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6 Things Your Mortgage Lender Wants You To Know About Getting a Home Loan During COVID-19

May 29, 2020

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Getting a mortgage, paying your mortgage, refinancing your mortgage: These are all major undertakings, but during a pandemic, all of it becomes more complicated. Sometimes a lot more complicated.

But make no mistake, home buyers are still taking out and paying down mortgages during the current global health crisis. There have, in fact, been some silver linings amid the economic uncertainty—hello, record-low interest rates—but also plenty of changes to keep up with. Mortgage lending looks much different now than at the start of the year.

Whether you’re applying for a new mortgage, struggling to pay your current mortgage, or curious about refinancing, here’s what mortgage lenders from around the country want you to know.

1. Rates have dropped, but getting a mortgage has gotten more complicated

First, the good news about mortgage interest rates: “Rates have been very low in recent weeks, and have come back down to their absolute lowest levels in a long time,” says Yuri Umanski, senior mortgage consultant at Premia Relocation Mortgage in Troy, MI.

That means this could be a great time to take out a mortgage and lock in a low rate. But getting a mortgage is more difficult during a pandemic.

“Across the industry, underwriting a mortgage has become an even more complex process,” says Steve Kaminski, head of U.S. residential lending at TD Bank. “Many of the third-party partners that lenders rely on—county offices, appraisal firms, and title companies—have closed or taken steps to mitigate their exposure to COVID-19.”

Even if you can file your mortgage application online, Kaminski says many steps in the process traditionally happen in person, like getting notarization, conducting a home appraisal, and signing closing documents.

As social distancing makes these steps more difficult, you might have to settle for a “drive-by appraisal” instead of a thorough, more traditional appraisal inside the home.

“And curbside closings with masks and gloves started to pop up all over the country,” Umanski adds.

2. Be ready to prove (many times) that you can pay a mortgage

If you’ve lost your job or been furloughed, you might not be able to buy your dream house (or any house) right now.

“Whether you are buying a home or refinancing your current mortgage, you must be employed and on the job,” says Tim Ross, CEO of Ross Mortgage Corp. in Troy, MI. “If someone has a loan in process and becomes unemployed, their mortgage closing would have to wait until they have returned to work and received their first paycheck.”

Lenders are also taking extra steps to verify each borrower’s employment status, which means more red tape before you can get a loan.

Normally, lenders run two or three employment verifications before approving a new loan or refinancing, but “I am now seeing employment verification needed seven to 10 times—sometimes even every three days,” says Tiffany Wolf, regional director and senior loan officer at Cabrillo Mortgage in Palm Springs, CA. “Today’s borrowers need to be patient and readily available with additional documents during this difficult and uncharted time in history.”

3. Your credit score might not make the cut anymore

Economic uncertainty means lenders are just as nervous as borrowers, and some lenders are raising their requirements for borrowers’ credit scores.

“Many lenders who were previously able to approve FHA loans with credit scores as low as 580 are now requiring at least a 620 score to qualify,” says Randall Yates, founder and CEO of The Lenders Network.

Even if you aren’t in the market for a new home today, now is a good time to work on improving your credit score if you plan to buy in the future.

“These changes are temporary, but I would expect them to stay in place until the entire country is opened back up and the unemployment numbers drop considerably,” Yates says.

4. Forbearance isn’t forgiveness—you’ll eventually need to pay up

The CARES (Coronavirus Aid, Relief, and Economic Security) Act requires loan servicers to provide forbearance (aka deferment) to homeowners with federally backed mortgages. That means if you’ve lost your job and are struggling to make your mortgage payments, you could go months without owing a payment. But forbearance isn’t a given, and it isn’t always all it’s cracked up to be.

“The CARES Act is not designed to create a freedom from the obligation, and the forbearance is not forgiveness,” Ross says. “Missed payments will have to be made up.”

You’ll still be on the hook for the payments you missed after your forbearance period ends, so if you can afford to keep paying your mortgage now, you should.

To determine if you’re eligible for forbearance, call your loan servicer—don’t just stop making payments.

If your deferment period is ending and you’re still unable to make payments, you can request delaying payments for additional months, says Mark O’ Donovan, CEO of Chase Home Lending at JPMorgan Chase.

After you resume making your payments, you may be able to defer your missed payments to the end of your mortgage, O’Donovan says. Check with your loan servicer to be sure.

5. Don’t be too fast to refinance

Current homeowners might be eager to refinance and score a lower interest rate. It’s not a bad idea, but it’s not the best move for everyone.

“Homeowners should consider how long they expect to reside in their home,” Kaminski says. “They should also account for closing costs such as appraisal and title insurance policy fees, which vary by lender and market.”

If you plan to stay in your house for only the next two years, for example, refinancing might not be worth it—hefty closing costs could offset the savings you would gain from a lower interest rate.

“It’s also important to remember that refinancing is essentially underwriting a brand-new mortgage, so lenders will conduct income verification and may require the similar documentation as the first time around,” Kaminski adds.

6. Now could be a good time to take out a home equity loan

Right now, homeowners can also score low rates on a home equity line of credit, or HELOC, to finance major home improvements like a new roof or addition.

“This may be a great time to take out a home equity line to consolidate debt,” Umanski says. “This process will help reduce the total obligations on a monthly basis and allow for the balance to be refinanced into a much lower rate.”

Just be careful not to overimprove your home at a time when the economy and the housing market are both in flux.

The post 6 Things Your Mortgage Lender Wants You To Know About Getting a Home Loan During COVID-19 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®.

Who’s the Best Mortgage Lender for You? How to Find Your Match

April 23, 2019

Mortgage Broker

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Most house hunts involve not only finding your dream home, but also selecting the best mortgage lender to finance this massive purchase.

So what do we mean by “best”? A mortgage with a low interest rate and fees, obviously, but it’s more than just the money. Ideally you want a mortgage lender who won’t leave you buried in paperwork, or confused by a slew of obscure terms you don’t understand.

In a recent survey, about 1 in 5 U.S. home buyers said they came to regret their choice in a lender. Don’t want to be one of them? Then be sure to ask yourself these questions below to home in on your perfect match.

How much money do I need?

A mortgage is by no means a one-size-fits-all product. Indeed, your budget plays a significant role in what lender you should choose.

If you’re looking to get a big loan, you’ll want to search for a lender that specializes in jumbo loans. In a nutshell, these are mortgages that 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. But, after the housing crisis, many mortgage lenders pulled out of the jumbo loan market. After all, extra-large home loans pose a greater risk to the lender.

To get a ballpark figure of how much money you need—and the type of house you can afford—plug your income and other numbers into an online home affordability calculator.

Would I qualify for a conventional loan?

Most home buyers obtain conventional loans, since these mortgages tend to offer the lowest interest rates. But in order to qualify for a conventional mortgage, borrowers need to meet certain requirements—like, for instance, a credit score of at least 620, a down payment of 5% to 20%, and a maximum debt-to-income ratio of 43%, says Todd Sheinin, mortgage lender and chief operating officer at Homespire Mortgage, in Gaithersburg, MD.

The DTI ratio is how much money you owe in monthly debt obligations (on student loans, credit cards, car loans, and hopefully soon a home loan), divided by your monthly income. So, let’s say you’re paying $500 to debts and pulling in $6,000 in gross (meaning pretax) income. Divide $500 by $6,000 and you’ve got a DTI ratio of 0.083, or 8.3%. However, that’s your DTI ratio without a monthly mortgage payment. If you factor in a monthly mortgage payment of, say, $1,000, your DTI ratio increases to 25%.

If I don’t quality for a conventional loan, what are my options?

Most home buyers who don’t qualify for a conventional loan do still qualify for other types. The main options include FHA loans, VA loans, and USDA loans. Generally the requirements for these are looser—meaning lower down payments, lower credit scores, and higher DTI ratios. However, they still have their limits.

Federal Housing Administration loans, for example, let home buyers put down as little as 3.5%, but borrowers generally need a minimum credit score of 580, says Tim Lucas, editor at MyMortgageInsider.com.

Meanwhile, U.S. Department of Agriculture loans let borrowers put as little as 0% down, but these loans are available only in certain rural locations.

Veterans Affairs loans also require no money down, but are available only to veterans, active-duty service personnel, and select reservists or National Guard members. If you quality for these loans, they’re great options.

Am I willing to hire someone to do the legwork?

To find the best mortgage lender, it’s essential that you shop around. However, there’s one alternative: Hire someone to do the shopping for you.

You can do this by hiring a mortgage broker—an industry professional who can shop for multiple lenders simultaneously on your behalf. The caveat: Sometimes mortgage brokers get their commission paid by the borrower (that’s you) based on an agreed-upon fee that becomes part of your closing costs, while other times brokers get paid by the lender that’s ultimately chosen to fund the loan.

Typically, a mortgage broker’s commission is around 1% to 2% of the loan borrowed (or $1,000 to $2,000 per $100,000). The upshot: Though you might have to pony up cash to use a broker, this person can help you not only find a lender but also negotiate for you—meaning you don’t have to do any haggling yourself to nab a low-interest home loan.

Am I comfortable getting a mortgage online or prefer hands-on guidance?

Online mortgages are growing in popularity, particularly for younger home buyers: One recent survey by NerdWallet found that 64% of millennial mortgage applicants would prefer to get it all done digitally. Though online lenders often offer lower mortgage rates and fees, they’re not right for everyone.

If you care about the kind of one-on-one, face-to-face service you get when you work with a local mortgage lender, be aware that you don’t typically get that with an online lender (although many online mortgage lenders do employ loan officers you can speak to on the phone).

Another reason an online lender may not be a good fit: Many don’t employ mortgage specialists who know the ins and outs of your local market, which can be a disadvantage if you’re applying for a complicated loan, such as a mortgage for a self-employed borrower.

Nonetheless, “online lenders are great for conventional scenarios: salaried borrowers without financial or credit complications, and properties that are typical for the area in design, lot size, condition, and amenities,” says Richard Redmond, author of “Mortgages: The Insider’s Guide.”

The moral of the story: You’ll have to weigh your loan needs and comfort level of completing the entire mortgage process online before choosing an online lender.

Do I want to work with a small or large lender?

Choosing between a small lender, like a local credit union, and a larger national lender, such as Bank of America or Wells Fargo, is mostly a matter of preference. But knowing which you’d prefer can help you find the right lender to fit your needs. If you like personal service, it may make sense to choose a small mortgage lender in your local area. Indeed, the bigger the bank, the more business it does, which means you’re just one of thousands of clients, so it may not bend over backward to attend to your every whim, says Bruce Ailion, a mortgage broker at Re/Max Town and Country in Atlanta.

If you don’t have much time to waste, a larger lender may be a better choice, since the bigger banks have in-house underwriters and larger teams to process mortgage applications faster.

Another factor consider: Large lenders may have more payment options such as online payment or automatic mortgage deduction. Also, big banks often let you do everything online, from your mortgage application to account management. (Many local lenders don’t have as well-oiled online banking systems.)

To better weigh all your mortgage options, head to realtor.com/mortgage to compare lenders and learn more.

The post Who’s the Best Mortgage Lender for You? How to Find Your Match appeared first on Real Estate News & Insights | realtor.com®.

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

April 11, 2019

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

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

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

Why does my interest rate matter?

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

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

Why do interest rates fluctuate?

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

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

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

How do I lock in my interest rate?

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

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

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

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

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

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

How do I get the best interest rate?

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

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

Tap into the right resources

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

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

 

The post A Guide to Mortgage Interest Rates: Why They Go Down and Up, and What to Do appeared first on Real Estate News & Insights | realtor.com®.

3 Things You’d Better Know Before Applying for a Mortgage—or Else

December 13, 2018

Unless you’re sitting on a ton of cold, hard cash, you’re going to need a mortgage to buy a home.

Unfortunately, you can’t just show up at a bank with a checkbook and a smile and get approved for a home loan—you need to qualify for a mortgage, which requires some careful planning.

So, how do you please the lending gods? It starts with arming yourself with the right knowledge about the home loan application process.

Here are three things you need to know before applying for a mortgage.

1. What is a good credit score

Ah, the all-mighty credit score. This powerful three-digit number is a key factor in whether you get approved for a mortgage. When you apply for a loan, lenders will check your score to assess whether you’re a low- or high-risk borrower. The higher your score, the better you look on paper—and the better your odds of landing a great loan. If you have a low credit score, though, you may have difficulty getting a mortgage.

So, what’s considered a good credit score in the mortgage realm? While a number of credit scores exist, the most widely used credit score is the FICO score. A perfect score is 850. However, generally a score of 760 or higher is considered excellent, meaning it will help you qualify for the best interest rate and loan terms, says Richard Redmond, mortgage broker at All California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”

A good credit score is 700 to 759; a fair score is 650 to 699. If you have multiple blemishes on your credit history (e.g., late credit card payments, unpaid medical bills), your score could fall below 650, in which case you’ll likely get turned down for a conventional home loan—and will need to mend your credit in order to get approved (unless you qualify for a Federal Housing Administration loan, which requires only a 580 minimum credit score).

Before meeting with a mortgage lender, Beverly Harzog, consumer credit expert and author of “The Debt Escape Plan,” recommends obtaining your credit report. You’re entitled to a free copy of your full report at AnnualCreditReport.com. Though the report does not include your score—for that, you’ll have to pay a small fee—just perusing your report will give you a ballpark idea of how you’re doing by laying out any problems such as late or missing payments.

2. What down payment you need

What’s an acceptable down payment on a house? In a recent NerdWallet study, 44% of respondents said they believe you need to put 20% (or more) down to buy a home. So, if you do the math, you’d have to plunk down $50,000 on a $250,000 house. Of course, that’s a big chunk of change for many home buyers.

The good news? That 20% figure is common, but it’s not set in stone. It’s the gold standard because when you put 20% down, you won’t have to pay private mortgage insurance, which can add several hundred dollars a month to your house payments. Another advantage of putting down 20% upfront is that that’s often the magic number you need to get a more favorable interest rate.

But, if you’re unable to make a 20% down payment, there are many lenders that will allow you to put down less cash. And there are a number of loan products that you might qualify for that require less money down. FHA loans require as little as 3.5% down. The U.S. Department of Veterans Affairs loan program gives active or retired military personnel the opportunity to purchase a home with a $0 down payment and no mortgage insurance premium. Same with USDA loans (federally backed by the U.S. Department of Agriculture Rural Development).

Another option worth pursuing is qualifying for down payment assistance. There are 2,290 programs across the country that offer financial assistance, kicking in an average of $17,766, according to one study. (You can find programs in your area on the National Council of State Housing Agencies website.)

There are some cases, though, where you’ll have to put more than 20% down to qualify for a mortgage. A jumbo loan is a mortgage that’s above the limits for government-sponsored loans. In most parts of the country, that means loans over $417,000; in areas where the cost of living is extremely high (e.g., Manhattan and San Francisco), the threshold jumps to $625,000. Since larger loans require the lender to take on more risk, jumbo loans typically require home buyers to make a bigger down payment—up to 30% for some lenders.

3. What is your DTI ratio

To get approved for a mortgage, you need a solid debt-to-income ratio. This DTI figure compares your outstanding debts (on student loans, credit cards, car loans, and more) with your income.

For example, if you make $6,000 a month but pay $500 to debts, you’d divide $500 by $6,000 to get a DTI ratio of 0.083, or 8.3%. However, that’s your DTI ratio without a monthly mortgage payment. If you factor in a monthly mortgage payment of, say, $1,000 per month, your DTI ratio increases to 25%.

Lenders like this number to be low, because evidence from studies of mortgage loans shows that borrowers with a higher DTI ratio are more likely to run into trouble making monthly payments, according to the Consumer Financial Protection Bureau.

For a conventional loan, most mortgage lenders require a borrower’s DTI to be no more than 36% (although some lenders will accept up to 43%), says Ray Rodriguez, regional mortgage sales manager at TD Bank.

The good news? If you’re above the 36% ceiling, there are ways that you can lower your DTI. The easiest would be to apply for a smaller mortgage—meaning you’ll have to lower your price range. Or, if you’re not willing to budge on price, you can lower your DTI by paying off a large chunk of your debts in a lump sum.

The post 3 Things You’d Better Know Before Applying for a Mortgage—or Else appeared first on Real Estate News & Insights | realtor.com®.

What Is Debt-to-Income Ratio? The Key to Qualifying for a Mortgage

September 12, 2018

What is debt-to-income ratio? This equation, comparing how much money you owe to the money you make, affects whether you can qualify for a mortgage—but let’s unpack this important term into plain old dollars and sense.

You know what debt and income each mean independently. Debt is money you owe to another party. As a consumer, your debt load is what you owe in obligations like credit card payments, student loans, car loans, installment loans, car loans, personal debts, alimony, or child support. Meanwhile, income is the sum of the money you make from your job, part-time work, alimony, or income-producing assets such as real estate or stocks.

So, what do debt and income have to do with obtaining a home loan?

What is debt-to-income ratio?

Your debt-to-income (DTI) ratio helps lenders figure out how (or whether) a home purchase can fit into your financial picture. To calculate your DTI ratio, you simply divide your ongoing monthly debt payments by your monthly income.

For revolving debt like a credit card, use the minimum monthly payment for this calculation. This might not match what you typically pay each month—hopefully, you’re paying off your credit cards as quickly as possible, in order to reduce how much money you pay in interest—but the minimum payment is what most lenders use when calculating DTI.

For installment debt, which is money you owe in fixed payments for a fixed number of months—such as installments you owe on the washer/dryer or A/C unit you purchased—use the current monthly payment.

So, let’s say you’re paying $500 to debts and pulling in $6,000 in gross (meaning pretax) income. Divide $500 by $6,000 and you’ve got a DTI ratio of 0.083, or 8.3%. However, that’s your DTI ratio without a monthly mortgage payment. If you factor in a monthly mortgage payment of, say, $1,000 per month, your DTI ratio increases to 25%.

Why does it matter?

Lenders use your DTI ratio to assess your ability to pay for a loan. Lenders like this number to be low. Why? Because evidence from studies of mortgage loans shows that borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments, says the Consumer Financial Protection Bureau (CFPB).

As a general rule, if you want to qualify for a mortgage, your DTI ratio cannot exceed 36% of your gross monthly income, says David Feldberg, broker/owner of Coastal Real Estate Group in Newport Beach, CA. A higher DTI ratio could mean you’ll pay more interest, or you could be denied a loan altogether.

Some lenders will loan money to people with DTI ratios exceeding 36%, but it’s rare. After all, if you default on your mortgage and your lender has to foreclose on your home, your lenders may not be able to recoup their full investment. And it’s bad for you too: As a borrower, defaulting on your mortgage can destroy your credit score, which would make it more difficult for you to qualify for another mortgage.

To verify income, a mortgage lender will want to see recent pay stubs and W-2 tax forms for the past two years. If you’ve recently had a change in pay, such as a raise, you’ll need to get a statement from your boss confirming your new salary. And, if you generate income from a source outside your primary job—such as part-time work or side gigs that pay only commission—you’ll have to provide W-2 forms for these as well.

To verify debt, you’ll have to provide official documents, such as credit card statements, that show the debts you currently owe.

How much home can I afford?

Curious what price home fits within your budget? Try a Home Affordability Calculator. It lets you plug in important financials, including your debt, income, and down payment, and uses your location to determine today’s interest rate, the tax rate in your area, and the cost of home insurance. Once you have that information, you can connect with a mortgage lender that will help you get a home loan.

The post What Is Debt-to-Income Ratio? The Key to Qualifying for a Mortgage appeared first on Real Estate News & Insights | realtor.com®.

Oops! 5 Mortgage Moves You May Not Realize You Need to Do

August 21, 2018

Getting a mortgage is easy, right? You’ve seen the TV commercials and the billboard ads touting promises like, “Get approved for a mortgage today!” Well, sorry to break the news, but the reality is that obtaining a home loan isn’t just one mouse click or phone call away.

There are a number of hoops to jump through and hurdles to cross before a mortgage lender will issue you a loan. To switch metaphors, it’s less of a sprint, more of a triathlon—and it’s easy to overlook an important stage or two as you move toward the finish line.

Curious what home buyers often miss, much to their chagrin? Here are five essential steps that many people don’t realize are needed for a mortgage.

1. Get pre-approved

In any highly competitive housing market, it’s akin to self-sabotage not to get pre-approved before making an offer on a house.

Pre-approval is a commitment from a lender to provide you with a home loan of up to a certain amount. This will set your home-buying budget, and also show sellers that you’re serious about buying when it comes time to put in an offer. In fact, many sellers will accept offers only from pre-approved buyers, says Ray Rodriguez, New York City regional mortgage sales manager at TD Bank.

Mortgage pre-qualification should not be confused with pre-approval. Pre-qualification is based solely on verbal information you give a lender about your income and savings—meaning that it shows how much you could theoretically borrow. But make no mistake, it’s no guarantee. Pre-approval, on the other hand, means the lender has already done its due diligence and is willing to loan you the money.

How to do it: To get pre-approved, you’ll have to provide a mortgage lender with a good amount of paperwork. For the typical home buyer, this includes the following:

  • Pay stubs from the past 30 days showing your year-to-date income
  • Two years of federal tax returns
  • Two years of W-2 forms from your employer
  • 60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts, such as CDs, IRAs, and other stocks or bonds
  • Any other current real estate holdings
  • Residential history for the past two years, including landlord contact information if you rented
  • Proof of funds for the down payment, such as a bank account statement. (If the cash is a gift from your parents, you need to provide a letter that clearly states that the money is a gift and not a loan.)

2. Ace the home appraisal

Lenders require a home appraisal before they’ll issue a loan, because the home you’re buying is going to serve as collateral. If you can’t make your mortgage payments, the lender will have to foreclose upon your home, and then sell the property to recoup its costs. Which is why it wants to make sure the property is worth the amount of money you’re paying for it.

If the home’s appraised value is the same as what you’ve agreed to pay, you’ve passed the appraisal. If the appraisal comes in at a figure higher than what you’re paying, you’re golden—in fact, you’ve gained instant equity! But, if the appraisal comes in lower than what you’ve agreed to pay, you have a problem.

How to do it: A lender won’t loan more than a home’s appraised value, which could leave you, the borrower, to cover the difference, says Chris Dossman, a real estate agent with Century 21 Scheetz in Indianapolis. But if you’re unwilling or able to do that, you have a few options:

  1. Negotiate with the seller. For the appraisal to pass, the seller may agree to lower the sales price. Of course, this might require some negotiating by your real estate agent with the seller’s agent.
  2. Appeal the appraisal. Sometimes called a rebuttal of value, an appeal involves your loan officer and agent working together to find better comparable market data to justify a higher valuation. If you file an appeal, the appraiser will review the information and then make a judgment call on whether or not to adjust the info.
  3. Order a second appraisal. If you believe the initial appraisal is significantly off base, for whatever reason—maybe the appraiser overlooked a good comp or wasn’t familiar with the local housing market—you can order a second appraisal. You’ll have to pony up for the expense, and appraisals can range between a few hundred dollars and $1,000, depending on the area.
  4. Walk away. This is a total bummer, but it may not be worth overpaying for a home, says Dossman.

3. Keep your credit score stable while under contract

Depending on the loan program, lender, and applicant’s specific credit history, the minimum credit score necessary to buy a home varies. The minimum requirement could be as low as 580 for a Federal Housing Administration (FHA) loan, or as high as 660 for a conventional loan, says Theresa Williams-Barrett, vice president of consumer lending and loan administration for Affinity Federal Credit Union. However, lenders vary in their requirements.

The caveat, though, is that your credit score must remain stable while you’re under contract on a house. Why? Because the lender’s final clearance and a loan commitment are subject to a last-minute credit check (and other verifications) shortly before closing.

How to do it: To avoid jeopardizing your final loan approval, follow these guidelines:

  • Don’t open new credit accounts. Applying for a new credit card can ding your score, says Beverly Harzog, a consumer credit expert and author of “The Debt Escape Plan,” because it results in a “hard inquiry” on your credit report. Buying a car, boat, or any other large purchase that has to be financed can also dock your score.
  • Don’t close old credit accounts. Closing an old account can hurt your debt-to-credit utilization ratio—a term for how much debt you’ve accumulated on your credit card accounts, divided by the credit limit on the sum of your accounts. This ratio comprises 30% of your credit score. By closing a credit card account, you reduce your available credit—making it more difficult to keep your debt-to-credit utilization ratio below 30% (the recommended percentage).
  • Don’t miss a credit payment. Even one late payment can cause as much as a 90- to 110-point drop on a FICO score of 780 or higher, according to Credit.com.

4. Review the closing disclosure form

Lenders must provide borrowers with a closing disclosure, or CD, at least three business days before closing. Essentially, the CD is the official follow-up to a more preliminary document you received when you first applied for your loan, called the loan estimate, or LE (also known as a good-faith estimate).

The LE outlined the approximate fees you would be expected to pay if you move forward with a lender to close on a home. But your closing disclosure is the real deal—it outlines exactly what fees you’re going to pay at settlement. You have to scrutinize it carefully, especially considering that a recent survey of real estate agents by the National Association of Realtors® found that half of agents have detected errors on CDs.

How to do it: Ask your real estate agent to sit down with you and compare the CD and LE. Here’s a list of things to triple-check:

  • The spelling of your name
  • Loan term (15 years? 30 years? Something different?)
  • Loan type (a fixed-rate or adjustable-rate mortgage)
  • Interest rate
  • Cash to close amount (down payment and closing costs)
  • Closing costs (fees paid to third parties)
  • Loan amount
  • Estimated total monthly payment
  • Estimated taxes, insurance, and other payments

5. Pass the underwriting process

Before your lender issues final loan approval, your mortgage has to go through the underwriting process. Underwriters are like real estate detectives. It’s their job to make sure you have represented yourself and your finances truthfully, and that you haven’t made any false or misleading claims on your loan application.

Underwriters will pull your credit score from the three major credit bureaus—Experian, Equifax, and TransUnion—to make sure it hasn’t changed since you were pre-approved. They will also review the appraisal of your prospective home to make sure its value matches the size of the loan you are requesting, and check that you haven’t taken on any new debts.

Many underwriters will also contact your employer to verify the job and salary that you listed on your loan application. This sounds like a basic step, but you’d be surprised how many people lie on their mortgage application.

How to do it: This one’s pretty simple. Assuming you’ve been diligent about keeping your credit score, job status, and debts stable, you’ll pass with flying colors. If the underwriter has a question, don’t panic—the best thing you can do is respond with prompt and complete information. Your agent is also there to help you troubleshoot any issues.

The post Oops! 5 Mortgage Moves You May Not Realize You Need to Do appeared first on Real Estate News & Insights | realtor.com®.

5 Mortifying Reasons Mortgage Applications End Up in the ‘Reject’ Pile

August 7, 2018

Peter Dazeley/Getty Images

Picture this nightmare: You apply for a mortgage, but your application gets rejected. Suddenly, you’re hit with an overwhelming wave of embarrassment, shock, and horror. It’s like having your credit card denied at the Shoprite. So. Much. Shame.

Sadly, this is a reality for some home buyers. According to a recent Federal Reserve study, one out of every eight home loan applications (12%) ends in a rejection.

There are a number of reasons mortgage applications get denied‚ and the saddest part is that many could have been avoided quite easily, had only the applicants known certain things were no-nos. So, before you’re the next home buyer who gets burned by sheer ignorance, scan this list, and make sure you aren’t making any of these five grave mistakes, which could land your mortgage application in the “no” pile.

1. You didn’t use credit cards enough

Some people think credit card debt is the kiss of death … but guess what? It’s also a way to establish a credit history that shows you’ve got a solid track record paying off past debts.

While a poor credit history riddled with late payments can certainly call your application into question, it’s just as bad, and perhaps worse, to have little or no credit history at all. Most lenders are reluctant to fork over money to individuals without substantial credit history. It’s as if you’re a ghost: Who’s to say you won’t disappear?

According to a recent report by the Consumer Financial Protection Bureau, roughly 45 million Americans are characterized as “credit invisible”—which means they don’t have a credit report on file with the three major credit bureaus (Equifax, Experian, and TransUnion).

There’s a silver lining, though, for those who don’t have credit established. Some lenders will use alternative data, such as rent payments, cellphone bills, and school tuition, to assess your credit worthiness, says Staci Titsworth, a regional manager at PNC Mortgage in Pittsburgh.

2. You opened new credit cards recently

That Macy’s credit card you signed up for last month? Bad idea. New credit card applications can ding your credit score by up to five points, says Beverly Harzog, a consumer credit expert and author of “The Debt Escape Plan.”

That hit might seem minuscule, but if you’re on the cusp of qualifying for a mortgage, your new credit card could cause your loan application to be denied by a lender. So, the lesson is simple: Don’t open new credit cards right before you apply for a mortgage—and, even if your lender says things look good, don’t open any new cards or spend oodles of money (on, say, furniture) until after you’ve moved in. After all, lenders can yank your loan up until the last minute if they suspect anything fishy, and hey, better safe than sorry.

3. You missed a medical bill

Credit cards aren’t the only debt that count with a mortgage application—unpaid medical bills matter, too. When you default on medical bills, your doctor’s office or hospital is likely to outsource it to a debt collection agency, says independent credit expert John Ulzheimer. The debt collector may then decide to notify the credit bureaus that you’re overdue on your medical payments, which would place a black mark on your credit report. That’s a red flag to mortgage lenders.

If you can pay off your medical debt in full, do it. Can’t foot the bill? Many doctors and hospitals will work with you to create a payment plan, says Gerri Detweiler, head of market education at Nav.com, which helps small-business owners manage their credit. Showing a mortgage lender that you’re working to repay the debt could strengthen your application.

4. You changed jobs

So you changed jobs recently—so what? Problem is, mortgage lenders like to see at least two years of consistent income history when approving a loan. As a result, changing jobs shortly before you apply for a mortgage can hurt your application.

Of course, you don’t always have control over your employment. For instance, if you were recently laid off by your employer, finding a new job would certainly be more important than buying a house. But if you’re gainfully employed and just considering changing jobs, you’ll want to wait until after you close on a house so that your mortgage gets approved.

5. You lied on your loan application

This one seems painfully obvious, but let’s face it—while it may be tempting to think that lenders don’t know everything about you financially, they really do their homework well! So no matter what, be honest with your lender—or there could be serious repercussions. Exaggerating or lying about your income on a mortgage application, or including any other other untruths, can be a federal offense. It’s called mortgage fraud, and it’s not something you want on your record.

Bottom line? With mortgages, honesty really is the best policy.

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What Is the Right of Rescission? It’s Like a Safety Net for Home Loan Seekers

August 3, 2018

Rescission on Home Loan

iStock

The right of rescission is a little-known—but very valuable—part of the home loan process. This federally protected right can come into play when you are refinancing or taking out a home equity loan or line of credit. Essentially, the right of rescission allows you to change your mind about a loan and walk away without a financial burden sitting on your shoulders.

Of course, there are limitations to when homeowners can and can’t exercise their right of rescission. So what are your rights when it comes to opting out of a loan? Below, our experts share how you can get out of a sticky financial situation.

What is the right of rescission?

The right of rescission falls under federal consumer protection laws that dictate what lenders can and can’t do. Called the Truth in Lending Act, these laws allow for borrowers to have a cooling-off period in which they can change their mind after signing loan paperwork. If you do change your mind, that’s when you get to exercise your right of rescission.

So how long do you have to change your mind and cancel the transaction? Three days from the date of closing, says Clint Bonkowski, director of mortgage lending at the online bank, Laurel Road.

“When a buyer exercises the right to rescind, the lender will withdraw the loan, and no funds will be disbursed,” he says.

Limits on the right of rescission

If you’re a homeowner, you may be wondering whether the right of rescission applies to you. It may, but there are limitations on the law.

  • Time limit: If you let more than three days lapse between signing the paperwork and speaking up, it’s too late. You’re now locked in to that loan contract.
  • Types of loans: Borrowers can only use this step to cancel refinance transactions, home equity loans, or home equity lines of credit (HELOC), says Richard Pisnoy, principal at the Silver Fin Capital Group in Great Neck, NY. That means you can’t use the right of rescission to walk away from a traditional home mortgage.
  • Types of properties: “The right of rescission is for primary residences only,” Pisnoy says. “A loan on a second home or investment property will fund the same day as the closing.”

 

How to exercise your right of rescission

Does your loan meet the standards of the right of rescission? If the answer is yes—and you’re having a major case of borrower’s remorse—it’s time to act.

You should have been provided with copies of the right to rescind document at closing, Bonkowski says, so check your paperwork.

“One of the copies will be signed, stating the buyer has received the form,” he says (this is actually required by federal law too!). “On the notice itself, the lender will provide instructions on how to exercise the right to cancel.”

To exercise your right of rescission, most lenders require the buyer to sign the right to rescind document and mail it to a specific address. But the process may vary depending on your lender. If you’re not sure what your bank requires, pick up the phone and call to find out. An emailed or faxed copy of the right of rescission document may also be acceptable.

How to avoid having to cancel your loan

Let’s hope you never get into a situation where you regret signing a loan contract, but there are a few things you can do to make it less likely that you’ll need to exercise your right of rescission.

Mat Ishbia, President and CEO of United Wholesale Mortgage in Pontiac, MI, suggests working with an independent mortgage broker who can explain the process to you face to face.

He also reminds us of the importance of never signing a contract without reading it first: “Make sure that you review your documents up front with the broker, so that it’s not a surprise at closing.”

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