While conventional wisdom dictates that 20% is the magic number required for a down payment on a home, that soaring figure may make the dream of homeownership seem completely unreachable for many young homebuyers. Between student loans and the rising cost of living in many areas, it’s no surprise that many millennials might struggle to save such a sum.
Thankfully, times have changed, and 20% is no longer the requisite amount for a down payment on a home. In fact, first-time homebuyers only need to worry about saving roughly 3% for a down payment!
In this post, we’ll discuss the three types of loans, benefits of each, and what you need to pay out of pocket for your down payment as well as how to get started.
Conventional Mortgage Loans:
What is a conventional mortgage loan? A conventional loan is not guaranteed or insured by the federal government. These loans are obtained through private institutions such as banks, credit unions, or private lenders.
Unbeknownst to many homebuyers, you can put a down payment on your dream home as low as 3%. This makes buying a home seem more achievable. A conventional loan conforms to a set of standards set by Fannie Mae and Freddie Mac. A new program was set into place in December 2014 allowing for smaller down payments. If you do choose to put down a smaller down payment, you may be required to take out private mortgage insurance and pay monthly premiums.
In order to put down a lower down payment, for example, 3%, you must have a credit score above 650. This may be a difficult feat for those who have loan debt or are starting to build credit. Another factor you have to consider is your debt-to-income ratio. This is the sum of your monthly obligations, like student loans and car payments compared to your monthly income. When taking out a conventional loan your debt-to-income ratio should be around 36% and no more than 43%.
- Not backed by the federal government
- Down payments as low as 3%
- No private mortgage insurance with a down payment of 20%
- Helpful to have a credit score of 650 and above
- Debt-to-income ratio of no more than 43%
Unlike a conventional loan, to qualify for an FHA loan you can have a credit score lower than 650. Your down payment is dependent on your credit score and the higher your score, the less you have to put down when purchasing a home. Those with a credit score of 500-579 must pay at least 10% down. Those with a credit score of 580 and over can pay as low as 3.5% down. FHA loans may be ideal for those with low credit scores due to student loan debt or those who have not built up a high credit score.
The FHA is an insurer, not a lender. Because of this, homebuyers must get their home loans from FHA-approved lenders. Different lenders have different costs, so it’s advised that borrowers compare prices of different lenders. Two private mortgage insurances must be paid on all FHA loans, the upfront premium and the annual premium. The upfront premium is 1.75% of the loan amount. The annual premium is 0.45% to 1.05% of the loan amount depending on the length of the loan term.
- Backed by the government (FHA)
- Down payments as low as 3.5%
- Must pay two premiums
- Credit score of 580 and above: down payments as low as 3.5%
- Credit score of 500 and above: down payments of 10% or more
What is a VA loan? A VA loan is a loan issued by approved lenders and guaranteed by the U.S. Department of Veteran Affairs or VA.
Veterans, active duty service members, National Guard members, and reservists must meet the requirements created by the VA in order to get approved for a VA loan. There may be no down payment required for VA loans depending on the qualified veteran, however, there is a funding fee that varies from 1.25% to 3.3% of the loan amount. Veterans who qualify for a VA loan can purchase a home worth up to $453,100 without putting any money down, although, the loan amount may be affected by the county because the value of the home depends partly on its location.
There is also no private mortgage insurance fee because VA loans are government backed. A great benefit from a VA loan is that the homebuyer can reuse their benefit. They do not have to be first-time homebuyers. If they are first-time homebuyers they can visit Veterans United to learn more about their options.
- Guaranteed by the government (VA)
- May not require a down payment
- Funding fees vary from 1.25% to 3.3% of the loan amount
- Loan amount may be affected by the location of the home
- No private mortgage insurance
Each loan comes with its own pros and cons, qualification requirements, and fees but there is another factor that comes into play when purchasing a home, the price. Whether you are thinking of buying a home now or in the future, it is important to know what price range is best, especially if you are a first-time homebuyer. To prepare for the purchase of a home, a pre-qualification is a quick first step in the process. Sean Hadley, Branch Manager at CrossCountry Mortgage, Inc., advises, “In this initial conversation, you should expect to get an understanding on how the process works and if there are any other financial steps you need to take to put you in the best position financially for your first purchase.” Pre-qualification is easy and free. Anyone in the Northeast Ohio area interested in learning about pre-qualification should visit Young Team Realtors’ preferred lender, CrossCountry Mortgage, Inc.
In conclusion, the three types of loans to consider when you are purchasing a home are conventional, FHA, and VA loans. The type of loan that is best for you varies depending on your credit score and how much you want to pay out-of-pocket. The best first step to take is to visit a mortgage lender, like CrossCountry Mortgage, Inc., to get an idea of the steps you should take when obtaining a loan. Once you conclude the best options for you, your dream home can become a reality.
Whether you’re searching for your first starter home or downsizing to more manageable condo, you’ll want the best credit score possible if you’re planning to take out a mortgage on your new home. Most lenders use some form of credit score to evaluate the level of risk associated with granting you a home loan, and a better credit score will result in a lower interest rate, meaning you’ll save more money in the long term.
The main factors that affect your credit score are your payment history, the amount you owe, length of your credit history, the types of credit used, and new credit inquiries. All of this information is included in your credit report.
While there are different types of credit scores, the most commonly used model, the FICO score, is used by 90% of U.S. financial institutions. Most credit scores use a 300- to 850-point range, with a higher score indicating a higher level of trustworthiness and reliability.
However, because your credit score is based on factual information contained within your personal credit report, there is no magic solution way to overhaul your score overnight. Instead, if you need to improve your credit score to take out a home loan, you can gradually improve your score through careful monitoring of your credit report and smart financial planning over time. Read more: what credit score do you need to buy a home?
CHECK YOUR CREDIT REPORT
Your credit report contains information about your personal finances, including any outstanding debts, bank accounts, credit cards, and your payment history, all information that informs your credit score.
If you haven’t already, check your credit report and ensure that all information is accurate. You may find that your report includes incorrect information, such as a late payment that you actually paid on time, which you can dispute with the credit bureau. You also might find evidence of suspicious activity that could be an indicator of identity theft, which you should report immediately.
The three Consumer Reporting Companies that compile credit information are Equifax, TransUnion, and Experian. You’ve probably heard by now of the recent Equifax data breach that compromised the sensitive personal information of 143 million Americans. If you find that your information was compromised, you might consider signing up for free credit monitoring, placing a credit freeze on your files, or setting up a fraud alert on your files. See other tips for monitoring your personal financial information here.
Through AnnualCreditReport.com, you can request a free copy of your report from each agency once a year. So, if you want to monitor your credit report over the course of a year, you can request one report every four months. If you happen to need another report, you can purchase an additional report for no more than $12.00.
RESOLVE OUTSTANDING UNPAID BALANCES
Resolve any outstanding debts that are currently in collections as soon as possible. While paying off old debts will not entirely remove that information from your record, your recent financial activity counts more than debts from the past. The longer the record of on-time payments, the higher your credit score. Any resolved accounts from collections will be wiped from your score within seven years, meaning these past problems won’t haunt you forever.
MAKE PAYMENTS ON TIME
Roughly 35% of your credit score is determined by your payment history. It’s simple: lenders want to ensure that they will receive payments on time, so it’s important to show that you pay on time. Set up mobile reminders or automatic payments online to ensure that you don’t forget a payment. If for whatever reason, you are unable to make a payment on its due date, consider calling the lender to ask for a grace period.
KEEP BALANCES LOW
Another main factor that can be reflected in your credit score is the amount that you currently owe: more specifically, the ratio of revolving (available) credit to used credit. Aim for 30% used credit or less. It is also not a great idea to carry a small balance on a large number of cards, because FICO scores also consider how many credit cards an individual has.
APPLY FOR CREDIT ONLY WHEN NECESSARY
Because FICO scores take into account the number of times that a potential borrower has inquired about loans, it’s smart to plan ahead and shop around for loan rates during one time period. FICO scores can tell the difference between a search for one loan and a search for many new credit lines based on the time frame within which the inquiries occur. For example, if you’re planning to buy a new car, it’s best to plan the purchase and take out the loan the same week that you begin inquiries. Financing setbacks are one of the most common reasons that real estate transactions get delayed, so if you’ve already been approved for a home mortgage, it’s smart to avoid any new credit activity during this period.
Often times, sellers and buyers think that once a home is under contract, the grunt work is over, but typically that is far from true. The buying/selling journey can be a long process and must meet specific agreed upon requirements. If not, the closing may experience delays.
According to a study by the Washington Post, 32% of closings get delayed. Of the third of postponed closings, financing issues triggered 46 percent, appraisal-related problems caused 21 percent of the delays, and home-inspection issues in 14 percent. 90 percent of the time, the buyer is responsible for the delay.
HOME FINANCING SETBACKS
Believe it or not, your credit score can fluctuate enough between loan approval and closing, which could result in the buyer being ineligible for the mortgage. The best way to avoid this is to incur no additional credit during this period, meaning no new car purchases, or any new credit activity at all.
Debt-to-income ratios also can change when an underwriter discovers that a buyer failed to disclose payment obligations such as child support or student loans. To avoid this, disclose absolutely everything to your loan offer. Also make sure you are not doing anything that could affect your qualifying income, such as a sudden job change.
HOME INSPECTION ISSUES
Most real estate transactions have an inspection contingency to ensure the home being purchased doesn’t have any major defects that could cost tons of money in the future.
After a home inspection is completed, the buyer has the opportunity to request repairs be completed or some type of seller concession, in lieu of the repairs. If a seller agrees to make repairs, it’s important that these repairs are done once a buyer receives their mortgage commitment.
If a closing is delayed due to inspections, it’s typically because a seller doesn’t make the agreed upon repairs. You should expect your real estate agent to follow up on the repairs to make sure they are completed well before the closing date so there are no delays.
One way to make sure your home will go through the inspection without a problem is to get a pre-listing inspection by a reputable professional before you list the house on the market. This allows the seller to fix anything important in advance.
UNDER APPRAISED HOME
Problems with a bank appraisal may be a reason your closing gets delayed. The issue normally comes down to the house under appraising for the agreed upon contract price. If the buyer and seller cannot come to new terms, or if the required repairs aren’t made, the deal could fall apart.
As long as your real estate agent is handling the transaction carefully and following up to make sure the appraisal has been completed, the house did in fact appraise, and there were no required repairs, then your closing will clear this contingency.
THE FINAL WALKTHROUGH
The last step before a home closes is the final walk through, which is especially important for the buyer. There are many things that a buyer should be on the look out for at the final walk through.
- Ensure agreed upon repairs are included
- Air conditioning is functioning
- Furnace is functioning
- Utilities are functioning
- Included appliances are functioning
- Toilets are functioning
If any one of these things are not acceptable, the closing will most likely delayed! Since the final walk through typically happens the day prior to the closing or sometimes even on the closing day, it can be extremely frustrating for a buyer. To avoid this, stay on top of the sellers to make sure their keeping their end of the deal, and disclosing if anything could delay the closing at the final walkthrough.
UNREALISTIC CONTRACT DATES
Whether you’re a buyer or seller, it’s imperative that you have a top realtor representing your interests. One of the most common reasons why a real estate closing is delayed is because of unrealistic contract dates that were agreed upon in the purchase offer. An experienced real estate agent knows how to appropriately structure the dates in a purchase offer to mitigate any prolong closings.
The majority of the time, It takes around 45-60 days for contract to close. This depends on the type of financing a buyer, if the property is bank owned, if the home is paid in cash, if there are a number of contingencies in the purchase offer, and other variables. It’s important to have the expectation that your home will take 1-2 months for closing to occur.
A top real estate professional should know whether the contract dates are realistic or not. For example, if you have a top producing listing agent and you receive a purchase offer with unrealistic contract dates, they will know what questions to ask the buyers agent and also what to advise you to counter in the purchase offer.
REACHING THE FINISH LINE
More often than not the deal will close. There just may need to be a few extra days to reach the finish line. The best option is to grant the buyer a contract extension. An extension to the contract establishes a new closing date that can be met in the future.
The new TRID law that went into affect a little over a year ago has pro-longed the closing timeline, but as long as the guidelines are followed, you can avoid delays. Under TRID, a new settlement statement called a Closing Disclosure must be issued to the borrower at least 3 days prior to closing. If that does not occur, the closing will be delayed for up to 7 days.
HOW DO DOWN PAYMENTS WORK? FIND OUT HOW MUCH MONEY YOU NEED TO PUT DOWN FOR A HOME
Whether you’re a first time homebuyer or exploring different financing options for your next home, you may have heard a lot of conflicting information about the size of a down payment when buying a house.
Most people looking to buy a home choose to finance their purchase through by getting a mortgage, rather than paying cash for a home. Generally, lenders like to see good income, low debt, strong credit, and of course, enough money for a down payment. A down payment is defined by the amount of cash that is your initial equity in the home.
If you’re thinking about buying a home, you have probably started saving up in anticipation for the down payment. But how much do you really need for a down payment? Generally, mortgage lenders like to see a 20% down payment, but do you really need that much?
A STANDARD 20% DOWN PAYMENT FOR A HOME
Ideally, putting 20 percent down is what you want to strive for as a homebuyer. If you are able to put this much down, you have a better chance of getting approved for a loan, most lenders won’t require you to take out a private mortgage insurance (PMI), and you’re more likely to be offered lower interest rates on your mortgage.
These advantages stem from your substantial stake in the home, meaning there’s less probability to default on your mortgage. There are all sorts of other benefits from putting 20 percent down such as:
- Lower upfront fees
- Lower ongoing fees
- More equity in your home right off the bat
- A lower monthly payment
The down payment is not the only upfront money you have to deal with. There are other monetary factors that come into play to consider as well. Explore below for some lower down payment options.
PROGRAMS THAT HELP YOU BUY A HOME WITH LESS THAN A 20% DOWN PAYMENT
Saving up 20 percent for a down payment can be a lot to ask for, even in the current economic upswing. If you’re looking to buy a $100,000 dollar house, that’s $20,000 you will need in savings. With stagnant wages, as well as rising rent and home prices achieving this can be extremely difficult. First time homebuyers may have more of a struggle affording a home because they’re younger, earn less, and have excessive amounts of student loan debt.
One commonly used loan programs is the option FHA option, which is one of the most popular financing options in the U.S.. It insures mortgages for homebuyers with lower credit scores, higher debt-to-income ratios, or less money for a down payment. FHA loans are insured by Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), a federal government agency.
The minimum down payment for an FHA loan is just 3.5 percent of the home’s purchase price. That means the down payment for, say, a $350,000 home would be just $12,250 with this type of loan. Your credit score should be 580 or higher, and your debt-to-income ratio can creep up to 56% or so. If your numbers look a little different, for example, your credit score is below 580, it’s still worth looking into the possibility of getting an FHA-backed loan.
VA AND USDA LOANS
VA loans, guaranteed by the U.S. Department of Veterans Affairs (VA), and USDA loans, backed by the U.S. Department of Agriculture, don’t require a down payment, which means buyers can purchase a home with very little cash upfront. The VA loan is open to most active-duty military personnel and U.S. military veterans, among other groups. The USDA loan is available in rural and outlying suburban areas.
A conventional mortgage loan is one that’s not backed by the government. This makes it distinct from FHA loans, VA loans, and other forms of government-insured mortgages. With a down payment of at least 5 percent, ranging to 20 percent, you can often qualify for a conventional mortgage loan, as long as you have adequate income, a reasonable debt-to-income ratio, and a credit score that exceeds the lender’s required minimum, typically between 660 and 700.
With this loan, you’ll still be offered a decent interest rate for this type of mortgage, but you’ll just have to pay a private mortgage insurance (PMI). This insurance protects the lender in case of a loan default. A PMI typically costs between 0.5% and 1.0% of the borrowed amount.
FANNIE MAE HOMEREADY LOANS
Another new option recently introduced by Fannie Mae is the HomeReady program and allows a down payment of just 3% and says the income of non-borrowing household members, as well as rental income, can be used to determine the debt-to-income ratio. This option is available for home purchases in specific low-income census tracts and other designated areas.
The bottom line is most people actually don’t choose to make a big down payment to buy a home because there are other options available. Some people can pay as little as 5% or some don’t need any down payment at all.
The only way to find out for sure is to talk to a lender. Most people don’t think they could qualify to obtain a loan, but you would be surprised with your options.
Do you have an eye on your next home?
This mortgage calculator can be used to figure out monthly payments of a home mortgage loan, based on the home’s sale price, the term of the loan desired, buyer’s down payment percentage, and the loan’s interest rate. This calculator factors in PMI (Private Mortgage Insurance) for loans where less than 20% is put as a down payment. Also taken into consideration are the town property taxes, and their effect on the total monthly mortgage payment.
CREDIT SCORE NEEDED TO BUY A HOME
If you are thinking about buying a house, you probably know your credit score or home buying credit affects this process. But how exactly does this affect your ability to buy a home?
Generally, the qualifying credit score for obtaining a mortgage is 660. Before 2008, you could take a mortgage loan out with as little of a credit score at 580, but ever since the housing crisis, banks are stricter to whom they choose to lend money.
HOW YOUR CREDIT SCORE AFFECTS YOUR INTEREST RATE
The higher your credit score, the lower the interest rate on the mortgage. So if you have a bad credit score, you will end up paying more on a house than someone who has a good credit score. Just because you have a bad credit score, does not mean you won’t be able to obtain a loan, but you will have a greater limit for home buying qualification.
Most lenders have carved-in-stone rules about handing out the best terms, and those rules almost always place a major emphasis on your credit score. If their best rates are offered to borrowers with a score of 700 or higher and yours is a 698, those two points could cost you thousands of dollars.
On a $150,000 30-year fixed-rate mortgage, that difference could cost you more than $13,000 in interest charges, assuming a 4.5 percent interest rate with a 700 credit score and a 4.875 percent rate on a 698 score. Fall below a 660 and the rate goes up even more, if you can even get approved for a mortgage at all.
OBTAINING A COPY OF YOUR CREDIT REPORT
When was the last time you got a copy of your credit score? You are entitled for a free copy of your credit report through the Fair Credit Reporting Act (FCRA) at annualcreditreport.com or by calling 1-877-322-8228. The big three national credit reporting companies, Experian, Equifax, and Trans Union, must also provide you with a copy of your credit report at least once a year.
Your credit report will include personal information such as your address, debts, and credit lines. Examine your credit report closely to check for any possible discrepancies. If you do notice any discrepancies in financial amounts on your credit report, highlight them so that you can dispute them. There have been multiple cases against credit companies for having false information on credit reports, so look carefully.
RESTORING POOR CREDIT
If you get your credit report back and everything looks right, but it’s less than you were hoping for, start doing the following to restore your bad credit.
PAY YOUR BILLS ON TIME
This might seem simple and straightforward, but this is crucial in repairing your credit score. Paying your bills on time month after month will reflect positively on your score. On-time credit card payments are big factors in helping your credit score.
PAY COLLECTION PAYMENTS
If you have any bills sent to collections, try to pay them off. Even if paying off the collections doesn’t get them removed from your credit report, it still may improve your credit score since a late payment is considered better than unpaid debt.
WATCH YOUR DEBT-TO-CREDIT RATIO
The lower your debt-to-credit ratio, the better it reflects on your credit report. Your credit score is driven by how much revolving credit you have versus how much you are using. To help improve your credit score, try to pay on the balance of your debt. If your debt-to-credit ratio is 30% or lower, you are usually in good shape.
GET RID OF ARBITRARY BALANCES
Although miniscule, arbitrary balances are tiny balances that you have spread over several different credit cards. Your credit score considers how many balances you have distributed amongst your various credit cards. Therefore, try to consolidate your spending onto one credit card in order to start making a difference in your credit score.
KEEP GOOD DEBT ON YOUR CREDIT REPORT
So what is good debt you ask? Could debt ever be good? The answer is, of course. Good debt that shows you as a responsible payer on your credit cards. The longer the history of your good paying record, the better it reflects on your credit score.
CHECK THE AGE OF NEGATIVE INFORMATION ON YOUR CREDIT REPORTS
It’s federal law for any negative information on your credit report to be removed after seven years. If you notice that your credit report has negative information on it, follow the steps above in the dispute process.
OVERVIEW OF HOME BUYING QUALIFICATIONS
When you start the home purchasing process, your mortgage lender will use different qualifications to determine if you are approved for a loan.
YOUR JOB HISTORY
When you are trying to qualify for a mortgage loan, your job history will be an important factor. Lenders like to see you have been at a job for two years, which reflects steady employment. If you have received promotions or a pay upgrade, this is seen as a big positive by the mortgage lender. If you have not worked continuously for the past two years, you can still qualify for a loan if you explain the reason to the mortgage lender.
BILL PAYMENT HISTORY
The mortgage lender will take an in-depth look at your bill payment history to give the lender an idea of how you will be paying your mortgage payments. You should be able to list all your debts and liabilities, each monthly payment amount, and how many years you have left to pay your debts. To verify the information you have personally provided, the lender may order a credit report.
DOWN PAYMENTS AND CLOSING COSTS
Another factor in determining your loan approval is calculating your down payments and closing costs. A good rule of thumb is that your down payment should equal 5% of your prospective home’s purchase price. Depending on your location, your closing costs could start to get expensive. To make sure you have enough money saved for these costs, the lender will check your bank account for funds stored in the bank, as well as verify how long these funds have been in your bank account.
MORTGAGE PAYMENT TERMS
The amount you can pay for your monthly mortgage will vary depending on how much money you put down, the expected borrowed amount, the repayment period, and your interest rate. If you select a shorter term to pay your mortgage off, your monthly payment will be higher. Most buyers choose a 30-year fixed mortgage to keep their payment at a minimum.
YOUR ABILITY TO MAKE MORTGAGE PAYMENTS
Besides calculating the term of your mortgage payments, the mortgage lender will use two formulas to determine if you have the ability to make your mortgage payment.
- Your monthly housing costs should be no more than 20% of your monthly gross income. The mortgage lender will consider other income streams such as payment for overtime work, a second job, retirement, Social Security benefits, disability, and VA payments.
- The mortgage lender will also consider your monthly housing costs with other extended debts such as student loans, car loans, or debt payments. These amounts should not equal more than 36% of your monthly gross income. Depending on your income, you may qualify for a financial assistance program. These financial assistance programs may help you get a bigger mortgage loan than you would normally qualify for under the mortgage lenders assessment.
HOW YOUR CREDIT QUALIFICATIONS WILL COME INTO PLAY WHEN YOU ARE PURCHASING A HOME
If you’re trying to buy a new home and already meet the 660 credit score benchmark, you will still need to stay on your toes. You need to ensure that you maintain this credit score throughout the entire home buying process. If you have less than stellar credit, do not feel intimidated by this credit card benchmark or by the home buying processes’ emphasis on your credit report. Just so that you are prepared, here ways that your credit score will have an impact during the home buying process:
Your credit score will determine your mortgage interest rate. If you have good credit, you may find a lower interest rate. The converse is also true. With a challenge credit score, you will find higher interest rates if any mortgage loan is offered to you.
A LARGE DOWN PAYMENT
With a challenged credit score, you may need to put down a larger down payment when you are trying to buy a home. A large down payment will reduce the amount of your mortgage each month.
There are several different types of loan programs available. Your credit score and credit history will affect the types of loans offered during the home buying process.
The Federal Housing Administration (FHA) loan program is part of the U.S. Department of Housing and Urban Development (HUD). There are several different mortgage loan facts that feature lower down payments and easier qualifications for this program.
LOCAL AND STATE MORTGAGE LOAN PROGRAMS
Some states and localities have mortgage loan programs that feature low to moderate financing. These loans typically feature down payment assistance and programs that are geared towards the first time homebuyer. The qualifications for this type of loan are not as stringent as that or conventional loan programs.
These loans contain conditions that are set by Freddie Mac and Fannie Mae. Note that conventional loans could be nonconforming and conforming. Freddie Mac and Fannie Mae establish the maximum loan amounts, income requirements, home buying credits, and down payment amount.
A VA loan is guaranteed by the United States Department of Veteran Affairs, allowing military veterans to obtain loans with favorable terms. The Department of Veterans Affairs checks qualifications to determine your eligibility for the loan. Sometimes these loans will not require a down payment.
These loans are guaranteed by the Rural Housing Service (RHS) of the U.S. Department of Agriculture (USDA). They are primarily for residents in rural areas and feature low closing costs and no down payments.
When you make an appointment with the mortgage lender, you will need to present them personal documents including:
You will need to verify the stated income on your application. Plan on bringing paystubs for the past six months.
YOUR HOME ADDRESS
Bring in a listing of all of your home addresses for the past two years.
SOCIAL SECURITY NUMBERS
You will need to bring the Social Security cards for all of the borrowers on the mortgage loan.
CHECKING AND SAVINGS BANK ACCOUNT STATEMENTS
You will need to bring in checking and savings account statements for the past three months.
THE ADDRESS OF YOUR BANK BRANCH
Furnish the address of your local bank branch. This is the one that you visit to make deposits and withdrawals and not the address of the bank’s headquarters.
INCOME TAX RETURNS
You will need to bring your federal income tax returns for the previous two years. If you are self-employed, you will need to bring in 1099 tax returns and balance sheets.
PROOF OF RENTAL AND UTILITY PAYMENTS
You need to show a good track record and payment history for your rent and utility payments. Plan to bring canceled checks. If you use a credit card, bring your credit card statement with the listings of the rent and utility bill payments on it.
PROOF OF ADDITIONAL INCOME
If you are receiving payments from a rental property, child support, or Social Security, you will need to provide these records to the mortgage lender.
DIVORCE SETTLEMENT PAPERS
If this applies to you, and your divorce is finalized, bring in your divorce settlement papers to your meeting with the mortgage lender.
While you don’t have to provide all of the required documents to the mortgage lender before receiving an estimate, it is in your best interest to present as many documents as needed so that the mortgage lender can make an educated decision on your behalf. During this stage, the mortgage lender will not charge any fees, except the one needed to obtain your credit report.
With all this information of credit scores, mortgage loan process, and types of loans, you should be able to make informed decisions about how to proceed in the home buying journey.
The good news is that if you have bad credit, this does not have to spell the end of your home buying dreams. You could work to repair your credit using the preceding tips in this document. Once you obtain your credit report, it will list your credit score, which will truthfully reflect your home buying credit.
Have you ever wondered how a home’s value is determined? With online property evaluation tools, Zestimates, and professional opinions, it can be confusing to determine what your home is worth. A property’s value is based on factors such as location, amenities, structural condition, and recent sales of similar properties around the area. To come up with a value, a property appraisal is completed so you can know the exact value of your home.
The most common form of appraisal is determining the fair market value of your property, or what the home should sell for on the fair market. There are other types of appraisals to determine the property’s tax-assessed value, which determines how much tax the homeowner should pay on the home annually.
There are formal appraisals, which can be done by a property appraiser, or they can be done by a real estate agent. If you are buying or selling a property, most lenders will require the services of a professional appraiser, but don’t confuse this with a home inspector. A home inspector is a qualified professional that will tell you about the condition of your home, not the value.
Here are the different reasons for needing an appraisal
- Selling your home
- Buying a home
- Home equity loans
- Cash or business loans
- Tax reassessments
SELLING YOUR HOME
When selling your home, an assessment of the property’s value is an important step in coming up with an initial listing price. This service is typically offered by your real estate agent and looks at comparable properties in the surrounding area.
Comparable properties are those sold within the past year or two that are similar to your home in terms of size, features, and condition.
After finding the “comps,” the agent then adds or subtracts value to your home. For instance, a property fence can add value to your home, but pealing exterior paint can subtract from it.
BUYING A HOME
When an offer on a home is accepted, the lending company will need a professional appraisal to be completed on the property. The lender requires this so they know the proper amount given on the loan. This also ensures that the amount you agree to pay for on the property is priced correctly.
For this reason, most buyers will include a contingency clause in the purchase agreement which states that the sale is contingent upon the approval of lender for the mortgage loan. This is contingent upon appraisal.
REFINANCING YOUR HOME
Refinancing a home means replacing your current mortgage loan with a completely new one. You can do so with the same lender you took out your first loan with, or you can find a new lender. Either way, it essentially means starting over with a brand-new loan term, which is why you don’t want to make the decision in haste because rates are low.
Refinancing also requires a property appraisal to make sure the collateral value offered by the property justifies the refinanced loan amount you ask for.
So, why do people refinance their home?
- To shorten the term of their loan
- Lower their interest rate
- Lower payment
- Adjustable-rate mortgage to a fixed loan
- And cash out some equity
- A home equity loan
A home equity loan is basically a line of credit secured by your home. When the line of credit is drawn down, the lender providing it places a second mortgage loan on your home until the loan is paid off, then you can use the loan to finance other purchases. However, if the loan is not paid off, your home could be sold to pay off the remaining debt.
You want a property appraisal for this because it could help you secure a loan. Also, it’s great thing to know if your property has increased in value or decreased.
CASH OR BUSINESS LOANS
You can use your home as the primary collateral source for other types of loans. This requires a current valuation of the home made by a professional appraiser and put in writing. You would then bring that written document with you when you got speak to lenders about the loan you’d like.
Many states base property taxes on the fair market value of homes. If your property has decreased in value, then you can request a reappraisal for it. This might lower your annual property tax, and who wouldn’t love that?
Having your home appraised will either add money to your pocket, or it is an eye opener to make changes. Or, if you’ve found your dream home and the asking price is $300,000, it’s always good to double check that the house is actually worth that amount.
How Much Can You Afford When Buying a Home?
This is it, the moment you have been waiting for. After years of waiting and saving your money, you’re finally ready to buy a home! Whether you are a first time home buyer or you’re looking to purchase a different home, the process can be both thrilling and nerve-wracking at the same time. It’s difficult to fully prepare for your home buying journey or know exactly what to expect, so by knowing a few key details, you will be able to assess how much you can actually afford with less of a hassle.
How Much Does a Home Actually Cost?
Start your process of buying a home by knowing how much a home costs. Yes, all homes have different price tags, but knowing that there are always upfront costs can help set a buyer on the right path of purchasing a home. Some of the costs when buying a home include:
- Down payments, and earnest money deposits
- Property taxes
- Home inspection
- Closing costs
- And while not as upfront, cash reserves
3 Easy Steps to Affording a Home
1) Check Your Credit
First time home buyers tend to have the most credit built up, with less than a third of it used. And if your credit is not up to par, begin the process of fixing your credit at least six months in advance to starting your home search. Fixing a credit score is a lot like losing weight, it takes time, discipline, and patience.
2) Evaluate Your Assets and Liabilities
Evaluating your assets is having a good understanding of what you owe and what money you have coming in. A great way to do this is by tracking what you spend, and knowing how much money you have left over. Start by listing all of your local bills (rent/mortgage, car payment, phone bill, credit card, utilities, etc). Then track your out-of-pocket spending for one month (groceries, gas, meals, entertainment, etc). After one month, review the numbers, and look for ways to save.
However, if your money-management system required sifting through piles of receipts and retrieving cash from various pockets and purses, there are apps to help make budgeting organized. Apps like Mint, GoodBudget, and Expensify, can help you put away the paperwork and get a better understanding of your daily, weekly, monthly, and annual spending habits. There is no such thing as enough saving.
3) Organize Your Documents
Homebuyers will need to have available records of their income and their taxes. You will need to have prepared:
- Two recent pay stubs
- The past two years W-2s, and tax returns.
- Bank statements for the past two months.
Once this is done, you’re ready to move on to the next phase of calculating how much you can afford.
Determine Your Loan
With all your information and research gathered, now you can figure out if you are qualified for a mortgage. A mortgage is a loan to finance the purchase of your home. The easiest way to determine this is through an online mortgage calculator. Simply click on the link given, input some short information, and quickly know if you are qualified for a mortgage. If you are not qualified, these calculators allow buyers a great stand point of what needs to be done in order to be approved for a mortgage. (link)
A down payment is the money you give to the home’s seller, while the rest of the money owed comes from your mortgage. For example, let’s say the home you decide to buy is $100,000. If you pay a 3% down payment, that means you will pay $3,000 and you borrow (loan) $97,000. Or, if you pay a down payment of 20%, you would pay $20,000 and borrow $80,000. If you need help with down payments, there are programs to assist buyers with qualifying incomes and situations. There are commercial programs like Private Mortgage Insurance (PMI) or Piggy Back Loans. While those programs are fairly easily to qualify for, they can cost a lot of money. If those programs to not work for you, there are government aid programs like FHA and VA that can help you make and decide your down payment.
This is very important and great advice to home buyers! In order to the get the actual amount you will pay on a home, you need to be pre-approved. Do this by applying to several lenders within a two week period so that the inquiries do not damage your credit report. The lenders we recommend are Cross Country Mortgage or Goldwater Bank. Receive your pre-approval before contacting a real estate agent so you can have a firm idea of what you can afford, and you don’t accidentally fall in love with a house that you cannot afford. If you follow these key details, your home buying journey will leave you better prepared and less stressed!
When thinking about buying a foreclosure, first time homebuyers often imagine a charming house with a white picket fence and rocking chairs on the wrap around porch, and that the house is owned by a widowed mom whom fell on hard times. However, this scenario is generally far from reality.
Homeowners stop making payments for a number of reasons. Few choose to go into foreclosure voluntarily, but it’s usually an unpredictable result from one of the following
- Laid-off, fired or quit job
- Inability to continue working due to medical conditions
- Excessive debt and mounting bill obligations
- Squabbles with co-owner, divorce
- Job transfer to another state
A foreclosure will hurt your credit rating and make it near impossible to buy another a home anytime soon. In addition, if the profits from selling your home do not cover the unpaid portion of your loan, your lender might take you to court for the rest.
But not to worry! There are several ways you can avoid foreclosure.
START BY NEGOTIATING WITH YOUR LENDERS
Lenders have an incentive to negotiate with home loan borrowers so that they too can reduce the number of foreclosures. And the faster you act, the more options you will have.
The minute you realize you are having financial troubles, ideally before you miss a payment, start speaking to your lender about temporary assistance, especially if you are experiencing short term unemployment or reduced income. The Federal Trade Commission notes that your lender might approve you for a form of mortgage suspension or reduction, known as a deferral or forbearance.
The next option is through the Home Affordable Modification Program (HAMP), and is most likely your strongest possibility. Most major lenders, according to the Treasury Department, participate in this program. In order to qualify for HAMP you will need to show that your mortgage exceeds 31% of your gross monthly income.
Lastly, ask your lender about how to go into a short sale. A short sale is a house that is listed for sale at a price lower than the amount owed on the mortgage. Ask your lender about this type of sale when you are in such financial turmoil that you don’t qualify for deferral or modification. While you do lose your home by selling it for less than what is left on your loan and transferring the home’s deed over to your lender, you do avoid foreclosure.
Your power to negotiate and be approved for help is at the mercy of your job, income and expense scenario.
FILING FOR BANKRUPTCY
Bankruptcy is a legal process that allows debtors to eliminate or reorganize their debts under bankruptcy court supervision. This will wipe out your personal liability for most types of debt.
HOW BANKRUPTCY WORKS:
There are two types of bankruptcy you can file for; Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy:
This is designed to wipe out general unsecured debts. This usually lasts around three months. Chapter 7 is commonly referred to as a liquidation because the appointed bankruptcy representative, or trustee, has the power to sell your unclaimed assets in order to pay back your creditors. In order to qualify for Chapter 7 your disposable income must be low enough to pass the means test.
Chapter 13 Bankruptcy:
This type of bankruptcy is commonly referred to as reorganization. This is when the trustee does not have the power to sell your unclaimed assets, but since you’re exempt from selling these assets, a plan will be put in place to help pay back some or all of your debts. Chapter 13 is a program that can help you save your home or pay off your nondischargeable debts.
The two steps to bankruptcy
- The moment you file for bankruptcy, an automatic stay goes into effect. This is prohibition of most creditors from trying to collect their debts from you. This includes the stopping of lawsuits, wage garnishments and credit calls.
- After you go through the bankruptcy process successfully, you will receive a discontinuance of your debts. This wipes out your personal responsibility for and obligation to pay back any debts through the bankruptcy. Though, this most likely will not wipe out all debts that were discharged.
Whether bankruptcy is in your best interest depends on your income, assets, and the types of debt you wish to eliminate.
SELLING YOUR HOME
If your home has appreciated in value since you bought it, you may be able to sell it with a Realtor. This is when you simply can’t afford the house you own, and all the options listed above won’t help. If you contact your lender they might allow you to stop making payments until the house is sold.
If you’re looking to sell your home in a timely manner, consider talking to us about our guaranteed sale program. We will make sure we get your home sold in 120 days, or we’ll buy it.
At this point, it may be difficult to get your house ready for the real estate market, however there are a few things you can do prepare your home for the real estate market:
Work on your curb appeal. Even just making sure the lawn is nicely mowed can make all the difference. And it takes no extra money to do some weed pulling as well.
Buyers don’t like to see a cluttered home. The less items, especially personal, you have lying around the better. Consider decluttering your rooms. It not only makes the rooms look larger, but it also allows buyers to visualize their personal items inside the space.
Research the market. Go online and look at houses for sale in your neighborhood. The key to selling your house is pricing it competitively. Look at other houses and see how they compare in size, number of rooms, and how updated they are to you. Don’t over price, price just right
Choose the right time to sell. Ideally, put our house on the market in the spring and summer. Homes typically show better in nicer weather.
HAND THE DEED OVER
If no fishes are biting on the sale of your home, your lender may agree to take the deed and cancel your debt. This is known as a deed in lieu of foreclosure. Ideally, the bank can sell your house but won’t report it as a foreclosure to the credit rating agencies. In fact, you may be able to negotiate with the bank about how it can help you preserve your credit rating.
Deeds in lieu of foreclosure will no longer leave you with taxes. Thanks to the “Mortgage Forgiveness Act of 2007,” the IRS is so no longer allowed to consider forgiven debt to be taxable income.
These are the steps to save your home from foreclosure. Some households have an array of assets that can be used to make payments and delay foreclosure. Unemployment insurance, disability insurance and savings are each potential cash sources for example. Household budgets can be slashed. Big, expensive cars can be traded in for cash. Retirement funds are often available.
So, don’t panic! A foreclosure does not have to be a scary situation. As long as you consider all your options you will be able to save yourself and your home.
Is Cash is Still King?
At a time when many Americans may find it difficult to scrape together a 10% down payment for a home, some buyers are looking to to purchase their home now in all-cash deals. The huge majority of cash buyers consists of individual investors, as well as second and first time home buyers.
When you purchase a home in cash, you save on certain closing costs and also gain immediate full equity in your property. You also avoid paying thousands of dollars in interest with an amortized mortgage.
So, if you could afford to pay cash for an investment property or your home, should you? Take a look at some of the pros and cons of buying a house with cash.
The Benefits of Buying a House with Cash
You’re a More Attractive Buyer
A seller who knows that you’re paying for cash will take you more seriously. If you don’t have to plan for a mortgage, sellers may find your more appealing. The mortgage process can be time-consuming, and there’s always the possibility that an applicant will be turned down, the deal will fall through and the seller will have to start all over again.
You’re also more attractive to a seller with cash because the closing will be much faster. Because of the new TRID laws that took effect late last year, the average mortgage loan-closing time is 45 days, while a cash close can take as little as 14 days. The faster close is more and more appealing to both buyers and sellers. Not only do sellers like the idea of this, but you might find it nice to quickly move into your new home.
Negotiate a Better Purchase Price
With cash, you’re much more likely to get a better deal, putting you in a better position to bargain. Since “time is money,” the sooner a seller receives their money, the sooner they can invest or make use of it.
Being ready to pay cash not only gives you an edge with motivated sellers eager to close the deal, it also helps with sellers in real-estate markets where inventory is tight and bidders may be competing for their property.
Avoid the Hassle of a Mortgage
Imagine forgoing the hassle of getting a mortgage. Since the housing crisis of 2007-08, mortgage underwriters have tightened their standards for deciding who can get a loan. As a result, they are likely to request more documentation, which means it can take more time and aggravation for mortgage applicants.
A borrower may back out of a contract because the appraisal comes in too low and the bank won’t make the loan. Sellers prefer this because they don’t have to worry about the bank pulling the loan at the last minute, or any of the other circumstance that occur with bank funded purchases. The loan may also fall through for other reasons like issues that come up during inspections.
Some buyers have little choice but to pay cash. We’ve had past clients that couldn’t get a new mortgage because they already have an existing mortgage on another house up for sale. Once the old property sells, they place a mortgage on the new property or decide to forgo the mortgage altogether to save on interest.
No Mortgage Payments
You’ll never lose a night’s sleep over mortgage payments. Mortgages represent the single largest bill Americans have to pay each month, as well as the biggest financial burden if income falls or if someone gets laid off. Years ago, homeowners would sometimes celebrate their final payments with mortgage-burning parties. Today, however, the average homeowner is unlikely to stay in the same place long enough to pay off a typical 30-year mortgage or even a 15-year one. In addition, homeowners often refinance their mortgages when interest rates fall, which can extend their loan obligations further into the future.
If peace of mind is important to you, paying off your mortgage early or paying cash for your home in the first place can be a smart move. That’s especially true as you approach retirement. Though considerably more Americans of retirement age carry housing debt than was the case 20 years ago, according to Federal Reserve data, many financial planners see at least a psychological benefit in retiring debt-free.
The Cons of Buying a House with Cash
All Your Eggs in One Basket
Paying for cash means typing up a lot of money in one asset class. If you drown your savings to pay for a house, you’ll be breaking one of the most important financial rule of diversification. In terms of return on investment, residential real estate has historically lagged behind stocks. That’s why most financial planners will tell you to think of your home as a place to live rather than an investment.
You’ll Sacrifice Liquidity
Liquidity refers to how quickly you can get your cash out of an investment if you ever need to. Most types of bank accounts are totally liquid, meaning that you can obtain cash almost instantly. Mutual funds and brokerage accounts can take a little longer, but not much. A home, however, can easily require months to sell.
You can borrow against the equity in your home, through a home-equity loan, home-equity line of credit or reverse mortgage. But all of these options have drawbacks, including fees and borrowing limits, so always be aware of the situation.
The Bottom Line
Paying all cash for a home can make sense for some people and in some real-estate markets, but make sure you consider the downsides too.