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What Is a Strategic Default on a House? When Walking Away Is the Right Move

November 8, 2019

What is a strategic default on a house?

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We’ve been told to never walk away from our problems, but what if walking away is the most logical solution? When it comes to an underwater mortgage—where the money you owe on the house is higher than the current market value—some homeowners choose to cut their losses.

Referred to as strategic default or strategic foreclosure, the decision to abandon your home loan is a workaround that some homeowners use to get out of a bad investment. Although controversial, there are times when voluntarily bolting on your mortgage based on declining values might make economic sense.

“During the foreclosure crisis, when property values plummeted, strategic default was the term used to describe borrowers who remained able to pay their mortgage, but made a calculated, strategic choice to stop paying,” says Charles Castellon, attorney at Widerman Malek, in Celebration, FL. “The strategic decision to default is fundamentally a business decision to cut losses.”

During the most recent financial crisis, negative equity in the U.S. peaked at 26% in the fourth quarter of 2009, according to CoreLogic. Today, 4.2% of mortgages are still underwater.

But how does a strategic default work, and how will it affect a homeowner’s creditworthiness?

How strategic default works

The process of a strategic default is fairly straightforward. After making the calculations and realizing your home value pales in comparison to the principle left on your mortgage, homeowners simply stop paying. And if lenders are not getting their money, sooner or later they’ll foreclose on the home.

“To strategically default, you stop paying the mortgage until the lender forecloses and repossesses the property,” says Tendayi Kapfidze, chief economist at LendingTree in New York.

Relevancy to today’s homeowners

Castellon says the concept of strategic default remains relevant since people will always suffer economic hardship, regardless of the strength of the overall economy.

Strategic default was a hot topic during the low point of the foreclosure crisis and may make a comeback after the next market correction,” says Castellon. “During hard times, they may not be able to pay all of their obligations and are forced to engage in triage. This involves determining the likely consequences that will come from defaulting on certain debts and deciding who to pay and who to stop paying.”

How defaulting affects your financial future

Of course, defaulting on a mortgage means you’ll take some sort of hit to your credit score. That’s why anyone considering strategic default should understand the consequences it can have on their financial future. When buying another home or even renting, lenders and landlords may be more discriminating based on your record.

“Any default will affect your credit score, and a foreclosure will remain on your report for up to seven years,” says Kapfidze.

However, he says, many borrowers who default, strategically or otherwise, can purchase a home again in as little as two years.

“Given that strategic defaulters did not do so because of cash flow challenges, they are likely to service other debts well and thus see recovery in their credit score faster than borrowers with additional financial challenges,” says Kapfidze.

Pros and cons of strategic default

Before you choose to walk away and let your property go into foreclosure, it’s important to understand the pros and cons of this decision.

“The benefits of the strategic default include getting out of bad debt and containing the financial damage. It’s all about mitigating losses and damage control,” says Castellon.

It’s important to note that strategic default is not without risk though—having one in your financial history can harm your credit scores and make it harder to get another loan down the road.

And, in some cases, lenders pursue borrowers for deficiency judgments. A deficiency judgment is the difference between the amount a borrower owes on the loan and the foreclosure sale price.

“In my experience, a very small percentage of my distressed mortgage clients have had to face a deficiency claim, but it has been known to happen,” says Castellon.

The post What Is a Strategic Default on a House? When Walking Away Is the Right Move appeared first on Real Estate News & Insights | realtor.com®.

5 Crucial Questions to Ask Before You Co-Sign a Mortgage

November 5, 2019

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If you’re considering co-signing a mortgage—say, to help your grown kids buy their first house—it’s wise to take a step back and consider whether this move makes sense. Sure, you’re helping a loved one purchase property, but this type of arrangement could also pose a risk to your own finances (not to mention your relationship with the co-signee).

So before you put your John Hancock on the line which is dotted, ask yourself these four key questions first.

1. What is co-signing, exactly?

When a home buyer uses a co-signer, the buyer becomes what’s known as the “occupying borrower”—the person who is going to be living in the home.

Meanwhile, the co-signer—usually a relative or friend of the occupying borrower—is someone who typically doesn’t live at the property.

Co-signers physically sign the mortgage or deed of trust in order to add the security of their income and credit history against the loan. In turn, both parties take on the financial risk of the mortgage together—meaning that if the occupying borrower defaults on the loan, the co-signer is expected to cough up the cash.

To qualify as a co-signer, you must have a strong credit history and good income, says Ray Rodriguez, regional sales manager at TD Bank. Co-signers get vetted just as ordinary borrowers do—they have their income, credit history, credit score, assets, and debts scrutinized by a lender.

2. What are my responsibilities when co-signing a loan?

If anything affects the occupying borrower’s financial health—for example, loss of a job or severe medical problems—”the co-signer is responsible for the [mortgage] payments,” says Rodriguez.

Moreover, if the occupying borrower misses a mortgage payment, that blemish can go on your credit report, as the co-signer, as well—potentially damaging your credit score significantly.

According to data from the credit analysis firm FICO, someone with an excellent credit score—780 or above—could see it drop 90 to 110 points if mortgage payments are missed.

Another thing to consider: When you co-sign a mortgage, you’re adding that person’s debt to your own, reducing your own borrowing power. As a result, “Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, a real estate broker at Brooklyn-based House-n-Key Realty.

3. What are the risks of co-signing?

Real talk: When you co-sign a financial product—whether it be a mortgage, a car loan, or a credit card—you could get burned.

In fact, in a 2016 CreditCards.com survey of 2,003 U.S. adults, 38% of co-signers said they had to pay a part of or the entire loan or credit card bill because the primary borrower failed to do so. Furthermore, 28% reported they suffered a drop in their credit score because the person they co-signed for paid late or not at all.

Most often, people co-sign mortgages for their friends or family—but co-signing inherently puts the relationship in jeopardy. Proof: Of respondents in the CreditCards.com survey, 26% said the co-signing experience damaged the relationship with the person they had co-signed for.

4. How do I mitigate my risks?

The good news? There are several safeguards you can put in place to protect yourself as a co-signer.

First, make sure your name is put on the title of the home. That way, if your borrower can’t pay the mortgage, you have the power to sell the property.

Second, take steps to monitor your co-borrower’s mortgage payments. You can do this by setting up email and text alerts to let you know when mortgage payments are posted, or asking the mortgage lender to notify you if the borrower misses a mortgage payment.

This offers a nice protection, since every home loan agreement offers borrowers a grace period for late payments.

Typically, there’s a 15-day grace period, in which case you would have 14 days after the payment is due to help your co-signee pay the bill without incurring a late fee or taking a hit on your credit report, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance.

You’ll also want to establish clear lines of communication between you and your co-signee—and make sure the person knows how to contact you if he or she has a problem with the mortgage.

5. Do I trust the borrower?

Before offering to become someone’s co-signer, ask yourself whether you truly trust the other person to be financially responsible for making the mortgage payments.

Pro tip: Past behavior is a good predictor of future behavior. If the person has had trouble making credit card payments or has a pattern of not meeting other financial obligations, he or she may not be responsible enough to be taking on a mortgage, especially one that has your name attached to it.

The bottom line

Co-signing a mortgage is serious business. You’re not just putting your name on a piece of paper—you’re putting your own finances, including your debt obligation and your credit score, at risk.

The post 5 Crucial Questions to Ask Before You Co-Sign a Mortgage appeared first on Real Estate News & Insights | realtor.com®.

How to Calculate Property Tax Without Losing Your Marbles

October 15, 2019

how to calculate property tax

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Need to know how to estimate your property tax? You’ve come to the right place! Most people know that homeownership requires coughing up copious amounts of money. There’s your mortgage, of course, but the costs hardly end there. You will also have to pay property tax.

If you already own a home, you can look at how your tax is calculated on the most current property tax statement. If you’re considering buying a home, look on the real estate listing for assessment and tax information, or go to the county website to find out the annual property tax.

Be aware that property taxes can change. The assessed value of your house can go up or down, depending on the local real estate market. Your assessment can go up or down depending on changes you make to your house; for example, if you make additions to your property, or even build a new house on land. And the tax rate can change, depending on your local government.

Even though the government sends you a tax bill every year and tells you how much you owe in property taxes, it’s important to know how that tax is calculated.

How to calculate property tax

There are a number of factors that come into play when calculating property taxes, from your property’s assessed value to the mill levy (tax rate) in your area. Here’s how to calculate property tax so you don’t end up blindsided by this hefty homeowner expense.

What is a home’s fair market value?

The market value of a home is basically the amount a knowledgeable buyer would pay a knowledgeable seller for a property, assuming an arm’s-length transaction and no pressure on either party to buy or sell. When a property sells to an unrelated party, the sales price is generally assumed to be the fair value of the property.

What is a home’s assessed value?

One factor that affects your property taxes is how much your property is worth. You probably have a good understanding of your home’s market value—the amount of money a buyer would (hopefully) pay for your place. (You could also enter your address in a home value estimator to get a ballpark figure.)

Still, tax municipalities use a slightly different number; it’s called your home’s assessed value.

Tax assessors can calculate a home’s new assessed value as often as once per year. They also may adjust information when a property is sold, bought, built, or renovated, by examining the permits and paperwork filed with the local municipality.

They’ll look at basic features of your home (like the acreage, square footage, and number of bedrooms and bathrooms), the purchase price when it changes hands, and comparisons with similar properties nearby.

Sometimes a home’s assessed value will be strikingly similar to its fair market value—but that’s not always the case, particularly in heated markets. In general, you can expect your home’s assessed value to amount to about 80% to 90% of its market value. You can check your local assessor or municipality’s website, or call the tax office for a more exact figure for your home. You can also search by state, county, and ZIP code on publicrecords.netronline.com.

If you believe the assessor has placed too high a value on your home, you can challenge the calculation of your home’s value for tax purposes. You don’t need to hire someone to help you reduce your property tax bill. As a homeowner, you may be able to show how you determine that your assessed value is out of line.

What is taxable value?

The taxable value of your house is the value of the property according to your assessment, minus any adjustments such as exemption amounts.

What’s a mill levy?

In addition to knowing your home’s assessed value, you will need to know another number, known as a mill levy. That’s the tax assessment rate for real estate in your area. The tax rate varies greatly based on the public amenities offered and revenue required by local government. If you have a public school, police force, full-time fire department, desirable school districts, and plenty of playgrounds and parks, your property tax rates will be higher than a town without them. (Hey, you get what you’re taxed for!)

Your area’s property tax levy can be found on your local tax assessor or municipality website, and it’s typically represented as a percentage—like 4%. To estimate your real estate taxes, you merely multiply your home’s assessed value by the levy. So if your home is worth $200,000 and your property tax rate is 4%, you’ll pay about $8,000 in taxes per year.

Where to find property taxes

Thankfully, in many cases, you may not have to calculate your own property taxes. You can often find the exact amount (or a ballpark figure) you’ll pay on listings at realtor.com®, or else you can enter a home’s location and price into an online home affordability calculator, which will not only estimate your yearly taxes but also how much you can anticipate paying for your mortgage, home insurance, and other expenses.

The post How to Calculate Property Tax Without Losing Your Marbles appeared first on Real Estate News & Insights | realtor.com®.

Buying a House After Bankruptcy? How Long to Wait and What to Do

October 12, 2019

buying house after bankruptcy

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Securing a home loan and buying a house after bankruptcy may sound like an impossible feat. Blame it on all those Monopoly games, but bankruptcy has a very bad rap, painting the filer as someone who should never be loaned money.

The reality is that of the 800,000 Americans who file for bankruptcy every year, most are well-intentioned, responsible people. Life has thrown them a curveball, however, that has left them struggling to pay off their past debts.

Sometimes, filing for bankruptcy is the only way out of a crushing financial situation, and taking this step can really help cash-strapped individuals get back on their feet.

And yes, many go on to buy a home eventually, despite the challenging credit score that results from bankruptcy. But how? Being aware of what a lender expects after a bankruptcy will help you navigate the mortgage application process efficiently and effectively.

Here are the steps on buying a house after bankruptcy, and the top things you need to know.

Types of bankruptcy: The best and the worst

There are two ways to file: Chapter 7 bankruptcy and Chapter 13 bankruptcy. With Chapter 7 bankruptcy, filers are typically released from their obligation to pay back unsecured debt—think credit cards, medical bills, or loans extended without collateral.

With Chapter 13 bankruptcy, filers have to pay back their debt. However, the debt is reorganized and a new repayment schedule established that makes monthly payments more affordable.

Since Chapter 13 filers are still paying back their debts, mortgage lenders generally look more favorably on these consumers than those who file for Chapter 7, says David Carey, vice president and residential lending manager at New York’s Tompkins Mahopac Bank.

A bankruptcy attorney can help determine if Chapter 7 or Chapter 13 makes the most sense for your specific situation. Unfortunately, both Chapter 7 and Chapter 13 bankruptcies will adversely affect credit scores. But don’t give up, hopeful home buyer.

How long after bankruptcy should you wait before buying a house?

Most people applying for a loan will need to wait two years after bankruptcy before lenders will consider their loan application. That said, it could be up to a four-year ban, depending on the individual and type of loan. This is because lenders have different “seasoning” requirements, which is a specified amount of time that needs to pass.

Fannie Mae, for example, has a minimum two-year ban on borrowers who have filed for bankruptcy, says David Reiss, professor of law and academic programs director at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

The FHA loan, on the other hand, has a minimum one-year ban in place after a bankruptcy. These bans, or seasoning periods, are typically shorter with government-backed loans (such as FHA or VA loans) than with conventional loans.

The time is measured starting from the date of discharge or dismissal of the bankruptcy action. Generally, the more time between debt discharge and the loan application, the less risky a once-bankrupt borrower looks in the eyes of a mortgage lender.

How to reestablish credit after bankruptcy

Once the bankruptcy process is over, reestablishing and maintaining creditworthiness is key to your financial health. Lenders will be looking for zero delinquencies postbankruptcy.

While you work to build new credit, don’t go overboard opening an extensive number of accounts, as this will work against you, advises Carey. Usually, opening just a couple of revolving credit lines and paying them in a timely manner over the course of 12 months helps to increase credit scores back to an acceptable level.

What to do before you apply for a mortgage

Before you apply for a mortgage loan, check your credit score by getting copies of your three main credit reports, which detail the financial transactions (and transgressions) from your past. You will want to check these credit reports for errors, such as a credit issue that you resolved but that is not reflected in your report.

“In some postbankruptcy cases, errors continue to report negatively on credit reports,” says Carey.

These mistakes will drag down your overall credit score and reduce your chances of getting approved for the mortgage. So if you spot mistakes on your credit reports, work with the credit bureaus to correct the information they include. This can boost your credit score significantly, and may even tip the scales on your home loan approval. Mortgage lenders want to see any movement from bad credit to good credit, so don’t leave any of your hard-earned progress on the table.

Buying a house after bankruptcy: Ways to woo a lender

To start the mortgage process, lenders require a detailed letter explaining why you needed to file for Chapter 7 or Chapter 13 in the first place. Ideally, the bankruptcy would have been caused by an extenuating circumstance beyond your control—such as the death of an income-contributing spouse, the loss of employment, or a serious illness.

In other words: A lender likes to see that you were hit with hard times that had a significant negative impact on your expenses or income, and made it impossible to meet your financial obligations.

What a lender won’t want to see is someone with a die-hard shopping habit or a lackadaisical attitude toward paying credit cards on time. If that’s you, you’ll have to prove you’ve changed.

Whatever the reason you filed for bankruptcy, lenders will need to properly document your extenuating circumstances, so be prepared to provide proof detailing your life event.

Medical bills, a doctor’s note, a death certificate, or severance paperwork are all acceptable evidence that prove to lenders that you are a safe bet worthy of a home loan.

The post Buying a House After Bankruptcy? How Long to Wait and What to Do appeared first on Real Estate News & Insights | realtor.com®.

8 Mortifying Questions You’ll Be Asked When Applying for a Mortgage

October 8, 2019

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If you need a mortgage to buy a home, rest assured: Prospective lenders will ask you a lot of questions. After all, loaning someone money is a risky proposition, so they’ll want some assurance you’ll pay them back!

So what questions might they ask you? Allow us to outline the most common queries during a consultation, and to tell you what constitutes a decent answer—and what doesn’t. That way, your mortgage pre-approval process won’t be derailed by any big surprises.

Ready? Make sure you have answers to these questions before you start the loan application process.

1. What is your credit score?

For starters, let’s look at your credit score—the numerical representation of how well you’ve paid off past debts. If you’re in the dark on what your credit score is, get your score for free at CreditKarma.com, or your full report at annualcreditreport.com. You may also be able to get a free score through your bank or credit union, or another financial institution.

Lenders typically offer the best interest rates to customers with the highest credit scores, generally 750 and above. Yes, you may get a loan without a good credit score. But you’ll pay higher interest rates if you do. Try to improve your score before you apply for a loan.

2. Do you have sufficient credit history?

A common misconception is that if you have a great credit score, you have the credit issue covered. Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage,” sees people who are proud of the fact they only have one credit card, which they hardly use, and a credit score of almost 800.

“It’s not just the score,” he says. “The whole purpose of the credit report is to have some sort of record that you have been able to establish credit and pay it back as agreed, reliably.” If you haven’t done that, lenders won’t be in a hurry to lend you money. You have what is known as “thin credit.”

If you only have one credit card, for example, you may not qualify for a prime loan with the lowest interest rates, regardless of your credit score. Your loan officer may recommend that you go out and get another credit card, or take out a small car loan, and come back when you have built a better track record of paying back debt.

3. How much is your countable income?

“Not everything you make necessarily counts,” warns Fleming. “It’s not unusual for someone to have this idea they make $200,000 per year, and an underwriter says they actually make $100,000 per year.”

The reason? A lender may not include any income that is sporadic, new, or for something that the lender determines isn’t a sure thing. Plus, ending a verifiable source of income you’ve had for years can also send up red flags, even if you have a new source of income to take its place.

Heather McRae, senior loan officer at Chicago Financial Services, Inc. in Chicago, IL, had one mortgage refinance borrower who retired during the loan approval process. Even though he had plenty of money from his pension and Social Security benefits, they had to wait a couple of months to document his new retirement income before he could get the loan.

Take-home lesson? Make sure your lender is aware of any recent changes to your income—not just the amount, but where it’s from.

4. Have you changed jobs recently?

People often move and buy a home at about the same time they change jobs. That can be a problem, especially if the new job compensates you in a way that’s different from the old one.

For example, say you were making an $80,000 base salary at your last job. You moved for a great job, where you get a $60,000 base salary, plus expected bonuses of $40,000, plus stock benefits. If you’re expecting the underwriter to count your salary as $100,000 or more, you’ll be disappointed. “If you don’t have a history to document that you have received that over two years, you can only use the lower base salary,” says McRae.

If you changed job fields, and your base pay stayed the same or improved, your loan approval may depend on the lender you are working with. Some lenders don’t care if you’ve even changed job fields completely, as long as you are a W-2 employee. Other lenders want you to stay in a new job field for one or two years first to establish yourself, before they’ll loan you money.

5. Do you have enough cash on hand?

Lenders expect you to have enough assets, such as cash and securities, to be able to pay for your down payment, inspections, and closing costs. An amount in reserve is important, too. The catch is that you probably won’t be able to count 100% of your assets for these purposes.

For example, say you have $20,000 in the bank, your parents have promised to give you $10,000 to help with the down payment, and you have $80,000 in your stock brokerage account. Sounds like you have $110,000 available to buy a house, right?

The lender won’t see it that way. They’ll count the $20,000, assuming you can show with bank statements showing that it’s been in your account for a while. The promise from your parents is less sure. The lender may want to see the money in your account, and get a signed letter from your parents stating that the money is a gift.

As for the $80,000 in your stock brokerage account, it may not be worth as much in the lender’s eyes as you think. Lenders often knock 25% to 35% off the value of a stock portfolio, according to Fleming. They assume selling off a stock portfolio and other securities will incur expenses. You may owe taxes on capital gains—they don’t know how much, so they’ll assume the worst.

Also, the stock market fluctuates, so if you have to cash in to buy a house, you could have to sell stock on a down day. If you need to sell stock to buy a house, and you are borderline on qualifying to have enough assets, consider cashing in before you apply for a loan.

What if you’re saving money in a shoebox under the bed? It doesn’t count. Put your money in the bank, and keep it there for at least a couple of months, so that it shows on your bank statements.

6. How much other debt do you have?

You could have a great income, plenty of cash, a high credit score, and still not qualify for a loan. The deal killer may be all the other monthly payments you have to make, from credit card companies to auto loans. You can even be derailed by back taxes, due to the Internal Revenue Service. Lenders compare your monthly debt payments to your income to determine whether they think you can handle your mortgage.

Tempted to go out and buy new furniture for your new house before the loan closes? Watch out—that added monthly expense can throw off your debt-to-income ratio, and ruin your chances of getting a loan. It’s a classic mistake.

7. What home are you hoping to buy?

You can’t control everything. For example, you could be trying to buy a condominium, and it turns out that the condo association isn’t viable, by underwriter’s standards. McRae says that sometimes the condo association doesn’t have enough insurance coverage, or other problems come up.

8. Are you single, married—or getting a divorce?

Lenders aren’t going to ask you how you’re getting along with your spouse. But they are interested if you are in the midst of a divorce, or if you have other major changes going on in your life that can affect your finances.

McRae had some clients who were getting a divorce in the middle of the transaction. The couple didn’t think they needed to mention this. They thought it wouldn’t make any difference, because they were still both on the loan and the divorce was amicable. However, the husband was obligated to pay alimony and child support. The underwriters had to charge the alimony and child support as expenses to the husband. Meanwhile, they couldn’t give the wife credit for those payments under underwriting guidelines, because she had not been receiving them for six months. In the end, it killed the deal. They couldn’t get the loan.

Bottom line? Make sure to keep your loan officer informed about what’s going on. You can do whatever you want after the loan closes, as long as you keep up your payments. But when in doubt, avoid making big changes to your life and financial situation before or during the loan approval process.

The post 8 Mortifying Questions You’ll Be Asked When Applying for a Mortgage appeared first on Real Estate News & Insights | realtor.com®.

5 Surprising Financial Lessons I Learned About Paying for My First Home

October 3, 2019

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I pride myself on being pretty financially savvy—after all, I’m a personal finance writer. I’m well versed in best practices for saving and spending, the ins and outs of HSAs and IRAs, and the basics of investing.

But when it came time to buy my first house, I had to put my ego aside: I was way out of my depth as I navigated the world of mortgages, closing costs, and escrow.

While all of the Budgeting 101 basics still apply to purchasing a home—top tip: Don’t buy anything you can’t afford!—some aspects of the process can come as a surprise to first-time buyers.

Gearing up to buy a house of your own? Get acquainted with these five lessons that I learned the hard way before you start shopping. Then, you’ll be ahead of the curve when it comes time to make an offer on your ideal home.

1. Don’t be fooled by your mortgage pre-approval amount

One of the first steps on the road to homeownership was requesting a mortgage pre-approval letter from a mortgage lender. I was shocked when my husband and I received a letter with a much higher number than we had ever considered spending.

The lender thought we could afford a house that cost how much?!

I quickly learned that a pre-approval letter is just assurance from a lender that the buyer is in good financial standing to take on a mortgage of a certain size. Lenders evaluate your financial history to come up with a pre-approval amount. Don’t confuse that number, though, with your actual budget for buying a house. In other words, just because you’re pre-approved for up to, say, $300,000, doesn’t mean a $300,000 mortgage will fit in your budget.

For us, we knew we didn’t want to stretch ourselves thin with a heftier mortgage, even if we were technically approved to take one out.

2. Closing costs can add up—and be complicated

Closing costs include out-of-pocket expenses like title insurance, notary fees, and the cost of the deed—and they can add up quickly. So when we made an offer on our house, we decided to ask for a credit from the sellers toward our closing costs—a common practice in which, typically, the seller advances an amount in cash that’s then tacked on to the purchase price. But I was surprised when our Realtor® urged us not to ask for too much from the sellers at closing.

“Some loan programs only allow a certain percentage of the sale price to given to the buyer as a credit,” says Joe DiRosa, a real estate agent with RealtyTopia in Pennsylvania.

That means that if you’re offering $200,000 for a house and your lender only allows you to accept 2% in closing costs, you shouldn’t ask for $5,000—that would be $1,000 down the drain, since you can only accept up to $4,000 in credit. Before you make an offer, ask your lender if your loan institutes a limit on closing cost credits.

3. PMI isn’t actually the devil

Private mortgage insurance—PMI for short—is at once a blessing and a curse. Lenders typically require it of buyers who are putting down less than 20% on their mortgage. This puts homeownership within reach for more people, but it also means an additional monthly payment that doesn’t add to the new owner’s equity.

For that reason, PMI sometimes gets a bad rap—better to shell out the necessary down payment cash (if you can) than waste your money on insurance, right? But in some cases, it’s in your best interest to put less money down and pay the PMI.

That was the case for my husband and me. We decided to hold on to some of the cash we would have put toward a 20% down payment and use that money to renovate our home and pay off other debts with higher interest rates. Our PMI payment has been manageable—we pay about $75 a month—and it’s worth it to keep our money in our bank account, where we can use it for projects like replacing the roof, renovating bathrooms, and creating a master suite.

4. You might have to make escrow payments

“Escrow” was a foreign word to me before buying a house. (Confession: I still picture a crow every time I hear it.)

Because we took out a loan with PMI, we were required to pay into an escrow account for our property taxes and home insurance. Escrow simply refers to the separate account where that money is held; basically, our lender sets aside the money for taxes and insurance, which acts as a safety net to ensure that we sock away enough money for those expenses.

While it’s nice to know we’re saving enough for taxes and insurance by paying into escrow, it’s also frustrating for control freaks like my husband and me, who would rather manage our money ourselves—preferably by putting that cash into a high-yield savings account where it can accrue interest. We’re looking forward to canceling our escrow payments as soon as we’ve built up enough equity in our home to remove PMI.

5. You need to budget for surprises (and your own mistakes)

During our home inspection, the inspector ran the dishwasher to make sure it worked—all good. Then, the day after we moved in, we loaded the dishwasher, hit “Start”—and it was dead. After flicking the electrical circuits on and off to no avail, we finally accepted that we would need to replace the dishwasher sooner than we had bargained for.

Several hundred dollars later, we learned that dishwashers are required to have their own wall switch, per local code. It turned out the old dishwasher wasn’t broken after all—the switch was just turned off.

All we could do was laugh, too slap-happy and exhausted from renovating to beat ourselves up much about the mistake. At least we planned to replace the dishwasher sooner or later, and we had enough savings to endure the blow. But the incident was a reminder that costly surprises (and stupid mistakes) are inevitable when you’re new to homeownership—and even when you’re not.

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How Much Home Can I Afford? Find That Magic Number Here

October 3, 2019

how much home can i afford

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How much house can I afford? Long before you start asking yourself what type of house you want—condo or house? Craftsman or ranch?—you should ask yourself this pragmatic question. After all, it’s no secret that your dream home can quickly turn into a living nightmare if you’re struggling to save for a down payment or wonder how you’ll afford your monthly payments.

And while lenders these days are less likely than ever to loan you more than you can easily manage, and require a substantial down payment, you should take charge of coming up with an affordable figure for your down payment and mortgage payment for your own sake.

Don’t rely on others, like a mortgage calculator, to do this critical step for you. Plus, it’s helpful to know how much house you can afford, so that you can shop within your price range—because nothing’s more of a downer than finding your dream home, only to discover after the fact that it’s out of reach. You’ll also have a good grasp of how much of a down payment you’ll need.

All of this means that it’s good to determine from the get-go what home price you can afford, including what the mortgage payment would be and how much you need for a down payment. We’re on the case! Here’s how to find that magic number for you.

How much house can I afford?

One of the most basic equations you can use to figure out home affordability is your debt-to-income ratio. This is essentially a way for you (and lenders) to compare your monthly income with how much you owe—and how a house can fit into that picture.

As a general rule, your debt-to-income ratio should remain below 36%, says David Feldberg, broker and owner of Coastal Real Estate Group in Newport Beach, CA.

Here’s how to figure it out: Calculate how much your monthly payments toward debt—that’s things like car payments, credit cards, and student loans. Then divide that amount by your monthly income.

Let’s say, for instance, that every month you’re paying $500 to debts and pulling in $6,000. Divide $500 by $6,000 and you have a debt-to-income ratio of 0.083, or 8.3%. That’s well below 36%, but then again, you don’t own a home yet.

Once you know your income and debt, you can plug those numbers into a home affordability calculator to see how much house you can afford while still remaining below that 36% debt-to-income ratio.

Let’s take the aforementioned example, where you make $6,000 a month and pay $500 in debts. Now let’s assume you’ve got around $30,000 for a down payment and can get a 30-year fixed-rate mortgage at a 5% interest rate. So this will put you in the ballpark of affording a home worth $248,800. What does this amount to for a monthly payment?

To know that, you’ll want to factor in more than just your monthly mortgage payment. There are other expenses, including property taxes and mortgage insurance. Add those in, and a mortgage calculator will reveal you’ll be paying about $1,573 for the privilege of owning this house.

How to calculate how much home you can afford

Of course, these numbers will change with a homeowner’s circumstances, as will how much house you can afford, how quickly you can save for a down payment, and how much you’ll be able to spend on a monthly mortgage payment.

Let’s say you were given a raise and now make $8,000 per month. Take those same numbers above (a down payment of $30,000 on a 30-year fixed interest rate mortgage at 5%) and you’d be able to afford a home worth $274,600, with a monthly mortgage payment of $2,073. Or let’s say you make $8,000 per month and are able to whittle your debt in half, down to $250 per month. That would mean “how much house” you can afford is in the area of $313,100, with mortgage payments of $2,201 per month.

As you can see, when you’re trying to figure out how much house you can afford, the details matter, so be sure to take all of them into account. In other words, don’t look at just your salary, or just how much your monthly mortgage payments will be.

Factor in student loan debt, mortgage insurance, down payment, and other expenses related to buying a house or your monthly bills. The clearer the picture you have of your financial commitments, the easier it will be to figure out how much house you can afford without getting in over your head.

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6 Types of Home Loans: Which One Is Right for You?

October 2, 2019

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If you’re shopping for a home, odds are you should be shopping for mortgage loans as well—and these days, it’s by no means a one-mortgage-fits-all model.

Where you live, how long you plan to stay put, and other variables can make certain mortgage loans better suited to a home buyer’s circumstances and loan amount. Choosing wisely between them could save you a bundle on your down payment, fees, and interest.

Many types of mortgage loans exist: conventional loans, FHA loans, VA loans, fixed-rate loans, adjustable-rate mortgages, jumbo loans, and more. Each mortgage loan may require certain down payments or specify standards for loan amount, mortgage insurance, and interest. To learn about all your home-buying options, check out these common types of home mortgage loans and whom they’re suited for, so you can make the right choice. The type of mortgage loan that you choose could affect your monthly payment.

Fixed-rate loan

The most common type of conventional loan, a fixed-rate loan prescribes a single interest rate—and monthly payment—for the life of the loan, which is typically 15 or 30 years. One type of fixed-rate mortgage is a jumbo loan.

Right for: Homeowners who crave predictability and aren’t going anywhere soon may be best suited for this conventional loan. For your mortgage payment, you pay X amount for Y years—and that’s the end for a conventional loan. A fixed-rate loan will require a down payment. The rise and fall of interest rates won’t change the terms of your home loan, so you’ll always know what to expect with your monthly payment. That said, a fixed-rate mortgage is best for people who plan to stay in their home for at least a good chunk of the life of the loan; if you think you’ll move fairly soon, you may want to consider the next option.

Adjustable-rate mortgage

Unlike fixed-rate mortgages, adjustable-rate mortgages (ARM) offer mortgage interest rates typically lower than you’d get with a fixed-rate mortgage for a period of time—such as five or 10 years, rather than the life of a loan. But after that, your interest rates (and monthly payments) will adjust, typically once a year, roughly corresponding to current interest rates. So if interest rates shoot up, so do your monthly payments; if they plummet, you’ll pay less on mortgage payments.

Right for: Home buyers with lower credit scores are best suited for an adjustable-rate mortgage. Since people with poor credit typically can’t get good rates on fixed-rate loans, an adjustable-rate mortgage can nudge those interest rates down enough to put homeownership within easier reach. These home loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start vacillating. However, the monthly payment can fluctuate.

FHA loan

While typical home loans require a down payment of 20% of the purchase price of your home, with a Federal Housing Administration, or FHA loan, you can put down as little as 3.5%. That’s because Federal Housing Administration loans are government-backed.

Right for: Home buyers with meager savings for a down payment are a good fit for an FHA loan. The FHA has several requirements for mortgage loans. First, most loan amounts are limited to $417,000 and don’t provide much flexibility. FHA loans are fixed-rate mortgages, with either 15- or 30-year terms. Buyers of FHA-approved loans are also required to pay mortgage insurance—either upfront or over the life of the loan—which hovers at around 1% of the cost of your loan amount.

VA loan

If you’ve served in the United States military, a Veterans Affairs or VA loan can be an excellent alternative to a conventional loan. If you qualify for a VA loan, you can score a sweet home with no down payment and no mortgage insurance requirements.

Right for: VA loans are for veterans who’ve served 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves. Because the home loans are government-backed, the VA has strict requirements on the type of home buyers can purchase with a VA loan: It must be your primary residence, and it must meet “minimum property requirements” (that is, no fixer-uppers allowed).

USDA loan

Another government-sponsored home loan is the USDA Rural Development loan, which is designed for families in rural areas. The government finances 100% of the home price for USDA-eligible homes—in other words, no down payment necessary—and offers discounted mortgage interest rates to boot.

Right for: Borrowers in rural areas who are struggling financially can access USDA-eligible home loans. These home loans are designed to put homeownership within their grasp, with affordable mortgage payments. The catch? Your debt load cannot exceed your income by more than 41%, and, as with the FHA, you will be required to purchase mortgage insurance.

Bridge loan

Also known as a gap loan or “repeat financing,” a bridge loan is an excellent option if you’re purchasing a home before selling your previous residence. Lenders will wrap your current and new mortgage payments into one; once your home is sold, you pay off that mortgage and refinance.

Right for: Homeowners with excellent credit and a low debt-to-income ratio, and who don’t need to finance more than 80% of the two homes’ combined value. Meet those requirements, and this can be a simple way of transitioning between two houses without having a meltdown—financially or emotionally—in the process.

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Where to Get a Mortgage: Bank, Broker, or Online?

September 27, 2019

where to get a mortgage

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Wondering where to get a mortgage? More than three-quarters of home-buying consumers need a loan to purchase property. As borrowers, we know that shopping around is the key to getting the best deal on most items. Plenty of us, however, somehow miss that message when it comes to mortgages.

According to a report last year from the Consumer Financial Protection Bureau, less than half of home buyers shop around for a mortgage lender. This mistake can cost borrowers thousands of dollars over the course of their home loans. Wake up, people! These days, borrowers can get a mortgage loan in lots of different ways. So you may be wondering where you should get yours.

Back in the day, banks were the only option for getting a mortgage, but then credit unions and brokers came on the scene. These days, borrowers can get a home loan online, much as you’d order up dinner from Seamless. But should you?

Where to get a mortgage

Each of these mortgage lenders has pros and cons for borrowers, so it pays to know what they are before you commit.

Bank

Most local and national banks have mortgage lending programs, some of them aggressive and highly developed.

Pros: If you already have a relationship with a bank (through a checking account, for example), you may be able to obtain a discounted interest rate if you also use them as a mortgage lender.

“If you’re a customer with good credit, you can get a competitive interest rate from your bank,” says Ginger Wilcox, chief industry officer for mortgage startup Sindeo.

Cons: Banks typically have a limited variety of mortgage products and more rigid credit standards than other types of lenders. They expect you to have a good credit score, a down payment, and an acceptable debt-to-income balance. The biggest banks may have a certain amount of bureaucracy for you to wade through, which can slow down the process.

Credit union

Credit unions are nonprofit organizations that offer financial services directly (and often exclusively) to their members. You may already belong to a credit union if you have a checking account or credit card account through them.

Pros: Credit unions typically have lower overhead than banks, so they may be able to offer a mortgage with lower interest rates or fees. In the first quarter of 2016, for example, rates on a 30-year fixed mortgage at credit unions averaged 3.84%, compared with 4.02% on the same loans at banks.

Cons: Like banks, credit unions have a limited variety of loan products. You have to pay a membership fee (typically $5 to $25) and meet certain membership criteria in order to join, usually based on things such as your geographic area or employer. Use this tool to research a credit union and see whether you qualify for membership. Credit unions also look at your ratio of debt-to-income and your credit score, although they may be more willing to work with you if necessary.

Mortgage broker

mortgage broker has relationships with multiple lenders and works on your behalf to find you the right loan with the best mortgage rate and lowest closing costs for your situation. The key factors would include the amount of down payment you have, your credit score, and other factors. Your real estate agent may recommend a local mortgage broker.

Pros: If you have a unique situation, for example if you are self-employed or have poor credit, a broker will know all of the options that are open to you—and which lender might offer the most appropriate product.

Cons: Brokers receive fees, paid either by the borrower, the lender, or a combination of the two. These are generally 1% to 2% of the value of the loan. There is no guarantee that you’ll get a better interest rate than you would have if you’d shopped around on your own, says Keith Gumbinger, vice president of the mortgage site HSH.com.

Online lender

Like nearly everything else these days, it’s now possible to apply for and receive approval for a mortgage entirely online, from lenders such as Quicken Loans or loanDepot.

Pros: Streamlined document uploading and the ability to apply on your schedule can make the process less stressful. Plus, online lenders may be able to close your loan more quickly. Sindeo, for example, claims it can close loans in as quickly as 15 days, while the average lender takes about a month and a half.

Cons: There’s little human interaction, which could be tough for first-time home buyers or others looking for an adviser to guide them through the process. Online lenders also don’t have the long-term relationships with local Realtors®.

“If you’re in a strong seller’s market, where there are multiple offers on properties, having a lender with credibility in the local real estate community can help your offer rise to the top of the pile,” says Richard Redmond, author of “Mortgages: The Insider’s Guide.”

Keep in mind, however, that whichever route you go, you should always shop around to make sure you’re getting the best deal, not only on your mortgage rate, but with the lowest loan origination fees and other closing costs.

You should also make sure you are ready to buy or refinance a home before you make a mortgage application. Check your credit report on the credit bureaus, and see if your credit history needs work.

If your credit score shows that you have bad credit, you may need to work on it for several months or even a year before you qualify for the loan amount you want, with a good mortgage rate.

Understand the requirements for a down payment, and save up an additional down payment if you need one. You may qualify for first-time home buyer or other down payment assistance in your state.

Pay down your credit card debt and other consumer debt as much as possible, to improve your debt-to-income ratio. The more you prepare before you apply for a loan, the easier it will be, and the better terms you can expect to receive.

It’s also becoming more common to get a pre-qualification or pre-approval letter from a mortgage lender before you make an offer on a home. Getting pre-qualified shows the potential seller that a lender thinks you can afford the monthly payment, and the lender expects to be able to give you a loan.

“Even if you’re getting a conforming loan and the rates don’t vary much, loan fees can vary lender by lender, and you can end up paying more than is necessary,” says Benjamin Beaver, a sales associate with Coldwell Banker Patterson Properties in San Angelo, TX.

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What Is a Jumbo Loan? It’s Not as Huge as You Might Think

September 26, 2019

what is a jumbo loan

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At first glance, a jumbo loan seems self-explanatory: It’s a great, big loan, right? Essentially, that’s true. Obtaining a jumbo loan allows you to borrow a higher loan amount than the maximum value of a conforming loan. A conforming loan essentially “conforms” to guidelines set by Fannie Mae and Freddie Mac. A nonconforming loan does not—in this case, because it is larger than the limits for conforming loans. But just how much larger your loan limit may be when it is nonconforming depends on a couple of factors. Read on to learn the ins and outs of jumbo loans—and the requirements for getting approval for one so you can buy your new home.

What is a jumbo home loan?

Jumbo loans exceed the loan limit of conforming loans, which is $424,100 in most areas. If you live in a high-cost area, the conforming loan limit is $636,150. (Limits are allowed to be higher outside of the contiguous United States.)

“Fannie Mae and Freddie Mac use a county’s median household income to define what the conforming loan cutoff is for that particular area,” explains Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”

But sometimes you need a higher loan amount for a high-priced real estate purchase, and that’s where jumbo loans come in. You can get a jumbo mortgage for a primary residence, vacation homes, or investment properties. It can also be a fixed-rate or adjustable-rate loan.

Credit requirements for a jumbo loan

Traditionally, borrowers will face more stringent credit qualifications when applying for an original or refinance jumbo mortgage, which typically require a minimum credit score of 700. (For a conforming loan, you’ll likely need a credit score of at least 620.) These are only benchmarks, though, since mortgage lenders set their own credit requirements, says Redmond.

“There is no one-size-fits-all credit score for jumbo loans,” he adds.

Where to go for a jumbo mortgage

After the housing crisis, many mortgage lenders pulled out of the jumbo loan market. After all, jumbo loans pose a greater risk to the lender. Today, most jumbo-size original and refinance loans come from banks.

According to the Wall Street Journal, jumbo home loans rose to 24% of mortgage approvals at six of the largest U.S. retail banks in 2015, from 21% the year before, according to an analysis of federal home-loan data.

Those banks are JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, PNC Financial Services Group, and SunTrust Banks. So if you are planning on applying for a jumbo home loan, be sure to look at the rates these banks are offering.

Down payment requirements for a jumbo mortgage

The magic down payment figure for conventional loans is 20%, because it enables the borrower to avoid having to pay private mortgage insurance, or PMI.

Many jumbo-loan lenders require at least a 20% down payment—and some even require a 25% down payment. Moreover, PMI is not typically available on mortgages with higher loan limits.

Debt-to-income ratio requirements

Debt-to-income ratio, or DTI, is your total minimum monthly debt (add up your mortgage, insurance, taxes, and other debt payments you make in a month) divided by your gross monthly income. This ratio is used to determine whether you can afford to make your mortgage payments.

Maximum DTI for a conforming loan is usually 45%, compared with 38% for a loan in the jumbo range. Again, this is because lenders assume more risk when providing larger mortgage loans.

Interest rates

Before the housing market collapse in 2008, many conforming loans had lower interest rates than jumbo loans. That’s no longer the case, Redmond notes.

In fact, in recent years, interest rates on 30-year fixed-rate jumbo loans have slipped below rates for 30-year fixed-rate conforming loans. In the current housing market you can expect to pay similar interest rates.

Can you get a jumbo loan if you have a high loan-to-value ratio?

loan-to-value ratio, or LTV, is essentially the amount of money you borrow from your lender, divided by the purchase price of the home, expressed as a percentage. Many home buyers believe that high loan-to-value jumbo loans are extinct when—in reality—they’re being offered by a number of mortgage lenders. Some even offer jumbo mortgages with up to 90% LTV.

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