The number of mortgage applications increased 1.4% as reported by Mortgage Bankers Association. “Mortgage rates declined for the sixth consecutive week, with the 30-year fixed rate decreasing to 6.29 percent, the lowest rate since February 2023. Treasury yields have been responding to data showing a picture of cooling inflation, a slowing job market, and the anticipated first rate cut from the Federal Reserve later this month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “With rates almost a full percentage point lower than a year ago, refinance applications continue to run much higher than last year’s pace. However, there is still somewhat limited refinance potential as many borrowers still have sub-5 percent rates. It is a positive development that there are homeowners who can benefit from a refinance as rates continues to move lower.”

Added Kan, “Purchase applications increased over the week and are edging closer to last year’s levels. Despite the drop in rates, affordability challenges and other factors such as limited inventory might still be hindering purchase decisions.”

The interest rates reported below are from a weekly survey of 100+ lenders by Freddie Mac PMMS. These average rates are intended to give you a snapshot of overall market trends and may not reflect specific rates available for you.

Shop and compare your personalized rates from multiple lenders (Sep 16th, 2024)

Copyright 2024 Freddie Mac. Averages are based on conforming mortgages with 20% down.

How do I get the best mortgage rate?

To get the best mortgage interest rate for your situation, it’s best to shop around with multiple lenders.

According to research from the Consumer Financial Protection Bureau (CFPB), almost half of consumers do not compare quotes when shopping for a home loan, which means losing out on substantial savings.

Interest rates help determine your monthly mortgage payment as well as the total amount of interest you’ll pay over the life of the loan. While it may not seem like much, even a half of a percentage point increase can amount to a significant amount of money.

Comparing quotes from multiple lenders ensures that you’re getting the most competitive mortgage rate for you. And, if lenders know you’re shopping around, they may even be more willing to waive certain fees or offer better terms for some buyers. Either way, you reap the benefits.

What determines my mortgage interest rate?

Your mortgage rate is influenced by a variety of factors that fit into two categories:

• The current economic climate: Factors like inflation and the Federal Reserve’s benchmark rate can have a big influence on current mortgage rates
• The specifics of your financial life: Within the context of the mortgage market, your personal finances help determine your precise interest rate 

While you can’t control the federal funds rate or other economic conditions, you can do things to improve your personal finances before applying for a mortgage loan.

Verify your mortgage eligibility. Start here (Sep 16th, 2024)

Any change to one of the following seven things can directly impact the specific interest rate you’ll qualify for.

Credit Score

Your credit score has one of the biggest impacts on your mortgage rate as it’s a measure of how likely you’ll repay the loan on time. The higher your score, the lower your rates.

If you haven’t pulled your credit score and addressed any issues, then start there before reaching out to lenders.

A better credit score opens up more loan options and lower interest rates in any housing market.

Down Payment

In general, the higher your down payment the lower your interest rate, because you’re viewed as a less risky borrower than someone who finances the entire purchase.

If you’re unable to put at least 20 percent down, then most lenders require Private Mortgage Insurance (PMI), which will be added to the cost of your overall monthly mortgage payment.

A lot of first-time homebuyer programs — such as statewide and local down payment assistance — can help you come up with a bigger down payment.

Loan Type

There are different types of mortgage loans on the market with different eligibility requirements. Not all lenders offer all loan types, and rates can vary significantly depending on the loan type you choose.

Some common mortgage loan products are conventional, FHA, USDA, and VA loans.

Within most of these loan types, you can choose a fixed-rate mortgage (FRM) or an adjustable-rate loan (ARM). ARM rates are often substantially lower than fixed rates, but keep in mind you’ll only hold that low rate for a few years (typically 5, 7, or 10) before it has the potential to increase.

Verify your mortgage eligibility. Start here (Sep 16th, 2024)

Loan Terms

Your loan term indicates how long you have to repay the loan. Shorter-term loans tend to have lower interest rates, but higher monthly payments when compared to the standard 30-year mortgage term. 

Exactly how much lower your interest rate and how much higher the monthly payment will be  depends a lot on the specific loan term and interest rate type you choose.

Interest Rate Type

There are two basic types of interest rates: fixed and adjustable. 

• Fixed interest rates stay the same for the entire loan term
• Adjustable rates have an initial fixed period (five or seven years is common), but will fluctuate after that period based on the current market rates for the remainder of the loan

Some home buyers take advantage of the low intro rate on an ARM if they know they’ll move or refinance before the initial rate expires. For many buyers, though, a fixed-rate loan is preferable as it offers predictability and stability over the life of the loan.

Loan Amount

The loan amount will differ from the price of the home. It’s the total amount you are borrowing, including any closing costs your roll into the price of the home, less than down payment.

If you roll the closing costs and other borrowing fees into your loan, you may pay a higher interest rate than someone who pays those fees upfront. Loans that are smaller or larger than the limits for conforming loans may pay higher interest rates too.

Location

Interest rates vary slightly depending on the state you live in as well as whether you’re looking to purchase rural versus urban real estate. Some loan products like USDA loans offer generally lower rates than conventional mortgage options for eligible borrowers.

Verify your mortgage eligibility. Start here (Sep 16th, 2024)

Why does my mortgage interest rate matter?

Your mortgage interest rate impacts the amount you’ll pay monthly as well as the total interest costs you’ll pay over the life of your loan. While it may not seem like a lot, a lower interest rate even by half of a percent can add up to significant savings for you.

For example, say a borrower with a good credit score and a 20 percent down payment   takes out a 30-year fixed-rate loan for $300,000. In this case, an interest rate of 4.75% instead of 5.25% translates to more than $90 per month in savings — in the first five years, that’s a savings of $5,500. 

It’s equally important to look at the total interest cost of your loan. In the same scenario, a half percent decrease in interest rate means a savings of almost $33,000 in total interest owed over the life of the loan.

The cost savings of different interest rates for a $300K 30-year fixed loan

Current mortgage interest rates

Freddie Mac’s weekly report covers mortgage rates from the previous week, but interest rates change daily — mortgage rates today may be different than reported.

To find out what rates are currently available, compare quotes from multiple lenders.

Verify your mortgage eligibility. Start here (Sep 16th, 2024)

Mortgage interest rate FAQs

Will interest rates rise in 2024?

Interest rates change daily. They have trended upward in 2024, bouncing back from the record lows of the pandemic era.

What are interest rates based on?

Fixed mortgage interest rates operate in their own market. They’re not directly tied to the Federal Reserve’s fed funds rate, although this benchmark rate can help influence the direction mortgage rates are headed. Other factors that influence mortgage rates include the health of the economy, the inflation rate, and how much demand lenders are seeing for home buying and refinancing. Only adjustable-rate mortgages are directly tied to market indices and therefore to the Fed’s benchmark rate.

How does your credit score affect your rate?

Your credit score measures your likelihood of making continuous, on-time mortgage payments. Homebuyers with higher credit scores seem less risky to lenders. So, in general, the higher your credit score, the lower your mortgage rate. But other factors such as your personal debt, down payment size, and loan program also influence your rate.

What is an APR?

APR stands for annual percentage rate. Your mortgage interest rate is part of your APR, but APR also includes additional borrowing costs such as mortgage insurance premiums or other fees that make your loan possible. Your APR will be higher than your interest rate.

How many times will the Fed raise rates in 2024?

The Federal Open Market Committee (FOMC) meets every six weeks and could change the Fed’s benchmark rate at any meeting. With inflation at levels not seen in 40 years, most economists expect multiple rate hikes this year.

What are today’s interest rates?

Rates change every day. To see weekly average rates, check out Freddie Mac’s Primary Mortgage Market Survey. These rates show the overall climate of the mortgage market, but your individual rate will depend on your personal finances.

Is a 3.5% interest rate good?

In today’s climate, 3.5 percent interest on a mortgage is below average. In 2020 and 2021, during the record low rates of the pandemic, 3.5 percent was above average for a new 30-year mortgage.

Are mortgage rates high right now?

Rates have been higher — a lot higher — than they are today. In October of 1981, for example, average rates topped 18 percent. Forty years later, in October of 2021, average rates on 30-year mortgages were below 3 percent. So, most homebuyers today are paying rates much closer to record lows than to record highs.

Shop and compare your personalized rates from multiple lenders. (Sep 16th, 2024)

The post Current Mortgage Interest Rates | September 2024 first appeared on My Mortgage Insider.

FHA rules allow borrowers to use the FHA streamline if they have a second mortgage, home equity line (HELOC), or home equity loan. However, there are limitations. The maximum loan amount of the first and second mortgage combined can be no more than 125% of the property’s current value.

Compare that with the standard FHA streamline rule, which states a borrower can refinance no matter how much their loan amount exceeds the home’s value.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

Can you get an FHA streamline refinance when you have a second mortgage?

If a borrower has a $200,000 FHA loan and a second mortgage, the first loan may still be eligible for a streamline up to 125 percent of the original purchase price. Using this same example, the second mortgage may be as high as $50,000 while the FHA first mortgage is still streamline refinance eligible.

If the second mortgage causes the CLTV to exceed 125 percent, the mortgage must be paid down in order for a borrower to successfully close an FHA streamline refinance.

What if the second mortgage exceeds limits?

Keep in mind that the FHA streamline refinance can’t pay down or pay off the second mortgage. The second mortgage holder will have to subordinate the loan. This means that the lender will request a document from the lender stating that the second mortgage or HELOC will be in second position behind the new FHA first mortgage.

“Second position” simply means the order in which the loan will be paid off in case of foreclosure. If the borrower fails to pay the mortgage and the home is foreclosed on, the bank will pay off the primary mortgage first. In these situations, second mortgages often don’t get paid off.

The higher risk contributes to higher rates for second mortgages. They are viewed as higher risk. Conversely, first mortgages typically come with low fixed rate, since they are the first to be repaid in a foreclosure or short sale situation.

Why is this important? The first mortgage lender, in this case FHA, needs their loan to be in first position to give you the best available rate on the FHA streamline.

Check today's FHA streamline refinance rates (Sep 16th, 2024)

Subordination issues

Typically, second mortgage lenders will comply with the subordination request. But there have been instances where they refuse to subordinate. It is within their right to deny a subordination request. However, you can help the success of the process.

Typically your refinance lender will request the subordination from the second mortgage holder. The second mortgage lender or servicer will sometimes issue a subordination denial to a third party, i.e. your refinance lender. But as the customer, you may have better luck pushing your subordination request through. Ask your refinancing lender for your second mortgage holder’s subordination department contact information.

Successful FHA refinancing with a second mortgage

Performing an FHA streamline while you have a second mortgage on your home is a little more complicated, but it can be done. With the right FHA lender and a bit of extra effort, homeowners can drop their mortgage payment even under these circumstances.

Check your FHA streamline refinance eligibility today (Sep 16th, 2024)

The post Get an FHA Streamline Even if You Have a Second Mortgage first appeared on My Mortgage Insider.

Home buyers pay an upfront mortgage insurance premium when they close on an FHA loan. This upfront fee — known as UFMIP or MIP — equals 1.75 percent of the loan amount.

This fee is refundable when you refinance into another FHA loan, like the FHA Streamline Refinance or the FHA Cash-out Refinance, within three years of closing your FHA home loan.

Your refundable amount will get smaller each month, and you will no longer be eligible for any refund amount after three years.

See if you’re eligible for an MIP refund and an FHA refinance loan today (Sep 16th, 2024)

FHA MIP Refund Chart 2024

Source: HUD 4155.2 7.2.i Elimination of UFMIP Refunds

Why does the FHA refund upfront mortgage insurance?

The word “refund” can be misleading. The Federal Housing Administration won’t send you a check in the mail. Instead, it’ll let you “re-use” part of the upfront MIP you’ve already paid.
You can reuse the FHA insurance premium only if you’re refinancing into another FHA loan — and only if you refinance within three years.

The FHA allows these partial refunds because MIP has a purpose. This fee helps lenders offer lower interest rates to borrowers who have riskier applications. It’s the main reason FHA loans can be a really good deal for home buyers with lower credit scores.

But the benefits of upfront MIP build slowly; your savings accrue gradually, with each monthly mortgage payment you make.

If you don’t keep your loan long enough to benefit very much from its lower interest rate, the FHA will refund part of the fee so you can re-use the money on your next FHA loan.

How to calculate your FHA MIP refund

To calculate your MIP amount for your new FHA refinance loan, you’ll need to know the following figures:

1. Your original MIP amount paid. You can find this listed on your original loan documents. Your loan officer can help you determine this.
2. The number of months since your loan’s closing date.
3. Your refund percentage (see chart above).

Multiply your original upfront MIP amount by the eligible refund percentage to determine your total refund amount.

For example, if your original MIP amount was $2,500 on a loan that closed 10 months ago, then your eligible refund percentage is 62%. Your MIP refund amount is $1,550 ($2,500 x 0.62).

This refund amount will be applied to the upfront MIP due on your FHA refinance loan.

How to calculate your new FHA loan MIP amount

To calculate your MIP amount for your new FHA refinance loan, you’ll need to determine the following figures:

1. Your new loan’s upfront mortgage insurance premium (UFMIP) amount — this is calculated by multiplying your base loan amount by 0.0175 (all FHA mortgages charge 1.75 percent for UFMIP)
2. Your MIP refund amount (see above section for how to calculate)

Next, subtract your MIP refund amount from your new mortgage loan’s UFMIP amount. This amount is the total UFMIP you owe on your new refinance loan.

For example, if your new refinance loan is $200,000, then your new UFMIP amount is $3,500 ($200,000 x 0.0175). Now, let’s say your MIP refund amount is $1,800. 

That means, you’ll only have to pay $1,700 UFMIP towards your new refinance loan ($3,500 – $1,800 = $1,700).

Eligibility requirements for FHA MIP refunds

The FHA has specific eligibility requirements for MIP refunds both for your original FHA loan and your new FHA refinance loan. To be eligible, your current FHA loan must:

• Have closed less than three years ago
• Be up-to-date on all mortgage payments with no serious delinquencies
• Not have entered foreclosure
• Not be an assumed FHA mortgage

Other things to note:

• You must refinance into another FHA loan to receive an MIP refund
• MIP refunds will be applied to the UFMIP on the new FHA refinance loan
• For FHA Streamline Refinances, MIP refunds are available after the 7-month waiting period required for these loans
• Your refinance loan closing must happen by the end of the 36th month after the current FHA loan was opened

See if you're eligible for a FHA refinance loan (Sep 16th, 2024)

Can I get the FHA MIP refund in cash?

FHA MIP refunds are not eligible as cash refunds. Rather, they are credited directly toward the UFMIP on your new FHA loan. 

The HUD underwriting guidelines state: “If the borrower is refinancing his/her current FHA loan to another FHA loan within 3 years, a refund credit may be applied to reduce the amount of the UFMIP paid on the refinanced loan.”

Who do I contact with questions regarding my MIP refund?

The U.S. Department of Housing and Urban Development (HUD) is the administrator of FHA loans. HUD has created a Mortgage Insurance Premium Refund Support Service Center where you can ask questions about mortgage insurance refunds. You can contact HUD with your questions in one of the following ways:

• Call 1-800-697-6967
• Email sf_premiums@hud.gov
• Search their database

To search this database, you will need your FHA case number which should be part of your original loan documentation.

Upfront mortgage insurance premiums vs. annual insurance premiums

In addition to the upfront mortgage insurance premiums of 1.75 percent, all FHA loans charge an annual FHA mortgage insurance premium. Each premium charges a different percentage on the base loan amount and has specific requirements.

These annual premium amounts vary based on your loan term and down payment amount:

• 30-year loan with less than 5 percent down: Annual fee of 0.85 percent for the entire loan term
• 30-year loan with 5 to 10 percent down: Annual fee of 0.8 percent the entire loan term
• 30-year loan with 10 percent or more down: Annual fee of 0.8 percent for 11 years 
• 15-year loan with less than 10 percent down: Annual fee of 0.7 percent for the entire loan term
• 15-year loan with 10 percent or more down: Annual fee of 0.45 percent for 11 years

The FHA divides these annual fees into 12 monthly installments. Each monthly mortgage payment will include an MIP installment. 

For example, a loan of $200,000 with an annual fee of 0.85 percent requires $1,700 in annual insurance fees the first year. To cover this cost, the FHA will add about $142 to each monthly payment.

Keep in mind all FHA insurance premiums are calculated based on your loan amount which, because of your down payment, should be smaller than your home’s purchase price. In addition, while your MIP rate stays the same, the actual amount you owe each year will go down as you pay off your loan balance over time. 

FHA MIP refund FAQs

How is FHA MIP refund calculated?

The partial refund of your upfront mortgage insurance premium grows smaller by 2 percentage points each month. After 36 months, you’re no longer eligible for an MIP refund. Scroll up to see a chart of refund amounts by month.

Can you get money back on an FHA loan?

The Federal Housing Administration insures a cash-out refinance loan. Like all cash-out refis, this loan works by borrowing against the home equity you’ve built up. If you have enough equity to meet the FHA’s and your lender’s rules, you can get cash back at closing.

Is an FHA upfront mortgage insurance premium refundable?

Part of your FHA loan’s upfront mortgage insurance premium can be reused if you refinance into another FHA loan within three years. The amount of your FHA MIP refund grows smaller each month.

How is FHA MIP calculated?

The FHA’s MIP adds 1.75 percent of the loan amount to your loan upfront. This fee can be paid as part of your loan’s closing costs or it can be rolled into the loan amount. The FHA also charges an annual mortgage insurance premium. For borrowers with 30-year terms who made the minimum down payment of 3.5%, the annual MIP will tack on 0.85 percent of the loan amount each year.

How do I get my FHA MIP refund?

Most FHA-authorized mortgage lenders will automatically apply your FHA MIP refund to your new MIP amount due. If you’re refinancing your FHA loan into another FHA loan, ask your loan officer to make sure your refund gets applied to your new upfront MIP.

Can you get money back on an FHA loan?

If you have enough home equity, you can get a cash-out refinance to borrow against your equity. FHA purchase and Streamline Refinance loans do not allow cash back at closing.

Can FHA MIP be removed?

Your FHA loan’s annual MIP will remain for the life of the loan unless you put more than 10 percent down. In that case, the premium goes away after 11 years. You can also refinance into a conventional loan to eliminate MIP. Conventional loans will not require private mortgage insurance (PMI) if you have at least 20 percent in home equity. In addition, you’ll need a credit score of at least 620 to refinance into an FHA loan.

Apply for an FHA refinance before your refund expires

Current interest rates have slowed the demand for refinance loans.

Meanwhile, home values have continued to rise in many markets, creating more equity for more homeowners.

If you’re thinking about getting an FHA refinance, you may be able to save money through an FHA MIP refund.

See if you're eligible for a FHA refinance loan (Sep 16th, 2024)

The post FHA MIP Refund Chart & Guide | 2024 Mortgage Insurance Premiums first appeared on My Mortgage Insider.

What is an FHA cash-out refinance?

There are two primary FHA refinance loan programs: the FHA cash-out refinance and the streamline refinance. The FHA cash-out loan provides cash-in-hand for the borrower. You open a loan with a bigger balance than what you currently owe, and the excess proceeds go to you.

Because it’s a riskier product for lenders, the FHA cash-out refinance loan requires more documentation than does the FHA streamline refinance. An FHA streamline refinance loan allows you to refinance to a lower rate with little documentation, but it doesn’t allow any cash to the borrower.

Check today's FHA cash out rates here (Sep 16th, 2024)

In this article:

• Benefits of a FHA cash-out refinance
• Credit score and LTV requirements
• Conventional cash-out vs. FHA cash-out
• FHA cash-out refinance guidelines
• FHA cash-out refinance requirements
• FHA cash-out refinance FAQ
• Our recommended refinance lenders

Benefits of an FHA cash-out refinance

As the name implies, the greatest benefit of an FHA cash-out refinance is to put extra cash in the borrower’s pocket. These funds can be used for any purpose such as:

• Home improvement expenses
• Education costs
• Buying a new car or paying off a car loan
• Consolidating credit card balances
• Creating cash for savings or investment

For example, if you owe $100,000 on your home you could open an FHA cash-out loan for $150,000, assuming your home has adequate equity and you qualify for the loan. If closing costs were $5,000, you could end up with an extra $45,000 in your pocket.

These loans may also be used to simultaneously lower the interest rate and/or change the loan term (30-year fixed to a 15-year fixed). Loans may even change from an adjustable-rate mortgage (ARM) to a steady fixed-rate loan.

Click here for today's FHA cash out rates (Sep 16th, 2024)

FHA cash-out refinance credit scores & LTV

Compared to conventional cash-out loans, FHA cash-out loans have relaxed guidelines that allow borrowers with lower credit scores and higher debt-to-income ratios to qualify.

The minimum credit score for FHA loans is 500, assuming a 10% down payment. FHA cash-out refinances require 15% equity (the same as a 15% down payment). So, in theory, you need a 500 credit score to qualify.

However, most lenders require a much higher credit score since cash-out financing is riskier than even a home purchase. You’ll probably need a minimum score between 600 and 660 to qualify for FHA cash out.

FHA cash-out maximum loan-to-value (LTV) is 80 percent of the home’s current value (a new appraisal is required) compared to the maximum conventional cash-out LTV of 80 percent. The higher limit is why many homeowners choose an FHA refinance instead of a conventional one.

For example:

• Current home value: $250,000
• Existing loan balance: $187,500
• Maximum conventional cash-out loan: $200,000
• Maximum FHA cash-out loan: $200,000

After paying off the existing loan plus closing costs, homeowners would receive about $10,000 cash for a conventional cash-out versus $21,000 for an FHA cash-out. That extra $11,000 may be enough for many homeowners to choose the FHA cash-out option.

Conventional cash-out refinance vs. FHA cash-out refinance

FHA cash-out loans also have their disadvantages.

All FHA loans require both an upfront mortgage insurance premium and a monthly insurance premium. The upfront mortgage insurance premium is 1.75% of the loan amount. For a $200,000 loan, that’s $3,500 in additional principal added to your loan amount.

Additionally, FHA requires monthly mortgage insurance which would be 0.80% of the loan amount per year on a loan with an 85 percent loan-to-value ratio. That’s $67 per month for every $100,000 borrowed.

Because of these extra costs, you should consider a conventional cash-out refinance if your home has significant equity. Conventional loans at or below 80 percent loan-to-value do not require upfront or monthly mortgage insurance.

Check your FHA eligibility (Sep 16th, 2024)

FHA cash-out refinance guidelines 2024

Income

The FHA cash-out refinance requires sufficient income to qualify for the new loan. Borrowers must verify their income with at least two most recent paycheck stubs from their employer showing current and year-to-date earnings, W-2 forms from the last two years, and in many instances, the two most recently filed federal income tax returns.

Assets

Asset verification in the form of bank and investment statements are typically not a requirement for an FHA cash-out refinance loan as no funds are needed in order to close the transaction. However, this does not mean the FHA lender cannot request bank statements as part of their internal underwriting guidelines.

Appraisal

The FHA lender evaluating an FHA cash-out loan application will require an appraisal report on the subject property. The value on the appraisal is used to determine the maximum allowable loan amount for an FHA cash-out loan. Currently, the maximum loan amount for an FHA cash-out refinance is 80 percent of the value of the property as long as the home was purchased more than one year ago and does not exceed FHA’s county-by-county loan limits.

Credit

The minimum credit score for all FHA loans is 500. While there is no minimum credit score established by the FHA for cash-out loans specifically, lenders will typically have their own internal requirements that are much higher than the minimum. The minimum credit score requirement for an FHA cash-out refinance is usually between 620 and 680. Check with a lender to see if your FICO score is high enough.

Click here to request a free FHA cash-out rate quote (Sep 16th, 2024)

FHA cash-out refinance requirements 2024

• 600 credit score or higher (varies by lender)
• Must be an owner-occupied property
• Loan-to-value (LTV) ratio must to exceed 80 percent
• No more than one late payment in past 12 months
• Existing mortgage must be at least six months old
• Debt-to-income (DTI) ratio below 41 percent
• Non-occupant co-borrowers may not be added

Occupancy. FHA cash-out refinance loans are for owner-occupied properties only and cannot be used for rental properties.

Payment history. To qualify for an FHA cash out, you may not have more than one mortgage payment that was more than 30 days late in the last 12 months. The existing mortgage must be at least six months old and have a verified payment history, usually determined by the borrower’s credit report.

Length of ownership. If you’ve lived in the home less than a year, the FHA lender will use the lower of the appraised value or the original purchase price of the home to determine your maximum loan amount. For example, if you purchased the home less than a year ago for $250,000 and it now appraises for $270,000, your maximum loan amount will be $200,000 (80 percent of $250,000).

Debt-to-income ratio. FHA cash-out loans require the borrower to meet existing debt-to-income ratio guidelines. The maximum FHA debt ratio guidelines are 29 and 41, but may be higher in certain instances. The first ratio, 29, is the housing ratio calculated by dividing the total housing payment with gross monthly income. The housing payment includes principal and interest, taxes, insurance, monthly mortgage insurance premium and any condo or homeowner association fees. For example, if the housing payment is $2,000 and monthly income is $7,000, the housing debt ratio is 28.5%.

The total debt ratio limit is 41 and includes the housing payment plus additional monthly credit obligations. Additional credit obligations include credit card payments, automobile or student loans, and installment debts. Other qualifying debt includes spousal or child support payments. This number does not include utilities, car insurance, or other non-debt payment types.

A borrower with $7,000 per month income may have a house payment up to $2,030 per month and monthly credit obligations of up to $840 per month.

Co-borrowers. Non-occupant co-borrowers are allowed on an FHA cash-out refinance loan as long as the non-occupant co-borrowers are on the original note. Non-occupant co-borrowers may not be added to the loan application to help the primary borrower qualify.

Click here to see today's FHA cash out refinance rates (Sep 16th, 2024)

FHA cash-out refinance FAQ

How much lower does my new rate have to be in order to qualify for an FHA cash-out loan?

There is no requirement that your new rate be lower by a specific amount, but the lender may require that there be a tangible benefit to you by refinancing. This benefit may be the cash itself, a lower payment, reducing your loan term, or changing from an adjustable rate or hybrid loan into a fixed-rate mortgage.

Is there any way to eliminate the mortgage insurance premium on an FHA loan?

The upfront FHA mortgage insurance is always required and cannot be changed. However, your lender may be able to adjust your interest rate upward and give you a credit from the excess profit from the loan, to help pay the 1.75% upfront mortgage insurance premium.

Can I refinance my conventional mortgage into an FHA cash-out loan?

Yes, you may. However, the FHA cash-out limit is 80 percent of the value of the home and requires a mortgage insurance premium to be paid. Consider the additional closing costs with an FHA cash-out loan and compare the FHA option with a conventional loan.

Check today's FHA cash out rates here (Sep 16th, 2024)

I’m not sure how much cash out I need. How do I determine that?

Your FHA loan will be limited both by the 80 percent loan-to-value ratio as well as your local loan limits established by FHA. With that limitation in mind, figure out how much cash you need for your specific goal. Tell your loan officer that number, and he or she will work backward, figuring in closing costs, to come to a sufficient loan amount (assuming all loan qualification factors make the desired loan amount possible).

If you only want to pull cash out of your property, but want to avoid the extra costs of a full refinance, consider obtaining a home equity loan instead. Many local and national banks are now offering second mortgages, which are a cheaper option than refinancing.

How late can a payment be in the past 12 months and still qualify?

Mortgage payments are typically due on the first of the month and considered past due after the 15^th of the month. Only payments that are more than 30 days past the original due date are considered “late.” Any payments made before 30 days past the due date are not counted against you, as long as your lender received the payment on time and did not report your payment late to the major credit bureaus.

I bought my property four months ago and I think it’s worth a lot more now. Can I refinance?

Properties owned less than six months are not eligible for a FHA cash-out refinance. You must wait at least six months. However, if your property has appreciated significantly in six months, the FHA lender will use the original sales price of the property or a new appraisal, whichever is lower. If you put the minimum 3.5 percent as a down payment six months ago, a lender will question why the property value has increased in such a short period of time.

What is the FACOP Refi initiative?

FACOP is an acronym for Federal Assistance Cash-Out Program, and some have recently begun to use the term interchangeably to describe an FHA cash-out refinance. Users searching for “FACOP refi” should be cautious of online scams offering free money to applications; the only legitimate FHA cash-out refinance is the one backed by the federal government and insured by the FHA.

Ready to apply for an FHA cash-out mortgage?

An FHA cash-out refinance can be a great idea when you’re in need of cash for any purpose. With today’s low rates, this loan type is a very inexpensive way to borrow money to achieve your goals.

Apply for the FHA cash-out refinance here (Sep 16th, 2024)

The post FHA Cash-out Refinance 2024 | Tap Into Your Home Equity first appeared on My Mortgage Insider.

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

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

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

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

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

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

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

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

FHA streamline refinance maximum loan calculation

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

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

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

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

Lender-paid closing costs on an FHA Streamline Refinance

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

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

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

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

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

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

Service release premiums give lenders the power to negotiate

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

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

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

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

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

FHA Streamline Refinance Closing Costs

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

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

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

Are there closing costs with an FHA Streamline Refinance?

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

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

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

Typical closing costs with an FHA Streamline Refinance

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

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

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

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

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

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

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

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

Who can use an FHA Streamline Refinance?

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

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

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

Two types of FHA Streamline Refinance loans

The FHA offers two different types of Streamline Refinance loans:

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

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

FHA Streamline Refinance Closing Costs FAQs

What is the FHA Streamline program?

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

Are there closing costs with an FHA Streamline Refinance?

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

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

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

Does an FHA Streamline Refinance get rid of PMI?

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

What are the cons of an FHA Streamline Refinance?

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

Is FHA Streamline Refinance a good idea?

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

Can I roll closing costs into an FHA refinance?

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

Who qualifies for an FHA Streamline Refinance?

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

How long does an FHA Streamline Refinance take?

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

FHA streamline loan borrowers aren’t hindered by closing costs

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

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

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

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

Nothing could be further from the truth.

The fact is that there have always been and always will be mortgage options for borrowers that don’t have a large down payment.  Here are five loan options for those who have 5 percent or less for a down payment.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

#1: Conventional loans with PMI

Conventional loans are mortgages approved using guidelines established by mortgage giants Fannie Mae and Freddie Mac. Historically, lenders required a down payment of 20 percent. Yet in 1957, private mortgage insurance, or PMI, was introduced.

Mortgage insurance is an insurance policy that repays the lender should the borrower default. The borrower pays for this insurance policy along with their monthly mortgage payment. This extra expense can be well worth it though.

Say a home is sold for $200,000. A 20% down payment is $40,000. That’s quite a lot for new home buyers. A 5 percent down is much more feasibly, at only $10,000. A PMI policy can be purchased at a cost of approximately $150 to $300 per month, depending on credit score. But this option helps bring down the barriers to homeownership significantly.

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

#2: Federal Housing Administration (FHA) loans

In recent years, FHA has been the standard for first-time home buyers. Although that’s shifting because of increased offerings in conventional lending, they are still very popular.

FHA loans require as little as 3.5% down, a bit less than the conventional requirement. That means on a $200,000 loan, the minimum down payment is just $7,000.

An FHA loan has a monthly mortgage insurance requirement like a conventional loan, but it also has an “upfront mortgage insurance premium,” or MIP. The MIP is 1.75% of the loan amount, or in this example an additional $3,500. However, this upfront premium does not have to be paid out of pocket and can be rolled into the loan amount.

The monthly mortgage insurance premium for an FHA loan is typically 1.35% of the loan amount per year, divided into 12 equal installments and added to the monthly payment. For example, a $200,000 total loan amount would require $225 per month in mortgage insurance.

Although an FHA loan is more expensive than its conventional counterpart, it allows for a lower credit score and offers more lenient income requirements, making it the best program for some home buyers.

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

#3: VA loans

This program is a special entitlement offered to active duty personnel and veterans of the U.S. armed forces. The VA loan requires no down payment whatsoever. In addition, there is no monthly mortgage insurance premium, just an upfront premium, usually 2.3% of the loan amount.

The minimal costs associated with this loan make it the clear choice for current and former members of the military.

Those who have served in one of the branches of the military including the National Guard or Reserves could be eligible.

For complete guidelines, see our VA home loan page or contact a VA-approved lender.

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

#4: USDA loans

Sometimes referred to as the Rural Development Loan, the USDA program requires no down payment.  As the name implies, the program is designed to assist borrowers buy and finance a property in rural, less urban areas.

In order to qualify for a USDA loan, the property must first be located in an eligible area. These areas are mapped on the USDA website. This is the first place borrowers should visit to see if a prospective home is eligible. By entering the address on the website, the property’s eligibility will be determined.

Eligible areas are often rural in nature, but surprisingly, many eligible areas are suburbs of bigger metropolitan areas. Even if you don’t think the area in which you’re looking to buy a home is eligible, it’s worth taking a look at the USDA loan map.

You could discover that you’re able to buy a home with zero down payment.

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

#5: Fannie Mae HomePath loans

Editor’s note: Fannie Mae ended their HomePath program on October 6, 2014. For more details, visit our Fannie Mae HomePath page.

Fannie Mae has a list of foreclosed properties that it offers for sale on the website HomePath.com. Buyers can look for homes in their area with a simple city or ZIP code search.

Home buyers can purchase these homes with only 5% down. What’s more, buyers receiving a gift from an eligible gift source only need $500 of their own money.

Unlike a standard conventional loan, Fannie Mae HomePath loans don’t require mortgage insurance or an appraisal. Some of the properties may be in need of repair, but they provide a great opportunity, especially for first-time home buyers who have little to put down on a home.

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

A 5% down payment is all you need

Lenders have realized that it’s unrealistic to require a 20% down payment considering today’s home prices. That’s why many programs are available, even to those with less-than-perfect credit and little money saved.

And current interest rates make it even more affordable to buy a home. Contact a reputable lender to find out which of these programs might work best for you.

Check your eligibility to buy a house with less than 5% down. Start here (Sep 16th, 2024)

The post 5 Ways to Buy a Home with 5% Down or Less first appeared on My Mortgage Insider.

If your family will be helping, your lender will need to know in advance. The lender will need a “gift letter” from the donor to make sure your down payment help has no strings attached.

If you’re planning to buy a house but need help with the down payment, you could ask for down payment gift money.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

In this article:

• Gift funds can help first-time homebuyers get a home
• Using conventional loan gift funds
• FHA loan gift funds
• USDA loan and VA loan gift funds
• Who can give gifts?
• What gifts are unacceptable?
• Sample mortgage gift letter (pdf)
• Gift money documentation
• Alternatives to down payment gift funds
• What is a gift of equity?
• Qualifying for a loan
• Down payment gift funds FAQs
• Our recommended lenders for home loans

Gift funds can help first-time homebuyers get a home

It takes a lot of cash to make a down payment, even with today’s smaller down payment mortgages.

For example, let’s say you’re buying a $350,000 home, which is less than the current median home purchase price in the U.S. That translates into a dollar amount of:

• $10,500 to make a 3% minimum down payment on a conventional loan
• $12,250 to make an FHA loan’s 3.5% down payment
• $17,500 for a 5% down conventional loan

A down payment gift could help you reach this threshold sooner, and buying sooner often means paying less. As years pass, homes tend to get more expensive.

And, don’t forget about the closing costs which could double your upfront cash outlay. Gifted money can help with those costs, too.

How do down payment gifts work?

Down payment gifts seem simple enough: Family members — or friends, in some rare cases — give you money, and you use the money for your down payment, closing costs, or both.

But there are some rules to know about. Following your lender and loan program’s rules will help avoid delays in closing your loan.

Overall, the rules ensure you’re not required to repay the gifted funds. For example, does the donor expect to own part of your home in exchange for the gift? Will the owner want a lien on the property?

The best way to clear up these questions is with a down payment gift letter.

What is a down payment gift letter?

A gift letter, from the donor to the lender, includes the donor’s name, address, and phone number. It also includes the donor’s relationship to the borrower and the amount of the gift.

The letter should state that the gift is intended to help the borrower make a down payment and that the donor has no expectation of repayment.

If your donor isn’t sure how to write a gift letter, that’s OK. The loan officer usually provides a template gift letter for the borrower to provide to the donor. The donor then completes and signs the letter.

Or, you can download an Editable Gift Letter or view a PDF Gift Letter.

Is gift money taxed?

You won’t have to report a down payment gift as income on your tax return. The money won’t be taxed as income.

It’s not quite as simple for donors. The IRS allows each donor to give you up to $17,000, beginning in the 2023 tax year, without paying a gift tax. (In 2022, the maximum was $16,000.) Married couples can give $34,000 ($32,000 in 2022).

Also, donors have a lifetime cap on gift-tax-free donations. Beginning in 2023, that lifetime cap is $12.92 million.

Are there limits on gift amounts?

As long as you and your donor meet your lender’s guidelines, you could use gifted money to cover your entire down payment amount on a primary residence.

In the past, conventional loan gift funds were limited to a certain percentage of the purchase price. But now this happens with some investment property loans.

That said, each loan type does have its own unique requirements, so we’ll discuss those next.

Using conventional loan gift funds

Conventional loans, regulated by Fannie Mae and Freddie Mac, allow the borrower to apply financial gifts to the down payment, fees, and closing costs.

Borrowers usually do not need their own funds when receiving a gift if the gift covers the entire down payment and other loan costs. (In the past, borrowers needed 5% of their own funds.)

Now, according to Fannie Mae, the minimum 5% borrower contribution is only needed when:

• The gift amount is less than 20% of the purchase price, and the property is 2- or 4-unit or a second home
• If the loan amount is over $647,200

How much money can be gifted on a conventional loan?

To clarify, borrowers don’t need to bring their own funds when receiving a gift that covers the entire down payment and closing costs — unless the final loan amount is higher than the annual conforming loan limit. The current loan limit in most counties is $766,550 in 2024.

If the gift amount does not cover all upfront costs, borrowers need to prove they have the money to cover them, or they’ll need to receive a higher gift amount.

You may think it’s unlikely for someone to give away enough money to cover the entire down payment and closing costs. But, it happens more than you might think. Gifted money has allowed many homebuyers to achieve homeownership much earlier than they would have on their own.

Who can give gift funds on a conventional loan?

Not just anybody can help you make the down payment on your home. Gifts from the following sources are acceptable:

• Spouses, fiances, or domestic partners
• Children or other dependents
• Other relatives by blood, marriage, adoption, or legal guardianship

Interested parties, such as real estate agents or the home’s seller, cannot donate to the cause.

However, the home’s seller could help, indirectly, through seller concessions, up to 3% of the purchase price if you’re putting less than 10% down.

Technically, seller concessions can go only toward your closing costs. But, in reality, getting help with closing costs could free up more of your own money for your down payment.

What documentation is required when a gift is being used on a conventional loan?

Lenders will need to track the source of your down payment funds. Along with asking for a gift letter, expect your loan officer to check one or more of the following:

• Your bank statements before and after the gift is deposited
• Your donor’s bank statements before and after the gift is deposited
• Deposit slips showing when you deposited the donor’s check
• Withdrawal slip showing the money leaving the donor’s account
• A copy of the deposited donation check
• Proof of a wire transfer between banks

It’s okay if you don’t have access to all of these documents. Obviously, if you received funds via wire transfer you won’t have a check to show.

Basically, the lender needs to trace the money from the donor’s bank account to your bank account. Keep in mind, the amount of the transfer must match what’s stated in the gift letter.

FHA loan gift funds

The typical FHA borrower makes a 3.5% down payment on a home. This means that if the purchase price is $300,000, the borrower needs to come up with $10,500. The FHA calls this down payment the borrower’s required “minimum investment.”

The minimum investment is the FHA’s way of making sure the homebuyer has “skin in the game” which lowers the risk of foreclosure.

But there’s one exception to the minimum investment rule: The minimum investment can come from a cash gift. Borrowers do not need to contribute any of their own funds if receiving a gift for the full 3.5% down payment.

USDA and VA loan gift funds

Using gifts on USDA and VA loans is less common because these loans do not require a down payment.

However, borrowers may still need help buying a new home with these loans, and gifted money can provide that help. For instance, if the new home’s appraised value is lower than the purchase price, the buyer will need cash to make up the difference. (Lenders won’t underwrite more than the appraised value of the home.)

Also, USDA loan and VA loan borrowers can use gifted money for closing costs.

U.S. Department of Agriculture Rural Development (USDA Guaranteed loans) allow gift funds to cover any down payment required or closing costs not already covered by the seller.

Likewise, The Veterans Administration (VA) allows gifts. For both of these programs, follow the same donor guidelines and documentation procedures as for conventional loans.

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

Who can give down payment gifts?

Typically, donors of financial gifts toward purchasing a house need to be relatives.

According to Fannie Mae’s underwriting guide, the gift giver can be “a relative, defined as the borrower’s spouse, child, or another dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.”

In addition, a fiancé or domestic partner can be the source of funds.

FHA expands the rules a bit, allowing an employer, labor union, charitable organization or government agency to contribute. There’s even a provision for a close friend to give a gift, provided a documented, long-term relationship was in existence prior to the real estate transaction.

An example would be a high school yearbook, a family photo album, or proof of being roommates in college. This is the kind of real-life documentation the underwriter might ask for when receiving gifted funds from a friend.

What gifts are unacceptable?

Whether you qualify for FHA or conventional financing, lenders ultimately want to know one thing: Is the money from a legitimate gift?

Lenders worry about illegitimate gifts because they could put the loan itself in jeopardy. The point of mortgage underwriting is to make sure you’re willing and able to make the new home’s mortgage payments.

If a down payment gift were really a loan, repaying the loan could make it more difficult to pay the actual mortgage payments.

Gifts can’t come from anyone who would benefit from the sale of the home – the seller, agents, loan officer, etc. – even if any of those individuals are related to the buyer.

Any sums of money received from anyone involved in the transaction are subject to the limits of “interested party contributions” as designated by the loan program. These funds could not be used for the down payment but only for closing costs.

For instance, FHA allows a maximum of 6% of the sales price in interested party contributions. These funds can only be applied to closing costs. Conventional financing allows:

• 3% contribution with a down payment of less than 10%.
• 6% contribution with a down payment between 10% – 25%
• 9% interested contribution for closing costs for down payments over 25%

Again, these funds can only be applied to closing costs, not the down payment.

Documenting the source of gifted mortgage funds

Another piece of documentation is the source of the funds. “Sourcing” funds, as it’s called within the mortgage industry, means showing proof of where the money came from. When dealing with gift funds, “sourcing” gift funds means providing a bank statement showing that the donor does in fact have enough money to give.

This is where things can get a bit sticky. Often, the mortgage lender requires the donor to hand over a full copy of his or her bank statements, showing all transactions and personal information.

Many donors don’t exactly enjoy handing over personal information for a loan that’s not even theirs. Anyone receiving a gift should let the donor know upfront about this requirement.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

More about gift money documentation

Next, a “paper trail” needs to be established. A paper trail is a set of documents that follow the money. The paper trail would include:

• A bank statement showing the gift money came out of the donor’s account
• A withdrawal receipt from the donor
• A deposit receipt from the receiver
• A statement from the receiver’s bank showing the money is now credited to his or her account

Then the receiver will have to show proof of the gift money coming out and a receipt from escrow showing the funds were received.

Some steps can be cut out if the donor wires the gift money directly to the escrow company handling the transaction. In that case, all that would be needed is the donor’s bank statement and a receipt from escrow.

Likewise, if gift funds were received a long time ago, documenting it may not be necessary. The mortgage lender considers the funds yours if you can show bank statements that do not show the initial deposit.

The gift money would then be considered “seasoned,” which means they have been in your possession long enough to be considered yours.

Alternatives to down payment gift funds

Not everyone has relatives who can donate tens of thousands of dollars for a down payment. That’s fine. You can still find help through down payment assistance programs.

Down payment assistance programs often help first-time home buyers through grants or loans. Many of the loans are forgivable if you stay in the home long enough.

There’s no single source for down payment assistance. Instead, programs are local. Check with your city or county government or Google “down payment assistance” to find local programs. Some of these programs have income limits; others require first-time buyers to complete a homeowners education course.

As with down payment gifts, tell your lender and real estate agent as soon as possible if you’ll be using down payment assistance.

What is a gift of equity?

Conventional loans allow for a gift type called a “gift of equity.” This could help if you’re buying a home from a family member. Basically, the seller charges you less than the home’s appraised value. The difference between the home’s value and what you pay serves as a gifted down payment.

For this to work, the current owner must still be an eligible donor, per conventional loan gift guidelines, and must own and have equity in a piece of property.

Here’s an example: Your parents own a second home worth $300,000 but have agreed to sell it to you for $240,000. The $60,000 price difference becomes your 20% down payment.

The paperwork would still show a home purchase price of $300,000, even though you’d borrow only $240,000.

As far as the paper trail, the lender will accept the final settlement statement, also called the final HUD-1. The final HUD-1 statement is provided by the escrow company and displays each fee that’s related to the property sale transaction.

The HUD-1 will show the gift by showing an item stating “Gift of Equity – $60,000,” or something to that effect. This is proof that the intangible equity has been transferred from the seller to the buyer.

The gift of equity may appear to fall within the definition of an interested party contribution since it’s the seller who is giving the gift. However, Fannie Mae and Freddie Mac make this situation exempt from interested party contribution rules when the buyer and seller have an eligible relationship.

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

Gifted money helps, but you still have to qualify

Receiving gifts can push you over one of the biggest home buying hurdles, but the down payment is only one piece of the puzzle.
You’ll also need to meet your lender’s:

• Credit score requirement: For conventional loans, the minimum is often 620. FHA lenders can go as low as 580 with a 3.5% down payment
• DTI limits: This stands for debt-to-income ratio. DTI compares your monthly income to your mortgage payment and other debts. Conventional lenders look for DTIs in the 36% to 43% range; FHA lenders can go higher, possibly up to 50% in some cases
• Income documentation rules: Lenders will want to see pay stubs, W2 forms, bank accounts, or tax returns. This proves you earn a steady and reliable income

The good news is that down payment gifts can help you overcome other qualifying challenges. For example, if your DTI is pushing your lender’s limits, a bigger down payment can lower your mortgage payment which, in turn, lowers your DTI.

Before you apply for a loan, use a mortgage calculator to see loan payments for different loan sizes and down payment amounts.

Mortgage loan gift funds FAQs

What are gift funds?

When family members donate money toward your down payment or closing costs, lenders call this money “gift funds” or “gifted funds.” Most types of loans allow gift funds now.

Are gift funds for a mortgage taxable?

For the home buyer, gift funds are not taxable. For the donor, gifts are subject to the IRS’s gift tax if the gift exceeds $17,000 in the 2023 tax year.

Who can give gift funds on a conventional loan?

Family members can contribute toward your down payment. This includes grandparents, parents, children, spouses, domestic partners, fiances, blood-related aunts, and uncles.

Are gift funds allowed on conventional loans?

Yes. In fact, if you’re buying a single-family home to use as a primary residence, gift funds can cover all of your down payment and closing costs.

Can a friend give gift funds for an FHA mortgage?

In some cases, friends can give gift funds for an FHA loan down payment. The lender will need proof that you have a long-term friendship with the donor. A high school or college yearbook could provide this proof.

Can you use gift funds toward a second home?

Yes. But if you’re putting less than 20% down on the second home, you’ll need to provide at least 5% of the down payment yourself.

Can gift funds be repaid?

For a loan originator to accept gifted funds, the donor has to give the money with no strings attached. There can be no expectation of repayment.

What happens if you pay back a down payment gift?

If your gifted money is actually a loan in disguise, you’d be committing mortgage fraud. It’s fraud because you would have misled the lender for the purposes of qualifying for the loan. However, if you wanted to return the gift later after you’d paid off or refinanced the mortgage, that would be between you and the donor.

Receiving gift funds is well worth the effort

Documenting down payment gifts can be complicated, but the process can be well worth it. For many first-time home buyers, gifts can mean the difference between buying a home now or buying a home years from now.

Receiving a gift reduces the amount of savings needed to close the purchase, and gifts also lower the payment on the future mortgage loan.

With a little education and a willing donor, receiving a gift to be applied toward the down payment on a house can turn out to be a sweet deal for a first-time home buyer.

Check your eligibility to use gift funds to buy a home. Start here (Sep 16th, 2024)

The post Down Payment Gift Money for First-Time & Repeat Home Buyers first appeared on My Mortgage Insider.

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

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

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

What is a USDA home loan?

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

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

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

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

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

USDA loan requirements for 2024

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

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

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

Getting approved for a USDA loan

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

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

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

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

Step-by-step guide to getting a USDA loan

To get your USDA home loan, follow these steps:

1. Get preapproved for a USDA loan

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

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

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

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

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

3. Apply for your loan

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

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

4. Follow your loan officer’s instructions

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

5. Get your own home inspection

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

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

6. Close the home loan

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

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

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

How USDA loans work

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

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

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

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

USDA Guarantee Fees

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

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

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

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

How USDA loan fees compare to other types of mortgages

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

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

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

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

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

More about USDA loan eligibility

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

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

USDA income limits

What does 115% of area median income really mean?

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

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

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

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

USDA credit score requirements

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

USDA geographic requirements

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

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

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

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

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

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

USDA first-time home buyer FAQs

Does the USDA require first-time home buyer education?

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

How do I qualify for a USDA loan?

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

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

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

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

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

How much are closing costs for a USDA loan?

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

Do USDA home loans require a down payment?

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

What is the minimum credit requirement for a USDA?

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

Do USDA loans have PMI?

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

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

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

Can I buy a foreclosure with a USDA loan?

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

Check your rates for a USDA mortgage

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

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

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

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

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

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

There is a limit to how much a seller can pay for, though. Each loan type — conventional, FHA, VA, and USDA — sets maximums on seller-paid closing costs.

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

What are seller concessions?

Seller concessions are closing costs the seller has agreed to pay. These are also known as seller-paid costs, or sometimes as sales concessions or seller contributions. New and experienced homebuyers can get into homes faster with help from the seller.

In this article:

• Conventional loan seller contributions
• FHA loan seller contributions
• VA loan seller contributions
• USDA loan seller contributions
• How to use excess seller contributions
• Our recommended lenders for home loans

Seller contributions by loan type

Each loan type has slightly different rules when it comes to seller contributions. The percentage each loan type allows varies as well. It’s important to understand the seller-paid maximums for your loan type, so you can take full advantage when it comes time to buy.

Maximum seller-paid costs for conventional loans

Fannie Mae and Freddie Mac are the two rule makers for conventional loans. They set maximum seller-paid closing costs that are different from other loan types such as FHA and VA. While seller-paid cost amounts are capped, the limits are very generous.

A homebuyer purchasing a $250,000 house with 10% down could receive up to $15,000 in closing cost assistance (6% of the sales price). This dollar figure is a lot more than the typical seller is willing to contribute, so the limits won’t even be a factor in most cases.

Source: Fannie Mae Selling Guide

FHA seller contributions

FHA seller concessions have similar rules to conventional loans. For all FHA loans, the seller and other interested parties can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other financing concessions.

If the appraised home value is less than the purchase price, the seller may still contribute 6% of the value. FHA indictors that the lessor of the two (purchase versus appraised) values may be used.

VA loan seller contribution maximum

The seller may contribute up to 4% of the sale price, plus reasonable and customary loan costs on VA home loans. Total contributions may exceed 4% because standard closing costs do not count toward the total.

According to VA guidelines, the 4% rule only applies to items such as:

• Prepayment of property taxes and insurance
• Appliances and other gifts from the builder
• Discount points above 2% of the loan amount
• Payoff of the buyer’s judgments and debts
• Payment of the VA funding fee

For example, a buyer’s core closing costs for things like appraisal, loan origination, and the title equal 2% of the purchase price. The seller agrees to prepay taxes, insurance, the VA funding fee, and a credit card balance equal to 3% of the sales price.

This 5% contribution would be allowed because 2% is going toward the core loan closing costs.

USDA seller contributions

USDA loan guidelines state that the seller may contribute up to 6% of the sales price toward the buyer’s reasonable closing costs. Guidelines also state that closing costs can’t exceed those charged by other applicants by the lender for similar transactions such as FHA-insured or VA-guaranteed mortgage loans.

Interested party contributions

Seller-paid costs fall within a broader category of real estate-related funds called interested party contributions or IPCs. These costs are contributions that incentivize the homebuyer to buy that particular home. IPCs are allowed up to a certain dollar amount.

Who is considered an interested party? Your real estate agent, the home builder, and of course the home seller. Even funds from down payment assistance programs are considered IPCs if the funds originate from the seller and run through a non-profit.

Anyone who might benefit from the sale of the home is considered an interested party, and their contribution to the buyer is limited.

Why set maximum seller-paid closing costs?

Mortgage rule makers such as Fannie Mae, Freddie Mac, and HUD aim to keep the housing market fair by keeping values and prices sustainable.

Here’s an example of how rampant seller-paid closing costs and other interested party contributions could inflate prices.

Imagine you are buying a home worth $250,000. The seller really wants to sell the home fast, so he offers $25,000 to pay for your closing costs and says you can keep whatever is left over. But, in exchange he changes the home price to $275,000.

He then illegally pays the appraiser to establish a value of $275,000 for the home.

A number of negative consequences arise:

• You paid too much for the home.
• Similar homes in the neighborhood will start selling for $275,000 (and, more if the cycle is repeated).
• The bank’s loan amount is not based on the true value of the home.

In a very short time, property values and loan amounts are at unrealistic levels. If homeowners stop making their payments, banks and mortgage investors are left holding the bill.

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

Can the seller contribute more than actual closing costs?

No. The seller’s maximum contribution is the lesser of the sales price percentage determined by the loan type or the actual closing costs.

For instance, a homebuyer has $5,000 in closing costs and the maximum seller contribution amount is $10,000. The maximum the seller can contribute is $5,000 even though the limits are higher.

Seller contributions may not be used to help the buyer with the down payment, to reduce the borrower’s loan principal, or otherwise be kicked back to the buyer above the actual closing cost amount.

Creative ways to use excess seller contributions

While seller contributions are limited to actual closing costs, you can constructively increase your closing costs to use up all available funds.

Imagine the seller is willing to contribute $7,000, but your closing costs are only $5,000. That’s a whopping $2,000 is on the line.

In this situation, ask your lender to quote you specific costs to lower the rate. You could end up shaving 0.125%-0.25% off your rate using the excess seller contribution.

You can also use seller credits to prepay your homeowners insurance, taxes, and sometimes even HOA dues. Ask your lender and escrow agent if there are any sewer capacity charges and/or other transfer taxes or fees that you could pay for in advance. Chances are there is a way to use all the money available to you.

You can even use seller credit to pay upfront funding fees for government loan types like FHA.

Use seller contributions for upfront FHA, VA, and USDA fees

All government-backed loan types allow you to prepay funding fees with seller contributions.

FHA loans require an upfront mortgage insurance payment equal to 1.75% of the loan amount. The seller may pay this fee as part of FHA seller concessions. However, the entire fee must be paid by the seller. If you use excess seller credit, but it’s not enough to cover the entire upfront fee, then you cannot use the funds toward the fee.

VA loans allow the seller to pay all or part of the upfront fee (2.3%-3.6% of the loan amount). The fee counts towards VA’s 4% maximum contribution rule.

USDA requires an upfront guarantee fee of 2.0% of the loan amount. The buyer can use seller contributions to pay for it.

Seller contributions help many become owners

Seller contributions and other interested party credits reduce the amount of money it takes to get into a home.

Zero-down loans such as USDA and VA require nothing down. But, opening any loan involves thousands in closing costs.

A seller credit can remove the closing cost barrier and help buyers get into homes for little or nothing out-of-pocket.

To see if you qualify to buy a home with zero down and low out-of-pocket expense, click here and complete a short form.

Many home shoppers are surprised that they not only qualify, but that initial homeownership costs are much lower than they expected.

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

The post Seller Contribution Maximums for Conventional, FHA, VA, USDA | 2024 first appeared on My Mortgage Insider.

A conventional refinance is one of the most versatile loans in today’s market.

Conventional refinances can convert any type of mortgage loan into a conventional loan. Simultaneously, a conventional refi could also cash out equity.

In many areas, home prices increased over the past few years. As a result, many homeowners are eligible for a conventional refinance and could even cancel PMI to further lower their costs.

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

In this article:

What is a conventional refinance?
What can a conventional refinance be used for?
Conventional refinance requirements 2022
Refinancing an FHA loan into a conventional loan
Getting rid of mortgage insurance with a conventional refi
Conventional refinance rates
Conventional loan limits
Conventional refinance loan lengths
Are adjustable-rate refinances available?
Do conventional refinances require closing costs?
Conventional refinance FAQ
Our recommended refinance lenders

What is a conventional refinance?

Conventional refinances are conventional loans that replace an existing mortgage loan. The refinance replaces the old loan by paying it off. Then, the homeowner starts making payments on the refinance loan instead of the original loan.

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

The new loan should benefit the borrower in some way: a lower interest rate, a shorter loan term, a fixed-rate loan, or cash back from equity, for example.

Like conventional loans, a conventional refinance is not insured by a federal agency. So borrowers rely more on their credit score and debt-to-income ratio to qualify.

The most qualified borrowers get the best deal on conventional refinance loans.

What can a conventional refinance be used for?

Conventional refinances can help you meet a variety of goals:

• Refinancing a primary residence, second home, or investment property
• Turning home equity into cash at closing
• Eliminating private mortgage insurance (PMI)
• Canceling FHA mortgage insurance
• Refinancing out of any other loan type
• Reimbursing a cash home purchase
• Shortening the home loan term

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

Ideally, a conventional mortgage refinance will achieve two or more of these goals at once.

For example, a conventional refi could replace an existing FHA loan, eliminating the FHA’s mortgage insurance premium, while also generating cash back at closing and shortening the loan term.

But meeting at least one goal is good enough for most borrowers.

Conventional refinance requirements 2024

Qualifying for a rate-and-term conventional refinance will resemble qualifying for a conventional purchase loan. Rate-and-term loans simply replace an existing mortgage with a new loan.

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

To be eligible for a conventional refinance, you’ll need to have sufficient loan-to value (LTV). Many conventional programs will allow you to refinance if you have at least 5% equity — though if you have an LTV of 20% or more then refinancing could also enable you to eliminate any private mortgage insurance (PMI) you might be paying.

Along with meeting LTV, you’ll need to have a FICO score of 620 with most lenders and a debt-to-income ratio below 43%. You’ll also need to document your income by sharing a W2, pay stub, or tax returns.

Conventional cash-out refinance requirements

A conventional cash-out refinance allows you to borrow against your home equity, generating “cash back” which you could use for debt consolidation, home improvements, or any other purpose.

A cash-out refi can’t access all of a home’s equity. Borrowers have to follow the 80% LTV rule which requires leaving 20% of the equity untouched.

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

So if you owned a home worth $250,000, your maximum loan size would be $200,000.

If you’ve paid down your existing mortgage to a balance of $150,000, a $200,000 loan would be large enough to pay off your existing loan while also paying you up to $50,000 at closing.

But if your current loan balance was $200,000, you wouldn’t have enough equity to get cash back, even though you have $50,000, or 20%, in equity. That 20% equity has to stay in the home.

Many lenders require higher credit scores for cash-out refinance options. Some look for 660 or 640 scores instead of only 620. Interest rates also tend to be a little higher for cash-out refinances compared to rate-and-term refinances.

Refinancing an FHA loan into a conventional loan

First-time home buyers — and other buyers with lower down payments and average credit scores — might need an FHA loan to buy a home.

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

But FHA borrowers pay FHA insurance. This FHA mortgage insurance premium (MIP) adds 1.75% of the loan amount upfront. Then, most borrowers pay another 0.85% of the loan’s amount each year in MIP.

Refinancing to a conventional loan can enable FHA borrowers to eliminate mortgage insurance premiums.

Conventional refinances eliminate FHA MIP

For most current FHA loan holders, the best way to stop paying MIP is to refinance their FHA loan into a conventional loan, exiting the FHA loan program altogether.

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

As long as the FHA homeowner has at least 20% equity — and can meet a conventional lender’s credit and debt-to-income ratio rules — the new conventional refi won’t need any mortgage insurance.

Of course, the homeowner should make sure the new loan will actually save money compared to the existing FHA loan. A borrower who barely qualifies for a conventional loan may not see much, if any, savings. In fact, a refinance might cost more.

To find out for sure, get a mortgage preapproval from a few different lenders. Preapprovals show your monthly mortgage payments and long-term costs.

Getting rid of mortgage insurance with a conventional refi

Conventional loans charge monthly mortgage insurance, too. When home buyers make down payments less than 20%, lenders require private mortgage insurance, or PMI.

Verify your eligibility for a conventional refinance. Start here (Sep 16th, 2024)

PMI rates vary by borrower. They usually range from 0.5% to 1.5% of the loan amount per year. For a $250,000 loan, a 1% PMI rate would cost $2,500 a year, or about $208 a month.

The good news is that you won’t have to refinance out of this extra cost. Once your loan balance falls to 80% of your home value, you can cancel PMI and stop paying for it.

Federal law requires your lender to cancel PMI once your loan balance falls to 78% LTV. If you think you’ve already met this requirement but your lender disagrees, check with your loan servicer about getting a new home appraisal.

Can I refinance out of PMI?

Conventional borrowers who want to get rid of PMI sooner by refinancing have a couple of loan options:

• Refinancing into loans that don’t require PMI: Some lenders offer private, in-house loan programs that don’t charge PMI. But these loans usually charge higher interest rates. So the savings might be minimal or nonexistent.
• Cash-in refinancing: Bringing cash to closing could drop a home’s LTV low enough to eliminate PMI. But there are closing costs to pay, and they cut into the savings. Plus, you might have to part with a lot of cash.

Most conventional loan holders will find it’s best to wait. When they’ve paid their loan down to 80% LTV, they can cancel PMI without paying closing costs or higher rates.

Conventional loan refinance rates

Almost every refinance shopper will get a different rate based on their financial situation.

For instance, a customer refinancing a rental property will get a rate that’s up to 0.5% higher than someone who is refinancing a single-family primary residence.

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

Likewise, someone with a 660 score will pay about 0.25% more than a customer with a 700 score.

In short, conventional loan refinance rates are based on risk to the lender.

Unlike federally insured loans, which insulate borrowers from the effects of this risk, you’ll get the best conventional refinance rate by being a low-risk borrower.

Lower-risk borrowers can refinance into rates that are below today’s average mortgage rates. And since a refi with 80% LTV requires no private mortgage insurance, a conventional refi’s APR will be lower, too.

Connect with a lender to start your conventional refinance application (Sep 16th, 2024)

2024 conventional loan limits

The standard conventional loan limit is $766,550. A qualifying refinance applicant can open a loan for at least this amount anywhere in the country.

But Fannie Mae and Freddie Mac allow higher limits in some areas where real estate costs more.

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

For instance, San Diego has a conventional loan limit of $1,149,825. Refinance consumers in Seattle and Queens, New York, can also be approved for a higher conventional loan.

The highest limit in the country is available in Honolulu, Hawaii, which is even higher than the limit in San Diego.

Homeowners in areas with high housing costs should check their conventional loan limit before they assume they need a jumbo loan.

Homeowners who refinance multi-unit homes have access to higher loan limits:

• The conventional loan limit for a 1-unit home: $766,550
• The conventional loan limit for a 2-unit home: $981,500
• The conventional loan limit for a 3-unit home: $1,186,350
• The conventional loan limit for a 4-unit home: $1,474,400

Homeowners with multi-unit homes that are also in high-cost areas can receive conventional loans of over $1.2 million.

Keep in mind that these are loan limits, not home price limits. Someone refinancing a $2 million home could receive a conventional loan of $766,550 in any area of the country.

What conventional refinance loan lengths are available?

The most popular conventional refinance loan terms are 15 and 30 years.

A 15-year fixed-rate mortgage will require higher monthly mortgage payments compared to a 30-year fixed loan. But long-term interest charges will be lower with a 15-year term.

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

Borrowers can also find 10- and 20-year mortgages, though they are less common. Some lenders will customize a conventional refinance’s term.

In general, longer terms make for lower payments but more interest.

Check your mortgage rates. Get started here

Are adjustable-rate mortgages available?

Yes, borrowers can refinance into an adjustable-rate mortgage (ARM). These loans have fixed rates for the first three, five, seven, or 10 years.

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

During this initial fixed period, the rate is typically lower than the rate you could get on a 30-year fixed-rate loan. After the intro rate expires, rates and payments can change each year.

ARMs are great for homeowners who plan to move, refinance again, or pay off their mortgage in a few years.

Do conventional refinances require closing costs?

Just like home purchase loans, refinance loans charge closing costs. These costs include loan origination fees and legal fees. Closing costs could also include a home appraisal fee and prorated property taxes and homeowners insurance premiums.

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

Closing costs usually range from 2% to 5% of the loan amount. That’s $2,000 to $5,000 for every $100,000 borrowed.

Some lenders advertise no-closing-cost loans. These loans normally charge higher interest rates which reimburse the lender for your closing costs.

How do I get a conventional cash-out refinance?

A cash-out refinance pays the borrower cash at closing. The cash out is borrowed from the home’s equity and must be repaid as part of the new loan’s monthly mortgage payments.

Here’s how it works: If a homeowner owes $100,000 on a home that’s worth $200,000, the homeowner can apply for a loan amount bigger than what they owe. The difference between the two loans goes to the homeowner.

Most lenders can approve a cash-out loan up to 80% loan-to-value ratio. So a homeowner who has 30% equity can take up to 10% of the home’s value in cash with a cash-out refinance.

Cash-out refinance rates are slightly higher than no-cash-out loans. The difference is usually about 0.125% — or about $10 more per month in interest for every $100,000 borrowed.

Considering the relatively low cost, a cash-out loan can be a great way to consolidate high-interest debt and get monthly expenses under control. For many households with a lot of debt from student loans, credit cards, and car loans, a cash-out loan may reduce payments by many hundreds of dollars per month.

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

Conventional refinance FAQ

Do I need to have a conventional loan to do a conventional refinance?

No. You can refinance any type of loan with a conventional loan. You can refinance FHA loans, USDA mortgages, Alt-A loans, subprime loans, option ARMs, and adjustable-rate mortgages.

My appraisal shows a lower value than expected. Can I still refinance with a conventional loan?

Possibly, but the refinance may require monthly mortgage insurance. It’s best to have 20% equity in your home before refinancing with a conventional loan.

I’m not sure about my credit. Should I apply for an FHA loan first?

You don’t have to pick one loan program when applying for a new loan. Your loan officer will look at your entire situation and try for the lowest-cost option. If a conventional loan doesn’t work out, the lender may switch you to an FHA loan. Don’t automatically rule out a conventional loan just because of your credit standing.

Can I refinance from an FHA to a conventional loan?

Yes. If you have sufficient equity and a credit score of 620 or higher, you can likely refinance to a conventional loan.

Why get a conventional loan? Why not refinance with FHA?

FHA can be used to refinance, but it’s typically for homeowners who can’t qualify for a conventional refinance due to past credit issues. Because of its flexibility, an FHA refinance is more expensive. Homeowners who don’t need the FHA’s flexibility can save money with conventional refinancing.

How do I apply for a conventional loan refinance?

Applying for a conventional refinance is just like applying for any other refinance.

Start by checking rates here. The lender will guide you through the rest of the process.

What is a conventional refinance?

A conventional refinance is a new conventional loan that replaces an existing mortgage on a house you’ve already bought. Unlike an FHA Streamline Refinance, which can be used only if you already have an FHA loan, a conventional refinance can replace any other mortgage type.

Can you refinance a conventional loan?

Yes, homeowners can refinance their conventional loans. Refinance loans are worth the time and money when they achieve a goal such as lowering your mortgage rate or monthly payments.

How soon can I refinance an FHA loan to a conventional loan?

FHA borrowers can refinance into conventional loans as soon as they have 20% equity in their home and a credit score of at least 620. Conventional lenders usually look for debt-to-income ratios of 43% or lower. These standards are stricter than FHA loan requirements.

How soon can you refinance a conventional loan?

There’s no waiting period for refinancing a conventional loan. However, it’s often best to wait until you have 20% equity in the home. If you made a 20% down payment, you should already have 20% equity.

Can you refinance an FHA loan to a conventional loan?

Yes, conventional refinances can replace loans of any type, including FHA, USDA, and VA loans.

Is a conventional refinance better than an FHA Streamline Refinance?

Not necessarily. But FHA Streamline Refinances work only for current FHA loan holders. They’re a great way to save money without going through the full credit underwriting process. Unless you have an FHA loan now, you couldn’t get an FHA Streamline Refi.

Can I get a conventional adjustable-rate refinance?

Yes, and these loans are becoming more popular as mortgage rates have bounced back from the historic lows of the pandemic. ARMs are more popular because they start out with a lower-than-average mortgage rate. Later, the rate will fluctuate with the market.

How much equity do I need to refinance to a conventional loan?

It’s possible to refinance a conventional loan with as little as 3% home equity. However, it may be best to aim for 20% equity before a conventional refinance. This would help you qualify for a lower mortgage interest rate and cancel private mortgage insurance, further reducing your monthly payments.

How do you qualify for a conventional refinance?

Conventional borrowers typically need FICO credit scores of at least 620, a debt-to-income n caratio no higher than 43%, and at least 20% in home equity. If you meet these requirements, shop around with at least three mortgage lenders so you can compare rates.

What does ‘conventional’ mean?

Conventional mortgages are home loans that are regulated by Fannie Mae and Freddie Mac. These two companies buy most conventional loans from lenders. Since they control the mortgage market, they make the rules for what qualifies as a conventional loan — also known as a conforming loan. Most home buyers use conforming loans.

Get started on your conventional refinance now

Not sure where to start with your conventional refinance?

A mortgage preapproval is a great place to begin. The preapproval process requires a soft credit check which won’t hurt your score.

It’ll show what rates you qualify for and how much you could save.

Connect with a lender to start your conventional refinance application (Sep 16th, 2024)

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