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Mortgage

How — and Why — to Refinance a Second Mortgage

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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One of the best feelings associated with homeownership comes from seeing the amount of equity in your house increase. Equity is the portion of your house that you own outright. It’s calculated by subtracting what you owe on your house from the amount your property is worth. As you pay down the mortgage or your house increases in value, you’ll own more of the house in the form of equity, and that can become one of your greatest assets. When you have a lot of equity, you can borrow against it to use the money for financial goals. A second mortgage allows you to do that.

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There are a number of reasons a borrower might take out a second mortgage, in addition to their primary one.

  • They may want to use the money to make major home improvements that they couldn’t otherwise afford.
  • They may decide to borrow against their equity to pay off other high-interest debt.
  • They may choose to use the money to fund a small business or pay for a child’s college education.

In other words, if a homeowner is in need of a significant amount of money for any reason, a second mortgage could provide the capital he or she needs.

However, like all debts, second mortgages come with a cost. You must pay interest on the money that you borrow. Sometimes homeowners may find that refinancing a second mortgage can save them money in the long run.

Types of second mortgages

Second mortgages come in a variety of different stripes:

A HELOC, or home equity line of credit, is just what it sounds like — a line of credit borrowed against your equity. Just as a credit card allows you to borrow money when you need it, a HELOC is an account from which you can borrow at will. You’ll be charged interest only on what you borrow, and you’ll be expected to make at least minimum payments on the debt. HELOCs typically have adjustable interest rates, meaning the amount of interest you pay can fluctuate over time. After what’s known as a “draw period,” you can no longer make withdrawals from the HELOC, and in some cases, the remaining balance may be due immediately.

A home equity loan (HEL) is another type of second mortgage. In this case, you take out a lump sum and pay the loan back in installments. Home equity loans typically have fixed interest rates, so your payments will likely remain the same throughout the life of the loan.

Another type of second mortgage is a piggyback mortgage loan. A piggyback mortgage is one that’s taken out at the same time that you take out a first mortgage. Its purpose is to help borrowers buy a home when they don’t have a lot of money for a down payment. Piggyback mortgage loans can also help you to avoid paying private mortgage insurance (PMI).

For conventional loans, you typically must put down at least 20% and finance no more than 80% of the loan in order to avoid paying PMI. With an 80/10/10 piggyback loan, you still only finance 80% of the loan with the first mortgage. However, you take out a second piggyback loan to pay 10% and you only put down 10% on the house. Two things you should know about piggyback loans: The second, smaller loan typically has a higher interest rate than the first mortgage loan, and it often has an adjustable rate, meaning the interest rate can fluctuate after an introductory period.

Reasons to refinance a second mortgage

Just as you can refinance a first mortgage, you can refinance a second mortgage. There are a number of reasons why a homeowner may choose to do so.

Interest rates have gone down. If interest rates have gone down since you initially took out the second mortgage, it may make sense to refinance to a lower rate. By refinancing to get a lower interest rate, you would save money on interest and you may end up with a lower monthly payment.

Your credit outlook has changed. You may have paid down debt or bounced back from a financial challenge and in the process, your credit score may have improved. With a higher credit score, you may now qualify for a lower rate if you refinance.

You want to lock in a fixed rate. If your second mortgage has an adjustable rate, you may want to refinance to get a fixed rate, particularly in a rising-interest-rate environment. That would give you the peace of mind in knowing that your interest rate won’t rise and your payments will stay the same for the life of the loan.

You want to change the terms of the loan. You might be able to get more favorable terms on the loan by refinancing. For example, you might change the length of the loan from 30 years to 15. A shorter-term mortgage is likely to come with a lower interest rate, although your monthly payments will be higher.

You want to borrow more money against your equity. Perhaps your equity has increased and you want to take out a larger second mortgage. Refinancing the initial loan could allow you to do that.

Steps to refinancing a second mortgage

If you think it makes sense to refinance a second mortgage, consider the following steps:

Determine how much it will cost you. Refinancing is not free. In fact, refinancing fees can easily equal as much as 3% to 6% of the loan. Make sure the benefits are worth it.

See if you’re eligible for a new loan. Lenders look at a number of factors such as your credit score, your income and the amount of debt you have. Lenders also use loan-to-value (LTV) ratios to guide their lending decisions. For example, a lender with an LTV ratio standard of 90% will only lend up to 90% of the house’s value. If the amount of the loan doesn’t fall within that lender’s LTV ratio guidelines, you may not be able to refinance.

Shop around and compare lenders. While you may decide to stick with the same lender, you might be able to get better terms from someone else. Don’t just look at the interest rate offered; calculate and compare the amount you would spend in closing fees, too.

Gather your paperwork. There are certain documents that lenders are likely to require. Among them are W-2s and other proof of income, tax documents, bank statements, investment account statements and current debt statements. If you have everything together, the application process will be easier.

Apply for the loan. While you go through the application process and wait for the deal to close, continue to make payments on your current second mortgage so you stay current on your account.

A note on taxes

One longtime benefit of home equity loans and HELOCs was that homeowners could deduct the interest on their tax returns. However, that changed when the Tax Cuts and Jobs Act of 2017 went into effect. As a result of that tax law, you can now only deduct interest from home equity loans and HELOCs if the loans are used for home improvements, according to the Internal Revenue Service (IRS). If you’ve been thinking about taking out a second mortgage to do some renovating, you can take advantage of the tax deduction. If not, make sure there are enough other benefits to justify the costs.

When it comes to your finances, you should always be looking for ways to get the most for your money. Sometimes refinancing can help you to do that. But the decision to refinance any mortgage should never be taken lightly. If you’re thinking about refinancing a second mortgage, make sure you weigh all the costs and benefits to make sure it’s the right decision for you.

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Mortgage

How to Recover From Missed Mortgage Payments

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understanding good faith estimate vs loan estimate
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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

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.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

What Is the Minimum Credit Score for a Home Loan?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

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.