With this refinance option, homeowners can get approved with no home appraisal and no credit check. This speeds up the approval process and lowers closing costs.

But these loans still require refinance closing costs, and paying them can be a big hurdle for homeowners.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

FHA doesn’t allow closing costs to be added to a new refinance loan

Many mortgage loans — like a conventional refinance — allow borrowers to finance closing costs into the new mortgage refinance loan to reduce out-of-pocket expenses.

Because the FHA Streamline Refi requires no home appraisal, the rules for loans backed by the Federal Housing Administration are a little different. Instead of basing the loan’s size on the loan-to-value ratio, the FHA streamline refinance bases its loan size on the home’s current FHA loan size.

Specifically, the lender subtracts the FHA MIP refund from the current unpaid principal balance, then adds on the new upfront MIP costs.

(Current unpaid principal balance) – (FHA MIP refund) + (New upfront MIP cost) = New maximum loan amount

FHA streamline refinance maximum loan calculation

For example, assuming a current FHA loan closed 12 months ago with a current loan balance of $150,000, the new loan amount would be as follows:

• Current balance: $150,000
• Upfront MIP refund due to borrower: $1,522
• New upfront MIP due: $2,625
• Max new loan amount: $151,103

The new maximum loan amount does not leave room for financing in closing costs. For an FHA Streamline Refinance, typical closing costs range between $1,500 and $4,000. Though, closing costs can vary widely depending on the lender, borrower characteristics, and the loan amount.

The good news is that you don’t always have to pay these closing costs out of pocket.

Lender-paid closing costs on an FHA Streamline Refinance

Streamline loans are in high demand with lenders — overall, they take less time and fewer resources to process compared to other loan types. Lenders also don’t have to order a home appraisal. This minimizes the risk of wasted time and energy if the home’s value does not appraise for the expected amount.

Lenders also don’t have to do income verification for the new loan. They don’t have to calculate your debt-to-income ratio. If you’ve been paying your monthly mortgage payment, lenders assume you’ll continue to do so when you have a lower monthly payment.

These factors add up to lenders wanting a lot of FHA Streamline Refinance business, and that’s good news for consumers. By getting multiple quotes from multiple lenders, banks and mortgage companies have to compete. This gives FHA Streamline Refinance applicants the leverage to reduce their out-of-pocket expenses.

For example, an FHA applicant gets two FHA streamline quotes at 7%. One lender quotes $3,000 due at closing; the other lender quotes $2,000. The borrower can, and should, negotiate using lower closing costs with the higher-priced lender.

By trying this method, many borrowers can drastically reduce or even eliminate their out-of-pocket costs without increasing their interest rate by rolling closing costs into the loan.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

Service release premiums give lenders the power to negotiate

Ever wonder how lenders are able to waive thousands of dollars in fees?

Lenders enjoy what’s called a service release premium (SRP). It’s a fee not disclosed on the Loan Estimate or other loan documents. Lenders collect the SRP when they sell a closed loan to a loan aggregator like Fannie Mae or Freddie Mac.

For FHA lenders, the aggregator is Government National Mortgage Association, or GNMA, which is owned by the U.S. government. (GNMA pools together loans and sells them off as securities to investors, who enjoy collecting the interest the borrower pays over the life of the loan.)

The SRPs that the lenders collect from these aggregators can add up to thousands of dollars. This money could be applied to pay for all or part of the borrower’s closing costs. The closing costs still exist, but the borrower isn’t required to pay them or is reimbursed any cost paid upfront.

FHA Streamline Refinance applicants have the power to lower their FHA closing costs by negotiating with the lender to pay them. It never hurts to ask.

FHA Streamline Refinance Closing Costs

Most homebuyers and refinancers know how to compare interest rates between different lenders, but many loan shoppers don’t think as much about closing costs and fees.

Closing costs can vary a lot by lender, too. Some charges are set in stone, but others aren’t. For example, loan origination fees can vary from 0% to 1% of the loan amount. If you’re refinancing a $200,000 loan, 1% would add $2,000 in closing costs; 0.5% would add only $1,000.

What’s the easiest way to compare closing fees? Get Loan Estimates from at least two lenders. All FHA lenders’ Loan Estimates should appear on a standardized form, making these charges easy to compare.

Are there closing costs with an FHA Streamline Refinance?

FHA Streamline Refinance loans are faster, easier — and less expensive — than most refinance loans. But they still require closing costs.

Any type of refinance will incur closing fees. Even when the lender advertises no closing costs, the costs still exist, and most often, they’re still being paid by the borrower in the long run — unless you negotiate, specifically, for your FHA lender to lower its fees.

Even when you pay closing costs, the benefits can still outweigh the costs if your new loan saves money every month.

Typical closing costs with an FHA Streamline Refinance

In addition to the fees listed below, qualifying borrowers are also required to prepay some expenses like taxes and homeowners insurance. The borrower’s current lender typically sends a refund of a similar amount when the loan closes. This means the net cost for borrowers is often close to zero for prepaid items.

*This is a list of possible fees for an FHA streamline refinance. While not an all-inclusive list, it should give you an idea of general closing costs.

Your loan could require higher or lower fees depending on the lender, the loan amount, and your credit score among other loan factors. The only way to get an accurate estimate is to get a Loan Estimate from a lender to see their quoted costs. Once you get this estimate from at least two lenders, then you can start to negotiate your fees.
While these costs may seem large, keep in mind the amount of money the lender collects in SRP at closing — this gives the borrower the power to negotiate.

Check your FHA streamline refinance rates. Start here (Sep 16th, 2024)

Can you refinance from an FHA loan to a conventional loan?

If you have an FHA loan, it’s possible to refinance to a conventional loan once you have 5% equity in your home.
If you meet the home equity eligibility requirements, refinancing to a conventional loan can give you the benefit of lower interest rates and allow you to get rid of your private mortgage insurance (if you have at least 20% equity in your home).

But just because it’s possible to refinance from an FHA loan to a conventional loan, it might not make financial sense for your situation. You’ll need to consider the net tangible benefit for your personal finances. Plus, this will require you to provide asset verification and you will probably need to pay for a new home appraisal.

Meanwhile, an FHA Streamline Refinance can help you quickly drop the monthly payment on your existing FHA loan and without so much documentation or an appraisal.

Who can use an FHA Streamline Refinance?

The FHA Streamline Refinance program works only for current FHA loan holders. And, it won’t work for every FHA homeowner.

To use this refinance option, a homeowner must be able to benefit from it. Benefits include getting a lower monthly mortgage payment or changing from an adjustable-rate mortgage to a fixed-rate mortgage.

And, of course, the homeowner must be living in the home as a primary residence. The Department of Housing and Urban Development (HUD) requires this of all FHA borrowers.

Two types of FHA Streamline Refinance loans

The FHA offers two different types of Streamline Refinance loans:

• Non-credit Qualifying Streamline Refinance: Lenders won’t have to check your credit score or income. Your payment history will show whether you’re qualified. Avoid late payments in the year leading up to your refinance
• Credit Qualifying Streamline Refinance: With this option, the lender will check your personal finances to make sure you’re approved to borrow. This will be necessary to add a new co-borrower or remove a co-borrower from your loan

Closing costs will likely be a little higher for a credit-qualifying loan since it requires a credit check and more thorough underwriting.

FHA Streamline Refinance Closing Costs FAQs

What is the FHA Streamline program?

An FHA Streamline Refinance loan replaces an existing FHA loan with a new FHA loan. The new loan saves the borrower money, usually by replacing a higher interest rate loan with a lower rate loan. Streamline Refis can also lower monthly payments by extending the loan term, though the FHA won’t allow adding more than 12 years to the term.

Are there closing costs with an FHA Streamline Refinance?

Yes, lenders still charge loan origination fees and other lender’s fees. Borrowers also pay third party fees like title insurance and attorney’s fees. Most borrowers will need to pay prorated property taxes or insurance premiums.

How much does it cost to do an FHA Streamline Refinance?

Costs vary by lender, loan, and borrower. Expect to pay $1,500 to $4,000 for the typical Streamline Refi.

Does an FHA Streamline Refinance get rid of PMI?

No. FHA loans don’t charge private mortgage insurance (PMI). Instead, they require the FHA’s Mortgage Insurance Premium (or MIP). Unless they make a down payment of 10% or more, FHA homebuyers pay MIP for the life of the loan. MIP is required on an FHA Streamline Refinance.

What are the cons of an FHA Streamline Refinance?

Unless your current mortgage is an FHA loan, you can’t use an FHA Streamline Refinance. That’s a con. Also, this loan won’t allow cash back at closing. You’d need a cash-out refinance for that.

Is FHA Streamline Refinance a good idea?

It’s a great idea to get a Streamline Refi if the new loan saves you money every month — and if you’ll keep the home long enough for the savings to pay off. If you plan to sell the home in a year, it’s probably not a good idea to refinance now.

Can I roll closing costs into an FHA refinance?

No. An FHA Streamline replaces your current loan with a new loan that’s the same size. There’s no room to finance closing costs and there’s no room to cash out home equity. To do that, you’d need an FHA cash-out refinance.

Who qualifies for an FHA Streamline Refinance?

Existing FHA homeowners who can save money by getting a new loan can qualify for an FHA Streamline Refinance. FHA homeowners can also qualify if they need to remove or add a co-borrower or replace an adjustable-rate loan with a fixed-rate loan. To be eligible for refinancing, an existing FHA loan must be old enough for the borrower to have made at least six monthly payments.

How long does an FHA Streamline Refinance take?

FHA Streamline Refinances are quicker and easier than most other refinance types. You could close within a few weeks if everything goes as planned. However, closing times vary by lender and borrower. Some could take as long as 45 to 50 days.

FHA streamline loan borrowers aren’t hindered by closing costs

Even though the FHA Streamline Refinancing program doesn’t allow closing costs to be rolled into the new loan amount, borrowers don’t have to pay those fees out of pocket — the high demand for FHA loans gives mortgage lenders (and borrowers) more leeway to negotiate a lower rate and fee structure.

If your FHA loan’s mortgage rate is higher than the rate you could get today, there’s no reason to be paying more for your home loan than necessary — and that includes closing costs to refinance.

Check your FHA streamline refinance eligibility. Start here (Sep 16th, 2024)

The post FHA Streamline Refinance: Negotiate Zero Out-of-Pocket Closing Costs first appeared on My Mortgage Insider.

That’s where a down payment gift comes in — if a close friend or family member wants to chip in and help the prospective homebuyer purchase a home, they can do so. However, there are strict rules and regulations for such a transfer of cash. Here’s what you need to know.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

How does using gift money for a mortgage down payment work?

“I see gift money becoming more popular, especially among millennials,” says Joann Perito, broker and owner of Avenues Unlimited. “Even if they make good money, because of large student loan amounts, it can be difficult for them to save for a down payment.”

In 2020, 58% of home buyers came up with their down payment primarily from their own funds. But this cost is often prohibitive, especially for first-time homebuyers who don’t have the benefit of funds from the sale of their current residence. 

You can use gifted funds to make a down payment, but your mortgage lender will want to know some details before they allow you to use it. Only two specific groups can give a home buyer money to fund their down payment.

• Family members — as long as they can prove they have a standing relationship with the buyer. Sometimes the gift can come from a friend as well, but not all loan programs permit this.
• Government agency, non-profit, or other organization offering down payment assistance — as part of a program meant to get first-time buyers into the market.

Dos and don’ts of a down payment gift

Check your home buying eligibility. Start here (Sep 16th, 2024)

Can you pay back a mortgage gift?

The answer is no. This is considered mortgage or loan fraud, which is a crime. It can also put your loan qualification at risk as all loans need to be factored into your debt-to-income ratio.

Perito has seen borrowers tell the lender their parents are gifting the money, but it’s actually a loan. “They expect their kids to pay it back eventually,” she says. “That can cause a problem because the lender has to take that into consideration for the debt-to-income ratio.”

The moral of this story: Be honest with your lender about where you’re receiving all funds for your down payment — they’ll likely find out anyway.

What else should you know about down payment gifts?

As previously mentioned, there’s a difference between receiving a down payment gift and a down payment loan. Buyers need to be clear with their mortgage lenders and confirm that the money received was gifted. A sudden infusion of cash without a traceable source will leave lenders suspicious and, perhaps, wary of completing the loan deal on their end.

Plus, you should talk with your lender to make sure you are reporting the gift properly to the IRS. The responsibility for this is on the borrower and gifter, as lenders are not required to report it.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Tax implications of a down payment gift

As previously mentioned, family members have to pay a gift tax for anything over their limit of $17,000, or a collective $34,000 from parents who file taxes jointly. The person receiving the money doesn’t have to pay taxes.

If the donor wants to give more than $17,000, they can either pay taxes or claim the money as part of their $12.06 million lifetime exemption for gift taxes. However, this decision shouldn’t be taken lightly, especially if the donor hopes to pass on a hefty estate to their heirs later on. The $12.06 million exemption applies to taxes on these funds, so using up the value now could force family members to pay tax on whatever they inherit.

For borrowers interested in borrowing more without tax implications, there may be options involving separate gifts. Speak with a CPA if this applies to you.

Buying a home is more than a down payment

Ultimately, the cost of the down payment is only one expense to consider in the home-buying process. Homebuyers need to pay for closing costs, which include expenses like an appraisal, credit report, and underwriting fees.

“Many people these days have a hard time coming up with $1,000 to become a homeowner,” Perito says. “I always ask them where they’ll be getting money for the inspection, moving costs, and other expenses. I suggest to all my buyers that they have at least $4,000 in the bank before they buy a house.”

Down payment gifts can make it easier for homebuyers to afford a home

If you’re in the market for a new home and want a little help, don’t hesitate — just make sure you follow the above steps to ensure you accept such a gift in the proper manner. A gift can put homeownership in reach for plenty of aspiring homeowners.

When you speak with your lender about which loan program is best for you, be sure to let them know up front that you plan on using gift funds for the down payment. Some loan programs have strict guidelines about how much gift money you can use for a down payment and who can gift you the money.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

What is a gift letter?

A gift letter confirms the relationship between you and the gift giver

If you plan on getting gift funds from a friend or family member, you’ll need a gift letter confirming your relationship to the giver. The letter also must indicate that the money is a gift and that there is no expectation of repayment. Usually, the letter is signed by both interested parties.

Gift Letter Template

The lender may also require further evidence of the gift — for instance, they may ask to see the gift-giver’s bank statements to show there are sufficient funds in the donor’s account to make the gift. They may also ask for a deposit slip or balance statement from the buyer’s account to show the down payment funds have been transferred.

Often gifts change hands during the application process. This allows time for the money to show up on both the giver and the buyer’s bank statements and for the mortgage lender to verify that the cash is from a legitimate source and the pair has an appropriate relationship.

If the gift funds are added to the buyer’s bank account after settlement, then documentation will still be required before it can be applied to the purchase. Typically, this will require a receipt of the cashier’s check as given to the closing agent.

Why do I need a gift letter?

You’ll need to provide a gift letter to your lender for a few reasons. 

First, the lender wants to assess your debt-to-income ratio (DTI) accurately. With that, the lender wants to confirm with you that there is no expectation of repaying the gift money. If you were expected to repay the gift, that could significantly impact your DTI. 

Second, government agencies want to confirm that the funds are legitimate and conform with all gift tax laws. Basically, the government wants to ensure that this gift money is not a part of a money-laundering scheme.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Gift letter rules by loan type

Depending on the type of loan you are pursuing, there are slightly different gift letter rules. You’ll need to outline exactly how you are related to the gift giver in your letter with each loan type. Your loan officer should be able to provide you with the correct gift letter rules and format for your loan.

Here’s what you need to know about each. 

VA loans

The VA loan allows eligible military service members and veterans to purchase a home with 0% down. If eligible, you can receive a gift for your home purchase from almost anyone. However, the gift cannot be from an interested party. 

Interested parties would include a builder, developer, real estate agent, or seller. Essentially, anyone involved in your home sale transaction is not allowed to provide gift funds.

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

Conventional loans

Conventional loans allow homebuyers to use gift money to cover a down payment and closing costs. The only caveat is that the funds must be from an acceptable source. Acceptable sources of gift funds include most family members. 

Fannie Mae and Freddie Mac consider spouses, children, and dependents to be relatives. Essentially, anyone related to the borrower by blood, marriage, adoption, or legal guardianship can provide gift funds. Additionally, a fiance or domestic partner can provide gift funds. 

Importantly, you cannot receive gift funds from someone involved in the transaction. 

FHA loans

If buying a home with an FHA loan — a loan guaranteed by the Federal Housing Administration — then you can use gift funds from certain parties. As with a conventional loan, you can receive gift funds from a relative. Additionally, your employer, labor union, or close friend can offer gift funds. And of course, government agencies that provide homeownership assistance grants can provide gift funds.

Again, you won’t be able to accept gift funds from anyone involved in the real estate transaction.

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

USDA loans

USDA loans help borrowers in rural areas achieve the goal of homeownership. As a borrower pursuing a USDA loan, you cannot receive gift funds from any interested parties. 

But you may receive gift funds from family members and others who want to help.

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

Down payment gift rules by property type

The use you have planned for the property will impact how gift funds can be used. Here’s what you need to know. 

Primary residences

If purchasing a primary residence, the loan options above may all be on the table. Depending on the loan type, you can use gift funds to cover some or all of the down payment amount. Additionally, gift funds can be used to cover closing costs. 

Secondary residences

If you are purchasing a secondary residence, your loan options are more limited. In most cases, you’ll have to pursue a conventional loan. With that, you can still accept gift funds. However, a lender may require you to contribute some of your own funds to supplement the gift when closing on a secondary residence. 

Investment properties

In general, borrowers cannot use gift funds as a down payment on an investment property. Typically, investors will need to come up with at least 5% of the down payment out of their own pocket. But the rest can be a gift. 

However, if you are using gift funds to support the purchase of an investment property outright, there are no explicit rules against that. Of course, you’ll need to abide by the tax rules surrounding gift limits. But if the gift is under the $17,000 limit, you may be able to use gift funds to help purchase an investment property outright. 

How much money can I receive as a gift?

As of 2023, any one person can contribute $17,000 to any other one person without tax consequences, which could, for example, total as much as $34,000 to one child, if each parent contributes.

In many cases, there’s no limit on the dollar amount of gift money that can go into a down payment, as long as the buyer is purchasing a primary residence. However, if someone uses a down payment gift to buy a second home or investment property, they have to pay at least 5% of the down payment. The rest can be a gift.

What is seasoned money?

If possible, it’s a good idea to ensure gift money is seasoned when it comes time to funnel it into a down payment — this avoids the gift documentation needed, too. Lenders want proof that funds have been in the buyer’s account for a substantial amount of time to show that the buyer hasn’t just gathered a bunch of cash on a short-term basis.

Seasoned funds should sit in the buyer’s bank account for, ideally, two months before the buying process. So, if you received a $10,000 gift from your Aunt Mary three months ago to help you buy a house, then the bank probably won’t ask about it — this is seasoned money.

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

Down payment gifts FAQ

How do I write a gift letter for a down payment?

A gift letter will need to confirm the donor’s relationship to the buyer. Plus, it should verify that the donor does not expect any repayment of this gift. 

And it can go something like this:

I, the gift donor, intend to gift $X amount to the gift recipient. The gift recipient is my (list relationship, such as son or nephew), and will use the funds as a part of their purchase of X property. I expect no repayment of this gift. The source of the gift funds is X. 

The donor will need to sign off on the letter, which must be provided to your mortgage lender. Plus, the donor may want to include their phone number in case the loan officer has any questions.

How much can be gifted for a down payment?

Any amount can be gifted for a down payment. But as of 2023, parents can only contribute a combined $34,000 per child to help with a down payment, otherwise, the gift would be subject to a special tax. Other family members have a $17,000 lending limit before they also run into the gift tax. 

Do all lenders require a gift letter?

Yes, all lenders will require a gift letter. Although you may have the funds, the lender needs to confirm that you won’t have to repay the gift. Plus, the lender must ensure that the funds came from a legitimate source. 

What is a gift letter for a mortgage down payment?

A gift letter is a document that the borrower and donor will need to provide a mortgage lender in the application process if the applicant received gift funds to cover the down payment. The goal of a gift letter is to provide the lender with proof of where the funds came from. Plus, ensure that the funds do not have to be repaid. 

Who should write a letter of explanation for a gift down payment?

The donor should write the gift letter to the lender. However, the borrower can help the donor craft a letter as long as the donor signs the document. 

Can a mortgage gift be repaid?

The gift letter will have to explicitly state that the donor doesn’t expect repayment of the funds. With that, you cannot repay the donor. 

What happens if you pay back a gift down payment?

If you pay back a gift down payment, after a gift letter explicitly stated that you would not, that will constitute mortgage fraud. With that, your home loan may be at risk. 

Does a mortgage gift letter get reported to the IRS?

A mortgage gift letter that shows a gift of less than $17,000 might not be reported to the IRS. That’s because any gift below the $17,000 limit will not incur the gift tax. However, gift letters that involve a gift of more than $17,000 will likely be reported to the IRS. With that, the involved parties should be prepared to cover the gift tax. 

Keep in mind that the limit will change each year. 

Are there tax consequences for giving down payment gifts?

As of 2023, the gift tax will be levied on gifts of more than $17,000 per donor. With that, parents can gift an adult child $17,000 each in 2023 for a combined total of $34,000. After that threshold, the gift would be subject to a tax. 

If you give a gift of more than the current limit, you should expect to pay taxes on the amount of the gift. 

What is a gift of equity letter?

A gift of equity is when someone sells you a home for much less than it is actually worth. For example, a parent may sell a child a home worth $250,000 for $100,000. In this situation, the seller would have to provide the lender with a gift of equity letter. The letter would outline the exact amount of equity gifted. However, keep in mind that the gift tax still applies to the amount gifted through this option. 

Check your eligibility to use gift money for a down payment. Start here (Sep 16th, 2024)

The post The Do’s & Don’ts of Down Payment Gifts | Free Gift Letter Template first appeared on My Mortgage Insider.

For those thinking about buying in a retirement community, there are several things to consider before signing any contracts or moving in your furniture.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Buying a home in a retirement community

“Some people just know that’s what they want. But a certain percentage don’t know what they are getting into at a retirement community,” says Bill Gassett, realtor for nearly 30 years at a RE-MAX Executive Realty in Hopkinton, Mass.

“Some people go from a house to condo in one of these communities. They get there, and it wasn’t exactly what they thought it would be. Some have disappointment when it comes to the community having a lot of control in their choices.”

Some places won’t even let you plant your own flowers, hang a flag or have a car in the driveway overnight.

But these communities can also be an amazing place for activities, comradery, like-minded people, amenities, quietness and safety (in gated communities), and maintenance included.

“When you visit, you should definitely talk with those who live there. Neighbors are very valuable at getting the truth out of, most of the time. They will either say they really love this place, or they aren’t so keen on this or that,” Gassett says.

Check your home buying eligibility. Start here (Sep 16th, 2024)

What to consider when buying in a retirement community

Here are some other things to check into if considering such a retirement community:

Decide on a condo or a house

It might not seem like an important decision, but picking between a condo or a home is one of the first things you should consider.

“A lot of people don’t really know the difference sometimes until they do a lot of research and talk to people,” he adds.

At your house, you are still the king of the castle. But many condominium communities have rules or others are telling you how to do a lot of things.

Get a real estate attorney

You need to get a list of all the rules and regulations of a property before signing anything. Have a real estate attorney review them to truly understand what you are getting into, Gassett explains.

Find out exactly what you’ll be responsible for as an owner, what powers the condo association has, what shape the association’s finances are in and what the condo documents spell out about the place overall.

Find out minimum age and who can stay over

Most of these retirement communities require residents to be 55 or older, but Gassett adds that most of the time only one person in a couple has to be that age. Also, some places have a higher minimum age such as 59, 60 or even 62.

Plus, there may be rules about having adult children or grandchildren staying over, especially if one needs a place to stay for an extended period of time.

Look at several options

Be sure to look at multiple options, especially if you are moving to an area you aren’t familiar with.  Also, visit it during off-seasons to see what the community is like year-round.

Rent for a while

Instead of making a big investment before you know a lot about a place, try renting a condo or home in the community for a week or two. Really take in all of the available activities, utilize all the nearby towns’ amenities and talk with people that live in the vicinity.

Pay attention to details

If sidewalks are shoveled immediately after a snowfall, flowers are blooming heartily and all the condos look beautiful, then that’s a good sign that this community is managed well.

Understand the focus

Some retirement communities have certain focuses, such as golf community built on a golf course. Others might not be so obvious so it’s worth checking their activity calendar.

Look at all the amenities such as the gym, tennis courts and classes, as well as nighttime activities such as happy hours, and any lifestyle extras such as community theater, card clubs, art classes, planned vacations or special outings, and block parties.

Look at the surroundings

It may look great inside the community, but what about everything outside the neighborhood? Learn as much about the area as you can, even if you aren’t moving far from where you used to be. AFter all, it is an entirely new community. A retirement community can be a great place for people especially those designed to make your retirement healthier, happier and more enjoyable, Gassett says. You just have to weigh the pros and cons before signing any papers or handing over any money.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post Tips for Buying in a 55 and Over Retirement Community first appeared on My Mortgage Insider.

But you’ll want to consider all the pros and cons before deciding to pay off your mortgage early, and make sure this will achieve the results you want. Below, we explore when paying off your mortgage is a good idea and break down the best ways to do it.

Check your home buying eligibility. Start here (Sep 16th, 2024)

4 ways to pay off your home loan early

1. Make extra payments

Extra payments applied to your principal balance will help pay off your mortgage faster.

Most mortgage companies will allow you to make additional payments using these methods:

• Bi-weekly payments – If you pay your mortgage every two weeks, rather than once a month, you’ll end up making 26 half-payments per year. That equates to 13 full payments — or one extra mortgage payment each year – meaning you’ll pay off your loan’s balance sooner. However, it’s important to make sure that your payments aren’t made later than your mortgage due date in order to avoid any late charges.
• Additional payments – Even if you can only make a few additional payments during the year, these amounts can add up to help reduce your principal balance over time. These principal payments will also shorten the overall term of the loan based on the amount you pay, which can make it a good way to work toward early mortgage payoff.
• Rounding up – Rounding up can be an easy way to pay extra toward your mortgage in smaller increments. For example, if your monthly payment is $1,150 and you round up to $1,200 that would be an extra $50 per month, which is an extra $600 per year toward the loan amount.

With each of these options, always confirm with your mortgage lender that your extra money is going to the principal instead of the interest. Paying interest early won’t reduce your balance or help you pay off the mortgage sooner.

2. Refinance your mortgage

Refinancing your mortgage to reduce your interest rate and loan term can help you pay off your mortgage early. For example, if you took out a $200,000 loan 10 years ago, and had an interest rate of 7%, then refinanced to 5% for another 15 years, you could save on interest and own your home that much sooner.

3. Recast your mortgage

A mortgage recast is when you pay a large lump-sum payment and then the lender recalculates a new amortization schedule for your loan based on the principal being reduced. When the principal is recast, the loan term and interest rate remain the same. With the overall loan amount reduced, though, your mortgage payments will be lower until the end of the loan term, which means you’ll have available cash to make extra payments toward your mortgage and pay it off more quickly. You’ll also save on total interest because you’re paying interest on a lower loan amount.

4. Make lump-sum payments toward your principal

If you get a bonus, tax refund, or inheritance during the year, you could apply that amount to your mortgage principal. By making a lump-sum payment, your monthly payment would remain the same but the reduced balance will shorten the length of the loan and reduce the total interest you pay.

Pros & cons of paying off your house early

Can you pay off your mortgage early?

Borrowers are generally allowed to pay off a mortgage early but could incur a prepayment penalty. Prepayment penalties typically apply if it’s within the first three years of the loan, and it’s a conventional, qualified mortgage that has a fixed rate. If it’s a government-backed loan, non-prime, or adjustable-rate mortgage it typically doesn’t have a prepayment penalty.

Should you pay off your mortgage early?

Deciding if you should pay off your mortgage early will depend on your financial situation and your future plans.

• When paying off your mortgage early might be worth it: Whether you’re in a good financial position, and have the additional money to make extra payments toward your mortgage loan, is a key consideration. For example, if you receive a windfall (such as an inheritance, a bonus, or a large tax return), you may want to apply that extra cash to your mortgage balance. Also, if you plan to retire soon and your income will decrease, then it could be beneficial to pay off your home early and reduce your future expenses.
• When making the minimum monthly payment may be better: Perhaps you have other high-interest debt (for example, credit card debt), or you don’t intend to stay in your home for a long period of time. Under such circumstances, it could be a better option to continue making the minimum monthly payments. This is especially true if you have a very low-interest rate for your current mortgage.

Ultimately, whether or not it’s a good idea to pay off your mortgage early will depend on the specifics of your personal finances.

Check today’s mortgage rates. Start here (Sep 16th, 2024)

How to pay off your mortgage early FAQ

What happens if I pay off an extra $100 a month on my mortgage?

By paying an extra $100 per month on the principal, your mortgage will be paid off sooner. For example, if you have a 30-year, $300,000 loan with a 4.125% interest rate, you would reduce your loan term by 3.5 years and save $30,036 in interest.

How can I pay off my 30-year mortgage in 10 years?

A 30-year mortgage can be paid off in 10 years if you can pay almost double in mortgage payments. For instance, if you have a 30-year, $300,000 mortgage with a 5% interest rate, its payment would be $1,610 per month. But making a monthly payment of $3,182 would pay off the loan in a shorter term, roughly 10 years. If you can afford higher monthly payments and qualify for a lower interest rate, you might also consider refinancing into a 10-year loan term.

Is it a good idea to pay off your mortgage early?

Your financial situation will determine if now is a good time to pay off your mortgage early or not. If you have higher-interest-rate debts and a low-rate mortgage, it may be better to pay off those higher debts first. However, if you can afford to make an extra monthly payment, you’ll pay less interest over the life of the loan — and enjoy the peace of mind of a paid-off home that much earlier.

What is the easiest way to pay off a mortgage early?

Accelerating your mortgage payments is usually the easiest way to pay off your mortgage early. For example, if you make four additional mortgage payments per year that would reduce your 30-year loan to 18 years.

What if I make two extra mortgage payments a year?

When you make two extra mortgage payments a year on a 30-year mortgage, your loan term will reduce by 8 years. This would save you $82,254 on a 30-year, $300,000 mortgage with a 5% interest rate.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post How To Pay Off Your Mortgage Early first appeared on My Mortgage Insider.

You can purchase a home with virtually anyone, including a friend — or several friends. But blending friendship and homeownership has benefits and drawbacks, and it entails taking a unique set of steps to qualify for a mortgage.

Check your eligibility to buy a home with a friend. Start here (Sep 16th, 2024)

Pros & cons of buying a house with friends

According to a recent Realtor.com survey of more than 1,000 U.S. adults, nearly one in three American homeowners have bought a primary home with someone other than their spouse. But purchasing property with a friend has its share of pros and cons.

Pros of buying a house with friends

• It can be easier to qualify for a mortgage loan. If both of you are applying for the mortgage, lenders will consider your combined assets, credit scores, and incomes when determining your eligibility for a home loan. And two incomes are always better than one in terms of how much home you can afford.
• It can help with a down payment. Splitting a down payment can help you save a lot of money upfront. And, with the median down payment on a home clocking in at about 13%, a typical down payment on a $300,000 house would cost $39,000. That’s no small amount, especially when you consider that wages haven’t been keeping up with home price growth.
• It can make ongoing monthly expenses more manageable. In addition to sharing responsibility for the monthly mortgage payment, you and a friend can split other homeownership costs, such as utilities, maintenance, repairs, and any mortgage insurance. This will help to make homeownership more affordable for both parties.

Cons of buying a house with friends

• It can potentially hurt your mortgage rate. If your friend has a lower credit score than you do, their lackluster credit could impact the interest rate you qualify for when applying for a mortgage. Mortgage lenders will consider both borrowers when reviewing your application. Generally, borrowers with credit scores of 740 or higher qualify for the best mortgage interest rates.
• It prevents you from having sole control of the home. When you co-own a home with a friend, your friend has a say over what happens to the property. This can create tension if only one of you decides you want to sell the home in the future.
• It can strain your friendship. Co-owning a home with a friend can be a recipe for tension if you don’t see eye to eye. It can also hurt your friendship if you live in the home together and don’t gel as roommates because of lifestyle differences.

How to buy a house with a friend: Step-by-step guide

Now that you know the pros and cons of purchasing property with a friend, you can make an informed decision about whether to buy a home with a friend.

If you decide you want to move forward, the following steps can streamline the buying process.

1. Create an ironclad contract.

Things can get messy without a written contract that spells out the terms of your agreement as co-owners. Your ownership agreement should specify terms such as who’s responsible for what expenses (including utilities, repairs, and home improvements), how home appreciation will be shared, how tax breaks will be divided, what happens if either person wants to sell, and how capital gains will be split when the property is sold. Pro tip: Although you can find generic co-ownership agreements online, it’s wise to have a real estate attorney draw up your contract, or at least review your contract before you sign it so that the terms are fair to both parties.

2. Determine your homeownership structure.

When co-buyers aren’t married, they typically share title (ownership) of the property as either tenants in common (TIC) or as joint tenants. TIC is a more flexible type of ownership since it allows for owners to have an unequal share of the property, which can be a good option if one person funds a larger portion of the down payment. Joint tenants, meanwhile, own a 50-50 share of the home.

3. Create a budget.

Discuss what price range you feel comfortable with so that you’re on the same page when you go to tour homes. Determine the maximum amount that you agree to spend on a home.

4. Discuss your exit strategy.

Establish clear provisions for how the home will be handled if one of you dies, wishes to sell your stake in the property, or experiences financial hardship and can’t pay their share of the mortgage. These conditions will provide protection for both parties.

5. Create a joint bank account.

Opening a joint checking account for homeownership expenses — including the monthly mortgage payment, utilities, property maintenance, homeowner’s association dues, and other ongoing costs — can help ensure that all bills get paid on time.

When is buying a house with a friend a good idea?

There are a number of scenarios where it may make sense to purchase a house with a friend:

• You need help qualifying for a mortgage. If you have a subpar credit score (think below 620) or insufficient income to qualify for a home loan, buying a house with a friend who has strong credit and a good income can strengthen your loan application. It can also be a great opportunity for first-time home buyers who may have a harder time coming up with down payment funds.
• You can’t afford homeownership expenses on your own. If you don’t feel comfortable taking on the responsibility of a mortgage, property taxes, insurance, and other recurring expenses, buying a property with a friend can help you manage the costs.
• You want the same things in a house. Whether you’re buying a primary home, where you’ll live together as roommates, or an investment property, make sure you’re aligned in terms of the type of house you want to purchase. Drill down to square footage, number of bedrooms and bathrooms, style, and, of course, location.
• You feel comfortable disclosing your financial situation. Considering that you’re making such a large investment together, there should be no secrets when it comes to sharing your personal finances, including income, savings, debts, credit scores, and spending habits.
• Your friendship is rock solid. Disagreements can arise when you own a home with a friend, from mundane squabbles — such as different temperature preferences — to significant feuds, like clashing design tastes. Is your friendship strong enough to withstand the inevitable quarrels that come with co-owning a home?

Check your eligibility to buy a home with a friend. Start here (Sep 16th, 2024)

Buying a house with a friend FAQ

Is it a good idea to buy a house with friends?

Whether it’s a wise idea for you to purchase a home with a friend depends on several factors, most notably the shape of your finances, your goals for purchasing the home, and your compatibility as roommates if you’re both going to live in the home as a primary residence. Depending on the housing market where you live, it can help bring a home purchase within reach. So, sit down with your friend and have an honest conversation about your motivations for buying a home together before you decide to move forward.

Can friends buy a house together?

Yes, there’s nothing stopping you, legally, from co-buying a home with a friend. Joint home ownership isn’t limited to family members or married couples (or unmarried couples!). But it’s important to create a written contract that specifies the terms of your responsibilities and rights as co-owners.

How long should you be with someone before buying a house together?

There’s no hard-and-fast rule in terms of how long you should live with a friend before buying a house together, but it’s generally a good idea to cohabitate for at least a year before going in on a home together. That way, you’ll have a strong sense of how compatible you are as roommates before you commit to a long-term relationship.

The bottom line: Buying a house with a friend

Buying a house with a friend can bring home ownership into reach for some home buyers. For buyers who are thoughtful about the implications of sharing a mortgage, it can provide a great opportunity to begin building home equity.

Check your eligibility to buy a home with a friend. Start here (Sep 16th, 2024)

The post Buying a House with a Friend: The Complete Guide first appeared on My Mortgage Insider.

“But that type of program went away,” says Addy, vice president and national sales manager for FirstBank Mortgage Partners in Charleston, S.C., She is also finishing her year-long presidency for the Mortgage Bankers Association of the Carolinas.

Assumable mortgages still exist, but it’s hard to find them anymore, she adds. And the buyer must qualify for the mortgage they are trying to assume.

Check your home buying eligibility. Start here (Sep 16th, 2024)

What is an assumable loan?

Just like the name says, you assume the home loan of the seller’s mortgage rather than getting a new loan. The servicer of the loan will handle getting the potential buyer’s full credit report and their debt-to-income structure and see if they qualify to make the payments now and in the future, Addy says.

Which loans are assumable?

FHA, VA and USDA loans can all be assumable. Conventional loans, such as the ever popular 30-year-loans, are not assumable. However, Addy states there are some non-conforming conventional loans that are assumable such as adjustable rate mortgages (ARMs) from Fannie Mae and Freddie Mac.

How does assumable mortgages work?

Depending on what the sellers negotiate with the buyers, they usually will want some equity from the home’s value that they have acquired while owning the home. “Interest rates are rising. You won’t be able to get a government loan these days for 3.5 percent interest,” Addy says. “So, you can assume someone else’s loan that is that rate. That can save you a lot of money through the years.”

Once the seller and buyer reach an agreement, they contact the loan servicer to handle the logistics to decipher whether the buyer can afford the loan. The closing happens but closing costs can be much less than a traditional closing. FHA, VA and USDA have limits on assumption-related fees.

How would you find an assumable mortgage?

Addy says that homeowners used to advertise assumable mortgage options on their For Sale by Owner ads. Some still do, but now it’s tougher to find. In most cases, you won’t find realtors involved in assumable mortgage sales because it’s not a true, traditional real estate sale. Realtors get an average of 6 percent commission when selling a home, but assumable mortgages have no contract so they wouldn’t be getting that payout. They might be able help their seller to find a buyer for an assumable mortgage.

“But it takes a very savvy homeowner to know how to market it and understand all the aspects of an assumable loan,” she says.

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

What are the advantages of an assumable mortgage for the buyer and seller?

The buyer gets a much lower interest rate than the current rates, especially with rates rising.

The seller will have reduced fees because they don’t have to pay real estate commission. They can sell their home outright without too much marketing or open houses. Plus an assumable mortgage helps the seller have more negotiating power on price.

What could be the disadvantages for the buyer or seller?

The buyer might need a large down payment because home values have risen in most areas. But if the home’s value has appreciated a lot, the buyer will need money to cover that equity.

Addy says that in her hometown of Charleston, the median home price has grown to $250,000.

“Plus there is a lack of inventory and a lack of affordable housing in a lot of markets around the country. Interest rates that go up a half a point knock out a whole block of borrowers. Assumable mortgages might be able to help a little. But all those 30-year fixed mortgages, which are definitely the most popular out there, aren’t assumable,” she states.

For sellers, It might be tough to find home buyers who have available cash on hand to pay the equity you need from the home. It’s tough enough for some people to come up with a minimum down payment. If you want equity out of your house, the buyers need cash, Addy says.

When is the best time to assume a mortgage?

“If you can find one, it might be a good thing to look into,” she says. “But the hard part will be finding one.”

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

The post What Are Assumable Mortgages and How Can You Get One? first appeared on My Mortgage Insider.

Here are some tips in having an awesome mortgage this year.

Check your home buying eligibility. Start here (Sep 16th, 2024)

1. Find the best lender and realtor for the best experience

Choosing a lender can be more than just identifying who has the cheapest rate, says Chasity Graff, mortgage broker/owner of LA Lending, LLC, in Baton Rouge, La. Her biggest advice for borrowers is to be a little more choosey when picking a loan officer and real estate professional.

“The loan and the borrower’s ability to purchase a home rides on the knowledge and foresight of the professionals they choose to work with,” she says.

There are multiple ways to approach this, one of which is getting your mortgage eligibility checked across a variety of lenders. This lets you see what rates are available to you from different lenders at once.

2. Make a smaller down payment

Who wants to have no money left after buying a house?

“I think most borrowers aren’t aware that smaller down payment options exist, even if you aren’t a first-time homebuyer,” says “These notions of having a 20% down payment being ideal were founded when sales prices were at a fraction of what they are now.”

With programs like USDA Rural Development offering 100% financing and FHA/Conventional options with as low as 3 – 3.5% down payments, there is no reason to wait until you have 20%, she adds.

In the amount of time it takes to save that, buyers could have been paying their own mortgage, gaining equity and building their financial wealth.

3. Find a loan with zero percent down

Zero down financing can be obtained in a variety of different programs.

“My favorite is the VA loan offered to those serving, who have served or who are surviving spouses of service members,” Graff says.

For those who haven’t served but meet income limitations and are willing to buy in certain locations, a USDA (AKA Rural Development) loan is available, she adds.

“I’ve had borrowers purchase homes on both of these scenarios with nothing due at the table. This is when a good realtor that can negotiate seller assistance with the closing costs can be invaluable,” Graff adds.

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

4. Choose a no-closing-cost mortgage

The title “no closing costs” mortgage is somewhat deceiving. 

“I hear that term thrown around, but technically, there will always be closing costs on every mortgage, the only thing that changes is how they are dealt with and paid,” she said.

On a purchase, you can negotiate a seller to pay some or all of your closing costs. Alternatively, you can also discuss increasing your interest rate to provide a lender rebate towards your closing costs. 

Or, for some programs, you can do both to eliminate all closing costs.

5. Refinance into a 10 or 15-year loan

Any money you can save on a refinance is beneficial, but you have to consider the closing costs that will be charged, the monthly or full term savings, and how long the homeowner plans to own the home. Essentially, you need to look at the whole picture.

“I helped a veteran purchase a beautiful condo and refinanced her less than 12 months later into a new loan saving her over $70,000 over the course of her loan.  It greatly improved her Christmas and traveling plans because we structured it to allow her to skip two mortgage payments,” Graff says.

6. Get a cash-out refinance loan to make life better

Think of your home as a long-term savings account.  As you pay your mortgage, you gain equity along with a natural appreciation. This increases your borrowing power, she says.

If you are stuck in some type of long-term debt and you are not getting anywhere, tapping into that equity can save you huge interest charges each month.  But remember that trading a three-year debt for a 30-year increase on your mortgage rarely is a smart decision. 

Check your home buying eligibility. Start here (Sep 16th, 2024)

7. Improve your credit score quicker to get the best mortgage rate

Paying down revolving debt is probably the biggest improvement you will see from month to month in your credit score, Graff explains. Getting your revolving balances/credit card debts down to 33 percent or lower can really affect your score.

The better your credit score, the better the mortgage rates that will be available to you.

Also, paying everything on time and dealing with negative accounts before they become a collection can make big leaps into improving your credit score.

8. Borrow only what you can afford to repay

“What if I told you when we approve mortgages, we look at your gross income before Uncle Sam gets their share, not your take-home pay,” Graff says. “Crazy, right?”

This is why it’s so important to know your limitations before you speak with a mortgage professional. Have a realistic discussion about where you want your monthly note to be –including insurance and taxes. You also need to know what you feel comfortable with for a downpayment and what you want to bring to the closing table.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post 8 Tips To Have an Awesome Mortgage This Year first appeared on My Mortgage Insider.

This post outlines several rate lock strategies along with their advantages and drawbacks.

Check your home buying eligibility. Start here (Sep 16th, 2024)

What Does It Mean To Lock A Mortgage Rate?

A mortgage lock involves a commitment by you and your lender. When you request a lock, your lender agrees to give you that rate, even if interest rates have increased. On the other hand, you are also making a commitment to close at that rate, even if interest rates have fallen.

What Does It Cost To Lock Your Rate?

The longer your rate lock, the higher the risk to the mortgage lender. So you’ll pay for the privilege. With most lenders, the standard lock period is 30 days. They quote rates assuming a 30-day lock.

By locking  7 to 15 days before closing you should get better pricing. For instance, one national lender’s rate sheet charges .15 percent more for a 30-day lock than it does a 15-day lock, and .25 percent more for a 45-day lock.

For a $300,000 home loan, it would cost an extra $750 to lock its rate for 45 days instead of 15.

The cost can get even higher if you choose to lock your rate for 60 days or more..

What About “Free” Rate Locks?

When lenders were experiencing very high volume, refinance processing suffered. Purchases get priority with most lenders, and refinance transactions can end up on the back burner.

This can result in “blown locks” for refis. To counter this and avoid angering customers, some lenders offered “free” locks of up to 90 days. However, they weren’t really free, because the rate for those loans was slightly higher than it was for purchases.

When you get mortgage quotes for a refinance or purchase, make sure you know what lock period you’re getting on your quote. That way you can make a valid comparison.

What’s The Best Time To Lock?

There are three schools of thought about locking. Some borrowers like to “set and forget” their rate, and they are averse to risking a higher rate in order to perhaps obtain a lower one.

Others are gamblers, checking rates every day in hopes of nailing down something better.

Finally, there are the ones who want it all. These borrowers buy a “float down” option, which allows them to lock in a rate, protecting them from potential rate increases. However, if interest rates fall while their loan is in process, they can get the lower rate.

Float Downs – Know What You’re Buying

There are rules for float downs. Some lenders only let you exercise the float down option the day they draw your closing documents. Others allow you to lock in a lower rate anytime during the process.

Still, others require the new rate to be at least a certain percent lower than your locked rate before they let you switch — .125 to .25 percent is typical.

Read your documents carefully, and understand what a float down will cost you since these agreements are not standardized.

You Blew Your Lock – What Now?

If you or your lender fails to complete your loan during the lock period, you lose the protection from rate increases but you don’t benefit if rates have fallen. You close at the higher of either the rate you originally locked, or the current interest rate for your mortgage.

However, if rates are rising, you might be better off extending your lock. This costs extra, but may end up being less expensive than the new, higher mortgage rate. For instance, one lender charges .02 percent per day to extend a lock. If new rates are .25 percent higher, it would cost about one percent to get the rate back to its original level. So if you miss your closing by five days, it’s absolutely worth paying .10 percent to save one percent.

How To Close Quickly And Save Money

One way to make sure that your loan closes on time is to have all your required documentation ready for your lender. Whenever you’re asked for something else, supply it immediately.

Even if your closing date is weeks away, get your stuff in now. That’s because your new documents may trigger questions from the underwriter, requests for new information, etc. You don’t want your loan derailed by an eleventh-hour request.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post When Should I Lock In My Mortgage? first appeared on My Mortgage Insider.

Yikes.

But they also ignore some factors that could drastically impact your ability to successfully manage a home loan.

In fact, you could find yourself approved for a home loan that you can’t realistically afford.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Just Because You Can, Doesn’t Mean You Should

Mortgage lenders are nosy, but even they draw the line at some point. This can cause them to miss some important matters.

Consider the most common causes of bankruptcy. Then see if there are any questions about these factors on your mortgage application.

There aren’t.

The most common causes of bankruptcy are medical expenses, divorce, and job loss. And yet, no lender is going to ask you about your hardening arteries, the state of your union or your last performance review.

They don’t even ask if you have health insurance. Yet that’s obviously a factor in your financial profile.

Underwriting Your Life

Before applying for a mortgage, give yourself a reality check.  

Don’t be one of those couples who try to solve awful marriage problems by having another baby or buying a house. You’ll just be upping your expenses and your blood pressure…

Which leads to….

Your health – even a young heart and strong bones can’t protect you from the idiot in the next lane trying to drive, eat a Big Mac and sell real estate at the same time. Accidents happen, and they can be expensive.

No insurance? No mortgage payment money.

Finally, understand that just because your lender liked your pay stubs and your W-2s, it won’t matter if your boss didn’t like your performance last quarter. Or if your company’s financials are in the toilet.

Only you know these things. And only you can consider them when deciding to buy or refinance a home.

Check your home buying eligibility. Start here (Sep 16th, 2024)

Commuting Considerations

Other issues that lenders ignore include your commute and your lifestyle. Yet, housing in many major metros gets very expensive near the largest job centers.

It’s become common for consumers to buy homes further away from their employment than they used to so they can (on paper) afford their mortgages. Industry insiders call this “driving until you qualify.”

Your commuting costs still exist, though, even if they’re invisible to mortgage lenders.

According to CPA Practice Advisor, commuting costs Americans on average $3,000 a year. That’s $250 a month, and adding that to your other bills may turn an affordable home into an anchor around your neck.

Note that some of this cost may be accounted for if you have an auto loan on your credit report.

HUD says to be affordable, your housing plus commute should not exceed 45 percent of your gross (before tax) income. Ask yourself if the house you want is truly affordable once you add in the cost getting to work.

Lifestyle

Your lifestyle also affects the amount of money available to pay your mortgage.

To some people, heli-skiing, following their favorite rock band or heading to Belize once a month are more important than saving money or even paying their bills.

Some, for religious or other reasons, contribute ten percent of their earnings to charity.

Others like to knit sweaters for cats and drink tea.

If you’re one of those homebuyers who lead a more expensive lifestyle (and you know who you are), figure out the cost of your happy habits and include them when deciding how much home you can buy.

Check your home buying eligibility. Start here (Sep 16th, 2024)

The post 4 Questions To Ask Yourself, Because Mortgage Lenders Won’t first appeared on My Mortgage Insider.

A general rule of thumb for homebuyers is your home loan should eat up no more than 28% of your pre-tax monthly income.

But some borrowers should set their personal level higher or lower. Below, we’ll help you figure out how much you can afford and we’ll also tell you the affordability rules lenders require for different types of mortgages.

Click here for today's mortgage rates.

How much house can I afford?

Generally speaking, your mortgage should be between 2 and 2.5 times your gross annual income. Add that number to your planned down payment and you’ll know the price range in which you should be house hunting.

But this, like most rules of thumb, has plenty of exceptions. Here’s why.

Salary is a poor indicator of mortgage affordability

Let’s suppose your salary is $100,000 a year. You could, by this rule of thumb, afford a mortgage of between $200,000 and $250,000.

But one person on that income may have much less left at the end of each month than another.

For example, let’s assume that one is a real estate agent with a big auto loan and credit card balance from expensive lifestyle choices. There’s nothing wrong with any of that — if he can afford it.

But another person with the same household income may have a much lower cost of living. Maybe he’s a freelance graphic designer who drives a paid-off car. His wardrobe costs a few hundred a year to maintain and he zeroes his card balances every month.

These two people have significantly different available income to pay towards a mortgage. So pre-tax income on its own doesn’t capture the whole picture.

Debt-to-income (DTI ratio is a better guide

Our two examples have precisely the same income but they have vastly different monthly budgets and thus different abilities to pay down a mortgage.

As a result, lenders are far more interested in an applicant’s debt-to-income ratio (DTI) than his or her raw income. It better reflects someone’s “discretionary income,” which is what’s leftover each month after unavoidable outgoings (including debt payments) are paid.

We’ll be getting into DTIs further on in this article — including how you can calculate yours.

Mortgage payments aren’t your only homeownership cost

There’s more to homeownership cost than your monthly payment. More on that later. But what makes up your monthly payment itself?

Mortgage professionals use the acronym “PITI” to cover some of the main ones. That stands for:

• Principal: The amount by which you reduce the amount you borrowed each month.
• Interest: The cost of borrowing.
• Taxes: The property taxes you have to pay.
• Insurance: Homeowners insurance. Plus, depending on where you buy, possibly flood, earthquake or hurricane cover.

None of these is optional and if you fall far behind on any of them, you’ll be in breach of your mortgage agreement and subject to action by your lender.

Other homeownership costs

If you choose to live in an area covered by a homeowners’ association, you’ll have to pay HOA dues.

And, absent warranties, every homeowner is responsible for the costs of maintenance and repair. The days when you could call your landlord when your HVAC failed or your roof sprang a leak are behind you.

Bear in mind that the older the home you buy, the higher your maintenance and repair costs are likely to be. And be sure to choose any home warranty you decide to buy carefully. There are sharks in these waters.

Ready to shop for your dream home? Start here.

Understanding debt-to-income ratios

Debt-to-income ratios may sound complicated but they’re really not.

DTI calculations are only interested in unavoidable monthly debt obligations. That means they don’t take account of things on which you could economize, such as food, gas, utilities, insurance premiums besides homeowners insurance, phone, cable or other entertainment.

Front-end DTI and back-end DTI

There are two types of DTI: front-end and back-end. Front-end DTI looks only at your housing costs, meaning the PITI you’ll pay on your new loan.

You divide your expected monthly PITI by your gross monthly income and will get a number on your calculator. Let’s say 0.21, which would mean your front-end PITI is 21%.

Back-end DTI involves the same simple calculation but it’s based on all your unavoidable monthly payments plus PITI. So it’s almost always much higher. And the next few sections are going to walk you through the world of back-end DTIs.

Payment obligations

Back-end DTIs are based on inescapable outgoings:

1. Debt payments: All, including those for student, auto, and personal loans, timeshare agreements and any loans that you’ve co-signed.
2. Minimum payments on plastic: Credit and store cards.
3. Alimony and child support payments that have at least six months to run.
4. PITI (see above): Payments on your new mortgage.

Dig out recent bank statements so that you can use exact, accurate figures. Because every mortgage lender to which you apply is going to do just that.

Income

Mortgage lenders are typically pretty generous over what they count as income. So you can usually include:

1. Salary and wages
2. Tips and bonuses (with 2 years’ history)
3. Pension income
4. Social Security income
5. Child support and alimony that you receive
6. Dividends, rents and other investment income

Again, try to be as accurate as you can, using bank statements or other records going back a year or two. Average out irregular incomes so you know what you receive each month over a period.

And remember: we’re looking at gross income. So it’s the amount you receive before you pay tax.

The big calculation

The big calculation is actually a small one. Yes, you’ll find DTI calculators online but the math is so simple you probably won’t bother to use one.

If you’ve already done the hard work in finding and adding up your actual figures, all you need do is divide your total monthly debt by your gross monthly income.

Here’s an example, based on that mythical person with exactly $100,000 a year coming in, which means a monthly income of $8,333 ($100,000/12). We’ll give him $1,000 of existing monthly payments, and another $2,000 in PITI on his new mortgage. So his total payments will be $3,000.

Divide $3,000 by $8,333 and you’ll get 0.36%. Which means his DTI is 36%.

So now you know how to calculate your DTI, replacing our mythical friend’s figures with your own. And it’s that simple.

Other DTI models

That’s the main way of calculating DTI. But there are two other models that can be used:

1. 35%/45% model: Your total monthly inescapable obligations, including PITI, should be 35% or less of your pre-tax (gross) income. Or 45% or less of your after-tax (net) income.
   
2. 25% after-tax model: Multiply your net income by 25%. The answer tells you how much you can afford in monthly PITI payments.

All these models are interesting ways to see the size of the mortgage you might get approved for and what home price you can afford.

But mortgages aren’t one-size-fits-all products. If you have a lavish lifestyle or unusually high outgoings, you might not be able to afford the same monthly mortgage payment as someone else with the same income and inescapable monthly commitments.

So, what percentage of your income should go to mortgage? It’s the percentage you can comfortably afford. And you need to decide for yourself how much that is. Lenders’ rules are a good guide to affordability. But they may not protect you if your circumstances are unusual.

Speak with a mortgage specialist today.

Some common DTI thresholds

Most lenders look for a maximum DTI of 40% on applications for most sorts of mortgages. But that’s a very general guideline. Some applicants get approved with DTIs or 45% — or, occasionally, even 50%.

But those approved with big DTIs are almost always strong borrowers in other respects. Perhaps they have a high credit score, a big down payment or such a high income that they can still afford to live comfortably even after they’ve paid all their inescapable monthly obligations.

How credit score and down-payment size impacts affordability

Every lender’s priority is to maximize its chances of getting its money back with as little expense as possible. They want to be as sure as they can that borrowers are ready, able and willing to make timely monthly payments.

Luckily, this protects most borrowers from taking on mortgages that they can’t afford or are incapable of maintaining.

Credit score

Having a high credit score suggests you’re good at managing your money. You’ve borrowed in the past and have paid back your loans with little or no bother so the lender can trust you to honor your financial obligations. And there’s a pretty reliable rule: The higher your credit score, the lower your mortgage rate.

It’s possible to be approved with a credit score as low as 580 for an FHA loan (backed by the Federal Housing Administration) with a 3.5% down payment. Indeed, for an FHA loan, your credit score can be as low as 500, providing you make a 10% down payment.

But many other types of mortgages require a minimum score of 620. And many lenders impose their own minimums, often 640 or 660. Of course, if you want a jumbo loan (an outsized mortgage that might involve millions of dollars), you’ll likely need a very high score.

Down payments

Just like a high credit score, a big down payment will nearly always buy you a lower mortgage rate. And, as we just saw with FHA loans, it can get lenders to be more flexible over other lending thresholds.

That’s because people with larger down payments are more financially invested in their home and stand to lose more money in the event of a foreclosure.

And, if things go horribly wrong and foreclosure becomes necessary, the lender stands a better chance of getting all its money back. As a result, the mortgage industry likes large down payments and rewards borrowers who have them.

Finally, borrowers who have down payments of less than 20% typically have to pay mortgage insurance premiums (MIPs) on federally backed loans and private mortgage insurance (PMI) on conventional loans. Borrowers who can come up with 20% of the sale price won’t have to.

Tips for lowering your monthly payment

There’s plenty you can do in the months leading up to a mortgage application to drive down your mortgage rate — and thus your monthly payments:

1. Reduce your borrowing. You’ve seen how important your DTI is so try to lower your debt burden. Focus first on getting all your credit and store card balances below 30% of their available credit limits.
   
2. Improve your credit score. Just getting those card balances below that magic 30% should raise your score very quickly. Don’t open or close any credit accounts in the run-up to a new application. Most importantly, continue to make every payment on time. And order a free copy of your credit report from annualcreditreport.com to check for mistakes, which are surprisingly common.
   
3. Start saving for the long term. Once you’ve reduced your debt, get saving. You may not have time to get together a substantial down payment this time around. But lenders will be impressed by any assets you have and making a bigger down payment than the minimum could buy you a lower mortgage rate. Meanwhile, saving should get you to the time when you can afford 20% sooner.

Start off with baby steps. You may not get to be a lender’s ideal borrower overnight but most of us can make ourselves a better bet quite quickly.

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