Tag: loans

When You Should And Shouldn’t Put 20% Down

Having a 20% down payment used to be a requirement for nearly all loans. That hasn’t been the case for quite some time, but it’s still touted as the conventional wisdom. In many cases, that may be true, but it’s not always the best idea. There are both advantages and disadvantages to putting 20% down.

If you have the money available already, it’s quite likely that the benefits heavily outweigh the drawbacks. Even though 20% down is no longer a requirement to get a loan, it is still a requirement to avoid mortgage insurance fees. Putting 19% down, for example, simply makes no financial sense at all, regardless of your financial situation. It’s also good to put down as much as you feasibly can in order to reduce the loan amount, thereby reducing your payments. The 20% mark is important if you can reach it.

If you still need to save money in order to achieve a 20% down payment, you’re going to need to crunch some numbers and also make some predictions in order to arrive at the correct solution. If you’re close to being able to put down 20%, it may be in your best interest to continue saving up to avoid mortgage insurance fees. But if you aren’t close, it may be best to simply forget about it. Even if you are definitely able to save money, by the time you get to the point that you can put down whatever 20% is now, home prices are likely to be significantly higher. In that case, it may be better not to wait. You also need to consider other costs and where you’re getting the money. If you need to take out a loan or draw on investments to reach 20%, this is probably not a good investment, unless it’s the only way you can viably make a home purchase.

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Cash-Out Refinancing A Solid Option For Home Renovations

If you’re planning to renovate your home, whether you intend to continue to live in it or to sell it at a profit, you need to think about how to pay for the renovations. Of course, it’s possible you have the cash on hand, which is great. But if not, there are a few financing options you can look into. It’s common to get a home equity line of credit (HELOC) or simply take out an additional loan. However, another option you may not be aware of is cash-out refinancing. It works by refinancing to a loan amount higher than your current loan balance, and taking the difference as cash.

The most important thing to consider when determining if you should get a cash-out refinance loan is the interest rate. It very likely won’t be the same as your current interest rate. If the rate is higher or even the same, it’s probably financially negative in the long run unless you can increase your home’s value significantly with the renovations. That’s why it’s a good option specifically for renovations. On the other hand, it’s entirely possible the rate is lower, or simply lower than traditional loans or HELOCs, in which case it’s a good financing option for any purpose. However, you may not want to use cash-out refinancing for large projects. Since you don’t receive the entire value of the new loan, but only the difference between the new loan balance and old loan balance, you’d need to increase the principal significantly to finance large projects. This could increase your interest payments by quite a bit even if the rate is lower.

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You May Be Eligible For California’s New Dream For All Shared Appreciation Loan

The California Housing Finance Agency (CalHFA) recently launched the Dream For All Shared Appreciation Loan, a secondary loan to be used in conjunction with CalHFA’s Dream For All Conventional first mortgage. This secondary loan carries its own set of requirements, which may or may not differ from the initial Dream For All Conventional first mortgage. The requirements of the secondary loan are provided here, but you should consult with CalHFA to be sure that you meet all requirements. The requirements are provided for two categories, both for the borrower and for the property.

The borrower must be a first-time homebuyer, which CalHFA defines as not having owned and occupied a home in the past three years. The borrower must also occupy the property as their primary residence and meet income limits for the program. In addition, the borrower, or at least one of the co-borrowers if there is more than one, for any CalHFA first-time homebuyer loan must take a CalHFA approved Homebuyer Education and Counseling course. This course does have a fee, which varies by method and agency, and can be done online or in-person. The Dream For All program also has its own additional course. Fortunately, this course is free, but it is only accessible online.

The property requirements are simple for single-family residences and manufactured homes, which are both allowed, but may be more complex for other types of properties. Condominiums must also meet the guidelines for whichever initial mortgage you choose. Guest houses, granny units, and in-law quarters may be eligible, but would not be eligible in addition to the main residence, since the property must be only one unit.

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More information about the Dream For All Shared Appreciation Loan here: https://www.calhfa.ca.gov/dream/index.htm

What Is A Wrap-Around Mortgage?

Wrap-around mortgages are not very common, but it’s still a good concept to know in case you find it difficult to get a more traditional mortgage loan. A sale with a wrap-around mortgage has two important components distinguishing it from a regular sale: First, the seller retains the current mortgage on the property being sold. This differs from standard sales in which the seller normally pays off the remaining mortgage as part of the sale process. Second, the loan is not issued by a lender but rather by the seller. In this way, the seller is most likely planning to pay their mortgage using the money gained from payments the buyer makes to the seller on their new mortgage.

Wrap-around mortgages have both advantages and disadvantages. The primary reason to get a wrap-around mortgage is that they don’t have any standardized qualification requirements. This mostly benefits the buyer, but can also be useful to the seller if they’re having difficulty finding buyers. The primary drawback is that the buyer and seller must write up the contract themselves, since there is no lender involved. That means both parties need to be legally and financially savvy. It’s also impossible to wrap around a mortgage that doesn’t exist, so the seller needs to have a mortgage. There are also cons specific to the seller and buyer. The seller in this instance incurs the same financial risk that a lender would normally. The buyer is very likely paying a higher interest rate, since the arrangement is not worth the risk to the seller unless they are profiting.

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Honesty Is The Best Policy On Mortgage Applications

Some of the questions on a mortgage application may seem unnecessary, but they’re all there for a reason. Certain omissions can lower your interest rate and make your offer seem more appealing. But even if you haven’t done anything wrong — especially if you haven’t done anything wrong — you should always disclose all relevant information.

Money changes hands all the time, and the transfer doesn’t always leave a paper trail. But lenders will still find it odd for you to suddenly have additional money or fewer debts. It’s perfectly legal to ask a friend or family member for some cash to help you buy a home or pay off a debt. That money came from somewhere, though, and if you don’t list it, your lender could assume you are hiding something and deny your application.

A common lie that seems more innocuous but can actually have even more drastic consequences is stating that you plan to live in the home when you actually don’t. People do this because interest rate is lower on loans for primary residences, and they figure it’s fine because of course they can always change their mind. However, this is actually a crime. It’s considered a form of mortgage fraud.

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What To Ask Lenders When Negotiating Mortgages

There’s plenty of advice out there telling you that negotiating your mortgage is important and that you should get multiple opinions. However, unless you know what you’re looking for, you’re probably not actually getting the best deal. On the surface, it may look like the lowest rate you can find, but it likely isn’t. You’ll often need to dig and ask the right questions.

So what are the right questions? Ultimately, you want to know the exact breakdown of the estimate. As you probably already know, interest rates aren’t based on just one factor. You may not realize that some of these factors are actually negotiable, or you may even have more information about it than the lender and be able to correct the estimate. Ask if the estimate includes any discount points. Discount points are an up-front payment that lenders aren’t going to tell you actually lowers your interest rate, rather than being just a standard fee. Discount points are negotiable, but lenders won’t mention that unless you bring it up. The estimate that a lender provides may or may not also include closing costs. Discount points and lender fees are part of closing costs, but a significant portion of them are not actually under the lender’s control. Lenders frequently underestimate escrow fees, so when it comes time for you to pay the closing costs, your fee may be higher than the estimate even if the rate is locked. Make sure to only compare costs the lender can control.

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More: https://www.cnbc.com/select/negotiating-mortgage-rates/

What Is A Seasoned Down Payment?

If you’ve just unexpectedly come into some extra cash, you may be tempted to immediately put it towards a home so you can start accruing equity as soon as possible. Unfortunately, this isn’t always possible. Most, but not all, lenders require at least a portion of your down payment to come from what they call seasoned funds. Typically, seasoned funds are those that have been in your possession at least 60 days. Lenders will require a paper trail to confirm how and when you acquired the funds used for your down payment.

Usually, at least half of your down payment must come from seasoned funds. However, rules vary by lender, both with the percentage of funds that must be seasoned and the length of “seasoning.” Fortunately, this mainly applies to windfall gains, and there are other methods of acquiring money that don’t need them to be seasoned. If the money was acquired via borrowing from your savings or retirement account, this is generally allowed, though you should discuss the tax implications of this with an accountant. Some lenders will allow gifts to be used for a down payment. Some don’t allow it at all, and those that do will probably require a written confirmation from the person gifting the money.

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ITIN Loans: An Option For Non-Citizens

Those who are not citizens or possibly not even residents of the US may have trouble qualifying for mortgage loans. Fortunately, there is an option available, so you don’t necessarily have to be stuck renting if you have just recently moved to the US. ITIN stands for Individual Taxpayer Identification Number, and is a number that the IRS can assign to taxpayers who cannot get a Social Security Number. If you apply and are assigned an ITIN, this can help you qualify to get an ITIN loan.

While you don’t need to be a resident or citizen, there are still some requirements for ITIN loans. You do need to provide tax returns and may have to fill out Form W-7. It’s possible that you will also be asked for additional forms of identification, such as a driver’s license or birth certificate. As with any mortgage loan, you will be expected to provide proof of income, assets, or employment.

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Should You Get A Home Equity Loan?

With home prices having skyrocketed and now starting to slow, many homebuyers are curious whether it’s a good time to get a home equity loan. In a survey of 1000 homeowners by MeridianLink, 21% stated they were considering getting a home equity loan at some point during the year, compared to just 8% last year. However, a little under half — 48% — aren’t even confident they know what a home equity loan is, or definitely don’t know, which encompasses 13% of respondents. Rising prices have, in fact, increased total equity by 15.8%. But that’s not the only thing you need to know.

The most important factor to keep in mind is whether it’s actually a home equity loan you’re interested in, or the similar but distinct home equity line of credit (HELOC). The answer will depend what you need the funds for and how quickly you want to repay it. A home equity loan has a fixed interest rate that is locked when you take out the loan. They’re relatively safe if you have good credit, but with current interest rates being high, they’re most useful for short-term uses, such as funding home improvement projects with a solid return on investment. HELOCs, on the other hand, have a variable interest rate that is based on the benchmark rate. The benchmark rate is currently still increasing, but that should change in the not-too-distant future. Therefore, a HELOC can be useful if you want to take advantage of high equity now and aren’t particularly worried about paying it off any time soon.

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More: https://www.foxbusiness.com/personal-finance/more-homeowners-consider-home-equity-loans

Wells Fargo Shifts Focus Away From Mortgage Lending

Wells Fargo is one of the biggest banks in the nation as well as one of the top mortgage lenders. In fact, it was the number 1 mortgage lender in 2019. However, that’s about to change. 2019 was also the year that Wells Fargo acquired a new CEO, Charlie Scharf, who inherited a company under strict scrutiny as a result of a 2016 fake account scandal. Among the changes Scharf is making is a massive shift away from mortgage lending to focus mainly on investment banking and credit cards.

According to Wells Fargo exec Kleber Santos, investigations into the 2016 scandal also revealed that their mortgage lending business was simply too large in scope. The implication is that it was too difficult to manage oversight of all the facets of the company, and that mortgage lending was the one that needed to be trimmed down. Wells Fargo will not be completely eliminating its mortgage lending business, but it will be cut down dramatically to prioritize existing customers and borrowers in minority groups.

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More: https://www.cnbc.com/2023/01/10/wells-fargo-once-the-no-1-player-in-mortgages-is-stepping-back-from-the-housing-market.html

What Exactly Is A First-Time Homebuyer?

The answer to this question may seem obvious. Of course a first-time homebuyer is just anyone who is buying a home for the first time, right? Well, not exactly. What the phrase is actually referring to is someone who is eligible for a given first-time homebuyer program, usually a lender’s loan program. The lender doesn’t care whether it’s your first time buying or not, only whether or not you are eligible for the loan.

It’s not entirely misleading, though. At least for the criterion related to homeownership, those buying for the first time would qualify. But even that criterion is slightly different; it commonly only requires that you not have owned a home within the prior three years. Moreover, there are multiple other qualification criteria for first-time homebuyer loans. They usually include requirements for down payment, credit score, proof of income, employment history, and a maximum debt-to-income (DTI) ratio. Typically, the down payment requirement is between 3% and 20%, the minimum credit score is 500 for FHA loans or 620 for conventional loans, two or more years of employment are required, and the DTI ratio must be no more than 43%. These numbers, as well as the specific criteria, could vary, both by region and by lender.

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For more information as well as information about specific first-time homebuyer programs, see: https://www.foxbusiness.com/personal-finance/who-qualifies-first-time-homebuyer

Homebuyers Under-Informed About Mortgage Options

Buying a home is a major life decision. Because of this, it’s important that prospective homebuyers take the time to research the best option for them. Unfortunately, that tends not to happen with mortgage loans. Only about 13% of prospective buyers spend at least a month researching lenders. By contrast, 28% spend just as much time researching cars, and 23% vacation options.

One major reason is that they’re simply not well informed. 30% of prospective buyers believe that their credit score will take a major hit if they shop around, the most common reason cited for not shopping around. This is not accurate, as it’s only getting a pre-approval that reduces your credit score, not consulting with lenders. You can submit as many applications as you want within a 45 day period and your credit score will only drop once. 15% also believe that all lenders use the exact same rate, so there’s no reason to get a second quote, which is definitely not the case.

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More: https://zillow.mediaroom.com/2022-11-18-Prospective-home-buyers-spend-about-as-much-time-researching-new-TVs-as-they-do-mortgage-lenders

Don’t Be Afraid To Be Selective With Mortgage Loans

The terms of mortgage loans have a lot more variance than one might expect. It’s well known that the average interest rate is just that, an average, but there would be no competition if that were the sole factor. Be sure to get lots of estimates, comparing both different types of loans at the same institution as well as the same type of loan at different institutions.

Make sure you understand the terms clearly, especially because some loans have hidden costs. These can include fees for printing documents or prepayment penalties, among others. Not all lenders have these, nor necessarily for all loans, so shop around. It’s also important to know the rate lock period, so you can be sure that the rate will still be valid by the time you finalize getting the loan. Some costs may even be negotiable, such as loan closing fees and interest rate.

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Qualified Vs Non-Qualified Mortgage Loans

Before you get a mortgage loan, ask yourself whether you want a qualified mortgage (QM) or non-qualified mortgage (Non-QM). You may be wondering under what circumstances you’d want your mortgage to not be qualified. Well, there are advantages and disadvantages to both. Non-QMs don’t conform to the regulations set forth by the Consumer Financial Protection Bureau (CFPB), but they’re actually entirely legal — the government simply can’t guarantee consumer protections.

So what are these protections, and why might you want to risk going without them? A QM loan cannot last longer than 30 years, cannot have prepayment penalties, cannot be a balloon loan, and should not have negative amortization. It requires a process for verifying several sources of information, including but not limited to bank statements and income. Because of this, it’s often more difficult to qualify for a QM loan. Therefore, someone who can’t qualify for a QM, such as many gig workers, may risk a non-QM loan. Investors, especially foreign investors, also frequently opt for non-QM loans that only require payments on interest. It’s also possible that you want to go for a longer-term loan, which would come with smaller payments, albeit a higher total amount paid once the loan is fully paid off. In any case, you probably want to ask a professional to explain the terms and risks of any loan you are considering taking, whether qualified or not.

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Benefits of a VA Home Loan

One of the offerings of the Department of Veterans Affairs is mortgage loans. Of course, this is limited to current or past members of the US military. With this restriction comes a few significant benefits if you qualify. VA loans have perks for both low-income and high-income homebuyers.

If you have the money to buy a more expensive home as long as you can get a loan, VA loans may have you covered. There are jumbo loans available which can even exceed $1 million. This may be a good bet even if you are not currently a high-income earner, as long as you are purchasing investment property. This is because there is no minimum down payment for VA loans; you can borrow up to 100% of the home’s value. You don’t even need to worry about private mortgage insurance (PMI), which is required for conventional loans with a down payment under 20%, but not for VA loans regardless of your down payment amount. If your investments pay off, or you start earning more money, you can also pay off the loan faster. VA loans have no penalty for accelerating payments.

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20% Down Payment is Actually a Rarity

It’s long been suggested that one should put down at least 20% of the purchase price as down payment. While this is probably a good idea if you can afford it, many people have taken this advice a bit too much to heart, and are reluctant to try to buy with a lower down payment amount. A third of homebuyers even think it’s a requirement to get a loan.

In reality, most loans have a much lower minimum down payment, with one of the most common types — FHA loans — having a minimum of just 3.5%. Some even have no minimum. In addition, the median down payment is significantly less than 20% for first-time homebuyers at 7%. It’s higher for repeat buyers at 17%, but that’s still under 20%. What’s more, there’s a good chance you can get homebuyer assistance to help cover the down payment. While a majority of homebuyer assistance programs are specific to first-time homebuyers, over a third of the approximately two thousand programs do not have this restriction.

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More: https://themlsblog.com/2022/10/10/saving-for-a-down-payment-heres-what-you-should-know/

Home Equity Loan Facts

You may have heard of a home equity loan, but you may not know what it actually is. A home equity loan uses the accrued value of your home as collateral against a loan, and typically allows you to borrow up to 85% of the difference between the home’s value and the balance due on your mortgage. If you fail to pay back your loan, you may have to sell the house to pay it back. This is similar to a home equity line of credit (HELOC), but unlike a HELOC, a home equity loan is a one-time event with a fixed interest rate. The interest rate tends to be higher than the rate for a standard mortgage loan, but lower than rates for most credit cards. Normal regulations for mortgage loan approval apply to home equity loans as well.

A home equity loan is frequently called a second mortgage. Homeowners frequently still have some balance due when they take out a home equity loan, which means they now effectively have not one but two mortgages. In addition, the money is often used to finance the down payment on a second home. However, this isn’t the only purpose of a home equity loan. You don’t need to have a mortgage to get a home equity loan — if you don’t have one, it just means your balance due is zero, and therefore there is potentially a higher ceiling on loan amount. Furthermore, the money gained from a home equity loan doesn’t need to be used for a second home, or anything relating to homes. It’s simply your money, and can be used without restriction.

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What Is A Drive-By Appraisal?

In most cases, getting a mortgage loan requires a home appraisal. Usually, this is a rather long process that involves extensive analysis of a home by an appraiser, inside and out. But sometimes the process can be expedited by using a drive-by appraisal, in which the appraiser only looks at the home’s exterior. The other advantage, besides the speed, is that it’s much less invasive for any current occupants, especially if they are tenants. Of course, this is at the cost of a much less in-depth evaluation.

Also, it’s not always possible to get a drive-by appraisal. It’s essentially at the discretion of the lender whether a drive-by appraisal is allowed. If the lender wants a full investigation, they simply won’t approve the loan. That said, more and more lenders are permitting them as a result of COVID, since evaluating the interior can be risky. Lenders are also more likely to allow a drive-by appraisal for a refinance as opposed to a new loan.

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Why Interest Rates May Be Higher Than Expected

When getting a mortgage loan, that money generally comes from a bank. But it’s important to realize that a bank isn’t just an impersonal repository of money. Banks are businesses, and as such, they’re always looking for profit. This extends to deciding your interest rate, which is nearly always not the best rate you could get.

One of the ways banks pull a profit is by looking to the future of interest rates. They will frequently take an expected future average rate rather than the current average rate if they expect rates will rise soon. They get slightly ahead of the game this way. The other reason rates are often higher is not entirely within the bank’s control, although it is partially a result of their actions. A common method of reducing risk is for a bank to sell debt to an investor. This also frees up capital for the bank. But it introduces an additional party also looking for a profit, and the bank may need to make concessions for the deal to go through. Increasing interest rates is a way to recoup these losses.

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New Loan Program Aimed At Helping First-Time Homebuyers

The California Housing Finance Agency (CalHFA) has introduced a new loan program called the Forgivable Equity Builder Loan. It comes with some heavy restrictions — only first-time homebuyers are eligible, and it only covers up to 10% of the purchase price. This is because it’s a supplementary loan that can only be taken out in combination with a CalFHA first mortgage. The good news is that this loan has an interest rate of zero percent, and is also forgivable if you occupy the residence continually for five years. However, standard interest rates apply to the CalFHA first mortgage.

The program also requires borrowers to complete a course on homebuyer education and obtain a certificate of completion. This course does require a one-time fee of $99 if taken online, or a variable-rate fee if taken in person. You must also occupy the new home as your primary residence, as well as meet income requirements. The property must be a single-family residence or manufactured home. This can include condominiums if they meet the requirements for the CalFHA first mortgage, or ADUs in some cases.

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More: https://www.calhfa.ca.gov/homebuyer/programs/forgivable.htm