Fannie Mae announced on Wednesday an enhancement to its desktop underwriting system, which will facilitate the asset, income, and employment verification process through a single data source.
Lenders can use a single 12-month asset verification report to identify recurring deposits in the applicant’s digital bank statement data. The solution will automatically use approved data from third-party vendors to validate income, employment, and assets in one step. It will be available effective March 29.
With the new functionality, the government-sponsored enterprise (GSE) is “exploring new ways to help our lenders open more doors for aspiring homeowners” and “removing a hurdle from the loan application process,” Cyndi Danko, senior vice president and single-family chief credit officer, said in a prepared statement.
Lenders can use the same report to check applicants’ rent payments and cash flow history. This may benefit qualified borrowers with limited or no credit history, potentially increasing the number of applicants approved, the GSE said.
Fannie Mae explained that lenders who opt into the DU validation service and leverage asset verification reports with at least 12 months of data may get “clear to close” faster and achieve Day 1 Certainty, which may reduce repurchase risk. In February, Fannie Mae also announced a “notice of potential defect” functionality in the latest version of its system Loan Quality Connect to address buybacks.
In a survey of pilot lenders, the GSE also noticed that 50% of them had some level of cost savings over their existing third-party report costs with the single asset verification report.
The enhanced verification process comes after the launching of an early assessment tool to determine buyers’ preparedness and mortgage options without the impact of a hard credit check. It also follows the announcement of an income calculator for self-employed borrowers, and a down payment assistance tool.
As I watch it snow here in the Sierra, hey, if you’re going to watch one video this week, watch this 15-second classic (with sound) on how our banking system works. You’ll watch it at least twice, and let your kids figure it out. Since its all-time high of 30,456 in 1921, the bank population in the United States had declined to only 4,377 at the end of 2020, a decline of about 86 percent. Thousands of residential lenders hope they’re not involved in the same trend. I mention this because, speaking of numerical trends, the United States is producing more oil than any country has ever produced in the history of the world: 13 million barrels per day. It’s been economically punishing for the countries in OPEC+, which has seen its global market share drop to a new low of 48 percent. This is an interesting issue when it comes to inflation, which helps drive mortgage rates, and will be a very interesting issue in the next eight months when it is expected that two octogenarians will be vying for the top job. (Found here, this week’s podcast is brought to you by nCino, makers of the nCino Mortgage Suite for the modern mortgage lender. nCino Mortgage Suite’s three core products – nCino Mortgage, nCino Incentive Compensation, and nCino Mortgage Analytics – unite the people, systems, and stages of the mortgage process. Hear an interview with Nerdwallet’s Kate Wood on housing market supply and advice for potential homebuyers.)
Lender and Broker Services, Products, and Software
To access the largest subset of home buyers in the market, lenders are redefining their go to market strategy. Milestones’ homeowner engagement solution goes well beyond a “What’s my home worth?” assessment. It enables lenders to proactively guide consumers through the entire homeownership journey with weekly touchpoints that are relevant and specific to their home. With essential resources for home services, home improvements, home document storage, and a homeowner dashboard to monitor and track their activity in one place, this platform is the one-stop shop for all things home. What sets them apart is its fully white-labeled capabilities that provides a seamless consumer experience that keeps YOUR lending products and partners top of mind. Adopt the ultimate homeowner engagement solution to connect more meaningfully with your prospects and borrowers and uncover new opportunities to boost your revenue. Book a meeting with sales today.
“Innovation-Powered Precision, Time-Tested Excellence! With a foundation built on 43 years of experience, PCV Murcor brings a deep understanding of our clients’ goals that complements appraisal modernization. Over our long history, we have honed our processes to provide reliable and unparalleled appraisal management services, setting the standard for excellence in the industry. Our use of state-of-the-art AI technology ensures precision and efficiency in every aspect of our service. AI’s ability to enhance efficiency, accuracy, and flexibility is reshaping the way properties are evaluated with distinct advantages. To learn more about our future-ready solutions for today’s appraisal management, visit here.”
“PlainsCapital Bank National Warehouse Lending, a subsidiary of Hilltop Holdings (NYSE: HTH), focuses on relationship-driven business with long-term success, by-the-way, have you heard about our BTW Services? We are pleased to offer all customers our Broker-Dealer, Treasury Management and Warehouse Lending (BTW) services. Our Broker-Dealers can help customers hedge their origination pipelines by buying and selling TBAs, specified pools and whole loan trading. Our Treasury Management team helps customers with escrow and cash management. Finally, the Warehouse Lending team provides customers with confidence to meet their loan funding needs. If you are interested in learning more about our BTW Services please contact Deric Barnett or Justin Tannen.”
TPO, Broker, and Correspondent Product News
“It’s been a busy first quarter for the Newrez Correspondent team! Delegated pilot programs for both 2nd Mortgages & Non-QM have been launched with more exciting news on the way. Enhancements to come include HomeReady® & Home Possible® $2500 grant products; FHLMC’s GreenCHOICE; FHA HUD 184/Heritage; Co-Issue offering, along with improvements to our Non-QM Smart Series programs, Enote expansion and more. Soon, our sales team will present our top 2023 clients their Premier Partner Plaques (PPP). This PPP award recognizes the partnership and is awarded to our lenders who finished at the top for loans funded in 2023. There are so many reasons to be aligned with a top tier partner, and Newrez Correspondent is that partner! For those not signed up with Newrez and looking to take advantage of these enhancements, or existing partners who want to become Premier, contact our sales team to learn more.”
Rocket Pro TPO has announced an update to its offerings, including its Credit Upgrade program. This initiative, previously exclusive, is now available to all partners. It provides a no-cost, rapid rescore service for clients with credit scores between 570 and 779, aiming to help them qualify for better loan products and rates. Additionally, Rocket Pro TPO offers a Home Equity Loan product that allows clients to protect their low mortgage rates while tapping into their home’s equity at a competitive rate. This option provides a fixed-rate, lump-sum payment, offering a stable alternative to variable-rate loans. For those interested in learning more about Rocket Pro TPO’s cost-saving products, the replay of their latest IGNITE Live seminar is available on their YouTube channel: IGNITE Live Replay. For more information on Broker or Non-Delegated Correspondent partnerships, contact Rocket Pro TPO to learn more.
Angel Oak Mortgage Solution is now offering Bank Statement Loans tailored specifically for self-employed individuals who have been in business for 1-year.
Reach more clients with LoanStream’s Non-QM Programs with loan amounts up to $4 Million. LoanStream NaNQ / Non-QM Programs are proprietary programs specifically created to fulfill mortgage program options for LoanStream brokers with non-prime programs.
The 5 Cs of Credit
A good trivia question for underwriters, or loan originators, is, “What are the 5 C’s?” The answer is character, capacity, capital, collateral, and conditions. Those are from a simpler time, but the fundamentals still apply despite all the hubbub about credit costs, scores, monopolies, hard pulls versus soft pulls, and… tri-merge versus bi-merge. I bring this up because it appears that the “new” scoring and bi-merge will be done at the same time, at the end of 2025. So, the industry has some to adjust and accommodate.
“Dear Stakeholders,
“Thank you for your continued engagement with FHFA’s Credit Score Initiative. As many of you likely saw, FHFA just announced a series of updates related to the implementation of the new credit score requirements for single-family loans delivered to Fannie Mae and Freddie Mac (the Enterprises). We are also pleased to announce the schedule for upcoming stakeholder forums to be hosted by FHFA, which is outlined below.
“Following valuable and thoughtful feedback gathered from the sessions held in late 2023, FHFA is aligning the implementation date for the bi-merge credit reporting option with the transition from the use of Classic FICO. This aligned transition is expected to occur in the fourth quarter of 2025. We expect this update will reduce cost and complexity for market participants.
“To better support the transition, the Enterprises are accelerating the publication of historical data on the VantageScore 4.0 model. This publication, originally targeted for the first quarter of 2025, is now expected early in the third quarter of 2024. FHFA and the Enterprises continue to work towards providing similar data to support the transition to the FICO 10T model.
“We would like to thank all those who participated in the stakeholder forums for sharing their perspectives on the sequencing of project milestones, as well as the expected uses of the historical data to support the new models. Your input helped inform the latest updates to the Credit Score Initiative.
“FHFA will be hosting the next series of virtual stakeholder forums in the coming weeks. The schedule is planned as follows: Bi-Merge Implementation Considerations (Tuesday, March 12, 3:00-4:00pm Eastern), Bi-Merge Implementation Considerations (cont’d) (Tuesday, March 26, 3:00-4:00pm Eastern), Transition Period Loan Delivery Considerations (Tuesday, April 9, 3:00-4:00pm Eastern), and Transition Period Loan Delivery Considerations (cont’d) (Tuesday, April 23, 3:00-4:00pm Eastern).
“As a reminder, these virtual stakeholder forums are open to the public, but they are not intended for media purposes. FHFA will provide agendas, materials, and links to access the sessions as they approach. Thank you again for your continued engagement. If you have further questions or thoughts, please contact us at [email protected].”
After 2023’s jarring price hikes, the credit bureaus and FICO are raising their credit reporting costs once again, passing this on to credit reporting agencies (CRAs). This latest price increase affects both hard and soft pull credit reports. In response, CRAs everywhere have updated their pricing options, allowing the customization of lender’s prequalification options to suit budgets.
And compliance departments noted that the FTC, which has authority to enforce the Equal Credit Opportunity Act (ECOA) against most types of non-depository financial services providers, issued a report in February describing its enforcement actions and related activity under ECOA during 2023: Annual Report on Its ECOA Enforcement and Policy Development Activity.
Capital Markets
The Fed has been preaching patience from markets when it comes to enacting rate cuts, a sentiment that was further bolstered yesterday after the central bank’s preferred price gauge rose in January at the fastest pace in almost a year (2.4 percent). Inflation rose 0.4 percent month-over-month compared to a downwardly revised 0.1 percent increase in December. The core rate increased 2.8 percent year-over-year. Personal Incomes rose 1.0 percent in January, which was also much higher than expected, driven primarily by growth in the annual cost of living increase in social security. Fed policymakers took the data in stride, repeating that easing can begin in the summer and there is room to be patient.
Yesterday also saw the release of a weaker-than-expected Chicago PMI for February and a disappointing Pending Home Sales report which came in down 4.9 percent for January. Initial jobless claims for the week ending February 24 increased to 215k, which is still a relatively low number for this series. Continuing jobless claims for the week ending February 17 increased by 45,000 to 1.905 million, which is the highest level for that series since November. It has become more challenging to find a new job right away, which indicates that the labor market is not running as tight as it once was. The four-week moving average for continuing claims of 1,879,750 is the highest since December 11, 2021
Today’s economic calendar contains no “first tier” scheduled market-moving news but has no fewer than seven Fed speakers scheduled. Go ahead and add in the final February S&P Global manufacturing PMI, ISM manufacturing PMI for February, January construction spending, and Michigan sentiment for February. (Unemployment data, normally released on the first Friday of the month, is next Friday.) After the 10-year yield rose 28 basis points in February, we begin March with the 10-year yielding 4.23 after closing yesterday at 4.27 percent, Agency MBS prices better about .125, and the 2-year at 4.59.
Jobs
Mark Pasternak appointed as the newest SecurityNational Mortgage Company VP to Spearhead Operational Excellence. In a significant move to bolster its leadership team, Security National Mortgage Company has announced the appointment of Mark Pasternak as Vice President of Mortgage Operations. Pasternak joins the company with over three decades of industry experience, including his most recent tenure serving as EVP of Operations at Academy Mortgage. His leadership background in both sales and operational management is sure to provide an operational edge for SecurityNational Mortgage. Andrew Quist, President of SecurityNational Mortgage Company, stated: “Mark is joining us with a wealth of experience and his innovative nature will be highly valuable to our operations team. Even in this challenging mortgage rate environment, SecurityNational is still dedicated to recruiting elite industry talent like Mark that align with our growth focused business objectives. We’re excited to see the impact Mark will have in our operations.” The addition of Mark Pasternak to the SecurityNational team underscores the company’s commitment to recruiting top talent to lead its strategic initiatives. With Pasternak at the helm of operations, SecurityNational is poised to enhance its operational capabilities and achieve new milestones in service and efficiency.
In the Northwest and California, Banner Bank is searching for Mortgage Loan Officers looking to create lasting Realtor and builder relationships at a bank focused on the market today. Banner has opportunities for lenders looking for local decision making with FHA, VA, USDA, state bond and true Portfolio lending opportunities along with servicing retained Fannie and Freddie loans to assist in client retention. Additional highlighted products cover CRA lending with private label no payment down payment assistance to help assist all borrowers with the right opportunity. Banner is the right fit for an established team, or the individual looking to grow their business and take the next step in their career. Please send resumes to Aaron Miller.
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Average mortgage rates edged higher yesterday. Although the change was negligible, it was enough to return them to their recent high, first reached last Thursday. However, they’re still way lower than the near-8% levels seen as recently as last October.
Earlier this morning, markets were signaling that mortgage rates today might barely move. However, these early mini-trends often switch direction or speed as the hours pass.
Current mortgage and refinance rates
Find your lowest rate. Start here
Program
Mortgage Rate
APR*
Change
Conventional 30-year fixed
7.36%
7.37%
+0.01
Conventional 15-year fixed
6.76%
6.79%
Unchanged
Conventional 20-year fixed
7.06%
7.09%
Unchanged
Conventional 10-year fixed
6.65%
6.68%
-0.01
30-year fixed FHA
6.42%
7.11%
+0.03
30-year fixed VA
6.71%
6.83%
-0.01
5/1 ARM Conventional
6.18%
7.32%
-0.01
Rates are provided by our partner network, and may not reflect the market. Your rate might be different. Click here for a personalized rate quote. See our rate assumptions See our rate assumptions here.
Should you lock your mortgage rate today?
Many investors now expect the Federal Reserve to implement its first cut in general interest rates in June. And to make only three modest cuts during 2024.
That’s very different from their expectations at the start of this year. Then, they thought the first cut would be in March followed by five more before Dec. 31.
It’s this shift in expectations, from the optimistic to the realistic, that largely explains why mortgage rates have been moving higher in recent weeks. And it’s my top reason for now thinking that mortgage rates probably won’t begin to trend consistently lower until well into the second (April-June) quarter.
So, for now, my personal rate lock recommendations are:
LOCK if closing in 7 days
LOCK if closing in 15 days
LOCK if closing in 30 days
LOCK if closing in 45 days
LOCKif closing in 60days
However, with so much uncertainty at the moment, your instincts could easily turn out to be as good as mine — or better. So, let your gut and your own tolerance for risk help guide you.
>Related: 7 Tips to get the best refinance rate
Market data affecting today’s mortgage rates
Here’s a snapshot of the state of play this morning at about 9:50 a.m. (ET). The data are mostly compared with roughly the same time the business day before, so much of the movement will often have happened in the previous session. The numbers are:
The yield on 10-year Treasury notes held steady 4.30%. (Neutral for mortgage rates.) More than any other market, mortgage rates typically tend to follow these particular Treasury bond yields
Major stock indexes were falling this morning. (Good for mortgage rates.) When investors buy shares, they’re often selling bonds, which pushes those prices down and increases yields and mortgage rates. The opposite may happen when indexes are lower. But this is an imperfect relationship
Oil prices climbed to $79.34 from $78.19 a barrel. (Bad for mortgage rates*.) Energy prices play a prominent role in creating inflation and also point to future economic activity
Goldprices inched down to $2,042 from $2,044 an ounce. (Neutral for mortgage rates*.) It is generally better for rates when gold prices rise and worse when they fall. Gold tends to rise when investors worry about the economy.
CNN Business Fear & Greed index — increased to 79 from 76 out of 100. (Bad for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are often better than higher ones
*A movement of less than $20 on gold prices or 40 cents on oil ones is a change of 1% or less. So we only count meaningful differences as good or bad for mortgage rates.
Caveats about markets and rates
Before the pandemic, post-pandemic upheavals, and war in Ukraine, you could look at the above figures and make a pretty good guess about what would happen to mortgage rates that day. But that’s no longer the case. We still make daily calls. And are usually right. But our record for accuracy won’t achieve its former high levels until things settle down.
So, use markets only as a rough guide. Because they have to be exceptionally strong or weak to rely on them. But, with that caveat, mortgage rates today look likely to hold steady or close to steady. However, be aware that “intraday swings” (when rates change speed or direction during the day) are a common feature right now.
Find your lowest rate. Start here
What’s driving mortgage rates today?
Today
This morning brought the second reading (of three) of gross domestic product (GDP) during the fourth quarter of last year. And it will likely hardly affect mortgage rates.
Today’s figure showed growth that quarter at 3.2%. Markets had been expecting it to be unchanged from its first reading at 3.3%. And they’d already priced that figure into mortgage rates.
Ten-year Treasury notes edged lower on the news. But mortgage rates didn’t immediately follow, and the difference between the actual figure and market expectations may not be enough to change them.
Tomorrow
We’re due January’s personal consumption expenditures (PCE) price index tomorrow. This is the Federal Reserve’s favorite gauge of inflation. So it certainly has the potential to move markets and mortgage rates, not least because it could influence decisions about the timing and scope of the Fed’s future cuts in general interest rates.
Tomorrow brings four key figures: two for the all-items PCE price index and two for the “core” PCE price index. The core figure is the all-items one after volatile food and energy prices have been stripped out, something that supposedly reveals underlying inflation. The Fed focuses on core figures.
There are two figures for each of these indexes. The first shows how prices moved in the month of January. And the second is the year-over-year (YOY) number, which shows how the same prices moved between Feb. 1, 2023 and Jan. 31, 2024.
Tomorrow’s inflation and other data
Here are what markets are expecting tomorrow (with December’s actual figures in brackets):
January all-items PCE price index — 0.3% (0.2 % in December)
January core PCE price index —0.4% (0.2% in December)
YOY all-items PCE price index — 2.4% (2.6 % in December)
YOY core PCE price index —2.8% (2.8% in December)
You can see that markets are expecting a small increase in most of these measures of inflation. And, because they’re expecting them, they’ll have already priced those into mortgage rates. So, if the figures come in as forecast, mortgage rates might barely move.
However, higher-than-expected figures could push those rates upward. Conversely, lower-than-expected ones could drag them downward.
Other economic reports due tomorrow rarely move mortgage rates far or for long, especially when they’re overshadowed by a major report like the PCE price index.
Ten senior Fed officials have speaking engagements tomorrow and on Friday, all after tomorrow’s report. And those could change mortgage rates if enough of them say things that cheer up or depress investors. But we can only wait to hear their remarks.
Don’t forget you can always learn more about what’s driving mortgage rates in the most recent weekend edition of this daily report. These provide a more detailed analysis of what’s happening. They are published each Saturday morning soon after 10 a.m. (ET) and include a preview of the following week.
Recent trends
According to Freddie Mac’s archives, the weekly all-time lowest rate for 30-year, fixed-rate mortgages was set on Jan. 7, 2021, when it stood at 2.65%. The weekly all-time high was 18.63% on Sep. 10, 1981.
Freddie’s Feb. 22 report put that same weekly average at 6.90% up from the previous week’s 6.77%. But note that Freddie’s data are almost always out of date by the time it announces its weekly figures.
Expert forecasts for mortgage rates
Looking further ahead, Fannie Mae and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.
And here are their rate forecasts for the four quarters of 2024 (Q1/24, Q2/24 Q3/24 and Q4/24).
The numbers in the table below are for 30-year, fixed-rate mortgages. Fannie’s were updated on Feb. 12 and the MBA’s on Feb. 20.
Forecaster
Q1/24
Q2/24
Q3/24
Q4/24
Fannie Mae
6.5%
6.3%
6.1%
5.9%
MBA
6.9%
6.6%
6.3%
6.1%
Of course, given so many unknowables, both these forecasts might be even more speculative than usual. And their past record for accuracy hasn’t been wildly impressive.
Important notes on today’s mortgage rates
Here are some things you need to know:
Typically, mortgage rates go up when the economy’s doing well and down when it’s in trouble. But there are exceptions. Read ‘How mortgage rates are determined and why you should care’
Only “top-tier” borrowers (with stellar credit scores, big down payments, and very healthy finances) get the ultralow mortgage rates you’ll see advertised
Lenders vary. Yours may or may not follow the crowd when it comes to daily rate movements — though they all usually follow the broader trend over time
When daily rate changes are small, some lenders will adjust closing costs and leave their rate cards the same
Refinance rates are typically close to those for purchases.
A lot is going on at the moment. And nobody can claim to know with certainty what will happen to mortgage rates in the coming hours, days, weeks or months.
Find your lowest mortgage rate today
You should comparison shop widely, no matter what sort of mortgage you want. Federal regulator the Consumer Financial Protection Bureau found in May 2023:
“Mortgage borrowers are paying around $100 a month more depending on which lender they choose, for the same type of loan and the same consumer characteristics (such as credit score and down payment).”
In other words, over the lifetime of a 30-year loan, homebuyers who don’t bother to get quotes from multiple lenders risk losing an average of $36,000. What could you do with that sort of money?
Verify your new rate
Mortgage rate methodology
The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.
How your mortgage interest rate is determined
Mortgage and refinance rates vary a lot depending on each borrower’s unique situation.
Factors that determine your mortgage interest rate include:
Overall strength of the economy — A strong economy usually means higher rates, while a weaker one can push current mortgage rates down to promote borrowing
Lender capacity — When a lender is very busy, it will increase rates to deter new business and give its loan officers some breathing room
Property type (condo, single-family, town house, etc.) — A primary residence, meaning a home you plan to live in full time, will have a lower interest rate. Investment properties, second homes, and vacation homes have higher mortgage rates
Loan-to-value ratio (determined by your down payment) — Your loan-to-value ratio (LTV) compares your loan amount to the value of the home. A lower LTV, meaning a bigger down payment, gets you a lower mortgage rate
Debt-To-Income ratio — This number compares your total monthly debts to your pretax income. The more debt you currently have, the less room you’ll have in your budget for a mortgage payment
Loan term — Loans with a shorter term (like a 15-year mortgage) typically have lower rates than a 30-year loan term
Borrower’s credit score — Typically the higher your credit score is, the lower your mortgage rate, and vice versa
Mortgage discount points — Borrowers have the option to buy discount points or ‘mortgage points’ at closing. These let you pay money upfront to lower your interest rate
Remember, every mortgage lender weighs these factors a little differently.
To find the best rate for your situation, you’ll want to get personalized estimates from a few different lenders.
Verify your new rate. Start here
Are refinance rates the same as mortgage rates?
Rates for a home purchase and mortgage refinance are often similar.
However, some lenders will charge more for a refinance under certain circumstances.
Typically when rates fall, homeowners rush to refinance. They see an opportunity to lock in a lower rate and payment for the rest of their loan.
This creates a tidal wave of new work for mortgage lenders.
Unfortunately, some lenders don’t have the capacity or crew to process a large number of refinance loan applications.
In this case, a lender might raise its rates to deter new business and give loan officers time to process loans currently in the pipeline.
Also, cashing out equity can result in a higher rate when refinancing.
Cash-out refinances pose a greater risk for mortgage lenders, so they’re often priced higher than new home purchases and rate-term refinances.
Check your refinance rates today. Start here
How to get the lowest mortgage or refinance rate
Since rates can vary, always shop around when buying a house or refinancing a mortgage.
Comparison shopping can potentially save thousands, even tens of thousands of dollars over the life of your loan.
Here are a few tips to keep in mind:
1. Get multiple quotes
Many borrowers make the mistake of accepting the first mortgage or refinance offer they receive.
Some simply go with the bank they use for checking and savings since that can seem easiest.
However, your bank might not offer the best mortgage deal for you. And if you’re refinancing, your financial situation may have changed enough that your current lender is no longer your best bet.
So get multiple quotes from at least three different lenders to find the right one for you.
2. Compare Loan Estimates
When shopping for a mortgage or refinance, lenders will provide a Loan Estimate that breaks down important costs associated with the loan.
You’ll want to read these Loan Estimates carefully and compare costs and fees line-by-line, including:
Interest rate
Annual percentage rate (APR)
Monthly mortgage payment
Loan origination fees
Rate lock fees
Closing costs
Remember, the lowest interest rate isn’t always the best deal.
Annual percentage rate (APR) can help you compare the ‘real’ cost of two loans. It estimates your total yearly cost including interest and fees.
Also, pay close attention to your closing costs.
Some lenders may bring their rates down by charging more upfront via discount points. These can add thousands to your out-of-pocket costs.
3. Negotiate your mortgage rate
You can also negotiate your mortgage rate to get a better deal.
Let’s say you get loan estimates from two lenders. Lender A offers the better rate, but you prefer your loan terms from Lender B. Talk to Lender B and see if they can beat the former’s pricing.
You might be surprised to find that a lender is willing to give you a lower interest rate in order to keep your business.
And if they’re not, keep shopping — there’s a good chance someone will.
Fixed-rate mortgage vs. adjustable-rate mortgage: Which is right for you?
Mortgage borrowers can choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).
Fixed-rate mortgages (FRMs) have interest rates that never change unless you decide to refinance. This results in predictable monthly payments and stability over the life of your loan.
Adjustable-rate loans have a low interest rate that’s fixed for a set number of years (typically five or seven). After the initial fixed-rate period, the interest rate adjusts every year based on market conditions.
With each rate adjustment, a borrower’s mortgage rate can either increase, decrease, or stay the same. These loans are unpredictable since monthly payments can change each year.
Adjustable-rate mortgages are fitting for borrowers who expect to move before their first rate adjustment, or who can afford a higher future payment.
In most other cases, a fixed-rate mortgage is typically the safer and better choice.
Remember, if rates drop sharply, you are free to refinance and lock in a lower rate and payment later on.
How your credit score affects your mortgage rate
You don’t need a high credit score to qualify for a home purchase or refinance, but your credit score will affect your rate.
This is because credit history determines risk level.
Historically speaking, borrowers with higher credit scores are less likely to default on their mortgages, so they qualify for lower rates.
For the best rate, aim for a credit score of 720 or higher.
Mortgage programs that don’t require a high score include:
Conventional home loans — minimum 620 credit score
FHA loans — minimum 500 credit score (with a 10% down payment) or 580 (with a 3.5% down payment)
VA loans — no minimum credit score, but 620 is common
USDA loans — minimum 640 credit score
Ideally, you want to check your credit report and score at least 6 months before applying for a mortgage. This gives you time to sort out any errors and make sure your score is as high as possible.
If you’re ready to apply now, it’s still worth checking so you have a good idea of what loan programs you might qualify for and how your score will affect your rate.
You can get your credit report from AnnualCreditReport.com and your score from MyFico.com.
How big of a down payment do I need?
Nowadays, mortgage programs don’t require the conventional 20 percent down.
In fact, first-time home buyers put only 6 percent down on average.
Down payment minimums vary depending on the loan program. For example:
Conventional home loans require a down payment between 3% and 5%
FHA loans require 3.5% down
VA and USDA loans allow zero down payment
Jumbo loans typically require at least 5% to 10% down
Keep in mind, a higher down payment reduces your risk as a borrower and helps you negotiate a better mortgage rate.
If you are able to make a 20 percent down payment, you can avoid paying for mortgage insurance.
This is an added cost paid by the borrower, which protects their lender in case of default or foreclosure.
But a big down payment is not required.
For many people, it makes sense to make a smaller down payment in order to buy a house sooner and start building home equity.
Verify your new rate. Start here
Choosing the right type of home loan
No two mortgage loans are alike, so it’s important to know your options and choose the right type of mortgage.
The five main types of mortgages include:
Fixed-rate mortgage (FRM)
Your interest rate remains the same over the life of the loan. This is a good option for borrowers who expect to live in their homes long-term.
The most popular loan option is the 30-year mortgage, but 15- and 20-year terms are also commonly available.
Adjustable-rate mortgage (ARM)
Adjustable-rate loans have a fixed interest rate for the first few years. Then, your mortgage rate resets every year.
Your rate and payment can rise or fall annually depending on how the broader interest rate trends.
ARMs are ideal for borrowers who expect to move prior to their first rate adjustment (usually in 5 or 7 years).
For those who plan to stay in their home long-term, a fixed-rate mortgage is typically recommended.
Jumbo mortgage
A jumbo loan is a mortgage that exceeds the conforming loan limit set by Fannie Mae and Freddie Mac.
In 2023, the conforming loan limit is $726,200 in most areas.
Jumbo loans are perfect for borrowers who need a larger loan to purchase a high-priced property, especially in big cities with high real estate values.
FHA mortgage
A government loan backed by the Federal Housing Administration for low- to moderate-income borrowers. FHA loans feature low credit score and down payment requirements.
VA mortgage
A government loan backed by the Department of Veterans Affairs. To be eligible, you must be active-duty military, a veteran, a Reservist or National Guard service member, or an eligible spouse.
VA loans allow no down payment and have exceptionally low mortgage rates.
USDA mortgage
USDA loans are a government program backed by the U.S. Department of Agriculture. They offer a no-down-payment solution for borrowers who purchase real estate in an eligible rural area. To qualify, your income must be at or below the local median.
Bank statement loan
Borrowers can qualify for a mortgage without tax returns, using their personal or business bank account. This is an option for self-employed or seasonally-employed borrowers.
Portfolio/Non-QM loan
These are mortgages that lenders don’t sell on the secondary mortgage market. This gives lenders the flexibility to set their own guidelines.
Non-QM loans may have lower credit score requirements, or offer low-down-payment options without mortgage insurance.
Choosing the right mortgage lender
The lender or loan program that’s right for one person might not be right for another.
Explore your options and then pick a loan based on your credit score, down payment, and financial goals, as well as local home prices.
Whether you’re getting a mortgage for a home purchase or a refinance, always shop around and compare rates and terms.
Typically, it only takes a few hours to get quotes from multiple lenders — and it could save you thousands in the long run.
Time to make a move? Let us find the right mortgage for you
Current mortgage rates methodology
We receive current mortgage rates each day from a network of mortgage lenders that offer home purchase and refinance loans. Mortgage rates shown here are based on sample borrower profiles that vary by loan type. See our full loan assumptions here.
A judgment is an order issued by a judge or jury to settle a lawsuit. This decision details the rights, responsibilities, and obligations of each party. For example, if you fail to pay a debt, the lender can take you to court. In this case, the judge may order you to pay the other party as part of the court’s final judgment.
The order can be issued in one of two forms:
A monetary judgment: A judgment that orders one party to pay the other party a specific amount of money.
A nonmonetary judgment: A judgment that involves a nonmonetary type of resolution, such as the exchange of property or services. For example, a contractor may be ordered to complete a service for a client.
There are several classifications for judgments, including:
In personam: This is the most common civil judgment classification. It occurs when one party is liable to another.
In rem: Rather than involving personal liability, in rem judgments hold liability over a specific item, such as property.
Quasi in rem: Quasi in rem judgments consider the legal rights of individuals and not necessarily all parties involved.
Ultimately, if you don’t pay a debt, the lender or bill collector can file a lawsuit against you to recoup the money. The judge or jury determines if and how much money you owe. These terms are laid out in the final judgment.
What Is a Judgment on Property?
Your property includes both physical items and money. That means judgment creditors can seek debt payment from more than your wages and bank accounts. They may also take back a car you financed or other personal property. Another option is placing a lien on some of your property, such as your home.
What Property Can Be Taken to Settle a Judgment?
Creditors must follow the law when applying a judgment to take, or seize, your property. Some things are exempt—which means they can’t touch those items or properties. Some examples include the home you live in, the furnishings inside it, and your clothes. State laws identify these items and set limits based on their value.
Non-exempt property can be taken to help meet a judgment debt. Your creditor can take or leverage these possessions in the following ways:
Wage attachments. This is known as wage garnishment. When your employer receives the proper legal notice, they must withhold a percentage of your wages. These payments are sent to the judgment creditor until your debt is paid. The Consumer Credit Protection Act caps these types of garnishments. The limit is 25% of your disposable weekly wages or the amount you earn that’s above 30 times the minimum wage. The lessor of these two amounts applies. Some states set the cap even lower.
Nonwage garnishment. If you’re retired, unemployed, or self-employed, your bank account may be garnished instead. Here, too, there are exemptions. Veterans payments, social security, and disability benefits are not eligible for nonwage garnishment. Some states add even more restrictions to the garnishment of bank funds.
Property liens. If you own real estate, your judgment creditor may file a legal claim against it. These liens notify lenders of the creditor’s rights to your property. That way, if you sell your real property, the debt must be paid out of the proceeds. In many states, liens are placed automatically when a judgment is entered.
Property levies. Judgments may also allow some of your non-exempt personal property to be taken through a levy. Law enforcement may seize things like valuable collections or jewelry to be sold at auction. Sales proceeds are applied to your debt.
What Are the Types of Judgments?
Judgments come in many forms. Below is a look at the five types of judgments.
Satisfied judgment: A satisfied judgment means the debt is settled. This doesn’t necessarily mean you have paid the debt in full. It could mean there’s a new payment arrangement and you’re making regular payments.
Unsatisfied Judgment: An unsatisfied judgment means the debt is not settled yet. You’re expected to follow the court order and make payments on the outstanding debt. Until you make your final payment or come to another agreement with the other party, it will remain an unsatisfied judgment.
Vacated Judgment: If you don’t agree with the court’s initial judgment, you have the right to appeal that decision. If the judge decides to dismiss the case, the initial order becomes a vacated judgment.
Summary Judgment: If both parties agree to the basic facts of the case, either party may request to skip the trial and go straight to a summary judgment. The judge issues this final judgment without going through the process of holding a trial.
Renewed Judgment: Some states allow creditors to seek a new judgment for specific reasons. If this happens, the judge may issue a renewed judgment. This judgment may void the initial judgment or serve as an additional order.
Three Ways of Getting a Judgment
There are several ways a civil judgment can be determined.
1. Judgment After Trial
As the name suggests, a judgment after trial is a decision that occurs only after a trial. Once the judge or jury hears all the evidence and makes a final decision, the judge issues a formal judgment in the case.
2. Consent Judgment
A consent judgment occurs when both parties negotiate a final settlement. The judge must approve this final agreement, which is done by issuing a formal consent judgment.
3. Default Judgment
A default judgment occurs when the defendant fails to respond to a summons and complaint. In this case, the judge issues a default judgment in favor of the plaintiff without hearing any evidence from the defendant.
Can Judgments Affect Your Credit?
Judgments can’t directly impact your credit because the details of these orders aren’t part of your credit report. However, it’s likely that issues leading up to the final judgment could affect your credit. For example, your payment history can remain on your credit report for up to seven years. If you have any missing or late payments that led to the judgment, this history can impact your credit score.
A judgment could also have a positive effect on your credit. For example, once the debt is paid, the account balance should change to zero on your credit report. This could help lower the amount of debt you owe, which could impact your credit utilization rate.
Once the judge issues a judgment, you can use Credit.com’s Free Credit Score service to see if it had any effect on your score. As you work to rebuild your credit, you can enroll in Credit.com’s ExtraCredit® program to monitor your credit score over time.
What Is a Judgment on a Credit Report?
Judgments aren’t reported on your credit report and don’t directly impact your credit score. However, judgments are public records, so lenders could still have access to this information. This could affect your ability to secure credit in the future.
What Happens After a Judgment Is Entered Against You?
Once the judge enters a judgment, both parties must abide by the order. For example, you must pay the amount of money ordered by the judge, and the creditor must mark the account paid in full once payment is made. If you can’t pay the amount all at once, you may be able to set up a payment arrangement. You’re legally obligated to make these payments.
What Happens After a Judgment Is Entered Against You?
The court enters a judgment against you if your creditor wins their claim or you fail to show up to court. You should receive a notice of the judgment entry in the mail. The judgment creditor can then use that court judgment to try to collect money from you. Common methods include wage garnishment, property attachments, and property liens.
State laws determine how much money and what types of property a judgment creditor can collect from you. These laws vary. So, you need to look to your own state for the rules that apply. A consumer law attorney can help you understand your state’s laws on judgment collections.
What Is the Difference Between a Civil Judgment and a Criminal Judgment?
There’s a major difference between civil court and criminal court.
A civil court typically involves disputes between two parties. For instance, it could involve a case between two individuals, two organizations, or one organization and one individual. These cases often pertain to a breach of contract, an unsettled debt or a lack of services.
Unless both parties agree to the facts of the case, the judge gives each party the opportunity to present evidence. For example, if a debt collector takes you to civil court for an unpaid bill, you can provide evidence of any payments you made. After hearing the evidence, the judge issues a final judgment, known as a civil judgment.
On the other hand, criminal court involves someone accused of breaking the law. The federal, state, or local government charges the accused party. If, after holding a trial, the defendant is found guilty or the defendant pleads guilty prior to the trial, the judge issues a criminal judgment. A sentence is issued later, which could include jail time or some other form of punishment.
What Can You Do to Avoid a Judgment?
Heading off a lawsuit is the best way to avoid a judgment. To do so, don’t ignore calls and correspondence from your creditor. Reach out to learn if they’ll accept suitable payment arrangements. Educate yourself on smart ways to pay debt collectors, and consider using the services of a debt management agency.
What if the loan company or debt collector has already started the lawsuit? Don’t skip court. Show up and fight. You may win if the statute of limitations has expired.
If you haven’t made a payment on an old debt for many years, you may have a successful legal defense. Most states set the time frame between four to six years. Collectors often still file suit because they win by default if you don’t show up. So, it’s important that you go to court with proof of your last date of payment.
If you successfully defeat or avoid a judgment, don’t stop there. Take some sensible steps to help you get out of and stay out of debt. Adopting these smart financial habits can also help prevent future judgment actions.
Additional FAQs about Judgments
How Long Can the Judgment Creditor Pursue Payment?
The answer depends on where you live, since state laws differ. Some states limit collection efforts to five to seven years. Others allow creditors to pursue repayment for more than 20 years. With the right to renew a judgment over and over in many states, it may last indefinitely.
Judgment renewals may be repeated as often as desired or limited to two or three times. This is another state-specific issue. Judgments can also lapse or become dormant. The creditor must then act within a specific time frame to revive it.
What Happens When You Can’t Pay a Judgment Filed Against You?
If you own a limited amount of property, it may all be exempt from judgment collection efforts. Also, you may not work or only work part-time. With the CCPA cap, that may mean you don’t earn enough for garnishment.
This inability to pay your debt is called being judgment proof, collection proof, or execution proof. While these circumstances exist, the judgment creditor has no legal way to collect on the debt. It’s not a permanent solution. The creditor may revisit collection efforts periodically for many years.
For a more permanent solution, you may want to consider filing bankruptcy. This process can discharge or eliminate most civil judgments for unpaid debt. Exceptions apply for things like child support, spousal support, student loans, and some property liens. Speak with a bankruptcy lawyer to learn whether this will help your situation.
Can You Settle a Judgment?
If you can afford to pay a decent lump sum, you may be able to negotiate a settlement. The judgment creditor may be willing to settle if they fear you will otherwise file bankruptcy. Get the terms and settlement amount you agree upon in writing. Be sure the creditor agrees to file a satisfaction of judgment with the court after they receive your pay off.
Can a Judgment Be Challenged or Reversed?
Challenging and overturning a judgment is difficult but not always impossible. This is the case if there were errors. Perhaps you weren’t notified of the suit or it was never your debt to begin with. Consult with an attorney to find out whether you have grounds to challenge the decision.
If you want to challenge a judgment, act fast. If you received prior notice of the case, you may have up to six months to reopen it. If you weren’t notified, you likely have up to two years to appeal. By reopening the case, you have the opportunity to fight the claim anew.
Do Credit Reports Still Include Judgments?
For many years, credit reports included judgment information. But that changed in 2017. The National Consumer Assistance Plan is responsible for creating more accurate credit data requirements. These changes resulted in the removal of civil debt judgments from credit reports.
Judgments are still a matter of public record. But the NCAP now requires that there be identifying information on these records for more accuracy. That data includes a social security number or date of birth along with the consumer’s name and address.
Public records cannot include this type of identifying information. It would violate privacy laws. This is the reason these judgments are no longer reported on credit files.
How Do You Find Out if You Have Any Judgments Against You?
You should receive a summons when you’re being sued. So, you can expect a default judgment will follow if you don’t show up in court. You can also expect a notification when a judgment is entered against you.
Mistakes happen, though. You may have missed the notice or moved to a new address. If that happens, you may not learn of the judgment until collection actions start.
What if You Find a Judgment on Your Credit Report?
Take action if you learn that judgments are still being reported by Equifax, Experian, or Trans Union. The NCAP eliminated this practice, so if there’s a judgment on your report, this is definitely something that you should dispute. Credit repair services, like Lexington Law Firm*, can help you challenge the errors on your behalf with the credit bureaus and request that they correct your report.
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Disclosure: Credit.com and CreditRepair.com are both owned by the same company, Progrexion Holdings Inc. John C Heath, Attorney at Law, PC, d/b/a Lexington Law Firm is an independent law firm that uses Progrexion as a provider of business and administrative services.
The VA home loan: Unbeatable benefits for veterans
For many who qualify, VA home loans are some of the best mortgages available.
Verify your VA loan eligibility. Start here
Backed by the U.S. Department of Veterans Affairs, VA loans are designed to help active-duty military personnel, veterans and certain other groups become homeowners at an affordable cost.
The VA loan asks for no down payment, requires no mortgage insurance, and has lenient rules about qualifying, among many other advantages.
Here’s everything you need to know about qualifying for and using a VA loan.
In this article (Skip to…)
Top 10 VA loan benefits
1. No down payment on a VA loan
Most home loan programs require you to make at least a small down payment to buy a home. The VA home loan is an exception.
Verify your VA loan eligibility. Start here
Rather than paying 5%, 10%, 20% or more of the home’s purchase price upfront in cash, with a VA loan you can finance up to 100% of the purchase price.
The VA loan is a true no-money-down home mortgage opportunity.
2. No mortgage insurance for VA loans
Typically, lenders require you to pay for mortgage insurance if you make a down payment that’s less than 20%.
This insurance — which is known as private mortgage insurance (PMI) for a conventional loan and a mortgage insurance premium (MIP) for an FHA loan — would protect the lender if you defaulted on your loan.
VA loans require neither a down payment nor mortgage insurance. That makes a VA-backed mortgage very affordable upfront and over time.
3. VA loans have a government guarantee
There’s a reason why the VA loan comes with such favorable terms.
The federal government guarantees these loans — meaning a portion of the loan amount will be repaid to the lender even if you’re unable to make monthly payments for whatever reason.
This guarantee encourages and enables private lenders to offer VA loans with exceptionally attractive terms.
4. You can shop for the best VA loan rates
VA loans are neither originated nor funded by the VA. They are not direct loans from the government. Furthermore, mortgage rates for VA loans are not set by the VA itself.
Instead, VA loans are offered by U.S. banks, savings-and-loans institutions, credit unions, and mortgage lenders — each of which sets its own VA loan rates and fees.
This means you can shop around and compare loan offers and still choose the VA loan that works best for your budget.
5. VA loans don’t allow a prepayment penalty
A VA loan won’t restrict your right to sell the property partway through your loan term.
There’s no prepayment penalty or early-exit fee no matter within what time frame you decide to sell your home.
Furthermore, there are no restrictions regarding a refinance of your VA loan.
You can refinance your existing VA loan into another VA loan via the agency’s Interest Rate Reduction Refinance Loan (IRRRL) program, or switch into a non-VA loan at any time.
6. VA mortgages come in many varieties
A VA loan can have a fixed rate or an adjustable rate. In addition, you can use a VA loan to buy a house, condo, new-built home, manufactured home, duplex, or other types of properties.
Or, it can be used for refinancing your existing mortgage, making repairs or improvements to your home, or making your home more energy-efficient.
The choice is yours. A VA-approved lender can help you decide.
Verify your VA loan eligibility. Start here
7. It’s easier to qualify for VA loans
Like all mortgage types, VA loans require specific documentation, an acceptable credit history, and sufficient income to make your monthly payments.
But, compared to other loan programs, VA loan guidelines tend to be more flexible. This is made possible because of the VA loan guarantee.
The Department of Veterans Affairs genuinely wants to make the loan process easier for military members, veterans, and qualifying military spouses to buy or refinance a home.
8. VA loan closing costs are lower
The VA limits the closing costs lenders can charge to VA loan applicants. This is another way that a VA loan can be more affordable than other types of loans.
Money saved on closing costs can be used for furniture, moving costs, home improvements, or anything else.
9. The VA offers funding fee flexibility
VA loans require a “funding fee,” an upfront cost based on your loan amount, your type of eligible service, your down payment size, and other factors.
Funding fees don’t need to be paid in cash, though. The VA allows the fee to be financed with the loan, so nothing is due at closing.
And, not all VA borrowers will pay it. VA funding fees are normally waived for veterans who receive VA disability compensation and for unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability.
10. VA loans are assumable
Most VA loans are “assumable,” which means you can transfer your VA loan to a future home buyer if that person is also VA-eligible.
Assumable loans can be a huge benefit when you sell your home — especially in a rising mortgage rate environment.
If your home loan has today’s low rate and market rates rise in the future, the assumption features of your VA become even more valuable.
VA loan rates
The VA loan is viewed as one of the lowest-risk mortgage types available on the market.
Verify your VA loan eligibility. Start here
This safety allows banks to lend to veteran borrowers at lower interest rates.
Today’s VA loan rates*
Loan Type
Current Mortgage Rate
VA 30-year FRM
% (% APR)
Conventional 30-year FRM
% (% APR)
VA 15-year FRM
% (% APR)
Conventional 15-year FRM
% (% APR)
*Current rates provided daily by partners of the Mortgage Reports. See our loan assumptions here.
VA rates are more than 25 basis points (0.25%) lower than conventional rates on average, according to data collected by mortgage software company Ellie Mae.
Most loan programs require higher down payment and credit scores than the VA home loan. In the open market, a VA loan should carry a higher rate due to more lenient lending guidelines and higher perceived risk.
Yet the result of the Veterans Affairs efforts to keep veterans in their homes means lower risk for banks and lower borrowing costs for eligible veterans.
VA mortgage calculator
Eligibility
Am I eligible for a VA home loan?
Contrary to popular belief, VA loans are available not only to veterans, but also to other classes of military members.
Find and lock a low VA loan rate today. Start here
The list of eligible VA borrowers includes:
Active-duty service members
Members of the National Guard
Reservists
Surviving spouses of veterans
Cadets at the U.S. Military, Air Force or Coast Guard Academy
Midshipmen at the U.S. Naval Academy
Officers at the National Oceanic & Atmospheric Administration.
A minimum term of service is typically required.
Minimum service required for a VA mortgage
VA home loans are available to active-duty service members, veterans (unless dishonorably discharged), and in some cases, surviving family members.
To be eligible, you need to meet one of these service requirements:
You’ve served 181 days of active duty during peacetime
You’ve served 90 days of active duty during wartime
You’ve served six years in the Reserves or National Guard
Your spouse was killed in the line of duty and you have not remarried
Your eligibility for the VA home loan program never expires.
Veterans who earned their VA entitlement long ago are still using their benefit to buy homes.
The VA loan Certificate of Eligibility (COE)
What is a COE?
In order to show a mortgage company you are VA-eligible, you’ll need a Certificate of Eligibility (COE). Your lender can acquire one for you online, usually in a matter of seconds.
Verify your VA home loan eligibility. Start here
How to get your COE (Certificate of Eligibility)
Getting a Certificate of Eligibility (COE) is very easy in most cases. Simply have your lender order the COE through the VA’s automated system. Any VA-approved lender can do this.
Alternatively, you can order your certificate yourself through the VA benefits portal.
If the online system is unable to issue your COE, you’ll need to provide your DD-214 form to your lender or the VA.
Does a COE mean you are guaranteed a VA loan?
No, having a Certificate of Eligibility (COE) doesn’t guarantee a VA loan approval.
Your COE shows the lender you’re eligible for a VA loan, but no one is guaranteed VA loan approval.
You must still qualify for the loan based on VA mortgage guidelines. The guarantee part of the VA loan refers to the VA’s promise to the lender of repayment if the borrower defaults.
Qualifying for a VA mortgage
VA loan eligibility vs. qualification
Being eligible for VA home loan benefits based on your military status or affiliation doesn’t necessarily mean you’ll qualify for a VA loan.
You still have to qualify for a VA mortgage based on your credit, debt, and income.
Verify your VA loan eligibility. Start here
Minimum credit score for a VA loan
The VA has established no minimum credit score for a VA mortgage.
However, many VA mortgage lenders require minimum FICO scores of 620 or higher — so apply with many lenders if your credit score might be an issue.
Even VA lenders that allow lower credit scores don’t accept subprime credit.
VA underwriting guidelines state that applicants must have paid their obligations on time for at least the most recent 12 months to be considered satisfactory credit risks.
In addition, the VA usually requires a two-year waiting period following a Chapter 7 bankruptcy or foreclosure before it will insure a loan.
Borrowers in Chapter 13 must have made at least 12 on-time payments and secure the approval of the bankruptcy court.
Verify your VA loan home buying eligibility. Start here
VA loan debt-to-income ratios
The relationship of your debts and your income is called your debt-to-income ratio, or DTI.
VA underwriters divide your monthly debts (car payments, credit cards, and other accounts, plus your proposed housing expense) by your gross (before-tax) income to come up with your debt-to-income ratio.
For instance:
If your gross income is $4,000 per month
And your total monthly debt is $1,500 (including the new mortgage, property taxes and homeowners insurance, plus other debt payments)
Then your DTI is 37.5% (1500/4000=0.375)
A DTI over 41% means the lender has to apply additional formulas to see if you qualify under residual income guidelines.
VA residual income rules
VA underwriters perform additional calculations that can affect your mortgage approval.
Factoring in your estimated monthly utilities, your estimated taxes on income, and the area of the country in which you live, the VA arrives at a figure which represents your “true” costs of living.
It then subtracts that figure from your income to find your residual income (e.g. your money “left over” each month).
Think of the residual income calculation as a real-world simulation of your living expenses.
It is the VA’s best effort to ensure that military families have a stress-free homeownership experience.
Here is an example of how residual income works, assuming a family of four which is purchasing a 2,000 square-foot home on a $5,000 monthly income.
Future house payment, plus other debt payments: $2,500
Monthly estimated income taxes: $1,000
Monthly estimated utilities at $0.14 per square foot: $280
This leaves a residual income calculation of $1,220.
Now, compare that residual income to for a family of four:
Northeast Region: $1,025
Midwest Region: $1,003
South Region: $1,003
West Region: $1,117
The borrower in our example exceeds VA’s residual income standards in all parts of the country.
Therefore, despite the borrower’s debt-to-income ratio of 50%, the borrower could get approved for a VA loan.
Verify your VA loan eligibility. Start here
Qualifying for a VA loan with part-time income
You can qualify for this type of financing even if you have a part-time job or multiple jobs.
You must show a 2-year history of making consistent part-time income, and stability in the number of hours worked. The lender will make sure any income received appears stable. See our complete guide to getting a mortgage when you’re self-employed or work part-time.
VA funding fees and loan limits
About the VA funding fee
The VA charges an upfront fee to defray the costs of the program and make it sustainable for the future.
Veterans pay a lump sum that varies depending on the loan purpose and down payment amount.
The fee is normally wrapped into the loan. It does not add to the cash needed to close the loan.
Find out if you qualify for a VA loan. Start here
VA home purchase funding fees
Type of Military Service
Down Payment
Fee for First-Time Use
Fee for Subsequent Use
Active Duty, Reserves, and National Guard
None
2.3%
3.6%
5% or more
1.65%
1.65%
10% or more
1.4%
1.4%
VA cash-out refinance funding fees
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
2.3%
3.6%
VA streamline refinances (IRRRL) & assumptions
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
0.5%
0.5%
Manufactured home loans not permanently affixed
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
1.0%
1.0%
VA loan limits in 2024
VA loan limits have been repealed, thanks to the Blue Water Navy Vietnam Veterans Act of 2019.
There is no maximum amount for which a home buyer can receive a VA loan, at least as far as the VA is concerned.
However, private lenders may set their own limits. So check with your lender if you are looking for a VA loan above local conforming loan limits.
Verify your VA loan eligibility. Start here
Eligible property types
Houses you can buy with a VA loan
VA mortgages are flexible about what types of property you can and can’t purchase. A VA loan can be used to buy a:
Detached house
Condo
New-built home
Manufactured home
Duplex, triplex or four-unit property
Find out if you qualify for a VA loan. Start here
You can also use a VA mortgage to refinance an existing loan for any of those types of properties.
VA loans and second homes
Federal regulations limit loans guaranteed by the Department of Veterans Affairs to “primary residences” only.
However, “primary residence” is defined as the home in which you live “most of the year.”
Therefore, if you own an out-of-state residence in which you live for more than six months of the year, this other home, whether it’s your vacation home or retirement property, becomes your official “primary residence.”
For this reason, VA loans are popular among aging military borrowers.
Buying a multi-unit home with a VA loan
VA loans allow you to buy a duplex, triplex, or four-plex with 100% financing. You must live in one of the units.
Buying a home with more than one unit can be challenging.
Mortgage lenders consider these properties riskier to finance than traditional, single-family residences, so you’ll need to be a stronger borrower.
VA underwriters must make sure you will have enough emergency savings, or cash reserves, after closing on your house. That’s to ensure you’ll have money to pay your mortgage even if a tenant fails to pay rent or moves out.
The minimum cash reserves needed after closing is six months of mortgage payments (covering principal, interest, taxes, and insurance – PITI).
Your lender will also want to know about previous landlord experience you’ve had, or any experience with property maintenance or renting.
If you don’t have any, you may be able to sidestep that issue by hiring a property management company. But that’s up to the individual lender.
Your lender will look at the income (or potential income) of the rental units, using either existing rental agreements or an appraiser’s opinion of what the units should fetch.
They’ll usually take 75% of that amount to offset your mortgage payment when calculating your monthly expenses.
VA loans and rental properties
You cannot use a VA loan to buy a rental property. You can, however, use a VA loan to refinance an existing rental home you once occupied as a primary home.
For home purchases, in order to obtain a VA loan, you must certify that you intend to occupy the home as your principal residence.
If the property is a duplex, triplex, or four-unit apartment building, you must occupy one of the units yourself. Then you can rent out the other units.
The exception to this rule is the VA’s Interest Rate Reduction Refinance Loan (IRRRL).
This loan, also known as the VA Streamline Refinance, can be used for refinancing an existing VA loan on a home where you currently live or where you used to live, but no longer do.
Check your VA IRRRL eligibility. Start here
Buying a condo with a VA loan
The VA maintains a list of approved condo projects within which you may purchase a unit with a VA loan.
At VA’s website, you can search for the thousands of approved condominium complexes across the U.S.
If you are VA-eligible and in the market for a condo, make sure the unit you’re interested in is approved.
As a buyer, you are probably not able to get the complex VA-approved. That’s up to the management company or homeowner’s association.
If a condo you like is not approved, you must use other financing like an FHA or conventional loan or find another property.
Note that the condo must meet FHA or conventional guidelines if you want to use those types of financing.
Veteran mortgage relief with the VA loan
The U.S. Department of Veterans Affairs, or VA, provides home retention assistance. The VA intervenes when a veteran is having trouble making home loan payments.
The VA works with loan servicers to offer loan options to the veteran, other than foreclosure.
Find out if you qualify for a VA loan. Start here
In fiscal year 2019, the VA made over 400,000 contact actions to reach borrowers and loan servicers. The intent was to work out a mutually agreeable repayment option for both parties.
More than 100,000 veteran homeowners avoided foreclosure in 2019 alone thanks to this effort.
The initiative has saved the taxpayer an estimated $2.6 billion. More importantly, vast numbers of veterans and military families got another chance at homeownership.
When NOT to use a VA loan
If you have good credit and 20% down
A primary advantage to VA home loans is the lack of mortgage insurance.
However, the VA guarantee does not come free of charge. Borrowers pay an upfront funding fee, which they usually choose to add to their loan amount.
The fee ranges from 1.4% to 3.6%, depending on the down payment percentage and whether the home buyer has previously used his or her VA mortgage eligibility. The most common fee is 2.3%.
Find out if you qualify for a VA loan. Start here
On a $200,000 purchase, a 2.3% fee equals $4,600.
However, buyers who choose a conventional mortgage and put 20% down get to avoid mortgage insurance and the upfront fee. For these military home buyers, the VA funding fee might be an unnecessary expense.
The exception: Mortgage applicants whose credit rating or income meets VA guidelines but not those of conventional mortgages may still opt for VA.
If you’re on the “CAIVRS” list
To qualify for a VA loan, you must prove you have made good on previous government-backed debts and that you have paid taxes.
The Credit Alert Verification Reporting System, or “CAIVRS,” is a database of consumers who have defaulted on government obligations. These individuals are not eligible for the VA home loan program.
If you have a non-veteran co-borrower
Veterans often apply to buy a home with a non-veteran who is not their spouse.
This is okay. However, it might not be their best choice.
As the veteran, your income must cover your half of the loan payment. The non-veteran’s income cannot be used to compensate for the veteran’s insufficient income.
Plus, when a non-veteran owns half the loan, the VA guarantees only half that amount. The lender will require a 12.5% down payment for the non-guaranteed portion.
The Conventional 97 mortgage, on the other hand, allows down payments as low as 3%.
Another low-down-payment mortgage option is the FHA home loan, for which 3.5% down is acceptable.
The USDA home loan also requires zero down payment and offers similar rates to VA loans. However, the property must be within USDA-eligible areas.
If you plan to borrow with a non-veteran, one of these loan types might be your better choice.
Explore your mortgage options. Start here
If you apply with a credit-challenged spouse
In states with community property laws, VA lenders must consider the credit rating and financial obligations of your spouse. This rule applies even if he or she will not be on the home’s title or even on the mortgage.
Such states are as follows.
Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
A spouse with less-than-perfect credit or who owes alimony, child support, or other maintenance can make your VA approval more challenging.
Apply for a conventional loan if you qualify for the mortgage by yourself. The spouse’s financial history and status need not be considered if he or she is not on the loan application.
Verify your VA loan home buying eligibility. Start here
If you want to buy a vacation home or investment property
The purpose of VA financing is to help veterans and active-duty service members buy and live in their own home. This loan is not meant to build real estate portfolios.
These loans are for primary residences only, so if you want a ski cabin or rental, you’ll have to get a conventional loan.
If you want to purchase a high-end home
Starting January 2020, there are no limits to the size of mortgage a lender can approve.
However, lenders may establish their own limits for VA loans, so check with your lender before applying for a large VA loan.
Spouses and the VA mortgage program
What spouses are eligible for a VA loan?
What if the service member passes away before he or she uses the benefit? Eligibility passes to an unremarried spouse, in many cases.
Find and lock a low VA loan rate today. Start here
For the surviving spouse to be eligible, the deceased service member must have:
Died in the line of duty
Passed away as a result of a service-connected disability
Been missing in action, or a prisoner of war, for at least 90 days
Been a totally disabled veteran for at least 10 years prior to death, and died from any cause
Also eligible are remarried spouses who married after the age of 57, on or after December 16, 2003.
In these cases, the surviving spouse can use VA loan eligibility to buy a home with zero down payment, just as the veteran would have.
VA loan benefits for surviving spouses
Surviving spouses have an additional VA loan benefit, however. They are exempt from the VA funding fee. As a result, their loan balance and monthly payment will be lower.
Surviving spouses are also eligible for a VA streamline refinance when they meet the following guidelines.
The surviving spouse was married to the veteran at the time of death
The surviving spouse was on the original VA loan
VA streamline refinancing is typically not available when the deceased veteran was the only applicant on the original VA loan, even if he or she got married after buying the home.
In this case, the surviving spouse would need to qualify for a non-VA refinance, or a VA cash-out loan.
A cash-out mortgage through VA requires the military spouse to meet home purchase eligibility requirements.
If this is the case, the surviving spouse can tap into the home’s equity to raise cash for any purpose, or even pay off an FHA or conventional loan to eliminate mortgage insurance.
Qualifying if you receive (or pay) child support or alimony
Buying a home after a divorce is no easy task.
If, prior to your divorce, you lived in a two-income household, you now have less spending power and a reduced monthly income for purposes of your VA home loan application.
With less income, it can be harder to meet both the VA Home Loan Guaranty’s debt-to-income (DTI) guidelines and the VA residual income requirement for your area.
Receiving alimony or child support can counteract a loss of income.
Mortgage lenders will not require you to provide information about your divorce agreement’s alimony or child support terms, but if you’re willing to disclose, it can count toward qualifying for a home loan.
Different VA-approved lenders will treat alimony and child support income differently.
Typically, you will be asked to provide a copy of your divorce settlement or other court paperwork to support the alimony and child support payments.
Lenders will then want to see that the payments are stable, reliable, and likely to continue for another 36 months, at least.
You may also be asked to show proof that alimony and child support payments have been made in the past reliably, so that the lender may use the income as part of your VA loan application.
If you are the payor of alimony and child support payments, your debt-to-income ratio can be harmed.
Not only might you be losing the second income of your dual-income households, but you’re making additional payments that count against your outflows.
VA mortgage lenders make careful calculations with respect to such payments.
You can still get approved for a VA loan while making such payments — it’s just more difficult to show sufficient monthly income.
VA loan assumption
What is VA loan assumption?
One benefit for home buyers is that VA loans are assumable. When you assume a mortgage loan, you take over the current homeowner’s monthly payment.
Verify your VA loan home buying eligibility. Start here
That could be a big advantage if mortgage rates have risen since the original owner purchased the home. The buyer would be able to acquire a low-rate, affordable loan — and it could make it easier for the seller to find a willing buyer in a tough market.
VA loan assumption savings
Buying a home via an assumable mortgage loan is even more appealing when interest rates are on the rise.
For example:
Say a seller-financed $200,000 for their home in 2013 at an interest rate of 3.25% on a 30-year fixed loan
Using this scenario, their principal and interest payment would be $898 per month
Let’s assume current 30-year fixed rates averaged 4.10%
If you financed $200,000 at 4.10% for a 30-year loan term, your monthly principal and interest payment would be $966 per month
Additionally, because the seller has already paid four years into the loan term, they’ve already paid nearly $25,000 in interest on the loan.
By assuming the loan, you would save $34,560 over the 30-year loan due to the difference in interest rates. You would also save roughly $25,000 thanks to the interest already paid by the sellers.
That comes out to a total savings of almost $60,000!
How to assume (take on) a VA loan
There are currently two ways to assume a VA loan.
The new buyer is a qualified veteran who “substitutes” his or her VA eligibility for the eligibility of the seller
The new home buyer qualifies through VA standards for the mortgage payment. This is the safest method for the seller as it allows the loan to be assumed knowing that the new buyer is responsible for the loan, and the seller is no longer responsible for the loan
The lender and/or the VA needs to approve a loan assumption.
Loans serviced by a lender with automatic authority may process assumptions without sending them to a VA Regional Loan Center.
For lenders without automatic authority, the loan must be sent to the appropriate VA Regional Loan Center for approval. This loan process will typically take several weeks.
When VA loans are assumed, it’s the servicer’s responsibility to make sure the homeowner who assumes the property meets both VA and lender requirements.
VA loan assumption requirements
For a VA mortgage assumption to take place, the following conditions must be met:
The existing loan must be current. If not, any past due amounts must be paid at or before closing
The buyer must qualify based on VA credit and income standards
The buyer must assume all mortgage obligations, including repayment to the VA if the loan goes into default
The original owner or new owner must pay a funding fee of 0.5% of the existing principal loan balance
A processing fee must be paid in advance, including a reasonable estimate for the cost of the credit report
Find out if you qualify for a VA loan. Start here
Finding assumable VA loans
There are several ways for home buyers to find an assumable VA loan.
Believe it or not, print media is still alive and well. Some home sellers advertise their assumable home for sale in the newspaper, or in a local real estate publication.
There are a number of online resources for finding assumable mortgage loans.
Websites like TakeList.com and Zumption.com give homeowners a way to showcase their properties to home buyers looking to assume a loan.
With the help of the Multiple Listing Service (MLS), real estate agents remain a great resource for home buyers.
This applies to home buyers specifically searching for assumable VA loans as well.
How do I apply for a VA loan?
You can easily and quickly have a lender pull your certificate of eligibility (COE) to make sure you’re able to get a VA loan.
Most mortgage lenders offer VA home loans. So you’re free to shop and compare rates with just about any company that catches your eye.
Getting a VA loan for your new home is similar in many ways to securing any other purchase loan. Once you find an ideal home in your price range, you make a purchase offer, and then undergo VA appraisal and underwriting.
VA appraisal ensures that the home meets its minimum property requirements (MPRs) and is structurally sound and safe for occupancy.
What’s more, VA-specific mortgage lenders are actually some of the highest-rated (and lowest-priced) on the market. Here are a few we’d recommend checking out.
Time to make a move? Let us find the right mortgage for you
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
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.
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.
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.
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.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Learn investment and tax strategies to help you achieve financial security and prepare for a prosperous retirement.
How can you balance saving for emergencies and investing for the future? What strategies can you employ to maximize your tax benefits and build a secure financial future? NerdWallet’s Kim Palmer and Alana Benson discuss investment strategies and tax planning to help you understand how to navigate your financial journey effectively. They begin with a discussion of investment strategies, with tips and tricks on understanding different investment accounts like 401(k)s and IRAs, leveraging compound interest, and the importance of starting investments early. Then, Alana discusses tax planning and filing in-depth, covering the intricacies of different tax forms like W-4s and W-2s, the significance of estimated taxes for freelancers, and strategies for managing capital gains taxes.
Kim and Alana delve into retirement planning and the challenges of active versus passive investing. They provide a framework for prioritizing your finances, emphasizing the creation of an emergency fund, taking advantage of employer 401(k) matches, and understanding the role of asset allocation based on age and risk tolerance. Additionally, they tackle the decision-making process in personal finance, such as choosing between paying off debt and investing, and the pros and cons of having a financial advisor.
Check out this episode on your favorite podcast platform, including:
NerdWallet stories related to this episode:
Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sean Pyles:
Hey listener, we’ve got a special episode in store for you today. Our investing and tax Nerds recently hosted a webinar going deep into how you can level up your investing and tax strategy. So we packaged that up into a podcast episode for you. The Nerds talk about what you need to know about different investing accounts, how to get help with your taxes and more. So here’s the webinar.
Kim Palmer:
Welcome everyone. I am Kim Palmer. I’m a personal finance writer at NerdWallet where we help people make smart decisions. One important note, we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. NerdWallet Inc is not an investment advisor or broker and does not provide personal financial advisory services. Today we are excited to talk to you about the basics of investing and taxes and we think we have some helpful info to share with you. You can always find more at nerdwallet.com or on the NerdWallet app. Our goal today is to kick off a helpful discussion about investing and tax information and tools. Alana Benson writes about investing topics including stocks, funds, and ethical investing. And now I will hand it over to Alana.
Alana Benson:
Thanks Kim. Hi everyone. Thank you for joining us today. So before we start, I just want to say a couple of things that often get forgotten when we’re talking about investing. So first, investing usually comes second to some other goals. If you’re having a hard time paying for necessities or you don’t have an emergency fund, it’s really important to focus on those things before we even start worrying about investing. Second, instead of scrimping, try to increase your income. So I didn’t start investing until I was in my late 20s, and that’s because one, I didn’t work at NerdWallet yet, so I literally didn’t know anything. And two, I was making around $25,000 a year, so I didn’t have much expendable income. And when you don’t have extra income, it’s really hard to prioritize investing and it just might not even be a good idea to do that.
When I started making more money, it was suddenly a lot more possible for me to invest for retirement. So if it’s possible for you and you want to be investing more, look for jobs that will pay you more or look into side hustles, but cutting back on your streaming services probably will not save you enough money for retirement. And finally, if you don’t have the money to invest now, that’s totally fine. Some people have serious money anxieties and others just don’t have the cash. Whatever your reason is, don’t stress too much about it. Just keep learning and when you’re able to, you can start investing. So why do we invest? What is the point of all this? And the answer is that it’s because we like money and that’s okay. There’s no shame in admitting it, I like money, most people like money. It’s because money isn’t just money. It’s not like Scrooge McDuck diving into pools of money and buying Maseratis. It’s not that.
It’s about not being stressed about your money all the time and it’s about being able to buy everything that you need and some stuff that you want comfortably without having money stress take up all of your energy. Money allows us to thrive instead of just survive and investing helps you make more money than you could ever possibly make just by working at a job. So okay, what actually is investing? This whole process is very strange. Okay. Investing is the process of money that you already have making additional money for you. And this works through what’s called compound interest. Compound interest means that your gains get a little bit bigger every year and that’s also why starting when you’re younger gives you a huge advantage and more money in the long run. So for example, you just start at that little number one in the box up there. Say you buy an investment for $100, if it goes up the average stock market return of 10%, it could then be worth $110, meaning that you’ve made $10.
Then that $10 that you earned also starts earning compound interest on top of the $100 you initially invested. That doesn’t sound like much of a profit, but imagine if you were doing it with way larger amounts of money over a way longer period of time. Now that 10% is an annualized rate, which means that you’re not going to get 10% every single year. In all likelihood, some years you’re going to finish up, some years you’ll finish down. But over the course of decades when you average all that out, you tend to get about 10%. The way you actually start investing is through an investing account. And there’s a couple of different types, but the type of investment account you have is actually really, really important because a lot of them have some pretty significant tax benefits that you want to take advantage of. So you’ve got your 401(k)s and these are offered through your employer. You add money to it and sometimes your employer matches it. So it’s basically free money. If you have a 401(k), you’ll likely choose your investments from a pre-selected list or a fund that will automatically adjust itself over time.
So this means 401(k)s are typically very hands off. IRAs on the other hand are investment accounts that you open up yourself. IRAs can be opened online through brokerages and actually at a lot of large banks, they also do that. So it’s likely you can open up an investment account just through your bank. Unlike with a 401(k), IRAs you’ll have to choose your own investments in those accounts. You may have heard about a thing called a Roth IRA or a Roth 401(k) and it’s good if you know the difference. So with a Roth, you pay taxes on your money now just like any other money that you earn and then the money you have invested inside that account grows tax-free and you can take it out tax-free in retirement. With a traditional IRA or 401(k), the money you contribute today is pre-tax.
So that is you get to deduct it from your income taxes this year. So it’s like a nice little treat this year, but then when you cash it out in retirement, you’ll owe income taxes on it. This is really, really important. I’ve seen a lot of people make this mistake. Your investment account is not an investment, so a Roth IRA, a 401(k), not an investment. So if you have a Roth IRA, that’s great, but that doesn’t mean you’re actually invested in anything. So you fund your investment account and then you buy investments from there. But I’ve heard of people opening a Roth IRA, putting in a bunch of money and then wondering why it didn’t grow over the last 10 years. So you have to purchase investments for your money to actually grow and if you don’t do it, you’ll miss out on all of those years of growth, so very important.
And there’s a couple different types of investments that you can choose from once you open and fund your investment account. So you’ve got stocks, I’m sure everyone’s heard of that, these are shares of ownership in companies and the way you make money from them is if they go up in value and some pay you a cut of the company’s profits on a regular basis. Then you’ve got bonds. This is when you loan money to companies or the government and they pay you interest. Funds, now these are very exciting because they’re basically just baskets of stocks and bonds that you buy all at once. So a fund is still a stock or bond based investment depending on the type of fund that you get. And there’s a lot of different kinds such as index funds or exchange traded funds and mutual funds, but they’re all collections of investments that you buy at one time.
And I think funds are pretty awesome because if you own a stock and that company goes out of business, you lose all of your money. But if you invest in a fund that covers 100 stocks and that same stock goes out of business, your investment is buoyed up by the other 99 companies. So again, all of these investments, stocks, bonds and funds, you buy them from your investment account and then you own them in there. All right, so let’s talk about the stock market, it’s this weird nebulous term that’s hard to understand. But the stock market is just where people buy and sell investments, but now people just trade investments online. So the stock market is made up of several what are called market indexes. Now these are basically just predetermined lists of companies and the performance of that overall list can tell us a lot about the health of the US economy.
So for example, the S&P 500, something you probably have all heard of, that’s just the list of 500 of the largest publicly traded companies in the US and it includes companies like Apple and Amazon. So when we say the stock market is down today, that means that on average most of those companies aren’t doing well. And you can’t invest in the literal stock market, but you can invest in funds that include all the same investments. So these are called index funds because they track a market index. So again, if you have an S&P 500 index fund, it should perform pretty closely to how the S&P 500 itself is actually performing. The S&P 500 goes up 10% a year on average and 6.5% after inflation. And this is just an average, so some years the market goes up more, some years it goes down less, but when done well, investing can potentially mean doubling your money every few years for doing basically nothing, which is my favorite way of earning money, by doing nothing. It’s great.
So let’s talk strategy. This is all about the way that you invest, when you put your money in and when you take your money out. So passive investing is where you buy that S&P 500 index fund and you keep adding money into it until you retire. It’s very boring, but it’s effective. So it can give you that 10% return on average over the long haul, but a lot of people want to make more than that 10%, and they do so by actively buying and selling stocks, crypto options and other high risk investments. They try to predict when they’ll be low, then they buy them and then they turn around and try to sell them when they’re high. So these people are called active traders or day traders. Only 20% of active traders make money over a six-month period. That is not a lot of people.
There have been a lot of studies over the years that show that active investing is a way less lucrative fashion than boring old passive investing with that index fund. Plus active investing is a lot more work, you have to do all kinds of research and you keep an eye on the markets and you can hypothetically earn more by actively trading versus passively earning the same amount as that historical return of 10%. But most people end up making less when they actually try it, and that’s because people are really bad at predicting things. And in order to make money on the overall stock market over the long term, you have to be really good at predicting things all the time. So maybe you make it big on one stock, but the odds of that happening again and again are very low. So let’s put all of this information together, the accounts, the actual investments and the strategy.
Here’s how financial advisors suggest you prioritize your money when you’re starting to invest. So the first thing you want to do is you’re not actually going to invest at all. The first thing is that you’re going to have an emergency fund. So this is money that you won’t actually put in the stock market, and that’s because when your money is invested, its value can change day by day. So say you have $1,000 and you want to use it for an emergency fund, but you invest it, when you have to fix something on your car suddenly, you go to check your money and its value could be $600 instead of $1,000 and that’s not good. If you put it in a high yield savings account, you can access that money at any time without risking its value. Plus right now the interest rates are really high.
So your money could be earning 4 to 5% just by sitting there. So next, you want to get that 401(k) match if it’s available to you because it’s free money. After that, it’s a good idea to look into IRAs. Both IRAs and 401(k)s have what’s called a contribution limit, which is just the maximum amount of money you can put in each of them every year. If you’re able to max out an IRA, then it’s a good call to move back to your 401(k). And the reason you switch around like that is because of the way the tax benefit works. So it’s likely more beneficial to invest in an IRA over a 401(k) if you’ve already gotten your match, if you have to choose between the two. Then if you max out your 401(k), you can move to a standard brokerage account. And this is not a list of everything you have to be doing right now.
You might be thinking, “Whoa, maxing out an IRA is $6,500, I cannot afford that”, and that is totally fine. So I like to picture it as a waterfall. So when you fill up your emergency fund, then you can start working on getting that 401(k) match. Only after that bucket is full should you then move on to investing in an IRA and so on. And wherever you’re at in your bucket filling journey is okay. It’s just nice to know what to do next when you’re ready for it. So we already talked about what accounts to invest from and the investments you can buy, but then do you just start buying a bunch of index funds or stocks or bonds? How do you know how much of each investment to get? And that is all about risk tolerance. And to understand that we have to understand how risk works over time.
If you’re investing for retirement and you’re in your 20s now, that means you have a ton of time for your investments to grow and then drop dramatically and then rise back up. So financial advisors would say you can afford to take on a bit more risk, AKA invest in riskier investments, because you have time for your investments to bounce back. Now, if you’re investing for your retirement and you’re 65, you don’t want to risk all the money you’ve been investing for years and years because you’re going to actually need to use it to pay for stuff in retirement pretty soon, so you want to protect it. And figuring out how much of each investment you should have is a fancy term called asset allocation, but it just means how much of your portfolio is in which of these investments.
And age is just a number, but typically when you’re younger, you may be able to afford to take more risk because you have more time for the stock market highs and lows to even out. So stocks, and okay, remember index funds and mutual funds are often made up of stocks so those count too, but those tend to carry more risk than investments like bonds. And an example of a 20-year-old’s investment portfolio, which includes all of your accounts so your 401(k), your Roth IRA, all of that together, that could be 100% stocks. And that’s fairly risky, but those 20 year olds are not going to retire for a long time. Now, a 65-year-old might have way more bonds because they don’t want to risk all that money they’ve earned over time. And one thing some investors do to mitigate risk is to slowly shift their asset allocation from high risk investments to low risk investments over time.
And again, I’m not a financial advisor and this is not personalized investment advice, but how much of each investment it’s good to have will usually depend on how much risk you are willing to take. And an investment portfolio can be really simple or really complicated. So you could have that one S&P 500 index fund and you purchase it from a Roth IRA, and that’s just all you do. Just if you want to keep it really simple or you can make it more complicated. So maybe you explore several stock-based funds such as international stocks and healthcare stocks and technology stocks, and you could invest in those types through a fund. So instead of buying 30 technology stocks, you just have one technology stock fund, then a small slice in bonds, and then an even smaller slice is crypto or other high risk investments. Though financial advisors have varying opinions on the safety of crypto.
So keep in mind, this is just an example and not necessarily what you should do personally, but it is really helpful to look up asset allocation portfolios through an online brokerage and see what they recommend for your specific age and when you plan on retiring. You can also talk with a financial advisor who can help guide you through those decisions. And investing is great because it can help you earn wealth, which you could spend on a boat, but more than likely one of your biggest investing goals will be retirement. And the sad truth is that in some things like retirement, they just cost so much that you’ll probably never afford them just by putting money in a savings account. And that’s why we say we have to invest for retirement. And the truth is that most people just aren’t saving enough for retirement.
So you’ll probably have a lot of expenses and you have to pay for that in retirement and some of it’s necessary like food or housing or medical care and some of it is travel or bucket list stuff, but you may not be working anymore or at least not as much as you were. And once you factor in inflation, it’s likely that a dollar today will be worth way less when you’re in retirement. And saving for retirement has gotten even more difficult because you can’t necessarily afford to live on social security. Medicare doesn’t always pay for your health needs and pensions aren’t really as common as they used to be. And because of all this, it’s really important to start investing for retirement sooner rather than later.
And if you’re early in your career, it might seem silly to worry about retiring right now, but if you start investing sooner, you actually spend less on retirement than if you start investing later in life overall and that’s because of compound interest. So our retirement calculator shows that if you start putting away $100 per month, that could grow to nearly $400,000 in 35 years. And it’s always good to know how much you should be trying to invest. When you have a long-term goal in mind, you want to know what that number is. So a retirement calculator can be a big help to figure that out, including NerdWallet’s retirement calculator. No shame, I’m going to plug it, but some financial advisors recommend saving 15% of your pre-tax income for retirement. So okay, let’s break that down. What does that look like?
So if you make $100,000 a year, again just because easy math, that would be $15,000 annually that you’re trying to save for retirement. But if you had a 5% match on your 401(k), you’d already be saving $10,000 a year between the $5,000 you make and the $5,000 your employer puts in. And then if you contributed another $5,000 to your Roth IRA, you’d already meet your target goal of saving $15,000 a year for retirement. You should also think about how much you can make during those peak earning years. If you’re younger, what career are you looking to have? You can look up what those wages tend to look like on a site like Glassdoor or ask someone in your life who is in that career path, and maybe do that tactfully because you’re asking about money. But figuring out what you want to be when you grow up may not be something you want to think about right now.
But to be honest, I studied English in college and no one told me about my job prospects. I figured that I would have to write a super famous book or be a teacher and you don’t have to have everything figured out now, but it doesn’t hurt to see how much a potential field could earn and figure out what careers are open to you. And just keep in mind that relationship between your earnings and investing like we talked about in the beginning. And if you’re later in your career, it is harder to take advantage of compound interest, but some of those investment accounts have those catch up contributions that we talked about so you’re able to contribute more after a certain age. Thank you all so much for listening to me talk very fast for a long time, and now I will hand it back over to Kim to talk about taxes. Thanks so much.
Kim Palmer:
Great, thank you so much, Alana. That was great. Someone actually asked in a pre-submitted question, “Why do I have to pay taxes?” Well, here is why. Taxes are used to pay for a lot of different things like clean water, roads, schools, healthcare, and the military. And your tax return is due every year in mid-April to the IRS. We’ll talk a little bit later about what to do if you need an extension, but in general that is the deadline. But first, let’s back up a little bit. When you file taxes, there is so much paperwork. One really important one is the W-4. That is the document that your employer asks you to fill out when you start a new job. And it plays a really big role in telling your employer how much in taxes to take out of each paycheck. It asks you things like your filing status, dependents, how much tax to withhold, and if you get a really big tax bill or a big refund, then you might want to go back and revisit your W-4 just to make sure you’re withholding enough but not too much.
There’s also the W-2, which is a document that your employer sends you to summarize how much in total they took out of your paycheck the previous year, and you’ll need to reference all those numbers when you file your tax return. If you are self-employed or you work a side hustle, then taxes won’t be automatically withheld from your paycheck, and that means you might have to pay something called estimated taxes, which is typically four times a year. In January, you’ll get something called a 1099 form that outlines how much money any company paid you, and then you’ll use that information when you file your return. And then finally, the 1040 is the main form you use when you file taxes, and we’ll drop a link in the chat for more about that. Okay, so you have all of your forms set. How do you actually file your taxes?
You can do it yourself through the IRS. You can use an online tax prep software or you can use a tax professional like an accountant or a tax preparer. If you do it on your own, you can either use paper forms or get access to brand name tax prep software through an IRS service called Free File. But it’s important to know that only people who make below a certain income qualify for the Free File program. If you use tax software like TurboTax, H&R Block or NerdWallet Taxes powered by Column Tax, many of these providers use a Q&A style to help you do your taxes and some even offer paid upgrades that connect you directly to a tax professional. If your finances are really complicated and you want some extra help, then you can also work with a tax preparer such as a certified public accountant.
You do want to make sure to ask them lots of questions and check their credentials before you agree to share your financial information. And you also want to check to see if they have a prepared tax identification number, which is an ID that’s required for anyone who files tax returns for compensation. The US does not have a flat tax system, and that means that portions of your income can be taxed at different rates. There are currently seven tax rates for federal income taxes that run from 10% to 37%. And which tax rate applies to you depends on your income and your filing status. So you might hear people say, “I’m in the 12% bracket” or “I’m in the 22% bracket”, but being in a tax bracket doesn’t mean you pay that tax rate on everything you make. And in reality, people’s income can fall into several different tax brackets depending on how much they make.
Portions or chunks of your income are taxed at different rates and some of those different taxes are then added together. So for example, some of your income could be taxed at a rate of 10%, another chunk could be at 12%. The more you make, the higher the tax rate might be on some of your income. And depending on the state where you pay your income taxes, you might pay a flat rate or a progressive rate similar to the federal structure. A small handful of states have no state income tax. If you want to pay less, you can look for tax breaks. Tax credits and tax deductions are two tools that can help you potentially minimize your tax bill, but they do work in different ways. Tax deductions reduce your taxable income. As a simplified example, a $25,000 tax deduction on $100,000 of taxable income means that only $75,000 of that income will get taxed.
Tax credits directly reduce your tax bill by the value of their credit. So this means if you owe $2,000 in taxes and you’re eligible for a $1,000 tax credit, you’ll end up owing $1,000. Tax credits tend to be more valuable because they have the potential to pack a bigger punch, so you definitely want to try to take all the tax credits you qualify for, and you could even get money back if a credit is refundable. Common tax credits include the earned income tax credit, the child tax credit, the lifetime learning credit, and the American opportunity credit and savers credit.
All right, I alluded to this at the beginning, but what happens if you’re not going to be ready by mid-April? What do you do? If you know you won’t be able to file on time before tax day, you can file for a free extension with the IRS and that gives you until mid-October to file your return. But you want to make sure that at least 90% of what you think you’ll owe in April is covered by an estimated tax payment or your withholdings. Otherwise, the IRS can hit you with a penalty for late payment. The failure to pay penalty is really no joke. It’s 0.5% of your unpaid taxes each month your payment is late plus interest. If you file late and you did not file an extension, you could also get hit with a failure to file penalty, which is 5% of your unpaid taxes each month that your payment is late. There is some good-ish news, if you file late but you don’t owe anything, you won’t get penalized but that doesn’t mean you’re not still obligated to file.
If you don’t, the IRS could file a return on your behalf and you might miss out on a refund if you’re owed one. And if your tax bill is so high that you can’t pay it off, you do have options. You can set up a long-term or short-term payment plan with the IRS.
I know that was a whole lot of information and taxes can seem scary, but we break down lots of popular tax questions and terms on nerdwallet.com. We have some time to address some pre-submitted questions from the audience ranging from about Roth IRAs to the pros and cons of having a financial advisor. And I do want to give a reminder here as we answer these questions that we are not tax or investing advisors. We are writers who focus on these fields and what we say is not investing or tax advice. So with that said, let’s dive into these questions. A question that came to us in an email was: how do you choose between paying off credit card debt and investing in saving for emergencies?
I really love this question because I think it speaks to some of the biggest challenges of personal finance, navigating these choices. And the answer is it’s really up to you. Many financial advisors say that the first step is to create a starter emergency fund, and you can read more in our article that we’ll link to, Should I Pay Off Debt Or Save? And you’ll see most people think about saving $500 to $1,000 first and then after that to consider contributing enough to a workplace retirement plan if they have access to one, and then contributing 3% to 5% of income to an IRA or a Roth IRA. And then financial advisors say people can consider focusing on paying off high interest debt and amp up investing efforts once they have paid that off. And now Alana, I’ll turn over to you. Perhaps you can answer the questions about Roth IRAs.
Alana Benson:
Absolutely. So a couple folks were wondering, before we went over everything, what a Roth IRA is and how does it work and when is it worth it to open one? So we already covered this a little bit, but again, it’s an individual retirement account and it lets you contribute money that you’ve already paid taxes on. So think about when you get your paycheck. That money has already had taxes taken out of it. So once you hit age 59 and a half and you have held the Roth IRA for at least five years, you can withdraw your contributions and any earnings, which is a fancy word for money that you earn from investing, without paying taxes again. And whether it’s worth it is up to you, especially if you’re trying to decide between a Roth IRA and a traditional IRA because it’s about when you pay those taxes and if you have a traditional IRA, you do get that tax break right now.
So that’s a personal decision. But you can also take out money tax-free from your Roth IRA later in life. So if that’s something that you are really trying to parse out, it might be good to talk to a financial advisor because they can help you with that question. We had two other questions. The first one is: how do you calculate how much money to put in your Roth IRA if you make over the maximum amount? So we didn’t actually cover this, so Roth IRAs do have income limits, but there is something called a Backdoor Roth that lets you contribute money first to a traditional IRA, pay taxes on it and then roll that money into a Roth IRA. And then our last question is: what are the pros and cons of having a financial advisor and how do you find one?
This is such a good question. The pros and cons really depend on your situation. The catchall term ‘financial advisor’ is used to describe a wide variety of people and services, including investment managers, financial consultants, financial planners. First and foremost, you always want to verify a financial professional because financial advisor doesn’t require people to be vetted. Certain things like a certified financial planner or a CFP, those actually have a very high level of education and have a certification that you can verify online. So anyone that you are talking about money with, you want to make sure that you are vetting them. And some of these people can just talk to you about your finances and some of them can actually manage your investments for you if you want that. Financial advisors, depending on the kind that you choose, can be pretty expensive. A robo-advisor is like an AI version of a financial advisor.
You just set up an account for one and then they charge you a pretty modest fee. And based on your age and your risk tolerance, it will manage your investments for you. An online financial advisor can offer more services and you can actually talk to a human being, but those do tend to cost a little bit more. And then you could go to an in-person financial advisor, depending on their credentials, that might cost even more, but sometimes it’s really nice to talk to somebody that you know and you can grow that relationship with them over time.
Kim Palmer:
Great. Thank you, Alana. And I think, actually, I can squeeze in one more question that we received. How do taxes work with investment accounts? How much do we set aside so we aren’t surprised by a tax bill? Which is a great question. If you’re selling stocks from a brokerage investment account, then you should be aware of three words, capital gains taxes. Those are the taxes you’ll pay when you sell assets for profit. Assets that you have owned for more than a year are subject to long-term capital gains tax, and the capital gains tax rate is 0%, 15% or 20% on most assets. Capital gains taxes on assets held for a year or less are subject to short-term capital gains. If you regularly trade stocks or other investments, you might be subject to short-term capital gains.
Those profits are taxed as ordinary income based on your tax brackets, which we went over before. Your final tax bill depends on a number of different factors. If you don’t want to be surprised, estimate what you’ll owe using tools such as a tax calculator or IRS worksheets. If needed, consider setting aside enough to cover the tax bill or paying estimated taxes and as always, your specific situation will differ and we are not tax professionals. We hope that you enjoyed this webinar and learned something today. If you’d like to get even more clarity on your finances and continue learning with NerdWallet, consider signing up for an account with us at nerdwallet.com. Thank you so much for joining us.
Sean Pyles: And that’s all we have for this episode. To send the Nerds your money questions, call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. Here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This webinar episode was produced by Alikay Wood, Sheri Gordon, and me. We had editing help from Liz Weston, Sara Brink mixed our audio, and a big thank you to NerdWallet’s editors for all their help. And with that said, until next time, turn the Nerds.
For some people, freelancing is the way they earn their living, relishing the freedom and flexibility of this type of work. For others, it’s a smart way to bring in some income in addition to a salary. Regardless of whether you’re managing your freelance business as a full-time endeavor or a side hustle, one fact is true: You’ve got to pay taxes on your earnings.
In this guide, you’ll learn about the steps to take in your situation, including:
• How do you pay taxes as a freelancer?
• Why are freelance taxes higher?
• What are some ways to reduce taxable income?
• What deductions should freelancers take?
• What should freelancers know about tax refunds?
How Taxes for Freelancers Are Different
The first thing to note is that taxes for freelancers are notably different in two major ways: Freelancers pay a larger percentage of their income (because of self-employment tax), and they’ve got to make estimated tax payments every quarter.
What Is Self-Employment Tax?
For the 2023 tax year, self-employment tax is 15.3%. That’s 12.4% for Social Security and 2.9% for Medicare.
That doesn’t mean that’s all that freelancers pay. Self-employment tax is what freelancers pay on top of regular income taxes. The percentage you pay in income taxes depends on what tax bracket you’re in but can range from 10% to 37%.
Why do freelancers pay a self-employment tax? When you’re an employee for a business who receives a W-2 form, your company pays some taxes for you.
But if you’re a freelancer — whether a writer, photographer, dog walker, or consultant — your clients don’t pay any taxes for you, so you’ve got to pick up the slack.
And don’t forget: You may also have to pay state and local taxes, depending on where you live.
What Are Quarterly Taxes?
Most people think of April 15 as the dreaded Tax Day for all Americans, when they have to pay their taxes. But taxes aren’t actually due on April 15: They’re due when you earn the money.
That’s why employers withhold taxes from every paycheck. Tax season is just that special time where the IRS wants you to go over the numbers and make sure the right amount was withheld — and pay up if you actually owe more. (Or, if you overpaid, file your return to claim a refund.)
But since taxes aren’t withheld when freelancers earn revenue from clients, the government expects freelancers to make quarterly tax payments throughout the year.
Freelancers have two options:
1. Pay 100% of the taxes they owed the prior year, split over four payments.
2. Pay 90% of the taxes they’ll owe for the current year, split over four payments.
Note that these percentages may be different if you’re a farmer, fisherman, or high-income earner.
Estimated taxes are among the most complicated parts of being a freelancer, and you can face underpayment penalties if you don’t send Uncle Sam your fair share throughout the years.
You can check out the IRS’s guidelines for estimated taxes , but a tax professional may be worth the cost if you’re confused.
💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.
Paying Taxes as a Freelancer
Now that you understand that freelancers must pay more in taxes and that they need to keep track of more tax deadlines, consider the actual process for freelancer tax filing.
Here’s how to pay freelance taxes in five steps.
1. Determine If You Have to Pay Freelancer Income Tax
First and foremost, it’s a good idea to make sure you actually have to pay freelancer taxes. If you fit the bill of the IRS’s definition of an independent contractor, you’ll have to file as a freelancer and will be subject to self-employment taxes.
The IRS says you’re an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
It’s a rather broad designation and might fit traditional freelance gigs like writers and graphic designers, but it can also apply to app-based workers, like drivers for Uber and Lyft, and even doctors, lawyers, and veterinarians.
Even if you receive a W-2 from an employer but made other revenue on the side, you’re still subject to freelancer income taxes — and must make estimated payments on that income.
2. Calculate How Much You Earned
As a freelancer, you may receive 1099-NECs from clients for the work you do, detailing just how much money you made from them (as long as you made $600 or more).
Even if you don’t receive a 1099, you still have to report any income you made on your tax return. This means paying taxes if you are paid on Venmo or another platform versus by check or a direct deposit.
If you don’t declare the income, you’re committing tax fraud — and the IRS can find out during an audit.
You may want to use a tax preparation checklist to help you organize these materials. You might start by compiling all your 1099-NECs and any other income forms, including 1099-INTs, 1099-Ks, 1099-MISCs, and W-2s, and then input them on your tax return or into your tax software. If you have additional income not represented by any forms, you’ll be able to report that as well.
3. Compile Your Business Expenses
As a freelancer, you can deduct genuine business expenses from your taxable income. The more expenses you have, the lower your adjusted gross income — and the less you have to pay in taxes.
These are called tax deductions. Many tax filers choose to take the standard deduction: $13,850 for single people or married individuals filing separately and $27,700 for married couples filing jointly. However, freelancers with a lot of business expenses might earn a larger deduction by itemizing all their business expense deductions.
Common Tax Deductions for Freelancers
Business expenses can vary significantly depending on the kind of work you do, but you may be able to to use some of these freelancer tax deductions, like:
• A portion of your rent or mortgage (your home office deduction)
• Phone and internet bills
• Any computer and software expenses
• Automotive expenses, including miles on your car when used for business (and only for business)
• Office supplies
• Travel expenses
• Marketing and advertising expenses
• Continuing education
Freelancers may also be able to take the qualified business income deduction and self-employment tax deduction.
Other Tax Deductions and Tax Credits
Business expenses may apply to freelancers specifically, but independent contractors can take advantage of other common tax deductions and credits.
Other common tax deductions include mortgage interest payments, charitable contributions, student loan interest payments, and the state and local tax deduction.
Tax credits are also a useful tax tool and can greatly reduce your tax bill as a freelancer. Some popular tax credits include the child tax credit, Earned Income Tax Credit, and electric vehicle tax credit.
Recommended: Fastest Ways to Get Your Tax Refund
4. Account for Estimated Payments
If you made estimated tax payments the previous year, don’t forget to apply those to your tax form when filing. After all, if you’ve handed over a chunk of change to the IRS already, you’ll want credit for it.
You’ll add your total payments to line 26 on Form 1040 if filling out the form yourself, but most tax software and accountants should prompt you for this information.
5. File and Calculate Estimated Payments
The last step in how to pay freelance taxes: You’re now ready to complete your forms, and send in your tax return and any payments that you owe. And it’s not necessarily just federal taxes that are needed for freelancer tax filing: Depending on where you live, you may owe state, local, and school district income taxes as well.
After filing, surprise: You’re not done yet. You’ll also need to estimate taxes for the current year. Your first quarterly payment is due on Tax Day in April.
If you’re working with an accountant, they can help you calculate how much you’ll likely owe and print out vouchers for you to mail in with your payments. If you wind up making significantly more or less throughout the year, you can adjust your estimated payments to match. That’s part of learning how to budget on a fluctuating income.
Freelancer Tax-Filing Tips
Freelancing and taxes can seem complicated. Here are tips to help you save money and hit all your deadlines.
Plan for Retirement as a Freelancer
Reducing your taxable income is helpful when you have to pay significantly more in taxes on your earnings. One way to do this — and prepare for your future — is to open a retirement account and make pre-tax contributions.
You can contribute to a traditional IRA, but there are also retirement plans designed for self-employed individuals, including a SEP IRA and a solo 401(k). It’s worth educating yourself about how these work and contribution limits so you can find the best option for your financial situation and aspirations.
Research Deductions
You may be tempted to take the standard deduction when filing, but if you have a lot of business expenses, you may earn a larger tax break by itemizing. Tax software and accountants generally know all the different types of taxes and guidelines. They can help you find all the tax deductions you qualify for, but it never hurts to do some research on your own.
Stay Organized
Organization is crucial when running your own business — and that holds true at tax time. By organizing your bills and tracking your income throughout the year (even on a daily basis), you should have good records of all your revenue and expenses.
Find record- and receipt-keeping systems that work for you. You may also want to set calendar reminders so you never miss a quarterly tax payment deadline.
Work with a Tax Professional
Freelancer income taxes can be challenging and confusing. If you’re overwhelmed and worried about making a mistake, it may be worth the money to hire an accountant or tax preparer.
Plus, the tax-filing fee may count as a deductible business expense for next year.
Understand Tax Refunds for Freelancers
Know that it is unlikely that you’ll get a tax refund as a freelancer. What often triggers a tax refund is that a full-time employee had too much money withheld for taxes from each paycheck and their overpayment comes back to them. (They can adjust their W-4 employee withholding tax form to avoid this situation in the future.)
But as a freelancer, it is unlikely you are overpaying your taxes, especially if you are tracking your income and paying the appropriate amount of quarterly taxes.
Recommended: Maximizing Your Time and Money
The Takeaway
Taxes can get more complicated if you’re a freelancer. You likely will pay more in taxes (thanks to the self-employment tax), and you’ll probably need to make quarterly estimated payments. It’s wise to regularly track and review your earnings and expenses so you can stay on top of how you are doing. For many freelancers, working with a tax professional is the best path forward.
Also worth noting: As a freelancer, you need several tools to stay organized and run your business, including a bank account.
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Better banking is here with up to 4.60% APY on SoFi Checking and Savings.
FAQ
Why is freelance tax so high?
Freelance taxes are higher because they include self-employment tax. This additional 15.3% is what employers traditionally pay on behalf of their employees. In the case of freelancers, they’re both the employer and the employee so they have to cover that amount.
Do I need to declare freelance income?
Yes, you must declare all freelance income. Even if you didn’t make enough to trigger a 1099 from a client — or that client forgot to send you a 1099 — you must report any and all income to the IRS.
What happens if you don’t file freelance taxes?
If you don’t make quarterly tax payments as a freelancer, you could be subject to underpayment penalties when you go to file. If you don’t pay at all, you’ll be subject to Failure to File and Failure to Pay penalties. You’ll owe interest on top of the fines — and eventually could face jail time if you don’t pay.
Can freelancers pay taxes annually?
While freelancers must file taxes annually like everybody else, they are usually required to make quarterly estimated taxes since no taxes are being withheld from their payments throughout the year.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
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Tracking down an old 401(k) may take some time, and perhaps the quickest way to find old 401(k) money is to contact your former employer to see where the account is now. It’s possible that your lost 401(k) isn’t lost at all; instead, it’s right where you left it.
In some cases, however, employers may cash out an old 401(k) or roll it over to an IRA on behalf of a former employee. In that case, you might have to do a little more digging to find lost 401(k) funds. If you ever wished you could click on an app called “Find my 401(k),” the following strategies may be of use.
4 Ways to Track Down Lost or Forgotten 401(k) Accounts
There’s no real secret to how to find old 401(k) accounts. But the process can be a little time consuming as it may require you to search online or make a phone call or two. But it can be well worth it if you’re able to locate your old 401(k).
There are several ways to find an old 401(k) account. Here are a handful that may prove fruitful.
Contact Former Employers
The first place to start when trying to find old 401(k) accounts is with your previous employer.
If you had more than $5,000 in your 401(k) at the time you left your job, it’s likely that your account may still be right where you left it. In that case, you have a few options for what to do with the money:
• Leave it where it is
• Transfer your 401(k) to your current employer’s qualified plan
• Rollover the account into an Individual Retirement Account (IRA)
• Cash it out
When your plan balance is less than $5,000 your employer might require you to do a 401(k) rollover or cash it out. If you’re comfortable with the investment options offered through the plan and the fees you’ll pay, you might decide to leave it alone until you get a little closer to retirement. On the other hand, if you’d like to consolidate all of your retirement money into a single account, you may want to roll it into your current plan or into an IRA.
Cashing out your 401(k) has some downsides. You would owe taxes on the money, and likely an early withdrawal penalty as well. So you may only want to consider this option if your account holds a smaller amount of money. If you had less than $5,000 in your old 401(k), it’s possible that your employer may have rolled the money over to an IRA for you or cashed it out and mailed a check to you.
Track Down Old Statements
If you have an old account statement, you can contact your 401(k) provider directly to find out what’s happened to your lost 401(k). This might be necessary if your former employer has gone out of business and your old 401(k) plan was terminated.
When a company terminates a 401(k), the IRS requires a rollover notice to be sent to plan participants. If you’ve moved since leaving the company, the plan administrator may have outdated address information for you on file. So you may not be aware that the money was rolled over.
Either way, your plan administrator should be able to tell you which custodian now holds your lost 401(k) funds. Once you have that information, you could reach out to the custodian to determine how much money is in the account. You can then decide if you want to leave it where it is, roll it over to another retirement account, or cash it out.
Check With Government Agencies
Different types of retirement plans, including 401(k) plans, are required to keep certain information on file with the IRS and the Department of Labor (DOL). One key piece of information is DOL Form 5500. This form is used to collect data for employee benefit plans that are subject to federal ERISA (Employee Retirement Income Security Act) guidelines.
How does that help you find your 401(k)? The Department of Labor offers a Form 5500 search tool online that you can use to locate lost 401(k) plans. You can search by plan name or plan sponsor. If you know either one, you can look up the plan’s Form 5500, which should include contact information. From there, you can reach out to the plan sponsor to track down your lost 401(k).
Search National Registries
Another place to try is the National Registry of Unclaimed Retirement Benefits. This is an online database you can use to search for an unclaimed 401(k) that you may have left with a previous employer. You’ll need to enter your Social Security number to search for lost retirement account benefits.
In order for your name to come up in the search results, your former employer must have entered your name and personal information in that database. If they haven’t done so, it’s possible you may not find your account this way. 💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).
What Should I Do With Recovered Funds?
If you do manage to recover an old 401(k) account and its assets, you’ll have some options as to what to do with it. In many cases, it might be a good idea to roll it over into another retirement account to try and stay on track with your retirement savings.
Another important point to consider: If you’ve changed jobs multiple times, it’s possible that you could have more than one “lost” 401(k) — and taken together, that money could make a surprising difference to your nest egg.
Last, if you were lucky to have an employer that offered a matching 401(k) contribution, your missing account (or accounts) may have more money in them than you think. For example, a common employer match is 50%, up to the first 6% of your salary. If you don’t make an effort to find old 401(k) accounts, you’re missing out on that “free money” as well.
But if you’re unsure of what to do, it may be worth speaking with a financial professional for guidance.
Further, if you’re not able to find lost 401(k) accounts you still have plenty of options for retirement savings. Contributing to your current employer’s 401(k) allows you to set aside money on a tax-deferred basis. And you might be able to grow your money faster with an employer matching contribution.
What if you’re self-employed? In that case, you could choose to open a solo or individual 401(k). This type of 401(k) plan is designed for business owners who have no employees or only employ their spouses. These plans follow the same contribution and withdrawal rules as traditional employer-sponsored 401(k) plans, though special contribution rules apply if you’re self-employed. 💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.
The Takeaway
There are several ways to try and find an old 401(k) account, but for most people, the best place to start is by contacting your old employers to see if they can help you. From there, you can also try reaching out to government agencies, tracking down old statements, or even searching through databases to see what you can find.
Saving for retirement is important for most people who are trying to reach their financial goals – as such, if you have money or assets in a retirement account, it may be worthwhile to try and track it down. Again, it may be worth consulting with a financial professional if you need help.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
Is it possible to lose your 401(k)?
It’s possible to lose money from your 401(k) if you’re cashing it out and taking a big tax hit or your investments suffer losses. But simply changing jobs doesn’t mean your old 401(k) is gone for good. It does, however, mean that you may need to spend time locating it if it’s been a while since you changed jobs.
Do I need my social security number to find an old 401(k)?
Generally, yes, you’ll need your Social Security number to find a lost 401(k) account. This is because your Social Security number is used to verify your identity and ensure that the plan you’re inquiring about actually belongs to you.
What happens to an unclaimed 401(k)?
Unclaimed 401(k) accounts may be liquidated or converted to cash if enough time passes, and that cash could be transferred to a state government, where it will be held as unclaimed property.
Can a financial advisor find old 401(k) accounts?
A financial advisor may be able to help, but the simplest way to find old 401(k) accounts is contacting your former employer. It’s possible your money may still be in your old plan and if not, your previous employer or plan administrator may be able to tell you where it’s been moved to.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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When it comes to buying a home, the significance of securing a mortgage with a competitive rate cannot be overstated. Imagine finding your dream home, only to realize the financial burden of a less-than-ideal mortgage rate.
This is where the expertise of a mortgage broker becomes invaluable. With their in-depth understanding of the mortgage landscape and access to a broad network of lenders, mortgage brokers play a crucial role in ensuring you don’t just find a loan, but the best possible loan for your situation.
Consider the impact: A difference of even 0.5% in your mortgage rate could mean saving or spending thousands over the life of your mortgage loan. In today’s market, where every little saving counts, the right mortgage rate can significantly affect your monthly budget and long-term financial planning.
Mortgage brokers offer a streamlined path through the complex process of loan comparison and application, saving you time, stress, and most importantly, money. Whether you’re in the process of home buying for the first time or looking to add to your portfolio, understanding the value a mortgage broker brings to the table is the first step towards securing your financial future.
What a Mortgage Broker Does
A mortgage broker serves as your ally in the journey toward homeownership, offering more than just a bridge to potential lenders. They dive into the vast sea of mortgage options, evaluating lenders and loan programs with an expert eye to pinpoint the ones that align with your unique financial landscape. But how exactly do they accomplish this? Let’s break it down.
Tailoring the Search to Your Financial Profile
Every homebuyer’s financial situation is distinct, with varying income levels, credit histories, and long-term goals. Mortgage brokers start by understanding these intricacies.
They assess your financial health, scrutinize your income, credit score, and debt-to-income ratio, and then use this information to filter through loan options. This personalized approach ensures that the recommendations they provide are not just any loans, but loans tailored to your specific needs.
Evaluating Lenders and Loan Programs
Mortgage brokers don’t just randomly select lenders. They perform a comprehensive analysis, comparing interest rates, loan terms, and qualification criteria across a wide spectrum of lenders.
This includes major banks, credit unions, and niche financing companies, some of which you might not have access to on your own. Their goal is to find you a loan that not only has competitive rates but also favorable terms that match your financial situation.
Overcoming Financial Challenges
Consider a scenario where a borrower has a solid income but a less-than-stellar credit score. A mortgage broker can identify lenders who are more lenient or specialized in handling similar profiles. Or, for self-employed individuals, brokers are aware of which lenders are more receptive to non-traditional income documentation, making what might seem like a daunting process simpler in finding suitable options.
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Best Mortgage Lenders
How a Mortgage Broker Can Help You
Engaging with a mortgage broker can significantly elevate your home buying journey, offering bespoke assistance that aligns with your unique financial and personal circumstances. Here’s a deeper dive into the ways a mortgage broker can be indispensable to prospective homeowners.
Streamlining the Loan Comparison Process
Mortgage brokers excel in their ability to filter through the vast array of loan options, identifying those that best fit your financial situation and home buying goals. This service is invaluable, saving you considerable time and effort that would otherwise be spent navigating through complex loan terms and conditions on your own.
Expert Negotiations on Your Behalf
With their extensive knowledge of the mortgage industry and relationships with multiple lenders, brokers are adept at negotiating terms that may not be directly accessible to you. This can include lower interest rates, reduced fees, or more favorable loan terms, directly impacting your financial well-being over the life of your mortgage.
Handling Paperwork and Coordination
The home loan process involves a significant amount of paperwork, from application forms to financial disclosures. A mortgage broker helps you compile the necessary documentation and ensures that all paperwork is completed accurately and submitted promptly, minimizing delays or issues.
Providing Tailored Financial Solutions
Brokers are particularly valuable for buyers with unique financial backgrounds — such as self-employed individuals, those with variable incomes, or buyers with a complex credit history. They have the expertise to find lenders who are more flexible with their lending criteria, providing solutions that might not be available through traditional channels.
Ongoing Support and Guidance
From the initial consultation to closing, a mortgage broker offers continuous support and guidance. They can clarify complex terms, answer questions, and provide updates throughout the process, ensuring you’re well-informed and confident in your decisions.
The Pros and Cons of Using A Mortgage Broker
Utilizing a mortgage broker comes with a host of advantages, but it’s important to consider the full picture. Let’s explore the nuanced benefits and potential drawbacks, enriched with real-life examples, for a more comprehensive understanding.
Pros
Access to Expertise and Options
One significant advantage is the broker’s role as an expert guide through the complex mortgage landscape. Their access to a broad array of lenders means they can offer various loan options tailored to your specific needs.
Case Study: Overcoming High Debt Ratios
For instance, a family with a high debt-to-income ratio was able to secure a favorable mortgage through a broker who knew which lenders offered more lenient qualification criteria, turning a challenging situation into a home-buying success story.
Cons
While brokers can offer invaluable assistance, there are considerations to keep in mind. Awareness of these aspects can help you make informed decisions.
Variability in Rates and Terms
It’s crucial to remember that not all deals brokered are set in stone. Interest rates and terms can fluctuate, which means the initial estimates might change. Engaging in open discussions about these possibilities can prepare you for any adjustments.
Direct Deals Might Be More Beneficial
In some cases, directly engaging with loan officers at your financial institution might offer more competitive mortgage options. It’s worth speaking to a loan officer at your bank or credit union to see what they have to offer before making a decision. This direct approach can sometimes yield benefits, especially if you have a strong relationship or history with the financial institution.
Mitigating the Drawbacks
Understanding how to leverage the benefits while minimizing the downsides involves clear communication with your broker about all potential options and staying informed about your own financial institution’s offerings.
The Cost of Hiring a Mortgage Broker
When considering the services of a mortgage broker, it’s important to understand how they are compensated for their expertise. Most often, mortgage broker fees are paid by the lenders, though there are situations where the borrower might cover these costs. This flexibility in the payment structure means that, in many instances, engaging a broker may not result in direct out-of-pocket expenses for you.
Brokers typically earn their income through commissions, which are usually between 1% and 2% of the loan’s total amount at closing. These costs can often be incorporated into your mortgage, becoming part of the loan’s overall financial setup. Despite the potential fees, the financial benefits that brokers can provide often far outweigh these costs.
In addition to their commission, brokers might also receive compensation through loan origination fees, administrative charges, upfront fees, or a yield-spread premium. Having a transparent conversation about the broker’s fee structure early on is crucial to avoid any surprises later in the process.
Although the idea of paying additional fees for a broker might seem significant, it is a strategic investment. The savings on your mortgage interest over time can substantially surpass the cost of the broker’s fee, making their services a valuable asset in your home buying or refinancing journey.
Finding the Right Mortgage Broker for You
With the abundance of mortgage brokers available, selecting the right one can seem daunting. Here are strategic steps to ensure you partner with a broker who best suits your needs:
Seek referrals from people you trust, like family, friends, or your real estate agent.
Confirm their professional credentials through the National Mortgage Licensing System.
Look for membership in recognized industry associations, such as the National Association of Mortgage Brokers, as a sign of professionalism and integrity.
Research online reviews to gauge their reputation and client satisfaction.
Discuss their fee structure upfront to understand how they are compensated.
Consult the Better Business Bureau to check for any complaints or issues.
Bottom Line: The Value of a Mortgage Broker
While searching for the ideal home loan can seem overwhelming, the right mortgage broker can significantly reduce your stress and workload. Their expertise and services not only simplify the loan comparison and application process but can also lead to significant savings on interest, making their cost a worthwhile investment in your financial future.
By carefully selecting a broker who aligns with your needs and financial goals, you position yourself to secure a mortgage that benefits you in the long term, both financially and personally.
Frequently Asked Questions
Do I need to use a mortgage broker to get a mortgage?
No, you are not required to use a mortgage broker to get a mortgage. You can also apply for a mortgage with a direct lender, such as a bank or credit union.
How do mortgage brokers make money?
Mortgage brokers typically earn a commission from the lender for successfully arranging a mortgage. This commission is typically a percentage of the loan amount. They may also charge you a fee as part of your closing costs.
How do I choose a mortgage broker?
If you decide to work with a local broker, make sure they are experienced, reputable, and have a proven track record. You can ask for recommendations from friends and family, or research mortgage brokers online to find one that meets your needs.
Can a mortgage broker help me if I have bad credit?
A mortgage broker may be able to help you secure a mortgage even if you have less than perfect credit. However, you may have to pay a higher interest rate or provide a bigger down payment to compensate for the increased risk to the lender.
Can a mortgage broker help me with refinancing my mortgage?
Yes, a broker can help you with refinancing your mortgage. They can work with you to find a lender that offers the best terms for your specific needs and help you navigate the refinancing process.