Non-Qualified Loan

Common Non-QM Underwriting Guidelines

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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

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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

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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

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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

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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

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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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What are the Benefits of a Fixed Rate Mortgage?

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If there’s one type of mortgage that is the most popular, it’s the fixed-rate mortgage. Perhaps it’s because of its predictability or because it’s the loan most people know about. Either way, you need to decide if it’s the right choice for you.

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Learn the pros and cons of this type of mortgage to help you make your decision.

The Pros of the Fixed-Rate Mortgage

  • Predictability – This goes without saying. Your interest rate never changes. You know from day one how much you will owe in principal and interest. The only amount that may change is your escrow payment. Real estate taxes and homeowner’s insurance costs may change, which could alter your mortgage payment slightly.
  • Simple comparison shopping – If you shop around with different lenders (which we recommend), it’s easy to compare apples-to-apples. You look at the two interest rates for the same terms and see which one is higher. You don’t have any calculations to perform or other factors to consider.
  • No worrying – You don’t have to watch the market during the months leading up to your adjustment rate to predict what your interest rate will do. No matter what happens in the market, your fixed-rate stays the same.
  • A variety of terms – Fixed-rate mortgages come in a variety of terms compared to other mortgage options, such as the ARM. You may be able to choose between the 10, 15, 20, 25, and 30 year term. This allows you to play with the payments a little to determine which one suits your budget the best.

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The Cons of the Fixed-Rate Mortgage

  • Higher starting rate – The adjustable rate mortgage often has an introductory rate that is lower than the fixed-rate loan. In exchange for the predictability, you may pay more interest on your loan for a few years. But, you don’t have the worry of an increasing rate down the road.
  • Pressure when locking the rate – Locking in your interest rate for a purchase or refinance is stressful. You have to choose just the right time, but that can be impossible. You cannot predict if rates will go up or down within the next hour let alone the next few weeks. This could leave you with buyer’s remorse if you lock in a rate and then rates fall.
  • Must refinance to lower rate – If rates fall and your friends with ARMs start to enjoy lower rates, you’ll still be paying your higher fixed rate. The only way out of it is to refinance, which costs money and isn’t always in your best interest, depending on the situation.

Choosing the Right Program

The best way to determine if the fixed-rate mortgage is for you is to compare all of your options. Ask several lenders which loan programs you qualify to receive. Then you can figure out which one works best for you. Don’t look at just the interest rate, though. That is deceiving. Instead, look at the big picture.

Lay out the quotes from each lender and compare closing costs, interest rates, and closing fees. An easy way to do it is to look at the APR. This gives you the breakdown of the cost of the loan over its entirety including all costs. This way you’ll have a better idea of which one suits you the most.

Of course, only you know what you can afford and what you are comfortable with taking. For example, if you have a stable job with a known income, taking a fluctuating ARM might not be the end of the world. If, however, you have a less stable job or you work on commission, you might want the predictability that a fixed-rate mortgage offers.

Consider all of the pros and cons and all of your options before making your decision.

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Pros and Cons of Homeownership

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Homeownership can be expensive, there’s no doubt about it. Dealing with repairs or just regular maintenance can be downright costly. Sometimes it might feel like you are constantly paying out without gaining any benefits in return.

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While you probably won’t see the financial benefits of being a homeowner right away, in time, they will be very apparent. Following are the most common benefits you’ll see.

Natural Appreciation

Even if you don’t make any changes to your home, but you keep it well maintained, your house may appreciate over time. It may not be a lot and it may even fall from time-to-time, but eventually the values usually come full circle. We saw this with the housing crisis. So many homeowners lost tremendous value in their homes. But, those that stuck it out are seeing those values come back again.

If you are in your home for the long haul, chances are you will see a return on your investment just with natural appreciation.

Building Equity With Monthly Payments

Every time you write that large mortgage payment check, you build equity in your home. Just how much depends on many factors including your interest rate and the term of your loan. Every payment, however, gets you that much closer to owning your home free and clear.

You can look at your amortization table from your closing documents to see just how much of your payment goes towards the principal and how much goes to interest. No matter how much goes towards the principal, though, you make gains with every mortgage payment you make. In other words, your investment gets larger with every passing month.

An Emergency Savings Plan

While we don’t recommend using your home’s equity as your emergency savings plan, it could work in a pinch. Because you reduce your principal with each payment you make, you increase your investment. Once you hit the point where you owe at least 20% of the home, if not more, you can tap into it with a cash-out refinance. If you end up in a serious situation where you don’t have the money to pay for, the equity in your home can be your ‘back up’ plan.

Tax Deductions

Many homeowners enjoy the tax benefits of owning a home. While you do have a lot of expenses as a homeowner, many of them can reduce your tax liability including:

  • Interest paid on the loan
  • Interest on a home equity loan (up to the first $100,000)
  • Real estate taxes
  • Points paid on your loan

You can often use these deductions if you itemize your tax deductions each year. The interest deduction alone could be a rather large deduction for you, as could your real estate taxes depending on where you live.

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Capital Gains go Untaxed

Usually capital gains are the first thing you worry about when paying taxes. You want to avoid too much of a profit as you know it will get eaten up by taxes. With your primary residence, though, this isn’t the case. If you are single, you can keep up to $250,000 profit from the sale of your home tax-free. The only stipulation is that you must live in the home for 2 years in order to qualify.

If you are married, you get an even larger profit as you can make up to $500,000 before being taxed on your capital gains. Again, however, you must live in the home for at least 2 years as your primary residence.

Homeownership Can Increase Your Credit Score

You might think even think of the ramifications of your mortgage on your credit score, but if you pay it on time, it can help in a big way. Credit scores are comprised of many factors including timely payments, the type of debt, and the age of the debt.

If you keep the same mortgage for many years and make regular payments on it, it could help improve your credit score. In the same respect, though, if you miss payments or default on the loan, it could have a drastic negative effect on your credit score. The best thing to do is only take a loan that you know you can afford to avoid anything negative from occurring.

There are many financial benefits of homeownership, and each person is different. Even if your home’s value drops or you don’t see your home appreciate fast, it will. Investing in real estate is meant as a long-term investment. It’s not going to have a quick turnaround or make you a quick profit. In time, though, it can be one of the most lucrative investments you make in your lifetime.

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Buying a House With Low Income

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If you have low income, you may think you can’t buy a home. Lenders look at your income, assets, and debt ratio, right? So how would you ever qualify if you don’t make top dollar for your area?

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Luckily, there are programs out there catering to borrowers with a small income. In fact, the USDA program is only for those borrowers with low monthly income. You can actually make too much money and not qualify for that particular program.

Keep reading and we’ll teach you how to take advantage of the programs available for borrowers with little income.

What Does Low Income Mean?

First, we must discuss what low income actually means. No one will be able to secure a mortgage if they don’t make enough to afford the payments. You must have enough income that you can cover the mortgage and your existing debts. You should still have some money left over too. Lenders verify this fact by looking at your debt ratios.

Each loan program has its own debt ratio requirements. They are as follows:

  • Conventional loans – 28% front-end ratio and 36% back-end ratio
  • FHA loans – 31% front-end ratio and 43% back-end ratio
  • VA loans – 43% back-end ratio
  • USDA loans – 29% front-end ratio and 41% back-end ratio

As you can see, each program differs in their requirements. You’ll even find different requirements between lenders regarding the same loan program. Lenders must use the program’s guidelines at a minimum. But, they are free to add to those requirements if they want to tighten up the restrictions on the loans they write.

Low income in this case, means a small income for your area, but enough to cover the debts you must cover.

The USDA Loan for Low Income Borrowers

The most common low income loan is the USDA loan. In order to be eligible for this loan, you must buy/refinance a home in a rural area. The USDA sets the rural boundaries, though. You may be surprised to see which areas qualify, as we may not consider them rural.

You must also have a total household income that is less than the allowed amount for the area. Every adult in your household that makes an income must disclose the amount they make. You then total this amount and deduct any of the following allowances that apply to you:

  • $480 for each child under 18 or over 18 and in school full-time
  • $480 for each disabled relative living with you
  • $400 for each elderly person living with you

If after deducting the allowances your income fits within the guidelines for your area, you may be eligible for the program.

Once you are eligible, you must qualify for the loan. This pertains only to the borrower and co-borrower now. You must be able to prove you have the income to cover the proposed housing payment, with a debt ratio no higher than 29%. You must also prove that your total debt ratio doesn’t exceed 41%.

If you meet these requirements and the house meets the USDA appraisal requirements, you are well on your well to securing a USDA loan.

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The VA Loan for Veterans

The VA provides 100% financing to veterans of the military, including those serving in the National Guard or Reserves. You do not need a down payment for this program and the VA doesn’t focus on your debt ratio.

Instead, the VA looks at your disposable monthly income. You have left this money after paying your monthly bills, such as the mortgage, installment loans, and credit card bills. Each area has a specific amount of disposable income required based on your family size.

As long as you have the income to cover your housing payment and existing monthly debts, you may qualify. You don’t have to make a certain amount of money for the program. The size and price of the house are what determines how much you must make to afford it. As long as your total debt ratio doesn’t exceed 43% and you have enough disposable income to meet the VA guidelines, you are in good shape.

The FHA Loan

The FHA program is also great for borrowers with low income. This is another government-backed loan program with flexible guidelines. The FHA requires borrowers to have a maximum 31% housing ration and 43% total debt ratio.

You do need a down payment for FHA loans, but only 3.5% of the purchase price. If you bought a $150,000 loan, you’d need $5,250 down. But, the FHA does allow you to accept gift funds from relatives, friends, or even your employer. The seller can also help you with the closing costs. It’s possible to come to an FHA closing with no money and still walk away with keys to your new home.

Don’t make the mistake of thinking you can’t buy a home if you have low income. Several programs cater to buyers just like you. The key is to shop around and find the best deal. Talk to lenders about the different programs that apply to you. This way you can receive quotes for each program, allowing you to choose the loan that works best for your financial situation.

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What is Mortgage Acceleration and Does it Work?

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Many companies advertise the mortgage acceleration program, promising to save you thousands of dollars in interest and cut years off your mortgage. Does it work? Is it worth it? These are the questions most people ask themselves and the professionals.

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While everyone wants to pay off their mortgage as fast as possible, it’s not always worth paying a service to make it happen. You have to pay money to save money, which is a little bit of backward thinking when in reality, the money you pay to the acceleration company could actually go toward your mortgage and further your ability to pay it off faster.

Understanding Mortgage Acceleration Programs

There are two basic ways to accelerate your mortgage according to mortgage acceleration programs:

  • Bi-weekly payments – You pay half of your mortgage payment every two weeks rather than making one full monthly mortgage payment. This turns into 26 half payments or 13 full payments (one extra payment per year).
  • Home equity line of credit accelerator – You take out a HELOC and use the funds to pay your mortgage down. Let’s say you take out a $20,000 HELOC. You pay $20,000 directly to your 1st You then deposit every paycheck to your HELOC, basically living off the HELOC. Any money left over pays your mortgage balance down.

Mortgage acceleration companies charge for both services. The fees vary by company, but they add thousands of dollars to your costs, thus eating away at the benefits of accelerating the mortgage.

However, you may be able to accelerate your mortgage yourself and without any extra cost. Check out how below.

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DIY Mortgage Acceleration

While mortgage acceleration companies claim to have the ‘secret’ to get you out of mortgage debt fast, it’s really not a secret. They are providing a service, which if you can’t trust yourself to handle on your own, may be worth it to you, but most people can manage it.

You can accelerate your mortgage in a variety of ways:

  • Bi-weekly payments – Using the same method mortgage acceleration companies use, you can pay half of your mortgage payment every two weeks (aligning it with your paydays). Just read the fine print on your mortgage to make sure you don’t have a prepayment penalty. Most mortgages today don’t, but if you do, this may not be an option.
  • Make one extra payment per year – If making payments every two weeks is just too much, consider making one full extra payment every year. You can do it at any point. This can knock off a few thousand dollars in interest and a few years off your loan.
  • Pay an extra amount each month – Send in any extra money that you can afford on your mortgage payment each month. Choose an amount that you can afford consistently for the greatest results. For example, an extra $50 or $100 can knock thousands of dollars off your loan and help you pay it off faster.
  • Apply windfalls to your mortgage – If you receive windfalls throughout the year, consider applying them to your mortgage. A few examples include tax refunds, commission checks, bonus checks, or inheritance money.

The key is to set up your own plan and stick to it. If you aren’t sure that you’ll stick to your plan, consider enlisting support – someone to hold you accountable. Whether it’s a family member, friend, or your financial advisor, let someone know of your plan. Set reminders on your phone or calendar and always check up on yourself. Look at your progress as you go to keep yourself motivated. Seeing your mortgage balance decrease will help keep you on track.

So should you pay for a mortgage acceleration program? The truth is that it’s probably not worth it. These companies are doing what you can absolutely do on your own. If you wonder about the financial effects of your extra payments or want help figuring out the best way to pay your loan off the fastest, talk with your financial advisor. He/she can help you figure out the plan that is most affordable and most effective without forcing you to pay a monthly and annual fee for a mortgage acceleration program that you could set up on your own.

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