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How to Pay Your Mortgage Off Faster

December 30, 2020 By JMcHood

You took out a mortgage with a specific term, but now you want to pay it off faster. Fortunately, you don’t have to refinance to pay your loan off sooner. There are ways that you can make larger payments, getting your principal paid down faster, which pays your loan off early.

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Pay a Little Extra Every Month

Most lenders allow you to pay extra money toward your principal balance. How much you pay depends on what you can afford. Whether you send an addition $50, $100, or $500 – it’s up to you. Just make sure you mark your mortgage coupon accordingly. There should be a spot to mark the extra principal. This ensures that the extra funds get allocated correctly.

While $50 or $100 a month doesn’t sound like a big deal, it adds up. Even this little amount can knock some interest off the life of the loan and a few months off your loan’s term. The key is to keep the extra payments consistent for the greatest results.

Make an Extra Payment Every Year

It’s easy to make an extra payment every year. You have two options:

  • Make one lump sum payment – If you get a bonus, tax refund, or have some other way that you get a windfall, you may want to make the extra payment all at once. You can do this at any time of year. Again, make sure you mark the coupon accordingly so it directly pays down your principal.
  • Pay 1/12th of the mortgage payment each month – If you can’t afford a lump sum payment, divide the payment by 12, and pay that amount in addition to your regular mortgage payment each month. After 12 months, you’ll have made an extra payment that year.

Making 13 payments a year can knock a few years and several thousand dollars of interest off the life of your loan.

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Make an Extra Payment Every Quarter

If you have the funds, make an extra payment more frequently than once a year. If you make an extra payment every three months, you’ll have made four extra payments each year. This could easily knock off several years and a lot of interest off your loan.

Apply a Windfall to Your Mortgage

If you receive a work bonus, work on commission and have a large sale, or get a tax refund, consider applying the funds to your mortgage. You can send any amount that you want to knock your principal down. If you do this regularly, you can knock plenty of time and interest off the life of your loan.

Pay Your Mortgage Every Other Week

This may sound strange, but if you make half of your mortgage payment every other week, you’ll naturally make 13 payments every year. Since there are 52 weeks in the year, you make 26 payments without having to budget extra money. At the end of the year, you’ll have made one full extra payment. If you do this continually, you’ll save yourself money on interest in the long run.

Calculate 15-Year Payments

If you can afford 15-year payments, but don’t want to spend the money on refinancing, here’s a simple tip. Use a mortgage calculator to figure out how much a 15-year payment would be given your interest rate and loan amount. Then make those payments. Make sure you let the lender know that the extra money is for your principal balance. You can then pay your loan in half the time, saving yourself thousands of dollars in interest and being mortgage-free in half the time.

Paying your mortgage off faster is possible. Whether you pay a little or a lot, your efforts pay off in the end. Always check with your lender to make sure they don’t charge a penalty for paying your loan off early, but most don’t today. Also, make sure you don’t pay the lender to set up bi-weekly payments for you. Many will do that as a service, but then charge you a fee for each payment. This takes away from the amount you pay toward your principal balance. You can do it on your own just as easily.

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Can you Deduct the Closing Costs to Refinance?

December 16, 2020 By JMcHood

It costs money to refinance, just like it did when you bought a home. The lender and appropriate third parties provide their services, for which they need to be paid. The costs add up, so many people want to know if they can deduct the closing costs on their tax returns.

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We help you explore the answer below.

Deducting Closing Costs

In general, you can’t deduct your closing costs when you refinance a loan. The same is true when you purchase a home. But, the good news is that there are a few expenses you can write off during the year that you refinance as well as the years you own the home.

Whether or not you can deduct closing costs depends on if your deductions exceed the standard deduction. The Tax Cuts and Jobs Act increased the standard deduction to $12,400 and $24,800 for singles and couples respectively. The higher standard deduction makes it the most common way to take tax deductions today since many people don’t have itemized deductions that exceed that amount.

If you do have deductions exceeding this amount, though, you can include the following deductions.

Mortgage Interest

Everyone pays interest on their mortgage. No matter your rate or type of mortgage, you can deduct these expenses on your tax returns. You must meet the following requirements to qualify:

  • The home must be your primary or secondary home
  • The refinance must be to improve your home
  • The loan must be for $750,000 or less

If you have a loan amount higher than $750,000, you may only deduct the interest on the first $750,000. For example, if you have an $850,000 loan, you can’t deduct the interest on the last $100,000.

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Mortgage Points

If you pay points to buy down your interest rate or as a part of your closing fees, you may deduct the points. Remember, points are prepaid interest. The lender collects the points at the closing, rather than over the life of your loan.

Unlike when you buy a home, you can’t deduct the full amount of the points during the year you paid them. With a refinance, you must deduct a portion of the points over the loan’s term. If you took a 30-year term, you can deduct 1/30th of the points each year. If you took a 15-year term, you can deduct 1/15th of the points paid each year.

Real Estate Taxes

Just as when you bought your home, you can write off at least a portion of your real estate taxes. The Tax Cuts and Jobs Act states that you can write off up to $10,000 in real estate taxes paid per year. This continues to be possible even after you refinance your mortgage.

Other Closing Fees

Any other closing fees you pay to refinance your loan cannot be deducted. This includes any fees paid to lenders or third parties, such as appraisers, attorneys, or title companies. Keep this in mind as you shop for a lender. Try to find a loan with the least amount of fees to help keep your costs down and to make refinancing make sense.

Always talk to your tax advisor when deciding whether you can write off certain expenses on your tax returns. Typically, just the interest and points get deducted, and as usual, you can still write off your property taxes.

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What are the Major Factors Affecting Interest Rates?

November 27, 2020 By JMcHood

If there’s one factor about a mortgage that most people worry about, it’s the mortgage interest rate. This little factor affects not only your monthly payment, but also how much interest you pay over the life of the loan. It could mean the difference between an affordable and unaffordable mortgage.

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So what determines which interest rate a lender gives you? There are many factors that when all put together, like a puzzle, the lender uses to provide you with a quote.

Keep reading to see what you need to watch in order to get the lowest interest rate for your loan.

What’s Your Credit History?

The very first thing most lenders look at is your credit report and for good reason. It lets them know how financially responsible you are, or aren’t. They use your credit score and history as a measure of your likelihood to pay back the loan you want to borrow.

As a general rule, the higher your credit score, the lower your interest rate. The lower your credit score, the higher your interest rate. It’s all about risk. If you have a high credit score, you pose a lower risk to the lender. In exchange, they can charge you less interest because it’s pretty likely that you’ll pay your mortgage back in full and on time.

If, however, you have a low credit score, you are a higher risk to the lender. The chances aren’t as good that you will make your mortgage payments on time. You may even default on your loan. The lender will likely charge a higher interest rate in order to make more money while you do make payments, in the event that you do default.

How Much are you Investing?

Another factor in your risk level is the amount of money you invest in the home. In other words, how much are you putting down? The more you invest, the more skin you have in the game. In other words, you have more of a vested interest to make your payments on time. If you don’t, you stand to lose a large portion of your own money.

As a general rule, 20% is the key when it comes to getting the best mortgage interest rate, but it’s not always necessary. Just putting down more than the minimum required makes you look better in the lender’s eye. Because they don’t focus on one factor, but all of them together, you want as many positive factors as you can.

For example, combining a higher than minimum requirement down payment with a high credit score shows the lender you are a good risk. However, a high down payment with a lower credit score shows good faith effort in offsetting your risky factor – the lower credit score.

How Much are You Borrowing?

Large loans obviously are a much higher risk than small loans, but that doesn’t mean you’ll automatically get a lower rate with a smaller loan. In fact, if the loan is too small, the lender will charge a higher rate just to make sure they make some money on your loan.

If, however, you borrow more than the conforming loan limit, you may pay an elevated rate because as your loan amount increases, your risk increases too. This will depend on the lender and the other factors of your loan application. In general, though, average size loans under the $453,100 conforming limit, but higher than $100,000 provide the lowest interest rates.

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How Long are you Borrowing the Money?

Generally, the less time you keep the bank’s money, the less interest they will charge you. Specifically, a 30-year term usually has a higher interest rate than a 15-year term. The bank knows they will have their money back in 15 years, so they keep the interest rate down. They will have their money back sooner so they can lend to another borrower.

A 30-year term ties up the bank’s money for a much longer period. While they won’t charge monstrous rates, they will be higher than the 15-year term just because of the higher level of risk. You double the amount of time that you will take to pay the bank back their money.

What Type of Interest Rate do You Want?

Finally, you must determine the type of interest rate. You can choose between a fixed rate and adjustable rate. Looks may be deceiving when it comes to the adjustable rate, though, so be careful. The adjustable rate is often much lower than the fixed rate. The tradeoff, though, is that it will adjust after the introductory period ends.

For example, let’s say you take out a 3/1 ARM. The interest rate is 3.0%. This means for the first three years of the loan, the rate will be 3%; it will not change. After those three years, though, the rate can adjust annually. This is where the catch starts. You’ll pay the index rate plus a predetermined margin. There’s no way to know today what the index (chosen by the lender) will be in three years. Your rate could go up or down quite a bit and you won’t know until you are closer to the adjustment date.

A fixed rate, on the other hand, never changes. It remains the same for the entire term. Because of this predictability, the lender charges a slightly higher rate than the introductory rate of the ARM.

Lenders take all of the pieces of the puzzle and put them together to come up with the perfect interest rate for you. Chances are that if you ask three different lenders for a rate quote, you’ll get three different answers. Each lender has their own threshold for risk and their own requirements. They will use those requirements to determine the right mortgage interest rate for you. The best thing you can do is shop around. If you apply with different lenders within a 30-day window, your credit doesn’t get hit for more than one inquiry. The credit bureaus recognize the need to talk with different lenders and get the interest rate that is most affordable for you.

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Can a Friend Provide Gift Funds for a Down Payment?

November 25, 2020 By JMcHood

The down payment is the largest obstacle when buying a home. First-time homebuyers struggle the most, because they don’t have equity in a home to sell. All money they put down comes from their own liquid assets.

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What if you don’t have the liquid assets? Can you get a gift from a friend? Technically the rules state that only family, your employer, or a charitable organization may provide gift funds. There are exceptions to the rule, though.

Proving the Friendship

Accepting money from a friend is different from accepting money from a family member or employer. What if the friend demands repayment? You may end up in a financially difficult situation. Will you default on your mortgage as a result? These are the issues lenders have with friends supplying gift funds.

However, that doesn’t mean you can’t accept gift funds from a friend. You will need to prove the friendship though. Family is easy to prove, whether a blood or marriage relationship. Friendship is a bit harder.

Lenders want to know how long you have known the friend and the depth of your friendship. Lenders want to know the friend is ‘close.’ Just how you prove this will vary by lender.

Proving the Gift Funds

No matter how you prove the friendship, you must prove the gift funds and their origination. You need a gift letter from the donor. Also, the donor must prove the origination of the funds. Just like you would have to do to use your own funds, lenders need to know there isn’t a loan lurking somewhere deep in the trenches here.

Let’s start with the gift letter. The donor must write a simple letter that states the amount of the gift, the reason/address of the property, and the date. The donor must also state that the funds are a gift and not a loan. They must state that no repayment is expected. This one sentence makes or breaks a gift letter.

Next, donors must provide proof of the funds. Are the funds in his/her bank account? The lender may source the funds with their income. If there are large deposits on the donor’s bank statements recently, the lender may ask about them. Basically, the lender needs to know if they are a loan from anywhere else.

If the donor sold a car, stocks, or any other asset, he or she must provide the bill of sale or any other proof of the sale. The lender needs solid proof that the funds aren’t a loan. Any funds the donor can’t prove may not be able to be gifted.

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What is the Maximum Amount you Can Gift?

Lenders typically allow 100% of the down payment to be a gift. Certain loan programs, like the FHA loan for borrowers with credit scores lower than 580 have different rules. The FHA requires the borrower to come up with at least 3.5% of the purchase price for the down payment. The remaining 6.5% may come from gift funds, though.

Aside from lender/loan restrictions, the IRS limits how much one person can gift you too. As of 2019, the IRS allows gifts of up to $15,000 without tax implications. If you receive any more than $15,000 from one person, you and the donor may have to report it at tax time.

Should a Friend Provide Gift Funds?

Before you accept gift funds, think about what it means. You shouldn’t be repaying the money, but how does the friend feel? Will the friend expect equity in the home? Will the friend expect to be on the title of the home? Working out these questions, no matter how difficult they may be to ask, is important.

You may even want to consult with your attorney before accepting gift funds. Make sure everything is on the up and up before you accept anything. Your lender isn’t the only person you have to face – you’ll face your friend for a much longer time in the future. Know his or her expectations before accepting the funds.

Gift funds are a great way to become a homeowner when you don’t have the money for a down payment. Many loan programs allow them, but exercise caution when accepting them. If they are from a friend, work out the fine details to avoid any issues in the future.

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Common Non-QM Underwriting Guidelines

October 19, 2020 By JMcHood

You don’t fit the standard mold for mortgage applicants so you think you won’t get a loan. Luckily, there are many lenders today that offer non QM loans. These “non qualified” loans provide borrowers just like you a chance to own a home. You don’t have to abide by the strict qualified mortgage guidelines – lenders are able to make their own rules.

How far can lenders go? Luckily for us, they can’t go too far. They still have to abide by the Ability-to-Repay Rules. Every loan must meet these requirements. If a lender wants to go above and beyond and meet the Qualified Mortgage guidelines, they can. But they are restricted on who they can lend to.

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Here we’ll look at Qualified Mortgage Guidelines as well as non-Qualified Guidelines so you can see how they compare.

Qualified Mortgage Guidelines

Your standard lenders offer what’s called a Qualified Mortgage. In other words, they receive protection against litigation from their borrowers. If a borrower becomes unable to pay their mortgage, they can’t sue the lender for giving them a loan they couldn’t afford.

Qualified Mortgages meet the following requirements:

  • Points and fees on the loan can’t exceed 3% of the loan amount
  • The loan can’t have any type of negative amortization or interest only payments
  • The term may not exceed 30 years
  • The income used for qualifying must be verified with paystubs, W-2s, and/or tax returns

Some borrowers don’t meet these requirements, though. The largest one is the income verification. A good example is a self-employed borrower. If you have only worked for yourself for the last 6 months, you won’t have tax returns providing your income yet. Even if you have been working for yourself for a long time, if you report a loss on your taxes, you can’t support a mortgage payment.

It’s borrowers like these or those that need a unique term that need a non QM loan.

Non QM Guidelines

The non qualified loans have different requirements. In fact, the requirements likely differ from lender to lender. The one thing they all have in common, though, is that they meet the Ability to Repay requirements. Every loan, qualified or not, must meet these requirements.

They are as follows:

  • You supply some type of proof of your income that supports the payment. It doesn’t have to be W-2s and tax returns. You can use your bank statements if they show consistent deposits of your regular income.
  • You supply proof of your assets if you don’t work and will use your assets to make the mortgage payments. You’ll need to provide enough statements to prove to the lender that you can afford the loan even without a job.
  • You’ll need proof of your current employment if you use it for qualifying purposes. If you use your assets instead, you won’t need to prove any type of employment.
  • You’ll need proof that you meet the minimum credit score that the lender requires. There’s no minimum score needed across the board. It depends on the lender and what risks they can take.
  • You’ll need proof that you have the minimum down payment required. Again, this varies by lender. Some lenders allow as much as a 95% LTV, while others only allow 85% or lower.
  • The lender must use the fully indexed interest rate for qualifying. Even if you take an ARM with a lower introductory rate, the lender must determine if you can afford the maximum rate.
  • You must also meet the required waiting period after a bankruptcy or foreclosure. These waiting periods will also vary by lender.

Additional Underwriting Guidelines

That’s not all. The lender must also make sure that you can:

  • Make the monthly mortgage payment (principal and interest) without issue
  • Make the monthly mortgage payment on any 2nd liens you hold
  • Afford your real estate taxes and homeowner’s insurance
  • Afford your current debts alongside your new mortgage; this includes alimony and child support payments
  • Have enough residual income after you pay all of your monthly bills

Again, these requirements may vary by lender. For example, some lenders may allow a credit score as low as 500 while another may require one as high as 620. These lenders keep non QM loans on their books. They don’t sell them to Fannie Mae or Freddie Mac. This means they can accept whatever risk they deem acceptable.

When you apply for a non qualified loan, you’ll go through the same process you would if you applied for a qualified loan. You must provide your personal identifying information. This includes your name, address, and social security number. You must also provide all financial information along with proof to support it.

The lender will run your file through underwriting and determine what conditions exist. Once you know the conditions, you must supply the appropriate proof. The underwriter will review your documents and decide if you can afford the loan.

The Ability to Repay rule works to protect you. Even though it may seem like it adds another layer of requirements onto your loan, it prevents you from taking a loan you can’t afford. If you don’t fit the mold for a qualified mortgage, shop around for a non QM loan. There are many lenders out there willing to supply these types of mortgages today. Shop around and find the best loan for your situation.

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Interest Only Home Loans: Pros & Cons

September 15, 2020 By JMcHood

An interest only home loan gives you the option to pay just the interest on a home loan during a specific period. In the case of a home equity line of credit, the most common loan that only requires interest payments, the period lasts for 10 years. After that, you enter the repayment period, which your loan becomes fully amortized and you make principal and interest payments.

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The interest only loan obviously provides you with a lower payment at the onset of the loan. It makes it much easier for you to afford. However, the repayment period comes eventually. In other words, you have to pay the principal of the loan off at some point. Knowing the risks involved with this loan can help you make the right decision for your situation.

You Don’t Gain Equity With an Interest Only Loan

When you take out a home loan, you borrow against the home’s equity. As you pay the principal down, though, you increase your equity once again. In the case of the interest only loan, you don’t pay any principal. Let’s say the period which you only owe interest lasts for 10 years, that’s 10 years of principal payments that you lose.

Eventually, you’ll gain the equity back, but it could be much further down the road than if you made regular interest and principal payments. Of course, you have the option to make principal payments even during the interest only required payment period, but you’d have to make regular principal payments in order to gain sufficient equity back.

Without the equity, you can’t borrow against your home in the future. Let’s say you have a home equity line of credit. You won’t be able to reuse that line of credit unless you pay the principal back. If you wait until the repayment period, the benefit of the HELOC is eliminated and you are stuck with regular mortgage payments consisting of principal and interest.

You May Land Upside Down on Your Loan

Without paying down any principal on your loan, you could land upside down on your loan. This means you owe more than the home is worth. There’s no way to predict what a home’s value will do in the future. If values drop, yet you still owe the same amount of principal you borrowed in the first place, you could be upside down or underwater.

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While this isn’t the end of the world if you plan on staying in the home, it makes it hard to move. If you sold your home for what it’s worth, you could end up owing more than you made in the sale. You’d take a loss rather than a gain on your real estate investment.

You May Not be Able to Afford the Principal Payment

Qualifying for the interest only loan usually requires a lender to ensure that you can afford the fully amortized loan in the future. But, if you don’t fully evaluate the situation, you may not realize the full implication of the principal plus interest payment. Again, since you can’t predict the future, you don’t know what your income will be like when the principal payments become due.

If you can’t afford the principal payment, you risk defaulting on your loan. If you miss enough payments, the lender can start the foreclosure process on your home. You then put your home at risk for loss because you can’t afford the principal payments.

The interest only loan is not as common as it used to be and for good reason. There’s something to be said about making principal and interest payments each month. If you end up in a bind and need the equity in your home, it will be there for you. All you had to do was make small principal payments each month. Making say $500 payments each month is a much better option than forking over thousands of dollars to deal with an emergency. That’s what the equity in your home can do for you – help you get out of an emergency. It can also serve as income during your retirement.

Think long and hard before taking out a loan that only requires interest payments. Consider your other options and compare the payments to see just how affordable a principal and interest loan may be now rather than later.

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Minimum Down Payment for Buying a Home

August 14, 2020 By JMcHood

You are ready to take the plunge and buy a home. You’ve heard the minimum deposit allowed is 20%. What if you don’t have that? Are you stuck renting for the rest of your life? Luckily, the answer is no. there are many factors that play a role in this answer, though.

We’ll explore each of these below.

No Deposit Required

Wouldn’t it be nice if you could find a loan program with no deposit required? Luckily, you can. The USDA and VA both offer programs with no down payment. In order to qualify, you’ll have to buy a rural property if using the USDA program. The VA program is reserved for those that served our country. If you fall into either category, you’ll enjoy the superior benefits of these programs.

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The USDA program has flexible guidelines along with the no down payment requirement. In fact, the program is for borrowers with low to moderate income. You can make too much money and not qualify for the program. You can see the USDA’s income guidelines here. Aside from the income requirements, you must also purchase a home within the USDA’s rural boundaries. You can view the eligible properties here.

Veterans also have the benefit of a no down payment program. In order to qualify, you must serve the appropriate time:

  • 90 days during wartime
  • 181 days during peacetime
  • 6 years in the National Guard or Reserves

If you meet the eligibility requirements, you’ll receive a Certificate of Entitlement. This gives you the right to buy a home with no down payment. Just like any other loan, though, you’ll need to qualify personally. For the VA loan, you’ll need a 620 credit score and a debt ratio no higher than 43%. The property must also pass the VA appraisal requirements.

Low Deposit Required

If you don’t qualify for one of the above no down payment loans, you have other options. Low deposit loans are the next best option. The most common is the FHA loan with a 3.5% down payment requirement. This loan doesn’t have maximum income or service requirements. It’s not just for first-time homebuyers either. As long as you meet the credit and income requirements, you may be eligible for the loan.

In order to be eligible, you’ll need at least a 580 credit score. You’ll also need a debt ratio that doesn’t exceed 31% on the front end and 43% on the back end. Lenders will also look for a decent credit history with no collections or other negative credit events in the recent past.

Some borrowers also qualify for a low down payment conventional loan. The down payment is slightly higher than the FHA loan, though. Conventional loans usually require a 5% down payment. In order to qualify, though, you’ll need exceptional credit and low debt ratios. Conventional loans generally have stricter requirements than FHA loans. However, they become even more restrictive with a low down payment.

Whether you take out an FHA or conventional loan with a low down payment, you’ll need to pay some type of mortgage insurance.

The FHA loan requires 0.85% annual mortgage insurance for the life of the loan. On a $200,000 loan, this means $142 per month or $1,700 per year. Your lender pays the insurance on your behalf on an annual basis. They then charge you 1/12th of the amount per month. The amount you pay decreases slightly each year as you pay the principal balance down. FHA MIP never expires. You pay it for the entire time you hold the loan, no matter your loan-to-value ratio.

Conventional loans also require mortgage insurance, but it’s different than the FHA loan. The amount you pay depends on your loan-to-value ratio and term of the loan. The longer you borrow the money, the higher percentage you pay. The difference between PMI and FHA MIP is that PMI can be canceled. By law, the lender must cancel it once you owe 78% of the value of your property. You can also request cancellation if you know your home appreciated or you paid the principal down enough.

Do You Ever Need 20% Down?

It might seem like you can get away with a low deposit with the large variety of loans available. Not everyone qualifies for these programs, though. In general, you need fairly good credit for these programs. The exception to the rule is the VA and USDA loans, but only certain people qualify for those programs.

Borrowers that don’t fall within these parameters may need a larger down payment. Conventional loans, as well as subprime loans, may be available, but for a higher down payment. Just how much you must put down depends on the lender and your parameters. Generally, the lower your credit score, the higher the required down payment. Your credit score helps lenders predict your level of financial responsibility. A low credit score equals a high risk in the eyes of the lender. If a lender approves you for a loan, it will usually be for a higher down payment.

The more money you have in the home, the more likely you are to make your payments. Lenders look at it like “skin in the game.” For example, if you invested $5,000 in a home, you might not fight hard to keep the home. But, if you had $20,000 invested, you may work much harder to make ends meet. This is why lenders often require higher down payments for risky loans.

If you want to lower the amount you deposit on a home, make your qualifying factors as attractive as possible. Fix your credit so that your score increases. Keep your debt ratio down and have liquid assets on hand. This way you prove to the lender that you are responsible and have money available should your income stop suddenly.

There are plenty of low down payment options. Shop around with different lenders to find the program that suits your needs the best!

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Understanding the Mortgage Loan Approval Process

July 27, 2020 By JMcHood

The mortgage process can be overwhelming, especially your first time around. Knowing what to expect can take a little anxiety out of the process. With the right knowledge and steps, you can easily get through the mortgage process with ease.

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The Preapproval

The first thing you should do is get a preapproval. This is when you apply with different lenders to see if they will give you the loan you need as well as at what terms/cost. The preapproval process involves you providing the lender with the following:

  • Paystubs for the last 2 months
  • W-2s for the last 2 years
  • Tax returns for the last 2 years if you are self-employed or work on commission
  • Asset statements for the last 2 months
  • Contact information for your employer
  • Consent to pull your credit

Giving a lender these documents now will give them time to evaluate your situation. They will determine your credit score, debt ratio, and amount of money you have available to put down on the home. They will then match you with the appropriate loan program. They will provide you with an interest rate and closing cost estimates all documented on a Loan Estimate. They will also provide you with a preapproval letter, which you can use when you shop for a home.

The Underwriting Process

Even though you obtained a preapproval, it’s not a guarantee that you will get the loan. It’s a preliminary approval based on what you provide the lender at the time of application. Once you find a property and sign a contract, the lender will officially underwrite your loan and let you know if you are approved.

Chances are that your preapproval will still stand unless things drastically changed for you. It will also depend on the property that you are buying. Is it worth the value that you agree to pay? Is it in good enough condition to move into right away? Is it safe, sound, and sanitary? Your lender will order an appraisal in order to figure all of this out. The appraisal can take between one to two weeks depending on the appraiser’s workload and the seller’s availability.

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Taking Care of Conditions

Once the lender underwrites your loan, they may give you an ‘approval with conditions.’ This simply means that the lender needs more information from you. If you respond in a timely manner with the documents that they need, you can clear the conditions and move onto the closing.

For example, they may ask for an additional paystub or they may want an explanation on an account on your credit report. Your lender will let you know what they need. If you can provide adequate documentation that proves that you are still a good risk, your approval will still stand.

Locking Your Interest Rate

At some point during the process, after signing a contract, you will have to lock your interest rate. You must do this at least a few days before your scheduled closing. This ensures that the lender can prepare the right documents for you.

You can lock an interest rate for as little or long as you want. Typically, the longer that you lock the rate, the more it will cost you. In other words, the higher the interest rate you will get. Lenders take a risk when they lock in an interest rate for a long time, so they typically charge more in order to make up for that risk.

Closing the Loan

The final step is to close the loan. Don’t make the mistake of getting too comfortable at this point, though. The lender will still do one final check on your credit score and your employment. They want to know that nothing changed between the time that they preapproved you for the loan and the closing. If you applied for new credit, made large purchases, or quit your job, you could put your approval at risk.

If everything remains the same and the lender is ready to close on your loan, they will schedule a closing with the title company. You will attend the closing with a closing agent, the loan officer, and your attorney. Once you sign the documents, you are the proud owner of a new home and a new mortgage!

Getting through the mortgage process isn’t impossible – it is a lot of work, though. Understanding the steps ahead of time and how long you must wait for the process to complete can help take the stress out of the process.

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Using Overtime Income for Mortgage Qualification

June 11, 2020 By JMcHood

Do you work overtime every now and then? Do you need that money to help you qualify for a slightly larger mortgage or maybe a mortgage at all?

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The good news is that you may be able to use your overtime to qualify for a mortgage. The bad news is that you must meet certain requirements in order to do so.

The Length of Time

First, you can’t use overtime that you just started receiving. Just like your regular income, lenders need to see a history of receipt of the income. Just how long you must receive it will depend on the lender. Some lenders allow the use of overtime income that you’ve received for just one year, while others make you wait two years.

What’s the difference and why do you have to wait so long? It has to do with consistency and reliability. If you only work overtime once in a while and it’s not a consistent thing, lenders won’t use it to qualify you for a mortgage. They can’t rely on it if it’s not something you receive on a regular basis. On the other hand, if you have been working overtime for the last two years, lenders can see a pattern, and figure out how much overtime to include in your qualifying income.

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Consistency of Your Overtime Income

Lenders need to see consistency in your overtime income over a period of months or years. What they want to see is stable and/or increasing income. If your overtime income seems to wane after a few months or there was a decrease from one year to the next, they may not be able to use it to qualify you for the loan.

Calculating Your Overtime Income

First, your lender will need to figure out which portion of your income is overtime. Using your W-2s or tax returns won’t suffice. While these documents show your total income received, they don’t break it down between regular and overtime income.

Instead, lenders will use your paystubs. Typically, you have to provide two paystubs, but you may need to provide more so that they can see the pattern of receipt of overtime income. Once the lender sees which income is overtime income, they will average the receipt over two years or however many years you’ve been receiving it. This allows lenders to account for the highs and lows. In other words, they can account for the times that you work overtime and the times that you don’t work overtime.

If a lender were to qualify you based on a recent period when you worked a lot of overtime, but you don’t have a history of working that much overtime, it could turn out bad in the end. If you become unable to afford your mortgage payment because the lender qualified you for too much, it could result in the loss of your home. If the lender uses an average, though, they can rest assured that they found the ‘happy medium’ and qualified you for a loan that you can afford.

Proving Continuance

One other large piece of the puzzle is proving the continuance of the overtime income. While no one can predict the future, lenders need to know that your overtime will continue for the next three years, for as far as they can see.

You can obtain this proof from your employer themselves. They need to complete what’s called a Verification of Employment. This form acknowledges your dates of employment as well as your income. On this document, your employer must state that your overtime is likely to continue for the next few years. While your lender realizes things can change, they need that reassurance from your employer in order to use your income.

Using overtime income is possible when all of the pieces of the puzzle fit. Talk to your lender about your overtime income and give them as many details as possible about it. The more they know about it, the more accurate an answer they can provide you for your loan.

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Documents Required for a Home Loan

May 4, 2020 By JMcHood

If you are self-employed, work on commission, or otherwise have irregular income, you might think it’s impossible to get a mortgage with full documentation. If you can’t prove regular income, a lender won’t want to give you a loan, right?

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Luckily, there are ways around it. While you may not be able to get conventional financing, you may be able to get a home loan with limited documentation.

Just what does this mean? Keep reading to find out more.

Verifying Your Income

The largest piece of the puzzle when applying for a mortgage is typically your income. It makes sense; lenders need to know that you can pay the loan back in full. They don’t want to give a loan to someone that might have trouble making the payments.

But what happens if you have irregular income or you can’t verify your self-employment income with your tax returns because of the write-offs that you take? You can use limited documentation. While this doesn’t mean ‘no documentation,’ it just means that you verify your income in some other way.

The traditional way to verify income is with your pay stubs, W-2s, and/or tax returns. If you know these documents won’t help you look like a ‘stable borrower,’ you may be able to verify your income with your bank statements instead. Lenders are able to accept bank statements for borrowers that regularly deposit their income in one bank account and that can provide proof that it’s their income.

Just why would bank statements be better than tax returns? It’s for one good reason – deductions. As a self-employed borrower or even borrower that works on commission, you have the right to take many deductions on your taxes. Unfortunately, mortgage lenders must use your adjusted gross income according to your tax returns. If you take so many write-offs that you make your AGI zero or negative, it would be impossible to qualify for a loan.

When you can use your bank statements, you can show lenders the amount of money you actually bring in because it’s deposited in your bank account. As long as lenders can tell that it’s your income and not money from any other source, they can use it.

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Verifying Compensating Factors

Accepting limited documentation is a big risk for lenders. In order for them to allow it, they need to see other compensating factors or factors that make your loan less risky. These include:

  • High credit score – show lenders that you are a good risk by having a high credit score. Lenders want to know that you pay your bills on time and don’t overextend your credit. A high credit score will give them this reassurance.
  • Low debt ratio – Lenders want to know that your monthly income isn’t spread thin. They want you to have disposable income in order to cover the cost of living. They also want to know that you aren’t in over your head in debt.
  • Assets – If you have money in savings or even in liquid investments, they can count as reserves. This is money the lender counts as what you could use to make your mortgage payment should your income decrease or stop. The more money you have available in reserves, the better your chances of approval become.

Finding a Lender

The hardest part of getting a limited documentation loan is finding an appropriate lender. You won’t get a conventional or even government-backed loan with limited documentation. Instead, you’ll need to use an alternative or subprime lender.

Don’t let the name scare you – they are literally just lenders that write their own programs and keep the loans on their own books. In other words, they don’t have to answer to any other investors. They can make their own rules, which may or may not include the ability to accept limited documentation.

You should shop around with at least three lenders to see what they have to offer. Since this is a portfolio loan program, you may find the terms and costs of the loan very different between lenders.

Getting a home loan with limited documentation is possible, you just have to be diligent in your efforts. Make sure to set up your qualifying factors as well as you can before you apply so that lenders see you as a good risk right from the start.

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