December 7th, 2017 8:01 AM by Jackie A. Graves
We can make two predictions with confidence about 2018: Home sales will accelerate, and your taxes will probably be affected in some way. As for mortgage rates, who knows? They were low throughout 2017, and even after the Fed raised rates twice, they remain low by historical standards.
Lenders say they often dispel the mistaken idea that homebuyers have to make down payments of at least 20 percent. In fact, some loan programs allow qualified people to buy homes with no down payment at all. Other loan programs allow down payments as small as 3 percent or 3.5 percent.
The Department of Veterans Affairs guarantees zero-down VA mortgages for qualified borrowers: veterans, active-duty service members and certain members of the National Guard and Reserves.
The U.S. Department of Agriculture guarantees zero-down mortgages as part of its Rural Development program. The loan guarantees are available in eligible areas — mostly rural areas, though some are suburban.
Navy Federal Credit Union offers zero-down mortgages for qualified members to buy primary residences.
Finally, Federal Housing Administration-insured mortgages allow down payments as small as 3.5 percent. And a few lenders offer conventional mortgages with down payments of as little as 3 percent with private mortgage insurance.
Federal Housing Administration-insured loans are appealing because they’re widely available to borrowers with imperfect credit. In 2016, the average credit score for an FHA homebuyer was around 686, while the average conventional homebuyer had a credit score around 753.
You need a credit score of 580 or higher to get an FHA-insured mortgage with a down payment as low as 3.5 percent. If your credit score is between 500 and 579, you need to make a down payment of at least 10 percent to get an FHA mortgage. But first you would have to find a lender that would approve the loan.
Here are more crucial facts about FHA loans.
Mortgage lenders don’t want you to deplete your savings on the down payment and closing costs. They want you to have “reserves” — cash, or assets that can be sold quickly, so you can take care of unexpected expenses without missing house payments.
Your lender will calculate the minimum reserves you’ll need to qualify for a mortgage. There’s a possibility that the reserve requirements will oblige you to unexpectedly make a down payment of less than 20 percent, triggering the need for mortgage insurance. To avoid mortgage insurance in this case, you’d have to cancel the deal, scrape up more money for a down payment and wait while you put aside more money.
Lenders would rather you have an emergency fund than not, even if it means you’ll have to make higher house payments because of mortgage insurance.
When people buy homes, they often “stretch” to make their initial monthly payments, on the theory that their incomes will go up over time, making house payments easier to cover.
But it’s smarter to live within your means. You can move up to a more expensive house after (and not before) your income rises. A conservative rule of thumb is that all of your monthly debt obligations, including the house payment, shouldn’t exceed 36 percent of your income before taxes.
Let’s say your household income is $5,000 a month: The monthly house payment, car payments, student loans, credit cards, child support and other obligations shouldn’t be more than $1,800, or 36 percent of that $5,000.
A typical mortgage has thousands of dollars in mortgage fees and other closing costs. If you pay those fees out of pocket, you tend to get the lowest interest rate you're eligible for. But you might want to accept a higher interest rate in exchange for the lender paying some or all of the closing costs.
For example, you might be offered an interest rate of 3.75 percent if you pay all the closing costs, or a rate of 4.125 percent if the lender pays the closing costs.
Generally speaking, no-closing-cost mortgages are attractive to people who plan to sell their homes within five years or so. If you plan to stay longer than five or six years, your total costs will be lower if you go ahead and pay the closing costs out of pocket. It’s a balancing act, because paying the closing costs could push you into making a smaller down payment, potentially forcing you to pay for mortgage insurance.
We already mentioned Veterans Affairs-guaranteed mortgages, but these home loans may be underused, even though they’re popular.
The primary feature of VA loans is that they can be used to buy a primary home without a down payment.
In 2016, approximately one-eighth of mortgages were guaranteed by the VA, according to the Mortgage Bankers Association. But a 2010 survey found that many home-buying veterans weren’t aware of the VA loan benefit or didn’t know much about it. About a quarter of active-duty military personnel weren’t aware that they were eligible for VA loans.
Comparison shop for a VA loan today.
Maybe those active-duty personnel believed that the VA loan benefit was available only to retirees or veterans who have been discharged. In fact, VA loans are available to honorably discharged veterans, those who are on active duty, or who have completed at least six years of service in the National Guard or selected Reserve units. Certain surviving spouses of veterans are eligible, too. See a detailed eligibility table.
A cash-out refinance happens when the homeowner refinances the mortgage for more than the amount owed. The borrower pockets the difference.
Cash-out refinances were popular during the real estate boom of the early 2000s. Then they almost disappeared after the housing bust wiped out billions of dollars in home equity. Now that home values have climbed near their pre-recession peaks in many markets, cash-out refinances have returned.
Compare rates on a mortgage refinance.
If you’re eligible for a VA-guaranteed mortgage, you might be able to refinance from a conventional mortgage (or an FHA-insured mortgage) into a VA loan.
In many cases, you can refinance for up to 100 percent of the home’s current value. This means you can do a cash-out refinance using a VA loan. Funding fees for cash-out VA refinances vary from 2.15 percent to 3.3 percent, and the fee can be added to the loan balance.
Keep your finances as boring and steady as possible between the time you apply for a mortgage and the time you close on the loan.
That sounds simple in theory, but it’s sometimes difficult in practice, especially for first-time homebuyers. What it means is this: Don’t charge up your credit cards and don’t apply for new credit while the mortgage is going through the underwriting process.
When you apply for the mortgage, the lender looks at your credit report and your credit score. Then, shortly before closing, the lender surveys your credit again. If there’s a substantial change — say you maxed out your credit cards to buy furniture and appliances, or you got a loan to buy a car — the lender might have to delay your mortgage closing. In drastic cases, you could torpedo your mortgage and have to apply all over again.
By Robin Saks Frankel – To view the original article click here