan, which means you get to call the shots on what you charge. You may decide seller financing is only worth your while at 6% interest, or 8%, or 10%.

Of course, the buyer will likely try to negotiate the interest rate. After all, nearly everything in life is negotiable, and the terms of seller financing are no exception.

4. You Can Charge Upfront Fees

Mortgage lenders earn more than just interest on their loans. They charge a slew of one-time, upfront fees as well.

Those fees start with the origination fee, better known as “points.” One point is equal to 1% of the mortgage loan, so they add up fast. Two points on a $250,000 mortgage comes to $5,000, for example.

But lenders don’t stop at points. They also slap a laundry list of fixed fees on top, often surpassing $1,000 in total. These include fees such as a “processing fee,” “underwriting fee,” “document preparation fee,” “wire transfer fee,” and whatever other fees they can plausibly charge.

When you’re acting as the bank, you can charge these fees too. Be fair and transparent about fees, but keep in mind that you can charge comparable fees to your “competition.”

5. Simple Interest Amortization Front-Loads the Interest

Most loans, from mortgage loans to auto loans and beyond, calculate interest based on something called “simple interest amortization.” There’s nothing simple about it, and it very much favors the lender.

In short, it front-loads the interest on the loan, so the borrower pays most of the interest in the beginning of the loan and most of the principal at the end of the loan.

For example, if you borrow $300,000 at 8% interest, your mortgage payment for a 30-year loan would be $2,201.29. But the breakdown of principal versus interest changes dramatically over those 30 years.

  • Your first monthly payment would divide as $2,000 going toward interest, with only $201.29 going toward paying down your principal balance.
  • At the end of the loan, the final monthly payment divides as $14.58 going toward interest and $2,186.72 going toward principal.

It’s why mortgage lenders are so keen to keep refinancing your loan. They earn most of their money at the beginning of the loan term.

The same benefit applies to you, as you earn a disproportionate amount of interest in the first few years of the loan. You can also structure these lucrative early years to be the only years of the loan.

6. You Can Set a Time Limit

Not many sellers want to hold a mortgage loan for the next 30 years. So they don’t.

Instead, they structure the loan as a balloon mortgage. While the monthly payment is calculated as if the loan is amortized over the full 15 or 30 years, the loan must be paid in full within a certain time limit.

That means the buyer must either sell the property within that time limit or refinance the mortgage to pay off your loan.

Say you sign a $300,000 mortgage, amortized over 30 years but with a three-year balloon. The monthly payment would still be $2,201.29, but the buyer must pay you back the full remaining balance within three years of buying the property from you.

You get to earn interest on your money, and you still get your full payment within three years.

7. No Appraisal

Lenders require a home appraisal to determine the property’s value and condition.

If the property fails to appraise for the contract sales price, the lender either declines the loan or bases the loan on the appraised value rather than the sales price — which usually drives the borrower to either reduce or withdraw their offer.

As the seller offering financing, you don’t need an appraisal. You know the condition of the home, and you want to sell the home for as much as possible, regardless of what an appraiser thinks.

Foregoing the appraisal saves the buyer money and saves everyone time.

8. No Habitability Requirement

When mortgage lenders order an appraisal, the appraiser must declare the house to be either habitable or not.

If the house isn’t habitable, conventional and FHA lenders require the seller to make repairs to put it in habitable condition. Otherwise, they decline the loan, and the buyer must take out a renovation loan (such as an FHA 203k loan) instead.

That makes it difficult to sell fixer-uppers, and it puts downward pressure on the price. But if you want to sell your house as-is, without making any repairs, you can do so by offering to finance it yourself.

For certain buyers, such as handy buyers who plan to gradually make repairs themselves, seller financing can be a perfect solution.

9. Tax Implications

When you sell your primary residence, the IRS offers an exemption for the first $250,000 of capital gains if you’re single, or $500,000 if you’re married.

However, if you earn more than that exemption, or if you sell an investment property, you still have to pay capital gains tax. One way to reduce your capital gains tax is to spread your gains over time through seller financing.

It’s typically considered an installment sale for tax purposes, helping you spread the gains across multiple tax years. Speak with an accountant or other financial advisor about exactly how to structure your loan for the greatest tax benefits.


Drawbacks to Seller Financing

Seller financing comes with plenty of risks. Most of the risks center around the buyer-borrower defaulting, they don’t end there.

Make sure you understand each of these downsides in detail before you agree to and negotiate seller financing. You could potentially be risking hundreds of thousands of dollars in a single transaction.

1. Labor & Headaches to Arrange

Selling a home takes plenty of work on its own. But when you agree to provide the financing as well, you accept a whole new level of labor.

After negotiating the terms of financing on top of the price and other terms of sale, you then need to collect a loan application with all of the buyer’s information and screen their application carefully.

That includes collecting documentation like several years’ tax returns, several months’ pay stubs, bank statements, and more. You need to pull a credit report and pick through the buyer’s credit history with a proverbial fine-toothed comb.

You must also collect the buyer’s new homeowner insurance information, which must include you as the mortgagee.

You need to coordinate with a title company to handle the title search and settlement. They prepare the deed and transfer documents, but they still need direction from you as the lender.

Be sure to familiarize yourself with the home closing process, and remember you need to play two roles as both the seller and the lender.

Then there’s all the legal loan paperwork. Conventional lenders sometimes require hundreds of pages of it, all of which must be prepared and signed. Although you probably won’t go to the same extremes, somebody still needs to prepare it all.

2. Potential Legal Fees

Unless you have experience in the mortgage industry, you probably need to hire an attorney to prepare the legal documents such as the note and promise to pay. This means paying the legal fees.

Granted, you can pass those fees on to the borrower. But that limits what you can charge for your upfront loan fees.

Even hiring the attorney involves some work on your part. Keep this in mind before moving forward.

3. Loan Servicing Labor

Your responsibilities don’t end when the borrower signs on the dotted line.

You need to make sure the borrower pays on time every month, from now until either the balloon deadline or they repay the loan in full. If they fail to pay on time, you need to send late notices, charge them late fees, and track their balance.

You also have to confirm that they pay the property taxes on time and keep the homeowners insurance current. If they fail to do so, you then have to send demand letters and have a system in place to pay these bills on their behalf and charge them for it.

Every year, you also need to send the borrower 1098 tax statements for their mortgage interest paid.

In short, servicing a mortgage is work. It isn’t as simple as cashing a check each month.

4. Foreclosure

If the borrower fails to pay their mortgage, you have only one way to forcibly collect your loan: foreclosure.

The process is longer and more expensive than eviction and requires hiring an attorney. That costs money, and while you can legally add that cost to the borrower’s loan balance, you need to cough up the cash yourself to cover it initially.

And there’s no guarantee you’ll ever be able to collect that money from the defaulting borrower.

Foreclosure is an ugly experience all around, and one that takes months or even years to complete.

5. The Buyer Can Declare Bankruptcy on You

Say the borrower stops paying, you file a foreclosure, and eight months later, you finally get an auction date. Then the morning of the auction, the borrower declares bankruptcy to stop the foreclosure.

The auction is canceled, and the borrower works out a payment plan with the bankruptcy court judge, which they may or may not actually pay.

Should they fail to pay on their bankruptcy payment plan, you have to go through the process all over again, and all the while the borrowers are living in your old home without paying you a cent.

6. Risk of Losses

If the property goes to foreclosure auction, there’s no guarantee anyone will bid enough to cover the borrower’s loan debt.

You may have lent $300,000 and shelled out another $20,000 in legal fees. But the bidding at the foreclosure auction might only reach $220,000, leaving you with a $100,000 shortfall.

Unfortunately, you have nothing but bad options at that point. You can take the $100,000 loss, or you can take ownership of the property yourself.

Choosing the latter means more months of legal proceedings and filing eviction to remove the nonpaying buyer from the property. And if you choose to evict them, you may not like what you find when you remove them.

7. Risk of Property Damage

After the defaulting borrower makes you jump through all the hoops of foreclosing, holding an auction, taking the property back, and filing for eviction, don’t delude yourself that they’ll scrub and clean the property and leave it in sparkling condition for you.

Expect to walk into a disaster. At the very least, they probably haven’t performed any maintenance or upkeep on the property. In my experience, most evicted tenants leave massive amounts of trash behind and leave the property filthy.

In truly terrible scenarios, they intentionally sabotage the property. I’ve seen disgruntled tenants pour concrete down drains, systematically punch holes in every cabinet, and destroy every part of the property they can.

8. Collection Headaches & Risks

In all of the scenarios above where you come out behind, you can pursue the defaulting borrower for a deficiency judgment. But that means filing suit in court, winning it, and then actually collecting the judgment.

Collecting is not easy to do. There’s a reason why collection accounts sell for pennies on the dollar — most never get collected.

You can hire a collection agency to try collecting for you by garnishing the defaulted borrower’s wages or putting a lien against their car. But expect the collection agency to charge you 40% to 50% of all collected funds.

You might get lucky and see some of the judgment or you might never see a penny of it.


Options to Protect Yourself When Offering Seller Financing

Fortunately, you have a handful of options at your disposal to minimize the risks of seller financing.

Consider these steps carefully as you navigate the unfamiliar waters of seller financing, and try to speak with other sellers who have offered it to gain the benefit of their experience.

1. Offer a Second Mortgage Only

Instead of lending the borrower the primary mortgage loan for hundreds of thousands of dollars, another option is simply lending them a portion of the down payment.

Imagine you sell your house for $330,000 to a buyer who has $30,000 to put toward a down payment. You could lend the buyer $300,000 as the primary mortgage, with them putting down 10%.

Or you could let them get a loan for $270,000 from a conventional mortgage lender, and you could lend them another $30,000 to help them bridge the gap between what they have in cash and what the primary lender offers.

This strategy still leaves you with most of the purchase price at settlement and lets you risk less of your own money on a loan. But as a second mortgage holder, you accept second lien position

That means in the event of foreclosure, the first mortgagee gets paid first, and you only receive money after the first mortgage is paid in full.

2. Take Additional Collateral

Another way to protect yourself is to require more collateral from the buyer. That collateral could come in many forms. For example, you could put a lien against their car or another piece of real estate if they own one.

The benefits of this are twofold. First, in the event of default, you can take more than just the house itself to cover your losses. Second, the borrower knows they’ve put more on the line, so it serves as a stronger deterrent for defaults.

3. Screen Borrowers Thoroughly

There’s a reason why mortgage lenders are such sticklers for detail when underwriting loans. In a literal sense, as a lender, you are handing someone hundreds of thousands of dollars and saying, “Pay me back, pretty please.”

Only lend to borrowers with a long history of outstanding credit. If they have shoddy credit — or any red flags in their credit history — let them borrow from someone else. Be just as careful of borrowers with little in the way of credit history.

The only exception you should consider is accepting a cosigner with strong, established credit to reinforce a borrower with bad or no credit. For example, you might find a recent college graduate with minimal credit who wants to buy, and you could accept their parents as cosigners.

You also could require additional collateral from the cosigner, such as a lien against their home.

Also review the borrower’s income carefully, and calculate their debt-to-income ratios. The front-end ratio is the percentage of their monthly income required to cover all housing costs: principal and interest, property taxes, homeowner’s insurance, and any condominium or homeowners association fees.

For reference, conventional mortgage lenders allow a maximum front-end ratio of 28%.

The back-end ratio includes not just housing costs, but also overall debt obligations. That includes student loans, auto loans, credit card payments, and all other mandatory monthly debt payments.

Conventional mortgage loans typically allow 36% at most. Any more than that and the buyer probably can’t afford your home.

4. Charge Fees for Your Trouble

Mortgage lenders charge points and fees. If you’re serving as the lender, you should do the same.

It’s more work for you to put together all the loan paperwork. And you will almost certainly have to pay an attorney to help you, so make sure you pass those costs along to the borrower.

Beyond your own labor and costs, you also need to make sure you’re being compensated for your risk. This loan is an investment for you, so the rewards must justify the risk.

5. Set a Balloon

You don’t want to be holding this mortgage note 30 years from now. Or, for that matter, to force your heirs to sort out this mortgage on your behalf after you shuffle off this mortal coil.

Set a balloon date for the mortgage between three and five years from now. You get to collect mostly interest in the meantime, and then get the rest of your money once the buyer refinances or sells.

Besides, the shorter the loan term, the less opportunity there is for the buyer to face some financial crisis of their own and stop paying you.

6. Be Listed as the Mortgagee on the Insurance

Insurance companies issue a declarations page (or “dec page”) listing the mortgagee. In the event of damage to the property and an insurance claim, the mortgagee gets notified and has some rights and protections against losses.

Review the insurance policy carefully before greenlighting the settlement. Make sure your loan documents include a requirement that the borrower send you updated insurance documents every year and consequences if they fail to do so.

7. Hire a Loan Servicing Company

You may multitalented and an expert in several areas. But servicing mortgage loans probably isn’t one of them.

Consider outsourcing the loan servicing to a company that specializes in it. They send monthly statements, late notices, 1098 forms, and escrow statements (if you escrow for insurance and taxes), and verify that taxes and insurance are current each year. If the borrower defaults, they can hire a foreclosure attorney to handle the legal proceedings.

Examples of loan servicing companies include LoanCare and Note Servicing Center, both of whom accept seller-financing notes.

8. Offer Lease-to-Own Instead

The foreclosure process is significantly longer and more expensive than the eviction process.

In the case of seller financing, you sell the property to the buyer and only hold the mortgage note. But if you sign a lease-to-own agreement, you maintain ownership of the property and the buyer is actually a tenant who simply has a legal right to buy in the future.

They can work on improving their credit over the next year or two, and you can collect rent. When they’re ready, they can buy from you — financed with a conventional mortgage and paying you in full.

If the worst happens and they default, you can evict them and either rent or sell the property to someone else.

9. Explore a Wrap Mortgage

If you have an existing mortgage on the property, you may be able to leave it in place and keep paying it, even after selling the property and offering seller financing.

Wrap mortgages, or wraparound mortgages, are a bit trickier and come with some legal complications. But when executed right, they can be a win-win for both you and the buyer.

Say you have a 30-year mortgage for $250,000 at 3.5% interest. You sell the property for $330,000, and you offer seller financing of $300,000 for 6% interest. The buyer pays you $30,000 as a down payment.

Ordinarily, you would pay off your existing mortgage for $250,000 upon selling it. Most mortgages include a “due-on-sale” clause, requiring the loan to be paid in full upon selling the property.

But in some circumstances and some states, you may be able to avoid triggering the due-on-sale clause and leave the loan in place.

You keep paying your mortgage payment of $1,122.61, even as the borrower pays you $1,798.65 per month. In a couple of years when they refinance, they pay off your previous mortgage in full, plus the additional balance they owe you.

Of course, you still run the risk that the borrower stops paying you. Then you’re saddled with making your monthly mortgage payment on the property, even as you slog through the foreclosure process to try and recover your losses.


Final Word

Offering seller financing comes with risks. But those risks may be worth taking, especially for hard-to-sell properties.

Only you can decide what risk-reward ratio you can live with, and negotiate loan terms to ensure you come out on the right side of the ratio. For unique or other difficult-to-finance properties, seller financing may be the only way to sell for what the property’s worth.

Before you write off the returns as low, remember that your APR will be far higher than the interest rate charged.

Beyond the upfront fees you can charge, you’ll also benefit from simple interest amortization, which front-loads the interest so that nearly all of the monthly payment goes toward interest in the first few years — the only years you need to finance if you structure the loan as a balloon mortgage.

Just be sure to screen all borrowers extremely carefully, and to take as many precautions as you can. If the borrower can’t qualify for a conventional mortgage, consider that a glaring red flag. Seller financing involves risking many thousands of dollars in a single transaction, so take your time and get it right.

Source: moneycrashers.com

Why Principal Reductions on Loan Mods Aren’t the Move

Last updated on January 19th, 2018

Unless you live under a rock, you’ve likely heard stirrings of a mega super duper fantastic solve-all trillion-dollar refinance program in the works to save America once and for all.

You know, the one President Obama plans to unveil just in time for the election to give his campaign a shot in the arm (at least that’s what the pundits are saying). For the record, I’m sure any other President seeking a second term would play this the same way.

(Read more about the rumored mass mortgage refinancing plan.)

Well, critics have already come out in droves to have their say about the proposed deal.

One that made me think was an opinion piece by the Motley Fool, who for some reason is talking about mortgages for a change, as opposed to tempting you with their “Hidden Gems.”

Doesn’t Address Underwater Homeowners

Their core issue with the proposal is that it doesn’t address borrowers with underwater mortgages, you know, those that exceed the current value of the associated homes.

The author argues that the lower mortgage payments would certainly help these borrowers (and stimulate the economy), but without any home equity, they won’t have the incentive to refinance.

This is where I think he (and anyone else with this argument) gets it wrong. You see, there are scores of borrowers, dare I say millions, who are underwater and making on-time payments (or at least trying to).

And a program with no loan-to-value ratio constraints that lowers their mortgage rate from 6% to 4% overnight would surely appeal to them, even if they had to pay some closing costs.

I don’t think they would need that extra incentive, in the form of principal reduction, to go through with the refinance.

And I do think a simple interest rate reduction would be enough for many of these borrowers to stay put in their homes, as opposed to buying and bailing, or bailing and renting.

After all, a loan modification should address affordability concerns, not necessarily a homeowner’s desire to stay put. We can’t beg people to stick around for the greater good.

Why Principal Reductions Are Trouble

Clearly borrowers who receive both an interest rate and principal balance reduction will be better off with regard to paying their mortgage, although certain data suggests otherwise.

But it gets to a point where the borrower is getting too much, and the cost is simply too high.

The fact is many homeowners are in negative equity positions either because they purchased homes with no money down, or because they serially refinanced until they zapped all the equity out of their homes.

And some people just bought at the worst possible time. I’ve purchased things at the wrong time too, but never expected to get bailed out for my bad luck.

So taxpayers can’t be on the hook for all these homeowners. It’s also not fair to the homeowners who don’t get any direct benefit. But I’m sure they won’t mind others refinancing to lower rates that they can obtain themselves.

As it stands, an interest rate reduction would be much more cost effective than a principal reduction, and still serve the same purpose.

There are plenty of homeowners who would be very happy to see their mortgage payment reduced by hundreds of dollars a month, even if they’re underwater.

Because let’s face it, if they haven’t walked away yet, there’s a good chance they’re sticking around for the recovery.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Obama Slashes Costs for FHA Streamline Refinances to Boost Market

Last updated on August 29th, 2018

In another effort to buoy the flagging housing market, the Obama administration announced today that it would essentially be removing the upfront mortgage insurance premium on streamlined FHA refinances.

So homeowners who currently hold an FHA loan, looking to refinance into another FHA loan to lower their mortgage rate, will pay just 0.01% in upfront mortgage insurance premiums.

This represents a huge discount compared to the 1% upfront premium currently charged.

The annual mortgage insurance premium will also be slashed in half to 0.55%, which together with the upfront premium reduction is estimated to save the average FHA borrower roughly a thousand dollars annually.

In order to qualify for the new program, your FHA loan must have been originated prior to June 1, 2009.

The Obama administration believes about 2-3 million FHA borrowers will be eligible to benefit from this initiative, but only time will tell how many are really helped.

Are Future Homeowners Eating the Cost?

While this is great news for those who currently hold FHA loans, it makes you wonder if future homeowners will wind up paying for it.

Last week, the FHA announced that it would be raising upfront mortgage insurance premiums from 1% to 1.75%, beginning in April.

Additionally, the agency said it would raise the annual mortgage insurance premium by 0.10 percent for loan amounts under $625,500, and 0.35 percent for loans between $625,500 and $729,750.

The measures were taken to meet the congressionally mandated minimum for the FHA’s Mutual Mortgage Insurance (MMI) fund, which has been depleted thanks to all the recent losses on bad loans. It is expected to boost the fund by $1 billion through fiscal year 2013.

So essentially first-time homebuyers and other current homeowners who do not hold FHA loans will pay a premium to take out an FHA loan.

It seems like a bit of a shift in wealth, though it will likely result in fewer new homeowners going to the FHA for mortgage financing, which is probably the end goal.

The FHA exploded in popularity in recent years as subprime lending fell by the wayside, but the agency bit off more than it could chew. So this is likely a bid to return to a more normalized mortgage market funded by private capital.

[FHA loan vs. conventional loan]

Still, it seems a little unfair for those who don’t hold FHA loans, regardless of what good it may do.

But if you have an FHA loan, this is a great time to inquire about a streamline refinance to lower your mortgage rate and your monthly mortgage payment, without being subject to steep closing costs.

Reviewing Servicemember Foreclosures

The White House also announced that it will conduct a review of all servicemembers foreclosed on since 2006 to identify any wrongdoings.

Those found to be wrongly foreclosed on will receive compensation equal to a minimum of lost home equity, plus interest and $116,785, paid for by the nation’s top loan servicers, who were involved in the National Mortgage Settlement.

Additionally, those who were wrongfully denied a refinance will be refunded any money lost as a result.

And those who were forced to sell their homes for less than the mortgage balance due to a Permanent Change in Station will also be provided with some form of relief.

Finally, the major loan servicers will pay $10 million into the Veteran Affairs fund, which guarantees funding for the VA loan program, and certain foreclosure protections will be extended to prevent future failings.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com