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How to Budget for Closing Costs and Fees on a 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.

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When you buy a home, in addition to your down payment, you need to budget for closing costs. Closing costs are the fees paid to third parties that help facilitate the sale of a home. The amount you’ll pay depends on several factors including the price of your home, your lender’s requirements, and the location of the property. We’ve put together this guide to help you get a sense of what to expect.

What costs to expect when closing on a mortgage

The type and amount of fees you’ll pay vary widely based on the lender you work with, the loan you choose, and your location. Here are some common fees to expect when closing on a home loan:

Fee

Description

Appraisal fee

Paid to a professional who gives the lender an estimate of the home's market value.

Attorney fees

In some states, an attorney may be required to represent the interest of the buyer and/or lender. This fee is paid to the attorney to prepare and review all closing documents.

Credit report

Some lenders charge a fee for accessing your credit information.

Flood determination

Paid to a third party to determine whether the property is located in a flood zone. If your property is in a flood zone, your lender may require you to purchase flood insurance in addition to homeowners insurance.

Home warranty fees

If you choose to purchase a home warranty on the property, the annual premium may be included in your closing costs.

Homeowners association (HOA) fees

If your home is located within a homeowners association, the association may charge a fee to help pay for services and capital improvements. You may also need to prepay a portion of your annual dues at closing.

Homeowners insurance

The first year's premium for your homeowner's insurance is typically paid in full at closing.

Inspection fees

Paid to a home inspector to evaluate the home and tell you whether the property you want to buy is in good condition. You may also have a separate pest inspection to check for termites and other pest infestations.

Land survey

Your lender may require that a surveyor conduct a property survey.

Origination charges

Upfront charges from your lender for making the loan. This may include an application fee and underwriting fees.

Notary fees

The cost of having a licensed notary public certify that the persons named in the documents did, in fact, sign them.

Points

An upfront fee paid to the lender in exchange for a lower interest rate.

Prepaid interest

If you close on your loan in the middle of the month, your lender will collect interest on your loan from the closing date until the end of the month.

Private mortgage insurance premium

Depending on the type of loan you choose and how much money you put down, you may have to pay mortgage insurance – a policy that protects the lender against losses from loan defaults. Some lenders require an upfront premium, some collect it in monthly installments, and some do both.

Property taxes

Six months of property taxes are typically paid at closing.

Recording fees

State and local governments typically charge a fee to record your deed and other mortgage documents.

Real estate broker or agent fee

Fees paid to seller's real estate broker for listing the property and to the buyer's broker for bringing the buyer to the sale. The seller of the property typically pays these fees.

Title insurance

Provides protection if someone later sues and says they have a claim against your home, either from a previous owner's delinquent property taxes or contractors were not paid for work done on the home before you purchased it.

Title search

A fee paid to the title company to search the public records of the property you are purchasing.

Transfer taxes

Taxes imposed by the state, county, or municipality on the transfer of property. They may also be called conveyance taxes, stamp taxes, or property transfer taxes.

The amount you’ll pay depends largely on your location. A 2017 survey from ClosingCorp, a provider of residential real estate closing cost data, found that the national average closing costs totaled $4,876. That figure is based on closing cost data reported to more than 20,000 real estate service providers across the country. ClosingCorp compiled the average closing costs in each state, and based on the average purchase price in each state, average closing costs ranged from about 1% to about 4% of the purchase price. (The actual closing costs you pay could be higher or lower — a general rule of thumb says to expect paying about 2 to 7% of your home’s purchase price in closing costs.)

States with the highest average closing costs were:

  • District of Columbia: $12,573 (2.01% of average purchase price)
  • New York: $9,341 (2.60%)
  • Delaware: $8,663 (3.36%)
  • Maryland: $7,211 (2.28%)

But based on percentage of average purchase price, these states had the highest average closing costs:

  • Pennsylvania: $6,633 (3.50%)
  • Delaware: $8,663 (3.36%)
  • Vermont: $6,839 (2.99%)
  • New York: $9,341 (2.60%)

States with the lowest average closing costs were:

  • Missouri: $2,905 (1.63%)
  • Indiana: $2,934 (1.89%)
  • South Dakota: $2,996 (1.48%)
  • Iowa: $3,138 (1.70%)

And by percentage:

  • Hawaii: $5,528 (0.84%)
  • Colorado: $3,994 (1.09%)
  • Massachusetts $4,273 (1.14%)
  • California: $6,288 (1.20%)

In areas where home prices are high, closing costs will typically be high as well because many closing costs are calculated as a percentage of the home’s purchase price. In other areas, the ClosingCorp report pointed to high county transfer taxes as the principal reason certain areas have such closing costs.

Fortunately, there are steps to you can take to save on closing costs.

How to save on closing costs

Step 1: Choose your location

The location has a lot to do with the total closing costs you’ll pay. Factors that affect closing costs include:

  • Home price. Since many costs are calculated as a percentage of the home’s purchase price, buying a less expensive home can lower your closing costs.
  • Property taxes. You may have to prepay six months of property (or real estate) taxes at closing, so buying a home in a state with high-property tax rates can significantly impact your closing costs. The Tax Foundation publishes a list of the property tax rates by state. New Jersey is the highest with an effective tax rate of 2.11%, and Hawaii is the lowest at 0.28%.
  • Laws and customs governing the closing process. Some states require an attorney to handle closings, resulting in higher legal fees at closing. In other states, closing costs are lower because closings are handled by a title or escrow company.
  • Real estate transfer taxes. Transfer taxes are imposed by state and local government entities and can vary widely by locale. The National Conference of State Legislatures publishes a list of real estate transfer taxes by state. Some states, such as Alaska and Louisiana, have none as of 2017. In some localities in Colorado, the rates can be as high as 4%.

Ask your lender or real estate agent about closing costs in your area. If you’re not determined to live in a particular area, you could save thousands in closing costs by buying in a neighboring state or county.

Step 2: Shop around

A crucial step to saving on closing costs is to shop around. Home loans are available from many different types of lenders, and different lenders may quote you different rates and fees, even of the same type of loan. You should contact several lenders for quotes.

When you receive a quote, don’t just get the interest rate, APR, or monthly payment amount. The lender should provide you with a Loan Estimate that discloses the loan terms, amounts, interest rate, total monthly principal and interest, and whether the item can increase after closing. It also communicates which closing costs you can shop around for and which are fixed no matter which lender you choose.

Also, take a look at the homeowners insurance premium listed on Page 2 of the Loan Estimate. The lender will estimate an amount for the Loan Estimate, but your homeowner’s insurance premium is set by the insurance company, not the lender, and insurance rates can vary drastically by company. Comparison shopping for insurance can have a significant impact on your closing costs, as you’ll typically pay the first year’s premium at closing.

Step 3: Negotiate

Jeffrey Miller, co-founder of AE Home Group in Baltimore, Md., says knowing whether closing costs are negotiable or non-negotiable depends on whether or not they’re being charged for the mortgage company’s labor or to an outside service. “Line items like origination fee can be negotiated lower, whereas line items like the county recording fee are set by an outside third party and are non-negotiable,” Miller said.

Page 2 of your Loan Estimate will list the services you cannot shop for and the services you can shop for. The services you cannot shop for may be set by a government program or a third party rather than the lender. Your lender may provide you with a list of approved vendors for the services you can shop for.

Miller says in his experience, the line item with the most potential savings is the survey. “As a buyer, you have the right to select the survey company that is used,” Miller said. “We’ve seen this price range anywhere from $120 to $600. If this amount is on the high side, then it may be advisable to select a new survey company.”

Step 4: Ask the seller to pay closing costs

Many loans, including FHA loans, allow sellers to contribute a percentage of the sales price to the buyer as a closing costs credit. This is especially useful for buyers who are short on cash for the down payment and closing costs but can handle a slightly higher loan balance.

For instance, say the seller is asking $200,000 for the home. The buyer can offer $204,000 but asks the seller to cover up to two percent of the original asking price in closing costs ($200,000 x 2% = $4,000). The seller is able to get the same net profit on the sale, and the buyer reduces his closing costs by $4,000.

Keep in mind that lenders may have restrictions on how much the seller can credit to the buyer at closing. For instance, FHA loans limit the seller concession to 6% of the home’s sales price. There may also be restrictions on the types of closing costs that can be covered by the seller credit. For instance, they may restrict the seller credit to covering non-recurring items like the title insurance and loan origination fees.

Step 5: Time your closing

Part of your closing costs consists of prepaid interest charges for the time between your closing date and the end of the month. The earlier in the month you close, the more you’ll pay in prepaid interest. To reduce the amount you’ll need out of pocket, you can consider closing at the end of the month. The difference may be small, but if you’re really strapped for cash to close, this could help. However, timing your closing at the end of the month doesn’t actually save you any money in the long term. It just impacts the amount you’ll need to come up with at closing.

Step 6: Sign in person

Kevin Miller, Director of Growth with Open Listings, an online house-hunting service based in Los Angeles, says you may be able to reduce the costs you’ll pay at closing simply by asking your escrow company. “You should contact them at the beginning of the process to discuss the fees they charge you,” he said. “If you agree to use electronic documents and sign in-person, you may be able to avoid fees for a mobile notary, printing, and mailing.”

Should I get a no-closing cost mortgage?

While shopping around for a mortgage, you may have come across a “no-closing cost mortgage” and wondered if it’s the right deal for you.

A no-closing-cost mortgage is worth looking into, but “no closing costs” doesn’t actually mean you won’t have to come up with any cash for closing. Instead, it means that the lender doesn’t charge any lender fees. However, they may charge a higher interest rate to cover the costs of making the loan or add the closing costs to your loan amount.

Either way, you won’t need to come up with as much cash to close, but you’ll typically have a higher monthly payment.

Also, keep in mind that you may still have to pay costs at closing, such as title insurance and appraisal fees. Before you get locked into a no-closing-cost mortgage, ask the lender for a Loan Estimate and take a look at the interest rate, APR, monthly payment and the amount you’ll need at closing. Consider whether reducing the cash you need to close is worth paying more in the long run with a higher interest rate or larger loan amount.

The bottom line

When you’re in the market for a mortgage, it pays to shop around. Review your paperwork carefully. Ask your lender about any costs and fees you aren’t familiar with, or anything that changes from your Loan Estimate to the closing documents. Negotiating can be intimidating for many people, but your home is a big investment. The more you can save on closing costs, the more cash you’ll keep in your pocket for moving, buying furniture, and making your new place feel like home.

Janet Berry-Johnson
Janet Berry-Johnson |

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

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Mortgage

How Much Does It Cost to Build a House?

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.

Factors that dictate cost

While the average costs to build a house can give you a general idea of how much you’ll pay for a new build, it’s important to note that the costs of building any home can vary dramatically. Where you live, for example, can play a huge role in not only the costs of land but the price of the permits and fees you’ll need to cover.

Of course, there are other factors that will dictate how much you pay, from the type of home you select to what you choose to do inside. Other factors that can dictate the costs of your home include:

  • Your lot: The NAHB reports that the average price for a lot of land worked out to $4.20 per square foot in 2015 (the most recent data available), bringing the total for an average size lot (20,129 square feet) to $84,541.80. However, this cost can vary depending on the lot you buy, the size of the lot and the local real estate market where you buy.
  • Home size: The larger the home, the more construction costs you’ll encounter, says Frank Nieuwkoop, sales and marketing director of new-home builder Valecraft Homes Ltd. Larger homes also require more materials (more flooring, more lighting, more fixtures, etc.), he says, which can lead to higher costs in a hurry.
  • Upgrades: If you opt for fancy upgrades, you’ll pay more for a new home, says Nieuwkoop. Granite or marble, upgraded fixtures, and custom woodwork can make any home considerably more expensive. This is one area where you can also save on the costs of building, however. Where laminate countertops may cost just $10 per square foot installed, you’ll pay more like $60 to $120 per square foot for concrete or recycled glass, according to Consumer Reports. If you multiply those savings across all the rooms that need counters in your home (kitchen and baths), it’s easy to see how you could pay more or less depending on what you choose.
  • Home design: The design of the home can also play a factor in cost, says Nieuwkoop. If you build a home that is standard in design, you may pay less than if you build a custom home with unique design or special features. If you design a truly custom home, you may also need to hire an architect to draft a design. Hiring an architect can add another 15 or even 20 percent of costs to your total project.
  • Siding: What you choose to cover the exterior of your home can play a big role in your total price. If you choose a custom stone exterior, you may pay more than you would if you choose vinyl siding instead.
  • Landscaping: Will you opt for an elaborate outdoor landscaping scheme or some simple greenery? Your landscaping choices will play a role in the costs of your home as well as ongoing outdoor maintenance. You’ll also pay more for a fenced yard.

Building vs. buying

Building a home comes with pros and cons that are entirely different from the factors that lead people to purchase an existing home. Before you choose to build or shop among homes already in your area, make sure to consider the advantages and disadvantages of both scenarios.

Pros of building your own home

  • Less competition: According to the National Association of Realtors, existing homes stayed on the market for an average of 34 days nationwide before being sold in October 2017. In “hot areas” of the country such as San Francisco, San Diego, Boston, and San Jose, however, houses — especially those in an affordable price range — tend to go under contract in less than a week, it notes. By selecting your own lot and building a home, you can avoid stiff competition for existing properties and still get the home you want.
  • Everything is new: “Many people love the idea that everything in their house will be brand new when they build,” says Nieuwkoop. Having new fixtures, a new roof, new appliances and a new HVAC system may also mean you’ll have fewer repair bills during the first few years of homeownership.
  • Choose the location of your home: Building a new home on a lot you choose puts you in the unique position of selecting exactly where you’ll live. This can be advantageous if you hope to live near work or near public transportation, or if you want a lot with a certain type of view. “Do you want to back up to a lake or woods?” asks Nieuwkoop. “When you build, you get to decide.”
  • Select your own floor plan and finishes: Whether you build a custom home or select a floor plan through a builder, you get to choose how your new home is set up — including your floor plan. You may even be able to select your own finishes including your paint color, countertops, flooring and cabinets.

Cons of building your own house

  • Moving delays: Building a home often means longer delays when it comes to moving, says Nieuwkoop. “Building a home can take as little as two months all the way up to a year,” he says. If you want to move quickly, this can be a deal-breaker.
  • Building surprises: Especially if you design a custom home, you may not know exactly how the floor plan flows until your home is already built, notes the expert. “With a custom home especially, you may end up with something different than you envisioned.” Fortunately, this isn’t typically a problem with larger builders and developers since they often have model homes you can walk through, he says.
  • Pricing surprises: With custom homes especially, pricing can easily surge — especially if you make changes as the plan moves along, says Nieuwkoop. Plus, there are added costs that come with building that many people forget. Adding window blinds and treatments can add up, as can new décor, shelving and other interior fixtures that don’t come in the home price. Builders rarely put a fence in the yard, so that’s another expense to consider if you want one.
  • Less negotiation power: You may be able to negotiate the price on an existing home if a buyer is motivated to sell, but there may be less wiggle room on the price of a new home.
  • Construction traffic: If you’re building in a new neighborhood, you may deal with ongoing construction traffic for months or even years.

Pros of buying an existing home

  • Save money with existing features: Existing homes tend to have a lot of additions and upgrades made already, says Nieuwkoop. You may already have mini blinds, a privacy fence and appliances, for example, which can help you save money.
  • Move in quicker: “Although it can take a few months to close on an existing home and be able to move in, the timeline until move day is still faster with an existing home,” says Nieuwkoop. If you need to move quickly, you can typically do so faster if you buy instead of build.
  • Property maturity: Existing homes tend to have more mature trees and landscaping, which could be advantageous if you don’t like the idea of growing new grass on your own.
  • No construction zone: If you’re buying a home in a mature neighborhood, you may not have to deal with ongoing construction issues like you would with a new build in a new neighborhood.

Cons of buying an existing home

  • Lack of customization: You don’t get to pick out the floor plan or fixtures when you buy an existing home. You get exactly what is there already, which may or may not be what you want.
  • Costs to upgrade: If you buy an existing home that is out-of-date, you may need to spend considerable sums of money to make important updates or replace out-of-date fixtures.
  • Hidden problems: Existing homes may have problems you don’t see, says Nieuwkoop, adding that home inspectors don’t always find every issue. “If there was a water leak in the home and the seller replaced the drywall without actually fixing the issue, you may not find out you need costly repairs until after you move in.”

Who it’s best for

According to Nieuwkoop, building is best for individuals and couples who are very detailed and know exactly what they want. Building is also ideal for people who don’t care as much about cost as long as they get a brand-new home and the ability to pick and choose every finish and feature.

“Building is also best for buyers who are patient and willing to endure some bumps along the road,” says the builder. “If you’re high stress and don’t want to deal with any issues, you may be better off buying a newer existing home.”

5 steps to building a house

While the process of building a house can vary slightly depending on whether you design your own custom home or work with a developer, the main steps to completing the process are the same. Fortunately, Nieuwkoop helped us outline the five steps to building a house from beginning to end.

Step 1: Create a budget.

Before you decide to build or buy a home, it’s crucial to know how much you can afford to spend. The best way to come up with a housing budget is to see a mortgage broker or apply for a mortgage online, to see how much you can afford to borrow. You should also get pre-approved for a mortgage, says Nieuwkoop. That way, you’ll be ready to work with a builder when you decide what you want. You can compare mortgage offers online with LendingTree, MagnifyMoney’s parent company.

Step 2: Purchase land or select a lot.

Once you know what you can afford (house and land included), it’s time to find a lot in an existing community or buy land you plan to build on. Keep in mind that the price of the land you buy will need to be included in your mortgage amount unless you plan to buy the land in cash separately. If you’re choosing a piece of land that hasn’t been developed, you should also ask your builder about the costs of adding utilities to the property, cutting down trees, or leveling the land.

If you’re buying from a developer or builder who is overseeing the construction of a new neighborhood, it’s possible the price of your chosen lot will be built into the price of the floor plan and home you select, says Nieuwkoop. Either way, now is the time to talk through land costs with a builder and decide where you want your new home to be.

Step 3: Develop floor plans and designs.

If you’re working with a builder, chances are good they’ll offer a range of floor plans and new home designs you can choose from. If you’re building a custom home, on the other hand, you’ll likely need to hire an architect to create a realistic housing design that encompasses all the features you want.

Either way, you need to nail down your ideal floor plan and design at this stage. Decide how many bedrooms and bathrooms you want, along with the general layout of your home. From there, you can select or design a housing plan that fits your budget and style.

Step 4: Select finishes, features, and appliances.

Once you’ve chosen the layout of your home, you still need to choose what goes inside. Work with your builder to decide on the interior finishes in your home, from the cabinets in your kitchen to your light fixtures, plumbing fixtures, flooring, and paint colors.

Step 5: Watch your home being built.

Once your home is commissioned and ready to be built, you can watch as the process takes place over the weeks and months. Nieuwkoop says that, ideally, your builder will let you walk through the home during various stages of the process. By walking through, you may be able to discover and point out issues that need to be fixed, such as incorrect fixtures or design problems.

How to finance the build

According to mortgage advisor Jeremy Schachter of Pinnacle Capital Mortgage, the process for financing a new build is similar to the process of buying an existing home.

When you build a home, it’s crucial to get pre-qualified with a bank or lender. During this process, the lender will take a look at your credit score, income, assets and debts, then use those factors to determine how much you can borrow.

The biggest difference with a new build, says Schachter, is that you’ll likely need to get pre-approved for a mortgage once and then start a portion of the process over again. “You’ll need to submit financial statements, a credit report, and pay stubs to get approved to build a house, but you’ll likely need to resubmit all this information again if the process takes several months,” he says. Schachter was clear that the final home closing doesn’t take place until the house is completed, and that this is when you’ll start making mortgage payments.

Fortunately, Schachter says, many lenders will let you lock in the interest rate on your home loan for up to a year when you’re building a home. But you should always check and ask about your APR to make sure you’re not stuck with a higher interest rate if your new build takes several months and rates surge during that time, he says.

What type of home loans can you use?

Schachter notes that consumers can use any type of home loan to build a property that they could use to buy a traditional home. For example:

  • VA loans: To qualify for a VA loan, you must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) based on your level of service. You must also plan to live in the home full-time.
  • FHA loans: You can apply for an FHA construction loan to finance a new build. To qualify for an FHA loan, you’ll need at least 3.5 percent as a down payment, a credit score of 580 or higher, and proof of income. You may qualify for an FHA loan with a credit score lower than 580, but you’ll need to make a larger down payment. Lenders will also look at your debt-to-income ratio — a figure determined by taking all your debt payments and dividing them by your gross monthly income. If you have $3,000 in bills each month and your gross monthly income is $5,000, your debt-to-income ratio is 60 percent. Generally speaking, lenders want you to keep your debt-to-income ratio under 43 percent, including all housing payments.
  • Conventional home loan: Requirements for a conventional mortgage can vary, although you typically need a good credit score (FICO score of about 740 or higher) to qualify for a loan with the best APR. Lenders also look at your employment history, income and debt-to-income ratio.
  • Construction loans: Schachter notes that individuals building a custom home may need to get a special “construction loan from a lender or bank.” These loans cover the initial costs of building a house, including the lot, building materials and architect fees. Schachter notes that construction loans are typically short-term loans with variable interest rates that are good for less than a year. Ultimately, construction loans are converted to permanent home loans once the construction process is complete.
Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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How Can Baby Boomers Tackle Their Housing Debt Faster?

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.

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Unlike people of her father’s generation, Lauren Beale, 60, said she never expected to own a house outright at retirement. 

Beale, a former journalist who retired in 2015, pays $2,063 a month for a mortgage for her home in Palos Verdes Estates, Calif., in Los Angeles County, where she lives with her husband. The couple bought the house for $800,000 in 2002.  

They now owe $268,000 on the mortgage. And Beale said she had no plans to double up on her payment and pay it off faster. “What if you need that money for some kind of emergency down the road?” she asked. “We are comfortable with some mortgage payment. It doesn’t make sense to draw from the nest egg, the retirement accounts, to pay it down soon.” 

Beale, now a freelancer and novelist, said she would rather keep her savings as a safety net: “I think boomers are feeling less secure about our medical futures.” 

Retired with a mortgage 

The Federal National Mortgage Association, known as Fannie Mae, recently released an analysis concluding that baby boomers — those born between 1946 and 1965 — were 10 percentage points less likely to own their homes outright than pre-boomer people who were the same age in 2000.  

The report says the rise in housing debt among older homeowners is increasingly worrisome. There are concerns that having mortgage obligations could weaken seniors’ financial security in retirement and put them at greater risk for foreclosure, among other potential problems. 

Still, Beale is not concerned. Her family’s monthly mortgage bill is just roughly 20 percent of the total household income. They have no other debts, nor do they have major monetary needs. Her financial goal at this stage is to have enough money to live comfortably in retirement, pay all the bills and be able to travel. 

To be sure, not every boomer is as financially confident as Beale. Nationwide, boomers carried an average housing debt of about $68,400 in 2016, according to Federal Reserve data analyzed by MagnifyMoney. National statistics also revealed that a hefty 2.5 million people ages 55 and older became renters between 2009 and 2015, up 28 percent from 2009, the biggest jump among all age groups. RENTCafe.com, a nationwide apartment search website, said the notable change in renter profile could be that empty-nesters changed lifestyles, got hit hard by the housing slump or can’t afford to own homes. 

How to pay off your mortgage faster 

For those who do care about paying mortgages off before retirement, here are some ways to handle those debts faster and stay motivated to reach your goals: 

Paying off debt? It’s like earning more money 

Leon LaBrecque, a Michigan-based certified financial planner, said roughly half of his clients — mostly middle-class Americans — are able to pay off mortgages approaching retirement. A boomer himself, he is all for paying off mortgages as soon as possible to achieve  better cash flow. 

“Debts are an anti-asset,” said LaBrecque. “Removing an anti-asset is the same as having an asset. So If I got a 4 percent mortgage, I pay it off, I made 4 percent.” 

He added: “It’s very hard to make 4 percent now. The fixed-income market is so constrained that there are not a lot of good alternatives to debt reduction.” 

Pay off other debts. High-interest debt, in particular. 

Before paying down a mortgage or paying it off, get rid of other high-interest-rate debts first. Think student loans and credit card balances.  

LaBrecque offered this example:  Say you have a 4 percent rate on your mortgage and an auto loan with a $350 payment and a 5 percent interest rate — you should pay the car note off first. Then you can put an extra $350 toward your mortgage each month. 

Find money from other sources 

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If you have cash idling somewhere, with no particular purpose, pay off your mortgage. Remember: If you go and pay off a loan, there is an immediate return for what you’ve repaid. 

“You got $125,000 sitting in the bank, making nothing, and you owe $80,000 on the mortgage; pay the mortgage off,” LaBrecque has been telling his elderly clients lately. 

Also, if you have money in the market, consider getting rid of a sub-performing investment and put the resources into the mortgage, he said. 

Improve the cash flow 

Be conscious of how you spend your money. If paying off housing debts is your primary goal, prioritize it and allocate your money accordingly.  

“We always talk about having a good cash-flow management system for our younger population, but we don’t get a lot of that on the older population,” said Juan Guevara, a Colorado-based certified financial planner. “We always think that, ‘Well, those guys have figured it out.’ Well, maybe not.” 

Take a look at your cash flow holistically. When you track your spending, you can watch for opportunities to put more money toward your mortgage. For example, if you were helping your children pay student loans, see if they can take on the responsibility and redirect that budget toward your housing debt. As you approach retirement, consider using any bonuses or pay raises you receive to pay down debt.  

Break down big goals. Baby steps. 

It’s easier to make big goals and separate them into little pieces, experts say. Guevara advises that boomers divide their monthly house payment by 12 and add that amount to their payment each month.  

If your monthly payment is $1,500, for instance, “now you’re looking at a goal of having to add another $125 to each payment every month, instead of having to come up with $1,500 at the end of the year,” Guevara said. 

Refinance your mortgage 

Once you’ve managed a good cash flow, it’s likely that you are able to apply extra funds to your mortgage every month. This is when you may to consider refinancing the mortgage to get a lower rate or a shorter term. 

LaBrecque said he suggests that clients take out 30-year mortgages but pay them off sooner.  

“You can always turn a 30-year mortgage into a 15 but you can’t turn a 15-year mortgage into a 30,” he said. “I’m a big fan of having the obligation as low as possible on a monthly but also have the flexibility to pay it off.” 

Shorter home loans generally have lower interest rates, so you’ll not only pay off your mortgage faster, you’ll also pay less in interest.  

Beale has refinanced her mortgage twice to lower the monthly payment. Her current 20-year mortgage now carries an interest rate of about of 3.88 percent, significantly lower than the original 30-year loan. (It came with a rate above 5 percent.) 

You can learn more about this tactic in our guide to refinancing your mortgage. 

Educate your children  

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Guevara said he has seen an increasing number of parents spending beyond their means for their children: They’re taking on student loans, supporting sons and daughters after they finish school or offering other assistance. Those expenses chew up a significant amount of the money they could be putting toward the mortgage.  

“It’s not my place to tell them to stop,” he said. “It’s my place to show them, ‘Look, this is what happens if you don’t stop or if you continue on the path that you are on now.’” 

If you want to own your house outright earlier, Guevara said it’s worth starting to teach your children about the value of money and helping them become more financially responsible in an early stage. 

“Money is a taboo in our society, and it shouldn’t be,” Guevara said. “It should be something that we talk about at the dinner table.” 

Look forward to financial freedom

Beale and her husband will be debt-free in 13 more years if they stay in the same house and continue making payments as they’ve been doing. But she doesn't seem to look forward to that day. 

“I think as we age, things that might seem like a happy occasion might be more of a sense of finality,” she said. 

But she also finds a silver lining — the financial freedom that comes when debt is paid off. 

“Who knows at that point; what if I have grandkids?” she said. “Maybe I’ll say: ‘Hey, my bills are paid. Maybe I’ll start taking that $2,000 and putting it into a college fund or something.’” 

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@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: $9.9 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: 7546
  • 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 are starting to ease somewhat The median mortgage borrower had a credit score of 754 from a high of 781 in the first quarter of 20126
  • 1.24% of all mortgages are in delinquency. In 2009, mortgage delinquency reached as high as 8.35%.11

Home Ownership and Equity Levels

In the second quarter of 2017, real estate values in the United States surpassed their pre- housing crisis levels. The total value of real estate owned by individuals in the United States is $24 trillion, and total mortgages clock in at $9.9 trillion. This means that Americans have $13.9 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’ tighter credit standards following the Great Recession.

New Mortgage Originations

Mortgage origination levels show signs of recovery from their housing crisis lows. In 2008, financial institutions issued just $1.4 trillion of new mortgages. In 2016, new first lien mortgages topped $2 trillion for the first time since the end of the housing crisis, but mortgage originations were still 25 percent lower than their pre-recession average.8 So far, 2017 has proved to be a lackluster year for mortgage originations. Through the second quarter of 2017, banks originated just $840 billion in new mortgages.

 

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

In a growing trend toward “non-bank” lending, both credit unions and nondepository lenders cut into banks’ share of the mortgage market. In 2016, credit unions issued 9 percent 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 issue new mortgages 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, but 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, private loan securitization which constituted over 40% of securitization in 2005 and 2006 is almost extinct today.

Government-sponsored enterprises (GSEs) have traditionally played an important role in ensuring that banks will issue new mortgages. Through the second quarter of 2017, Fannie Mae or Freddie Mac purchased 46% of all newly issued mortgages. However, in absolute terms, Fannie and Freddie are purchasing less than in past years. In 2016, GSEs purchased 20% fewer loans than they did in the years leading up to 2006.8

Through the second quarter of 2017, a tiny fraction (0.7%) 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 $490 billion in total assets, including $420 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 percent of all loans issued in 2016, and 25 percent in the first half of 2017. 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 754 today. The scores on the bottom decile of mortgage borrowers rose even more dramatically from 578 to 648.6

Despite the dramatic credit requirement increases from 2006 to today, banks are starting to relax lending standards somewhat. In the first quarter of 2012, the median borrower had a credit score of 781, a full 27 points higher than the median borrower today.

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 second quarter of 2017, just 9% of all mortgages were issued to borrowers with subprime credit scores. Who replaced subprime borrowers? The share of mortgages issued to borrowers people with excellent credit (scores above 760) doubled. Between 2003 and 2008 just 27% of all mortgages went to people with excellent credit. In the second quarter of 2017, 54% 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. More than 10% of borrowers put 0% down. As a result, the average loan-to-value ratio at origination has climbed to 87%.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 42%. The average LTV on mortgaged homes is 68%.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 5.4% 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

Mortgage delinquency rates stayed constant at their all-time low (1.24%). This low delinquency rate came following 30 straight quarters of falling delinquency, and are well below the 2009 high of 8.35% delinquency.11

Today, delinquency rates have fully returned to their pre-crisis lows, and can be expected to stay low until the next economic recession.

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 September 28, 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, September 28, 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 September 28, 2017.
  6. Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 28, 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 September 28, 2017. Gives an average unpaid principal balance on a new loan = $244K.
    3. Housing Finance at a Glance: A Monthly Chartbook, September 2017.” Page 17, Median 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, September 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, September 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. Accessed September 28, 2017
  11. Quarterly Report on Household Debt and Credit August 2017.” Mortgage Delinquency Rates, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed September 28, 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, September 28, 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, September 28, 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, September 2017” Size of the US Residential Mortgage Market, Page 6 and Private Label Securities by Product Type, Page 7, 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. Accessed September 28, 2017
  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, September 28, 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, September 28, 2017.
    5. U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates, Aggregate Value (Dollars) by Mortgage Status, September 28, 2017.
  17. Housing Finance at a Glance: A Monthly Chartbook, September 2017.” Negative Equity Share, Page 22. Source: CoreLogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff. Accessed September 28, 2017
  18. Survey of Consumer Expectations Housing Survey – 2017,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed September 28, 2017.
Hannah Rounds
Hannah Rounds |

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

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Why October’s the Best Time to Start Looking for Your First 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.

Fall may be the best time to look for a house
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As the leaves start to fall and the air gets autumn-crisp, the housing market cools down. But if you’re ready to buy your first home, there may be no hotter time to start the search.

Trulia, an online real estate resource for homebuyers and renters, recently released a report concluding that October is the best month for starter-level home-hunting. The organization found that starter-home supply peaks in October and rises 7 percent in the fall months, compared with the spring. That results in home prices that are 4.8 percent and 3.1 percent lower

in the winter and spring, respectively, than in the summer, the busiest home-buying season.

The Trulia report aligns with an analysis released recently by ATTOM Data Solutions, a real estate database. ATTOM reported that home buyers get the best deals in February, when the median home price is 6.1 percent less than the rest of the year, on average. These findings were based on public home-selling data from 2000 to 2016.

Buying a home could be a long process. If you are going to seal the deal in February, you need to be making offers in December or January, which means you should start looking as early as October or November, said Daren Blomquist, ATTOM’s senior vice president.

How the fall housing market aids first-time buyers

The fall house-hunting guidance holds particularly true for first-time buyers, many of whom tend to be young professionals without children, experts say.

“They are not as tied to the school calendar,” said George Ratiu, managing director of quantitative and commercial research of the National Association of Realtors. Conventional wisdom says the fall season is the best time for first-time buyers to look for houses because home prices are likely to drop as more houses come on the market and families with children have either moved or stopped looking.

People searching for starter homes also enjoy more flexibility than existing homeowners looking to move.

“The catch-22 is that if it’s a good time to buy in the fall, it’s a bad time to sell,” Blomquist said. “So it’s kind of a wash for move-up buyers. Whereas first-time home buyers don’t have to worry about the selling of the equation.”

New buyers still face many obstacles

However, it can still be a challenging market for first-time home buyers, and it’s getting tougher, experts say.

Supply and demand

Nationally, housing supply has been shrinking over the past few years. It has tightened even more in 2017 than in previous years. Existing homes available for sale at the end of August fell 2.1 percent to 1.88 million and were down 6.5 percent from last August, according to the NAR.

It would take 4.2 months for the houses on the market to be sold at the current pace, down from 4.5 months a year ago. (Six months is considered a balanced buyer-seller market.)

But the demand for housing has been growing as a result of an improving economy and increasing job opportunities.

“Prices had nowhere to go but up,” Ratiu said. Homebuyers “have more money, but there are not enough homes on the market, and the price of homes has outpaced their income, which makes it hard for them buy.”

Nationally, the August median sales price of existing homes, which starter buyers tend to purchase, was $253,500, 5.6 higher percent than last August, according to the Realtors’ association. Meanwhile, wage growth remained fairly stagnant, at around 2.5 percent, the Bureau of Labor Statistics reported.

The NAR on Tuesday reported that Pending Home Sales, a future-looking indicator, fell 2.6 percent in August compared with last year -- its lowest reading since January 2016.

“When I see pending sales declining, it’s likely sales for the next month will be down,” Ratiu said.

Ratiu said that much of the declining sales was the result of the housing shortage, which indicates that people looking to buy may not be able to find a house. But if they can buy, fall months are still a good time to snag a suitable home, Ritiu said, because the slow sales season gives starter home buyers that edge in a tough seller’s market.

“If first-time homebuyers are competing with buyers who have bigger down payments, which typically you would have with a move-up buyer, they are going to lose out more often than not in that situation,” Blomquist said. “So if they are willing to buy when other buyers are dormant or in hibernation, then they could get an edge and face less competition.”

Tougher lending standards

Tougher lending standards since the financial crisis have have hit hard among first-time buyers, who made up 31 percent of all homebuyers in August, the NAR reported. The median down payment percentage in the second quarter of 2017 rose to its highest in nearly three years, at 7.3 percent, up 1.4 percentage points from last year’s 5.9 percent, according to ATTOM.

This means if you buy a home for $200,000, you would have to put down $14,600 today versus last year’s $11,800.

To put that in perspective, at the peak of the last housing boom in 2006, before the financial crisis, the median down payment percentage for houses sold nationwide was 2.1 percent, Blomquist said.

There are good reasons why the down payment percentage rose, but it puts a huge financial burden on college graduates and young professionals coming into a pricey real estate market while carrying an average student loan debt of more than $35,000, experts say. (On that topic, here are some important things to know if you have student loan debt and are buying a house.)

Trulia reported that first-time homebuyers need to allocate nearly 40 percent of their monthly paycheck to buy a starter home, up from 31 percent in 2013.

Factors to consider when buying your first home

Seasonality is just a piece of the puzzle in homebuying — the biggest factor people should consider is affordability, Blomquist said.

“You’ve got to look at your finances and determine if it’s a good financial decision for you to buy a home,” he said.

Also recommended: Weigh the pros and cons of buying versus renting, as it sometimes makes sense to rent, depending on your long-term plans. If you are looking to buy your first home in the coming months, you can check out this guide for first-time homebuyers to help you through the long and complicated process.

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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A Guide to Understanding Bridge 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.

Getting a bridge loan
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Buying a new home before you can sell your old one can present quite the financial conundrum. This is mostly because you have to come up with the cash for a new property when you don’t have access to the home equity you have already built up in your existing property. That’s where a bridge loan comes in.

What is a bridge loan?

Bridge loans promise to fill the gap or “provide a bridge” between your old residence and the one you hope to buy. They accomplish this by providing temporary financial assistance through short-term lending.

Unfortunately, bridge loans come with pitfalls, some of which can be costly or have long-term financial consequences. This guide will explain the good and the bad about bridge loans, how they work, and some alternative strategies.

How does a bridge loan work?

While bridge loans can come in different amounts and last for varying lengths of time, they are meant to be short-term tools. Generally speaking, bridge loans are temporary financing options intended to help real estate buyers secure initial funding that helps them transition from one property to the next.

Let’s say you found your dream home and need to buy it quickly, yet you haven’t had the time to prepare your current residence for sale, let alone sell it. A bridge loan would provide the short-term funding required to purchase the new home quickly, buying you time to get your current home ready for sale. Ideally, you would move into your new home, sell your old property, then pay off the loan.

Here are some additional details to consider with bridge loans:

  • Your current residence is used as collateral for the loan.
  • These loans may only be set up to last for a period of six to 12 months.
  • Interest rates are higher than those you can get for a traditional mortgage.
  • You need equity in your current home to qualify, usually at least 20 percent.

Also keep in mind that there are several ways to repay a bridge loan. You may be required to start making payments right away, or you may be able to wait several months. Make sure to read the terms and conditions of your loan so you know where your financial obligations begin and end.

Risks of taking out a bridge loan

Taking out a temporary loan so you can purchase a new home may sound ideal, but as with most financial products, the devil is in the details. While these loans can help in a pinch if you aren’t able to purchase a property through other means, there are notable disadvantages.

They can cost more than alternatives

David Reiss, a professor at Brooklyn Law School and the academic program director at the Center for Urban Business Entrepreneurship, says the biggest downside of these loans is the price tag. Because bridge loans are meant to work for the short term, lenders have a much shorter timeline for turning a profit. As a result, “they typically charge a few percentage points higher than what you would pay with home equity loans,” says Reiss. Not only that, but they come with closing costs that may be expensive, and can vary from loan to loan.

So, even if the loan is short-term, it will likely cost you more than borrowing the money through a traditional mortgage by selling your existing home first, or through other means.

You’re taking on more debt

Another inherent risk with bridge loans: You’re simply borrowing more money. “The loan is secured by your home, so you have another mortgage,” Reiss says. “If you don’t make payments, then you could face late fees and financial turmoil.”

You can’t predict when you’ll sell your home

And if you’re unable to sell your home and your new or old monthly mortgage payments are taking a big chunk of your income, you could have trouble meeting all your financial obligations.

Reiss offers one other scenario in which a bridge loan could spell financial trouble: if the real estate market sours.

“You might assume you’ll sell your home easily, but that isn’t always the case,” says Reiss. “Unexpected events can screw up your plans to sell your home, so if you end up carrying multiple mortgages, you could potentially end up in trouble.”

According to Reiss, taking out a bridge loan could easily leave you with three home loans — your old mortgage, your loan, and your new mortgage — if the housing market slumps inexplicably and you can’t sell.

“This may not be a problem temporarily, but it can cause financial havoc in the long run,” he says. “You’ll be stuck with the unexpected expense of carrying all these mortgages.”

Falling behind on payments can lead to foreclosure on your old home, your new property, or both.

Advantages of a bridge loan

Applicants who are well aware of the risks of this financial product may still benefit from choosing this option. There are notable advantages, Reiss says, especially for certain types of buyers.

They can give you an edge in competitive markets

Bridge loans are “the kind of loan you get when you need to move forward and you can’t do it any other way,” says Reiss. If you are absolutely dead-set on purchasing a property and struggling to make the financials work, then a bridge loan could truly save the day.

This is especially true in housing markets where homes are moving quickly, Reiss notes, since a bridge loan allows you to buy a new home without a sales contingency in the new contract. What this means is, you’re able to write an offer on a new property without requiring the sale of your old home before you can buy.

This can be quite advantageous “in a hot market where sellers are getting lots of offers and you’re competing against other buyers who are paying in cash or making offers without a contingency,” Reiss says.

Bridge loans may be more convenient than the alternatives

Reiss also says that, while there are other loan options to consider for buying a new home, they aren’t always feasible in the heat of the moment. If you wanted to purchase a new home before selling your old home and needed cash, you could consider borrowing against your 401(k) or taking out a home equity loan, for example.

Yes, these options may be cheaper than getting a bridge loan, Reiss acknowledges. The problem is, they both take time. Borrowing money from your 401(k) may take several weeks and plenty of back and forth with your employer or human resources department, and home equity loans can take months. Not only that, but it might be difficult to qualify for a home equity loan if your home is for sale, Reiss says.

“A home equity lender who catches wind of your intent to sell your home may not even loan you the money since it’s fairly likely you’ll pay off the home equity loan quickly, meaning they won’t turn a profit,” he says.

Bridge loans, on the other hand, could be more convenient and timely because you may be able to get one through your new mortgage lender.

Four good reasons to take out a bridge loan

With the listed advantages and disadvantages above in mind, there are plenty of reasons buyers will take on the risk of a bridge loan and use it to transition into a new home. Reasons consumers commonly take out bridge loans include:

1. You want to make an offer on a new home without a sales contingency to improve your chances of securing a deal.

The most important reason to get a bridge loan is if you want to buy a property so much that you don’t mind the added costs or risk. These loans let you make an offer without promising to sell your old home first.

2. You need cash for a down payment without accessing your home equity right away.

A bridge loan can help you borrow the money you need for a down payment. Once you sell your old home, you can use the equity and profit from the sale to pay off your loan.

3. You want to avoid PMI, or private mortgage insurance.

If most of your cash is locked up as equity in your current home, you may not have enough money to put down 20 percent on your new home and avoid PMI, or private mortgage insurance. A bridge loan may help you put down 20 percent and avoid the need for this costly insurance product.

“But you would need to net out the costs of the bridge loan against the PMI savings to see if it is worth it,” says Reiss. “And remember, once you have sold the first home, you could use the equity from that home to pay down the mortgage on your new home and get out of paying PMI.”

According to the Consumer Financial Protection Bureau (CFPB), you may have to order an appraisal to show you have at least 20 percent equity to get PMI taken off your new loan, and even then, it can take several months.

“So, we might be talking about six to 12 months of avoided PMI payments if you were planning on using the equity from your old home to pay down the mortgage on your new home,” says Reiss.

4. You’re building a new home.

A bridge loan can help you pay the upfront costs of building a new home when you aren’t yet prepared to sell your old one because you still need a place to live.

How to qualify for a bridge mortgage loan

Because bridge loans are offered through mortgage lenders, typically in conjunction with a new mortgage, the requirements to qualify are similar to getting a new home loan.
While requirements can vary from lender to lender, you commonly need to meet the following criteria for a bridge loan:

  • Excellent credit
  • A low debt-to-income ratio
  • Significant home equity of 20 percent or more

Typically, lenders will approve bridge loans at the value of 80 percent of both the borrower’s current mortgage and the proposed mortgage they are aiming to attain. Let’s say you’re selling a home worth $300,000 with the goal of buying a new property worth $500,000. In this example, across both loans, you could only borrow 80 percent of the combined property values, or $640,000.

If you don’t have enough equity or cash to meet these requirements — or if your credit isn’t good enough — you may not qualify for a bridge loan, even if you want one.

Fees and other fine print

Before you take out a bridge loan, it’s important to understand all the costs involved. Here are some fees and fine print you should look for and understand:

Fees

Since bridge loans vary widely from lender to lender, the fees involved — and the costs of those fees — can vary significantly as well. Common fees to look for include an origination fee that can be equal to 1 percent or more of your loan value. You will also likely be on the hook for closing costs for your loan, although the amount of those costs can be all over the map based on the terms and conditions included in your loan’s fine print. As example, Third Federal Savings and Loan out of Cleveland, Ohio, offers a bridge loan product with no prepayment penalties or appraisal fees, but with a $595 fee for closing costs. Borrowers may also be on the hook for documentary stamp taxes or state taxes, if applicable. Make sure to check your loan’s terms and conditions.

Prepayment penalties

While it’s unlikely your loan will include any prepayment penalties, you should read the terms and conditions to make sure.

Payoff terms and conditions

Because all bridge loans work differently, you need to be sure when your loan comes due, or when you need to start making payments. You may need to make payments right away, or you might have a few months of wiggle room. Because there are no set guidelines, these terms can vary dramatically among different lenders.

Tips to sell your home quickly and avoid a bridge loan

If you’re on the fence about getting a bridge loan because you’re worried about short-term costs or the added layer of risk, try to sell your home quickly instead. If you’re able to sell, you may be able to access your home’s equity and avoid a bridge loan altogether, while also eliminating the possibility of getting “stuck” with more than one home.

We spoke to several real estate professionals to get their tips for selling your home quickly. Here are their best tips for getting your home ready to sell in a short amount of time:

Tip #1: Do some quick outdoor cleanup and landscaping work, then try to make your home as neutral as possible.

“To get people inside, they need to like the outside of your house,” says Nancy Brook, a Realtor who sells properties with RE/MAX of Billings, Mont. “Trim trees and shrubs, treat weeds, and mow and trim lawns.”

You should also make sure that there’s no chipped or peeling paint, she recommends. “And if your home is anything but a neutral color, you should seriously consider painting it.”

Tip #2: Get rid of half your stuff (or more).

As Brooks notes, most real estate agents suggest that sellers pack up most of their personal items and remove them from the house when they’re trying to sell. This helps people declutter while also making their property more appealing to people who might be turned off by someone else’s personal photos and items.

“Pack up or get rid of rid of paperwork, knick-knacks, personal photos and collections,” says Brooks. “Any furniture that obstructs a walkway should be eliminated. Get rid of any unnecessary dishes, pots, pans and small appliances in your kitchen. All the excess gives a junky appearance.”

Tip #3: Deep-clean from top to bottom.

While cleaning seems like an obvious first step, it is often neglected, notes Trina Larson, RE/MAX Realtor and selling specialist from Potomac, Md.

“You would never purchase a dirty car or a dirty new jacket,” she says. “Get everything as clean as possible, and try to make your house look brand-new.”

Items on your to-clean list should include corners, edges of baseboards, light fixtures, windows inside and out, your home’s siding and anything that isn’t in pristine condition.

Tip #4: Get rid of off-putting smells.

If you want to sell quickly, your house should smell clean and inviting, Larson suggests. “Your first step is to remove every offensive odor,” she says.

Go through each room and take inventory of what you smell. “Pet urine is especially heinous, and there is only way to remove it,” she says. “You have to go in and replace the carpet where the accident happened. Although it might seem like an expensive task, it is worth every penny. No cooking or animal odors.”

Basic cleaning can also help remove smells. The cleaner your home, the fresher it will seem to potential buyers.

Bottom line: Is a bridge loan worth considering?

If you want to buy a home quickly and don’t have time to sell your home, a bridge loan could help. Likewise, bridge loans can be a good option for people who are moving or building a new home and need the capital to make the sale go through regardless of cost.

On the other hand, such loans may not be the best choice for consumers who don’t want to risk getting stuck with two homes and multiple payments. They’re also a poor choice for buyers who don’t want to pay any additional closing costs or interest payments to get in the home they want.

In the end, only you can decide if the risk of getting a bridge loan for your new home is an acceptable one.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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Mortgage

How to Determine If a No Closing Cost Refinance Is Right 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.

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A home mortgage refinance doesn’t come cheaply, as homebuyers typically must pay thousands of dollars in closing costs and fees to finalize a loan. These expenses can seem endless as you get bills for everything from attorney fees to an appraisal to a loan origination fee. Closing costs vary by lender, loan amount and location, but in the end, they’re usually up to 3 percent of the home’s purchase price. For a $200,000 loan, that means closing costs of roughly $6,000.

For many homebuyers, these upfront costs put refinancing out of reach.

What is a no closing cost refinance?

A no closing cost refinance means that you refinance your home mortgage without paying thousands of dollars in upfront closing costs and fees to close the loan. But that “no” in the name can be confusing, because you’re not really avoiding that expense. While this process can save homebuyers money upfront, lenders work in closing costs elsewhere either by slightly raising interest rates or adding the closing costs to the balance of the loan.

How do I get one?

You can refinance your mortgage with no closing costs at banks, credit unions or other lenders. Standard qualifications for refinancing will apply, including a property value that exceeds the amount of the refinance and a credit score that is greater than lender minimums (usually more than 620). Lenders also typically expect your refinance payment and other debt payments to total less than 43 percent of your gross income.

Savings analysis: No closing cost refinance vs. regular refinance

No closing cost refinance doesn’t always result in savings. Homeowners who have a good idea how long they will stay in the house will be in the best position to decide whether refinancing without closing costs is a good idea.

Here is a comparison between a standard refinance and a no closing cost refinance where the lender slightly raises the interest rate to compensate for the lost closing costs. Loan officers will raise your interest rate based on daily market rates.

Regular refinance

No closing cost refinance

Mortgage balance

$200,000

$200,000

Closing costs

$4,800

None at loan closing

Refinance interest rate

3.5%

4.1%

Term

30 years

30 years

Monthly payment

$898

$966

Total cost of mortgage*

$323,312

$347,903

In this example, a homeowner who stays in his home for at least 30 years will save $68 per monthly payment and more than $24,500 over the life of the loan with a lower interest rate. The additional interest that comes with the no closing cost refinance loan far exceeds the $4,800 of closing costs with a regular refinance.

Another common way lenders will refinance a mortgage with no closing costs is to roll the costs into the balance of the loan. Here’s the same mortgage using this option.

Regular refinance

No closing cost refinance

Mortgage balance

$200,000

$204,800

Closing costs

$4,800

None at loan closing

Refinance interest rate

3.5%

3.5%

Term

30 years

30 years

Monthly payment

$898

$920

Total cost of mortgage*

$323,312

$331,072

The no closing cost refinance costs an extra $22 per month. If you stay in your home for the duration of the loan, the no closing cost refinance would add an additional $2,960 to your mortgage expenses (after accounting for the $4,800 you’d pay upfront for the regular refinance).

For homeowners who only plan to stay in their homes five years or fewer, however, refinancing with no closing costs could help them break even or come out ahead on closing costs. Here’s a breakdown.

Regular refinance

No closing cost refinance

Mortgage balance

$200,000

$200,000

Closing costs

$4,800

None at loan closing

Refinance interest rate

3.5%

4.1%

Terms

30 years

30 years

Remaining balance after five years

$179,394.15

$181,185.57

With a no closing cost refinance, you would pay about $1,790 more on a $200,000 mortgage if you got a regular refinance; however, you would have paid the $4,800 in closing costs upfront, meaning you’d save money in the long run with a no closing cost refinance (assuming you sell the house after five years).

Is a no closing cost refinance a good idea?

The upside

The biggest advantage of a no closing cost refinance is you do not have to come up with several thousand dollars in cash to close on your refinanced mortgage. Closing costs can add up quickly as you factor in an appraisal, loan origination fee, and other charges, and many buyers simply can’t afford them. A no-cost refinance doesn’t eliminate those costs, but it does spread them out into monthly payments, allowing you to pay for them over time.

The downside

Over the life of a loan, a refinance with no upfront closing costs can add up to a significantly more expensive choice than a traditional refinance. You can use a refinance calculator to help you figure out whether a no-cost refinance is worth it.

Is a no closing cost refinance right for you?

As you are thinking through whether a refinance with no closing costs is right for you, here are some questions to consider.

Will you qualify to refinance your mortgage?

Before applying, make sure your credit score is high enough to be approved for a refinance loan. You’ll also need to have sufficient equity in your home and a debt-to-income ratio of less than 43 percent, in most cases.

Will refinancing lower your monthly payment?

If your goal is to get a lower monthly mortgage payment through refinancing, a traditional refinance will likely be your best bet. A no closing cost refinance could also lower your monthly payment, though. Don’t forget to calculate in either the higher balance or higher interest rate you’ll have after the lender factors in closing costs. Before you agree to the refinance terms, be sure they will lower your monthly payment enough to be worthwhile.

How long do you plan to stay in your house?

If you are planning on selling your house in less than five years, a refinance with no closing costs almost always will save you money. You may have a higher monthly payment than a regular refinance, but if you get out of the mortgage after a few years, you likely will have spent less than if you had taken out a traditional refinance and paid closing costs.

If you plan to stay in your house indefinitely or longer than several years, a no closing cost refinance may be much more costly in the long run.

How to shop for mortgage refinance loans

To compare no closing cost refinance offers, visit financial institutions and talk with loan officers. They will look at current interest rates and your financial information to help you determine whether refinancing with no closing costs will work for you.

One advantage of no closing cost refinances is that they eliminate the closing costs and fees that can make loan-offer comparisons complicated. With quotes for no closing cost refinance mortgages in hand, you can easily compare interest rates. This allows mortgage shoppers to more effectively shop around and find the best deal.

What to look out for

As you should before agreeing to any loan terms, make sure you understand all costs involved. While a lender may not be charging closing costs when the loan is signed, there may be other fees and expenses that aren’t waived. Ask about fees and what they include. These could be:

  • Government transfer taxes
  • Homeowners insurance
  • Escrow funds

Some no closing cost refinance loans come with prepayment penalties to steer borrowers away from refinancing the loan quickly for a lower interest rate. Check the rules of the loan to make sure there are no prepayment penalties.

Where to shop for no closing cost loans

Traditional lenders, such as banks and credit unions, as well as other private lenders, may offer a refinance mortgage with no closing costs. You can compare current refinance rates with the online comparison tool by LendingTree, our parent company, but you’ll need to talk to a mortgage loan officer to determine what your refinance with no closing costs would look like.

If you have kept up with your mortgage payments but have little or no equity in your home to qualify for refinancing your mortgage, the federal Home Affordable Refinance Program (HARP) can help. If you qualify, you could refinance with a low interest rate and favorable terms. HARP also does not require a minimum credit score and will roll closing costs into the new loan.

Beware of closing cost scams

While refinancing your mortgage, you may receive emails that appear to be from your lender asking you to wire them closing costs. Do not respond, the Federal Trade Commission (FTC) warns, as this is a phishing scam trying to get your personal information and empty your bank account. This scam begins when hackers break into homebuyers’ or real estate professionals’ email accounts and steal information about real estate transactions they are working on.

You should never send financial information by email, the FTC warns.

How to save on closing costs

If you’re worried upfront closing costs will make refinancing your mortgage too expensive, shop around. Closing costs can vary widely by lender and location, and remember that they’re negotiable. The more options you research, the better you will be able to choose the deal that allows you to pay the least for closing costs.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

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Understanding the FHA 203k Loan

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.

Finding your dream home is hard.

Unless you have an unlimited budget, just about any home you buy will require compromise. The house that’s move-in ready might have fewer bedrooms than you’d like. The house that’s in the perfect location might need a lot of repairs.

Sometimes it feels like you’ll never be able to afford the house you truly want.

This is where the FHA 203(k) loan can be a huge help.

The FHA 203(k) loan is a government-backed mortgage that’s specifically designed to fund a home renovation. Whether you’re buying a new house that needs work or you want to upgrade your current home, this program can help you do it affordably.

Part I: Understanding the basics of 203(k) loans

What is a 203(k) loan?

The FHA 203(k) loan is simply an extension of the regular FHA mortgage loan program. The loan is backed by the federal government, which provides two big advantages:

  1. You can qualify for a down payment as low as 3.5 percent.
  2. You can quality with a credit score as low as 500, although better credit scores allow for better loan terms.

The additional benefit of the 203(k) loan over regular FHA loans is that it allows you to take out a single loan to finance both the purchase and renovation of a property, giving you the opportunity to build your dream home with minimal money down.

How a 203(k) loan works

A 203(k) loan can be used for one of two purposes:

  1. Buying a new property that’s in need of renovations, from relatively minor improvements to a complete teardown and rebuild.
  2. Refinancing your existing home in order to fund repairs and improvements.

The maximum loan amount is determined by the general FHA mortgage limits for your area, and the minimum repair cost is $5,000. But as opposed to a conventional loan, in which your mortgage is limited to the current appraisal value of the property, a 203(k) loan bases the mortgage amount on the lesser of the following:

  • The current value of the property, plus the cost of the renovations
  • 110 percent of the appraised value of the property after the renovations are complete

In other words, it enables you to purchase a property that you otherwise might not be able to take out a mortgage on because the 203(k) loan factors in the value of the improvements to be made.

And it allows you to do so with a down payment as low as 3.5 percent, which can be especially helpful for first-time homebuyers who often don’t have as much cash to bring to the table.

All of this opens up a number of opportunities that would otherwise be off limits to many homebuyers. For Pamela Capalad, a fee-only certified financial planner and the founder of Brunch & Budget, it was the only way that she and her husband could afford a house in Brooklyn, N.Y., which is where they wanted to live.

“Finding out about the 203(k) loan opened us up to the idea of buying a house that needed to be renovated,” Capalad said. “It was by far the most budget-friendly way to do it.”

Of course, the opportunity comes with some additional costs.

According to Eamon McKeon, a New York-based renovation loan specialist, interest rates on a 203(k) loan are typically 0.25 to 0.375 percentage points higher than conventional loans.

They also require you to pay mortgage insurance. There is an upfront premium equal to 1.75 percent of the base loan amount, which is rolled into the mortgage. And there is an annual premium, paid monthly, that ranges from 0.45 to 1.05 percent, depending on the size of the loan, the size of the down payment, and the length of your mortgage.

Additionally, McKeon cautioned that unlike conventional loans, this mortgage insurance premium is applied for the entire life of the loan unless you put at least 10 percent down. The only way to get rid of it is to refinance.

What renovations can be financed through a 203(k) loan?

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A 203(k) loan allows you to finance a wide range of renovations, all the way from small improvements like kitchen appliance upgrades to major projects like completely tearing down and rebuilding the house.

The U.S. Department of Housing and Urban Development provides a list of eligible improvements:

The big stipulation is the work has to be done by a contractor. You are not allowed to do any of the work yourself (though there is an exception to this rule for people who have the skills to do it).

According to McKeon, this is the most challenging part of successfully executing a 203(k) loan. He said the vast majority of the projects he sees go south have contractor-related issues, from underestimating the bid, to being unresponsive, to not having the correct licenses.

On the flip side, one of the benefits is that the bank helps you manage costs. They put the money needed for the renovations into an escrow account and only release it to the contractor as improvements are made and inspected.

For Capalad and her husband, this arrangement was one of the draws of the 203(k) loan.

“I liked knowing that the contractor couldn’t suddenly gouge us,” she said. “He couldn’t quote $30,000 and then come back later and tell us we actually owed him $100,000.”

Capalad suggested using sites like Yelp and HomeAdvisor, as well as references from friends, to find a contractor. She said you should interview at least four to five people, get bids from each, and not necessarily jump at the cheapest bid.

“We made the mistake of immediately rejecting higher estimates,” said Capalad. “We realized later that their estimates were higher because they were more aware of what needed to be done and how the process would work.”

Who can use a 203(k) loan?

A 203(k) loan is available to anyone who meets the eligibility requirements (discussed below) and is looking to renovate a home.

It’s often appealing to first-time homebuyers, who are generally younger and therefore less likely to have the cash necessary for either a conventional mortgage or to fund the renovations themselves. But there is no requirement that you have to be a first-time homebuyer.

The program can also be used to finance either the purchase of a home in need of renovation or to refinance an existing mortgage in order to update your current home.

3 reasons to use a 203(k) loan

There are a few common situations in which a 203(k) loan can make a lot of sense:

  1. Expand your opportunity: In a hot market, move-in ready homes often sell quickly and for more than asking price. A 203(k) loan can open up the market for you, allowing you to choose from a wider range of properties knowing that you can improve upon any house you buy.
  2. Upgrade your current home: If you want to add a bedroom, redo your kitchen, or make any other improvements to your current home, a 203(k) loan allows you to refinance and fold the cost of those upgrades into your new mortgage with a smaller down payment than other options.
  3. Increase your home equity: McKeon argued that anyone taking out a regular FHA loan should at least consider turning it into a 203(k) loan. With the right improvements, you could increase the value of your home to the point that you have enough equity after the renovations to refinance into a conventional mortgage and remove or reduce your monthly mortgage insurance premium.

What it takes to qualify for a 203(k) loan

Qualifying for a 203(k) loan is much like qualifying for a regular FHA mortgage loan, but with slightly stricter credit requirements.

“FHA may allow FICO scores in the 500s, [but] banks/lenders have discretion or are required to only go so low on the score,” McKeon said.

Here are the major criteria you’ll have to meet:

  • You have to work with an FHA-approved lender.
  • The minimum credit score is 500, though McKeon said a credit score of 640 is typically needed in order to secure the smallest down payment of 3.5 percent.
  • You have to have sufficient income to afford the mortgage payments, which the lender determines by evaluating two years of tax returns.
  • Your total debt-to-income ratio typically cannot exceed 43 percent.
  • You must have a clear CAIVRS report, indicating that you are not currently delinquent and have never defaulted on any loans backed by the federal government. This includes federal student loans, SBA loans and prior FHA loans.
  • The current property value plus the cost of the renovations must fall within FHA mortgage limits.

The 203(k) loan application process

McKeon said the process of applying for a 203(k) loan generally looks like this:

  1. Get preapproved for a mortgage by an FHA-approved lender.
  2. Find a property you want to buy and submit an offer.
  3. Find an approved 203(k) consultant to inspect the property and create a write-up of repairs needed and the estimated cost.
  4. Interview contractors, receive estimates, and select one to be vetted and approved by your lender.
  5. Obtain an appraisal to determine the post-renovation value of your house.
  6. Provide other information and documentation as requested by your lender in order to finalize loan approval.

Property types eligible for 203(k) loans

A 203(k) loan can be used for any single-family home that was built at least one year ago and has anywhere from one to four units. You can use the loan to increase a single-unit property into a multi-unit property, up to the four-unit limit, and you can also use it to turn a multi-unit property into a single-unit property.

These loans can be used to improve a condominium, provided it meets the following conditions:

  • It must be located in an FHA-approved condominium project.
  • Improvements are generally limited to the interior of the unit.
  • No more than 5 units, or 25 percent of all units, in a condominium association can be renovated at any time.
  • After renovation, the unit must be located in a structure that contains no more than four units total.

A 203(k) loan can also be used on a mixed residential/business property if at least 51 percent of the property is residential and the business use of the property does not affect the health or safety of the residential occupants.

It’s worth noting that the property must be owner-occupied, so a 203(k) loan is not an option for a pure investment property.

Within those limits, a wide variety of properties could qualify. McKeon noted that when he writes these loans, he doesn’t care about the current condition of the property. Everything is based on the renovations to be done and the future condition of the property.

Part II: Types of 203(k) loans

Standard vs. streamline 203(k) loans

A streamline 203(k) loan, or limited 203(k) loan, is a version of the 203(k) loan that can be used for smaller renovations. While there is no limit to the renovation costs associated with a standard 203(k) loan — other than the general FHA mortgage limits — a streamline 203(k) can only be used for up to $35,000 in repairs. There is no minimum repair cost.

In return, you get an easier application process. While a standard 203(k) loan requires you to hire a HUD-approved 203(k) consultant to help manage the renovation process, a streamline 203(k) does not.

However, there are limits to the kind of work you can have done with a streamline 203(k) loan. You can review the list of allowed improvements here and the list of ineligible improvements here, but here’s a quick overview of what isn’t allowed with a streamline 203(k):

  • The improvements can’t be expected to take more than six months to complete.
  • The improvements can’t prevent you from occupying the property for more than 15 days during the renovation.
  • You cannot convert a single-unit home into a multi-unit home, or vice versa.
  • You cannot do a complete teardown.

So when does a streamline 203(k) loan make sense over a standard 203(k) loan? Here is when it’s worth considering:

  • The property requires less than $35,000 in repairs and otherwise falls within the requirements for an eligible renovation.
  • You are comfortable scoping the work, gathering contractor estimates, and supervising the renovations without the help of a consultant.
  • You don’t expect the renovations to require an extensive amount of time.
  • You like the idea of minimizing paperwork and otherwise shortening the entire process.

Part III: Is a 203(k) loan the best option for you?

Alternatives to a 203(k) loan

Of course, a 203(k) loan isn’t the only way to finance a renovation. Here are some of the alternatives.

Fannie Mae HomeStyle Renovation Mortgage

The Fannie Mae HomeStyle Renovation Mortgage is a conventional conforming mortgage that, like the 203(k) loan, is specifically designed to finance renovations.

The biggest drawback is that it requires a 5 percent down payment as opposed to 3.5 percent. That can potentially require you to bring a few thousand dollars more in cash to the table.

But McKeon says that if you can afford it, it’s usually a better option. The biggest reason is that your monthly private mortgage insurance (PMI) is typically less, and it automatically drops off once your loan-to-value ratio reaches 78 percent, as opposed to a 203(k) loan where the PMI generally lasts for the life of the loan.

Home equity loan

If you’re looking to renovate your current home, one option would simply be to take out a home equity loan that allows you to borrow against the equity you’ve already built up in your house.

The advantages over a 203(k) loan would generally be a potentially lower interest rate and fewer restrictions around what improvements are made and who makes them.

The big downside is that your loan is limited to your current equity. If you purchased your home relatively recently, or if your home has decreased in value, you may not have enough equity to finance a sizable improvement. And if you are looking to purchase and renovate a new home, the 203(k) loan is likely the better option.

Title I property improvement loan

Like 203(k) loans, Title I property improvement loans are backed by the federal government. They allow you to borrow up to $25,000 for single-family homes, and up to $12,000 per unit for multi-unit properties, to improve a home you currently own.

This loan could be preferable to a 203(k) loan if the improvements you want to make are relatively small, you don’t want to refinance or don’t have the money for a down payment, and/or you’d like to avoid some of the requirements and inspections surrounding a 203(k) loan.

Personal savings

If you have the savings to afford the renovations yourself, or if you can wait until you do have the savings, you could save yourself a lot of money by avoiding financing altogether.

Of course, this may or may not be realistic, depending on the type of project you’re considering. For smaller projects that aren’t urgent, this is a worthy candidate. For larger projects or those that need to be addressed immediately, financing may be the only way to make it happen.

203(k) loans open up new opportunities

The FHA 203(k) loan isn’t for everybody. As Capalad found out the hard way, the money you save is often more than made up in sweat equity.

“I was making calls during my lunch break, and my husband was regularly stopping at the house to check in on things,” she said. “It really felt like our lives stopped for those 10 months.”

But McKeon said that if you have a creative eye and you’re willing to put in the work, you can end up with a much better home than you would have been able to purchase if you limited yourself to move-in ready properties, especially if you have a limited amount of cash to bring to the table.

In the end, it’s all about understanding the trade-offs and doing what’s right for you and your family. At the very least, the 203(k) loan expands the realm of possibility.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt at matt@magnifymoney.com

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Mortgage

5 Things You Shouldn’t Do Before Buying 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.

Source: iStock

There’s a lot more to qualifying for a mortgage than simply saving up money for a down payment. You need to find a good real estate agent, have money on hand for closing costs, and understand your budget and taxes.

But for as much as there is to do while you’re preparing to buy a home, there are also things you shouldn’t do. Taking any one of these actions can jeopardize your purchase, leaving you disappointed at best, and potentially in a financial bind.

Don’t take on new debt

Mortgage underwriters consider your debt-to-income ratio when evaluating your ability to make monthly payments. If you have too much debt, it can affect how much you can borrow or whether or not you can even get a mortgage. Neil Cannon, a mortgage loan officer at PenFed Credit Union, encourages potential homeowners to start thinking about their debt usage as soon as they start planning to save for a down payment.

“If you want to own a home in two years, but you need to buy a car now, the decision on the car can affect your home purchase in two years,” Cannon explains.

He gives the following example: If you purchase a used car for $6,000 and pay it off within two years, you’ll look much better financially than someone who bought a $50,000 car with 0% financing and still has four years left on their auto loan.

While you should carefully evaluate any decision to take on debt years before purchasing a home, it’s especially vital to do so before closing. Cannon notes that if you prequalify for a mortgage, and then take out a loan for a car or other purchase prior to closing, it can threaten the entire deal.

Don’t switch jobs

Cannon says that before closing, your lender will perform a Verification of Employment — also known as a VOE. The VOE typically occurs up to two weeks before closing, though it can happen as late as hours before you sign on the dotted line.

If you’ve resigned between prequalification and closing, you will not be able to close. If you’ve switched jobs, you must have already reported to work at the time the VOE is completed if you want your new salary to be included.

Generally, though, it’s wise to stay with the same employer for at least two years before closing on your home. This is because compensation like bonuses, overtime, and commissions are variable, and your underwriter will need two years’ worth of documentation if you want this money to be considered as income on your mortgage application.

Cannon also notes that underwriters consider bonuses discretionary, no matter how your employer may pitch them.

“I have had dozens of clients tell me they have a ‘guaranteed bonus,’” says Cannon. “If that is the case, then it is not a bonus, and your employer is torturing the English language.”

This means that your bonus may not be counted as guaranteed income on your mortgage application, even if you feel confident your bonus will come in as it has in years past. If your bonus is particularly large, this could impact how much money you qualify to borrow — or if you qualify to borrow at all.

Don’t move money around

“If we cannot track the source of large deposits, we can’t use the assets for qualifying,” says Cannon.

“I had a recently married couple have a deposit of $14,000 into their savings account. It was all wedding presents, and it was basically all cash. It could not be traced. We could not use it.”

The couple was lucky: Their parents were able to give them a documented gift of $14,000 to make up the difference. Without their parents’ generosity, the couple wouldn’t have qualified, even though they had the money on hand.

If you cannot properly document where your money came from, the best-case scenario would be that your underwriter would not allow the funds to factor into the equation — meaning you can’t count them as an asset toward purchasing or closing on the home.

The worst-case scenario is that the underwriter could assume the money is recently acquired debt. Without documentation, the lender has no way of knowing. This could negatively affect your debt-to-income ratio.

Cannon notes that while it is possible to move money around, it’s wise to do so with guidance from your loan officer — especially during the 60 days prior to filling out your mortgage application all the way through closing.

Don’t sign a contract before getting prequalified

“You always want to be prequalified before you start shopping for a home so you do not make knee-jerk emotional decisions,” says Cannon. Signing a contract puts you under legal obligation. Doing so without being prequalified is a risky move, as you’ll lose any earnest money you put down in good faith at the time you signed the contract should you not qualify. You could also end up with a lawsuit against you, depending on how far the seller is willing to go.

Even if your contract has a financing contingency clause — meaning you have a set amount of days to secure a loan or terminate the contract — it’s still in your best interest to get prequalified. You may have as little as 15 days to secure a loan with the contingency.

If you are unable to, and you do not terminate the contract in writing within the specified time frame, some contracts will still legally obligate you to purchase the home. Because you lack capital, you won’t be able to. If the seller chooses to sue, you could end up in court.

Don’t assume you know as much as your real estate agent

With so much knowledge at their fingertips, it’s easy for today’s homebuyers to feel empowered. There are calculators that tell you how much you should theoretically be able to borrow. You can easily obtain an estimate on a house’s market value versus asking price. You can even research all the first-time homebuyer assistance programs in your area from the comfort of your couch.

But don’t mistake the ease of obtaining information for professional expertise. As a buyer, using a real estate agent costs you nothing. Your agent has likely gone through the home-buying process more than you will in your entire lifetime, and their depth of knowledge — especially of your local market — is something to take advantage of.

“If you are a buyer, you likely need guidance to figure out why this home seems overpriced to you and why that home looks like a great bargain,” says Cannon. “Realtors are compensated fairly, and good Realtors create value for their clients.”

Brynne Conroy
Brynne Conroy |

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

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The Best Mortgages That Require No or Low Down Payment

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 you’re considering buying a home, you’re probably wondering how much you’ll need for a down payment. It’s not unusual to be concerned about coming up with a down payment. According to Trulia’s report Housing in 2017, saving for a down payment is most often cited as the biggest obstacle to homeownership.

Maybe you’ve heard that you should put 20% down when you purchase a home. It’s true that 20% is the gold standard. If you can afford a big down payment, it’s easier to get a mortgage, you may be eligible for a lower interest rate, and more money down means borrowing less, which means you’ll have a smaller monthly payment.

But the biggest incentive to put 20% down is that it allows you to avoid paying for private mortgage insurance. Mortgage insurance is extra insurance that some private lenders require from homebuyers who obtain loans in which the down payment is less than 20% of the sales price or appraised value. Unlike homeowners insurance, mortgage protects the lender – not you – if you stop making payments on your loan. Mortgage insurance typically costs between 0.5% and 1% of the entire loan amount on an annual basis. Depending on how expensive the home you buy is, that can be a pretty hefty sum.

While these are excellent reasons to put 20% down on a home, the fact is that many people just can’t scrape together a down payment that large, especially when the median price of a home in the U.S. is a whopping $345,800.

Fortunately, there are many options for homebuyers with little money for a down payment. You may even be able to buy a house with no down payment at all.

Here’s an overview of the best mortgages you can be approved for without 20% down.

Type of Loan

Down Payment Requirement


Mortgage Insurance

Credit Score Requirement

FHA

FHA

3.5% for most

10% if your FICO credit score is between 500 and 579

Requires both upfront and annual mortgage insurance for all borrowers, regardless of down payment

500 and up

SoFi

SoFi

10%

No mortgage insurance required

Typically 700 or higher

VA Loan

VA Loan

No down payment required for eligible borrowers (military service members, veterans, or eligible surviving spouses)

No mortgage insurance required; however, there may be a funding fee, which can run from 1.25% to 2.4% of the loan amount

No minimum score
required

homeready

HomeReady

3% and up

Mortgage insurance required when homebuyers put down
< 20%; no longer required once the loan-to-value ratio reaches 78% or less

620 minimum

homeready

USDA

No down payment required

Ongoing mortgage insurance not required, but borrowers pay an upfront fee of 2% of the purchase price

620-640 minimum

FHA Loans

An FHA loan is a home loan that is insured by the Federal Housing Administration. These loans are designed to promote homeownership and make it easier for people to qualify for a mortgage. The FHA does this by making a guarantee to your bank that they will repay your loan if you quit making payments. FHA loans don’t come directly from the FHA, but rather an FHA-approved lender. Not all FHA-approved lenders offer the same interest rates and costs, even for the same type of loan, so it’s important to shop around.

Down payment requirements

FHA loans allow you to buy a home with a down payment as low as 3.5%, although people with FICO credit scores between 500 and 579 are required to pay at least 10% down.

Approval requirements

Because these loans are geared toward lower income borrowers, you don’t need excellent credit or a large income, but you will have to provide a lot of documentation. Your lender will ask you to provide documents that prove income, savings, and credit information. If you already own any property, you’ll have to have documentation for that as well.

Some of the information you’ll need includes:

  • Two years of complete tax returns (three years for self-employed individuals)
  • Two years of W-2s, 1099s, or other income statements
  • Most recent month of pay stubs
  • A year-to-date profit-and-loss statement for self-employed individuals
  • Most recent three months of bank, retirement, and investment account statements

Mortgage insurance requirements

The FHA requires both upfront and annual mortgage insurance for all borrowers, regardless of their down payment. On a typical 30-year mortgage with a base loan amount of less than $625,500, your annual mortgage insurance premium will be 0.85% as of this writing. The current upfront mortgage insurance premium is 1.75% of the base loan amount.

Casey Fleming, a mortgage adviser with C2 Financial Corporation and author of The Loan Guide: How to Get the Best Possible Mortgage, also reminds buyers that mortgage insurance on an FHA loan is permanent. With other loans, you can request the lenders to cancel private mortgage insurance (MIP) once you have paid down the mortgage balance to 80% of the home's original appraised value, or wait until the balance drops to 78% when the mortgage servicer is required to eliminate the MIP. But mortgage insurance on an FHA loan cannot be canceled or terminated. For that reason, Fleming says "it's best if the homebuyer has a plan to get out in a couple of years."

Where to find an FHA-approved lender

As we mentioned earlier, FHA loans don’t come directly from the FHA, but rather an FHA-approved lender. Not all FHA-approved lenders offer the same interest rates and costs, even for the same type of loan, so it’s important to shop around.

The U.S. Department of Housing and Urban Development (HUD) has a searchable database where you can find lenders in your area approved for FHA loans.

First, fill in your location and the radius in which you’d like to search.

Next, you’ll be taken to a list of FHA-approved lenders in your area.

Who FHA loans are best for

FHA loans are flexible about how you come up with the down payment. You can use your savings, a cash gift from a family member, or a grant from a state or local government down-payment assistance program.

However, FHA loans are not the best option for everyone. The upfront and ongoing mortgage insurance premiums can cost more than private mortgage insurance. If you have good credit, you may be better off with a non-FHA loan with a low down payment and lower loan costs.

And if you’re buying an expensive home in a high-cost area, an FHA loan may not be able to provide you with a large enough mortgage. The FHA has a national loan limit, which is recalculated on an annual basis. For 2017, in high-cost areas, the FHA national loan limit ceiling is $636,150. You can check HUD.gov for a complete list of FHA lending limits by state.

SoFi

For borrowers who can afford a large monthly payment but haven’t saved up a big down payment, SoFi offers mortgages of up to $3 million. Interest rates will vary based on whether you’re looking for a 30-year fixed loan, a 15-year fixed loan, or an adjustable rate loan, which has a fixed rate for the first seven years, after which the interest rate may increase or decrease. Mortgage rates started as low as 3.09% for a 15-year mortgage as of this writing. You can find your rate using SoFi’s online rate quote tool without affecting your credit.

Down payment requirements

SoFi requires a minimum down payment of at least 10% of the purchase price for a new loan.

Approval requirements

Like most lenders, SoFi analyzes FICO scores as a part of its application process. However, it also considers factors such as professional history and career prospects, income, and history of on-time bill payments to determine an applicant’s overall financial health.

Mortgage insurance requirements

SoFi does not charge private mortgage insurance, even on loans for which less than 20% is put down.

What we like/don’t like

In addition to not requiring private mortgage insurance on any of their loans, SoFi doesn’t charge any loan origination, application, or broker commission fees. The average closing fee is 2% to 5% for most mortgages (it varies by location), so on a $300,000 home loan, that is $3,000. Avoiding those fees can save buyers a significant amount and make it a bit easier to come up with closing costs. Keep in mind, though, that you’ll still need to pay standard third-party closing costs that vary depending on loan type and location of the property.

There’s not much to dislike about SoFi unless you’re buying a very inexpensive home in a lower-cost market. They do have a minimum loan amount of $100,000.

Who SoFi mortgages are best for

SoFi mortgages are really only available for people with excellent credit and a solid income. They don’t work with people with poor credit.

SoFi does not publish minimum income or credit score requirements.

VA Loans

Rates can vary by lender, but currently, rates for a $225,000 30-year fixed-rate loan run at around 3.25%, according to LendingTree. (Disclosure: LendingTree is the parent company of MagnifyMoney.)

Down payment requirements

Eligible borrowers can get a VA loan with no down payment. Although the costs associated with getting a VA loan are generally lower than other types of low-down-payment mortgages, Fleming says there is a one-time funding fee, unless the veteran or military member has a service-related disability or you are the surviving spouse of a veteran who died in service or from a service-related disability.

That funding fee varies by the type of veteran and down-payment percentage, but for a new-purchase loan, the funding fee can run from 1.25% to 2.4% of the loan amount.

Approval requirements

VA loans are typically easier to qualify for than conventional mortgages. To be eligible, you must have suitable credit, sufficient income to make the monthly payment, and a valid Certificate of Eligibility (COE). The COE verifies to the lender that you are eligible for a VA-backed loan. You can apply for a COE online, through your lender, or by mail using VA Form 26-1880.

The VA does not require a minimum credit score, but lenders generally have their own requirements. Most ask for a credit score of 620 or higher.

If you'd like help seeing if you are qualified for a VA loan, check to see if there's a HUD-approved housing counseling agency in your area.

Mortgage insurance requirements

Because VA loans are guaranteed by the Department of Veterans Affairs, they do not require mortgage insurance. However, as we mentioned previously, be prepared to pay an additional funding fee of 1.25% to 2.4%.

What we like/don’t like

There’s no cap on the amount you can borrow. However, there are limits on the amount the VA can insure, which usually affects the loan amount a lender is willing to offer. Loan limits vary by county and are the same as the Federal Housing Finance Agency’s limits, which you can find here.

HomeReady

 

The HomeReady program is offered by Fannie Mae. HomeReady mortgage is aimed at consumers who have decent credit but low- to middle-income earnings. Borrowers do not have to be first-time home buyers but do have to complete a housing education program.

Approval requirements

HomeReady loans are available for purchasing and refinancing any single-family home, as long as the borrower meets income limits, which vary by property location. For properties in low-income areas (as determined by the U.S. Census), there is no income limit. For other properties, the income eligibility limit is 100% of the area median income.

The minimum credit score for a Fannie Mae loan, including HomeReady, is 620.

To qualify, borrowers must complete an online education program, which costs $75 and helps buyers understand the home-buying process and prepare for homeownership.

Down payment requirements

HomeReady is available through all Fannie Mae-approved lenders and offers down payments as low as 3%.

Reiss says buyers can combine a HomeReady mortgage with a Community Seconds loan, which can provide all or part of the down payment and closing costs. “Combined with a Community Seconds mortgage, a Fannie borrower can have a combined loan-to-value ratio of up to 105%,” Reiss says. The loan-to-value (LTV) ratio is the ratio of outstanding loan balance to the value of the property. When you pay down your mortgage balance or your property value increases, your LTV ratio goes down.

Mortgage insurance requirements

While HomeReady mortgages do require mortgage insurance when the buyer puts less than 20% down, unlike an FHA loan, the mortgage insurance is removed once the loan-to-value ratio reaches 78% or less.

What we like/don’t like

HomeReady loans do require private mortgage insurance, but the cost is generally lower than those charged by other lenders. Fannie Mae also makes it easier for borrowers to get creative with their down payment, allowing them to borrow it through a Community Seconds loan or have the down payment gifted from a friend or family member. Also, if you’re planning on having a roommate, income from that roommate will help you qualify for the loan.

However, be sure to talk to your lender to compare other options. The HomeReady program may have higher interest rates than other mortgage programs that advertise no or low down payments.

USDA Loan

USDA loans are guaranteed by the U.S. Department of Agriculture. Although the USDA doesn’t cap the amount a homeowner can borrow, most USDA-approved lenders extend financing for up to $417,000.

Rates vary by lender, but the agency gives a baseline interest rate. As of August 2016, that rate was just 2.875%

Approval requirements

USDA loans are available for purchasing and refinancing homes that meet the USDA’s definition of “rural.” The USDA provides a property eligibility map to give potential buyers a general idea of qualified locations. In general, the property must be located in “open country” or an area that has a population less than 10,000, or 20,000 in areas that are deemed as having a serious lack of mortgage credit.

USDA loans are not available directly from the USDA, but are issued by approved lenders. Most lenders require a minimum credit score of 620 to 640 with no foreclosures, bankruptcies, or major delinquencies in the past several years. Borrowers must have an income of no more than 115% of the median income for the area.

Down payment requirements

Eligible borrowers can get a home loan with no down payment. Other closing costs vary by lender, but the USDA loan program does allow borrowers to use money gifted from friends and family to pay for closing costs.

Mortgage insurance requirements

While USDA-backed mortgages do not require mortgage insurance, borrowers instead pay an upfront premium of 2% of the purchase price. The USDA also allows borrowers to finance that 2% with the home loan.

What we like/don’t like

Some buyers may dismiss USDA loans because they aren’t buying a home in a rural area, but many suburbs of metropolitan areas and small towns fall within the eligible zones. It could be worth a glance at the eligibility map to see if you qualify.

At a Glance: Low-Down-Payment Mortgage Options

To see how different low-down-payment mortgage options might look in the real world, let’s assume a buyer with an excellent credit score applies for a 30-year fixed-rate mortgage on a home that costs $250,000.

As you can see in the table below, their monthly mortgage payment would vary a lot depending on which lender they use.

 

Down Payment


Total Borrowed


Interest Rate


Principal & Interest


Mortgage Insurance


Total Monthly Payment

FHA


FHA

3.5%
($8,750)

$241,250

4.625%

$1,083

$4,222 up front
$171 per month

$1,254

SoFi


SoFi

10%
($25,000)

$225,000

3.37%

$995

$0

$995

VA


VA Loan

0%
($0)

$250,000

3.25%

$1,088

$0

$1,088

HomeReady


homeready

3%
($7,500)

$242,500

4.25%

$1,193

$222 per month

$1,349

USDA


homeready

0%

$250,000

2.875%

$1,037

$5,000 up front,
can be included in
total financed

$1,037

Note that this comparison doesn’t include any closing costs other than the upfront mortgage insurance required by the FHA and USDA loans. The total monthly payments do not include homeowners insurance or property taxes that are typically included in the monthly payment.

ANALYSIS: Should I put down less than 20% on a new home just because I can?

So, if you can take advantage of a low- or no-down-payment loan, should you? For some people, it might make financial sense to keep more cash on hand for emergencies and get into the market sooner in a period of rising home prices. But before you apply, know what it will cost you. Let’s run the numbers to compare the cost of using a conventional loan with 20% down versus a 3% down payment.

Besides private mortgage insurance, there are other downsides to a smaller down payment. Lenders may charge higher interest rates, which translates into higher monthly payments and more money spent over the loan term. Also, because many closing costs are a percentage of the total loan amount, putting less money down means higher closing costs.

For this example, we’ll assume a $250,000 purchase price and a loan term of 30 years. According to Freddie Mac, during the week of June 22, 2017, the average rate for a 30-year fixed-rate mortgage was 3.90%.

Using the Loan Amortization Calculator from MortgageCalculator.org:

Assuming you don’t make any extra principal payments, you will have to pay private mortgage insurance for 112 months before the principal balance of the loan drops below 78% of the home’s original appraised value. That means in addition to paying $169,265.17 in interest, you’ll pay $11,316.48 for private mortgage insurance.

The bottom line

Under some circumstances, a low- or no-down-payment mortgage, even with private mortgage insurance, could be considered a worthwhile investment. If saving for a 20% down payment means you’ll be paying rent longer while you watch home prices and mortgage rates rise, it could make sense. In the past year alone, average home prices increased 16.8%, and Kiplinger is predicting that the average 30-year fixed mortgage rate will rise to 4.1% by the end of 2017.

If you do choose a loan that requires private mortgage insurance, consider making extra principal payments to reach 20% equity faster and request that your lender cancels private mortgage insurance. Even if you have to spend a few hundred dollars to have your home appraised, the monthly savings from private mortgage insurance premiums could quickly offset that cost.

Keep in mind, though, that the down payment is only one part of the home-buying equation. Sonja Bullard, a sales manager with Bay Equity Home Loans in Alpharetta, Ga., says whether you’re interested in an FHA loan or a conventional (i.e., non-government-backed) loan, there are other out-of-pocket costs when buying a home.

“Through my experience, when people hear zero down payment, they think that means there are no costs for obtaining the loan,” Bullard says. “People don’t realize there are still fees required to be paid.”

According to Bullard, those fees include:

  • Inspection: $300 to $1,000, based on the size of the home
  • Appraisal: $375 to $1,000, based on the size of the home
  • Homeowners insurance premiums, prepaid for one year, due at closing: $300 to $2,500, depending on coverage
  • Closing costs: $4,000 to $10,000, depending on sales price and loan amount
  • HOA initiation fees

So don’t let a seemingly insurmountable 20% down payment get in the way of homeownership. When you’re ready to take the plunge, talk to a lender or submit a loan application online. You might be surprised at what you qualify for.

Janet Berry-Johnson
Janet Berry-Johnson |

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

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