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It’s Now Easier for Millions of Student Loan Borrowers to Get a Mortgage

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Student loan borrowers who are making reduced income-driven repayments on their loans will have an easier time getting mortgages under a new policy announced recently by Fannie Mae.

Nearly one-quarter of federal student loan borrowers benefit from reduced monthly student loan payments based on their income, Fannie Mae says. However, there’s been some confusion about how banks should treat the lower monthly payments when they calculate a would-be mortgage borrower’s debt-to-income ratio (DTI): Should banks consider the reduced payment, the payment borrowers would have to pay without the income-based “discount,” or something in between?

It’s a tricky question, because student loan borrowers have to renew their qualification for the lower payments each year, meaning a borrower’s monthly DTI could change dramatically a year or two after qualifying for a mortgage. The banks’ confusion over which payment amount to use can mean the difference between a borrower qualifying for a home loan and staying stuck in a rental apartment.

There’s even more confusion when a mortgage applicant qualifies for a $0 income-driven student loan payment, or when there’s no payment amount listed on the applicant’s credit report. Previously, in that situation, Fannie Mae required banks to use 1% of the balance or a full payment term.

As of last week, Fannie has declared that mortgage lenders can instead use $0 as a student loan payment when determining DTI, as long as the borrower can back that up with documentation.

That announcement followed another Fannie update issued in April telling lenders that they could use the lower income-based monthly payment, rather than a larger payment based on the full balance of the loan, when calculating borrowers’ monthly debt obligations.

“We are simplifying the options available to calculate the monthly payment amount for student loans. The resulting policy will be easier for lenders to apply, and may result in a lower qualifying payment for borrowers with student loans,” Fannie said in its statement.

Taken together, the two announcements could immediately benefit the roughly 6 million borrowers currently using income-driven repayment plans known as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Contingent Repayment (ICR), and Income-Based Repayment (IBR).
Freddie Mac didn’t immediately respond to an inquiry about its policy in the same situation.

What This Means for Student Loan Borrowers Looking to Buy

Michigan-based mortgage broker Cassandra Evers said the changes “allow a lot more borrowers to qualify for a home.” Previously, there was a lot of confusion among borrowers, lenders, and brokers, Evers said. “[The rules have] changed at least five or six times in the last five years.”

The broader change announced in April, which allowed lenders to use the income-driven payment amount in calculations, could make a huge difference to millions of borrowers, Evers said.

“Imagine you have $60,000 in student loan debt and are on IBR with a payment of $150 a month,” she said. Before April’s guidance, lenders may have used $600 (1% of the balance of the student loans) as the monthly loan amount when determining DTI, “basically overriding actual debt with a fake/inflated number.”

“Imagine you are 28 and making $40,000 per year. Well, even if you’re fiscally responsible, that added $450-a-month inflated payment would absolutely destroy your ability to buy a decent home … This opens up the door to a lot more lenders being able to use the actual IBR payment,” Evers said.

The Fannie Mae change regarding borrowers on income-driven plans with a $0 monthly payment could be a big deal for some mortgage applicants with large student loans. A borrower with an outstanding $50,000 loan but a $0-a-month payment would see the monthly expenses side of their debt-to-income ratio fall by $500.

It’s unclear how many would-be homebuyers could qualify for a mortgage with an income low enough to qualify for a $0-per-month income-driven student loan repayment plan. Fannie did not have an estimate, spokeswoman Alicia Jones said.

“If your income is low enough to merit a zero payment, then it is probably going to be hard to qualify for a mortgage with a number of lenders. But, with the share of IBR now at almost a full 25% of all federally insured debt, it’s suspected that there will be plenty of potential borrowers who do,” Jones said. “The motivation for the original policy and clarification came from lenders’ requests.”

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.

Bob Sullivan
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Bob Sullivan is a writer at MagnifyMoney. You can email Bob here

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Commercial Mortgage Refinancing: How Does It Work?

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In business, there are many reasons why you may want — or need — to look into commercial mortgage refinancing. Maybe your credit score has vastly improved over the last few years and you’re hoping to score a better interest rate, or maybe you’re trying to avoid making a large balloon payment at the end of your current loan term. Regardless of your reasons for wanting to consider a new loan, the process can seem daunting. However, it doesn’t have to be. This guide will walk you through the ins and outs of refinancing a commercial mortgage so that you can make the financing decisions that will work best for you and your business.

Why refinance a commercial loan?

Lower interest rates

The first reason why you may want to refinance a commercial mortgage is to take advantage of lower interest rates. Interest rates are still at relative lows, historically, and if your financial situation has improved since the last time you were approved for a loan, you could be a candidate to take advantage of those lower rates.

Increased cash flow

The main benefit of those lower interest rates is that you’ll have a decreased monthly payment. That lower payment means increased savings, which can be a source of greater cash flow.

On the other hand, you also have the option of doing a cash-out refinance, in which you borrow more money than you currently owe. The excess comes to you as tax-free funds to be used however you wish. Usually, people use this method to undertake big projects like making improvements to the property or funding an expansion.

Better loan terms

Another reason why someone might consider refinancing is to create an opportunity to negotiate more favorable loan terms. This could mean moving from an adjustable-rate mortgage (ARM) to a more stable fixed-rate option or simply tailoring the length of the loan to meet your current needs.

Avoiding balloon payments

Additionally, refinancing your loan could be a way to avoid having to make a sizable balloon payment — a larger-than-usual one-time payment at the end of the loan’s term. Mortgages with balloon payments generally come with lower, sometimes interest-only, payments over the life of the loan. However, when the balance of the loan becomes due, it could amount to thousands of dollars. If you don’t have that amount of cash on hand, refinancing will allow you to extend your repayment window.

What are the borrower requirements to refinance?

In order to get approved for a commercial mortgage, you’ll need to meet certain borrower requirements. Though the exact specifications will vary by lending institution, here’s a general overview of what you can expect:

Repayment ability

First and foremost, lenders want see that you have the ability to actually repay the loan. Typically, this is determined by something called a Debt Service Coverage Ratio (DSCR). It’s found by dividing your business’s net operating income by annual loan payments. In this case, it’s best to shoot for a ratio of 1.2 or more.

Management

Ideally, your business will have a strong management history in order to prove its longevity. For this reason, most lenders limit themselves to businesses that have been operating for two years or more. You may also be asked to show a resume or business plan detailing your experience and future projections.

Equity

In this case, equity refers to the stake that the owner has in the property. In some instances in which the property generates enough income on its own, it can serve as its own collateral. In others, the borrower must put up personal collateral of his or her own.

Credit history

Finally, lenders want to be sure that you have a history of paying off existing debts, so they’ll check your credit score. Be aware that both your business and personal scores may be evaluated.

How does a commercial refinance differ from a home loan refinance?

“Lenders look at this type of loan differently,” said James Hoopes, a senior vice president at NorthMarq Capital in Minneapolis, Minnesota.

“With home loans, your personal credit decides whether or not you get the loan. Here, the amount of income the property produces from its tenants is just as — if not more — important than your credit score.”

In addition to differences in qualifying requirements, Hoopes pointed out that there are huge differences in the way residential and commercial loans get paid off.

“Residential loans tend to amortize over the life of the loan,” he explained, “meaning that the homeowners will have usually paid off the loan in full by the end of the term.”

“Commercial loans, on the other hand, tend to have an amortization period that’s longer than the loan term, which means that borrowers can find themselves facing a large payment when the loan comes due.”

Above all, Hoopes cautions borrowers to think carefully before refinancing their commercial loans. These types of loans come with high penalties that aren’t seen when refinancing traditional home loans.

Types of commercial loans

These days, there are a few distinct types of commercial loans that you can choose from. Be sure to research each one before applying so that you know which type of financing is best for your business.

SBA 7(a) loans

The SBA 7(a) loan is the most common type of small-business loan. The loan is popular because it’s backed by the U.S. Small Business Administration (SBA) and is geared toward serving businesses that might otherwise be turned down by banks. These loans come with a limit of $5 million, and the SBA agrees to back up to 85% of loans up to $150,000 and 75% of those above that amount.

CDC/SBA 504 loans

Another government-backed loan, the CDC/SBA 504 loan is different from the SBA 7(a) loan in the way it’s structured. For this, the SBA will provide 40% of the total project costs, while a Certified Development Company (CDC) will provide an additional 50%, and your down payment will account for the final 10%. Due to its structure, there is no limit on how much you can borrow for CDC/SBA 504 loans; however, the maximum amount that the SBA will provide is $5 million.

Private loans

Private loans are offered by a bank or mortgage company. Traditionally, these loans offer competitively low interest rates. In exchange, however, they typically come with higher qualifying standards in terms of acceptable credit scores and operating histories.

How can you find a lender?

Ideally, you’ll already have a lender in place from the last time you applied for a mortgage. However, if that’s not the case, don’t hesitate to do your own research. Ask your industry contacts who they use for financing, use the SBA website’s free lender match service and read online reviews.

The commercial loan refinancing process

“The first step to refinancing a commercial loan is figuring out what kind of loan you need,” advised Hoopes of NorthMarq Capital. This means taking a close look at why you want to refinance, whether it’s to secure a lower interest rate or to fund renovations via a cash-out option.

The next step is to shop around. “Talk to different lenders in your area to get a sense of what they can offer you. Ask about interest rates, fees and other terms until you find the best proposal for you,” he continued.

From there, it’s all about gathering the right documentation and filling out an application. Every lending institution will have different application requirements. However, in general, you should expect to need the following: a property description, a rent roll, proof of income (profit/loss or revenue/expense statements showing several years of operating history) and the borrower’s resume and financial statements.

“After that, you can enter what’s known as the underwriting period,” Hoopes said. “During this time, the lender will order an appraisal and other third-party reports to determine if you’re eligible to receive the loan.”

“Once the loan has been approved, the lender will issue a loan commitment and, at that point, it’s just a matter of preparing the legal documents for closing,” he concluded.

Fees and closing costs

Not surprisingly, fees can vary from lender to lender, as well; however, two common fees that you should watch out for are prepayment penalties and and a guaranty fee. Prepayment penalties can be hefty and result from paying off your existing mortgage early with your new loan.

For their part, only SBA loans are subject to the guaranty fee. This fee is charged to the lender but is passed along to you for the security of having a government-backed loan. Only the amount of the loan that’s backed by the SBA is taxed, rather than the loan’s face value.

Luckily, closing costs are a bit more predictable. “As a rule of thumb, for loans under $10 million, I would estimate 2% of the loan amount for both closing costs and lender fees, not including legal fees,” Hoopes said. “But they can move up from there.”

The bottom line

At first glance, commercial mortgage refinancing can seem like an overwhelming process, but it doesn’t have to be. With a little bit of research, planning and forethought, you should be able to find a commercial loan that serves your and your business’s needs.

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.

Tara Mastroeni
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Tara Mastroeni is a writer at MagnifyMoney. You can email Tara here

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What You Should Know About VA Construction Loans

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Ready to build your dream home? If you’re an active-duty service member or veteran of the U.S. Armed Forces, you may not realize that the Veterans Administration (VA) backs construction loans to help offset the costs of turning that house in your head into a reality.

Jesse Gonzalez, broker of record at North Bay Capital in Santa Rosa, California, and member of the Veterans Association of Real Estate Professionals (VAREP), said these loans are relatively new and not well-known, even among active-duty service members. “There are not a lot of mortgage professionals doing these,” Gonzalez said. “My competition is sparse in this area because most mortgage professionals simply don’t understand it.”

But experts like Gonzalez say a VA construction loan is a fantastic resource for folks who want to build a home. Unlike conventional construction loans, VA construction loans offer a host of special benefits — from the possibility of 100% financing without a down payment to locked-in interest rates that won’t change over the years of the loan.

So, what do you need to know to take advantage of this resource? Do you need a special credit score or an approved contractor to build your new home? Let’s take a look at what you might need to do to get some help from the VA to build that house.

Qualifications for a VA construction loan

Much like VA loans designed to purchase an existing home, VA construction loans carry a number of eligibility criteria that lenders will look for before offering you this special type of mortgage.

Before you call a private lender (more on that later), take a look at some of the qualifications you’ll likely need to get one of these loans:

  • Loans are open to veterans, active-duty military or eligible surviving spouses of members of the Armed Forces. You can check your eligibility on the VA’s website.
  • Lenders require a Certificate of Eligibility (COE), a special form issued by the government to prove you’re eligible for a VA-backed loan.
    Homes must be built by a licensed contractor (building it yourself or with relatives is typically not allowed).
  • Homes must be built as a primary residence and occupied within 60 days of completion (exceptions are made for business units built on properties primarily intended for residential use).
  • A minimum credit score of 620 is typically required, although some exceptions can be made.

Minimum property requirements for VA construction loans

Even if you and your home plans fit the bill for a VA construction loan, you should be prepared to jump through a number of hoops once you actually start construction.

Although the VA doesn’t put restrictions on the overall design of the house — whether you build a cute bungalow or a sprawling McMansion is up to you — if you’re going to build with a VA-backed loan footing the bill, your property will have to meet several requirements regarding usage, utilities and the like.

Some of the major things to be aware of include

  • Usage — VA loans are intended to help people with housing, so it’s no surprise the VA construction loan requires the primary use be residential. Up to four units are allowed on certain properties, depending on size. Business units are allowed, provided they don’t “impair the residential character of the property,” according to VA rules, or exceed 25% of the gross floor area.
  • Living space — The size of the living space must accommodate living, sleeping, cooking and dining space.
  • Utilities — Water, sewer, gas and electricity must be available for the unit (or units, if there are multiple). Homes must have a means for safe sewage disposal, and connection to public sewerage is required, if it’s feasible.

Steps to getting a VA construction loan

If you’re interested in applying for a VA construction loan, a private lender may be able to help you, and some of the process will be similar to that of a conventional loan application.

  1. Certificate of Eligibility. This step is required only for VA-backed loans, not conventional loans, but it’s a must! To apply, you can fill out an online application, send in your documents by mail, or ask a lender for help.
  2. Prequalification. This is the first step of any loan process, and it will include a credit check as well as the need to provide the COE, income documents, and possibly proof of other assets. You may also be asked to undergo the following:
    1. Builder registration. This is a review of your chosen contractor to ensure it’s reputable and up to the task.
    2. Deal calculation. This number crunching will be done by the lender as he or she figures out a total loan amount that includes any closing costs, seller or building concessions, interest and more.
  3. Underwriting. This is step two of the process. Your lender will submit the loan for review. As with conventional loans, the underwriter will look at your income, credit, assets and construction plans. Information to verify your debt-to-income (DTI) ratio may also be requested by some lenders. In the case of a VA construction loan, the underwriter also will look to see that your builder is approved by the VA.
  4. Closing. VA construction loans allow for something called a “one-time close.” While traditional building loans usually require the borrower take out and refinance a construction loan as a permanent home loan once construction is complete, VA borrowers get to skip that second step. Instead, there’s a single closing, at which time the borrower and lender sign all necessary paperwork and money is handed over so that construction can begin. The builder will use the money to build, but payback of the loan won’t begin until construction is complete.

Pros of a VA construction loan

Why would you want to get a VA construction loan, if you’re eligible, when you could just buy an existing home?

According to Evan Wade, co-founder and partner of Philadelphia Mortgage Brokers in Philadelphia and member of the Association of Independent Mortgage Experts (AIME), VA construction loans are especially popular in areas with limited housing inventory.

“The VA does not wish to restrict the type of homes a veteran is able to buy,” Wade explained. “If a veteran wishes to construct a brand new house while still being able to utilize their hard-earned benefits, they should definitely be able to do so.”

The benefits don’t stop there. A construction loan could allow the freedom to design a home that truly suits your and your family’s needs, instead of making do with a home that’s simply “almost right.” Here are some other benefits for which you might qualify with a VA construction loan:

  • Lower interest rates
  • Skipping a down payment
  • Avoiding Private Mortgage Insurance (PMI), which typically is not required

Cons of a VA construction loan

There are, of course, some aspects of a VA construction loan that might not make it a perfect fit. Before you approach a lender, you might want to take the following into consideration:

  • VA construction loans require builders be approved by the VA. That means you can’t build your home yourself or use friends and family helpers to cut construction costs.
  • Some building styles are banned under this construction loan, such as a tiny house.
  • Not all lenders, even lenders who offer VA loans, provide VA construction loans.

Where can you find a VA construction loan?

It can be tough to find a lender who is versed in VA construction loans; however, they are out there. Asking friends or family who are also in the military world for word-of-mouth recommendations can be a great way to find the perfect lender who can walk you through the process.

VAREP also offers a “find a member” option on its website to assist in locating military-friendly mortgage professionals located around the U.S.

Before you borrow

When it comes to building a home, the VA construction loan is a valuable option for would-be homeowners who qualify. If you’re not sure one is right for you, you might also want to consider a traditional construction loan.

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.

Jeanne Sager
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Jeanne Sager is a writer at MagnifyMoney. You can email Jeanne here

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