Making big money from investment property (real estate purchased for the purpose of earning rental income or a profit from reselling it) is rarely as simple as “buy low, sell high.” It requires careful research, planning, hard work, and a dollop of good luck.

But as long as you make real estate investment decisions with your eyes wide open, the financial rewards could surprise and delight you.

Check your eligibility to purchase investment property. Start here (Sep 16th, 2024)

In this article:

• Pros and cons of buying an investment property
• Should you flip or rent your investment property?
• Hard money loans
• Conventional mortgage loans
• FHA mortgage loans
• VA mortgage loans
• Home equity lines of credit (HELOCs)
• Our recommended lenders for home loans

What is an investment property?

An investment property is a real estate asset you purchase with the express intent of earning a profit by flipping it or renting it out.

Generating income with investment properties

In 2023, the average gross return profit margin of house flipping — purchasing, renovating, and quickly reselling homes — was 29.8%.

In other words, the average house-flipper earned $29,800 for every $100,000 invested.

The average return on rental properties in 2023 was 10.6%. This means the average buyer of a $500,000 apartment building earned $53,000 in a single year.

By contrast, the average stock market return over the past 50 years was about 10% while the average investor’s return on mutual funds was between 4-5% over the last 50 years.

The numbers make it easy to see why so many investors are drawn to the world of real estate.

What is the difference between an investment property and a second home?

You buy an investment property with the primary goal of making a profit, typically by renting out the space for most of the year or flipping the home. A second home is one that you intend to visit on a regular basis.

This distinction matters when you buy property because mortgage lenders treat investment properties and second homes differently. Second homes are subject to lower interest rates and easier requirements, but you must prove you plan to live there at least part of the year. By contrast, investment properties — which you plan to sell or rent out full-time — have slightly higher interest rates and stricter mortgage guidelines.

What to consider before buying an investment property

The excitement of purchasing your first investment property is compelling. But before you jump into the process, there are a few important points to consider.

Housing market trends

Like other types of investments, the value of home prices rises and falls based on broad economic trends. It’s not unusual for the housing market in an area to go through boom and bust cycles.

As you consider areas to invest in, look for indicators of the long-term housing market trends. If an area is growing, that might be a more prudent investment than a dying small town.

Buying with a partner

If you choose to jump into real estate with a partner, make sure that you are both on the same page about your investment goals and risk tolerance. Before finalizing any property purchase, get legal paperwork in order to indicate your separate ownership percentages.

Property taxes and insurance

As a property owner, you’ll face property taxes. Take a look at this expense before moving forward with a property. You don’t want to get stuck in a place with sky-high property tax obligations.

Investment properties also require homeowners insurance, and you may be required to purchase additional coverage if you plan to rent the home out. Make sure you get quotes from homeowners insurance companies before buying so you can factor in this ongoing cost when estimating your investment property expenses.

Property management companies

A property management company can take some of the hassle out of being a landlord. But it’s critical to find the right property management company, otherwise, your potential headaches will multiply. Explore the options in your area and the cost before moving forward with a particular deal.

Check your eligibility to purchase investment property. Start here (Sep 16th, 2024)

Pros & cons of buying an investment property

For small-scale investors, the most common real estate strategies come in two flavors:

1. Rental property
2. House flipping

Here are the biggest benefits and drawbacks of each.

House flipping pros & cons

Rental property pros & cons

Should you flip or rent?

Should you flip houses or purchase rental properties?

It all depends on your goals, and to what degree you can leverage your skills, expertise (construction skills are very helpful), and your current financial situation.

In general, house flipping is usually the bigger gamble because these deals hinge on whether property values will rise in the near future. Although price depreciation is never a good thing for property owners, stable and/or falling prices have less impact on someone whose main source of income comes from rents versus a fast resale of a property.

In 2021, the highest flipping returns were in Akron, OH (114 percent); Flint, MI (114 percent); Canton, OH (70 percent); Augusta, GA (94 percent); and York, PA (107.5 percent), according to ATTOM Data Solutions. These cities topped the list because they had lots of affordable, older homes that could be quickly renovated. At the same time, housing prices there were also rising.

For rental properties, the best markets in mid-2023 were Indian River County, FL, in the Sebastian-Vero Beach metro area (15 percent); Collier County, FL, in the Naples metro area (14.7 percent); Wayne County, MI, in the Detroit metro area (13 percent); Mercer County, NJ, in the Trenton metro area (12.7 percent) and Charlotte County, FL, in the Punta Gorda metro area (12 percent). The worst markets were generally located in the biggest cities on either coast, where real estate prices have long been sky-high.

But local markets are always changing. Like any other type of investment, real estate carries both risks and rewards. You can reduce the risks by thoroughly researching markets and your financing options, but you can never entirely eliminate them.

Check your mortgage rates. Start here (Sep 16th, 2024)

Step-by-step guide to buying an investment property

If you’re interested in purchasing an investment property, here is the process for purchasing it.

• Determine your preferred strategy: Before you start shopping for a home, decide if you want to flip or rent the property.
• Research the market: Scope out where you want to buy a property. Run the numbers for a few properties in the area to make sure the venture would be profitable.
• Make your offer: When you find a deal that suits your needs, submit an offer to the seller.
• Inspect the property: Unless you are prepared for a higher level of risk, don’t waive the right to inspect the home. If you find a big problem, reevaluate the deal.
• Finalize your financing: The lender will ask for all sorts of documents about your finances during the underwriting process. Be prepared to send along everything they need for a quick closing.

Investment property mortgage requirements 2024

If you want to obtain a mortgage for your investment property, the requirements vary based on the type of loan you pursue. But in general, here’s what lenders may require:

• A credit score of at least 700
• A down payment of at least 20%
• A carefully thought-out plan for the property

You’ll need to prove to the lender that your finances are robust enough to handle this new debt.

Check your eligibility to purchase investment property. Start here (Sep 16th, 2024)

How to get the best property investment loan

The best investment property financing for you will depend on your particular financial situation. That said, these simple tips should help you finance more property for less money.

Shop around for the best rates

Contact multiple lenders, starting with the bank that issued your first mortgage, to compare interest rates and terms, as well as the closing costs and other fees.

Check the fine print

Always read the “fine print” to uncover any large fees and extra costs, including extra costs triggered by the number of existing loans/mortgages you already have.

Opt for a larger down payment where possible

Whenever possible, reduce the interest rate in exchange for a larger down payment. In some cases, it might also make sense to pay upfront fees (“points”) to lower the rate. If you apply for a big loan and plan to hold the property for a long time, paying upfront fees and/or a higher down payment could trim thousands of dollars from your repayment total.

Build your credit score

In the months before you launch your property search, check your credit report to learn which types of loans you qualify for. If your score is a bit anemic, take steps to improve it before buying— e.g., by paying down (or paying off) as much debt as possible.

Have cash on hand

Be sure you have ample reserves of cash or other liquid assets. Six months’ cash reserves are usually required to qualify for investment property mortgages.

Focus on long-term goals

Consider your long-term goals to determine which type of loan would work best in your current, and possible future, situation. For example, what would you do if your company made you relocate while you were in the middle of a fix-and-flip venture? Did you borrow enough to hire contractors to finish the job? (If so, by how much would that reduce your profits – and ability to repay the loan?)

Stick to a budget

Determine how much property you can afford, and stick to your budget. First-time real estate investors frequently underestimate their costs. If you purchase only those properties you can afford, cost overruns may result in annoyance and a minor reduction of your profit margins. If you fall in love with a property and exceed your price caps, any additional expense may spell catastrophe.

Best loans for investment property

Getting an investment property loan is harder than getting one for an owner-occupied home — and usually more expensive.

Many lenders want to see higher credit scores, better debt-to-income ratios, and rock-solid documentation (W2s, pay stubs, and tax returns) to prove you’ve held the same job for two years. (This last requirement can make things difficult for retirees and the self-employed.)

Additionally, most will insist on a down payment of at least 20%, and many want you to have six months of cash reserves or easily-liquidated assets available.

Things can be harder when you have a few outstanding home loans already. If you already have four mortgages, you’ll need some savvy to get a fifth. Most banks won’t issue new mortgages to investors who already have four, even when the loans will be insured by a government agency.

Some lenders won’t even care about your credit or employment history, as long as they see lots of potential profits in the investment property you’re considering.

Hard money loans

These loans are mostly used by house flippers and professional real estate investors. Also known as commercial real estate loans and “fix and flip” loans, they have three main advantages:

1. Faster approval and funding. In some cases, loans will be approved on the same day the application is submitted, and funding can take as little as three days. Thanks to this speed, hard money loans are ideal for investors who want to buy a property fast – before the competition can scoop it up.
2. Easier to qualify. If you make a down payment of 25% to 30%, have sufficient cash reserves and a good track record as a real estate investor, many lenders will overlook a subpar credit score. And they may not care that you already have 4+ mortgages
3. Short-term loans. Most hard money loans have terms of 1-2 years or 3-5 years. For someone buying a rental property, this would be a deal killer. Few rental property buyers want to pay back the loan within a year or two. But for house flippers, these terms are perfect, which is fortunate, because there’s no such thing as a 12-month mortgage. Even if banks wrote short-term mortgages, most would never loan money for a property that needed significant repairs — one that might not qualify as inhabitable.

Other than the 25% to 30% equity requirement, the biggest downside of a hard money loan is the cost. Interest rates typically range from 9% to 14%, and many also carry upfront fees (in the form of “points”) of 2% to 4% of the total loan.

Conventional mortgages

Compared to hard money loans, conventional mortgages are relatively cheap. However, they are more expensive than loans for owner-occupied properties. In general, you’ll probably pay a one-half to one percent higher interest rate for an investment property conventional mortgage.

For some future real estate moguls, however, the issue with conventional mortgages is not their cost, but getting approved.

Assuming you will not occupy a unit in the building, most banks will want to see the following to approve a mortgage for a rental property:

• A down payment of at least 20%. If you’d like a lower rate, make a 25%+ down payment. (On the plus side, there is no mortgage insurance when you put down 20% or more.
• A credit score of 720 or higher. Scores below 720 won’t necessarily doom your application, but they will trigger higher interest rates, higher fees, and lower LTVs.
• Six months of “liquid reserves” (cash or assets that can be easily converted to cash).

Once you have four mortgages on your credit, many conventional lenders won’t approve your fifth mortgage.

Although a program introduced by Fannie Mae in 2009 does allow 5-10 mortgages to be on a borrower’s credit, finding a bank that will give you a mortgage can be difficult, despite the guarantee from Fannie Mae.

The program requires six months’ payments held as a liquid reserve at the time of settlement. It requires at least 25% down for single-family homes and 30% down for 2-4 unit properties. If you have six or more mortgages, you must have a credit score of 720 or more. No exceptions.

Check your conventional mortgage eligibility (Sep 16th, 2024)

FHA mortgages

To finance a rental property, an FHA mortgage may be the perfect “starter kit” for first-time investors.

But there’s a catch. To qualify for the generous rates and terms of an FHA mortgage, you must buy a multifamily property of 2-4 units and occupy a unit in the building. Then the property qualifies as “owner-occupied.”

FHA mortgages are not directly issued by a government agency. Instead, the loans are made by private lenders, and the FHA insures those lenders against losses. This gives banks more incentive to lend to borrowers who might otherwise be seen as too risky.

Thanks to government backing, FHA mortgage lenders are lenient with regard to minimum credit scores, down payment sizes, and the borrower’s previous real estate experience.

The down payment requirement for FHA mortgages is just 3.5% for buildings with one to four units. (But remember you have to buy a 2-4 unit property to use FHA for investment properties). By contrast, a conventional loan might require 20% down on a two-unit purchase and 25% down on the purchase of a 3-unit or 4- unit home.

Because the FHA allows cash gifts for down payments and the use of down payment grants from a municipality, it’s even possible to get an FHA-financed home with no money of your own.

Just as important, the agency states that it will insure loans to borrowers with credit scores as low as 500. This is more than 100 points below the minimums for conventional and VA mortgages.

The FHA also makes allowances for home buyers who have experienced a recent foreclosure, short sale, or bankruptcy because of “extenuating circumstances,” such as illness or loss of employment.

FHA mortgage lenders would like applicants to have a minimum credit score of 580, but most lenders will require a much higher score to qualify for a 2-4 unit property in which you are renting out one or more of the additional units.

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

VA mortgages

According to a 2016 study by the National Association of Realtors, 16% of active duty military personnel own investment properties compared with 9% of the general public.

There are two reasons for this:

1. Because active-duty personnel are frequently forced to move, they are often unable to sell their current homes at a price that would let them recoup their investment. So instead of selling the houses, they become absentee landlords.
2. VA mortgages allow veterans, active-duty service members, and their surviving spouses to obtain investment property loans with no money down and low mortgage rates. As with FHA loans, the only requirement is that the borrower lives in one of the building’s units (in this case, for at least one year). After that, they can rent out the entire building and live somewhere else.

Rental properties can have as many as four units or can be a duplex or triplex. The property can even be a home in which a room is rented or a home with a separate apartment on the property.

Borrowers can even buy one property, live there for a year and then repeat the process with multiple buildings until they reach a financing maximum known as the entitlement limit.

Another advantage of VA mortgages: borrowers can use the rents from other units in the building to qualify for the loan by including that rent as income. Typically, they can add 75% of the market rents toward their qualifying incomes.

On the downside, the rental property must be in move-in condition and receive approval from a VA home appraiser before the loan can be approved.

Click here to check your VA home loan eligibility. Start here (Sep 16th, 2024)

Home equity lines of credit (HELOCs)

Home equity lines of credit — known as HELOCs — are revolving credit lines that usually come with variable rates. Your monthly payment depends on the current rate and loan balance.

HELOCs are similar to credit cards. You can withdraw any amount, any time, up to your limit. You’re allowed to pay the loan down or off at will.

HELOCs have two phases. During the draw period, you use the line of credit all you want, and your minimum payment may cover just the interest due. But eventually (usually after 10 years), the HELOC draw period ends, and your loan enters the repayment phase. At this point, you can no longer draw funds and the loan becomes fully amortized for its remaining years.

Compared with conventional mortgages, HELOCs offer more flexibility and lower monthly payments during the draw period. You can borrow as much or as little as you need — when you need it.

The potential drawbacks are the variable interest rates (which rise in tandem with the Federal Reserve’s prime rate) and the possibility that the monthly payments could skyrocket once the repayment phase begins.

In some house-flipping situations, a HELOC could be a lower-cost alternative to a hard money loan.

But unlike a hard money loan, a HELOC could have more risk attached: if you don’t already own an investment property, you’ll secure the HELOC with your primary residence. If you default on the loan, the lender will foreclose on your home, not the investment property.

If you already own an investment property, you can overcome this problem by applying for a HELOC on one or more of those properties. The only trick is finding a lender.

Because many real estate investors defaulted during the 2008 housing bust, a lot of banks won’t approve home equity lines of credit that are secured by investment properties. The few banks that do offer these HELOCs make it much harder to qualify for them than they once did.

Lenders will want to see lower debt-to-income ratios (30% to 35% for investment property borrowers versus 40% for someone borrowing against a primary residence). And they will also charge higher interest rates or require you to pay 2-3 “points” upfront.

However, you can take a HELOC out on your primary residence at much better terms. Then, use the proceeds to make a down payment on an investment property.

Other options if you have equity built in a primary residence or other investment properties include a home equity loan or cash-out refinance.

Seller financing

In rare circumstances, you might be able to obtain seller financing for an investment property. Also known as owner financing, a land contract, or a contract for deed, this is an arrangement in which the seller acts as the bank, providing you with a private mortgage.

Instead of getting a traditional loan through a mortgage company or bank, you finance the purchase with the existing owner of the home.

Seller financing isn’t easy to come by. The vast majority of sellers want to be paid in full at the closing in order to pay off their own mortgages.

Also, a home can’t legally be seller-financed unless it’s owned free and clear. Relatively few homes are owned free and clear. Most owners have some sort of mortgage.

Owner-financed land contracts are often structured on a 5-year balloon mortgage. This means they are due in full after just five years, no matter how much or how little the buyer has paid off.

Some come with a 10-year amortization, meaning a schedule of payments that completely pay off the loan in 10 years. This option results in very high mortgage payments.

In some instances, seller financing might make sense for a house flipper. But in most cases, this type of loan is neither possible nor desirable.

Apply for an investment loan

Ready to start investing? See what loan programs are available to you, and find out what rates are available. In just minutes you’ll be narrowing the search for your own investment property.

Check your eligibility to purchase investment property. Start here (Sep 16th, 2024)

Investment property FAQs

Is it harder to get a mortgage for an investment property?

In general, it is more challenging to get a loan for an investment property than an owner-occupied property. That’s because lenders often require a higher down payment and more financial stability than they do for a primary home purchase.

What credit score is needed for an investment property?

You’ll likely need a credit score of at least 700 to obtain a loan for an investment property. However, you might be able to get away with a lower credit score if you are planning to make a down payment of 25% or more.

What type of loan should you get for an investment property?

The type of loan you should get for an investment property varies based on your goals for the property. For example, a conventional bank loan might make the most sense for a buy-and-hold plan. But a hard money loan could be more appropriate for a flip. Ultimately, you’ll have to decide which lending option works best for your situation.

Can you deduct mortgage interest on an investment property?

Unlike mortgage interest paid for your primary residence, the mortgage interest tax deduction doesn’t apply to an investment property. However, mortgage interest payments on a loan for investment properties are considered a business expense, which can be deducted to lower your taxable income.

Can you get a 30-year mortgage for an investment property?

Yes, it’s possible to get a 30-year mortgage for an investment property. You’ll likely find loan terms ranging from 10 to 30 years. The right loan term will vary based on your goals and our budget.

Are investment property mortgage rates higher?

In general, mortgage rates for investment properties are a half to full percentage point higher than mortgage rates for a primary residence. That’s because lenders perceive a higher risk.

What is the best down payment for an investment property?

The best down payment for an investment property varies based on your situation. Usually, a down payment between 20% to 25% is ideal. However, the right down payment will depend on your investment goals and budget.

What type of mortgage can be used for investment properties?

When seeking a loan for an investment property, you can pursue conventional mortgages, hard money loans, and private money loans. If you are willing to live in a part of your investment property, you could also pursue an FHA loan or VA loan.

Do you need to put 20 percent down on an investment property loan?

In most cases, you’ll need to put down at least 20% on an investment property loan. But the exact requirements vary based on your lender.

How much can I borrow for an investment property?

The dollar amount you can borrow varies based on the home and your budget. Depending on the situation, it’s possible to borrow up to 80% of the home’s value.

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

The post Investment Property Loans | Options & Requirements 2024 first appeared on My Mortgage Insider.

Here are a few of the highlights of the HomeReady Mortgage program:

• As little as 3% down payment
• Lower private mortgage insurance costs
• Down payment sources include gifts, cash-on-hand, and down payment assistance programs.
• Use income from non-occupant co-borrowers to qualify
• Income from non-borrowing household members helps your approval.
• “Boarder income” (income from a roommate) helps you qualify.
• Use rental income from a basement apartment or mother-in-law unit.

Is HomeReady only for first-time homebuyers?

With its new HomeReady mortgage, the giant mortgage backer looks to help first-time home buyers and repeat buyers alike.

This new mortgage program is laser-focused on helping minorities, Millennials, and mixed families on their road to homeownership.

This program goes way beyond the flexibility of most other loan types, even ones considered ultra-flexible like FHA.

In this article:

• Flexible down payments
• Income sources
• Income limits
• Credit score minimums
• Mortgage insurance costs
• Our recommended lenders for home loans

HomeReady is flexible on down payments

Down payments have been one of the toughest parts of breaking into homeownership.

According to a Trulia report, a whopping 58% of renters between the ages of 18 and 34 said the down payment was the number one obstacle to owning a home.

Fannie Mae has its sights aimed right at that issue.

Sourcing a down payment for your HomeReady Mortgage

The HomeReady Mortgage only requires 3% down. But more importantly, the source of that 3% is very flexible.

Most other mortgage programs require what’s called a “minimum contribution” from the borrower. This is the amount home buyers must come up with on their own. Only after they have met the minimum contribution can they receive help from a gift or down payment assistance program.

Not so with HomeReady. One hundred percent of the down payment can come from a down payment gift. A parent or other relative can fund the entire amount of the down payment and closing costs.

The buyer can also receive a grant from an approved down payment assistance source. Many cities and states around the country offer down payment assistance programs that cover up to 100% of the required down payment.

Cash-on-hand down payments

But the real groundbreaking feature is the ability to use cash-on-hand. Many people save cash in a safe place at home rather than in a traditional savings account.

Most mortgage programs require an applicant to open a bank account, deposit their cash and wait 60 days. After two months, the borrower can submit bank statements that do not show an unexplained bank deposit.

HomeReady allows a potential home buyer to apply immediately. Just keep in mind that lenders may require various methods of verifying cash-on-hand. Still, this feature allows HomeReady borrowers to buy a home sooner.

Many income sources can help you qualify

Another HomeReady flexibility is regarding income.

Regular income

HomeReady is exactly like other mortgage programs in that borrowers can use employment income, commission, bonus, and even tip income to qualify.

Household Income

Home buyers can use the income of household members who will not be on the loan.

This feature works great for multiple families living in one home, parents living with children, or unmarried couples where only one individual wishes to be on the loan.

The non-borrower’s income must be used as a compensating factor – not for qualification. This means that the lender will not add your household member’s income to your income to make an approval decision.

Rather, the non-borrower’s income will be considered a reason to approve a borrower even though his or her debt-to-income ratio is over 45%.

Debt-to-income ratio is determined by two factors: 1) the amount of the future house payment plus all other required monthly debt payments, and; 2) gross income.

For instance, someone making $4,000 per month and $2,000 in housing, credit card, and student loan debt payments would have a 50% debt-to-income ratio.

Normally such a home buyer would not qualify. The maximum debt-to-income for HomeReady is 45%. Yet additional income from household members could help the lender approve the loan above the 45% mark, even though the borrower is not technically within guidelines.

Every situation is different so check with a lender to see if household income can help you qualify for this program.

Co-signer income

This program allows income from non-occupant co-borrowers. This is the term used for co-signers of the loan who will not live in the home.

For instance, parents who already own a home can co-sign their child’s mortgage loan. The lender will use their income along with the main borrower’s income for qualification.

Boarder/roommate income

In addition, the home buyer can use “boarder” income to qualify. A boarder is basically a roommate or someone renting space in your household. To use the income you must document rental payments and a shared living situation for the previous 12 months.

This feature makes homeownership much more feasible. Be sure to confirm your roommate will move into your new home with you. If so, they will be helping you qualify –and pay for – your mortgage!

Mother-in-law units/Accessory Dwelling Units (ADUs) Rental Income

If the home you plan to purchase has a basement apartment, mother-in-law unit above the garage, or another accessory unit, you could use rental income to qualify.

Even if you do not currently have a roommate, you can find a renter for the additional unit in the new home and use the proposed income to qualify. Unlike boarder/roommate income, you do not have to have 12 months history of shared residency.

You do not need previous landlord experience or education to use income from an ADU renter. Keep in mind that the home must be classified as a 1-unit home with an ADU, not a 2-unit home. Using rental income is still possible when buying a 2-4 unit home, but you may need landlord education and/or experience.

Income limits for the HomeReady Mortgage

Income limits for the HomeReady program are intended to ensure that the program is reserved for applicants who need it most.

What is the HomeReady income limit?

Income limits are set by geographical areas. In underserved areas, there are no income limits. In more economically developed areas, Fannie Mae has limited the amount of money HomeReady applicants can make. The following is a breakdown of income limits.

• Properties in low-income census tracts: no income limit
• Properties in high-minority areas and designated disaster areas: 100% of the area’s median income
• Properties in any other area: 100% of the area’s median income

For instance, a home buyer in Los Angeles County finds a home within an area that limits income to 100% of the median income. The median income for Los Angeles is $67,200 so that is the most the buyer can make and still buy the home.

If the borrower makes more than this, he or she could find a home in an underserved area with no income limit. Upon a successful home search, he or she could use HomeReady.

Fannie Mae has published HomeReady eligibility maps for each state that detail each geographical area. It can be difficult to see the exact boundaries. Be sure to check the property address of the home you want to buy and your income with your lender.

HomeReady credit score minimums

Applicants don’t need perfect credit to qualify.

In fact, FICO scores down to 620 could be approved.

A credit score of at least 680, though, will yield the best rates. Fannie Mae waives some upward rate adjustments for borrowers with a 680+ score.

That means higher credit borrowers can receive a better rate for a 3% down loan than would 20%-down borrowers.

Be aware that lenders often impose “overlays” — tighter standards than Fannie Mae itself mandates. If your lender requires higher credit scores than those mentioned above, shop around to find a more lenient mortgage provider.

Lower mortgage insurance costs with the HomeReady program

Fannie Mae has reduced the amount of required mortgage insurance coverage. This translates to lower costs for the borrower.

Private mortgage insurance (PMI) would cost around $230 per month on a typical 3 percent down loan of $250,000, according to MGIC’s Rate Finder.

Under the HomeReady program, PMI is just $160 per month. The $70-per-month savings allows HomeReady buyers to afford more home for the same amount of money.

HomeReady home buyer education

All buyers who use the program must complete home buyer education. The course is provided online and can be done according to the individual’s own pace and schedule.

There is a small fee of $75 for the education – a small price to pay for the flexibility of the program.

New homeowners benefit greatly from pre-purchase education. It’s hard to know all the ins and outs of homeownership by researching on your own. Going through formal training is a great idea for first-time home buyers whether or not they use the HomeReady program.

Why is Fannie Mae rolling out HomeReady?

Fannie Mae formed an Economic and Strategic Research group. What did this group find? New homeownership is being driven by an ever-increasing number of diverse groups.

For instance, Millennial home buyers are moving from renting to buying in more numbers. Straddled with student loans, many have had no luck saving for a down payment.

First- and second-generation immigrants to the United States often pool their resources together to buy a home. Two families could live under the same roof. A group of single people might buy a home together to defray high housing costs.

Finally, the U.S. population is aging. Parents are moving in with their children. As of 2012, over 57 million people lived in multi-generational households. That’s about twice the number as in 1980.

Adult children will need to buy bigger homes as they plan to house aging parents long-term. The HomeReady program allows them to use their parents’ income to buy a bigger home.

I’m ready to apply for the HomeReady Mortgage Program

It’s a great time to see if you qualify. Checking your eligibility is a great way to start your homeownership journey.

Families and individuals will find the program much easier to qualify for than other programs. It could even be a great loan to compare if you’re also shopping for an FHA loan.

The program works for first-time and repeat home buyers. Check your eligibility now and get a free rate quote.

The post HomeReady Mortgage | Requirements & Income Limits for 2024 first appeared on My Mortgage Insider.

But it’s important to understand exactly how a home equity loan can impact your finances. We’ll take a closer look at how a home equity loan works and help you understand what’s required to get one.

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

What is a home equity loan?

A home equity loan, otherwise known as a second mortgage, allows you to access the equity you’ve built in your home by using your home as collateral. When you take out a home equity loan, you’re agreeing to an additional loan payment on top of your existing mortgage loan for the life of the loan.

Home equity loan rates

Home equity loan rates vary based on the lender, loan amount, loan term, and your specific financial circumstances. A borrower with a good credit score can lock in a better rate than a fair credit borrower.

In 2022, home equity loan rates for a 15-year fixed term have ranged from 2% to 12%. Home equity loan rates are typically higher than currently available mortgage rates, as they are considered second mortgages and pose more risk for lenders.

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

Home equity loan requirements

The exact requirements for a home equity loan vary based on the lender. But in general, you’ll need to check the following boxes:

• Existing home equity: You’ll need to have a substantial amount of equity in your home. Most lenders prefer to lend no more than 80% of the equity in your home, meaning you’ll need more than 20% equity available to borrow against. To calculate the equity you’ve built in a home, subtract your existing mortgage balance from the market value of your home.
• Good credit score: Lenders often expect a good credit history from home equity loan borrowers. It’s possible for borrowers with a score in the mid-600s to get approval, but most lenders prefer a credit score above 700.
• Low debt-to-income ratio: A low DTI assures lenders that you can afford to make the payments based on your income. Typically, a DTI lower than 43% is acceptable but a lower DTI increases the strength of your application.

If you are considering a home equity loan, the eligibility requirements are similar to a traditional mortgage. Ultimately, lenders want to make sure you can afford the payments — in addition to your current mortgage — for the duration of the loan term.

What can a home equity loan be used for?

Home equity loans offer an opportunity to fund a wide range of needs. As a borrower, there are usually no constraints on how you can use the funds. But typically, homeowners take advantage of home equity loans to fund a major expense.

A few popular uses include:

• Home improvements
• Medical bills
• A new business
• High-interest debt

A common use for home equity loans is debt consolidation. Home equity loans tend to offer low rates compared to high-interest credit card debt. As a result, some homeowners use this loan option to pay off credit card debt and “consolidate” down to one lower-interest loan.

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

How does a home equity loan work?

A home equity loan is often referred to as a second mortgage. So, it’s not surprising that the process of taking out a home equity loan may feel similar to taking out a regular mortgage.

Lenders will use your existing home’s equity as collateral to protect against the possibility of you defaulting on the loan. With that, most lenders won’t let you borrow more than 80% to 90% of the home’s appraised value. But your unique situation will have an impact on how much you can borrow.

After receiving a lump sum, you’ll be responsible for making principal and interest payments for the loan term. Home equity loans typically have fixed interest rates and stable payments over the loan term, unlike home equity lines of credit (HELOCs), which often have variable rates. Home equity loans are also “fully amortized,” meaning your loan will be zeroed out at the end of the fixed payment period.

If the borrower defaults on the loan, the lender can seize the home to cover the remaining debt.

Other ways to access home equity

Home equity loan vs HELOC

A HELOC, or home equity line of credit, is a revolving line of credit. Instead of receiving an upfront lump sum, you’ll have access to a credit line to spend as needed. You can draw down funds when you need to up to the credit limit. Typically, a HELOC involves a draw period followed by a repayment period and a variable interest rate.

In contrast, a home equity loan involves a lump sum upfront and fixed monthly payments. You won’t have the option to easily pull out more funds as needed. But the fixed interest rate and set repayment installment schedule mean you know exactly how much interest you’ll be paying and when the loan will be paid off.

Home equity loan vs cash-out refinance

A home equity loan involves taking out a second loan, while a cash-out refinance replaces your existing mortgage with a new mortgage. With a cash-out refinance, the outstanding balance of your new mortgage is paid off and you agree to a new term and interest rate. At the end of the day, cash-out refinancing means you’ll just have one payment after accessing a lump sum from your home equity.

Some homeowners prefer cash-out refinances as they can offer lower interest rates than a second mortgage. However, if current mortgage rates are above your existing mortgage rate, replacing your home loan with a cash-out refinance may not be ideal.

Check your eligibility for a cash-out refinance. Start here (Sep 16th, 2024)

Home equity loan FAQ

What is a home equity loan?

A home equity loan, or second mortgage, allows you to borrow against the equity you own in your home. You can use the funds from a home equity loan for anything from home renovations to education costs.

Where can I get a home equity loan?

Homeowners can access home equity loans through banks, credit unions and online lenders.

How do I apply for a home equity loan?

Before you start the application process, shop around for a home equity loan lender that offers the best terms and rates. Once you find the right lender, you’ll submit an application that includes information about your home, employment and credit history.

Is a home equity loan a mortgage?

A home equity loan is a type of mortgage loan that allows you to access cash, using your home as collateral. If you default on a home equity loan, the lender may seize your home to recoup its costs.

Are home equity loan rates higher than mortgage rates?

Typically, home equity loan rates are higher than regular mortgage rates. That’s because a home equity loan is considered a second mortgage.

This is because, in the case of default, the primary lender claims the first lien, which means the risk assumed by the second lender is greater than it would be for a first mortgage.

What is the interest rate on a home equity loan?

Home equity loan interest rates vary widely based on your unique situation and the market conditions. A borrower with a good credit score can lock in a better rate than a fair credit borrower.

What is the monthly payment on a $100,000 home equity loan?

The monthly payment on a $100,000 home equity loan varies based on the interest rate and loan term. But let’s say that you take out a 10-year home equity loan with a 5% fixed rate. With that, you’d make monthly payments of $1,061.

Do home equity loans hurt your credit?

Like all loans, home equity loans can help or hurt your credit score. If you make on-time payments, a home equity loan could improve your credit. But if you regularly miss payments, your credit score will suffer.

Is it good to borrow from home equity?

Whether or not it is good to borrow from home equity depends on your unique financial situation. For some borrowers, it may be more practical to take a personal loan or dip into a savings account, rather than tap home equity.

Typically, home equity loan rates are lower than high-interest credit card debt. With that, you could save by using a home equity loan when you might otherwise use a credit card. But a home equity loan uses your home as collateral, which means your home is at risk if you default.

How much money can you borrow on a home equity loan?

The maximum loan amount you can borrow varies based on the amount of equity you own in the home. In general, lenders won’t allow more than an 80% to 90% loan-to-value ratio (LTV). Keep in mind that LTV includes the balance on your existing mortgage. So your primary mortgage and second mortgage (home equity loan) cannot total more than 80-90% of your home’s value when combined.

How long do you have to pay back a home equity loan?

You can find home equity loan terms in the range of five to 30 years. As a borrower, you’ll have to decide what period of time works best for you.

Can you get a home equity loan with bad credit?

It’s more challenging to get a home equity loan with bad credit, but it may be possible. Since you are using your home as collateral, lenders may be more willing to work with bad credit borrowers. Keep in mind that lower credit scores lead to higher interest rates on home equity loans.

Can I use a home equity loan to buy another house?

Depending on the amount of home equity you have, it’s possible to use a home equity loan to access cash to buy another home.

Are there closing costs on a home equity loan?

Yes, you should expect to pay between 2% to 5% of the loan balance in closing costs for a home equity loan. The closing costs may include origination fees, application fees, and more.

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

The post Home Equity Loan Rates & Requirements 2024 first appeared on My Mortgage Insider.

Borrowers hoping to get a mortgage with a non-traditional source of income have options. While “true” no income verification mortgages no longer exist, lenders can qualify you based on almost any kind of cash flow. So you don’t need a traditional income to qualify. Below, we’ll take a closer look at this option.

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

What is a no-income verification mortgage?

A no-income mortgage, sometimes referred to as a no-doc mortgage, is an option for borrowers with a non-traditional income stream or another source of assets. This type of loan doesn’t require standard income documents to finalize your loan. However, you do need to prove that you have enough cash flow, savings, or other assets to make consistent mortgage payments over the life of the loan.

How does a no-income mortgage work?

Of course, the lender still needs to know that you can afford the loan. But instead of looking at your W-2s, pay stubs, or tax returns, the lender lets you provide proof of your financial stability in other ways.

For example, you might show bank statements or investment account balances to prove to the lender that you can afford the mortgage payments. In some cases, you can even use the projected rental income of a property to qualify for the mortgage.

Types of no-doc mortgages

No documentation loans come with a few different variations.

While common before the 2008 financial crisis, no-income verification loans — also sometimes called non-QM loans — are no longer widely available to homebuyers. These loans are risky for lenders, so they require higher mortgage rates for borrowers.

Here’s a closer look at what each:

• Stated Income, Verified Assets (SIVA): For this loan type, the lender often requires self-employed borrowers to show proof of a consistent income through bank statements. Typically, self-employed individuals and high-net-worth individuals are prime candidates for this type of loan.
• No Income, Verified Assets (NIVA): With NIVA loans, lenders look at the borrower’s assets. The goal is to have enough other assets that the lender could seize as collateral if the loan goes south. A typical NIVA loan candidate is a retiree with cash reserves and limited income.
• Stated Income, Stated Assets (SISA): SISA loans are mortgages that truly require no documentation at all. Instead, the lender simply takes your word for how much income and assets you have. This type of loan is not available for owner-occupied properties. But it’s still possible for real estate investors to pursue this loan type.
• No Income, No Assets (NINA): NINA loans are geared towards mortgages for investment properties. In this case, the lender looks at the rental income potential of the property. If the rental property’s potential cash flow can cover the monthly payment, a NINA loan is a potential option.
• No Income, No Job, No Assets (NINJA): In this case, the mortgage lender relies entirely on the applicant’s reported income, job, and assets.

Pros & cons of a no-doc mortgage

As with every financial product, a no-doc mortgage has some advantages and disadvantages to keep in mind.

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

When should you get a no-income verification mortgage?

If it’s a challenge to verify your income, then a no-income verification mortgage is an option worth pursuing.

Here are a few scenarios when this type of mortgage makes sense:

• Your tax situation is complicated: If you have income streams spread out across multiple tax returns, verifying all of this information can be a challenge.
• Your income is irregular: Those with a fluctuating income might find this mortgage type more accessible.
• You have a high net worth without a regular income: If you have sufficient assets, you could leverage that financial stability into a mortgage without proving a regular income stream.

Step-by-step guide to getting a no-income verification mortgage

If you want to pursue a no-income verification mortgage, here are the steps you’ll need to take:

• Build your credit score: Most lenders require an excellent credit score for no-income verification loans.
• Save up a significant down payment: You’ll likely need a large down payment for this type of loan. Be prepared to make a down payment of at least 20%, and probably closer to 30%.
• Gather the necessary documents: Although you won’t need to provide a pay stub, lenders will likely expect other types of documentation. For example, you might need to provide bank statements or investment account statements to prove you can afford to repay the loan.
• Submit your application: After you have the documents in hand, you can apply for a no-income verification mortgage. As a borrower, you should be prepared to answer any extra questions the mortgage lender has about your financial situation.

Qualifying for a no-income verification mortgage

In general, it’s relatively challenging to qualify for a no-income verification mortgage. As a homebuyer, it’s often easier to work through the mortgage process if you have a steady W-2 income for your household.

It’s not impossible to qualify for a no-income verification mortgage. But be prepared to provide extensive documentation about your financial situation.

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

Are no-income verification loans safe?

If you have the necessary funds to repay the mortgage, then there is nothing inherently unsafe about a no-income verification mortgage. However, these are non-qualified mortgage (non-QM) programs, meaning they are controlled by individual lenders and not regulated by any government agency. As such, they might lack important borrower protections that come with standard mortgage loans.

Before signing up for a no-income verification mortgage, be sure to carefully read and understand your loan terms. Look out for any risky clauses like prepayment penalties or balloon payments that would not be included on a standard mortgage loan.

As with all mortgage types, including conventional loans and government-backed loan programs, there is a risk that the lender will repossess your home if you don’t make your payments on time.

Does a no-income verification mortgage enable you to buy a home with no income?

Yes, a no-income verification mortgage enables you to buy a home without a regular job, or steady source of income. However, you’ll need to have sufficient existing assets to repay the loan. The lender will confirm that you can make the loan payments in one way or another.

No-income verification loan rates

No-income verification loan rates vary based on the lender, loan amount, loan term, and your specific financial circumstances. A borrower with a good credit score can lock in a better rate than a fair credit borrower.

No-income verification loan rates are substantially higher than currently available mortgage rates, as they pose more risk for lenders.

Check your mortgage rates. Start here (Sep 16th, 2024)

No-income verification mortgage FAQ

Can I buy a home with no income?

If you want to purchase a home with no income, you’ll need a substantial net worth with enough assets to support repaying the loan. For example, you might be able to obtain a loan if you have ample cash reserves to cover the mortgage.

Can you get a mortgage without a verifiable income?

Yes, it’s possible to get a mortgage without a verifiable income. But it’s more challenging than obtaining a mortgage with a regular income stream. If you don’t have a verifiable income stream, then you’ll need enough assets to support the mortgage payments.

What loan does not require proof of income?

No-income verification mortgages don’t require proof of income. But these types of loans require proof of other assets. You always need to prove to a lender that you can afford to repay the loan.

What is a no-income verification mortgage?

No-income verification mortgages, or no doc loans, don’t require you to provide proof of a traditional income stream through W-2s or tax returns. Instead, you can qualify for the loan based on your assets. Sometimes lenders call these bank statement loans or stated income loans.

Can I get a mortgage if I get paid in cash?

If you get paid in cash, it might be possible to get a mortgage. For example, if you are reporting this cash income on your tax returns, that might be enough evidence for the lender. But potential homeowners pursuing this option will likely need a higher credit score and encounter higher mortgage rates.

Can you get a mortgage without a job?

You may be able to get a mortgage without a job. If you want to purchase a home without a job, you’ll likely need sufficient assets or another source of income to support the loan amount.

What should be your minimum income to buy a house?

There is no minimum income required to buy a house. Instead, you’ll need to prove to the lender that you can cover the mortgage payments. In some cases, cash reserves or other assets are enough proof for the lender.

What credit score is needed for a no-income verification mortgage?

Each lender sets its own specific credit score requirements for no-income verification home loans. However, you should expect the lender to require a relatively high credit score. If possible, aim to get your credit score above the 700 mark.

How can I get approved for a mortgage without proof of income?

Although you can’t get approved for a traditional mortgage without proof of income, there are other loan options when trying to obtain a primary residence. You can get approved for a mortgage loan without proof of income by providing proof of assets. If you have enough assets, the lender might be willing to move forward regardless of income.

How can I buy a house without 2 years of income?

If you want to buy a home without a two-year income history, then you’ll likely need a great credit score and a large down payment. Additionally, you’ll likely need significant cash savings, assets, and a low debt-to-income ratio.

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

The post No Income Verification Mortgage | Guidelines for 2024 first appeared on My Mortgage Insider.

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

Is getting a land loan the same as a home mortgage?

Well, there are some big similarities and some differences, says Jim Nowak, regional vice president and sales & customer rel ations for the Mid-East Region of GreenStone Farm Credit Service in East Lansing, Mich. Independently owned Farm Credit Service (FCS) offices across America and Puerto Rico help rural communities with loans and leases. For those getting land loans, the FCS can help people wanting just a single lot or thousands of acres.

Land loans can be purchased with cash or through seller financing, bank financing or an equity loan or equity line of credit secured by your existing home. Also, the U.S. Department of Agriculture offers a program for low-income borrowers called Section 502 direct loans. These loans allow people to buy property with plans to make improvements needed and to add a house to the lot.

“When you are looking at a mortgage as opposed to a vacant land loan, the first thing that is different from a financial institution’s perspective is that a land loan or vacant lot loan is a little bit more risky,” Nowak explains. “There is no home on the lot for collateral, which is what a regular home mortgage takes into consideration. So that means that the interest rates will be a little higher on a vacant land loan.”

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

Land loans are riskier

Nowak explains that banks believe these loans are riskier because of scenarios such as this a family is encountering challenging financial times. If they own a 10 acre piece of land somewhere across town in hopes to someday build their dream house but they are living in their current home, they most likely will stop paying on that land and not their house, he explains.

“Throughout time in history, banks have viewed vacant land not as comfortable on their portfolio,” Nowak says.

When it comes to the higher interest rates to help with the fear of defaulting, banks and other lenders have their own varying scales. But he said many times a land loan will be at least 1% – 1.5% more than just getting a mortgage for an existing home.

“We have many people who come to us and don’t even realize there are loans out there for vacant land. Some think that to buy a home site before you build on it, that you need to pay cash for that,” he says. “That’s not the case. Loans for vacant land at Farm Credit is what we specialize in.”

It doesn’t matter if someone is buying the land for hunting, fishing or to eventually build a house, the land loan would be the same.

As far as the terms for a land loan, many banks and financial institutions do not offer 30 year loans like they would for a home mortgage. It’s best to check with your lender to see they type of terms and interest rates being offered for vacant land.

“The banks usually will offer a 5-year adjusted rate mortgage with a balloon payment at the end,” Nowak states. “But at GreenStone, we actually will finance a land loan on a 30-year fixed term. That’s the niche we have. It’s very, very rare. But we’ve been doing it since I’ve been around for 12 years.”

He says after doing it for 100 years, the FCS feels comfortable financing land since the organization has been doing it for 100 years and taking land as the collateral. And it doesn’t matter if it’s just one small lot or 200 acres.

However, the terms are different for farmers not potential housebuilders.

“We, generally speaking, will fund 65 loan-to-value — meaning customers put down 35% of the purchase price, and generally, the term will be at 20 years. There certainly have been exceptions made, and we have gone to 25 and 30 year fixed terms for farmland,” Nowak says.

When someone wants to purchase a vacant piece of land or even a small two acre lot, those are the parcels that will go up to 30 year terms, he says. If it is a very large purchase, the FCS credit department would rather like to have 25 years plus 20% down on most vacant land.

Similarities of a land and home loans

“Underwriting is one of the things that is very similar when you talk about home mortgages and vacant land,” he adds. “We collect the same financial information, and we still have to get title work and appraisals done. Those are the similarities.”

In Michigan and in many parts of the country, a land loan – especially if it will eventually be a home site (which is classified under 10 acres) — lenders require a percolation (or perc) test to determine the absorption rate of soil so a septic system can be placed there and a home built on that land.

Other differences of home mortgages and vacant lot loans can save you some bucks. For instance, there are no insurance requirements when you buy vacant land, Nowak says. However, when you have a home mortgage, every financial institution will expect you to get property insurance on the home to protect both you and the bank if disaster should hit.

“Also, most financers will expect the borrower to get mortgage insurance if they put down less than 20%. With vacant land, there is no such thing as mortgage insurance or PMI,” he says. “That can save you a lot of money.”

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

The post Differences And Similarities Between Land Loans And Home Mortgages first appeared on My Mortgage Insider.

Check your mortgage rates. Start here (Sep 16th, 2024)

Tips for finding small mortgage loans

“It is a problem that we will need to do some creative thinking on how to fix,” says Ellen Seidman, a senior fellow at the Urban Institute, the housing finance policy center, in Washington, D.C.

She and fellow co-worker Bing Bai, a research associate, wrote a blog recently from their research titled, Where have all the small loans gone?

“It’s important to know that this trend happened well before 2014 – when all the new rules and regulations were written,” Seidman adds.

Getting a mortgage loan for less than $50,000 has become almost impossible, she explains. From 2004 to 2011, only 3-4 percent of mortgages were for less than $50,000, and the number is even lower for 2014.

But in many towns, a substantial amount of homes cost $50,000 or less.

In their research, they uncovered certain towns such as Scranton, Penn., and Kalamazoo, Mich., had a large number of homes for under $50,000.

According to Seidman, lenders don’t find these smaller loans attractive. Loan origination fees are mostly fixed and recovered either through the sale of the loan or over time, or through the financing spread and payment for servicing.

However,  there is hope if you want a smaller mortgage loan. Here are a few ways to find one when you need one:

Check your mortgage rates. Start here (Sep 16th, 2024)

Small-town banks & credit unions

“In some small towns, you can get some lending of that size from the local banks that are doing it,” she says.

Going to your own local bank or credit union lender who knows you might also give you a chance to get a smaller mortgage.

Neighborhood organizations

Mission-oriented neighborhood groups in your area might be offering smaller-sized loans. These organizations may also offer homeowner counseling, and sometimes downpayment and closing cost assistance.

Personal loan

Personal loans can come from anywhere, from major banks to high-interest payday loans. Be careful to find a lender who offers manageable terms and an affordable interest rate as picking the wrong mortgage could prove to be costly.

Family & friends

If you know someone who has money to spare, you could convince them to give you a loan. According to the Federal Reserve Board Survey of Consumer Finances, loans from family and friends amount to $89 billion each year in the United States, and a large amount of that is specifically borrowed to purchase a home.

It is a wise move to draw up and sign a loan contract regardless of your relationship with the lender. This protects both parties in case of a disagreement. A loan agreement between two individuals is more simplistic but very similar to a standard bank promissory note.

Home equity loans

It’s worth checking with your local banks and credit unions that do refinancing loans to see if they will give you a home equity loan to buy a home, says Bruce Dorpalen, executive director of the National Housing Resource Center in Washington, D.C. The home you are buying becomes the collateral since you don’t already have a house.

“You will have to have 20 percent down, but that’s not so difficult with smaller mortgages. Plus, the good thing is the upfront costs with home equity loans are much less than for a regular mortgage,” he says. “Home equity loans to some banks are their thriving part of their business.”

Seidman says that small mortgage loans are important to the vitality of hundreds of urban communities throughout the United States.

“Bringing them back will be hard, and we don’t have any immediate or easy solutions,” she says. “We’re eager to work with policymakers and industry leaders to understand the impact of these loans and develop strategies to encourage their availability.”

Check your mortgage rates. Start here (Sep 16th, 2024)

Check your eligibility with multiple lenders

Instead of individually contacting each lender to find out if you are eligible for a specific type of loan, you can get multiple rate quotes from lenders by providing a few pieces of your information.

Doing this can save some time, and you may find out about mortgage opportunities you didn’t know were available to you.

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

The post Small Mortgage Loans: Do Lenders Do Them Any More? first appeared on My Mortgage Insider.

A non-conforming loan is any mortgage that is not partly guaranteed by a government department or agency.

Conforming loans are conventional loans that meet the rules set by Fannie Mae and Freddie Mac. If they fit Fannie and Freddie’s guidelines, then your lender can sell the mortgage to those agencies after closing.

As the name suggests, non-conforming loans don’t conform with Fannie and Freddie’s rules. And they’re not backed by the government like an FHA, VA, or USDA mortgage. That means non-conforming loans can be more creatively drafted and tailored to fit your and your lender’s needs.

Types of non-conforming loans

The most popular type of non-conforming loan is a jumbo loan. Jumbo loans have a higher value than Fannie and Freddie allow.

Conforming loan limits

Each year, the Federal Housing Finance Agency (FHFA) announces the following year’s loan limits up to which Fannie and Freddie can lend.

The current loan limits are 766,550 for mortgages in areas where home prices are below or around the national average.

Limits run as high as 766,550 in higher-cost areas and Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

So, if you need to borrow a loan amount that’s larger than your local FHFA ceiling allows, you’ll need a non-conforming loan in the shape of a jumbo loan.

Other reasons applicants get non-conforming mortgages

Sometimes, a person applying for a mortgage can’t tick all of Fannie and Freddie’s boxes even if he or she is clearly a sound borrower.

Low credit score

Take, for example, someone whose credit score is 610 due to a prior medical issue. If her credit score is down at 610, Fannie and Freddie won’t lend to her since their minimum credit score is 620.

An individual lender might approve a loan if she’s a great borrower in other respects: has few existing debts or a large down payment. But it won’t be a conforming mortgage because Fannie and Freddie’s rules exclude her. It might offer her a non-conforming loan.

Property problems

Sometimes the borrower is well-qualified but the property isn’t. For example, someone who buys a log cabin in the suburbs may need a non-conforming loan because there are no comparable properties by which to verify the value.

The property could be a condo within a complex that is not approved by any of the major lending agencies like Fannie Mae and FHA.

There are many reasons a property can’t get traditional financing and in those cases, applicants may opt for a non-conforming lender and loan.

Pros & cons of non-conforming loans

Pros of non-conforming loans

1. Greater flexibility than conforming loans. Your lender can construct a deal that suits you and it.
2. Higher loan limits. Jumbo loans often run into the millions. Each lender sets its own limits.
3. More property options. The more you can borrow, the wider your choice of homes.

Cons of non-conforming loans

1. More personalized requirements mean a lender might put in clauses that disadvantage you. You might need professional advice when you’re negotiating your deal.
2. Fewer lenders to choose from. Many but not all lenders offer jumbo loans. Fewer yet offer other sorts of non-conforming loans.
3. Higher interest rates. Without government backing, your lender has no one with whom to share the loss if your loan goes bad. Inevitably, higher risk means higher rates.
4. Harder to qualify for. This isn’t always the case but is often true, especially with jumbo loans.

A non-conforming loan may be just what you need. But you should reassure yourself over your contract’s terms and your ability to comfortably afford your mortgage.

Benefits of a conforming loan

If a lender can sell your loan to Fannie or Freddie then its risk is limited.

So conforming loans often come with some significant upsides compared to non-conforming ones. For example, you may:

1. Find it easier to get your application approved. You usually just have to meet Fannie and Freddie’s minimum standards.
2. Often be offered a lower mortgage rate.
3. Need a lower down payment. 3% is the standard minimum for the most popular conforming loans.
4. Get away with a lower credit score. 620 and up is a common requirement.

Most borrowers only opt for a non-conforming loan if they need the higher borrowing limits of a jumbo mortgage. Otherwise, they would usually be better off with a government-backed mortgage. More information on those below.

Benefits of a government-backed mortgage

These are non-conforming loans in the sense that they don’t conform to Fannie and Freddie’s requirements. But the mortgage industry doesn’t define them that way because they’re not conventional mortgages.

There are three flavors of government-backed loans:

• FHA loans. These are backed by the Federal Housing Administration and open to anyone.
• VA loans. These are backed by the Department of Veterans Affairs and available to veterans, current service members, and very few closely related groups.
• USDA loans. These are backed by the US Department of Agriculture and intended to promote rural development. You’ll need to have an average or below-average income for your area and be buying in a designated rural (or sometimes suburban) area. But 97% of America’s landmass is so designated.

Of course, none of these loan types is an alternative to a jumbo loan. They all have loan limits that are typically lower than those for conforming loans. You can find the current loan limit where you want to buy using a look-up tool on the website of the Department of Housing and Urban Development.

FHA loans

For an FHA loan, you’ll need a down payment of 3.5%. You can be approved for an FHA loan with a credit score as low as 580, though in that case, you’ll need a down payment of 10%. These are often chosen by borrowers with damaged credit scores.

Just watch out for mortgage insurance premiums (MIPs). These can be costly.

VA loans

Few are eligible for these because they require minimum levels of military service. But they offer considerable benefits to those who qualify. They come with zero down payment, low, lower interest rates, lenient credit score requirements, no loan limits and no continuing mortgage insurance.

USDA loans

USDA loans offer a zero down payment requirement, low rates and a relatively easy credit score threshold.

But you will be on the hook for mortgage insurance, though at a lower cost than an equivalent FHA loan.

Important note

It’s worth noting that each department or agency has minimum requirements but lenders are free to impose their own, stricter standards for these mortgages — and for conforming loans. So, if you’re turned down even though you comply, shop around for more sympathetic lenders.

However, you should be shopping widely for your loan anyway. Because you could save thousands by seeking out the lender that’s ready to offer you the best mortgage deal.

When is a non-conforming loan the right choice?

If you want to borrow more than Fannie and Freddie allow, you’ll need a jumbo loan. And those, by definition, are non-conforming.

Other sorts of non-conforming loans are possible. But they’re rare in the real world.

So most people who can’t get or don’t want a conforming loan turn to government-backed ones.

Non-conforming loan FAQ

Is a jumbo loan non-conforming?

Yep. In fact, it’s by far the most common type of non-conforming loan.

What is a non-conforming conventional loan?

Conventional loans are ones that aren’t backed by a government department or agency. And non-conforming loans are ones that aren’t compliant with Fannie Mae’s and Freddie Mac’s standards.

So all non-conforming loans are conventional ones. And that means all jumbo loans and (much more rarely) a few private, lender-borrower mortgages are non-conforming conventional loans.

Can non-conforming loans be sold to Fannie Mae or Freddie Mac?

No. Fannie and Freddie are only able to buy mortgages that conform to their standards. And, by definition, non-conforming ones don’t.

Can you refinance a non-conforming loan?

Absolutely. You can typically refinance just about any mortgage. So, if you want a lower rate, some cash or to swap to a conforming home loan, you can do so.

But, of course, you’ll have to find a willing lender. And you’ll need to meet the “underwriting standards” (borrower requirements) it sets.

What are non-conforming loan limits?

There aren’t any formal ones. A lender that isn’t conforming with Fannie and Freddie’s standards can lend as much as it’s comfortable with. And jumbo loans often go up to a few million dollars.

Obviously, every jumbo lender will make exhaustive checks to satisfy itself that you can comfortably afford your mortgage payments. So your maximum loan amount will be set by your circumstances as much as the lender’s policies.

In contrast, conforming loans and government-backed mortgages all have loan limits, noted above.

The post Non-Conforming Loans: The Complete Guide first appeared on My Mortgage Insider.

RefiNow and Refi Possible are new refinance programs available to homeowners with existing conventional mortgages owned by Fannie Mae or Freddie Mac.

They’re open to homeowners with lower-than-average incomes and higher existing debts. If you qualify, these loan options could save you as much as $1,200 to $3,000 a year in reduced monthly mortgage payments.

Check to see if you're eligible for a low-income refinance program (Sep 16th, 2024)

How do RefiNow and Refi Possible work?

Both programs have the same goal: to make it easier for people in lower-income households to refinance to a lower mortgage rate. Qualifying borrowers are guaranteed an interest rate reduction of 0.50% or more.

Fannie’s RefiNow became available on June 5, 2021, while Freddie’s Refi Possible launched in August 2021.

In a statement announcing its launch Fannie Mae senior vice-president Malloy Evans explained:

Lower-income borrowers typically refinance at a slower pace than higher-income borrowers, potentially missing an opportunity to save on housing costs. Fannie Mae’s new RefiNow option will help more homeowners refinance by removing some of those barriers, improving affordability, and promoting sustainable homeownership.

How much can you save with RefiNow or RefiPossible?

How much you can save with RefiNow or Refi Possible depends on the specifics of your financial situation and goals.

Still, the potential savings for borrowers could be huge.

If you qualify, these loan options could save you as much as $1,200 to $3,000 a year in reduced monthly mortgage payments.

Here’s an example, assuming an existing 30-year, fixed-rate mortgage (FRM) being refinanced to a new 30-year FRM.

If you haven’t refinanced for several years and you’re paying a current mortgage interest rate of 5.25% with a mortgage balance of $250,000, then your monthly mortgage payment would be $1,325.

With a refinance to a new interest rate of 3%, your monthly payment would drop to $1,071. That’s $254 less per month — or $3,048 less every year for the rest of your mortgage.

Of course, refinancing means you’re resetting the clock on your mortgage. Adding years to your mortgage means you’re also increasing the amount of interest you’ll pay in total. Every borrower will have to weigh the benefits and costs of refinancing for their specific situation.

It’s very possible that the reduction to your mortgage interest rate will more than compensate for the costs of refinancing but you’ll have to determine the best option for your finances.

See today’s mortgage refinance rates (Sep 16th, 2024)

RefiNow and Refi Possible eligibility

First, you need to establish whether your existing mortgage is owned by Fannie Mae or Freddie Mac.

Typically, your mortgage lender will sell your mortgage to one of the government organizations after closing, so you might not know who owns your mortgage.

Both Fannie and Freddie make this information easy to find. Fannie Mae has a mortgage lookup tool here, and Freddie Mac has one here. If you can’t find your mortgage in one, try the other.

Once you’ve established that your mortgage is owned by Fannie or Freddie, you’ll need to confirm that you meet the following eligibility requirements:

• Household income is at or below 80% of the median income for the area
• No missed mortgage payments within the past 6 months and no more than 1 missed payment within the past 12 months
• Current loan-to-value ratio of no more than 97%
• Current debt-to-income ratio of no more than 65%
• Credit score of 620 or higher

Finally, the property itself must be a single-family, one-unit property that you occupy as your primary residence. That means these refinance programs cannot be used for investment properties, vacations homes or multi-unit properties.

Shop for your best rate

The bigger the difference between your current mortgage interest rate and your new one, the more you’ll save.

When you refinance, it’s important to shop around with multiple lenders to make sure you’re getting the lowest new interest rate possible.

Request quotes from at least 3 to 5 mortgage lenders and compare them side by side. Lenders will provide Loan Estimates in a standard format that are easy to compare. Review the quoted interest rate, the annual percentage rate (APR) and the closing costs.

This simple exercise might take you a few hours but it could save you thousands of dollars.

Why did the FHFA create new low-income refinance programs?

For the past year, mortgage rates have hovered at historic lows and refinancing activity has been booming.

However, lower-income homeowners have been less able to take advantage of low interest rates.

These new programs allow homeowners who may have struggled to qualify for a refinance — or who did not have the cash on hand to do so — to benefit from low interest rates.

A lower interest rate and lower monthly mortgage payment mean more money for day-to-day living expenses, especially for homeowners who may have reduced income due to the pandemic. Refinancing may also help some homeowners avoid foreclosure by making their monthly payments more affordable.

Should you refinance with RefiNow or Refi Possible?

Both of these programs could offer significant savings for homeowners, especially those who haven’t been able to take advantage of historically low interest rates.

The specific savings available to you will depend on the details of your financial situation. A loan officer or mortgage broker can help you find the best option for you.

Click here to see whether refinancing could help you save (Sep 16th, 2024)

The post RefiNow and Refi Possible | New Low-Income Refinance Programs 2024 first appeared on My Mortgage Insider.

There are several options out there that can make the situation easier. You get the loan to buy the property, and then there is a reserve put in escrow to help you continually pay for the changes being done.

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

How to finance a fixer-upper

Terry Lambert, home mortgage specialist for AgStar Financial Services in Bloomer, Wis., says she has a lot of clients looking for financing for fixer-uppers.

“A lot of them are trying to save money and do the work themselves. Many look for those types of properties to fix up and re-sell for profit,” she says.  A lot of ideas seem to come from the fixer-upper television shows, which seem to mainly be more people doing the improvements on homes they plan to live in.

At her agency, they have a special process specifically for purchasing rehabs or construction loans in general. “We use what is called a sworn statement – which is basically a very complete checklist of typical construction processes, materials and labor so the borrower doesn’t miss anything when they are obtaining all of their bids,” Lambert says.

It really is a breakdown of most things they might possibly run into so they have the funding set up appropriately and don’t run short on funds and don’t find themselves in a situation where they are not able to finish the project.

“We also always add in a 10 percent contingency fund amount over and above the total of the bids/estimates in case there are any cost overruns or unforeseen items that pop up that need to be taken care of as well,” she explains. “Our preference is to disburse funds directly to the vendors so that we can actually stamp the back of the checks with a lien waiver stamp – which saves the client the hassle of having to get the waivers signed by the vendors.”

Lambert says that AgStar’s construction and rehab loans have some high requirements including borrowers must have a credit score of 720 or higher; a debt-to-income ratio of 36 percent or less; and 20 percent down of the overall appraised value.

“There are cases where the client doesn’t actually have to come into closing with any down payment or cash out of pocket. We do allow our clients to be their own general contractors, which is becoming rare among lenders,” Lambert says.

Type of rehab loans:

Fannie Mae HomeStyle Renovation Mortgage: This loan allows borrowers to make renovations up to 50 percent of the as-completed appraised value of the property with a first mortgage rather than getting a second mortgage, home equity line of credit or other financing. By having just one loan, you eliminate having more than one set of closing costs. You also typically get a much lower interest rate on a first mortgage. Borrowers can qualify for up to 105 percent combined loan-to-value.

Also, according to Fannie Mae, the renovation work must be completed no later than 12 months from the date the mortgage loan was delivered. The lender is responsible for monitoring the completion of the rehab work.

Federal Housing Administration (FHA) 203(k) Rehabilitation Loan: FHA partners with state and local housing agencies and non-profit organizations to rehabilitate properties. With the rehab loan, you get funds for the rehabilitation and you only need to put down as little as 3.5 percent. Sometimes, you can get down payment and closing cost assistance, depending on the area you are buying the house. Some counties and specific neighborhoods do offer incentives for people to rehab homes.

Lambert says that closing costs for rehab and construction is similar to a normal mortgage loan. However, there are two additional fees that are charged – one for all the additional disbursements that will be made during the process, and another for the additional inspections that need to be done during the process.

“If the loan is to stay as a portfolio loan, meaning an in-house type loan, we can just lock the interest rate, and there is no further cost and other paperwork needing to be done. Otherwise, we would need to refinance the loan for secondary market,” she says.

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

The post Loans for Fixer Uppers first appeared on My Mortgage Insider.

Additionally, Fannie Mae’s High LTV Refinance Option (HLRO) currently has no expiration date. Similar to HARP and FMERR, it’s a great loan option for underwater homeowners who don’t have enough equity earned in their home to qualify for a refinance.

The Home Affordable Refinance Program, or HARP has helped millions of underwater homeowners.

But millions more are not eligible because their loan is not owned by Fannie Mae or Freddie Mac.

Still others are not eligible for HARP because they

• have used HARP before on the same property
• closed their loan after May 31, 2009
• have more than one late mortgage payment in the last 12 months.

There are other refinance options available when you think outside the HARP box.

Check today's rates here and apply for a conventional refinance (Sep 16th, 2024)

“Cash-in” Refinancing

Most homeowners have heard of a cash-out refinance. It allows those with equity in their homes to receive cash at closing.

A cash-in refinance is the opposite. The homeowner puts cash into the transaction to close the loan because they don’t have enough equity.

This type of loan doesn’t sound like a good deal on the surface, but it can work out in the homeowner’s favor.

Here’s how. Say you could save $350 per month by refinancing. But you are $10,000 short on equity and not HARP eligible. You could take $10,000 from another source to complete the refinance.

Once you have enough cash, a myriad of loan types are available. You are no longer stuck in the HARP-ineligible jail cell. Fannie Mae, Freddie Mac, FHA, and VA refinance types suddenly become real options for reducing your high mortgage interest rate.

Eligible Sources of Funds for a Non-HARP Cash-in Refi

The biggest hurdle with a cash-in refinance is where to get the cash. It might not be as hard as you think.

The funds could come from a number of sources.

A personal loan or line of credit

Local banks and credit unions offer personal lines of credit. These are not attached to your home but are unsecured loans meaning you don’t need an asset as collateral.

Just remember you’ll need enough income to qualify for the line of credit and refinance loan.

A current investment or savings account.

Do you have a savings account making a dismal one half of one percent interest per year? Why not make money by saving money on your monthly home payment instead?

Instead of making $50 per year in interest, you could be saving hundreds of dollars per month.

Sale of an asset like a car

Obviously you need a car to work. But many people have way too much equity tied up in a car. It might be worth it to sell the vehicle, buy a more modest one, and use the net proceeds to refinance. It’s a sacrifice, but one that will lower your bills and make you more financially healthy.

A gift from a relative

You can receive a cash gift to make up the gap between your loan and negative equity. It’s a lot like raising funds for down payment to buy a house. Gift funds can come from the following sources.

• A spouse, child, or legal dependent.
• Another relative who is related by blood, marriage, adoption, or legal guardianship
• A fiancé, fiancée, or domestic partner.

Be sure to follow the guidelines for gift funds as outlined here.

How a Cash-in Refi can Pay Off

While it may sound like you’re robbing Peter to pay Paul, the numbers can work out surprisingly in your favor.

Let’s look again at the scenario in which you could save $350 per month by coming up with $10,000.

You’re going to make just a fraction of that amount in interest each month by keeping the cash in savings.

Likewise, your monthly cost for a $10,000 unsecured line of credit would be much less than $350 per month. If you assume a payment of $100 per month for a small loan, your net savings is still $250 per month.

A refinance lowers the interest on your entire loan balance. You’re leveraging a small dollar amount to reduce interest on a very big loan. That reduces overall strain on your budget.

A cash-in refinance is definitely worth a back-of-the-napkin calculation to see if it pencils out.

If you can come up with the cash to make up your negative equity, one of the many non-HARP refinance options become available to you.

Non-HARP Cash-In Refinance Types

If you make up your negative equity with cash, here are your refinance options:

FHA Refinance

• Refinance up to 97.75% of the home’s current value with a standard FHA refinance.
• Can refinance a loan that is not eligible for HARP.

Check your FHA eligibility here.

VA Refinance

• Adequate military service required.
• Can refinance out of any loan type up to 100% of the home’s current value.

Conventional Fannie Mae or Freddie Mac Refinanance

• Need 3-5% equity or cash-in to refinance.
• Requires mortgage insurance.

Cash-in Refinance Benefits

If you’re not sure if you can make a cash-in refinance work, it’s a simple as getting a hold of a lender who can work the numbers out for you.

Once you have all the facts, see if the refinance will benefit you, or if you should wait for your home’s equity to go up enough to refinance without any cash.

Check today's rates here and apply for a conventional refinance (Sep 16th, 2024)

The post Compelling Option for HARP Ineligible Homeowners: Cash-In Refi first appeared on My Mortgage Insider.