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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
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Key takeaways
- Construction loans are short-term loans that you can use to build a new home.
- Some construction loans can be converted to mortgages after your home is finished.
- Construction loans typically have tougher criteria than conventional mortgages for existing homes.
If you can’t find the right home to buy, you might be thinking about building a house instead. Financing this type of project is somewhat different than getting a mortgage to move into an existing property. Instead of a mortgage, you take on a construction loan (also known as a construction mortgage). Here’s what to know about construction loans.
What are construction loans?
Construction loans are loans that fund the building of a residential home (aka a stick-built house), from the land purchase to the finished structure. Common types are a standalone construction loan — a short-term loan (generally with a year-long term) — which only finances the building phase, and a construction-to-permanent loan, which converts into a mortgage once the construction is done. Borrowers who take out a standalone construction loan often get a separate mortgage to pay it off when the principal falls due.
You can use a construction loan to cover such costs as:
- The land
- Contractor labor
- Building materials
- Permits
How do construction loans work?
The initial term on a construction loan generally lasts a year or less, during which time you must finish the project. Because construction loans work on such a short timetable and are dependent on the project’s progress, you (or your general contractor) must provide the lender with a construction timeline, detailed plans and a realistic budget. Based on that, the lender will release funds at various phases of the project, usually directly to the contractor.
Construction loan statistics
- Construction loans typically require 20 percent down, at minimum.
- As of the second quarter of 2023, commercial and non-commercial construction loan volume totaled $488.54 billion, according to S&P Global Market Intelligence.
- Currently, the top five construction loan lenders, in terms of number of loans, are (in order): Wells Fargo, JP Morgan Chase, Bank of America, U.S. Bank and Bank OZK, reports S&P.
Construction loans vs. traditional mortgages
Beyond the cost and repayment timeline, construction loans and mortgages have a few main differences:
- The funds distribution: Unlike mortgages and personal loans that provide funds in a lump-sum payment, the lender pays out the money for a construction loan in stages as work on the new home progresses. These draws tend to happen when major milestones are completed — for example, when the foundation is laid, or the framing of the house begins.
- The repayments: With a mortgage, you start paying back the principal and interest right away. With construction loans, your lender will typically expect you to make interest payments only during the construction stage. Additionally, borrowers are typically only obligated to repay interest on any funds drawn to date until construction is completed.
- Inspection/appraiser involvement: While the home is being built, the lender has an appraiser or inspector check the house during the various construction stages. As the work is approved, the lender makes additional payments to the contractor, known as draws. Expect to have between four and six inspections to monitor the progress.
- Requirements: Construction loan requirements include being financially stable and having the ability to make a down payment. Lenders also want to see a construction plan, which you can read more about below.
- Interest rates: Construction loan interest rates are typically higher than traditional mortgage rates. This is often because you’re not providing collateral to back the loan, which means the lender is taking on more risk.
Types of construction loans
There are different types of construction loans available to borrowers, which are designed to suit various financial needs.
Construction-to-permanent loan
With a construction-to-permanent loan, you borrow money to pay for the cost of building your home. Once the house is complete and you move in, the loan is converted to a permanent mortgage.
In essence, the loan becomes a traditional mortgage, typically with a loan term of 15 to 30 years. You can opt for a fixed-rate or an adjustable-rate mortgage.
Then, you start making payments that cover interest and the principal. (During the construction loan phase, your lender disburses the funds based upon the percentage of the project completed, and you’re only responsible for interest payments on the money drawn). While many construction loans are conventional loans — entirely privately originated and financed — there are government versions as well. Your other options include an FHA construction-to-permanent loan — with less-stringent approval standards that can be especially helpful for some borrowers — or a VA construction loan if you’re an eligible veteran.
Whatever the type, the big benefit of the construction-to-permanent approach is that you have only one set of closing costs to pay, reducing your overall expenses. “There’s a one-time closing so you don’t pay duplicate settlement fees,” says Janet Bossi, senior vice president at OceanFirst Bank in New Jersey.
Construction-only loan
A construction-only loan provides the funds necessary to build the home, but the borrower is responsible for repaying the loan in full at maturity (typically one year or less). You can settle the debt either in cash or by obtaining a mortgage to pay it off.
Construction-only loans can ultimately be costlier than their construction-to-permanent cousins, especially if you have to finance the repayment. That’s because you complete two separate loan transactions and pay two sets of fees. Closing costs tend to equal thousands of dollars, so it helps to avoid another set. And, of course, you have to invest time and energy shopping for a mortgage.
Another consideration: Your financial situation might worsen during the construction process. If you lose your job or face some other hardship, you might not be able to qualify for a mortgage later on — and might not be able to move into your new house.
Renovation loan
If you want to upgrade an existing home rather than build one, you can compare home renovation loan options. These come in a variety of forms depending on the amount of money you’re spending on the project.
“If a homeowner is looking to spend less than $20,000, they could consider getting a personal loan or using a credit card to finance the renovation,” says Steve Kaminski, head of U.S. Residential Lending at TD Bank. “For renovations starting at $25,000 or so, a home equity loan or line of credit may be appropriate, if the homeowner has built up equity in their home.”
Another viable option in a low mortgage rate environment is a cash-out refinance, whereby a homeowner would take out a new mortgage in a higher amount than their current loan and receive the extra as a lump sum. As rates tick up, though, cash-out refis become less appealing.
With any of these options, the lender generally does not require disclosure of how the homeowner will use the funds. The homeowner manages the budget, the plan and the payments. With other forms of financing, the lender will evaluate the builder, review the budget and oversee the draw schedule.
Owner-builder construction loan
Owner-builder loans are construction-to-permanent or construction-only loans in which the borrower also acts in the capacity of the home builder.
Most lenders won’t allow the borrower to act as their own builder because of the complexity of constructing a home and the experience required to comply with building codes. Lenders typically only allow it if the borrower is a licensed builder by trade.
End loan
An end loan simply refers to the homeowner’s mortgage once the property is built, says Kaminski. You use a construction loan during the building phase and repay it once the construction is completed. You’ll then have a regular mortgage to pay off, also known as the end loan.
“Not all lenders offer a construction-to-permanent loan, which involves a single loan closing,” says Kaminski. “Some require a second closing to move into the permanent mortgage, or an end loan.”
Construction loan rates
Unlike traditional mortgages, which carry fixed rates, construction loans usually have variable rates that fluctuate with the prime rate. That means your monthly payment can also change, moving upward or downward based on rate changes.
Construction loan rates are also typically higher than traditional mortgage rates. That’s partially because they’re unsecured (backed by an asset). With a traditional mortgage, your home acts as collateral — if you default on your payments, the lender can seize your home. With a home construction loan, the lender doesn’t have that option, so they tend to view these loans as bigger risks.
On average, you can expect interest rates for construction loans to be about 1 percentage point higher than those of traditional mortgage rates.
Construction loan requirements
The companies that offer construction loans usually require borrowers to:
- Be financially stable. To get a construction loan, you’ll need a low debt-to-income ratio and proof of sufficient income to repay the loan. You also generally need a credit score of at least 680.
- Make a down payment. You need to make a down payment when you apply for the loan, just as you do with most mortgages. The amount will depend on the lender you choose and the amount you’re trying to borrow to pay for construction, but construction loans usually require at least 20 percent down.
- Have a construction plan. Lenders will want you to work with a reputable construction company and architect to come up with a detailed plan and schedule.
- Get a home appraisal. Whether you’re getting a construction-only loan or a construction-to-permanent loan, lenders want to be certain that the home is (or will be) worth the money they’re lending you. The appraiser will assess the blueprints, the value of the lot and other details to arrive at an accurate figure. For construction-to-permanent loans, the home will serve as collateral for the mortgage once construction is complete.
How to get a construction loan
Getting approval for a construction loan might seem similar to the process of obtaining a mortgage, but getting approved to break ground on a brand-new home is a bit more complicated. Generally, you should follow these four steps:
- Find a licensed builder: Lenders will want to know that your chosen builder has the expertise to complete the home. If you have friends who have built their own homes, ask for recommendations. You can also turn to the NAHB’s directory of local home builders’ associations to find contractors in your area. Just as you would compare multiple existing homes before buying one, it’s wise to compare different builders to find the combination of price and expertise that fits your needs.
- Find a construction loan lender: Check with several experienced construction loan lenders to obtain details about their specific programs and procedures. If you have trouble finding a lender willing to work with you, check out smaller regional banks or credit unions. Compare construction loan rates, terms and down payment requirements to ensure you’re getting the best possible deal for your situation.
- Get your documents together: A lender will likely ask for a contract with your builder that includes detailed pricing and plans for the project. Be sure to have references for your builder and any necessary proof of their business credentials. You will also likely need to provide many of the same financial documents as you would for a traditional mortgage, like pay stubs and tax statements, that offer proof of income, assets and employment.
- Get preapproved: Getting preapproved for a construction loan can provide a helpful understanding of how much you will be able to borrow for the project. This can be an important step to avoid paying for plans from an architect or drawing up blueprints for a home that you will not be able to afford.
- Get homeowners insurance: Even though you may not live in the home yet, your lender will likely require a prepaid homeowners insurance policy that includes builder’s risk coverage. This way, if something happens during the construction process — the halfway-built property catches on fire, or someone vandalizes it, for example — you are protected.
Construction loan FAQ
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Construction loans cover the costs of building a home. Typically, that means the expenses associated with construction, such as contractor fees, labor and permits. But you can also use the funds to purchase land. However, construction loans do not cover design costs. If you want to hire a professional to design your home, you’ll need to cover that cost on your own.
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Ask your lender how money gets disbursed from your loan amount. Some lenders allow for monthly draws, while others will only authorize a draw after a passed inspection. Inquire about any processes or documentation required to pull money from your construction loan so that you can pay the bills in a timely fashion as they come in.
Understanding this process — and ensuring your contractor does, too — can help to avoid delays because of insufficient funds.
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There are benefits and drawbacks to construction loans. These types of loans tend to have higher interest rates than those associated with a mortgage, for instance. In addition, the funds provided by a construction loan are only released in stages as work on your home progresses rather than in a lump sum upfront. However, construction loans often only require interest payments while your home is being built, which can be easier on your budget. The loan terms may also be more flexible than those that come with a traditional loan.
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Talk to your contractor and discuss the timeline of building the home and what sort of factors could slow down the job. Delays could result in changes to your loan’s interest rate, which can lead to higher payments. Delays can also lead to delays in fund disbursement for construction-only loans.
If your project takes longer than expected, work with your contractor to try to resolve any bottlenecks. You should also keep in touch with your lender to let them know what’s going on. Clear and consistent communication can help avoid major issues with the loan.
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In general, it is harder to qualify for a construction loan than for a traditional mortgage. Most lenders require a credit score of at least 680 — which is higher than what you’d need for most conventional, VA and FHA loans. It’s also typical for lenders to ask for a minimum down payment of 20 percent on construction loans, so you may have trouble qualifying if you can’t get that much money together upfront.
Source: bankrate.com
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Key takeaways
- It’s possible to get approved for a home loan as a self-employed borrower, but you often have to take a few extra steps to prove your creditworthiness.
- To boost your chances, consider non-conforming loans and/or non-qualifying mortgage lenders or mortgage brokers who specialize in the self-employed.
- Other strategies include making a larger down payment, raising your credit score and lowering your debts.
If you run your own business — or are a gig worker, freelancer or independent contractor — financing a home could prove challenging. The reason? One of the first things lenders look for is a steady, verifiable income stream. Without a regular paycheck or W-2 statement, it can be harder to prove how much you make, and how reliably you make it. That’s why most lenders have stricter rules for self-employed borrowers.
Just because you work for yourself doesn’t mean you’re guaranteed to have a hard time getting a mortgage, however. If you supply the right documentation to verify your income, do your homework and know what to expect, you can get approved for a loan.
Can you qualify for a mortgage while self-employed?
Yes, it is possible to qualify for a mortgage while self-employed. However, in some cases, you may need to put in a little extra work.
It’s a common misconception that it’s always more difficult for self-employed applicants to get a loan than regular salaried or hourly workers with a W-2 from their employer, says Paul Buege, president and CEO of Inlanta Mortgage in Pewaukee, Wisconsin.
“In all cases,” says Buege, “the basic criteria to get approved are the same: You need to have a good credit history, sufficient liquid available assets and a history of stable employment.”
Challenges can crop up, however, if you’ve only been working for yourself for a short time or make less money than lenders prefer — even if it’s just on paper. “Self-employed individuals often take full advantage of the legal tax deductions and write-offs that are allowed by the IRS; unfortunately, this means that they often show a low net income — or even a loss — on their tax returns,” says Eric Jeanette, president of Dream Home Financing and FHA Lenders, based in Adelphia, New Jersey. “That can make it tougher to qualify for a mortgage.”
Complicating matters is that the rules for self-employed applicants can vary depending on the lender or loan type.
“This makes the process confusing, especially if you are shopping around and applying with multiple lenders,” says Anna DeSimone, a New York City-based personal finance expert and author of “Housing Finance 2020.” Often, “it lengthens the time you may have to spend trying to get approved for a loan.”
How to get a mortgage when you’re self-employed in 5 steps
If you’re self-employed, the loan approval process will be somewhat similar to that of a W-2 salaried applicant: You’ll need to provide certain documentation to verify your employment income and prove to the lender that you’re a creditworthy fit for a mortgage in general and a certain sum.
1. Determine if you’re classified as self-employed
If you own a business or have one partner, you will be considered self-employed. “A loan qualification is based on your taxable income shown on your personal 1040 federal tax returns,” says DeSimone. If earned income is verified by 1099 forms, rather than W2s, you’re likely to be considered a freelancer rather than a salaried worker bee.
The same goes if your return includes Schedule C, which is used “to report income or loss from a business you operated or a profession you practiced as a sole proprietor, to quote the IRS. “Mortgage applicants with a 25 percent or greater share in a business or partnership are considered self-employed,” says DeSimone.
Here are other factors that qualify you as self-employed:
- You run a business as a sole proprietor or independent contractor
- You are part of a partnership that runs a trade or a business
- You are a gig worker or run a part-time business that accounts for most of your income
Even when you have a second, part-time job with a W2, a lender will likely place more weight on your own gig — if it’s your primary income source.
2. Prepare a pitch that explains your business
Depending on the nature of your work, your problem may not be so much the amount of your income as the reliability of it. While you’re not required to submit a full business plan, it may behoove you to prepare some documents that show the health of your industry and explain why your services are (and are likely to stay) in demand. Supply reports or tax returns that prove revenue growth and provide links to a professional website that helps an underwriter understand you’re serious and successful in your field.
If you have any contracts or written agreements indicating that you’re on retainer or guaranteed compensation for a period, include those. These details may convince a lender that you can make those monthly mortgage payments.
Providing the lender with any of the below items can help show your job is secure:
- Data showing the health of the industry and demand for your services
- A description of your experience in the business, including any certifications
- Tax returns from previous years, especially if they show growth in revenue over time
- Explanations of any revenue gaps
- Your professional website
- A business plan, if you have one
- Description of the services you provide
- Ongoing contracts you have with clients
- Anything else that shows your income is likely to continue
3. Gather necessary documents to show lenders
Your lender will need to see proof of income, just like they would for a salaried employee. It’s just that you may have to jump through more hoops to provide that proof. “Since self-employed people have non-traditional income structures, they may be required to show additional income documents when applying for the mortgage,” says Alan Rosenbaum, founder and CEO of GuardHill Financial Corp. in New York City.
The sort of documents you might need include:
Employment verification
- A copy of your business license
- Proof of business insurance (if applicable)
- Articles of incorporation, LLC or partnership (if applicable)
- State or federal permits
- Any other documents that prove when you began operating
Income documentation
- Two years of federal income tax returns (personal and business)
- Recent business bank statements and profit-and-loss reports (aka income statements)
- An itemized list of unpaid accounts receivable
4. Shop multiple lenders
You may want to seek a loan officer who has experience underwriting a self-employment mortgage. These officers may fight harder for your approval and be able to explain your qualifications to the underwriting department. Lenders who offer FHA loans may also be a better fit than traditional loans because they are guaranteed by the government and lessen the risk to the lender.
A mortgage broker might be able to steer you toward lenders who specialize in self-employment mortgages.
5. Consider a non-qualified-mortgage lender
A non-qualified mortgage (non-QM mortgage or loan, for short) is a type of non-conforming loan, one in which there are looser income verification criteria. Instead of using standard federal qualifications to ascertain your creditworthiness, the lender bases approval on alternatives — like your average bank statement balance over the last 12 to 24 months, for example. The lender would be willing to consider this balance as an earned-income equivalent, in place of pay stubs.
This sort of mortgage is often tailor-made for the self-employed or those lacking the proverbial bi-weekly paycheck. If you choose this type of mortgage, just be prepared to pay a higher interest rate and some additional closing costs. There may also be some features, like balloon payments or 30-plus-year terms, that often aren’t allowed on traditional, “qualified” mortgages.
How to improve your chances of getting a mortgage when you’re self-employed
There are several ways to boost your odds of getting approved for a mortgage as a self-employed borrower.
Boost your credit score
Focus on improving your credit score and credit history. This requires making bill payments on time, paying down debt, correcting any errors or red flags on your credit reports and sticking to the limits on your revolving credit accounts.
Lower your debt-to-income ratio
Another way to increase your likelihood of funding is to lower your debt-to-income (DTI) ratio to 43 percent or less. This can be done by avoiding taking on any new debt, lowering your existing debt and paying it off faster than scheduled and earning extra money.
Make a larger down payment
Forking over a higher down payment than the minimum needed can help, too. “Down payment requirements for a bank statement loan were as low as 10 percent before COVID-19 hit,” says Jeanette. “But now, many lenders require 20 percent or more.”
Shop around for the right lender for you
Shopping around among different lenders and programs can yield the best opportunities. Focus on those that do business with independent contractors or sole proprietors.
“Work with an experienced loan officer who understands self-employed business records and documentation,” says Buege. “This person can help you present your business earnings and liabilities in a clear and understandable way that facilitates the approval process.”
Enlisting a skilled mortgage broker (again, one familiar with self-employed applicants) can also up your chances.
Loan types to consider when you are self-employed
Fortunately, self-employed borrowers are eligible for virtually all of the same mortgage types available to others. That means you can qualify for a conventional loan from a variety of private lenders or a government-backed loan.
“You should be eligible for all available options, including both conforming mortgage programs by Fannie Mae, Freddie Mac, FHA and others, as well as non-conforming loans if necessary,” says DeSimone.
Here’s a closer look at each:
- Fannie Mae and Freddie Mac mortgages: These are traditional conforming loans that require a 20 percent down payment and may have fairly strict approval requirements. It’s not impossible for a self-employed person to get approved, but you may have more success after at least five years in business.
- FHA: FHA loans are guaranteed by the Federal Housing Administration and only require a 3.5 percent down payment for most homebuyers. The fact that the government is backing the loan may make some lenders more likely to approve this loan for someone who is self-employed.
- VA: VA loans are available to current service members and people who were previously active-duty. Requirements depend on the time of your service. These loans can guarantee up to 100 percent of the loan, which would mean you’re not responsible for any down payment. If you have a VA home loan COE, your lender may find your application more appealing.
What if I don’t qualify for a mortgage?
If you don’t get approved for a traditional mortgage, you can try applying for a non-conforming loan. “But these often come at a higher cost to the consumer, and not everyone can qualify,” says Buege, who adds that non-conforming loans can charge a higher interest rate and closing costs and impose less favorable repayment terms.
Alternatively, you could pursue a personal loan, although the maximum amount you can borrow likely won’t cover the cost of the home purchase.
If you’re trying to refinance and get denied, you could try applying for a home equity loan or home equity line of credit (HELOC) if you’ve built up enough equity in your property and meet the qualifications.
Self-employed mortgage FAQ
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Lenders for self-employed mortgages will look at a borrower’s net business income to determine loan eligibility. This means they look at your gross income minus business expenses.
You can use tax returns to quickly calculate your gross and net income for previous years. Business owners may also find a recent income statement useful for proving your current income stream. Self-employed people may also be allowed to use rental income or government payments as a part of their overall income.
Also, keep in mind that loan applications for all types of self-employment are underwritten using a process DeSimone calls “add-backs,” whereby certain non-cash business expenses (like depreciation) are added back to your net income.
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The short answer is yes, you can get a mortgage loan with less than two years of self-employment history. This situation may require more documentation to get a mortgage. Lenders typically want to see at least two years of self-employment before they will give you a mortgage.
However, your income isn’t the only factor they use to determine eligibility. Having a strong credit score can help boost your application. In addition, if you’ve become self-employed in an industry where you’ve previously worked, you can show continuity of career, even if you’ve been self-employed for less than two years.
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If your self-employment income is insufficient to qualify for a mortgage, having a co-signer or a co-borrower can help you qualify for a mortgage or even a larger loan amount. Having either a co-signer or a co-borrower allows you to use their income and credit to qualify for a loan.
It’s important to note that co-signers are slightly different from co-borrowers. Both take on the debt as their own in addition to you. However, a co-borrower becomes a joint owner on the title, while a co-signer does not.
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Keeping business expenses separate from personal expenses can help keep your credit utilization score lower because you won’t put any potentially large business expenses on your personal credit accounts. A low credit utilization score is one factor that lenders look at when assessing you for a mortgage.
Source: bankrate.com
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Editor’s Note: Parts of this story were auto-populated using data from Curinos, a mortgage research firm that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our methodology here.
Both 30-year and 15-year fixed mortgage rates were up over the past week, according to Curinos data analyzed by MarketWatch Guides. Today, the 30-year fixed-rate mortgage stands at 7.45% and the 15-year fixed rate is 6.73%.
Though the Federal Reserve chose to hold interest rates steady in its first meeting of 2024, recent economic signals for prospective homebuyers continue to be positive. Last week, two promising pieces of economic data were released.
The Mortgage Bankers Association (MBA) published data on Wednesday showing that mortgage applications increased by 3.7% week-over-week. While this is still lower than a year previously, home-buying activity is trending upward.
Additionally, Fannie Mae’s latest Home Purchase Sentiment Index shows that prospective homebuyers are increasingly optimistic about rates falling this year. The index increased 3.7 points in January, reaching its highest level since March 2022, and the share of consumers expecting mortgage rates to drop over the next 12 months increased from 31% to 36%.
Here are today’s average mortgage rates:
- 30-year fixed mortgage rate: 7.45%
- 15-year fixed mortgage rate: 6.73%
- 5/6 ARM mortgage rate: 7.01%
- Jumbo mortgage rate: 7.24%
Current Mortgage Rates
Product | Rate | Last Week | Change |
30-Year Fixed Rate | 7.45% | 7.19% | +0.26 |
15-Year Fixed Rate | 6.73% | 6.57% | +0.16 |
5/6 ARM | 7.01% | 6.85% | +0.16 |
7/6 ARM | 7.22% | 7.07% | +0.15 |
10/6 ARM | 7.37% | 7.21% | +0.16 |
30-Year Fixed Rate Jumbo | 7.24% | 7.06% | +0.18 |
30-Year Fixed Rate FHA | 7.24% | 6.93% | +0.31 |
30-Year Fixed Rate VA | 7.21% | 6.99% | +0.22 |
Disclaimer: The rates above are based on data from Curinos, LLC. All rate data is accurate as of Monday, February 19, 2024. Actual rates may vary.
>> View historical mortgage rate trends
Mortgage Rates for Home Purchase
30-year fixed-rate mortgages are up, +0.26
The average 30-year fixed-mortgage rate is 7.45%. Since the same time last week, the rate is up, changing +0.26 percentage points.
At the current average rate, you’ll pay $695.79 per month in principal and interest for every $100,000 you borrow. You’re paying more compared to last week when the average rate was 7.19%.
15-year fixed-rate mortgages are up, +0.16
The average rate you’ll pay for a 15-year fixed-mortgage is 6.73%, an increase of +0.16 percentage points compared to last week.
Monthly payments on a 15-year fixed-mortgage at a rate of 6.73% will cost approximately $883.80 per $100,000 borrowed. With the rate of 6.57% last week, you would’ve paid $874.96 per month.
5/6 adjustable-rate mortgages are up, +0.16
The average rate on a 5/6 adjustable rate mortgage is 7.01%, an increase of +0.16 percentage points over the last seven days.
Adjustable-rate mortgages, commonly referred to as ARMs, are mortgages with a fixed interest rate for a set period of time followed by a rate that adjusts on a regular basis. With a 5/6 ARM, the rate is fixed for the first 5 years and then adjusts every six months over the next 25 years.
Monthly payments on a 5/6 ARM at a rate of 7.01% will cost approximately $665.97 per $100,000 borrowed over the first 5 years of the loan.
Jumbo loan interest rates are up, +0.18
The average jumbo mortgage rate today is 7.24%, an increase of +0.18 percentage points over the past week.
Jumbo loans are mortgages that exceed loan limits set by the Federal Housing Finance Agency (FHFA) and funding criteria of Freddie Mac and Fannie Mae. This generally means that the amount of money borrowed is higher than $726,200.
Product | Monthly P&I per $100,000 | Last Week | Change |
30-Year Fixed Rate | $695.79 | $678.11 | +$17.68 |
15-Year Fixed Rate | $883.80 | $874.96 | +$8.84 |
5/6 ARM | $665.97 | $655.26 | +$10.71 |
7/6 ARM | $680.14 | $670.01 | +$10.13 |
10/6 ARM | $690.33 | $679.47 | +$10.86 |
30-Year Fixed Rate Jumbo | $681.50 | $669.34 | +$12.16 |
30-Year Fixed Rate FHA | $681.50 | $660.61 | +$20.89 |
30-Year Fixed Rate VA | $679.47 | $664.63 | +$14.84 |
Note: Monthly payments on adjustable-rate mortgages are shown for the first five, seven and 10 years of the loan, respectively.
Factors That Affect Your Mortgage Rate
Mortgage rates change frequently based on the economic environment. Inflation, the federal funds rate, housing market conditions and other factors all play into how rates move from week-to-week and month-to-month.
But outside of macroeconomic trends, several other factors specific to the borrower will affect the mortgage interest rate. They include:
- Financial situation: Mortgage lenders use past financial decisions of borrowers as a way to evaluate the risk of loaning money.
- Loan amount and structure: The amount of money that bank or mortgage lender loans and its structure (including both the term and whether its a fixed-rate or adjustable-rate).
- Location: Mortgage rates vary by where you are buying a home. Areas with more lenders, and thus more competition, may have lower rates. Foreclosure laws can also impact a lender’s risk, affecting rates.
- Whether borrowers are first-time homebuyers: Oftentimes first-time homebuyer programs will offer new homeowners lower rates.
- Lenders: Banks, credit unions and online lenders all may offer slightly different rates depending on their internal determination.
How To Shop for the Best Mortgage Rate
Comparison shopping for a mortgage can be overwhelming, but it’s shown to be worth the effort. Homeowners may be able to save between $600 and $1,200 annually by shopping around for the best rate, researchers found in a recent study by Freddie Mac. That’s why we put together steps on how to shop for the best mortgage rate.
1. Check credit scores and credit reports
A borrower’s credit situation will likely determine the type of mortgage they can pursue, as well as their rate. Conventional loans are typically only offered to borrowers with a credit score of 620 or higher, while FHA loans may be the best option for borrowers with a FICO score between 500 and 619. Additionally, individuals with higher credit scores are more likely to be offered a lower mortgage interest rate.
Mortgage lenders often review scores from the three major credit bureaus: Equifax, Experian and TransUnion. By viewing your scores ahead of lenders considering you for a loan, you can check for errors and even work to improve your score by paying down balances and limiting new credit cards and loans.
2. Know the options
There are four standard mortgage programs: conventional, FHA, VA and USDA. To get the best mortgage rate and increase your odds of approval, it’s important for potential borrowers to do their research and apply for the mortgage program that best fits their financial situation.
The table below describes each program, highlighting minimum credit score and down payment requirements.
Though conventional mortgages are most common, borrowers will also need to consider their repayment plan and term. Rates can be either fixed or adjustable and terms can range from 10 to 30 years, though most homeowners opt for a 15- or 30-year mortgage.
3. Compare quotes across multiple lenders
Shopping around for a mortgage goes beyond comparing rates online. We recommend reaching out to lenders directly to see the “real” rate as figures listed online may not be representative of a borrower’s particular situation. While most experts recommend getting quotes from three to five lenders, there is no limit on the number of mortgage companies you can apply with. In many cases, lenders will allow borrowers to prequalify for a mortgage and receive a tentative loan offer with no impact to their credit score.
After gathering your loan documents – including proof of income, assets and credit – borrowers may also apply for pre-approval. Pre-approval will let them know where they stand with lenders and may also improve negotiating power with home sellers.
4. Review loan estimates
To fully understand which lender is offering the cheapest loan overall, take a look at the loan estimate provided by each lender. A loan estimate will list not only the mortgage rate, but also a borrower’s annual percentage rate (APR), which includes the interest rate and other lender fees such as closing costs and discount points.
By comparing loan estimates across lenders, borrowers can see the full breakdown of their possible costs. One lender may offer lower interest rates, but higher fees and vice versa. Looking at the loan’s APR can give you a good apples-to-apples comparison between lenders that takes into account both rates and fees.
5. Consider negotiating with lenders on rates
Mortgage lenders want to do business. This means that borrowers may use competing offers as leverage to adjust fees and interest rates. Many lenders may not lower their offered rate by much, but even a few basis points may save borrowers more than they might think in the long run. For instance, the difference between 6.8% and 7.0% on a 30-year, fixed-rate $100,000 mortgage is roughly $5,000 over the life of the loan.
Expert Forecasts for Mortgage Rates
Mortgage rates have cooled significantly over the past several months. After the 30-year fixed-rate mortgage hit 8% last October, it ended 2023 closer to 7%. In fact, the average for Q4 2023 was 7.3%.
Analysts with Fannie Mae and the Mortgage Bankers Association (MBA) both project that rates will fall going into 2024 and throughout next year.
Fannie Mae economists expect rates to drop more quickly, falling below 6% by Q4 2024. Meanwhile, the MBA’s forecast for Q4 2024 is 6.1% and 5.9% for Q1 2025.
More Mortgage Resources
Methodology
Every weekday, MarketWatch Guides provides readers with the latest rates on 11 different types of mortgages. Data for these daily averages comes from Curinos, LLC, a leading provider of mortgage research that collects data from more than 250 lenders. For more details on how we compile daily mortgage data, check out our comprehensive methodology here.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
Source: marketwatch.com
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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
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Shopping for your first home is an exciting time. You are choosing a place to plant yourself and bloom for many years to come.
However, home shopping is not all fun and games. Not only do you have to find the perfect home, but also the right financing terms for your new mortgage. If you have bad credit, you are likely worried about your mortgage options.
As a first-time homebuyer, the process of buying a home can be overwhelming. Before you lose hope, it is entirely possible to secure a home loan with bad credit. Many mortgage lenders offer subprime home loans that work specifically with borrowers with poor credit. We will dive into the details to help you get through the first-time home-buying process more easily.
How Bad Credit Can Affect Your Home Loan
Typically, lenders that approve loans to borrowers with bad credit offer less than favorable terms. In most cases, you can expect to pay a higher interest rate.
A slightly higher interest rate might not seem like a big deal. However, even a slight increase in your interest rate could result in thousands of dollars in interest payments over the course of your loan.
When you sort through your loan offers, make sure to run the numbers. You might not be willing to pay the premium rates for the opportunity to buy a home right now.
Other Factors that Mortgage Lenders Consider
As a borrower, your credit score is not the only factor lenders consider. Before a mortgage lender approves a large loan, it will look at various other factors, including:
- The amount of money in your savings account. If you have a healthy savings account, that may offset your bad credit.
- Income. The higher your income, the more likely you are to be approved.
- Employment history. If you just landed a high paying job, then the lender might be less willing to work with you. However, consistently earning a high income for many years will strengthen your application.
- Debt-to-income ratio. If you already have a high debt burden, then lenders may be less willing to work with you.
- Current expenses. If your current rent payment is similar to the mortgage payment, then a lender may see that you are able to easily handle that expense.
When you go through the home buying process, expect to provide a lot of paperwork to verify this information. In many cases, you will be required to provide tax statements, paychecks, and more. However, if you stay organized throughout the process, your sanity will thank you later.
How to Secure Home Financing with Bad Credit
To qualify for a bad credit home loan, you will need to be willing to put in the time. Finding the best option for your situation may require some patience. Not all options will work for everyone, but it is likely that at least one option will work for everyone.
See Where You Stand
Before you start looking for homes, take a closer look at your financial health.
Start by checking your credit score. A free way to do this is through Credit Karma. Once you know where your credit score is, take the time to find your credit report. Once you have your credit report, read through for any errors. A mistake on your credit report may be dragging your score down. If you find any mistakes, you can dispute them.
After digging into your credit score, take a step back. Assess your savings. Have you grown it steadily? Either way, it is crucial to understand exactly how much house you can afford.
Consider Saving for a Larger Down Payment
One way to secure a mortgage loan with more favorable terms with bad credit is to provide a larger down payment. Bigger down payments give the mortgage lender reassurance that you are able to repay the loan.
For conventional loans, banks typically require a down payment of at least 20%, but there are many options for a lower down payment. But you can usually secure better terms if you wait until you’ve saved a sizable down payment.
Find A Lender that Will Work with You
Not every lender is willing to work with bad credit borrowers. Although, you may not be able to secure a conventional loan from a well-known bank, it is entirely possible to find a lender.
If you have bad credit, you’ll need to find a lender that offers subprime home loans or that works with government-backed programs.
Luckily, many mortgage lenders are likely willing to work with you. The tricky part can be finding your choices. Check out our top mortgage lenders to get started.
Financing Options for First Time Homebuyers with Bad Credit
The federal government offers several assistance programs for buying your first home. Take a minute to find out if you qualify for any of these programs.
FHA Loans
If you have bad credit, an FHA loan might be your best option. The minimum credit score to qualify for an FHA loan is just 500! Of course, some mortgage lenders may require a slightly higher score to approve you. But you can shop around to find a lender willing to work with you.
If your credit score is between 500 and 579, the Federal Housing Administration (FHA) requires a minimum down payment of at least 10%. However, if you have a minimum credit score of 580, you’ll only be required to put down 3.5%.
With FHA loans, a mortgage insurance premium (MIP) is required along with an upfront MIP fee of 1.75% of the loan amount.
As a first-time homebuyer with bad credit, the benefits of this program can help your home purchase go smoothly.
USDA Loans
If you are willing to live in a rural community, a USDA loan could be a suitable option. These loans are guaranteed by the United States Department of Agriculture, and don’t private mortgage insurance (PMI).
Typically, you’ll need a minimum credit score of 640 to score a USDA loan. However, a lower credit score does not automatically disqualify you.
If you have a low credit score, then the lender will look more closely at other contributing factors before deciding on your loan application. You may need to prove that your credit was damaged by something outside your control or provide credit references like utility statements to prove your creditworthiness.
VA Loans
A VA home loan is guaranteed by the Department of Veteran Affairs. If you meet the requirements of service, then you could qualify for a no down payment option to secure the home of your dreams.
In contrast to traditional lenders, the VA home loan program has less strict requirements when it comes to their loans. The goal of the program is to get the bravest in our nation into a safe home. With that, lenders that provide VA-backed loans can offer loans to borrowers with lower credit scores.
Almost every member or veteran of the military, reserve, or National Guard is eligible to apply for these loans. The first step you should take is to secure your Certificate of Eligibility. With that, you’ll be able to apply for a VA loan with an approved lender.
See also: How to Get a VA Loan with Bad Credit
Research State Assistance Programs
The U.S. Department of Housing and Urban Development works to provide affordable homeownership options throughout the country. In many states, they offer first-time homebuyers assistance.
Depending on your area and income, the type of assistance may vary. For example, in some areas, you may qualify for a down payment grant that will help you secure your home purchase. With a higher down payment, you may be able to offset the negative effects of your poor credit score.
Compare Mortgage Rates
Once you have determined the best path for you, it is time to compare lenders. If you take the time to shop around for the best loan terms, you stand to save thousands of dollars over the course of your loan.
Shopping around for the right lender might be the most important part of your entire home buying process. Find a lender that you are comfortable with and that is willing to work with your poor credit score.
Work on Your Credit Score
A surefire way to secure better mortgage terms is to improve your credit score. If you can wait on your home purchase, then you might have a stronger loan application.
Improving your credit score will take time. But if you put in the effort the long-term benefits are worth it. Not only will you be more likely to be approved for loans, but also will likely pay less in interest payments.
To start improving your credit score make sure to pay bills on time and work towards paying off your debt.
First-Time Home Buyer with Bad Credit FAQs
Can I buy a house with bad credit?
Yes, it is possible to get a home loan with bad credit. However, the interest rate and other loan terms may be more expensive than if you had good credit.
You may also need to have a bigger down payment and show proof of income. However, there are also lenders who specialize in offering mortgages to people with low credit scores.
What are the requirements for getting a mortgage with bad credit?
- Have a steady income: Lenders want to know that you have a consistent income, so they will want to see evidence of your income such as pay stubs or W2s.
- Have enough money saved for a down payment: With poor credit, most lenders will require a down payment of at least 5-10% of the purchase price.
- Accept higher interest rates and fees: With a weak credit history, you may be required to pay higher interest rates and fees.
- Find a cosigner: Having a cosigner can help you get approved for a mortgage with bad credit. The cosigner will be held responsible for the loan if you are unable to make your monthly mortgage payments.
What do mortgage lenders consider a bad credit score?
Lenders generally consider a credit score below 580 to be bad credit. Lenders may also consider scores between 580 and 669 to be fair credit. Credit scores of 670 or higher are typically considered good credit.
What is the minimum credit score needed for a mortgage?
Minimum credit scores needed for a mortgage varies by lender, but typically a score of 620 or higher is required for conventional loans, and a score of 500 or higher is required for FHA loans.
The minimum credit score needed for USDA loans is typically 640, and the minimum credit score needed for VA loans is typically 620.
What type of mortgage loan is best for someone with bad credit?
The best type of loan for someone with bad credit is usually an FHA loan. These loans are typically easier to qualify for than other types of loans, as they have more lenient credit score minimums and down payment requirements.
What other factors do lenders consider when evaluating my loan application?
Lenders will typically look at your credit score and credit report to assess your creditworthiness. They may also consider your down payment, debt-to-income ratio (DTI), income, employment history, and assets when evaluating your loan application.
Your down payment can show lenders that you are committed to the loan, and can also help to reduce the amount of the loan. Your DTI ratio is a measure of how much of your income is going towards paying off your existing debts. A higher DTI ratio can indicate to lenders that you may not be able to afford a loan.
Your income, employment history, and assets provide further evidence that you are a reliable borrower, and can help to establish your ability to repay the loan.
What is a conventional loan?
A conventional loan is a type of loan that is issued by private lenders and purchased by government-sponsored enterprises such as Fannie Mae and Freddie Mac.
How can I improve my credit scores?
- Pay your bills on time: Payment history is the most important factor in your credit score, so be sure to make payments on all your bills on time.
- Keep credit card balances low: Your credit utilization ratio, or the amount of available credit you are using, makes up 30% of your credit score. Try to keep your credit card balances low by using no more than 30% of your credit limit.
- Don’t open too many new accounts: Opening too many accounts in a short period of time can be a red flag for lenders and can hurt your credit score.
- Check your credit report: Make sure to regularly check your credit report for errors or other negative information that can hurt your score.
- Consider a credit builder loan: Credit builder loans are designed to help people with no or low credit build a payment history and improve their credit score over time.
Bottom Line
Purchasing the home of your dreams with bad credit is not impossible. You will need to put in the time to figure out which path is the right one for you.
Once you see your financial path to your home, make steps towards that goal every single day. Your new home is not as far away as you think!
Source: crediful.com
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We often think of homebuyers as younger, but retirees and senior citizens have plenty of reasons to make a purchase, too. Although the current housing market isn’t the best for buyers, waiting for it to change isn’t an option for some older house hunters. Here’s what to know about getting a mortgage as a senior.
Key statistics on seniors and mortgages
- Roughly two-thirds of adults who own a home have a mortgage, according to 2022 data from the U.S. Federal Reserve.
- The median mortgage in 2022 was $1,400 per month, based on data from the U.S. Federal Reserve
- Baby boomers carry an average of $190,441 in mortgage debt — the second-lowest balance, behind the Silent Generation, according to 2023 data from Experian.
- At 52 percent, baby boomers account for the largest generation of home sellers, according to the National Association of Realtors. They also account for the biggest cohort of homebuyers, at 39 percent.
- More than forty percent of people report that paying for housing negatively impacts their mental health, according to a Bankrate survey.
- Iowa is the No. 1 best state to retire to in 2023, according to a Bankrate study. Delaware, West Virginia, Missouri and Mississippi also rank highly. The worst states to retire include Alaska, California and New York.
Can you get a mortgage as a senior?
Yes, lenders offer mortgages for seniors. When it comes to getting a home loan, mortgage lenders look at many factors to decide whether a borrower is qualified — but age isn’t one of them. It’s one of the protected categories specified by the Equal Credit Opportunity Act, which makes it unlawful to discriminate against a credit applicant because of age (along with race, religion, national origin, sex and marital status).
Still, lenders can ask your age on mortgage applications, but only for the purpose of gathering demographic data, as specified by the Home Mortgage Disclosure Act (HMDA). The information is supposed to be confidential and not used as a criterion to approve or deny the applicant.
“The same underwriting guidelines apply to retirees and seniors as does to everyone else,” says Michael Becker, branch manager and loan originator at Sierra Pacific Mortgage in Lutherville, Maryland. “They must have the capacity to repay the loan — that is, have the income and assets to qualify.
“I once did a 30-year mortgage for a 97-year-old woman,” says Becker. “She was lucid, understood what she was doing and just wanted to help out a family member [by taking] some cash out of her home, and had the income to qualify and the equity in the home — she owned it free and clear. So she was approved.”
Is qualifying for a mortgage harder for seniors?
Despite laws prohibiting lending discrimination on the basis of age, it can still be challenging for seniors to qualify for home financing. In fact, a 2023 working paper out of the Federal Reserve Bank of Philadelphia found a link between the rejection rate on mortgage applications and the age of the borrower.
This could be for a number of reasons, including qualifying factors like assets and debt. If you’re managing a lot of debt already, you might not be able to take on a mortgage (or another mortgage), especially if you now have less income in retirement. No matter your age, you’ll still need to meet the lender’s criteria for approval.
How to qualify for a mortgage in retirement
When seniors apply for a mortgage, lenders look at the same financial criteria as they do for any other borrower, including credit history and score, debt-to-income (DTI) ratio, income and other assets.
Credit score
Here are the minimum credit scores needed based on loan type:
Loan type | Minimum credit score |
---|---|
Conventional loans | 620 |
FHA loans | 580 with 3.5% down payment, 500 with 10% down payment |
VA loans | No minimum requirement, but generally 620 |
USDA loans | No minimum requirement, but generally 640 |
Bear in mind that minimum scores can allow you to qualify for a loan in general, but you won’t get the best interest rates the lender has to offer. For a conventional loan, for example, you’d need a score of 740 or higher to nab a more competitive rate.
You can check your credit score for free each week by visiting AnnualCreditReport.com.
DTI ratio
Calculate your DTI ratio using this formula:
DTI = Monthly debt payments (including mortgage or rent) / monthly gross income x 100
Some lenders allow a DTI ratio as high as 50 percent, but most prefer to see you spend less than 45 percent of your monthly income on debt payments, including your mortgage.
Income verification
Besides what’s required to prove your identity, you’ll need to supply documentation about your income. If you’re still working — and many are, according to a recent Bankrate survey — that includes paystubs, W-2s and tax returns. If you’re retired, it might include:
Income source | Documents |
---|---|
Social Security | Copies of benefit verification, proof of income or proof of award letter, statements and/or tax returns |
Pension | Copies of retirement award or benefit letter statements and/or tax returns |
401(k), IRA and Keogh distributions | Copies of statements and/or tax returns |
Interest and dividends income | Copies of statements, 1099s and/or tax returns |
Annuities | Copies of statements and/or tax returns |
Rental property income | Copies of tax returns and/or current lease agreement |
Disability | Copies of disability policy and/or benefits statement |
“Generally, two months’ of bank statements are needed to show those payments being deposited into the retiree’s account,” says Becker. “Since there is no paycheck, the bank statements serve the same purpose. The deposits have to match what the forms show.”
Investment income — capital gains, dividends, distributions and interest — is reported on your tax return. For the income to be used to qualify you for the loan, you’ll need to provide two years’ worth of returns.
“If the retiree has retirement income that is nontaxable, like Social Security income or tax-exempt interest, that income can be ‘grossed up,’ or increased 15 to 25 percent, depending on the loan product, to help qualify for the loan,” says Becker.
Should you get a mortgage in retirement?
In general, it’s best to avoid taking on more debt in retirement, when your income might not be as predictable as it once was. Using your retirement savings to pay down your mortgage can make it difficult to enjoy a comfortable retirement lifestyle and cover costs like medical bills.
“Even if one owns a property with no further mortgage payments due, property taxes and upkeep will be a consideration,” says Mark Hamrick, senior economic analyst and Washington bureau chief for Bankrate. “As with people of all ages, having a budget, limiting expenses and accurately accounting for income expectations are key.”
Then again, working hard to pay off your mortgage debt prior to retirement might not be the best strategy either. It could leave you financially vulnerable and unable to pay for emergencies.
However, taking out a senior mortgage can be a smart play for retirees who can afford to make a substantial down payment on a home. Along with a smaller loan, consider a shorter loan — say, a 15-year mortgage instead of the benchmark 30-year. Yes, your monthly payments will be higher, but your interest rate will be lower. You can also ask your lender about senior citizen mortgage assistance programs that are available in your state.
Be sure to consider your spouse or partner when deciding to get a mortgage. What would happen if one of you were to die, and how would that affect the survivor’s ability to repay the loan? If your surviving spouse or partner would not be able to take over the loan, getting a mortgage during retirement may not be a smart financial decision.
7 mortgage options for seniors
There are plenty of home loan options available to retirees or seniors — mostly the same as for anyone, with one exception. Here are seven to consider:
- Conventional loan: You can find conventional mortgages from virtually every type of lender, in terms ranging from eight to 30 years. If you’re not making a down payment or don’t have an equity level of at least 20 percent, you’ll need to pay private mortgage insurance (PMI) premiums.
- FHA, VA or USDA loan: These government-insured loans might be easier to qualify for than a conventional mortgage. You can only get a VA loan if you or your spouse has served in the military, however, or a USDA loan only if you’re buying in a USDA-approved area.
- Cash-out refinance: With a cash-out refi, you’ll get a brand-new mortgage and cash out some of your home’s equity in a lump sum.
- Home equity loan: A home equity loan is a lump-sum loan, usually with a fixed rate, fixed monthly payments and a term between five and 30 years. You’ll typically need at least 20 percent equity to qualify.
- Home equity line of credit (HELOC): – A HELOC is a variable-rate product that works similarly to a credit card — you’re given a line of credit to draw on as needed. You’ll have a certain number of years to draw the money, and then a certain amount of time to repay the loan.
- Reverse mortgage: A reverse mortgage is a loan taken out against your current home, in which a lender pays you monthly installments; these must be repaid, or the home surrendered to the lender, when you die or move out. To qualify, you must be at least 62 years old, own your home outright (or close to it) and live in the home as your primary residence. You’ll also have to pay for the property taxes, homeowners insurance, HOA fees (if applicable) and other upkeep on the home.
- No-document mortgage: A no-doc mortgage doesn’t require income verification. It’s an uncommon product, but it can be an option for borrowers who have irregular income.
Bottom line
Seniors with good credit, sufficient retirement income and assets and not a lot of debt can get a mortgage or home loan. The keys are knowing your long-term plans, exploring loan options and providing documentation to support your application. It’s also worth speaking to a financial advisor or retirement planner to prepare your finances for the new loan. If you’re acquiring or unloading property, you’ll want to revisit your estate plan, as well.
Frequently asked questions
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Lenders consider employment wages, Social Security payments, freelance income, part-time income, tips, pension and retirement income as income for loan qualification. They also count alimony and child support payments, unemployment benefits, investment income and disability leave.
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It’s possible to get a mortgage with Social Security as your only income, depending on how high your payments are. But like any borrower with a low income, you might not qualify for a large mortgage, and you may have to put down a sizable down payment to get approved. If you’re looking for mortgages for seniors on Social Security, ask lenders about their specific eligibility requirements before applying.
Source: bankrate.com
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It doesn’t matter how long ago you purchased your house, whether it’s been just a few years or several decades. Consider re-evaluating your current mortgage and living situation to determine whether a refinance could benefit your wallet.
The process is almost as in-depth as getting a new mortgage, so we’ll show you exactly when you should consider refinancing and how to complete the process.
What is a mortgage refinance?
Mortgage refinancing is the process of replacing an existing mortgage with a new mortgage loan. The new loan may have a different interest rate, term, or loan amount than the original mortgage.
People often refinance their mortgages to take advantage of lower interest rates, to change the terms of their loan, or to tap into the equity they have built up in their home.
When should you refinance your mortgage?
Before you jump into the refinance process, it’s wise to think about your goals. There are many times when it’s a good idea to look into mortgage refinancing, but you always have to look at the big picture as well.
For example, if interest rates are lower than when you got your mortgage or your credit has improved recently, you may qualify for a lower interest rate. This allows you to save money over the long run and have a lower monthly payment.
But here’s the catch.
If you lock into that lower interest rate and refinance for another 30-year mortgage, you’re adding time to the loan term. This might not be a big deal if you’ve only been paying off your mortgage for a couple of years. On the other hand, you may end up paying more interest over time, even with the lower rate, if you’re already several years into your current term.
Get your lender to crunch some comparisons for you, or do it yourself using a refinance calculator. That way you know for sure whether you’re really saving money or not.
See also: How Much Does it Cost to Refinance a Mortgage?
Drop Your PMI Coverage
Another time to look into refinancing your mortgage is if you’re paying private mortgage insurance and have reached 20% equity in your home’s value. At that point, you may be able to refinance and drop that PMI contingency.
Since PMI typically costs up to 1% of your loan amount each year, you could save yourself some serious money, especially since it’s not going towards your principal or interest.
As always, be sure to also consider the closing costs that come along with refinancing as well as how much of your loan you’ve already repaid. The financial benefits of the refinance should always outweigh the expenses.
Cash-Out Refinance
Another reason some people want to refinance is to access cash. Maybe they want to fund a home renovation project or pay off debts. A cash-out refinance will allow them to leverage the equity in their house to obtain that cash.
How soon can you refinance your home?
When it comes to refinancing, lenders typically look more at the amount of equity in your home than the length of time you’ve owned it. This is especially true of cash out refinances, which require 20% equity in the home. If you just want to change your interest rate or length of the loan, then you’ll need somewhere between 5% and 10% home equity.
If you’ve already refinanced your home once after the original purchase, your lender might make you wait before doing it again. The industry standard is usually six months, so as long as you’re over that threshold, you shouldn’t have an issue.
Prepayment Penalties
One issue to be aware of, however, is the potential for a prepayment clause in your existing home loan. Although it’s rare these days, this penalty can charge you a large fee if you pay off your mortgage early.
When you refinance, that’s exactly what you’re doing: paying off your old mortgage (and lender) with a new mortgage that could very well be through a new lender. Check your existing loan contract to make sure a refinance won’t come with any unexpected penalties.
How much could you end up paying?
Some prepayment penalty clauses are structured so that you pay 80% of the interest you would owe over the next six months. That can easily amount to thousands of dollars, especially if you’re early in your mortgage with interest-heavy payments.
How to Refinance a Mortgage
Refinancing your home doesn’t happen overnight. In fact, there are several steps involved. Here’s a play by play so you know exactly what to expect.
1. Determine the Type of Refinance You Want
We’ve talked about setting a goal for your refinance and this is a huge part of starting the process. You may want a standard refinance that merely adjusts your interest rate. Or perhaps you want to cash out some of your equity. Alternatively, you may wish to refinance out of an adjustable-rate mortgage to a fixed-rate or switch the length of your term.
2. Check Your Credit Score
Once you know the type of mortgage loan you want, it’s time to start preparing for the process. Knowing your credit score lets you know a bit more what you can expect in terms of loan qualification and interest rates.
Some loan types have absolute minimums, while others are more flexible. Check your credit score upfront so that you can get an idea of whether you meet basic refinance requirements.
3. Estimate Your Home’s Value
Next, you need to get an idea of how much your home is currently worth. The best way to do this is to look at comps in your neighborhood.
Check websites like Zillow and Realtor.com to find out what current sales prices look like, as well as properties that have been recently sold. Take a look at the price per square foot for these homes and apply that number to the square footage of your own home.
Of course, that’s not an absolute. Your home’s true value depends on several factors, including upgrades and lot size. But you can take these things into consideration to get a general idea of what your appraisal value could be.
4. Compare Lenders
You don’t have to refinance with your current mortgage lender. In fact, it’s smart to shop around to find the best loan terms. Compare all the details of your refinance offer. Getting a lower interest rate is definitely important, but you also want to consider potential closing costs and origination fees.
How a lender structures the new loan is also significant and can influence your decision. If you’re trying to save on how much cash you spend upfront, you might prefer a lender who lets you incorporate your closing costs into the loan amount. Alternatively, low interest rates may be the most influential factor when choosing a lender.
5. Get a Loan Estimate
After comparing rates and fees from multiple mortgage lenders, you can get a loan estimate from your top choices. A loan estimate is a form that provides essential information about the terms of a mortgage refinance loan.
It is intended to help borrowers compare different loan offers and make an informed decision about which one is the best fit for them. The loan estimate includes the loan terms, the projected monthly payments, the closing costs, and other charges associated with the loan. It also includes information about the lender, the mortgage broker (if applicable), and the real estate broker (if applicable).
6. Prepare for Your Application
After you pick out a lender with the mortgage rates and terms you like, it’s time to start gathering your documentation for your refinance application. You’ll likely need things like bank statements, tax forms from the last two years, and pay stubs.
Getting all of this paperwork together in advance can save time during the application and underwriting processes.
7. Get Ready for the Appraisal
Part of the mortgage refinance process is to get a professional appraisal on your home. Your lender typically orders this and the fee is usually included in your closing costs. Make sure your home is clean and presentable. You don’t need to make major changes but picking up ahead of time can create a good impression on the appraiser, as can a freshly mowed yard.
8. Anticipate Your Needs for Closing
Closing on a refinance is similar to when you originally closed on your home. Typically, your lender will arrange a meeting with a public notary so you can sign all of your paperwork. You can make this at a time and place that is convenient for you. If the refinanced loan is in both your name and someone else’s, like your spouse’s, then you’ll both need to be present to sign.
Once the paperwork is complete, you’ll start making monthly payments to your new lender as scheduled in your closing documents. Any new terms or rates will also apply so you can start paying down your newly refinanced home loan.
How to Refinance Your Mortgage FAQs
What are the eligibility requirements for a mortgage refinance?
To be eligible for a mortgage refinance, you typically need to have good credit, sufficient equity in your home, and the ability to make the monthly payment on the new loan.
- Credit score: Lenders typically prefer borrowers with good credit scores when evaluating mortgage refinance applications. A good credit score is generally considered to be above 670, but this can vary depending on the lender. If you have a lower credit score, you may still be able to refinance your mortgage. However, you may be offered less favorable terms, such as a higher interest rate.
- Equity: To be eligible for a mortgage refinance, you typically need to have sufficient equity in your home. Equity is the portion of your home that you own outright, and it is determined by subtracting the amount you owe on your mortgage from the value of your home. To refinance, you will typically need to have at least 20% equity in your home.
- Ability to make payments: Lenders will consider your income, debts, and other financial obligations when evaluating your ability to make the monthly mortgage payment on a refinance. You will typically have to provide proof of income, such as pay stubs or tax returns, and you will need a debt-to-income ratio that is within the lender’s guidelines.
In addition to these requirements, you may also need to meet other eligibility criteria, such as being current on your mortgage payments and having no recent bankruptcies or foreclosures.
How do I compare refinancing options?
To compare refinancing options, you can use online mortgage calculators or consult a financial professional or mortgage lender. You should consider the interest rate, terms, and costs of each option.
What are closing costs?
Closing costs are fees that are associated with the process of obtaining a mortgage. They can include fees for appraisals, credit checks, title searches, and other services.
How much do closing costs typically cost?
Closing costs can vary widely depending on the specific loan and lender, but they typically range from 2% to 5% of the loan amount.
Can I refinance my mortgage if I have bad credit?
It may be more difficult to qualify for mortgage refinancing if you have bad credit, but it’s not impossible. You may be able to qualify for a refinancing option with a higher interest rate or with a co-signer.
How long does it take to refinance a mortgage?
Refinancing your mortgage can take anywhere from a few weeks to a few months, depending on the complexity of your situation and the lender’s process. It’s a good idea to start the process as early as possible to ensure that you have enough time to complete it.
Source: crediful.com
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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.
A person’s credit score can impact their finances positively and negatively. Entities from commercial banks to auto loan lenders uses credit scores to determine if they’re willing to trust an applicant. FICOⓇ and VantageScoreⓇ, the two most popular scoring models, assign credit scores from 300 to 850—and higher scores typically pave the way for more lucrative deals.
Whether you have no credit history whatsoever or you’re looking to improve your current credit standing, everyone has the power to work on their credit. There is no set timeline for how long it can take to improve your credit, as everyone’s individual circumstances are different. Keep that in mind as we share 15 of the best ways to work to build credit fast in 2024.
Key takeaways
- Making timely payments can help you more quickly build credit since payment history makes up 35 percent of your FICO credit score.
- Becoming an authorized user on another credit card can help improve your score over time.
- Removing errors on your credit report can help your score most accurately reflect your credit history.
Table of contents:
1. Apply for credit builder loans
Any kind of loan you secure can help you build credit if you make payments on time and in full. However, credit builder loans specifically exist to help borrowers improve their credit. If approved, applicants will pay into a secured account that they can only access at the end of their term.
Pro tip: A lender will normally approve low- or no-credit borrowers for a credit builder loan, but anyone can apply regardless of their standing.
2. Build credit with rent payments
Building credit with rent payments can be especially effective for individuals with no credit history. Your timely rent payments won’t raise your score automatically, as landlords don’t typically report rent payments to the credit bureaus. Instead, you’ll need to find a rent reporting service that can add your payments to your credit report.
Pro tip: You can enroll in rent reporting services with any of the three major credit bureaus: EquifaxⓇ, ExperianⓇ and TransUnionⓇ.
3. Maintain your oldest accounts
A person’s credit age, or length of credit history, makes up 15 percent of your FICOscore. This means that closing an old account can lower your score by reducing your overall credit age. If you have an old credit card, even if you don’t regularly use it, it’s usually best to keep that account open.
Pro tip: You can call your credit card issuer and request that the annual fee be waived on an old card.
4. Apply for a retail credit card
Stores and online vendors that offer retail credit cards can help you quickly build credit if you’re a frequent shopper, with one important caveat: you must use the card responsibly. These cards may come with unique bonuses like cashback rewards or discounts. Just be careful not to overspend so you’re able to pay your balance off in full every month.
Pro tip: Retail cards can benefit frequent shoppers who also have the funds to pay off their debts quickly.
5. Challenge errors on your credit report
Credit reports are intended to reflect your spending habits, but no system is perfect. Sometimes, a payment you’ve made doesn’t get reported on time or you notice inaccuracies elsewhere on your report, like an account you never opened. Lexington Law Firm can check your credit report for errors or discrepancies and challenge them on your behalf.
Pro tip: You can request one free credit report annually from each of the three credit bureaus.
6. Apply for a secured credit card
Secured credit cards traditionally have lower interest rates and higher credit limits than unsecured cards. The caveat is that borrowers will have to put down collateral to be eligible, but responsibly using secured cards can significantly improve your credit.
Pro tip: For secured credit cards, collateral comes in the form of the cash deposit you make when you first open the account.
7. Use a credit monitoring service
Credit monitoring services can help borrowers get a better sense of what’s happening on their credit profile. Many services can also dispute errors and take action if they detect fraudulent activity. Lexington Law Firm offers credit monitoring services and other features like ID Theft Insurance and help with challenging errors on credit reports.
Pro tip: Lexington Law Firm also provides free credit assessments to help you understand which services might benefit you the most.
8. Make timely payments
Payment history accounts for roughly 35 percent of your FICO credit score and about 40 percent of your VantageScore. Consistently making payments on time will display your financial reliability and responsibility to lenders and credit bureaus.
Pro tip: Using autopay can reduce instances of forgetting to make payments on time.
9. Increase your credit limit
Your credit utilization ratio weighs your current account balances against your total credit limit. Increasing your credit limit can give you more breathing room when borrowing funds. Borrowing $500 with a $1,000 limit would give you a 50 percent utilization rate. Borrowing $500 with a $2,000 limit would give you a 25 percent utilization rate.
Pro tip: It’s best to keep your credit utilization ratio below 30 percent if you can.
10. Become an authorized user on another account
Becoming an authorized user on another account lets you borrow funds on a credit card that you may not have access to otherwise. Positive action on that account can affect everyone who’s linked to it—and the same goes for negative habits. You can become an authorized user on another account even if you have no or bad credit history, provided you have the primary account holder’s permission.
Pro tip: It’s best to only become an authorized user on an account where the cardholder already has good or better credit.
11. Acquire a student credit card
Student credit cards typically have less stringent requirements than their grown-up alternatives. Responsibly using these cards can help new borrowers prove their creditworthiness.
Pro tip: Student card requirements normally include enrollment at qualifying institutions, proof of income or a cosigner and no bad credit history.
12. Use a rapid rescoring service
It takes varying amounts of time for changes to be added to your credit report. Rapid rescoring for a mortgage can help your credit by quickly updating your credit report with new information. For a fee, a mortgage lender can pay credit reporting companies to expedite the reporting process for someone who’s looking to take out a home loan.
Pro tip: It can generally take roughly 30 to 45 days for a change to appear on your credit report.
13. Meet with a financial advisor
While it’s becoming increasingly easy to access financial information, not everyone has the years of experience needed to add context to that information. Financial advisors can offer tailored strategies to help clients reach specific goals and improve their credit standing.
Pro tip: You can find a financial advisor to meet with online if you don’t want to meet with one in person.
14. Download credit-building apps
Credit-building apps can help borrowers improve their scores in various ways. Some apps can provide custom recommendations based on the data you provide them. Others can offer incentives and in-app rewards to help promote better financial habits.
Pro tip: Many commercial banks offer free apps with credit-building features.
15. Use a credit builder card
Much like a credit builder loan, this option helps low- and no-credit borrowers increase their standing. Credit builder cards function just like normal cards, but they usually come with more stringent limits like higher interest rates and lower overall limits.
Pro tip: Credit builder cards often have more lenient eligibility requirements than other commercial bank cards.
Improve your credit knowledge with Lexington Law Firm
We’ve outlined some of the best ways to build credit fast in this guide, but there’s still plenty of additional information that could help you increase your financial literacy. Learning how to read a credit report and knowing which factors affect your credit score are vital long-term skills. Lexington Law Firm’s team of professionals can help you gain a better understanding of your credit profile. Get your free credit assessment today.
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