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

Pros of a cash-out refinance

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

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

Cons of a cash-out refinance

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

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

Best and worst uses of a cash-out refinance

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

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

How to get a cash-out refinance

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

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

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

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

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

What are the alternatives to a cash-out refinance?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scenario 1: High Current Rate, Lots of Equity

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

Scenario 2: New Homeowner, Little Equity

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

Scenario 3: Homeowner with Equity and a Low Rate

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

Get approved for a cash-out refi

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

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

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

But, don’t worry. We’ll reveal what constitutes a “large deposit,” when this amount won’t be questioned and when it will, how you can substantiate the deposit’s validity, and why you should let your lender know if you’re expecting one of these windfalls.

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

What is a large deposit?

A “large deposit” is any out-of-the-norm amount of money deposited into your checking, savings, or other asset accounts.

An asset account is any place where you have funds available to you, including CDs, money market, retirement, and brokerage accounts.

Depending on the source of these large deposits, they may or may not concern your lender. For example, income from your regular employer like your salary or an IRS tax refund won’t draw any attention because the reference for these deposits will be clearly shown on your bank statement. There’s no question about their legitimacy.

But, if someone repays you for a personal loan or you sell your car and deposit that amount in your checking account, your lender will likely ask you to provide proof of who gave you the money.

Why do lenders care what I deposit into my own account?

A loan underwriter’s job is to confirm that you qualify for the loan by evaluating your credit history, your ability to repay the loan, and the value of the home compared to the loan amount. They also make sure that your loan application follows the “rules” for the specific loan type you’re applying for.

An unexplained deposit can threaten your loan qualification, especially if you can’t establish where those funds originated. Bottom line: Wherever the large deposit came from, you’ll need to prove the source.

Some common reasons why an underwriter may flag a large bank deposit include to confirm:

• You didn’t take out a new loan or debt. Those new loan payments must be included in your loan application, and you’ll need to qualify for the loan with the new debt payment incorporated into your debt-to-income ratio.
• You have additional income. All income needs to be accounted for when applying for a loan even if it’s from a side gig.
• You acquired the funds from an acceptable source. The money can’t come from someone who will benefit from the transaction like the home seller or real estate agent.
• You received the money as a down payment gift. Depending on the type of loan you applied for, certain rules apply. Some loan types don’t allow for down payment gifts at all.

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

How to explain large cash deposits during the mortgage process

It all comes down to documentation. Every loan underwriter may ask for different types of documentation. Some documents that you should have at-the-ready in case they’re requested include:

• The cancelled check that was deposited
• A letter from the person who gave you the money explaining why, especially if it’s a down payment gift
• A third-party estimate of the item’s value, such as the Kelly Blue Book value for a vehicle
• A copy of the ad you placed to sell a big-ticket item like a car

The most difficult type of deposit to verify is “mattress money” — a.k.a cash on hand in your home that was never deposited in your checking or savings account. Proving the source of this type of money is difficult. If you want to deposit these funds, it’s best to wait until after your mortgage loan is approved. Or, “season” the funds before applying for your mortgage loan in the first place.

What is seasoned money?

Seasoned money is money that has been in your checking or savings account for at least 60 days. In general, lenders require your past two months’ bank statements during your loan application. All listed deposits need to come from an identifiable source. It’s also enough time for any new open account or loan to show up on your credit report.

Lenders aren’t concerned with any large deposit into your checking or savings account older than 60 days. So, if you want to make a large deposit, then apply for your loan two months after. That money is concerned “seasoned” and lenders won’t ask about it.

How much can I deposit?

There’s no simple formula to determine how much money a lender will consider a large deposit. Loan underwriters look at your overall financial situation. If you make $100,000 per year and have a ton of cash saved, then the underwriter may not ask about a $500 deposit. But, if you have just enough in your checking account to cover the down payment, then expect the lender to ask about any unidentifiable deposits — even as low as $100.

“The size of the bank deposit is only a concern if it’s out of the ordinary for that account,” says Eric Jeanette, a mortgage professional since 2002 and founder of Dream Home Financing and FHA Lenders. “For example, a $10,000 deposit may raise an underwriter’s eyebrow if the account only has a $12,000 balance and the previous activity was minimal,” explains Jeanette. “But that same deposit won’t get a second look if the account balance was high and there have been similar transactions over time.”

A good rule of thumb is to consider any deposit that is more than 25% of your usual monthly income a “large deposit.”

It’s also important to keep your accounts stable after you’ve applied and before you’re approved. “If the loan application process gets delayed, the lender may ask for another bank statement or more pay stubs,” says Jeanette. “If you have a large deposit or have depleted your funds, your loan approval may have problems.”

What to do if your bank statement shows a large deposit?

If you have a large deposit on your previous two months’ bank statements, make sure it’s from an eligible source that you can prove — your lender is going to ask about it. If the money is from a loan, then be upfront with your lender and don’t attempt to hide it. That’s fraud and your lender is going to uncover the loan anyway.

For a deposit that’s hard to document then consider seasoning the money. That way you won’t be asked about it. With some pre-planning, you’ll ensure that large deposits won’t negatively impact your home purchase or refinance loan application.

A final note on large deposits

Consider your finances ahead of applying for your mortgage loan. Be proactive about securing any documentation you may need — review your accounts like a loan underwriter and be critical. Any questionable deposit may delay the closing of your loan or even risks denial. That could cost you in fees and contract extensions and potentially higher interest rates for your loan. When in doubt, speak to your loan officer.

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

The post Why You Should Avoid Large Bank Deposits During the Mortgage Application Process first appeared on My Mortgage Insider.

In this refinancing guide, we’ll walk you through the pros and cons to determine if a refinance makes sense for you and your family.

Ready to refinance? Check your eligibility here (Sep 16th, 2024)

Before you refinance as a single mom

Refinancing isn’t a decision that should be taken lightly. In general, refinancing the family home must align with your overall financial goals and save you money. Below are four things to do before going down the refinance path to ensure that you’re making the right financial decision.

Determine your refinance goals

“Ask yourself this key question,” Says Charlie Scanlon, president of Phoenix Credit Consultants, “Is it in your best interest to stay in the marital home or will it be a financial struggle?”

If the home is too big, or you’d like to move to a different neighborhood, then you should look at a purchase home loan, not a refinance. But, if you want to stay in your home, consider your reasons for refinancing.

Some common refinance reasons:

• Lower monthly mortgage payment and interest rate
• Remove private mortgage insurance (PMI)
• Fund home improvements or major repairs

Determining your refinancing goals will help you decide which of the refinance loans is best for your situation.

Improve your credit

“Frequently in cases where there was a divorce, credit ends up damaged,” Scanlon explains. “This happens because of the expenses associated with attorney fees and the additional costs associated with maintaining separate households during the divorce litigation.” Credit can also be impaired because of one or both spouse’s vindictiveness.

It’s important to take a close look at your credit score and history before a lender does. If a lender pulls your credit it becomes a “hard inquiry” and can affect your credit score, but if you pull your credit it’s considered a “soft inquiry” and won’t affect your number. This will give you time to address any issues before speaking to a lender.

A free source like AnnualCreditReport.com is a great place to start — federal law, in fact, allows you one free report every 12 months from each credit reporting company. If you have a low credit score, you should try to increase it. It will take time, but in general, the higher your credit score the lower your interest rate.

Some actions to take that can help increase your credit score:

• Set up automated payment systems, especially if you tend to forget to pay bills
• Bring all of your bills current if you’ve fallen behind on payments
• Dispute any errors on your credit reports

Read more: Ways to Increase Your Credit Score Effectively

Include child support income

If you receive child support or alimony, you may be able to include it as part of your income to qualify for a refinance loan. For example, Fannie Mae guidelines state you must receive this income for three years after the date of the mortgage application. So, if your child is 15 years old and support stops when he reaches 18, this income won’t be considered. Also, you must document that you’ve received child support for at least the past six months.

Comparison shop lenders

Almost half of consumers don’t comparison shop for home loans, according to research from the Consumer Financial Protection Bureau (CFPB). This means a lot of homeowners are losing out on substantial savings. Even half of a percentage point decrease can amount to a significant amount of money, especially in total interest costs over the life of the loan.

It’s best to get quotes from three to four lenders to ensure that you’re getting the best interest rate for you. Also, if lenders know that you’re shopping around, they may waive certain fees or offer better terms to earn your business.

Read more: How to Comparison Shop for a Mortgage

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

Consider the costs of refinancing

“Borrowers should keep in mind the fees associated with any refinance, including closing costs and other charges,” says Scanlon.

If the costs to refinance are more than what you’ll save from a refinance, then it may not be the right financial decision. But, there are some things that you can do to make sure the associated costs for your refinance are as low as possible.

Negotiate to eliminate the prepayment penalty

Some lenders charge a prepayment penalty for paying off a loan early. A refinance is considered a prepayment, because you’re technically paying off your current mortgage loan with a new refinance loan. If there’s a prepayment penalty in your contract, ask your refinance lender to negotiate to eliminate the charge or at least to reduce the amount.

Get a loan estimate

After you’ve submitted your refinance application, the lender is required by law to give you an estimate of all of the fees and closing costs within three business days. This is called a Good Faith Estimate or GFE (see an example GFE). The GFE also documents your loan amount, the terms of the loan, if a prepayment penalty exists, and your monthly payment amount. Be sure to take your GFE to loan closing to make sure none of the amounts have changed drastically.

Finance closing costs

Closing costs are all of the fees associated with loan processing or purchasing a property. For example, the appraisal, title report, and upfront mortgage insurance are all considered closing costs. Most closing costs are paid out-of-pocket and can range from 1%-5% of the loan amount.

However, you may be able to roll your closing costs into your loan. This is dependent on loan type — conventional refinances allow it, while FHA streamline refinances don’t. Adding closing costs to your loan amount may raise your interest rate, but you won’t be required to come up with any cash on the day you sign the refinance loan documents.

Refinance home loans for single moms

The refinance home loan that is best for you is going to depend a lot on your financial goals. In general, streamline refinance loans are intended to lower your monthly payment and interest rates, while cash-out refinances allow you to tap into your earned equity to pay for large purchases. Below is an overview of these common refinance loan options.

Streamline Refinance. This refinance loan type is a good choice if you’re looking to lower your monthly payment and interest rate. It’s relatively easy to qualify for requiring minimal paperwork and no appraisal. Also, if you’ve earned 20% equity in your home and are still paying private mortgage insurance (PMI), then a streamline refinance can remove this monthly cost as well.

Read more:

• Conventional Streamline Refinance
• FHA Streamline Refinance

Cash-out Refinance. If you’re looking to fund large home repairs or need to consolidate high-interest credit card debt, then a cash-out refinance allows you to tap into your earned equity and turn it into cash. The process for these loans are similar to purchase loans — income verification and a home appraisal is required to qualify. You can generally borrow up to 80% of the home’s value in cash, but the amount will ultimately be determined by how much you owe and your home’s current value.

Read more:

• Conventional Cash-out Refinance
• FHA Cash-out Refinance

If you still have questions, then reach out to a licensed mortgage professional to discuss your financial situation and goals.

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

The post A Single Mom’s Guide to Refinancing first appeared on My Mortgage Insider.

The good news: Yes, you can.

Though, qualifying for a mortgage with retirement income comes with specific requirements. Similar to getting a mortgage before retirement, you’ll need to have reliable income now and the foreseeable future that shows you can repay the mortgage, you must have good credit, and have little debt. (Your age shouldn’t come up at all — the Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants because of their age.)

Check your eligibility for a retirement mortgage today (Sep 16th, 2024)

Retirement mortgages explained

Getting a loan, even when you aren’t retired depends on your income, credit history, amount of debt, and your assets. For retirees, assets become even more important because many won’t have regular income except for possibly Social Security benefits.

“It’s an individualized situation. Some people wouldn’t dream of having any debt when they retire. Others are OK with it, says Peggy Doerge, president of the Iowa Mortgage Association and vice president of senior underwriting at MidWestOne Bank. “In fact, some retirees get advice from their financial advisors to refinance their current mortgage or take out a new mortgage.”

For example, if a retiree is making 5% on their assets and they can qualify for a mortgage loan for 3.5%, plus get tax deductions, then a loan makes sense, says Doerge.

Retirement income

When trying to qualify for a mortgage, it’s important for retirement income to be steady, predictable, and expected to continue whether the retiree is upsizing or downsizing. Mike Egermier, financial consultant at Egermier Wealth Management Group says, “In general, lenders are looking for cash flow at regular intervals — a pension is viewed more favorable compared to an IRA in the stock market.”

Retirement income can come from a variety of sources including:

• Social Security income. If the Social Security income is for the retiree, then it’s considered to not have an expiration date, but if the Social Security income is from a family member (like survivor or spousal benefits), then the borrower must prove that the income is secure for at least three more years.
• Retirement or pension income. This asset isn’t expected to expire and can be counted as income. Some pensions decrease the income amount for surviving spouses, though — make sure that your spouse can cover all the bills, plus the mortgage in the event of your passing.
• Annuities. If the borrower can document that this income will continue for at least three years, then it can be listed on the mortgage application.
• 401(k)s, IRAs, and Keogh plans. The retiree needs unrestricted access to these accounts without incurring any penalties — those under 59 ½ years of age usually can’t withdraw funds from their 401(k) without paying withdrawal penalties. Distributions from these investments must last for at least three years after the date of the mortgage application. Also, if any of these retirement accounts consist of stocks, bonds, or mutual funds, then lenders can only use 70% of the amount received as income due to their volatile nature.\

Get started on your retirement mortgage today (Sep 16th, 2024)

Credit score

In general, having a good credit score is a prerequisite for loan qualification, but each lender has different requirements. Credit score requirements can also vary depending on your situation like the type of loan and your down payment amount. For example, FHA loans require a larger down payment for lower credit scores. Your credit score also affects the interest rate you’ll qualify for; in general, the higher the score, the lower the interest rate.

Debt-to-income ratio

Your debt-to-income ratio also plays a part in getting a mortgage in retirement. According to the Consumer Financial Protection Bureau (CFPB), 43 percent is the highest debt-to-income ratio a borrower can have to qualify for a mortgage (some lenders offer exceptions). This means that all debt, including car, credit card, and student loan payments, plus the monthly mortgage payment, including property taxes and homeowners insurance must be 43% or less of the borrower’s gross monthly income.

Retirement mortgage advice

Before retiring, it’s a good idea to meet with a financial advisor and a loan officer to learn about your retirement mortgage options. These financial professionals should direct you to specific mortgage programs that are the best for your situation and ultimately help save you money.

It’s also important to have a budget before talking to a lender. You need to know the answers to how you’ll cover costs if inflation hits or your property taxes skyrocket, says Egermier. He also adds it’s important to factor in costs if a medical problem arises or your health insurance costs significantly increase.

“One trip to the hospital can eat away at your savings.”

When deciding if getting a mortgage when retired is a good idea, an individual of retirement age should know the answers to the following questions (some of these you may need to consult a financial professional):

• Will your income decrease after retirement?
• How long will your income last?
• Is your current home paid off?
• Are you eligible for tax breaks that will increase your income?
• How will your household income change if a spouse passes away?
• Are you comfortable incurring more debt?

Should you pay off your mortgage or invest in additional retirement savings.

According to the Center for Retirement Research’s study titled “Should You Carry a Mortgage Into Retirement” paying off your mortgage is the better choice unless you “can earn a risk-free return that exceeds its mortgage interest rate; or cannot satisfy its demand for risky assets without borrowing money. Few meet these exceptions, so the payoff option is the best bet.” Basically, this minority is those who are willing to invest in stocks an amount that is equal to or exceeds their loan amount.

Should you pay off your mortgage or refinance your mortgage before retirement?

Refinancing is generally a good idea if it lowers both the mortgage payment and interest rate. But, only the retiree can answer whether it’s best for their situation. It depends on their income, current mortgage payment, amount in savings, and whether or not the tax advantage of the mortgage interest is enough to counteract their expenses.

Get started on your retirement mortgage today (Sep 16th, 2024)

The post Get A Mortgage After Retirement | How To Qualify 2024 first appeared on My Mortgage Insider.

Several factors go into calculating how much this fee is including whether the borrower has used his VA home benefit before and whether he’s making a down payment.

The money received from the VA Funding Fee goes to the Department of Veterans Affairs (DVA). That organization uses these funds to repay lenders a portion of the loan if a homeowner defaults on his payments. It also helps the DVA maintain its loan guarantee program so military members in the future can become homeowners. The VA Funding Fee helps reduce the burden on U.S. taxpayers.

How much is the VA Funding Fee?

The VA funding fee ranges from 0.5 to 3.6 percent of your loan amount. A number of variables determine the exact fee amount, including whether you are making a down payment, your entitlement code, whether you’ve used the benefit before, and the type of VA loan you want.

First-Time Use Purchase & Construction Loans

*Including cash out refinance loans

Second-Time Use Purchase & Construction Loans

*Including cash out refinance loans

Streamline Refinance & Interest Rate Reduction Refinance Loan (IRRRL)

Other Types of VA Loans

For someone using their veteran benefits for the first time buying a home, that person would pay 2.3 percent of their loan amount. On a $250,000 home, with no down payment, the VA Funding Fee would be $5,750.

When you make a down payment of $12,500 (5 percent of the $250,000 loan) on that same house, then your VA Funding Fee will be $3,918. That’s because you only pay the fee on the loan amount, which is now $237,500, not the price of the home. Your percentage also went down to 1.65 percent because you made a down payment.

If two veterans get a loan together, an unusual circumstance, the funding fee operates a little differently. When both veterans are entitled to the VA loan, then the funding fee is divided in half. If one veteran is exempt, but not entitled, then the full funding fee must be paid.

During the loan process, your lender will let you know the exact amount of the fee you must pay or even if you must pay. Traditionally, your Certificate of Eligibility indicates whether or not you’ll pay the VA Funding Fee. Certain veterans, military personnel and spouses have exemptions from the VA Funding Fee.

Subsequent use funding fees

The first time a veteran uses the VA mortgage loan program, he pays a lower fee than during the second or subsequent times. If he or she is exempt from paying the fee the first time the loan benefit is used, he or she will also be exempt any time after when using the VA mortgage program.

For example, let’s consider someone who has already bought a house with a VA loan. He has sold that home and is now buying another one. The new home costs $250,000. Without a down payment, his Veterans Funding Fee will run $9,000 or 3.6 percent of the loan amount.

Compare that to a 2.3% Funding Fee if it were his first time buying a house with a VA loan.

But a higher funding fee doesn’t always apply, even if you use the VA loan twice.

• You are subject to just a 1.0% finding fee no matter how many times you use a VA loan for a manufactured home.
• Additionally, if you refinance your current VA loan with a VA streamline refinance, the funding fee drops to just 0.50%.
• If you pay a 5% or 10% down payment, the funding fee remains the same as for first-time use.

Who is exempt from the VA Funding Fee?

As it turns out, several categories of veterans, military personnel, and spouses don’t have to pay this fee. Here’s the list:

• Disabled veterans who receive compensation because their disability is service-related.
• Retired veterans who could receive disability pay if they weren’t already getting retirement earnings.
• Veterans eligible to receive compensation because of a pre-discharge review or exam.
• Veterans on active duty who are otherwise eligible for compensation.
• Service members on active duty who have received the Purple Heart (when someone in the military is injured due to enemy action; this rule became effective in 2020)
• Surviving spouses of a veteran who has passed or who was totally disabled, and the spouse is getting Dependency and Indemnity Compensation (DIC).

Lenders look at an applicant’s Certificate of Eligibility (COE) or Verification of VA Benefits to determine whether he or she is exempt from the VA Funding Fee. When the situation doesn’t seem definitive, the VA makes the final determination. If, for some reason, that can’t be accomplished prior to closing, lenders must collect the fee and send it to the VA. Then when a determination is made, the VA either keeps the money or refunds it.

VA Funding Fee Refund

Buyers who have a disability claim pending when it comes time to close on your home must pay the VA Funding Fee. Later, if your claim is accepted, you can apply for a VA Funding Fee refund.

If you’ve heard uncomplimentary things about the VA Funding Fee refund status, the VA completed an initiative in 2019 that solves that problem. The VA did an internal review of VA-backed home loans for the past two decades. In that review, they discovered that more than 130,000 loans had refunds due. Some of these oversights were due to clerical errors and many affected Veterans whose exemption status changed after their mortgage closing.

Veterans eligible for a refund were notified by mail. Programs and systems have been changed and updated so refunds won’t be overlooked in the future.

How to Avoid Paying the VA Funding Fee Out of Pocket

If you don’t qualify for any of the exemptions above, you can ask the seller to pay your VA Funding Fee. The seller can pay up to 4 percent of the loan amount towards the Funding Fee, plus things like property taxes and insurance. The seller can pay for additional things that don’t count toward the 4 percent, such as the appraisal, credit report, and discount points.

The other way, and probably the most likely way for a home buyer to avoid handing over a large chunk of money at closing, is to wrap the VA Funding Fee into your total loan amount. You’ll then finance it and pay it off over time. That, of course, means an increase in your mortgage payments. Also, be aware that your lender charges interest on your loan, so by financing the VA Funding Fee, you’ll pay more than if you paid it all at once at loan closing.

Changes to the VA Funding Fee

When the President signed the Blue Water Navy Vietnam Veterans Act in 2019, it triggered an increase in VA Funding Fees.

Starting in January 2020, the fee for first-time buyers with no down payment is 2.3 percent of their loan amount, up from 2.15 percent in 2019. Those who have used their VA home loan benefit before will pay 3.6 percent of their loan amount, up from 3.3 percent in 2019. These higher fees will remain in place for two years, then go back to 2019 rates from 2022 through September 30, 2029.

The fees will now be equal for all the branches of the military including the National Guard and reservists. Previously, the National Guard and anyone in the military reserves paid a little higher fee.

Updates to VA Loan Limits in 2020

Another change that took effect in January 2020 is VA loans are no longer subject to loan limits. If you want to buy in a more expensive housing market, you can extend your buying potential more than ever before. And with no down payment.

This doesn’t mean you can buy a house you can’t afford. You still need enough income to qualify for the loan and must meet your lender’s credit requirements.

One more caveat — those who are already paying on a VA loan or who defaulted on a previous loan — are subject to loan limits in 2020. Those VA loan limits match those put in place by the Federal Housing Finance Agency (FHFA) on conforming loans.

Closing Costs to Consider, In Addition to the VA Funding Fee

Besides the VA Funding Fee, VA loan borrowers may be asked to pay other closing costs. Those may include, but aren’t limited to:

Loan origination fee. Lenders can charge up to 1 percent of your VA loan for origination, processing, and underwriting charges.

Credit report. A lender may charge you for getting your credit information, but the VA limits that to $50 maximum.

Title insurance. This protects both you and your lender in the event liens or other legal issues are discovered after closing. Consider buying owner’s title insurance, too. This protects your investment from claims for something that happened before you purchased the home. Most common of these are the previous owner didn’t pay taxes or he neglected to pay a contractor for work he did on the home.

VA appraisal fee. If you haven’t already paid for your home’s appraisal, you’ll need to do so at closing.

Recording Fee. This is a charge from a government agency, usually the county your home resides in, to register your purchase. Then it becomes public record.

Discount points. These are fees you may pay to your lender to get a lower interest rate on your mortgage loan.

Property taxes. Any taxes due within 60 days must be paid at closing.

State and local taxes. And state and local taxes must be paid if applicable.

Well, septic, and termite inspection fees. In 41 states, buyers aren’t allowed to pay for a termite inspection. Usually, the seller pays for fixing any issues that stem from these inspections.

Mortgage closing costs typically run from 2-5 percent of your loan. On our sample $250,000 home that calculates to $5,000-$12,500. Some of these fees may be negotiable, you can ask the seller to pay some of them, or you can make some of them part of your monthly mortgage payments.

You can ask the seller to pay all your closing costs or ask them to share the burden with you. The VA allows sellers to pay the VA Funding Fee, for discount points, appraisal fee, credit report, state and local taxes and recording fees.

If the seller pays a portion or all of your Veterans Funding Fee, then he can also pay your property taxes, insurance and pay down your credit card balance. The amount he pays on these concessions can’t exceed 4 percent. For our example home, selling for $250,000, that computes to $10,000.

VA Funding Fee FAQ

How much is the VA IRRRL funding fee?

The VA Funding Fee for the refinancing product, Interest Rate Reduction Refinance Loan (IRRRL) is 0.5 percent for everyone whether you’ve used your VA loan benefits before or not.

Is the VA Funding Fee tax deductible?

Maybe. Unless you’re exempt, you must pay the fee in its entirety at closing to be able to deduct it on your taxes. You will use tax form 1098, “Mortgage Interest Statement,” and enter the amount in box no. 5.

How much is a VA cash out refinance funding fee?

Rates for the first use of this benefit are 2.3 percent of your loan amount and subsequent users pay 3.6 percent of the loan amount.

Do all VA loans have a funding fee?

Yes, this fee applies to every VA purchase and refinance loan, unless you’re exempt.

Is there a VA Funding Fee for a refinance?

Yes.

Bottom line

Even considering the VA Funding Fee, which you may not have to pay, a VA home loan can be a wonderful deal.

These loans come with a government guarantee, which means if you’re unable to make your payments, a portion of your loan will be repaid to the lender. This reduced risk for the lender translates to lots of benefits for the buyer.

You can move into your dream home with no down payment, you don’t have to buy mortgage insurance and the rates are great. You can use your VA loan to buy a house, condominium, duplex, newly constructed home, manufactured home and other kinds of properties, also. Pay off your loan whenever you want, with no prepayment penalties.

The VA loan program can become complicated, so to get the most accurate information up front, engage a VA lender from the beginning.

The post What is the VA Funding Fee? first appeared on My Mortgage Insider.

To get to that point, he first needs to look at your credit history, verify your employment and income, evaluate your debt-to-income ratio (DTI) and confirm the source of your down payment. He also may order an appraisal to make sure the home’s selling price matches its value.

“The mortgage underwriter is a person who analyzes the loan structure, borrower’s credit, income, debt load and the home being financed to decide if the loan meets the risk profile required by the loan program,” says Mike Scott, a senior loan mortgage originator for Independent Bank.

Different loan programs allow different risks. For example, Scott explains, an FHA loan will often allow a higher debt load than a conventional loan. A VA loan examines the borrower’s net income and residual income. So, a married person with 10 children needs more residual income to qualify for the loan because each person in the household adds more to the general bills.

Click here to see how much home you can afford now.

What is a mortgage underwriter?

According to Study.com, all mortgage underwriters must be licensed within the state where they’re employed. Each financial organization has their own criterion over and above licensure.

Generally, most lending institutions hire someone with at least a bachelor’s degree to fill this position, says Scott.

He is tasked with deciding whether or not you’re a good risk – if you’ll be able to make the monthly payments for the home you want to buy. The underwriter looks at how you’ve handled money in the past and a few other financial scenarios.

Underwriters rarely contact the buyer directly which distinguishes them from others involved in the home buying process.

The real estate agent’s job is to help you find the home that fits your wants and needs and facilitate the purchase. For providing these services he earns a commission.

Mortgage brokers act as the middlemen between the borrowers and lenders. They originate the loan and have a variety of lenders at their disposal to meet your needs. Mortgage brokers work closely with the agents, underwriters, lenders and title companies.

The lender, which is usually not an individual but a financial institution, mortgage bank or credit union, gives you the money you need to buy the home. The loan officer or loan consultant who works for the lender will be your main point of contact. He helps you with the loan application, getting a credit report, filing the appropriate documents and choosing the right loan type.

Others you may meet or hear from during the mortgage process include the seller of the home you want, his selling or listing agent, an inspector and an appraiser. The inspector checks the house over for structural integrity, a good roof, the right plumbing and electricity. An appraiser values what the home and land is worth based on current marketing data. But the person that holds your home-buying future in his hands is the underwriter.

What do mortgage underwriters look at?

“The loan underwriting process is often shrouded in mystery, usually leading to an anxious borrower,” says Matthew Yu, vice president of Socotra Capital. “Underwriting isn’t all that scary unless you have blemishes on your file.”

The mortgage underwriter evaluates your credit history and payment records, which tells him how much debt you have, how long you’ve had it and if you’re making consistent payments in order to eliminate this debt. That’s not all they look at though and your credit score won’t be the only benchmarks used to determine your risk. Rent payments, utility payments, insurance premiums and other monthly bills also come into play. Your entire financial image is considered.

An underwriter will also evaluate your capacity to take on a loan, which includes looking at your income and assets. Usually, they ask for two years’ worth of tax returns to verify your income. If you’re self-employed you may be asked for additional paperwork. In order to close on the loan, you need money in the bank — your assets — for closing costs and other fees required in the process.

When assessing your risk, the underwriter will also consider whether you plan to make a 10 or 20 percent down payment.

An appraisal lets the underwriter know the value of the home you’re buying. He wants to ensure his company isn’t loaning you money for a house you won’t be able to resell down the road.

A survey of the property is also required to determine property lines and the location of the home on that land. This enables the underwriter to get a copy of the title insurance and discover, hopefully, there are no liens, unpaid taxes or judgments on the property.

The borrower submits the documents requested, Yu explains, and they are ticked off a checklist. When an item isn’t satisfactory, then a substitute is requested.

Click here to verify your home buying eligibility.

What does it mean when a loan is in underwriting?

While all your documents and other requested items are being considered, your mortgage loan is considered to be in underwriting.

“Sometimes an underwriter will initially issue a conditional approval due to missing or incomplete documentation, due to the property requiring repairs or needing explanations on some of the items documented such as the source of a large or unusual deposit,” says Scott.

In this case, the processor or loan officer then works to meet the conditions and the file is sent back to the underwriter for final approval before closing.

How long does it take for the underwriter to decide?

Decision time varies by lender but can take anywhere from one day to two weeks, says Yu.

A key determining factor on how long a loan takes is how many underwriters the lender has on staff. Even though you may have stellar credit, submitted the right documents and everything is a “go,” you still must wait until your turn comes up for underwriting.

“A consumer can always ask for an update on the loan process,” says Yu. “Any loan officer or mortgage broker should be familiar with the underwriting process and can shed some light on what’s going on behind that curtain.”

How to Have the Best Underwriting Experience

Your lender will navigate most of the underwriting process for you. However, you can help keep the process simple and efficient by responding to your mortgage underwriter’s questions and requests promptly, and by being upfront about your financial picture.

Even though a mortgage underwriter works behind the scenes when deciding whether or not to grant you a home buying loan, he’s a very significant piece of the puzzle and can bring you closer to owning the home of your dreams.

Click here to get a pre-approval now.

The post What is a mortgage underwriter? first appeared on My Mortgage Insider.