Answer: Private mortgage insurance and mortgage life insurance are two very different financial products.

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

Private mortgage insurance (PMI) vs mortgage life insurance

Private mortgage insurance is required by lenders when home buyers purchase a home with less than 20 percent down. If the home buyer is unable to pay the mortgage, then the property is foreclosed and sold at auction. The mortgage insurance company pays the lender for some or all of the loss.

Mortgage life insurance is something completely different. While the beneficiary of private mortgage insurance is the lender, the beneficiaries of mortgage life insurance are your heirs.

With a mortgage life insurance policy, you can typically buy coverage for 15 or 30 years. If something happens, the insurance company steps in and pays off the mortgage balance.

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

What to consider with mortgage life insurance

As with all insurance policies, there are a number of issues to consider.

First, since the mortgage balance is declining with each payment it follows that the death benefit available from mortgage life insurance is also falling. With some policies, however, there may be a residual coverage amount, say not less than 20 percent of the original loan amount.

Second, because mortgage life insurance is “insurance,” the money paid out by the policy is tax-exempt. See a tax professional for details.

Third, you can typically get a rider with mortgage life insurance which allows you to add a second person to the policy. In other words, if the property is owned by two people and one dies, the policy will kick in to pay off the mortgage balance. This will allow a co-homeowner, such as a spouse, to own the property free and clear of any mortgage debt.

Fourth, insurance coverage may not be available for home buyers above a certain age. Alternatively, lenders cannot engage in age discrimination and must make mortgages available to any qualified home buyer regardless of age.

Fifth, you may be able to find a mortgage life insurance policy that has a premium waiver that goes into effect in the event of disability. If you see such a clause it will be important to review exactly what it means with an insurance broker. Get your answers in writing.

Sixth, you need to determine who actually gets paid in the event of death. Does the mortgage insurance company step in and directly pay the lender, or does the insurance company write a check for your heirs? This is a matter of personal preference.

In some cases, you may prefer a mortgage-free property while in others you might want your heirs to get the cash if you are certain they can continue to carry the loan.

Seventh, check to see if the premiums are level for the life of the policy. In some cases, you may find that the insurance company can raise the premium. This raises a question: Is there a maximum monthly premium cap?

Is mortgage life insurance worth it?

The question that arises with mortgage life insurance is whether it’s actually the right insurance product for home buyers. It pays out only in the event of death which means you might want to speak with insurance brokers and consider term life insurance policies as an alternative.

For instance, payment upon “death” or only an accidental death, not death from disease or old age. With a life insurance policy, the payout is tax-free but the benefit does not decline over time.

For details and specifics speak with such experts as insurance brokers, tax professionals, and fee-only financial planners.

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

The post Mortgage Life Insurance or Private Mortgage Insurance – Which is Better? first appeared on My Mortgage Insider.

Since mortgage lenders compare your monthly payments to your income to see how much house you can afford, monthly car payments will affect your mortgage eligibility.

But auto loans and auto leases are not viewed as the same by mortgage underwriters. Here’s what you need to know if you’re in the market for a new car and a mortgage at the same time.

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

Your debt-to-income ratio and your car payment

When you apply for a mortgage loan, or even a pre-approval, the lender will check your debt-to-income ratio, or DTI ratio.

DTI shows whether borrowers can reasonably afford all of their monthly bills along with the new mortgage loan payments.

Lenders typically look for DTIs of 43 percent or less, though FHA lenders may approve a loan with up to 50 percent DTI in some cases.

If you earn $9,000 a month before taxes (gross income), then 43% of your income equals $3,870. All of your debt payments — including your new mortgage payment — would need to fit within this $3,870 budget.

A car payment plus a house payment should fit within this budget for most households. But what about things like student loans and credit card minimum payments — and what if you’re buying a second or a third car?

All of a sudden, that new car payment could limit the size of your home loan.

Will leasing a car affect buying a house?

Whether you lease or buy a new car, you’ll add money to your monthly expenses.

But there is a difference between buying and leasing a new car from the point of view of mortgage underwriters.

Even if you have a $450 monthly car loan payment and a $450 a month auto lease payment, these are seen differently by mortgage lenders.

A lease payment is essentially rent. At the end of the lease, your equity in the vehicle is zero and your net worth does not increase. You also have decisions to make once the lease term ends:

• You can lease another vehicle
• You can buy the vehicle you’ve been leasing
• You can buy another vehicle

These choices have one quality in common: They mean your need to make monthly payments will continue unless you’re able to buy a car for cash.

With an auto loan, the situation is different. Each monthly payment gives you more equity in the vehicle. After the loan is paid off the car is yours. It’s an asset that you can keep without making a monthly payment or trading in for another car.

Having a paid-off vehicle helps strengthen your mortgage application.

When car payments are not considered a debt

While car lease payments are always considered a debt for DTI purposes, that’s not always true with car loans. They may not count against you even if you pay out big money each month. This is partly because, under Fannie Mae and Freddie Mac rules, lenders can ignore monthly auto loan costs if 10 or fewer payments remain.

“Lease payments,” says Fannie Mae, “must be considered as recurring monthly debt obligations regardless of the number of months remaining on the lease.

“This is because the expiration of a lease agreement for rental housing or an automobile typically leads to either a new lease agreement, the buyout of the existing lease, or the purchase of a new vehicle or house.”

The story with auto loan payments is different.

Does leasing a car affect your credit score?

Whether you lease or buy, a new vehicle can impact your credit score.

With a lease, you have a monthly payment obligation. When the lease ends, there’s likely to be either a new lease or a new monthly cost for a vehicle purchase. In either case, credit utilization is increased, and that can reduce your credit score.

Paying down a recurring loan balance should strengthen your credit report, increasing your credit score. Higher credit scores can mean lower mortgage rates and easier loan applications.

How car leases impact government-backed mortgages by loan type

Government-insured loans like FHA, VA, and USDA loans have their own underwriting rules. Each loan type views auto leases and loan payments differently.

FHA mortgages and auto leases

Payments on car leases will always be included in your DTI for an FHA loan even if the lease term expires soon.

But if you have a car loan that will be paid off within 10 months, FHA lenders won’t have to include the car payment in your DTI. To be excluded from your DTI, the amount of money due on your auto loan each month can’t exceed 5 percent of your gross monthly income.

While some loan programs will allow you to pay down your loan balance to reach the 10-month threshold before buying the house, the FHA does not.

VA mortgages and auto leases

The VA does not distinguish between auto loans and auto leases, but individual VA lenders can, and they most likely will. The VA says debts and obligations with fewer than 10 remaining payments can be ignored for DTI purposes.

But, it also says that lenders must include “accounts with a term less than 10 months that require payments so large as to cause a severe impact on the family’s resources for any period of time.”

Confused? You bet. To clarify matters the VA gives this example:

“Monthly payments of $300 on an auto loan with a remaining balance of $1,500, even though it should be paid out in five months, would be considered significant,” says the VA.

Why? Because “the payment amount is so large as to cause a severe impact on the family’s resources during the first, most critical, months of the home loan.”

USDA mortgages and auto leases

Like FHA loans, USDA loans will always include auto lease payments as monthly debts to find your debt-to-income ratio. But auto loan payments may not count toward DTI.

If you owe 10 or fewer monthly payments on your car, USDA lenders won’t have to include your car payment in your monthly debts.

Reduce recurring payments before applying for a mortgage

Paying down your debt — auto or otherwise — before buying a home should help you qualify for a better mortgage loan.

Lower debt creates a lower debt-to-income ratio, and a lower DTI ratio can open up more home loan options for borrowers.

Paying down your credit cards, for example, will lower their minimum monthly payments, and lenders typically use minimum credit card payments when they calculate your DTI. Full repayment on an installment loan, such as a student loan or car payment, should help even more.

Lower monthly payments can increase your home buying budget

Generally speaking, lower monthly debt correlates to a bigger possible mortgage, which means lowering your monthly payments wherever possible could mean a bigger home buying budget.

Plus, your lower DTI can help you land a lower interest rate or help you qualify for a lower minimum down payment.

Reducing your monthly obligations has the added benefit of improving your credit history which also helps your mortgage or refinance eligibility.

Never buy a car after applying for a mortgage loan

A lot of first-time home buyers are just starting out in their financial lives. Along with buying a house, they also need to buy a new or used car.

But financing an auto purchase right after applying for a mortgage can wreak havoc on your home buying process. The new car payment will throw a wrench in your DTI, and underwriters will notice.

Wait until after you’ve closed on the home — and officially become a homeowner — to get a car loan, no matter what the car dealership says.

FAQs

Will leasing a car affect buying a house?

Yes. Any kind of monthly debt, including a new lease payment, will affect mortgage eligibility. A lease may affect buying a house more than a car loan. Leasing or financing a car right after applying for a mortgage loan could change the conditions of your loan offer.

Does leasing a car affect your debt-to-income ratio?

Yes, mortgage lenders will include your lease payment in your monthly debts when it calculates your debt-to-income ratio. Higher monthly debts can affect the size of your loan, your mortgage interest rate and your required down payment amount.

Does a car lease count as debt?

Yes, car leases count as debt from the point of view of mortgage loan providers. Student loans, credit card minimum payments, and personal loan payments also count as debt. Utility bills and other living expenses such as groceries and gasoline do not.

Does having a leased car affect getting a mortgage?

A car lease can add hundreds of dollars to your monthly payment obligations. Mortgage lenders consider your other monthly payments as they assess your eligibility for a home loan. Too much monthly debt can limit your mortgage eligibility.

Does leasing a car hurt your credit score?

A car lease interacts with your credit history much like a car loan would. The lease adds a hard inquiry and a new credit account which often lowers a borrower’s credit score at first. But making regular lease payments should add positive data to your credit history, potentially increasing your credit score.

The bottom line: Buying a car and applying for a mortgage

So will leasing a car affect your home buying process? Yes, it most likely will. In some cases, a lease will have a bigger impact on a mortgage application than a car loan would.

For some car shoppers, it may be best to wait a few months until you have completed your home purchase. For specific advice on your situation, it’s best to speak with a professional mortgage loan officer.

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

The post Should You Buy or Lease a Car Before Applying For a Mortgage? first appeared on My Mortgage Insider.

Answer: For most mortgages today there are five reduction strategies to consider without refinancing.

First, there is the occasional prepayment. In this situation, every so often you add money to your mortgage payment by using the “extra principal” line on your payment coupon.

If you go this route, be sure to check your mortgage balance in the coming month to make sure the additional payment was properly credited.

Second, usually the term “extra principal” means that the borrower chips in some money here and there to reduce the principal balance. However, it sometimes happens that the borrower wants to make a single substantial payment, say $10,000 or $20,000.

If this is the case, do not simply make a larger payment without first calling the loan servicer and asking if the payment will be considered a “curtailment.”

If it is counted as a curtailment, the interest rate remains unchanged, the loan balance is significantly reduced, and in turn the lender will lower the minimum monthly payment because less is needed for the loan to be self-amortizing over its remaining life.

The terms of a curtailment must be worked out with the lender in advance so that everybody understands what will happen once your payment is received.

Third, you can plan to make regular prepayments, say $100 every month. For example, if you have $175,000 mortgage at 4.25%, the monthly payment for principal and interest will be $861.

Add an extra $100 per month to the mortgage and it will be repaid in 293 months instead of 360 months, meaning the loan-term will be reduced by 67 payments.

Since most 30-year loans do not actually last three decades, what will most likely happen is that you’ll sell or refinance and simply owe less to the lender at closing.

Fourth, you can effectively decide your loan length. If you increase the monthly payment on our $175,000 loan to $1,317, the loan will be repaid in 15 years – or by paying $1,084 per month you can have 20-year financing.

Fifth, you can create what is effectively a bimonthly payment. Instead of paying $861 for principal and interest each month, we can instead pay $430.50 every two weeks if we go the bimonthly route.

While such as schedule will surely pay off the loan more quickly, it is not a plan which most lenders will accept – mostly because they do not want to handle 26 payments a year.

The solution is to keep lenders happy and get the same essential result as you would with a bi weekly payment. This can be easily done by dividing your current monthly payment by 12 and adding the result to the extra principal line of your payment coupon.

In this case, we would take $861, divide by 12, and that gives us $71.75. If we add $861 plus $71.75 the total monthly payments will be $932.75. If you multiply $932.75 times 12 you get $11,193.

Alternatively, if you multiply $430.50 times 26 you get the same result.

You will sometimes hear about third parties who offer to operate bi-weekly payment programs on your behalf. Naturally, if you enroll in such a program you will have to pay various fees and charges, money better spent on paying down the mortgage.

Since your mortgage agreement is with the lender, you must make sure that all payments required for the mortgage are paid in full and in a timely way. If a third party happens to be late with a payment or does not make it at all, then it’s your credit that will suffer.

For these strategies to work your loan must allow prepayments without penalty. In today’s mortgage marketplace most financing bans penalties, but there are some loans out there where you can still get dinged for prepayments.

Typically, if your mortgage coupon has a line that allows you to add “extra principal” or something similar then you should be okay.

If you have any questions about penalties call your loan servicer and ask what penalties – if any — apply to your mortgage.

The post How Can I Quickly Cut My Mortgage Debt? first appeared on My Mortgage Insider.

Answer: Imagine that you want to buy a home for $200,000. With a conforming mortgage, you will put down 20 percent or $40,000. Because of the down payment size there’s no requirement to buy mortgage insurance. You borrow $160,000 and with a 4.25 percent interest rate fixed over 30 years with monthly payments on principal and interest at $787.10.

With an FHA loan, the numbers for the same $200,000 property look like this:

• You put down put down 3.5 percent ($7,000). You agree to finance $193,000. This is the “base” loan amount.

• You then pay a 1.75 percent up-front mortgage insurance premium (the up-front MIP). The total cost is $3,377.50. You can pay the up-front MIP at closing, but to save cash most will add it to the debt. The result is a final mortgage amount of $196,377.50, but we’ll round it to $196,378.

• With the FHA program you also pay an annual mortgage insurance premium (the annual MIP). At the time this article was written, the annual MIP is calculated at .85 percent of the outstanding mortgage balance.
• The monthly payment for principal and interest is $966.06. The monthly expense for the up-front MIP is $136.71. The total monthly cost is $1,102.77.

If we look at the two options, we can see that if we buy with 20 percent down our monthly cost is $787.10 versus $1,102.77 with FHA financing. Closing costs for both loan options are extra.

No doubt, the monthly FHA loan cost is higher. But is it somehow unfair?

If we take a careful look at the two options we can see some interesting distinctions.

First, if we buy with 20 percent down the initial loan amount is $160,000 versus $196,378 for the FHA borrower. Since we’re borrowing an additional $36,378, this explains one reason for the higher cost of FHA financing,.

Second, we have not assigned any value to the $36,378 NOT paid by the borrower who puts down 20 percent.

Let’s imagine that we can invest $36,378 into a five-year certificate of deposit (CD) that pays 1.85 percent annually, roughly the rate as this is written. The account will earn $672.99 annually or $56.08 per month.

Now we can see that a borrower who puts down $40,000 really has a higher economic cost than just the mortgage payment. The real cost of the loan with 20 percent down is the monthly mortgage payment, $787.10, plus any lost monthly interest, $56.08, or a total of $843.18. Now the cost of conforming and FHA are somewhat closer.

There are a few points to be made here.

First, the typical FHA borrower doesn’t have the option of financing with 20 percent down because he or she simply doesn’t have $40,000 in cash, not including cash for the closing costs.

Second, without $40,000 downpayment a buyer cannot buy with a conforming loan. Unless they can buy now it, means a potential purchaser loses out if home values rise – plus they cannot lock-in today’s prices. By not purchasing, an individual may also face higher housing costs if rental rates increase.

Third, mortgage insurance has value. In this case, it enables a purchaser to buy with 3.5 percent down instead of the traditional 20 percent. FHA insurance also protects lenders in the event of default, the reason they are willing to accept a far lower down payment.

Fourth, with fixed-rate financing at today’s rate, the FHA borrower has locked in a bigger loan than the borrower who pays 20 percent up front. The individual who pays 20 percent up front has invested an additional $33,000 for the downpayment in our example.

Without refinancing, the buyer cannot capture a better return if interest levels for savings increase nor use the money for other purposes such as funding business or paying tuition.

The bottom line: There’s risk in every transaction, whether it is real estate, stocks, bonds or any other type of investment. We don’t know if home values, interest rates and rental costs will rise or fall in the future.

However, we do know is this: The FHA mortgage program gives individuals without 20 percent down the opportunity to buy real estate at today’s prices. In exchange, the FHA borrower pays an insurance premium.  

It’s up to each individual to see if FHA financing and real estate ownership make sense. Given their needs, finances and personal preferences, each home buyer should do what’s in their best interest.

The post Is Mortgage Insurance Overpriced? first appeared on My Mortgage Insider.

Answer: According to the Consumer Financial Protection Bureau (CFPB), “shopping for a mortgage with someone else is the same regardless of whether you and the other person are married, registered domestic partners, unmarried partners, or just friends.

“Lenders cannot discriminate against you based on your marital status. However, there are different things to consider depending on who you are getting a mortgage with — particularly when it comes to the real estate title and the tax implications.”

While lenders cannot discriminate, they do have rules they can apply to joint borrowers. For example, they will generally use the lowest credit score between the co-buyers. They will also combine the incomes of all buyers when evaluating the application.

What are the obstacles for unmarried buyers?

The real issues unmarried co-buyers are likely to face involve those “title and tax” concerns mentioned by the CFPB.

For instance, how much of the property is owned by each party? How will tax deductions for mortgage interest and property taxes be divided? What are the obligations of each party if you split up? If the downpayment is a gift for one co-borrower who gets the money if you break up?

These generally won’t be your favorite questions to ask with your boyfriend or girlfriend, but they’re important to know.

In the lender’s eyes you will be mortgage co-signers. That means each of you has a 100 percent obligation to repay the mortgage. One of you loses a job? Doesn’t matter, the payment must be made. One of you moves out? Still doesn’t matter.

If the payment isn’t made, both credit reports will get dinged.

If one of you is supposed to pay the mortgage and the payment isn’t made, both of you are responsible for the debt. For example, if you borrow $200,000, you are each responsible for the full repayment of the $200,000 and not some lesser amount.

“Keep in mind,” says the CFPB, “that property, marriage, and inheritance laws differ widely from state to state. Your rights and responsibilities also change depending on how the property is owned and titled.

Consulting with a real estate agent can help

“Not all states offer all kinds of titles or define them in the same way. Depending on the state, some types of titles may have different implications based on whether you are married or not. Some states, known as ‘community property states,’ have special rules for married couples.”

You and your co-buyer are best served by first consulting with a local real estate attorney or legal clinic before buying a home or searching for a mortgage.

You’ll want a formal ownership agreement which details how the title will be held and the ownership percentage of each party, among other things.

In addition, both parties should have a will and such other paperwork as you may need to assign property ownership in the event of a death or if someone cannot express their preferences.

Is this fun stuff? No, but if there is a dispute or other problem it will be a lot cheaper, faster, and easier to resolve problems with proper paperwork than without.

The post Can I Buy Real Estate With A Friend? first appeared on My Mortgage Insider.

I’m now interested in buying a home but not clear how lenders will count my income.

Answer: Job switches are not uncommon. According to the Bureau of Labor Statistics, the typical worker has held the same job for just 4.2 years. Given this reality, it’s not surprising that lenders have guidelines that show how to handle such cases.

Depending on what type of mortgage you are trying to get, there are going to be different guidelines to follow.

FHA mortgages

The Department of Housing and Urban Development (HUD) says that lenders may consider self-employment income if the home buyer has been self-employed for at least two years.

If the buyer has been self-employed between one and two years, then the lender may only count the income if the the home buyers “was previously employed in the same line of work” where the buyer is now self-employed “for at least two years.”

Those looking to get an FHA loan will have to follow these guidelines when applying.

VA loans

According to the VA, self-employment for “less than two years cannot usually be considered stable unless the applicant has had previous related employment and/or extensive specialized training.”

It adds that a prospective home buyer with less than one year of self-employment “can rarely qualify.”

There are other requirements that come with VA loans. Applicants must be active or retired military members, and in some instances, their spouses can be eligible as well.

Fannie Mae

One of the two big buyers of conforming mortgages, Fannie Mae says “self-employment income can vary from year-to-year and because of the increased chance of uneven cash flows, self-employment adds a layer of risk that is not present with salaried borrowers.”

Self-employed buyers also have a higher chance of become delinquent on payments, meaning higher risk for lenders.

Because of this, Fannie Mae requires two years of work history to show their earnings – and prove that they will continue to make around that month in the future.

Some homeowners can use just 12-24 months of self-employment if they are still working in the same field as they were before they became self-employed.

Freddie Mac

Freddie Mac, the other big buyer of local mortgages, requires that those with less than two years of self-employment history must prove they have at least two years of experience in the field.

The home buyer must also show tax returns which “reflect at least one year of self-employment income.”

So through Freddie Mac, two years of self-employment history is not required in all cases.

Portfolio lenders

While most mortgages are made within the guidelines above, there are loans that lenders originate and keep, so-called “portfolio” loans.

Since portfolio loans can have guidelines that can be different from the usual standards, it’s possible that some lenders might be willing to finance a self-employed home buyer with less than a year or two of experience.

The bottom line

Qualified home buyers who have been self-employed for at least two years should fly through the system. Those with one to two years of self-employment will need to fully document their income and experience plus they can expect more lender scrutiny.

Home buyers with less than one year of self-employment will likely need to wait before applying for a mortgage unless they can find a friendly portfolio lender.

The post How Long Must I Be Self-Employed To Get A Mortgage? first appeared on My Mortgage Insider.

Answer: The mortgage industry is moving as quickly as it can toward automation. In an ideal world, home buyers and refinancers will type in their names and a few other pieces of information and the computer will instantly determine their ability to get a mortgage.

This sounds great in theory, but in practice we all tend to be a little different and one result is that the lending system has a few fudge factors built-in. The good news is that such flexibility tends to benefit you.

For example, loan programs often have a strict debt–to–income ratio (DTI), say not more than 43 percent.

In other words, up to 43 percent of your gross monthly income can be used for housing expenses such as the mortgage, property insurance, property taxes and recurring debts which might include auto loans, minimum credit card payments or student loans.

If the DTI ratio can somehow be higher, a home buyer might obtain a larger loan or more readily qualify. This is where compensating factors become important.

A compensating factor is really just an adjustment that lenders can make. However, they can’t just fudge the numbers. They have to operate within the requirements of the loan for which you are applying, and they also must meet their own standards.

What are examples of compensating factors? The answer varies according to the loan program and the lender. However, a good basic list looks like this:

Energy-efficient mortgages

When homes have better energy efficiency it means that homeowners have lower monthly costs for utilities. If a home meets certain energy efficiency standards the lender is often able to increase the DTI ratio.

Cash reserves

Lenders really dislike the idea of risk. The less risk represented by a given loan, the happier the lender.

If a lender sees that you have good savings habits and as a result have bulked up your cash reserves, they may be able to adjust your DTI higher.

As an example, if you have reserves equal to three monthly mortgage payments or six monthly mortgage payments in addition to all the projected costs to acquire the property, the lender is likely to be ecstatic.

By traditional standards, it may not seem like a big deal to have a few months of savings socked away. However, millions of Americans simply don’t save. The evidence? A study by the Consumer Financial Protection Bureau (CFPB) estimated that the typical payday loan amounted to less than $400.

Consistent payments

If you have been renting for some time at a given monthly rate — and your new mortgage payment will be similar, perhaps less than your current rental cost, or even a touch higher — lenders will be happy to consider that fact when reviewing your application.

In a sense, they know from your rental history you will be able to handle the new monthly payment, and that reduces lender anxieties.

Minimum discretionary debt

It’s okay to have a mortgage application that shows debt. After all, an applicant with both savings and no debt is fairly rare. What lenders would like to see for those who do have debt is that it meets certain standards.

With FHA financing, little or no discretionary debt can be a compensating factor according to HUD:

• When the Borrower’s housing payment is the only open account with an outstanding balance that is not paid off monthly.
• If the credit report shows established credit lines in the Borrower’s name open for at least six months.
• The Borrower can document that these accounts have been paid off in full monthly for at least the past six months. One reason to keep checks and bank statements is to document payments.

Additional income

Not all income earned by applicants can count toward their qualifying income. For example, a bonus here and there or some extra overtime are unlikely to help your qualifying income level.

However, if additional income can be documented for at least a year, the lender may be able to use such income is a qualifying factor.

Residual income

The VA loan program qualifies borrowers in part by looking at what is called “residual” income. Since VA financing has very few foreclosures, the residual income standard can be seen as a strong measure of financial stability.

The idea of residual income is to see how much cash a borrower has at the end of the month given income, family size, and location. The more cash the better. Lenders can sometimes use the same system to create a compensating factor for non-VA loans.

The bottom line

When speaking to lenders, ask if you qualify for a little assistance through the use of compensating factors. You may not need them to qualify, but if you do they can mean the difference between getting the loan you want versus a mortgage which is too small or maybe even an application which is declined.

The post How Compensating Factors Can Lead To Mortgage Success first appeared on My Mortgage Insider.

Answer: Seller take-backs have been with us for as long as real estate has been sold. This is not a new idea but it’s an approach which raises certain questions.

Is the property now financed? If there is an existing mortgage on the property, how will it be paid off if you finance the sale?

In some cases, home buyers envision seller financing to mean that the owner will continue to make payments on the original mortgage and that new financing will be secured with additional debt, a so-called wraparound mortgage.

As an example, imagine that you now have a $250,000 mortgage balance at 4 percent on your home and the property sells for $300,000. The buyer might put down $10,000, so you will take back $40,000 in second-lien financing and you will also continue to make payments on the original mortgage.

No one will ask the lender for permission to assume the $250,000 loan.

You will charge the buyer 4.5 percent for financing, meaning you will get a half percent premium on the $250,000 mortgage balance plus 4.5 percent on the additional $40,000 in financing.

Such transactions involve a lot of risk – for the seller.

First, mortgages routinely have what is called a due on sale or acceleration clause. A lender might demand immediate repayment of the $250,000 arguing – strongly – that the residence has been constructively sold even though you continue to make payments.

Second, you have now sold the property and have $10,000 in hand. Is that enough to acquire a replacement property? Move? How much of the $10,000 will be needed for closing? If you need more cash from the transaction a seller take-back won’t work.

Third, what happens if the buyer doesn’t make payments six months from now? The $250,000 mortgage is an agreement between the seller and the lender. If payments aren’t made the owner’s credit will be hurt.

The seller with a take-back has the ability to foreclose if the buyer does not make required payments.

However, it’s not as simple as it sounds. The seller will need a lawyer to file the appropriate paperwork. The court system can be very slow – and lawyers are expensive.

If the matter does get to court and the property is foreclosed, all the money from the property’s sale will go first to the original lender. Only after the entire balance has and been repaid will any remaining money be given to the holder of the second lien, the seller in this case. If the property sells at auction for $249,000, there won’t be a dime for the seller who took back financing in our example.

Fourth, why is a seller take-back necessary? As this is written, mortgage rates are around 4 percent, a historically-low interest level. Is there some reason the buyer cannot get lender financing? Could there be a credit problem? Even if there is no mortgage on the property why do you want to extend credit to someone who can’t get a bank loan?

Fifth, if the buyer can get a lender mortgage then the sale process is very simple: At closing you get paid and the purchaser gets the property. The sale agreement used by local real estate brokers will work very nicely to help both buyer and seller. Any existing mortgage on the property will be paid off, and if the sale price is sufficient you’ll get a check at closing.

What you won’t get is an obligation to be involved with the property – or the lender – after settlement. Potential liabilities associated with seller take-backs will be gone. You’ll be out.

In all cases involving seller take-backs it’s smart to speak with a real estate attorney before signing anything. It’s also smart – if a seller take-back is of interest — to require credit reports and past tax returns that can be reviewed by the financial professional of your choosing as well as a large cash down payment, sale forms, and a mortgage note satisfactory to your attorney.

The post Seller Financing Versus Lender Mortgage: Which Is Better? first appeared on My Mortgage Insider.

I’ve heard that a 40-year home loan can help lower monthly payments and make buying a home more affordable — who offers 40-year mortgages?

Longer term financing is still available, despite falling out of favor after the housing crash 10 years ago. But, finding a lender that offers a 40-year mortgage lender can be difficult.

The real question: Should you get a 40-year loan in the first place?

A closer look at 40-year mortgage costs

For many borrowers, the biggest barrier to homeownership is affordability — and, your monthly mortgage payment is your first hurdle. All lenders have standards to borrow that every borrower must meet. One of those standards is your debt-to-income ratio (or, DTI), which generally can’t exceed 43%. Large monthly mortgage payments can push borrowers past DTI limits, which can result in declined loan applications.

This makes 40-year mortgages attractive for some. Longer loan terms equal smaller monthly costs. With less owed each month, some borrowers can more easily afford financing and in some cases may qualify for larger loan amounts.

But, for a better comparison, we need to look beyond just monthly payments — interest costs and amortization are also important cost considerations when evaluating which loan is right for you.

Comparing 15-, 30-, and 40-year Mortgages: A Breakdown of Costs*

*Monthly payments and potential interest costs are based on a $200,000 home loan with a fixed rate of 4.875%.

Things to consider when comparing costs for 40-year mortgages:

• Lower monthly payments. While it’s true that your monthly payment will be lower with a 40-year mortgage, it likely won’t be by much. In the illustration above, there’s only a $110 monthly savings between a 30-year home loan versus a 40-year. This small monthly savings may not be worth the other long-term loan costs.
• Higher interest rates. The interest rate that you qualify for will depend on a variety of factors, including your credit score and credit history. However, lenders who offer longer term loans typically charge a higher interest rate than loans with 15- or 30-year terms.
• Higher interest costs. The longer the loan term, the more you’ll spend in interest costs over the life of the loan. The 40-year loan has the highest potential interest costs (more than three times the amount of a 15-year loan and around $74,000 more for the 30-year) in the example above — and that’s assuming the same interest rate; in reality, it’s likely to be higher.
• Takes longer to build equity. You’ll essentially be making 10 extra years of interest payments with a 40-year mortgage, which means that you’ll build up equity at a much slower rate than a 15- or 30-year mortgage. This is particularly important for homebuyers who don’t plan to be in the home for the entire 40 years, which is increasingly common. In 2018, the average home was owned for only nine years according to the National Association of Realtors.

Who offers 40-year mortgages?

Since it’s easier to qualify for a 40-year mortgage in terms of DTI, you might expect that they are easy to find, but this isn’t the case. Many lenders don’t offer them at all.

Federal rules say lenders can offer two types of residential financing, “qualified mortgages” (QMs) and “non-qualified mortgages” (non-QMs). Qualified mortgages include FHA, VA, and conventional loans that can be purchased by Fannie Mae and Freddie Mac.

What makes a qualified mortgage?

To be considered a “qualifying mortgage,” a loan must comply with the Consumer Financial Protection Bureau’s (CFPB) product feature requirements. One of these primary requirements is a maximum loan term of no more than 30 years.

Even if a loan is not a qualified mortgage, it can still be an appropriate loan. Lenders are free to originate mortgages — QM or not — based on their own criteria, or what the CFPB calls “sound, tested underwriting guidelines that you have used in the past to make loans that have generally performed well.”

“Consumers should understand that every loan made today is subject to the ability-to-repay rule; non-QM loans just have a different way to get there,” says Mike Frantontoni, chief economist with the Mortgage Bankers Association.

Still, lenders prefer to originate QM loans because they’re safe. Dodd-Frank protects lenders who properly originate QM loans from lawsuits by borrowers, insurers, and investors. As a result, 97% of originated loans are qualified mortgages and non-QM loans — a category that includes 40-year mortgages by definition — are difficult to find.

To find a 40-year mortgage lender look for lenders who offer non-QM financing such as jumbo mortgages. Be sure to speak with several loan officers to see how rates and terms compare.

40-year mortgage rates

It used to be that jumbo loans, as one type of non-QM mortgage, were more expensive than other forms of financing. That has changed. Today, jumbo loans are comparable to FHA or 30-year conventional mortgages.

Rates vary and fluctuate daily — it’s important to shop around to get the best deal. Look for lenders who offer non-QM financing such as jumbo mortgages. Compare rates and terms carefully, and get the financing that works best for you.

The post Can You Get A 40-year Mortgage? first appeared on My Mortgage Insider.

Answer: We tend to think of “income” as the numbers which show up on a bi-weekly employment check. For lenders, however, many forms of income are entirely acceptable for mortgage underwriting.

‘Income” comes in different flavors. There can be salary, overtime, bonus, and commission income – all of which will delight lenders. However, the list of acceptable mortgage income types is actually much longer. According to Fannie Mae with proper documentation lenders can readily consider the following types of income when qualifying borrowers:

• Alimony or Child Support
• Automobile Allowance
• Boarder Income (restrictions apply)
• Capital Gains Income
• Disability Income – Long Term
• Employment Offers or Contracts
• Employment-Related Assets as Qualifying Income
• Foreign Income
• Foster Care Income
• Housing or Parsonage Income
• Interest and Dividend Income
• Military Base pay, flight or hazard pay, rations, clothing allowance, quarter’s allowance, and proficiency pay
• Mortgage Credit Certificates
• Mortgage Differential Payments Income
• Notes Receivable
• Public Assistance
• Retirement, Government Annuity, and Pension Income
• Seasonal Income
• Social Security Income
• Temporary Leave Income
• Tip Income
• Trust Income
• Unemployment Benefits
• VA Benefits Income (non-education)

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Taxable and non-taxable mortgage income

The issue of “what is income?” is further complicated by tax questions. Lenders like to see income which has been reported on tax forms but some income is not taxable so it’s not reported. As an example, Nolo.com explains that child support is neither taxable nor deductible.

Document, document, document

From a lender’s perspective “income” is income only if it can be fully documented. Lenders have strict paperwork requirements because they have an obligation to verify the ability of all borrowers to repay their mortgages. They do this by creating a careful paper trail showing that at the time of application the borrower was fully qualified for financing.

Consider alimony. According to Freddie Mac guidelines a borrower receiving alimony must provide several forms of supporting documentation, including:

• Evidence that alimony has been paid for at least the past six months.
• Evidence that payments will continue for at least the next three years.
• Copies of the agreement which establishes payments such as a signed court order, legally binding separation agreement or a final divorce decree.
• Evidence of the child or children’s ages when child support is involved.

Strategies

It might seem like paperwork overkill but lenders will be elated if you can show lots of documents to back up mortgage income claims.

Although we live in the electronic age it’s still best to be paid by check. A check shows who paid, the amount involved, and the date.

When depositing income it’s best to have a separate deposit for each check. With a corresponding bank deposit receipt there’s evidence that the money was both collected and deposited.

Cell phone deposits make it easy to document payments by check. The check comes in, the front and back are scanned for the deposit, and a notice of approval is received by email. Print out the approval and you have both the physical check and dated evidence of the deposit. Lenders will love it.

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Gross-up income

One of the great oddities of “other” income is that sometimes it may be worth more than the amount shown on the check. Here’s how.

When lenders compute your debt-to-income ratio (DTI) they need to know your monthly income. By “monthly income” they mean what you earn before deducting taxes, your gross income. If Stevens gets $1,000 a month in non-taxable pension income they have to “gross-up” that sum, to treat it as though it’s a taxable amount. They might increase the amount for qualification purposes to $1,150 or $1,250. This higher number will make it easier to qualify for financing.

Reductions

If it’s true that some non-salary income can be used to boost your qualifying income it is also true that sometimes you can’t get credit for all that you deposit.

The classic example is rental income. Take in $12,000 in profits from a rental property and lenders are likely to see only $9,000 – a 25 percent reduction. How come? Lenders like that you have rental income but they worry that looking forward there may be vacancies and surprise maintenance requirements.

To find out more you need to get pre-approved. Show your documentation to loan officers and ask if there are additional steps you can take to verify income. Also ask about grossing-up and reductions because such calculations can impact your ability to qualify for financing.

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The post What Do Lenders Count As Mortgage Income? first appeared on My Mortgage Insider.