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Don’t Apply for New Credit Before Your Mortgage Closes

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

I remember it like it was yesterday. I was sitting in the office of my mortgage broker, reviewing my loan application for the purchase of my first house. I didn’t know much about the process of buying a house and because I had just graduated college two months earlier, I also had very limited credit history.

When my lender revealed that my credit score was barely above the cut off for making the loan, he said it was partly because I had limited history, but it was also low because I had recently opened a new credit card. This is when he told me not to apply for any new credit before my mortgage closed.

Why Do You Suddenly Need Credit?

Any time you apply for new credit, your credit score is dinged by a few points. But this isn’t the only reason why you shouldn’t apply for new credit while you are in the process of obtaining a new mortgage.

Loan officer, Jessica Vaughn, with Farm Credit of Western Kansas, an agricultural lender in my hometown of Colby, Kansas, told me that any time one of her customers has applied for any type of new credit alongside a new mortgage from her it “throws up a red flag.”

“The first thing I’m thinking is why do they need a new mortgage and a new line of credit for another purchase?” Vaughn says. “The dishonesty of not telling me about their other potential debts and pulls on their credit score is also a red flag. I’m a lot more willing to work with someone if they are honest with me about their intentions from the beginning.”

Your Interest Rate Could be Higher

Vaughn went on to explain that as part of the process of qualifying a customer for a mortgage with a Farm Credit lender, a projected cash flow for the customer is produced and his or her total debt payments are carefully analyzed against historical and projected income.

“If they all of a sudden have a new credit line open in addition to their mortgage, it’s harder for us to analyze and it could put them over-the-top of where we are comfortable with their debt payments being,” Vaughn said.

With most mortgage lenders there are different tiers for determining the interest rate on your loan. The tier you fall into depends on several factors that determine your overall level of risk. One of those factors is your credit score, and another factor is your debt-to-income ratio. Both of these factors are negatively impacted anytime you take on a new line of credit, like a credit card, or an installment loan, like a car loan or anything else with set monthly payments.

You Could Lose Your Mortgage

Applying for new credit while seeking a mortgage will not only negatively impact your credit score and mortgage interest rate, but it could even cost you the mortgage altogether.

“You can absolutely be rejected for on mortgage application because you applied for new credit elsewhere,” Vaughn said.

Just because your credit score was above the cut off at the time you applied for the mortgage doesn’t mean you are in the clear. There is a rule that requires lenders to re-check your credit score just prior to your mortgage closing. If your score has dropped to below the cut off, your mortgage can be rejected.

In my case, because I was so close to the credit score cut off at the time of my application, I most likely would have been rejected for my mortgage application if I’d opened any other new credit cards or installment loans prior to my loan closing.

What to Do if You are Shopping Around

When I was applying for my mortgage in 2012, my lender told me to especially avoid taking out a new loan for a car, or even shopping for a car until my mortgage was closed.

The reason he warned me to avoid shopping for a new car is because car dealerships often run your credit report even if you are just shopping around for the best rate on a new or used car.

Vaughn concurs.

“We don’t like it when a customer’s CB report shows more than 3 new hits within a 12 month period.”

“Sometimes this is because customers are shopping around for the best rate on a car loan, or even on a mortgage,” Vaughn explains. “If you are shopping around for a good rate, don’t sign an application or that lender has the authority to pull your CB score, which hurts your credit. Instead, be honest and tell lenders up front that you are shopping for the best rate.”

Luckily, I heeded my lender’s warning and avoiding opening up any new credit cards or loans before my mortgage was closed a few months later. Otherwise I might still be cutting checks to a landlord instead of building equity in my home.

When This May Not Be an Issue

While it’s never recommended that you start applying for credit directly before or during the mortgage process, it isn’t always a death sentence on good rates or getting approved. Someone with many years of credit history and an 800+ credit score, probably wouldn’t be doubted too much by a lender if he or she opened up a credit card during the mortgage process. There is a long history of responsible behavior and the credit card probably would be seen as a red flag, but maybe just a chance to take advantage of a promotional offer.

Kayla Sloan of Shoeaholicnomore.com

Kayla Sloan
Kayla Sloan |

Kayla Sloan is a writer at MagnifyMoney. You can email Kayla at Kayla@magnifymoney.com

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U.S. Mortgage Market Statistics: 2017

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.

Homeownership rates in America are at all-time lows. The housing crisis of 2006-2009 made banks skittish to issue new mortgages. Despite programs designed to lower down payment requirements, mortgage originations haven’t recovered to pre-crisis levels, and many Americans cannot afford to buy homes.

Will a new generation of Americans have access to home financing that drove the wealth of previous generations? We’ve gathered the latest data on mortgage debt statistics to explain who gets home financing, how mortgages are structured, and how Americans are managing our debt.

Summary:

  • Total Mortgage Debt: $9.8 trillion1
  • Average Mortgage Balance: $137,0002
  • Average New Mortgage Balance: $244,0003
  • % Homeowners (Owner-Occupied Homes): 63.4%4
  • % Homeowners with a Mortgage: 65%5
  • Median Credit Score for a New Mortgage: 7646
  • Average Down Payment Required: $12,8297
  • Mortgages Originated in 2016: $2.065 trillion8
  • % of Mortgages Originated by Banks: 43.9%9
  • % of Mortgages Originated by Credit Unions: 9%9
  • % of Mortgages Originated by Non-Depository Lenders: 47.1%9

Key Insights:

  • The median borrower in America puts 5% down on their home purchase. This leads to a median loan-to-value ratio of 95%. A decade ago, the median borrower put down 20%.10
  • Credit score requirements make mortgages tougher than ever to get. The median mortgage borrower had a credit score of 764.6
  • 1.67% of all mortgages are in delinquency. In 2010, mortgage delinquency reached as high as 8.89%.11

Home Ownership and Equity Levels

In the first quarter of 2017, real estate values in the United States recovered to their pre-recession levels. The total value of real estate owned by individuals in the United States is $23 trillion dollars, and total mortgages clock in at $9.8 trillion dollars. This means that Americans have $13.7 trillion in homeowners equity.12 This is the highest value of home equity Americans have ever seen.

However, real estate wealth is becoming increasingly concentrated as overall homeownership rates fall. In 2004, 69% of all Americans owned homes. Today, that number is down to 63.4%.4 While home affordability remains a question for many Americans, the downward trend in homeownership corresponds to banks tightening credit standards for new mortgages.

New Mortgage Originations

Mortgage origination levels show signs of recovery from their housing crisis lows. In 2008, financial institutions issued just $1.4 trillion dollars of new mortgages. In 2016, new first lien mortgages topped $2 trillion for the first time since the end of the housing crisis. Despite the growth in the mortgage market, mortgage originations are still 25% lower than their pre-recession average.8

As recently as 2010, three banks (Wells Fargo, Bank of America, and Chase) originated 56% of all mortgages.13 In 2016, all banks put together originate just 44% of all loans.9

In a growing trend toward “non-bank” lending, both credit unions and non-depository lenders cut into banks’ share of the mortgage market. In 2016, credit unions issued 9% of all mortgages. Additionally, 47% of all mortgages in 2016 came from non-depository lending institutions like Quicken Loans and PennyMac. Behind Wells Fargo ($249 billion) and Chase ($117 billion), Quicken ($96 billion) was the third largest issuer of mortgages in 2016. In the fourth quarter of 2016, PennyMac issued $22 billion in loans and was the fourth largest lender overall.9

Government vs. Private Securitization

Banks tend to be more willing to lend mortgages to consumers if a third party will buy the mortgage in the secondary market. This is a process called loan securitization. Consumers can’t directly influence who buys their mortgage. Nonetheless, mortgage securitization influences who gets mortgages and their rates. Over the last five years government securitization enterprises, FHA and VA loans, and portfolio loan securitization have risen. However, today private loan securitization is almost extinct.

Government-sponsored enterprises (GSEs) have traditionally played an important role in ensuring that banks will issue new mortgages. In 2016, 46% of all loans issued were securitized by Fannie Mae or Freddie Mac. However, in absolute terms, Fannie and Freddie purchased 20% fewer loans than they did in the years leading up to 2006.8

In 2016, a tiny fraction (0.4%) of all loans were purchased by private securitization companies.8 Prior to 2007, private securitization companies held $1.6 trillion in subprime and Alt-A (near prime) mortgages. In 2005 alone, private securitization companies purchased $1.1 trillion worth of mortgages. Today private securitization companies hold just $500 billion in total assets, including $440 billion in subprime and Alt-A loans.14

As private securitization firms exited the mortgage landscape, programs from the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have filled in some of the gap. The FHA and VA are designed to help borrowers get loans despite having smaller down payments or lower incomes. FHA and VA loans accounted for 23% of all loans issued in 2016. These loan programs are the only mortgages that grew in absolute terms from the pre-mortgage crisis. Prior to 2006, FHA and VA loans only accounted for $155 billion in loans per year. In 2016, FHA and VA loans accounted for $470 billion in loans issued.8

Portfolio loans, mortgages held by banks, accounted for $639 billion in new mortgages in 2016. Despite tripling in volume from their 2009 low, portfolio loans remain down 24% from their pre-crisis average.8

Mortgage Credit Characteristics

Since banks are issuing 21% fewer mortgages compared to pre-crisis averages, borrowers need higher incomes and better credit to get a mortgage.

The median FICO score for an originated mortgage rose from 707 in late 2006 to 764 today. The scores on the bottom decile of mortgage borrowers rose even more dramatically from 578 to 657.6

In 2016, 23% of all first lien mortgages were financed through FHA or VA programs. First-time FHA borrowers had an average credit score of 677. This puts the average first-time FHA borrower in the bottom quartile of all mortgage borrowers.8

Prior to 2009, an average of 20% of all volumes originated went to people with subprime credit scores (<660). In the first quarter of 2017, just 8% of all mortgages were issued to borrowers with subprime credit scores. Mortgages for people with excellent credit (scores above 760) more than doubled. Between 2003 and 2008 just 27% of all mortgages went to people with excellent credit. In the first quarter of 2017, 61% of all mortgages went to people with excellent credit.6

Banks have also tightened lending standards related to maximum debt-to-income ratios for their mortgages. In 2007, conventional mortgages had an average debt-to-income ratio of 38.6%; today the average ratio is 34.3%.15 The lower debt-to-income ratio is in line with pre-crisis levels.

LTV and Delinquency Trends

Banks continue to screen customers on the basis of credit score and income, but customers who take on mortgages are taking on bigger mortgages than ever before. Today a new mortgage has an average unpaid balance of $244,000, according to data from the Consumer Financial Protection Bureau.3

The primary drivers behind larger loans are higher home prices, but lower down payments also play a role. Prior to the housing crisis, more than half of all borrowers put down at least 20%. The average loan-to-value ratio at loan origination was 82%.10

Today, half of all borrowers put down 5% or less. A quarter of all borrowers have just 3.5% equity at the time of mortgage origination. As a result, the average loan-to-value ratio at origination has climbed to 88%.10

Despite a growing trend toward smaller down payments, growing home prices mean that overall loan-to-value ratios in the broader market show healthy trends. Today, the average loan-to-value ratio across all homes in the United States is an estimated 48%. The average LTV on mortgaged homes is 73%.16

This is substantially higher than the pre-recession LTV ratio of approximately 60%. However, homeowners saw very healthy improvements in loan-to-value ratios of 94% in early 2011. Between 2009 and 2011 more than a quarter of all mortgaged homes had negative equity. Today, just 6.2% of homes have negative equity.17

Although the current LTV on mortgaged homes remains above historical averages, Americans continue to manage mortgage debt well. Current homeowners have mortgage payments that make up an average of just 16.5% of their annual household income.18

After falling for 20 straight quarters, mortgage delinquency rates reached an eight-year low (1.57%) in the fourth quarter of 2016. Delinquency rates ticked up to 1.67% for the first time in Q1 2017, but remain substantially below the 2010 high of 8.89% delinquency.11

Despite the general progress, delinquency rates are still six basis points higher than their 2003-2006 average of 1.07%. It remains to be seen if delinquency rates will return to their pre-crisis lows, or if the housing market is entering a new normal.

Sources:

  1. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, June 22, 2017.
  2. Survey of Consumer Expectations Housing Survey – 2017,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed June 22, 2017.
  3. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “Average Loan Amount, 1-4 family dwelling, 2015.” Accessed June 22, 2017.
  4. U.S. Bureau of the Census, Homeownership Rate for the United States [USHOWN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USHOWN, June 22, 2017. (Calculated as percent of all housing units occupied by an owner occupant.)
  5. “U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates,” Mortgage Status, Owner-Occupied Housing Units. Accessed June 22, 2017.
  6. Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed June 22, 2017.
  7. Calculated metric:
    1. Down Payment Value = Home Price* Average Down Payment Amount (Average Unpaid Balance on a New Mortgageb / Median LTV on a New Loanc) * (1 – Median LTV on a New Loanc)
    2. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “Average Loan Amount, 1-4 family dwelling, 2015.” Accessed June 22, 2017. Gives an average unpaid principal balance on a new loan = $244K.
    3. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  8. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” First Lien Origination Volume from the Urban Institute. Source: Inside Mortgage Finance and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  9. Mortgage Daily. 2017. “Mortgage Daily 2016 Biggest Lender Ranking” [Press Release] Retrieved from https://globenewswire.com/news-release/2017/04/03/953457/0/en/Mortgage-Daily-2016-Biggest-Lender-Ranking.html.
  10. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  11. Quarterly Report on Household Debt and Credit May 2017.” Mortgage Delinquency Rates, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed June 22, 2017.
  12. Calculated metric: Value of U.S. Real Estatea – Mortgage Debt Held by Individualsb
    1. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, June 22, 2017.
    2. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, June 22, 2017.
  13. Mortgage Daily, 2017. “3 Biggest Lenders Close over Half of U.S. Mortgages” [Press Release]. Retrieved from http://www.mortgagedaily.com/PressRelease021511.asp?spcode=chronicle.
  14. Housing Finance at a Glance: A Monthly Chartbook, May 2017” from the Urban Institute Private Label Securities by Product Type, Urban Institute, calculated from: Corelogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  15. Fannie Mae Statistical Summary Tables: April 2017” from Fannie Mae. Accessed June 22, 2017; and “Single Family Loan-Level Dataset Summary Statistics” from Freddie Mac. Accessed June 22, 2017. Combined debt-to-income ratios weighted using original unpaid balance from both datasets.
  16. Calculated metrics:
    1. All Houses LTV = Value of All Mortgagesc / Value of All U.S. Homesd
    2. Mortgages Houses LTV = Value of All Mortgagesc / (Value of All Homesd – Value of Homes with No Mortgagee)
    3. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, June 22, 2017.
    4. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, June 22, 2017.
    5. U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates, Aggregate Value (Dollars) by Mortgage Status, June 22, 2017.
  17. Housing Finance at a Glance: A Monthly Chartbook, May 2017.” Negative Equity Share. Source: CoreLogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  18. Survey of Consumer Expectations Housing Survey – 2017,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed June 22, 2017.
Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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7 Reasons Your Mortgage Application Was Denied

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.

There are few things more nerve-racking for homebuyers than waiting to find out if they were approved for a mortgage loan.

Nearly 627,000 mortgage applications were denied in 2015, according to the latest data from the Federal Reserve, down slightly (-1.1%) year over year. If your mortgage application was denied, you may be naturally curious as to why you failed to pass muster with your lender.

There are many reasons you could have been denied, even if you’re extremely wealthy or have a perfect 850 credit score. We spoke with several mortgage experts to find out where prospective homebuyers are tripping up in the mortgage process.

Here are seven reasons your mortgage application could be denied:

You recently opened a new credit card or personal loan

Taking on new debts prior to beginning the mortgage application process is a “big no-no,” says Denver, Colo.-based loan officer Jason Kauffman. That includes every type of debt — from credit cards and personal loans to buying a car or financing furniture for your new digs.

That’s because lenders will have to factor any new debt into your debt-to-income ratio.

Your debt-to-income ratio is fairly simple to calculate: Add up all your monthly debt payments and divide that number by your monthly gross income.

A good rule of thumb is to avoid opening or applying for any new debts during the six months prior to applying for your mortgage loan, according to Larry Bettag, attorney and vice president of Cherry Creek Mortgage in Saint Charles, Ill.

For a conventional mortgage loan, lenders like to see a debt-to-income ratio below 40%. And if you’re toeing the line of 40% already, any new debts can easily nudge you over.

Rick Herrick, a loan officer at Bedford, N.H.-based Loan Originator told MagnifyMoney about a time a client opened up a Best Buy credit card in order to save 10% on his purchase just before closing on a new home. Before they were able to close his loan, they had to get a statement from Best Buy showing what his payments would be, and the store refused to do so until the first billing cycle was complete.

“Just avoid it all by not opening a new line of credit. If you do, your second call needs to be to your loan officer,” says Herrick. “Talk to your loan officer if you’re having your credit pulled for any reason whatsoever.”

Your job status has changed

Most lenders prefer to see two consistent years of employment, according to Kauffman. So if you recently lost your job or started a new job for any reason during the loan process, it could hurt your chances of approval.

Changing employment during the process can be a deal killer, but Herrick says it may not be as big a deal if there is very high demand for your job in the area and you are highly likely to keep your new job or get a new one quickly. For example, if you’re an educator buying a home in an area with a shortage of educators or a brain surgeon buying a home just about anywhere, you should be OK if you’re just starting a new job.

If you have a less-portable profession and get a new job, you may need to have your new employer verify your employment with an offer letter and submit pay stubs to requalify for approval. Even then, some employers may not agree to or be able to verify your employment. Furthermore, if your salary includes bonuses, many employers won’t guarantee them.

Bettag says one of his clients found out he lost his job the day before they were due to close, when Bettag called his employer for one last check of his employment status. “He was in tears. He found out at 10 a.m. Friday, and we were supposed to close on Saturday.”

You’ve been missing debt payments

During the loan process, any recent negative activity on your credit report, which goes back seven years, can raise concerns. The real danger zone is any activity reported within the last two years, says Bettag, which is the time period lenders play closest attention to.

That’s why he encourages loan applicants to make sure their credit reports are accurate and that old items that should have fallen off your report after seven years aren’t still appearing.

“Many things show on credit reports beyond seven years. That’s a huge issue, so we want to get dated items removed at the bureau level,” Bettag says.

For first-time homebuyers, he cautions against making any late payments six months prior to applying for a mortgage. They won’t always be a total deal-breaker, but they can obviously ding your credit, and a lower credit score can lead to a loan denial or a more expensive mortgage rate.

Existing homeowners, Bettag says, shouldn’t have any late mortgage payments in the 12 months prior to applying for a new mortgage or a refinance.

“There are workarounds, but it can be as laborious as brain surgery,” says Bettag.

You accepted a monetary gift

Your lender will be on the lookout for any out-of-place deposits to your bank accounts during the approval process. Bettag advises homebuyers not to accept any large monetary gifts at least two months or longer before you apply, and to keep a paper trail if the lender has any questions.

Any cash that can’t be traced back to a verifiable source, such as an annual bonus, or a gift from a family friend, could raise red flags.

This can be tricky for homebuyers who are relying on help from family to purchase their home. If you receive a gift of money for a down payment, it has to be deemed “acceptable” by your lender. The definition of acceptable depends on the type of mortgage loan that you are applying for and the laws that govern the process in your state.

For example, Bettag says, the Federal Housing Authority doesn’t care if a borrower’s entire down payment comes as a gift when they are applying for an FHA loan. However, the gifted funds may not be eligible to use as a down payment for a conventional loan through a bank.

You moved a large amount of money around

Ideally, avoid moving large sums of money about two months before applying.

Herrick says many borrowers make the mistake of shuffling too much cash around just before co-signing, making themselves look suspicious to bank regulators. Herrick says not to move anything more than $1,000 at a time, and none if you can help yourself.

For example, If you’re considering moving money from all of your savings accounts into one account to deliver the cashier’s check for the down payment, don’t do it. You don’t need to have everything in one account for the cashier’s check for your closing. You can submit multiple cashier’s checks. All the lender cares about is that all of the money adds up. You may be able to simply avoid some of this hassle by arranging to pay using a wire transfer. Just be sure to schedule it in time.

You overdrafted your checking account

If you have a credit issue already, says Bettag, overdrafting your checking account can be a deal-breaker, but it won’t cause as much of an issue if you have great credit and offer a good down payment. Still avoid overdrafting for at least two months prior to applying for the mortgage loan.

You may be the type to keep a low checking account balance in favor of saving more money. But if an unexpected bill could risk overdrafting your account, try keeping a few extra dollars in the account for padding, just in case.

You forgot to include debts or other information on your loan application

Your loan officer should carefully review your application to make sure it’s filled out completely and accurately. Missing a zero on your income, or accidentally skipping a section, for example, could mean rejection. A small mistake could mean losing your dream home.

There’s also the chance you accidentally omitted information the underwriter caught in the more extensive screening process, like money owed to the IRS. Disclose all of your debt to your loan officer up front. Otherwise, they may not be able to help you if the debt comes up and disqualifies you for your dream home later on.

If you owe the IRS money and are in a payment plan, Bettag says your loan officer can still work with you. However, they want to see that you’ve been in a plan for at least three months and made on-time payments to move forward.

“Can you imagine not paying your IRS debt, getting into a payment plan, and then not paying on the agreed plan? Not cool for lenders to see, but we do,” says Bettag.

The Bottom Line

There is no hard and fast rule on how long before you begin the mortgage process that you should heed these warnings. It all varies, according to Bettag. If you have excellent credit and a strong income, you might be able to get away with a recently opened credit card or other discrepancies — minor faults that might totally derail the application of a person who has bad credit and inconsistent income.

Whatever the case may be, Bettag encourages prospective homebuyers to stick to one general rule: “Don’t do anything until you’ve consulted with your loan officer.”

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Risks to Consider Before Co-signing Your Kid’s Mortgage

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.

Homeownership is a cornerstone of the American Dream for most, but many millennials are finding it difficult to afford to buy in.

Overall, millennials are still far behind in homeownership compared to previous generations were at their age. Only 39.1% of millennials lived in a home they owned in 2016 compared with 63.2% of Gen Xers, according to an analysis by Trulia Economist Felipe Chacón.

Student debt and stagnant incomes could share some of the blame. Millennials earn 78.2 cents for every dollar a Gen Xer earned at their age, Chacón found. Nearly half of millennial homebuyers report carrying student loan debt, according to the 2016 National Association of Realtors Home Buyer and Seller Generational Trends survey. They carry a median loan balance of $25,000.

Loan officers have to take a borrower’s total debt picture into account when running their application, and it’s become increasingly hard to qualify for a mortgage with a vast amount of student debt.

When they can’t get approved for a mortgage, it’s common for homebuyers to seek out a co-signer for their loan. Often, that person is a parent.

Co-signing a child’s mortgage loan is a serious decision, and parents should weigh all of the risks before making any promises. We asked financial experts what risks are worth worrying about to help clear out the noise.

1. You’re on the hook if your kid stops making mortgage payments

When you co-sign a loan, you agree to be responsible for payments if the primary borrower defaults. If you’re expecting to retire during the life of the mortgage loan, co-signing is an even larger risk, as you may be living on fixed income.

Dublin, Ohio-based certified financial planner Mark Beaver says he’d be wary of a parent co-signing a mortgage for their adult child. “If they need a co-signer, it likely means they cannot afford the house, otherwise the bank wouldn’t require the co-signer,” says Beaver.

By co-signing, you effectively take on a risk the bank doesn’t want. And the list of potential scenarios in which your child may no longer be able to afford their house payments can be vast.

“What if your daughter marries a jerk and they get divorced, or he/she starts a business and loses money, or doesn’t pay their taxes. The risk is ‘what can happen that can make this blow up,’” says Troy, Mich.- based lawyer and Certified Financial Planner, Leon LaBrecque.

Bottom line: If you wouldn’t be able to comfortably afford the payments in case that happens, don’t co-sign.

2. You’re putting your credit at risk

A default isn’t the only event that could negatively affect your finances. The mortgage will show up on your credit report, too, even if you haven’t taken over payments. So, if your child so much as misses one payment, your credit score could take a hit.

This may not be the end of the world for an older parent who doesn’t anticipate needing any new lines of credit in the future, Beaver says, but it’s still wise to be cautious.

You might think your child is ready to become a homeowner, but a closer look at their finances may reveal they aren’t yet that financially mature. Don’t be afraid to ask about their income and spending habits. You should have a good idea of how your child handles their own finances before you agree to help them.

“Sure, we don’t want to meddle and pry into our children’s business; however, you are putting yourself financially on the line. They need to understand that and be open about their own habits,” says Andover, Mass.-based Certified Financial Planner John Barnes.

3. Your relationship with your child could change

Co-signing you child’s mortgage is bound to change the dynamics of your relationship. Your financial futures will be entangled for 15 to 30 years, depending on how long it takes them to pay off the loan.

Seal Beach, Calif.-based certified financial planner Howard Erman says not to let your feelings get in the way of making the correct decision for your budget. Think of how often you communicate and the depth and strength of your relationship with your child. If saying no might create serious tension in your relationship, you likely dodged a bullet.

“If your child conditions their love on getting money, then the parent has a much bigger problem,” says Erman.

Similarly, you should consider how your relationship would be affected if somehow your child ends up defaulting on the mortgage, leaving you to make payments to the bank.

4. You might need to let go of future borrowing plans

Co-signing adds the mortgage to the debts on your credit report, making it tougher for you to qualify for additional credit. If you dreamed of one day owning a vacation home, just know that a lender will have to consider your child’s mortgage as part of your overall debt-to-income ratio as well.

Although co-signing a large loan such as a mortgage generally puts a temporary crimp in your ability to borrow, keep in mind you may be affected differently based on the dollar amount of the mortgage loan and your own credit history and financial situation.

How to Say “No” to Co-signing Your Child’s Mortgage

There is a chance you’ll need to deny your child’s request to co-sign the loan. If you feel pressured to say yes, but really want to say no, Barnes suggests you say no and place the blame on a financial adviser.

“Having [someone like] me say no is like a doctor telling a patient he or she can’t run the marathon until that ankle is healed. It is the same principle,” says Barnes.

He advises parents facing the decision to co-sign a loan for a family member to meet with a financial planner to analyze the situation and give a recommendation for action.

If you choose to take the blame yourself, you may want to take the time to explain your reasoning to your child if you feel it’s warranted. If you said no based on something they can change, give them a plan to follow to get a “yes” from you instead.

LaBrecque suggests that parents who want to help out but don’t want to take on the risks of co-signing instead give the child a down payment and treat it as an advance in the estate plan. So if you “gift” your kid $30,000 to make the down payment, you would reduce their inheritance by $30,000.

The “gift the down payment” method grants you some additional benefits too.

“[The] method has a more positive parent/child relationship than the potential awkwardness of Thanksgiving with the kid(s) and late payments on the mortgage. Also, the ‘down payment gift’ is a quick victory. The kid’s now made their bed with the mortgage; let them sleep in it,” says LaBrecque.

Similarly, you could choose to help your child pay down their debts, so they’ll be in a better position to get approved on their own.

If you must say no, try to do so in a way that will motivate them toward the goal rather than deflate them. Erman recommends lovingly explaining to your child how important it is for them to be able to achieve this success on their own.

How to Protect Yourself as Co-signer

The best way to protect yourself against the risks of co-signing is to have a backup plan.

“If a child is responsible with money, then I generally do not see a problem with co-signing a loan, provided insurance is in place to protect the co-signer (the parent),” says Barnes.

He adds parents should make sure the child, the primary borrower, has life insurance and disability insurance in case the widowed son or daughter-in-law still needs to live in the home, or your child becomes disabled and is unable to work.

The insurance payments will also help to protect your own credit history and future borrowing power in case your child dies or becomes disabled. But these protections would be useless in the event your child loses their job.

If that happens, “insurance will not pay your bill unfortunately, so even if you are well insured, budgeting is vitally important,” Beaver says.

If you choose to take on the risk and co-sign, Barnes says to make sure you and your child have a plan in place that details payment, when to sell, and what would happen if your child is unable to make payments for any reason.

Additionally, LaBrecque recommends you get your name on the deed. Don’t forget to address present or future spouses. Ask your lawyer about having both kids sign back a quit-claim deed to the parent. If you get one, he says, you’ll be protected in case the marriage goes south, or payments are made late, because you would be able to remove a potential ex off the note.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Life Events, Mortgage

The Hidden Costs of Selling A Home

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.

With home values picking back up, many homeowners may be already dreaming of the money they’d make selling their home. Although the aim is to make money on a home sale, or at least break even, it’s easy to forget one important thing: selling a house costs money, too.

A joint analysis by online real estate and rental marketplace Zillow and freelance site Thumbtack found American homeowners spend upward of $15,000 on extra or hidden costs associated with a home sale.

Most of those expenses come before homeowners see any returns on their home sale. Most of the money is spent in three categories: closing costs, home preparation, and location.

Here are a few hidden costs to prepare for when you sell your home.

Pre-sale repairs and renovations

Zillow’s analysis shows sellers should plan to spend a median $2,658 on things like staging, repairs, and carpet cleaning to get the property ready.

Buyers are generally expected to pay their own inspection costs; however, if you’ve lived in the home for a number of years and want to avoid any surprises, you might also consider spending about $200 to $400 on a home inspection before listing the property for sale. That way, you can get ahead of surprise repairs that may decrease your home’s value.

Staging is another unavoidable cost for any sellers. Staging, which involves giving your home’s interior design a facelift and removing clutter and personal items from the home, is often encouraged because it can help make properties more appealing to interested buyers. Not only will you need to stage the home for viewing, but sellers often need to have great photos and construct strong descriptions of the property online to help maximize exposure of the property to potential buyers. If your agent is handling the staging and online listing, keep an eye on the “wow” factors they add on. Yes, a 3-D video walk-through of your house looks really cool, but it might place extra pressure on you budget.

You could save a large chunk on home preparation costs if you decide to DIY, but if you outsource, expect a bill.

ZIP code

Location drove home-selling costs up for many respondents in ZIllow’s analysis, as many extra costs were influenced by regional differences — like whether or not sellers are required to pay state or transfer taxes.

With a median cost of $55,000 for closing and maintenance expenses, San Francisco ranked highest among the most-expensive places to sell a home. At the other extreme, sellers in Cleveland, Ohio, pay little more than a median $10,100 to cover their selling costs.

Generally, selling costs correlate with the cost of the property, so expect to pay a little more if you live in an area with higher-than-average living costs or have a lot of land to groom for sale. Take a look at Zillow’s rankings below.

Closing costs

Closing costs are the single largest added expense of the home-selling process, coming in at a median cost of $12,532, according to Zillow. Closing costs include real estate agent commissions and state sales and/or transfer taxes. There may be other closing costs such as title insurance or escrow fees to pay, too.

Real Trends, a research and advisory company that monitors realty brokerage firms and compiles data on sales and commission rates of sales agents across the country, reported the national average was 5.26% in 2015.

Real Trends says rates are being weighed down by:

  • an increasing number of agents working for companies like Re/Max that give them flexibility to set commission rates without a minimum requirement
  • more competition from discount brokers like Redfin, an online brokerage service that charges sellers as low as 1%
  • an overall shortage of homes for sale pressuring agents to negotiate commission rates

The firm’s president, Steve Murray, told The Washington Post he predicts agent commissions will fall below 5% in the coming years.

Luckily, some closing costs are negotiable.

To save on real estate agent commissions, you can either negotiate their fee down or find a flat-fee brokerage firm like Denver-based Trelora, which advertises a flat $2,500 fee to list a house regardless of its selling price. Larger companies like Re/Max give their agents full control over their commission rates, so you may have better luck negotiating with them.

If you have the time on your hands, you could also list the home for-sale-by-owner to save on closing costs. Selling your home on your own is a more complicated and time-intensive approach to home selling and can be more difficult for those with little or no experience.

Other costs to consider:

Utilities on the empty home

If you’re moving out prior to the sale, you should budget to keep utilities on at your old place until the property is sold.

It will help you sell your home since potential buyers won’t fumble through your cold, dark home looking around. It may also prevent your home from facing other issues like mold in the humid summertime. Be sure to have all of your utilities running on the buyer’s final walk through the home, then turn everything off on closing day and handle your bills.

Make room in your household’s budget to pay for double utilities until the home is sold.

Insurance during vacancy

Again, prepare to pay double for insurance if you are moving out before your home sells. You’ll still need homeowner’s insurance to ensure coverage of your old property until the sale is finalized. Check the terms first, as your homeowner’s insurance policy might not apply to a vacant home. If that’s the case, you can ask to pay for a rider — an add-on to your basic insurance policy — for the vacancy period.

Capital gains tax

If you could make more than $250,000 on the home’s sale (or $500,000 if you’re married and filing jointly), you’ll want to take a look at the rules on capital gains tax. If your proceeds come up to less than $250,000 after subtracting selling costs, you’ll avoid the tax. However, if you don’t qualify for any of the exceptions, the gains above those thresholds could be subject to a 25% to 28% capital gains tax.

The Key Takeaway

Selling a home will cost you some money up front, but there are many ways you can plan for and reduce the largest costs. If you’re planning to sell your home this year, do your research and keep in mind falling commission costs when you negotiate.

List all of the costs you’re expecting and calculate how they might affect the profit you’d make on the sale and your household’s overall financial picture. If you’re unsure of your costs, you can use a sale proceeds calculator from sites like Redfin or Zillow to get a ballpark estimate of your potential selling costs, or consult a real estate agent.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Mortgage, Pay Down My Debt

Should You Use a Mortgage to Refinance Student Loans?

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.

Fannie Mae, the largest backer of mortgage credit in America, recently made it a little easier for homeowners to refinance their student loans. In an update to its Selling Guide, the mortgage giant introduced a student loan cash-out refinance feature, permitting originators that sell loans to Fannie Mae to offer a new refinance option for paying off one or more student loans.

That means you could potentially use a mortgage refi to consolidate your student loan debt. Student loan mortgage refis are relatively new. Fannie Mae and SoFi, an alternative lender that offers both student loans and mortgages, announced a pilot program for cash-out refinancing of student loans in November 2016. This new program is an expansion of that option, which was previously available only to SoFi[/SoFiSL customers.

Amy Jurek, a Realtor at RE/MAX Advantage Plus in Minneapolis/St. Paul, Minn., says people with home equity have always had a cash-out option, but it typically came with extra fees and higher interest rates. Jurek says the new program eliminates the extra fees and allows borrowers to refinance at lower mortgage interest rates. The policy change could allow homeowners to save a significant amount of money because interest rates on mortgages are typically much lower than those for student loans, especially private student loans and PLUS loans.

But is it a good idea?

Your student debt isn’t eliminated; it’s added to your mortgage loan.

This may be stating the obvious, but swapping mortgage debt for student loan debt doesn’t reduce your debt; it just trades one form of debt (student loan) for another (mortgage).

Brian Benham, president of Benham Advisory Group in Indianapolis, Ind., says refinancing student loans with a mortgage could be more appealing to borrowers with private student loans rather than federal student loans.

Although mortgage rates are on the rise, they are still at near-historic lows, hovering around 4%. Federal student loans are near the same levels. But private student loans can range anywhere from 3.9% up to near 13%. “If you’re at the upper end of the spectrum, refinancing may help you lower your rate and your monthly payments,” Benham says.

So, the first thing anyone considering using a mortgage to refinance student loans should consider is whether you will, in fact, get a lower interest rate. Even with a lower rate, it’s wise to consider whether you’ll save money over the long term. You may pay a lower rate but over a longer term. The standard student loan repayment plan is 10 years, and most mortgages are 30-year loans. Refinancing could save you money today, but result in more interest paid over time, so keep the big picture in mind.

You need to actually have equity in your home.

To be eligible for the cash-out refinance option, you must have a loan-to-value ratio of no more than 80%, and the cash-out must entirely pay off one or more of your student loans. That means you’ve got to have enough equity in your home to cover your entire student loan balance and still leave 20% of your home’s value that isn’t being borrowed against. That can be tough for newer homeowners who haven’t owned the home long enough to build up substantial equity.

To illustrate, say your home is valued at $100,000, your current mortgage balance is $60,000, and you have one student loan with a balance of $20,000. When you refinance your existing mortgage and student loan, the new loan amount would be $80,000. That scenario meets the 80% loan-to-value ratio, but if your existing mortgage or student loan balances were higher, you would not be eligible.

You’ll lose certain options.

Depending on the type of student loan you have, you could end up losing valuable benefits if you refinance student loans with a mortgage.

Income-driven repayment options

Federal student loan borrowers may be eligible for income-driven repayment plans that can help keep loan payments affordable with payment caps based on income and family size. Income-based repayment plans also forgive remaining debt, if any, after 25 years of qualifying payments. These programs can help borrowers avoid default – and preserve their credit – during periods of unemployment or other financial hardships.

Student loan forgiveness

In certain situations, employees in public service jobs can have their student loans forgiven. A percentage of the student loan is forgiven or discharged for each year of service completed, depending on the type of work performed. Private student loans don’t offer forgiveness, but if you have federal student loans and work as a teacher or in public service, including a military, nonprofit, or government job, you may be eligible for a variety of government programs that are not available when your student loan has been refinanced with a mortgage.

Economic hardship deferments and forbearances

Some federal student loan borrowers may be eligible for deferment or forbearance, allowing them to temporarily stop making student loan payments or temporarily reduce the amount they must pay. These programs can help avoid loan default in the event of job loss or other financial hardships and during service in the Peace Corps or military.

Borrowers may also be eligible for deferment if they decide to go back to school. Enrollment in a college or career school could qualify a student loan for deferment. Some mortgage lenders have loss mitigation programs to assist you if you experience a temporary reduction in income or other financial hardship, but eligibility varies by lender and is typically not available for homeowners returning to school.

You could lose out on tax benefits.

Traditional wisdom favors mortgage debt over other kinds of debt because mortgage debt is tax deductible. But to take advantage of that mortgage interest deduction on your taxes, you must itemize. In today’s low-interest rate environment, most taxpayers receive greater benefits from the standard deduction. As a reminder, taxpayers can choose to itemize deductions or take the standard deduction. According to the Tax Foundation, 68.5% of households choose to take the standard deduction, which means they receive no tax benefit from paying mortgage interest.

On the other hand, the student loan interest deduction allows taxpayers to deduct up to $2,500 in interest on federal and private student loans. Because it’s an “above-the-line” deduction, you can claim it even if you don’t itemize. It also reduces your Adjusted Gross Income (AGI), which could expand the availability of other tax benefits.

You could lose your home.

Unlike student debt, a mortgage is secured by collateral: your home. If you default on the mortgage, your lender ultimately has the right to foreclose on your home. Defaulting on student loans may ruin your credit, but at least you won’t lose the roof over your head.

Refinancing student loans with a mortgage could be an attractive option for homeowners with a stable career and secure income, but anyone with financial concerns should be careful about putting their home at risk. “Your home is a valuable asset,” Benham says, “so be sure to factor that in before cashing it out.” Cashing out your home equity puts you at risk of carrying a mortgage into retirement. If you do take this option, set up a plan and a budget so you can pay off your mortgage before you retire.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Mortgage

2 Times an Adjustable-Rate Mortgage Makes Perfect Sense

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.

The interest rate on your loans determines how expensive it is to borrow money. The higher the interest rate, the more expensive the loan.

With a conventional, 30-year fixed-rate mortgage, borrowers with the best credit can expect to receive a 4.23% interest rate on that loan. The average homebuyer borrows about $222,000 when they take out a mortgage, which means paying a staggering $168,690 in interest over the term of the loan.

When you need to repay balances in the hundreds of thousands of dollars, even half a point of interest can make a huge difference in how expensive your mortgage is. If you borrowed the same amount but had a rate of 4.73% rate, you’d pay $192,190 in interest — or almost $24,000 more for the same loan.

Given that interest rates make such a big impact on how much your mortgage costs, it makes sense to do what you can to get the lowest rate possible. And this is where adjustable-rate mortgages can start to look appealing. In two cases especially, it makes perfect sense to go with an ARM: when you plan to pay off your mortgage quickly, or you plan to move out of the home within a few years.

Adjustable-Rate Mortgages Can Allow You to Borrow at Lower Rates

An adjustable-rate mortgage, also known as an ARM, is a home loan with a variable interest rate. That means the rate will change over the life of the loan.

ARMs are usually set up as 3/1, 5/1, 7/1, or 10/1. The first number indicates the length of the fixed rate period. If you look at a 3/1 ARM, the initial fixed rate period lasts 3 years. The second shows how often the interest rate will adjust after the initial period.

Some ARMs come with interest rate caps, meaning there’s a limit to how high the rate can adjust. And their initial rate is often much lower than traditional fixed-rate loans.

This can help you buy a home and start paying your mortgage at a lower monthly cost than you could manage with a fixed-rate mortgage. Borrowers with the best credit scores can access a 5/1 ARM with an interest rate of 3.24% right now.

The Risks ARMs Pose to Average Homebuyers

“The main advantage of an ARM is the low, initial interest rate,” explains Meg Bartelt, CFP, MSFP, and founder of Flow Financial Planning. “But the primary risk is that the interest rate can rise to an unknown amount after the initial, fixed period of just a few years expires.”

Homebuyers can enjoy extremely low interest rates for a month, a quarter, or 1, 5, 7, or 10 years, depending on the term of their adjustable-rate mortgage. But borrowers have no control over the interest rate after that.

The rate can rise to levels that make your mortgage unaffordable. Remember our earlier example, where just half a point of interest could mean making the entire mortgage $24,000 more expensive?

ARMs adjust their rates periodically, and the new rate is partly determined by a broad measure of interest rates known as an index. When the index rises, so does your own interest rate — and your monthly mortgage payment goes up with it.

The variable nature of the interest rate makes it difficult to plan ahead as your mortgage payment won’t be static or stable.

“Imagine at the end of year 5, rates start going up and your mortgage payment is suddenly much higher than it used to be,” says Mark Struthers, a CFA and CFP who runs Sona Financial. “What if your partner loses their job and you need both incomes to pay the mortgage?” he asks. In this situation, you could be stuck if you don’t have the credit score to refinance and get away from the higher rate, or the cash flow to handle the extra cost.

“Once you get in this spiral, it is tough to get out,” says Struthers. “The spiral just gets tighter.”

And yes, adjustable-rate mortgages can go down. While that’s possible, it’s more likely that the rate will rise. And some ARMs will limit how high and how low your rate can go.

Struthers puts it plainly: “ARMs are higher-risk loans. If you can handle the risk, you can benefit. If you can’t, it can crush you. Most people do not put themselves in a position to handle the risk.”

Who Can Make an ARM Work in Their Favor?

That doesn’t mean no one can benefit from adjustable-rate mortgages. They do come with the benefit of the lower initial interest rate. “If you plan to pay off the mortgage during that initial fixed period, you eliminate the risk [of getting stuck with a rising interest rate],” says Bartelt.

That’s exactly what she and her husband did when they bought their own home.

“In my situation, we had enough savings to buy our house with cash. But the cash was largely in investments, and selling all the investments would push our income into significantly higher tax brackets due to the gains, with all the cascading unpleasant tax effects,” Bartelt explains.

“By taking an ARM, we can spread the sale of those investments out over 5 years, minimizing the income increase in each year. That keeps our tax bracket lower,” she says. “We avoided increasing our marginal tax rate by double digits in the year of the purchase of our home.”

She notes that another benefit of taking the ARM in her situation was the fact that she and her husband could continue to pay the mortgage past that initial 5 years if they chose to do so. “The interest rate won’t be as favorable as if we’d initially locked in a fixed rate,” she admits. “But that option still exists, and having options is power.”

Planning for a Quick Sale? An ARM Might Work for You

Another way ARMs can provide benefits to homeowners? If you won’t live in the home for long. Buying the home and also selling it before the initial rate period expires could provide you with a way to access the lowest possible rate without having to deal with the eventual rise in mortgage payment when the rate increases.

“ARMs are typically best for those who are fairly certain they won’t be in the house for a long period of time,” says Cary Cates, CFP and founder of Cates Tax Advisory. “An example would be a person who has to move every two to four years for their job.”

He says you could view taking out an ARM as a way to pay “tax-deductible rent” if you already know you don’t want to stay in the house for more than a few years. “This is an aggressive strategy,” he explains, “but as long as the house appreciates enough in value to cover the initial costs of buying, then you could walk away only paying tax-deductible interest, which I am comparing to rent in this situation.”

Cates says you’re obviously not actually paying rent, but you can mentally frame your mortgage payment that way. But you need to know the risk is owing on your mortgage if you go to sell and the home hasn’t realized enough appreciation to cover what you spent to buy.
He also reminds potential homebuyers that you take on the risk of staying in the home longer than you expected to. You could end up dealing with the rising interest rate if you can’t sell or refinance.

What You Need to Know Before Taking an ARM

Before applying for an adjustable-rate mortgage, make sure you ask questions like:

  • What is the initial fixed-interest rate? How does that compare to another mortgage option, and is it worth taking on a riskier mortgage to get the initial fixed rate?
  • How long is the initial fixed rate period?
  • How often will the ARM adjust after the initial rate period?
  • Are there limits to how much your ARM’s rate can drop?
  • How high can the ARM’s rate go? How high can your monthly mortgage payment go?
  • If the mortgage’s interest hit the maximum rate, could you afford the monthly payment?
  • Do you have a plan for selling the home within the initial rate period if you want to sell before paying the adjusted rate?
  • Could you pay off the mortgage without selling if you did not want to pay the adjusted rate?

Do your due diligence and understand the risks and potential pitfalls before making a final decision. But depending on your specific situation, your finances, and your plans for the next 5 years, you could make an ARM work for you.

Kali Hawlk
Kali Hawlk |

Kali Hawlk is a writer at MagnifyMoney. You can email Kali at Kali@magnifymoney.com

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Mortgage

Buying a House When You Have Student Loan Debt

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.

Buying a House When You Have Student Loan Debt

Student loan debt is a reality for many people wishing to buy homes. Fortunately, it does not have to be a deal-breaker. But there’s no getting around the fact that a large amount of student loan debt will certainly influence how much financing a lender will be willing to offer you.

In the past, mortgage lenders were able to give people with student loans a bit of a break by disregarding the monthly payment from a student loan if that loan was to be deferred for at least one year after closing on the home purchase. But that all changed in 2015 when the Federal Housing Authority, Fannie Mae, and Freddie Mac began requiring lenders to factor student debt payments into the equation, regardless of whether the loans were in forbearance or deferment. Today by law, mortgage lenders across the country must consider a prospective homebuyer’s student loan obligations when calculating their ability to repay their mortgage.

The reason for the regulation change is simple: with a $1.3 million student loan crisis on our hands, there is concern homebuyers with student loans will have trouble making either their mortgage payments, student loan payments, or both once the student loans become due.

So, how are student loans factored into a homebuyer’s mortgage application?

Anytime you apply for a mortgage loan, the lender must calculate your all-important debt-to-income ratio. This is the ratio of your total monthly debt payments versus your total monthly income.

In most cases, mortgage lenders now must include 1% of your total student loan balance reflected on the applicant’s credit report as part of your monthly debt obligation.

Here is an example:

Let’s say you have outstanding student loans totaling $40,000.

The lender will take 1% of that total to calculate your estimated monthly student loan payment. In this case, that number would be $400.

That $400 loan payment has to be included as part of the mortgage applicant’s monthly debt expenses, even if the loan is deferred or in forbearance.

Are Student Loans a Mortgage Deal Breaker? Not Always.

If you are applying for a “conventional” mortgage, you must meet the lending standards published by Fannie Mae or Freddie Mac. What Fannie and Freddie say goes because these are the two government-backed companies that make it possible for thousands of banks and mortgage lenders to offer home financing.

In order for these banks and mortgage lenders to get their hands on Fannie and Freddie funding for their mortgage loans, they have to adhere to Fannie and Freddie’s rules when it comes to vetting mortgage loan applicants. And that means making sure borrowers have a reasonable ability to repay the loans that they are offered.

To find out how much borrowers can afford, Fannie and Freddie require that a borrower’s monthly housing expenses (that includes the new mortgage, property taxes, and any applicable mortgage insurance) to be no more than 43% of their gross monthly income.

On top of that, they will also look at other debt reported on your credit report, such as credit cards, car loans, and, yes, those student loans. You cannot go over 49% of your gross income once you factor in all of your monthly debt obligations.

For example, if you earn $5,000 per month, your monthly housing expense cannot go above $2,150 per month (that’s 43% of $5,000). And your total monthly expenses can’t go above $2,450/month (that’s 49% of $5,000). Let’s put together a hypothetical scenario:

Monthly gross income = $5,000/month

Estimated housing expenses: $2,150
Monthly student loan payment: $400
Monthly credit card payments: $200
Monthly car payment: $200

Total monthly housing expenses = $2,150

$2,150/$5,000 = 43%

Total monthly housing expenses AND debt payments = $2,950

$2,950/$5,000 = 59%

So what do you think? Does this applicant appear to qualify for that mortgage?

At first glance, yes! The housing expense is at or below the 43% limit, right?

However, once you factor in the rest of this person’s debt obligations, it jumps to 59% of the income — way above the threshold. And these other monthly obligations are not beyond the norm of a typical household.

What Can I Do to Qualify for a Mortgage Loan If I Have Student Debt?

So what can this person do to qualify? If they want to get that $325,000 mortgage, the key will be lowering their monthly debt obligations by at least $500. That would put them under the 49% debt-to-income threshold they would need to qualify. But that’s easier said than done.

Option 1: You can purchase a lower priced home.

This borrower could simply take the loan they can qualify for and find a home in their price range. In some higher priced real estate markets it may be simply impossible to find a home in a lower price range. To see how much mortgage you could qualify for, try out MagnifyMoney’s home affordability calculator.

Option 2: Try to refinance your student loans to get a lower monthly payment.

Let’s say you have a federal student loan in which the balance is $30,000 at a rate of 7.5% assuming a 10-year payback. The total monthly payment would be $356 per month. What if you refinanced the same student loan, dropped the rate to 6%, and extended the term to 20 years? The new monthly payment would drop to $214.93 per month. That’s a $142 dollar per month savings.

You could potentially look at student loan refinance options that would allow you to reduce your loan rate or extend the repayment period. If you have a credit score over 740, the savings can be even higher because you may qualify for a lower rate refi loan. Companies like SoFi, Purefy, and LendKey offer the best rates for student loans, and MagnifyMoney has a full list of great student loan refi companies.

There are, of course, pros and cons when it comes to refinancing student loans. If you have federal loan debt and you refinance with a private lender, you’re losing all the federal repayment protections that come with federal student loans. On the other hand, your options to refinance to a lower rate by consolidating federal loans aren’t that great. Student debt consolidation loan rates are rarely much better, as they are simply an average of your existing loan rates.

Option 3: Move aggressively to eliminate your credit card and auto loan debt.

To pay down credit debt, consider a balance transfer. Many credit card issuers offer 0% introductory balance transfers. This means they will charge you 0% interest for an advertised period of time (up to 18 months) on any balances you transfer from other credit cards. That buys you additional time to pay down your principal debt without interest accumulating the whole time and dragging you down.

Apply for one or two of these credit cards simultaneously. If approved for a balance transfer, transfer the balance of your highest rate card immediately. Then commit to paying it off. Make the minimum payments on the other cards in the meantime. Focus on paying off one credit card at a time. You will pay a fee of 3% in some cases on the total balance of the transfer. But the cost can be well worth it if the strategy is executed properly.

Third, if the car note is a finance and not a lease, there’s a mortgage lending “loophole” you can take advantage of. A mortgage lender is allowed to omit any installment loan that has less than 10 payments remaining. A car is an installment loan. So if your car loan has less than 10 payments left, the mortgage lender will remove these from your monthly obligations. In our hypothetical case above, that will give this applicant an additional $200 per month of purchasing power. Maybe you can reallocate the funds from the down payment and put it toward reducing the car note.

If the car is a lease, you can ask mom or dad to refinance the lease out of your name.

Option 4: Ask your parents to co-sign on your mortgage loan.

Some might not like this idea, but you can ask mom or dad to co-sign for you on the purchase of the house. But there are a few things you want to make sure of before moving forward with this scenario.

For one, do your parents intend to purchase their own home in the near future? If so, make sure you speak with a mortgage lender prior to moving forward with this idea to make sure they would still qualify for both home purchases. Another detail to keep in mind is that the only way to get your parents off the loan would be to refinance that mortgage. There will be costs associated with the refinance of a few thousand dollars, so budget accordingly.

With one or a combination of these theories there is no doubt you will be able to reduce the monthly expenses to be able to qualify for a mortgage and buy a home.

The best piece of advice when planning to buy a home is to start preparing for the process at least a year ahead of time. Fail to plan, plan to fail. Don’t be afraid to allow a mortgage lender to run your credit and do a thorough mortgage analysis.

The only way a mortgage lender can give you factual advice on what you need to do to qualify is to run your credit. Most applicants don’t want their credit run because they fear the inquiry will make their credit score drop. In many cases, the score does not drop at all. In fact, credit inquiries account for only 10% of your overall credit score.

In the unlikely event your credit score drops a few points, it’s a worthy exchange. You have a year to make those points go up. You also have a year to make the adjustments necessary to make your purchase process a smooth one. Do keep in mind that it is best to shop for mortgage lenders and perform credit inquiries within a week of each other.

You should also compare rates on the same day if at all possible. Mortgage rates are driven by the 10-year treasury note traded on Wall Street. It goes up and down with the markets, and we’ve all seen some pretty dramatic swings in the markets from time to time. The only way to make an “apples-to-apples” comparison is to compare rates from each lender on the same day. Always request an itemization of the fees to go along with the rate quote.

Rafael Reyes
Rafael Reyes |

Rafael Reyes is a writer at MagnifyMoney. You can email Rafael here

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4 Reasons You Should Make Biweekly Mortgage Payments

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.

4 Reasons You Should Make Biweekly Mortgage Payments

The vast majority of people make monthly payments on their mortgage either until they sell their property or the mortgage balance has been repaid. Like the beige paint on the walls in your apartment, monthly payments are fine, but maybe there’s a more appealing alternative. One choice is to split your mortgage payment in half, paying every two weeks instead of making one lump-sum payment each month.

Biweekly mortgage payments could actually save you more in the long term, says Jim Lestitian, senior loan officer at Federated Mortgage Corp.: “This is a great and easy way to prepay your loan (shorter term) and reduce the amount of interest paid over the term of the loan.”

When you pay off the principal more quickly, less interest accrues, and you also reduce the amount of time it will take you to pay back the loan. When biweekly mortgage payments are set up properly, it’s possible to accomplish just that.

In this post, we’ll break down the pros of making biweekly mortgage payments and show how this strategy differs from making additional mortgage payments.

4 Benefits of Biweekly Payments

  1. You’ll gain equity in your home a lot faster

Arguably the most valuable benefit of biweekly payment is that you can gain more equity in your home. Equity accumulates more quickly when you pay twice monthly, because the money you borrowed from the bank has less time to accrue interest.

Why does equity matter?

When you buy a house, the ultimate goal is to live in your home without owing the bank any more money. The amount of ownership you have in a home also fluctuates constantly with the current market value. The difference between the current market value of your home and your mortgage is called equity. Therefore, when your mortgage is completely repaid, the total value, or equity, in the house belongs to you. If you sell your house before your mortgage is repaid, some or all of the proceeds from your sale are used to repay the outstanding mortgage balance.

  1. You’ll pay less interest over time

When you first take out a mortgage, the bank gives you a fixed or variable interest rate. This is the “rent” the bank will charge, and it is typically applied to your balance daily. Since your “rent” is charged daily, you want to spend as few days as possible “renting” the bank’s money. In other words, pay back the principal of the mortgage as quickly as possible to reduce your overall interest expense.

Biweekly mortgage payments help to reduce your interest expense because instead of making one payment against interest and principal each month, you’re making two. While the two separate payments are individually smaller, they both have a more significant impact, because each payment slightly reduces the amount of principal. So, if less principal means the bank can charge less “rent,” then the total “cost” of your mortgage will be reduced with biweekly payments.

  1. You’ll pay off your mortgage faster

The third rider on this tandem bicycle of home financing is duration, or the length, of your mortgage. Most often, mortgages are based on 15- or 30-year terms. However, when biweekly payments are made, your mortgage’s principal is reduced more quickly, so less interest is charged. As a result, you simply won’t need the full term of your loan to pay back the balance.

  1. The secret extra payments

Why the emphasis on biweekly payments, rather than twice-monthly payments?

What is 52 divided by 2? OK, what is 12 times 2? These two problems produce two different numbers, don’t they? By making a payment on your mortgage every two weeks, you’ll make an additional two payments over the course of a year.

The inherent benefits of the secret extra payments compound the three perks listed above: you’re going to have a lower interest expense, by chipping away at your principal more quickly, thereby shortening the amount of time you will need to pay off the balance.

Though, just as there’s more than one way to build a house, there’s a second approach to the 13th payment: additional payments toward principal.

Biweekly Payments vs. Additional Payments

Biweekly payments are not your only option for a shorter, more inexpensive mortgage. Additional payments are a great alternative and applicable to any loan. An additional payment is entirely separate from your total monthly payment and then applied directly to principal. An additional payment can also be any amount you wish, made with any frequency that suits your budget.

Additional payments are totally within your control. In the event that biweekly payments are unavailable or not in your best interest, nothing is stopping you from saving one or more months of mortgage payments (a good idea regardless) and then contributing that balance directly to principal. This approach will simulate the secret extra payments created by biweekly payments, but without the need to adopt a biweekly structure.

Similar to biweekly payments, additional payments will reduce your total interest expense and loan duration. When you’re devoting additional cash to accelerate the repayment of a loan, however, you must consider if this is the best use for your money. For instance, the amount of your additional payment could be used to pay other debts, grow more liquid investment accounts, or increase your emergency fund. These are important considerations because you don’t want to find yourself in a position where you need money that is inaccessible due to being tied up in your home.

When you make an additional payment, be sure to call your lender and tell them to apply it to the principal. You would never want to find yourself in a position where you’ve sacrificed the benefits of an additional payment due to a clerical error by a bank employee.

4 Questions You Must Ask Before Signing Up for Biweekly Mortgage Payments

  1. Are biweekly payments available with my lender?

Just as every landlord won’t offer the same amenities, all lenders won’t offer the option to make your mortgage payments on a biweekly schedule rather than monthly installments. Since interest rates do not vary significantly from one lender to the next, most often this payment structure is used as an additional selling point to entice a potential borrower. So why would a lender not offer a biweekly payment structure to its borrowers?

Biweekly payments are more complicated to administer, feasibly doubling the amount of work on the part of the lender. In addition to being more labor intensive, biweekly payments also generate less income for the lender over the lifetime of the loan. Remember, a mortgage is just another product offered by a lender, so when you make biweekly payments, you’re essentially receiving a discount on the total price of your mortgage.

If your lender does not offer the option of a biweekly payment structure, third-party vendors do exist to fill the gap. These companies simulate biweekly payments by coordinating with your lender to fulfill your monthly mortgage payment on your behalf. Then, you make biweekly payments to the third-party vendor, most often with the addition of an initial and/or ongoing fee.

  1. Are there additional fees associated with a biweekly payment structure?

Since a biweekly payment structure means more work for the lender, many lenders charge fees to enroll. Lestitian often sees lenders or third-party vendors apply a $200 to $400 fee to establish a biweekly payment structure and/or charge an ongoing monthly transaction fee. Therefore, unless you are going to save more in interest by making biweekly payments than you’ll pay in fees, it probably doesn’t make sense to pay biweekly.

  1. When will my lender apply my second payment to my mortgage balance?

Lenders don’t always treat biweekly mortgage payments the same. Some lenders will apply your biweekly payments to your mortgage balance as soon as your payments are received. Other lenders will simply hold your first payment until your total payment has been received.

If your lender is not applying your biweekly payments immediately, there is no point in signing up for biweekly payments. Stick to the usual monthly payment or consider refinancing with a lender who will honor extra payments. The benefit of biweekly payments is only realized if the payments are applied to your mortgage balance immediately.

  1. How does my lender calculate interest?

Your bank will calculate the interest due on a daily, weekly, or monthly basis. This detail is important to note because it dictates how much value you will be able to derive from making biweekly mortgage payments.

If interest is calculated daily, then you will save 14 days of interest expense with every biweekly payment. Similarly, if interest is calculated weekly, you will save two weeks of interest expense, with every biweekly payment. The lynchpin for biweekly payments is if interest is calculated monthly, which is very rare. If this is the case, however, you will not realize any additional benefit by making biweekly instead of monthly payments. So you’re better off sticking to once-a-month payments.

The Bottom Line

Biweekly payments, when structured properly, are a great way to shorten the duration and lower the interest expense of your mortgage, all while enabling you to build equity in your home more quickly. Though remember that the devil is in the details.

Before signing on the dotted line, make sure that your biweekly payments are applied to your balance immediately and not held until the end of the month. You also need to be cognizant of how interest accrues on your mortgage and any associated fees, because both components play a major role in how much additional value you will gain from making biweekly payments.

Another point to consider is whether or not biweekly payments are even the best option for you. Your alternative option is to make additional payments toward principal, which can help to produce the same benefits as biweekly payments but without the lengthy commitment. Though whether or not biweekly payments are appropriate for you, your mindset is a prudent one. To be focused on strategies for building equity and reducing expenses as quickly as possible is likely to pay dividends for years to come.

Aaron Kahn |

Aaron Kahn is a writer at MagnifyMoney. You can email Aaron here

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How to Speed Up Your Mortgage Refinance

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.

Clock time deadline

When you’re refinancing your mortgage, timing is everything.

Once a lender offers you a rate, they only give you a certain amount of time in which to take advantage of it — a period called a “lock.” Locks come in 15-day increments. The shortest is 15 days, followed by 30 days, followed by 45 days, and so on. Shorter locks generally mean better rates, while longer locks mean higher rates.

If you’ve found an amazing interest rate with a short lock period, you’ll want to make sure things go as quickly and smoothly as possible so you don’t lose that fantastic deal. Here are the best ways to speed up the mortgage refinance process so you can take advantage of lower interest rates.

Related Article: Guide to Refinancing Your Mortgage

Be Honest on Your Application

You may be tempted to omit some debt on your application in order to get approved for a larger loan. Don’t do it. Lenders will find out if you’re withholding information about debts, and the ensuing paperwork will slow down the process. Avoid the headache now and be forthright about all of your finances.

You do not, however, need to disclose all of your assets. In fact, Casey Fleming, mortgage adviser and author of The Loan Guide: How to Get the Best Possible Mortgage, cautions against it if you want the process to go quickly.

“Typically, [you only need to disclose] enough to pay for all closing costs, plus a little more than three months of reserves,” Fleming advises. One month of reserves is the sum of the principal, interest, taxes, insurance, mortgage insurance, and any HOA dues you may incur with your new property.

“Providing more assets than this just gives the underwriters more paperwork to plow through and more opportunities for more questions,” Fleming says. “It is not considered fraudulent to understate your assets.”

Know How to Access Your Paperwork and Return Documents Quickly

Because each individual’s situation is different, it’s very hard for borrowers to know what paperwork they will need to include in their application before applying. Fleming does, however, recommend knowing how to get necessary paperwork should it be requested. This includes knowing how to print out e-statements from financial accounts and obtaining copies of pay stubs and deposited checks.

Throughout the process, you will be asked to submit additional supporting documentation, along with signing and returning new documents issued by the financial institution. This is one of the biggest things that slows down mortgage refinances, and it’s completely in your hands. Return all requested paperwork expediently.

Stay at Your Current Job

If you’re thinking of making a career move, hold off until you close. Stability is a big deal when lenders are making their decisions, and switching employers before closing could negate the entire deal.

Don’t Take on New Debt

If you’re looking for a fast refinance, it is wise to stop taking on new debts 60 days before you apply. It can take this long for lenders to report new loans to the credit bureaus. If your new loan doesn’t appear on your credit report, the financial institution issuing the mortgage refinance will have to get in touch with the credit bureaus directly, which costs both additional time and money.

Note: Taking on new debt, even prior to 60 days before your application, can temporarily reduce your credit score. This can affect the interest rates you are offered or even keep you from qualifying.

You may think you’re golden after you have been approved, but that simply isn’t true. Your lender will pull your credit report on the day of closing, enabling them to see any new debt you’ve taken on since they approved your application. Don’t do anything that would change your debt-to-income ratio.

Find a Lender Who Uses Appraisal Waivers

In the past, common industry advice instructed borrowers to schedule their appraisal as soon as possible, and to keep their own schedule flexible so they could accommodate that of the appraiser. Because physical property appraisals take a long time, this was one of the best things you could do to speed up the process.

However, technology is now offering better and quicker options both for the lender and the borrower.

“More and more automated approvals are requiring only an automated valuation — a software-generated estimate of value,” says Fleming. These valuations are similar to Zillow Zestimates, but they are more accurate as they are based on more data points. “This is commonly known as an appraisal waiver. It is faster and, of course, cheaper than a real appraisal.”

Fleming says that the cost of a typical home appraisal would likely run somewhere between $400 and $500, though he notes these numbers can vary depending on region.

“Appraisal waivers used to be $75,” says Fleming, “but I understand that Fannie [Mae] is experimenting with waiving the appraisal waiver fee.” That means that the appraisal waiver is potentially free to your financial institution.

Not all lenders use appraisal waivers equally. Before applying, you can ask different lenders what percentage of their loans were approved with appraisal waivers in the past 12 months. This can help you identify lenders who will save you a lot of time during the appraisal process.

If you can’t find a lender with competitive rates who also uses appraisal waivers, stick to the old advice and book your appraisal as early as possible.

Refinances Will Move Faster This Year

If you applied for a mortgage refinance in 2016, you probably noticed that the process took a long time. There was a reason for that.

“Interest rates stayed much lower than expected,” Fleming explains. “The purchase market is not highly sensitive to interest rates, but the refi market is. Purchase applications were about as predicted [in 2016], but the refi market was much larger than anticipated.”

Because interest rates stayed so low, more people applied for mortgage refinances. Financial institutions weren’t expecting the increased demand, so many found themselves severely understaffed.

In 2017, Fleming doesn’t predict the same problem. In fact, he anticipates that mortgage refinances will close much more quickly.

“With rates up about 0.5% or more from the lows of last year, it is estimated that 25% to 50% of the refi market is no longer viable,” says Fleming. “It no longer makes sense for [many homeowners] to refinance. So, in 2017 the purchase market will stay about steady, while the refi market will drop precipitously.”

That means staffing should not be an issue and lenders will be eager for your business. The entire process is anticipated to move very quickly in the new year, which is good news for those securing competitive interest rates with short lock periods.

Brynne Conroy
Brynne Conroy |

Brynne Conroy is a writer at MagnifyMoney. You can email Brynne at brynne@magnifymoney.com

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