When you apply for a cash-out refinance, it means you want to take out some of that equity in a lump sum of cash. It also requires you to replace your current mortgage with a new one, but for more than you owe on your home. You receive the difference in cash to use as you please — pay off debt, home improvements, pay student loans. Although, as you’ll learn in this guide, some uses of the cash are better than others.

Pros of a cash-out refinance

You can reap a bounty of benefits if you meet these conditions:

• A lower interest rate. Refinancing your mortgage can lower your interest rate, especially if you purchased or refinanced your home a few years ago when rates were much higher. For example, if you bought your current home in 2018 your interest rate for a 30-year fixed loan could be as high as 5%. Today rates average between 3 to 4 percent. If you only want to lower your interest rate and don’t need the cash, you’ll do better with a regular refinance.
• A higher credit score. If you use the cash to pay off your outstanding debts, you’re on the road to increasing your credit score. That’s because you’ve decreased your credit utilization ratio or the percentage of your credit amount that you’re currently using.
• Debt consolidation and other uses for the cash. When you pay down your credit cards and other bills, you can then consolidate the remainder of the debt into one account with a lower interest rate. Other positive uses for the cash from a mortgage refinance include contributing to your retirement savings, starting or adding to a college fund, and making home renovations.
• A tax deduction. If you put the cash into home improvements, you may be able to write off the mortgage interest. Whatever modifications you make must substantially add to your home’s value in order to do this. These might include adding a stone veneer to the exterior, building a deck and patio, a major kitchen remodel, or updating a bathroom.

Cons of a cash-out refinance

There are a number of downsides to a cash-out refinance though, including:

• Requires an appraisal. Cash-out refinances require an appraisal by a certified, state-licensed home appraiser. This person determines your home’s value by visiting your property, comparing it to similar properties, and then writing a report using the data he’s gathered. An appraisal usually costs from $400-$600. Depending on the state of the real estate market, scheduling and completing an appraisal may take some time.
• Closing costs. You must pay the closing costs when you receive a cash-out refinance loan. Typically, these are between 2-5 percent of the entire new loan amount and include lender origination fees, attorney’s fees, and the appraisal fee, if you haven’t already paid that separately. Due to the high costs of a refinance, these loans are best when you’re taking out a large sum of money. For example, paying $5,000 in closing costs isn’t worth it if you’re only getting $10,000 in cash. You’re better off getting a home equity line, which comes with lower closing costs. But if you’re getting $100,000 cash from the transaction, it may be worth the extra fees.
• Private mortgage insurance. When you borrow more than 80 percent of your home’s equity or value, you’ll have to obtain private mortgage insurance (PMI). This insurance protects the lender in case you don’t make your payments. Currently, PMI costs from .05-1 percent of your loan amount. You usually have two options – a one-time upfront annual premium paid at closing or you can roll the PMI into your monthly loan payments. Generally, it’s not worth adding PMI to your loan just to get cash out of the home. Consider a home equity line or loan, which does not require PMI.
• Foreclosure risk. If, at some time in the future, you’re unable to make your mortgage payments, you risk losing your home due to foreclosure. Your home becomes the collateral for any kind of mortgage you have.
• Different loan terms. Your loan terms may change when you get a cash-out refinance. You’re paying off your original home loan and swapping it for a new one and that means new terms. Following are a few changes that could happen: The new mortgage may take longer to repay our monthly payments may go up or down Your interest rate could change. Be sure to read the Closing Disclosure to note your new loan terms. This is what to look for in the document.
• You don’t get your cash instantly. The processes involved with approving a mortgage loan or a refinance — an appraisal, the underwriting — may take 30-60 days, depending on how busy mortgage lenders are when you apply. On top of that, there is a 3-day “rescission period” toward the end of the loan where, by law, you can cancel the loan if you feel it isn’t the right move. All in all, a cash-out refinance is not a good solution if you need quick cash.

Best and worst uses of a cash-out refinance

Although the cash you receive from a cash-out refinance can buy whatever you please, you might want to consider the consequences of some of these purchases. Let’s start with some of the best ways to use your cash.

• Home improvement projects. According to HomeAdvisor the average cost to remodel a bathroom runs around $10,000, while the national average for a complete kitchen remodel is $25,100. For expensive improvements like these, a cash-out refinance can be the way to go. You’ll also increase the value of your home with certain improvements like those listed and energy-efficient appliances, adding more square footage like a new home office and replacing windows.
• Paying off credit card debt. This can be a good idea, as some credit card interest rates run as high as 18 percent. However, you’ll need to employ some tactics to keep from running up new balances on those credit cards. Stick to a budget that balances your expenses and your income. When you do make a credit card purchase, which you’ll want to do to rebuild your credit score, either have the cash on hand to back up that spending or pay it off right away. And, build up an emergency fund with what you would have been paying in credit card interest. That way you’re less likely to get into trouble with credit cards again.
• Add to your existing investments. This may be wise if those investments are gaining at a higher rate than your refinance rate. It’s best to check with a trusted financial planner before using this option.
• Purchase a rental property. This can be a positive use of the cash as long as you don’t mind all the work you’ll need to do. Investigate the legal and financial ramifications before going down this path.
• Buy a vacation home. If you don’t want to be a landlord, you could use the cash from your cash-out refinance as the down payment on your very own vacation spot.
• Put it to use for an existing business of yours or your new startup. Having emergency cash for a business can come in handy.

How to get a cash-out refinance

Now that you’ve decided a cash-out refinance meets your needs, what steps should you follow?

Check your credit score at one of the free sites like annualcreditreport.com or your credit union. Most lenders require a credit score of 620 or higher for a cash-out refinance. If your score falls below that, you’ll need to work on raising it before applying for a cash-out refinance. You’ll also need to check your debt-to-income ratio, which needs to be less than 40-45 percent. This is the amount of your monthly debts divided by your total monthly income.

You must have also accrued substantial equity in your home to take out a cash-out refinance. Removing 100 percent of your equity isn’t allowed unless you qualify for a VA cash-out refinance (requires military service history) and that lender allows a loan of 100 percent.

It’s a good idea to know how much cash you’ll need ahead of time. If you’re going to use the money for household improvements, first get some estimates from contractors so you’ll have a good idea of what those upgrades will cost. To pay off high-interest debt, like credit cards, tally that total before asking for cash-out refinance.

That way you only take out the amount of equity you really need and can leave some.

What are the alternatives to a cash-out refinance?

There are many scenarios in which a cash-out refinance is not the best loan option: You want to keep closing costs to a minimum You have less than 30-40% equity in the home You are seeking a relatively small amount of cash, say $5,000 – $20,000.

In these cases, you should at least consider a cash-out refinance alternative.

Home Equity Line of Credit: How is a HELOC different from a cash-out refinance?

A home equity line of credit (HELOC) differs considerably from a cash-out refinance. It’s still secured by your home, but it doesn’t replace your existing loan. It’s an additional, totally separate loan, which is why HELOCs are sometimes known as second mortgages.

You can think of a HELOC like an open-ended loan, somewhat like a credit card. You borrow against the HELOC as the need arises, and when you repay, you still have access to borrow again up to the available limit.

Most HELOCs come with an adjustable interest rate, which means the rate can change month to month. The lender allows interest-only repayments for a certain amount of time and usually the borrower can only access these funds for 10 years, which is called the draw period. When the draw period is over, you pay a regular monthly payment which will fully repay the mortgage balance, typically over an additional 10 years.

Home Equity Loan: How is a home equity Loan different from a cash-out refinance?

A home equity loan, also secured by your home, is for a fixed amount of money that you repay over a fixed amount of time. Like a home equity line, it’s an additional loan that sits on top of your current primary mortgage.

But unlike a home equity line, you don’t have access to borrow funds again and again. So these are better for one-time projects.

The amount you can borrow is usually 85 percent or less of the equity you have in your home. Your income, your credit history, and the market value of your home also factor in to determine how much you can borrow.

This is the main difference between a home equity loan and a cash-out refinance.

Home equity loan: Is a second mortgage on your home. The existing primary mortgage stays intact

Cash-out refinance: Converts your current mortgage into a separate larger one, with up to 30 years to pay it off. In the end, you just have one loan.

Would a cash-out loan, home equity loan, or a personal loan work best for your situation?

How long you’ve owned your home, and your current interest rate should factor into your decision about what type of loan will work the best for you. Consider the following scenarios and decide which one fits your circumstances:

Scenario 1: High Current Rate, Lots of Equity

Homeowner No. 1, a couple, has a high-interest rate (8% or higher) on their current mortgage and they’ve earned a sizable amount of equity (70-85%). This homeowner wants to lower their interest rate and at the same time pull out some cash. The home is old enough that some home improvements won’t wait much longer, plus they’d like to increase the value of their property in case they want to sell and downsize in the future. Homeowner No. 1 is a good candidate for a cash-out refinance.

Scenario 2: New Homeowner, Little Equity

Homeowner No. 2, a family, recently bought the home they’re living in, so they don’t have much equity yet. This family looks forward to sending their son to college in two years but doesn’t quite know how they’ll afford it without burying them all in student loan debt. Other homeowners in this category might need money for household repairs, or to pay their credit card bills. All these homeowners will be best suited to either a personal loan or a personal line of credit.

Scenario 3: Homeowner with Equity and a Low Rate

Homeowner No. 3, a single man, already has a very low mortgage rate and can’t see how he can get a better one. Still, he needs money to replace appliances, which all seem to be breaking at the same time. Refinancing isn’t a good option for him, since he’ll lose his current low rate and would have to accept a higher interest rate. So he’s going to check into adding a home equity loan or a home equity line of credit to his existing first mortgage. See below for more information on how home equity lines/loans work.

Get approved for a cash-out refi

During the approval process, the lender may ask you for additional documents like bank statements, pay stubs, or income tax returns. Having these financial papers readily available will help streamline your approval.

Address any questions you have to your lender. Soon you’ll have the cash you need.

The post Cash-out Refinance | Pros & Cons 2024 first appeared on My Mortgage Insider.

• Buying with no money down: Usually, home buyers put at least 3% down, and a lot of buyers need larger down payments to get competitive interest rates. USDA loans require no money down.
• Getting competitive interest rates: Even with no down payment, USDA loans can offer competitive interest rates because they’re guaranteed by the federal government.
• Paying less mortgage insurance than with an FHA loan: Compared to federally insured FHA loans, USDA loans charge lower mortgage insurance premiums.

If you meet the USDA’s geographic and income rules, a USDA Guaranteed Loan could make you a homeowner with less money out of pocket.

Check your USDA loan eligibility. Start here (Sep 16th, 2024)

What is a USDA home loan?

USDA home loans help Americans in rural and suburban areas become homeowners through two separate loan programs:

• USDA Guaranteed Loans: The USDA insures private mortgage loans for moderate-income buyers in rural areas
• USDA Direct Loans: The U.S. Department of Agriculture lends money directly to low-income home buyers who live in eligible rural areas

This article will focus on the USDA Guaranteed Loan program, which is far more common than the USDA Direct Loan. This program works like most other loan types available to current home buyers.

In a nutshell: private lenders lend money so the borrower can finance a new home purchase. Mortgage payments go to the private lender or loan servicer.

The U.S. Department of Agriculture’s role is to insure the loans, making them more attractive for lenders. The USDA’s end goal is rural development, and these attractive home loan options help spur growth.

USDA loan requirements for 2024

Before you apply for the USDA home loan program, make sure you meet the program’s eligibility requirements:

• Geography: If the city you’re buying a home in has fewer than 10,000 residents, your home should meet the USDA definition of a “rural area.” Unincorporated areas also qualify. Some municipalities with up to 20,000 people will qualify for USDA financing.
• Income: Your household income must fall below the USDA’s limits for your area. The limit is 115% of your area’s median income. If your area’s median income is $50,000, you can’t earn more than $57,500. You can measure your income eligibility using this USDA tool.
• Home characteristics: USDA loans finance primary residences only. USDA loans can finance a manufactured home if it’s brand new.

If you meet both the income and the geographical requirements above, you’re eligible to submit a USDA loan application. However, USDA loan eligibility doesn’t guarantee USDA loan approval.

Getting approved for a USDA loan

The USDA insures loans for moderate-income people who are buying rural housing. But private mortgage lenders underwrite these loans.

To get your application approved, you’ll need to meet your lender’s requirements. These include:

• Credit score: USDA-approved lenders usually look for FICO scores of 640 — higher than the 620 that most conventional lenders require and the 580 FHA lenders can accept. If you haven’t established a credit score yet, your lender may be able to check your rent and utility payment histories instead.
• Debt-to-income ratio: 41% is the maximum DTI allowed by the USDA. This is also more strict than many conventional loans, which top out at 43%, and FHA loans which could go as high as 50% DTI in some cases.
• Employment history: USDA-approved lenders want to see at least two years of steady employment.

If you meet all of those requirements — and if your home purchase price does not exceed the home’s appraised value — you could buy the home with no money down.

Step-by-step guide to getting a USDA loan

To get your USDA home loan, follow these steps:

1. Get preapproved for a USDA loan

The preapproval process shows how your application would perform in a real underwriting process. You’ll get a good idea about your price range and monthly payment size without making any commitments.

It’s smart to get at least three preapprovals since lenders’ rates can vary.

2. Find a home in an “eligible rural area”

USDA Guaranteed Loans typically finance single-family homes in cities and towns with populations of 20,000 or fewer and in unincorporated areas.

Not sure about a property? Enter the address into this map before making an offer on the home.

3. Apply for your loan

After you’ve found a home, made an offer, and gone under contract, it’s time to apply for the USDA rural development loan.

You’ve already compared lender offers in Step 1. Now you can make your application official with one of the lenders. USDA loans offer 30-year terms with fixed rates.

4. Follow your loan officer’s instructions

Your loan officer will guide you through the process of uploading financial data for the underwriting process. Be sure to respond to your loan officer’s request for more information as quickly as possible.

5. Get your own home inspection

The USDA will check out the home you’re buying to make sure it provides minimum safe living conditions. To get a more thorough assessment of the home’s condition, you should hire your own home inspector.

If your inspector finds major structural damage or systemic problems with the home, you may want to look for a different home. You could also ask the home’s current owner to fix the problems.

6. Close the home loan

If you’re happy with the home inspection — and if your lender’s underwriters are satisfied with your financials — it’s time to make the home purchase official.

USDA home loans do not require down payments as long as the home’s purchase price does not exceed its appraised value. But you will need to pay closing costs, which often range between 2% and 5% of the loan amount. For a $250,000 home, closing costs could range from $5,000 to $12,500.

Closing cost or down payment assistance programs in your area may be able to help.

How USDA loans work

A no-money-down mortgage may seem too good to be true, especially in a market where a lot of homebuyers still think they’d need 20% down.

Many first-time home buyers wonder: How can lenders allow no-money-down mortgages while still charging competitive interest rates?

It’s possible because of the USDA’s mortgage insurance. This insurance would compensate the lender after a foreclosure. In short, lenders face less risk, and less risk translates into a better deal for home buyers.

Repeat and first-time home buyers can benefit from the USDA program, as long as they’re buying a primary residence, live in a designated rural area, and earn less than 115% of their area’s median income.

USDA Guarantee Fees

USDA loans aren’t a handout. Home buyers contribute to the cost of their loan’s USDA mortgage insurance. They pay through the USDA’s guarantee fees.

The first guarantee fee adds 1% to the loan amount at closing. For a $250,000 home loan, this upfront guarantee fee would cost $2,500. Buyers can roll this fee into the loan amount and still buy with no money down.

Along with the upfront fee, buyers pay an annual USDA loan fee of 0.35% of the loan amount. For the same $250,000 home, the annual fee would cost $875 — or about $73 a month — during the first year.

This annual fee will be added to your monthly payments for the life of the loan. But the fee gets smaller as the loan balance decreases. Refinancing into a conventional loan later would eliminate this annual fee.

How USDA loan fees compare to other types of mortgages

The USDA’s guarantee fees can be money well spent. They allow you to borrow at competitive interest rates with no down payment — an advantageous route to homeownership.

Plus, other types of loans charge mortgage insurance fees, too.

• FHA loans: Charge mortgage insurance premiums of 1.75% upfront and 0.85% annually. Unless borrowers put 10% or more down, they pay the FHA’s annual fee for the life of the loan.
• Conventional loans: Need no upfront mortgage insurance but require private mortgage insurance (PMI) when borrowers put less than 20% down. PMI normally ranges from 0.5% to 1.5% a year. Buyers can cancel PMI once they’ve built up 20% home equity.
• VA loans: Charge an upfront fee of 2.3% for first-time buyers with zero down and up to 3.6% for repeat buyers. VA loans do not require annual mortgage insurance

Compared to these loan types, USDA loans charge lower fees. Only VA loans, which go to veterans and active duty military service members, can charge less with no money down.

Check your USDA loan eligibility. Start here (Sep 16th, 2024)

More about USDA loan eligibility

The biggest drawback to USDA loans is that — unlike FHA and conventional loans — not everyone can apply for USDA-insured financing.

But USDA eligibility may not be as difficult as you think. Let’s look at each of the requirements for eligibility.

USDA income limits

What does 115% of area median income really mean?

A family of two is eligible to buy a home in a Seattle suburb area with an annual income of up to $93,450. If you have a family of five and you’re moving to the same area, you can make up to $123,350 a year.

Annual income limits vary by region. For a five-person family, here is the maximum qualifying annual income in other areas:

• San Antonio, TX: $98,650
• Chicago, IL: $115,100
• San Jose, CA: $161,000
• Miami, FL: $106,700
• Richmond, VA: $114,750

As you can see, you can earn a healthy income and still qualify for USDA financing.

USDA credit score requirements

Potential borrowers don’t need to have “good” credit history to get a USDA mortgage loan. Lenders require a credit score of just 640 to qualify.

USDA geographic requirements

A smart first step is to check with a USDA lender on the USDA-eligible area closest to your current residence.

Most lenders, especially those around eligible areas, offer USDA loans. They process all the paperwork and work directly with the U.S. Department of Agriculture to get a loan approved.

USDA loans work for homes in unincorporated rural areas and in small towns with populations of 10,000 or fewer. A lot of municipalities with up to 20,000 can qualify if the area is “rural in nature,” according to the USDA.

But this doesn’t mean you’d need to buy a house that’s located an hour from the nearest grocery store, restaurants, and medical clinics.

In fact, USDA financing can work in the outlying suburbs that surround many of the nation’s biggest cities.

If your current lender does not offer USDA loans, find one that does. Don’t opt for FHA simply because your preferred lender can’t do USDA loans.

USDA first-time home buyer FAQs

Does the USDA require first-time home buyer education?

USDA Guaranteed home loans do not require first-time home buyer education. Even though it’s not required, home buyers can benefit from a brief education course if they’re not already familiar with the mortgage application process. USDA Direct loans — for which the USDA is the lender — do require first-time home buyers to take an education course.

How do I qualify for a USDA loan?

First, make sure you’re USDA loan eligible. This means buying in a small town or unincorporated area and earning 115% or less of your area’s median income. Then, make sure you are eligible as a borrower. It’s best to have a credit score of 640 or higher and a debt-to-income ratio of 41% or lower.

Are only first-time home buyers eligible for USDA loans?

No, any home shopper who’s buying a primary residence — and not a vacation home or investment property — can apply for USDA financing.

What is the maximum amount I can borrow with a USDA loan?

The USDA doesn’t set a maximum for USDA Guaranteed Loans. Instead, your lender does. Lenders base maximum loan sizes on borrowers’ ability to repay the loan. Debt-to-income ratio (DTI) and income level affect maximum loan size. The USDA will insure the loan as long as the loan amount doesn’t surpass the appraised value of the home.

How much are closing costs for a USDA loan?

Closing costs vary, but they typically range from 2% to 5% of the loan amount. On a $250,000 loan, closing costs could range from $5,000 to $12,500. The home’s seller, or a closing cost assistance program in your area, may be able to help.

Do USDA home loans require a down payment?

No, USDA loans require no down payment as long as the home’s appraised value is higher than the loan amount. If, for some reason, your purchase price exceeds the appraised value, you’d need a down payment to make up the difference. For example, if the home you’re buying is appraised at $245,000 but you’ve agreed to pay $250,000, you’ll need to make a $5,000 down payment.

What is the minimum credit requirement for a USDA?

Most USDA lenders look for credit scores of at least 640 and debt-to-income ratios of 41% or less.

Do USDA loans have PMI?

No, but they charge a similar fee: the USDA’s guarantee fee. This costs 1% of the loan amount upfront and 0.35% of the loan amount each year. This annual rate is cheaper than most PMI policies which average about 1% per year.

How do I find out whether a property is USDA-eligible?

To find out whether a property is USDA-eligible, enter the home’s address into the USDA’s lookup tool.

Can I buy a foreclosure with a USDA loan?

Yes, if you and the home meet the USDA’s eligibility rules, the USDA will insure a loan on a foreclosed home. Keep in mind the home will need to meet the USDA’s basic requirements for safety and livability. A lot of fixer-uppers don’t meet this requirement.

Check your rates for a USDA mortgage

Average rates for home purchases and refinances have risen back to their historic norms.

Your USDA loan rate will depend on your income, debt, and credit score.

The USDA loan program can offer competitive rates even when you have average credit and no down payment.

That’s one reason USDA loans can be so attractive to first-time home buyers.

Check your USDA loan eligibility. Start here (Sep 16th, 2024)

The post USDA Loans: First-time Home Buyer’s Guide 2024 first appeared on My Mortgage Insider.

An adjustable-rate mortgage (ARM) is a home loan that offers a low interest rate for a pre-set period, typically anywhere from 3 to 10 years. When that period is finished the loan’s rate adjusts based on changes in overall interest rates — though in most cases, “adjusts” means the rate increases.

Adjustable-rate mortgages can offer a good deal for some buyers — depending on their home buying goals, their specific financial circumstances, and overall market conditions. Below, we’ll explore how an adjustable-rate mortgage works and when it makes sense.

Check your eligibility for an adjustable-rate mortgage. Start here (Sep 16th, 2024)

Fixed-rate vs adjustable-rate mortgage: Which is better?

Understanding the differences between a fixed-rate mortgage and an adjustable-rate mortgage can help you determine which loan is right for you. So, let’s take a closer look at how these loans work.

A fixed-rate mortgage is a home loan that lets you permanently lock in your interest rate for the entirety of the loan term. As a result, your monthly payment will stay the same over the life of the loan. Fixed-rate mortgages typically span from 15 to 30 years. They’re good if you’re looking for a consistent mortgage payment. They’re also a good option if you’re planning to own your home for a while.
An ARM, on the other hand, is an entirely different type of mortgage loan product.

How does an adjustable-rate mortgage work?

An ARM has a lower interest rate than a fixed-rate loan — and, as a result, a lower mortgage payment — for a predetermined initial period. When that initial period ends, the rate can fluctuate depending on the current conditions of the mortgage market.

ARM rates and rate caps

Typically, ARMs have significantly lower mortgage rates during their introductory period than rates for fixed loans. As of August 18, the average 5-year ARM offers an introductory rate that’s roughly a whole point lower than the average fixed interest rate for a 30-year mortgage.

There are caps, however, that limit how high the new rate can go on. There are three types of interest rate caps: an initial cap adjustment, a subsequent cap adjustment, and a lifetime cap adjustment.

The initial cap adjustment is the most that your rate can rise the first time that it adjusts. The subsequent cap adjustment sets a limit on the most that the rate can increase in a single adjustment period after the initial adjustment. And the lifetime cap is how high the rate can increase over the life of the loan.

ARM caps are set by mortgage lenders. They’re typically presented in a series of three digits, such as 2/2/5, that represent each cap: the initial cap (2), the subsequent cap (2), and the lifetime cap (5). Most ARMs follow a 2/2/5 structure or a 5/2/5 structure, according to the Consumer Financial Protection Bureau.

For instance, if you have an ARM with a 2/2/5 cap, your rate cannot change by more than:

• 2% when the fixed-rate period ends
• 2% for each adjustment period
• 7% over the life of the loan

Imagine your initial ARM interest rate is 3%. With these caps in place, your rate could not go higher than 5% at its first adjustment; it could not increase by more than two percentage points at any subsequent adjustment; and it could not go higher than 7% over the life of the mortgage loan.

Click here for today’s ARM rates (Sep 16th, 2024)

Refinancing an ARM

An ARM can be refinanced to a fixed-rate mortgage at any time. That offers a nice safety cushion for buyers who decide they’d like to stay in their home longer than they originally planned.

Refinancing an ARM entails replacing your existing loan with a new mortgage. You’ll typically want to refinance your ARM (or sell your home) before the ARM’s introductory period ends, especially if interest rates are higher at that time. When you apply for a refinance, the lender’s underwriter will analyze your income, credit score, assets, and debts to determine your eligibility for a new loan.

When refinancing, expect to pay 2% to 5% of your loan principal in closing costs. For, a $300,000 mortgage, your closing costs for refinancing could run from $6,000 to $15,000.

Different types of ARM loans

Generally, there are three kinds of ARMs: hybrid, interest-only, and payment option.

A hybrid ARM offers an initial fixed interest rate that then adjusts, usually once per year. The initial period typically lasts 3, 5, 7, or 10 years. Most modern ARM loans are hybrid ARMs.

An interest-only (IO) ARM is a loan where the borrower is only required to pay the interest portion of the mortgage for a pre-set period of time — also typically 3 to 10 years. Interest-only payments don’t pay down your mortgage principal.

A payment option (PO) ARM is an adjustable-rate loan that offers several payment choices: paying an amount that covers both the loan’s principal and interest, paying an amount that covers only the loan’s interest, or paying a minimum (or limited) amount that may not even cover the loan’s monthly interest.

Pros & cons of an ARM mortgage

Pros of an adjustable-rate mortgage

The benefits of getting an adjustable-rate loan are that it:

• Creates short-term savings through a low initial mortgage rate
• Works well for temporary homes
• Makes homes more affordable
• May enable you to borrow more money

Cons of an adjustable-rate mortgage

The drawbacks of an ARM are:

• It’s more complex than a fixed-rate loan
• Payments can increase a lot after the initial rate expires
• It makes budgeting more difficult

Qualifying for an ARM

To be eligible for an adjustable-rate mortgage, you typically must have:

• At least a 5% down payment (note: FHA ARMs require only 3.5% down payments)
• A credit score of at least 620
• A debt-to-income ratio (DTI) of no more than 50%
• A loan-to-value ratio (LTV) of no more than 95%

When does an ARM mortgage make sense?

An ARM may be a good fit if you’re a first-time buyer purchasing a starter home that you know you’re going to sell before the introductory period is over, an investor flipping a house, or feel comfortable with payment fluctuations and potentially absorbing higher rates and higher mortgage payments in the future.

Click here for today’s ARM rates (Sep 16th, 2024)

What is an ARM mortgage? FAQs

What is an ARM?

An adjustable-rate mortgage (ARM) is a loan that offers a low interest rate for an initial period, typically anywhere from 3 to 10 years. When the introductory rate expires, the interest rate adjustment means your monthly payment can fluctuate depending on mortgage market conditions.

Why would you choose an ARM?

It may make sense to get an ARM instead of a fixed-rate mortgage if you’re planning to sell the home before the introductory rate period ends, flipping a house short term, or need a low introductory rate to afford a home purchase.

How does an ARM work?

An ARM is a type of loan that offers a low interest rate for a predetermined number of years, typically anywhere from 3 to 10 years. But when that introductory period is over the loan’s rate can adjust depending on changes in overall mortgage rates.

Are ARM rates lower than fixed rates?

Typically, yes — and the difference can be substantial. As of August 18, the average 5-year ARM offered a 4.39% introductory rate, according to Freddie Mac. That week the average rate for a 30-year fixed-rate mortgage was 5.13%.

Is a 7-year ARM a good idea?

A 7-year ARM might be a good way to save money if you know that you’re going to sell the home within the first 7 years.

What are basis points and how do they relate to ARMs?

A mortgage basic point, or “discount point,” is a fee that you pay at closing to your lender—typically 1% of your loan amount—in exchange for a lower interest rate, usually by around 0.25% (25 basis points). Purchasing basis points for an ARM can lower your introductory interest rate, making your monthly mortgage payment more manageable.

Are there limits on how high ARM interest rates can go?

Adjustable-rate mortgages have caps on how high the interest rate can go after the introductory rate expires. These rate caps are set by lenders.

What is the fully indexed rate on an ARM?

The fully indexed rate is the highest possible interest rate that you’d pay when your ARM’s introductory rate period ends. This figure is calculated by adding the index (whatever that happens to be when your initial rate expires) and a margin (usually 1.75% for Fannie Mae or Freddie Mac loans).

Check your eligibility for an adjustable-rate mortgage. Start here (Sep 16th, 2024)

The post What is an ARM mortgage? | Rates & Requirements 2024 first appeared on My Mortgage Insider.

Extremely popular in the early 2000s, stated income loans were one of the factors of the housing market collapse. Why? Lenders were approving borrowers based on the income stated on their loan application but didn’t require income documentation to verify if it was accurate. The result: many borrowers could not make their mortgage payments and the result was foreclosure. Now, after the financial crisis, “no-doc mortgages” are a thing of the past.

With the passing of the Dodd-Frank Act of 2010, stated income loans for owner-occupied properties are now illegal. Lenders must fully document a borrower’s ability to repay the loan either with income or assets. (Stated income loans still exist for real estate investors, however, because they aren’t purchasing an owner-occupied home.)

That leaves some borrowers at a disadvantage, especially self-employed individuals or freelancers. But, the good news is that there is a type of loan called a bank statement loan (also referred to as alternative income verification loans) that meet these borrowers’ needs.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Stated income loans for self-employed borrowers

Self-employed borrowers may find it difficult to qualify for traditional mortgages due to their variable income and tougher documentation requirements from lenders. With alternative documentation loans — sometimes called bank statement loans — lenders use different methods to determine qualification but still meet the new ability-to-pay standards as laid out in the Frank-Dodd act.

For bank statement loans, lenders use bank statements (typically 2 years) to confirm a borrower’s income rather than tax returns and recent pay stubs like traditional borrowers. Each lender has its own underwriting requirements to determine net income (income minus business expenses and taxes), so if you don’t qualify with one lender, then there may be another that you will.

Bank statement loans are offered through non-QM lenders (also known as non-qualifying mortgage lenders), which sounds scary but simply means the loan can’t be sold to Freddie Mac or Fannie Mae, which most loans are. Not all lenders offer non-QM loans, so you’ll need to shop around — this list from the Scotsman Guide is a good place to start.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Qualifying for a bank statement loan

In addition to determining your net income, lenders also look at the following things when determining home loan qualification:

• Two-year timeframe. Most lenders require self-employed borrowers have at least two years of experience with consistent income.
• Debt-to-income-ratio. This ratio determines the maximum loan amount. Some lenders may go as high as 55% (traditional mortgages are usually between 36% to 45%), though the actual ratio is lender specific.
• Down payment. These loans tend to require larger down payments than traditional mortgages. A borrower with great credit may still be required to put 10% down (conventional mortgages allow for 3% down), but some lenders may require more.
• Credit score. Expect a higher credit score requirement with bank statement loans (680+). While you may qualify with a lower score, you’ll definitely be charged a higher interest rate.

Also, a note about interest rates. Because these loans are considered riskier, expect interest rates to be 1% or more higher than for traditional mortgages. Though, as more lenders start offering non-QM loans, rates may become more competitive.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Stated income loans for real estate investors

While stated income loans don’t exist for owner-occupied properties and they aren’t intended to buy a primary residence. They’re still available for borrowers looking to purchase an investment property. This is a big help for borrowers like real estate investors, house flippers, wanna-be landlords, and self-employed borrowers looking to purchase a non-occupant property and qualify for a loan program without fully documenting their income or providing tax returns.

Brian O’Shaughnessy, CEO of Athas Capital Group, says that many of his clients use these loan types to buy another rental property to better their cash flow, or they’re flipping a property and need a loan to finance the remodeling stage. In addition, some borrowers use stated income loans temporarily because they expect a large cash advance at the end of the year, but don’t want to pass up an investment property — they use these loans to keep a portion of their own capital to use for other investments.

“Stated income loans are growing. It’s a step up from hard money loans,” O’Shaughnessy says. (Hard money loans are specialized collateral-backed loans, which have high-interest rates and short terms usually around 12 months.)

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

Qualifying for a stated income loan

Lenders who offer stated income mortgages aren’t qualifying borrowers nonchalantly. There’s still a mortgage application process. Borrowers need to have good credit scores, plenty of cash reserves, and a large down payment. Many stated income loans are based on the equity position of the property, which means that the more the borrower puts down, the easier it’ll be to get the loan.

“With us, a buyer has to put down at least 30% down compared to the regular 20% with a conventional loan. Many of our clients end up putting down 35%-50%,” O’Shaughnessy says. “The loan also has a maximum 70% loan-to-value ratio.”

The borrower’s employment is verified, but the application just has to state monthly gross income. Bank account statements and asset documentation are required to show that the borrower does indeed have the money. Also, similar to bank statement loans, interest rates will most likely be higher than a traditional mortgage loan depending on the lender.

Check your eligibility for a stated income loan. Start here (Sep 16th, 2024)

The post Stated Income Loans Available in 2024 first appeared on My Mortgage Insider.

You keep your existing first mortgage and add a second mortgage loan on top of it. In this way, you can tap into your home’s equity to make home improvements and accomplish other goals.

Many lenders offer low rates and flexible terms when getting a second mortgage.

Types of second mortgages

What is a home equity loan (HEL)?

A home equity loan is a lump-sum loan, usually with a fixed interest rate, that’s paid down over its term in equal installments. Rates are slightly higher than for variable home equity loans (discussed next) but you know your monthly payments will never rise.

What is a home equity line of credit (HELOC)?

A home equity line of credit functions like a line of credit. It differs from a home equity loan in three main respects:

1. You can borrow, repay and borrow again up to your credit limit during the initial “draw” period.
2. Later, there’s a repayment period during which you can’t borrow more and have to zero your balance. Normally you just pay it down. But you may be able to refinance.
3. You pay interest only on your outstanding balance.

Home equity lines of credit (HELOCs) are particularly good when you’re a contractor, freelancer or working in the gig economy. They let you smooth out differences in your monthly income.

And they can be handy if you need to borrow a large sum for a brief period because you’ll only be paying interest for that period.

Advantages of a second mortgage

So why take out a second mortgage in the first place? Let’s run through some advantages.

1. You can usually borrow more

Credit cards and personal loans usually let you borrow a few thousand dollars. But with a second mortgage you can typically borrow more — often much more.

Assuming your credit and finances are in good order, the only constraint is the amount of “equity” you have in your home. That’s the sum by which the market value of your home exceeds your current mortgage balance.

You won’t be able to borrow that full sum because lenders will likely want you to keep a cushion of roughly 20% of your home’s value.

For example, if your home’s worth $300,000 and your mortgage balance is $150,000. Your total equity would also be $150,000. You’d be able to leave 20% ($60,000) equity and still borrow $90,000 ($150,000 equity – $60,000 retained-equity cushion = $90,000).

2. Low interest rate

A second mortgage is typically quite secure for your lender. You’re using your home as collateral so the lender stands a very good chance of getting its money back. And that means it can afford to give you a lower rate than you’d generally get with unsecured loans such as credit cards or personal loans.

3. Any-purpose loans

Some loans restrict what you can spend your borrowed money on. For example, auto loans can only be used to buy a car or truck.

But you can spend the proceeds of a second mortgage on anything you want. Planning a weekend in Vegas where you’re happy to lose the whole lot on a single spin of the roulette wheel? That’s none of the lender’s business.

Though we wouldn’t recommend it.

4. Tax benefits

If you use the proceeds of a second mortgage to “buy, build or substantially improve your home” (IRS’s words), the mortgage interest may be deductible. That was the case for 2019 filings.

Using the money for any other purposes (including Vegas trips) will mean you can’t make those deductions.

But the tax code changes often and rules can get complicated. So talk to a qualified, professional advisor before you rely on your ability to make any deductions.

5. You don’t impact your first mortgage’s rate

This is an advantage that really applies only when mortgage rates are rising.

For example, imagine you got a loan at 2.5% and average rates were later up at 5%. A second mortgage would let you keep your low rate on your main borrowing and pay the high interest rate just on your new loan.

6. Closing costs are lower than for a refinance

Whatever current rates, your closing costs are likely to be lower with a second mortgage than if you refinance. It’s possible you could save thousands.

Use a refinance calculator to help you. Or talk to lenders about your options.

7. You may not need an appraisal

Some lenders say they require no “formal” appraisal on a second mortgage. But they’re likely to get one based on desk research of your neighborhood’s home-price trends and perhaps Google Street View.

Still, you might save that appraisal fee.

Disadvantages of a second mortgage

Inevitably, second mortgages come with cons as well as pros. Here are the main ones:

1. You’ll almost certainly pay a higher interest rate than on your first mortgage.
2. It’s an extra financial burden. A second mortgage on top of your primary mortgage means two payments each month instead of one.
3. You could lose your home to foreclosure. This is a secured loan with your home as collateral. As such, you give the lender the right to foreclose on the home to get its money back.

It’s also worth noting that (unsecured) personal loans have changed over the years. Some now compete more directly with second mortgages over rates, costs, and loan limits. But you’d need to be outstandingly creditworthy and have remarkably robust finances for the deals you’re offered to be comparable with a home equity loan.

Second mortgage rates

On the day this was written, the lowest home equity loan rate we found was 3.290% for a five-year term. But even advertised rates intended to tempt you went as high as 5.745%. Those were appreciably higher than the average 30-year fixed mortgage rate, which was 2.89% that day.

However, that lowest rate came with zero fees. And the highest charged only $99. Others, with rates in between, charged up to $1,354 in fees. They’re all thousands lower than you’d typically expect to pay in closing costs on a cash-out mortgage refinance (up to 2-5% of the loan amount).

HELOC rates were generally lower, with the best we found 2.240% with zero fees. But remember: HELOCs have variable rates. So you could pay more if interest rates rise.

HELOC rates are typically tied to wider rates: your lender’s prime rate plus a margin to take into account your risk of defaulting or paying down your debt early. When the prime rate moves, so does your rate.

At the time of this writing, prime rate was just 3.25%. So if your HELOC’s rate was prime + 0.50%, your rate today would be 3.75%. Ask yourself if you could afford the payments if prime went up to 5 or 6%.

Home equity loan rates, though, are typically tied to mortgage rates. They’re usually fixed but you may be able to find variable-rate options.

How to get a second mortgage

Applying for a home equity loan or HELOC is fairly straightforward. It’s like accessing any other borrowing and, typically, they are widely available.

However, if you’re reading this while the COVID-19 pandemic is still a major problem, you may find that some lenders have suspended their second mortgage offerings, especially on HELOCs.

Before you apply, make sure you’re in good financial shape: that you are the sort of borrower lenders find attractive.

Reasons to get a second mortgage

Anyone who needs a cash injection may be interested in a second mortgage. But here are some circumstances in which many find them especially attractive:

1. Debt consolidation. Pay down store and credit cards, personal loans and perhaps even auto loans. You can make a single, much smaller payment at a considerably lower interest rate.
2. Manage irregular cash flow. HELOCs let those in the gig economy smooth out the peaks and troughs in their irregular incomes. Borrow, repay and borrow again as needed.
3. When a cash-out refinance is undesirable or impossible. You may not want to refinance your existing mortgage. Or you may not qualify for a new one.
4. Pay for home improvements. There may be tax advantages.

80/10/10 Piggyback Loans

There’s another situation in which home equity loans can be useful. Suppose you have a 10% down payment for your first or next home. You’ll likely have to pay expensive mortgage insurance. But if you use a second mortgage to borrow the amount you need to put down 20%, you won’t have that obligation.

This is more common than you may think. In the jargon of the mortgage industry, it’s called “piggybacking.” But you must make sure you can comfortably afford both mortgage payments.

How to qualify for a second mortgage?

Lenders are going to assess that you’re able, ready and willing to make payments on your new loan — just as they do for first mortgages. In particular, they’re going to look at your:

1. Credit score and report. If you’ve managed debt well in the past, you’re likely to do so in the future. Expect to need good credit (a score of 670-739 or higher, according to FICO).
2. Equity. As discussed above, you’ll probably need to retain roughly 20% of the equity you have in your home. So you can often borrow the difference between 80% of your home’s market value and your current mortgage balance. But don’t take more than you need.
3. Employment record. You need a job and a record of being a consistent earner.
4. Existing debts. The lender wants to know you can afford to make payments on both mortgages. And the amount you’re paying to keep up with other monthly obligations (existing debts, child maintenance, alimony, other homeownership costs) will affect its view of that affordability.

Of course, you should tell your lender if you’re going to use your second mortgage to consolidate some or all of your existing debts. That could change that last calculation.

Second mortgage FAQ

Are mortgage rates higher for a second mortgage than a first mortgage?

Generally yes. Though not always much higher. The difference will depend on how attractive a borrower you are.

What’s the difference between a second mortgage and a refinance?

For many borrowers, the important differences are that it’s easier and cheaper to get a second mortgage. But expect to pay a higher interest rate.

If you’re torn between a cash-out refinance and a second mortgage, run the numbers. There’s a mathematical answer that should tell you which is more beneficial to you. But don’t be surprised if your personal circumstances and priorities override that math.

How do you get a second mortgage?

1. Search for lenders online.
2. Apply online or over the phone. Get a rate quote.
3. Supply documentation requested by the second mortgage lender.
4. Wait for the lender’s approval decision.
5. If approved, supply any additional documentation.
6. Sign final paperwork.
7. Receive funds.

Just as with a first mortgage, make sure your credit and finances are in the best shape possible before you apply. That should earn you a lower rate and might even be the difference between your application being approved or declined.

What lenders offer second mortgages?

Large numbers of banks, mortgage lenders, and credit unions offer home equity loans and HELOCs. You don’t have to go for the lender with which you have your first mortgage.

Indeed, you shouldn’t. By all means, get a quote from it. But shop around for the best deal and get quotes from multiple lenders. This comparison shopping can save you a large amount of money.

These loans can enable you to convert your real estate equity to cash.

The post Second Mortgages | What To Know 2024 first appeared on My Mortgage Insider.

Most conventional mortgages come with caps on the possible loan amount. These are called “conventional loan limits” or sometimes “conforming loan limits.”

In most parts of the country, conventional loan limits top out at over $500,000. So most home buyers will be well under the limit.

However, if you want to buy where real estate is more expensive than average, your limit may be higher. Because these caps are tied to local home prices at a county level.

If you need to borrow more, you may be able to find a “jumbo loan” (an outsized one) from a lender that’s comfortable with the amount you need. Many will happily lend millions of dollars to the most creditworthy applicants.

Still unclear? We’re about to dig into all the details you need to know.

Conventional Loan Limits in 2024

In 2024, the baseline loan limit is $766,550. So you should be able to borrow at least that — providing your credit and personal financial situation is strong enough to justify such a loan.

That figure is for buying a single-family home in an area with average or lower-than-average home prices. If you’re looking to buy multi-family housing in such an area, the maximum loan limits are higher depending on the number of units:

• Two units: $766,550
• Three units: $766,550
• Four units: $766,550

But it’s not just the number of units that can increase these loan limits. If you’re buying in a county where home prices are expensive, you may be eligible for a higher limit.

High-cost area limits

Indeed, limits are automatically 50% higher for four designated high-cost areas. That’s currently $1,149,825:

• Alaska
• Hawaii
• Guam
• The US Virgin Islands

There are also higher loan limits (again, up to 50% above the minimum) in other areas of the US where homes are significantly more expensive than average. For example, the cap for the 10021 ZIP code in Manhattan’s Upper East Side in New York for 2024 is also $1,149,825.

Meanwhile, there are gradations between the highest and lowest caps. So, for example, the 02199 ZIP code in Boston, Massachusetts, had a median home sale price in November 2023 of $4,500,000. And its conventional loan limit in 2024 is $862,500 — not quite the highest available, but significantly above the “base” loan limit for the rest of the country.

All those figures are for single-family homes. And if you’re buying in one of the most expensive areas, the limits are higher for properties with multi-family occupancy:

• Two units: $1,472,250
• Three units: $1,779,525
• Four units: $2,211,600

What are conventional loans?

A conventional loan is one that isn’t directly guaranteed or “backed” by the federal government. These are loans issued by private mortgage companies and approved by rules created by Fannie Mae or Freddie Mac.

Government-backed loans still have loan limits but they are generally lower than those for conventional loans.

The exception is VA loans, which no longer have a formal limit. However, VA borrowers still need to meet qualifying thresholds set by lenders. And those lenders must always be sure that their borrowers can comfortably afford the monthly payments on a new mortgage.

You can divide conventional loans into two types:

1. Conforming loans. Those bought by Fannie or Freddie, plus ones that meet their requirements and so could be bought by them.
2. Non-conforming loans. Those not backed by the government nor buyable by Fannie or Freddie. These are purely private-sector mortgages and may not have formal loan limits.

Given we’re talking loan limits here, the following is about conforming loans. And that includes most conventional ones.

How conventional loan limits work and how to find yours

Every November, the Federal Housing Finance Agency (FHFA) announces new loan limits for conventional loans for the following year. And each limit is usually higher than the last, in line with rising home prices.

So, in the early 1970s, the standard limit for single-family homes was $33,000. By 2019, it was $484,350. And now, in $2024, it’s 498,257.

But don’t assume that rising loan limits are inevitable. When the FHFA announced 2020’s caps, 43 counties had ones that remained unchanged.

How to find your loan limit

The FHFA sets limits according to a formula laid down in the Housing and Economic Recovery Act of 2008 (HERA).

But you don’t need a calculator and home sales data to work out the limit in the county where you want to buy. Just type the ZIP code into this lookup tool from The Mortgage Reports.

Why are there conventional loan limits?

Technically, Fannie and Freddie are government-sponsored enterprises (GSEs). Their role is to channel credit to parts of the population where access to that credit creates a public good — in this case, increased homeownership.

The degree of Fannie and Freddie’s independence from the government is debatable. Because they’re regulated by the FHFA, their autonomy is limited.

And, more importantly, the federal government is likely to be on the hook for any extended losses they make. Hence these loan limits. They put a brake on lending and so limit the taxpayer’s exposure to risk.

Are limits for conventional loans and FHA loans the same?

No, because conventional loan limits are generally higher than those for FHA mortgages.

The most you can borrow for a single-family home in somewhere defined by the FHA as a low-cost county is $0. But the upper limit in high-cost counties is $0.

We put a random ZIP code (87190) into The Mortgage Reports lookup tool. Turns out, that’s in Bernalillo County in New Mexico, which is the most populous county in that state. There, the standard conforming loan limit was $0. But the FHA equivalent was $0.

What is a jumbo loan?

Jumbo loans are private loans that are not subject to the same regulations as conforming loans, and they may help you bridge the gap between the price of your dream home and the loan limits for conventional loans.

Be aware that getting approved for one of these can be more difficult than when you apply for other types of mortgages. And you may pay more for your borrowing.

Because jumbo loans are private, they’re relatively unregulated — compared to conforming loans or loans backed by a government agency.

And that can be both a good and bad thing. On the one hand, you need to be sure that you understand — perhaps with professional help — the terms of your loan agreement and are happy with them. On the other, you can negotiate more freely with the lender to tailor a deal that suits you.

Characteristics of a jumbo loan

Don’t see jumbo loans as a workaround for mortgage issues. Compared with conforming or government-backed loans, they often (but not always) come with:

1. Higher mortgage rates. You might want to consider an adjustable-rate mortgage (ARM) to keep your interest rate affordable.
2. Stricter underwriting standards. You’ll likely need an impressive credit score: often 700 minimum or 740 for bigger loans. And you shouldn’t have too many existing financial obligations eating up a high proportion of your monthly pre-tax income (this is your debt-to-income ratio, or DTI).
3. Higher down payments. Many lenders demand at least 20% down for jumbo loans.

Because you usually negotiate your deal individually, you may be able to create some wiggle room for these. For example, if you’re putting down 50% of the home’s market value, you might get some leeway on your credit score or DTI.

Avoid jumbo loans with a piggyback loan

Some find it better to avoid jumbo loans by having two smaller ones: a conforming main mortgage and a “piggyback loan.” That’s a second mortgage that bridges the gap between the conventional loan limits and your purchase price.

For example, let’s say you wanted to buy a $750,000 home where the local loan limit was $550,000. You have $100,000 for a down payment. If you got a $650,000 loan, you would be over the conforming limit for the area, and you’d need a harder-to-get jumbo loan. Fortunately, that’s not your only option.

You could structure it as follows:

• Primary loan of $550,000
• Second mortgage of $100,000 (closes simultaneously with the primary loan)
• Down payment of $100,000

You potentially qualify much more easily for the primary loan since it’s a conforming loan, not a jumbo.

This doesn’t work for everyone. But it’s an idea worth exploring. All you can do is run the numbers. A mortgage calculator is a good place to start.

How to get a jumbo loan

Many lenders have suspended their jumbo loan program during the COVID-19 pandemic.

Mortgage companies put more on the line with these loans than with other sorts and many lenders are more risk-averse during uncertain times.

But don’t let that put you off. If you’re a reasonably strong borrower, you still stand a good chance of getting your application approved. You just have to search farther afield to find the lenders still offering jumbo loans.

While you’re shopping around for your jumbo loan, be aware that the variations between different lender mortgage rates can be wider for jumbo loans than for other types of mortgages. So be sure to explore the market widely to find your best deal.

The post Conventional Loan Limits 2024 first appeared on My Mortgage Insider.

“They are now living in their dream home, near their family, have increased their retirement nest egg and have no mortgage payments for as long as they live in the home. That is why this 62-and-older couple chose to get a mortgage at this time in their lives,” says Bill Parker, senior loan originator at Wallick & Folk Inc. in Scottsdale, Ariz.

Click to check your home buying eligibility. (Sep 16th, 2024)

Can senior citizens get mortgages?

Senior citizens can get mortgage loans just like everyone else – it all depends on income, credit score, and cash available. Even seniors into their 90s can get mortgages if they qualify financially.

There are varying reasons for wanting a mortgage. Some seniors may want to downsize to a single-story home or a property that requires less upkeep or perhaps they want to be closer to family.

Some seniors even get mortgages to buy homes for their children who couldn’t qualify for a loan.

No matter the reason, senior citizens are more than able to qualify for a mortgage. According to the Federal Trade Commission (FTC), elderly people are protected against discrimination from getting a home loan or any kind of credit based on their age. It’s called the Equal Credit Opportunity Act, a federal law that protects borrowers against bias due to age, race, color, religion, national origin sex, marital status, or even those who get public assistance.

This means that all seniors are eligible to buy a home if they can qualify.

Click to check your home buying eligibility. (Sep 16th, 2024)

What loans are available to senior citizens?

The sky’s the limit when it comes to mortgages for seniors if they qualify and can prove they have enough regular income. That said, loan applications for retirees often look a bit different.

What loan term is best for seniors?

One thing for seniors to consider is how long a loan term they should get. For some, a 30-year mortgage may be a little long.

At the same time, a 30-year loan may be the best option for some based on its lower monthly payments.

The length of the term a senior gets could also depend on requirements that are specific to certain loan types.

Click to check your home buying eligibility. (Sep 16th, 2024)

Loan program options for seniors

Senior home buyers have all the same loan program options as regular home buyers. That mean that the best loan option will depend on the specifics of their personal finances including how much of a down payment they can afford to make or the amount they feel comfortable paying toward a monthly mortgage payment.

For seniors who can, a conventional loan is likely to be a great option.

But for seniors who may have a harder time qualifying for a conventional loan, there are a number of loan program options to help make home ownership possible.

Government home loans for seniors citizens

FHA loans

FHA loans, which are backed by the Federal Housing Administration, are an accessible option for home buyers who may be having a harder time coming up with the money for a down payment.

For borrowers with a credit score of at least 580, it’s possible to get an FHA loan with just 3.5% of the purchase price down. This can be a great option for senior home buyers who are buying a home for the first time.

VA loans

For senior homebuyers who have military experience, a VA loan can be a great option. These loans are backed by the Department of Veterans Affairs and offer a number of significant benefits, including relatively low interest rates, no down payment, and no mortgage insurance.

USDA loans

For seniors who live in rural areas, the USDA program offers zero-down payment loans to borrowers who make less than the median income for the geographic area.

Home Equity Conversion Mortgages (HECM)

For senior homebuyers who need another option, there is the Home Equity Conversion Mortgage. It can be a great option for borrowers who don’t meet the income requirements of a regular mortgage. That can happen when people are living on fixed incomes like pensions, retirement income, or Social Security.

Some senior homebuyers may find themselves in the same position as the couple Parker worked with. They already owned a home worth $550,000 and had no mortgage left on it. They netted about $525,000 from the sale of the house after paying a real estate commission and closing costs. The home they wished to purchase was listed at $605,000.

If not for the HECM, they would have had to use up all of their net proceeds plus another $100,000 of their retirement savings to pay the rest of the purchase price plus closing costs, Parker said.

Instead, they chose a HECM for about $355,000 on the new home, and they only needed $275,000 of the sale proceeds. This allowed them to not only leave their retirement savings intact, but they added the remaining $250,000 of the proceeds from the profits of selling their house into their retirement account.

HECM is a popular loan program option for qualifying senior citizens. If you are 62 or older, are a current homeowner, are residing in your home, and have paid off most or all your mortgage or paid down, you can participate in FHA’s HECM program.

This is FHA’s reverse mortgage program — the only such program insured by the federal government — and it allows people to purchase another primary residence if they have extra cash on hand to pay the difference between the HECM proceeds and the sale price plus closing costs.

Click to see you FHA eligibility. (Sep 16th, 2024)

Home equity loans for seniors

You could use a cash-out refinance but that resets the interest rate and the loan term on your mortgage. If you’ve got a mortgage you’re happy with then refinancing might not be the best option.

For senior borrowers looking to access their home equity, there are a couple of second mortgage options.

1. Home equity loan: This kind of loan will give borrowers a lump sum of cash upfront that they’ll then pay back at a fixed rate over a set period of time.
2. Home equity line of credit (HELOC): Unlike a home equity loan, this type of loan operates as a revolving line of credit, up to a set limit.

It’s important to remember that with a home equity loan, the loan is secured by your home, which means that your home could be on the line if you fail to repay. Given that, it’s important not to take a second mortgage on lightly and to make sure that you’re not using it for anything frivolous.

While it could be worthwhile to make necessary home improvements, it’s probably not the right type of loan for a new car purchase. It could be a good choice if you’re looking to pay off high-interest credit card debt but not if you’re simply going to run up the credit card balances again.

Mortgages are becoming more accessible to seniors

A few years ago, the biggest players in residential mortgages started allowing seniors to use imputed income from their retirement funds, IRAs and other retirement assets to qualify for the loan they wanted.

This policy change allows seniors to use the balances in these accounts to supplement their earnings on paper without ever taking out any money. Before this change, some seniors were turned down for loans because their debt-to-income didn’t match high standards even though they had great equity in their homes, had some savings, and had good credit scores.

Click to check your home buying eligibility. (Sep 16th, 2024)

Get advice before choosing a loan

Sometimes the elderly become prey to predatory mortgage lenders. Under the Truth in Lending Act (TILA), lenders have to disclose the cost and terms of a loan along with a lot of other information. The Real Estate Settlement and Procedures Act (RESPA) prohibits the payments of unearned fees and kickbacks.

According to the National Consumer Law Center, equity-rich and cash-poor elderly homeowners are a big target for unscrupulous mortgage lenders. It is recommended that before signing anything, you talk with a trusted accountant or attorney about the terms and costs any potential home purchase and new mortgage.

Click to see today’s rates. (Sep 16th, 2024)

The post Best Home Loans for Senior Citizens in 2024 first appeared on My Mortgage Insider.

The “Affordable Loan Solution” mortgage is a conventional loan program from Bank of America intended to be a less expensive option than the popular FHA-backed mortgage. It requires just 3 percent down and no mortgage insurance.

Take advantage of low rates with just 3% down

Low- to no-downpayment loans are popular among home buyers. Mortgage rates are incredibly low, and rental payments are expected to increase significantly in the future.

However, new homebuyers are finding it difficult to come up with 20% of the home value upfront. Fortunately, borrowers don’t need to put 20% down. In some cases, they will only need to put 3 percent down, and potentially, home buyers may not need to make a downpayment at all.

With today’s low mortgage rates, lenders are rolling out programs that make it easier for a home buyer to get accepted for a low downpayment loan. The new 3% down loan is just one of many low downpayment loans available to those looking to get a mortgage.

New low down payment home loan only for certain buyers

This home buying program targets a specific group of aspiring homeowners.

Not every home buyer will be eligible. Some will not meet credit score minimums. Others might earn an income that lies outside of eligible levels.

Applicants must meet the following requirements.

• They must make less than their area’s median income
• They must have a credit score of at least 660
• They must purchase the home as their primary residence

The loan was created to give potential FHA borrowers another mortgage loan option. This new loan could save borrowers over $100 a month in payments on a $150,000 30-year fixed-rate mortgage near current interest rates, as compared to a similar FHA loan.

While an FHA loan has more flexible eligibility, those that meet the requirement for the “Affordable Loan Solution” loan may find that it is a better option for their budget.

Mortgage insurance requirement waived

Along with the benefit of a low down payment, this new mortgage program will not require private mortgage insurance (PMI).

The appeal to avoiding PMI payments is monthly payments will be lower. PMI was created to allow home buyers to get loans even if their down payment was below the 20% threshold. If a borrower gets an FHA loan and puts 5% down, they would be required to pay PMI. PMI can significantly increase your monthly mortgage payment in exchange for the benefit of a reduced downpayment.

This new loan program is backed by Freddie Mac and the non-profit Self-Help, so the borrower doesn’t need to pay any form of mortgage insurance premiums. This could save home buyers a decent amount of money over the life of the loan — money that can instead go to increasing your home equity.

Other loan options may still be a better fit for some home buyers than Bank of America’s new program. Their minimum credit score of 660 is higher than the FHA loan, which requires just a 580 score to qualify for the 3.5% minimum down payment.

Roughly half of the country has a credit score below 660. This, along with other restrictions, may make it difficult for some home buyers to get approved for a conventional mortgage.

Plus, Bank of America has not specified what their mortgage rates are on this program. Even without PMI payments, the new loan program could mean a higher interest rate than FHA, Conventional 97 or HomeReady loans, depending on your financial situation.

Other low down payment mortgage options available

Bank of America isn’t the only lender offering 3 percent downpayment loans. Large and small mortgage lenders and banks across the country offer low downpayment loans that are not specific to a single lender.

The HomeReady mortgage

HomeReady is a Fannie Mae program that allows 3% down and a credit score of just 620. Guidelines limit the amount the eligible applicant can make in some areas of the country. In areas considered underserved, there is no income limit.

This loan is considered the first multi-generational loan, since buyers can use the income of non-borrowing household members to help them qualify. Adult children can qualify more easily when buying a bigger home they plan to live in with their elderly parents.

Conventional 97 mortgage

The Conventional 97 loan also requires just 3% down with a low credit score of 620. Borrowers will have to pay PMI, but on a 30-year fixed-rate mortgage these payments will go away after 10 years.

Quicken Loans has their own 3% down mortgage program called the Home Possible mortgage. While it does require PMI, borrowers can have a higher annual income with Home Possible than with Bank of America’s loan.

USDA loans

If borrowers are looking for low down payments, a USDA loan should not be overlooked. USDA loans require 0% down payment and the minimum required credit score is 640. Also, they do not require PMI, but rather an annual fee that is usually much lower than most mortgage insurance.

USDA loans are only available in areas that are less dense in terms of population, but many suburban areas are eligible. Borrowers may also make up to 115 percent of their area’s median income, making these loans less exclusive than most low-to-no down payment mortgages.

VA loans

For home buyers with qualifying military service, a VA-backed mortgage loan is an attractive option. These loans are available with no down payment and lower interest rates. Borrowers won’t have to pay mortgage insurance either though there is a one-time funding fee that allows the program to be self-sustaining and is significantly less than monthly mortgage insurance premiums.

Today’s rates

The best loan option not only depends on your down payment but also on your mortgage rate.

Mortgage rates change daily, and lower rates can make it even easier to afford a new home with a low down payment.

The post Avoid PMI Without 20% Down | Guide 2024 first appeared on My Mortgage Insider.

For some borrowers, monthly income isn’t easy to calculate.

Freelancers, business owners, and other independent contractors are considered “self-employed.” Their income is determined by profit-and-loss statements, 1099s, and tax returns.

Fortunately, that won’t exclude you from getting a mortgage. It’s possible to get approved with self-employed income as long as you know what lenders are looking for.

Click here to see if you have enough income to qualify now (Sep 16th, 2024)

How is self-employment income calculated for a mortgage?

This article will show you how to calculate your self-employment income just like lenders do. That way you’ll know whether you can buy or refinance a property.

In this article:

• Two-year self-employed minimum
• Are you self-employed? You might be if…
• Required self-employed documentation
• What types of self-employed income do lenders look for?
• Do mortgage lenders use gross or net income?
• Self-employed mortgage loan options
• Home loan alternatives for self-employed borrowers
• What are mortgage lenders looking for with self-employed borrowers?
• Mortgage qualifying tips for self-employed borrowers
• Tax return issues for self-employed borrowers
• Calculating self-employed income
• Our recommended lenders for self-employed borrowers

Two-year minimum for self-employment

Before calculating your income, a lender will make sure you’ve been in business, in a self-employed capacity, for at least two years.

How do you prove that? You can provide a copy of your business license, but lenders will also want to see two years of federal filed income taxes, signed and dated.

Lenders define a self-employed borrower as anyone who receives more than 25 percent of their income in non-salaried pay. This definition incorporates borrowers who work on commission or earn bonuses along with a regular salary.

Check your homebuying eligibility now (Sep 16th, 2024)

You might be self-employed if….

Will your mortgage lender consider you self-employed? The answer is yes if:

• You’re a sole proprietor
• You own your own business
• You are a partner with at least 25% ownership in a business
• You receive more than 25% of your income in bonus or commission income
• You are a contract worker, even if you work for only one company
• You receive 1099 forms instead of W2s
• You pay self-employment tax payments
• The bulk of your income comes from dividends and interest
• You are primarily a landlord
• You receive royalties

Let’s be clear: Self-employed people can still get mortgage loans. But they may have to provide some extra income documentation compared to someone with two years worth of W2 forms from an employer.

Self-employed business structures

A wide variety of business structures fit the description of “self-employment” from a lender’s point of view. And mortgage underwriters will look at each self-employment structure differently.

Here are some common business structures.

• Sole proprietorship: One person owns and controls the business. Income is reported on Schedule C of your personal income tax return. An example would be the single owner of a landscaping company. Generally, sole proprietorships are smaller companies
• Partnership: Two or more people own and control the business. Profits from the business are split between the owners
• Corporations: Stockholders own the business. Usually these are larger companies. A borrower who is 25 percent owner of a corporation is pretty rare to see on a mortgage application, but it happens. Getting the corporate tax returns can be difficult, since many parties may be involved in releasing them
• S Corporations: This is a corporation with a limited number of stockholders. If you are the owner of an S Corp, you’ll need to supply your 1120S tax return to your lender.

IRS tax return schedules for self-employed borrowers

Along with personal 1040 tax forms, lenders may ask self-employed loan applicants for the following schedules:

• Schedule C: Reports income or loss from a sole proprietorship
• Schedule D: Reports income from capital gains or losses. This type of income comes from the sale of stock or real estate. Usually, these are one-time events and can’t be counted toward ongoing income. However, day traders and property flippers may be able to use schedule D income if they prove it has been steady for three years
• Schedule E: Income and loss from leased and rented real estate is reported on this form. Borrowers who maintain a full-time job while owning rental properties will have net income or loss from schedule E. The lender will add or subtract this income from their employment income. Depreciation claimed on the schedule E can typically be added back to the borrower’s income.
• Schedule F: This schedule is used for farming income.

Your tax preparation software — or your professional tax preparer — can provide these forms if you don’t already have them.

Required documentation for self-employed borrowers

If you are a self-employed person applying for a mortgage, you will have to hand over more documents than a salaried or wage-earning employee would.

Depending on your personal finances, you’ll need to provide some of these extra documents:

• Personal income tax forms: This includes two years’ personal tax returns (IRS form 1040) along with all schedules you were required to file, including Schedule SE
• Proof of income: 1099 forms and/or W2s from your small business if you pay yourself a salary
• Business tax forms: These include K1s and forms 1120 and 1120S, if you were required to file those
• Profit-and-loss statement: This shows the current year’s finances and how they compare to previous years’ tax records
• Current clients: This list helps lenders see you’re still earning the income reflected in tax statements
• CPA letter: This shows you are still running your self-employed business
• Explanation letter: To explain irregularities — such as receiving most of your income at a specific time of year. Otherwise, the lender may think your profit-and-loss statement is off track compared to previous years’ income

If you are part of a business that has many owners, make sure all controlling parties agree that you can have access to business tax returns and can turn them over to a lender.

Click here to see if you can buy a home now (Sep 16th, 2024)

What types of income do mortgage companies look at for self-employed borrowers?

Lenders will want to know all about your income when you apply for a mortgage. For most home buyers, “income” means money earned from work, and sharing income should be simple enough.

But lenders will consider any source of income that’s steady and reliable, including disability benefits, child support payments, and — for self-employed borrowers — income from a variety of sources.

Income sources for self-employed borrowers could include:

• Fees earned through gig work such as making deliveries
• Fees earned through freelance work
• Consulting fees
• Money earned in a seasonal job
• Revenue from a business
• Rents from investment properties

To count as “income” in your lender’s eyes, any source of income will need to be continuing — not a one-time payment or income from a contract that has expired.

Check your eligibility for a home loan (Sep 16th, 2024)

Do mortgage lenders use gross or net income?

For taxpayers who earn wages or a salary, mortgage lenders typically look at gross income. That’s your income before state and federal income tax deductions, health insurance premiums, and Social Security or Medicare taxes.

It’s different for self-employed borrowers. Self-employed taxpayers usually reduce their tax liability by writing off work-related expenses: travel expenses, subscriptions, rents, etc.

This method saves money at tax time by lowering taxable income. But it can also have a negative effect on mortgage eligibility.

From a lender’s point of view, a lower taxable income just looks like a lower income. A lower income raises the debt-to-income ratio — one of the key factors lenders check.

Self-employed mortgage loan options

Just like any other home buyer, self-employed buyers have four main options for a home loan:

Conventional loans

Most mortgage borrowers get conventional, conforming loans. Fannie Mae and Freddie Mac, which are government-sponsored enterprises, set the guidelines for these loans.

For self-employed borrowers, conforming lenders will look for two years of self-employment history, though one year may be enough if you can show you’ve earned a similar income in a similar field for at least two years before you became self-employed.

Conventional loans do not come with insurance from the federal government, unlike FHA, USDA, and VA loans, so lenders will rely more on your credit score, debt load and down payment size.

You’ll need:

• A FICO score of at least 620
• A debt-to-income ratio below 43 percent in most cases
• A 3 percent down payment

To get more competitive interest rates, you’ll likely need to surpass these limits.

FHA loans

Self-employment rules for FHA loans look a lot like conventional loan requirements. It’s best to have at least two years of successful self-employment history.

You could get approved for an FHA loan with only one year of self-employment history if your previous work experience was in the same field. It also helps if you have degrees or certifications to show you’re qualified for your profession.

FHA loans come with a big advantage for borrowers with lower credit scores: built-in mortgage insurance from the Federal Housing Administration. This insurance protects the lender, allowing lower mortgage rates despite a lower credit score and minimum down payment.

To get approved, you’ll need:

• A FICO score of at least 580
• A debt-to-income ratio below 50 percent
• A 3.5% down payment

It’s possible to find an FHA lender willing to approve a loan even if your credit score falls as low as 500, but the lender would require a 10 percent down payment instead of the usual 3.5 percent.

FHA loans finance only primary residences, and they require the borrower to pay mortgage insurance premiums, adding an upfront fee as well as annual fees.

USDA loans

USDA loans offer a great deal — competitive interest rates, low mortgage insurance premiums and no down payment required — but only to home buyers with moderate income in rural and suburban areas.

Self-employed borrowers who meet the USDA’s eligibility requirements will need to show a two-year history of earnings.

Borrowers with only one year of self-employment history can get approved by showing they were employed in a similar field for at least two years before their self-employment started.

USDA-guaranteed loans require:

• A FICO score of 640 or higher
• Income that does not exceed 115% of your area’s median income
• No down payment required

VA loans

Only veterans, active-duty military members and some surviving spouses of veterans can use the VA home loan program. If you’re eligible, a VA loan is likely your best deal.

These loans require no money down and no mortgage insurance. The VA does not impose loan limits, and the VA’s guarantee to lenders allows them to lower mortgage rates.

Self-employed borrowers can get approved by showing two years of self-employment history. If you have at least one year of self-employment, you can still get approved by showing you worked in a similar field for at least two years before becoming self-employed.

VA loans finance only primary residences.

Home loan alternatives for self-employed applicants

Most home buyers who are self-employed use the same types of mortgages as everyone else. What’s different is the way self-employed borrowers document their income.

But self-employed people often write off expenses at tax time, lowering their adjusted gross income. If your net earnings aren’t high enough to qualify for the mortgage you need, you may have another option.

A bank statement loan could help solve your problem. These loans rely on deposits into your bank, instead of tax forms, to show your income.

But these loans have higher interest rates because they’re riskier for lenders — they don’t conform to Freddie Mac and Fannie Mae rules.

Other options: Apply with a co-borrower who is not self-employed. Or start a conversation with your loan officer about the inaccuracies in your earned income.

What are mortgage lenders looking for with self-employed borrowers?

No matter how a borrower gets paid, a mortgage lender wants to know the same thing: Will this borrower be able to make regular loan payments for the foreseeable future?

Self-employment presents a challenge to mortgage underwriters, but it shouldn’t be a deal-breaker — it’ll just require more questions from the lender.

If the borrower can answer the lender’s questions, showing the lender that the income has been reliable for at least two years — and that the income should continue for at least three more years — the lender should be satisfied.

It’ll also ease the lender’s worries if the borrower has a strong credit profile and a low debt-to-income ratio.

Click here to see if you have enough income to qualify now (Sep 16th, 2024)

Mortgage qualifying tips for self-employed borrowers

Self-employment can complicate the home buying process. If possible, avoid complicating your application in other areas. Be sure to:

Check your DTI ratio

The lower your monthly bills in relation to your earned income, the stronger your mortgage application will look.

Different lenders and loan types have different rules but shoot for a ratio that’s less than 36 percent of your adjusted gross income. You can do this by paying off a few loans and lowering your credit card balances.

Monitor your credit

Your monthly income shows your ability to repay a loan; your credit score shows your willingness to repay it based on your recent financial habits.

Minimum credit scores for mortgages tend to range from 580 to 640. But getting your score above 720 will strengthen your application a lot.

Just like with DTI, paying down some debt and making regular, on-time payments will help. Also, be sure to check your credit reports for errors that could be pulling down your score.

Keep business expenses separate

As a small business owner, your personal and business finances may be intertwined. If so, your mortgage lender will have a harder time distinguishing your money from your business’s money.

If possible, in the two years before applying for a mortgage, change your financial habits to keep your personal and business finances separate. A certified public accountant can help.

Tax return issues for self-employed borrowers

Several issues can trip up a self-employed borrower when applying for a home loan and providing tax returns to the lender. Here are some of the most common:

Expenses

A lender will consider what a business made in net earnings, not gross profit. For instance, a pet shop owner pulled in $80,000 last year in revenue. Not bad, right?

But the business also had to pay rent, supplies, utilities and insurance to the tune of $30,000 last year. So a lender will only consider $50,000 in profit as real income.

If your business makes $100,000 but you write off $90,000, guess how much the lender will say you made? Yep, $10,000 or just $833 per month. And you can’t qualify for much house with that.

Writing off legitimate business expenses is a wise move yet there are occasions where there are so many write-offs the business appears to make no money at all. If you plan to apply for a mortgage in the next three to four years, don’t go overboard on your write-offs.

See how much of your income a lender will use for qualification (Sep 16th, 2024)

Your side business

Many people work full time, yet have a side business, for which they file Schedule C on their tax returns.

Note that if you plan not to disclose your side business for whatever reason, your lender will find out about it anyway. The lender will pull transcripts (called 4506 transcripts) directly from the IRS which will show income or loss from a Schedule C business.

When you apply for the mortgage, be sure to tell your loan officer about your side business, and how much it made or lost during the last two years.

Many side business owners simply have a side business to write off expenses. If this is you, keep in mind that the lender will count your business loss against you.

For instance, if your tax returns show that you lost $12,000 in the prior year, your lender will reduce your qualifying current monthly income by $1,000.

Unlike positive business income, you don’t have to have the business for two years for it to count against you. If you just opened your side business, a loss for just one year will need to be considered.

If you closed your business after filing the previous year’s tax return, it’s possible for the underwriter to disregard the business loss. Write a letter saying how, why, and when you closed the business, and provide any documentation backing up the business closure.

Employee expenses

Even if you’re not self-employed, you can claim unreimbursed business expenses including mileage. You claim these on form 2106. These deductions are counted against your total W2 income.

An example of employee business expenses are tools and supplies not provided by the company, non-reimbursed mileage to work-related meetings, and cell phone charges if you use your personal cell phone for work.

Two-year self-employed average income

When a lender reviews business income, they look at not just the most recent year, but a two-year period. They calculate your income by adding it up and dividing by 24 (months).

For example, say year one the business income is $80,000 and year two $83,000. The income used for qualifying purposes is $80,000 + $83,000 = $163,000 — then divided by 24. That shows a monthly income of $6,791 per month.

Declining self-employed income

But the lender also looks at something else when reviewing years one and two: consistency.
The example above showed consistent income from year to year. What if the income looked more like this:

• Year 1: $80,000
• Year 2: $40,000

When you calculate a monthly income with these numbers, the amount is $5,000 per month.

A lender probably won’t approve this loan. Why? Because there is a serious decline in income and could indicate a failing business.

Part of the income review process is determining the likelihood the income will continue. A business with declining income looks like a business that might not survive three more years.

In fact, lenders will typically make a loan determination based on the worst year’s income.

However, there is no hard-and-fast rule regarding a specific decline in income. It’s up to the judgment of the underwriter approving the loan. A slight variance of say $80,000 to $70,000 might raise some questions but with a proper explanation, the application will still be approved.

There may be a legitimate reason for the lower income. The business owner took some time off to take care of a new baby. This easy-to-document occurrence can show why the income took a slight dip. In this instance, the underwriter might ask for three years’ tax returns instead of just two.

Cash flow

A lender will also look at bank statements to examine the cash flow of the business. Is there enough monthly income to service debt? Some businesses rely on daily purchases of their goods and services such as a café or retail store. Others rely on just a few transactions per year.

When reviewing income, a lender wants to make sure there are enough funds in an account to pay the bills.

Using business accounts for your down payment and closing costs

In some cases, you can use funds from your business accounts from your down payment.

Sometimes, though, the underwriter will ask you for a letter from your certified public accountant (CPA) saying that taking money from the business won’t jeopardize the ongoing health of the business.

Your CPA may or may not be willing to write this letter.

The underwriter wants to verify your business won’t be short on cash and be forced to take out loans or shut its doors due to lack of funds. After all, your business is the source of your income, and if your income stream stops, you may default on your loan.

Any business funds used for closing costs or the down payment on a home should be excess money that the business will not need for the foreseeable future.

Check today's mortgage rates (Sep 16th, 2024)

Calculating self-employed income is complicated

If you’re self-employed, you may disagree with the final income the underwriter determines for you. This is a common feeling experienced by many self-employed home buyers.

Self-employed income calculations can sometimes boil down to judgment calls by the underwriter, especially for borrowers who have multiple businesses or properties, or whose business ventures are a bit outside the box.

If there’s any doubt about how much the underwriter will calculate in your case, give your tax returns to a mortgage professional for review.

Also, most lenders offer an underwriter income review for more complicated tax returns, sometimes even before you officially apply for the mortgage.

This review gives everyone involved a starting point since the underwriter comes up with qualifying income ahead of time.

How to calculate self-employment income FAQs

How is self-employment income calculated?

Self-employed individuals typically submit income tax forms to document their income for a mortgage loan. The lender will then average income over the past two years and divide that annual income by 12 to come up with an average monthly income.

How do I calculate my gross monthly income for self-employment?

Add up all your income for the previous two years and then divide that number by 24 to see your gross monthly income. To count as income for your lender, your income should come from a source that’s at least two years old — and you should have proof you expect the income to continue at least three more years.

Can I calculate self-employment income from my tax returns?

Yes. You can check Line 11 of your 2021 1040 tax form to see your adjusted gross income. (Online software like TurboTax can also show your AGI.) Then, divide your AGI by 12 to see your monthly income.

How do I calculate gross annual income for self-employment?

Adjusted gross income shows your net profits from self-employment. That is, it’s your income after expenses. If you’ve filed taxes for the previous year, you have already calculated adjusted gross income. It’s on Line 11 of the 2021 1040.

Do I have to report self-employed income?

Yes, you should report self-employment income to your lender. If you’re self-employed but you earn most of your income from a salaried or wage-earning job, you may not need to apply as a self-employed borrower. However, to use your self-employment income to qualify for your loan, you’ll still need to provide tax forms and other documents.

Can you get a joint mortgage if one person is self-employed?

Yes. You can get a joint mortgage with one self-employed and one W-2 borrower on the application.

What’s the best lender for self-employed mortgages?

Most lenders work with self-employed borrowers. Once you’ve documented your income, the rest of your borrowing experience shouldn’t be much different from anyone else’s. Be sure to get quotes from at least three lenders since pricing — for both fees and rates — can differ a lot from lender to lender.

Is it harder to get a mortgage when you’re self-employed?

A self-employed borrower faces more scrutiny than the standard paystub/W2 employee.
If you go into your loan application with the proper expectations, you’ll close your mortgage loan with very few surprises.

Click here to check your homebuying eligibility now (Sep 16th, 2024)

The post How To Calculate Self-Employment Income for a Mortgage | 2024 first appeared on My Mortgage Insider.

But there is a situation in which lending rule maker Fannie Mae allows you to buy a home as an owner-occupied residence, even though you don’t plan to live in it.

This exception is when you are buying a home for elderly parents. This loan option is sometimes referred to as the Family Opportunity Mortgage.

Buying a home for aging parents

According to Fannie Mae, a child may provide housing for an elderly parent “if the parent is unable to work or does not have sufficient income to qualify for a mortgage on his or her own.”

Additionally, the parents do not have to be on the loan.

This means that as a child of aging parents, you can supply housing for them and obtain the same rates, fees, and lending flexibility as if you were buying your own home to live in. Again, you don’t have to live in the home you buy with your parents to get these special accommodations. Your parent or parents can live there and you can remain in your current living situation.

If not for this allowance by Fannie Mae, children buying a home for elderly parents would need to buy the property as a second home or investment property.

Second homes generally need to be 50-100 miles away from your current primary residence — not exactly convenient or safe if your parents need regular care.

And investment properties require a 20-30% down payment, harder qualification criteria, and significantly higher mortgage interest rates.

The relaxed guidelines around buying a home for an elderly parent could mean the difference between being able to afford it or not.

Family Opportunity Mortgage guidelines

Because the purchase is considered owner-occupied, the buyer can put as little as 5% down on the home by obtaining a mortgage insurance policy. This reduced down payment requirement can lower the initial cost required by at least $30,000 on a $200,000 home purchase.

Not only that, but classifying the home as an investment property instead of an owner-occupied one will raise the rate by about 0.50%, or $45 per month on a $150,000 mortgage.

With assisted living costs skyrocketing, purchasing a home for elderly parents can be very cost-effective. You may find that the mortgage payment is a fraction of the cost of a nursing home or assisted living facility.

Even purchasing a home and combining it with in-home nursing visits may be more affordable than a nursing home.

Qualifying for a Family Opportunity Mortgage

To qualify for the loan, you’ll need to meet the general Fannie Mae conventional loan guidelines, and you may have to supply a few additional items, such as:

• Proof of relationship to parent if it’s not obvious, for instance, if you have a different last name than your parent
• Parent’s pay stubs, if any
• Parent’s Social Security award letter (to prove your parents can’t afford the mortgage on their own).

If it appears you qualify to buy a home for your parents as an owner-occupied residence, contact one of our lending professionals for a free mortgage rate quote. They may be able to help get your parents into a great home.

The post Fannie Mae Family Opportunity Mortgage | 2024 Guidelines first appeared on My Mortgage Insider.