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What the New DOL Fiduciary Rule Means For You

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Geeting advice on future investments

Seven years in the making, the Department of Labor’s long-awaited Fiduciary Rule finally went into effect June 9.* The full breadth of the rule’s impact won’t officially be felt until January 2018, when advisors must be fully compliant with the rule’s requirements.

The rule survived an upheaval by the Trump administration, which had hinted earlier this year that it might seek to block the rule’s implementation.

Aimed at saving consumers billions of dollars in fees in their retirement accounts, the Department of Labor’s new fiduciary rule will require financial advisers to act in your best interest. However, the final rule includes a number of modifications, including several concessions to the brokerage industry, from the original version proposed six years ago.

Here’s what you need to know about these new rules and how they may affect your money.

*This story has been updated to reflect the rule’s successful release.

What is a Fiduciary?

So what exactly is a fiduciary? According to the Certified Financial Planner (CFP) Board, the fiduciary standard requires that financial advisers act solely in your best interest when offering personalized financial advice. This means advisers can’t put personal profits over your needs.

Currently, most advisers are only held to the U.S. Securities and Exchange Commission’s suitability standard when handling your investments. This looser standard allows advisers to recommend suitable products, based on your personal situation. These suitable products may include funds with higher fees — with revenue sharing and commissions lining their own pockets —  which may not reflect your best possible options.

What is Changing Exactly?

Affecting an estimated $14 trillion in retirement savings, the Department of Labor’s new fiduciary rule is meant to help you receive investment advice that will aid your nest egg’s ability to grow. Many investors have been pushed toward products with high fees that quickly eat away at profits.

All financial professionals providing retirement advice will now be required to act as fiduciaries that must act in your best interest. This applies to all financial products you may find in a tax-advantaged retirement accounts. Because IRAs offer fewer protections than employment-based plans, the Department is concerned about “conflicts of interest” from brokers, insurance agents, registered investment advisers, or other financial advisers you may turn to for advice.

Despite these new protections, the Department of Labor also made some key concessions. Previously, brokers were required to provide explicit disclosures about the costs of products to their clients. This included one, five, and ten year projections. However, this requirement has been eliminated. After heavy pushback from the industry, the Department of Labor also agreed to allow the use of proprietary products.

Additionally, the Department of Labor has pushed the deadline for full implementation of their new rules. Firms must be compliant with several provisions by June and fully compliant by January 1, 2018.

Despite all of these concessions, the Department of Labor’s highest official insists the integrity of their rule is still in place.

Exceptions You Should Know About

Although advisers working with retirement investments will no longer be able to accept compensation or payments that create a conflict of interest, there’s an exception many brokers will likely pursue.

Firms will be allowed to continue their previous compensation arrangements if they commit to a best interest contract (BIC), adopt anti-conflict policies, disclose any conflicts of interest, direct consumers to a website that explains how they make money, and only charge “reasonable compensation.” The best interest contract will soon be easier for firms and advisers to use because it can be presented at the same time as other required paperwork.

How These New Rules Might Affect Your Investment Options

Although these new rules don’t call out specific investment products as bad options, it’s expected advisers may direct you to lower-cost products, like index funds, more regularly. New York Times also predicts the new regulations may also accelerate the movement toward more fee-based relationships. They also suggest complex investments like variable annuities may soon fall out of favor.

What Will the Larger Impact of These Changes Be?

Backed by extensive academic research, the Department of Labor’s analysis suggests IRA holders receiving conflicted investment advice can expect their investments to underperform by an average of one-half to one percentage point per year over the next 20 years. Once their new rules are in place, they are anticipating retirement funds will shift to lower cost investments, savings consumers billions of dollars.

What You Can Do To Protect Yourself

Although these new rules are a positive step for consumers, it’s important to remember there are still a wide variety of financial professionals out there. And the quality of the advice you receive can vary greatly based on their level of education, experience, and credentials. In order to find someone who is equipped to handle your unique financial situation, you will still need to do your homework.

You may want to start by looking for a fee-only financial planner. Due to the nature of how they are compensated, fee-only financial planners operate without an inherent conflict of interest. They are paid a fee for the services they provide and they don’t earn commissions from product sales.

Once you’ve narrowed down your options you’ll want to ask about their credentials, what types of clients they work with, what types of services they offer, while carefully checking their background and references. Like any professional working relationship, you’ll want to feel comfortable with someone you are receiving financial advice from, so it’s important to make sure your personalities and priorities are aligned. Remember, no one cares more about your money than you do. That’s why it’s essential to carefully vet anyone who is working with you to secure a healthier financial future.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Mortgage

Guide to Getting a Mortgage When You’re Self-Employed

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

For some Americans, self-employment is the ultimate dream. Roughly 15 million people (10.1% of the total U.S. workforce) were self-employed in 2015, according to the U.S. Bureau of Labor Statistics. Self-employment offers workers the kind of flexibility that can be hard to find in a traditional 9-to-5 job, not to mention the potential for higher earnings.

However, self-employment does come with its own challenges, and, unfortunately, one of these difficulties can be homeownership. Despite earning a solid income, self-employed borrowers face a unique set of hurdles when it comes to determining whether they are eligible for a mortgage. In this guide, we will cover a number of requirements borrowers should begin preparing for as early as possible into their home-buying journey.

The Self-Employed Challenge

In order to gain a deeper understanding of what it takes to be approved for a mortgage as a self-employed borrower, it’s helpful to know how mortgages work in the U.S. For starters, most banks bundle up mortgages and sell them to Fannie Mae, Freddie Mac, or private investors.

To make those investments as safe as possible, Fannie Mae and Freddie Mac have a strict set of guidelines for lenders to follow when deciding which borrowers qualify for a mortgage. Because self-employed borrowers’ income can be unpredictable, they are considered higher-risk borrowers than W-2 workers. That means these guidelines are especially strict for self-employed borrowers.

Requirements for Self-Employed Borrowers: Fannie and Freddie

Although there are a variety of options for mortgages available, we are going to focus on eligibility requirements for self-employed borrowers seeking financing through Fannie Mae and Freddie Mac. Why? If you’re eligible for these loans, you will have access to the lowest interest rates and safest mortgages.

Fannie Mae

Fannie Mae’s Selling Guide outlines a strict set of rules about income for self-employed borrowers. Fannie Mae notes your business income (from a partnership or S corporation) reported on IRS Form 1040 may not necessarily represent the income that has been distributed to you. They point out it’s important to review business income distributions that have been made or could have been made while determining the viability of your business.

Eligibility for Fannie Mae

First and foremost, all borrowers (whether self-employed or not) need to meet Fannie Mae’s normal eligibility requirements:

  • You must be a natural person (living human being) who has reached the age at which a mortgage is legal in the area where the property is located. There is no maximum age limit for the borrower.
  • You must have a valid Social Security number or Individual Taxpayer Identification Number.
  • Per Fannie Mae’s Eligibility Matrix, credit scores must meet the following criteria:
    • Manually underwritten loans – 620 for fixed-rate loans, 640 for adjustable-rate mortgages (ARMs)
    • Desktop Underwriter loans – 620 for both fixed-rate and ARMs
    • Mortgages insured or guaranteed by a federal government agency (HUD, FHA, VA, and RD) – 620
  • The purchase of a single unit principal residence must have a loan-to-value (LTV) of no higher than 97%. If your loan-to-value ratio is less than 75%, a credit score as low as 620 is allowed.
  • Your debt-to-income (DTI) ratio should be no greater than 36%. If your DTI ratio falls between 36% and 45%, a credit score above 680 is required.
  • Fannie Mae now offers a 3% down payment option.

In addition to these requirements, self-employed borrowers have some additional hoops to jump through.

Verification of Income

In order to verify your employment and income, a lender will ask for a copy of your signed income tax returns (individual and sometimes business, as well) from the past two years. This paperwork must include all applicable forms.

A lender may also use IRS-issued transcripts from your individual and business federal income tax returns from the past two years. If you are using these, the information must be complete and legible.

If you use two years of signed individual federal tax returns, the lender may waive the need to see your business tax returns if:

  • you are using your own personal funds to fund the down payment and closing costs and can satisfy the reserve requirements;
  • you have been self-employed in the same business for at least five years; and
  • your individual tax returns show an increase in self-employment income over the past two years.

In certain situations, Desktop Underwriter, Fannie Mae’s automated underwriting system, will only require one year of personal and/or business tax returns if lenders document your income by:

  • obtaining signed individual and business federal income tax returns for the most recent year,
  • confirming the tax returns reflect at least 12 months of self-employment income, and
  • completing Fannie Mae’s Cash Flow Analysis (Form 1084) or any other type of cash flow analysis form that applies the same principles.

Analysis of Your Personal Income

Your lender will prepare a written evaluation of your personal income, including your business’s profit or loss, as reported on your income tax returns. This will help them determine how much stable and continuous income you have. It’s important to note this step isn’t required if you qualified using income you didn’t receive from self-employment. Examples include qualifying for the loan using a traditional W-2 salary or your retirement income.

Freddie Mac

Freddie Mac’s Selling Guide also provides an outline for lenders on how to assess the income for self-employed borrowers. Although there are differences, Freddie Mac and Fannie Mae use similar criteria when it comes to assessing self-employed borrowers.

Freddie Mac uses Loan Product Advisor, an enhanced automated underwriting system, to help ensure loans meet their eligibility requirements. Even if you aren’t using self-employed income to qualify for a Freddie Mac mortgage, they must enter your self-employed status into this software.

Verification of Income

Your lender will calculate your average monthly income based on a review of your complete federal individual income tax returns (Form 1040) including W-2s and K-1s and your complete business tax returns (Forms 1120, 1120S, and 1065).

Analysis of Your Personal Income

If you are self-employed but not using self-employment income to qualify, your lender will request to see your individual federal tax returns to see if there is a business loss that may have an impact on the stable monthly income used to qualify. If a business loss is reported on your individual tax returns, your lender may need to obtain additional tax returns to fully assess the impact of a business loss on income for qualifying.

Eligibility for Freddie Mac

In addition to these special requirements for self-employed borrowers, you also must meet Freddie Mac’s normal eligibility:

  • If you are a non-U.S. citizen who is lawfully living in the U.S. as a permanent or nonpermanent resident alien, you are eligible for a mortgage on the same terms as a U.S. citizen.
  • For a manually underwritten mortgage, your credit history must have at least three credit accounts (on or off your credit report) or four noncredit payment references. Noncredit payment references must have existed for at least 12 months.
  • You must have a valid Social Security number or Individual Taxpayer Identification Number.
  • Per Freddie Mac’s Minimum Indicator Score Requirements, credit scores must meet the following criteria:
    • For a single unit and primary residence with an LTV less than or equal to 75%, you must have a minimum credit score of 620.
    • For a single unit and primary residence with an LTV greater than 75%, you must have a minimum credit score of 660.
  • Your monthly housing expense-to-income ratio should be no greater than 25% to 28%.
  • Your monthly debt-to-income ratio should be no greater than 33% to 36% of your stable monthly income. If your debt-to-income ratio exceeds 45%, you won’t be eligible for a Freddie Mac loan.
  • The purchase of a single unit principal residence must have an LTV of no higher than 97%.
  • Freddie Mac now offers a 3% down payment option.

Requirements for Your Business

In addition to looking at your personal financial situation, Fannie Mae and Freddie Mac also are required to evaluate the financial health of your business.

Fannie Mae

Fannie Mae says you are self-employed if you have 25% or greater ownership interest in a business. In order to qualify, Fannie Mae also analyzes several components of your business.

Length of Self-Employment

Fannie Mae asks lenders to review a two-year history of your previous earnings. However, if you have a shorter period of self-employment (12 to 24 months), your most recent signed federal tax return must reflect your income. It’s important your past income was earned in a field similar to your current business. In these cases, the lender will give careful consideration to your level of experience and the amount of debt your business has acquired.

Analysis of Your Business Income

If you are relying on self-employed income to qualify for a mortgage, and you don’t meet the requirements to waive your business tax returns (as mentioned in the previous section), your lender will also prepare a written evaluation of your business income. Your lender will use their knowledge of your industry to help determine the long-term stability of your business.

The primary goal of this analysis is to:

  • consider the recurring nature of your business income, including identification of pass-through income that may require additional evaluation;
  • measure year-to-year trends for gross income, expenses, and taxable income for your business;
  • determine (on a yearly or interim basis) the percentage of gross income attributed to expenses and taxable income; and
  • determine a trend for the business based on the change in these percentages over time.

Your lender may use Fannie Mae’s Comparative Income Analysis or other methods to determine your business’s viability.

Use of Your Business’s Assets

If you are planning to use assets from your business for a down payment, closing costs, or financial reserves, your lender will need to perform a cash flow analysis to make sure this transaction won’t have a negative impact on your business. This may require additional documentation, like several months of recent business asset statements, to evaluate your cash flow needs over time.

Freddie Mac

Freddie Mac also characterizes self-employed borrowers as people who own at least 25% of a business. Your business can be a sole proprietorship, a partnership, an S corporation, or a corporation. You may notice several similarities when it comes to how Fannie Mae and Freddie Mac evaluate your business. However, there are some distinctions you should be aware of.

Length of Self-Employment

For Freddie Mac, the lender will be required to document a two-year history of your self-employment to ensure your income is stable. If your self-employment history is less than two years, the lender must evaluate your company’s products and services in the marketplace. They will also need to document your two-year history prior to self-employment to show you’re currently earning the same or a greater income in a similar occupation. The lender must consider your experience in the business before looking at your income, and your tax returns must show at least one year of self-employment income.

Analysis of Your Business Income

Your lender will analyze your tax returns and provide a written analysis of your self-employed income. Noncash items like depreciation, depletion, and amortization can be added back to your adjusted gross income. Documented nonrecurring losses and loss carryovers from previous tax years can also be added back to your adjusted gross income.

If you are using self-employment income to qualify, Freddie Mac requires lenders to analyze tax returns and provide a written analysis of your self-employed income. If your income has significantly increased or decreased, you will need to provide sufficient documentation to prove your income is stable. Additional tax returns may be needed if your self-employment income has fluctuated.

Freddie Mac recommends lenders be careful when including additional income you have drawn from your corporation, partnership, or S corporation as qualifying income. Your lender will need to confirm you have a legal right to that additional income. Your lender also needs to verify your percentage of ownership from a review of your business’s tax returns.

Location of Your Business

If you are moving to another region, your lender must consider your company’s service or products in the new marketplace before reviewing your income. You will need to document how your income will continue to be stable in a new location.

Use of Your Business’s Assets

If your business’s assets are used for a down payment, closing costs, financing costs, prepaid or escrows, and reserves, these assets must be verified and must be related to the business you own. The withdrawal of assets from a sole proprietorship, partnership, or corporation may have a negative impact on your business’s ability to continue operating. The impact of this transaction will be considered in your lender’s analysis of your self-employed income. You will need to provide documentation of cash flow analysis for your business using your individual and/or business tax returns. You can learn more about the required documentation here.

What Types of Properties Are Eligible for a Fannie or Freddie Mortgage?

When you are comparing mortgage options, it’s important to know which types of properties are eligible. Here are the basics to keep in mind as you are assessing each choice.

Fannie Mae

Fannie Mae is willing to purchase first-lien mortgages that are secured by residential properties for dwellings that consist of 1-4 units. However, there are some cases where the number of units may be restricted. The property must be located in the United States, Puerto Rico, the U.S. Virgin Islands, or Guam.

The property must be safe, sound, and structurally secure and must be adequately insured per Fannie Mae’s guidelines for property and flood insurance. It must be the best use of the property, must be readily accessible by roads that meet local standards, and must be served by local utilities. Lastly, the property must be suitable for year-round use.

Freddie Mac

Freddie Mac expects lenders to equally assess both a borrower’s eligibility and the adequacy of the property as collateral. Freddie Mac is willing to purchase mortgages secured by residential properties in urban, suburban, and rural market areas. The property must be residential, be an attached or detached dwelling unit(s) located on an individual lot.

The property must be safe, sound, and structurally secure and must be covered by property insurance that meets Freddie Mac’s hazard requirements. It must be the best use of the property, have legal access, and have utilities and mechanical systems that meet local standards. It must be suitable for year-round use and not be subject to a pending legal proceeding.

Where to Go if Fannie and Freddie Reject You

If you don’t qualify for a mortgage backed by Fannie Mae or Freddie Mac, there are a number of private lenders worth exploring. These are considered nontraditional lenders. Some of the more reputable ones include SoFi, Quicken Loans, and PenFed, among many others. Additionally, you may want to reach out to major banks to learn about their nonconforming product options.

SoFi

SoFi’s unique proprietary underwriting uses free cash flow as the primary criterion in determining your eligibility. They also look at a history of financial responsibility and professional responsibility. For qualified borrowers, they offer mortgages with 10% down payments and no mortgage insurance for their 15-year and 30-year mortgage products. They also offer a 30-year 7/1 ARM. This is a hybrid mortgage that begins with seven years at a fixed rate, and changes every year after that.

Interest rates depend on your qualifications and the overall mortgage rate environment, but typically fall in the low 3% to low 5% range for both 15-year and 30-year mortgages.

SoFi estimates 10% of their borrowers are self-employed, so they are well equipped to assess each individual’s unique financial position. They cite their unique underwriting model and commitment to personal service as creating a friendly environment for self-employed borrowers. Additionally, SoFi doesn’t impose restrictions or rate adjustments for self-employed borrowers.

Quicken Loans

According to Quicken Loans, self-employed borrowers are eligible for all the same loans and terms as traditionally employed W-2 borrowers. The key difference is self-employed borrowers need to provide tax returns documenting their business’s income. They like to see two full years of tax returns with stable to increasing income. However, there are some situations on conventional loans that only require one year of tax returns if your business has existed for 5 or more years.

Quicken Loans points out some self-employed borrowers tend to keep all of their assets in business accounts. This can complicate documentation requirements when funds for closing are not from personal accounts. In these types of situations, they usually require business tax returns to review cash flow. This ensures the funds being used to buy a home won’t jeopardize the health of the company.

Conventional loans over 80% LTV require mortgage insurance, while FHA and VA loans have insurance built into the program, regardless of LTV.

Here are their general credit and debt-to-income guidelines for each type of loan:

  • Conventional – minimum FICO 620 and maximum DTI 45%.
  • FHA and VA – minimum FICO varies but is typically 580. DTIs will vary by lender but typically are permitted to 50%.
  • Jumbo – minimum FICO is typically 700 and the maximum DTI is typically 43%.

When it comes to eligibility, there is no difference between self-employed and traditionally employed borrowers for credit score, loan-to-value, or debt-to-income ratios. Quicken Loans also noted self-employment isn’t a deciding factor for interest rates. However, it’s important to know you probably won’t be approved with an income decline of more than 25%.

PenFed

PenFed, a national credit union headquartered in Alexandria, VA, verifies income of self-employed borrowers through copies of personal and business federal tax returns from the past two years. You are required to provide complete tax returns, including all schedules and supporting documents. In some cases, you may also need to provide corporate tax returns for companies you have significant ownership in.

PenFed reviews and averages your net income from self-employment that is reported on your tax returns to determine your income that can be used to qualify. If your income hasn’t been reported on your tax returns, it won’t be considered. Usually PenFed requires a one-year and sometimes a full two-year history of self-employment to prove your income is stable.

Nonconforming Loans from Traditional Lenders

It may not be the first option that springs to mind, but some banks do originate loans. These loans tend to be nonconforming and have higher interest rates.

For example, Chase offers jumbo mortgages for loans between $417,000 and $3 million. These are both fixed-rate and ARM loans for up to 30-year terms.

For these types of products, Chase typically will only work with existing customers, depending on their assets. If you don’t have a prior relationship with the bank, you won’t be eligible. If you’re interested in a nonconforming product, Chase recommends starting by applying for pre-qualification here.

In order to be approved for these types of products, you must meet the following requirements:

  • Credit score – 680 minimum
  • Down payment – 15% without mortgage insurance
  • Reserve balance – 18 to 24 months
  • Debt-to-income ratio – no more than 45%

When it comes to interest rates, Chase factors in all the above criteria. However, the larger the loan, the better rates are available. They prefer to use your pre-qualification information as a starting point and work through interest rate options from there.

How to Comparison Shop for a Mortgage Loan

Did you know nearly half of mortgage borrowers don’t comparison shop? A recent Consumer Financial Protection Bureau (CFPB) study found 77% of borrowers only apply with one lender or broker. These same borrowers were quick to rely on salespeople rather than doing their own research.

As we have outlined, mortgages are available through a variety of types of lenders. Because the process of qualifying for a mortgage when you are self-employed requires additional legwork, and may be more expensive, it’s even more important to shop around.

The CFPB’s interest rates tool is a great place to start. By plugging in your credit score, state, home price, and down payment percentage, you can see a graph of lenders and interest rates being offered in your region. Although this tool doesn’t state which lenders are offering these rates, you can Google the rate + your state + mortgage to find out exactly where it is being offered.

Remember, lenders want your business, and knowing what else is available will only give you more leverage. Like any other mortgage, you will want to ask about points, mortgage insurance, and closing costs. You can compare each lender’s Loan Estimates before making a final decision.

For conforming loans, backed by Fannie Mae or Freddie Mac, you can try the above tactic for shopping around. You can also try local banks and credit unions. For private lenders like SoFi, Quicken Loans, or PenFed, you are better off reaching out to these companies directly. For nonconforming loans from traditional lenders, it’s easiest to start with banks you have an existing relationship with.

Here is an example to help you determine what is right for you:

Conforming Loan from Fannie Mae or Freddie Mac

This example is for the state of Tennessee:

Credit score – 680-699
Home price – $200,000
Down payment – $6,000 (3%)
Loan amount – $194,000
Rate type – fixed
Loan term – 30 years
Interest rates – 4%-4.625%
Total cost for interest rates at 4% – $333,360
Total cost for interest rates at 4.625% – $358,031

Nonconforming Loan from SoFi

Credit score – 680-699
Home price – $200,000
Down payment – $20,000 (10%)
Loan amount – $180,000
Rate type – fixed
Loan term – 30 years
Interest rates – 3%-5%
Total cost for interest rates at 3% – $273,240
Total cost for interest rates at 5% – $347,860

Keep in mind credit score, home price, and down payment will all affect your interest rates. You should ask about points, mortgage insurance, and closing costs, which are not included in these examples.

Start Preparing Now

The entire process may feel daunting, but there are a number of things you can start doing now in order to put your best financial foot forward:

  • Stay Organized Keeping pristine records of your company’s profits and/or losses is a smart practice whether you are applying for a mortgage or not. Staying on top of paperwork from the beginning will be helpful for both you and your loan officer.
  • Avoid Co-Mingling Funds One of the biggest mistakes self-employed individuals make is co-mingling personal and business funds. Lenders may want to see separate statements for your credit card, checking, and savings accounts. If you are feeling overwhelmed by the process, you can start by comparing our favorites.
  • Improve Your Credit Score A recent Zillow study found self-employed borrowers are twice as likely to have a FICO score below 680. It’s never too soon to start making improvements. Start by pulling free reports from all three credit bureaus — Experian, Equifax, and TransUnion — once per year from AnnualCreditReport.com. Once you are armed with your current scores, you can take action with our credit score guide.
  • Pay Down Debt Regardless of your employment status, it is nearly impossible to be approved for a mortgage if your debt-to-income ratio is above 45%. In most cases, a maximum debt-to-income ratio of 33%-36% is preferred. If you are above that range, paying down debt will improve your chances of being approved.
  • Save a Larger Down Payment Offering a larger down payment may provide additional leverage when it comes to eligibility.
  • Build Up Your Cash Reserves Having a sizable emergency fund can signal to lenders you are prepared for the inevitable dips in income self-employed borrowers face. Help ease your bank’s nerves about irregular income by having extra cash on hand.
  • Carefully Evaluate Tax Deductions If you are planning to purchase a home within the next few years, it’s critical to begin weighing the pros and cons of your business’s tax deductions now. It may be worth writing off fewer business expenses in order to qualify for a less expensive conforming mortgage. This step is worth discussing with a trusted tax professional. For more information on self-employed taxes, you can visit the Self-Employed Individuals Tax Center.

Final Thoughts

When it comes to homeownership, there is a lot to think about, and being approved for a mortgage is just the beginning. The stress of buying a home is only elevated for self-employed borrowers, who face additional hurdles each step of the way. However, the process doesn’t have to be overwhelming. By crafting a game plan as early as possible, and sticking with it, you will have the best possible chance of being approved.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Mortgage

The Guide to Getting a Mortgage After Foreclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

mortgage after foreclosure

Introduction

If you’re among the one million homeowners who lost a home to foreclosure between 2007 and 2008, you may be starting to think about re-entering the housing market. If you went through a foreclosure during the earlier part of the financial crisis, it may no longer be on your credit report, and you may be qualified to try and become a homebuyer again.

If you lost your home more recently, along with five million other Americans between 2007 and 2014, it’s never too early to start preparing yourself for the qualification process. The three major credit reporting firms, Equifax, Experian, and TransUnion, begin reporting your foreclosure once a lender says you have missed your first payment, and you will have to wait seven years before it is removed. However, there are a variety of different mortgage options available, with varying eligibility requirements, and some have shorter waiting periods that you may be able to take advantage of if you qualify.

Here’s everything you need to know about qualifying for a mortgage after foreclosure.

What Will it Take To Get Approved?

Federal Housing Administration (FHA) Loans

Insured by the federal government, Federal Housing Administration (FHA) backed loans are often one of the first options foreclosed-upon borrowers turn to. Although bigger banks like JP Morgan Chase and Bank of America have restricted FHA loans by requiring very high credit scores, smaller banks have been more willing to lend to foreclosed-upon borrowers.

If you’ve gone through a full foreclosure and repaired your credit, you may be eligible for an FHA loan in just three years. Some borrowers have even been approved in as little as one year, although this is rare. According to Moody’s Analytics, about 1.2 million foreclosed-upon borrowers were approved for FHA loans after three years.

FHA loan programs vary from state to state, but they share common eligibility qualifications—minimum credit scores of 500-580 and a debt-to-income ratio of less than 43%. Plus, you’re required to make a minimum 3.5% down payment.

Although FHA loans require significantly lower down payments and look for lower credit scores than conventional mortgages, most loans are insured by mortgage insurance premiums, which will increase your monthly mortgage payment. Mortgage insurance premiums for 30-year mortgages cost 0.85% of the loan’s value, which adds up quickly for more expensive homes. And some homeowners are required to pay mortgage insurance premiums for the life of the loan. That’s why it’s important to carefully assess the full cost of your FHA mortgage.

FHA’s Back to Work – Extenuating Circumstances Mortgage Loan Program

Normally, you have to wait 3 years after foreclosure to be approved for an FHA fixed-rate mortgage. However, FHA’s Back to Work Program may help you qualify for a new mortgage in as little as one year after bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale. The program, which has been extended through September 30, 2016, offers families affected by the housing crisis and recession a second chance at homeownership.

How can you qualify? FHA will consider your eligibility if you’ve had a foreclosure but now meet the following criteria:

  1. You meet FHA loan requirements.
  2. You can document your foreclosure resulted from a financial hardship beyond your control.
  3. You have re-established a responsible credit history.
  4. You have completed HUD-approved housing counseling.

To begin the process, you will need to take a “Pre-Purchase Counseling” course with a HUD-approved housing counseling agency 30 days prior to filling out an application. You will also need to meet FHA’s loan requirements with minimum credit scores of 500-580 and a debt-to-income ratio of less than 43%.

Once a lender has determined you meet FHA’s requirements, you will be able to apply for a loan under the Back to Work program. You will need to explain how your financial hardship was caused by factors beyond your control — a reduction in income, job loss, or a combination of the two. These events need to have caused your household income to drop by 20% or more for a period of at least six months. Detailed documentation, like employment verification, W-2s, and tax returns, will be required to prove these events in order to qualify. Divorce, previous loan modifications, or the inability to rent an income property won’t count.

To re-establish a responsible credit history, FHA requires that you have 12 months of on-time rent payments. They also require that you haven’t been more than 30 days late on more than one non-housing loan payment. They also watch for collections accounts and court records reporting (with exceptions for medical bills and identity theft).

Fannie Mae Loans

Fannie Mae-backed loans have longer waiting periods for foreclosed-upon borrowers than FHA. The standard waiting period is seven years. However, extenuating circumstances may qualify you for three years.

Fannie Mae defines extenuating circumstances as “nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.” You will need to be prepared to provide your loan officer with an “extenuating circumstances letter” explaining why you had no reasonable alternatives other than defaulting on your financial obligations.

Fannie Mae requires a minimum credit score of 620 for fixed rate mortgages and 640 for adjustable rate mortgages. And they won’t accept a debt-to-income ratio of more than 43%. Fannie Mae loans require a 20% down payment.

Freddie Mac Loans

Similar to Fannie Mae loans, Freddie Mac also has a seven-year standard waiting period. Their waiting period for borrowers with extenuating circumstances is also three years.

In order to qualify as a borrower with extenuating circumstances, Freddie Mac requires your mortgage file to contain:
  • A written statement about the cause of your financial difficulties to explain the outside factors beyond your control.
  • Third-party documentation confirming the events detailed in your statement were an isolated occurrence, significantly reduced your income and/or increased expenses, and rendered you unable to repay your mortgage.
  • Evidence on your credit report and other documentation in the mortgage file of the length of time since completion of your foreclosure to the date of application and of completion the recovery time period requirements.

Freddie Mac also requires a minimum credit score of 620. They won’t lend if your debt-to-income ratio is above 43%. Freddie Mac loans require a 20% down payment.

Veterans Affairs (VA) Loans

Did you know 1 in 3 home-buying Veterans doesn’t realize they have a home-buying benefit? Depending on your length of service, duty status, and character of service, you may be eligible for a Veterans Affairs (VA) home loan after foreclosure. VA loans, guaranteed by the Department of Veterans Affairs, allow veterans and active military to bounce back more quickly after a foreclosure. The waiting period to be approved for a VA loan after foreclosure is only two years.

Once you have established you’re eligible, you will need a Certificate of Eligibility (COE) for your lender. This certificate will verify your eligibility for a VA-backed loan.

Veterans Affairs doesn’t limit the amount you can borrow. However, there is a limit to how much liability they are willing to assume, and this will affect the amount of money you can be approved for. Veterans Affairs’ liability is limited to the amount a qualified Veteran with full entitlement can borrow without making a down payment. Remember, these loan limits will vary by county, depending on the value of the home you are interested in.

If your income and credit qualifies, lenders will generally loan up to four times your entitlement without a down payment. Basic entitlements are usually $36,000 for eligible veterans. Although VA loans are more lenient on credit history than conventional loans, lenders generally look for a credit score of at least 620.

Non-Qualified (non-QM) Loans

For foreclosed-upon borrowers who don’t fit the standards for mortgages from Fannie Mae or Freddie Mac lenders, another product has emerged — non-qualified (non-QM) loans. These are a newer type of agency-alternative loan backed by hedge funds and private equity firms. The layers of risk associated with these loans are often secured by larger down payments or higher interest rates. The lender’s primary concern is your ability to repay, and many don’t require a waiting period for foreclosed-upon borrowers.

Ability-to-repay is an important aspect of qualifying for a non-QM loan, so most lenders will require income documentation. Depending on how much time has passed since your foreclosure, most loans require at least 20% down and adequate assets to cover reserves. You’ll find these interest rates are significantly higher than market rates.

A&D Mortgage, a private lender based in Hollywood, FL, offers non-QM products to foreclosed-upon buyers in their home state. They advertise that if there hasn’t been a judgement, you can apply for a mortgage as soon as you have settled your foreclosure.

Their loan periods are typically 24-60 months, with 7.999-11% adjustable interest rates. Down payments start from 30% and your debt-to-income ratio needs to be below 50%. Additionally, you should expect to pay standard origination and closing fees. A&D Mortgage is looking for credit scores of at least 500, and they will accept a loan-to-value ratio of up to 70%. The entire process takes a minimum of 5-7 business days once they have received your paperwork.

Another private non-QM lender, Angel Oak Home Loans, based in Atlanta, GA has a program specifically dedicated to serving foreclosed-upon borrowers with bad credit. Their program, Home$ense, was created specifically for homebuyers who were caught in the recession and mortgage crisis.

Home$ense allows you to begin the application process immediately after your foreclosure has settled. They offer 30-year fixed mortgages with interest rates of 5.5 percent to up to 9 percent, and they require a minimum 20 percent down payment.

These loans allow a loan-to-value ratio of up to 80% and don’t count late mortgage payments from the past 12 months against you. The average credit score of their borrowers is 670. Their loans are available for single-family residences, and they will approve up to $1 million for your loan.

Should You Wait to Qualify for an FHA Loan?

It’s easy to get caught in the excitement of purchasing a home, especially after a foreclosure. However, it may be smarter to exercise patience and wait 3 years to qualify for an FHA loan. This example illustrates why:
Non-QM
Credit score 620-639
Home price $200,000
Down payment $40,000 (20%)
Loan amount $160,000
Rate type fixed
Loan term 30 years
Interest rates 5.5 to 9%
Full cost of mortgage at 5.5% $327,046
Full cost of mortgage at 7% $383,214
Full cost of mortgage at 9% $463,463
FHA Loan
Credit score 620-639
Home price $200,000
Down payment $40,000 (20%)
Loan amount $160,000
Rate type fixed
Loan term 30 years
Interest rates 3.375% to 4.125%
Full cost of mortgage at 3.375% $254,647
Full cost of mortgage at 4.125% $279,158

Even without the full recovery of your credit score, it’s easy to see the differences in cost between these two types of loans. In addition to a significantly lower monthly payment, an FHA loan will save you a lot of money over the lifetime of the loan.

Comparing the Costs of Mortgages After Foreclosure

How much will a foreclosure affect your credit score? It depends on what credit score you started with. According to FICO, if your credit score is 780, a foreclosure will drop your score by 120-140 points. And if your credit score is 680, a foreclosure ding your score by at least 85-65 points. The higher your score, the greater of an impact your foreclosure will have. The lower your score, the less likely a lender will approve your loan, and if you are approved, you will probably be stuck paying higher interest rates.

Assuming your score has dropped to 620, here are a few examples of how much your mortgage after foreclosure may cost. These examples are for mortgages in Tennessee:

FHA Loan
Credit score 620-639
Home price $200,000
Down payment $40,000 (20%)
Loan amount $160,000
Rate type fixed
Loan term 30 years
Interest rates 3.375 to 4.125%
Total cost for interest at 3.375% $94,647
Total cost for interest at 4.125% $119,158
VA Loan
Credit score 620-639
Home price $200,000
Down payment $40,000 (20%)
Loan amount $160,000
Rate type fixed
Loan term 30 years
Interest rates 3.49 to 4.25%
Total cost for interest at 3.49% $98,328
Total cost for interest at 4.25% $123,357
Conventional Loan
Credit score 620-639
Home price $200,000
Down payment $40,000 (20%)
Loan amount $160,000
Rate type fixed
Loan term 30 years
Interest rates 3.75 to 4.875%
Total cost for interest at 3.75% $106,755
Total cost for interest at 4.875% $144,824

Remember, credit score, home price, and down payment will all affect your interest rates. It’s also important to ask about points, mortgage insurance, and closing costs, which are not included in these examples.

Deficiency Judgements: What You Need To Know

If you’ve had a foreclosure, you need to be aware of the risks associated with deficiency judgements. Many lenders will forgive deficiency through a short sale before foreclosure. But be aware that lenders have the ability to file motions for old foreclosure lawsuits and hire debt collectors to go after your remaining debt, court fees, and attorney’s fees, plus any interest that has accumulated.

Fannie Mae and Freddie Mac lenders are among the ones doing this, and they are specifically targeting “strategic defaulters.” In 2011, Fannie Mae and Freddie Mac went after 12 percent of the 298,327 homes they foreclosed on for deficiency judgements. Fannie Mae has hired debt collectors in 38 states and Freddie Mac has taken foreclosed-upon homeowners to court in 17 states.

In a press release, Fannie Mae explained how they have instructed lenders to monitor delinquent loans facing foreclosure and make recommendations for cases that may warrant deficiency judgments. Additionally, they pointed out that borrowers who worked with lenders may be considered for foreclosure alternatives like a loan modification, a short sale, or a deed-in-lieu of foreclosure.

How does a deficiency judgement work? If your home had a $250,000 mortgage, the value may have decreased to only $150,000 after the financial crisis. If you foreclosed at that point, and your lender sold your home at its current value, the $100,000 difference would be the deficiency balance. A Washington Post investigation uncovered a story of a Rockville, MD family who lost their home to foreclosure in 2008. Over three years after their foreclosure, they were taken to court by lenders to collect their deficiency balance of $115,000, which included three years of interest.

Although deficiency judgements are not a common problem right now, they could come back to haunt you once you’ve recovered from a foreclosure, secured a better job, and have started rebuilding savings. Deficiency judgements are still allowed in 40 out of 50 states, and the statutes of limitation range from 30 days to 20 years. You won’t know it’s coming until you receive a court notice, and many times your debt will no longer be with the original lender. Interest may become one of the largest expenses, especially if your debt is old. And once there is a judgement, you will be stuck paying it off.

In many cases, filing for Chapter 7 bankruptcy may be the only way out. And that option may not be available if you earn more than your state’s median income by family size. If that’s the case, Chapter 11 or Chapter 13 may be your only other options.

Should You Wait To Apply?

When you’re ready to own another home, you may be tempted to try and re-enter the housing market as quickly as possible. However, rushing into the home-buying process may not be the right choice.

First, you should figure out when the negative mark on your credit report is due to be dropped. Start by checking your credit report from each of the three credit-reporting firms, Equifax, Experian and TransUnion, through annualcreditreport.com. It’s free every 12 months, and these reports will show you exactly when your foreclosure was recorded.

When it comes to applying for a new mortgage, timing is key. If there are only a few months left before the foreclosure is removed from your credit report, you may benefit from waiting until the black mark is gone. When lenders check your credit reports during the application process, they won’t see your foreclosure.

However, if you still have another year to go, and you want a mortgage, you may not benefit from waiting. Interest rates are on the rise, and there’s no guarantee they won’t be higher than what you are able to secure earlier — even with a blemished credit report.

Keep in mind some applications may ask questions about previous foreclosures, so you may be required to disclose this information either way. And the information about your foreclosure may make a lender think twice about your eligibility.

So does it make more sense to wait? Here are a couple of examples comparing the costs for FHA loans:

Example #1
Credit score 620-639
Home price $200,000
Down payment $40,000 (20%)
Loan amount $160,000
Rate type fixed
Loan term 30 years
Interest rates 3.375 to 4.125%
Total cost for interest at 3.375% $94,647
Total cost for interest at 4.125% $119,158

This examples assumes your score has dropped to 620, you can afford a 20% down payment, and you’re looking for a 30-year fixed rate FHA loan in Tennessee. You have passed the three-year waiting period, but a foreclosure is still on your credit report.

Example #2
Credit score 720-739
Home price $200,000
Down payment $40,000 (20%)
Loan amount $160,000
Rate type fixed
Loan term 30 years
Interest rates 3.25 to 4.00%
Total cost for interest at 3.25% $90,679
Total cost for interest at 4.00% $114,991

This example assumes your score increased to 720 after your foreclosure was removed from your credit report. All other details are the same as the previous example. As you can see, the 100-point difference in credit score represents roughly $4,000 in savings over the lifetime of the loan.

Because interest rates are controlled by market forces outside of your lender’s control, you may want to think about how much rates may increase on their own within the timeframe of when you’re looking to qualify for a mortgage. We recommend using the Consumer Financial Protection Bureau’s interest rate tool as you are gathering data to make your decision.

General Tips On Being Approved For a Mortgage After Foreclosure

Regardless of which type of mortgage you decide to pursue, and the mandatory waiting period associated with it, cleaning up your finances will help the entire process go more smoothly:
Pay down all credit card debt

Paying your credit card debt off completely is one of the fastest ways to improve your credit scores. This type of debt compared to your spending limits accounts for 30% of your FICO scores. Once you’ve paid off your credit cards, you should see the change reflected in your credit score within a month.

Don’t apply for other loans

Resist the temptation of increasing your debt burden before applying for additional financing. This includes car loans, furniture loans, or appliance financing. Your debt-to-income ratio is one of the most important factors lenders look for when trying to determine your eligibility for a mortgage.

Avoid other blemishes on your credit report.

After your foreclosure, prioritize paying all of your bills or loan payments on time. You won’t want to begin the seven-year period of waiting for negative events to be removed again.

Conclusion

Losing a home to foreclosure can be a devastating experience, but you’re not alone. 7.3 million “boomerang” buyers who have lost a home over the past decade are preparing themselves to re-enter the housing market over the next several years. In fact, 25% of these foreclosed-upon buyers already have their foreclosure removed from their credit report. It’s important to take your time exploring all available options, selecting a program that best fits your current financial situation, and securing the best possible terms.

Our guide was designed to offer you a comprehensive overview of the options that are currently available, but it’s always a great idea to conduct a bit of your own research. With the large volume of borrowers seeking to re-enter the market in the next few years, additional options may continue to emerge.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Strategies to Save

The Ultimate Guide for Handling Your Emergency Fund

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

If our lives always went according to plan, we would never be hit with expensive car repairs, sudden job layoffs, family emergencies, or unexpected health problems. But these curveballs are simply part of life, and if you’ve ever been caught off guard for one of them, you know how important an emergency fund can be.

Most of us can agree having extra money set aside to deal with life’s rough patches is a good thing, but not everyone agrees on the specifics. It’s hard to see a downside to saving as much as possible, but here are some key tactics to keep in mind.

My Emergency Fund Story

I quickly learned the importance of an emergency fund after burning out in my previous career. Five years of promoting concerts throughout North America had taken its toll, and I knew I needed a break to recharge. But working in the music business also led to excessive spending on designer clothing, fancy dinners, and too much partying—leaving little savings to show for my hard work. So I drastically cut back, saving 40-50% of everything I earned, until I had finally socked away six-months of my take-home pay. My six-month emergency fund gave me the confidence to quit my job and recharge for a few months before eventually transitioning into tech.

How Much Emergency Fund Do You Need?

Experts recommend saving three to six months of your take-home pay in liquid assets for your emergency fund. But if you’re properly insured, a smaller amount may be sufficient. It’s also important to consider your existing level of liability. Ultimately, your individual circumstances will determine how much you need.

Ask yourself these important questions during the decision making process:

  • Does your employer or union provide a loss of income protection plan like short or long-term disability insurance?
  • What are the withdrawal terms on your permanent life insurance policy?
  • How robust is your medical insurance plan?
  • What is your existing level of fixed expenses and debt? You should certainly still have an emergency fund of at least $1,000 if you’re dealing with debt.
  • Does your family have additional sources of income?
  • Do you have access to a home equity line of credit?

Although saving too much is never a bad thing, it’s definitely possible to hold onto too much cash. Be aware that inflation eats away at the value of your cash over time. Also, there’s an opportunity cost when holding too much cash in low-return investments as opposed to investing some of those funds.

Tactics To Quickly Build an Emergency Fund

One of the fastest ways to build an emergency fund is by automating your savings. If a certain amount is deducted from every paycheck, you will never have the opportunity to spend that money earmarked for savings on payday cocktails. There are a couple of ways to set this up:

  1. Speak with your company’s HR department about automatically deducting a certain amount of money from every paycheck and depositing it into your savings account.
  2. Ask your bank to automatically transfer a fixed amount from your checking account to your savings account every month.

Even $25 or $50 a month accumulates more quickly than you might think. Remember, you won’t be able to spend what’s not available. Money market mutual funds, asset management accounts, and series EE savings bonds all work well for automated savings plans.     

Allocation of Your Emergency Fund Assets

The Importance of Liquidity

Most financial advisors emphasize the importance of maintaining adequate liquidity with your emergency fund. Liquidity means having easy access to cash, without needing to dip into your long-term investments, in order to pay your bills on time.

Although I saved the recommended six months of take-home pay, I didn’t hold an adequate amount in cash. After two months without a full-time job, I was forced to sell some stocks to cover my expenses—a move that can cause a loss of principal or tax liability.

A misallocated emergency fund certainly isn’t the worst financial problem you can have. But given the choice, you’d probably prefer not to be forced to sell off your assets when they’ve declined in value.

Where To Allocate Your Assets

There’s a lot to consider when you begin thinking about where to stash your emergency fund assets. For starters, you’ll want to consider your own risk tolerance. Next, you’ll need to evaluate each option’s rate of return. This isn’t always easy to compare because compounding interest rates are quoted at different periods (annually, quarterly, or even daily). You’ll also want to think about the tax implications of these allocations. A financial planner or accountant can help with specific tax questions you may have.

Here’s a breakdown of your options:

Checking account: They are convenient, easy to use, and FDIC insured. They generally require a low minimum balance, but some accounts can incur costly fees. The primary downside is no or low interest rates. If you’re using a checking account that keeps dinging you with fees, then it’s time to switch.

Savings Account: They are FDIC insured up to $250,000 and have higher interest rates than a checking account. In some cases the interest rates can be above 1.00% APY. However, the return is still considered low compared to the alternatives. Savings accounts aren’t as liquid as a checking account as it can take a day or more to access the funds depending on your bank.

Money Market Deposit Account: These accounts are insured, have limited checking privileges, and offer relatively attractive (variable) interest rates. However, they still offer lower returns than CDs and money market mutual funds. They also require a high minimum balance.

Certificate of Deposit (CD): CDs are insured, but interest rates are fixed, so you won’t benefit if rates go up. There’s a minimum required deposit and there are penalties for early withdrawal.

Money Market Mutual Fund: These funds work well for an automated payroll deduction plan and offer some checking privileges. There’s limited risk due to the short maturity of the investments, but they are not insured. The minimum initial balance is generally between $500 and $1,000.

Asset Management Account: This account also works well with an automated payroll deduction plan and offers a high return. However, these accounts aren’t insured and require a high minimum balance of $5,000. Additionally, these accounts have monthly fees that range from $25 to $200.

U.S. Treasury Bills: These offer attractive interest rates, are exempt from state and local taxes, and guaranteed by the Federal government. However, they are far less convenient to liquidate than the other options.

U.S. Series EE Bonds: Depending on when they are purchased, the interest rate can be fixed or variable. They can purchased and redeemed at any bank and work well with automated payroll deduction plans. They are exempt from local and state taxes. Interest only accrues twice per year, and there’s a penalty if you redeem before five years.

Regardless of the amount and the allocation you choose, an emergency fund is critical for your long-term financial health. In a perfect world, you’d never have to use it, but you’ll sleep much better at night knowing you’re covered if a disaster strikes.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Pay Down My Debt

Options to Get Out of Your Timeshare

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Options to Get Out of Your Timeshare

You’ve finally escaped the stress of your commute, stacks of unfinished paperwork, and the never-ending demands of the office. You’re staying someplace warm, enjoying pina coladas on the beach or working on your tan by the pool.

The resort’s sales manager has casually mentioned an affordable way to return to this same place every year. And in your relaxed state of bliss, you start daydreaming about future vacations. You imagine making the resort an annual family destination or the spot to celebrate your wedding anniversary.

Let’s face it — buying a timeshare is often an impulsive decision. And one you may regret after the drinks have worn off, your vacation is over, and reality sets in. Because chances are, your timeshare is not the amazing deal the resort’s sales manager sold you on. If you’re stuck with buyer’s remorse or simply can’t afford your timeshare, here is how to minimize the damage to your wallet and credit score.

What is a Timeshare?

So what is a timeshare exactly? A timeshare allows you to buy the right to use a property every year for a certain period of time. And the property is usually part of a resort. A deeded timeshare means you’re purchasing a portion of the property. And a non-deeded timeshare mean you’re leasing the right to use the property for an agreed upon number of years (usually 10-50).

How Much a Timeshare Actually Costs

The cost of a timeshare varies based on the size of the unit, the resort’s location, the time of year, amenities, and more. But the National Timeshare Owners Association (NTOA) says the average timeshare sales price is $20,020.

What does typical report-based financing looks like?

  • Loan Amount – $20,000
  • Term of Loan – 6 years (72 months)
  • Interest Rate Charged – 15.9%
  • Monthly Payment – $432.74
  • Actual Cost – $31,157.28

Many resorts also offer a 1-year loan with a 0% interest rate if you’re willing to put 50% down within 30 days of purchasing the timeshare.

In addition to the cost of the timeshare itself, you’re also responsible for an annual maintenance fee. The National Timeshare Owners Association (NTOA) says the average maintenance fee for 2015 is a whopping $880. This annual maintenance fee can increase over time. And you’re responsible for paying this fee every year regardless of whether or not you visit.

Selling a Timeshare

Are you thinking about trying to sell your timeshare? Although the National Timeshare Owners Association (NTOA) lists three preferred resellers on their website, it’s not always that simple.

Resale websites operate as a subscription service. And their fees range from $14.99 to $125 per year. Plus, resellers may take a portion of the sale.

Remember, timeshares are not real estate investments. And the secondary market is oversaturated with buyers. Want to see further evidence? A quick search on eBay revealed dozens of timeshares practically being given away for $1.

Try Refinancing Your Loan

Between the high interest rates of resort-based financing and the annual maintenance fee, what was sold as an affordable vacation becomes expensive very quickly. If you’re struggling to afford monthly loan payments, you may want to try refinancing to secure a single-digit interest rate.

LightStream, a division of SunTrust bank, offers timeshare-refinancing options if you’re a U.S. citizen with good credit. They don’t charge fees to refinance. And their interest rates are fixed.

Here’s an example of what the numbers may look like for refinanced timeshare loan:

  • Loan Amount – $20,000
  • Term of Loan – 6 years (72 months)
  • Interest Rate Charged – 7.84% – 9.84% APR with Autopay
  • Monthly Payment – $349.10 – $368.91
  • Actual Cost – $25,135.20 – $26,561.52
  • Money Saved – $4,595.76 – $6,022.08

Your timeshare might be such a financial drain that you decide to sell (or give it away) and then refinance the remaining debt to pay it off quickly and with a lower interest rate.

Consider Timeshare Exchanges

Did your resort’s sales manager mention the option of timeshare exchanges? It’s a major selling point for many buyers. And who wouldn’t like the option of trading timeshares with owners in other locations? But does it make sense for you? It depends.

If you’ve paid off your debt, it may be worth the additional fees to list your timeshare on an exchange. The National Timeshare Owners Association (NTOA) lists preferred exchange companies on their website. But you need to read the fine print. Less popular destinations and off-peak season timeshares tend to be more difficult to exchange. And there may be other restrictions that weren’t mentioned at the closing table.

Try To Negotiate With Original Owner

Have you paid off your debt but you’re sick of coughing up annual maintenance fees? It’s worth reaching out to the original owner to see if they’re willing to negotiate. They may agree to let you out of your original deal if you agree to cover a few years of maintenance fees. And they’ll have the option of reselling the timeshare to another buyer. It doesn’t hurt to ask!

Can’t negotiate with the original owner? Try getting a team of experts to help you legally get out of the contract with the Time Share Exit Team.

The Truth About Timeshares

It’s cheaper than ever to find affordable places to stay on vacation. Websites like Airbnb, VRBO, and HomeAway make it easy to find affordable listings all over the world. A timeshare at a luxury resort may seem attractive today, but what happens when your tastes and lifestyle change? The truth is, timeshares don’t always get used as often as buyers originally planned.

If you have to finance a timeshare, it’s probably not worth buying. Why? Resort-based financing can incur interest rates of 15-16%. And even once you’ve paid off the loan, you’re still stuck with expensive annual maintenance fees averaging $880 or more! Plus, attempting to resell can be a nightmare. It can get costly and there’s just not a strong secondary market. And all this doesn’t even include the cost of travel to get to your timeshare in the first place.

Despite all these drawbacks, almost 400,000 timeshares were sold in 2015. And it’s easy to see how buyers get roped in. It’s not easy to make a clear-headed decisions on a white sand beach after a couple of margaritas.

If you’re regretting your choice to buy or can’t afford your timeshare, you can minimize the damage to your wallet and credit by refinancing, exchanging, or negotiating with the original owner.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Life Events, Pay Down My Debt, Strategies to Save

8 Money Resolutions You Haven’t Considered

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Black woman using credit card and laptop

With the holidays winding down, many of us are shifting our focus toward the New Year. And that means the annual brainstorm of resolutions. With massive amounts of cash spent on holiday gifts, it’s not surprising financial resolutions are top of mind.

A study from Fidelity found the top three financial resolutions have been consistent for the past four years — save more, pay off debt, and spend less. However, financial resolutions declined 28% between 2014 and 2015. Why? Respondents are feeling better about their finances.

Despite the decrease in financial resolutions and increased confidence about money, Fidelity also discovered 51% of respondents who made resolutions are better off financially. And 49% found breaking resolutions into smaller, short-term goals made them more attainable.

Are you ready to work toward a more prosperous 2016? But you are not sure where to get started? Here are 8 important money resolutions you probably haven’t considered:

1. Pick up a Side Hustle

Is there still a significant gap between what you’re earning and how much you’d like to be earning? If you’re still months away from your annual review and you’re not expecting any quarterly bonuses, it may be time to pick up a side hustle.

There are countless options for earning extra money in your spare time. And many side hustles can even be done from the comfort of your home. Think about your own diverse skillset. Chances are you have multiple talents to offer. And you could use these talents to save a busy person a lot of time.

Personally, I’ve earned a steady side income from blogging, freelance writing, and social media consulting. In the past, I’ve waited tables, sold beer at Tennessee Titans games, and been hired as a production assistant or runner for concerts.

What are some ways you could earn extra money in 2016?

2. Stop Obsessing Over the Latte Factor

Let’s face it — your monthly expenses can only be cut down so low. And skipping that cup of coffee with an important new contact really isn’t going to make that much of a difference.

Rather than depriving yourself with extreme frugality, redirect that energy and think about the big picture. Focus on activities that can help you earn more money rather than constantly trying to cut back. If your frugal lifestyle is getting in the way of your career or side business, it’s time to rethink your priorities.

3. Learn How To Save on Taxes

When it’s time to file your taxes, nothing is more frustrating than endlessly searching for business expense receipts, education costs, medical bills, and more. Why not create a system to stay more organized all year?

If your tax situation has become more complicated, it may pay off to seek professional advice from a certified public accountant. They can provide tailored advice for your unique financial situation and offer suggestions for getting ahead of next year’s tax bill.

[7 Ways to Minimize Taxes on Your Side Income]

4. Dive Deep into Your Company Benefits

When was the last time you reviewed your employer’s benefits package? The beginning of the year is a great time to carefully check these details to make sure you’re not leaving anything on the table. This may include looking closely at the details of your health insurance, health savings account (HSA), retirement plan, vacation policy, and other on-the-job perks. Don’t overlook the benefits you’ve worked hard to earn. And don’t be afraid to ask questions if you discover something you don’t understand.

5. Talk To Your Parents About Their Retirement

Ready for a wake up call? The median retirement savings for 55 to 64-year-olds was only $14,500 in 2013. And the average 65-year-old American can expect to live for nearly 20 years.

It’s never a fun or comfortable topic, but it pays to talk to your parents about their plans for retirement. Why? You could be on the hook for their excessive spending or debt problems. Get ahead of potential issues by having these conversations as early as possible. You’ll have more time to work on solutions together.

6. Create a Will

Many adults don’t start thinking about a will until they’ve had children because it can determine future guardianship. But it’s smart move to start planning before that.

Even if you’re young and healthy, it’s never too early to draft a will. If something happened to you, the last thing you’d want is loved ones arguing over your assets. Or even worse, letting your state of residence determine what happens to your estate.

An estate-planning attorney can help you write a will. And you’ll want to name a trustworthy executor to carry out your wishes. It’s a good idea to periodically review your will and make changes as needed.

7. Budget For Self-Care

Did you know burnout can be as bad for productivity as illness? The American Institute of Stress has indicated almost half of all American workers are showing symptoms of burnout.

So how can it be avoided? Experts recommend taking time to socialize, develop interests outside of work, exercise, and take time to relax. Instead of stressing about these added expenses, make room for them in your budget. Bottom line? Don’t be stingy when it comes to self-care.

[Creating an Emergency Fund While Saddled with Debt]

8. Establish an Emergency Fun Fund

On top of a healthy self-care budget, it’s important to prepare for unexpected fun stuff. The concept of an emergency fun fund was introduced to me by MagnifyMoney’s Erin Lowry.

She described it as some extra money she’d stashed away for last-minute weekend trips out of New York City or an impromptu celebratory dinner, because it’s important to recharge. And you may be willing to treat yourself more often if you’ve planned for it in advance.

Looking Ahead

Saving more, paying off debt, and spending less are important financial resolutions. But where should you begin? As Fidelity’s survey revealed, breaking goals down into smaller, more manageable chunks may be the secret to actually accomplishing them. Try and imagine your future self, one year from today. And ask yourself, what do you want to have accomplished?

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Mortgage

New Mortgage Rules Could Delay the Home Buying Process

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Purchase agreement for house

Have you ever felt overwhelmed by the mortgage process? You’re not alone. For years, consumers have complained about the seemingly endless amounts of mortgage loan paperwork. Making matters worse, these forms have consistently been littered with complicated and confusing terminology. But the Consumer Financial Protection Bureau (CFPB) wants to make the mortgage process easier. And that’s why its overhauled the system with the new “Know Before You Owe” disclosure rules.

Earlier this month, the CFPB’s new disclosure rules went into effect, making the entire mortgage process more transparent. This new process should help you understand your options, make it easier to shop around for mortgages, and avoid costly surprises at closing.

Although the real estate industry has spent over a year preparing for these changes, experts are predicting closing delays. However, some of the reasons for delays can be avoided. If you’re thinking about buying a home, here’s what you need to know about the CFPB’s new “Know Before You Owe” disclosure rules.

The Loan Estimate Makes it Easier To Shop Around and Compare Offers

Did you know nearly half of U.S. homebuyers don’t shop around and compare mortgages? A recent CFPB survey found 47% of all U.S. homeowners only seriously considered one lender or broker for their mortgage. And failing to shop for a mortgage can be expensive. CFPB’s research shows 30-year fixed rate conventional loans can vary by more than half a percent between lenders. This can add up to hundreds of dollars over the course of a single year.

So, how can this costly mistake be avoided? By arming yourself with knowledge.

Over the past four years, the CFPB has received countless complaints about the complexity of trying to get a mortgage. And as a response, they’ve simplified the mortgage loan application process by consolidating four overlapping disclosure forms into two. The first of its new disclosure forms combines the initial Truth-in-Lending disclosure and the Good Faith Estimate. This new form is the Loan Estimate.

To keep you informed, lenders must provide the Loan Estimate within three business days of submitting a mortgage application. The Loan Estimate makes comparing loan options easier by clearly listing the following details:

  • Monthly Principal & Interest
  • Prepayment Penalty
  • Balloon Payment
  • Mortgage Insurance
  • Estimated Escrow
  • Estimated Total Monthly Payment
  • Estimated Closing Costs
  • Estimated Cash To Close

The CFPB recommends comparing Loan Estimates from at least three different lenders. Also, it created the Loan Estimate Explainer to further demystify this new disclosure. The Loan Estimate Explainer includes a helpful checklist of details to review. It also offers a sample Loan Estimate and detailed definitions of the key terminology from each page.

The Closing Disclosure Offers More Time To Review Paperwork Before Closing

We’ve all heard nightmare stories about borrowers being surprised by unexpected expenses at their closings. But why was this happening? Many believe borrowers weren’t given sufficient time to review their paperwork.

To eliminate confusion, the CFPB has created the Closing Disclosure by combining the final Truth-in-Lending disclosure and HUD-1 Settlement Statement. And lenders must provide the Closing Disclosure at least three days before your closing.

Tripling your previous period of review time, you now have three days to compare the Loan Estimate and Closing Disclosure line by line. And if something doesn’t look right, you now have more time to ask why. This extra time gives you the chance to ask for a second opinion from a real estate agent or lawyer before signing your mortgage paperwork.

The closing process doesn’t have to feel overwhelming. CFPB’s Closing Disclosure Explainer provides the same transparency as their Loan Explainer, making it much easier to carefully compare the two documents. Also, the CFPB has created a closing checklist to help you stay organized.

How “Know Before You Owe” May Delay the Closing Process

While many agree the simplification and increased transparency are both wins for consumers, the traditional 30-day closing period may no longer offer enough time. Some real estate agents are now preparing clients for at least 45-day closings. And some agents are even estimating 60-day closings.

Why? Everyone involved with a real estate transaction must comply with the CFPB’s new rules. This includes real estate agents, title companies, mortgage brokers, bankers, and more. And although the industry has spent over a year preparing for these changes, there may be unexpected delays as the new system and processes are implemented. But, hopefully, “Know Before You Owe” will grow more efficient as time passes and the process becomes the new norm.

How To Prevent Unnecessary Closing Delays

Closing delays aren’t just caused by professionals. You may inadvertently delay the closing process by missing a mistake on your Closing Disclosure. To speed up the process, review the Closing Disclosure immediately and let your lender know right away if you discover any errors. Even small changes require the creation of a new Closing Disclosure, triggering another three-day window for review. And this three-day period cannot be waived.

A delay could also be caused by a change in your mortgage’s interest rate. To avoid this issue, don’t mess with your credit score during the closing period. And consider asking for 45-day interest rate-lock period, rather than the traditional 30-day rate-lock.

What’s the big deal about delays? Delays can create a headache when selling another home, moving to a new city, or starting a new job. Also, longer waiting periods could potentially hurt your chances of home ownership in competitive markets. Wall Street Journal explains how extra delays could put you at a disadvantage. Especially if you’re competing with cash offers in popular neighborhoods.

“Know Before You Owe” is a Long-Term Win For Consumers

“Know Before You Owe” can help you understand your options, make it easier to shop around for mortgages, and avoid costly surprises at closing. But it’s important to know what has recently changed in the mortgage process. And you need to know how these changes may affect your closing. By preparing yourself in advance, you may be able to avoid the headache of unnecessary delays.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Life Events, Mortgage

Why an Out-of-State Investment Property Can Be Risky

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Mortgage

Real estate investing can be an exciting way to build wealth and secure your financial future. But what happens when you’re priced out of your city? It’s a frustrating reality for many prospective buyers, especially millennials. Burdened with crushing amounts of student loan debt and staggering high rent, many young professionals struggle to save the necessary down payment. A recent Bloomberg study identified 13 major cities where homeownership is completely out of reach for millennials. If you can’t afford to buy a home in your city, investing in a less expensive area may seem more realistic. But if you’re looking for a property out of state, here is what you need to know.

Start By Doing Your Homework

Just because a home is cheaper out of state doesn’t automatically make it a turn-key rental. And while it’s always smart to carefully evaluate a potential home purchase, detailed research becomes even more essential with a long-distance property.

How much do you really know about the local real estate and rental market? Are there known concerns about the future of the city’s economy? Do employment and job growth prospects seem promising? Is the city’s population growing? In order to make an informed decision, you need to become intimately familiar with the city’s housing market and rental laws. Arm yourself with knowledge at both the city and neighborhood level.

Also, it’s important to dig into the history of the property itself. The last thing you want to be surprised by is higher than expected property tax increases. Or even worse, the nightmare of a property’s liens and probate issues. Although most lenders should be aware of these potential problems, a title search can be completed through the local county clerk’s office. It never hurts to double check, because if liens or probate issues exist, you may need to hire a real estate attorney to sort through it.

Plan on budgeting for an in-person visit. Also, you’ll need an independent, detailed home inspection. Do not automatically assume the seller’s agent is looking out for your best interests. An unbiased home inspector, not affiliated with the agent, may be most trustworthy. Bottom line: if you want to know exactly what you’re buying, and you absolutely do, seeing the property in-person and a thorough home inspection are non-negotiable.

Brainstorm a List of Potential Challenges

Owning and managing a rental property is almost never easy. And an out of state property can magnify these challenges. Before beginning the home buying process, take a step back. Be realistic and honest by thinking about some of the problems that may occur.

Have you assessed the riskiness of your property? A primarily owner-occupied neighborhood is sometimes considered lower risk. And high-risk properties can lead to more frequent and expensive maintenance. If your rental property falls under this category, have you budgeting adequate time and money for this?

Does your job offer the flexibility needed to deal with problems as they arise? Most tenants expect repairs to be handled immediately. And, realistically, can you quickly manage these repairs from afar?

How would you handle problem tenants from a distance? What if a tenant doesn’t pay and stops communicating? If needed, how easily can you deal with the eviction process? And what if a tenant caused significant and costly damage? Are you willing to periodically visit the property?

How Much Do Property Managers Cost?

If day-to-day management from a distance doesn’t seem possible, you may want to consider hiring a property manager. An experienced property manager can greatly reduce the headache of managing tenants. But they also may significantly cut into your profits.

How much should you expect to pay? Property management fees vary anywhere from 4-12% of your gross rent. Remember, this percentage greatly depends on the quality and scope of their services. So, you don’t necessarily want to chase the cheapest option. Quality management is critical to your property’s success. But you definitely need to carefully review the details of your agreement to avoid unexpected expenses.

For example, does the company charge vacancy fees? What about new account set-up or leasing fees? If you’re still not exactly sure how your property manager is being compensated, make sure to ask upfront. A fantastic property manager can be the key to a successful rental investment. But you don’t want to reduce profits with costly surprise expenses.

Why Out of State Mortgages Cost More

Did you know investment property mortgages typically cost more than owner-occupied homes? Unfortunately, it’s one of the major motivators behind mortgage fraud. But how much of difference should you expect?

For starters, conventional loans require at least a 20% down payment for investment properties. Why? Non-owner occupied homes are considered riskier and statistically have higher loan default rates. To further protect their investment, conventional lenders also charge higher interest rates.

In addition, you’ll also be charged higher insurance premiums as a landlord. Standard homeowners insurance isn’t adequate and doesn’t always cover a tenant’s claims. Landlords insurance is needed to cover injury claims or property damage. And some landlords insurance policies may also cover a certain portion of lost rental income if a property becomes uninhabitable.

Why an Out of State Investment Property Can Be Risky

Let’s face it, investing in an out of state property can be risky. And it can also be a massive time commitment. Avoid jumping into decisions blindly by doing your homework about the local market and economy. You’ll also want to learn as much as possible about the property before signing any paperwork. Don’t buy a property unseen or without a home inspection. Prepare for inevitable challenges and be realistic about how much time you can devote to the project. If working with a property manager is more convenient, make sure you understand their complete costs. Lastly, be prepared to pay more for the home’s down payment, interest rates, and insurance premiums. An out of state investment property may be risky. But it can still be lucrative if you fully understand and prepare for the costs.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Life Events, Mortgage

Why Lying on Your Mortgage Application Just Isn’t Worth the Risk

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Mortgage

Have you ever gotten lost in daydreams about building wealth? We all have. And at some point, you’ve probably thought about purchasing an investment property to help you reach that goal. Maybe you’ve considered working for yourself as a full-time landlord. Or even building your own mini real estate empire and managing multiple properties. But before you start cashing an imaginary handful of rent checks, you should take a step back. Can you actually afford an investment property? Maybe a seemingly harmless white lie could enable your start towards becoming a mogul. Before you wander too far down that path, beware the consequences. 

My Investment Property Opportunity

Recently, my sister and I were offered the chance to purchase a two-family home right outside of Boston to settle a family member’s estate. It’s nestled in a quiet, tree-lined inner city neighborhood with tons of street parking. Plus, it’s just a few blocks from the subway, making it a prime location for someone commuting to Boston for work every day. Clearly, the house has major cash flow potential as a rental property.

So, what stopped us? The massive down payment. Because we both live out of state, the home would be considered an investment property. And financing an investment property with a conventional loan usually requires a minimum 20% down payment.

Appraised at nearly $600,000, we’d have to cough up a staggering $120,000 to cover the loan’s mandatory 20% down payment. Our dreams of becoming landlords were quickly deflated. We’d lost nearly all hope for the idea when she identified a potential loophole.

Many FHA loans can be approved with a 3.5% down payment, but require the property to be owner-occupied. FHA requires the borrower to establish the home as his or her primary residence within 60 days of signing the loan. Also, the owner must live there for at least a year.

“I can just say I live there,” she insisted. “Who would ever know the difference?”

How much could her seemingly innocent mortgage application fib hurt? Quite a bit, it turns out. Realizing we really couldn’t afford the home, we quickly abandoned our unattainable investment property idea. But, unfortunately, this doesn’t happen as often as it should.

Not all borrowers have been honest. Our country saw an uptick in rental property investments following the housing market collapse. And many borrowers intentionally misrepresented their living situation in order to secure a smaller down payment and lower interest rates for their loan. But misleading your lender about owner occupancy is an incredibly risky move. Lying on a mortgage application is considered mortgage fraud and is illegal.

Why Do People Lie About Owner Occupancy?

After being tempted by an attractive property we couldn’t afford, it’s really easy to understand how others are motivated to lie about their owner occupancy status. Especially when financing a first home with an FHA loan has significantly lower financial hurdles.

How much money do most people put down on a first home purchase? Despite the threat of costly mortgage insurance, many first-time homebuyers can’t scrape together 20%. Or they prefer to keep their cushion of emergency savings in tact, even if it means paying extra for a mortgage insurance premium (MIP).

Luckily, most FHA loans only require a minimum down payment of 3.5%. And because borrowers are required to pay MIP on these loans, FHA backed lenders can afford to offer more attractive interest rates.

Using Nashville’s current median home price of $230,000 as an example, it’s easy to see a stark contrast between the costs of FHA and conventional loans.

First, there’s a much smaller down payment. An FHA loan would require $8,050 to meet their 3.5% down payment. However, a conventional loan with a 20% minimum down payment would cost a borrower $46,000. Obviously, the $37,950 difference is huge and could potentially make a property unaffordable for some buyers.

Why is there such a huge difference? Loans for non-owner occupied properties are considered riskier and have higher rates of default. To protect their investment, conventional loan lenders also tend to charge higher interest rates.

The Consumer Financial Protection Bureau (CFPB)’s interest rates tool yielded significant differences in interest rates between FHA and conventional loans in Tennessee:

  • Credit score: 700 – 719
  • Home price: $230,000
  • Down payment: 20%
  • Rate type: Fixed
  • Term: 30 years
  • Loan type: Conventional

Interest rates: 4.0 – 4.5%

  • Credit score: 700 – 719
  • Home price: $230,000
  • Down payment: 4%
  • Rate type: Fixed
  • Term: 30 years
  • Loan type: FHA

Interest rates: 3.625 – 4.375%

Lenders Are Cracking Down

“Are you planning to make this home your primary residence?”

It may seem innocent enough to lie about where you’re planning to live. But Fannie Mae has named occupancy as one of their common mortgage fraud red flags. Their list of inconsistencies in an applicant’s loan file includes examples for lenders to look for like an unrealistic commute distance, new homeowner’s insurance that’s a rental policy, or a borrower who is downgrading from a larger, more expensive house.

Lenders have become more sophisticated in detecting mortgage fraud than ever before. Companies like LexusNexis have the software to analyze 16 dimensions of occupancy evidence, speeding up research time and reducing investigative expenses. This software makes it much easier to get caught.

What Happens If You’re Caught Lying?

Are you still willing to take the risk? You could be facing major trouble if you’re caught. For starters, your lender could immediately demand full repayment of the loan. And they could move the property to foreclosure if you’re unable to pay. But that’s not even the worst-case scenario. Your case could be escalated to the Federal Bureau of Investigation, risking criminal charges.

It’s Not Worth the Risk

A lot of people dream about building long-term wealth through real estate investing. But dishonesty isn’t the right way to get there. Mortgage fraud is illegal. And misleading your lender about your occupancy status can lead to foreclosure or criminal charges. Both of these can leave you worse off than before you decided to take a chance on that investment property. Bottom line: lying on your mortgage application about owner occupancy just isn’t worth it.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Life Events, Mortgage, Pay Down My Debt

Getting a Mortgage After Bankruptcy

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Purchase agreement for house

Whether you’re drowning in loans, unemployed, racking up medical bills, or guilty of too much online shopping, one thing’s for certain — we all hate debt. And when debt becomes impossible to pay back, bankruptcy may seem like the only way to escape.

While filing for bankruptcy may be the right solution, it can negatively affect your finances for years to come. But, fortunately, life moves on. And despite this financial setback, you may want access to credit in the future. Without it, large purchases like a home can be difficult. It’s not impossible, but applying for a mortgage post-bankruptcy means working through a particular set of challenges. Prepare yourself by knowing these important guidelines.

Know the Difference: Chapter 7, 11, & 13 Bankruptcies

We constantly hear about bankruptcies in the media, but what does filing for one actually mean? Bankruptcy is a legal procedure that can help you wipe out or repay debt under the protection of the United States bankruptcy court.

Chapter 7 and Chapter 13 are the main types of consumer bankruptcies. But what are the key differences?

Chapter 7 is typically the preferred type of bankruptcy because involves liquidation and eliminates all your eligible debt. This means your nonexempt property will be sold and the proceeds will be distributed to your creditors. Exempt property varies from state-to-state, but part of your property may be subject to liens or mortgages, promising it to other creditors. It’s important to know Chapter 7 bankruptcies may, but not frequently, result in a loss of your property. You may lose your home outside of bankruptcy to foreclosure if you fall behind on your mortgage payments.

It is much harder to be eligible for Chapter 7 bankruptcy. If your income is above the median in your state and you prove you have sufficient cash flow to service some of the debt, then you’ll likely be forced to file Chapter 13.

Chapter 13 bankruptcy allows you to keep property, adjust debt, and to pay it back over time. This is a long process as the repayment period is typically three to five years. If you’re behind on mortgage payments, it may be easier to keep your home in Chapter 13 because you may be able to make up payments in your repayment plan.

What about Chapter 11 bankruptcies? If your business is a corporation, partnership, or you own a small business, Chapter 11 may give you a chance to reorganize. Chapter 11 also can help restructure debt so it can be paid back over time.

Unfortunately, bankruptcies may stay on your credit report for up to 10 years. Because of this, many people incorrectly assume bankruptcies ruin your chance at homeownership. This definitely isn’t the case, but it does mean the path to purchasing a home will take more time. 

The Waiting Period After Bankruptcy

Even if bankruptcy stays on your credit report for 10 years, you’re not expected to wait that long before trying to buy a home. However, Fannie Mae knows a bankruptcy increases your likelihood of a mortgage default. Despite this red flag, Fannie Mae encourages lenders to investigate the cause of these issues, make sure sufficient time has passed, and verify an acceptable credit history has been re-established. So, how long do you have to wait? The waiting periods begin upon the completion, discharge, or dismissal date of your bankruptcy.

Both Chapter 7 and Chapter 11 require a four-year waiting period. However, if you have documented extenuating circumstances, it’s possible it may be reduced to two years.

Chapter 13 bankruptcy requires either a two-year or four-year waiting period, depending on what step of the procedure you’re on (discharge or dismissal). If you’ve had more than one bankruptcy within seven years, a five-year waiting period is required. But remember, this time period kicks in after the Chapter 13 bankruptcy is complete, so that’s two to four years on top of the original three to five years working your repayment plan. It could be up to nine years total before you’re eligible.

If you’re anxious to start the home buying process, these waiting periods may feel inconvenient. But they offer a fantastic opportunity to clean up your credit and reduce your debt-to-income ratio before re-applying for a mortgage.

The Importance of Your Credit Score and Debt-To-Income Ratio

As soon as your bankruptcy case has been discharged and closed, it’s time to take a detailed look at your finances. Chances are, you have a lot of room for improvement. Luckily, Fannie Mae’s mandatory waiting period gives you the chance to prepare.

Here’s what you need to do:

  • Improve your credit score. First, get a copy of your credit report and a view of your credit score to see what work needs to be done. AnnualCreditReport.com offers a free report every year, but this does not come with a credit score. You can find more information about how to access your score here. Do you know what steps to take next? 35% of your score is based on payment history. That means you need to pay every single bill on time. If you no longer have access to any lines of credit, then consider getting a secured credit card in order to rehabilitate your credit. Start doing this right away and you’ll see improvements. Going forward, you need to monitor your credit report regularly. Remember, your credit score will also affect what interest rate you’ll be able to secure, and consequently, which mortgages you’ll be able to afford.
  • Pay down outstanding debts. After the dust settles from your bankruptcy, do you still owe any money? Try to repay these debts as quickly as possible. Debt-to-income ratio is the single most important factor in getting approved for a mortgage. Looking for your best chance at approval? Aim for a debt-to-income ratio of 40% or less. Also, make sure you don’t take on any additional loans during this period of time.
  • Stick with your Chapter 13 repayment plan. Did you file for Chapter 13 bankruptcy? If so, don’t miss any of your court-ordered repayment requirements. Diligently follow exactly what you’ve agreed to.
  • Save as much as you can. Do you have an emergency fund? A health stash of cash reserves can help keep your debt repayment plan on track as unexpected expenses pop up. Don’t forget, you’re also going to need a chunk of change for your mortgage down payment.

Bankruptcy doesn’t have to create a barrier to homeownership. But bouncing back may take time. Whether you’ve filed for Chapter 7, 11, or 13, Fannie Mae’s mandatory waiting periods offer an opportunity to get your finances back on track. Use this time wisely by committing to improve your credit score and reduce your debt-to-income ratio. Save as much as you can. And when the time comes to reapply for a mortgage, be upfront with your lender. Be honest about your setbacks, show how much progress you’ve made, and explain how you’ve learned from past mistakes. Remember, bankruptcy was never meant to be a life-long penance; it’s a chance for you to start over.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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