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Would You Buy a Prefab Home From Airbnb?

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Models of Backyard homes, from Airbnb’s experimental product development team Samara. Credit: Samara

A popular short-term rental platform is stepping into the homebuilding industry next year.Airbnb recently announced that as soon as fall 2019, the company will start testing prototypes of homes that can be “designed, built and shared,” according to a news release about the new project.

Backyard, an initiative from Airbnb’s experimental product development team Samara, investigates how buildings can incorporate insight from the Airbnb community, plus sophisticated manufacturing techniques and smart-home technology, to adapt to the changing needs of homeowners and occupants.

“We helped people activate underutilized space — from a spare bedroom or treehouse to your apartment while you’re away — and built a community that connected people around the world,” said Airbnb co-founder Joe Gebbia, who leads the Samara team, in a statement. “With Backyard, we’re using the same lens through which Airbnb was envisioned — the potential of space — and applying it more broadly to architecture and construction.”

The basis of the initiative started with the question, “What does a home that is designed and built for sharing actually look and feel like?” and grew from there, according to the news release. The Backyard team has gathered input from the construction industry to find practical solutions, which range anywhere from environmentally-friendly materials to fully prefabricated homes.

What is a prefabricated home?

A prefabricated or “prefab” home is a factory-built dwelling that is composed of separate parts. Those parts are delivered to the property site and assembled into a house on a permanent foundation. Prefab homes — which are also referred to as modular homes — are often treated as “real property,” or land and the structures included on that land, according to the Consumer Financial Protection Bureau.

The construction process of a prefab home is much faster than that of a site-built home. It’s possible for a prefab home to be move-in ready in approximately three months, according to the National Association of Home Builders. Because most of the construction happens inside a factory, building a prefab home isn’t usually slowed down by weather delays and other unpredictable factors.

Prefab vs. manufactured home

A modular or prefab home isn’t the same as a manufactured home. Although they are both factory-built, manufactured homes are constructed on a permanent chassis and must conform to the Manufactured Home Construction and Safety Standards enforced by the U.S. Department of Housing and Urban Development (HUD). (Manufactured homes are also sometimes called mobile homes, despite the fact that they aren’t on wheels.) Prefab homes don’t have to follow HUD’s standards; they must comply with local building codes, however.

While there are a variety of limitations and requirements specific to getting a loan for a manufactured home, modular homes may qualify for conventional financing. Fannie Mae treats prefab homes the same way as site-built homes, and they follow similar guidelines.

Financing a modular home

Modular homes are considered one-unit or single-family properties under standards set by Fannie Mae. For 2019, the conforming loan limit for one-unit properties in most U.S. counties is $484,350, and in higher-cost areas the limit is $726,525.

The government-sponsored enterprise purchases modular home mortgages from lenders for properties that meet certain requirements:

  • They must be built of the same quality and with the same materials as a site-built home.
  • They must be legally classified as real property.
  • They must conform to all local building codes.

Rental income you’re anticipating from your modular home — say, if you’re planning to be an Airbnb host — could help you qualify to get financing for that modular home.

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Pros and cons to buying property you plan to share

Consider the following pros and cons of buying a modular home built for sharing.

Pros

  • You have the ability to customize your property to your liking — beyond the limited choices typically offered by many builders.
  • You create another income stream by providing short-term rental services to guests, which in turn, can help you pay down your mortgage more quickly.

Cons

  • You’re “sharing” your home, which means there’s a level of sacrifice that has to take place in terms of your personal space.
  • There may be times throughout the year when rentals are slow, which affects your cash flow.
  • Your insurance premium will likely increase, as you’ll probably need to purchase a business insurance policy in addition to carrying a homeowners policy.

Multiple paths to homeownership

Initiatives like Airbnb’s Backyard underscore the fact that there are several ways to enter into homeownership, whether it’s a site-built single-family home or prefabricated property designed to be shared.

Regardless of which dwelling type has your eye, be sure you’re taking the necessary steps to prepare for the homebuying process. That includes improving your credit history and score, paying down outstanding debt, determining how much house you can afford and saving for a down payment. Additionally, consider asking yourself these five questions before you decide to buy a home.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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FHA Releases New Loan Limits for 2019

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Mortgages backed by the Federal Housing Administration (FHA) have received new loan limits for 2019.

The Federal Housing Administration (FHA), which is overseen by the U.S. Department of Housing and Urban Development’s Office of Housing, announced Friday that the new national loan limit — also called the “floor” — for one-unit properties in low-cost areas has increased from $294,515 in 2018 to $314,827 for 2019. This amount is set at 65% of the conforming loan limit for mortgages that follow Fannie Mae and Freddie Mac guidelines, which increased to $484,350 for 2019.

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Loan limits are increasing in more than 3,000 U.S. counties, but will remain unchanged in 181 counties. Next year’s FHA loan limits for multi-unit properties are:

  • Two-unit: $403,125
  • Three-unit: $487,250
  • Four-unit: $605,525

FHA loan limits in high-cost areas have increased to the following amounts:

  • One-unit: $726,525
  • Two-unit: $930,300
  • Three-unit: $1,124,475
  • Four-unit: $1,397,400

The limit in high-cost areas is referred to as the “ceiling” and is set at 150% of the national conforming loan limit amount. A list of the counties at the ceiling as well as a list of those counties between the floor and ceiling can be found on HUD’s website.

How FHA loans measure up

FHA loans are a popular option for first-time homebuyers, typically due to the lower credit score and down payment requirements. In fact, nearly 83% of FHA loans went to first-timers during fiscal year 2018, according to data from the FHA’s Mutual Mortgage Insurance Fund report.

It’s possible to qualify for an FHA loan if you have a credit score of at least 580 and a 3.5% down payment; however, if your score falls between 500 and 579, you’ll need a 10% down payment. Other common requirements include a debt-to-income ratio of no more than 43% and documented proof of employment and sufficient income.

The FHA isn’t a lender — it just insures home loans, so you’ll ultimately need to go through an FHA-approved lender to apply for a mortgage.

Don’t forget MIP

Although FHA loans have less strict guidelines for borrowers, there are additional costs to consider, such as mortgage insurance premiums.

Because FHA borrowers have a lower threshold for a down payment, they are required to pay mortgage insurance. This extra cost is to protect the lender in the event the borrower defaults on their mortgage payments. There’s an upfront mortgage insurance premium, which is paid at closing, and an annual mortgage insurance premium that is divided into 12 installments and paid monthly as part of your mortgage payment.

The upfront premium is 1.75% of the loan amount. The annual premium ranges from 0.45% to 1.05%, depending on your loan-to-value ratio and loan term. Borrowers who put down less than 10% must pay mortgage insurance for the life of the loan, while those who put down at least 10% can drop their mortgage insurance premiums after 11 years.

FHA vs. conventional mortgage rates

Mortgage interest rates on FHA loans are comparable to rates on conventional loans, based on data from the Mortgage Bankers Association (MBA).

The average rate for a 30-year fixed-rate FHA loan clocked in at 4.97% and the 30-year fixed conventional loan rate averaged 4.96% for the week ending Dec. 7, 2018, according to the MBA’s weekly mortgage applications survey.

For a more thorough understanding of FHA lending, read our complete guide to FHA loans.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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A Crucial Step in Qualifying for a Mortgage Is Getting Preapproved

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Buying a home can be a fulfilling yet frustrating experience. There’s a whole lot more involved than looking at well-staged photos online for hours at a time and then landing the home of your dreams.

One of the most important but overlooked to-dos of homebuying is demonstrating to potential lenders that you’re a creditworthy borrower. One of the best ways to do this is by getting a mortgage preapproval. Here, we’ll break down the preapproval process and explain what you can generally expect.

What is mortgage preapproval?

A mortgage preapproval is a conditional green light from a mortgage lender that you’re eligible to borrow a certain amount of money for a home purchase. Lenders share this information in writing, so you’ll often hear this referred to as a “preapproval letter.”

A mortgage preapproval is different from a mortgage prequalification, though the terms are sometimes used interchangeably. A prequalification provides a rough estimate of how much you might qualify for and comes from a surface-level review of your financial information.

A preapproval is more involved and gives you a more accurate idea of what a lender will offer in terms of a loan amount and interest rate. It also illustrates to home sellers that you’re a legitimate buyer — giving you a leg up in the bidding process.

How to qualify for a mortgage

In order to get preapproved for a mortgage, you first must qualify for one. Potential borrowers interested in a conventional mortgage are generally expected to meet the following requirements:

  • Provide at least a 3% down payment. The loan-to-value ratio — which is a calculation of the mortgage amount divided by the home’s price tag — can’t exceed 97%.
  • Have a minimum credit score of 620. Keep in mind that if your score is on the lower end, you’ll be required to provide a higher down payment at closing.
  • Have a maximum 45% debt-to-income ratio. There’s a threshold on how much of your gross monthly income can go to debt payments to qualify for a mortgage. In some cases, that ratio is capped at 36%, but the overall maximum across mortgage products is generally 45%.
  • Prepare to pay private mortgage insurance. If you put down less than 20% of the purchase price, you’ll pay PMI monthly. This is in addition to your mortgage payment.

There are also employment and income documentation requirements.

Government programs offer slightly more lenient guidelines for certain borrowers. FHA loans are available to people with credit scores as low as 580, and VA loans offer zero-down payment loans to military members and veterans.

The Home Possible® and HomeReady® homebuying programs offered by government-sponsored enterprises Freddie Mac and Fannie Mae also help low- to moderate-income borrowers looking for a conventional loan. It’s important to note that Fannie and Freddie don’t lend directly to borrowers; you’ll need to work with an approved lender to apply for a loan.

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How to get preapproved for a mortgage

If you’re confident that you qualify for a mortgage, you can move on to getting preapproved. Here’s a rundown of what you need to know.

When to get preapproved for a mortgage

The best time to seek a mortgage preapproval is when you think you’re ready to buy a house, but before you start spending tons of time house hunting. That’s because it’s not worth falling in love with a home that’s outside the price range you can realistically afford.

Depending on the lender’s process and how quickly you submit the requested documents, a mortgage preapproval can be issued in as little as 24 hours.

Where to get preapproved for a mortgage

There are several types of financial institutions that offer mortgage preapprovals:

  • Banks
  • Credit unions
  • Mortgage brokers
  • Mortgage lenders

Depending on the institution, you may be able to submit your documents electronically for a mortgage preapproval. Check with individual lenders to learn more about their process.

Compare offers with LendingTree

It works in your favor to get multiple mortgage preapprovals — at least two or three. Before you commit to one lender, you want to be sure you’re getting the best available terms for your financial situation. According to LendingTree, which owns MagnifyMoney, homebuyers stand to save more than $27,000 in interest over the life of a $300,000 loan by comparison shopping for the best mortgage interest rates.

LendingTree makes it easy to compare mortgage offers from multiple lenders. It only takes a few minutes to input your information into their secure tool and you will be able to compare the rates and terms of multiple preapproval offers. This is by far the easiest way to make sure your are getting the best deal on your mortgage.

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What you need to get preapproved

Lenders will request several documents and types of information from you for a mortgage preapproval. Those items typically include:

  • Government-issued photo ID, like a driver’s license
  • Social Security number
  • 2 months of bank statements
  • 1 month of pay stubs
  • 2 years of W-2 or 1099 tax forms
  • Credit reports and scores from all three bureaus

This information helps lenders determine your debt-to-income ratio, creditworthiness and ability to repay if they lend you money.

Advantages of getting preapproved for a mortgage

A mortgage preapproval is close to a must-have for potential homebuyers. Here are some reasons why it’s an important step in the homebuying process.

  • You get a solid idea of the loan you’d qualify for, which makes it easier to determine how much house you can afford.
  • Home sellers will take you more seriously as a potential buyer and will be more comfortable accepting your offer.
  • Lenders are giving you a vote of confidence that you’re more than likely eligible to borrow money from them.
  • You’re given an opportunity to compare interest rates before committing to a specific lender.
  • You’re presented with a picture of where you stand financially and what short-term improvements to your credit you can make before closing, such as paying down more of your debt.

Things to watch for when getting preapproved for a mortgage

There are some caveats to mortgage preapproval, however.

  • A preapproval is not a guarantee that you’ll get a loan from the lender that issued it. Getting preapproved is conditional.
  • There should not be major changes to your financial situation between the time you’re preapproved and when you decide to move forward with a particular lender. Don’t apply for new credit such as an auto loan or credit card, change jobs or take any other action that would affect your eligibility.
  • Preapprovals aren’t indefinite — they often last for about 90 days. You’ll have to go through the process again if you haven’t closed on your home by the time your preapproval expires.

What happens after preapproval?

Once you have your home picked out, then it’s time to complete a full mortgage application.

After you submit your mortgage application, the lender has three days to provide you with a Loan Estimate, which tells you the estimated loan amount, interest rate, closing costs, monthly payment and taxes for your mortgage, among other important details. .

You’ll want to submit mortgage applications for at least two or three lenders and compare the Loan Estimate document you receive from each. Pay attention to all the estimated costs and fees associated with the mortgage transaction to make sure you choose the best deal.

When you’ve made a choice, you’ll need to express your “intent to proceed” with your chosen lender. Notify the lender within 10 business days of receiving your Loan Estimate, according to the Consumer Financial Protection Bureau. You would then provide the lender with additional documentation related to your credit, income, proof of down payment funds and whatever else they require. After that, your loan goes through the underwriting process. You’ll get the property appraised and inspected during this period, as well.

If all goes well and you’re granted full approval, then you’re ultimately scheduled for a final walk-through and closing.

The bottom line

Getting a mortgage preapproval is a crucial step in the homebuying process, but it doesn’t mean you’re in the clear to borrow from a lender just yet. Having a preapproval letter does give you a leg up over the competition, however.

Be sure you’re in the best financial shape possible before you reach out to lenders to begin the preapproval process. Pay down your outstanding debt, clean up any blemishes or errors on your credit report and find ways to increase your available down payment.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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