Important Mortgage Documents You’ll Need to Sign

Estate agent giving house keys to client after signing agreement contract real estate with approved mortgage application form

Buying a new house is an incredibly exciting time in your life. It can also be an incredibly stressful one. I am a firm believer in reducing stress by eliminating all the possible unknowns. I believe that buying a house is stressful (aside from a large amount of money you are spending) because few people really know what to expect. It just seems like one more document to fill out, another set of statements to fax, and one more phone call to make. If you have an awareness of what is needed and a schedule when the paperwork and phone calls are needed, then you can be better prepared and relax a little bit. You can start by reading this article about residential mortgage documents so you can have some expectation of what is coming your way.

What Is A Mortgage?

Before I jump right into an explanation of mortgage documents, I want to first explain a mortgage. When you think about buying a house mortgage, I am sure you know that typically comes with a large loan and a relatively high monthly payment. This is will most likely be the biggest payment you make each month. There are not many people that can afford to pay for a house with the money they have saved, so they usually need to take out a loan, or mortgage, that allows them to buy a house and make payments to the lender until the loan is paid back. As with all loans, the lender adds interest to the money you borrow as a fee for allowing you to borrow the money in the first place. That is how the bank makes money, by charging you interest and fees.

When you borrow money for a mortgage, you are using the house that you are buying as collateral. That means you are stating that you promise you will repay the money and if you do not, the lender can take your house as payment. Mortgages can either be a fixed rate or an adjustable-rate mortgage. A fixed-rate mortgage means that the interest rate is fixed and remains the same for the life of your mortgage. An adjustable-rate mortgage means that the rate will change over the life of the mortgage. There are different adjustable-rate mortgages, so the rate changes based on the criteria around your mortgage.

 

Mortgage Application Documents

There is a lot to know about mortgages before you consider buying a house. To determine whether you’ll qualify for a mortgage loan, you need to know what mortgage lenders look at. Even though we live in a paperless world, one of the areas that have not gone paperless is mortgages. Not only is there a lot of paperwork for you to fill out, but there are a lot of mortgage documents and statements that you need to provide to the lender. What is good to know is that the documents are relatively easy to fill out, there are just a lot of them. When you get any document that you need to fill out, make sure you read the entire document and fill out the form completely. Do not skip over any areas and make sure the information is as correct as possible.

Listed below are many of the documents you must fill out or provide when applying for a mortgage.

Mortgage Application

One of the most important mortgage documents you will fill out is the actual loan application. It is called a Uniform Residential Loan Application. It requires information from every person whose name is going on the loan. That may be you, you and your spouse, or you and your partner. No matter who is it, you all must fill out the loan application. This document requires information about you, the house you want to purchase, previous employer information, financial information, and some other questions. It is important that you fill out the information completely and correctly. One of the next steps is the lender asking you for proof of all of the information on this document. You can think of this document as the first page of all your mortgage paperwork. The closing documents are the last pages and all the supporting information goes in the middle.


Income Verification

You will come to realize that all of the mortgage documents are important. When the lender asks you to fill out a document, or submit proof of something, they give you a due date. It is important that you meet those requirements because failure to do so can result in being denied a mortgage. On your loan application, you list your income and then the lender wants to see proof of it. They want to know that you earn enough money to pay the mortgage payment. They want to know how long you have been with your current employer as well as how much you earn. When you have a long term employment history with the same employer, lenders see that to mean that you are reliable.

The documents a lender may request are:

W2s

A lender is most likely going to request W2s for the past two years for each person applying for the mortgage. If you do not have access to these records, you may have to contact the IRS to get copies. If you have breaks in your employment, you may need to write a written explanation as to why

Pay stubs

These are the best way for a lender to see what amount of money is coming home with each payment. Most likely, you will need to provide 30 days of pay stubs. For most people that is two pay stubs, but for those who are paid weekly, they will need to provide four. If you receive any other payments that you are reporting on your application, you must provide proof of that, too

Tax returns

Lenders want to see how much you claimed and deducted on your tax returns. In addition to providing tax returns, you may also fill out a form that allows the lender to request the transcript directly from IRS

Additional income

If you are self-employed, then you may have to provide some additional documentation, such as a profit and loss statement, 1099s, and three years of tax returns. If you receive any type of alimony or child support, you may need to provide the court order along with bank statements or checks to prove this

Assets and Debts

Some additional mortgage documents that you should be aware you will need to provide are ones that show your assets and debts. Lenders are especially interested in your debt and your debt to income ratio. They want to know how much debt you have in relation to the amount of income you have coming in each month. It may be helpful to you, especially if you have a high amount of debt, if you create an account to save money to pay for your house so that you can show you have money prepared for that. This fund can also help you when it comes to early costs with purchasing a home, such as furniture, or any repairs or upgrades that you may have to make. Lenders are interested that you are making sound financial decisions in general.

Their goal is to make sure that you will be able to continue to pay your mortgage for the entire length of your mortgage. On the mortgage application, you list out all of your debts and the lender may want to see proof of those debts as well as your bank statements to show your assets.

The documents a lender may request are:

Bank statements

Lenders may request two to three statements of all your bank accounts. They use these documents to verify your income, balances in your accounts, and where you are getting the money for your down payment. If you have large deposits in your account, the lender is going to want an explanation of the source. Some, but not all lenders, allow you to use a gift for a down payment. If your lender allows a gift, you may have to get the gifter to sign a document stating that it was a gift and repayment is not expected

Retirement accounts

Lenders want to see two to three months of statements from any investment accounts that you list on the mortgage application. This can include 401k, IRAs, CDs, and stocks.

Closing Documents

The mortgage documents that I mentioned above are the documents that are requested when you are applying for a mortgage and typically before you are actually approved for the loan. If you apply for one loan and it is not approved, you may decide to apply for a different one. If that is the case, you should expect to have to provide the same documentation again. There may be some additional documents that you have to provide, depending on your situation.

If you have been renting a home for at least a year, you may need to provide proof of that rent. If you have recently divorced, you may need to provide the divorce decree and child support. This information may also be important if the divorce has impacted your credit. If you have had a bankruptcy and foreclosure, then you may have to provide some additional documentation. You may need to provide proof that the debts have been paid. You also may need to wait at least seven years to purchase a home.

Closing Disclosure

Once you have finally made it to closing, you may not be out of the woods, yet, as far as mortgage documents are concerned. You still have some additional forms to sign. You may not have to fill them out, but you have to review them and sign them. And you should have the opportunity to review the documents three days prior to your scheduled closing date. When you review these documents, you want to verify that your name is spelled correctly. In addition, verify that the loan amount, interest rate, loan type, and purpose line up with what you are expecting. You do not want any surprises when it comes to those documents.

In addition, read all of the fine print to determine if there is a penalty if you pay off your mortgage early. You also want to make sure that there is not a balloon payment for your mortgage that you were not previously aware of before signing the paperwork. You also want to make sure that the estimated monthly payment matches the estimate that you received for your loan. The amount of money that you must bring to closing is also listed on these documents, so you want to make sure that you are aware of that amount and that you have the cash to bring to closing. You do not want to get into the office to sign the paperwork and be surprised.

Promissory Note

This is one of the mortgage documents that is your agreement to repay the money you borrow. It should list the amount you are borrowing, late payment penalties, and your interest rate. If you have an adjustable interest rate, there should be details about how and when your rate can change.

Deed of Trust

In the list of mortgage documents, this is the one that gives you your rights as a borrower. It also states that if you do not pay your mortgage, the lender can foreclose and take your house. This document contains a section that states you will not use hazardous material in your home. It also states that if you sell the home listed on the documents, then you must repay the loan in full.

Escrow and Right of Recission

These mortgage documents tell you some important information. Escrow is an account that holds money for you and then pays your taxes and homeowners insurance. This account takes money from each mortgage payment and it sits there until those bills need to be paid. This document outlines how much money is being put in your escrow account and then outlining how it is being used. You want to make sure you understand the money that is going in and out of this account.

The right of recission document basically states that you have the right to cancel your loan within three business days. This document is only included when you are refinancing your primary residence. If this is not a refinance, you will not sign this document.

Difference Between a Bank and Mortgage Company

When you are looking for a mortgage lender, you have two options available to you, a traditional bank or a mortgage company. A bank is probably the lender type with which you are most familiar. They usually have one person dedicated to mortgages. This person completely understands all of the mortgage products the bank offers. They help you with your financial situation by taking an in depth look at your financial situation and looking for ways you can improve it. They may not be able to offer you a loan if your credit score is too low. Typically, the bank pays its employees a salary so they are not charging you extra fees for their services.

A mortgage company employs a large number of employees that specialize in lending and financial products. They have more options to provide you. If you have a low credit score, a mortgage company may be able to get you approved for loans whereas a traditional bank may not be able to. A mortgage company will assess your credit score and income and look for mortgage options that are the best fit for you. Mortgage companies work off commission and may pass that cost along to you in extra fees. The other side of that is they may work harder for you to get your mortgage approved. No matter which option you choose, the mortgage documents that you need to fill out will remain the same.

Conclusion

I have run through a list of mortgage documents that you are going to have to fill out and sign when you want a mortgage. There are always special circumstances that may require you to fill out some additional documents that are not listed here. These are the major ones that you should expect to sign. If you do not sign them, you may want to ask your lender why you did not get that document. You do not want to get to the final days right before closing and find out you have to obtain some more documents and you only have hours to do so.

First-Time Homebuyer Tips You Don’t Want to Miss

Model house, construction plan for house building, keys, calculator and clipboard.

You have just made a really big decision. The decision to stop renting from someone else and buy your own home. Buying your first home is not only a big life decision it is a big financial decision. It will change the way you spend money and your priorities within your budget. But it’s also exciting to have a place to call your own. A place where you can paint the walls without asking anyone for permission. A place where you can change out the faucets just because you feel like it. If you are embarking on this process here are some first-time homebuyer tips you don’t want to miss.

First Time Homebuyer? Do Not Miss These Helpful Tips

Buying a home is usually the largest financial decision a person makes. But following our homebuyer tips will help get you through the mortgage process. The first thing to do is to save enough money for both the down payment on the property and all of the costs that come up while trying to close the deal. Once you’ve saved the money run your own credit check before any potential lenders do to assess your credit score and catch anything that has been reported in error. Once you are confident in your credit, visit several lenders and become pre-approved for a mortgage. That makes you more attractive to sellers.

Start Saving

Ideally, you are paying yourself first out of every paycheck and are building savings. In order to buy a home, your lender is going to require a cash down payment, usually of 20 percent of the purchase price. According to the real estate website Zillow, the median price of a home in the United States is $247,084. While certainly there are some areas where houses are less expensive and other areas where houses are more expensive, 20 percent of the median price of $247,084 is a down payment of almost $50,000.

Even if you have been saving regularly, you may not have enough for the full down payment. So if you are committed to purchasing your own home, you may have to readjust your budget to divert more money to savings. This might be a time to set a financial goal of having a certain amount of down payment money saved by a specific date.

It’s also not enough to just save the amount of the down payment. You will also need enough cash on hand to pay the costs associated with closing on the property.

Check Your Credit Score

If you are going to try and qualify for a mortgage you should probably do your own credit checkup first. Check with some of the major credit reporting agencies like Experian, Equifax, and TransUnion to see what your credit score is like. A credit score is generally calculated as a three-digit number. Scores that are in the high 600s are thought of as good credit and scores in the middle 800s are considered to be excellent. Higher credit scores give you access to mortgages with lower interest rates.

One of our first-time homebuyer tips is to do your own credit checkup you can also catch potential problems in advance and get them resolved. Maybe a credit agency reported that you made a late payment when you didn’t. Or maybe there is something on the report that doesn’t have anything at all to do with you. If you see the problems in advance you have the opportunity to address them and clean up your credit history.

Get Pre-Approved for a Loan

Once the down payment money is saved and you’ve checked on your credit score one of our next first-time homebuyer tips is to get approved for a residential mortgage. This is where you begin encountering the paperwork portion of this process. In order to get pre-approved for a home loan, you will need to provide a prospective lender with:

  • Social Security Number
  • Tax returns from the last 2 years
  • W-2s from employers for the last 2 years
  • 30 days worth of paycheck stubs
  • 60 days worth of bank account activity statements

During the pre-approval, process lenders will dig into your financial well-being. They want to establish your creditworthiness, your debt-to-income ratio, employment history, current income and a tally of your assets and liabilities. Once they pre-approve you they will you a letter that says that. Many sellers want to see that letter before they will consider an offer. The letter is generally good for 60 to 90 days.

You aren’t limited to just visiting one lender for pre-approval. You can shop around to several.

Find Your New Home

Things to consider when buying a new house

Once you have saved enough money to cover the down payment and closing costs and you have been pre-approved for a mortgage it is time to go shopping for that new home. You can start to get a feel for the housing market where you want to live by taking advantage of online listings. One of our first-time homebuyer tips is to browse through the real estate listings at Realtor.com, Trulia and Zillow. You can see what the inventory is like that is in your price range. How many bedrooms? How many bathrooms? Are you looking at single-family or multi-family dwellings? What are prices like in the center of the city as opposed to 15 miles away in the suburbs?

The photos and virtual house tour videos let you get a real glimpse of what you’ll find inside. Is the kitchen hopelessly outdated in harvest gold and avocado or has it already been updated with more modern finishes? Do the bedrooms have walk-in closets or are they much smaller? Are the bathrooms small or spa-like?

Once you get a better feel for where you want to be and what you can afford one of our first-time homebuyer tips is to engage a buyer’s agent in your search. Buying a property is a major financial and emotional investment. Experts agree that a first-time homebuyer needs an agent in their court. A real estate professional can interpret the market, explain trends, comb through the legalese and negotiate on your behalf. You want a real estate agent making offers on your behalf and evaluating any counter-offers. Your realtor should be able to tell you when the time is right to sign on the dotted line and when you shouldn’t.

How Do I Find a Real Estate Agent?

The best place to get a referral to a real estate agent is through word of mouth. If you have had any friends or colleagues rave about their recent home buying experience, find out who their agent was. Another one of our first-time homebuyer tips is to select a realtor that is connected to you or your circle.

If you don’t know anyone who has a great real estate agent, look for an agency with positive reviews. And keep in mind there are different realtors with expertise in different parts of the market. You might not want to engage with a specialist in million-dollar homes if the top of your budget is $250,000. That agent may have different expertise than you need.

One of our homebuyer tips during the search is to remember that there might not be a perfect home. To satisfy your budget you might have to compromise. A garage might have been tops on your wish list until you find that perfect cottage with a gravel driveway. A fireplace might have been non-negotiable until you found that townhouse with the family room built-in bookcases instead.

Trust your instincts. You will be living in the house. When you feel like you have found the perfect place, you probably have. This is the part where you need a professional real estate agent to guide you through the process of making an offer on the property and potentially having to come up with a counteroffer. Expect some back and forth before you come to an agreement.

Choose the Right Mortgage

When this process began you learned where to shop for a mortgage by visiting several lenders to get pre-approved for a loan. Once you have settled on a purchase price you have to go back to these lenders and formally apply for a loan. They will likely have some mortgage options for you.

We connect you to reputable lenders quickly and efficiently. By filling out this form below, you allow us to research the database and find unique offers suitable for your situation. Sounds good? You can see if you can get a mortgage loan, right now:


Fixed-Rate Mortgage

A fixed-rate mortgage has one pre-determined interest rate that lasts for the life of the loan. The payment on a fixed-rate loan doesn’t change over time. That means the payment will be a consistent financial obligation for the homeowner.

Adjustable-Rate Mortgage

This type of mortgage begins with lower interest rates but will be adjusted in the future to correspond with current market trends. An adjustable-rate mortgage is like a game of chance. After a certain amount of time, the interest rate and the payments could go up, or they could go down. Adjustable Rate Mortgages are often favored by buyers who want to get into a home in the least expensive way but are prepared to increase their financial commitment down the road.

Balloon Mortgages

Balloon mortgages are the least common types of mortgages. They have a fixed monthly payment but at the end of the loan an extra payment, usually a very large one, is due.

There are some federally backed mortgage options for those who qualify.

FHA Loans

These loans are guaranteed by the Federal Housing Administration. They were created for low to moderate-income homebuyers. FHA loans require smaller down payments than conventional loans and usually have lower interest rates. FHA loans have strict terms but they are popular with first-time homebuyers because of the reduced down payment.

VA Loans

U.S. Armed Forces veterans may qualify for loans from the Department of Veterans Affairs. Sometimes the VA loans will act as a bank and provide direct loans for veterans. Other times the VA will guarantee a portion of the loan that is made by a private lender.

What are the Terms of a Mortgage?

Lenders usually write mortgages for either 15 or 30 years. The longer the loan the more you will pay in interest, but your monthly payments will be lower.

What is Private Mortgage Insurance?

Private Mortgage Insurance, or PMI, is purchased when the buyer is making a down payment of less than 20 percent of the selling price. It protects the lender in case the borrower defaults on the loan. The lender arranges for this type of coverage with a private insurance company. Sometimes the total cost of the PMI is due in one big payment at the closing. More commonly it is rolled into the monthly mortgage payment. One of our first-time homebuyer tips is to monitor how much equity you have built up over time by making mortgage payments. When you get to a certain amount you will be able to cancel your PMI.

What are Mortgage Points?

Mortgage points are fees homebuyers pay to lenders to get a reduced interest rate on a mortgage. That’s why they are also known as discount points or a way to buy down the interest. Generally, each point is worth 1 percent of the amount of the loan. Financial experts often recommend this strategy for homebuyers who are planning to stay in their homes for a lengthy amount of time because it lowers the interest. One of our first-time homebuyer tips is to calculate whether or not you should pay points for the interest rate deduction you by looking for your “break-even” point. Divide the cost of the points by the monthly savings you get from the points to find out how long you have to stay in the house to make it financially worthwhile.

Home Inspection

After the seller has accepted your offer and your lender is exploring mortgage options there is one very important step to take. Another of our first-time homebuyer tips is to schedule a home inspection. A professional home inspector is trained to look for things that may already be a problem with the home or things that are about to become a problem. Having a home inspection helps to eliminate surprises after the deal is closed.

Home inspectors generally look at the quality of the roof and whether or not there is any termite damage or damage from other pests around the home. They can look at the well or water system, the septic system and test for radon. They also look at fireplaces, chimneys, HVAC systems, the condition of the windows and more.

Once you have the home inspection report in hand you will be able to make decisions about repairs and whether to ask the seller to take care of some things before closing. Sometimes sellers will hire someone to do the work that was uncovered in the home inspection. Sometimes they will reduce the selling price but leave it up to the buyer to make repairs.

Don’t Underestimate Closing Costs

It is quite an accomplishment to save enough money for a down payment on a house. But the costs associated with buying a home don’t stop there. There are costs associated with trying to get a mortgage including an application fee, an origination fee and a fee for the lender to run a credit check. The lender will require an appraisal of the property to determine its value and that is a cost that is absorbed by the buyer. The buyer will pay for the home inspection. The property lines also have to be surveyed before the sale and the buyer pays for that. The buyer will also have to place in escrow a deposit that is generally equal to two months worth of property taxes. The buyer also has to purchase homeowner’s insurance in advance and pay any fees to transfer membership in the home owner’s association.

If your state requires an attorney at the closing you’ll pay that as the buyer. There will be a fee that covers the closing and maybe even a courier fee for transporting documents.

So another one of our first-time homebuyer tips is to save more money than you think you need to cover both the down payment and all of the costs that can be associated with closing on a property.

Conclusion

Take your time shopping for a home and learn all you can about the market where you want to live. Engage a real estate professional who can guide you every step of the way from searching for a home to unlocking the front door. Once you have a deal on a property go back to the lenders who pre-approved you and begin exploring mortgage terms and interest rates to figure out what works best for your budget. Take care of due diligence before the property is yours by ordering a complete home inspection. And before you sign the closing documents make sure you know how much money you have to bring to the table to walk away as a homeowner.

VA Loans for Those That Serve and Deserve

When you think of military benefits, you probably think of continued health care through the Veterans Administration (VA) hospital or buying cheap groceries at the PX. The VA’s loan program should top your list though. Low rates and zero down requirements make VA loans one of the top benefits available to those in or released from the military.

All About VA Loans

Qualified recipients can purchase or build a home or refinance one with a loan up to $484,350, the 2019 loan limit. In areas where real estate costs more like New York City and Los Angeles, the VA provides a higher loan limit. You also avoid paying for Private Mortgage Insurance (PMI). PMI insurance type protects your lender until you reach at least 20 percent equity for which you pay monthly premiums.

During the year 2018, the VA backed mortgages worth $161.3 billion. The average home loan amount was $264,197.

The affordability of these loans makes them attractive to every service-member and veteran who wants to own a home. Traditional mortgages simply cost more money, and they have far tougher qualifications. Read on to learn how to shop mortgage lenders, apply for a VA loan and to explore the loan process in-depth.

VA Loans: Basic Training

Your loan still comes from a private lender although it is backed by the US Department of Veterans Affairs. The program began in 1944 and since then more than 22 million individuals have purchased homes through it.

With a conventional home loan, you must put down as much as 20 percent. The VA loan programs offer the only loans you can get with no down payment.

With a conventional home loan, you must purchase PMI which can incur a monthly cost of hundreds of dollars. You avoid that with a VA loan.

With a conventional home loan, interest rates can reach sky-high limits. The government backing on a VA loan keeps its interest rates very low – in many cases, under five percent.

With a conventional home loan, you must meet stringent requirements. The VA home loan program provides a more lenient lending policy and has more lax requirements.

VA Funding Fee

You will pay a VA Funding Fee to the Department of Veterans Affairs which helps pay for future VA loans. Those with a service-related disability avoid the funding fee. Which ranges from about 2 percent for first-time homebuyers to 3.3 percent to 3.6 percent for repeat home buyers. You can bundle this cost into the loan amount.

VA Loan Limits

The zero down payment loan limit for 2019 was $484,350. In major metropolitan areas where the cost of a home rises higher than the typical US home, the home buyer can qualify for up to $726,000. New York City is one of the locations where this exception applies. A veteran can qualify for loans for larger amounts, but they must put money down.

The loan amount for which you can qualify varies. Your credit score and debt ratio still largely determine this. You can determine ahead of time the amount of house payment you can afford with the amount you can put down as an initial payment.


AIT: VA Home Loan Types

You can obtain a VA-backed loan or a direct home loan.

VA-backed loan

With a VA-backed loan, the VA guarantees the loan you obtain from a private lender. This means that if the lender must foreclose on your home because you defaulted on the loan, the lender can recover a portion of or all of its losses. This lessens lender risk, resulting in improved loan terms for you.

Another benefit to you is that the financial lenders follow VA loan standards rather than their own. They can require additional standards. But these typically fall within a reasonable request such as a specific minimum credit score or obtaining an updated home appraisal. If you apply for a direct from the VA loan, no minimum credit score requirement exists. If you apply for loans from private or traditional lenders, you will need to meet their requirements. Which typically is a credit score of 620 or higher.

VA Direct Home Loan

Conversely, with a VA direct home loan, the VA functions as your mortgage lender. You apply to the Administration and work with the VA to manage a loan you receive.

You still must prove you have sufficient income to repay the mortgage. While VA loans still look at your debt load, the guidelines for the debt ratio are a little more lenient. VA guidelines allow veterans to use their home-loan benefits a year or two after bankruptcy or foreclosure.

Within both of these loan types, you will find various programs.

  • Purchase loan: a loan to buy a home for the first time or as a repeat buyer
  • Native American Direct Loan (NADL): a home loan and home improvement loan program for Native American veterans and veterans who are married to a Native American. This direct loan from the VA lets the individual purchase or improve a home on federal trust land
  • Interest Rate Reduction Refinance Loan (IRRRL): individuals who already have a VA-backed home loan may qualify for an IRRRL which reduces or stabilizes monthly payments
  • Cash-out refinance loan: you take out a loan against the equity in your home which you can then use to fund the school, pay debts or use it in some other manner

If you want to see which lenders may want to make you an offer, start with this form:


Caveats to VA Loans

You can use VA residential mortgage loans for more than one home. But it can only be for your primary residence. VA loans cannot be used to finance vacation homes or investment properties.

You must obtain a certificate of eligibility (COE) before you can apply for a VA home loan. You can qualify for basic entitlement and/or bonus entitlement. The basic entitlement equals $36,000 or 25 percent of the total mortgage whichever is less. A bonus entitlement equals up to $85,087, still 25 percent of a larger loan amount. The 25 percent is the amount of the loan the VA covers. It is not the same as the loan limit. This is the amount that the VA guarantees to the financial lending institution.

VA Loan advantages and disadvantages

Get Your COE

You can apply for your COE in three different ways. Again, you will need this before you can apply for VA loans.

  • Lender request: Have your lender use the database at their disposal to determine your eligibility and produce your COE
  • VA.gov: Apply online at VA.Gov by logging into your account and completing the COE application page
  • Postal mail: Print a hard copy of the COE application from the VA website. Complete it and include your eligibility documentation. Mail the application to the VA

Documents Required for COE

Your necessary documents vary by branch.

You can use your full entitlement package more than once. Deplete your entitlement a little at a time. You might use $24,000 of your package on the first home you purchase. Selling it ten years later, you might return to the VA for a second home loan and use another $12,000 of entitlement.

Veterans and Current or Former National Guard or Reserve Members in Federal Active Service

Must include a DD Form 214 with a copy showing the type of service and the reason for leaving.

Active Duty Service Members, Current National Guard or Reserve Members

Who have never been Federal active service must include an up-to-date statement of service signed by the adjutant, personnel office or commander of the unit or headquarters with their name, Social Security number, date of birth, entry date of active duty, duration of lost time and the name of the command providing the data

Current National Guard or Reserve Member

Who has never been Federal active service must include an NGB Form 22, report of separation and record of service for each period of National Guard service

Current National Guard or Reserve Member

Who has never been Federal active service must include an NGB Form 23, Retirement Points Accounting and proof of the character of service

Discharged Member of the Selected Reserve

Who has never been activated for Federal active service must include a copy of your latest annual retirement points statement and evidence of honorable service

Surviving Spouse

Spouses who receiving Dependency & Indemnity Compensation benefits must submit VA Form 26-1817 and veteran’s DD214, if available. If they receiving Dependency & Indemnity Compensation benefits must submit the veteran’s and surviving spouse’s social security number on the 26-1817 form. Surviving partners must include a copy of your marriage license, and need to submit form DD214, proving discharge orders. For those who do not receive Dependency & Indemnity Compensation benefits must submit VA form 21-534. Mail a copy of VA 21-534 to the mailing address for your state of residence. Surviving spouses must include the death certificate or DD Form 1300 – Report of Casualty.

Eligibility Requirements

By now, you have seen me refer to the eligibility requirements a number of times. Ah, but what are they, you ask?
You will be happy to know that it is really easy to obtain your COE. You are eligible for a VA loan if you meet any of the following statuses:

  • regular active military
  • veterans
  • reservists
  • National Guard
  • military spouses whose spouse died during active duty or from a service-connected disability

There Are a Few Qualifications For the Above Categories of Individuals

Active-duty military personnel must serve for six months before qualifying for a COE. If an active duty military member serves 90 consecutive days during wartime, they qualify for the COE.

National Guard members and reservists must serve six years before qualifying for a COE. If they get called to active duty, they gain eligibility following 181 days of active duty.

Here’s the thing – a COE simply means you qualify to apply for a mortgage. The COE allows you to start shopping for your mortgage. That is not like shopping for a new pair of blue jeans. You start looking for a mortgage by considering traditional mortgage lending institutions. That means you will need to meet each lender’s requirements for debt-to-income ratio, credit score and income verification. Typically, these VA loans do not include any income verification mortgage option.

The fees required vary by branch, too. It also varies depending on which option you choose – zero down payment or a down payment of 10 percent or greater.

  • Armed forces first-time borrowers with no money down pay a fee of 2.15 percent of the loan amount
  • Armed forces first-time borrowers with 10 percent or greater down pay a fee of 1.25 percent
  • National Guard members and reservists pay an additional quarter of a percentage point more than active-duty military
  • Returning borrowers with no money down pay 3.3 percent of the loan amount

Home Occupancy Requirements

You typically must move into your new home within 60 days of purchase. You must use it as your primary residence. Some exceptions are made to the move-in deadline based upon a case by case basis.

Chris Birk, director of education at Veterans United, about the occupancy requirement

Final Thoughts

The VA also offers financial counseling to its borrowers. If you cannot make your mortgage payments, the VA will help you negotiate with the lender to alter the repayment plan, modify the loan and help develop other alternatives to foreclosure. The VA offers mortgage counseling to every veteran regardless of whether they obtained a VA loan. Phone (877) 827-3702 for financial counseling and help with getting a handle on your mortgage.

Jumbo Loans to Help You Live Larger than Life

Have you ever wondered how people can afford those million-dollar homes? Or multi-million dollar homes? Me, too. If you have ever applied for a mortgage or even looked into applying for a mortgage, you might know that getting a mortgage for around $500,000 is about the highest mortgage loans go. While that amount can buy a pretty nice house, the more expensive ones are still out of reach. If your dream home exceeds the regular mortgage limits, you might need to start looking into jumbo loans.

What Are Jumbo Loans?

In short, jumbo loans are mortgage loans that exceed the amount of money allowed by conforming home loans. These are the types of loans that you apply for if the home you wish to purchase is really high. The amounts of these two different mortgage types differ according to many things, including the area in which you hope to purchase your home.

Jumbo Loans vs Conforming Loans

There are many different types of mortgages, but these two are in reference to the size of the loans:

Regular or Conforming Loans

You have probably heard of Fannie Mae and Freddie Mac. If not, these are basically organizations sponsored by the government that have a lot of influence in the housing market. Every year, these organizations set certain guidelines that pertain to mortgages. Among other things, they set the cap on mortgage limits. If lenders provide mortgages that conform to those guidelines, aka conforming loans, then the mortgage is insured, or guaranteed by these organizations.

To simplify, Fannie Mae and Freddie Mac basically tell lenders, “As long as you meet our guidelines and do not loan more than the amount we specify, we will ensure your loans.” Most lenders choose to offer only conforming loans, as they are much less risky than non-conforming ones.

Jumbo Loans

Some lenders offer jumbo loans or loans that exceed the limits of conforming loans listed below. These are not insured by Fannie Mae or Freddie Mac, meaning that the lender assumes a lot more risk. Due to this, getting approved for jumbo loans is a much more stringent process.

Conforming Loan Limits

Infographic of jumbo loan versus conforming loan Every year, the Federal Housing Finance Agency sets forth the conforming loan limits. Typically, these limits rise with the cost of homes and often increase every year. The conforming loan limits depend a lot on the area you are looking to purchase the home, too. In most counties, the limit in 2020 is $510,400.

However, the FHFA takes into account the higher prices of homes in high-cost areas. That loan limit can be as much as 150 percent of the base loan amount. This means that some areas in America have a loan limit of up to $765,600 for 2020. Do remember that these limits are revisited yearly, so what is listed today may be totally different if you look again next January.

What Happens When You Default On Your Mortgage

These two loan types might get a little confusing if you do not understand what it means that Fannie Mae and Freddie Mac guarantees loans. Let’s simplify as much as we can. If you take out a mortgage from your bank, you will make payments to the bank. If your bank remains your creditor and you default on your mortgage, the bank has the right to take possession of your home.

Once they do that, they have to actually do something with the home or else they are still out of the money they loaned you. Instead, they will try to sell the home to make the money back. With jumbo loans, the lender is responsible for getting their own money back.

Often, though, your bank will sell your mortgage to other investors. The bank gets their money back and the investors make the interest. As long as the mortgage fits inside of the Fannie Mae and Freddie Mac limits, these organizations take over. If you default on your loan, Fannie and Freddie still get investors their money.

Think about it like this:

Let’s say you are a teenager and your parents have put a down payment on a car for you. They tell you the following: “As long as you make it home by curfew, get your chores done, take your little brother to school, and keep your grades up, we’ll pay your car payment and insurance. If you do not meet those requirements, you can pay your own bills.”

So Fannie Mae and Freddie Mac are the parents in this situation. They tell the lender, “Hey, follow these guidelines, and we will ensure you get your money back whether the borrower pays or not.” Of course, lenders are going to want their money back, so they usually stay within those limits.

Sometimes, though, they will take the risk and go outside of those limits. If they do so, though, they want to be as close to certain as possible that the borrower will actually pay them back.

Benefits of Jumbo Loans

Jumbo loans are pretty risky, but they do have a couple of good points.

Higher Mortgage Limits

The biggest benefit of jumbo loans is the amount of money you can borrow. You are not stuck within the Fannie Mae and Freddie Mac conforming loan limits, so you can purchase a higher-priced home.

One Loan

It is not unusual for a home buyer to find their dream home outside of the conforming loan limit. In fact, it happens quite often. When it does, some people choose to take out two conforming loans to cover the cost of the home. Having two separate mortgage payments to make, though, can be a hassle.

Getting one jumbo loan and spreading it out over a long time period is another option. There is something to remember here, though. The longer you pay on a mortgage, the more you pay overall in interest. If you are choosing between one jumbo loan and two conforming loans, it is important that you compare not only what the monthly payments will be, but also the total price you will pay over your entire mortgage.

Downsides to Jumbo Loans

It is important to understand the risks of jumbo loans, as well.

Higher Down Payment

Jumbo loans often require a higher down payment than conforming loans.

Higher Mortgage Limits

Yes, I know. This was listed under “Benefits”, too. Well, that’s because higher mortgage limits can be either a good thing or a bad thing. Just because you can get a higher-priced home does not mean you should. This is obviously your choice, but it is something you should carefully consider.

With any type of mortgage, you need to accept the loan you can afford, not the one the lender says you can. Think about it: you are going to be committing to this mortgage payment for a very long time. If paying $500 a month for a mortgage means you will be eating Ramen noodles every night for the next 30 years, you might want to consider a smaller loan or find a better paying job first.

Higher Interest Rates

Though this may not always be the case, it is not odd to see higher interest rates on jumbo loans since the lender is taking on so much more risk.

Qualifications

Jumbo loans are much harder to qualify for than conforming loans. Their credit, income, and debt-to-income ratio requirements are much more strict, making it hard for most people to get approved.

Higher Fees and Closing Costs

As jumbo loans are larger, they require a more in-depth qualification process, and they often require a second appraisal, you can expect to pay higher fees and closing costs, too.

How to Qualify for Jumbo Loans

Remember, jumbo loans are a lot riskier for lenders than conforming loans, so qualifying for them will be more difficult. While there is no guarantee that you will or will not be approved, there are some basics to know about what can help you qualify for jumbo loans.

Large Down Payment

Typically, lenders that offer jumbo loans want you to have a larger down payment. While a conforming residential mortgage may require less than a 5 percent down payment, jumbo loans may require anywhere from 10 to 20 percent. The lower the down payment you have, the higher of an interest rate you can expect to pay.

Great Credit Score

Conforming mortgages work with many different credit ratings, but jumbo loans usually do not. Though the requirement can vary from lender to lender, do not be surprised to find that many of them require a score well over 700.

Low Debt-to-Income Ratio

Let’s start by saying that most lenders that offer jumbo loans are going to prefer a high income. In addition to that, they are going to want to see that most of that income is free. In other words, if you make a lot of money but owe a lot of that money, your chances for approval are slim. The lower your debt-to-income ratio, the better of a chance you have.

Liquid Assets

Though this is not always true, many lenders want to see that you have money put away that can cover quite a few mortgage payments. Some call these cash reserves and others call them liquid assets. Regardless, having cash available to you that can ensure you make your mortgage payments can definitely improve your chances when applying for jumbo loans.

These assets may come in many forms. For instance, they might come in the form of a savings account. They might also come in the form of some type of investment. Anything you have to offer is worth mentioning to the lender. It might also save you some time if you take documentation of these assets with you to apply for your loan.

Extras

Every lender will have his or her own documentation requirements, but it is not odd for lenders of jumbo loans to require more paperwork than lenders of conforming loans. It is important to understand that these lenders are really putting their necks on the line to provide a loan, so it stands to reason that they want to dot every “I” and cross every “T”.

While other loans will require proof of income and other ordinary documents, lenders of jumbo loans may ask to see bank statements, W-2s or 1099s, tax returns, proof of your liquid assets, and more. Additionally, they may require an additional appraisal or inspection of the home prior to purchase. If you default on the loan and have your house foreclosed on, the lender will be stuck figuring out what to do with it. So, of course, they want to make sure the home is worth the price they are loaning you.

Shopping for a Mortgage

Shopping for a mortgage is a process, but you can make the process a little easier and more successful with these mortgage shopping tips:

Determine Your Budget First

I said it before and I will say it again: You need to know how much you can afford prior to applying for a loan- any loan. Before you even begin to look for a lender, sit down with your budget. If you do not have a budget, make one before you make another move. Be sure that your budget includes everything you pay out and purchase regularly.

Also, take into account any financial goals you have. This includes charitable donations, saving for a vacation, saving for college, buying your next car or TV, and so on. If it is a part of your financial plan, it needs to be added in.

Only after you have added up all of these totals should you see what is left for a house payment. You can always revisit your budget later if need be, but having a monthly amount in mind can help you make the best decision regarding the price of the home you purchase.

Shop Around

It is a mistake to assume that all lenders are the same. Do yourself a big favor and talk to at least three lenders that offer jumbo loans. Compare their rates, terms, and preapproval amounts. Don’t go with the first one you find, you could end up costing yourself a lot more money. If you don’t have enough time to contact different lenders, maybe you should consider taking a mortgage broker, who will find the best offer for you. Buying a house is an important part of life. It is exciting, scary, and stressful all at the same time. There are so many things that you should know when you are preparing to buy a house.

You can always count on Loanry to connect you with reputable lenders and may even make the entire process a bit easier for you. Down below, you will get a list of lenders who may give you a mortgage loan, based on the information you put in. Try it:


Do Not Rush

I know that it is really, really exciting to think about buying a home, but try not to rush the process just because you have a preapproval in hand. Remember, a mortgage is a commitment, and jumbo loans are a very big commitment. If you are going to get one, you need to be sure that you find the home you want.

Take some time to explore neighborhoods, school systems, potential employment, and so on. If a house really interests you, take time looking through it- like, really take some time. Do not just walk through it. Stop in each room and decide if it suits your needs. It is a lot easier to work hard and sacrifice for something you love year after year than it is something you do not really like. Be sure that it is worth it.

Be Prepared

While you need to take time finding your home, it is okay to hope the actual approval process would hurry. To help it out, take any documents with you when you go into apply.

Conclusion

I hope that this guide has given you a good understanding of jumbo loans and has helped you determine if getting one is the right move for you. As always, before you choose to get a loan, think it through carefully. Every financial decision requires thought and consideration as they can affect your life for years to come. Since a mortgage is a debt you will be paying on for many years to come, you want to make the best decision possible.

If you feel uncertain about taking out a mortgage, you might consider talking to a financial advisor first. A financial advisor that is not connected to the lender can take a real and unbiased look at your finances and your goals. He or she can objectively tell you how much mortgage you can afford. If you do not have a financial advisor, consider talking to a trusted family member or friend who is good with numbers.

 

Home Equity Loans When It’s Time to Leverage Your Asset

Surprise bills can come up at any time forcing you to need money fast. Before you turn to family and friends, look at your homeownership. You may have a  huge savings account you did not even realize you have in your home. It is called your home equity and it can help you to leverage your asset.

If you own your home, even if you have not yet paid off the mortgage completely, you can leverage the equity in your home. Their home is typically the most valuable asset of most Americans. As you pay off your residential mortgage, you build equity. Equity refers to the amount of the paid off value of the home mortgage. If you have a mortgage of $400,000 and have paid off $200,000 of your mortgage, you have earned 50 percent of the home’s equity. At 2018’s end, US homeowners had amassed $5.9 trillion in equity. You can leverage your asset to get your loan.

Your Guide to Understanding the Mortgage Process

Leverage Your Asset: Home Equity Loans in General

You might wonder how that equity helps you. You can use your equity to refinance your home or borrow against it for a cash-out loan or establish a line of credit. Each of those three options works in a different way.

  • Refinance: also called a rate and terms loan, this option lets you obtain an updated interest rate and loan terms based on the amount you have left to pay off on your original mortgage
  • Cash-out: another type of refinancing loan, this lets you use up to 80 percent of your equity to access cash from the home’s value
  • Line of Credit: establishes an account equal to your equity or a portion of it that you can draw money from as needed to pay for any item you need

Warning: The Lender Will Need to Foreclose on Your Home if You Do Not Pay Your Mortgage Back

That may sound like an odd warning since you would not have equity in the first place if you had not been paying off your mortgage, but many people take out a home equity loan because of a major need. It is typically a large, costly need, such as medical bills for a major emergency. It can often complicate the repayment process since by accessing the equity, you erode it. In other words, you owe that money all over again. You give up the money you already paid into the home.

Most financial lenders force you to leave about 20 percent of your equity in the home. If you take out a Veteran’s Administration loan though, you can access 100 percent of your equity. That puts you back to the first day you bought your house though. You would need to pay the whole home off again. That is a major caveat to accessing the equity. It puts you back at square one.

Qualifying to Leverage Your Asset

Qualifying to use your home’s equity comes down to more than whether you have built equity in it. You must meet multiple criteria:

  • a minimum of 15 percent equity of the fair market value of your home, also referred to as a loan-to-value ratio
  • a FICO credit score of at least 620
  • a history of paying off debt
  • a documented repayment capability
  • a debt-to-income ratio of less than 50 percent

Home Equity Options

Of the three home equity options, you must choose the one that works best for you. This depends on your specific situation. First and foremost, the reason for the loan determines which home equity option to use. Other factors that influence what is available to you including your credit history, income and your home’s value.

Leverage Your Asset: Home Equity and Paying Down Debt

You can use home equity loans to obtain money to consolidate debts and quickly pay off credit cards, student loans, or auto loans. The house provides the collateral for a cash-out refinancing loan, making it easier to obtain a lower interest rate. If you need to pay off a bunch of debts, a cash-out refinance mortgage makes the best choice.

Why?

A credit card might have a high-interest rate, perhaps an APR as high as 25 percent. If you have even one card with that APR, you pay your principal debt and a quarter of it back. Obtaining a cash-out loan lets you pay off the card and pay only a few percent interests on the loan. You typically spread the payments out longer since most mortgages range from 15 to 30 years, but you make quick progress paying down your debt. The trick is to not use the credit card again once it gets paid off. Once you pay the cards off, you obtain a zero-interest or low-interest credit card for use. This lets you avoid the previous problem. You then close down the higher interest cards.

Think Twice Before Everything

Here’s the thing and I know that I am repeating myself, but I cannot stress it enough — you have to know that you can easily pay back the new mortgage. If you miss payments, you lose your home. Period. The bank will foreclose.

This may seem simple at first, but realize that you probably started out with a 40-year mortgage. You already paid into it for 10 to 15 years to build the equity you have. Now, you are erasing that equity and spending it to pay for something. Since you are taking out a new mortgage, you will get new terms. You probably will not get another 40-year term. You will have fewer years to pay it off. So, let’s assume you get 30 years to pay it off and you used 80 percent of your available equity. That means you will have higher mortgage payments than you did initially. You owe more with less time to pay for it. You could end up still paying off your mortgage in retirement.

Also, you are spending a ton of money on a single expense. If that expense pays you back, that helps. If it does not, you are losing money and you need to re-pay the mortgage. So, if you know that you can easily re-pay it, go ahead and take out the line of credit or the loan. If not, try for a different loan type.

Leverage Your Asset: Home Equity and Renovations or Major Purchases

Perhaps you need to renovate your home or want to remodel it. This can cost thousands of dollars and you will need to pay the contractor all at once. They may flow the funds through and pay the sub-contractors they use or you may have to pay the subcontractors directly, too. You will need to purchase materials for them to use.

Also, you might need to purchase a new vehicle, or have an existing vehicle modified with a lift or something else. You may need to purchase an SUV or RV for work purposes.

These large expenses that may require multiple expenditures benefit from a home equity line of credit. This revolving credit line lets you withdraw from it when needed without a new application and works better than a reverse mortgage.

Leverage Your Asset: Home Equity and New Mortgage Terms

You can also refinance your residential mortgage simply to take advantage of lower interest rates and better terms. This way you can save money in the long-term. You may end up with smaller monthly payments and a lengthy-term to repay it.

For this refinancing to work to your advantage, you need to have a superb credit score to leverage your asset. That lets you qualify for the lowest interest rates and the best terms possible. The higher your credit score, the better.

Borrowing Limits

The borrowing limits are there to protect you. While a VA loan will allow you to tap 100 percent of your available equity, it is not a good idea. Your equity stems from the part of your home you already paid off. The less equity you use, the less you have to re-pay in addition to the money you already owe. This means you should use as little equity as possible.

Important Factors Regarding Home Loans

No matter what kind of loan you decide to take out, there are risks. You will also have upfront expenses.

Any type of loan application creates a hard inquiry on your credit report. That creates a temporary reduction in your credit score. It typically only ranges 5 to 10 points, but it still happens.

You will need to pay for a home appraisal, also you pay new title fees and one-quarter of the annual property taxes. These expenses you can roll these expenses into the loan. You will also get a refund on your existing home insurance and an escrow account. There is a delay though.

“We don’t want people to be extended outside their means. If they are rolling revolving debt into a 30-year fixed, yes the monthly payment goes down, but you are stretching it out over time.” – JPMorgan Chase & Co. executive director and senior lending manager Fady Semaan told Forbes

Loan Shopping Made Easier

The modern way to find a loan is to start at Loanry. The site functions as a loan mall. Just like you shop for blue jeans at a shopping mall, you can shop for a loan online. At Loanry, you can fill out and submit a form that creates a soft hit on your credit and lets you know about loans for which you might qualify. You can reduce your research by using it. All you need to do is enter your information below, and wait for potential offers within the next few minutes. Start here:

Once you have a list of potential lenders, you need to meet with each. Ask them to explain the available loan plans to you. Ask the loan officer questions to clarify the loan terms and conditions. Make sure you fully understand the following:

  • the monthly payment amount
  • the interest rate
  • the APR points
  • the finance charges
  • the application, appraisal, broker, document preparation, funding, loan processing and origination/underwriting fees

Getting Ready to Apply for a Loan

You might feel ready to jump in and apply for a loan after speaking with the loan officers. Do not apply yet. You should know some things before taking out a home equity loans that loan officers may not tell you.

First, check your credit score. You requesting your own score does not affect your score. It does not create a hard inquiry. You will not lose credit score points for checking it yourself. So, make sure your credit is application ready. You can do this for free using the US government website.

What Your Credit Score Includes

You might think three digits cannot say much about you, but to a financial lending institution or creditor, it tells a long story. It goes back at least seven years. Credit score is important for this type of mortgage, same as it is important for FHA loans.

Credit score ranging

Ranging from 300 to 900, it tells the loan officers if you pay on time, if you have a lot of credit cards, if you take out too much credit and if you max out your cards – in three digits. Few people actually have a 300. That would mean you never paid anything you had taken out and you really overextended yourself. A 900 tells the bank you are a credit god or goddess. You make a lot of money, you always pay on time or early, you barely use the credit you do have and you manage your money really well.

Most people have about a 550 to a 640. That means the average person is late sometimes, pays on time mostly, uses about half of their available credit. That means there are some people who cannot get a loan, some people who easily get a loan at a great rate and the majority of people who can get a loan, but have to pay a higher interest rate to mitigate the risk of them paying late or not at all. Your credit score encompasses the following:

  • your bill-paying history
  • how many accounts you have and the type
  • your late payments
  • any collection actions
  • your outstanding debt
  • how long you’ve had your accounts

An algorithm determines your score based on that information. Your score gets compared with the credit performance of other individuals with similar profiles. That probably sounds unfair. You get judged by the other people who the algorithm says you share the same traits, but the system works pretty well. If you recently landed a job that pays you far more than when you established your credit, it shows when you pay back your loan even more quickly.

Boost your credit score

You can boost your score pretty quickly by paying everything on time for six months. This will bump you up by about 20 points.

You should also check for mistakes in your credit report. If you find incorrect information, you will need to file a dispute with the credit bureau from which the report came. This is because each creditor reports to a different bureau or bureaus. Some report to all three, some only to one. You need to check your report on all three because you do not know which credit bureau the bank will use. If incorrect information shows up on all three, then you need to dispute it on all three. Do not apply for a loan until the dispute is taken care of on all three bureaus, if it appeared on all three.

Lender Negotiations

After you have met initially with each potential lender, rather than pick one, negotiate with many. Make them compete for your business by letting them know that you are shopping around for the best deal possible. Negotiate the fees, points and interest rate on each. Tell them what the other lenders offered and asked them to beat it.

Once you choose your bank, read the closing papers closely before you sign them. You cannot count on the bank keeping it exactly as you discussed. You must check it. If they changed the loan terms from what you had agreed to, do not sign the papers. Go back to negotiating or walk away. Even if you do sign the papers, you typically have the right to cancel without penalty for up to three days after you sign the loan papers.

Conclusion

You can fund your renovation project, car purchase, college tuition or any of a number of other large expenses by leveraging your home equity. Whether you just want to save money on the terms and interest on your mortgage or you need to fund a major expense, you can do so using a rate and terms refinancing loan, a cash-out refinancing loan or a line of credit. Analyze your credit and meet with loan officers after beginning your research at Loanry. You can find a home equity loan or line of credit that suits your budget, credit score, and ability to repay.

No Closing Cost Mortgage: We All Like No Cost

A no closing cost mortgage can be a bit confusing but it’s one of the residential mortgage types that are available to you. With this term, you may think that the fees are being paid by someone else or being waived completely. With a no closing cost mortgage, you are instead paying the closing cost with your loan balance instead of out of pocket. Not every bit of your closing costs will be able to get folded into your loan. But the closing costs you pay at the signing will be less than with a traditional mortgage.

What Are the Closing Costs?

Every house mortgage will come with some closing costs. Closing costs can be pretty high and typically range from about 2% to 5% of the loan amount. It may be helpful for you to calculate the closing costs for your particular situation so you can get an idea. If you are purchasing a $250,000 home then you may be paying anywhere from $5,000 to $12,500 at the settlement table for closing costs. The closing costs vary with your specific situation and location. Common closing costs include the appraisal cost, title insurance, tax service provider fees, taxes, and prepaid costs, such as homeowners insurance and property tax. Lenders can also add loan origination fees and application fees that can increase the closing costs.

There really isn’t a way to get a home without closing costs. You have the decision whether or not you pay them with cash when you are signing the loan or add them into the monthly mortgage payment. However, there are ways to reduce the closing costs by negotiating third-party charges and lender fees. It’s also possible to qualify for housing grants or closing cost assistance in some areas. Many of the grants can be free money and you don’t need to prepay them unless you move or refinance. If you have a military connection, VA loans have a limit on the closing costs that are allowed.

How Does a No Closing Cost Mortgage Work?

There are two different ways that lenders structure no closing costs mortgages. The differences are subtle but the result is the same.

1. A lender can have you finance the closing costs. With this loan, the lender just adds your closing costs to the total loan balance. The monthly payments will be higher because you are now paying the closing costs with interest for the full length of the term.

2. The second option is that the lender absorbs the closing costs but you have a higher interest rate. This also means you will be paying more each month since your total interest costs will be higher over the life of the loan.

No matter how the lender does it, your monthly payment will increase slightly. You will pay less at closing time but pay more over the life of the loan.

Pros and Cons of a No Closing Cost Mortgage

One of the main advantages of using this type of loan is the upfront savings. With this loan, it helps a borrower who is short on funds to close. This is helpful if you have made a large down payment and already paid out of pocket for your inspection and appraisal. You may still want to have some cash on hand to make upgrades and renovations once you move into the home. You may not need the cash on hand for home improvements but may need it for other expenses, such as medical expenses. Maybe you would rather have the peace of mind that having a large emergency fund brings.

Assigning a dollar amount to the savings will depend on the purchase price and closing costs. If paying for closing costs out of pocket would drain your cash then a no closing cost mortgage can be the obvious choice. However, you should weigh the original savings against what you may pay in interest over the loan when you have a higher rate. Even just a small fraction of a point can cost you thousands of dollars over the loan term.

For example, Buyer A has a 4% rate, while Buyer B has a 4.25% rate. Both are purchasing a $250,000 home. Buyer A pays $179,674 in interest while Buyer B pays $192,746. This is a difference of $13,072. You then have to add this interest to the additional interest Buyer B is paying for the closing costs in the loan. Financing the closing costs can make it harder to qualify for a loan and the higher interest rates can mean a bigger monthly payment, which could push your budget. If your borrower qualifications are already tight then the higher interest rate could be an issue.

Debt to Income Ratio

Your debt-to-income ratio is the percentage of your income that is going toward paying your debt each month. Many lenders like to see a number of 43% or less. This figure will include what you are spending on your mortgage, as well as student loans, credit cards, and any other debts you have. If you are accepting a higher rate to pay for the closing costs then this will increase your monthly payment. When you are increasing your monthly payment, you have a higher debt obligation.

Even if you are okay with the extra interest and are getting a no closing cost mortgage, it doesn’t mean that you don’t have any money due at the table. Your lender may allow you to have a loan that covers customary closing fees, such as tax recording or escrow. However, you may still have to pay for things typically charged as closing costs, such as private mortgage insurance, transfer fees, or real estate taxes.

Is A No Closing Cost Mortgage Right for You?

If you are considering a no closing cost mortgage then you should think through the decision carefully. You should weigh the pros and cons and keep some things in mind. What is your motivation for getting the no closing cost loan? How much are you saving by not paying any closing costs upfront? What is the new loan rate and how much does it affect your monthly payments? How long do you plan to stay in the home?

The decision on whether or not a no closing cost mortgage is right for you is going to depend on how long you plan on staying in the home. If you are going to stay in the home for the full mortgage term then you will end up paying more for the closing costs, in the long run, thanks to the interest rate. However, if you plan on moving within a few years of buying then the financial impact of the higher interest rate may not matter as much. If you have short-term plans with the financing then not paying closing costs may be a good strategy. However, if you think of this home as your forever home, it’s probably best to pay closing costs upfront, instead of throughout the life of the loan.

Things to Consider with a No Closing Cost Mortgage

You can use different mortgage calculators to determine if a no closing cost mortgage is right for you but there are also some other things to consider.

Do you have enough for closing costs? Many people are only eligible for a loan if they can agree to have a certain amount for a down payment. This can be the bulk of savings for many people and there just isn’t enough to pay for closing costs. Instead of having to dip into an emergency fund or savings, a no closing cost mortgage may be the only way that you can go through with the purchase. If this is the case, you have to decide if the price of this type of mortgage is right for you or if you should save more before you purchase a home.

How long will you be in the home? This can help you determine the break-even point of how long you will be in the home with the added monthly payments. If closing costs are $10,000 then it may take you about 8.3 years to break even. After this, you are paying more than if you would have just paid the closing costs upfront.

Is there an early repayment penalty clause? If you decide to go the higher interest rate route while thinking that you can pay off the loan ahead of the break-even point, you need to check if this is an option. Many mortgage contracts have a penalty for the early repayment of a loan. If your lender does have this, it could make it harder to avoid paying closing costs upfront and avoid paying even more over the course of the loan.

Examples of Closing Costs

  • Loan Origination Fee: The origination fee is so that the lender can prepare your loan. The average fee is about 1% of the loan.
  • Appraisal Fee: During the appraisal process, a professional comes to the property to assess the value. Many appraisers charge $300 to $500 for their services.
  • Title Fees: The document you receive when you buy your home is the deed. The title shows that the seller legally transferred ownership of the property to you. Title insurance saves you from any errors in the records of your property or home.
  • Credit Report Fee: Lenders need to check your credit score and some lenders will pass the fee of checking the score back to you during closing. These fees can range from $25 to $50 depending on your state and your lender.
  • Prepaid Interest: The lender can ask that you pay the first month’s interest upfront during the closing. This will depend on the interest rate and that depends on the type of loan you have and your credit.
  • Discount Points: These are optional and this is the fee you would pay the lender in exchange for a lower interest rate. Each point costs 1% of the total loan amount and you are able to buy multiple points.

Are There Other Ways to Get Rid of Closing Costs?

If you are hoping to avoid closing costs then a no closing cost mortgage may not be the only thing that will work for you. You can also take other routes to help manage some of the costs. One of the first things you want to do is ask the lender to waive some of the closing fees. It doesn’t hurt to ask but don’t expect too much. A more realistic solution can be to ask the seller to cover some of the closing costs by using a concession. A seller concession works by determining the closing costs you want the seller to pay.

If the seller agrees then that amount is added to the purchase price. You get a mortgage for the new purchase price and then the original purchase price is paid to the seller and the differences go to the closing cost. This is a legal way to roll the closing cost expenses into your loan, which wouldn’t normally be allowed unless you are refinancing. However, it’s still important to note that if you are rolling the closing costs into the loan, you are paying interest on them. When you increase the total loan amount, you are increasing the monthly payment as well.

Even with a seller concession, you still need to bring money to closing. The number of seller concessions you can have will depend on the loan type. If you want to ask the seller to pick up some of the closing costs, be sure to get help from your real estate agent. Agents are able to help with negotiations for seller concessions once your offer has been accepted.

Reducing Closing Costs

Besides a seller concession, there are ways to reduce the closing costs you are paying.

Compare Costs

Lenders have different fees. So it’s even more of a reason to go mortgage loan shoppingAnd see which lender offers the lowest closing costs. You can ask a lender to match lower closing costs you see offered elsewhere. There are some services in the closing costs that you are allowed to shop around for before committing. You don’t have to go with the provider the lender suggests if you can find a lower price.

Compare different mortgage lenders here on Loanry. Enter your information below and you will get a list of lenders who may give you a loan, based on the information you put in.


Evaluate the Loan Estimate

Don’t just go through the loan estimate right away. Take the time to evaluate each item with the lender and question what each fee covers. This can be a good way to identify any unnecessary or padded fees. Keep an eye out for fees that have a similar name. This could mean the lender is likely charging twice for the same thing.

Negotiate Fees with the Lender

Once you have a handle on the fees you are paying then you are able to start negotiating. Ask for more vague fees to be knocked off the final total. Ask the lender to give you a closing disclosure form when it’s available. This details the final closing costs. Compare it to what was on the loan estimate and then ask the lender to justify the discrepancies.

Delay the Closing

You can minimize the prepaid daily insurance charges by closing toward the end of the month. Plan ahead and try to schedule your closing when you will have to pay less money upfront.

Save on Points

If you are buying in a low-interest rate environment then you likely don’t need extra points. Paying for points can add up fast so save that money and pay it toward the closing costs.

Alternative Lower Cost Loans

A no closing cost mortgage isn’t the only way to save money. And you may find that there are alternative loans out there to decrease the amount of cash you need upfront.

FHA Loans: These loans are offered by private lenders but are insured by the Federal Housing Administration. Under this program, you can have as little as 3.5% down on a home, saving you money on upfront costs.

VA Loans: These loans are offered to veterans and service members but may be loans that don’t require any down payment.

USDA Loans: These loans are backed by the U.S. Department of Agriculture and are designed for borrowers in rural areas defined by the agency. Under this program, borrowers may be able to take out a loan without making a down payment.

Final Thoughts

A no closing cost mortgage allows you to bundle many of the closing costs into your loan. This way, you end up paying more over the life of the loan in interest. But you don’t have to have a large amount of cash upfront. This may make sense for you depending on if you have the funds for closing, how long you are going to be in the home, and how the structure of your mortgage. There are ways to lower closing costs so you aren’t stuck paying a huge fee upfront. Or having to bundle it into the loan. There may also be alternative lower-cost loans that don’t require large down payments. So you don’t have to bring as much cash to the signing table. Always shop around for your mortgage options so you are picking the right one for your situation.

Mortgage Broker Versus Banks Explained


Buying a house is an important part of life. It is exciting, scary, and stressful all at the same time. There are so many things that you should know when you are preparing to buy a house. When you feel like you do not have all the information, it can be a more stressful time. While there are many details that go along with home buying, there is one that is not talked about much. That detail involves a mortgage broker. You may not even know what a mortgage broker does. Do not worry about that because it will all be explained in the article. Continue reading to find out the differences between a mortgage broker and a bank so you can choose the right one for you.

How Do I Know If I Should Buy A House?

Buying a house is the largest purchase you will make in your life. It is the most expensive and probably the one that will cause you the most headache for years to come. You should make sure you are ready to make the plunge into homeownership before you even start looking at houses. There are a few key items to indicate if you should buy a house now, or maybe wait a little longer. Making sure you are ready for the responsibility is key. While it makes sense to be nervous about taking on a mortgage and the upkeep of a house, if it makes you feel completely unprepared then you may not be ready, yet.

If you have a secure job and believe that you are going to stay where you are for a while, then now may be a good time to buy a house. When you buy a house, it makes you feel a little more stable in your life and community. If you know you want to stay where you are for a while, buying a house may be a good idea. Perhaps you are interested in getting a tax break. If you do not have a mortgage to claim, you are missing out on a tax break and could pay higher taxes. Owning a house also gives you the opportunity to earn equity in something. As you pay the mortgage, the home becomes yours. When you have paid it off completely, you own it and it becomes your largest asset.

What Is A Mortgage?

If you think that you are ready to buy a house, there are some details that you need to understand. A mortgage is an agreement between you and a lender. The lender agrees to allow you to borrow a significant amount of money to purchase a house and property. You promise the lender that you will make a payment each month to repay the loan until the agreed upon time has ended. At the end of that term, the mortgage has been paid and you are now the sole owner of the home and property. If you do not pay back the mortgage, the lender has the right to take your home.

When you borrow money for a mortgage, you are borrowing the cost of the house, but you are also paying interest on the money you borrow. The amount of interest you pay is directly related to your credit. A mortgage broker may be able to help you find a mortgage with a lower interest rate. It is important to note that when you are considering the purchase of a home, you should not only shop for a house, but also do some mortgage loan shopping. Not all mortgages are alike and you have to find the one that is the right fit for you.

Mortgage Broker versus Banks – Which One Is Better For You?

Let’s get to the point and explain one possible dilemma you may have when getting a mortgage. This dilemma is whether you need a mortgage broker or a bank. Read on and find out what are the pros and cons of each, which one is better for you, and more about every option.

What Is A Mortgage Broker?

I would like to be clear here by saying that you do not need a mortgage broker to get a mortgage or to buy a house. However, you may want to consider at least talking to a mortgage broker to see what value he or she can provide to you. Remember, anything you can do to make this experience easier for you, you might want to consider. A mortgage broker is there to help you. Yes, of course, this person wants to get paid to provide you a service, but the service is completely to your benefit.

A mortgage broker is basically the middleman for you. This is the person that finds you the best loan with the best rates for your credit score. This person works for you to find the right fit for you. This is the person that works with the banks and applies for several different loans for which you may qualify. Typically, a mortgage broker has great relationships with the banks and works hard for you while you sit back. They are individually licensed and do not work for a specific bank or lender.

This person handles most of the work for you. He or she gathers all the documentation that you need, pulls your credit report and history, as well as verifies your employment and income. He does this all in a short turnaround time because he is completely dedicated to providing this service. Once you pick the loan that you feel works best for you, the mortgage broker interacts with the underwriter for the lender, your real estate agent, and the closing company to make this transaction as easy and simple for you as possible.

Do I Need One?

You certainly do not need a mortgage broker to buy a home. The real question should be do you want one? A mortgage broker makes the process easier for you, but also takes it all out of your hands. I know some of us like to be in control of every step along the way. If you are that person, you might not find much value in a mortgage broker.

If you someone that stresses easily and finds comfort in someone who is an expert doing the dirty work for you, then a mortgage broker might be the way for you to go. In addition, using a mortgage broker can save time for you. They can save you the time it takes for you to fill out loan applications. Once you get a response from the lenders with loan estimates, you are going to want to do a side by side comparison of those estimates. A mortgage broker can help you with those comparisons. If there is any interaction with the underwriter after you have decided which lender you plan to use, a mortgage broker can handle that for you.

Does It Cost More For A Mortgage Broker?

There are fees associated with using a mortgage broker. If you are considering using a mortgage broker, you should be aware of the fees and how they are paid. There are two basic types of mortgage broker fees. One is lender based compensation and the other is borrow based compensation. The broker decides how he or she collects the fees, so it is important for you to ask before signing a contract with a broker.

Lender based compensation means that the lender pays your broker’s fees. Those fees are passed along to you in your mortgage, so you end up paying the fees for the life of your mortgage. The downside to this type of fee schedule is the broker may decide to go with the loan that pays a higher fee to them. Borrower based compensation means that you pay the fees at the time of closing. This is often in an origination fee, which varies on the state, your broker and the amount of your loan. The downside to this is you have to have this money at the time of closing. The positive side to this is your mortgage payment is not inflated by the cost of your broker’s fees. You also do not have to worry about the broker selecting a lender that pays a higher broker fee.

Keep in mind, no matter what mortgage broker you use, there is always be an additional fee to your residential mortgage. It may be worth it to you to pay that fee for the peace of mind using a broker gives you. If you have the money to bring to closing to pay for a broker, then this may be the best option. Just be sure no matter which choice you make, it is the right one for you at this time.

What Does A Bank Offer?

A bank does not really offer more than a mortgage broker offers to you. If you have a long-standing relationship with a bank, it might make more sense for you to use that bank. Often times, your real estate agent may have a relationship with a lender that you can use for your mortgage. There are always fee associated with buying a house and obtaining a mortgage. Even if you use a mortgage broker, you still need a lender to give you the money. That lender has fees of their own, which they pass along to you, either in your mortgage or at closing. If you utilize the services of a mortgage broker, there are fees on top of the lender’s fees.

The only real benefit to going directly to a bank instead of using a mortgage broker as a middle man is that you do not have to pay additional fees. If you already know which bank you want to use, there is no real reason to use a mortgage broker. You are adding fees that you do not have to pay on top of the lender’s fees.

But, if you still don’t know where to look for a mortgage loan for your new home, maybe Loanry can bring some options to you. The only thing that you need to do is to enter your information and see if you qualify:

Are Bank Fees Different?

The fees that a bank charges are different from the ones a mortgage broker charges. You always have to pay the bank fees when you borrow money, however, you only have to pay broker fees when you use a mortgage broker. So you should be aware of the fees that you will have to pay as part of your mortgage. You will get the total cost that you have to bring with you at closing. And you should have an idea of how much money is expected of you in advance. You may not be given the actual number until a few weeks before closing. That may not be enough time for you to gather the money you need.

Some of the fees that a bank may charge are:

Origination fee – This is a fee that lender charges you for handling all aspects of your loan. This covers their administration costs, application fees, underwriting fees, processing fees and really any other fee that they would like to add. You must bring this money to closing. It does not get included in to your mortgage payments.

Points – This is something that you can negotiate with the lender. You can lower your interest rate by paying points. You must pay for these points at closing. One point will cost you about 1 percent of your mortgage, or about $1,000 for every $100,000 borrowed. Each point you pay can reduce your interest by about .25 percent. This allows you to pay some of your interest up front so it is not attached to your mortgage payments.

Other Fees – There are other fees associated with buying a house. You have to pay for an appraisal and title insurance. You may be able to negotiate the payment of these items. Most of the time you have to pay these fees at closing.

Why Does My Credit Matter?

Your credit matters because your credit score directly impacts the interest rate you receive. Your credit score is a three digit number that appears on your credit report. And your credit report gives you a detailed list of all of your credit activities. It shows your payment history, how much debt you have, and how you use it. And it can also show the age of your credit. It shows all of your late or missed payments and even loans on which you have defaulted. Your credit score is also highlighted on your credit report. Your credit score gives lenders an indication of your credit worthiness.

You should know your credit score before you attempt to get a mortgage. One way you can do that is by pulling a copy of your credit report. You are entitled to a free copy of your credit report every year. When you want to buy a house, it is a good idea to look at your credit score about 4 or 5 months before you apply for a mortgage. You should also begin looking at the mortgage rates. A 740 or above is a great credit score. Anything between 680 to 739 is average. A score between 620 to 679 is fair. Anything between 580 to 619 is poor and a score below 579 is bad.

You should also know that when you apply for a mortgage, the lender looks at your FICO score and the credit score. The difference with a mortgage is the lender pulls a credit report from each of the three credit bureaus. Typically all three scores are a little different. As a result, the lender uses the middle range score. So the way that looks is if your credit scores are 600, 620, and 650, the lender uses 620.

Can I Improve My Credit?

You can still get bad credit mortgage loans, but it is always a good idea to improve your credit score. While it is possible to improve your credit, it does take consistent and hard work. You must be prepared to make some compromises so that you can get your credit score to increase. One of the best ways to improve your credit is to review your credit report for errors. If you find any, you should work to correct them immediately. If you can have errors removed from your credit report, you can increase your credit score.

After that, you should make every effort to reduce your debt as much as you can. The higher your debt is means the lower your credit score is going to be. The lower you can get your debt also means the lower your debt to income ratio is going to be. The lower your debt to income ratio means the higher your credit score. Lenders prefer to see your debt to income ratio below 30 percent. Another way to improve your credit is to increase your income. You may not be able to change your income, you can get a second or side job. This allows you to take all the money you earn from your second job and put it towards paying off your debt. This may help you to cut the amount of time it takes you to pay off your debt in half.

Do I Need A Down Payment?

Yes, you typically always need a down payment. There are some grants or loans that do not require you to have a down payment when you obtain the loan. The down payment is the money you put down on a house. You pay this money at closing. You do not borrow this money from the lender. So you need to provide this money on your own, out of your pocket. This is the amount of the purchase price house for which you pay. This money is supposed to come from your savings account. You can pay it electronically from your bank account, or with a check, or with a credit card. This money is not included in the amount of money you take out for your mortgage.

The higher your down payment that means the less money you borrow from the lender. This also means that your monthly mortgage payment is going to be lower. You may hear many people debate over the correct amount that you should put down with a down payment. You should put down as much money as you can afford for your down payment. Most lenders want you to put down at least 20 percent of the purchase price of the house.

If you do not put down 20 percent, the lender sees you as a bigger risk, so they want you to pay PMI. When you do not pay at least 20 percent down, that means that the bank could allow you to borrow more than the house is worth. PMI is private mortgage insurance that increases your monthly payment. The private mortgage insurance gives an extra layer of protection to the lender. If you default on the loan, the insurance covers the money you owe to the bank.

What Should I Avoid?

When it comes to obtaining a mortgage, there are a few other details that you should consider. You should make sure that you get pre-approved. Most sellers require that you get a pre-approval notice. This proves that you are serious about actually buying a house. It also lets you know how much of a mortgage you qualify to obtain.

Just because a lender approves you for a certain amount, it does not mean that you should actually borrow that amount. Most likely, even though the bank thinks so, you may not be able to afford that amount. You should create a budget to determine how much money you can afford to pay in mortgage payments. There are many mortgage calculators available online that will help you estimate how much your actual mortgage payment may be. Once you have a good estimate of your mortgage payments, and you have a good budget that indicates how much you can afford to pay. Hopefully, the two numbers match. If they do not match, you need to adjust how much you want to spend on a house.

You should avoid not getting an inspection on the house you want to buy. A house inspection can tell you about any problems that might be hidden in the house. It can tell you if there are houses that you might want avoid purchasing because there might be hidden problems. You also want to make sure that you read all the entire mortgage documents. You especially should make sure that you read all of the fine print on all the mortgage documents.

Other Terms I Should Know

There are a few terms that you should understand before you embark on house shopping.

Loan to Value Ratio (LTV) – This is the ratio of the value of the house versus the amount the lender allows you to borrow. The lender wants the LTV to be 80 percent or less. This is where your down payment of 20 percent comes in.

Fixed-Rate Mortgage – This is a mortgage with a fixed interest rate. The rates that the lender gives you at the time of the loan remains the same throughout the life of the mortgage.

Adjustable-Rate Mortgage (ARM) – This is a mortgage with an interest rate that is adjustable. The mortgage starts at one rate, which is usually lower, and it stays there for a set period of time. That set period of time is typically 5 years. After that set time, the rate is adjustable based on the prime rate. You take your chances with an ARM, because it is possible that the interest rate increases your mortgage to a rate that you cannot afford to pay.

Title Insurance Company – This is a company that is a settlement agent that acts during closing. They take the money from the buyer or the lender and make sure that everyone that should get paid during closing gets paid.

Conclusion

I have given you a lot of information about mortgages, mortgage brokers and fees from lenders. It is important that you have a full understanding of all of the fees associated with a mortgage before you apply for one. When you buy a house, you have the option to use a mortgage broker or work directly with a bank. There are additional fees associated with working with a mortgage broker that are applied on top of any fees that the lender applies to your mortgage.

You should also understand if you pay the fees upon closing, or if you pay them as part of your mortgage payments. To understand the fees and how they work, you should be sure to read all of the documents from the lender, including any and all of the fine print. You are responsible for understanding all of the information that the lender gives you.

The Ultimate First Time Home Buying Guide

If you are in the market to buy a new home, whether it’s your first time or you have forgotten about some of the details, this home buying guide can help you prepare for the journey ahead.

What Is a First Time Homebuyer?

When planning a first time home buying guide, it helps to define who a first-time homebuyer is. It makes sense that a first-time homebuyer refers to someone who hasn’t purchased a home before. The definition can actually be broader than that. Those who can’t scrape together enough of a down payment can be eligible for assistance through different first-time homebuyer loan programs and grants. In order to qualify for many of the programs, prospective homebuyers must not have owned a home for at least the last three years. You don’t need to be a complete novice in order to qualify as a first-time homebuyer and to utilize a first time home buying guide.

Should You Buy a Home?

If you are researching a home buying guide then you are likely ready to move forward in the home buying process. There are some signs that show you are ready for homeownership.

Your Credit Score Has Improved

Some renters may be locked out of homeownership because of their credit score and not being able to qualify for a residential mortgage. A low credit score is a common reason why many renters can’t make the jump to owning a home. Too much debt and a history of late payments can hurt your score. If you have worked on your credit score then it may be time to start looking for a home. The better your credit score, the better the loan terms and interest rates will be.

You Are Good at Managing Debt

One thing lenders look for when screening applicants is the debt-to-income ratio. If you previously had a higher ratio and have since paid off some of your high balances then you may be in a better place to get a mortgage. This also gives you some more wiggle room in your budget so you can build up an emergency fund for any home repairs.

You Have Money Set Aside for the Extra Costs of Owning a Home

When renting, if there is an issue with the property then you don’t have to worry about paying for it since it’s the landlord’s responsibility. You also don’t have to pay for homeowners insurance or property taxes. However, when you own a home then all the costs are your responsibility. If you have set some money aside then you may have enough extra money to handle these additional expenses that come with homeownership. If you are putting everything you have into the down payment then you don’t have any money for potential repairs or improvements you need to make.

You Can Afford the Down Payment and Closing Costs

A first-time buyer won’t have the proceeds from the sale of another home to help fund the down payment on a new one. This is one of the main reasons why it’s hard to buy your first home. The down payment will depend on the house mortgage you get for your home.

You Are Ready to Settle Down

There are a lot of upfront costs associated with buying a home so it’s best to stay for a few years so you can recover those costs. If you plan on moving in a few years then homeownership may not be right for you.

Step by Step First Time Home Buying Guide

No matter if it’s your first time or your fifth time buying a home, there are some steps to take in following a home buying guide.

Assess Your Personal Finances

The first step in a home buying guide is by looking at your finances. You don’t want to just start looking at listings and open houses without first looking at your personal finances. The smart approach is to check your credit score and reports, look at your budget, and figure out your ability to make a down payment and save for closing costs. There may also need to be an earnest money deposit for you to consider. Some states require a deposit of 10% of the purchase price, while other states allow just a few hundred dollars.

Start organizing your paperwork in order to show lenders your financial stability. This means gathering bank statements, federal tax returns, pay stubs, W-2 forms, and a list of assets and debts. Lenders will check your credit report and verify your income. During this time when you are looking at your finances, you can see if you are eligible for first-time homebuyer programs and grants that could help with closing costs or a down payment. Start to become familiar with different mortgage types and down payment requirements. You don’t want to base decisions on emotion so you need to do your research during this stage.

Get Mortgage Quotes

You want to get mortgage quotes from at least three different lenders so you can compare terms and interest rates. Ideally, you want the lowest interest rate because the less money you spend on your mortgage then the more money you have in your budget for repairs and maintenance that come with homeownership. There will be different loan programs that have different requirements. If you are having trouble getting a mortgage, even with different requirements, you may need to spend time working on finances before you can move forward with a home purchase.

Get Preapproved For a Mortgage

Once you have gotten quotes from some lenders it’s time to get preapproved. When you are preapproved, this puts you in a stronger position to make an offer on the home. The preapproval letter will tell you how much you are qualified to borrow, the loan program you are using, and the expected down payment you will make. The final approval will take place after an underwriter verifies the information you give and there are conditions that are met. Preapproval letters help you in a competitive market and will help sellers take you more seriously.

Find a Good Real Estate Agent

Real estate agents can help tremendously with the home buying process. Agents who work in a particular market know the area and can give you insight into the neighborhoods and school districts. When you are ready to start looking at homes, interview agents and hire one once you find the right fit. You can consider a buyer’s agent who will not only help you find the right home but also negotiate the best offer and recommend professionals whose interests align with yours. Listing agents will usually represent the seller and the main goal for this agent is to get the best purchase price on the home. The buyer’s agent will help from the buyer’s perspective so it’s best to work with someone who represents your own interests.

Start Shopping for the Home

This is where the fun part begins. Have a list of top requirements that you can give to your agent so you aren’t wasting your time looking at homes that won’t meet your needs. When you begin to view homes, take photos and notes since it can be hard to remember all the unique features when you start to look at several properties. In addition to looking at the home itself, you also want to look at the neighborhood. See how traffic flows and get a sense of the character. Talk to neighbors and check crime statistics in the neighborhood.

For a home you are considering, see if you can get a copy of any homeowners association documents so you know what the rules are and if this will work for you. Doing as much research and due diligence as you can ahead of time will help you avoid any mistakes in the process. If you buy a home without researching the schools and later find out they aren’t the best, you will be disappointed. Never purchase a home without seeing it first.

Make an Offer

Once you find the home you love it’s time to make an offer. This can be an exciting time but it’s also a nail-biting part of the process. Your agent should run an analysis of other comparable listings that have recently sold in order to help you make an offer that is competitive. Your offer will include the offer price, deadline for the seller to respond, and any contingencies you want to request. Contingencies, such as those for the home inspection, financing, and appraisal, give you the ability to walk away from the deal without any penalty if certain conditions are met.

Negotiate Closing Costs

Within days of applying for a mortgage, you will get a loan estimate that details the loan terms, along with estimated closing costs. Some closing costs are negotiable. For example, your lender may charge underwriting fees or an origination fee that is discounted or waived if you ask. The seller may also pick up some of the costs. You may be able to get the closing costs rolled into your mortgage but then you will usually pay a higher interest rate. It’s important to understand there is some wiggle room to negotiate on certain services.

Get a Home Inspection

An inspection only takes about three hours and can range in cost but it’s important. Home inspectors will usually check the home’s roof, physical structure, and heating, plumbing, and electrical systems. However, an inspector usually won’t look for mold or lead paint. Your real estate agent can recommend a good inspector or you can find one on your own with a little research.

It’s always good to put a contingency clause in place that will allow you to cancel the deal without any penalty if the home inspection uncovers major problems and the seller won’t address them. You and your agent should be present during the inspection so you can ask questions. Even if a typical home inspection won’t cover it, you can also have someone inspect for mold if you are concerned about it. You can ask the seller to purchase a one-year home warranty at closing. This can be reassuring for first time buyers with a tight budget.

Get Insurance and Finalize Your Move-In Details

Homeowner’s insurance will be required by your lender and is necessary to help protect your big investment. Premiums can vary so, just like with lenders, you want to get quotes from multiple prospective companies. Figure out your needs and make sure that you get enough coverage for you to rebuild your home if it’s damaged or destroyed. If your home is located in a flood zone, you will need to get flood insurance as well. As you start to prepare for move-in day, contact local utilities to arrange for a new service for your move-in date. You can also start to hire movers and start the packing process. There are a lot of upfront costs when it comes to buying a home and there could even be some unpredictable ones after move-in day. It’s a good idea to have an emergency fund for any surprise repairs or maintenance.

Time for Closing

You will have to get updated financial paperwork and paystubs before you close to prove your employment status hasn’t changed and you can make your mortgage payments. Within 24 hours of closing, buyers will do a final walkthrough of the property to make sure repairs, if the seller was responsible for them, were made and the home is vacant. At closing, you will sign a lot of paperwork to finalize the loan and transfer ownership. You will be required to wire funds or bring a cashier’s check for the down payment and must also have your identification.

Your lender and real estate agent will walk you through the process and it’s okay to take your time as you review documents. You are committing to the largest financial transaction you will likely make in your life Three days before closing, you will get a form that outlines the fees and the loan. Compare it to your initial loan estimate to make sure you aren’t being charged unexpected fees and that your personal information is correct.

Your Guide to Understanding the Mortgage Process

Benefits of Owning a Home

A home buying guide can only help you so much if you don’t realize the potential benefits of owning a home.

Owning a home is an investment. Unlike many purchases that decrease in value, homes appreciate over time. Even though local markets have different factors, the national median home price goes up each year. Every time you pay your mortgage, the debt amount goes down and the value of your home continues to rise.

With homeownership, you can take advantage of tax benefits. The biggest tax benefit is the option to deduct interest payments from your income tax return. This is especially important at the start of the mortgage when a lot of the monthly payment is applied to your interest.

Depending on the mortgage you choose, you can help stabilize your housing costs. If you have a fixed-rate mortgage then you have the same payment for your entire term, while rental payments for nearby properties can continue to rise.

You get more control over your living space. Renting usually doesn’t allow you to have a lot of options when it comes to personalizing your living space. With homeownership, you can make improvements to your home. Home improvements can actually lead to increased home value, both in your daily home life and financially. With the power of equity, you get the extra finances you need to reinvest in your home when cash funds aren’t an option.

Different Types of Mortgages

Part of following a home buying guide is figuring out different types of mortgages you can get.

Conforming Loan: The conforming mortgage loan is what many people think of when they think of a home loan. This type of loan is a good choice for homebuyers who have a good credit score and can save for a down payment of at least 10%. Conforming loans can come with fixed rates, where your interest rate never goes up or down and you pay the same amount every month. It can also be available with an adjustable rate, where the interest rate changes based on the market.

FHA Loan: FHA loans are a popular choice with first-time buyers because they require a smaller down payment and have more flexibility when it comes to underwriting. Those with below-average credit can also get approved.

VA Loans: VA loans can be useful to those in the military. They are available to veterans and active members of the U.S. military. The rates usually beat all other common loan types.

USDA Loan: These loans are for those who are in rural areas and these loans don’t require large cash down payment.

Avoiding Homebuyer Mistakes with a Home Buying Guide

Even if you are following a home buying guide, it can be easy to make some mistakes. Make sure to avoid them so the process goes smoothly.

Talking to Only One Lender

This is a big mistake and can leave thousands of dollars on the table. The more you shop around, the better position you are in to compare to make sure you are getting a good deal and the lowest possible rate. When it comes to where to shop for a mortgage, there are plenty of options. You can choose to go to your bank, the local credit union, or even use an online lender.

If you want to look into the best online lenders, you can fill out the form below and Loanry will match you with lenders who may be willing to give you a loan based on the information you provide. Start here:


Buying More Home than You Can Afford

It can be easy to fall in love with a home that can stretch your budget. Overextending yourself is not a good idea. When you buy a home that exceeds your budget, it will put you at risk of losing your home if you reach tough financial times. There will be less wiggle room in your budget for expenses or other bills.

Moving Too Quickly

Buying a home can be a complex process and there are a lot of steps in the home buying guide. A big mistake you can make is not planning far enough ahead for the purchase. Rushing the process can mean you don’t have enough saved for a down payment and closing costs and you are aren’t addressing issues on your credit report.

Draining Your Savings

Spending all your savings on the down payment and closing costs can be an issue. While it may be nice to put down 20% so you can avoid mortgage insurance, you want to have savings left for needed repairs or an emergency fund. Paying mortgage insurance may not be ideal but if you deplete your savings to make a bigger down payment, it’s riskier.

Not Paying Attention to the Neighborhood

If you are fixating on the home, you could wind up in a neighborhood you don’t like. Selecting the right neighborhood is important for your family and life. Be sure to discuss with your real estate agent about school ratings and crime stats. Visit the neighborhood at different times to get a sense of neighbor interactions, traffic, and the overall vibe.

Making a Decision Based on Emotion

Buying a home can be a big milestone. It can be easy to get attached and make an emotional decision. Remember that you are making probably the largest investment of your life. Emotional decisions can lead to overpaying for a home or stretching your budget.

Not Sticking to Your Budget

It’s best to look at properties that cost less than the amount for which you were preapproved. Even though you may technically be able to afford your preapproval amount, that’s the ceiling and it won’t account for other monthly problems or expenses. Shopping with a firm budget in mind can help when it comes to making an offer. When you find a home you love, it’s tempting to make a high-priced offer thinking that it will help you win but sticking to your budget can ensure you avoid a mortgage payment that is hard to afford.

Getting Your Down Payment

Your down payment is a big part of a home buying guide. It’s the cash you pay upfront to get a home loan.

Many people believe that you need a 20% down payment. While there are benefits to having a 20% down payment and lenders do like to see this, this is not the only way to buy a home. A 20% down payment has some benefits, such as putting more equity into your home right off the bat and a lower monthly payment, but there is also a caveat. The down payment is not the only upfront money you have to worry about. The closing costs can be a huge chunk as well.

There are some other low down payment alternatives for you to consider. Different mortgages have lower rates and it’s possible to buy a home with as little as 3% down.

You will need to decide the right down payment for you. It may sound like an easier decision to just go with a lower option but a lower down payment can make you a bigger risk in the eyes of a lender. This is why mortgages with lower down payment requirements are backed by the government. Instead of requiring mortgage insurance, some of the options will include a funding fee or an upfront guarantee fee. Whatever it is called, a fee is a fee. If you are considered a higher risk then you will likely pay a higher interest rate for the life of the loan, in addition to these other fees.

Calculating Your Mortgage Payment

It’s easy to calculate your mortgage payment if it just includes principal and interest. For this, you can use a bare-bones calculator. However, this is rarely the case. There are a lot of costs that can be built into your monthly mortgage payment. There are some key components that could play a role when you are calculating your monthly payment.

Principal

This would be the home’s purchase price minus any down payment. It the amount you are borrowing for the home.

Interest

This is what the lender charges to loan you the money for the home. Interest rates are expressed as a percentage.

Property Taxes

This is the annual tax assessed by state and local government authorities on your land and home. Property taxes may sometimes be separate from your mortgage payment or added in.

Mortgage Insurance

If the down payment is less than 20% then you may be required to have mortgage insurance. This insurance protects the lender in case you default on the mortgage. Once the equity in your home reaches the 20% threshold then the insurance is cancelled, unless you have an FHA loan.

Homeowners Association Fee

If your home is part of an HOA then a fee is paid to the organization that helps with property improvements, upkeep, and shared amenities. This can also be separated from your mortgage payment occasionally.

Final Thoughts

If you are a first-time homebuyer, it’s important to follow the steps in a home buying guide. Even if you have bought a home before but it has been a while, a home buying guide can help you plan ahead so you are ready for the process. There are many benefits of buying a home and some signs that mean you could be ready for homeownership. Consider different mortgage options available to you, especially if your credit score isn’t the best. You also want to avoid common mistakes that can happen during the home buying process so you are taking advantage of the lowest rates available.

FHA Loans: Your Complete Guide

A FHA Loan (Federal Housing Administration) is a mortgage given by an FHA-approved lender and then insured by the FHA. FHA loans are a house mortgage created for low- and moderate-income borrowers since they require a lower minimum down payment and don’t require a high credit score when compared to conventional loans.

In 2019, you only needed to have a down payment of 3.5% and needed a credit score of 580. However, you can still qualify if your credit score is between 500 and 579 but you will need a larger down payment. With FHA loans, down payments can come from a financial gift from family, savings, or down payment assistance. These factors make FHA loans a popular choice for first-time homebuyers. It’s important to note that the Federal Housing Administration actually doesn’t lend you the money but instead guarantees the loan. You still get the loan from a traditional lender, such as a bank. You pay for this additional insurance through a mortgage insurance premium and the lender has less risk because the FHA pays the claim to the lender if you default on the loan.

Different types of loans cater to different needs of borrowers. To find out everything you need to know about FHA loans, and if they are right for your, just keep reading.

How an FHA Loan Works

With an FHA loan, there are two types of mortgage insurance premiums you pay: the upfront mortgage insurance premium and the annual mortgage insurance premium. The upfront premium is 1.75% of the base loan amount and is paid at the time of closing or rolled into the loan. The payments are deposited into an escrow account that is set up by the U.S Treasury Department. The funds are used to make mortgage payments in case you default. You also make the annual payments every month. These payments can vary as a percentage of the base loan amount depending on the loan length, the amount, and the original loan-to-value ratio.

These mortgage premiums can’t be canceled in most instances. The only way to get rid of the premiums is to refinance with a non-FHA loan or to sell the home. Even though they are popular for first-time homebuyers, repeat buyers can get FHA loans if they’re using the loan for a primary residence.

How to Qualify for an FHA Loanfha credit scores

In order to qualify for FHA loans, borrowers will need to meet some lending guidelines.

Borrowers will need a credit score of 500 to 579 with a 10% down payment or a score of 580 or higher with a 3.5% down payment. Borrowers also need an employment history for the last two years that can be verified with pay stubs, bank statements, or federal tax returns. FHA loans need to be used for a primary residence. The property will need to be appraised by an FH- approved appraiser and meet certain property guidelines. Your monthly mortgage payments can’t exceed 31% of your monthly income. Some lenders do allow a ratio of 40% in certain cases. If you have experienced bankruptcy then you will need to wait 12 months to two years to apply. However, lenders can make some exceptions on waiting periods.

Special Considerations for FHA Loans

The lender you choose will evaluate your qualifications for an FHA loan just as it would any other mortgage application. Instead of using your credit report, lenders look at payment history records and work history. You are able to qualify for an FHA loan even if you have gone through foreclosure or bankruptcy if you have re-established good credit. In general, the lower the credit score and the lower down payment you have, the higher the interest rate will be.

When you buy a home, you will still be responsible for certain out-of-pocket costs, such as attorney fees, appraisal costs, and origination fees. One of the advantages of FHA loans is that the seller, homebuilder, or lender can pay some of these at closing on your behalf. If a seller is having a hard time finding a buyer then he or she may offer to help you out at closing in order to sweeten the deal.

Your lender will need to be approved by the FHA and you need to show steady employment history or that you have worked for the same employer for the past two years. If you are self-employed, you can use documented tax returns and profit and loss statements. If you have been self-employed for less than two years then you could be eligible if you have a solid work and income history for the two years that precede your self-employment.


Types of FHA Loans

The FHA also insures other loan programs that are offered by private lenders.

FHA 203(k) Loans

This type of FHA loan allows a homebuyer to purchase a home and renovate it with just one single mortgage. Homeowners can also use this program to refinance their current mortgage and add the remodeling projects into a new loan. There are two types of FHA 203(k) loans. The limited 203(k) has an easier application process and the improvements or repairs must total $35,000 or less. The standard loan will require you to fill out some extra paperwork and is needed if the improvements cost more than $5,000 but the total value of the property still falls within the FHA mortgage limit for the area.

Home Equity Conversion Mortgage

A home equity conversion mortgage (HECM) is the most popular type of reverse mortgage. A HECM will allow older homeowners above the age of 62 with a significant amount of equity or who own their homes to withdraw some of the home equity. The amount that can be withdrawn can depend on the borrower, the current interest rate, the appreciated value of the home, and the mortgage limit.

Energy Efficient Mortgage Program

Energy efficient mortgages are backed by the FHA and are used by buyers to purchase homes that are already energy efficient or to buy and remodel older homes with energy-efficient upgrades. The cost of the upgrades can be rolled into the loan without the need for a larger down payment.

FHA Section 245(a) Loan: This program is for borrowers whose incomes will increase over time. You start out with a smaller monthly payment and then gradually go up. There are different plans available with different increments.

Conventional Loans Versus FHA Loans

The government, unlike FHA loans, doesn’t insure conventional loans. Qualifying for a conventional loan will require a higher credit score, a larger down payment, and a solid income.

You can get more down payment help with an FHA loan. Since the FHA allows financial gifts or down payment assistance it can be much easier to scrape together your payment. Conventional lenders may restrict the amount of your down payment that can come from a gift. FHA loans can have lower interest rates than conventional loans. When the interest rates are lower, you pay less over time.

FHA loans have different mortgage insurance requirements. Those who get an FHA loan need to pay an upfront mortgage insurance premium and an annual mortgage insurance premium. With a conventional loan, private mortgage insurance is only required if you put less than 20% down. There will be just one monthly payment instead of two. There are also different rules for when you can stop paying insurance. For a conventional loan, you can stop paying but you won’t be able to with an FHA loan.

What about the Interest Rate of an FHA Loan?

FHA loans can be either adjustable or fixed-rate loans. With a fixed-rate loan, the rate won’t go up and down so the mortgage payment is predictable and stable throughout the life of the loan. With an adjustable-rate mortgage, the interest rate will move along with the market. The interest rate and the monthly payments can adjust periodically. The interest rate can be lower with an adjustable rate but can go up over time and there are no guarantees.

Finding an FHA Lender

Finding an FHA lender is an important step in getting an FHA loan. These tips can help you find the best FHA lender for your needs.

Shop Around

Lenders offer FHA home loans, not the federal government. Each lender does offer its own fees and rates so you need to shop around. Shopping around is one of the best mortgage tips you can pay attention to. You will want to compare your FHA mortgage lenders to find the top lenders before you go forward. Your current bank or credit union may be an FHA-approved lender so it helps to check. You may want to consider working with a mortgage broker who specializes in FHA loans because they will be in the best position to offer meaningful and accurate advice and can guide you in your homeownership goals. Since you aren’t able to drop the premiums you want a lender who can help you compare all the costs of FHA loans.

If you think that this all process is incredibly daunting, you can do is let Loanry try to help you. We make it easy for consumers to find the right lenders for their needs and avoid falling victim to scams. Put in your information and see which lenders may offer a loan for you:

=

Know Your Credit Score

It’s important that you understand your credit score before you apply. Your credit score may be better than you think and this may allow you to qualify for a conventional mortgage. Your lender options can be limited if your credit score is low. You will need a larger down payment if your credit score is lower as well. Knowing your credit score is helpful because you may need time to improve your credit score before you apply.

Understand How Closing Costs Work

Since the U.S. Department of Housing and Urban Development oversees the FHA loans, there is a cap at 3% of 5% of the loan amount for closing costs. The FHA allows homebuilders and sellers to pay some of the closing costs. If you think you will need help with covering these then you may be able to qualify for down payment assistance or help with closing costs. Many states have their own mortgage programs that can be paired with FHA loans and the programs can also cover the upfront costs.

Know Your APR

Your APR (annual percentage rate) will have an impact on your mortgage. The APR will determine how much interest you pay in your monthly payment and thus over the life of the loan. It can be easy to believe that all FHA loans have the same APR but that isn’t true. Each lender sets its own and there is a lot of variance between lenders. You can use an APR calculator to help you determine any long-term costs of your mortgage before you pick a lender.

Advantages of FHA Loans

There are some instances when an FHA loan may be right and they offer a number of advantages.

Small Down Payment

FHA loans allow you to get a home with a smaller down payment. This gives you more borrowing options.

You Can Use Others’ Money

It will be easier to use gifts for your down payment and closing costs if you choose FHA financing.

No Prepayment Penalty

There may not be a prepayment penalty, which can be a big plus for certain borrowers. You never know what can happen. Maybe you somehow get a lot of money, or you simply decide you want to get rid of this dept much earlier than you though you would. So it is great when you do not have to pay additionally.

Assumable Loans

A buyer can take over the loan if it is assumable. This means he or she will pick up where you left off and benefit from lower interest costs if you sell your home.

A Chance to Reset

If there is a recent bankruptcy in your past then it will be easier to get approved for an FHA loan. You only need two to three years after financial hardship.

Improvements and Repairs

Certain FHA loans can be used to pay for home improvements. If you are looking at a property that needs improvements then these programs make it easier to fund your purchase and improvements in just one loan.

Disadvantages of FHA Loans

FHA loans do have some disadvantages, as does every loan type offered.

Low Down Payment

A low down payment may seem like a great idea but it can also be a disadvantage. Putting only 3.5% down can mean you aren’t yet on solid financial ground and taking on a home can be risky. The more you borrow, the more interest you will pay and it will make your home more expensive.

Upfront Insurance

When you are putting less than 20% down, you will have upfront insurance costs. FHA loans have two types of insurance. A bigger loan means a larger monthly payment.

Ongoing Insurance: Not only will you have upfront insurance but you will also be paying for insurance monthly. The extra cost means you pay more each month. You aren’t able to cancel this insurance with an FHA loan.

Limited Choices

There are limited choices for when you can use an FHA loan. This may not be a problem but sometimes an adjustable-rate loan or an interest-only mortgage can be a better fit.

Loan Limits

Another disadvantage of FHA loans is there are outside limits on how much you are able to borrow. The region you live in sets these limits. The lower-cost areas have a lower limit than usual FHA loans. Higher-cost areas have higher limits. There are also special exception areas, such as Hawaii and Alaska, where the high construction costs make the limits higher. You can look up the loan limit on the FHA website.

Property Limitations

Getting an FHA loan approved will require a property that meets certain standards. For example, basic health and safety requirements will need to be met. If you are searching for a fixer-upper or a major bargain then FHA loans may not be right. For a property that is move-in ready, it’s not a problem. If you are buying a condo, it can be challenging. If there aren’t enough units in your development that are owner-occupied then an FHA loan may not be the best option. The loan can’t be used for investment or rental properties and the property needs to be used as your primary residence.

Qualifying

FHA loans don’t always get approved. You still need a minimum credit score and you still need to have documentation of sufficient income to repay the loan. You must meet this certain credit score unless you are planning to have a larger down payment.

Seller Hesitation

In some situations, FHA loans can be a disadvantage when you are looking for a home. Sellers like to know about potential buyers and a FHA loan won’t always signal strength. A seller may fear that there are extra requirements that are going to slow down the process. If you are buying in a hot market, this may not be to your advantage and you can miss out on some great properties.

FHA Loan Relief

Once you have an FHA loan, you may be eligible for loan relief if you have experienced a financial hardship, such as an increase in living expenses or a loss of income. The FHA-HAMP program can help you avoid foreclosure on the property by permanently lowering the monthly mortgage to a more affordable level. In order to become a full participant in the program, you need to successfully complete a trial payment plan where you make three scheduled payments on time at the lower modified amount.

Is an FHA Loan Right for You?

FHA loans can be an ideal choice if you want a low down payment and your credit score isn’t perfect. If you aren’t able to qualify for a conventional loan then an FHA loan may be the right choice. If you are able to afford a larger down payment then you want to consider getting a conventional loan. The mortgage insurance costs can make an FHA loan more expensive. You still need to shop around carefully in order to find the best option and lender for you.

An FHA loan won’t help you if your credit score is less than 500. If your credit score is less than 500, you will need some time to work on improving your credit score before you apply. An FHA loan won’t be best for those who are shopping on the higher end of the price spectrum and it’s not designed to. The program was created to support low- and moderate-income homebuyers, especially those with limited cash reserves for a down payment.

How Much Home Can You Afford?

In order to determine how much home you can afford for your residential mortgage, you will need to understand back-end versus front-end debt ratio. The front-end ratio is a percentage of your gross monthly income and shows the payment you can realistically and reasonably afford from a lender’s point of view. The back-end ratio reflects the new payment for the mortgage but also your recurring debt. It will be higher than the front-end ratio.

Your mortgage amount will depend a great deal on interest rates. Interest rates can change daily or even hourly. Your down payment also affects how much home you can afford. First-time homebuyers benefit from not putting everything they have toward a down payment so they have money for other costs associated with a home, such as maintenance. First-time homebuyers can also underestimate the cost of maintenance and other homeownership needs.

Do A Trial Run

Before you jump into homeownership, try setting aside the additional amount you would pay for a mortgage every month to see how you do. For example, if your rent is $800 and you plan to pay $1,200 on your mortgage then set aside the extra $400 per month for three to six months. If you can’t do that for a few months then you can’t afford that mortgage amount.

If you feel more comfortable borrowing less than the amount shown for any preapproval amount you get then do so. You don’t want to make the mistake of taking out a mortgage that you aren’t able to afford. A dream home may be able to wait. You probably don’t need the most expensive home you are qualified to buy. Consider a starter home as your first home. Work first on building equity and security for yourself and your family.

Tips on Saving for a Home

Even if you choose an FHA loan, you need to still save some for a home. With FHA loans, you will need to save less for a down payment but you still need some money and consider the closing costs, property taxes, ongoing repairs, and maintenance. This can be a lot to take on so you should save up as much as you can before you buy a home.

Determine How Much You Need

Meet with a mortgage loan officer to know what loans you qualify for, home much home you can afford, and how much of a down payment you will need. This will help you determine how much you need to save and it could be a lot less than you think, especially with an FHA loan.

Get Debt Under Control

Your debt can make it harder to save for a home since a chunk of your income is going toward your debt. The debt load can also make it harder when applying for a mortgage. If you have debt, and most people do, do what you can to reduce it. Consider refinancing debt to lower payments. If you have a credit card with a high balance then pay off as much as can and consider if it makes sense to transfer your balance to a lower-interest card.

Consider if It Makes Sense to Put Retirement Savings on Hold

You may not be able to do this if you are close to retirement. However, if you are young and contribute some of your income to a retirement plan then consider diverting this toward your down payment and costs for the home. It should only be for the short term since saving for retirement is important. However, it can make a big difference in how much money you have to put toward a home.

Use Technology

Apps can help you remember to send a portion of your paycheck to your savings account. You can also use apps that will round up your purchase to the nearest dollar and then take the spare change and add it to an investment account. Spare change can add up over time.

Ask for Gift Money

With an FHA loan, you can use gift money toward your down payment. Ask your family for money for your birthday and other special occasions instead of a gift. While not everyone will oblige, some of your relatives may like knowing they are helping you toward your dream of owning a home.

Get a Side Hustle

In this economy, there is a lot you can do as a side hustle. Consider some time every week doing your side hustle so that you can make some extra cash that you can put away toward your home.

Mortgage Loan Statistical Overview: By the Numbers

Final Thoughts

FHA loans can be a good option for certain homebuyers. In order to qualify for a FHA loan, you typically need a lower credit score and down payment than a conventional mortgage. There are some advantages and disadvantages of FHA loans. And while they can help a lot of first-time homebuyers, they may not be an option for everyone. Regardless of whether or not you choose an FHA loan, you need to know how much home you can afford. There are different things you can do in order to save up for a home.

What Are the Pros and Cons of Prepaying Your Mortgage?


Owning a home is a dream many people have, and it is a significant investment. Taking a mortgage allows many people to start the critical step of purchasing a home. Depending on the kind of mortgage you go for, it can become a burden for many people because of the monthly payments. You want to negotiate a mortgage that will not require that you pay for the rest of your life. You may, therefore, grapple with the question of whether or not you should make prepayments on your mortgage has a way of clearing the balance faster. However, is it a good idea?

There is no yes or no answer when it comes to mortgage prepayment. If you prepay your mortgage early, you will save a lot of money with regards to the interest you will have to pay. You get to increase the equity in your home, and best of all, you own the home sooner.

However, there are specific considerations you need to have, including whether or not you could put your money to better use elsewhere. You may, for example, settle other debts. And you could also think about saving for retirement so that you ensure that you are comfortable in the future. You may also put aside money in your emergency savings account for those situations when you may require a lot of cash upfront. If you do not have all these factors in place, you may want to rethink prepaying your mortgage. It is a decision you must only make once you have all your financial needs in place.

Understanding How the Mortgage Structure Works

You are thinking about applying for a residential mortgage, but you do not have the relevant knowledge around it. To be able to negotiate the best rates, you must take the time to understand what you are getting into. Applying for a mortgage can be tricky for most people. If you do it wrong, it could mean that you spend the rest of your life paying off the debt.

A house mortgage is a loan that you take to purchase a home. You have the principal amount, loan repayment term, and interest. You will also need to consider the taxes and insurance that may apply to the loan. Shop around for the best mortgage lender, meaning that you have to take the time to do your due diligence. You must also be ready for the lender to look into your financial background and your credit score. The best mortgage tips we could ever give you is to factor in how much money you have so that you only apply for what you can afford. You have other expenses that you need to take care of, and it would not make sense for you to take on additional obligations without having the budget in place.

Be realistic about what you can afford, and only look for a loan that you know you can service comfortably. You may have to put down an amount for the down payment, after which the lender will require that you make monthly payments, until the payoff date. The lender will give you an amortization schedule, which will provide you with a breakdown of the loan. Initially, you will be paying off the interest, and towards the end, the principal amount.


Why Would You Want to Make Prepayments On a Mortgage?

Paying a mortgage early is a strategy many people will use to offset their loans quickly. You will accrue several benefits, which we will highlight below. Such includes the ability to save thousands of dollars in interest. You also get to eliminate long-term debt. There is also the aspect that the sooner you pay off your mortgage, the earlier you own your home.

What Is the Process of Prepaying a Mortgage?

You must understand how prepayment works. When you make prepayments on your mortgage, you get to reduce the interest you will pay over the loan term period.

When you are looking for a mortgage lender, and sure you have a good understanding of their penalties. Most will not penalize borrowers if they decide to repay their mortgage early. You must also ensure that whatever prepayment you make goes into the principal, and not the interest. If you do not let the mortgage lender know in advance that you would like the money to go to the principal amount, they may apply it to the interest. You will, therefore, be servicing the interest payments, which works for the lender but will not help you offset your loan earlier.

What Are the Advantages of Prepaying Your Mortgage?

There are several advantages to prepaying your mortgage, and we will look at them in more detail below.

You Reduce Your Loan Cost

By prepaying your mortgage, you get to reduce the total cost of the loan. If, for example, you took a loan for about $100,000 for a 30-year loan at 4%, you will need to pay $477 every month. If you decide to make an extra payment within that year and end up with 13 instead of 12 payments, you will save over $10,000 over the loan period. You also get to reduce the loan repayment term by up to four years. If you can double the payments, you can take care of the 30-year loan within 11 years. Make sure that you negotiate with the bank to put the extra payments on the principal amount so that the extras do not go to the interest. Making early payments on your interest does not mean that you will gain equity to your home faster.

You must also be careful about prepayment penalties, and must, therefore, be very clear about this before you start making any prepayment.

It Will Affect Your Taxes and Interest

The advantage of prepaying your mortgage is that you will receive tax breaks. If you pay it off entirely, the same does not apply. You, however, get to benefit from paying less interest on what you would eventually spend on the final loan. It would, therefore, make more sense to pay off your loan early. It is doubtful whether the tax incentives would outweigh the benefit of paying less interest.

You Get to Pay Off Your Loan Sooner (And Save on Interest)

Prepaying your mortgage will mean that you get to reduce the time you will need to pay off the loan. You also get to ensure that you have better cash flow in the future. If you have a young family, you will have many concerns among them being able to pay school fees, college fees tuition, among others. You are, therefore, better off facing these years without having the burden of mortgage payments as well. What you will enjoy is the peace of mind, and an ability to handle your financial obligations more comfortably.

Резултат слика за prepaying mortgage infographic

It Helps Build Home Equity Faster

You calculate your home equity by subtracting what you owe on the loan, from the market value of your home. If, for example, the market value of your home is $500000, your mortgage balance is $300,000, then the equity in your home is only $200,000. You therefor get to increase your home equity by reducing the mortgage balance, which you can hasten by making larger payments. The best thing about having home equity is that you can use it to apply for a home equity line of credit or loan.

It Will Impact On Your Credit Score

If you have less debt and can make your monthly payments, it will help improve your credit score. Credit reference Bureaus will base your credit score on your ability to handle your financial obligations. Showing that you can comfortably make mortgage payments is, therefore, a fantastic way to raise your credit score. A good credit score is essential, especially if you hope to apply for loans in the future. Moneylenders will want to know whether you are capable of making payments, and one way of knowing is by looking at your credit score.

Prepaying Your Mortgage Is a Good Option If You Are a Poor Saver

Different people will handle money in different ways. For some, immediately they receive the money they will run to the bank and save it for some future projects. And for others, the money will go into investment options. For some, it will go towards settling debts or paying off certain financial obligations.

Yet, some people receive cash and immediately go on a shopping spree, and within no time, they will have nothing remaining. If you are someone who is not capable of saving, then prepaying your mortgage may be the best option. You are better off spending the cash, reducing your principal mortgage amount instead of wasting it on frivolous activities.

Disadvantages of Prepaying Your Mortgage

But let’s look at the flip side as well. As with anything, prepaying your mortgage and answer to the question “Should you do it?” is not all black and white. Here are some disadvantages you should know about if you are thinking about paying off your mortgage earlier.

You May Incur Penalties

We have already talked about lenders who will impose a penalty if you make your mortgage payments early. We would, therefore, recommend that you take the time to read the documents properly before you sign up for a house mortgage. You will avoid any issues concerning the notice.

You Lose Out On the Tax Deductible Benefits

When you prepay your loan, you reduce your mortgage interest. You will note that any payments you make towards your loan in the initial stages go towards paying off the interest. If we are to go back to the example above of mortgage for $300,000 over 30 years at 4% interest. You could deduct $10,920 in tax benefits.

However, the law now requires that you itemize your deductions, which may be an inconvenience for many homeowners. The standard deduction is $12,200, $18,350, and $24,400 for individuals, heads of households, and couples who are filing jointly, respectively. After 2017, you could only deduct interest on the first $750000, while in the preceding years, you could do it for up to 1 million dollars.

You May Lack Money to Invest in Other Projects

Prepaying your mortgage means that you do not have money left over for investing in other Ventures. You could lose fantastic opportunities in things such as real estate investment trusts, stocks, bonds, among others. Talk to your financial advisor about where you can put your extra money so that you get better financial Returns. It will also depend on your financial risk Tolerance levels.

You May Be Better Off Paying Higher Interest Debts

Instead of prepaying your mortgage, you may want to think about paying off higher interest debts. You may, for example, have student loans or credit card loans that attract very high-interest rates. It would make more financial sense to pay off such, and then make prepayments on a mortgage only when you have the financial capacity to do so.

You May Ignore Other Financial Goals

Other than investing or paying off high-interest debts, there are many other financial goals many individuals have. One such purpose is ensuring that you have retirement savings, which will help you live a more comfortable life, once you leave formal employment.

You must also ensure that you have emergency funds that can cover up to six months of your bare living essentials.

How Do You Make the Decision On Whether to Prepay Your Mortgage?

As we have already seen above, deciding on whether to prepay your mortgage is a weighty one. You must weigh the savings vs. opportunities, as well as determining the best places to use the available money. You must also have a good understanding of your credit profile and your ability to make more money in the future. Other things to consider include exposure to inflation, lost tax benefits, the returns you will forgo on investments, among others.

Prepaying your mortgage means that you can comfortably take care of your financial obligations. You must also save, put something aside for the emergency fund as well as towards your retirement years. You can build home equity by reducing the mortgage amount.  If, however, you need cash quickly, turning your home into money may be more complicated than you could anticipate. The value of your home also depends on the market, and in times of market volatility, the value of your home may be lower.  What you may have bought for $200,000 could at a particular time cost as low as $100,000.

How to Pay Off Your Mortgage Early

Paying off your mortgage early is a great accomplishment because it gives you a level of financial independence. It allows you to plan for your money without having to worry about mortgage payments. However, it ties up your cash, and you are not able to put it on other areas, which would give you higher Returns.

Many financial advisors are wary about telling their clients to settle the mortgage early. They feel you are better off putting your money to better use elsewhere. You do, however, need financial discipline to be able to realize your financial goals. There are times you will have to make some sacrifices so that you get to keep a large part of your income.

Your age will also determine what kind of decision you make with regards to prepaying your mortgage. If you are young and have the potential to earn money over a long time, you should think about aggressively investing the money. However, if you are close to retirement age, it would make more sense for you to pay off the mortgage. So how can you pay off your mortgage early?

Think About Refinancing to Shorter-Term Loans

You can refinance a 30-year loan to 10 or 15 years. You must, however, factor in that your monthly payments will be more, unless, you can negotiate for lower interest rates.

Reconfigure Your Payments

Looking for mortgage refinancing is not always the best option. Talk to your financial lender to help you reconfigure the payments to lower terms. Look at the various time frames and how they could impact your monthly payments. Think about the penalties, and channel your money to paying off the principal.

Резултат слика за mortgage us infographic

Pay A Bit More or Add an Extra Payment

You have the option of adding a little more money to your monthly payments. You could also look at the year as having 13 months instead of 12 so that you make one extra payment every year.

Lump-Sum Payments

You can opt to make a lump sum payment towards the principal amount anytime you have some extra cash. It will help you reduce the loan term, and you must keep a close watch on the payoff date.

Factors to Consider If You Want to Pay Off the House Mortgage Faster

There are several factors you need to consider when thinking of paying off the house mortgage quickly, and these include: –

  • Understand what you owe, and how much interest you will pay
  • Set goals of paying off the mortgage faster, and work towards it. Setting financial goals is vital because it helps you determine better use for your money
  • Consider the interest rates you pay for all your that’s including credit cards, among others.
  • Think about paying the high-interest rate loans first before prepaying your mortgage
  • If you can afford it, make weekly or bi-weekly payments instead of monthly. It will allow you to make a full extra payment every year thereby enabling you to pay off the mortgage faster
  • If you have some extra money, consider making lump payments on the principal

Tips for Paying Off a Mortgage Faster

Mistakes to Avoid When Taking a Mortgage

There are several costly mistakes one can make when taking a mortgage. These include: –

Committing Too Much to The Mortgage Payments

The typical household has very many home related costs that you must meet before investing your money to mortgage payments. It could be tuition, replacing your car, shopping for groceries, among others. You must contain your expenditure to less than 28% of your pre-tax income. It will then determine how much you can put aside for your mortgage payments.

Not Understanding What It Means to Own a Home

There are so many other costs you will incur from owning a home that it may come as a surprise to you as a new homeowner. Routine maintenance will take up to 2% of your home purchase price. While this does not apply to every year, the costs may vary, whether upwards or downwards. You may, for example, need to replace the roof, fix the furnace, install a new water heater system, among others. The amount you spend on Renovations will depend on how old the house is. You will also need to factor in property taxes insurance, among others. You must factor in these costs when you are budgeting for the mortgage prepayment.

Taking The First Loan Offer That Comes Your Way

We cannot emphasize this enough; you must shop around for the best lender when you are thinking of applying for a mortgage. You must also pay attention to any other fees that may accompany the loan amount you receive. There are some hidden costs that you will only discover once you have put your signature on the dotted line. Talk to someone who has a good understanding of mortgages, even if it requires that you set aside some money to pay a financial advisor.

Find a reputable lender, an open and honest one, with whom you can communicate all your questions and concerns. Open communication is extremely important, and you need to trust your lender that they are telling you everything you need to know. If you’re interested in getting offers, please fill out the form below:


Not Paying Attention to APR

We all know that lenders like to hype the fact that they are offering very low-interest rates. What does not accompany the marketing language is the fact that you will end up paying high fees in other areas. Do a comparison of the annual percentage rates (APR) because it will show you the actual cost of your loan. It will take into consideration the principal amount, interest, origination fees, and closing costs, among others.

Not Paying Attention to Your Credit Report

It is interesting to note that few people pay attention to their credit reports. Yet, you can get your credit report from the credit Bureaus or even online. You must spend time checking your report and correct any issues before you apply for a mortgage. The lender may reject you, and a bad report will stay on your credit score for a long time.

Not Paying Attention to Your Down Payment

Most lenders will require that you make a down payment before they disperse the final loan amount to you. You must, therefore, look for a way to finance it, if you do not already have sufficient savings to take care of this cost.

Not Insuring the Mortgage

You must take insurance for the loan you receive for your home so that if anything happens to you, you do not leave your family in financial Straits. Your family will get monetary benefits if you take life insurance. It also protects them from inheriting the loan if you die. Other policies, such as critical illness insurance, will assume liability if you are not able to make payments due to significant illness.

Floating Vs. Fixed-Rate Loans

If you take a floating rate loan, you will pay varying interest amounts depending on the market situation. Sometimes you may pay a lower amount other times; it may be higher. Fixed-rate loans, on the other hand, are fixed and will not fluctuate. From the beginning, you know how much you pay every month, thus allowing you to budget better.

Not Paying Attention to The Penalties

It all goes back to reading the fine print before you sign on the dotted line. There are specific penalties you face, as we have already stated above, including the payment or lump sum penalties. In other situations, if you’re not able to make the payments, a bank can employ specific recovery strategies to get back their money. It is not uncommon for clients to complain about very harsh treatment from specific lenders, anytime they were not able to pay back the amounts on time.

Ignoring Customer Reviews

Reading customer reviews and even talking to some customers can help you avoid a bad lender. Carefully read and listen to what they have to say so that you know what to expect.

Final Thoughts

Buying a home is an essential component because, quite honestly, no one wants to pay rent for the rest of their lives. You must, however, take the time to shop around for a suitable lender who will give you the best mortgage rates available. Prepaying your mortgage allows you to get rid of the debt burden early, but there are specific considerations you must have.

We have looked at the advantages and disadvantages of paying off your mortgage early. We have also shared with you mistakes to avoid when taking a mortgage. The most critical thing to do is to understand the mortgage structure. You must not tie up your money because you could be putting it to other uses, such as paying off high-interest rate debts. You must also ensure that you save for retirement, as well as set aside something in your emergency fund. Before making any financial obligations, you must talk to a financial expert to guide you through the process.

About the Author – jamie a