Non-Qualified Loan

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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What are the Disadvantages of a Home Equity Line of Credit?

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If you have equity in your home, you might consider tapping into it with a home equity line of credit. This second mortgage gives you access to your equity with low interest rates and costs, in many cases. While they are often easier to qualify for, they do have their downsides, though.

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Before you apply for a home equity line of credit, it’s a good idea to familiarize yourself with the downsides and how they pertain to you.

You Put Your Home at Risk

When you take out a home equity line of credit, you put your home on the line. Just like with your first mortgage, if you default on the loan, you can lose your home in foreclosure. In other words, the bank can come take your home from you in order to make good on your debt.

The reason that you take out the home equity line of credit will determine if this is a serious risk for you or not. Many people take out a HELOC to consolidate their consumer debt. A common example is people that are over their head in credit card debt. If you take the equity in your home to pay off the credit card debt, it can be freeing. But now your home just became at risk whereas with just the credit card debt, there wasn’t anything secured to the debt. If you didn’t pay your credit cards, the credit card company couldn’t take your home.

Before you take out a HELOC, it’s important to consider the reason to determine if you should put your home on the line or if there is another way to help your situation.

You Could Get in Over Your Head

A home equity line of credit isn’t like any other mortgage product out there. With the HELOC, you get a credit line. The bank gives you access to this credit line either with a checkbook or a debit card. You are then free to use the funds as you see fit.

You only pay interest on the funds that you withdraw. So if your credit line is $15,000, but you only use $5,000 of it, you only pay interest on the $5,000 that you used. You have the option to also pay back the principal if you want. If you don’t, you’ll start paying it back after the first 10 years that you have the credit line.

Here’s the downside. If you pay back the debt, you can reuse the funds until the first 10 years are over. In other words, you could have a large credit line at your disposal, encouraging you to use it when you otherwise might not have spent the money. This is the most common with borrowers that consolidate their debt into their HELOC. These borrowers often end up racking up their credit cards again because they are free. It also happens with borrowers that don’t pay off credit cards, but use the HELOC funds in another way, but pay the loan back early. They are often tempted to use the funds because the credit line is there and available for use.

You May Pay an Annual Fee

Many banks charge a fee, much like credit cards do in order to keep your credit line open. You need to read the fine print of the loan the lender gives you. Some lenders don’t charge a fee at all. Others charge one but only if you don’t withdraw a certain amount from your line of credit each year.

Knowing what the loan will cost you, aside from the interest is important. If it’s going to cost you a few hundred dollars per year and you are just going to let the money sit there, it’s not worth it. You are paying a fee for something that you don’t need.

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The Interest Rate is Variable

Most home equity line of credit loans don’t have a fixed interest rate. In other words, the rate can vary on a monthly basis. This means that when you do have money outstanding, you will never know what your exact monthly payment will be until you receive the bill.

It can be disconcerting to not know what your payment will be each month. While the interest rate won’t vary excessively, it will still vary. If you have a large HELOC balance, even a small increase in the interest rate can be difficult for you financially.

You May be Upside Down on Your Loans

As we all saw during the housing crisis, home values can fall and fall fast. There’s no way to predict if that will happen to us again. If it does and you have not only a first mortgage, but also a HELOC, you could find yourself upside down. This means that you owe more in mortgages than your home is worth. This could leave you stuck in your home for longer than you anticipated.

While lenders may offer a way out of an upside down loan, such as a short sale, it still affects you financially. It can also damage your credit. It’s wise to make sure that you keep your total outstanding loan-to-value at less than 80% of your home’s current value if possible to help prevent this situation from occurring to you.

You May not be Able to Deduct the Interest

If you enjoy deducting your mortgage interest on your taxes, you may be disappointed with your HELOC and inability to deduct the interest. The new tax law only allows you to deduct mortgage interest on a HELOC if you used the funds to improve the home.

If you used the funds for anything but home improvement, you cannot deduct the interest that you pay on the loan. While the rate may be lower than you would pay on a credit card, that’s about the only benefit you’ll see when you use a HELOC vs a credit card.

Before you take out a home equity line of credit, it’s important to look closely at the downsides of doing so. This isn’t to say that you can’t benefit from a HELOC, because many people can. You just need to give the loan amount, interest rate, and reason for taking the loan careful thought before making a decision.

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The Top Reasons Underwriters Need a Letter of Explanation

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The mortgage process can feel like a serious of questions that never ends, but it’s for good reason. Lenders need to make sure you can afford the loan beyond a reasonable doubt. The last thing you or the bank wants is a foreclosure.

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After you provide documentation for your income, assets, and liabilities, expect to answer questions about certain areas of your life, most notably your bank account, credit and job history. Sometimes lenders ask questions about these factors that require a Letter of Explanation. All an LOX does is put into writing the reasons for your current situation that may need a little more explanation.

So why do lenders ask for a Letter of Explanation? Check out the top reasons below.

You Change Jobs Often

Lenders want a consistent job history. While a 2-year history is recommended, if you changed jobs within the last two years it doesn’t automatically mean you won’t get approved. When lenders get the most concerned is when you changed jobs frequently within the last two years or if you completely changed careers within that time.

Let’s look at an example. You used to be a teacher but decided to get trained as a real estate agent last year. Those are two completely different career paths and since your real estate career is rather new, a lender may worry that you won’t succeed. You may need to write a Letter of Explanation stating your reasons for changing careers as well as what training you underwent so that you succeed in your new career.

If you didn’t change careers, but change jobs often to the point that a lender considers it ‘job-hopping, they may want an explanation for your actions. In other words, they want to know why you keep leaving your job (is it forced or voluntary) and what you benefit from leaving and starting a new job.

Lenders use these answers to decide if you are a good risk for a loan or if you are a high risk of default.

You Have Large Deposits

If you make large deposits in your bank account within two months of applying for a loan, you’ll have to explain it. If a lender can’t tie the deposit in with your employment income, they’ll need concrete proof of its origination.

Along with the paperwork proving the funds’ origination, lenders will want a Letter of Explanation. The LOX should state where you obtained the funds and why. If you don’t have proof of your explanation, a lender may not be able to accept the deposit as a part of your funds. For example, if you claim you sold your car and received cash for it, but you don’t have a Bill of Sale and/or a canceled check from the buyer, the lender may not be able to use the funds for qualifying purposes.

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Late Payments

Lenders look closely at your credit score and credit history. Your credit history actually tells them a lot more about your financial responsibilities. If upon looking at your history they see many late payments or collections, they may want an explanation.

For example, some people fall onto hard times and make several payments late within a short period. This may be easily explained with a Letter of Explanation. For example, if you fell ill and were in the hospital, it would make sense why you were unable to pay your bills on time for that short period. An LOX could explain the situation and if you could provide proof of your downfall as well as how you picked up the pieces, it would help your situation.

Lenders need to know that late payments aren’t a typical habit and that this was a one-time occurrence, which you can prove with your LOX.

Change in Income

If you’ve had a change in income recently, and it wasn’t a raise, you’ll need to explain the situation in a letter. All lenders see is a drop in income, which makes them want to decline your loan. But, if you have a valid reason, such as you started a new career or started at a new company that has more opportunities for advancement, an underwriter may see the value in it and approve your loan. Without the letter, the lender would see you as a high risk of default and decline the loan.

A good Letter of Explanation can be the difference between loan approval and loan denial. Stay in close contact with your loan officer to find out what questions the underwriter may have on your loan so that you can clear up any miscommunication right away and keep your mortgage approval.

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How to Use Home Equity as Retirement Income

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One of the largest investments you’ll make in your lifetime is your home. But did you realize that you can live off the equity when you retire? This can come in especially handy if you didn’t quite save enough for retirement. While you can’t count on your home solely for your retirement income since home values are so volatile, it can be a supplement to your retirement income.

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So how do you make your home equity work for you? Check it out below.

Sell Your Investment

First, you should know that the IRS allows quite an exception for capital gains on your home. As long as you lived in the home for at least two of the last five years, you can exclude up to $250,000 in capital gains if you are a single taxpayer and $500,000 if you are married filing jointly. This means you can earn $250,000 or $500,000 in tax-free retirement income.

Of course, you’ll need a place to live even after you have the money in hand, so now what? How do you make the most of your situation?

Sell and Downsize

The most obvious way to live on your home equity is to sell your home and downsize to a smaller home. This offers a few benefits:

  • Lower price range leaving you with money to live on
  • Lower property taxes
  • Lower homeowner’s insurance
  • Fewer maintenance costs

Sell and Rent

There’s no rule that says you have to buy a home after you sell your original home. If you’d rather not deal with homeownership, renting is always an option. You’ll likely save money on your monthly payments, as well as reap the following benefits:

  • Pay no property taxes
  • Only pay for renter’s insurance which is cheaper than homeowner’s insurance
  • Not have to worry about maintenance and repairs
  • You can live off a larger amount of the capital gains

What to do With Your Home Equity

Now the bigger question is what do you do with your capital gains? Whether you downsize or rent, what you do with the proceeds really determines what happens next. You have a few options:

  • Invest the funds and let your proceeds grow to help you have more money in retirement
  • Put the money in a high-yield savings account to use during retirement

What you choose depends on where you are in life. If you are still a few years from retirement, why not invest the money in low-risk investments and reap the rewards? If you are closer to retirement, however, you may want to play it safe and avoid losing any of your retirement income.

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Other Options to Use Home Equity in Retirement

If selling your home isn’t on your top list of things to do, there are a couple of other ways you can live on your home equity:

  • Take out a home equity loan – Find a lender that allows you to withdraw up to 80% – 85% of your home’s equity. If you’re nearing retirement, you should have little to no first mortgage, so there should be plenty of home equity to use. Keep in mind that you’ll have to make payments each month depending on the type of home equity loan you take. A home equity line of credit requires interest only payments for the first 10 years and then full principal and interest payments for the next 20 years. If you take out a home equity loan, you’ll pay principal and interest for 20 years.
  • Take out a reverse mortgage – If you and your spouse are over the age of 62, you may be able to borrow the home’s equity in a reverse mortgage. The reverse mortgage doesn’t require you to make any payments while you are alive (and living in the home). You use the equity as income, receiving it either as a lump sum or in monthly installments. The mortgage does accrue interest, but you don’t have to pay the balance back until you or your heirs sell the home.

If you look at your home as an investment, it can be a retirement income vehicle for you as you age. Whether you stay in the home (aging in place) and take out a reverse mortgage or you sell the home, downsize, and live off the proceeds, your home can help supplement any money you’ve saved for retirement thus far.

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How Does an Asset-Based Mortgage Work?

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Did you know that you don’t have to have an income to qualify for a mortgage? As shocking as that sounds, it’s true. There’s a trick though. You have to be able to prove that you have enough assets to cover the mortgage payment for the next 30 years.

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The asset-based mortgage can help retirees or those just living off their assets to get a mortgage. Maybe you don’t want to exhaust all of your assets at once. If you don’t mind paying interest on the loan, you may be able to secure a mortgage even without verifying that you work.

What Type of Assets Can you Use?

You can use almost any type of liquid asset that you have available. In other words, you can’t use other pieces of real estate or a vehicle as an asset. But you can use things like your checking, savings, CDs, money markets, stocks, bonds, mutual funds, and even retirement accounts.

You should know, though, that you can only use 100% off any cash you have on hand. This includes any checking or savings accounts. Any assets tied up in an investment will be taken at 70% of the current value. This allows the lender to account for any taxes and/or fees you may pay for using the funds.

Does Age Matter?

Your age may matter when applying for an asset-based mortgage. There are two reasons for this – retirement age and the length you will hold the loan.

As far as retirement goes, lenders care about your age so that you don’t deplete your retirement savings before you are even of retirement age. If you apply for an asset-based mortgage using your 401K or IRA and you are over the age of 65, a lender may be willing to count those funds. Again, they will only use 70% of the value to qualify it as income, though.

If you are far from retirement age, a lender may not be willing to count your retirement funds as income. If you are too far from retirement, it can be risky to let you use those funds to pay your mortgage. What does that leave you with when you retire?

Finally, your age matters to help determine the length of the loan. Generally, lenders use 360 months to determine your income. In other words, they divide your total assets by 360 to come up with your monthly income. If you are over the age of say 75, the lender may divide your income over 120 months rather than 360 months. Anyone younger than 75 years old, though, will likely have their assets divvied up over 30 years, though.

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What Will Lenders Use to Qualify?

Once you have the total amount of your assets based on the 70% formula with the exception of cash, checking, or savings accounts, you divide that number by 360. See the example:

You have $1,500,000 in assets. $300,000 of it is in cash, the remainder is in stocks, bonds, and IRAs. You are 45-years old. Lenders will do the following:

$1,500,000 – $300,000 = $1,200,000

$1,200,000 x .70 = $840,000

$840,000 + $300,000 = $1,140,000

$1,140,000/360 = $3,167 monthly income

The lender will use this figure to determine how much you can afford each month, just as they would if you made money from employment.

Qualifying for the Loan

Once you know your monthly income, the rest of the qualification process works much the same as any other loan. You must meet the credit score and debt ratio requirements of each loan program. The lender needs to make sure that you can afford the loan beyond a reasonable doubt. They will do so by verifying all aspects of your loan including taking a long, hard look at your credit history.

The question you need to ask yourself is if the asset-based mortgage makes sense. Many people know this mortgage as an asset depletion mortgage. As the name suggests, you deplete your assets. You need to make sure this is a smart choice for you not only now, but well into the future. What will the future hold? How will you pay for your expenses moving forward? Are you retired for life or will you seek employment again sometime in the future?

These are things you must consider when determining if the asset-based mortgage makes sense. Talk with lenders to see what options are available to you and make sure you can comfortably afford the loan before making any decisions.

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What is Seasoning and Does it Affect Your Eligibility for a HELOC?

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You have equity in your home so you think you can access it right away. That may not be the case, though. Some lenders and/or programs require a specific amount of seasoning. In other words, you must be in the home for a certain amount of time before you can access the equity. Some lenders also require a specific amount of equity before you can touch it, which is in line with the time requirement as it takes time to build equity.

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Just how long do you have to wait? Keep reading to find out.

The Amount of Equity

What lenders really care about is the amount of equity you have in the home. Typically, the magic number is 20%. Most loan programs require you to have 20% of the equity untouched. This gives lenders a cushion should you default on your loan.

This means that you can borrow as much as 80% of the home’s value, leaving 20% of the equity untouched. For example, if your home is worth $250,000, you can borrow up to $200,000. If you have a first mortgage with a balance of $150,000, you could still borrow up to $50,000 in a HELOC.

The Time

Most HELOC lenders don’t have a specific amount of time you must wait to take out a HELOC. Some may have the stipulation of six months to a year, but it typically takes at least that long to have enough equity in the home.

If you didn’t make at least a 20% down payment, it will take quite a bit of time to get to the point that you have more equity than the 20% cushion lenders require. At this point, time isn’t an issue, because it takes long enough to build up the equity. Lenders care more about the 20% equity requirement than how long you’ve been in the home.

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Other Eligibility Requirements for a HELOC

Seasoning isn’t the only requirement you must meet to get a HELOC. Yes, it’s a big part of it, but having 20% equity in the home isn’t the only requirement. You could have 20% equity and still not qualify for the loan.

Here’s what you need:

  • Good credit – Second loans are risky for lenders. If you default on your payments, the first lender gets paid first. Second lienholders only get the money that is left, which oftentimes isn’t enough to pay them off in full. Having a good credit score helps balance out the risk, showing lenders that you’ll make good on your debts.
  • Low debts – Lenders also look at your debt-to-income ratio. This compares your gross monthly income to your monthly debts. If your debts take up too much of your income, you pose a high risk of mortgage default. Keeping your debts low helps keep your DTI down, which increases your chances of approval.
  • Stable employment – Lenders love to see borrowers with many years at the same job. Even if you changed jobs recently, if it’s within the same industry, it may help. Lenders need stability, knowing that you won’t change jobs often or be out of a job and unable to afford your mortgage payment.
  • Assets – While it’s not a requirement, having assets on hand helps your chances of HELOC approval. If lenders know that you have money set aside for an emergency, they’ll feel better about your ability to pay your HELOC even if you lose your job or experience any other type of financial emergency.

HELOCs typically have flexible requirements, but the seasoning isn’t one they let go of very easily. Lenders need to know that there’s room in the home’s value should you experience a foreclosure. Having more than 20% equity in your home and having at least a year between when you bought the home and applied for the HELOC will give you the best chances at securing an approval.

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The Top Refinancing Mistakes to Avoid

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Refinancing can be a great way to save money or tap into your home’s equity. Before you jump in and get too excited, though, know the top mistakes that many borrowers make while refinancing. These tips can help you get the most of your refinancing process.

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Refinancing When it Doesn’t Make Sense

Many borrowers jump at the chance to lower their interest rate, not giving it a second thought. While a lower interest rate does sound great and it can save you money, it is only beneficial in certain situations. Since refinancing costs money, you have to determine at what point you’ll break even. This means paying off the closing costs you had to pay to refinance and reaping the loan’s savings.

You can figure out your breakeven point with the following calculation:

Total closing costs/Total monthly savings = Break-even point

Your total monthly savings is the difference between your original mortgage payment and the new payment. If your break-even point is 36 months or less, it may make sense to refinance, but only if you’ll be in the home for a while afterward. Let’s say your break-even point was 24 months and you knew you would move in 36 months. It doesn’t make sense to pay all that money to refinance just to save a little money over 12 months. But if you knew you’d be in the home for another five years, for example, then it may be worth it.

Not Changing Your Term

When you refinance, you basically start your term over again. It’s also a chance to get a fresh start too. If you keep the same term, it’s like you start over from the beginning. For example, let’s say you have a loan now with a 30-year term and you’ve paid on it for five years. Interest rates drop so you want to refinance to save money. If you take another 30-year term, you just added five years to your loan. If instead, you take a 25-year term or less, you maintain the same progress, or put yourself in a better situation.

Before you take the lower term, make sure you can afford the payment. Lower terms have higher principal payments because you pay the loan off in a shorter amount of time. Don’t make the mistake of taking a payment that you can’t comfortably afford, as that will put you at risk of defaulting on your loan.

Not Checking Your Credit Score

Refinancing may not make sense if you don’t have the qualifications to get a good interest rate. Many people assume their credit is fine, but don’t check it. You can check your actual credit score through programs offered by banks and credit card companies. Most companies offer free access to your credit score. Watching that number can help you know where you stand. If it seems low, it may be time to pull your credit report to see what’s bringing your score down.

You can also pull your free credit reports from www.annualcreditreport.com. You have access to your credit report from each of the three bureaus annually. You can pull them all at once or one at a time. While they don’t include your credit score, your credit history is what makes up the score. If you notice late payments, high credit balances, or collection accounts, take care of the problems so that you can increase your score before you refinance.

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Not Checking Your Home Value

Don’t just assume that your home value increased, that’s not how it works. Real estate values fluctuate all of the time. You can easily check your home’s value using an automated tool online. While it may not be extremely accurate, it will give you a ballpark estimate of your home’s value.

If you want something more concrete, look up the sale price of homes similar to yours in the area over the last six months. This will give you an average price that your home would sell for on the current market. This will be a good indication of the market value of your home.

Many people don’t even realize they are upside down on their loan or they assume they have more equity in the home than they have. Refinancing may not make sense if the home’s value isn’t as high as you thought. The higher your LTV is, the higher the interest rate most lenders will charge you.

Changing Jobs Right Before Applying

Just like when you applied for a purchase loan, lenders want a stable employment history. They like to see you at the same job for at least two years. If you recently changed jobs, it could be harder to find a willing lender. The only exception to this rule is if you changed jobs but stayed within the same industry. If you have a history of success within the industry, lenders may be more willing to accept the newer job change.

Using Your Current Lender for the Refinance

Your current lender may be a good resource for your refinance, but don’t assume they offer the best rate or terms. Shop around and get quotes from several lenders. See what is available to you. Some lenders may have different programs that help you get even more out of your refinance than your current lender can offer.

You may end up back with your current lender and that’s acceptable, but shop around first. You should know beyond a reasonable doubt that you are getting the best deal that is available to you today.

Before you refinance, make sure you have all of your ducks in a row. Don’t just refinance because you can. Do so because you’ll save money now as well as over the life of the loan. If the new loan has a lot of closing costs or a long break-even point, think of your other options before putting yourself in a tough financial position.

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The Top 5 Tips for Shopping for a Mortgage

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As you shop for a mortgage, it’s easy to get overwhelmed. There are so many terms and numbers thrown around, not to mention the decisions you must make. Before you set out to get a mortgage, learn the top things you should know to make it a success.

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Know Your Credit Score and Credit History

Before you shop for a mortgage, you should be an educated borrower. That includes being educated about yourself. Do you know your credit score? Do you know what your credit history looks like? If not, now is the time to look.

You can get a free copy of your credit report from www.annualcreditreport.com. This will give you your credit history, not your score. Go over the report. Look for any inaccuracies. Do all of the accounts belong to you? Is all of the payment information correct? If anything is incorrect, address it with the reporting credit bureau and reporting creditor right away. It may take some time to get it fixed.

Also, look at your trade lines. Do you have late payments? Take the time to bring the accounts current. Do you have too much credit outstanding? Try to pay your balances down. The more you improve your credit history, the higher your credit score will get. If you want to know your actual credit score, check with your credit card companies or bank, they usually offer free access to your credit score.

Get Pre-Approved

All buyers, whether first-time buyers or not, should get pre-approved before shopping for a home. The pre-approval lets you know a few things:

  • How much loan you can borrow
  • The maximum purchase price you can afford
  • The loan program you qualify for
  • The loan’s terms

A pre-approval also helps when dealing with sellers. Many sellers won’t show you their home unless you are pre-approved. It’s the only way to know that you are a serious buyer. Without the pre-approval, you could be a nosy neighbor or someone that thinks they can buy a home, but may not be able to afford it.

We suggest getting quotes from at least three lenders when you get pre-approved. This way you have at least three loans to compare to one another and decide which one is right for you.

Know All of Your Options

Today you have many options when taking out a mortgage. Government-backed loans, such as FHA, VA, and USDA loans are all flexible options. You also have conventional loans, which have slightly stricter guidelines as well as subprime loans, which vary by lender.

Ask about all loans that you qualify for based on your credit score, down payment, and debt-to-income ratio. This way you can weigh all of your options. Government-backed loans typically have flexible guidelines and require little down payments (some don’t even require a down payment). You may pay a funding fee or annual mortgage insurance for the life of the loan, though.

If you have great credit, low debt ratios, and at least five percent to put down on the home, you may qualify for conventional financing. These loans don’t have a funding fee and only require Private Mortgage Insurance until you owe less than 80% of the home’s value.

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Knowing your options gives you a chance to determine which loan costs the least now, as well as over the life of the loan. Don’t just take the loan with the lowest interest rate – look at the big picture to decide which loan is right.

Don’t Take Out New Credit

The last thing you should do is apply for new accounts when you are ready to shop for a mortgage. Lenders look at your credit history, your current outstanding credit, and any current inquiries. They’ll know if you took out new credit. Even if you have a lot of inquiries, but no new credit, they’ll be hesitant to give you a loan.

A flurry of new inquiries means that you are desperate for money. If the inquiries are less than 60 days old, there could be new loans out there that aren’t reporting on the credit report yet. It’s best to keep your credit as stable as possible before taking out a mortgage. This is even true after you get pre-approved. Lenders will pull your credit again just before the closing. Avoid opening any new accounts, closing old accounts, or even using your current credit card accounts to keep your approval.

Think About the Future

Most people take the first loan that comes to mind – usually the 30-year fixed loan. What if you could afford more, though? What if you could pay your loan off in half the time? A 15-year fixed loan means you pay a lot less interest because you pay the loan off much faster.

Think about your goals. Do you plan to be debt-free before you retire? Plan your term around that time. Do you plan to go from one income to two or two to one in the future? This could also affect the size of the mortgage payment that you take. While you can refinance your mortgage in the future, it’s best to choose the mortgage now that will still work in the long run.

Shopping for a mortgage doesn’t have to be stressful. Set yourself up with the right mortgage the first time by educating yourself on the process. Go into the mortgage process knowing what you want and the best way to get it. This will give you the best outcome for one of the largest investments of your life.

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Mortgage Down Payment Gift Rules

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Did you know that you can accept gift funds for many loan programs? Gift funds help you come up with a down payment on a home. Before you accept money from just anyone and throw it in your account, though, you should know the rules.

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Each loan program has the same requirements regarding accept gifts for down payments. Yes, you can accept them, but you must follow the tips below.

How Much Money Can you Receive?

First, let’s discuss the amount you can receive. This varies by loan program.

  • FHA loans – If you have at least a 580 credit score, the entire down payment can be a gift. If you have a credit score between 500 – 579, you must contribute 3.5% of your own funds. The remaining 7.5% (for a total 10% down payment) can be from a gift. You can also use gift funds to help with closing costs.
  • Conventional loans – The entire down payment can be a gift as long as you buy a single-family property. If you buy a 2-4 unit property, at least 5% of the down payment must be from your own funds. Gift funds may also help you pay your closing costs.
  • VA and USDA loans – Neither VA or USDA loans require a down payment; you can get 100% financing, but you can use gift funds to cover the cost of closing the loan.

Who Can Gift you Money?

All loan programs have the same guidelines. You can accept gift funds from family, your employer, or a charitable organization. In some cases, you can accept funds from a friend, but you must be able to document your relationship, showing that you’ve been friends for a long time. If you are unsure if someone qualifies, ask your loan officer. When it comes to family, though, all family counts including relatives by blood, marriage, and step-family members.

Documenting the Gift Funds

Here’s where you really need to pay attention. All lenders require you to properly document the gift funds. Don’t just accept money from someone and think you can use it for your loan. You must follow the proper steps, which first includes a gift letter.

The gift letter should be from the donor. It should state all of the following:

  • The amount of the gift
  • The reason for the gift (buy a home)
  • The property address
  • A statement that this is not a loan and no repayment is expected
  • Signed and dated by the donor

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Once you have the gift letter, the donor can transfer the funds to you. They should transfer the funds in a way that the lender can track, such as via check, electronic transfer, or wire transfer. The lender will need to see the funds leave the donor’s account and get deposited into your account. You can provide the deposit ticket or your asset statement showing the deposit.

In some cases, lenders need to track the funds provided by the donor. In other words, they need to see where the donor got the funds, to ensure there isn’t a loan in the works. If the donor sold an asset, received a windfall, or used his or her income, they should be able to document the origination of the funds.

Make sure you deposit the funds in the account you’ll use to fund the down payment and closing costs. Don’t combine accounts or use more than one account. Keep it simple from the start so that the lender can effectively transfer the funds.

Who Can’t Provide Gift Funds?

Something you should also note is who cannot give you gift funds. While the list is long regarding who can, it’s just as lengthy regarding who can’t help. Basically anyone that’s involved in the transaction can’t give gift funds. This includes the builder, seller, realtor, and lender. Anyone that has an interest in the transaction is ineligible.

This doesn’t mean the seller can’t help with the closing costs – he or she just cannot give any money for the down payment. When a seller helps with closing costs, it’s called a seller’s concession. The seller concedes some of his or her proceeds from the sale to help you with your loan costs.

Mortgage down payment funds must come from either you or an approved gift source. Lenders are very careful about who provides the down payment funds to make sure there isn’t any ‘bribing’ to buy the home. You should buy the home of your own free will and because you are financially capable of doing so. If that means getting gift funds for the down payment, it is possible, you just have to follow the rules.

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How to Use Mortgage Comparison Sites

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The internet makes everything easier, right? You can buy just about anything from the comfort of your own home. You can also do your research or ‘window shop’ before you head out. Many people do this with cars or appliances. But what about mortgages, can the internet help you compare loans?

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You can with mortgage comparison sites. These helpful sites give you an idea of what to look for in a loan before you ever talk to someone. Keep reading to learn how they work.

The Required Information

A quick search online will turn up hundreds of mortgage comparison sites. Each one works a little differently. The idea, however, is to provide you with quotes from several lenders that help you choose the right loan for you.

Some sites require you to disclose your personal identifying information. This way they can contact you and talk with you directly about your loan needs. Other sites, however, keep everything anonymous. You just enter basic information such as:

  • Your estimated credit score or credit rating
  • The type of transaction (purchase or refinance)
  • The down payment range
  • The state the property is in
  • The type of property

With this information, mortgage comparison sites can give you links or information to mortgage companies that have programs that match your criteria.

Other companies require all information including the actual sales price, real estate tax amount, and homeowner’s insurance payment. They provide the same results, though, links or referrals to lenders that may offer a program that suits your needs.

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Comparing the Offers

Once you have several offers – typically three to five, you should compare them. This could get tricky, though. Don’t just compare interest rates or just compare closing fees. You have to look at the big picture.

Look at what the loan costs over the entire lifetime. For example, a loan with a 4% interest rate sounds a lot better than a loan with a 5% interest rate, right? But what if that 4% rate came with double the closing costs? You may want that 5% interest rate after all.

The loan that works for you should be the one that costs you the least amount over the entire term. Think about how long you’ll stay in the home. If you take out a 30-year term, but will only stay in the home for 3 years, it doesn’t make sense to pay higher closing costs just to get a lower interest rate. You won’t be in the home long enough to enjoy the lower rate.

If, however, this is your home until you can’t live there any longer, keeping the interest rate as low as possible may be a good choice. Calculate how much you would save in interest with the lower interest rate over the loan’s term. If it exceeds the extra closing costs you’d pay for the lower rate, then it’s worth taking the lower interest rate loan.

Mortgage Comparison Sites Have Reviews

There’s a lot that goes into a mortgage that has nothing to do with the numbers. Your house is probably one of the largest investments you’ll make in your lifetime. You want to work with a company that is customer friendly and accommodating.

Use the reviews on the mortgage comparison sites to your benefit. Of course, read through as many as you can, not just one or two as some people have skewed opinions. But knowing what others have to say can help you make a decision. If one company is hard to get a hold of on the phone and you prefer phone contact, check other lenders. Or if a lender has a reputation of selling loans often and you want to remain with one lender, look elsewhere.

The mortgage comparison sites help you find the best deal as well as the right mortgage company for you. Take your time when choosing your mortgage company. Look at everything that the company is about as well as the terms of the mortgage they offer. Make your decision only after comparing it to at least two or more other loans so that you know you’ve got the best option for you.

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