Non-Qualified Loan

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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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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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 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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Does a Garage Add Home Value?

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You may not think of your garage as adding value to your home since it’s not living space, but it can help. Adding a garage adds storage space, which is of high value to many buyers. Where your home is located and the type of garage you add will determine how much value it adds to your home, but know that you’ll see some type of return on your investment.

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Why Garages Matter

You still may be wondering why a garage would add value. Let’s look at it from the buyer’s point of view. Garages can:

  • Provide storage space for your vehicle
  • Provide storage space for items you don’t need on a regular basis
  • Great place to conduct hobbies, like woodworking or mechanics
  • Serve as a ‘man cave’

The uses for the garage are literally endless. There isn’t a specific use you must use it for in order for it to affect your home’s value. Just having a garage will help increase it.

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The Type of Garage Matters

There are two types of garages you can choose – attached or detached. Typically, attached garages provide the most value. This is mostly for convenience purposes. Detached garages are harder to access, especially in areas of bad weather, but that’s not to say that they won’t add any value to your home, because they do.

Believe it or not, attached garages cost less to construct. If your property isn’t set up to accept an attached garage, however, a detached garage can add value. This is especially true if detached garages are the ‘norm’ for the area.

The Style Matters

Even though it may be tempting to construct a garage that looks nothing like your own, but suits your personal preference, you may not see the increase in value that you desire. Homebuyers love a uniform look. Choosing to make the garage look just like the rest of the home will keep your neighbors happy and your home value up.

How Much Do Garages Increase a Home’s Value?

How much of a return on your investment you’ll see when adding a garage depends on the area. Do you live in an area where parking is a hot commodity? Maybe it’s hard to find street parking in your neighborhood. If that’s the case, a garage will add incredible value. If you live in an area where garages aren’t the ‘norm,’ though, you may not see as large of an improvement in the home’s value.

If you already have a garage, but it’s in less than optimal condition, renovating it can greatly increase your home’s value. A large part of your home’s value has to do with its curb appeal. Since the garage is one of the first things people see on your home, an ill-fitting garage could really hamper your home’s value.

On average, homeowners see between a 75% and 80% return on their investment when adding or renovating a garage. Before you decide to do so, talk with a local appraiser to see how a garage will affect your home’s value. If you won’t see that much of an improvement, you may want to find other ways to fix up your home to improve its value.

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Understanding ITIN Loan Programs

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Foreign nationals often want to set down roots in the United States. Most loan programs require a social security number, which you don’t have. This may make you feel like it’s impossible to get a mortgage, fortunately, there are ways around it. If you have an ITIN, and you meet the loan requirements, you may secure the financing you desire for a mortgage.

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Credit is Important

Before lenders will approve you for a mortgage, they need to see your financial habits. Do you pay your bills on time? Do you overextend your credit? Lenders need these answers.

The only way to get those answers is with a credit history. Without a social security number, though, you won’t have one. Fortunately, many creditors extend credit with just an ITIN.

We recommend starting small. Apply for a secured credit card, which is a credit card with a deposit. The credit card company reports your credit card usage and payments to the credit bureau in exchange for a deposit on your account. The credit card company will give you a credit line equal to the deposit. If you put $100 down, you get a $100 credit line.

As you use your credit and pay your bills on time, you will build up credit. You may want two of these trade lines just to build up your credit. Once you establish yourself for six months or so, apply for an unsecured credit card or personal loan. Keep your loan amount request small, but see if you can get any other type of loan that will help build your credit.

As you continue to pay your bills on time and use your credit responsibly, you’ll obtain a credit score that shows financial responsibility.

Stay Employed

Lenders also put a lot of emphasis on your employment. They want to know that you’ll be at the same job for the foreseeable future. Because you are an ITIN borrower, you already pose a risk of default. Lenders like to see at least a 2-year stable employment history when you don’t have a social security number.

In addition to your work history, you must prove your work ‘future.’ Because you are a foreign national, lenders care about your plans. Will you be here next year? Will you be here in three years? Most lenders require an employment contract that goes through at least the next three years. If you don’t have a contract good for at least three years, it could make it harder to get an ITIN mortgage.

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Make a Large Down Payment

Unfortunately, as an ITIN borrower, you’ll need a larger down payment than borrowers with a social security number. As a general rule, plan on at least a 20% down payment. In some cases, you may need more. Lenders determine the required down payment on the riskiness of your loan.

For example, if you have a low credit score, you will need a larger down payment than someone with a higher credit score. You’ll also need a larger down payment if you have a lot of outstanding debt compared to your gross monthly income.

The down payment helps offset the risk of default. The lender knows that there is at least a little equity in the home. If you stop making your payments, the lender can sell the home for a profit and keep the funds as repayment.

Before you use funds for a down payment, you have to show its origination. In other words, you need a bank account here in the United States. You also need to be able to show regular deposits. It’s best to have your income deposited directly into your account. It’s easy for lenders to source (your paystubs) and it’s consistent. Lenders want the money in the account for at least two months before they will count it for your down payment. This way they know the money didn’t come from another loan as it would show up on your credit report.

Save Monthly Reserves

In addition to your down payment, you need money in a reserve account. Most lenders require six months’ worth of mortgage payments in your savings account or any other liquid account. If your mortgage payment were $1,200, you would need at least $7,200 in a bank account. If you run into financial trouble, the reserves are there to bail you out. Lenders rely on the reserves, so the more money you have on hand, the higher your chances of securing approval.

Have Compensating Factors

Lenders look for any compensating factors that make up for the risk that being an ITIN borrower pose. The compensating factors could be any of the following:

  • High credit score
  • Low debt ratio
  • More than six months of reserves on hand
  • Long work contract

Try to offset the riskiness of being an ITIN borrower by providing as many positive factors as you can. The more reasons a lender has to trust that you won’t default on your loan, the more likely you are to get the mortgage approval.

ITIN loan programs often foreign nationals a way to buy a home in the United States. With good credit, a decent debt ratio, and enough money saved, you should be able to get the loan you need to buy a home.

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What are the Pros and Cons of a Mortgage Recast?

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Most people know about the mortgage refinance options they have, but are you aware of the possibility of a mortgage recast?

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A mortgage recast re-amortizes your existing principal balance, potentially lowering the amount of interest you pay for the loan. Unlike the mortgage refinance, you keep the same loan and terms, the only difference is the principal balance.

In order to use a mortgage recast, you must significantly pay down your principal balance. You can do this with one lump sum payment or through the years with extra principal payments. The lender takes the new principal balance and ‘recasts’ it over the remaining term with the same interest rate you had.

Keep reading to learn the pros and cons of this process.

The Pros of a Mortgage Recast

You Won’t Pay Closing Costs

Recasting your mortgage doesn’t require the lender to underwrite your loan. The lender doesn’t even have to do any major work on it. Instead, the lender takes the current principal balance and recasts it over the remaining term. You use the same lender that you have currently. It’s worth asking if the lender charges fees for this service, but they won’t be anywhere near as high as the closing fees on a refinance.

You Won’t Have to Qualify

If you refinance your mortgage, you must go through the qualification process all over again. This includes checking your credit, debts, income, assets, and loan-to-value ratio. You may or may not qualify to refinance your loan.

If you recast your mortgage, you don’t have to go through any of this. You keep the loan with the same lender that qualified you for it in the first place. Recasting your mortgage gives you a lower mortgage payment, so there’s not much risk for the lender when recasting your mortgage. In fact, the lender comes out ahead if you paid a big chunk of the principal balance off already.

You Pay Less Interest

The largest benefit of the mortgage recast is the lower amount of interest you’ll pay. Recasting your mortgage lowers the principal balance that the lender figures the interest payments on. With the lower balance, you pay less interest each month as well as over the life of the loan. It’s different from just paying down your principal balance ahead of schedule. With a mortgage recast, the lender actually reduces your payments, minimizing how much interest you pay over the life of the loan.

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The Cons of Mortgage Recast

You Keep the Same Term

Recasting your mortgage doesn’t lower the loan’s term. It uses up the term you have left. In other words, you won’t pay your mortgage off any faster. If you pay the minimum required payments, you will still pay the mortgage over the entire initial term. Of course, you have the option to make extra payments and pay the loan off early, but your amortized payments will pay your loan off in the original term.

You Need a Large Sum of Money

In order to qualify for a mortgage recast, you must be able to significantly pay down the mortgage balance. Each lender has different requirements regarding how much you must pay down. Some lenders require a lump sum payment, such as $10,000 or $20,000 while others allow incremental payments throughout the years towards the loan’s principal.

You Give up Your Liquidity

Once you pay the large sum of money upfront to pay the balance down, you lose the money’s liquidity. Once tied up in your home, you can’t get access to the funds unless you refinance the home with a cash-out refinance. While a cash-out refinance may be available, it will cost you money and could extend your loans’ term, depending on what you can afford.

A mortgage recast can offer many benefits if you are trying to limit the amount of interest you pay. Before you recast your mortgage, though, look at all of your options. Do you have an emergency fund that can cover expenses should your income stop? If not, putting your money into your home to get a mortgage recast may not be the best option. On the other hand, if you are financially secure and just want to limit how much your mortgage costs in the end, talk to your lender about the possibility of a mortgage recast.

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The Guide to Mortgage Loans for Physicians

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Buying a home may seem impossible when you have piles of student loans staring you in the face. Even with a doctor’s salary, covering the cost of the student loans plus a mortgage is a lot. Luckily, lenders have mortgage loans for physicians to help you address this situation.

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Keep reading to learn more about mortgage loans for physicians.

What are Physician Mortgage Loans?

Physician mortgage loans, or loans specifically for doctors, have special terms that only apply to doctors. In other words, anyone in a different profession cannot secure this type of loan. Doctor mortgage loans come from alternative lenders or portfolio lenders. You won’t find them at your big name banks that offer only Fannie Mae, Freddie Mac, FHA, VA, and USDA loans. Instead, you’ll find them at smaller lenders that keep the loans they write on their own books.

Physician mortgage loans can have many different faces. It depends on the lender and your needs. Some lenders can tailor a loan to meet your needs. For example, some lenders require a small down payment of 5% to 10%, while other lenders allow 100% loan-to-value loans (no down payment).

Figure out what you need and then tell that to lenders when you shop around. If you know you don’t have the reserves to put down on a home just yet, be upfront with lenders. Let them know that you need a 100% LTV loan. This will help them figure out the right terms for the loan. Don’t assume a lender will say ‘no;’ you have to ask.

Qualifying for Mortgage Loans for Physicians

Because mortgage loans for physicians come from many different lenders, we don’t have a definitive guide of how to qualify. Instead, we know what lenders look for in general, but make sure to ask your lender about the specific details it requires.

The general guidelines include:

  • Good credit score – A credit score over 700 is best, but some lenders may allow a credit score as low as 680 if you look around.
  • Good debt ratio – Your debt-to-income ratio (not including student loans) should be less than 45%. This means your current debts should take up less than 45% of your gross monthly income.
  • Proof of deferred student loans – If you pay your student loans currently, the payments become a part of your debt ratio. The physician mortgage loan program doesn’t include deferred student loan payments in the DTI, though, which can help you get approved.
  • Have a medical degree – You must have graduated medical school and have a degree in order to qualify for most doctor loan programs.
  • Proof of a job – You must provide proof that you have a job. If you aren’t working as a doctor yet, you’ll need proof that you will start working within the next 60-90 days.

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Why Lenders Offer Physician Loans

It may seem odd that lenders would go out their way to help doctors that already have more loans than they can handle, but they have good reason. Most doctors make a great living eventually. When they first start out in their career, the income may be less than optimal and when you combine that with a lot of student loans, it can seem unbearable. But fast forward a year or two and most doctors can successfully pay their loans down, stay on top of their mortgage payments, and have plenty of disposable income, which is why lenders give doctors this special treatment.

In generals, doctors don’t pose a high risk of default. Thanks to a high-paying career, doctors can keep up with their payments and even pay their loans off early in some cases. Lenders worry much more about borrowers in other professions that don’t have high job security or the ability to advance as doctors do.

Should you Consider a Physician Loan?

Not every doctor should get a physician loan, as crazy as that sounds. You should think of your future and where you see yourself first, especially if you opt for a 100% loan. Here’s why.

Borrowing 100% of the purchase price of a home means that you have no equity in the home. If you move in the next two to three years, you still won’t have much equity as it takes several years to pay your principal down to a point that you actually have decent equity. If you move within the next couple of years, you won’t have money to put down on the next home, at least from the equity of your current home. Unless you have money saved up from your increased income, you may find yourself in the same boat in your next home.

If you plan to stay put in the home, though, the physician loan may help. Sure, it takes a while to build up equity, but if you are in the home for the next 20 to 30 years, it won’t matter to you. Of course, you have other options aside from just a 0% down payment loan – you just have to ask lenders what options they can provide you.

Choosing a physician loan is a personal decision. It’s definitely an attractive option for doctors who have a large amount of student loans that don’t see themselves becoming a homeowner within the next few years. As is the case with any loan, make sure you understand the loan’s terms well. Ask the lender about the rates, fees, and terms. Think of your future as well, so that you know what to expect when you sell and need the equity for a down payment.

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Should You Build a New Home?

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If you are in the market to buy a home, chances are that you thought about whether you should buy an existing home or build a new one. You aren’t alone. Most buyers go back and forth on this decision. While building a new home seems like the ‘best’ way to do it, there are pros and cons you should consider before making your decision.

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The Pros of Building a Home

There’s nothing like building a new home. Walking in and knowing that everything is brand new and built just for you is a feeling you can’t replicate. But, there are other benefits too:

  • Customization – Unless you buy a spec home, you can typically choose all of the features of the new home. You’ll choose things like the type of flooring, cabinetry, and trim. You’ll even choose the colors of the countertops, carpentry, and door handles. You’ll make so many decisions that you’ll probably want to avoid decision making for a while afterward.
  • Energy efficiency – Building a new home means using today’s latest technology. This often means more efficient insulation, HVAC systems, windows, and doors. According to the EIA, new homes are 30% larger than old homes, yet only use 2% more energy.
  • Less maintenance – New homes often come with a warranty for up to 10 years. If there’s a defect or something breaks down within that time, you may get it fixed for nothing. This will vary by warranty, though. Even without the warranty, everything in the home is new and should last without needing repairs or maintenance for at least a few years.

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The Cons of Building a New Home

The new home smell only lasts for so long and then reality occurs. Knowing the downsides of building a home can help you make the right decision. The downsides include:

  • Longer time to move in – According to the Census Bureau, it takes 7.5 months to build a home. If you were to buy an existing home, you may be able to move in as little as 30 days. If you have a home to sell or your lease is up on your rental, you may have to find somewhere to live in the meantime.
  • Little room for negotiation – Home builders typically don’t negotiate the sales price of the home. You may have some wiggle room on negotiating upgrades or other incentives, but the actual price of the home will likely remain the same.
  • Everything costs money – That beautiful model you walked into and fell in love with isn’t what you’ll get with the base price of the house. Ask the representative what’s included in the base price and you may be unpleasantly surprised. Each upgrade adds to the price of the home, which can make it harder to get a mortgage.

Keep in mind too, that just because a home is new doesn’t mean it’s perfect. Humans build it and they can make errors. Things can go wrong or they could just get lazy. We highly recommend that you still pay for a home inspection if you decide to build a new home. The inspector can make sure that everything is built to last and identify any problems up front.

What Can You Afford?

Putting the pros and cons aside, it really comes down to what you can afford. Know how much mortgage you qualify to receive. Then compare that to the prices of the homes in the area. Again, because all upgrades are extra on a new home, you need to know what you can afford. You may find out that after putting all of the options on the new home that you want that it’s out of your price range.

Comparing the cost of new homes to existing homes in the area will give you a ballpark idea of where you stand. If the new homes are completely outside of what you pre-qualify for on a mortgage, you may want to stick to the pre-existing homes. If the prices are about the same or the new home prices are less than what you qualify for, then it’s up to your personal preference.

Choosing a new home or an existing home is a big decision. Look at the big picture and remember that this is one of the largest investments you’ll make in your lifetime. Think of your goals for the home and how long you plan to live there. Combine that with the amount of mortgage you can afford and you should be able to make a solid decision.

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