Sometimes it’s simply a small notion that someone at work
mentioned. A coworker just bought a first home and they just keep talking about
it. Or maybe you start noticing For Sale signs around that were there, but you
never noticed them. Perhaps you real estate agent friend keeps telling you it’s
time to buy and stop renting. Whatever the motive, buying a first home is a
pretty big step. All homeowners remember buying their very first home. Pretty
much every detail. They remember where they close and can remember what their
settlement agent looked like. They certainly remember the down payment and
closing costs and getting the keys to the home handed over to them. It’s pretty
exciting. If these thoughts are swirling in your head, ask these questions to
see if they can push you across the goal line.
You’ll need money for a down payment, closing costs and cash
reserves. There are a couple of loans that don’t require a down payment, VA and
USDA loans, but those are either reserved for certain buyers or the property is
located in a rural area. Otherwise, you’ll need a down payment. There are some
conventional loans that ask for a down payment of as low as 3.0 percent and FHA
loans only need a 3.5 percent down payment. All loans need closing costs to pay
for various services from third party vendors. From an appraisal to title
insurance, there are fees. Your loan officer can provide a loan cost estimate
based upon request. Cash reserves are identified as the number of months’ worth
of house payments are left over in the bank after the loan has closed.
That’s a combination of current market rates, the term of your
loan, your gross monthly income and current monthly credit obligations. A good
estimate can be had by taking about one-third of your gross monthly income.
That gives your lender an idea of what you can qualify for as it relates to
monthly payment. Then, using current rates, apply that payment to calculate a
qualifying loan amount. This is an estimate, but your loan officer will figure
this for you.
This is something that many first time buyers don’t take into
consideration. When you rent and the hot water heater goes out, it’s a call to
the property manager or landlord who comes and fixes it for you. You don’t have
to pay for it, it’s part of your lease agreement. The hot water heater belongs
to the owner of the property who is responsible for keeping it in shape. When
you own a home and the hot water heater goes out, it’s you that has to come up
with the funds to fix it. Your agent will also recommend that you have the
property inspected by a licensed home inspector. You’ll get a report on the
overall condition of your property as well as the condition of appliances.
This is largely based upon how much you can qualify for. When
your loan officer provides you with a preapproval and telling you how much you
can finance, your agent then locates different areas of town that fits into
your budget. Professional agents know the demographics and home values in all
areas of town, some you may not even know about. Most buyers want to buy in an
area that is close to work with an easy commute. Still others like the urban
lifestyle and live in a high-rise condo downtown.
Yes, you really need an agent. Don’t try to find a home and
negotiate a price on your own. You’ll be dealing with another agent who excels
at negotiations. You need someone with the same skills on your side. And one
other thing, you won’t need to pay for your agent’s services, the sellers take
care of that.
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One of the biggest challenges, if not the biggest challenge, is
coming up with the money for a down payment on a home. Even if someone is
taking advantage of the new conventional 3.0 percent down program or the FHA
mortgage, most every loan requires some sort of a down payment. While 3.0
percent doesn’t sound like a whole lot, if you’re buying your first home it
usually is. On a $250,000 home, that comes out to $7,500. That’s not even
mentioning closing costs. But there are sources for down payment funds that
might sometimes be overlooked.
Okay, this is the obvious source. From a checking or a savings
account, accessing readily available cash from a bank account is the most
common. Consumers can save up a little each month until the minimum amount of
funds needed have accrued. The lender will ask for copies of the most recent
bank statements showing available funds as well as documenting the source of
those funds. Most often the deposits are from an employer via direct deposit.
Self-employed borrowers who do not receive a regular paycheck on the 1st and
15th will be asked to provide business bank statements as well.
There are those fortunate few who do receive a financial gift
from a family member. Gift funds must also be tracked to make sure the funds
are coming from an acceptable source. Gift funds can come from a family member,
relative, or someone in a committed relationship. Lenders want to make sure the
gift funds aren’t a loan that must be paid back at some point in the future.
There needs to be a signed “gift letter” included with the loan file stating
the amount of the gift, the donor’s name and where the funds are coming from.
Lenders won’t ask for bank statements from the donor, but do want to know the
funds came from an account in the donor’s name.
If someone has a retirement account with an employer such as a
401(k), that person can take out a loan against the fund. This is allowable per
lending guidelines but is also subject to the employer’s approval. Most
retirement funds allow for someone to borrow up to one-half of the employee’s
vested balance in the account. With an IRA, first time buyers can withdraw up
to $10,000 without penalty. The withdrawal will still be subject to any income
If someone owns something that can be appraised by an
independent third party, the proceeds when selling that asset are an acceptable
source. Selling an automobile is acceptable, for instance because it has an
appraised value. Even a highly prized baseball card is an appraisable asset.
It’s important to document the transaction from the initial sale to the deposit
in the account.
Down payment assistance programs are typically overseen and/or
issued by a county or state agency. Such programs typically require the
borrowers’ gross monthly income to not exceed certain limits and are often
available to first time buyers. These programs can also be geographically
targeted to help low to moderate income communities flourish. Down payment
assistance can come in the form of a grant, which means there is no repayment
required, or a loan which can be forgiven after living in the property for a
certain period of time, typically three years or more.
Ever wonder how people achieve high credit scores? 750? 790?
800+? It’s not fantasy but there are those who are both dedicated to building a
pristine credit file or simply pay their bills on time and their scores
gradually rise. But getting these high numbers is no accident. There’s a method
to all this and if you’re wanting to get your scores in the stratosphere or
just want to improve your current credit standing, there is a roadmap for you
You must first understand how these three digit scores are
calculated. Scores range from as low as 300 to as high as 850. Although I’ve
never seen any score as low as 300 or as high as the perfect 850. Personally, I
think either is impossible to achieve. That said, those with excellent credit
didn’t get those scores by accident. Credit scores assign values to five
different credit patterns. Those are:
• Payment History
• Length of Credit History
• Types of Credit Used
• Credit Inquiries
Payment History is listed first because it has the greatest
impact on a score. This one category alone makes up 35% of your total score.
This makes sense because this is the one single measure of someone uses and
manages credit. A consumer credit report won’t list when account payments were
made but will list when a payment is made more than 30, 60 and 90 days past the
due date. As long as a credit account payment was made before 30 days, the
score won’t be negatively impacted, and scores will gradually improve. Note, if
someone makes a monthly payment say 20 days past the due date, while it won’t
impact the score the consumer will likely pay some sort of late payment fee to
the creditor. If a payment is made more than 30 days past the due date, scores
will begin to falter. More so if a payment is made more than 60 and then 90
days past the due date.
The second most important category is credit utilization. Some
may think that carrying a zero balance and leaving the account alone that way
is a good way to increase credit scores. That’s not the case at all. And if you
think about it, how would any algorithm calculate a credit score if there is no
activity, right? Utilization accounts for 30% of the total score. There should
also be a running balance instead of paying off the credit account to zero each
month. Most creditors report payments at different times so carrying a balance
is typically an automatic. However, scores do improve is the running balance is
approximately one-third of the total credit line.
How long someone has used credit also contributes to the total
score. If someone has used credit for a long time, that counts more toward a
score compared to someone brand new to the credit world. Even if someone with a
history and a credit newbie have perfect credit histories, the person who has
used credit responsibly over a longer period of time will be rewarded. This
category represents 15% of the total score.
Finally, using different types of credit accounts helps out. A
car loan, credit card and installment accounts are a good mix and accounts for
10% of the total score. Recent credit inquiries also make up the final 10% of
the score. Credit inquiries are those when an individual makes multiple
requests for new credit accounts within a relatively short period of time. One
of two recent inquiries won’t do much harm but more than that can.
How consumers achieve high credit scores means concentrating on
the first two, payment history and utilization. These two alone make up nearly
two-thirds of the total score. By paying attention to payment history and
keeping a running balance near the magic mark, scores can and will begin to
rise from any level.
FHA. 30-year conventional. 15-year term. With so many loan
options out there, how do you know which is best? There is not one
across-the-board winner because everyone’s situation is different. But there
are pros and cons of each that might make one loan work better for you. We’re
comparing and contrasting some of the most popular options to help you make the
best choice when buying a house.
This is a 30-year loan with rates that are fixed every month.
These loans follow Fannie Mae and Freddie Mac guidelines and are not backed by
the government like FHA loans.
Pro: With set payments,
there’s no need to worry about rising rates. Loans are available for a range of
buyers, with options like HomeReady and Conventional 97 that
offer as little as 3% down. Also, there is no upfront mortgage insurance fee
like you have on FHA loans.
Con: You have to pay
PMI if you put less than 20% down. There also may be higher credit score
requirements than FHA loans.
A 15-year fixed-rate option also has fixed rates for the life of
the loan. If you’re the type who wants to pay your home off more quickly, this
could be a good choice.
Pro: You pay far less
interest over the life of the loan and pay off your home in half the
Con: Monthly payments
FHA loans are federally insured, which is why down payment and
credit score requirements are more relaxed.
Pro: FHA loans require
as little as 3.5% down. Credit score requirements are also lower than
conventional loans. You can typically qualify for a loan with a 3.5% down
payment at a 580 score, and may be able to get a loan with a score as low as
500 if you have 10% down.
Con: You’ll have to pay
mortgage interest, which you can’t get rid of unless you refinance. FHA loans
also come with an upfront mortgage insurance fee.
“An adjustable-rate mortgage (ARM) is a type of mortgage in
which the interest rate applied on the outstanding balance varies throughout
the life of the loan,” said Investopedia. “Normally,
the initial interest rate is fixed for a period of time, after which it resets
periodically, often every year or even monthly. The interest rate resets based
on a benchmark or
index plus an additional spread, called an ARM margin.”
Pro: Rates are often
lower during the introductory or fixed period than what a borrower can get with
a fixed-rate loan, making homeownership more affordable initially.
Con: Once the ARM gets past
the fixed period, monthly payments can skyrocket, leaving owners unprepared and
possibly in danger of defaulting.
Looking to buy in a rural area? You may qualify for a USDA loan.
USDA-eligible homes may also be located in some suburban areas. You can check
eligibility on their website.
Pros: USDA loans offer
low or even no down payments and low interest rates. Rates can be as low as 1%
with subsidies on direct loans.
Cons: Household income
is capped and a mortgage insurance premium is required for down
payments under 20%.
Veterans Administration (VA) loans help military members
and veterans purchase homes.
Pro: VA loans tend to
have the lowest average interest rates, and loans are available with no down
payment. In addition, there is “no monthly mortgage insurance premiums or PMI
to pay,” according to VAloans.com.
Con: They’re not
available to the general public, and veterans must meet a list of
is escrow? In real estate, an escrow account is a secure holding
area where important items (e.g., the earnest money check
and contracts) are kept safe by an escrow company until the deal is closed and
the house officially changes hands. Escrow is also a contractual arrangement in
which a third party—usually the escrow officer—maintains money and documents
until the deal is done and escrow is closed.
agent is a third party—perhaps someone from the real estate closing company,
an attorney, or a title company agent (customs vary by state), says Andy Prasky, a real estate professional with
Re/Max Advantage Plus in Twin Cities.
party is there to make sure everything during the transaction proceeds
smoothly, including the transfers of money and documents, and to hold assets
safely in an escrow account until disbursement.
protects all of the relevant parties in a real estate transaction, including
the seller, the home buyer, and the lender, by ensuring that no escrow funds
from your lender and other property change hands until all of the conditions in
the agreement have been met. Along the way, proper documentation is filed with
the escrow agent or the escrow company as each step toward closing is
that might be part of the process could include home inspection, repairs,
mortgage approval, and other tasks that need to be accomplished by the buyer or
seller. And every time one of those steps is completed, the buyer or seller
signs off with a contingency release form; then the transaction moves to the
next step (and one step closer to closing).
conditions are met and the transaction is finalized, the closing costs are paid
and the money due to the sellers is disbursed from your lender. Meanwhile an
escrow officer clears (or records) the title, which means the buyer officially
owns the home.
varies—as well as whether the buyer or the seller (or both) pays—with the fee
for this real estate service typically totaling about 1% to 2% of the cost of
money—also known as an escrow deposit—is a dollar amount buyers put into
an escrow account after a seller accepts their offer. The escrow company holds
the money in an escrow account for the duration of the transaction.
to think of it is as a "good-faith” deposit into an escrow account, which
will compensate the seller if the buyer breaches the contract and fails to
buyers come up with cash for escrow and deposit it into the escrow account from
their own funds. The payment amount is small compared with the cost of the home
and the loan, and the home buyers may not even have a mortgage lender yet when
they make an offer on a home.
earnest money can be borrowed from your lender, but there are certain rules
involved. First-time buyers are most likely to need to go to their mortgage lender
to make this escrow account deposit. Your lender will ultimately count the
deposit toward closing costs and the down payment on the house.
seem like a pain, but here's how it can work in your favor. Let's say, for
example, the buyer had a home inspection contingency and discovered that
the roof needed repairs. The seller agrees to fix the roof. However,
during the buyer's final walk-through, she finds that the roof hasn’t been
repaired as expected. In this case, the seller won’t see a dime of the buyer’s
money until the roof is fixed. Talk about a nice safeguard!
benefit from escrow, too: Let's say the buyers get cold feet at
the last minute and bail on the transaction. This may be disappointing to
the seller, but at the very least, buyers have typically ponied up a
sizable chunk of change for their earnest money
deposit. This money, often totaling 1% to 2% of the purchase price
of a home, has been held in escrow. When buyers back out with no legitimate
reason, they forfeit that money to the seller—a decent consolation for the
sale's failure and the expense of making mortgage payments and other expenses
while the home was off the market.
other words, is the equivalent of bumpers on cars, keeping everyone safe as
they move forward in a real estate transaction. Odds are, no one's trying to
swindle anyone. But isn't it nice to know that if something does go wrong,
escrow is there to cushion the blow?
homeowner makes monthly payments to the mortgage servicer, part of each payment
goes toward the mortgage and part of it goes into an escrow account for payment
of property taxes and insurance premiums such as homeowners insurance or
mortgage insurance. When those bills are due, the escrow service uses the funds
in the escrow account to make payment to your insurance company and to the
county for property taxes.
If more money
accumulates in your escrow account from monthly payments than is necessary to
pay property taxes and insurance, the mortgage company sends you a refund
check, and may lower your monthly mortgage payment. On the other hand, if
insurance premiums and property tax expenses go up, your mortgage holder may
send you a bill for the difference, or raise your monthly loan payments.
you prepay your mortgage? For some homeowners
it’s a financially savvy move—but for others, beefing up their loan payments
just doesn’t make sense. To help you figure out whether prepayment is right for
you, here are the pros and cons cited by financial experts.
is the extra fee you pay your lender for loaning you the cash you needed to buy
a home. After all, lenders don’t just hand out dough for free—they’re in the
business to make money.
increasing your monthly mortgage payments—also called “prepaying” your
mortgage—you’ll effectively save money in interest charges. Those savings can
add up big-time.
example, let’s say you take out a $200,000 mortgage with a 4% fixed interest
rate and a 30-year term. If you continue to make your minimum monthly payments,
you’d be forking over $143,739 in interest over 30 years until the debt is paid
off. But, by paying an extra $100 per month, you’d pay only $116,702 in
interest over a 25-year time span—a savings of $27,037.
accelerating your mortgage payments, you’ll also be shortening how
long it takes to pay off the loan, which would increase your cash flow in the future. That’s a
huge incentive for some borrowers.
families with young children, where the parents are concerned about paying for
their children’s college tuition, sometimes we will recommend they increase
mortgage payments so that when their kids head off to college their mortgage
obligation is gone,” says Joe
Pitzl, a certified financial planner for Pitzl Financial, in
Arden Hills, MN.
more money each month toward your mortgage’s principal can also give you peace
of mind, says Marguerita
Cheng, a certified financial planner at Blue Ocean Global
Wealth in Gaithersburg, MD.
it’s gratifying knowing that you’re paying your mortgage sooner than you
originally planned to do,” Cheng says.
matter how much money you put down on your mortgage, your home equity is the
value of your home minus the amount you owe on your loan. So say your home is
worth $250,000 and your mortgage balance is $200,000. In this case, you’d have
$50,000, or 20%, in home equity.
larger mortgage payments toward your loan's principal would enable you to build
equity faster. Having more home equity can be a tremendous boon if you’re
looking to get a home
equity loan or home
equity line of credit, such as to pay for home improvements, says Tendayi Kapfidze,
chief economist at Lending Tree.
that you have less debt—and that you manage your debts responsibly, by paying
your mortgage off early—can raise
your credit score. That can help if you’re planning to apply for a car loan or a
second mortgage on a vacation home, since your credit score would affect the
interest rate you qualify for.
prepaying your mortgage reduces your mortgage interest, it may not make sense
from a tax-savings perspective. Mortgages are structured so that you start off
paying more interest than principal.
example, in the first year of a $300,000, 30-year loan at a fixed 4% interest rate,
you'd be deducting $10,920. (To find out how much you paid in mortgage interest
last year, punch your numbers into our online
taking a mortgage interest deduction under the new tax law requires itemizing
itemizing may no longer make sense for many homeowners, since the standard
deduction jumped under the new tax plan to $12,200 for individuals, $18,350 for
heads of household, and $24,400 for married couples filing jointly.
thing to consider: In the past, you could deduct the interest from up to $1
million in mortgage debt (or $500,000 if you filed singly). However, for loans
taken out from December 15, 2017, onward, only the interest on the first
$750,000 of mortgage debt is deductible, says William L. Hughes, a
certified public accountant in Stuart, FL.
dollar you put toward your mortgage principal is a dollar you can’t invest in
higher-yield ventures, such as stocks, high-yield bonds, or real estate investment
being said, “you’d be assuming more risk by investing your money in, say, the
stock market instead of putting the money toward your mortgage,” Pitzl points
have to consider your risk tolerance before you decide where to put your extra
cash,” says Cheng.
many homeowners, paying off higher-interest debt—such as from a credit card or
private student loan—is more important than prepaying their mortgage, Cheng
about it: If you’re carrying a $400 debt on a credit card from month to month
with a 20% interest rate, the amount of money you’re paying in credit card
interest is $80 per month—that would be leaps and bounds higher than what you’d
be paying in mortgage interest on a home loan with a 4% interest rate.
retirement savings is crucial, of course. However, some people make the
mistake of prepaying their mortgage instead of maxing out their retirement
contributions, Cheng laments.
the bare minimum, I recommend my clients do a full 401(k) match with their
employer,” she says.
Pitzl encourages people to build a sufficient emergency fund—typically, a fund
large enough to cover three to six months of their essential expenses—before
they focus on prepaying their mortgage.
you get into a bind, you can’t sell off windows and doors to make ends meet,”
lenders charge a fee if a client’s mortgage is paid in full before the loan
term ends. That’s why it’s important to check with your mortgage lender—or look
for the term “prepayment disclosure” in your mortgage agreement—to see if
there’s a penalty and, if so, how much it is.
bottom line: If you don't have enough money to pad your savings before you
begin paying off your mortgage early, prepaying your home loan may put you in a
financial hole if an emergency crops up.
not sure what direction to go in? Consider sitting down with a financial
planner to discuss your options based on your personal finances.
you're hoping to score a deal while house hunting (and who isn't?), one
bargain-basement option well worth exploring is a HUD home. So what is that
exactly? Simply put, a HUD home is a property owned by the U.S. Department of
Housing and Urban Development, but there's some backstory here, so allow us to
Long before a
home becomes the property of HUD, it typically was owned by a regular homeowner
who'd made this purchase with an FHA loan. Federal Housing Administration loans are easier to
qualify for than a conventional loan because the FHA requires a low down
payment (as little as 3.5%). However, if the owner ends up unable to pay his
monthly mortgage, he ends up in foreclosure on the FHA loan, which means the home goes to
HUD, which then must figure out how to unload this real estate and make back
you come in! The process of buying a foreclosed HUD home varies from a
conventional sale in a couple of ways, so here's what you'll want to know
before you venture down the HUD real estate path.
want to own these foreclosed homes any longer than it needs to, so these homes
are priced to move, often below market value. Plus, the
government agency offers special incentives to buyers in certain markets to
sweeten the deal on a HUD-owned home.
the HUD “Good Neighbor” program offers
HUD homes in revitalizing areas at a 50% discount to community workers (e.g.,
teachers, police officers, firefighters, and EMS personnel) who plan to live in
the property for at least 36 months.
perks: low down-payment requirements or sales allowances you can use to pay
closing costs or make repairs on the HUD home—not to mention, FHA financing
options. So be sure to inquire with your real estate agent about the unique
home-buying possibilities; the HUD route could be an even better bargain than
how it first seems.
for home buyers is that HUD gives preference to owner-occupants who intend to
live in the home for at least one year, so odds are good you'll beat out
investors to boot. Another HUD win!
aren't listed on conventional real estate websites, and can instead be found at hudhomestore.com, where you can shop for HUD
properties by state or ZIP code. You never know what you might find in a HUD
search, in what location, and at what price. HUD listings typically contain
photos, an asking price, and—here's where things get different—a deadline by
which you should submit your offer.
HUD homes are
sold through an auction process: Once the HUD listing period deadline is past
and bids are in, HUD reviews its options. If none of the bids is deemed
acceptable (usually because it's too low), HUD extends the offer period and/or
lowers the asking pricing until a match is made.
are considered, but in almost every case, the highest acceptable bid wins, says Mark
Abdel, a real estate professional with Re/Max Advantage Plus in
the question: How much should a hopeful buyer offer on a HUD listing? Well,
that all depends on how hot the local market is and the condition of the home
(more on that next).
HUD homes are
sold as is—meaning what you see is what you get. If the leaky roof or
electrical needs repairs, it's all on you, the prepared home buyer, to cover
the costs. And if you're aiming to be an owner-occupant, you'll likely want to
square away any renovations quickly. That’s why it’s critical to get a home inspection before
you put your bid in.
home inspection will alert you to what types of repairs or improvements need to
be made, which you should factor into your bid accordingly,” advises Abdel.
That’s not to
say that HUD homes always sit in disrepair and fall into the fixer-upper
category. Each one, once HUD takes it over, is assigned a field service
manager, who keeps a watchful eye on the home to make sure it’s secure and
provides maintenance while the home is unoccupied.
The HUD field
service manager may even oversee cosmetic enhancements or repairs, depending on
the home’s condition, before the bidding process begins. Some HUD homes are
even move-in ready, so never presume you'll end up with a clunker; you could
easily be a lucky HUD buyer!
All financing options are available for HUD
homes, including FHA, VA, and conventional financing. If you’re
buying a HUD home that needs repairs, check out a FHA 203k loan, which
can allow you to include the renovation costs in the loan.
estate agent can help you determine what programs—FHA, VA, and additional
assistance options—you might be eligible for; and your lender may even offer
some creative suggestions.
order to represent you in your bid for a HUD home, your real estate agent must
be HUD-approved. Many are, so ask your Realtor® or else you can specifically
search for HUD-registered agents at hudhomestore.com.
The homebuying process
is full of acronyms and if you're unfamiliar with them, it can be hard to
understand what you're agreeing to.
PMI, APR, LTV… say what? Don't stress
when you hear acronyms you don't recognize – we're here to help! Let's get
started with some of the most important acronyms and their definitions, so you
can sound like a pro as you go through the homebuying process.
Percentage Rate): The annual percentage
rate tells you the annual cost of borrowing money based on the loan amount
interest rate, and certain others fees. The APR is the bottom-line number you can use
to shop and compare rates among lenders.
Mortgage): A fixed-rate mortgage has an interest rate
that does not change during the entire term of your loan. This is the most
common type of mortgage, giving you certainty and stability over the life of
Mortgage): A adjustable-rate mortgage usually give you
lower monthly payments at the onset, but over time your payments will change
with interest rates. With this type of mortgage your interest rate adjusts
after an initial period — typically 3, 5 or 7 years — and resets periodically.
LTV (Loan-to-Value): The loan-to-value
ratio divides the amount of money borrowed by the appraised value of the home
and tells you how much of your home you own versus how much you owe on your
mortgage. Lenders use it to help evaluate the risk and terms of your loan.
DTI (Debt-to-Income): The debt-to-income
is the percentage of your monthly income that goes toward your monthly debt
payments. Lenders typically use this to measure your ability to manage monthly
payments and repay debts.
Mortgage Insurance): Private mortgage insurance is an
insurance that protects lenders from losses if a homeowner is unable to pay
their mortgage. It is required for homebuyers who make down payments that are
less than 20% of the home purchase price. Typically, PMI will be incorporated
into your monthly mortgage payment.
and Interest): Principal and interest are the portion of your monthly
mortgage payment that goes toward paying off the money you borrowed to buy your
home. For most homeowners your principal and interest make up the majority of
your monthly mortgage payment — but not all of it.
PITI (Principal, Interest, Taxes and
Insurance): Together, principal, interest, taxes and insurance make
up your total monthly mortgage payment. Calculating your total monthly payment,
not just principal and interest, is an essential part of the loan approval
process because it will give you a more accurate picture of the costs of homeownership.
Principal Balance): The unpaid principal balance is the
amount of principal still owed on a loan. On a typical monthly mortgage
payment, a portion of your payment is applied to the interest and a portion is
applied to the principal. The following month's interest is based on your UPB.
You can check how much how much of your payment is going towards your principal
by looking at your amortization schedule.
Association): 20% of America's homeowners that live
within a community governed by a Homeowners Association. If you are considering
buying in one of these communities, it's important that you pay your fees as
scheduled – typically monthly, quarterly, or annually. HOA fees vary from
community to community and may cover services such as trash removal, lawn care
and maintenance for common areas, pest control.
Words matter! Learn your homebuying lingo now so that when it's
time buy a home you can talk with confidence about one of the most important
investments you'll ever make. To learn more about the homebuying process
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An FHA loan
is a government-backed mortgage insured by the Federal Housing Administration,
or FHA for short. Popular with first-time homebuyers, FHA home loans require
lower minimum credit scores and down payments than many conventional loans.
Although the government insures the loans, they are offered by FHA-approved
come in fixed-rate terms of 15 and 30 years.
FHA loans work
flexible underwriting standards allow borrowers who may not have pristine
credit or high incomes and cash savings the opportunity to become homeowners.
But there’s a catch: borrowers must pay FHA mortgage insurance. This coverage protects
the lender from a loss if you default on the loan.
insurance is required on most loans when borrowers put down less than 20
percent. All FHA loans require the borrower to pay two mortgage insurance
Upfront mortgage insurance premium: 1.75
percent of the loan amount, paid when the borrower gets the loan. The
premium can be rolled into the financed loan amount.
Annual mortgage insurance premium: 0.45
percent to 1.05 percent, depending on the loan term (15 years vs. 30
years), the loan amount and the initial loan-to-value ratio, or LTV. This
premium amount is divided by 12 and paid monthly.
So, if you
borrow $150,000, your upfront mortgage insurance premium would be $2,625 and
your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25
per month), depending on the term.
insurance premiums cannot be canceled in most instances. The only way to get
rid of the premiums is to refinance into a non-FHA loan or to sell your home.
FHA loans tend to be popular with first-time homebuyers, as well as those with
low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as
they use it to buy a primary residence.
are limited to charging no more than 3 percent to 5 percent of the loan amount
in closing costs.
The FHA allows home sellers, builders and lenders to pay up to 6 percent of the
borrower’s closing costs, such as fees for an appraisal, credit report or title
to qualify for an FHA loan
eligible for an FHA loan, borrowers must meet the following lending guidelines:
FICO score of 500 to 579 with 10 percent
down or a FICO score of 580 or higher with 3.5 percent down.
Verifiable employment history for the
last two years.
Income is verifiable through pay stubs,
federal tax returns and bank statements.
Loan is used for a primary residence.
Property is appraised by an FHA-approved
appraiser and meets HUD property guidelines.
Your front-end debt ratio (monthly
mortgage payments) should not exceed 31 percent of your gross monthly
income. Lenders may allow a ratio up to 40 percent in some cases.
Your back-end debt ratio (mortgage, plus
all monthly debt payments) should not exceed 43 percent of your gross
monthly income. Lenders may allow a ratio up to 50 percent in some cases.
If you experienced a bankruptcy, you
must wait 12 months to two years to apply, and three years for a
foreclosure. Lenders may make exceptions on waiting periods for borrowers
with extenuating circumstances.
vs. conventional loans
loans, conventional loans are not insured by the government. Qualifying for a
conventional mortgage requires a higher credit score, solid income and a down
payment of at least 3 percent for certain loan programs. Here’s a side-by-side
comparison of the two types of loans.
loans vs. conventional mortgages
3% to 20%
for credit scores of 580+; 10% for credit scores of 500-579
15, 20, 30 years
or 30 years
0.5% to 1% of the loan amount per year
premium: 1.75% of the loan amount; annual premium: 0.45% to 1.05%
rate, fixed rate
of FHA loans
to its popular FHA loan, the FHA also insures other loan programs offered by
private lenders. Here’s a look at each of them.
FHA 203(k) loans —
These FHA loans help homebuyers purchase a home — and renovate it — all with a
single mortgage. Homeowners can also use the program to refinance their
existing mortgage and add the cost of remodeling projects into the new loan.
FHA 203(k) loans come in two types:
203(k) has an easier application process, and the repairs
or improvements must total $35,000 or less.
203(k) requires additional paperwork and applies to
improvements costing more than $5,000, but the total value of the property
must still fall within the FHA mortgage limit for the area.
Conversion Mortgage, or HECM — A HECM is the most popular type
of reverse mortgage and is also insured by the FHA. A HECM allows older
homeowners (aged 62 and up) with significant equity or those who own their
homes outright to withdraw a portion of their home’s equity. The amount that
will be available for withdrawal varies by borrower and depends on the age of
the youngest borrower or eligible non-borrowing spouse, current interest rates
and the lesser of the home’s appraised value or the HECM FHA mortgage limit or
Efficient Mortgage (EEM) program — Energy efficient mortgages
backed by the FHA allow homebuyers to purchase homes that are already energy
efficient, such as EnergyStar-certified buildings. Or they
can be used to buy and remodel older homes with energy-efficient, or “green,”
updates and roll the costs of the upgrades into the loan without a larger down
FHA Section 245(a) loan — Also
known as the Graduated Payment Mortgage, this program is geared at borrowers
whose incomes will increase over time. You start out with smaller monthly
payments that gradually go up. Five specific plans are available: three plans
that allow five years of increasing payments at 2.5 percent, 5 percent and 7.5
percent annually. Two other plans set payment increases over 10 years at 2
percent and 3 percent annually.
to find FHA lenders
their home loans from FHA-approved lenders rather than the
FHA, which only insures the loans. FHA-approved lenders can have different
rates and costs, even for the same loan.
FHA loans are
available through many sources — from the biggest banks and credit unions to
community banks and independent mortgage lenders. Costs, services and
underwriting standards vary among lenders or mortgage brokers, so it’s
important to shop around.
about how to find the best FHA
loan limits for 2019
For 2019, the
floor limit for FHA loans in most of the country is $314,827, up from $294,515
in 2018. For high-cost areas, the ceiling is $726,525, up from $679,650 a year
ago. These limits are referred to as “ceilings” and “floors” that FHA will
insure. FHA updates limit amounts each year in response to changing home
required by law to adjust its amounts based on the loan limits set by the
Federal Housing Finance Agency, or FHFA, for conventional mortgages guaranteed
or owned by Fannie Mae and Freddie Mac. Ceiling and floor limits vary according
to the cost of living in a certain area, and can be different from one county
to the next. Areas with a higher cost of living will have higher limits, and
vice versa. Special exceptions are made for housing in Alaska, Hawaii, Guam and
the Virgin Islands, where home construction is more expensive.
servicers can offer some flexibility on FHA loan requirements to those who have
suffered a serious financial hardship or are struggling to make their payments.
might be in the form of a temporary period of forbearance,
a loan modification that would lower the interest rate, extend the payback period,
or defer part of the loan balance at no interest.
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It’s a question
homeowners ask when interest rates tumble: Should I refinance my home mortgage
or stick with the loan I have?
While a home
refinance may ultimately be a smart financial move, a number of questions must
be considered first that will help evaluate your specific situation.
Here are some
of the top questions to keep in mind:
I lock in a fixed interest rate or lower my interest rate?
Locking in a
fixed or lower interest rate or lower payment are good reasons to refinance.
with a variable rate mortgage, for example, might want to refinance to a fixed
rate loan to avoid higher payments if rates rise. With fixed rate loans, the
monthly payment stays the same for the life of the mortgage. Snagging a lower
interest rate that results in savings on your monthly mortgage cost might also
make refinancing a good option.
lenders will offer a selection of refinance loan types and can lock in a rate
once the borrower is ready to apply,” said John Cabell, director of wealth and
lending intelligence for J.D. Power. “The exact monthly payment may be hard to
pin down until all transaction fees are finalized, and sometimes those details
are not finalized until closing.”
I lower my total interest expense?
total interest over the term of a new loan compared with the remaining term on
an existing loan can be another good reason to refinance. However, in some
cases switching to a mortgage with a lower rate but a longer term could result
in you paying more interest over the life of the loan despite having a smaller
Bankrate’s refinance calculator can help you
do the math.
I have enough equity?
If your home
is worth more than you owe on your existing mortgage, you’re in a much better
position to refinance than if you have no equity.
A home with a
lot of equity built up will have a lower loan-to-value ratio (LTV), which banks
prefer as it makes the loan less risky. An LTV of 80 percent or less also
eliminates the need for private mortgage insurance. It also makes it
easier to refinance for a larger amount than your existing mortgage, known as a
cash-out refinance. Funds raised in a cash-out can be used to pay down debt,
fund home improvements or help with college costs.
nearby home sales and speaking with a local realtor, you may be able to get a
general idea on the value of the home,” said Sherry Graziano, senior vice
president and mortgage transformation officer at SunTrust. “You can then
compare that to what you still owe on your mortgage to see what equity you have
built. If it’s too little, it may not be worth refinancing and may not meet the
my credit score high enough?
If you have a
good history of making your mortgage payments and paying your other bills on
time, you’re in a much better position to refinance than if you’ve made some
late payments or missed any payments that hurt your credit rating.
score will affect your eligibility for loans and low interest rates,” said
Cabell. “Knowing your score before applying for a refinance and building a good
score over time are important for ensuring you have the most financial
should be able to tell you up front whether you’re qualified for specific
refinance offers based on your credit score.
much will I pay in closing costs?
It may not
make sense to pay points and closing costs to refinance even if you could lower
your interest rate, payment or total interest expense.
the amount of closing costs you’re willing to pay should not exceed the
financial benefits of the lower refinance interest rate,” said Cabell. “That
fact requires validating before you commit to the transaction, though, so
consumers should make sure the lender provides assurance in writing.”
A rule of
thumb is to calculate how many months it will take to recoup your closing
costs. Let’s say your closing costs are $3,000 and your monthly savings are
$125 after the refinance. It would take you 24 months to breakeven and start
enjoying the cost savings of the lower interest rate on the new mortgage.
worth noting that some lenders offer a no-cost option that lets you get the benefits of refinancing at a higher
interest rate without paying any costs. This typically comes with a higher
interest rate, however.
long do I plan to own my home?
factor to consider before embarking on a home refinance is how long you expect
to own the property. If you’re planning to move within a few years, refinancing
may not make sense, even if you could get a lower interest rate.
There might not be enough time to offset your closing costs, despite a lower
borrower is considering selling the property within the next few months or
couple of years, it may not be advisable to refinance since the borrower may
not recoup the upfront fees and interest over such a short timeframe,” said
On the other
hand, you may be able to lower the upfront costs if you’re willing to accept a
slightly higher interest rate. But that could mean that it wouldn’t make sense
for you to refinance.
costs are involved in a refinance?
can cost hundreds or thousands of dollars, depending on the loan amount, the
type of loan, the region of the country where the property is located and other
include an appraisal fee, credit report, title insurance and closing or
“The cost to
refinance will depend on the lender and associated third parties, so it pays to
understand those cost obligations before committing,” said Cabell.
Reasons to refinance a home
rates are at historical lows, doesn’t mean refinancing is the right decision
should have a clear financial objective and see refinancing as one of a
multitude of options to achieve that objective,” said Graziano, who outlined
the following key reasons one might want to refinance.
To alter the terms of the
loan by shortening or lengthening the life of the loan
To take advantage of a lower
interest rate, resulting in lower monthly payments and paying less total
interest over the term of a new loan.
To replace an
adjustable-rate mortgage with a fixed-rate mortgage
To consolidate debt or to
finance educational expenses or home improvement projects
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