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5 Rampant Mortgage Myths You’ll Hear These Days—Completely Debunked

August 14, 2020

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These days, things are changing so fast, it’s tough to keep up. That’s especially true in the mortgage industry, where interest rates and the overall home loan landscape are shifting with such head-spinning speed, it’s easy for outdated information to circulate, leading home buyers and homeowners astray.

You may have heard, for instance, that everyone can score a record-low interest rate, or that refinancing is a no-brainer, or that mortgage forbearance means you don’t have to pay back your loan, ever. Sorry, but none of these rumors is true—and falling for them could cost you dearly.

To help home buyers and homeowners separate fact from fiction, we asked experts to highlight some rampant mortgage mistruths out there today. Whether you’re looking to buy or refinance, these are some reality checks you’ll be glad to know.

Myth No. 1: Everyone qualifies for low interest rates

There’s a lot of buzz about record-low mortgage interest rates lately. Most recently, a 30-year fixed-rate mortgage dropped to 2.88% for the week of Aug. 6, according to Freddie Mac.

This is great news for borrowers, but here’s the rub: “Not everyone will qualify for the lowest rates,” explains Danielle Hale, chief economist at realtor.com®.

So who stands to get the best rates? Namely, borrowers with a good credit score, Hale says. Most lenders require a minimum credit score of about 620. Some lenders might require an even higher threshold (more on that later).

Your credit score isn’t the only factor affecting what interest rate you get. It also depends on the size of your down payment, type of home, type of loan, and much more. So, keep your expectations in check, and make sure to shop around to increase the odds you’ll get a good rate.

Myth No. 2: Getting a mortgage today is easy

Many assume today’s low interest rates mean that getting a mortgage will be a breeze. On the contrary, these low rates mean just about everyone is trying to get a mortgage, or refinance the one they have. This glut of applicants, combined with the uncertain economy, means some lenders may actually tighten loan requirements.

In fact, a realtor.com analysis found that 5% to 20% of potential borrowers may struggle to get a mortgage because of these stricter standards. And getting a mortgage could become even tougher if the recession gets worse.

For example, some lenders may also require higher minimum credit scores and larger down payments. In April, JPMorgan Chase began requiring a 700 minimum credit score and 20% down payment.

Jason Lee, executive vice president and director of capital markets at Flagstar Bank, says some lenders aren’t offering the loans that are considered riskier—such as jumbo loans, which exceed the conforming loan limit (for 2020, that max is $510,400).

“There aren’t as many loan products available,” Lee says.

And even if you do manage to get a loan, it may take longer than you’d typically expect.

“Based on low rates and a high volume of refinances, loans are taking longer to complete from application to closing,” says Staci Titsworth, a regional mortgage manager for PNC Bank.

As such, borrowers should ask their lender how long the process will take to close, and make sure they’re aware of the expiration date on the interest rate they’ve locked in—since with rates this low, they could go up.

“Most lenders are locking in the customer’s interest rate so it’s protected from market fluctuations,” Titsworth adds.

Myth No. 3: Everyone should refinance their mortgage

“With mortgage rates hovering near record lows, a refinance can make sense and can help free up monthly cash flow,” Hale says.

Still, not everyone should refinance. Homeowners should make sure to take a good hard look at their situation to see whether it makes sense for them.

For one, it will depend on your current interest rate. If it’s low already, it may not be worth the trouble—particularly since refinancing comes with fees amounting to around 2% to 6% of your loan amount.

Given these upfront costs, refinancing often makes sense only if you plan to remain in your house for a while.

In general, “refinancing is a good idea for homeowners who plan to live in the same home for several years, because they will reap the monthly savings over a longer time period,” Hale explains.

Myth No. 4: You can apply for a mortgage after you’ve found a home

Many people assume that you can find your dream home first, then apply for the mortgage. But that’s backward—now more than ever. Today, your first stop when shopping for a house should be a mortgage lender or broker, who can get you pre-approved for a home loan.

For “a buyer in a competitive market, it’s typically essential to have pre-approval done in order to submit an offer, so getting it done before you even look at homes is a smart move that will enable a buyer to move fast to put an offer in on the right home,” Hale says.

Mortgage pre-approval is all the more essential in the era of the coronavirus pandemic. Why? Because many home sellers, leery of letting just anyone tour their home, want to know a buyer is serious—and has the cash and financing to make a firm offer. As such, some real estate agents and sellers require a pre-approval letter before a potential buyer can view a home in person.

Nonetheless, according to a realtor.com survey conducted in June of over 2,000 active home shoppers who plan to purchase a home in the next 12 months, only 52% obtained a pre-approval letter before beginning their home search, which means nearly half of home buyers are missing this crucial piece of paperwork.

Aside from getting their foot in the door of homes they want to see, home buyers benefit from pre-approval in other ways. Since pre-approval lets you know exactly how much money a lender will loan you, it also helps you target the right homes within your budget.

After all, as Lee points out, “You don’t want to get your heart set on a home only to find out you can’t afford it.”

Myth No. 5: Mortgage forbearance means you don’t have to pay back your loan

The record unemployment caused by the COVID-19 pandemic means millions of Americans have struggled to pay their mortgages. To get some relief, many have been granted mortgage forbearance.

Nearly 8% of mortgages, or 3.8 million homeowners, were in forbearance as of July 26, according to the Mortgage Bankers Association.

The problem? Many mistakenly assume that mortgage forbearance means you won’t have to pay your loan, period. But forbearance means different things for different homeowners, depending on the terms of the mortgage and what type of arrangement was worked out with the lender.

“Forbearance is not forgiveness,” Lee says. “Rather, it’s a timeout from having to make a mortgage payment where your servicer—the company you send your mortgage payments to—will ensure that negative impacts to your credit report and late fees will not occur. However, because forbearance is not forgiveness, you will need to reach some sort of resolution with your loan servicer about the missed payments.”

The paused payments may be added to the back end of the loan or repaid over time.

“It does not forgive the payments, meaning the borrower still owes the money,” Hale says. “The specifics of when payments need to be made up will vary from borrower to borrower.”

The post 5 Rampant Mortgage Myths You’ll Hear These Days—Completely Debunked appeared first on Real Estate News & Insights | realtor.com®.

Saving Up for a Down Payment? Here’s Where To Put Your Money

May 5, 2020

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The coronavirus crisis has heightened financial anxiety and uncertainty. But if buying a home has been part of your life plan, there’s no need to panic. Many Americans will receive stimulus payments in the coming weeks, which could ease some of the burden, and if you’re able, now is still a good time to start saving for the down payment on your mortgage.

So where should you put that money while you amass the right amount? There are a number of places to stash your cash—each with its own pros and cons.

“Some have low risk, but also low returns, like a savings account or CD,” says Sherry Graziano, head of mortgage omni experience at Truist. “Other options may have higher returns, but they typically have a higher risk associated with them.”

Exactly which type of account will work for your own personal path to homeownership depends on your individual financial situation, how soon you plan to buy a home, and how much risk you’re willing to take. Here’s a look at your options.

Savings, checking, or money market accounts

Best for: People buying a home in three months or less

If you plan to buy a home fairly soon, a savings account is one of the safest places to put your money. They are FDIC-insured, meaning your money is protected in case of banking institution failures, and your money is always accessible.

“The least risky type of account is a savings account,” says Shelby McDaniels, channel director of corporate home lending at JPMorgan Chase. “They are highly insured. It is simple to link a checking or direct deposit to the account, and most do not have any restrictions on timing.”

Most first-time home buyers, she says, use a savings account to begin the process of buying a home.

The downside? Savings account interest rates tend to be low, with less than a 2% annual percentage yield, according to an America’s Best Rates survey. High-yield savings accounts averaged 2% to 2.4%, but some require a minimum deposit or that you maintain a minimum balance.

Money market accounts are another option. They are similar to savings accounts, but offer some checking features and sometimes a little more interest.

If you’re opting for a savings account, make sure you’re aware of any fees or requirements, like maintaining a minimum balance, Graziano says.

Certificate of deposit

Best for: People buying a home in three to 12 months

A certificate of deposit, or CD, is another low-risk option. Offered by banks and credit unions, CDs give savers interest on a lump sum of money if they leave it in the account for a designated time frame, such as three, six, or 12 months, or even longer.

If you’re saving for a down payment, CDs have a couple of downsides.

“CDs typically don’t allow for additional deposits, so that may not be the best option if a client is planning on making continuous deposits,” Graziano says.

CDs also have a low interest rate—just a hair higher than savings accounts—and the money isn’t accessible until the CD has matured.

McDaniels suggests choosing a CD that will work well within your time horizon so you can use it when you need it.

401(k)

Best for: People buying a home in three years or less

A 401(k) is a retirement account that you contribute to tax-free, but it has annual contribution caps and limits when you can withdraw money before you reach age 59 and a half. For 2020, the contribution limit is $19,500, according to the IRS.

Buying a home is one instance where you can use money from your 401(k) before reaching retirement age, but it can be risky.

Early withdrawals come with a 10% penalty on the amount taken out, and you’ll have to pay income tax on the distribution.

You can also take a loan against the 401(k). However, Graziano says, “the client would want to determine the amount of the repayment, and be sure that they will be comfortable with the new house payment and 401(k) repayment responsibility.”

Another thing to consider: You’ll miss out on any interest you would have earned on the money taken out of the 401(k), McDaniels notes.

“This can be a good short-term option for someone who knows they will be able to pay back their 401(k) loan quickly, with no penalty,” she says.

Roth IRA

Best for: First-time home buyers purchasing within three years

A Roth IRA, or individual retirement account, is usually opened at a bank or investment firm. Roth IRAs are a good way to save, because you fund the account with after-tax money, meaning contributions aren’t deducible but funds withdrawn when you retire are also not taxed as income.

First-time home buyers can often take money out of their Roth IRA to buy a home without paying a penalty. You can withdraw the amount you’ve contributed tax- and penalty-free, and then, once the contribution amount is maxed, you can take out as much as $10,000 of the account’s earnings.

Historically, IRAs have earned high interest of 7% to 10%, and money can be accessed within a few days. But keep in mind that Roth IRA contributions are capped at $6,000 for 2020, so you can save only so much per year. And you can’t repay the money you take out like you can with a 401(k). So once you take it out, even to buy a home, it’s gone and you miss out on the years of accumulating interest.

Investment accounts

Best for: People buying a home in five years or more

The stock market fluctuates, so investing and hoping your money grows before you buy a house with it can be a risky move. Still, if your time horizon for home buying is more than a few years off, this could be a decent option where your money could expand by as much as 10% during boom market years.

“Higher risk typically means greater return,” Graziano says. “But keep in mind there is no guarantee when investing in the stock market. The account may lose value, too.”

Investing in the stock market can be complex, and you may owe fees and commissions.

McDaniels suggests carefully examining your financial situation and home-buying plans to evaluate the benefits and risks. And when you sell your stock, it can take up to three days to see your money, according to rules set by the Securities and Exchange Commission.

Make sure the cash is accessible

Wherever you choose to put your money, make sure it’s accessible when you find your home.

“The timeline and flexibility with the amount of down payment are the two biggest factors that a buyer should take into consideration,” McDaniels says. “Someone who has a flexible timeline or already has a portion of their down payment might want to consider an investment account. While someone who is just starting to save or plans to buy in a shorter timeframe (of a few months) might be best suited for a savings account.”

Exactly how much you need to save for a down payment varies by your lender and the type of loan you get. Before you buy a home, McDaniels recommends saving 20% of your take-home pay, as well as three to six months of your mortgage payment.

Lenders usually require 60 days of asset account statements verifying the funds needed for the home purchase, and the source of any large deposits.

“Money kept at home in a safe commonly known as ‘mattress money’ is not eligible to be used for the down payment or closing costs,” Graziano says.

The post Saving Up for a Down Payment? Here’s Where To Put Your Money appeared first on Real Estate News & Insights | realtor.com®.

I’m 27 and Put 17% of My Income Into My 401(k), but That’s Keeping Me From Buying a Home

December 27, 2019

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Hello Catey,

I am a single, 27-year-old male. I am beginning to save for a down payment on a home. I currently contribute about 17% to my 401(k). While that is great, it doesn’t leave me very much room to save for a new home. I am looking for perspective about lowering my 401(k) contributions to help save up for a down payment on a home, versus maintaining 401(k) and lengthening my home-buying timeline.

Thanks,
Zack

Dear Zack,

First of all, congrats on contributing so much to your 401(k) – you’re in an elite minority. A survey from personal finance site GoBankingRates found that about one in three Americans have nothing saved for retirement, with millennials being the most likely group to have a $0 retirement balance.

And even those who do contribute aren’t typically contributing like you do: The average person in their 20s with a 401(k) plan is putting in an average of 7% of their income with their employer matching an average of 4%, Fidelity data shows.

So you’re far ahead of the pack on saving for retirement — and that’s great. Even so, before you touch those retirement contribution amounts, consider other options: “This individual is taking a binary approach to his financial situation, assuming that the 401(k) is the only place to look for cash flow to purchase a home,” says Rich Ramassini, the director of strategy and sales performance for PNC Investments. He notes that you should look at your annual cash flow (income – expenses) and look for other opportunities to save — if you haven’t already.

If you’ve done that, some experts MarketWatch consulted with said that it’s OK for you to lower your 401(k) contributions — to a point, and for a short time — if you want to buy a home. (That advice assumes you don’t have any other high-interest debt and you have an emergency fund socked away -— things you might want to deal with before buying a home, as MarketWatch wrote in this article).

“I generally recommend that employees set aside at least 10% to 15% of their income in order to fund the retirement that they want,” says certified financial planner Amy Ouellette, the director of retirement services at Betterment for Business. “However, your contribution rate doesn’t need to be set in stone, and it’s okay to consider lowering it a bit when saving up for other big milestones. While saving for retirement is incredibly important, so is having the financial freedom to make other worthwhile investments like home ownership.”

So how low can you lower your 401(k) contributions while trying to save for a home? “If buying a home is a few years out, I’d consider reducing your 401(k) savings rate to 8% to 10% of your income, while building up the down payment fund; this way you continue to build for your retirement while meeting a shorter term goal,” says Ouellette.

Certified financial planner Bobbi Rebell cautions that if you decide to lower your contributions to save for a home, you should still make sure you contribute at least enough to get the company match: “That is free money and often a return of 100% depending on the specifics of the plan,” Rebell, who is also the host of the Financial Grownup and co-host of the Money with Friends podcasts, adds. And Ouellette adds that you may want to talk to a financial advisor to calculate exactly how much to decrease contributions by and how much that will leave you for a down payment.

Another possible option: A 401(k) loan, though that also comes with risks. “The best option available, if you plan to stay at your job for a while, is to take a loan from your 401(k) to help cover you for the down payment on the home. Doing this will allow you to continue funding your 401(k) on a pre-tax basis (at the same rate as before), locking in that federal tax deduction up front, while getting you the funds needed to buy the home,” says Dave Cherill, a member of the American Institute of CPAs’ Personal Financial Planning Executive Committee — who adds that you must “keep in mind, if you leave your job with the loan outstanding, you will either need to pay it back, or include it in income that tax year and pay a 10% penalty on top (if under the age of 59-1/2).”

And of course, it’s important that you’re selective about the house you buy, ensuring that you can truly afford the home, that you’re getting a good mortgage rate if you do take out a loan, among other factors. And you should be aware of the fact that investing more in stocks may have upsides over real estate, as MarketWatch explored here.

“Owning a home is a huge financial investment but it is also a lifestyle choice. It provides stability, and a sense of ownership. It is often a commitment to a community,” Rebell points out. “Ownership has many non-financial benefits so it’s not [just] about comparing which will give you the better ‘return.’”

The post I’m 27 and Put 17% of My Income Into My 401(k), but That’s Keeping Me From Buying a Home appeared first on Real Estate News & Insights | realtor.com®.

How to Get a Mortgage on a Vacation Home: It’s a Whole Different Game

December 16, 2019

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You’ve spied a cozy bungalow for sale in your favorite beach town, and it hits you—wouldn’t it be great to purchase this oasis yourself? Yet before you get ready to make an offer, consider this: A mortgage on a vacation home works light years differently than a loan for a primary run-of-the-mill residence.

So before you head down this enticing path of purchasing a home away from home, check out this latest installment of our Guide to Buying a Vacation Home. Here, we highlight everything you need to know on the mortgage front so you can sail through the process and into your own personal retreat without a hitch.

Why vacation home mortgages may incur higher costs

Mortgages on vacation homes often require higher down payments and may have higher interest rates and property taxes, depending on the location. Why? Because financing a vacation home requires mortgage lenders to take on more risk than they would with a regular home in a variety of ways, says Steve Darnell, first vice president of sales at Flagstar Bank.

For one, vacation homes are often vacant, or rented out to tourists who may have less of an interest in maintaining the place in pristine condition.

“Occupied properties are considered less risky than rental properties, where no one is on-site with a vested interest in caring for the property,” Darnell explains.

If the buyer of a vacation home also has a mortgage on a primary residence, this poses another type of risk that the buyer’s finances might be stretched too thin over two mortgages.

“It might be fine in good times,” Darnell says, “but challenging for the homeowner to keep up with payments in a down economy.”

The location of a vacation home could pose yet another liability. Many popular vacation spots are susceptible to natural disasters, like hurricanes and flooding. Even with insurance, Darnell says, “lenders can face losses.”

All this risk means home buyers may have to pay a little more for their vacation homes in the form of a higher down payment, higher interest rates, and higher insurance premiums.

How much is a down payment on a vacation home?

While it varies by lender, according to Darnell, conventional mortgage programs that might typically need only 3% down on a primary residence will require a minimum of 10% down on a vacation home. If you plan to rent out the home rather than enjoy it yourself, that down payment could go up to 15%. In addition to having a higher down payment, mortgage interest rates on vacation homes could also be higher.

Also, not all mortgage products that are available for buying a primary residence are available for a vacation home purchase. For example, FHA and VA loans can’t be used to buy a vacation home, says Sherry Graziano, senior vice president and mortgage transformation officer at SunTrust Bank.

Why you must disclose how the vacation home will be used

“When a homeowner wants to purchase a vacation home, they must declare how they intend on using it at the time of application,” Graziano adds.

There are a few ways a vacation home can be classified:

  • Primary residence, where the homeowner lives most of the year
  • Secondary residence, which is rented out for no more than 180 days a year
  • Investment property, which is used strictly as a rental to generate income

If the occupancy type changes from the terms of the initial mortgage, homeowners should consider contacting their lender, since the home may need to be refinanced to change the mortgage terms to match its new purpose.

While refinancing a vacation home may seem like a pain, in many cases the change could be beneficial. For example, Graziano says, if a vacation home was initially purchased to be used as a rental property but the owner later decides to make it the primary residence, refinancing could bring a lower interest rate, and  may qualify for a different loan product (like an FHA or VA loan).

Your property tax and insurance bills could be higher

Vacation homes may also come with a higher property tax bill than a primary residence, Darnell says. He urges home buyers to make sure they understand the tax rates, which vary by state and locality, especially if they’re buying a home in a different state that they may not be as familiar with.

Along with different tax rates, there could be different rules and laws for real estate fees and expenses, Graziano says.

Closing costs, usually 2% to 7% of the home’s purchase price, also vary, and some states have higher transfer taxes, the fee for passing a property title from one person to another.

Homeowners insurance could also be as much as 20% higher on a vacation home, especially if it is rented out.

Mortgage pre-approval for a vacation home

Due to these higher costs, experts recommend that vacation-home buyers get pre-approved for a mortgage. That’s where loan advisers review a home buyer’s loan application, which includes the individual’s income, assets, credit, and liabilities to recommend the best-suited mortgage product.

“It is always best to have a mortgage pre-approval in hand before you sign a purchase agreement,” Darnell says. “That puts you in a better bargaining position in bidding on a home.”

He suggests checking with multiple lenders to ensure that you’re being offered a competitive rate and loan terms.

On top of the monthly mortgage payment, taxes, and insurance, Graziano says vacation-home owners need to budget for the big picture, and factor in operating costs, maintenance, repairs, utilities, and “any ancillary services for sustainable homeownership.” She says these costs are sometimes overlooked.

“Purchasing a vacation home can be exciting, but it’s important that homeowners are financially confident and have budgeted for all related expenses,” she says.

The post How to Get a Mortgage on a Vacation Home: It’s a Whole Different Game appeared first on Real Estate News & Insights | realtor.com®.

Stop Making Excuses! Busting the Most Common Reasons for Not Buying a Home

September 5, 2019

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Owning a home means you can build equity, take advantage of tax deductions, and partake in a little something called the American dream. For the past couple of years, the U.S. homeownership rate has hovered around 64%. But there’s also a considerably large pool of renters in the country who have plenty of reasons for not buying. And some of those explanations are totally legit: Financial, economic, or personal limitations can prove that now is not the right time to buy. But we know an excuse when we hear one.

We get it—investing in real estate is a huge commitment. It’s scary and exciting all at the same time. But what if buying actually is in the realm of possibility?

Think of all of the reasons you’ve ever given for not getting into the real estate game. Now allow us to poke holes in those theories.

We asked real estate agents to weigh in on the most common reasons people give for not buying a home—along with their counterarguments to these statements. If you do your research and everything checks out, purchasing property could be totally feasible.

‘I don’t have enough for a down payment’

According to Jonathan Self, a Realtor® at Center Coast Realty in Chicago, most people who say they don’t have enough for a down payment have no idea how much money they would even need.

“Most people who tell me this have not spoken with a lender—it’s rare for people to go to a lender before their agent,” he says.

So, the first step is to find a reputable lender. This can help you set your goals and put you on the path to homeownership.

Yes, there’s certainly a chance you won’t have enough for a down payment. Yet, on the other hand, you might not need as much money as you think you do. Or, your financial snapshot will qualify for loans that don’t require a large down payment. But you’ll never know unless you reach out to a lender.

‘I need to save more money’

For some, it makes sense to wait and save for a down payment, future mortgage payments, or home repairs. But as home prices edge higher, so do rent costs. That’s why buying might be a better decision than renting.

“The rent you’re paying could be converted to investment in equity,” says John Manning, managing broker at Re/Max on Market in Seattle.

Talk to a lender to see if you qualify for a mortgage. Most agents are willing to match potential buyers with mortgage professionals.

“There are mortgage products for almost every financial scenario,” Manning says.

‘I’m locked into my lease’

This is a common excuse, especially among first-time home buyers, according to Heather Sims at Ebby Halliday Realtors in Dallas. “My response is always, ‘Let’s find out what the penalty is for breaking that lease.’”

She says there’s often no penalty at all if your property management company is able to find a tenant to rent out the unit.

“Other times, it’ll be one month’s rent. In the grand scheme of things, that’s not very much given how much money you’re saving (and investing) by buying a home with a reasonable mortgage rate,” Sims says.

In some situations, the sellers will need to lease back the home as they search for a new home. In these instances, Sims says, it’s easy for buyers to recoup the cost of breaking their lease.

‘I might move away’

Many of us haven’t found our forever town or city yet. That’s fine. The possibility of relocation is a valid reason for holding out on purchasing a home—unless you’ve been saying that for years. The truth is, not investing in property could mean you’re leaving money on the table.

In some areas, mortgage payments are comparable with paying monthly rent. If that’s the case in your neighborhood, it might be wise to buy.

“Even if you have to get out of town before your four to five years of equity has built up to help you break even, you could rent [out] the home and continue to get equity from the tenants,” says Self.

‘I’m waiting the market out’

It’s a seller’s market. Or is it a buyer’s market?  Buyers often use this confusion as an excuse to wait out buying a house because they believe they’ll be able to get a better deal in the near future. Markets are cyclical, and it is usually prudent to purchase when there are more sellers than buyers.

“However, there is a good chance your money isn’t doing much for you in your savings account,” Self says. “No one has a crystal ball, but I know people who have been waiting for years so they can jump in at the right time.”

Manning agrees: “Many people will never manage to outsave market appreciation and can lose purchasing power if interest rates trend upward.”

‘I’m looking for the perfect house’

Everyone is looking for the perfect home, but if you’ve been searching for years, and you’ve viewed hundreds of homes to no avail, you may need to tweak your expectations. It’s one thing to prefer a move-in ready home over a fixer-upper, or three bathrooms over two, but sheer perfection is hard to find.

“From my experience, buyers who are looking for a perfect house will never find it, because a perfect house doesn’t exist, regardless of the price,” says Russell Volk, a Realtor at Re/Max Elite in Huntingdon Valley, PA.

If a house has eight of the 10 features on your wish list, it’s seriously worth considering.

The post Stop Making Excuses! Busting the Most Common Reasons for Not Buying a Home appeared first on Real Estate News & Insights | realtor.com®.

Earnest Money Deposit vs. Down Payment: What’s the Difference?

August 22, 2019

Earnest Money Deposit vs. Down Payment: What's the Difference?

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When you buy or sell a home, you get used to hearing words you’ve never heard before. The mortgage lenders and insurance agents who help you through the process will throw around so much real estate jargon, somewhere along the way you might wish you had brought a dictionary—or maybe a translator.

Two rather vague but very important terms for buyer and seller alike are “earnest money deposit” and “down payment.” Both have to do with cold, hard cash, but what’s the difference? Here’s your cheat sheet on earnest money deposit vs. down payment.

What is earnest money?

Earnest money—also known as an escrow deposit—is a dollar amount buyers put into an escrow account after a seller accepts their offer. Buyers do this to show the seller that they’re entering a real estate transaction in good faith, says Tania Matthews, an agent with Keller Williams Classic III Realty in Central Florida.

Another way to think of earnest money is as a good-faith deposit that will compensate the seller for liquidated damages if the buyer breaches the contract and fails to close.

How much is a typical earnest money check?

Earnest money deposits usually range from 1% to 2% of the purchase price of a home—depending on your state and the current real estate market—but can go as high as 10%. If a home sales price is $300,000, a 1% earnest money deposit would be $3,000.

The buyer’s financing can also dictate the amount of an earnest money check. For example, if a buyer makes a cash offer, the seller may request more earnest money to show a true “buy-in” from the purchaser, says Matthews. In that instance, the seller of a $300,000 home might want a 3% deposit (or $9,000) versus the 1% deposit for an offer financed through a mortgage.

In any case, the seller can either accept, reject, or negotiate the buyer’s suggested earnest money amount, says Bruce Ailion, a Realtor® with Re/Max brokerage in Atlanta.

The earnest money deposit process

Earnest money deposits are delivered when the sales contract or purchase agreement is first signed. They are often in the form of the buyer’s personal check.

The check is held by the buyer’s agent, title company, or other third party (but never given directly to the seller) and is sometimes never even cashed, says Brian Davis, co-founder of SparkRental.com.

If the check is cashed, the funds are held in an escrow deposit account. The money will be shown as a credit to the buyer at closing and will offset part of the down payment amount or closing costs.

So here’s the real crux of the matter: If a prospective buyer backs out of the deal, the seller might be able to keep the earnest money deposit.

Matthews advises sellers to comb through the contract to see if they can take legal action. But keep in mind that if the buyers back out for any reason allowed by the contract or purchase agreement, they are legally entitled to get their earnest money back.

What is a down payment?

down payment is an amount of money a home buyer pays directly to a seller. Despite a common misconception, it is not paid to a lender. The rest of the home’s purchase price comes from the mortgage.

The money you put down can come from the buyer’s personal savings, the profit from the sale of a previous home, or a gift from a family member or benefactor.

Down payments are usually made in the form of a cashier’s check and are brought to the closing of a home sale or wired directly from the buyer’s bank.

Typical down payment amount

The exact amount of a down payment is often determined by the lender in relation to the overall loan amount. The minimum down payment required by mortgage lenders is 3% of the house’s price, and a 20% down payment is recommended by real estate agents.

Your purchase contract offer generally states how much you intend to put down, and a seller may be more likely to accept your offer if you are putting more money down.

But that’s not to say you have to put down 20%. After all, that’s a large chunk of change to have on hand, especially for first-time home buyers.

Be aware that the down payment is not all you need to buy a house. You also need to budget for closing costs, appraisals, and other expenses when you purchase real estate.

Is a 20% down payment mandatory?

For decades, a 20% down payment was considered the magic number you needed to be able to buy. It’s an ideal amount, but for many people it’s not realistic. In fact, many financing solutions exist, so you can consider that myth busted.

“Putting [down] less than 20% is OK with most banks,” Christopher Pepe, president of Pepe Real Estate, in Brooklyn, NY, told U.S. News & World Report.

Of you’re putting down less than 20%, however, there’s a catch. You will probably have to also pay for mortgage insurance, an extra monthly fee to mitigate the risk that you might default on your loan. And mortgage insurance can be pricey—about 1% of your whole loan, or $1,000 per year per $100,000.

Still, nothing compares to the feeling of owning your own home, so if you have your heart set on buying, there are options out there to help you achieve your dream of homeownership.

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Giving—or Receiving—a Down Payment Gift? Here Are the Tax Consequences

June 7, 2019

gawriloff/iStock

Searching for homes and scrolling through listing photos is fun, but saving up for a down payment can be a real challenge. That’s why some home buyers turn to family for a helping hand in the form of the gift of a down payment. But whenever a large stack of cash changes hands, Uncle Sam wants to know—and that means tax returns can get complicated. So before you give or get a down payment gift, make sure you understand their tax implications.

Who can give you a cash gift for a down payment?

If you’re buying a home, you can only use a cash gift from an immediate relative to help get a mortgage to buy a home. That means a parent, grandparent, sibling, or spouse. It’s also generally acceptable to receive gifts from a domestic partner, or significant other, if you’re engaged to be married.

“Keep in mind you will have to provide detailed documentation in the form of a gift letter to the lender that states the name of the donor, their relationship to you, the date and amount of the gift,” says Jennifer Harder, founder and CEO of Jennifer Harder Mortgage Brokers. You’ll also need a statement from the donor that the money was given with no expectation of repayment.

And watch out for this important condition: The general rule is, if you are putting a down payment of 20% or more, it can all be gifted money. But if your down payment is less than 20%, some of that needs to come from your own pocket.

How much of a tax-free gift can you give?

Any one person can give a gift of $15,000 or less to another individual and not have to pay taxes on it.

Here’s an example of how families can amass a bigger gift under that regulation: Each member of a couple trying to get help with a down payment can receive $15,000 from each parent. So Mom gives $15,000 to her daughter and $15,000 to her son-in-law, and Dad does the same. That means that one set of parents could give the couple a total of $60,000 tax-free. And then the husband’s parents could do the same.

“All that’s required is that it is a gift, meaning it’s made with disinterested generosity,” says Ann Brookes at Taxattorneyatlaw.com.

“The beauty of the gift tax is that any amount received that’s beneath the current $15,000 exclusion amount is not taxable to anyone,” says tax expert and CPA, Folasade Ayegbusi of accountingwithfolasade.com. She used the gift tax strategy to purchase her first home.

“I received a $10,000 gift and used it as my down payment,” she says.

What if the down payment gift is above $15,000?

Down payment amounts above $15,000 and received as a gift must be reported on a gift tax return by the person making the gift—not the beneficiary. But that doesn’t mean the donor will pay taxes.

“The gifts get tallied up over time and offset against the lifetime exclusion on gifts, which is currently $11.4 million,” says Brookes. “The purpose of filing the return is to track your lifetime gift amount, which will be used in calculating tax on your estate when you die.” If you give more than $11.4 million while still alive, the gift tax rate kicks in, which can be anywhere from 18% to 40%.

What if you don’t report the down payment gift?

There is generally a three-year statute of limitations on filing a gift tax return, although that doesn’t begin until a return is filed. If you do not file the gift tax return within that period, “the IRS can assess a gift tax, in addition to penalties and interest, on a reportable gift that was not adequately disclosed to the IRS on a return, years—even decades—after the gift was made,” says tax attorney Jennifer Correa Riera of Miami’s Fuerst, Ittleman, David & Joseph.

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A Guide to Mortgage Interest Rates: Why They Go Down and Up, and What to Do

April 11, 2019

Mortgage interest rates are a mystery to many of us—whether you’re a home buyer in need of a home loan for your first house or your fifth.

After all, what does “interest rate” even mean? Why do rates swing up and down? And, most important, how do you nab the best interest rate—the one that’s going to save you the most money over the life of your mortgage?

Here, we outline what you need to know about interest rates before applying for a mortgage.

Why does my interest rate matter?

Mortgage lenders don’t just loan you money because they’re good guys—they’re there to make a profit. “Interest” is the extra fee you pay your lender for loaning you the cash you need to buy a home.

Your interest payment is calculated as a percentage of your total loan amount. For example, let’s say you get a 30-year, $200,000 loan with a 4% interest rate. Over 30 years, you would end up paying back not only that $200,000, but an extra $143,739 in interest. Month to month, your mortgage payments would amount to about $955. However, your mortgage payments will end up higher or lower depending on the interest rate you get.

Why do interest rates fluctuate?

Mortgage rates can change daily depending on how the U.S. economy is performing, says Jack Guttentag, author of “The Mortgage Encyclopedia.”

Consumer confidence, reports on employment, fluctuations in home sales (i.e., the law of supply and demand), and other economic factors all influence interest rates.

“During a period of slack economic activity, [the Federal Reserve] will provide more funding and interest rates will go down,” Guttentag explains. Conversely, “when the economy heats up and there’s a fear of inflation, [the Fed] will restrict funding and interest rates will go up.”

How do I lock in my interest rate?

A “rate lock” is a commitment by a lender to give you a home loan at a specific interest rate, provided you close on your home in a certain period of time—typically 30 days from when you’re pre-approved for your loan.

A rate lock offers protection against fluctuating interest rates—useful considering that even a quarter of a percentage point can take a huge bite out of your housing budget over time. A rate lock offers borrowers peace of mind: No matter how wildly interest rates fluctuate, once you’re “locked in” you know what monthly mortgage payments you’ll need to make on your home, enabling you to plan your long-term finances.

Naturally, many home buyers obsess over the best time to lock in a mortgage rate, worried that they’ll pull the trigger right before rates sink even lower.

Unfortunately, no lender has a crystal ball that shows where mortgage rates are going. It’s impossible to predict exactly where the economy will move in the future. So, don’t get too caught up with minor ups and downs. A bigger question to consider when locking in your interest rate is where you are in the process of finding a home.

Most mortgage experts suggest locking in a rate once you’re “under contract” on a home—meaning you’ve made an offer that’s been accepted. Most lenders will offer a 30-day rate lock at no charge to you—and many will extend rate locks to 45 days as a courtesy to keep your business.

Some lenders offer rate locks with a “float-down option,” which allows you to get a lower interest rate if rates go down. However, the terms, conditions, and costs of this option vary from lender to lender.

How do I get the best interest rate?

Mortgage rates vary depending on a borrower’s personal finances. Specifically, these six key factors will affect the rate you qualify for:

  1. Credit score: When you apply for a mortgage to buy a home, lenders want some reassurance you’ll repay them later! One way they assess this is by scrutinizing your credit score—the numerical representation of your track record of paying off your debts, from credit cards to college loans. Lenders use your credit score to predict how reliable you’ll be in paying your home loan, says Bill Hardekopf, a credit expert at LowCards.com. A perfect credit score is 850, a good score is from 700 to 759, and a fair score is from 650 to 699. Generally, borrowers with higher credit scores receive lower interest rates than borrowers with lower credit scores.
  2. Loan amount and down payment: If you’re willing and able to make a large down payment on a home, lenders assume less risk and will offer you a better rate. If you don’t have enough money to put down 20% on your mortgage, you’ll probably have to pay private mortgage insurance, or PMI, an extra monthly fee meant to mitigate the risk to the lender that you might default on your loan. PMI ranges from about 0.3% to 1.15% of your home loan.
  3. Home location: The strength of your local housing market can drive interest rates up, or down.
  4. Loan type: Your rate will depend on what type of loan you choose. The most common type is a conventional mortgage, aimed at borrowers who have well-established credit, solid assets, and steady income. If your finances aren’t in great shape, you may be able to qualify for a Federal Housing Administration loan, a government-backed loan that requires a low down payment of 3.5%. There are also U.S. Department of Veterans Affairs loans, available to active or retired military personnel, and U.S. Department of Agriculture Rural Development loans, available to Americans with low to moderate incomes who want to buy a home in a rural area.
  5. Loan term: Typically, shorter-term loans have lower interest rates—and lower overall costs—but they also have larger monthly payments.
  6. Type of interest rate: Rates depend on whether you get a fixed-rate mortgage or an adjustable-rate mortgage, or ARM. “Fixed-rate” means the interest rate you pay remains fixed at the same level throughout the life of your loan. An ARM is a loan that starts out at a fixed, predetermined interest rate, but the rate adjusts after a specified initial period (usually three, five, seven, or 10 years) based on market indexes.

Tap into the right resources

Whether you’re looking to buy a home or a homeowner looking to refinance, there are many mortgage tools online to help, including the following:

  • A mortgage rate trends tracker lets you follow interest rate changes in your local market.
  • mortgage payment calculator shows an estimate of your mortgage payment based on current mortgage rates and local real estate taxes.
  • Realtor.com’s mortgage center, which will help you find a lender who can offer competitive interests rates and help you get pre-approved for a mortgage.

 

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What Is a Mortgage? Home Loan Basics Explained

February 14, 2019

What is a mortgage? In a nutshell, a mortgage is a loan that enables you to cover the cost of a home. Since you probably don’t have hundreds of thousands of dollars lying around, a mortgage loan makes it possible to purchase real estate by fronting you the money.

From there, you pay back the loan via monthly payments that last over the course of years or even decades. Consider it the biggest, longest, most life-changing IOU you’ll ever get!

If you’re a newbie to buying real estate, you may be confused by mortgage basics like the following: What do you need to do to persuade a mortgage lender to give you a home loan? And how do you pay it back? Read on for tips on how to find a mortgage and the different types you’ll need to consider.

Mortgage basics: 3 terms you’ll need to know

When you apply for a mortgage loan to buy real estate, here are the main terms you’ll need to know:

  1. Down payment: This is the money you must put down on a house to show a lender you have some skin in the game. You’re best off making a down payment totaling 20% of the price of the home (e.g., $40,000 on a $200,000 home), because this will allow you to avoid an extra fee called private mortgage insurance (PMI). But if you don’t have a chunk of change that large lying around, never fear—certain lenders will accept smaller down payments like 10%, 5%, or even 0% based on your circumstances. Also know that most loans entail your paying upfront closing costs—additional fees that come with processing your home loan.
  2. Principal: This is the amount of money that you are borrowing and must pay back, which is the price of the home minus your down payment (taking the above example, you’d subtract $40,000 from $200,000 to get a principal of $160,000).
  3. Interest rate: Lenders don’t just loan you the money because they’re good guys. They stand to make money off you, too, since you pay them back plus interest—a percentage of the money you borrow. The interest rate you get will vary based on your lender and your own personal circumstances, so it pays to shop around for the best rate.

Mortgages are typically paid back gradually in the form of a monthly mortgage payment, which will be a combination of your paying back your principal plus interest (the one exception to this is an interest-only mortgage, where your monthly payment is interest only for a certain amount of time).

Another fee that might be baked in this mortgage payment is money to pay property taxes and home insurance premiums. These funds get set aside in an escrow account that your lender will use later to pay these bills as they come up.

When to get a mortgage

Believe it or not, you should shop for a mortgage before you start hunting for a house. It might not be as fun as checking out open houses, but it’s way more important.

You’re looking to get a mortgage pre-approval, an in-depth process where a lender will check your credit report, credit score, debt-to-income ratioloan-to-value ratio, and other aspects of your financial profile. This serves two main purposes: First, it will let you know the maximum purchase price of a home you can afford.

Second, and more important, mortgage pre-approval shows home sellers that you are serious about buying a home, which is particularly crucial in a hot housing market, says Chantay Bridges with TruLine Realty in Los Angeles.

Just know that pre-approval is different from pre-qualification. Mortgage pre-qualification entails a basic overview of a borrower’s ability to get a loan without the paperwork to back it up. As such, pre-qualification is an easy and fast way to get a ballpark figure of what you can afford, but it’s no guarantee you’ll get a loan with this lender. So, don’t get your home-buying hopes up unless you’re pre-approved—that’s the real McCoy!

Another easy first step? Before you start browsing online listings or visiting open houses, plug your info into an online home affordability calculator, which will give you an idea of how large your mortgage can be.

Mortgage basics: Where to get a mortgage

Here are the main places you can get a mortgage loan:

  • Banks: This can be a great place to start if you have an institution you work with that already knows you and your finances. That said, banks typically have only a few loan options so it’s smart to talk with your banker, and then compare the programs with a couple more options before settling on one.
  • Nonbank lenders: These companies (e.g., Quicken Loans or PennyMac Financial) are often willing to work with borrowers that banks avoid due to their riskier profile. If you have a poor credit history or some other blemish in your financial past, you may have better luck landing a loan with nonbank lenders, which now provide more than half of all loans.
  • Mortgage brokers: Mortgage brokers are specialists who can help walk you through a much wider variety of options to find a loan that’s right for you. They often work with many different lenders so they can help identify different rates and programs based on your specific situation.

Mortgage basics: An introduction to loan types

There are a surprising variety of mortgage choices available. So how do you figure out which mortgage is right for you? Here are the main types of home loans to consider:

  • Fixed-rate mortgage: A fixed-rate mortgage is just what it sounds like: The interest rate will not vary over the life of the loan. While the interest rate on a fixed-rate loan might be slightly higher overall, a fixed-rate mortgage is a good choice for buyers who like the certainty of knowing their monthly payment will never go up.
  • Adjustable-rate mortgage: An adjustable-rate mortgage (ARM), also called a variable-rate mortgage, will start with a lower interest rate for the first few years, and then that interest rate (and monthly mortgage payment) will “adjust” after a predetermined period (typically five years) based on market indexes. As such, a home buyer enjoys an initially lower mortgage payment. However, this type of loan can feel risky if interest rates rise a lot. Although there is a cap that can prevent too much damage, it’s still smart to check your loan terms and consider your personal situation carefully to determine if an adjustable-rate loan is right for you. Another option? You may be able to refinance an ARM before the rate adjusts. A refinance is where you renegotiate the terms of your loan later on, which could enable you to switch to a fixed-rate mortgage or other type of loan.
  • FHA loan: A Federal Housing Administration loan, typically called an FHA loan, requires a down payment as low as 3.5%. As such, these loans are particularly great for first-time home buyers with meager savings for a down payment or a less than stellar credit score. The catch? These loans require you to pay for mortgage insurance.
  • VA loan: If you’ve served in the United States military, a VA loan from Veterans Affairs can allow a qualifying home buyer to score a mortgage with no money down, no mortgage insurance requirements, and a great mortgage rate in terms of interest. The details: To qualify for a VA loan, you’ll need to have served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves.
  • USDA loan: U.S. Department of Agriculture loans (USDA loans) are designed for families in rural areas. The government finances 100% of the home price (no down payment!) provided you qualify. The mortgage rate in terms of interest may be favorable, too.

How long do home loans last?

Mortgage loans have different “terms,” which means how long a borrower will make monthly payments to whittle the loan amount down to nothing. The two most common terms are 30 years and 15 years. The payment on a 15-year loan will obviously be higher each month you have it, but ultimately a shorter-term loan will save you money in interest, since the life of the loan lasts for a shorter time.

How to shop for a mortgage

Since loans come with different interest rates, time frames, closing costs, and more, it behooves a prospective borrower to shop around, much like you’d compare different laptops before settling on the best one for you.

And, since any interest rate offered by a lender might fluctuate daily—which will have a direct impact on what you ultimately pay—home buyers might also want to do all their research during the same time period as much as possible, says Brandon Haefele, president and CEO of Sacramento-based Catalyst Mortgage and a member of the board of directors of the California Mortgage Bankers Association. That way, you know you’re making a valid comparison.

Working with a qualified (and patient) loan adviser can help you sort out your options. This pro can help you determine which type of loan is best for your situation and walk you through what your payments would be for different types and terms of loans. The loan adviser will also break down the various closing costs that come with each loan.

By understanding what a mortgage is and all the different types available, you can make the choice that’s right for you and your budget.

Angela Colley contributed to this article.

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5 Reasons to Talk to a Lender Right Now—Long Before You Buy a Home

December 7, 2018

Most potential home buyers wait to talk to a mortgage lender until they’re ready to buy. Makes sense, right? Why bother digging up your financial statements and filling out a bunch of paperwork if you’re not going to buy right away?

If buying a home is one of your long-term goals, you may be doing yourself a disservice by not talking to a lender sooner rather than later. The goal of any good mortgage lender is to help you get “mortgage-ready.” This means getting you and your finances in order so you can qualify for the best mortgage possible, with financial terms and a monthly payment that make sense for you and your budget.

So even if buying a home is a few years away, sitting down with a mortgage lender today can help get you on the path to homeownership. Here are five reasons why you should talk to a lender, even if you’re not quite ready to buy.

1. You may be closer to buying a home than you think

One reason home buyers may hesitate to meet with a lender is that they think they aren’t financially ready. They may think their credit score is too low, or they don’t have enough saved up for a down payment.

They might be surprised, though.

“Every day, I’m able to show a prospective home buyer a home financing option or solution they didn’t know about,” says Gaurav Mahajan, vice president of residential lending at Draper and Kramer Mortgage Corp. of Chicago. “From a credit score, monthly payment, and down payment perspective, many potential buyers are closer to owning a home than they realize.”

2. You don’t need perfect credit to buy a home

Many people put off buying a home until they have a good credit score (typically a score of 700 or higher). According to Mahajan, a credit score of 620 is generally considered the minimum to qualify for a mortgage, but many lenders work with applicants with lower credit scores. Federal Housing Administration loans are available to applicants with scores as low as 580, and your lender may be able to connect you with other options.

3. A lender can help you create an action plan for improving your credit

If your credit score is on the lower end, you may want to take some steps to improve your credit so you can qualify for a better interest rate.

“I often begin working with prospective home buyers one to two years in advance,” says Heather McRae, senior loan officer at Chicago Financial Services, in Chicago. “If there are [credit] items that need to be addressed—like how to boost your credit score to obtain the best rate and terms, or the best way to handle an account that has gone to collections—I guide people on how to best tackle these items.”

Michael Press of Penrith Home Loans in Seattle agrees. “If a buyer’s credit score needs improvement or perhaps they have an issue documenting necessary income or assets needed to qualify, a seasoned mortgage lender can help formulate a plan to get that same buyer in a better position to buy,” he says.

To formulate an action plan, lenders will typically:

  • Do a “soft” credit check—A soft credit check is a credit inquiry that doesn’t hurt your credit score. This gives your potential lender a sense of where you stand today.
  • Review your financial statements—Reviewing your bank statements and any investment or retirement accounts you have helps your lender know your available income and assets.
  • Ask you about your budget, income, and financial history—Don’t be shy or embarrassed when it comes to disclosing this information to your lender, whose goal is to work with you. If you had a financial rough patch, got behind on a bill, or co-signed on a loan for your brother-in-law that you really regret, let your lender know.

 

Once your potential lender knows the ins and outs of your financial situation, it can develop a plan to help you pay down debts that are dragging down your credit score.

4. A lender can specify what you need for a down payment

Lenders can also clarify exactly how much you need to save for a down payment. FHA loans, for example, require a down payment of at least 3.5%. You may want to make a larger down payment to bring down your monthly payment or to offset negative credit items. A larger down payment of 25% to 30% lowers the lender’s financial risk, making your application more appealing.

A high down payment isn’t a requirement to qualify for a mortgage, though. Depending on your situation, you may qualify for a down payment assistance program. Many of these programs are localized, so to find out what you qualify for in your city and state, you should sit down with a lender in your area. For example, McRae reviews the pros and cons of local down payment assistance programs with her prospective home buyers to help them make an informed decision.

5. You’ll know what to expect

The mortgage application process is lengthy, even for experienced home buyers. For first-time buyers, sitting down with a lender can give them an understanding of the mortgage underwriting process, how long it takes, and what documentation they will need to have prepared.

“With interest rates rising and many housing markets shifting, education and preparedness are more important than ever,” says Press.

Sitting down with a lender can help demystify the lending process, giving you time to get “mortgage ready” so you can purchase your dream home—whenever the opportunity presents itself.

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