Cover Unexpected Costs with a Personal Loan

Owning a home comes with its rewards — it’s an investment, a cozy haven to kick-up your feet after a long day of work, and a welcoming place to bring family and friends together. Although all of this makes homeownership fulfilling, owning a home also opens the door for unexpected (but necessary) expenses.

If you’ve suddenly been hit with a home improvement project that’s pinching your budget, like a roofing issue or heater malfunction, a personal loan might be an option to help cover the cost.

What is a personal loan?

A personal loan is an installment loan that’s typically issued by a bank, credit union or online lender. According to the Federal Reserve, the average interest rate on a two-year personal loan is 10.22% but varies depending on your credit score and other criteria. Some lenders offer repayment terms anywhere from 12 months to five years.

A benefit of using a personal loan for emergency home improvement projects is that the approval process is generally quick so you can address urgent home repairs sooner. Some online lenders can run a credit check, approve your application and send funds your way with a couple of days. The approval process for banks and credit unions, on the other hand, can take anywhere from a couple of days to a couple of weeks, if the lender needs additional information.

How to find a personal loan

If you’ve decided that a personal loan makes sense to fund your next home project, make sure you’re aware of these next steps.

1. Assess your budget

The last thing you need is taking out a personal loan only to realize after the fact that you can’t afford to repay it. Calculate how much you realistically need for your home improvement project, giving yourself a reasonable buffer for unforeseen repair expenses (e.g. permit fees, price changes for a specific material, etc.)

Then, tally your monthly income and financial obligations to ensure you still have enough cash on hand to keep the lights on and make monthly installments toward your loan. Using a spreadsheet or budgeting app can help you track these numbers easily.

2. Know your credit score

Generally, you need a good credit score to get approved for a personal loan. Your credit score is one of the key factors that lenders use to determine whether your application is approved, and a higher credit score results in a lower interest rate offer.

Check your credit score with the three credit bureaus to ensure there isn’t an error or suspicious activity that might inadvertently lower your credit score. For a free credit report, go to AnnualCreditReport.com to see where your credit stands before moving forward in the process.

3. Compare rates and terms

When you’ve confirmed that you have a good credit score that can get you competitive interest rates, it’s tempting to accept a loan from the first lender that approves you. But like other major purchases, it’s important to shop around.

Compare interest rates, annual percentage rates (APR), and term durations available, and read the fine print for any conditions or fees that might offset any benefits.

To start, try reaching out to your existing financial institution first to see what they can offer; sometimes credit unions, in particular, offer rate incentives for loyal members. Also, consider using a personal loan aggregator website to compare offers from multiple online lenders at once (just do your due diligence to ensure the site is legitimate).

4. Submit an application

If you’re ready to submit an application, you can either complete a form online or apply in-person, depending on your lender. Although all lenders require different information to process a loan application, some common information to prepare ahead of time include:

  • Personal information
  • Income
  • Employment information
  • Reason for the loan
  • Amount you want to borrow

To minimize any delays on your end, it’s helpful to prepare copies of verification documents, such as a driver’s license, proof of address like a utility statement, information about your home and pay stubs. Your prospective lender will likely reach out to you if they need any other information to make a decision.

Although it’s always best to have emergency savings set aside for a sudden home improvement project, turning to a personal loan is a useful option when you’re pressed for funds and time. As urgent as your project might feel, however, always take the time to do your research to ensure you’re making the right move for your situation.


Posted on November 5, 2019 at 10:17 am
Joey Dion | Posted in Financing Information |

Investment Properties! How do they work?

Investing in property can be a great way to build your net worth, diversify your investment portfolio, generate cash flow, or build your retirement fund.

However, you have to know the basics before you start investing in properties. They’ll help you determine whether property investment is right for you.

Many people want to invest in real estate. Few put forth the time or effort to learn what they need to invest successfully. Do you think investing in real estate might be the right investment vehicle for you? Here are a few property investment basics to help get you started.

Why invest in properties?

Real estate is a worthwhile long-term investment because it offers attractive benefits, including cash flow, appreciation, diversification, tax deductions, and competitive returns. It’s the combination of these advantages that creates such an appealing investment vehicle.

There are dozens of ways to invest in real estate, but for the most part, investors partake in this asset class for these five reasons.

1. Cash flow

Cash flow is the income from renting or leasing a property. Positive cash flow means there’s money left over after paying expenses. Negative cash flow means there are more expenses than income.

Most investors buy property because it offers positive cash flow. Cash flow can be acquired from a single-family rental property, apartment complex, industrial building, retail space, self-storage facility, and many more real estate investment vehicles.

Let’s say you buy a duplex that produces $2,000 a month in monthly rental income. After $700 in expenses and paying the mortgage, you have a positive cash flow of $300. That might not seem like much, but once you pay off the mortgage, it’ll go up. And if you buy another property, your total cash flow will go up again.

Eventually, with enough time and positive-cash-flow properties, you can create a monthly income that sustains your living expenses. It could even replace the income from your job or support you in retirement.

When building long-term wealth, cash flow is almost always a factor.

2. Appreciation

If you hold a property over some time, there’s a chance the property will increase in value, or “appreciate.”

Appreciation is a potential added benefit of real estate investing — there’s no guarantee it will happen. Market fluctuations or shifts in local economics can disrupt the local supply and demand. That changes the value of a property.

However, the longer you hold a property, the higher the chance it will appreciate over that time.

3. Diversification

Managing risk is a large part of investing. You can manage risks by selecting certain investments over others or making multiple investments. Many people use real estate to diversify their investments beyond stocks, bonds, and mutual funds.

There’s still risk in real estate investing. But having properties across multiple asset classes, markets, or investment vehicles can lower your risk.

4. Tax benefits

While most new investors don’t get into real estate because of the tax advantages, they can be a significant benefit.

There are several tax incentives and deductions offered to real estate investors. There are also ways to use real estate to defer taxes or avoid having to pay taxes on future gains at all.

Learn the tax benefits available when investing in properties. And if you have questions, speak with an accountant who specializes in real estate investing. They’ll help you figure out how to get the most tax benefits from your investment.

5. Return on investment

It doesn’t matter if you invest in stocks, bonds, cryptocurrencies, or real estate — the goal is to grow your money. This is called a return. The higher the return, the faster you get your money back and start making a profit.

For example, if you put $25,000 in a real estate investment receiving an 8% return, you would get $2,000 in yearly income. Over 20 years, that initial $25,000 would garner you $40,000 without requiring additional money.

It’s worth noting that you may have to put in more money for things like maintenance and tenant screening. But those expenses are deductible.

There’s no guarantee your money will grow in real estate — or any investment vehicle, for that matter. But you can get a consistent return with real estate. Buying a rental property today could mean cash flow for decades to come. Appreciation, tax benefits, and a strong long-term return sweeten the deal.

neighborhood storefront

Realistic expectations for beginner property investors

It’s more work than you think

All too often, beginner investors don’t know what it means to be a real estate investor. Property investments aren’t just stunning house flips, big checks, and passive cash-flowing properties.

There’s a lot of work involved in learning how to invest in real estate and finding, analyzing, and managing worthwhile investments. While it can be a very profitable business, it takes commitment.

It’s a long game

Building wealth doesn’t happen overnight. It’s a long-term game. Making enough cash flow to replace your income or adequately meet your retirement goals takes time. It’s not uncommon for new investors to try growing too quickly, leading to quick investment decisions that result in poor returns.

While you can achieve financial freedom through real estate, it’s important not to rush. Carefully review and evaluate each investment opportunity. Make sure each property is well managed and running efficiently to support further growth.

Start small

Many people make their first property investment in residential real estate. It costs less than investing in commercial properties and there’s less analysis, acquisition, and management required.

If you want to invest in commercial real estate, consider investing in a REIT or real estate ETF first. After learning and saving more, you can work toward acquiring your own piece of commercial real estate.

Find the right market

While investing locally may be the most comfortable option, it’s not always the best. Finding a market that supports your property investment is imperative to a successful real estate venture.

Areas have different demands; some may have a higher need for assisted living, mobile home parks, or student housing. Research the supply and demand of the type of property you want to invest in and find geographic areas that support the growth or development of that asset class.

Keep in mind the amount of money you have available to invest, as well. Specific markets, like the Pacific Northwest or New York City, have incredibly high real estate prices, and some investors get priced out of the market. You can spend $250,000 or more on a downpayment for a property. That much money would buy you an investment property in cash elsewhere.

If you’ve identified a market with affordable investment opportunities, look into the local economy. Job and population growth, low vacancy rates, and a stable median income are good signs.

Know your numbers

If you want to venture into investment properties, learn how to analyze individual opportunities. You’ll need to know how to calculate the potential income, expenses, and return on investment. Make sure your numbers account for vacancy rates and routine maintenance and repairs.

If you have a loan on the investment property, make sure you have 3–5 months of mortgage payments saved. If there’s an economic downturn, a longer-than-expected vacancy, or other unexpected events, you may need it.

Rather than taking any positive cash flow as income now, it may be wise to use that to pay down your mortgage faster. This reduces the interest you pay over time and increases your cash flow sooner.

Master your niche

Become an expert of whatever avenue of property investing you decide to pursue — residential rentals, vacation rentals, commercial property, or another niche. When you master that area, you can analyze opportunities faster, acquire and manage properties more smoothly, and use your experience to build a larger portfolio.

Try not to get distracted by other investment avenues until you’ve seen sustained success with your current investments. It’s better to do one thing well than three things poorly.

Investing in properties can be very lucrative if done properly. But keep realistic expectations. Always weigh the risks and rewards before investing and keep learning about each niche. Build your expertise as you build your portfolio.

source: https://www.fool.com/millionacres/articles/understanding-property-investment-basics-get-you-started/


Posted on October 22, 2019 at 8:27 pm
Joey Dion | Posted in Financing Information |

Invest in Equity!


Posted on September 23, 2019 at 2:10 pm
Joey Dion | Posted in Financing Information |

1% rate becomes 10% buying power!

How do interest rates affect my buying power?

Clients often ask if now is the time to buy a home. Some want to buy, but would like to save a bit more for a down payment.

Others want to wait until the market hits bottom.

In both cases, they are missing the major reason to buy right now – interest rates.

Nothing affects a home’s affordability more than interest rates. After all, we live with the monthly payment, not the amount of the loan.

Look at the chart below depicting the monthly payments for 30 year loans of $400,000 and $750,000.

As you can see, just a 1% change in the interest rate can have a drastic effect on the monthly payment.

Now let’s look at it another way. Suppose we have two clients. One can afford a monthly payment of $2000. The other can afford a monthly payment of $5000.

Look at how the change in interest rates affects the size of the 30 year loan they can afford, and in return, the size of the home they can buy.

As you can see, the higher the interest rate, the less house a buyer can afford.

Finally, assuming a buyer has enough for a minimal down payment, does adding an extra $20,000 to the down payment help much with the monthly payment. Not really, at an interest rate of 4%, each additional $10,000 in a loan will make the monthly payment rise by about $48. That’s it. If the trade off for saving for a larger down payment is that interest rates rise in the mean time, waiting probably is not worth it.

A better strategy may be to go ahead and lock in the low interest rate by buying now, perhaps with a 80-10-10 mortgage (we can explain that), and look to pay off the “10” mortgage with the funds that otherwise would have been saved for a larger down payment.

source: https://walkerteamrealtors.com/how-do-interest-rates-affect-my-buying-power/


Posted on September 17, 2019 at 7:57 pm
Joey Dion | Posted in Financing Information |

Want A Higher Credit Score?

Start Building (or rebuilding) Credit Today

Most of us long to own a home. We see this idealized place as our shelter in bad times. We love the thought of being able to decorate the entire series of rooms to our unique specifications. Here is our own abode, where we can plant a garden, entertain friends and raise children. Somehow, renting an apartment just isn’t the same.

Unfortunately, for many of us, buying a home is a difficult prospect because of one major drawback, a poor credit history. Bad credit almost always creates complications when trying to purchase something as big as a home.

That three-digit credit score and our credit report can make the difference between being granted a home loan and being rejected out of hand. Why? Because our credit report tells a financial story of us as payers of debt, and it has a long memory. Few people manage to go along forever without making a single financial mistake, and the fact is that many times, those people who pay cash for everything, end up with a lower credit score than those of us who juggle debt.

The worse your credit report is, the harder it will be to acquire a home loan. That is why it is imperative, before you go house shopping and long before you need to move, to study your credit report and clean it up as much as you possibly can. In several months to a year’s time, you can improve your credit report and raise your credit score. Then you will have a much better chance of moving into your own home at a competitive interest rate.

A low credit score means that you will be charged a much higher interest rate when you apply for a home loan. Additionally, you will be required to contribute a much larger down payment of cash. Finally, if your score is very low, you might simply be denied altogether, although virtually every mortgage company now has special programs designed to help those with bad credit get loans for home purchases.

If you have a steady job and a steady income, if you have worked in the same field for two years or more and if you are able to put 10-20 percent down on a home, you will find your chances of acquiring a home loan greatly improved, even if you have a very low credit score. Getting a loan from the bank or credit union where you already do business is sometimes easier. There are other things you can do to improve your chances as well.

Figure out where you’re at right now

If you are working to improve your credit in order to buy a home, get a copy of your credit reports from all three credit reporting agencies. Why? Because they will not be exactly the same and you need to know what is on every one. Some creditors send information to all three agencies, but some only send reports to one or two. Additionally, when a mortgage lender pulls your report to check your history, they will use the middle score from all three to decide whether or not to qualify you for a loan.

If you have not ordered a copy of your credit report in the last year, you are entitled to a free copy from all three bureaus. These will not include your credit score, however, to get that, go to www.myfico.com where you will be charged a small fee.

Make yourself comfortable and start assimilating the information on your reports. Check every single item. Verify that everything is correct, including your name, Social Security number, current and previous addresses, list of employers, debts and any public records concerning you.

You will most likely discover errors on your credit report. These errors could be dragging your credit score down. It is not uncommon for people to find errors of such magnitude that their credit score is hundreds of points less than it should be. These errors can be caused by simple mistakes, like transposing a 6 for a 5, but they can also be due to criminal identity theft. Either way, you need to know.

Now you must begin the work of cleaning up your credit report as much as you possibly can. This generally requires an exchange of letters. Keep careful notes and copies of everything you do. Send your letters via certified mail. If the credit reporting agency cannot verify the questionable information that you are disputing, they must remove it, and they only have thirty days to respond to you.

If you don’t have the time to expend this effort, or you feel it is too complicated, you can easily get the aid of a reputable credit repair agency. These skilled and experienced people accomplish this kind of repair work every day, and they know how to make positive things happen.

After each questionable item is removed from your credit report, make sure to insist that the credit bureau mail you a revised, corrected copy. Now you are on the way to owning a home!

There is no instant, painless way to repair your credit, even when there are inaccuracies on your report, especially if you are struggling to save money. Plan on exercising patience with this process. The end result is worth the effort.

Why your credit score is so important

You will often see your credit score referred to as a FICO score. This three-digit number, running anywhere from 300-850, is calculated by complex mathematical equations and is used as a way to determine if you are a good credit risk.

Your credit score is determined by taking each of the following five sections of your credit report and weighting them according to a set standard.

  • Payment history: 35%
  • Outstanding debts: 30%
  • Length of your credit history: 15%
  • Types of credit you’ve used: 10%
  • Amount of new credit: 10%

Problems arise when your score falls below approximately 650. If your score runs beneath that number, you should expend determined effort to clean up your report and raise your score. This would include eliminating any inaccuracies on your reports, as mentioned, but also includes paying off whatever outstanding debts you can and making certain that you make your monthly payments on time. A year’s worth of on-time payments will raise your score and show a mortgage lender that you are responsible.

Lenders will look at

  • Your employment history and your identity: Make sure all of this is completely correct.
  • Inquiries made on your credit: This can hurt you, and it might not be something you knew about. If you apply for credit cards, for whatever reason, there could end up being five or six inquiries on your credit report. This makes lenders suspicious of your credit-worthiness. If these inquiries stretch out over time, they are counted individually and this makes things look worse. Most of us shop around for the best interest rate when it comes to buying a car or home, however, so the credit reporting agencies look at inquiries made within fourteen days of each other as only one inquiry.
  • How you have paid your debts in the past: Your credit report details how you have handled credit and debt in the past. It will show your credit limits, whether you were ever late with a payment, how long it took you to pay things off, how high you charged credit, etc.
  • Public record information: Here is where the credit report lists things like bankruptcies, foreclosures and liens.

Explain things to a lender in writing

Provide the lender, in writing, the reason for your poor credit score. Explain your situation if a certain credit card bill was never forwarded to your new address, or if a postal employee was stealing the neighborhood mail. Explain late payments due to a job layoff. Even when a lender’s computer kicks you out of the system, a human being will take a second look at your loan application to see if there is any way to make things work. Some lenders are more sympathetic and flexible than others. You may have to shop around a bit to find them.

Find a good mortgage broker

Mortgage brokers provide a valuable service. They know which lenders will work fairly with people who have had credit challenges. A mortgage broker “shops” for the best lender for your unique situation and can end up saving you a substantial amount of money.

The seller-financed loan

Sometimes buying a home from the homeowner is the best bet. This person might not check your credit, and could be more flexible about how the home is purchased. Sometimes a homeowner is as eager to sell as you are to buy, and creative methods can be set up to suit both of you. The seller can carry the loan, for example. A “wraparound” mortgage might be an option. That happens when the seller still owes money on the home and you take over the mortgage payment, plus an additional amount that covers the balance. Wraparounds are not legal in all states.

Mortgage pre-approval

You can get pre-approved for a home loan before you ever look at a single house. First, get your credit report as clean as it can be, pay off as many outstanding debts as you can and raise your credit score as much as possible. Then go to a mortgage lender or broker and get yourself a pre-approval certificate.

In this case, a mere “pre-qualifying” letter is not the same thing. You need to have the lender actually pull your credit report and pre-approve you as would be done if you had already picked out a home.

The lease-to-purchase option

If you already rent the home you would like to buy, and the homeowner agrees to sell it to you, a portion of your rent will go toward your down payment. At a certain agreed-upon date, you will have accumulated some equity. Never forget that if you embark upon this option and for some reason it does not work out, the money you have spent will not be returned.

Borrow the sum you need from your relatives, friends, 401K or IRA

Though this should probably be a last resort, it is an option for many people. Additionally, the Roth IRA has a special provision just for this purpose. With the Roth, you are allowed to withdraw up to $10,000 in order to buy a first home.

If you do borrow money, you need to disclose this information to the lender. If the money provided was a gift and does not need to be paid back, provide proof of this in writing.

Warnings

When you apply for a home loan and everything has worked out, be careful not to mess things up. Do not go out and finance a car, for instance, while you are waiting for your home purchase to close. It could throw off your credit ratio and ruin the entire loan process. To be safe, try not to charge anything or apply for any other loans during this sensitive period. You could end up losing your earnest money on top of losing the home you want to buy.

How to get your credit reports

To get your FICO credit score, visit www.myfico.com. This website is packed with other helpful financial tips, and ideas about how to raise your score.

The three major credit reporting bureaus have set up a central website, address and phone number where we can get our free annual credit reports. This organization can be reached through their web site at www.annualcreditreport.com or at their toll free number: 877-322-8228. You can print a copy of their request form from www.ftc.gov/credit and mail it to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

Never give up the dream of owning a home

Less than perfect credit does not mean you will never own a home. Put in the work to clean up your credit reports and hang in there. Owning a home is a dream worth achieving.

 

source: https://www.creditrepair.com/articles/loan-center/buying-a-home-with-poor-credit


Posted on September 6, 2019 at 9:51 am
Joey Dion | Posted in Financing Information |

What Is Mortgage Underwriting?

The mortgage underwriting process is an important step along the path to loan approval. It’s a time when borrowers hold their breath, cross their fingers, and hope they don’t get any bad news from the lender. When you make it through underwriting, it’s basically downhill from there.

But what actually happens during this process? What does the underwriter look for? And what can you do, as a borrower, to help ensure that everything stays on track? Here’s an in-depth look at the mortgage underwriting process.

Mortgage Underwriting Definition

Before we go any further, let’s start with a basic definition.

Mortgage underwriting — Is a process through which banks and lenders measure the risk of loaning money to a certain borrower, and to determine if that risk is acceptable. The mortgage underwriting process also ensures that the borrower meets all requirements for the particular loan being offered.

This process takes place after the loan application and supporting documents have been submitted, and before the final closing day. It involves an in-depth review of the loan, the borrower, and all of the supporting loan documents.

What Happens During This Process

The mortgage underwriting process has three main purposes:

  • It evaluates the level of risk associated with a particular loan.
  • It ensures that the borrower meets all requirements for the loan.
  • It ensures that all of the required documents are in place.

Let’s take a closer look at these three components:

1. Evaluating risk.
Underwriting is one of the risk-analysis tools used by lenders. The “risk” in this context is the likelihood of borrower default. The mortgage underwriting process helps the lender determine how likely it is that the borrower will default (or fail to repay) the loan in the future. They determine this by reviewing the borrower’s credit history, payment history, debt-to-income ratio, and other factors. Borrowers who are considered to be a higher risk often have a harder time qualifying for loans.

2. Ensuring the borrower meets loan requirements.
Different types of home loans have different requirements associated with them. Some of these requirements come from the lender that originates the loan, while others are imposed by a secondary organization (like the Federal Housing Administration or Freddie Mac). During the mortgage underwriting process, the underwriter will make sure that the borrower meets all of the requirements for the specific loan being used.

3. Checking loan documents.
There are many documents required during the mortgage application and approval process. They include (but are not limited to) bank statements, tax returns, W-2 forms, and pay stubs. Checking and verifying loan documents is another important part of the mortgage underwriting process. The lender wants to ensure that everything is squared away, before they send the “docs” to the closing or escrow agent.

Above all, the lender wants to assess the borrower’s ability and willingness to repay the loan. Willingness is a bit hard to measure. But they can measure a person’s financial ability to repay by examining income and assets, combined debts, and past credit / borrowing history. These are the things lenders are most concerned with during the mortgage underwriting process.

The Source of Underwriting Guidelines

So where do these mortgage underwriting guidelines come from? This will depend on the type of loan you’re seeking.

Most mortgages today are based on guidelines that come from the FHA, the VA, Fannie Mae or Freddie Mac. The FHA (Federal Housing Administration, part of HUD) insures home loans made by direct lenders such as Wells Fargo and Citi. Similarly, the Department of Veterans Affairs (VA) guarantees loans made by mortgage lenders. Fannie and Freddie actually purchase loans made by lenders.

So if a mortgage company wants to sell its loans into the secondary market, or have them insured by the federal government, they must adhere to the underwriting guidelines issued by those organizations. So you can think of these as “baseline” or minimum requirements.

If you really want to learn the nuts and bolts of the loan-approval process, you could review the mortgage underwriting guidelines put out by the FHA, Freddie Mac and Fannie Mae. You can find these handbooks online by doing a Google search. All three of these organizations offered various “fact sheets” and FAQ pages that summarized the bulk of their guidelines.

Keep in mind that individual lenders will have their own internal guidelines as well, in addition to those mentioned above. They are free to do business however they want, as long as they don’t violate federal or state lending laws. This is why it’s possible to get rejected by one lender, and then approved by another the very next week.

How Long Does the Process Take?

The length of the mortgage underwriting process can vary due to a number of factors. A highly experienced underwriter who works quickly might process three times as many loans as a brand-new underwriter who is still learning the ropes. The mortgage company’s backlog of applications plays a role as well. Also, some borrowers have more “issues” that need to be resolved along the way, and this can lengthen the underwriting process.

So it could take anywhere from a few days to a few weeks (from the time your application reaches the underwriter to the time you’re actually approved or denied). Five business days is probably average.

Learn more about the timeline.

You’re Not Approved Until the Underwriter Says So

A lot of first-time home buyers get the pre-approval confused with the final approval. They are two different things. Getting pre-approved by a mortgage lender is a worthwhile process. It lets you know how much they are willing to lend you. It will also make sellers more inclined to consider you’re offer, since you’ve been “screened” by a lender already.

But the pre-approval is not a commitment or guarantee to lend. There is still a lot that can go wrong between the pre-approval and the final approval. Remember, the mortgage underwriting process takes place after the pre-approval and prior to closing.

 

Source: http://www.homebuyinginstitute.com/homebuyingtips/2010/02/what-is-mortgage-underwriting-and-how.html


Posted on September 3, 2019 at 11:37 am
Joey Dion | Posted in Financing Information |

Ever wondered why FHA loans are often great for first-time home buyers?

“What is an FHA Loan? – The Complete Consumer Guide

What is an FHA Loan?

An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). They are popular especially among first time home buyers because they allow down payments of 3.5% for credit scores of 580+. However, borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.

Borrowers can qualify for an FHA loan with a down payment as little as 3.5% for a credit score of 580 or higher. The borrower’s credit score can be between 500 – 579 if a 10% down payment is made.  It’s important to remember though, that the lower the credit score, the higher the interest borrowers will receive.

The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930s; to provide mortgage lenders with adequate insurance; and to help stimulate the housing market by making loans accessible and affordable for people with less than stellar credit or a low down payment. Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.

 

FHA Loan Requirements

For borrowers interested in buying a home with an FHA loan with the low down payment amount of 3.5%, applicants must have a minimum FICO score of 580 to qualify. However, having a credit score that’s lower than 580 doesn’t necessarily exclude you from FHA loan eligibility. You just need to have a minimum down payment of 10%.

The credit score and down payment amounts are just two of the requirements of FHA loans. Here’s a complete list of FHA loan requirements, which are set by the Federal Housing Authority:

  • Borrowers must have a steady employment history or worked for the same employer for the past two years.
  • Borrowers must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
  • Borrowers must pay a minimum down payment of 3.5 percent. The money can be gifted by a family member.
  • New FHA loans are only available for primary residence occupancy.
  • Borrowers must have a property appraisal from a FHA-approved appraiser.
  • Borrowers’ front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, homeowners insurance) needs to be less than 31 percent of their gross income, typically. You may be able to get approved with as high a percentage as 40 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
  • Borrowers’ back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of their gross income, typically. You may be able to get approved with as high a percentage as 50 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
  • Borrowers must have a minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
  • Borrowers must have a minimum credit score of 500-579 for maximum LTV of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants’ credit worthiness.
  • Typically borrowers must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you’ve managed your money in a responsible manner.
  • Typically borrowers must be three years out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you’ve improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
  • The property must meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).

Benefits of FHA Loans: Low Down Payments and Less Strict Credit Score Requirements

Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. For FHA loans, down payment of 3.5 percent is required for maximum financing. Borrowers with credit scores as low as 500 can qualify for an FHA loan.

Borrowers who cannot afford a 20 percent down payment, have a lower credit score, or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario.

Another advantage of an FHA loan it is an assumable mortgage which means if you want to sell your home, the buyer can “assume” the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.

Mortgage Insurance is Required for an FHA Loan

You knew there had to be a catch, and here it is: Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront -– or, it can be financed into the mortgage –- and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.

Upfront mortgage insurance premium (UFMIP) — Appropriately named, this is a one-time upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.

Annual MIP (charged monthly) — Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s loan-to-value (LTV) ratio, loan size, and length of loan:

Loan Term Loan Amount LTV Ratio Annual Insurance Premium
Over 15 years $625,000 or less 95% or less 0.80%
Over 15 years $625,000 or less Over 95% 0.85%
Over 15 years Over $625,000 95% or less 1%
Over 15 years Over $625,000
Over 95%
1.05%
15 years or less $625,000 or less 90% or less 0.45%
15 years or less $625,000 or less Over 90% 0.70%
15 years or less Over $625,000 90% or less 0.70%
15 years or less Over $625,000 Over 90% 0.95%

 

For example, the annual premium on a $300,000 loan with term of 30 years and LTV less than 95 percent  would be $2,400:  $300,000 x 0.80% = $2,400. To figure out the monthly payment, divide $2,400 by 12 months = $200. So, the monthly insurance premium would be $200 per month.

How Long Do Borrowers Have to Pay FHA Mortgage Insurance?

The duration of your annual MIP will depend on the amortization term and LTV ratio on your loan origination date.

For loans with FHA case numbers assigned on or after June 3, 2013:

Borrowers will have to pay mortgage insurance for the entire loan term if the LTV is greater than 90% at the time the loan was originated. If your LTV was  90% or less, the borrower will pay mortgage insurance for the mortgage term or 11 years, whichever occurs first.

Term Original Down Payment Duration
15 years or less less than 10% Life of loan
15 years or less 10% or higher  11 years
Over 15 years less than 10% Life of loan
Over 15 years 10% or higher  11 years

 

For loans with FHA case numbers assigned before June 3, 2013:

Term Original Down Payment Duration
15 years or less 22% or higher No annual MIP
15 years or less less than 22% Cancelled at 78% LTV
Over 15 years 22% or higher 5 years
Over 15 years less than 22% Cancelled at 78% LTV
(5 years minimum)

FHA Loan Limits

The Federal Housing Authority sets maximum mortgage limits for FHA loans that vary by state and county. In certain counties, you may be able to get financing for a loan size up to $729,750 with a 3.5 percent down payment. Conventional financing for loans that can be bought by Fannie Mae or Freddie Mac are currently at $625,000.

 

How Do You Get an FHA loan?

A lender must be approved by the Federal Housing Authority in order to help you get an FHA loan. You find FHA lenders and shop for mortgage quotes for an FHA loan quickly and easily on Zillow. Just submit a loan request and you will receive custom quotes instantly from a marketplace filled with hundreds of lenders. The process is free, easy and you can do it anonymously, without providing any personal information. If you see a lender’s loan quote that you are interested, you can contact the lender directly.

 

FHA Loan Interest Rates

Below are today’s average FHA interest rates. You can also use Zillow to the see FHA interest rates for your particular situation. Just submit a loan request with less than a 20% down payment and you will instantly receive custom FHA quotes from multiple lenders.  Use the filter button to filter solely on FHA mortgage rates.

To see what interest rate you would qualify for, enter your specific details such as credit score, income, and monthly debts (under Advanced). Then when you’re ready to talk to a lender, you can contact any of the lenders that appear on your search.

Program Interest Rate APR 1 Day Change
30-Year Fixed FHA 3.53% 4.6% 0.03%
20-Year Fixed FHA 0% 0% 0%
15-Year Fixed FHA 3.49% 4.59% 0.02%
10-Year Fixed FHA 3.96% 5.3% 0%
7/1 ARM FHA 0% 0% 0%
5/1 ARM FHA 3.59% 4.75% 0%

A 30-Year Fixed FHA loan of $300,000 at 3.53% APR with a $10,880 down payment will have a monthly payment of $1,351. A 20-Year Fixed FHA loan of $0 at 0% APR with a $0 down payment will have a monthly payment of $0. A 15-Year Fixed FHA loan of $300,000 at 3.49% APR with a $10,880 down payment will have a monthly payment of $2,143. A 10-Year Fixed FHA loan of $300,000 at 3.96% APR with a $10,880 down payment will have a monthly payment of $3,031. A 7/1 ARM FHA loan of $0 at 0% APR with a $0 down payment will have a monthly payment of $0. A 5/1 ARM FHA loan of $300,000 at 3.59% APR with a $10,880 down payment will have a monthly payment of $1,362. All monthly payments displayed assume a maximum Loan to Value (LTV) of 100% and 680 credit score, and do not include amount for taxes and insurance. The actual monthly payment may be greater.”

source: https://www.zillow.com/mortgage-learning/fha-loan/


Posted on August 27, 2019 at 10:34 am
Joey Dion | Posted in Financing Information |