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Mortgage Process

Mortgage Process Steps

Approved Loan

The mortgage industry is a significant part of the US economy and is one of the biggest in the world. The mortgage rates are at an all-time low of 3.08% as of March 2021, spurring many home buyers. However, the mortgage process is quite daunting, especially for a first-time buyer. It is not always that you enter into debt with that many zeros.

A proper understanding of the mortgage loan process increases the chances of approval. Not only that, but it also helps you ask the right question. The process follows the following distinct steps including:

  • Budget Estimation
  • Pre-approval
  • House Hunting
  • Mortgage Application
  • Underwriting
  • Closing

In this article, we take you through the mortgage loan process in detail from budgeting to closing.

The Process of Getting a Mortgage

A mortgage is a type of loan used to finance a property, the latter being the collateral. It is generally a secured loan where the lender holds your property in collateral until the loan is paid in full.

The mortgage process itself starts with the borrowers applying with one or more lenders. The latter requires proof of the borrower’s repaying capability, including bank statements, tax returns, and employment proof. Furthermore, the lender will also run a credit check as a part of the loan approval process.

Once the loan is approved, the lender offers a preapproved amount at a specific interest rate. Buyers also have the option of applying for the loan before buying a home called preapproval. This gives you an edge in a tight property market.

Once the buyer, seller, and the lender agree, they come together for a closing meeting. At this point, the buyer makes the down payment to the mortgage lender. The seller then transfers the ownership to the buyer and receives the purchase price.

What Is the First Step in Getting a Mortgage?

The first step in any mortgage process is research. As with any significant financial decision, take time out to research the market. First, list the properties and the neighborhoods you like, followed by the asking prices. Next, see how long the houses stay in the market. This gives you an idea about the housing trend of the region.

Furthermore, take time to understand the process and the steps involved. That way, you know what to expect and get everything ready from your end.

15 Steps of a Mortgage Loan Process

Buying a new home is a big step yet exciting phase for everyone involved. However, the all too important mortgage can be overwhelming. Understanding the process and the technicalities can help you make the right decisions. Moreover, it also helps you to stay organized and be in control.

1. Prepare Your Budget

It is safer to kick off the mortgage loan process with a budget estimation. In many ways, that helps you to set realistic expectations not only with the house but also the mortgage.

Your purchase price should be three to five times the annual household income as a rule of thumb. This excludes the 20% down payment. Also, take into consideration your debt and financial situation.

Alternatively, you can also calculate the maximum monthly mortgage payment you can afford. Then work backward towards the maximum house price you can afford. According to the US Census Bureau’s 2019 American Housing Survey, the median monthly mortgage payment is $1200.

The mortgage payments include the principal, interest, and the homeowner’s insurance. When you focus on the monthly payment, your budget will account for all the ongoing costs.

2. Get Your Finances in Order

Mortgage Process - Get Your Finances in Order

With the budget ready, assess your finances to see if you are ready to buy a new house? Have you saved enough for a down payment and closing costs? What about your debts? And get ready to have your financials probed.

Buying a home is the most significant financial investment of your lifetime. So, it’s no wonder your lender goes through your financials with a fine-toothed comb. They are wary of substantial debts like student loans and car loans. If you are laden with debt, you may want to take a step back and improve your financial health.

Another point to note is the credit score. Lenders scrutinize your credit history for any cases of discrepancies. The minimum credit score requirement for home loans ranges between 580-620. A higher credit score warrants a better interest rate.

To improve your credit score:

  • Pay outstanding debts
  • Do not open new accounts
  • Avoid too many credit inquiries
  • Dispute errors in your credit report (if possible)

The final point to note is the debt to income ratio. It is a measure of your debt (credit card, car loan, personal loan, and student loan) and your income. A low debt to income ratio increases your chances of loan approval.

3. Choose the Right Mortgage

Have you decided what kind of mortgage you are looking for? Remember, the interest rate also depends on the mortgage that you choose. Moreover, the eligibility criteria also vary depending on the loan.

There are four major loan programs:

VA Loan – Backed by the Department of Veterans Affairs, VA loans are available only for veterans or active service members.

FHA Loan – Insured by the Federal Housing Administration, this loan has a low credit score minimum.

USDA Loan – Backed by the U.S. Department of Agriculture, the USDA loans are suitable for lower-income borrowers.

Conventional Loan – The government does not insure conventional loans. And hence have strict eligibility criteria. They are suitable for people with solid credit.

Of the above-mentioned loan programs, the mortgage rates for the VA loans are often the lowest.

4. Down Payment

Coming to down payments, VA loans and USDA loans do not need any down payment. Furthermore, FHA loans require a 3.5% down payment and conventional loans 3%. However, they will incur mortgage insurance. With a larger down payment of, say, 20%, you can avoid mortgage insurance. The issue with low or no down payments is that you’ll have to pay private mortgage insurance, which reflects on the monthly payments.

5. Research Mortgage Lenders

From traditional banks to credit unions and online lenders, you have many options. Your choice of mortgage lender depends on the mortgage that you choose. For example, if you choose a VA mortgage, the lender works with military/veteran borrowers.

You may want to consider:

  • The lender’s minimum qualifications should align with that your requirements.
  • Do the interest rates include points? Points are paid fees upfront to reduce the interest.
  • How do you want to communicate with the lender? If you do not care about an in-person service, you can go for an online service as well.
  • Does the lender provide financial services such as down payment assistance?

It is wise to get pre-approved by three mortgage lenders. That way, you can compare the interest rates and choose the one that saves you money. Even a .5% difference in rates can save you thousands of dollars in the loan duration.

6. Get a Mortgage Pre-Approval

Mortgage Pre-Approval Stamp

A mortgage pre-approval ensures that you have a smooth buying experience. It shows the real estate agent and the seller that you are ready and equipped to buy. Moreover, it gives you an upper hand over the other buyers since you already qualify for a home loan.

Preapprovals are generally a letter from the mortgage lender containing the approved amount. This is based on your savings, credit score, and current income. The lender may also look at your income and asset documentation. Preapproval letters are easy to get provided you prove your eligibility.

Another critical point to remember is that pre-qualification is not pre-approval. The former is a measure of the borrower’s ability to get a mortgage loan. It requires no verification or credit check. On the other hand, the latter means that you are qualified for a loan.

7. Prepare Your Documents

Before the pre-approval, you need to get your documents ready. Gathering the documents ahead reduces the stress, letting you concentrate on house hunting. Then, when the time comes, hand the documents over to the loan officer.

The loan officer will create a loan file with the necessary documentation. The first of which is the mortgage application and credit report. Here are some of the documents you need to have in hand:

  • W2-forms (two years)
  • Pay stubs (30 days)
  • Federal tax returns (2 years)
  • Other sources of income
  • Recent bank statements (2 months)
  • Documentation related to long-term debts such as car loans and student loans
  • Identification card: State issued driver’s license or valid passport
  • Social security number
  • Profit and loss statements if self-employed(2 years)
  • Documentation related to child support and marriage alimony.
  • Details about your recent deposits in your bank account with proof
  • Documentation for any gift certificate or other funds used in your down payment

8. Hire a Real Estate Agent

Mortgage Process - Hire a Real Estate Agent

A skilled real estate agent is critical for your house-hunting process. They can help you look for houses within your budget and in your desired neighborhood. They also guide you through the home buying process. Real estate agents see thousands of homes every year. As a result, they will have a list of homes that fits within your budget along with the features you desire.

9. Get House Hunting

With everything in hand, you can jump right into house hunting. Your agent will have a list of properties for you to look into. Visit the properties with your agent. Choose that you could imagine living with your family.

Depending on your budget, you may not get everything that you desire. Make a list of features arranging based on the priority. This will help you choose the right one that meets your needs.

10. Make an Offer

Now that you have chosen the one that caught your eye, it is time to make an offer. Your real estate agent will now prepare the offer. They will know how to structure the offer and the contingencies to add. So, it’s better to leave them to it. The details in this agreement are negotiable. The sellers may want to make changes and add contingencies from their end as well.

When you make the offer, consider making an earnest money deposit. This is a cash deposit made to show that you are serious about securing the house. It can be as little as $500 or as much as 5% of the purchase price. The earnest money depends on the local custom, so it is safer to keep the real estate agent in the loop.

11. Get a Home Inspection

Mortgage Process - Home Inspection

Once your order is accepted, you may want to get a home inspection firsthand. It gives you an idea about the stability of the house and also the repairs needed (if any). Some of the critical areas the home inspector checks are:

  • Foundation
  • Roofing
  • Home’s Structure
  • Plumbing
  • Electrical

You can use any issues uncovered during a home inspection for negotiation before arriving at a final purchase price.

12. Apply for the Mortgage

You would have completed the mortgage application process during the pre-approval stage. If not, you would have to apply now.

Even with the pre-approval, you would have to submit final documentation before underwriting. For example, your lender would need the purchase agreement and proof of earnest money. Furthermore, they would also require the current income and asset documentation. And any other documents missed during the preapproval.

Within three business days(may change depending on your lender), you will get a loan estimate. The estimate contains the terms and conditions, interest rates, and fees.

13. Have the Home Appraised

The lender will set up an independent appraisal process. This protects you from paying more than the house is worth. During the process, the house is evaluated against similar properties in the same neighborhood.

If the appraised value is lower than the purchase price, you have three options to choose from:

  • First, pay the difference from your pockets at the time of closing.
  • The seller has to lower the value.
  • Walk away from home, provided you have the appraisal clause in the purchase agreement.

14. Mortgage Underwriting

Once the purchase agreement is finalized, it is sent to your banker, who then reviews your options. During the underwriting process, the underwriter verifies your income, debt, assets, and employment.

Since the preapproval lasts for only 90 days, your lender may recheck your credit reports. Therefore, refrain from taking on additional debts for this time being and put your loan in peril.

As a final step, you and the lender will decide when to lock in the mortgage rates. A mortgage rate lock will ensure that the interest remains the same until closing. The lock stays in place for 30-60 days.

Also, the title insurance is brought forward before closing. This is also when you make sure that the seller meets the contingencies as per the agreement.

15. Get Ready to Close

Once the underwriting is complete, the closing meeting is scheduled. It happens either at the attorney’s office (or title company). You’ll need to bring the following documents:

  • Photo ID
  • Closing Disclosure
  • Down Payment
  • Closing Costs

Of these, the closing disclosure is the most important. The loan estimate gave you the predicted cost, while disclosure confirms those costs. Above all, these should match without differing too much.

Regarding the closing costs, you have the option to:

Once everything is in order, checked, and signed, you can receive the keys for your property.

How Long Does It Take to Complete the Home Buying Process?

The process varies for everyone depending on the lender. Here’s an approximate time frame for your reference.

Pre-approval takes a day at the most, as long as you have the necessary documentation.

Closing can take as long as 30 days from the day you start underwriting. The lack of appraisers can delay the process. However, this may vary from county to county, especially if there is a shortage of appraisers.

Having the necessary documentation in hand may speed up the process.

Conclusion

Closing after Signed Contract

Buying a home may seem long and complex from the time of pre-approval to closing. However, armed with the required knowledge, you can overcome any foreseen circumstances. Besides, you are in a better position to make the process go smooth for all the parties involved.

Before closing, if you start having second thoughts, you can back off at any point in the process. The mortgage loan process comes with mile-long paperwork.

Even though staying on top of it all is difficult, take your time to understand every step of the way. Keep track of what you are paying and signing lest you fall into a hole unable to come out of.

Refinance Your Home

A Complete Guide to Refinancing Your Home

Interest Rates Displaying on LaptopFor the 8th straight week, home refinancing rates are below 3%. The low interest rates have increased the home equity in many markets. An average borrower gained $33,000 in home equity in the year 2021. Refinancing your home, when done right, can save you money in interest.

But what if you want to refinance your home multiple times. Does it work? How often can you refinance your home? This article will help answer these and many other questions as we cover the following main topics:

What Does it Mean to Refinance Your Home?

Refinancing refers to the mortgage that you obtain to replace the current one. Here, your lender pays off your existing mortgage, hence the term refinancing. As a result, you can shorten your loan term, lower your interest, or convert your equity into extra cash. There are two types of refinancing:

  • Rate and Term Refinancing: With a rate and term refinance, you get a new mortgage with a lower interest rate. And, if possible, a shorter payment term. The latter, however, depends on the market.
  • Cash-out Refinancing: With a cash-out refinance, you can borrow up to 80% of your home’s value for cash. However, even though you get lower interest rates, the loan amount could increase. This leads to larger payments or longer loan terms.How Often Can You Refinance Your Home? Man working with a calculatorHow Often Can You Refinance Your Home? Man working with a calculator

Is it Bad to Refinance Your Home Multiple Times?

Refinancing multiple times is not a good idea. However, you can do it, and if done right can benefit you in the long run.

In other words, you can refinance as many times as you want as long as it makes financial sense. And your lender should also allow it. But, furthermore, you need to be aware of the hidden risks and the associated costs. Otherwise, you are bound to end with more debt.

HOW MANY TIMES SHOULD YOU REFINANCE YOUR HOME?

There is no legal limit to the number of times you can refinance your house. But, it is not a good idea to refinance your home again and again in a short period of time. The decision, however, comes down to numbers. The general rule is that you should be able to save money. And for that to happen, you need to consider the following:

WAITING PERIOD

Depending on the loan type, your lender may or may not impose a waiting period.

For a conventional loan such as rate and term refinance, you do not have a waiting period. However, for a government-backed loan, you need to hold on to your mortgage for at least six months. In the case of cash-out refinances, you would have to wait for six months from the closing date. Additionally, you need to build enough equity in your home.

Apart from this, your lender may also have a “seasoning period”. During this time you cannot refinance with the same lender. The seasoning period is generally six months after the closing date. However, it doesn’t mean that you cannot refinance using a different lender.

LENDER’S STANDARDS

As with every other loan, first and foremost, you should be able to meet the lender’s standards. Anything may have changed from the last time you refinanced. You may have acquired more debt, less credit score, or reduced income. Whatever it may be, it can affect your eligibility. Other factors that make up the lender’s standards are the equity and DTI ratio.

CLOSING COSTS

Refinancing is quite similar to that of a mortgage. In that sense, you have to pay closing costs which may be anywhere between 2% to 5% of the loan principal. Some fees included are:

  • Appraisal Fees: Even if you had an appraisal in recent times, your lender would also require another before refinancing. This is done to ensure that they pay according to the value of your home and not too much.
  • Application Fees: No matter you receive a refinancing or not, you need to pay an application fee.
  • Attorney Review Fees: Few states require an attorney to review and finalize your loan. In such an event, you would have to pay attorney fees. The fees can change depending on the state you reside in.
  • Inspection Fees: Depending on the state, you may also have to get your home inspected. While a few states require an inspection every time you refinance, others every 5-10 years.
  • Title Search and Insurance: A new lender may require you to pay for the title search to confirm the ownership of the property.

PREPAYMENT PENALTIES

Most lenders penalize you if you pay to settle your mortgage before the loan term ends. For example, say your lender has a clause that says you cannot pay off your loan within five years. If you refinance your mortgage loan within five years, you may have to pay everything you have saved in interest.

This may cause you issues if you have already refinanced and reset your loan term. Read the loan documents before applying for new refinancing.

LOAN-TO-VALUE (LTV) RATIO

The loan-to-value (LTV) ratio is essential when you seek a cash-out refinance. Most mortgage lenders require you to maintain an LTV ratio of 80%. And hence they restrict the amount you withdraw from your equity. Unfortunately, they do not allow you to withdraw 100%.

How Long Do You Have to Wait Between Refinancing?

Depending on the home loan and refinancing, you may or may not have to wait in between refinancing. Refinance rules vary depending on the mortgage, whether it is a conventional or government-backed loan.

REFINANCING FHA LOANS

FHA loans are those insured by the Federal Housing Administration. It has a few refinances on its own, governed by different rules.

  • Rate and Term: Lenders require you to wait for seven months (six monthly mortgage payments). All the mortgage payments within this time period should be paid on time. And one late payment before that.
  • Cash-out: You must own and occupy the home you are refinancing. In addition, you must have had a mortgage for at least six months and without any late payments.
  • FHA Streamline: It is one of the easiest FHA refinances since it doesn’t have much paperwork. And no appraisal either. You must have held a mortgage for seven months with at least six monthly payments. All payments should be on time.

REFINANCING VA LOANS

VA loans are those that are backed by the Department of Veterans Affairs. The rules are the same for both the IRRL or VA cash-out refinance. You have to wait for seven months (210 days) or six monthly payments, whichever comes first.

REFINANCING USDA LOANS

USDA Loans are financed by the U.S. Department of Agriculture. They have two loans, and the refinancing rules differ for both of them:

  • Guaranteed loan: You must have held the mortgage for a minimum of 12 months.
  • Direct loan: There is no waiting period.

Does Refinancing Your Home Hurt Your Credit Score?

Refinancing Multiple Times Hurts Your Credit ScoreYes! Refinancing does hurt your credit scores. However, any credit hit is likely to be short-lived and can revive soon after. The primary reason for the credit hit is the hard credit inquiry your lender does as a part of the qualification process. Any hard inquiry is recorded and affects your score for the time being.

Another factor that affects the credit score is the new loan itself. It affects the length of the credit history with the new term and the amount owed. Finally, closing the current loan may also reduce your score.

Is it Worth Refinancing Your Home Now?

Experts say it is worth refinancing your home if the mortgage rates are lesser than your current interest rate by at least 1%. While it is a broad generalization, you may also consider the below reasons:

  • Pay off the existing loan faster.
  • You have enough equity built up to refinance into a new mortgage without mortgage insurance.
  • Tap into the equity with a cash-out refinance.

Why Do Homeowners Refinance Multiple Times?

There are many reasons why homeowners may want another refinancing. The most important of it all is the low interest rate and monthly mortgage payment. Here are a few other reasons why homeowners refinance multiple times.

TAKE A LOW-INTEREST MORTGAGE

The interest rates have been the lowest in recent times. Make use of the current situation and refinance your mortgage to your advantage. Moreover, by not changing the duration, you can save money owed on interest payments.

LONGER-TERM LOAN

Utilize refinancing to increase the repayment period if you have trouble making the minimum payment. By increasing the duration of the loan, you can ease the strain until your financial situation improves.

A point often overlooked is that the longer your term, the more amount you pay in interest.

LOWER MONTHLY PAYMENT

With a mortgage refinance, you can also lower monthly payments by increasing the term. That, combined with a low interest rate, can ease your financial burden.

REMOVE PRIVATE MORTGAGE INSURANCE (PMI)

Remove Private Mortgage Insurance Lenders require you to have Private Mortgage Insurance (PMI) if you put down a down payment of less than 20%. You can refinance into a conventional loan provided you have a 20% equity built in your home.

CONSOLIDATE DEBT

With refinancing, you can consolidate a high-interest debt such as:

  • Student Loans
  • Personal Loans
  • Credit Card Debt
  • Car Loans

You can save money from the interest payments by exchanging these debts for one with a low interest rate. However, the potential savings are affected if you are increasing the terms. Unless you are careful, it may even bite into your credit cards, leaving you with more debt.

TAP INTO EQUITY

Refinancing your existing mortgage into a new loan allows you to tap into the home equity. You can either use the loan balance after paying off your old loan to:

  • Consolidate Debts
  • Sponsor Home Improvements
  • Build Emergency Funds

How Often Can You Refinance Your Home Loan?

You can refinance a mortgage as often you’d like. However, you may have to meet the eligibility standards every time you refinance.

  • A credit score of 600 – 620, depending on the refinancing
  • Steady income
  • A low debt-to-income (DTI) ratio
  • Good home equity of at least 20% (for better refinance rates)

What Is the Average Time to Refinance a Mortgage?

The average time taken to refinance a mortgage is 30 days. However, it can be as low as 15 days and can go as high as 45 days depending on the below factors:

  • Appraisals
  • Inspections
  • Your Financials
  • Credit Checks
  • Lender’s Ability to Handle Loans

Then there are circumstances like the pandemic when the average time increased. The uncertainty and the changes in credit requirements led to unexpected delays.

How Much Money to Borrow When Refinancing Your Home

You can borrow anywhere between 75 – 90% of the value of your home when refinancing. The amount, however, depends on your eligibility and the lender’s rules. You cannot borrow the remaining 25 – 10% as it is retained as equity.

Drawbacks of Refinancing Your Home Multiple Times

Pitfalls of Refinancing Your Home Multiple TimesIt is a known fact that refinancing helps you save money. However, there are potential risks and pitfalls when you are refinancing your home multiple times:

HIGH CLOSING COSTS

Refinancing doesn’t come free but rather with closing costs and prepayment penalties. Unless you calculate the break-even point, you will end up losing more on these expenses.

INCREASED INTEREST EXPENSES

You are losing too much money on interest expenses over the period of your loan. Your payments in the initial years go towards interest rather than building equity.

LONGER LOAN PERIOD

Your savings will be high if you have a low repayment period along with a low interest rate. However, with a longer loan period, you will end up paying more than you borrowed.

LOSING PROTECTION

States like California provide buyers with extra protection. According to this, the banks cannot sue if you go into foreclosure. With refinancing, you tend to lose a layer of protection. Check the loan documents if the refinancing does so too. If not, it is better to back off.

LESS FLEXIBILITY TO MEET OTHER FINANCIAL GOALS

If you refinanced your home loan for lower terms and interest rates, you might want to think again. Due to increased monthly payments, you would not be able to save anything much, even a retirement fund.

Conclusion

The current interest rates may tempt you to refinance multiple times. According to the rules, there’s no limit to the number of times you can refinance the loan. However, you may want to proceed, only if it makes any financial sense. The below factors may affect the financial benefits you reap from refinancing:

  • Closing Costs
  • Prepayment Penalties

Homeowners can pay these as cash or wrap them into the loan, increasing the loan principal. The refinancing loan will also have a slightly higher interest rate.

If tapping into the equity is your goal, you can take out a home equity loan or a home equity line of credit (HELOC). They generally have low interest and also lets you borrow against the built-up equity. Another option is a personal loan. It is also an excellent way to borrow without risking your home.

Other related articles you may enjoy:

Proof of Income for Mortgages: Income and Asset Verification

Proof of Income for Home Mortgage LoanProof of Income

According to statistics by the National Association of Realtors® (NAR), 88% of homebuyers finance their home purchase through a mortgage or a home loan. Qualifying for a mortgage can be a tedious process and requires a lot of documentation.

Due to the substantial money borrowed, most money lenders have strict requirements to guarantee that you have sufficient funds to ensure monthly mortgage payments. While this process seems taxing, it is worth all the pain since you do not end up with an unattainable payment at the end of each month.

This article will guide you through the following main topics:

Proof of Income for Home Loans

The proof of income isn’t as simple as handing over your recent pay stubs. It’s much more complicated than that. The mortgage lender needs to ascertain your ability to repay the loan. Therefore, they will require several documents to confirm that your income is as stated. For someone with traditional employment with a W-2 form, the process is straightforward. But, first, you’ll have to provide the following documents to prove that you have enough income:

  • Pay stubs of at least two years
  • Tax returns for two years
  • W-2 forms – most recent

Lenders do not require you to be in the same job for two years; however, they’d prefer that you remain in the field. If you recently changed jobs, they may also ask for proof of income from your employer.

The lender will obtain the federal tax returns directly from the IRS, for which you’ll have to provide a signed form 4056-T. It authorizes the IRS to release them to your lender. Keep in mind that your application may be rejected if you have made a significant job change recently within two years. For someone relying on bonuses and commissions for their income, lenders generally require at least two years of bonus and commission income. For calculation purposes, they take an average of both years. However, if the income in the current year is lower, the lenders tend to use the lower number.

Proof of Income for Self-Employed People

The process is more complicated for people in self-employment. Tax returns are the primary means of verification of income for the self-employed. Mortgage lenders expect at least two years of income from your business and also tax returns. In addition to that, you may also be asked to provide profit-loss statements or bank statements for the past two years to ensure that the stated income hasn’t changed. It’s important to note that, for self-employed, the lenders are looking for the adjusted gross income (AGI) on your Schedule C. AGI is the business income minus any expenses and deductions.

Do I Have to Own a Business to Be Self-Employed?

Self-Employed Red StampYou do not have to own a business to be self-employed. A mortgage lender considers the following people also to be self-employed:

  • You do not receive W-2 tax forms rather 1099 tax forms.
  • Contractor or freelancer
  • You own 25% or more of a business
  • 25% of your income is from self-employment
  • A good portion of your income is from dividends and interests.

Eligibility Income Criteria Required for a Mortgage

Most mortgage lenders have a different definition of what’s affordable than borrowers. That’s because they want to make sure that you can repay the loan. And as such, they do not prefer you spending more than 36% of your pre-tax income on debt payments. If you have excellent credit, the number can go higher than 41%.

To calculate the minimum income needed to qualify for a loan, the lender adds the monthly mortgage payment, minimum monthly payment for credit cards, any other loans (i.e. car loan), child alimony, child support, etc. They then compare it with your monthly income. The resulting total debt payments should be less than 36% of your pre-tax income.

How Much Income Do You Need to Buy a Home?

Proof of income is one of the most important factors when it comes to a mortgage loan. However, there’s no minimum income you’ll need to buy a home. Instead of minimum income, lenders look at the Debt-to-Income (DTI) ratio. It shows the percentage of the gross monthly income that goes towards debt obligations. The DTI may vary depending on the different loans, conventional, FHA, VA, and USDA.

Generally speaking, your monthly payments should not be more than 30% of your gross income.

An adequate DTI for a home purchase depends on other factors, including the credit score. Most lenders require a DTI of at least 45%, while others allow as high as 50%, provided you have good credit and supplementary cash reserves.

What Are the Requirements of a Home Loan?

In addition to proving their income and employment history, borrowers also need to meet the standard loan requirements. Along with your finances, the type of property and the intended use also play an essential part in the home loans you qualify for. While the guidelines may vary depending on the different types of loan options, you can expect most lenders to follow the following criteria.

Credit Score

The credit score is a numerical rating that tells the lenders how responsible you are with your money. A conventional mortgage has a different credit requirement than other government-backed loans. Generally, the lenders expect a credit score of 620 or higher for better mortgage rates.

A high score can get you a low interest rate, while a low score can result in higher rates. Home Loan Requirements: Proof of Income & Decent Credit Score

In the latter case, it’s also possible you’ll have trouble qualifying for a loan. Here are the minimum credit score requirements for various government-backed loans.

  • Conventional Loans – 620
  • FHA Loans – 580
  • VA Loans – 580
  • USDA Loans – 640

If you have a low credit score, you probably miss payments and regularly overdraft on your accounts. If your credit score isn’t where it is supposed to be, here are a few things you can do to increase it over time.

  • Pay off debt – Determine any outstanding debt payments, pay them until it paid in full. With the reducing debts, the lender may even approve your mortgage.
  • Make all payments on time – Making your monthly payments on time can help increase your score since 35% of the credit score comes from your credit history.
  • Avoid closing credit lines – Neither close an existing credit line nor open new credit when buying a home.

Credit History

For an accurate report, lenders may pull the credit report (with your permission, of course). According to Bruce Ailion, a real estate agent in Atlanta, you may need to explain any shortcomings on your credit report, including a short sale or a foreclosure. In addition, you may have to write a statement explaining the lapses in your report. It helps the lender to evaluate the risk. They may even let it go if it’s a one-time unavoidable circumstance.

Assets

Your lender may also ask to see your assets while assessing the risk factors. Generally, they look for assets and bank accounts that can pay your mortgage payments when you run into any financial trouble. Assets are things you own that hold a significant value.

  • Checking and savings account
  • Stocks, bonds, and mutual funds
  • Certificates of deposit (CDs)
  • IRAs, 401(k)s or other retirement accounts

Lenders typically request the documents for verification to confirm the sources.

What Should Be an Optimum Size of Down Payment?

A down payment is the amount of mortgage the borrower lays down at the time of closing. Generally, it is 20% of the loan amount. Any amount less than that, you’ll have to buy private mortgage insurance (PMI). However, it is not the minimum you need to qualify for a loan. How much money you put down depends on you. Nevertheless, lenders have a minimum limit for the down payment, which you’ll have to meet.

  • Conventional Loan – 3%
  • FHA Loan – 3.5%
  • VA/USDA Loan – 0%

Proof of Income Requirements for Mortgage Loans

Your income is not as much as a point of consideration when obtaining a loan. The most crucial part is your ability to make monthly mortgage payments. Other factors they’ll consider are the credit score, DTI ratio, and down payment. Each lender determines its qualifying criteria. Here’s a look into what lenders expect from borrowers:

Monthly Income

If you are on a payroll, the mortgage process is pretty straightforward. You’ll have to submit your recent pay stubs and W-2’s. If self-employed, you’ll have to submit your tax returns and other documents that the mortgage lender requests. The longer you stay in a position, the more the lender will be ready to loan you. In case you moved roles, you may want to wait a year or two before applying for a mortgage. Some of the other sources of income include:

  • Overtime
  • Commissions
  • Alimony payments
  • Military benefits and allowances
  • Social security income
  • Child support payments
  • Investment income

Debt-to-Income (DTI) Ratio

Mortgage lenders use the Debt-to-Income (DTI) ratio to decide how much you qualify for.

DTI = Monthly Debt Payments ÷ Monthly Household Income

With the DTI ratio, the lenders determine if you can comfortably afford another debt. A low DTI is ideal, with lenders preferring 50% or lesser. Any more than that, chances are that your mortgage application will be rejected. If you have a high DTI, look for ways to cut back on your monthly budget or increase your income.

Asset Statements

Asset statements are proof of your net worth, including investments, bank statements, and assets, providing a detailed look at your finances. The comprehensive portfolio of assets ensures that you can comfortably afford the mortgage. Furthermore, it also helps the lender determine that the approved mortgage is the right one for your financial needs. When you apply for a mortgage, your lender requires records verifying the assets and the source of your wealth. In order to confirm the assets, you’ll submit asset statements detailing your portfolio to the lender. Here are some of the types of assets that need to be submitted in the verification:

Liquid Assets

Proof of Income - Liquid Assets - CashAssets that have a cash value or can be converted to cash are called liquid assets. Lenders would want to verify that you have the means to pay the payments, insurance, taxes, and interest on your mortgage. The capability to pay for these is determined by the liquid assets, including bank account, savings account, checking account, stock option, etc. Experts suggest having six months of current income in liquid assets or cash to tide you over in times of financial emergency. This ensures that you can continue paying the mortgage payments even if you have no source of income.

Non-Liquid Assets

In addition to the liquid assets, lenders also expect proof of non-liquid assets in the asset statement. Non-liquid assets refer to difficult assets that take longer to convert to cash, including cars, jewelry, self-owned businesses, real estate, artwork, antique furniture, real estate property, etc. They may also change in value from the time it was initially purchased. While non-liquid assets may be difficult to convert in times of emergency, they are still valuable to lenders.

Gift Funds

If you receive money from friends and family to be put toward down payment or closing costs, it is also an asset in the eyes of the lender. Hence you need to verify the source during verification. To use the money safely without it affecting the mortgage approval process, ensure that you have the bank statement showing the deposit and also the bank statement from the giftee as a legitimate source of funds.

Process of Getting Mortgage Approval

The mortgage approval process is one of the most daunting yet vital steps before a home purchase. The process is long and can take anywhere from several weeks to several months.

Preapproval

Most borrowers prefer to get preapproved before starting the house hunt. Preapproval gives an idea of how much money you can expect from your lender and enables them to place a competitive bid. Even real estate agents and sellers prefer preapproved buyers.

Application

Once you have found your dream home, placed a bid, and your offer has been accepted, you can apply for a mortgage. At this juncture, the mortgage lender will check your credit report, income, assets, bank statement, debts, and other financial aspects.

Income Verification

The lender then does the income verification, where he confirms your income and ability to make monthly payments. Having all your documents ready and organized increases your chances of getting approved. The documents vary depending on your employment situation and may include pay stubs, W-2 forms, tax returns, profit/loss statements, and bank statements.

Do not make any cash deposits in your account before and during the mortgage process. You should deposit any cash intended for a down payment way before demonstrating your ability to save money. This is also counted as a part of your assets and should be verifiable.

Appraisal

Another factor that determines the loan amount is the appraisal. The lender conducts an independent appraisal of the property before approving the mortgage. The loan amount usually depends on this appraisal.

Home Title InsuranceTitle Search and Insurance

Before the mortgage is approved, the lender does a property title search and title insurance through a title company. This is to ensure that no other company or individual has rights or legal claims on the house.

Decision

With all the information in hand, the lender will approve or deny your loan. If they are unable to verify the financial information at hand, they may also suspend your application.

No-Income Verification Mortgage

No-income verification mortgages, otherwise called stated-income mortgages, use non-standard means of income documentation. They do not require borrowers to prove a source of income. The mortgage is ideal for self-employed people and seasonal employees. You can use available assets, home equity, and cash flow. There are four types of no-income verification mortgage:

  • SISA – Stated Income, Stated Assets
  • SIVA – Stated Income, Verified Assets
  • NIVA – No-Income Verification, Verified Assets
  • NINA – No-Income Verification, No-Asset Verification

Each of the loans mentioned above has different requirements. However, keep in mind that these should not be used to hide an insufficient financial standing. Apply for a no-income mortgage only if you can make the payments.

Conclusion

Verifying your income is the most critical part of the mortgage approval process. Having a verified proof of income ensures that you have the finances and assets needed in order to qualify for your home mortgage application. When you apply for a mortgage, lenders want to make sure that you have the capacity to make on-time payments every month without fail. Therefore, they have strict requirements for a borrower, including employment history and proof of income. The best advice experts have for you is to seek a professional like a mortgage broker who can guide you through the process. In addition, they can help you find a trustworthy real estate agent and a mortgage lender.

Altitude Home Loans LogoThe people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll guide you through the Home Loan application process. You’ll be glad you did.

Everything You Need to Know About HUD Section 184 Loans

HUD Section 184 LoanAre you a member of a federally recognized tribe? Did you know that you may be eligible for a Native American home loan?

Section 184 loans are dedicated to providing home loans to the Native American community. Those associated with federally recognized tribes may be eligible for a section 184 Indian home loan.

This article brings you insight into what a Section 184 loan is, the requirements, eligibility, loan terms, and much more.

What Is a HUD Section 184 Mortgage Loan Program?

Created by Congress in 1992, the HUD Section 184 loan program increases the homeownership opportunities to Native Americans, tribally designated housing entities, Indian housing authorities, and tribes. It is a guaranteed mortgage loan program available through private financial institutions. The loans are guaranteed by the Office of Loan Guarantee within HUD’s Office of Native American Programs.

What Is the Down Payment?

Since the Office of Native American Programs backs the loans, section 184 has a pretty low down payment. It is 2.25% for loans above $50,000 and 1.25% for loans under $50,000. This money can be from your investments, savings, or a gift from a family member.

Is a Section 184 Loan an FHA loan?

Section 184 is a HUD (U.S. Department of Housing and Urban Development) loan and not an FHA (Federal Housing Administration) loan. However, both the loans share the same loan attributes and requirements.

How Does a Section 184 Loan Work?

A Section 184 loan works in two ways:

Tribal Trust Land: The BIA or HUD sets the home or land as a leasehold estate upon approval. This makes the property a leased entity while the loan is repaid and ten years after the last payment. In case of a foreclosure, the lender seizes the lease instead of the home.

Allotted Trust Land: The individual holds allotted trust land and does not need approval for a leasehold estate. However, the BIA and HUD should approve the loan application. In case of a foreclosure, the lender seizes the home.

To ensure that the land remains within the tribe, the lender offers the lease or the land to the tribe or an eligible member of the tribe or the Indian housing authority.

Section 184 Loan Requirements

To be eligible for the section 184 Indian home loan guarantee program, you must be a currently enrolled member of a federally recognized Native American tribe. In the case of individual buyers, the loan applies for owner-occupied properties. The occupancy requirement doesn’t apply for tribally designated housing entities, Native American housing authorities, or tribes.

  • Approval Process – The loan approval process depends on the lender. It uses a more flexible, human-based approach.
  • Credit Score – It doesn’t have a minimum credit score/credit history requirement making it easy for eligible, credit-challenged borrowers. However, lenders are required to verify the borrower’s employment for the prior two years.
  • Borrower Debt-to-Income Ratio – The typical DTI ratio is 41%. However, the ratio can be higher if the borrower has a solid financial profile.
  • Borrower Income Limit – There are no borrower income limits.

Loan Terms of Section 184

Section 184 is fixed-rate financing with a market rate of interest.

  • Max Loan Amount: 150% percent of the FHA lending Limits for the Area
  • Prepayment Penalties: None
  • Max Loan Length: 30 Years or Less

Section 184 Loan Interest RateInterest Rate on a 184 Loan Program

One of the advantages of a section 184 loan is that the interest rates are based on the market rate, no matter the credit score.

How Do I Apply for a Section 184 Loan?

Section 184 loan has to be applied through a list of lenders preapproved by HUD.

How Do I Qualify for a Native American Home Loan?

To qualify for a Section 184 loan, you need to be an American Indian or Alaska Native member of a federally recognized tribe. In addition, the property must meet FHA construction and safety codes. Furthermore, it must be the primary residence of the applicant and is not applicable for second homes.

Conclusion

Section 184 loans are a one-of-a-kind way for Native Americans to buy a home. However, not all lenders are approved for offering this type of loan. The loan benefits include low interest rates, low down payments, mortgage insurance benefits, flexible underwriting, etc.

Since the loan is not dependent on the credit score, the applicants qualify for more financial assistance. However, to be eligible for the loan, you need to be a member of a federally recognized tribe.

These loans can be used on and off trust lands for:

  • Purchase of an existing home
  • Home improvements
  • New construction
  • Refinancing

Altitude Home Loans LogoThe people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll guide you through the Home Loan application process. You’ll be glad you did.

Mistakes of First Time Homebuyers

First Time HomebuyersHome affordability is the highest right now in 42 years, according to the National Association of Realtors. The home prices have also been down more than 30% from their 2006 peak.

While buying a home is not to be taken lightly, this news makes it ideal for homebuyers, especially those looking to buy for the first time.

Buying your first home can be challenging, especially in booming markets such as Tuscon. Being a seller’s market, the situation is already difficult without considering your lifestyle and financial situation. This article walks you through over 20 common pitfalls that first time homebuyers make that you can avoid.

Avoid 21 Mistakes First Time Homebuyers Make

First time or not, you need to be prepared for it. Being knowledgeable about the market and the home buyer mistakes to avoid takes you a long way into making a successful buy.

Here are some of the most serious mistakes you would want to avoid when you are a first-time homebuyer.

#1 Buying a House When You Are in Debt

It’s never a good idea to buy a home when you are already in debt. This includes credit cards, student loans, etc. With a new mortgage, you are just burdening yourself with more financial trouble, and even if you manage to buy a home, you are just one emergency away from foreclosure. Moreover, if anything breaks in your home, you wouldn’t have the means to fix it.

Instead, push your search on the back burner for now and pay off all existing loans. After your debt has been paid off, save a minimum of three months of living expenses as your emergency fund and then start saving for your down payment.

#2 Not Putting Forward a Sizeable Down payment

A survey by NerdWallet, concludes that 11% of its participants under the age of 35 agreed that low down payments were a mistake.

While you would have to pay 20% as a down payment ideally to avoid private mortgage insurance, it is not the case every time. Anything less than 10% is too little. With larger down payments, you can score a low interest rate, smaller mortgage, lower monthly payments, and better equity.

For example: Consider a home with a purchase price of $300,000. With a down payment of 5% or $15,000, you’d have to take a mortgage for $285,000. You’d have to pay this over the period of the loan with accrued interest and mortgage insurance payment.

However, with a down payment of 20%, you’d have to take out a mortgage for just $240,000, which may be easier on the pocket later on.

In short, you want to make sure that your down payment you make should allow you to afford the mortgage payments without crimping your budget.

#3 Not Utilizing the First Time Homebuyer Programs

Not all first time homebuyers have their down payment and closing costs saved up. That doesn’t mean that you have to delay buying your home until everything lines up. There are many low-to-no-down-payment programs, including state and federal loans, that cover your down payment as well and at competitive rates.

These loans make owning a home easier for first time homebuyers. By not utilizing them, you are missing out on invaluable assistance from the government. Talk to your mortgage lender about programs and grants for first time homebuyers.

On the downside, few lenders may not provide financing for houses purchased through these programs.

#4 Ignoring FHA, VA, and USDA Loans

First Time Homebuyer Program - FHA LoanOn the lookout for conventional loan programs, we miss out on special assistance programs such as FHA, VA, and USDA loans that make life easier for you. Their programs require very few qualifications such as no down payment, a low credit score, no mortgage insurance, etc.

The FHA (Federal Housing Administration) loan is ideal for people who have had financial issues in the past and have trouble qualifying for other loans. You may also still qualify to get the loan even if you’ve filed for bankruptcy or struggled financially in the past.

  • FICO Score of 580+
  • Down payment of 3.5%

Apart from the above, VA Loan or veteran assistance loan requires:

  • FICO Score of 620+
  • Certificate of Eligibility from the VA
  • Debt-to-income ratio – 60%

USDA loan is backed by the U.S. Department of Agriculture, which allows you to roll the closing costs into the loan.

  • FICO Score of 640+
  • Household income below USDA limits
  • Your home should be in a rural or suburban area.

#5 Buying the Best House You Can Afford

However beautiful the home may be, do not reach for one that is beyond your price range. This is important, especially in the current times when the home prices are on an upward curve.

Buying a home beyond your budget puts you at risk for foreclosure since it makes you increasingly open to financial stress. Furthermore, the monthly payments are liable to leave little room for other bills and expenses.

Instead of focusing on the amount you qualify for, check how much monthly payment you can afford in the long run, along with the other financial obligations.

Ideally, your house payment should not be more than 25% of your take-home pay. And that includes principal, interest, property tax, homeowner’s insurance, homeowners association fees, and mortgage insurance if applicable.

Do not forget to add these when considering how much you can afford as your monthly payment.

#6 Ignoring Resale Value

While it doesn’t make sense to consider the resale value now, it will matter at some point in the future when you plan on selling.

Research says average American life in a house for about ten years. With that in mind, consider the location and the neighborhood before buying your home.

Take time out to study your neighborhood.

Are there any boarded-up businesses? Are there any empty houses? If your answers are affirmative, people seem to be moving out.

Look out for developments like water, gas, or septic lines, as they may add value to the neighborhood.

#7 The Wrong Mortgage

As mentioned earlier, there are a lot of mortgages aimed at getting you a house no matter the financial situation. But, the truth is they can drown you in interests and fees, which you will find difficult to recover from the burden.

The wrong mortgage can tie you up to decades of financial stress.

What is the right mortgage? Well, that depends on the situation. All in all, a fixed-rate mortgage offers better terms, saves money in interest, fees, etc.

Even with all the loan options available, it is better to stick with a conservative mortgage. Compare the different mortgage terms and how they affect your monthly payments and total interest.

#8 Neglecting Mortgage Preapproval

The current real estate market trend favors sellers rather than buyers, which means more demand for affordable homes than available. In a competitive market, you can quickly lose your property to another buyer if you are not pre-approved.

A preapproval letter attached along your offer shows the seller that you are a serious buyer and that your credits and finances are stable enough to get a home loan.  Besides, it also means that the paperwork process moves faster as you begin your home search.

#9 Picking the Wrong Lender

As much as it is essential to find the right real estate agent, the same translates to a lender. Having the right lender is the most crucial step in your home buying process.

The right lender gives a home buyer multiple choices for a down payment, mortgage payment, term, and other factors that go into buying a house.

Never allow a lender to dictate the terms. Ask for the explanation behind their financial recommendation, and if they do not provide one, it is better not to engage.

The process of closing on a home is vast; the mortgage application itself requires a lot of documentation and paperwork. You’d want someone who takes time and explains everything to you. Do not forget to take into account the customer service and the closing time.

Keep in mind that a suitable lender takes you on the right path and can save you some money along the road.

#10 Getting just One Quote

First time homebuyers often go with the first bank or financial institution they get the quote from. According to Freddie Mac, you will likely save $1500 for every new lender you get a quote.

The more quotes you get, the better interest rates and loan terms you get. Not just that, you also get more data to compare and shop around.

Talk with three different lenders and mortgage brokers. Compare the interest rate, loan terms, lender fees, closing costs, etc. Not only do you want someone with low interest rates but also with better closing time.

#11 Not Reviewing Credit Reports

According to Federal Reserve, 90% of US homeowners who took out mortgages had a credit score of 65o while 75% had 700 and sometimes even more.

Your credit report plays a vital part in establishing your mortgage amount and interest rate. With a conventional loan, you would need a credit score of 65o; however, 700 or more would be ideal.

If your score is low, the chances are that you may have missed a few payments on time. In this case, you can expect your interest rate and APR to be higher.

First time homebuyers may not be aware that paying the bills on time doesn’t warrant a good credit report. Even if you have been handling your finances responsibly, the chances are that there could be errors hurting your score.

Look for tweaks you can make to increase your credit score before getting into the home buying process.

#12 Ignoring the Neighborhood

While focusing on the home itself, home-buyers make the mistake of ignoring the neighborhood, access to amenities, school district, etc.

While you may love your new home, the chances are that you won’t prefer living there with a wrong surrounding area with poor access to amenities. And selling it will also be difficult since it may not fetch you a good resale value.

Drive around the neighborhood. Look around for parks and schools. Make a note of the businesses and schools around the home. And most importantly, your neighbors should be welcoming.

And coming to the exterior, pay attention to the yard. Any long-term issues like water pooling should be considered serious since they may affect the foundation. Also, consider the size of the yard. Is it enough for the kids to play.

#13 Not Shopping Around

While you need to compromise to some degree when it comes to house hunting, do not cave on the most important things.

Do not buy a condo just because it is cheaper than a home. In the same line, do not go for a one or two-bedroom house when planning on having children. These are not compromises rather strains that would not work in the long run.

Unless you are looking for a more customized home, there will be something similar in the same neighborhood. Look for homes constructed by the same builder, and you can find a home with the same features.

So, shop around and be open to a broad market. Use real estate apps and websites to narrow down the process depending on your price range.

#14 Moving Too Fast

Buying a home is complex, especially when you get into the mortgage process. The biggest mistake home-buyers do hurrying up with the process without any plan. This can cost you later on since you would not be able to save enough for your down payment and closing costs. It also prevents you from addressing the issues in your credit reports.

What you can do is extend the timeline to at least a year or even more. Remember that it may take years to save enough for a down payment and repair your credit report.

Ideally, homebuyers should be paying down the debt, saving money, and boost their credit score in preparation for buying their first home.

#15 Dragging Your Heels

Your first home is special. While you prefer to wait around to make a careful decision, you may lose the property to the competition. Losing the property you put so much time, and effort in can be heartbreaking.

The home buying process can be long and drawn out until you find the perfect home. It takes time and effort from your regular activities and works to make it work.

Do not drag it further unnecessarily. At the same time, you do not want to rush into buying a home either.

To put it another way, the moment you find a home that you love, pounce in with an offer. If not, someone else might, and you will have to continue with the search. Do not underestimate how slow and laborious house shopping can be.

#16 Emptying Your Savings

First Time Homebuyers Emptying Their SavingsGenerally, first time homebuyers dump everything they have in their savings account towards a down payment, thereby draining it of even emergency funds. The mistake they make is when they ignore or do not account for the unexpected fees associated with purchasing a new home. If you do not have any funds set aside for these expenses, you could end up in dire financial straits.

When the opportunity to buy a home arises, make sure that you have money set aside for the closing costs and the other expenses.

#17 Miscalculating the Hidden Costs

Most first time homebuyers are unaware of the hidden costs that come with buying a home. The hidden fees include:

  • High utility bills
  • New utilities
  • Homeowner’s insurance
  • Maintenance and repair
  • Property taxes
  • Furniture

When you do not anticipate these costs, you may end up touching your emergency funds. Add the expenses to your savings goal and save them before buying your home.

Remember, the mortgage payment doesn’t account for the costs of homeownership like utility costs, property taxes, maintenance, etc.

#18 Not Planning for Closing Costs and Moving Expenses

Most first time homebuyers focus so much on the prospect of a new home and the down payment that they forget about the closing costs and the other expenses that come with buying a house.

Closing costs, including the appraisal fee, inspection fee, property taxes, insurance, and legal fees, will be around 3 – 4% of the purchase price. For example, for a home valued at $300,000, the closing costs would be around $9,000 – $12,000. The catch is that you would have to pay this before the closing date.

And, then there are the moving expenses. The moving expenses can be anywhere between $650 – $1,800 for 100 miles. Ensure that you plan ahead for these costs, save up along with your down payment and then jump on the housing market.

#19 Skipping Home Inspection

It is wise not to look at appearances like cosmetic issues, lousy landscaping, and outdated carpeting if you are looking for a good deal. Instead, concentrate on the structure such as roof, foundation, floor plan, etc.

One way to ensure a sound structure is via home inspection. It helps you avoid disasters and give you a thorough idea of the electrical, plumbing, heating, and cooling systems, design, etc.

While a home inspection costs a few hundred dollars, it is worth the information it provides.

#20 Forgetting about Homeowner’s Insurance

Homeowner's InsuranceAnother potentially costly mistake first time homebuyers make is avoid taking necessary insurances. Title insurance and homeowners’ insurance are the two most important insurance you may want to consider.

In case there is content to the title of the home, the former comes to your aid and likely pays off to ensure that the house is yours.

On the other hand, homeowner’s insurance helps you during a fire, flood, and other natural or manmade disasters. Not only should it replace your belongings but also help you to rebuild your home.

#21 Taking on Credit While Closing

The period between applying for a mortgage and finalizing the loan is crucial. You may want to refrain from doing anything that hurts your credit score, like a new credit card, auto loan, student loan debt, etc.

Your lender will check your credit score a week before closing, even though it has already been done earlier. If there is a change in credit score or debt to income ratio, the interest rate is bound to change along with the fees. This can result in delays or even cancellations.

Wait until after the closing to apply for new credit cards, furniture, or appliances.

Conclusion

Buying a home is a significant decision, especially if it is the first time. It defines financial freedom and maturity, making the buying process an emotional one.

However, it is essential that you make rational decisions and not get wrapped in the notion of a dream home. You need to be able to make a sound financial decision while also committing yourself to the task.

To achieve this, you should be aware of the common mistakes first time homebuyers make in order to be able to avoid them. Equipped with the knowledge you should be able to save for a down payment, find the right mortgage, get preapproval, and finalize your new home.

Remember, every mistake mentioned above could not only cost you thousands of dollars but wreak emotional distress as well.

The people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll guide you through the Home Loan application process. You’ll be glad you did.

Related Article: First-Time Homebuyer’s Guide

Questions to Ask a Mortgage Lender

 

Buying a house is the first half of the battle. The second and the most important one is to choose a mortgage and a lender. Lenders are financial institutions or banks that facilitate home loans. Since you are likely to be paying off your mortgage for the next few years, it’s in your best interest to establish a working relationship with your lender. The right mortgage questions can help you navigate the process easier and obtain valuable information.

Our article brings to you the important questions to ask mortgage lenders, tips to help choose the best lender, and much more.

Essential Questions to Ask Your Mortgage Lender

Essential Questions to Ask Your Mortgage LenderAcquiring a mortgage can be a stressful and pretty complicated process, not to mention competitive. To make everything easier, here are a few questions you may want to ask your mortgage lender:

  • How much can I borrow?

The mortgage you can borrow depends on many factors including your income, credit history, and employment status, among others. Apart from that, there are special government programs you may be eligible for, i.e., veterans and first-time homebuyers, where you may be able to borrow much more than conventional loans.

  • What are the interest rate and the annual percentage rate?

Be sure to ask him about the interest rate as well as the corresponding annual percentage rate APR (Annual Percentage Rate). The latter counts for loan-related charges and the fees but not the early payoffs.

  • Which type of loan is the best for me?

Get your lender to explain the different loan options, including adjustable-rate loans, fixed-rate loans, interest-only loans, etc. Do not shy away from asking your lender about the pros and cons of each loan.

  • How many discount points does the loan include?

Discount points are essentially fees paid to the lender to bring down the interest rate. Every point equates to 1% of the loan amount. Check if discount points are included in the quoted rate and the benefits of buying more points.

  • What are the closing costs?

Closing costs makeup to 3-5% of the loan amount and include appraisal fees, attorney fees, origination fees, etc. Make sure that your lender provides you with a loan estimate covering the above.

  • Any other fees and costs I need to know about?

The lender should provide you with a closing disclosure containing other expenses and costs associated with the loan.

  • Can you guarantee on-time closing?

If, your lender cannot close within the said period, do they accept the additional expenses incurred?

Things to Look for in Choosing a Mortgage Lender

First and foremost, do not hesitate to shop around. Find a lender who not only gets you the best interest rate but also involves themselves in the process.

Here are a few tips to help you select the right lender:

  • Strengthen your credit score. Higher the score, the better bargaining power you have.
  • Get preapproved with a few lenders to increase your chances of having your offer accepted.
  • Compare the mortgage rates, down payment requirements, insurance, fees, etc., and select the one that works to your advantage.
  • Understand the major players in the field. You can choose between credit union companies, mortgage bankers, savings and loans, mutual savings banks, and correspondent lenders.
  • Ensure that your lender is registered in the state you reside.
  • Narrow down your choice by reading reviews and complaints online.
  • Always read the fine print on the loan documents. They reveal what the lenders do not say outright.

Things That Get Your Loan Application Denied

While it is essential, to be honest with your lender, the wrong information can get your mortgage application denied. Here are a few things you dare not reveal:

  • Lying on your loan application is a felony; It can reduce your chances of approval.
  • Not paying the bills on time; Inconsistency is a prime concern, and missed bill payments are red flags.
  • Maxed out cards; Lenders may run a final check, and any new debts can cause them to deny the application or change the terms.
  • Never apply for new cards or credit lines when you are about to finalize your loan.
  • Lenders would like you to have stable employment for at least two years. Repeated job changes are another red flag.
  • While a lateral move or a promotion may not make significant changes, going to a commissioned work can be the reason your application is denied.
  • You should have finalized the details of the down payment before seeking a home loan. If you haven’t so far, it could lead to your application getting denied.
  • Make sure your lender knows if the initial down payment is a gift. The donor should be an immediate family member, and you should be able to furnish paper trails.
  • Do not ask about foreclosure in the initial signing process.
  • Do not ask them for information about credit scores. Monitoring your credit score should be a part of your financial routine by now.

Types of Mortgage and Mortgage Loans

Types of Mortgage Loans - FHA LoanA mortgage is a loan that a borrower uses to buy real estate like a home or other property. The property itself acts as collateral for the loan. The loan is then repaid over a period of time in a series of monthly mortgage payments.

Mortgages can be:

Fixed-Rate Mortgage is a home loan paid over a fixed period with a fixed interest rate no matter the changes and trends.

Adjustable-Rate Mortgage is where the interest rate is fixed initially but later on increases over the life of the loan depending on the market.

Interest-only Mortgage involves complex repayment schedules and is only used by sophisticated and experienced borrowers.

FHA Loans are insured by the government through the Federal Housing Administration (FHA). They are a good choice for first-time buyers since they have incentives like low or no down payment, low credit score, etc.

VA Loans is issued for US veterans and spouses of deceased veterans. Most often, these loans do not require any down payment.

Mortgage Lender Questions for Home Buyers

Consumer Financial Protection Bureau reports that most homebuyers do not put as much thought into a mortgage as they do with homes. Only when you look around and ask your lender relevant questions is when you get a reasonable mortgage rate.

  • What are the different mortgages you offer?

There are quite a few different types of loans available for home buyers. Of these, the most common one is the conventional loan. Then, there are government-insured loans such as the VA loans and FHA loans. Talk with your mortgage lender and choose the right type of mortgage for your financial situation.

  • Are there any down payment assistance programs?

Down payment assistance programs are offered by local, federal, and government agencies to help cover the down payment and closing costs in some cases. Make sure that your mortgage lender works with the program of your choice.

  • Is there a prepayment penalty?

Lenders charge a prepayment penalty in case you pay the loans early to make up for the lost interest.

  • What is the minimum down payment?

The usual down payment is 20%, with most loans. Few lenders allow you to go as low as 3% if you are qualified, but you may have to pay for private mortgage insurance and increased closing costs. Moreover, with a 20% down payment, the lender may lower your interest rate.

  • Can I get a rate lock on the interest rate?

With fluctuating interest rates, it is better to have a rate lock if possible. Lenders usually charge 1 point. But, beforehand, enquire about the fees, lock-in period, etc. Also, ensure that you have it in writing.

  • What about the origination fees?

Origination fees are upfront fees charged by the lender for processing the mortgage loan application. It can be anywhere from .5%-1% of the loan amount.

  • How long do you need to process the loan?

A lot of factors affect the processing time but a rough idea of the time helps you plan. The average closing time is 43 days.

Reasons to Talk to a Mortgage Lender Before House Hunting

If you are keen on buying a home, it makes sense to start with your mortgage lender before contacting a realtor. This helps you understand your financial situation with all the available options in front of you.

Some of the reasons why you would want to talk to a lender first hand:

  • It helps to set realistic expectations when buying a new home. If nothing, get a preapproval letter in the least. It makes you attractive to sellers and real estate agents.
  • You can still shop around with a preapproval letter. But, the catch here is that your credit score gets dinged every time someone pulls your credit report. However, if all your inquiries are within a set period, say 2 weeks, it is considered one inquiry and doesn’t affect your score as much.
  • A pre-approved mortgage loan offer attracts sellers and real estate agents since it proves that you are serious about buying and not just looking around.
  • Starting the mortgage application process earlier makes it easier to complete it on time.

Questions to Ask Your Lender Before Closing Your First Home Mortgage

Being prepared comes in handy especially when it comes to the first home mortgage. Here are some questions you may want to ask your mortgage lender before closing:

  • How much is the monthly payment?

Make sure you can afford the monthly mortgage payment especially if you are paying rent at the same time.

  • When is my payment due?

Not down the due date for every month and also the grace period if any.

  • Will my payments change?

Your payments do not change unless you have an ARM or if your insurance or taxes change. But, it doesn’t hurt to ask.

  • Does the seller bear any of the fees?

Depending on the deal, some of the closing costs may be borne by the seller. Your lender should be able to guide you in this regard.

  • How much is the escrow?

Ensure that you are setting aside enough sum to cover the insurance and the property taxes every year.

  • What is the appraised value of my house?

Knowing this figure can help you if you are planning on selling your house in the coming years.

  • Do I require mortgage insurance?

In general, your mortgage insurance can be waived when you owe less than 80% of the mortgage. Consult with your lender about when and how to get it removed.

Questions to Ask When Getting a Home Loan

Questions to Ask Mortgage Lenders When Getting a Home LoanThere’s a lot more you need to consider than the mortgage rate when getting a home loan. The following questions can help you with the important questions you may want to ask your lender.

  • What home loans do I qualify for?

Not all lenders offer the loans you qualify for. So, it pays to do a little research on your own firsthand.

  • What’s the best rate you can offer me?

Though interest rates depend on the loan-to-value ratio, it doesn’t hurt to negotiate. The higher the down payment, the better your interest would be.

  • Give me a brief about the loan estimate document.

The loan estimate document covers the pertinent information including interest rate, monthly payments, closing costs, etc. Walkthrough the document so that you are clear on the terms and conditions.

  • Do you charge for rate lock?

While most lenders offer a rate lock for 30-60 days for free, not all do that while others charge for an extended lock period.

  • Do you have any loan programs where I can avoid paying mortgage insurance?

Many lenders offer non-private mortgage insurance loans even if the down payment is less than 20%.

  • What documents do I need to provide?

The quicker you had over the necessary documents, the faster the loan process time would be. So, it pays to enquire about the documents in the beginning and have them ready.

Mortgage Questions to ask During a Refinance

Refinancing your mortgage has many benefits such as lower interest rates, less monthly payment, reducing your terms, and many more. However, before refinancing you may want to ask your lender the following questions.

  • What interest rate do you offer for a no-cost refinance?

Be sure to ask your lender about the interest rates for no-cost refinancing loans. While lenders advertise their lowest rates, it might not be the one for you.

Make sure the rates they quote are based on your refinancing situation and financial needs.

  • Do I qualify for a refinance?

While every lender has their own qualifications, here are some common factors, that remain the same for everyone: Credit score, debt-to-income ratio, and home equity.

  • What refinancing options do you offer?

The most common refinancing options available are rate and term refinance and cash-out refinance. Ensure that you ask your lender about the various options as well as the benefits and drawbacks of every option.

  • How does this affect my monthly payment?

Depending on the type of refinance you choose, the payment can either increase or decrease. In the case of the latter, even though the payment is less, you’ll be paying more towards the interest than the loan itself. For the former, you’ll be paying more towards the loan and own your house quite soon.

  • Will you sell my loan?

Chances are that your lender will sell your loan to maintain a cash flow. Few other lenders on the other hand do the servicing in-house even if the mortgage is sold.

  • How much equity can I cash out?

You cannot cash out more than 80% of your equity with the exception being the VA loan where you can take 100% of the equity.

Questions to Expect from Mortgage Lenders

Here are a few questions your mortgage lender may ask you prior to your application.

  • Credit Report

They might go into detail about the history including how you pay your cards i.e, minimum balance, or full payments. You may also have to disclose co-signed loans, income taxes, property taxes, bankruptcies, support payments, etc.

  • Income

Ensure that you disclose all your sources of income. They may also inquire about your past and current jobs including the job stability in the recent past. In the case of self-employment, you may also have to explain your business setup.

  • Property purchase or refinancing

If you are refinancing, you may have to give details about your property including the type of property(rental or owner-occupied), improvements if any, known damages, potential hazards, etc.

  • Future plans

By disclosing your future plans, you let them know about your ability to make mortgage payments. So, you may want to reveal information about any apparent job changes.

  • Your expectations from mortgage loans

You may want to be upright about how much you would like to put down for a monthly payment and prepayment penalties if any. Finally, your lender would want to pay off the loan quickly or just make the lowest payment.

Questions Mortgage Lenders Can’t Ask

Questions Mortgage Lenders Can't AskEven though it looks like a lender can ask any question, they cannot ask anything that is discriminating based on race, religion, color, sex, age, marital status, etc.

Who’s Better: Mortgage Lender or Bank?

There aren’t as many differences between banks and mortgage lenders. They both fund the loans directly. But a lender, on the other hand, doesn’t offer financial services like cards, savings accounts, etc.

On the bright side, the lenders are not as conservative as the banks and are more flexible. Hence they accept low credits, down payments, and interest rates.

Factors That Disqualify You for Mortgage Loans

As of July 2012, the financial institutions tightened the procedure and hence the following factors can get you disqualified for a loan.

  • Too low credit scores; Be it a medical issue or an inability to pay, it’s all the same for a lender. Since this defines your ability to pay back loans, low scores are not appreciated.
  • Lack of proper employment or steady employment; You need to have 2 years of steady and continued employment before being considered for a home loan.
  • Inadequate monthly income; Even if you have a steady income, the lender may not approve owing to insufficient funds.
  • Too much debt; A debt ratio of 36%-38% will disqualify you for a loan.

Conclusion

Buying a home is a complex and stressful process. Asking your questions ahead of time can help make it easier to choose the appropriate lender.

Make sure you ask a lot of questions about income requirements, down payments, types of loans you qualify for, prepayment penalties, etc. There are no right or wrong questions. Walkthrough the finer details and make sure to get all your “t’s” crossed and “i’s” dotted. Whatever type of loan you apply for, ensure that you read the terms of the agreement carefully before signing up. Take your time to understand the risks and weigh the pros and cons before proceeding.

The people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll guide you through the Home Loan application process. You’ll be glad you did.

Guarantor Loans

Guarantor Loan ApplicationThere has been a lack of knowledge about guarantor loans in the recent past and it was not as widespread. But in the past year or so after the onset of the COVID-19 pandemic, there has been an increase in the number of guarantor loans.

People who have little in the way of financial resources or credits go for these loans if they could produce a guarantor with good credit history. They are usually a trusted family member or friend who accepts the financial responsibilities of the borrower.

This article takes you through everything you need to know about Guarantor Loan, how it works, eligibility, liabilities, interest rates, etc.

Guarantor Loan

A Guarantor Loan is an unsecured loan that requires someone(a friend or a family member) to act as a guarantor. These loans are a great way to borrow money if you have poor credit or no credit at all. However, the catch is that the person who co-signs the loan becomes the guarantor and agrees to repay if the borrower cannot make the repayments. Having one gives confidence to the lenders about getting their money back since the loan doesn’t have collateral of any kind.

The interest rates are usually high, with a 50% APR. Larger loans are often paid over several years.

How Does a Guarantor Loan Work?

Guarantor loans work just like your unsecured loans in a way that both the loans don’t require security from the borrower. Instead, it requires a guarantor who co-signs the loan, thereby providing a guarantee for the repayments.

In most cases, the borrower will have a low income and would not have a home or a car for collateral. Sometimes, borrowers may have had one too many credit applications or poorly managed their credit, leading to your low credit score.

The lender credits the loan based on the paying ability of the guarantor. But first, they will be asked to prove their repayment capacity via their income, assets, or savings. They can also secure the loan against their property.

In order to prevent fraudulent activity, the loan is first transferred to the guarantor, who then passes it on to the borrower.

Guarantor Eligibility Criteria

Any person can become a guarantor, but they need to fulfill the eligibility criteria set by the lender:

The guarantor should:

  • Not have a direct financial link to the borrower
  • Be over 18 years of age
  • Not exceed 75 years
  • Have good credit history without any issues on the credit report
  • Maintain stable income to cover the loan repayments in case the borrower defaults
  • Have a home, property, or a car to act as collateral
  • Be a U.S. citizen

Guarantor Check

As a part of being a guarantor, the lender runs a series of checks to assess if they will be able to make the repayments on time (if needed).

  • Credit check
  • Post-application check to confirm the identity and address
  • Check their income, including assets, salary, etc.

Documents Required from a Guarantor

As a guarantor, you will have to provide documents:

  • Identity proof
  • Address proof
  • Occupation
  • Pay stubs
  • Bank statement
  • Assets and liabilities

Benefits of a Guarantor Loan

A guarantor loan benefits the borrower greatly:

  • It allows people with no credit score or lower income to secure loans and help get started in life.
  • With every repayment, the credit score increases.
  • Interest rates are lower than payday loans.
  • It is widely available and is a simple process once you have secured yourself a guarantor.
  • A better credit score makes applying for loans and credit cards easier.

Risks of a Guarantor Loan

Risks of Guarantor LoansThe guarantor loans are always risky for a guarantor:

  • They have to make monthly repayments if the borrower defaults.
  • They may also be liable to pay extra charges
  • There will be a negative impact on the credit history if the guarantor is unable to repay.
  • The APRs charged on the loans may vary depending on the market situation.

Interest Rates on Guarantor Loans

Interest rates for guarantor loans are considerably higher than conventional loans due to the risk to the lender and can be 40% to 50% APR. But considering the payday loans at 1500% to 2000% this is definitely lower.

Points to Look for in Guarantor Loans

Apart from the risk to the guarantor, there are some points you may want to know before applying for guarantor loans:

  • Consider other avenues of lending, such as bad credit scores or loans from credit unions.
  • Look for low-interest options on comparison websites and agencies which run a soft credit check that doesn’t leave a mark on your credit file.
  • Getting a loan on the guarantor’s name may be a better option since they might be able to get a better interest rate and APR.
  • While secured loans may give you a lower interest rate, you may lose your asset upon default.
  • For unsecured loans, the lender doesn’t have a claim to your property.
  • Consider the overall cost of the loan, which includes the arrangement fees (only applicable to loan providers)

What Is a Guarantor for a Loan?

A guarantor is someone maybe a family member or a trusted friend who knows the financial situation of the former. They should meet the lending criteria set by the creditor and provides a guarantee for the borrower by co-signing for them.

In the event that the borrower is unable to repay the loan, the guarantor takes over and does the monthly repayments. As such, the latter should be able to rely on the former to make the monthly repayments on time and be on top of his/her finance.

In some cases, your spouse or partner can be a guarantor provided you have no financial links such as a joint bank account. Most times Guarantors are often parents who help out their young adult children get a start in credit history.

Loan Guarantor Responsibilities and Liabilities

The guarantor is solely accountable for the payments on the loan. By signing the loan agreement, they agree to be responsible for the financial decisions made by the borrower.

In case the borrower defaults for some reason, he/she is liable to repay the loan amount. Otherwise, they may face legal action or lose the asset used as security.

Does Being a Guarantor Affect My Credit Rating?

No, simply being a guarantor doesn’t affect your credit rating; however, your actions as one might. If the borrower defaults, you are liable to make the repayment. In this case, the non-payment will negatively impact your credit record and lower your credit scores.

Things to Consider While Being a Guarantor

While there is no harm in being a guarantor, your credit history takes a hit if the borrower defaults on the loan. Here are some pointers you may want to consider:

  • Consider the financial situation of the borrower even if the person is your family.
  • Reconsider if you are planning on taking loans for yourself. Few lenders do not consider you eligible for a loan when you are a guarantor yourself.
  • Make sure you can repay if the borrower defaults. Agree only if the amount is within your capacity to repay.

Can I Stop Being a Loan Guarantor?

No! You cannot stop being a loan guarantor if you have signed the agreement. You have to continue as long as the loan term. However, you can try the following options:

  • Either the borrowers or the guarantors should pay the loan in full.
  • The lender goes bankrupt
  • Get another loan at a lower interest rate to pay the guarantor loan in full.
  • Talk with the lender about revisiting the terms.

Guarantors for Personal Loans

Personal loans are considered to be unsecured loans. So, if the creditworthiness of the borrower comes into question, the bank may ask for a guarantor to co-sign the loan for you. And if the borrower doesn’t repay, the guarantor will be expected to make the repayments.

Guarantors for Personal Loans - Person Applying for Personal Loan on PCIs a Guarantor Required for Personal Loan?

Banks generally do not ask for a guarantor unless they doubt the borrowers’ financial standing and the ability to repay loans. Having a guarantor ensures the safety of their money.

Here are a few reasons why a financial institution may ask for guarantors:

  • The credit history doesn’t meet the set requirements.
  • Bad financial decisions.
  • Unstable employment and income which make repayments difficult.
  • Job stability

No Guarantor Loans for Poor Credit History

Not everyone has a guarantor to co-sign the loan for them, especially in the case of immigrants. In this case, you may avail for a no-guarantor loan.

However, your desperate situation may attract one too many scammers. Here are a few points to watch out for:

  • The loan process happens via a phone call.
  • There are no physical addresses for the lenders.
  • Lenders don’t have permission to operate in the state.
  • The financial institution asks for money to be sent to them.

Guarantors vs. Co-Signers

Both the co-signers and the guarantors help get the loan approved and that is where the similarity ends. Simply put, co-signers are co-owners of an asset, while guarantors have no claim to the asset purchased by the borrower.

If the borrower doesn’t meet the income criteria set by the lenders, the co-signing arrangement happens. In this case, the asset is owned equally by both parties: the borrower and co-signer. However, a guarantor may be asked to step in when borrowers have sufficient income but don’t qualify for the loan because of poor credit histories.

Also, co-signers take on more financial responsibility than guarantors do as co-signers are equally responsible right from the start of the agreement, whereas guarantors are only responsible if the borrowers default and fail to meet their financial obligation.

What Happens if a Guarantor Loan is Not Repaid?

The guarantor loan has a significant impact on the family member or friend who co-signs if you do not make the repayments. If they secure the loan against property, they run the risk of losing it.

  • If the borrower cannot repay the loan, the lender reaches out to the guarantor, who is obliged to catch up with the repayments.
  • Lenders have the Continuous Payment Authority (CPA) with which he/she can make the payments directly from the bank accounts.
  • In case the account has insufficient funds, the usual debt collection process starts where the debt is passed on to the debt recollection agency.
  • In the worst case, the lender could take court action against both the guarantors and borrowers. The same will be recorded on the credit file too.

Can a Guarantor Sue a Borrower?

Yes, the guarantor to the loan can sue if he/she defaults and the guarantor had to repay the entire debt amount.

Conclusion

Getting a loan is a pretty cumbersome process, especially for people with poor or no credit. A guarantor loan on the other hand is an awesome way of helping others get the money that they need by having someone co-sign for them. On the downside, however, the interest rate is typically pretty high and so is the APR.

Altitude Home Loans LogoWhatever type of loan you apply for, ensure that you read the terms of the agreement carefully before signing up. Take your time to understand the risks and weigh the pros and cons before proceeding. Finally, ensure that you compare guarantor loans and cherry-pick the one that suits your needs the best.

The people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll help you through the Home Loan application process.

Cash-Out Refinance Mortgage

Cash-Out Refinance

Cash-Out RefinanceExperts suggest that home prices are steadily climbing and could reach new heights in 2021, increasing by nearly 5.7%.

Buying a home is a costly affair and a big investment for the ordinary person, such that you’d want to make the space warm, cozy, and comfortable. However, with the rising costs, you are neither left with money to make the necessary changes nor be able to save up for it.

With cash-out refinancing, you can renovate, remodel and update your home without having to resort to high-interest loans such as personal loans and credit cards. Apart from that, you can also negotiate the payment terms, get a lower interest rate, etc.

This article takes you through everything you need to know about cash-out refinancing, including reasons, pros, cons, closing, how cash-out refinance works, and many more.

Cash-Out Refinancing

A cash-out refinance is where you take a new loan with a higher loan amount than the current mortgage. The new loan replaces your existing mortgage, and the remaining amount is handed over to you minus the closing costs. The lump-sum you get is yours to do as you please.

The cash-out refi depends on the home’s value. Most lenders let you borrow 80%, while you can take the entire home equity in the case of VA loans.

Also, the higher loan amount may result in higher interest rates.

Calculate Cash-Out Refinance

Cash-out refinance lets you take advantage of the equity you’ve built on your home. For example, if your home is worth $200,000 and you have paid off $60,000. You still owe $140,000 as a mortgage balance.

Let’s say that you want to make $20,000 worth of renovations to your home; You can take a cash-out refinancing to fund your renovations.

The cash-out refinance replaces the original mortgage. So, your new mortgage would be:

$140,000 + $20,000 = $160,000

You would receive the remaining $20,000 a couple of days after closing.

How Does Cash-Out Refinancing Work?

The cash-out refinance works similarly to any other loan process. You (the borrower) start with finding a lender with better interest rates and payment plans, submitting an application, and documentation.

Here are the detailed steps your lender may take you through:

Meet the Requirements Set By Your Lender

The lender first sets their terms and conditions, upon the qualification of which you are eligible for a cash-out refinancing:

  • You should have a credit score of at least 620.
  • Your debt-to-income ratio should be less than 50%
  • You should have at least 30% of the equity in your home.
  • No late payments on your mortgage within the last 12 months.
  • Refinance is available only for the primary residence.

Decide How Much Cash You Need

The next step is to determine how much capital you may need. If you are planning for renovations, it is a good idea to contact your contractor and get an estimate prior to the application.

For debt consolidation, sit with your bank statements, credit cards, etc., and work out how much cash you would need to cover your debts.

Complete the Application Process

To complete the application process, you may need to provide the following documentation:

  • Bank statements
  • W-2
  • Pay Stubs

After you get the approval, the closing process starts. You may have to wait for a couple of days after closing to receive your lump sum.

Reasons to Consider a Cash-Out Refinance

A cash-out refinance provides better financial benefits than a personal loan or a second mortgage. Here are some of the reasons why you may want to consider a cash-out refinance:

  • Funding renovations and home improvements

Constant upgrades and renovations are needed to maintain your home and also to increase the home’s value. From broken HVAC systems to kitchen remodeling, cash-out refinancing helps to use the home equity to fund your home improvements.

  • Consolidate and pay your debt

With a refinance, you can opt to consolidate your debts for a lower interest rate and pay them off.

  • Lower interest rate

Personal loans and credit card debt can have a higher interest rate, while mortgage and refinancing generally have a lower interest rate. Hence it makes sense to pay off your credit card debt and personal loan using a cash-out refinance.

  • Better investment opportunities

Refinancing may make sense to withdraw cash from refinancing for investment opportunities and retirement plans rather than having funds ties with your home. You can also use a cash-out refinancing towards financial needs such as college funds since the interest rate is lower.

Cash-Out Refinance: Pros and Cons

Cash-out refinancing provides you with a considerable amount of money when you require liquid cash and at a competitive interest rate. But the risk is real. Since you use your home equity to fund the refinancing, you run the risk of losing your home.

Hence it makes sense to evaluate the pros and cons:

Cash-Out Refinance Pros and ConsPros of a Cash-Out Refinance

  • The equity in your home is worth a significant amount, and tapping gives you access to a lump sum of cash. You can use the money to either further your/your child’s education or maybe invest in a business with assured success.
  • Mortgage rates are generally lower when compared to credit cards and personal loans since it is secured by your home.
  • Increase the monthly payments by replacing the original loan with a new one.
  • In case the cash is used to fund any substantial renovations that increase the home’s value.

Cons of a Cash-Out Refinance

  • Restarting the monthly payment terms increases the interest costs. Dragging out the payment does not yield the savings you expect from paying off a lower interest loan.
  • The loan is secured against your home. Failing to repay, you run the risk of losing your home. Do not withdraw more than you need.
  • Withdrawing up to 90% of your home equity increases the borrowing costs since you have to bring it back to the 80% threshold.
  • Mortgage loans have higher closing costs which run in hundreds to thousands of dollars. You can either pay them upfront or roll them into your loan amount.
  • You tend to use it as your personal piggy bank for lavish vacations or purchases with access to home equity. Consider seeking help for your spending habits through a non-profit counseling agency.

To Cash-Out Refinance or Not

Cash-out refinance is a good idea if you require access to your home equity for home renovations or something that gives you a better return for your investment. It also gives you a chance to lower your mortgage rate if you are in the higher mortgage interest bracket.

However, it may be a bad idea to avail yourself of cash-out refinancing if you plan on using the money for a new car or vacation since they do not have little to no investment.

Closing on Your Mortgage Refinancing

The final step in cash-out refinancing is the closing, where you sign documents, pay the fees, and then walk away with a new loan (hopefully a better interest rate). The process itself may take up to a few hours in the least.

Three days before the closing process, you get the Closing Disclosure which contains

  • Closing costs
  • New Terms
  • Monthly Payments
  • Miscellaneous costs and credits
  • Fees

The closing costs for a cash-out refinance would be 2% to 5% of the new mortgage, i.e., $4000-$10,000 for a $200,000 loan. You can either pay closing costs with a cashier’s check or roll them into your loan amount.

The closing costs may cover:

  • Early repayment fees
  • Discount points
  • Origination fees
  • Appraisal and inspection fees
  • Mortgage and title insurance fees

Once everything is signed, the “Right of Rescission,” the three-day grace period for the borrower, starts. It may take 3 -4 days to complete the transaction and get cash.

On a side note, you would be required to read and sign a lot of documents, affidavits, and declarations. Make sure that you read them meticulously before signing as they are legally binding.

Which Is Better? – Cash-Out Refinance vs. Home Equity Line of Credit

Cash-Out Refinance Versus Home Equity Line of CreditCash-out refinance and home equity line of credit both access your home’s equity and uses your home as collateral. But that is where the similarity ends.

Cash-out refinance settles the existing mortgage and kick starts a new mortgage with different terms and lower interest rates. It gives you a significant amount of liquid cash, which is yours to use as you wish. On the downside, they have high closing costs.

HELOC, on the other hand, is a new one in addition to your first mortgage loan. Considered to be a second mortgage, it has its payments and terms, which don’t influence the original loan in any way. Unlike refinancing, you get a line of credit from where you withdraw as you require. Home equity line of credit has very little to no closing costs.

Which Is Better? – Home Equity Loan vs. Cash-Out Refinance

Home equity loan and cash-out refinance lets you convert your home equity into cash. But both operate differently.

A home equity loan acts as a second mortgage and is secured against your home. The amount you get depends on the home’s equity. You will be responsible for the mortgage and also the new mortgage loan at the same time. With a home equity loan, the lender pays the closing costs.

With a cash-out refinance, you take out a new one to replace your mortgage loan with the home equity used to pay for the cash-out. It will have new terms, including a lower mortgage rate and more extended monthly payments.

The mortgage interest is lower for the cash-out, but the high closing costs more than makes up for it.

Conclusion

Cash-out refinance is the best option if you require a significant amount of liquid cash to pay off high-interest loans or home renovation. But the catch is that your home is used as collateral, and if you are unable to make payments, you may end up losing the home. And then there are the closing costs. But to your advantage, they also come with tax benefits. Your auditor should be able to guide you with these.

Tapping into your home equity is not a decision to be taken lightly. If you are not sure about cash-out refinancing, you may want to talk with your financial advisor or a home loan expert.

The people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll help you through the Home Loan application process.

Other timely articles you may enjoy:

Home equity loans Tucson

How Do Home Equity Loans Work?

How Do Home Equity Loans Work?

Home equity loans Tucson

Did you know that the usable home equity in the US totals 5.5 trillion dollars? And somewhat surprisingly, it has continuously grown throughout 2020 and beyond despite the advent of a worldwide pandemic. Here is a guide to home equity loans that let you know everything you want.

You know all about the first mortgage which you used to purchase your home. But are you aware that you can take an additional loan on your home?

This article takes you through everything you need to know about a home equity loan, how to calculate home equity, equity lines of credit, and much more.

What is a Home Equity Loan?

A home equity loan is a loan that is obtained by using your home as collateral. Just like your mortgage, you pay it back in fixed monthly payments for the life of the loan. If you don’t pay it back, the lender can foreclose your home as payment, and you could lose your home.

This kind of loan is dependent on the:

  • Current market value
  • Mortgage balance

How Does Home Equity Loan Work?

Sometimes called a second mortgage, a home equity loan allows a homeowner to borrow a lump sum amount against the equity. Equity is the difference between the current market value and the outstanding mortgage. The interest rate depends on the payment history and credit.

Once approved, the lender and the borrower agree on a set payment term. The borrower then makes monthly payments covering both the interest and the principal.

To start with, you might decide to contact a credit counselor to determine your creditworthiness and to find out how much your home is worth.

Is it a Good Idea to Do a Home Equity Loan?

A home equity loan is a good idea if:

  • You use the funds to make a home improvement that increases your home’s future value.
  • You cover your debt with a low fixed interest rate.
  • You have investment plans with guaranteed returns.

However, it’s usually a bad idea to secure a home equity loan to:

  • Shift your debt around
  • Purchase a new car
  • Pay for vacation

If you cannot pay for the above with your monthly budget, you cannot afford to borrow money on loans either.

Home-equity-loan-showing-dollar-on-white-background

How Much Can You Borrow on a Home Equity Loan?

The amount you can borrow really depends on how much difference there is between the value of your home and your current principal balance. Usually a loan of this type requires a minimum home equity of 20% or more to borrow. Additionally, most lenders allow you to borrow a lump sum of only up to 85% of the home equity.

To calculate the eligible loan amount, the lender divides the amount you owe on your mortgage by your home’s current value. It’s called the loan to value ratio, or LTV. The LTV should be 80% or less, which means that your equity would be 20% or more.

Shop around for a lender who gives you both a better fixed rate and higher LTV.

What Documents Do I Need for a Home Equity Loan?

With appropriate documentation, a home equity loan is a pretty easy and straightforward process. Here’s what most lenders will require to give you a loan.

  • W2 earnings statements or 1099 DIV income statements (for the previous two years)
  • Federal tax returns (for the previous two years)
  • Paycheck stubs for the past few months
  • Recent bank statements
  • Proof of investment income
  • Proof of additional income

Depending on your lender, you may need other documentation not listed here, but having these in hand can speed up the process.

Can You Get a Home Equity Loan at Any Time?

Generally, the answer is yes! You can get a home equity loan at any time, but only once. You can’t take out another mortgage before closing out the others.

When you take a loan, you get a lump sum amount of money upfront. You can then repay it over time as previously agreed upon.

It should have a fixed interest rate which would remain the same throughout the loan term.

Are Home Equity Loans Available to Rental Property?

Yes! If you are a rental property owner, you can get a loan provided you qualify. Though you can obtain up to 100% LTV, lenders restrict the loan to 65% – 80% on a rental property.

Everything else is basically the same as for a primary residence.

When Should You Refinance a Home Equity Loan?

Refinancing a loan is ideal if you are looking for different loan terms or to refinance your mortgage for a lower interest rate.

You can refinance a loan when you:

  • Secured your first and second mortgage when the interest rates were high
  • Have a good amount of equity
  • Can afford the monthly payments
  • Plan to sell your home within few years
  • Save overall costs

What Is the Downside of a Home Equity Loan?

Any loan that uses your primary residence as collateral should be considered very carefully, so it’s a good idea to weigh the pros and cons before you apply for a home equity loan.

The downsides of home equity loans should also be taken into consideration.

  • A home equity loan requires you to use your home as collateral.
  • If you default on the loan, the lender can repossess your property, and you may end up losing your home.
  • If you are still paying your first mortgage, a second loan can be a financial burden.
  • There will likely be closing costs.
  • You can’t get a loan with poor credit.

How Much Equity Do I Have on My House?

Equity is the difference between your mortgage balance and your home’s value. Your equity increases when:

  • you pay down your mortgage
  • the value of your house increases

Your equity can also fall if the house falls in value faster than the rate at which you pay your mortgage.

Here’s an example to explain the above:

Imagine you buy a house for $200,000 with a down payment of $20,000. Your mortgage loan would be for the $180,000 remaining, and your equity would be about $20,000.

In about two years, your principal would be reduced down to $170,000 thanks to your timely payments (minus interest), but the value of your home shrinks down to $160,000. In this case, the equity in your home would be -$10,000 since your home has actually decreased in value.

However, if you build or substantially improve your home, the equity should increase in value over the years.

How Do I Use the Equity in My Home?

You have three ways by which you can use the equity in your home:

  • a home equity loan
  • a line of credit
  • a cash-out refinance

A home equity loan is usually a smart way to secure a loan and receive a lump sum. These loans almost always have lower interest rates than a personal loan. Your choice, however, depends on your need and also the situation. Contact your credit counselor to check if you have enough equity in your home to apply for a loan.

How Soon Can You Access Equity?

As early as six months after the purchase of your home, you may request a revaluation. A few lenders may require you to wait up to one year for access. Regardless of the required time limit, you should try to wait until you determine how much equity you have before you use your home to back the loan.

What Can A Home Equity Loan Be Used for?

There are few rules regarding what this type of loan can be used for. You can use it for:

  • Home improvements like kitchen renovation, a new roof, a garage, or building a patio
  • Funding college education for your kids (due to the lower rate of interest than student loans)
  • Manage emergency expenses
  • Cover wedding expenses
  • Consolidate your debts to a low-interest rate
  • Investment opportunities like a second residence or share market
  • Funding your business (if the interest rates are lower than comparable small business loans)

But it is safer to use the money for home improvement since it that’s what will increase your home’s value.

Will a home equity loan work for you?

Can You Use Home Equity to Pay Off Debt?

Yes! You can take out a home equity loan to pay off debts, especially high-interest or unsecured debt. Some homeowners use it to pay off credit cards or car loans. The downside is that your debt is now secured by your home.

Can I Use a Home Equity Loan to Buy Another House?

Yes! You can use the money to finance another house. But ensure it is an investment property and that you can make the monthly payments.

Using a home equity loan to buy another house allows you to:

  • Retain your existing investments
  • Get a lower rate of interest
  • Access a part of your net worth that would otherwise be inaccessible

When you use it as a down payment, it enables you to increase the cash flow from your new house. However, you would also run greater risk if real estate values go down instead of up.

What is the Closing Cost for Home Equity Loans?

The closing costs can range anywhere from 2% to 5%.

A few lenders may waive closing costs occasionally, but you might have to pay certain offsetting fees, as well as being expected to close the loan in a specific time period, generally three years.

  • Appraisal fee – $300-$700
  • Notary fee – $50 – $200 for every signature
  • Credit report fee – $30 – $50
  • Title search – $75 – $100
  • Attorney fees – Varies

Can Home Equity Loans Be Paid Off Early?

Yes! You can pay back your loan early, provided that you are prepared to pay any prepayment penalties.

Some lenders may charge you a fee if you pay back the loan in less than five years. Make sure you read the loan agreement carefully before making a decision.

Do Home Equity Loans Hurt Your Credit Score?

It’s true that some home equity loans may lower your score or hurt your credit, depending on your:

  • Financial situation
  • Ability to repay

Also, if you have a high credit utilization rate, your score may decrease. On the other hand, if you open a line but don’t use a lot of it, your score will probably increase.

Requirements to get the loan you are looking for

The requirements to get a home equity loan are:

  • Your credit score should generally be upwards of 700. Some lenders may accept scores between 621-700 too.
  • You should have enough equity in your home (at least 15%-20%)
  • Your debt to income ratio should be 43% or lower.
  • You need to have a good payment history.
  • Your income is sufficient to be a good credit.

What Credit Score Is Needed for a Home Equity Loan?

A higher credit score correlates to a lower interest rate. Aim for a score of 740 or higher for an optimum interest rate. Still, some lenders accept scores as low as 660 or even 620, but your interest rate will definitely increase with lower scores.

Do You Need Homeowners Insurance to Get a Home Equity Loan?

Most loans require you to carry a homeowner’s insurance unless you either:

  • Own your home outright
  • Have an old mortgage

Banks demand insurance as a requirement for a loan, just in case the unthinkable happens. It’s a good idea to have a home insurance policy in place beforehand.

Why Would I Be Denied a Loan?

You can have a good credit score and still be rejected for a home equity loan. Banks are more concerned than ever about getting their money back.

If you were denied, it may be because:

  • You accumulated unexpected debt
  • You have unreliable income
  • You filed for bankruptcy

Is the Interest on a Home Equity Loan Tax Deductible?

Interest on a loan is tax deductible only if:

  • The loan is for your first or second home
  • You use the loan to substantially improve the home
  • It is a construction loan
  • Both the lender and borrower enter an agreement to repay the loan

Home equity loan and how to get one

How Do I Get a Loan on a House That Is Paid for?

Homeowners with a paid-off house can secure loans the same way you would do with a mortgaged home.

A property that is already paid off is an excellent candidate for a loan due to the lack of liens. That means in the case of a foreclosure, no liens mean the loan is paid off first, which means a lower interest rate. However, this doesn’t necessarily guarantee a loan. Your payment capacity also comes into the picture. You may be able to borrow money only up to the max LTV of your lender.

What is a Home Equity Line of Credit?

A home equity line of credit or a HELOC closely resembles a credit card. You have a source of funds that you have access to when and as you choose. You can withdraw as little or as much as you’d like.

Much like a home equity loan, the rate of interest is much lower than the other loans.

Depending on the bank, you can access it via:

  • a check
  • an online transfer
  • a credit card

In a way, they act as emergency funds that you can access any time you want.

How Does Equity Line of Credit Work?

With a HELOC, you borrow the equity in your home with it as collateral. As you use the lines of credit, you can repay by replenishing them like a credit card.

You can borrow as little as you want or as much as you’d like within your draw period. At the end of the draw period, you begin to repay it back.

A home equity line has a variable rate of interest, which differs from month to month. This is a marked difference from a fixed-rate second mortgage.

Home Equity Loan or Line of Credit

Both the loan and the equity lines of credit are taken against the home. While the loan gets you a lump sum, the home equity line acts more like a credit card. Like credit cards, you can access the money whenever the need arises.

The loan has fixed interest rates with payments in regular intervals. The credit lines have a variable interest and often do not have any fixed payment plan.

Apart from these, both function the same. Which you use, however, depends on your financial situation.

Home Equity Loans or Mortgage

The notable difference between a mortgage and a loan is the time of purchase. A home equity loan is taken on a home you already own, while a mortgage is a loan that allows you to purchase the home in the first place.

Both are lending tools that are taken against your house. Both have tax deductions of up to $750,000.

Lenders generally offer 80% of value as a loan. The rate of interest is sometimes lower on a home equity loan when compared to that of a mortgage.

Home Equity Loans vs. Personal Loans

Both the loans vary vastly, both in the interest rates and in the loan limits and eligibility. They have different pros and cons.

A home equity loan has a low rate of interest since it is secured using your home as collateral. It often offers a lower interest rate than a personal loan would.

Personal loans may take days to close and fund, but home equity loans can take over three weeks.

 

Conclusion

Home equity loans are loans based on the equity of the house as security. The loan amount is calculated based on what you owe on your mortgage and what your home is worth. This type of loan offers lower interest rates than personal loans. You’d have to make a monthly payment in addition to your mortgage.

While you can use the money for any purpose, it is generally safer to buy, build, or substantially improve your home, prioritizing spending that will increase the property’s value for years to come.

Home equity lines are loans that act similarly to credit cards. You can then use it as and when the need arises. The loan amount and interest depends on the lender.

Securing a loan (home equity or otherwise) can be a daunting task. But with the proper research and preparation, your efforts can meet with success.

Find out more on home equity loans 

How Hard Is it to Qualify for a Mortgage?

For many first time home buyers, the entire process involved with purchasing their first property is intimidating. Several factors determine your monthly mortgage payment and how much house you’re able to afford. 

It may seem obvious, but before you can own a home, you have to apply for a mortgage.

Unless you have the cash to buy your home outright, which most people don’t, a mortgage is a must. So understanding the difficulties involved with mortgage approval is vital. Applying for a mortgage is like applying for credit. But it’s a little more complicated. Mortgage lenders look at several factors when deciding whether to approve or deny your application. Having all of your records and financial information goes a long way. While all of this sounds intimidating, it doesn’t have to be. Reputable mortgage lenders like Altitude Home Loans are willing to work with applicants to ensure high approval odds. 

 

To learn more about the difficulty of getting mortgage approval, continue reading. 

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