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How to Get a Mortgage With Bad Credit: How Low Can You Go?

September 22, 2019

How to Get a Mortgage With Bad Credit

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It’s one of those home-buying riddles that many think is all but unsolvable: How can a home buyer get a mortgage with bad credit? After all, if your credit score is abysmal, you may as well kiss your dreams of a home loan goodbye. Right?

Wrong. In spite of what you’ve heard, there is hope for home buyers or people who want to refinance their home loans, but who have less than perfect credit—or even bad credit.

By “bad credit,” of course, we mean your credit score—that all-important numerical representation of your track record of paying off past debts to lenders, covering everything from your credit card to college loans. Mortgage lenders check your credit score to gauge how good you’ll be at paying them back, too, and a low credit score can definitely work against you.

According to a national survey by Experian, one-third of prospective home buyers are afraid that their poor credit score will reduce their chances of purchasing a home. Meanwhile, 45% of people polled in the subprime market say they’ve decided to delay home buying until their credit score improves, with 1 in 5 believing that their bad credit means they’ll have to shelve the idea for at least five years.

Is this true? Exactly how bad is subprime credit, anyway? We’ll set you straight below, and offer some guidance on how to get a mortgage when you want to buy a house or refinance, but your credit report shows you have poor credit.

How to check your credit score

Before you can explore your loan options with possibly bad credit, you need to assess what shape your credit is really in, says Todd Sheinin, a mortgage lender and chief operating officer at New America Financial in Gaithersburg, MD. For starters, credit scores range from 300 to 850, and are calculated based on the following factors:

  • Payment history: 35%
  • Debts owed: 30%
  • Length of credit history: 15%
  • Types of credit you have: 10%
  • Applications for credit: 10%

 

By law, you’re entitled to a free copy of your credit report once a year from each of the three major credit bureaus: Equifax, Experian, and TransUnion.

You can request the reports through AnnualCreditReport.com. However, your credit report only shows your credit history; to see your actual score, you’ll need to pay a small fee directly through the credit bureaus’ websites. (Alternatively, you can get a free estimate of your score through Credit.com, CreditKarma, or CreditSesame. Some credit unions and other financial institutions also let you see your credit score.)

If your credit score is 760 or above, you’re considered a low-risk borrower—meaning that lenders are likely to offer you the best interest rates and terms when you apply for a loan. Meanwhile, a good score is from 700 to 759, a fair score is from 650 to 699, and credit scores below 650 are seen by lenders as poor credit scores, sometimes referred to as sub-prime.

If your low credit score is below 650, you may want to step back and take a few months to raise your score before you apply for a mortgage loan. You might be surprised how much your FICO score improves with several months of on-time payments and other strategic improvements to your credit report. If your credit report is just thin, with not enough history of making monthly payments, you might consider getting a credit card to improve your creditworthiness. (A credit card only improves your credit score if you keep it in good standing, so do your best to avoid late payments.) Another option if you have subprime credit is to get a co-signer. But if you’re looking to buy a home right away and your credit report shows that you have bad credit, you do have options for a bad-credit mortgage.

Option 1: FHA loan

If you have bad credit, you might still be able to qualify for a government-backed Federal Housing Administration (FHA) loan. Because FHA loans were created for low- and moderate-income borrowers that would otherwise be locked out of the housing market due to bad credit scores, qualifying credit scores on FHA loan programs start at minimum credit scores of 580 and up. Another bonus: FHA loans let borrowers, regardless of credit history, make a down payment as low as 3.5%.

The downside? Because FHA loans are government-insured, FHA borrowers must pay an upfront mortgage insurance premium. Currently the loan program fee is 1.75%—that’s $5,250 on a $300,000 home loan. FHA borrowers also have to pay annual mortgage insurance, currently around 0.85% of the borrowed loan amount—or $2,550 more per year. All those fees increase your mortgage payment every month. Also, FHA loans are usually capped at $417,000. (In certain high-cost areas, the FHA mortgage loan limit is $625,000.)

Option 2: VA loan

Active and retired military are eligible for a loan offered by private lenders through the U.S. Department of Veterans Affairs. Not only do lenders working with the VA accept credit scores of 620 and below, but these lenders require no down payment and no mortgage insurance premium—all at decent interest rates.

“Because interest rates are fixed on VA loans, they’re not based on the borrower’s credit score,” Miller says. In other words, because the government guarantees a portion of the loan, having bad credit and no down payment won’t prevent lenders from offering you a great mortgage loan rate.

Option 3: 15-year fixed-rate loan

Good news: Most conventional loans only require a minimum credit score of 620, based on Fannie Mae and Freddie Mac guidelines. However, “if you have a 620 credit score, you’re going to pay a higher interest rate,” says Heather McRae, a senior loan officer at Chicago Financial Services. But there is one interesting exception.

“If you get a 15-year fixed loan, the lender will essentially turn a blind eye toward your low credit score with respect to what interest rate you get,” says McRae. In other words, for a 15-year fixed loan, a lender would offer the same interest rate whether the borrower has a 620 or a 750 credit score.

You can also look at a 15-year adjustable-rate loan. Sometimes lenders offer lower initial rates on adjustable-rate loans, meaning that you are more likely to qualify for the monthly payments.

Granted, lenders will still require that you meet other requirements in terms of income, down payment, debt-to-income ratio, and other factors. For a refinance, with or without a cash-out deal, you must meet loan-to-value requirements. Lenders want to see a solid salary and plenty of cash upfront to get a purchase or refinance home loan with bad credit. Still, it’s a great option if your past bad credit issues are haunting you, while your present circumstances are solid and scream “All systems go!”

Option 4: A bigger down payment for a bad-credit mortgage

Some mortgage lenders might be willing to approve you for a home loan, even with bad credit, if you make a larger-than-usual down payment. Why? Because lending is a risk-based business, and a borrower who makes a larger down payment is less likely to default. “The more you put down, the more you minimize the risk to the lender,” says Sheinin.

So, by increasing your down payment to 25% or 30% on a conventional loan—instead of the standard 20% down payment—you’ll strengthen your mortgage application. You should also show the lender a strong debt-to-income ratio and steady income history. Bear in mind a bad credit score can still negatively affect the loan interest rate offered by your lender.

Whether you expect to apply for an FHA or VA loan, or other type of loan, consider talking to a mortgage broker before you go house shopping and get pre-qualified for a loan. This is especially important if you are a first-time home buyer, because a mortgage broker can help you avoid looking at houses you can’t afford, or talk to you about what you need to do to qualify for the house you have your heart set on.

The post How to Get a Mortgage With Bad Credit: How Low Can You Go? appeared first on Real Estate News & Insights | realtor.com®.

15-Year vs. 30-Year Mortgage? How to Decide

September 21, 2019

choosing a house and mortgage

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Banks offer a dizzying array of mortgage options, and one of the biggest decisions you’ll have to make in the mortgage process is how long your home loan will last. In other words, you’ll have to weigh the pros and cons of a 15-year mortgage and 30-year mortgage.

How long are you willing to linger with your loan? What kind of monthly payments can you stomach? How do mortgage rates affect the bottom line? We’re here to help with a little mortgage math!

15 or 30 years: What’s the difference?

At first glance, the difference between a 15-year mortgage and a 30-year mortgage seems obvious: A 15-year mortgage stretches your monthly payments over 15 years, and a 30-year mortgage spaces mortgage payments out over, of course, 30 years. But you already knew that much about mortgages, right?

Now here’s something you might not know about mortgage terms: Since a longer loan life means you can make smaller payments, a recent survey found that 86% of home loan applicants opt for a 30-year mortgage (a fixed-rate mortgage).

Here’s how the mortgage term numbers play out: If you purchase a $300,000 home with a 20% down payment, a 30-year (fixed-rate) mortgage at the going interest rate (currently 3.68%), your mortgage payment will be $1,102 per month for 30 years.

Get a 15-year mortgage for the same loan amount, and you’ll be rewarded with a slightly lower interest rate (currently 2.69%), but you’ll have to cough up $1,622—that is, $502 more per month on your mortgage payment. That’s a pretty significant difference in monthly payment, no doubt.

Bottom line? If you can’t afford large monthly payments or are worried about not being able to in the future due to job loss, sporadic income, health issues, or whatever other curveballs might come your way, it’s understandable that you’d opt for a 30-year mortgage with the higher interest rate rather than 15-year loan with the lower mortgage rate. The peace of mind alone could be priceless when it comes to choosing the terms of your mortgage (which may also have property tax rolled into it). And in many cases, the 30-year mortgage (even with its higher interest rate) is a more practical loan, depending on personal finances and cash flow.

Ultimately, your potential circumstances over the life of the loan should absolutely be taken into consideration when selecting a mortgage and its corresponding monthly payment. How will (or won’t) that monthly payment fit into your life for (possibly) decades to come? How much house do you really need at this point in your life, and does it make sense to pursue a smaller loan and/or home instead? Will you want or need to refinance your loan down the road? Asking these questions is an essential exercise in making a prudent mortgage decision, particularly for first-time homebuyers who are navigating the changing and still settling landscape of their financial situation.

Stepping into a home loan requires more than just number-crunching; it demands a bit of soul-searching and thinking ahead, too. This is something that will be a significant part of your life every month for many years.

Benefits of a 15-year mortgage

What many homeowners forget to factor in is that a 15-year mortgage may cost more now, but it will save you major cash in interest payments to your lender down the road.

“A 15-year loan will save you a ton of money,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”

You might be surprised by just how much, so let’s continue with the above example: For a $300,000 home purchased with a 20% down payment, a 30-year mortgage at today’s average interest rate (3.68%) will end up costing you a total of $456,708—that’s in interest and principal—by the time those 30 years are up.

By contrast, a 15-year loan at today’s average interest rate (2.69%) will ultimately cost you only $351,933. In other words, a 15-year mortgage will ultimately save you $104,775 in interest payments—serious money, which might add up to a very good reason to tighten your belt and give the 15-year mortgage a try.

You can run your own numbers with realtor.com®’s mortgage calculator to figure out which loan approach is right for you. Also be aware that your debt-to-income ratio may be a factor in whether you qualify for a 15-year mortgage.

How to save money on a 30-year mortgage

If you can’t afford making the higher payments on a 15-year mortgage but like the idea of saving on the loan’s interest, there are other ways to make that happen, even if you have a 30-year mortgage.

For one, most lenders don’t prohibit borrowers from paying off a loan early, so there’s no reason you can’t pay off a 30-year mortgage in just 15 years (or 20, or 25, or whatever you can manage). So if you do find yourself with extra money one month, due to a bonus or tax refund, consider putting it toward paying off your mortgage early. You’ll save a huge chunk in interest without sacrificing the sense of security that comes with knowing you can easily afford to make your monthly mortgage payments—and maybe occasionally a little extra.

Just know that a 30-year mortgage does not always require you to spend 30 years paying off the loan. You can technically make it into a mortgage that best fits your personal situation. And for that matter, you can always explore the option of a refinance on your mortgage if you’re interested in modifying your mortgage’s interest rate or terms.

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Watch: What Your Mortgage Broker Wishes You Knew

The post 15-Year vs. 30-Year Mortgage? How to Decide appeared first on Real Estate News & Insights | realtor.com®.

What Is Interest? The Fee That Can Tack Thousands Onto Your Mortgage

September 21, 2019

What is interest?

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You’ve probably overheard homeowners boast that they nabbed a “great interest rate” on their mortgage. But what is the definition of interest, exactly? Essentially, interest is an extra fee you pay your lender for borrowing the money to buy a home. Lenders, after all, don’t just let you borrow money out of the goodness of their hearts.

“They want to be compensated for putting money in your pocket,” says Jack Guttentag, author of “The Mortgage Encyclopedia.”

Since mortgage lenders are providing cash upfront to make homeownership possible, they require you to repay every penny you borrow, plus interest. Now, if you’ve got a lot of dough lying around in a savings account and want to pay for the whole house upfront (or most of it) with an all-cash offer, you can avoid paying interest or snag a very low interest rate.

But let’s face it, most of us aren’t living in this dreamy scenario, which makes home loans and interest par for the course—so it pays, literally, for a borrower to know how it all works—the interest rates, the fluctuations, the fees, all of it.

How interest rates on home loans work

When you get a mortgage loan, your interest payment is calculated as a percentage of the total loan amount you’re borrowing. For example, the general formula dictates that if you get a 30-year $200,000 loan with a 4% interest rate (often expressed as the annual percentage rate or APR), you will end up paying back not only that $200,000, but an extra $143,739 in interest—so you’re looking to borrow a total amount of $343,739.

Month to month in the above scenario, your mortgage payments would amount to about $955 per month. Part of that monthly payment would go toward paying back what you borrowed (this is known as your principal), and the rest goes toward interest.

The exact proportion varies month to month—early on, homeowners pay more interest and less principal—but that composition changes as the loan matures.

For instance, in your very first month for the above scenario, you’d pay $288 to your principal and $666 to interest. By the second year, and every year after, you’ll see those figures slowly reverse, meaning that a higher percentage of your monthly mortgage loan payment will be applied to the principal; and by your last check to your lender 30 years later, you’d pay $951 toward principal and $3 toward interest (check out realtor.com®‘s mortgage calculator to punch in your own numbers).

So what does this payment schedule mean for borrowers? It means it will take time for you to build equity in your home, since you’re largely paying interest during the early years as a borrower. Yet there’s an upside to this reality: If you file a Form 1040 and itemize your deductions, the interest on a home loan is deductible on your taxes (there are some limitations). That means that early on, you will get a big tax break that dwindles as your equity rises.

Why interest rates fluctuate

Interest rate fluctuations are based on several factors.

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

These financial shifts could be stressful if they affect your monthly mortgage payments. Luckily, when you get a home loan, there’s a way to shield your savings account from this roller coaster by getting a fixed-rate mortgage, which locks in your rate at whatever level it is at the time you apply. It will then remain the same over the life of your loan (typically 30 years). Alternatively, if you don’t mind the market’s ups and downs, you can opt for an adjustable-rate mortgage.

How to get a low-interest loan

Not everyone who applies for a mortgage loan gets the same interest rate. It varies widely depending on a variety of factors.

Probably the biggest variable is you: Interest rates for home loans vary depending on the borrower’s credit score. Good credit leads to lower interest rates, which is why it’s important to know your credit score and keep it stellar. Your interest rate can also vary based the type of loan you get: 15-year loans, for example, typically offer lower interest rates than 30-year loans. ARMs have lower interest rates than fixed-rate mortgages (at least at first).

The bottom line: Paying interest may be a reality of homeownership, but how much interest you pay depends on many factors, so make sure you grasp the basics before you apply.

The post What Is Interest? The Fee That Can Tack Thousands Onto Your Mortgage appeared first on Real Estate News & Insights | realtor.com®.

What Is Loan to Value Ratio? It’s the Key to Getting a Good Mortgage

September 20, 2019

loan to value ratio

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The loan-to-value ratio (LTV) is a crucial factor if you’re buying a home and applying for a mortgage. So what exactly is this loan-to-value ratio, or LTV? An LTV ratio is simply the amount of money you borrow from your lender, divided by the purchase price of the home, and expressed as a percentage.

For example, let’s say the home you have your eye on is worth $250,000, and you plan to make a down payment of 20% of the home’s price, or $50,000. That would mean you need a loan amount of $200,000. That would also mean your LTV ratio would be $200,000/$250,000 = 0.8, or 80%.

The whole loan-to-value conversation may still seem confusing, so hang with us. You’re about to become an LTV expert, so get ready to dazzle your friends with a little loan-to-value brilliance.

Why the loan-to-value ratio matters

Lenders use LTV ratios to determine the risk level they face loaning money to a prospective client. The higher a client’s LTV, the greater the odds are deemed to be that this borrower might stop paying the monthly mortgage fees and default on the loan.

This could spell less favorable mortgage terms and interest rates for a hopeful home buyer, which is why the LTV ratio is such an important figure. It’s not the only factor involved, though. Credit scores are also considered when it comes time to calculate a mortgage rate.

“Borrowers who have a higher loan-to-value ratio are considered more risky to lenders, because they have less equity in their homes,” explains Keith Gumbinger, vice president of HSH.com, a mortgage information resource.

In other words, that lack of home equity translates to less skin in the game. For instance: Let’s say you make a down payment of only 10%, or $25,000, on that home worth $250,000. That would mean you need a loan amount of $225,000, which would also mean your loan-to-value ratio would be $225,000/$250,000 = 0.9, or 90%.

Most conventional private lenders like banks require that borrowers have an LTV ratio of 80% (or lower) before they approve a loan. This effectively means that the buyers need to make a 20% down payment. Home buyers with a higher LTV (and lower down payment)—often first-time home buyers or those with credit-score issues—may be deemed too risky and be denied a mortgage.

Alternatively, lenders might approve the loan for a high-LTV client, but at a higher interest rate (more risk, more reward). They also might require that the buyer purchase private mortgage insurance (PMI) to cover the lender should the borrower default. PMI is typically required for conventional loans with down payments of less than 20%. Just be aware: If you’re a high-LTV client, private mortgage insurance will almost certainly be mandatory. It’s not the end of the world; keep in mind that there are still ways to outsmart your LTV ratio.

How to lower your loan-to-value ratio

There are two ways to lower your loan-to-value ratio to get good terms on a home loan. That’s right—your LTV ratio is not set in stone.

The first is to make a larger down payment. At least 20% will generally lower your LTV to within a range found to be desirable by mortgage lenders. The other strategy for rehabbing your ratio, of course, is to buy a cheaper house to achieve a more favorable LTV. So, if you have only $25,000 for a down payment, buy a home worth $150,000. That would mean your mortgage amount would be $125,000, and that your LTV would be $125,000/$150,000 = 0.83, or 83%.

When in doubt, talk to a lender or Realtor® to discuss your options. Ideally, this should be before you start house hunting and seeing if you can get pre-approved. This way, you will know what’s within your budget and where you fall on the LTV spectrum. The loan-to-value calculation is a crucial one in the home-buying process, so it makes sense to head into the home-buying process fully educated about your LTV ratio. You can also crunch the numbers with this mortgage calculator.

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Watch: What Your Mortgage Broker Wishes You Knew

The post What Is Loan to Value Ratio? It’s the Key to Getting a Good Mortgage appeared first on Real Estate News & Insights | realtor.com®.

5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home

September 18, 2019

5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home

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Many homeowners with mortgages have considered refinancing at some point or another. Refinancing a mortgage essentially replaces your current mortgage with a new loan. It’s an especially enticing choice for people who want to decrease their interest rate, lower their monthly payments, pay off the loan faster, tap into home equity, or turn an adjustable-rate into a fixed-rate loan.

But hold on. Sherry Graziano, SVP, mortgage transformation officer at SunTrust in Orlando, FL, says that just because rates are at historic lows doesn’t mean that refinancing is the right decision for everyone. “Before beginning conversations with lenders, the homeowner should have a clear financial objective and see refinancing as way to achieve that objective.” 

Once you’ve decided that refinancing is worth exploring, find a mortgage representative who can clarify all the financials and explain all your options. While you’re discussing this, it’s important to ask the right questions—and lots of them.

Ready to refinance your home? Before you jump in and start the refinancing process, here are some questions you should plan to ask your mortgage lender.

1. ‘Does my quote include taxes and insurance?’

When applying for a loan, a lender will provide an estimate that gives a breakdown of all closing costs, the rate, and all other related costs with the loan.

Jeremy Engle, a mortgage lender with Vero Mortgage in Visalia, CA, says the lender’s quote usually includes taxes and insurance. “I ask clients for a current copy of their mortgage statement, and I can pull the figures from that,” he says.

Lenders will typically provide a detailed quote that will break down the new monthly payment, and it should highlight taxes and insurance, according to Graziano. She says homeowners may also want to ask about the associated fees—both the lender’s and other third parties’. “Typical costs may include an appraisal fee, credit report, title insurance, and closing or attorney’s fees,” Graziano says.

2. ‘How much money do I need to bring to closing?’

On average, homeowners can anticipate paying 2% to 3% of the loan amount to refinance a mortgage. So refinancing a $300,000 home loan, for example, could cost $6,000 to $9,000 and would be due at or before closing. Just as with your current home mortgage, the refinancing process will also include closing fees.

Communicate with your lender and ask what you need to bring to the closing table. Closing costs can include a variety of fees—bank, appraisal and attorney fees—for the services and expenses needed to finalize a mortgage.

When it comes to how much to bring to closing, it depends on the loan the borrower is looking to acquire and is unique to each borrower’s financial situation, according to Tarek Hassieb, a licensed real estate broker for Liberty Realty in Hoboken, NJ.

“If they want a lower payment, they’ll bring the appropriate funds to satisfy the payment they feel comfortable with. A borrower can essentially bring zero dollars to closing and add the closing costs to the loan, and bring nothing to the closing table,” says Hassieb.

Graziano says lenders offer different terms and promotions, and it is worth reading through all the documents. 

3. ‘What are my out-of-pocket costs?’

Discuss with your loan officer any additional fees you may be responsible for that are not included in your closing fee estimate. These may be included as separate costs, such as insurance and a property survey. Out-of-pocket costs vary, depending on each buyer’s situation.

“While some homeowners may opt to pay out of pocket for some expenses, many will choose to roll their refinancing costs into the loan,” says Graziano. “Homeowners should be clear about whether or not the lender offers them that option.” 

4. ‘Do I have room to cash out any equity?’

Most lenders prefer to see some equity if you are to qualify for a loan. Usually, the more equity there is in a home, the easier it is to refinance. Experts say at least 20% equity is needed if you don’t want to pay private mortgage insurance. However, even with less, you can still refinance, but the terms may not be as favorable. Hassieb says that since each buyer’s loan may be different, this would be assessed on a case-by-case basis.

5. ‘How long is the term of the loan that you are quoting me?’

When you refinance, you will have a new term and amortization schedule. Each time you refinance your property, the clock is reset for the term length. “The loan would restart to Day One. So consider it a new loan. A borrower can choose a term from 10 years up to 30 years,” says Hassieb.

The cost to refinance a mortgage can vary based on such factors as interest rate, credit score, loan amount, and lender. As a homeowner, if you want to get a better mortgage refinance deal, you should shop around and make lenders compete for your business.

Hassieb says most lenders have an online link to a refinance pre-approval that can help the lender understand the borrowers’ financial situation and help them achieve their financial goals.

The post 5 Questions to Ask Your Mortgage Lender Before Refinancing Your Home appeared first on Real Estate News & Insights | realtor.com®.

Finding Home Loans With Bad Credit (Yes, You Can)

August 28, 2019

home loans for bad credit

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Finding home loans with bad credit isn’t for the faint of heart—or at least not something you should do without some serious homework. But there’s good news if you’re wondering how to buy a house with bad credit: It can be done!

A good credit score typically means you’ll get a great mortgage. A bad credit score means you’re in trouble, but you shouldn’t just throw in the towel. From low credit score mortgages to cash options to down payment strategies, this crash course explains how to buy a home with bad credit. Yes, it can be done.

What is a bad credit score?

First things first: While you may have a vague sense your credit score is bad, that’s not enough. How bad is it, really?

Ideally, you should check your credit report long before meeting with a mortgage lender. Your credit score is based on the information that appears on this report, and you’re entitled to a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.

Credit scores, also called FICO scores, range from 300 (awful) to 850 (perfection).

If your credit score is 750 or higher, “you’re in the top tier” and positioned for the best interest rates and the most attractive loan terms for home buying, says Todd Sheinin, mortgage lender and chief operating officer at New America Financial in Gaithersburg, MD.

A good credit score is from 700 to 749. If you fall below that range, lenders will start to question whether you’re a risky investment as a potential borrower.

“If your credit stinks, you’re at an immediate disadvantage and may have trouble qualifying for a home loan,” says Richard Redmond, a mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”

So, what next?

Check for errors

If your credit rating is subpar, that’s no reason to beat yourself up (at least not immediately), because you may not even be to blame for all of those blemishes.

Creditors frequently make mistakes when reporting consumer slip-ups. In fact, 1 in 4 Americans finds errors on credit reports, according to a 2013 Federal Trade Commission survey. So make sure to scour your credit report for slip-ups that aren’t your own. From there, you’ll need to contact the organizations that provided the erroneous info (e.g., a bank or medical provider) and have them update it. Once that’s done, your credit score will rise accordingly on your credit report.

As for any mistakes that are your fault? If they’re one-time mistakes, it never hurts to call and ask that they get removed from your record.

The only fix for major mistakes (darn chronic credit card debt), however, is time. Banish bad credit by making payments by their due date (late payments truly are the devil for hopeful home buyers), and you will gradually see your credit score rise. Just don’t expect to rewrite your credit history overnight. You have to prove to lenders that you’re up to the task of making those mortgage payments on time—all while saving for a down payment, of course. Nobody said this would be easy!

Pay up for a home loan for bad credit

Depending on your credit score, you might still qualify for low credit score mortgage options—but you should expect to pay a higher interest rate, says Sheinin. Getting a mortgage with a higher rate means you’ll pay your lender more money in interest over time, of course, but it at least enables you to join the home-buying club.

With interest rates still historically low (check yours here), it could make sense to buy now and take the higher rate.

Get a low credit score home loan

Federal Housing Administration loan is one option for prospective home buyers with poor credit, as the FHA typically offers these mortgages for less-than-perfect credit scores and first-time home buyers. The FHA requires a minimum 580 credit score (and other requirements) to qualify, but FHA loans also enable you to make a down payment as low as 3.5%.

The big drawback? Because the federal government insures these low credit score home loans, you’ll pay a mortgage insurance premium, which is currently assessed at 1.75% of the base FHA loan amount. However, depending on your actual credit score, certain conventional loans may still be available to home buyers with low credit, and these loans may require a slightly smaller down payment than the FHA loan minimum. Be sure to do your homework when exploring the FHA option.

Increase your down payment

If you have poor credit but a lot of cash saved up, some mortgage lenders might be willing to approve you for a home loan if you make a larger down payment.

“The more you put down, the more you minimize the risk to the lender,” says Sheinin.

So, by increasing your down payment to 25% or 30% on a conventional loan—instead of the standard 20%—you’ll strengthen your mortgage application, making yourself far more attractive to a lender. Just remember that your bad credit score can still negatively affect your mortgage loan’s interest rate.

Still, though, the chance to own your own home may outweigh those downsides any day. So if you’re convinced your credit history is sure to dash your home-buying dreams, chin up! Put in the work to overcome your bad credit—develop a healthier relationship with credit cards, work with a knowledgeable lender, and explore all of your mortgage options.

The post Finding Home Loans With Bad Credit (Yes, You Can) appeared first on Real Estate News & Insights | realtor.com®.

What Is a Homestead Exemption? Protecting the Value of Your Home

August 22, 2019

what is a homestead tax exemption?

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Owning a home is likely your biggest asset, but also your biggest expense. Between the mortgage, insurance, unexpected repairs like roof damage, property taxes, and possibly homeowners association fees, your home can take a big chunk out of your wallet.

But fortunately, a homestead exemption can provide a degree of relief from those property taxes. Here’s what you need to know about a homestead exemption.

What is a homestead tax exemption?

What exactly is a homestead exemption? Essentially, it’s a law that helps protect the value of your home.

“Homestead tax exemptions waive a certain dollar amount or percentage of home value from property taxes,” says Jay Hobbs, a real estate agent at Long & Foster Real Estate, in Washington, DC.

The word “homestead” indicates that the exemption can be used only for the home you spend most of your time in.

“The incentive applies only to primary residence, not investment property or second property,” says Julie Upton, a real estate agent at Compass in San Francisco.

Homestead exemptions usually offer a fixed discount on taxes, such as exempting the first $50,000 of the assessed value, with the remainder of the home’s value being taxed at the normal rate. For example, using a $50,000 homestead exemption, a home valued at $150,000 would be taxed on only $100,000 of assessed value.

Hobbs provides another example: If the value of your home is $300,000, and your property tax rate is 1%, your property tax bill would equal $3,000. However, if you were eligible for a homestead tax exemption of $50,000, the taxable value of your home would drop to $250,000, meaning your tax bill would drop to $2,500, saving you $500.

But homestead exemptions don’t just apply to taxes. This provision can also help homeowners shield some of their home’s value from creditors. If bankruptcy or the death of a spouse brings debt collectors to your door, a homestead exemption prevents the forced sale of your primary home. The homeowner is allowed to claim a certain amount of equity in the property as exempt from collection by creditors.

Again, using our $50,000 homestead exemption example, if a homeowner has a property valued at $300,000, the creditors are only entitled to $250,000.

Homestead exemptions vary by state

Homeowners living in every state except New Jersey can take advantage of a homestead exemption. It’s also worth noting that Pennsylvania’s homestead exemption is small: a mere $300.

Texas, Florida, Kansas, and Oklahoma have some of the most generous homestead exemptions. In Texas, for example, all homeowners are allowed a $25,000 homestead exemption for school taxes. And seniors and disabled homeowners qualify for an additional $10,000 exemption. Texans can also claim an additional $3,000 exemption for certain county taxes.

In California, however, the exemption is much lower: The first $7,000 of the value of the home is not taxed. So, if your home is assessed at $600,000, the tax liability would be on $593,000, not $600,000.

“With exceedingly high home prices in the state of California, most residents feel the exemption is negligible,” Upton says.

The post What Is a Homestead Exemption? Protecting the Value of Your 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.

The post Earnest Money Deposit vs. Down Payment: What’s the Difference? appeared first on Real Estate News & Insights | realtor.com®.

Need a Mortgage Fast? You’re in Luck: The Home Closing Process Is Speeding Up

August 20, 2019

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Once your offer on your dream home is accepted, it doesn’t mean you can just grab the keys and move in. If you need a mortgage, securing this home loan takes time. The good news is that it’s faster now than ever.

According to a recent three-year study by LendingTree, the length of time it takes to get a mortgage—aka closing—is an average of 40 days in 2019. That’s down from 51 days in 2018, and 74 days in 2017.

And here’s some good news for homeowners who’ve already moved in: The time it takes to refinance a mortgage is also dwindling. Refinancing takes an average of 38 days in 2019, down from 43 in 2018, and 55 days in 2017.

Home buyers should be thrilled to hear that the mortgage process is speeding up—who doesn’t want to move into their new home as quickly as possible? Earlier closing times can also save home buyers money, especially if they are paying high rent or having to find temporary housing while waiting to move into the new home.

Why it takes less time to get a mortgage today

The digitization of the mortgage process is the main reason for the shorter closing times, according to the LendingTree report. The mortgage industry has become increasingly digital since the 2008 financial crisis, when companies operating in the paper-centric system of the past lost or misrecorded some details from their clients, causing problems and legal issues during the foreclosures that often followed.

Since then, some lenders have created new mobile-friendly products to speed up the mortgage-approval process. For example, Quicken Loans launched the app Rocket Mortgage in 2015 to help borrowers close earlier than the industry standard, reportedly sometimes as quickly as eight days.

Another factor contributing to shorter closing times is that mortgage volumes have been decreasing, says Tendayi Kapfidze, chief economist at LendingTree. However, he says that given the recent drop in interest rates, “that’s kind of reversed itself a little bit, but we’re still seeing shorter times than in 2018.”

The LendingTree study also found that loans for smaller amounts took longer to close. Loans of under $150,000 averaged 47 days, versus 39 days for those above the conforming loan limit, which is $484,350 in 2019.

“You’d think something being more valuable or bigger risk for the lender, they might take a little bit more time with it, but it’s the exact opposite,” Kapfidze says. One possible reason is that lenders may require a more extensive appraisal for lower-priced homes, which might have some type of damage or other problem.

How to get a mortgage fast

So what can consumers do to reduce as much as possible the length of time it takes to get a mortgage? To speed up the closing process, Kapfidze urges home buyers to choose a lender with a more digital, less paper-driven process. Before signing on with any lender, ask if the company can digitally link to a borrower’s bank, the IRS, or other institution to get information to process the mortgage, since this is the key to a speedy approval.

Online lenders make it easier for borrowers to compare mortgages, and they often offer better rates and faster approvals, but they come with less customer service, so they may not work well for complex home loans. Mortgage industry experts suggest that borrowers look over the application process, check out online reviews of the company, and make sure it is registered with the Better Business Bureau before they sign up.

Here’s more on how to get a mortgage fast:

Work on your credit score

Before starting the home-buying process, make sure your credit score is in check. According to the LendingTree study, consumers with higher credit scores saw shorter closing times.

People with a credit score of above 760 have an average 38-day closing time in 2019, while closings take an average of 45 days for those with scores of below 720.

Have your financial documentation in order

“A lot of the delay in closing times is just the back-and-forth between the lender and the borrower,” Kapfidze says. He suggests having all documentation well-organized and easy to access, so that it doesn’t take long to send it to the lender.

Also, make sure that all the information that you provide is accurate, he says. If a mortgage lender goes to verify something and finds a discrepancy in what a borrower provided, that can slow things down.

The exact documentation that borrowers need to provide depends on the type of loan they’re seeking, but generally, the required documents relate to a borrower’s income, assets, and employment, such as a W-2 form, pay stubs for the previous 30 days, and bank statements. Borrowers also need valid identification, a loan application, a contract for the home purchase, and homeowner insurance contact information.

Get pre-approved for a mortgage

Many loan experts urge home buyers to get pre-approved for a mortgage before they start shopping for a home, especially if their financial situation is complex. A pre-approval helps buyers better understand what type of home they can afford and can shorten closing times.

“You’re going to have to go through this process at some point anyway, so you might as well get it out of the way upfront as quickly as you can,” says Hayden Hodges, a Dallas-based mortgage loan officer at U.S. Bank. “I would want to know what my ceiling is, what my conditions are, as quickly as I can, as opposed to perhaps getting into unnecessary fire drills towards the end of a transaction.”

Lenders can work quickly to get borrowers pre-approved. Borrowers can speed up the process even more by providing all the documentation needed for pre-approval, Hodges says.

Make sure you have cash on hand

Having cash available to supply earnest money and to pay closing costs can help you close faster, Kapfidze says. Some closing costs need to be paid in cash, so make sure you can easily access the funds.

“You don’t want to get to closing, and it’s like, ‘Hey, you need to have a $12,000 check,’ and then realizing your money’s not liquid,” he says.

The post Need a Mortgage Fast? You’re in Luck: The Home Closing Process Is Speeding Up appeared first on Real Estate News & Insights | realtor.com®.

Should You Prepay Your Mortgage? The Pros and Cons

August 14, 2019

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Should you prepay your mortgage? For some homeowners it’s a financially savvy move—but for others, beefing up their loan payments just doesn’t make sense. To help you figure out whether prepayment is right for you, here are the pros and cons cited by financial experts.

Pro: You’ll cut down on the interest you owe

Interest is the extra fee you pay your lender for loaning you the cash you needed to buy a home. After all, lenders don’t just hand out dough for free—they’re in the business to make money.

By increasing your monthly mortgage payments—also called “prepaying” your mortgage—you’ll effectively save money in interest charges. Those savings can add up big-time.

For example, let’s say you take out a $200,000 mortgage with a 4% fixed interest rate and a 30-year term. If you continue to make your minimum monthly payments, you’d be forking over $143,739 in interest over 30 years until the debt is paid off. But, by paying an extra $100 per month, you’d pay only $116,702 in interest over a 25-year time span—a savings of $27,037.

Pro: You’ll get your mortgage paid off sooner

By accelerating your mortgage payments, you’ll also be shortening how long it takes to pay off the loan, which would increase your cash flow in the future. That’s a huge incentive for some borrowers.

“For families with young children, where the parents are concerned about paying for their children’s college tuition, sometimes we will recommend they increase mortgage payments so that when their kids head off to college their mortgage obligation is gone,” says Joe Pitzl, a certified financial planner for Pitzl Financial, in Arden Hills, MN.

Paying more money each month toward your mortgage’s principal can also give you peace of mind, says Marguerita Cheng, a certified financial planner at Blue Ocean Global Wealth in Gaithersburg, MD.

“Emotionally, it’s gratifying knowing that you’re paying your mortgage sooner than you originally planned to do,” Cheng says.

Pro: You’ll build equity faster

No matter how much money you put down on your mortgage, your home equity is the current market value of your home minus the amount you owe on your loan. So say your home is worth $250,000 and your mortgage balance is $200,000. In this case, you’d have $50,000, or 20%, in home equity.

Making larger mortgage payments toward your loan’s principal would enable you to build equity faster. Having more home equity can be a tremendous boon if you’re looking to get a home equity loan or home equity line of credit, such as to pay for home improvements, says Tendayi Kapfidze, chief economist at Lending Tree.

Pro: It helps your credit score

Showing that you have less debt—and that you manage your debts responsibly, by paying your mortgage off early—can raise your credit score. That can help if you’re planning to apply for a car loan or a second mortgage on a vacation home, since your credit score would affect the interest rate you qualify for.

Con: Prepaying reduces mortgage interest, which is tax-deductible

Because prepaying your mortgage reduces your mortgage interest, it may not make sense from a tax-savings perspective. Mortgages are structured so that you start off paying more interest than principal.

For example, in the first year of a $300,000, 30-year loan at a fixed 4% interest rate, you’d be deducting $10,920. (To find out how much you paid in mortgage interest last year, punch your numbers into our online mortgage calculator.)

Nonetheless, taking a mortgage interest deduction under the new tax law requires itemizing deductions—and itemizing may no longer make sense for many homeowners, since the standard deduction jumped under the new tax plan to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly.

Another thing to consider: In the past, you could deduct the interest from up to $1 million in mortgage debt (or $500,000 if you filed singly). However, for loans taken out from December 15, 2017, onward, only the interest on the first $750,000 of mortgage debt is deductible, says William L. Hughes, a certified public accountant in Stuart, FL.

Con: You could miss out on more lucrative investment opportunities

Every dollar you put toward your mortgage principal is a dollar you can’t invest in higher-yield ventures, such as stocks, high-yield bonds, or real estate investment trusts, Pitzl says.

That being said, “you’d be assuming more risk by investing your money in, say, the stock market instead of putting the money toward your mortgage,” Pitzl points out.

“You have to consider your risk tolerance before you decide where to put your extra cash,” says Cheng.

Con: You may miss paying off higher-interest debts

For many homeowners, paying off higher-interest debt—such as from a credit card or private student loan—is more important than prepaying their mortgage, Cheng says.

Think about it: If you’re carrying a $400 debt on a credit card from month to month with a 20% interest rate, the amount of money you’re paying in credit card interest is $80 per month—that would be leaps and bounds higher than what you’d be paying in mortgage interest on a home loan with a 4% interest rate.

Con: Prepaying a mortgage could hamper achieving other financial goals

Building your retirement savings is crucial, of course. However, some people make the mistake of prepaying their mortgage instead of maxing out their retirement contributions, Cheng laments.

“At the bare minimum, I recommend my clients do a full 401(k) match with their employer,” she says.

Moreover, Pitzl encourages people to build a sufficient emergency fund—typically, a fund large enough to cover three to six months of their essential expenses—before they focus on prepaying their mortgage.

“If you get into a bind, you can’t sell off windows and doors to make ends meet,” Pitzl says.

Con: There may penalties for prepaying your mortgage

Some lenders charge a fee if a client’s mortgage is paid in full before the loan term ends. That’s why it’s important to check with your mortgage lender—or look for the term “prepayment disclosure” in your mortgage agreement—to see if there’s a penalty and, if so, how much it is.

The bottom line: If you don’t have enough money to pad your savings before you begin paying off your mortgage early, prepaying your home loan may put you in a financial hole if an emergency crops up.

Still not sure what direction to go in? Consider sitting down with a financial planner to discuss your options based on your personal finances.

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