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Non-Qualified Loan

Documents Required for a Home Loan

July 31, 2022 By JMcHood

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

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

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

Verifying Your Income

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

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

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

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

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

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Verifying Compensating Factors

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

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

Finding a Lender

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

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

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

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

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How to Manage your Debt Ratio to Obtain Bank Statement Loans

May 31, 2022 By JMcHood

Are you recently self-employed? Maybe it occurred as a result of the economic disaster that occurred after the housing crisis of 2007. Whatever the case may be, if you own your own business and are making a good living, you are back on the track to good things. What if you obtained your mortgage right before the housing bust and took an adjustable rate mortgage that is about to adjust now and you need to refinance? Your situation is completely different, going from someone’s employee to self-employed. In the eyes of the bank, this is a riskier move, but that does not mean it is impossible to refinance. There are many lenders out there willing to help you out, but you should do these three things first to make sure you are good and ready.

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Make your Business Legitimate

Your business might seem legitimate in your eyes, but in the eyes of the banks, it is not until you do a few things:

  • Have a licensed CPA prepare your taxes right from the start, if you can. If you have already been in business for a while, get a licensed CPA right away. This ensures that a non-interested third party handles your income and can vouch for the validity of it.
  • Have a business license with your name on it. It is not enough to hang a shingle outside and call yourself a business. You have to be a legally recognized business, which is done by registering your business and receiving a license to prove it.
  • If you do not have a business license or your business does not need one, be prepared to have your CPA write a letter on his letterhead stating that you have been in business for the last 2 years or longer and that he has been handling your taxes for that period of time.

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Have High Credit Scores

This could be the hardest step when trying to refinance as a self-employed borrower. Your credit scores probably took a hit as you started your business. With extensive credit being granted, applications being filled out, and money flying around, your credit score is likely to be all over the place. Generally, lenders want self-employed borrowers to have a credit score over 700. There are simple ways to get this going on your end if you are not there right now:

  • Minimize your utilization rate, which means try to pay down as much of your debt as possible. Using more than 30 percent of your available credit gives your credit rating a good beating.
  • Make your payments on time all of the time, especially any housing or installment payments.
  • Take care of any collections or judgements reporting on your credit report, whether you have to pay them off or just straighten them out, getting them removed from your credit report if they were already satisfied.

Save Money

Money talks in the mortgage industry. The more liquid money you have available and can prove to a lender, the less risky you become. Being self-employed adds a layer of risk to your mortgage application because you do not have steady income, like you would have if you were a salaried employee. Because of this, lenders need factors that will make you less risky – or factors that will help you continue to make your mortgage payments should your business suddenly begin to falter. Liquid assets, meaning money that is not tied up in any type of investment or collateral can serve as a compensating factor, lowering the risk your self-employment brings. If you do not have adequate savings yet, start saving now and wait to refinance until you have several months to one full year’s worth of reserves on hand.

Lenders want to see that the self-employed have their ducks in a row, so to speak. They want to know that you are not a high risk and that you can continue to pay your mortgage no matter what is going on in your business world. When you have a third-party to vouch for you; have high credit scores; and have plenty of reserves, there are many options for a self-employed mortgage out there for you. Whether you get a stated income loan, bank statement loan, or qualify for a conventional loan with your last two years’ tax returns, there are many alternatives out there – start getting yourself ready today so you can apply!

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3 Things the Self-Employed Need to do in Order to Refinance

April 30, 2022 By JMcHood

The dreaded debt ratio holds many borrowers back from obtaining a mortgage, especially those that are self-employed. Because your income is not as straightforward as someone with a consistent salary and W-2 to prove it, you have to be more creative with your monthly debts in order to get your debt ratio down. The typical maximum for a Qualified Mortgage is 43 percent, but you have to have other factors that fall into line, such as predictable income in order to qualify under those guidelines. Lenders that are willing to offer alternative documentation loans, such as bank statement loans, are able to be a little more flexible with the debt ratio, but they still want it as low as possible. Here are a few simple ways to ensure your DTI is not out of control in order for you to get approved for a more unique loan program.

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Refinance your Debts

You can have outstanding debt and still get a mortgage. What lenders care about most is the monthly payments you must make. If your current payments take up a large portion of your monthly income as they figure it based on your last 12 to 24 months’ worth of bank statements, then you may have a harder time qualifying. If this is the case, try refinancing those debts. A few examples include:

  • Student Loans – If you have numerous student loans that were previously deferred or that you are still paying on despite having them for many years, they can really take up a large portion of your monthly income. Rather than paying several loans per month, try to refinance them into one loan with one low payment. This might extend the length of time it takes to get the loans paid off, but with the lower payment, you have more income available for a mortgage payment.
  • Credit Cards – Minimum credit card payments can add up when you have many of them going on at once. If you are able to apply for one card or even one personal loan that can pay off all outstanding credit cards, leaving you with one payment, you will likely free up some of your money for your mortgage payment.

When you refinance your debts, make sure the terms are favorable to you and that your new payment will be less than the combined payment of the multiple debts it is paying off. If you refinance credit cards, make sure to close out those cards so that they are not providing you with more available credit than is necessary as that can have an impact on your overall credit score, which plays a role in your eligibility as well.

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Pay Debts Off

If you recently started your business and have a lot of outstanding credit because of the costs necessary to start the business, try to get those debts paid off as soon as possible. The quicker you pay the debts off, the higher your credit score will rise and the lower your debt ratio will become. The more bank statements you are able to provide the lender with for a bank statement loan, the better your rate will be, so try to get those debts paid off in the beginning stages of starting your business, allowing your income to accumulate after the fact. This way when you show the lender 24 months or more of banks statements, you are able to have a lower debt ratio because you paid off those initial debts that helped you get started.

Wait Until you are in Business for a While

Along with the ability to have fewer debts, being able to show at least 24 months of bank statements will help you be able to have a higher qualifying income. When you just start your business, income can fluctuate quite a bit during that first year. If you wait 2 years and your income steadily increased, your 24-month average income will be higher than the 12-month average, which means you will have more income to use for your debt ratio, bringing it down even lower.

Managing your debt ratio in order to qualify for bank statement loans is one of the most important ways to get a loan as a self-employed borrower. There are many lenders that offer alternative documentation loans, giving you plenty of opportunity get a mortgage even though you are self-employed. The key is to have all of your documents in order and your debts as low as possible in order to maximize your qualifying income. Apply with a variety of lenders for a bank statement loan to ensure that you get the best rate and terms available today!

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Why do you Pay Higher Interest Rates on Alternative Documentation Loans?

April 14, 2022 By JMcHood

Lenders base your interest rate on the risk of default you pose. That’s why conventional loans and government-backed loans often have lower interest rates than alternative documentation loans. Fannie Mae, Freddie Mac, FHA, VA, and USDA loans all require full documentation. A lender can’t give you a loan unless you document your income, employment, assets, debts, and credit score. Lenders can tell beyond a reasonable doubt what type of risk you pose.

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With alternative documentation loans, there may be a missing piece to that puzzle. While you still verify things like your income, assets, employment, and debts, you do so in an alternative format. You don’t provide your paystubs or your tax returns for example. An alternative lender is willing to accept other forms of documentation.

Keep reading to see what makes lenders give you higher rates.

Lack of Income Verification

On a fully documented loan, you provide your paystubs for the last 30 days and your W-2s/tax returns. This shows lenders verification of your income from a third party. Now if you use an alternative documentation loan because you can’t verify your income with paystubs or tax returns, you may need to verify it with bank statements. You show the lender your bank statements for the last few months that show the deposit of your income.

While your bank statements show that you have the money and that you deposited your income, it’s not the same as third-party verification. Lenders take a risk when they give you a loan based on your income according to your bank statements. While this may be perfectly acceptable for some lenders, they generally charge you a higher interest rate to make up for the higher risk of default.

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Lack of Proof of Employment

Oftentimes the borrowers with a high risk of default are those that are self-employed. These borrowers don’t have paystubs to verify their income. They may have tax returns, but they often show a loss or lower income than you actually make because of the large number of write-offs that you can take. This lack of proof of income and/or employment is risky for lenders. If a lender thinks you have/make enough money to qualify for the loan, they may allow it, but with a much higher interest rate.

Lower Credit Scores

Because alternative documentation loans are a portfolio loan, lenders keep them on their own books. This means that lenders can come up with their own qualifying requirements. In other words, they don’t have to follow the Fannie Mae, FHA, VA, or USDA guidelines. This could allow a lender to give you a loan even if you have a lower credit score.

Each lender will have a specific credit score that they require, which may or may not be lower than what other loans require. If you do find a lender willing to accept say a 620 credit score, you can bet that they will charge a higher interest rate. The lower credit score lets lenders know that you are somewhat of a high risk of default. In order to make up for that risk, lenders typically charge points on the loan as well as higher interest rates.

The Overall Risk of Default

Alternative document loan lenders just take a higher irks of default. They want to avoid that risk by making sure that you qualify for the loan, but there’s still that element of risk. If you don’t have the highest credit score or you can’t verify your income for one reason or another, the lender will charge you a higher interest rate to make up for the risk that you pose.

The best thing that you can do is make sure that you minimize your risk of default. If you need an alternative documentation loan, try to increase your credit score, keep your debt ratio down, and have verification that proves beyond a reasonable doubt that you have the income to qualify for the loan.

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What are No Doc Loans?

February 28, 2022 By JMcHood

If the thought of getting a mortgage frightens you because of the vast amount of paperwork that is required, you may want to look at no doc loans. While these loans have certainly taken a back seat to traditional loans in recent years, they are still available from a select few lenders.

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The people that are good candidates for the no doc loans are those that are self-employed, retired, or newly employed with little history to verify. What’s the tradeoff for the ‘no doc’ loan? Typically, you’ll pay a higher interest rate and higher closing costs than a borrower that gets a traditional loan.

What do you Need for No Doc Loans?

The name no doc is a little misconceiving. Yes, you still need to provide some documentation to get the loan. The lender needs to make sure that you can afford the loan beyond a reasonable doubt. Typically, people with this type of loan don’t verify their income, but they are able to back it up in some other way, such as:

  • A high credit score – If you can’t quite verify your income because you are self-employed or don’t have a long employment history, but you have a high credit score, your income may not matter. Lenders can tell a lot from your credit score. They can tell if you pay your bills on time, how much credit you have outstanding, and what your credit history is like going back several years. If you have great credit, you may be able to convince a lender that you are a good risk.
  • A lot of assets – If you are able to verify your assets, we suggest that you do it. Not verifying your income is risky enough or lenders. If you can show them that you have a large amount of assets in your checking, savings, or investment accounts, they may be more willing to give you the loan. They will generally base your assets on the number of months of mortgage payments that they cover. The more months you can cover, the higher your likelihood of getting the loan becomes.
  • A large down payment – Lenders want to know that you have your own investment in the home. If you don’t verify your income, at the very least, they want your own money invested in the home. This way they have more reassurance that you will do what it takes to get the mortgage paid no matter what happens. If you only put a little bit of money down, you have a higher likelihood of walking away from the home.

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An Alternative to No Doc Loans

If you can’t find a lender or you don’t like the high rates and fees that come along with the no doc loan, you may have another option – the Bank Statement Loan. This is a good option for those borrowers that have good income, but can’t prove it via their tax returns or W-2s. The Bank Statement loan allows you to verify your income through the use of your bank statements over the last 24 months. The same rules apply as with the no doc loan, though. Because the lender isn’t officially verifying your income with your W-2s and/or tax returns, they will need to see some compensating factors. At the very least, they want a large down payment and money in savings to cover at least a few months of payments.

While no doc loans might not be the most common anymore, they are available from a variety of lenders. You may have to shop around a little bit to find a willing lender including using a broker or shopping for a lender online rather than just in your local area. It’s a good idea to get quotes from at least three lenders so that you can find the loan that costs the least amount for you.

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What Compensating Factors do you Need for Low Doc Loans?

February 14, 2022 By JMcHood

Low doc loans still exist, contrary to popular belief. They just aren’t as widespread as they once were, especially after the housing crisis. Lenders are starting to realize that there are still people that need these low doc loans in order to get financing. The most common people are the self-employed and the retired.

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In order to get the low doc loans, though, lenders typically look for compensating factors. These are factors that ‘make up’ for the fact that you need a low doc loan. Keep reading to learn the most common compensating factors that lenders want to see.

Great Credit Score

Your credit score can speak volumes to a lender. A great credit score lets a lender know that you are financially responsible. You make smart financial choices, you don’t overspend, and you pay your bills on time. Despite the fact that you need a low doc loan, the high credit score can let a lender know that you are a good risk.

Just what constitutes a great credit score? It really depends on the lender, but typically they want a 720 credit score or higher to consider it ‘great.’ If you have a credit score of this magnitude, you may be able to get a mortgage without a lot of documentation.

A Lot of Reserves

Reserves are money you have set aside that you won’t use for the purchase transaction. In other words, it’s an emergency fund that you have set aside. Lenders like to see reserves because it gives them peace of mind that you will be able to pay the mortgage even if something happens to your regular income.

Lenders measure your reserves based on the number of mortgage payments it covers. For example, let’s say that you have $10,000 in reserves and your mortgage payment is $1,000. You have 10 months of reserves on hand or you can cover 10 months of mortgage payments.

There isn’t a certain amount of reserves that you must have on hand – but obviously the more you have the better your chances of approval. Lenders typically like to see at least six months of reserves on hand, but if you have more, it can only help your chances of getting approved.

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A Large Down Payment

Lenders want to know that you have an investment in the home. If you only put a small amount of money down, it may not be incentive enough to keep making your payments if something happens to your income.

The more money you can put down on the home (from your own funds), the lower the risk of default becomes. For example, let’s look at the difference between a 3% down payment and a 15% down payment.

If you want to buy a $250,000 home, you would put down $7,500 for a 3% down payment and $37,500 for a 15% down payment. That’s a big difference. If your business folded and it became difficult for you to make your mortgage payments, you might consider walking away from a $7,500 investment, but a $37,500 investment would be a lot harder to walk away from in most cases.

Each lender has a specific amount that they want you to put down in order to compensate for the low doc loan. Usually down payments of 20% or higher are highly desired, but any amount that you can put down that is above the minimum requirement can be a compensating factor.

History in the Industry

If you are self-employed, it helps if you have a long history in the industry that your business is in. This gives the lender reassurance that you have what it takes to succeed as a business owner. If you don’t have the right experience because you just entered the industry, it can be a red flag for a lender as they try to determine if you will succeed or not. Since no one can predict the future, they go off your past and without a past for them to evaluate, they may not want to take the chance on your low doc loan.

Each lender will have their own requirements and have a different threshold on what they consider compensating factors. If you need a low doc loan, talk to various lenders. See what they require and what they would consider ‘a compensating factor.’ You can then compare the costs and the interest rates offered by each lender to help you decide what will work for you.

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Does a Garage Add Home Value?

December 24, 2021 By JMcHood

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

October 28, 2021 By JMcHood

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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Should You Build a New Home?

September 12, 2021 By JMcHood

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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Investing in Residential Real Estate When You Have Bad Credit

July 7, 2021 By JMcHood

You have a burning desire to invest in real estate, but you have bad credit. Do you have to stash your dreams away or is there a way to make it happen?

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Luckily, there are ways you can still make your dreams happen. You may not do it the ‘standard’ way, but you can get it done. The best way is to work on your credit first. If that’s not an option, we’ll help you discover other options below.

Improve Your Credit

Start by determining if you can fix your credit. It may seem impossible, but if you take it one-step at a time, you can make it work.

  • Bring all payments current – If you are behind on payments, get caught up. If all of your bills are paid on time, your credit score will start to increase. This looks better to mortgage lenders too.
  • Pay old debt down – If you have a lot of revolving debt, get the balances down. Even if you can’t pay them off in full, get the balances as low as possible.
  • Don’t open new credit – The older your accounts, the higher your credit score. Keep old accounts open and refrain from opening anything new for a while.

These simple steps can help your credit score increase. If you have too many of one type of account, you’ll need to diversify your credit as well. For example, if you have too many revolving accounts, add in an installment loan. This helps diversify the risk and increases your credit score.

Working Around Bad Credit

If your credit score doesn’t increase fast enough, there are a few ways you can work around the bad credit and invest in real estate:

  • Get a cosigner – Someone with good credit that is willing to go into ‘business’ with you can help the situation. You both bring something to the table. Maybe you have the income/assets to qualify for the loan. Your cosigner can bring the credit score. Together you can create a good risk for a lender willing to let you invest in homes.
  • Go subprime – Conventional and government-backed loans are not the only options. Try subprime lenders or credit unions. They often have their own programs. They make up their own rules, which may even allow lower credit scores.
  • Get seller financing – Depending on where you are investing, you may find a seller willing to provide the financing. Since you are investing in the home, you may be flipping it. The seller will know that you will pay the loan off quickly. If they can make a quick buck on the interest while selling their home, they may be willing.

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Should You Invest in Real Estate With Bad Credit?

The bigger question is if you should be investing in real estate with bad credit. You already have issues, should you compound them with an investment in real estate?

Today, the average US credit score is 687. Anything much below that and lenders are leery. Shouldn’t you be too?

If you have a bad credit score, you should ask yourself why. Are you in over your head in credit card debt? Did you let a mortgage or installment loan default? Did you file for bankruptcy? These are all questions you need to ask yourself. Really determine why you have bad credit. Is it something you are overcoming?

Investing in real estate isn’t a ‘get rich quick’ scheme. It takes time and money. You have to either fix the home up and sell it for more than you bought it. If you keep it, you’ll need to maintain the home and rent it out. There’s no guarantee that you’ll make a profit flipping a home or that you’ll find renters. Then you are stuck with this home and its subsequent mortgage. This could put you in a further financial bind.

Consider Your Options

You must consider your options very carefully. If having another mortgage will make you sacrifice if things don’t go your way, it might not be the right choice. If you have a partner splitting the costs with you, though, it may work. Again, you must consider all of your circumstances to see what will work.

The bottom line is that you can find funding to invest in real estate even with bad credit. It may not be rock bottom interest rates. It may even cost you a few points on the front. Investment mortgages aren’t as borrower friendly as mortgages for a primary residence. They pose a risk to the lender. If you are in a bind, you’re more likely to stop making payments on an investment property than your own home.

Consider the costs and shop for a lender that will work with you. Paying high fees or inflated interest rates can only ruin your chances of making money. Look at the process from all angles before deciding that buying another home is the right choice. Once you do your research, you’ll be better prepared for what lies ahead if you decide to invest in real estate.

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When inquiring about a mortgage on this site, this is not a mortgage application. Upon the completion of your inquiry, we will work hard to match you with a lender who may assist you with a mortgage application and provide mortgage product eligibility requirements for your individual situation.

Any mortgage product that a lender may offer you will carry fees or costs including closing costs, origination points, and/or refinancing fees. In many instances, fees or costs can amount to several thousand dollars and can be due upon the origination of the mortgage credit product.

When applying for a mortgage credit product, lenders will commonly require you to provide a valid social security number and submit to a credit check . Consumers who do not have the minimum acceptable credit required by the lender are unlikely to be approved for mortgage refinancing.

Minimum credit ratings may vary according to lender and mortgage product. In the event that you do not qualify for a credit rating based on the required minimum credit rating, a lender may or may not introduce you to a credit counseling service or credit improvement company who may or may not be able to assist you with improving your credit for a fee.

Copyright © Mortgage.info is not a government agency or a lender. Not affiliated with HUD, FHA, VA, FNMA or GNMA. We work hard to match you with local lenders for the mortgage you inquire about. This is not an offer to lend and we are not affiliated with your current mortgage servicer.

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