Below, we’ll dive into the requirements for an FHA loan down payment and the types of down payment assistance available for these loans.

Check your eligibility to buy a home with just 3.5% down (Sep 16th, 2024)

What are the benefits of an FHA loan?

FHA loans are government-backed loans offered by the Federal Housing Administration (FHA).

This loan program offers significant benefits for home buyers including:

• Low down payment
• Flexible credit qualifications
• Relatively low mortgage rates

These benefits make it an excellent loan program for first-time home buyers or those with limited cash reserves.

What is the minimum FHA loan down payment?

Your down payment minimum with an FHA loan will depend on your credit score.

Homebuyers with a credit score of 580 or greater can get an FHA loan with just 3.5% down.

Homebuyers with scores between 500-579 may still qualify for an FHA loan but will likely need to make a larger down payment of 10%.

FHA minimums and private lenders

Keep in mind that while the FHA sets the minimum requirements for this loan program, private mortgage lenders can set their own standards, which may be stricter.

If you’re hoping to qualify with a credit score between 500 and 579, for example, it may be harder to find a willing lender — even though FHA technically allows these credit scores with 10% down. So make sure you shop around and explore your options. Some lenders will be more lenient than others.

Click here for today’s FHA mortgage rates (Sep 16th, 2024)

Mortgage insurance requirements for an FHA loan

In addition to the guarantees offered by the FHA, lenders charge mortgage insurance premiums (MIP) to offset the higher risk associated with FHA loans. The borrower pays for this insurance but it’s the FHA lender who gets the payout in the case of mortgage default and foreclosure.

MIP comes in two parts. First, there’s an upfront mortgage insurance premium (UFMIP). UFMIP can be paid at closing but most borrowers roll it into the loan amount to avoid the upfront fee. The cost is usually 1.75% of the loan amount. So this is what a $200,000 home purchase would look like:

• Purchase price: $200,000
• Down payment (3.5%): $7,000
• Loan amount before upfront MIP: $193,000
• Upfront MIP of 1.75%: $3,378
• Total loan amount: $196,378

Secondly, you have to pay a smaller (but still significant) premium each month. Most often, this monthly mortgage insurance is equal to 0.85% of the existing loan balance per year. For that $200,000 home purchase, it will cost about $136 per month, which is added to the monthly mortgage payment.

FHA mortgage insurance premiums (MIP) don’t drop off automatically

Unlike the private mortgage insurance with conventional loans, which drops off after you’ve accrued sufficient home equity, the mortgage insurance premiums on an FHA loan will typically last for the life of the loan.

To get rid of your mortgage insurance payments, you’ll need to refinance to a different loan type — one without mortgage insurance — once your loan-to-value (LTV) is greater than 80%.

The only exception is for FHA borrowers who make a down payment of 10% or more. In this case, your MIP is removed after 11 years.

Down payment gift rules for FHA loans

An added benefit of FHA loans is that they offer less strict rules about down payment gifts than some other types of mortgages, making it that much easier for borrowers to benefit from the help of family or friends.

Some — or even all — of your down payment for your new home can be a gift, as long as:

1. The money is a gift, not a loan in disguise
2. The person giving the money provides a formal gift letter
3. There is a documented paper trail of the money leaving the giver’s account and arriving in yours

The gift can come from a family member, an employer or labor union, a close friend, or a charitable organization. This is a big FHA loan benefit as conventional loans have stricter rules regarding gift funds.

FHA loan down payment assistance programs (DPAs)

There are thousands of down payment assistance programs (DPAs) across the United States. And there’s at least one in every state. Many cities and counties offer their own programs, too.

Every DPA has its own rules. Some give help with closing costs while others don’t. Some help only first-time buyers.

Assuming you qualify, you may be offered a low-interest loan that you pay down in parallel with your main mortgage. You could even be given thousands of dollars in outright grants — meaning you never have to repay a cent.

Low down payment alternatives to FHA loans

There are a number of low down payment loan program alternatives to the FHA loan.

Conventional 97 loan: 3% down

Sometimes known as “Conventional 97” mortgages — because you can borrow up to 97% of the value of the home — these loans require a minimum down payment of just 3%.

That’s lower than the FHA’s 3.5% minimum. So why does anyone opt for an FHA loan?

Well, it’s mostly because of the credit score requirements. Fannie Mae, for instance, insists on a minimum score of 620 for its fixed-rate mortgages (FRMs) and 640 for its adjustable-rate mortgages (ARMs) to qualify for the Conventional 97 program. Some private lenders require even higher scores.

To get the best rates for a Conventional 97, you should have a good credit score above 700.

If you have a good credit score, you might opt for a low-down payment conventional mortgage. This is because you can cancel mortgage insurance when you’ve paid down the loan. FHA requires mortgage insurance for the entirety of the loan term.

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

HomeReady loan: 3% down

This conventional loan program, intended for moderate-income borrowers, will allow you to buy a home with just 3% down. The HomeReady loan program also has lower private mortgage insurance (PMI) rates compared to a standard conventional loan.

To qualify, you’ll need to earn less than 80% of your area’s median income.

Click here to see if you qualify to buy a home with the HomeReady Mortgage (Sep 16th, 2024)

Home Possible loan: 3% down

Much like a HomeReady loan, this Home Possible loan program can help moderate-income borrowers purchase a home with a down payment of just 3% and reduced PMI premiums.

Check your Home Possible eligibility here (Sep 16th, 2024)

VA loans: 0% down

VA loans are reserved almost exclusively for veterans who meet minimum service levels, and those now serving in the military.

If you’re eligible, your service buys you one of the best mortgages around: zero down payment, low-interest rates, no continuing mortgage insurance, and the option of a VA streamline refinance later.

USDA loans: 0% down

If you want to live in a less densely populated area, you may be eligible for a USDA loan with zero down.

And that’s more likely than you may think: roughly 97% of the American landmass is so designated, including some suburbs.

However, these mortgages are reserved for those with “regular” incomes — up to 115% of the area’s median to be exact. For example, home buyers near Portland, Oregon can make up to $105,950 and still be eligible. There’s a good chance that you’re income-eligible.

You still have to pay some mortgage insurance on a USDA loan, but probably less than you would with an FHA one.

Click here for current USDA rates (Sep 16th, 2024)

FHA loan requirements in 2024

Besides down payment requirements and minimum credit score, what else is needed to qualify for an FHA loan?

FHA loan limits

In most of the US, you can borrow up to $498,257 for a single-family residence with an FHA loan. But that rises to $1,149,825 if you’re buying in an area with high home prices.

The limit may be even higher if you want to purchase a home in Alaska, Hawaii, the US Virgin Islands or Guam — or if you’re buying a residence for multiple families.

To find the loan limits in the place you want to buy, use the look-up tool on the website of the US Department of Housing and Urban Development (HUD).

FHA debt-to-income ratio (DTI)

Alongside your credit score and down payment, the other thing lenders look at closely is your debt-to-income ratio or DTI. That’s the percentage of your pre-tax monthly income that’s taken up by monthly commitments including debt, alimony, and child support. You will also need to add your housing expenses once your new mortgage is in place. Utilities are not taken into account.

FHA guidelines are relatively flexible about your DTI. And it’s possible to get approved with one as high as 50%. However, you’ll likely need to impress in other ways (like a higher credit score or down payment than the minimums) to get that high a ratio approved. More often, FHA lenders prefer a DTI below 45%.

Click here for today’s FHA mortgage rates (Sep 16th, 2024)

FHA loan down payment FAQ

What is an FHA loan?

An FHA loan is a government-backed mortgage loan insured by the Federal Housing Administration (FHA) that requires a minimum down payment of 3.5% and has more flexible credit requirements than many other loan options. FHA loans can be used to buy a home, refinance your existing mortgage, or renovate a home.

What is the minimum down payment for an FHA loan?

For borrowers with a credit score of 580 or above, the minimum down payment for an FHA loan is 3.5%. For borrowers with a credit score between 500 and 579, the minimum down payment is 10%.

Does FHA require 3.5% down?

Yes, the FHA requires a minimum down payment of at least 3.5%.

Can you put more than 3.5% down on an FHA loan?

Yes, you can put down more than 3.5% and it may even lead to a lower mortgage rate. Additionally, depending on your credit score, a 10% down payment may be required.

Can you do no down payment with FHA?

FHA home loans do not offer a “zero down” option, however, there are different kinds of down payment assistance available for FHA borrowers. There are both state and regional programs that offer down payment assistance and which may enable a borrower to obtain an FHA loan without using any of their personal funds for the down payment or closing costs.

Can you use a credit card for an FHA down payment?

No, using a credit card is strictly prohibited by the FHA, as credit cards are considered “non-collateralized loans.”

Can you put 20% down on an FHA loan?

The FHA only requires a minimum down payment of 3.5% (or 10%, for lower credit borrowers). However, you can put down as much as you want above and beyond the down payment minimum, and doing so may get you a lower mortgage rate and lower monthly payments.

What happens if I put 20% down on an FHA loan?

A larger down payment on your FHA loan will likely get you a lower mortgage rate and lower monthly payments. But, unlike conventional loans, you’ll still need to pay mortgage insurance, even if you make a down payment of 20% or more. That’s why a conventional loan is often more affordable if you have a large down payment.

Can a down payment be included in an FHA loan?

No, you cannot finance your down payment into your FHA loan. However, there are down payment assistance programs that may help to cover your down payment and closing costs.

Can I get additional down payment assistance with an FHA loan?

The FHA itself does not offer down payment assistance. However, there are a number of down payment assistance programs and grants that can help FHA borrowers.

Is an FHA loan right for you?

An FHA loan might be the right answer if you’re looking for a low down payment loan program with relatively low interest rates and flexible credit requirements.

FHA loans are particularly helpful for:

1. Those who wish to be homeowners but who would otherwise be excluded from mortgage borrowing
2. People with lower credit scores
3. Those with limited savings, especially if they can access down payment assistance or gifts

Check with a lender to learn whether you qualify for an FHA loan today.

​​ Check your FHA eligibility (Sep 16th, 2024)

The post FHA Loan Down Payments | Requirements 2024 first appeared on My Mortgage Insider.

You keep your existing first mortgage and add a second mortgage loan on top of it. In this way, you can tap into your home’s equity to make home improvements and accomplish other goals.

Many lenders offer low rates and flexible terms when getting a second mortgage.

Types of second mortgages

What is a home equity loan (HEL)?

A home equity loan is a lump-sum loan, usually with a fixed interest rate, that’s paid down over its term in equal installments. Rates are slightly higher than for variable home equity loans (discussed next) but you know your monthly payments will never rise.

What is a home equity line of credit (HELOC)?

A home equity line of credit functions like a line of credit. It differs from a home equity loan in three main respects:

1. You can borrow, repay and borrow again up to your credit limit during the initial “draw” period.
2. Later, there’s a repayment period during which you can’t borrow more and have to zero your balance. Normally you just pay it down. But you may be able to refinance.
3. You pay interest only on your outstanding balance.

Home equity lines of credit (HELOCs) are particularly good when you’re a contractor, freelancer or working in the gig economy. They let you smooth out differences in your monthly income.

And they can be handy if you need to borrow a large sum for a brief period because you’ll only be paying interest for that period.

Advantages of a second mortgage

So why take out a second mortgage in the first place? Let’s run through some advantages.

1. You can usually borrow more

Credit cards and personal loans usually let you borrow a few thousand dollars. But with a second mortgage you can typically borrow more — often much more.

Assuming your credit and finances are in good order, the only constraint is the amount of “equity” you have in your home. That’s the sum by which the market value of your home exceeds your current mortgage balance.

You won’t be able to borrow that full sum because lenders will likely want you to keep a cushion of roughly 20% of your home’s value.

For example, if your home’s worth $300,000 and your mortgage balance is $150,000. Your total equity would also be $150,000. You’d be able to leave 20% ($60,000) equity and still borrow $90,000 ($150,000 equity – $60,000 retained-equity cushion = $90,000).

2. Low interest rate

A second mortgage is typically quite secure for your lender. You’re using your home as collateral so the lender stands a very good chance of getting its money back. And that means it can afford to give you a lower rate than you’d generally get with unsecured loans such as credit cards or personal loans.

3. Any-purpose loans

Some loans restrict what you can spend your borrowed money on. For example, auto loans can only be used to buy a car or truck.

But you can spend the proceeds of a second mortgage on anything you want. Planning a weekend in Vegas where you’re happy to lose the whole lot on a single spin of the roulette wheel? That’s none of the lender’s business.

Though we wouldn’t recommend it.

4. Tax benefits

If you use the proceeds of a second mortgage to “buy, build or substantially improve your home” (IRS’s words), the mortgage interest may be deductible. That was the case for 2019 filings.

Using the money for any other purposes (including Vegas trips) will mean you can’t make those deductions.

But the tax code changes often and rules can get complicated. So talk to a qualified, professional advisor before you rely on your ability to make any deductions.

5. You don’t impact your first mortgage’s rate

This is an advantage that really applies only when mortgage rates are rising.

For example, imagine you got a loan at 2.5% and average rates were later up at 5%. A second mortgage would let you keep your low rate on your main borrowing and pay the high interest rate just on your new loan.

6. Closing costs are lower than for a refinance

Whatever current rates, your closing costs are likely to be lower with a second mortgage than if you refinance. It’s possible you could save thousands.

Use a refinance calculator to help you. Or talk to lenders about your options.

7. You may not need an appraisal

Some lenders say they require no “formal” appraisal on a second mortgage. But they’re likely to get one based on desk research of your neighborhood’s home-price trends and perhaps Google Street View.

Still, you might save that appraisal fee.

Disadvantages of a second mortgage

Inevitably, second mortgages come with cons as well as pros. Here are the main ones:

1. You’ll almost certainly pay a higher interest rate than on your first mortgage.
2. It’s an extra financial burden. A second mortgage on top of your primary mortgage means two payments each month instead of one.
3. You could lose your home to foreclosure. This is a secured loan with your home as collateral. As such, you give the lender the right to foreclose on the home to get its money back.

It’s also worth noting that (unsecured) personal loans have changed over the years. Some now compete more directly with second mortgages over rates, costs, and loan limits. But you’d need to be outstandingly creditworthy and have remarkably robust finances for the deals you’re offered to be comparable with a home equity loan.

Second mortgage rates

On the day this was written, the lowest home equity loan rate we found was 3.290% for a five-year term. But even advertised rates intended to tempt you went as high as 5.745%. Those were appreciably higher than the average 30-year fixed mortgage rate, which was 2.89% that day.

However, that lowest rate came with zero fees. And the highest charged only $99. Others, with rates in between, charged up to $1,354 in fees. They’re all thousands lower than you’d typically expect to pay in closing costs on a cash-out mortgage refinance (up to 2-5% of the loan amount).

HELOC rates were generally lower, with the best we found 2.240% with zero fees. But remember: HELOCs have variable rates. So you could pay more if interest rates rise.

HELOC rates are typically tied to wider rates: your lender’s prime rate plus a margin to take into account your risk of defaulting or paying down your debt early. When the prime rate moves, so does your rate.

At the time of this writing, prime rate was just 3.25%. So if your HELOC’s rate was prime + 0.50%, your rate today would be 3.75%. Ask yourself if you could afford the payments if prime went up to 5 or 6%.

Home equity loan rates, though, are typically tied to mortgage rates. They’re usually fixed but you may be able to find variable-rate options.

How to get a second mortgage

Applying for a home equity loan or HELOC is fairly straightforward. It’s like accessing any other borrowing and, typically, they are widely available.

However, if you’re reading this while the COVID-19 pandemic is still a major problem, you may find that some lenders have suspended their second mortgage offerings, especially on HELOCs.

Before you apply, make sure you’re in good financial shape: that you are the sort of borrower lenders find attractive.

Reasons to get a second mortgage

Anyone who needs a cash injection may be interested in a second mortgage. But here are some circumstances in which many find them especially attractive:

1. Debt consolidation. Pay down store and credit cards, personal loans and perhaps even auto loans. You can make a single, much smaller payment at a considerably lower interest rate.
2. Manage irregular cash flow. HELOCs let those in the gig economy smooth out the peaks and troughs in their irregular incomes. Borrow, repay and borrow again as needed.
3. When a cash-out refinance is undesirable or impossible. You may not want to refinance your existing mortgage. Or you may not qualify for a new one.
4. Pay for home improvements. There may be tax advantages.

80/10/10 Piggyback Loans

There’s another situation in which home equity loans can be useful. Suppose you have a 10% down payment for your first or next home. You’ll likely have to pay expensive mortgage insurance. But if you use a second mortgage to borrow the amount you need to put down 20%, you won’t have that obligation.

This is more common than you may think. In the jargon of the mortgage industry, it’s called “piggybacking.” But you must make sure you can comfortably afford both mortgage payments.

How to qualify for a second mortgage?

Lenders are going to assess that you’re able, ready and willing to make payments on your new loan — just as they do for first mortgages. In particular, they’re going to look at your:

1. Credit score and report. If you’ve managed debt well in the past, you’re likely to do so in the future. Expect to need good credit (a score of 670-739 or higher, according to FICO).
2. Equity. As discussed above, you’ll probably need to retain roughly 20% of the equity you have in your home. So you can often borrow the difference between 80% of your home’s market value and your current mortgage balance. But don’t take more than you need.
3. Employment record. You need a job and a record of being a consistent earner.
4. Existing debts. The lender wants to know you can afford to make payments on both mortgages. And the amount you’re paying to keep up with other monthly obligations (existing debts, child maintenance, alimony, other homeownership costs) will affect its view of that affordability.

Of course, you should tell your lender if you’re going to use your second mortgage to consolidate some or all of your existing debts. That could change that last calculation.

Second mortgage FAQ

Are mortgage rates higher for a second mortgage than a first mortgage?

Generally yes. Though not always much higher. The difference will depend on how attractive a borrower you are.

What’s the difference between a second mortgage and a refinance?

For many borrowers, the important differences are that it’s easier and cheaper to get a second mortgage. But expect to pay a higher interest rate.

If you’re torn between a cash-out refinance and a second mortgage, run the numbers. There’s a mathematical answer that should tell you which is more beneficial to you. But don’t be surprised if your personal circumstances and priorities override that math.

How do you get a second mortgage?

1. Search for lenders online.
2. Apply online or over the phone. Get a rate quote.
3. Supply documentation requested by the second mortgage lender.
4. Wait for the lender’s approval decision.
5. If approved, supply any additional documentation.
6. Sign final paperwork.
7. Receive funds.

Just as with a first mortgage, make sure your credit and finances are in the best shape possible before you apply. That should earn you a lower rate and might even be the difference between your application being approved or declined.

What lenders offer second mortgages?

Large numbers of banks, mortgage lenders, and credit unions offer home equity loans and HELOCs. You don’t have to go for the lender with which you have your first mortgage.

Indeed, you shouldn’t. By all means, get a quote from it. But shop around for the best deal and get quotes from multiple lenders. This comparison shopping can save you a large amount of money.

These loans can enable you to convert your real estate equity to cash.

The post Second Mortgages | What To Know 2024 first appeared on My Mortgage Insider.

Most conventional mortgages come with caps on the possible loan amount. These are called “conventional loan limits” or sometimes “conforming loan limits.”

In most parts of the country, conventional loan limits top out at over $500,000. So most home buyers will be well under the limit.

However, if you want to buy where real estate is more expensive than average, your limit may be higher. Because these caps are tied to local home prices at a county level.

If you need to borrow more, you may be able to find a “jumbo loan” (an outsized one) from a lender that’s comfortable with the amount you need. Many will happily lend millions of dollars to the most creditworthy applicants.

Still unclear? We’re about to dig into all the details you need to know.

Conventional Loan Limits in 2024

In 2024, the baseline loan limit is $766,550. So you should be able to borrow at least that — providing your credit and personal financial situation is strong enough to justify such a loan.

That figure is for buying a single-family home in an area with average or lower-than-average home prices. If you’re looking to buy multi-family housing in such an area, the maximum loan limits are higher depending on the number of units:

• Two units: $766,550
• Three units: $766,550
• Four units: $766,550

But it’s not just the number of units that can increase these loan limits. If you’re buying in a county where home prices are expensive, you may be eligible for a higher limit.

High-cost area limits

Indeed, limits are automatically 50% higher for four designated high-cost areas. That’s currently $1,149,825:

• Alaska
• Hawaii
• Guam
• The US Virgin Islands

There are also higher loan limits (again, up to 50% above the minimum) in other areas of the US where homes are significantly more expensive than average. For example, the cap for the 10021 ZIP code in Manhattan’s Upper East Side in New York for 2024 is also $1,149,825.

Meanwhile, there are gradations between the highest and lowest caps. So, for example, the 02199 ZIP code in Boston, Massachusetts, had a median home sale price in November 2023 of $4,500,000. And its conventional loan limit in 2024 is $862,500 — not quite the highest available, but significantly above the “base” loan limit for the rest of the country.

All those figures are for single-family homes. And if you’re buying in one of the most expensive areas, the limits are higher for properties with multi-family occupancy:

• Two units: $1,472,250
• Three units: $1,779,525
• Four units: $2,211,600

What are conventional loans?

A conventional loan is one that isn’t directly guaranteed or “backed” by the federal government. These are loans issued by private mortgage companies and approved by rules created by Fannie Mae or Freddie Mac.

Government-backed loans still have loan limits but they are generally lower than those for conventional loans.

The exception is VA loans, which no longer have a formal limit. However, VA borrowers still need to meet qualifying thresholds set by lenders. And those lenders must always be sure that their borrowers can comfortably afford the monthly payments on a new mortgage.

You can divide conventional loans into two types:

1. Conforming loans. Those bought by Fannie or Freddie, plus ones that meet their requirements and so could be bought by them.
2. Non-conforming loans. Those not backed by the government nor buyable by Fannie or Freddie. These are purely private-sector mortgages and may not have formal loan limits.

Given we’re talking loan limits here, the following is about conforming loans. And that includes most conventional ones.

How conventional loan limits work and how to find yours

Every November, the Federal Housing Finance Agency (FHFA) announces new loan limits for conventional loans for the following year. And each limit is usually higher than the last, in line with rising home prices.

So, in the early 1970s, the standard limit for single-family homes was $33,000. By 2019, it was $484,350. And now, in $2024, it’s 498,257.

But don’t assume that rising loan limits are inevitable. When the FHFA announced 2020’s caps, 43 counties had ones that remained unchanged.

How to find your loan limit

The FHFA sets limits according to a formula laid down in the Housing and Economic Recovery Act of 2008 (HERA).

But you don’t need a calculator and home sales data to work out the limit in the county where you want to buy. Just type the ZIP code into this lookup tool from The Mortgage Reports.

Why are there conventional loan limits?

Technically, Fannie and Freddie are government-sponsored enterprises (GSEs). Their role is to channel credit to parts of the population where access to that credit creates a public good — in this case, increased homeownership.

The degree of Fannie and Freddie’s independence from the government is debatable. Because they’re regulated by the FHFA, their autonomy is limited.

And, more importantly, the federal government is likely to be on the hook for any extended losses they make. Hence these loan limits. They put a brake on lending and so limit the taxpayer’s exposure to risk.

Are limits for conventional loans and FHA loans the same?

No, because conventional loan limits are generally higher than those for FHA mortgages.

The most you can borrow for a single-family home in somewhere defined by the FHA as a low-cost county is $0. But the upper limit in high-cost counties is $0.

We put a random ZIP code (87190) into The Mortgage Reports lookup tool. Turns out, that’s in Bernalillo County in New Mexico, which is the most populous county in that state. There, the standard conforming loan limit was $0. But the FHA equivalent was $0.

What is a jumbo loan?

Jumbo loans are private loans that are not subject to the same regulations as conforming loans, and they may help you bridge the gap between the price of your dream home and the loan limits for conventional loans.

Be aware that getting approved for one of these can be more difficult than when you apply for other types of mortgages. And you may pay more for your borrowing.

Because jumbo loans are private, they’re relatively unregulated — compared to conforming loans or loans backed by a government agency.

And that can be both a good and bad thing. On the one hand, you need to be sure that you understand — perhaps with professional help — the terms of your loan agreement and are happy with them. On the other, you can negotiate more freely with the lender to tailor a deal that suits you.

Characteristics of a jumbo loan

Don’t see jumbo loans as a workaround for mortgage issues. Compared with conforming or government-backed loans, they often (but not always) come with:

1. Higher mortgage rates. You might want to consider an adjustable-rate mortgage (ARM) to keep your interest rate affordable.
2. Stricter underwriting standards. You’ll likely need an impressive credit score: often 700 minimum or 740 for bigger loans. And you shouldn’t have too many existing financial obligations eating up a high proportion of your monthly pre-tax income (this is your debt-to-income ratio, or DTI).
3. Higher down payments. Many lenders demand at least 20% down for jumbo loans.

Because you usually negotiate your deal individually, you may be able to create some wiggle room for these. For example, if you’re putting down 50% of the home’s market value, you might get some leeway on your credit score or DTI.

Avoid jumbo loans with a piggyback loan

Some find it better to avoid jumbo loans by having two smaller ones: a conforming main mortgage and a “piggyback loan.” That’s a second mortgage that bridges the gap between the conventional loan limits and your purchase price.

For example, let’s say you wanted to buy a $750,000 home where the local loan limit was $550,000. You have $100,000 for a down payment. If you got a $650,000 loan, you would be over the conforming limit for the area, and you’d need a harder-to-get jumbo loan. Fortunately, that’s not your only option.

You could structure it as follows:

• Primary loan of $550,000
• Second mortgage of $100,000 (closes simultaneously with the primary loan)
• Down payment of $100,000

You potentially qualify much more easily for the primary loan since it’s a conforming loan, not a jumbo.

This doesn’t work for everyone. But it’s an idea worth exploring. All you can do is run the numbers. A mortgage calculator is a good place to start.

How to get a jumbo loan

Many lenders have suspended their jumbo loan program during the COVID-19 pandemic.

Mortgage companies put more on the line with these loans than with other sorts and many lenders are more risk-averse during uncertain times.

But don’t let that put you off. If you’re a reasonably strong borrower, you still stand a good chance of getting your application approved. You just have to search farther afield to find the lenders still offering jumbo loans.

While you’re shopping around for your jumbo loan, be aware that the variations between different lender mortgage rates can be wider for jumbo loans than for other types of mortgages. So be sure to explore the market widely to find your best deal.

The post Conventional Loan Limits 2024 first appeared on My Mortgage Insider.

A cash out refinance or HELOC (home equity line of credit) lets homeowners turn some of their “equity” into cash. But when you’re choosing between them, you’ll need to consider the specifics of your personal finances to determine which type of loan is right for you.

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

What’s the difference between a second mortgage and a refinance?

HELOCs, home equity loans and cash out refinances all let you get your hands on cash that’s currently tied up in your home.

HELOCs and home equity loans are second mortgages. In other words, you borrow and repay them in parallel with your original mortgage. And that means two monthly mortgage payments.

However, a refinance involves swapping your current mortgage for a completely new one.

Read on to discover the detailed differences in costs and characteristics that can make any of them the best in different circumstances.

Different options for tapping home equity

What is a cash out refinance?

You get a whole new mortgage. But you borrow more than you’d need just to replace your existing one and you receive a check for the difference.

What is a HELOC?

It’s a second mortgage that complements — rather than replaces — your first mortgage. You get a line of credit, similar to the one you get with a credit card. So you can borrow, repay, and borrow again up to your credit limit. And you pay interest only on your outstanding balance.

What is a home equity loan?

This, too, is a second mortgage. But, instead of getting a line of credit, you receive a lump sum, which you pay down in equal installments.

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

What’s the difference between a HELOC and a home equity loan (HEL)?

We just covered the main differences. But there are others:

1. HELOCs usually have variable interest rates while HELs usually have fixed ones. So you run the risk of rising rates with a HELOC.
2. HELOCs tend to have lower interest rates than HELs. But your personal creditworthiness and financial health may influence your rates even more.
3. HELs are straightforward installment loans. You pay them down in equal installments.
4. HELOCs come in two phases. The draw period is when you can borrow, repay, and reborrow. But then comes the repayment period, during which you can’t borrow anymore. You must pay it off little by little via monthly payments, or refinance it into another loan.

Home equity loan, HELOC or cash out refi: Which is best?

Which is best has as much to do with your needs as each mortgage loan’s characteristics. Pick the one that meets your requirements best, bearing in mind the following:

1. The mortgage rates. Typically, cash out refinances have the lowest rates, followed by HELOCs and then HELs.
2. The closing costs. This time, cash out finances are usually most costly, followed by HELs and then HELOCs. Run the numbers to see which combination of rates and costs suits you best.
3. How much you want to borrow. Mortgage lenders will normally borrow up to 80% of the equity you have in your home with all of these. But cash out refinances and HELs provide a lump sum while HELOCs let you draw down from a line of credit.
4. What you’ll do with the money. HELs and refinances are best for lump sums. But HELOCs are great for freelancers, contractors and others in the gig economy. You can borrow in lean months, repay in good months and borrow again when times turn hard again. HELOCs are also good for those who want large sums for a short time. You only pay interest on the outstanding balance.
5. How long you plan to stay in your home. The sooner you’ll be moving on, the more you’ll want to keep your closing costs lower. They’ll be wasted when you sell and get a new mortgage. So a HELOC, with its low or zero closing costs, may be better in those circumstances.
6. Your risk tolerance for rising interest rates. Rates have been low and generally falling for more than a decade but that’s no guarantee they’ll stay that way. If you opt for a HELOC, which usually has a variable rate, you’ll be on the hook if they rise. HELOCs are usually based on the prime rate, currently 3.25%. Great borrowers get prime + 0%. Prime rate has been as high as 5.5% in recent years, and much higher in the past. Make sure you can still afford a rate that goes up 2-3% in coming years.

Of course, we’re talking generalities here. For example, you can find HELs with variable rates. And you could choose an adjustable-rate mortgage (ARM) for your cash out refinance.

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

Pros and cons of a cash out refinance

Pros of a cash out refinance

Why might you choose a cash out refinance rather than a HELOC or HEL? Well, there are several possible reasons:

1. Lower mortgage rates. These refinances typically have lower interest rates than home equity loans, but not always than HELOCs.
2. More flexibility. You can choose the type of mortgage that suits you: conventional, FHA, VA, jumbo. But you can’t do a cash out refinance on a USDA loan.
3. Lower monthly payments. You can spread payments over 30 years, which is a longer loan term than most home equity loans or lines of credit. The more payments, the lower each needs to be. Home equity loans — but not HELOCs — can also last 30 years but they’re usually for a shorter period of time.

Those are compelling advantages for many borrowers. But here are the drawbacks.

Cons of a cash out refinance

Cash out refinancings have some disadvantages you should take seriously:

1. You’re resetting the clock on your mortgage balance. Suppose you’ve had your existing 30-year mortgage for 10 years. Get a 30-year cash out refinance and you’ll be paying down your home for 40 years: the 10 you’ve already done and the 30 on the new loan. If you can afford the payments, opt for a 15- or 20-year term.
2. You may pay more in the end. Even with a lower interest rate, borrowing (and paying interest) for so long is expensive. Your total cost of borrowing will likely be lower with a shorter home equity product. Unless, that is, you can afford the higher payments that come with a 10-year, 15-year or 20-year cash out refinance.
3. Closing costs are higher than for home equity products. If you plan to move in the next few years, those higher costs could make a cash out refinance too expensive.
4. Your new loan could have a higher rate than your existing one. That’s less likely at a time when rates are falling. But cash out refinances often have slightly higher rates than straight refinances when your only benefits are a lower rate and a smaller monthly payment.
5. You might have to pay mortgage insurance. This is rare because most lenders require you to keep a 20% equity cushion that lets you avoid those premiums. But if you find one that lets you borrow more than 80% of you home’s value, you will have to pay mortgage insurance.

Cash out refinances remain a very popular way to get cash from the value of your home.

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

Pros and cons of home equity lines of credit (HELOCs)

Although HELOCs and cash out refinances both let you access money that’s tied up in your home, they’re typically used for very different purposes. So let’s look at the tradeoffs:

Pros of home equity lines of credit (HELOCs)

For the right borrower, HELOCs have some impressive advantages:

1. Typically lower closing costs than a cash out refinance or home equity loan. Sometimes those costs are zero. The lower upfront costs could make a HELOC a good option, even if you intend moving in a year or two.
2. May be eligible for tax deductions on your interest payments. But only if you use the money for certain types of home improvements.
3. Low rates. Typically appreciably lower than for a HEL. Sometimes these rival cash out refinance rates.
4. Borrow large amounts. This depends on the amount of equity but you’re likely able to borrow much more than with a credit card or personal loan.
5. Flexibility. Borrow, repay and borrow again at will up to your credit limit. And only pay interest on your balances. Great for those with constantly changing incomes. And for those who want to borrow big sums for short periods.

Cons of home equity lines of credit (HELOCs)

So what should you be wary of? Here are some potential drawbacks:

1. Higher interest rates. Not all HELOC rates can compete with refinance ones.
2. Shorter terms. HELOCs often come with terms of five to 10 years. And shorter terms mean higher monthly payments, compared with cash out refinances and some HELs.
3. Two mortgage payments. This applies to HELOCs and HELs which are both are in addition to your primary mortgage. A second mortgage means a second monthly payment.
4. Variable interest rates. After more than a decade of downward trending rates, we sometimes think interest rates can move only one way. But that’s not true. And current economic uncertainty could eventually lead to higher rates. If that happens when you have a HELOC, your loan could become high-interest debt and you’ll have to pay more and make higher monthly payments.
5. Repayment periods. After a set number of years, your draw period will end and your repayment one begins. Some borrowers experience difficulties at that point. They can’t borrow anymore and they have a fixed time within which to pay down their balance. Unless they can refinance the loan amount.

In the end, the choice between a cash out refinance and a HELOC depends on the specifics of your financial circumstances.

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

The post Cash Out Refinance vs HELOC: What’s the difference? first appeared on My Mortgage Insider.

There’s no one-size-fits-all answer to this one and it’s going to depend on a number of factors, including the type of mortgage you want and your personal financial circumstances.

Below, we’ll explain how to assess your situation. And you’ll be in a much better position to make a smart, informed choice over the size of down payment that suits you best.

We’ll cover:

• What is a down payment?
• Minimum down payment by mortgage type
• Pros and cons of different sized down payments
• Benefits of a 20% down payment
• How much down payment is required to avoid private mortgage insurance (PMI)?

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

What is a down payment?

A down payment is a deposit you put down when you buy a home.

It represents the initial ownership value that you have in your home. That’s your equity, which is the amount by which the value of your home exceeds your mortgage balance. So, if you put down 50%, you start off with an ownership interest of one-half. With 20% down, you own one-fifth. And so on.

From a lender’s point of view, the bigger your down payment, the more invested you are in your home. And that means it’s more likely it is you’ll do everything possible to protect what may well be your biggest asset.

Better yet for the lender, a big down payment means a deep cushion if things go wrong. So, if you lose your job and can’t pay the mortgage, it’s likely that your lender will get their money back in the unfortunate event that they have to foreclose on your home loan.

With such a low risk of loss, it’s no wonder that mortgage lenders typically give preferential mortgage rates to those with large down payments.

Those rate reductions usually come in 5% increments. So if you have 8-9% down, you might think about increasing that to an even 10%.

Minimum down payment amount by mortgage type

So there are usually real advantages to exceeding the minimum down payment required for any particular type of mortgage. But many homebuyers — and especially first-time ones — don’t have that luxury.

So, at the minimum, how much of a down payment should you make upfront on a house? It will vary depending on what type of mortgage you’re seeking.

Loan programs have the following down payment requirements:

Conventional mortgage*: 3% minimum. But you’ll likely get a better rate with 5%, and will escape mortgage insurance completely with 20%.

FHA loans: 3.5% minimum. Backed by the Federal Housing Administration. These are typically for people with credit scores too low to get a conventional loan. And with conventional loans, you’ll get lower interest rates with a bigger down payment, and you’ll pay mortgage insurance if your down payment is less than 20%.

VA loans: 0% minimum. Backed by the Department of Veterans Affairs and available almost exclusively to current servicemembers and veterans. Typically a great choice, if you’re eligible. No continuing mortgage insurance.

USDA loans: 0% minimum. Backed by the U.S. Department of Agriculture and available if the home is in an eligible location (suburban and rural areas), and your income is close to or lower than the median for the area. You’ll also need to pay mortgage insurance.

Jumbo loans: Most lenders require at least 20%-30% down. Outsized, private-sector mortgages for those buying expensive homes. Shop around if the down payment your lender requires is too high as some lenders may have more flexibility.

*A conventional mortgage is one that conforms to the rules set by Fannie Mae and Freddie Mac, whether or not one of those actually guarantees it. Most 30-year, fixed-rate mortgages are conventional ones, as are some others.

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

Pros and cons of a large down payment

Below, we’ll go in-depth on the major advantage of a 20% down payment: avoiding mortgage insurance.

But there are some other important advantages to a large down payment, along with some inevitable drawbacks.

Pros of a large down payment

Lower monthly payments. Besides saving with a lower mortgage rate, you’ll be borrowing less overall and therefore paying back less each month.

Bigger and better home. You can afford a more expensive home with the same monthly payment if you put more down more.

Cheaper borrowing. The less you borrow, the lower the total cost of the interest you’ll pay over the lifetime of your mortgage.

Cons of a large down payment

Overstretching yourself. You need to keep back money in a savings account, including an emergency fund. Because it can be hard to access your home equity if you need it.

Losing investment opportunities. The more of your money you tie up in your home, the less money you have to ride a stock market boom or invest in a start-up.

Making bigger losses if home prices fall. The bigger your stake in your home the bigger your loss if its value of the real estate drops. Those with low down payments let the lender shoulder more of the risks of the housing market.

And there’s another potential downside. Perhaps counterintuitively, you get a lower return on your investment, the bigger your down payment.

The return on investment puzzle

For a more in-depth explanation of this, check out “Before Making A 20% Mortgage Down Payment, Read This.”

But here’s a high-level explanation, based on a $400,000 home that increases in value to $420,000 over a year:

• With 20% down on the home, or – $80,000, y: Your rate of return is 25%. (Your $20,000 profit is 25% of your $80,000 investment.)
• With 3% down on the home, or – $12,000, y: Your rate of return is 167%. (Your $20,000 profit is 167% of your $12,000 investment.)

Even allowing for a higher rate and mortgage insurance, you might make 105% with 3% down, as opposed to 25% with 20% down.

This might not be enough to convince you to make a smaller down payment. The whole idea of a mortgage is to build equity over time and you’ve still made $20,000 either way. But it’s a tradeoff to be aware of.

More benefits of a 20% down payment

In addition to giving you access to lower mortgage rates, a 20% down payment can enable borrowers to avoid private mortgage insurance.

Mortgage insurance

Mortgage insurance is a continuing, monthly charge for homeowners who put down less than 20%. And it’s one that protects the lender rather than you, even though you’re the one paying it.

But mortgage insurance isn’t all bad. It can make homeownership possible for people who haven’t yet saved a 20% down payment. And depending on where you live, you might pay a few hundred dollars a month for private mortgage insurance while accruing much more in home-price appreciation.

But there are some programs that can allow you to escape mortgage insurance, even if you don’t have 20% of the new home purchase price to put down.

VA loans are a special case

There are no continuing mortgage insurance monthly premiums for those with VA loans, even if you put down nothing. Instead, there’s a VA funding fee.

That’s 2.3% of the loan amount for first-time use, and 3.6% for subsequent uses, payable on closing. However, you can often roll it up into your new mortgage.

How much does mortgage insurance cost?

The cost of mortgage insurance depends on the type of loan you choose and the amount you borrow. Here are some examples. However, actual amounts vary by mortgage rate and credit score, so model yours using a mortgage calculator. And then confirm it when you get your mortgage quotes.

With FHA loans, you usually pay an initial premium on closing of 1.75%, followed by an annual premium (paid monthly) of 0.85%. On a $289,500 loan (a $300,000 home with a minimum down payment of 3.5%), you could be looking at about $200 a month in extra costs due to mortgage insurance.

For conventional loans, you pay no initial premium on closing but 0.19-1.86% annually, again payable monthly. For the same mortgage example, that could be $280 a month.

For a USDA loan, there’s a 1% initial premium then 0.35% annually. That works out to about $80 a month.

When can you stop paying mortgage insurance?

In the past, you could stop paying mortgage insurance premiums when you’d made enough mortgage payments — or enjoyed enough home-price appreciation — that your home’s value exceeded your mortgage balance by the required amount. And you still can, for conventional loans.

But that’s no longer the case for FHA loans. Mortgage insurance stays attached to those mortgage loans until you:

1. Pay off the loan
2. Move and sell the home
3. Refinance to a loan without mortgage insurance

Unsurprisingly, many choose the third option: refinancing.

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

How much down payment is required to avoid private mortgage insurance (PMI)?

Most people only escape mortgage insurance by making a down payment of 20% or more — or by waiting until their equity reaches the required amount. Then they can stop paying premiums or refinance, depending on their type of loan.

But some lenders offer ways around this:

1. Lender-paid mortgage insurance. The lender picks up the tab for the premiums. However, these loans come with higher mortgage rates, so you end up paying for mortgage insurance anyway.

2. Piggyback loans. You borrow the difference between your savings and a 20% down payment with a second mortgage. For instance, you can secure a second loan for 10% of the purchase price and pay 10% down. This is known as an 80-10-10 loan.

But both those options tend to be costly. The first typically brings a higher mortgage rate and the second a further loan to maintain.

But for some homebuyers, these alternatives can be attractive. And remember that if you don’t pay PMI, you can expect to pay a higher interest rate which means higher monthly mortgage payments.

Down payment assistance programs

There are down payment assistance programs in every state that may enable you to make a larger down payment than you otherwise would.

So how much should you put down on a house?

All the above is the essential information you need to know when deciding how big of a down payment to make. Ultimately it’s a decision determined by your unique financial situation and your choice of mortgage program. And you should now be better equipped to make an informed home buying decision.

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

The post How much should you put down on a house? first appeared on My Mortgage Insider.

It’s usually on the lower end of that percentage range for bigger loans and higher for small loans.

For instance, a $300,000 refinance might come with $6,000 in closing costs, just 2%. But a $100,000 refinance could require $4,500 in costs — 4.5%.

According to the Federal Reserve Bank of St. Louis, the median sales price of an existing home in June 2020 was $295,300. So, if you wanted to refinance 80% of that ($236,240), your closing costs could range between $4,725 and $11,800.

Freddie Mac reckons most people end up paying around $5,000.

What determines refinance closing costs?

Part of it’s down to your choice of lenders. Some simply charge more for refinancing than others. That’s why we urge you so often to shop around for the best deal: you need to consider both refinance rates and closing costs.

And remember, you don’t have to stick with your current lender when you refinance. You’re getting a whole new mortgage and you can and should explore all your options in the marketplace.

Your closing costs could also depend on the type of loan you want. For example, cash-out refinances often incur higher closing costs and refinance rates.

Streamline refinances

But the type of refinancing is also a key factor. Some types of mortgage (FHA, VA, and USDA) allow you to “streamline” your refinance, which reduces both paperwork and costs. Although lenders are free to set their own procedures, with streamline refinances you may not even need a: Home appraisal Credit check Employment, or income verification

And that should save you a lot of money on closing costs. These streamline refinances are available only if you do not want to take cash out and you do stick with your existing type of mortgage. But you can still switch lenders.

Fannie and Freddie’s streamline-lite

Savings may be smaller but still worthwhile if you have an existing mortgage with either Fannie Mae or Freddie Mac. They both have refinancing products (the High Loan-to-Value Refinance Option and Enhanced Relief Refinance, respectively) that permit simplified documentation as well as allowing you to refinance a large proportion (roughly 97%) of your home’s market value.

But, again, these aren’t available if you need a cash-out refinance. And, for these, you must stay with Fannie or Freddie while being free to switch to a different lender.

Common mortgage refinance costs

Closing costs will vary dramatically depending on the specifics of your refinance.

Here are the fees and costs that those refinancing commonly incur:

• Origination or underwriting fee. 0-1% of the loan amount. What the lender charges for setting up the loan.
• Discount points. 0-2% of the loan amount. These are optional and allow you to purchase a lower mortgage rate. People who plan to keep their loan (and home) forever may choose to pay more money upfront to get a super low rate.
• Application fee. $300-500. These are rarer nowadays but you may still find them.
• Appraisal fee. Probably $400-$1,000 for an average property. Appraisal fees can be much more depending on the size and location of your property.
• Credit report fee. $20-$30. The cost of pulling your credit report.
• Flood determination fee. $20. This evaluates the likelihood that your property is susceptible to flooding.
• Flood monitoring fee. $40. This pays for continuing checks on flood-map updates.
• Tax monitoring and tax status research fees. $150-$225. This makes sure you stay current with property taxes.

All the above fees are determined by the lender.

But there’s another category that you have to pay but that you can shop around for. In other words, you get to appoint the supplier (or you can get the lender to do so), providing the company or person is appropriate. So you might make savings on:

• Pest inspection fee. $150.
• Survey fee. $50-$100.
• Insurance binder. $65-$70 for the binder itself. Be aware that other fees incurred in compiling it can add up to $700 or more.
• Lender’s title policy. $500-$700.
• Settlement agent’s fee. Can range from $800-$2,000. The cost is likely to vary hugely depending on services provided, city, purchase price and loan value.
• Title search. As low as $150 for a rudimentary tract search. But you could pay $1,000 or more for a full ownership and encumbrance report

All those cost estimates are necessarily vague. And, if you’re refinancing a big mortgage, you could pay a lot more. What we’re trying to do is give a feel for averages. In some states, you’ll also incur attorney fees.

What is a no-closing-costs refinance loan?

Anyone who says you won’t pay closing costs is stretching the truth a little but it is possible for you to avoid paying closing costs at closing (though you will have to pay them in the end).

Here are the two alternatives that are commonly available:

1. The lender adds your closing costs to your mortgage balance. So you pay them back (plus interest) over the life of the loan, perhaps as long as 30 years
2. Your closing costs disappear. But you have to pay a slightly higher interest rate on your refinance so the lender makes its money back over the years.

There’s just no such thing as a free home loan. But that doesn’t mean those alternatives are always a bad idea. Providing you work out how much they’ll cost you and make an informed decision, you can perfectly legitimately choose to take advantage of a “no-closing-costs” offer.

After all, you may not have that sort of money. Or, if you do, you may have better things to do with it. But it is part of the answer to our original question: How much does it cost to refinance a mortgage?

What’s the cost of resetting your loan term?

Refinancing very often means resetting the clock on your mortgage. Suppose you bought your home or last refinanced five years ago and chose a 30-year, fixed-rate mortgage (FRM). Now you want to refinance to another, similar, 30-year loan. You’ll end up paying for your home over 35 years: five on the old loan and 30 on the new one.

That’s great in some ways. The longer you have to pay back any loan, the lower each payment should be. And, in this case, you’ll be making 420 monthly payments (35×12) instead of 360 (30×12).

So those monthly payments will be lower, even if you were to refinance at the same mortgage rate. And the payments are likely to be even lower if you get a lower mortgage rate than you were paying previously.

The “But” here is inevitable. There’s always a downside. In this case, it’s that you’ll be paying interest on your mortgage for 35 years instead of 30 years. You may be paying less each month but you’re going to pay considerably more in the end.

Here’s an example:

Assume you’re purchasing a home with a starting loan of $250,000 at a rate of 4%. This chart illustrates how you’ll pay if you ride out the original loan, in comparison with the costs if you refinance the $222,000 balance at the five-year mark to a rate of 3.5%. Your monthly costs will go down but will be spread out over another thirty years, meaning you might end up paying more in the long run. In this case, refinancing would cost an additional $720 over the life of your loan.

The trouble with amortization

This increased cost of your mortgage is made worse by something called amortization. Amortization determines how each of your monthly payments breaks down into interest and principal (the amount you borrowed). With a mortgage, nearly all of each monthly payment goes on interest in the early years. And that means your principal (mortgage balance) is reduced very slowly. In fact, you only start paying more principal than interest halfway into year-18 of a 30-year FRM.

Imagine you borrowed $273,886 five years ago. Your mortgage balance should still be $244,054 in year 5. Because you’ll have paid only $29,832 on your principal but a whopping $40,563 in interest.

When you refinance, the amortization clock resets along with your mortgage clock. And it will take you another 18.5 years to get to the point where you’re paying more in principal than interest. That’s a total of 23.5 years (18.5 on the new loan, plus five lost years on the old).

A mortgage calculator can help you see amortization in action. Put in your own figures, click “view full report” and all the details come up, including a brilliant amortization graph that proves that a picture paints a thousand words.

Minimizing the cost of refinancing

There’s a way to make refinancing much less expensive over the long term. But it often involves some short-term pain.

You can refinance to a shorter term. So, instead of getting a new 30-year FRM, you move to a 15-year or 20-year one. Some lenders pretty much let you pick your own term, so, in our example, a 25-year term isn’t out of the question.

Take this route, and you’ll pay way less interest over the lifetime of your loan and will be mortgage-free that much sooner. As an added bonus, a shorter-term loan typically comes with a lower mortgage rate.

The downside to a shorter loan term

It’s win-win-win. Except for another of those inevitable Buts. Your monthly payments are likely to be appreciably higher.

So reducing your loan term is generally an option only to those with healthy cash flows and plenty of spare money at the end of each month. They stand to make big savings on the cost of their borrowing.

For the rest of us, who find our household finances a continuing struggle, a refinance to a new 30-year term is usually our only choice. We have to prioritize making our monthly payments as affordable as possible over any long-term gains. And it’s fine to do that.

3 tips to lower your refinance costs

Here are three ways in which you can make your refinance less costly:

Think ahead and work on your credit score

A higher credit score is almost bound to earn you a lower mortgage rate. So work on yours in the months leading up to a refinance application.

Shop around with multiple lenders

Whatever you do, don’t ask just your existing lender for a refinance quote. Apply to several lenders, perhaps including your current one. Because both interest rates and closing costs (as we’ve already seen) vary wildly between them, you stand to save literally several thousand dollars by shopping around.

You will, by law, receive a loan estimate from those lenders to which you apply and that are willing to lend to you. These now come in a standardized format, meaning they provide the same information within the same layout. And that makes it exceptionally easy to compare them.

Don’t worry that applying to multiple lenders involves multiple hits to your credit score. Providing you make all your applications within a “focused period” (most seem to think that means two weeks), your score should take the same tiny hit that inevitably occurs whenever you apply for a new credit account. And it should normally recover very quickly, as long as you continue to follow all the usual rules.

Negotiate your refi closing costs

The closing costs and fees (sometimes even the mortgage rate) you see on loan estimates aren’t set in stone. Often, one of the biggest costs there will be the origination or underwriting fee, which is what the lender charges for setting up the refinance. And lenders may be willing to reduce theirs to win your business.

Armed with several loan estimates, don’t hesitate to call and tell lender #1 that lender #2 is offering a better deal because of x, y and z. Ask them to match or better lender #2’s deal. The worst that can happen is the loan officer says no. And you can keep playing one lender off against the others to your heart’s content.

If your home has been appraised recently and home prices in your neighborhood are fairly stable, also ask the loan officer to use that valuation. That could save you $300 or $400 on a new one if she agrees.

And don’t forget those suppliers we mentioned above that you are allowed to choose yourself. From pest inspection fees to title searches, you can appoint your own qualified suppliers and negotiate your own rates. The list of services you can shop for comprises section C on page 2 of your loan estimates.

Again, a few hours on the phone or online could give you a handsome return on that time in lower closing costs.

7 reasons to refinance

Have we made the costs and processes of refinancing sound daunting? It’s time to remind you of what those buy you. A worthwhile refinance could allow you to:

1. Lower your mortgage rate. That helps to moderate your total cost of borrowing and also to…
2. Reduce your monthly payment. Making your loan more affordable.
3. Balance your household budget. A cash-out one can let you consolidate all your debts.
4. Get spare cash. Invest, carry out home improvements or treat yourself, using funds from a cash-out refinance.
5. Change your term. Save money in the long run by choosing a loan with a shorter term.
6. Eliminate mortgage insurance payments. If you now have 20% or more equity in your home (its market value today is at least 20% higher than your current mortgage balance) you can switch your FHA loan for one that doesn’t charge PMI.
7. Convert your loan type. You won’t get a streamline refinancing, but you can swap your current type of loan (Fannie, Freddie, FHA, VA, USDA, etc.) to one that makes more financial sense for you.

If you qualify for a great deal, there’s never been a better time to refinance.

The post How much does it cost to refinance? first appeared on My Mortgage Insider.

Private mortgage insurance (PMI) is usually between 0.19% and 1.86% of your mortgage balance. And you sometimes need to pay an upfront premium on closing, too.

But how much you have to pay will depend on the type of mortgage you choose, how much you put down, and — with some loans — your credit score.

Private mortgage insurance (PMI) is normally needed if you make a down payment on your loan that’s less than 20% of the home’s value.

Read on to discover:

• What is PMI?
• The different rates for different types of mortgage
• Which loans take your credit score into account and which don’t
• How to calculate your PMI
• Is PMI worth it?
• 4 ways to avoid PMI

What is PMI?

First, we need to clear up some jargon. PMI is technically the term for mortgage insurance paid on conventional loans. When government-backed loans charge mortgage insurance, it’s officially called mortgage insurance premiums (MIPs).

But most people nowadays don’t differentiate between the two. And we’re going with the flow and calling them all PMI.

Not all mortgage insurance is bad

Many homeowners hate PMI because they have to pay for it, even though it gives them no immediate benefit. It exists to protect the lender in the event you default and end up in foreclosure.

But PMI’s bad reputation isn’t wholly deserved. It’s often the only way you can get on the first rung of the homeownership ladder — unless you have enough savings to make a 20% down payment.

And those who complain about it frequently find they make way more through rising home prices than PMI costs them.

The different rates for different types of mortgages

The rules that govern how much you pay for PMI can be quite complicated. So only bother to get your head around those of the following that you think you might choose.

Conventional loans

These are mortgages that aren’t backed by the government. So they are either offered privately or through Fannie Mae or Freddie Mac, which are government-sponsored enterprises, rather than the government itself.

There’s good and bad news for PMI. The good news is you don’t have to make an initial payment on closing. And that the starting annual rate is a very attractive 0.19% of the loan value.

But the bad news is that few pay such a low PMI rate. Lenders include credit scores in their PMI calculations for conventional loans. And borrowers with only fair credit (580-669, according to FICO’s definition) could find that annual charge is sky-high — assuming they can get approved at all.

Conventional loans: The mortgage insurance math

The top rate for mortgage insurance on a conventional loan is 1.86%. On a $250,000 loan that would be $4,650 in your first year, which is $387.50 monthly.

On the other hand, those who have stellar credit scores and exceptionally sound finances could pay that ultralow starting rate of 0.19%. That comes in at $475 a year or $39.58 a month on that $250,000 loan.

If we take a middling figure of 1%, that would be $2,500 a year or $208.33 a month.

All those are rough figures. They partly depend on your mortgage interest rate and other factors. But we’ll tell you how to calculate yours with a bit more precision in a minute. Just recognize that you won’t know for sure until you get preapproved by a mortgage lender or request a loan estimate.

Of course, most homebuyers pay somewhere between those two extremes. But you can see why borrowers with lower scores often shun conventional loans, and instead frequently turn to other loan options, like FHA loans.

FHA loans

These are government-backed loans, which means a portion of your borrowing is guaranteed by the Federal Housing Administration.

The FHA ignores your credit score when it calculates your PMI (or, technically, your MIP). So it’s way friendlier to those with only fair credit.

But, typically, you have to pay a one-time super-premium of 1.75% of the loan value when you close. And, after that, 0.85% annually, payable monthly.

For our $250,000 loan, that’s $4,375 on closing and a $2,125 annual premium — or $177 a month. You’d need to be a pretty good borrower to get such a low monthly payment with a conventional loan.

But there’s a catch. With conventional mortgages, you can stop paying PMI when your loan balance falls to 80% of your home’s original purchase price. But, with FHA ones, you remain on the hook for the entire life of the loan unless you move home or refinance.

USDA loans

There are two relevant good points about this program:

1. You don’t need to make a down payment. Literally nothing, though you may get a better mortgage rate if you can put down something.
2. PMI (MIP) costs are lower than for FHA loans and many conventional ones.

The typical PMI charges are 1% on closing and 0.35% annually. For our $250,000 example loan, that’s $2,500 on closing and $875 annually ($72.92 monthly).

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

VA loans

Another government-backed program, this time managed by the Department of Veterans Affairs. The program has some unique characteristics:

1. Zero down payment
2. Low mortgage rates
3. No continuing PMI or MIP

Take note of the word “continuing.” While you won’t have to make regular monthly mortgage insurance payments, there is an initial payment due when closing your home purchase. It’s called the VA funding fee — rather than mortgage insurance — but it serves the same purpose.

So how much is the funding fee? The first time you use the program, it’s 2.3% of the loan amount and less if you choose to make a 5% or 10% down payment. After that, it’s 3.6% for each subsequent loan. But, again, lower rates apply with a down payment of 5% or 10% and higher.

For our $250,000 example loan, that’s $5,750 on closing with zero down on your first loan. Sounds a lot? Not when you remember you won’t spend a penny more on PMI.

Not sure if you’re eligible for a VA loan? Learn more here.

How to calculate PMI

In theory, calculating PMI is easy. You just do what we did in our examples: Take the loan value and multiply by x%, with x the relevant mortgage insurance rate.

That’s easy for FHA, VA, and USDA loans because each of those has its own flat-rates. But it’s more complicated for conventional mortgages because your credit score and other factors are going to play a part in the math.

So, with these conventional ones, you can’t be certain how much your PMI premiums will cost you until you actually apply to multiple lenders and receive quotes.

But you probably have a fair idea of your credit score and down payment. And, if you have 800+ credit and 10% down, you might assume you’re going to pay the lowest rate (0.19% annually) or close to it. Meanwhile, if your is 620-640, you might expect to pay the highest (1.86% annually) or close to it. And, if your score is somewhere close to the middle, you could use 1% as a rough guide, while expecting the final number to be a bit higher or lower.

How to figure out your entire mortgage insurance payment

The key figure you need to know before signing a mortgage loan agreement is how much your total monthly payments will be.

You’ll have to allow more for maintenance and repairs. And you may need to add some additional monthly costs, such as homeowners’ association fees (if you’re buying in an HOA) and extra insurance if the property is susceptible to flooding, earthquakes, hurricanes, or other special risks.

But, for most homebuyers, the costs they need to know are:

• Principal and interest
• Private mortgage insurance
• Property taxes
• Homeowners insurance

Luckily, The Mortgage Reports has a suite of mortgage calculators that will give you a monthly payment breakdown. You can even add in your HOA dues manually. There’s one for conventional loans and three others specifically for FHA, USDA, and VA loans, as well as a refinance calculator.

Is PMI worth it?

The answer to that question largely depends on how quickly home prices are rising in the area where you want to purchase. What PMI essentially buys you is the ability to cash in on appreciating values before you’ve saved the lump sum needed for a 20% down payment.

Of course, it brings other homeownership benefits, too. But, from a financial standpoint, it’s that early ability to benefit from home price inflation that’s key. Suddenly, you see rising real estate prices as a plus, rather than something to watch with dread.

Check out your local market

So, if you want to buy somewhere that currently has stagnant prices or even falling ones, you may prefer to wait until you’ve saved up a 20% down payment before buying. Even then, you might hesitate.

But if home prices are shooting up there, PMI could turn out to be a very sound investment — with a handsome return.

At the time of writing, home prices are rising nationwide. But that covers some extreme local variations. So don’t look just at national figures. Investigate the market where your next home will be.

5 tips to avoid paying PMI

1. Make a 20% down payment

But that might not be an option for you. So what are the other four?

2. Pay down your mortgage

The federal Homeowners Protection Act (HPA) provides rights for homebuyers over the termination of PMI payments. But it does not apply to FHA and USDA loans — and isn’t needed for VA ones.

Under that law, your PMI payment obligations must automatically terminate when your mortgage balance is scheduled to reach 78% of the original valuation of your home. The only condition is that your payments must be current at that time.

This has nothing to do with rising home prices. It’s your home’s original appraised value on purchase (or the contract sales price, whichever is lower) that’s used. And the date is exactly predictable: You can find it on your amortization table.

You can also request in writing that PMI payments stop when that figure reaches 80%. But that earlier cancellation brings some extra conditions that don’t apply to automatic terminations at 78%.

These include: A good payment history. No second mortgages. So no home equity loan or home equity line of credit (HELOC). You may be asked for a fresh appraisal to confirm that your home hasn’t lost value since you bought it.

If your PMI payments are a burden, your payments are up to date and you can fulfill those conditions, it may be worth the hassle of making your application.

3. Pass the halfway point of your home loan term

Your PMI must also be terminated when you reach the midpoint in your mortgage term. (Remember, this does not apply to FHA and USDA loans). The Consumer Financial Protection Bureau explains:

“There is one other way you can stop paying for PMI. If you are current on payments, your lender or servicer must end the PMI the month after you reach the midpoint of your loan’s amortization schedule. (This final termination applies even if you have not reached 78 percent of the original value of your home.) The midpoint of your loan’s amortization schedule is halfway through the full term of your loan. For 30-year loans, the midpoint would be after 15 years have passed.”

4. Refinance

If you’ve come into some money or your home’s value has appreciated enough for you to attain 20% equity, then refinancing can enable you to remove PMI.

Of course, that’s likely to come with closing costs. But, with mortgage rates the way they’ve been recent, you might be able to reduce your monthly mortgage payment at the same time. You may well end up with a lower rate and lower monthly payments, even leaving aside your PMI savings.

And you can then refinance from any type of mortgage to any type of mortgage for which you qualify. Even FHA loans don’t have PMI if you put down 20%.

5. Piggyback mortgages

You may be able to avoid PMI altogether, provided you’ve managed to save a 10% down payment. You can do this through a piggyback mortgage, also known as 80/10/10 financing (though you can find 75/15/10 versions if you’re buying a condo).

Have you guessed how this 80/10/10 business works? You have your 10% down payment and you borrow another 10% as a second mortgage, often a HELOC. That means your main mortgage is only 80% of the home’s value and you’re effectively putting down 20%.

Obviously, everybody would be doing this if there weren’t some downsides. And those include:

1. Typically, a higher rate on the smaller mortgage.
2. It’s harder to qualify. You’ll need good credit and not too many other debts.
3. It can be more difficult to refinance.

Still, some find this an effective way of avoiding PMI. You can learn more here.

The bottom line

PMI isn’t the evil that many homebuyers seem to think. But you have to look at it as an investment: the price of benefiting from rising home prices. And like all investments, you need to run your figures and assess your risks.

The post How much is PMI (private mortgage insurance)? first appeared on My Mortgage Insider.

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

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

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

Types of non-conforming loans

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

Conforming loan limits

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

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

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

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

Other reasons applicants get non-conforming mortgages

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

Low credit score

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

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

Property problems

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

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

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

Pros & cons of non-conforming loans

Pros of non-conforming loans

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

Cons of non-conforming loans

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

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

Benefits of a conforming loan

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

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

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

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

Benefits of a government-backed mortgage

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

There are three flavors of government-backed loans:

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

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

FHA loans

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

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

VA loans

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

USDA loans

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

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

Important note

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

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

When is a non-conforming loan the right choice?

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

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

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

Non-conforming loan FAQ

Is a jumbo loan non-conforming?

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

What is a non-conforming conventional loan?

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

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

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

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

Can you refinance a non-conforming loan?

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

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

What are non-conforming loan limits?

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

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

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

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

A mortgage pre-approval letter is a document from a lender confirming their willingness to lend you a specified maximum amount of money.

A pre-approval letter impresses sellers and real estate agents because it shows you’re a serious buyer with the financial ability to move forward with a purchase.

What’s the benefit of a pre-approval letter?

A pre-approval can ultimately secure your dream home and save you money. An offer from someone who’s pre-approved is more valuable than one from a rival home buyer without a letter. It’s common for a seller to accept a lower offer from a pre-approved buyer over someone with no letter.

And remember, you don’t need to offer the maximum amount your letter indicates you can borrow. You should choose an amount you can comfortably afford to repay.

Differences between “pre-qualified” and “pre-approved”

During your home search, a pre-approval letter will be a lot more meaningful to sellers — and a more powerful tool for getting you into your dream home. If you’re pre-approved, it means the mortgage lender has verified the financial information — like your credit history and debt-to-income ratio — provided in your mortgage loan application and confirmed your eligibility for the loan amount.

That’s because a pre-qualification or “pre-qual” is the lender’s best guess at your approval status based on your answer to a few questions over the phone or online.

Pros & cons of pre-qualification

Pros of pre-qualification

Mortgage pre-qualification is a cheap (often free), quick and easy alternative to pre-approval. And it’s certainly better than having no letter from a lender.

Cons of pre-qualification

Because the lender takes your word for all the claims you make in your mortgage application and doesn’t verify them, a pre-qualification is no guarantee.

Pros & cons of pre-approval

Pros of pre-approval

When you’re making an offer on a house, you’re far more likely to be successful if you’re pre-approved. Because the process for pre-approval is more complex, a seller considering your offer knows that a lender has already verified your financial situation and is prepared to lend you money to complete the purchase.

Cons of pre-approval

The process for pre-approval is much more complex. The lender will require supporting documentation from you and will independently verify the information you provide.

Indeed, pre-approval is very similar to a full application process with the exception of evaluating the property since you haven’t found that yet. Because of this, pre-approval gets much closer than pre-qualification to proving you qualify for the loan.

If you’re self-employed or have unusually complex finances, it’s especially important that you take the time to get pre-approved.

Many self-employed people overestimate their income. Lenders will use your adjusted gross income after expenses. For example, if you take in $100,000 per year, but write off $40,000, the lender will only use $60,000 to qualify. It’s better to discover these surprises before you get excited about a home to buy.

What kind of offer do sellers and real estate agents prefer?

There’s more to a home purchase offer than the amount. For sellers and realtors, these are the most attractive types of offer, ranked:

1. All-cash offers
2. Offers with a mortgage pre-approval letter
3. Offers with a pre-qualification
4. All other offers

If — all other things being equal — you are in competition with another prospective buyer who’s higher up on that list than you are, you may have to sweeten the deal by beating their offer with a higher offering price.

How to get a mortgage pre-approval letter

When should you apply for pre-approval?

It’s best to apply for a pre-approval letter when you’re ready to start house hunting.

The Consumer Financial Protection Bureau (CFPB) explains why:

Lenders typically check your credit before issuing a pre-approval letter, and the letter may have an expiration date on it (typically 30 to 60 days). For these reasons, many people wait to get a pre-approval letter until they are ready to begin shopping seriously for a home. However, getting pre-approved early in the process can be a good way to spot potential issues in time to correct them.

In other words, if you’re self-employed or have other characteristics that might take a lender a while to get its head around, you might want to ask for your pre-approval letter early in the home buying process.

Pre-approval requirements will vary by lender

Every lender sets its own policies for how long a letter is valid or how much it costs to get one.

As a result, you should shop around for your pre-approval letter. Ask lenders upfront what their policies are, including:

1. How much it will cost (some lenders charge an “application fee”)
2. How long it will remain valid
3. Cost of renewing it if it expires before you’ve found your new home
4. What documents you will need to supply (so you can get them ready in advance)

You don’t have to use the lender who issued your pre-approval letter

Once you’ve found the home you want and have agreed on a purchase, you don’t have to go with the lender who issued your letter. Feel free to shop around for the best available deal.

In fact, you should shop around because the picture might change once the home is known. And the only way to effectively compare loan offers is to get in loan estimates (standardized documents lenders must by law send to all successful applicants) and examine them side by side. Only those provide the level of detail you need to be sure you’re getting an excellent deal.

That said, you’ll probably want a loan estimate from the lender that issued your letter — and it might be the best deal. But a mortgage pre-approval letter does not commit you in any way.

What’s included in a mortgage pre-approval letter?

Pretty much all pre-approval letters will include the same key information. That includes:

1. Loan program: Whether you’re getting a conventional, jumbo, FHA, VA, USDA, or some rarer type of mortgage.
2. Loan type: Is it a fixed-rate or adjustable-rate mortgage (ARM)? Will it last 30 years, 15 years or some other term?
3. Amount of the loan: This is the maximum sum you can borrow.
4. Maximum purchase price: The loan amount plus your down payment.
5. Qualified interest rate: The mortgage rate the lender is willing to charge you.
6. How long the offer will last: The date on which the letter expires.

It’s important to note that your pre-approval letter isn’t actually a mortgage offer. And there are rare circumstances in which it could lapse even while it remains in-date.

For example, if you run up a lot of expenses on your credit cards, you’ll likely do severe damage to your credit score. Or if mortgage rates suddenly shoot up, you won’t be able to afford to borrow as much.

In those circumstances — and a few others — it’s possible for your pre-approval letter to be rendered invalid. But that happens rarely.

5 tips to help you get pre-approved for a mortgage

It’s up to each lender to decide what documentation it requires from you to issue a pre-approval letter. But pretty much all of them will require the following, which must be the most recent possible:

1. Proof of assets. Bank statements for checking and savings accounts, broker statements for investment portfolios, and any other documents that show your assets.
2. Good credit. You won’t be expected to document this because the lender will run its own checks.
3. Proof of income. Paystubs, W2s, and sometimes tax returns. It’s more challenging for self-employed people to prove their income and they may need to provide a range of documents.
4. Employment. Your paystubs help but you may require a letter from your employer confirming your length of service and that you’re still on the payroll.
5. Identification. By law, lenders must confirm that you are who you say you are. A government-issued photo ID may be enough but expect to show more if the lender has any grounds to suspect you aren’t who you say you are.

These are the minimum requirements. A lender can ask for any documentation it wants to satisfy itself as to your suitability as a borrower.

What’s a good credit score to buy a home?

When buying a home, you want a credit score as high as you can get it.

If you’re buying an expensive home and need an outsized mortgage (a “jumbo loan”), you’ll likely need a FICO credit score of at least 700 — and considerably higher if you want a low rate.

But, at the other end of the scale, some lenders require only a 580 score for FHA and VA loans. And if you make a down payment of 10%, you may be able to get an FHA loan when your score’s down at 500. Some other programs and lenders look for minimum scores of 620 or 640.

So “good” credit varies hugely depending on the loan program. But one fact applies across the board: The higher your score, the lower the mortgage rate you’re likely to pay.

Pre-approval letter FAQ

Does a pre-approval letter guarantee a home loan?

No. Even a mortgage offer doesn’t absolutely guarantee one. If your credit score drops dramatically, if you become unemployed or if the basis of your application materially changes, a lender can pull or amend your offer right up until closing.

But lenders want your purchase to proceed smoothly as much as you do so it’s rare for them to pull an offer without very good cause.

Does pre-approval mean I’m committing to a lender?

No, you can and should comparison shop among several lenders once you’ve found the home you want to buy.

Can I buy a house for less than my pre-approval letter?

Yes! Your pre-approval letter shows the size of loan that a bank is willing to give you but you should buy a home for a price you feel comfortable borrowing. The pre-approval indicates the upper end of your price range but feel free to shop below that.

Is a pre-approval letter required to make an offer?

Anyone can make an offer, pre-approval letter or no. But your offer is likely to be taken much more seriously by the seller and real estate agent if you have one.

Indeed, the seller might accept a lower offer with a pre-approval letter than from someone with only a pre-qualification letter or no letter at all. That’s because you’re much more likely to be able to close your purchase. Only all-cash buyers are in a stronger position than you.

Is a pre-approval letter binding?

Nope. A lender is required to honor a pre-approval letter and you are free to shop around for loans with other lenders once you’ve selected a house.

Should you get multiple pre-approval letters?

You can but there’s no reason to and there’s probably a cost to get each one.

Also, requesting more letters than you need might harm your credit score because many lenders carry out “hard” credit checks — sometimes called a “hard inquiry” — as part of the process, which inevitably impacts your credit report.

Instead of getting multiple pre-approval letters, talk through your needs with one of your preferred lender’s loan officers. If that lender doesn’t meet your expectations, shop around for better mortgage options.

How long does the pre-approval process take?

Some mortgage companies can turn around a pre-approval letter within a few business days but some of this will depend on you. If you have all your documentation prepared and ready to submit, you’ll receive your pre-approval that much faster. Similarly, if you are responsive to queries from the lender then the process will move quicker.

But even the most responsive applicants can expect the process to take a week or more if your application is less than straightforward. And a few unlucky people get mired in queries and requests for additional documentation for many weeks.

The post Mortgage Pre-Approval Letter: The Complete Guide first appeared on My Mortgage Insider.

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

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

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

How do RefiNow and Refi Possible work?

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

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

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

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

How much can you save with RefiNow or RefiPossible?

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

Still, the potential savings for borrowers could be huge.

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

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

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

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

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

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

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

RefiNow and Refi Possible eligibility

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

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

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

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

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

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

Shop for your best rate

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

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

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

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

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

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

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

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

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

Should you refinance with RefiNow or Refi Possible?

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

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

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

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