Advertiser Disclosure

Life Events, Mortgage

Open Credit Report Disputes Can Sabotage Your Chance For a Mortgage

Monday, June 29, 2015

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Kate Dore Kate Dore

Purchase agreement for house

After months of searching through listings, you’ve finally found your dream home. Your offer has been accepted and you’ve started daydreaming about future dinner parties, contemporary light fixtures, and planting a backyard herb garden. Just one problem — the financing hasn’t been approved.

The mortgage underwriting process can seemingly last a lifetime when it’s standing between you and your dream home. However, the timeline hasn’t always been such a nail-biter for prospective homebuyers.

The housing bubble leading up to The Great Recession created a hunger from investors for mortgage-backed securities. As a result, borrowing costs were lowered, lending standards were loosened, and many homebuyers were approved for loans they couldn’t afford. When the housing market collapsed, many Americans were in trouble. These predatory lending practices contributed to both the financial crisis and The Great Recession.

A direct response to The Great Recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act or “Dodd-Frank” was signed into law in 2010. This financial reform legislation included the creation of the Consumer Financial Protection Bureau who established the Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act.

These new standards include a much more comprehensive financial verification process for mortgages including a closer look at an applicant’s credit history.

Why Do Credit Scores Matter?

Before you begin the home buying process, it’s smart to review your credit report and have a copy of your FICO score handy. Your FICO score is assigned by the credit reporting agencies based on the information within your credit report. A FICO score also factors into your Ability to Repay qualifications.

Tip: You can request a free credit report once a year from AnnualCreditReport.com.

Credit scores aren’t the only thing mortgage loan officers worry about, but a FICO score can heavily influence the interest rate you are able to secure. The highest scores qualify consumers for the best possible mortgage rates.

It’s critical to arm yourself with this information in advance. Plus, it gives you the opportunity to dispute any inaccuracies you’ve discovered and clean up your report.

What is a Credit Report Dispute?

Credit report inaccuracies are relatively common. Inaccurate information can happen for a variety of reasons — a clerical error, a shared name, or even identity theft. And inaccurate information in your credit report can harm your score. That’s why it’s important to regularly keep track of what’s happening.

Under the Fair Credit Reporting Act (FCRA), consumers have the right to dispute inaccurate information. Fortunately, it’s easier than ever to file a dispute with all three credit reporting agencies online.

The problem is, many disputes can go unresolved for long periods of time. An unresolved dispute can be particularly troublesome for consumers applying for a mortgage. Many applicants don’t realize an open credit report dispute can raise a red flag to lenders, and may even prevent mortgage approval.

[Learn more about Fannie Mae’s Frequently Asked Underwriting Questions here.]

How Open Credit Report Disputes Hurt a Mortgage Application

If open credit report disputes are relatively common, how can they hurt a mortgage application?

When a dispute is filed, credit reporting agencies are required to label the item as “in dispute.” An item being actively disputed can not harm your FICO score. In fact, your score will be temporarily inflated while harmful items are being investigated.

Lenders know credit reports with disputed items are not the most accurate picture of a consumer’s history and many require for this status to be removed before approving a mortgage application. This leaves some consumers with a difficult decision to make — accept costly credit report errors or delay applying for a loan until disputes have been resolved.

Fannie Mae & Freddie Mac

Fannie Mae’s automated underwriting system, Desktop Underwriter (DU), automatically issues the warning message “consumer disputed” when a credit report reveals a 30-day or more delinquency reported within 2 years of the inquiry. The lender must confirm the accuracy and completeness of the borrower’s credit report by obtaining a new report without the dispute or manually underwrite the loan.

Loan Prospector, Freddie Mac’s automated underwriting system, follows a similar process. Gaining access to a new credit report with updated information is not an option for the borrower if the creditor won’t correct the information. And when a consumer files a complaint with the credit reporting agencies (TransUnion, Equifax, and Experian), the agencies will often defer to the creditor.

Last fall, the National Consumer Law Center wrote a letter to the Federal Housing Finance Agency, urging reform for the treatment of consumers with credit report disputes. They believe lenders who reject applicants because they don’t want to manually underwrite the loan are in violation of the Equal Credit Opportunity Act (ECOA).

FHA Approved Mortgages

FHA approved mortgages will approve an application with a disputed credit report, however, the process may still be time consuming.

A couple of years ago, the U.S. Department of Housing and Urban Development decided to look more closely at open disputes and provided new instructions for lenders in a Mortgagee Letter (ML). This ML addresses both derogatory and non-derogatory disputes and requires lenders to more carefully evaluate the risk associated with a consumer.

LendingTree

LEARN MORE Secured

on LendingTree’s secure website

NMLS #1136 Terms & Conditions Apply

LendingTree is our parent company

 

What To Do if You’re Still Struggling

Dealing with an unresolved credit report dispute can turn into a consumer nightmare. Even if you’ve followed best practices, like submitting credit report disputes both in writing and online, you may still be unhappy with the results.

Fortunately, you can still submit a complaint to the Consumer Financial Protection Bureau. They will forward your complaint directly to the company in dispute and work to get a response from them. Another option is to seek guidance from a consumer advocate or an attorney. The National Foundation for Credit Counseling may be a helpful place to start.

Because a credit report and FICO score have such a strong influence on lifelong financial health, the best defense is to be proactive. Regularly monitoring your credit report and working to fix inaccuracies before applying for a mortgage is the best way to prevent major problems.

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.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

TAGS: , ,

1
saving

Featured Accounts AD

* Sponsors listed are Member FDIC or NCUA insured.

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

Making the Most of Today’s Minimum Mortgage Requirements

Friday, December 7, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Denny Ceizyk Denny Ceizyk
iStock

The past several years house values have increased in many parts of the country. Median incomes in the United States have also risen the past four years in a row. If your income is heading higher, or you’re noticing houses are selling for more in your neighborhood, you may be thinking about buying a home, or accessing some of the equity in the house you currently own. The biggest factor that will drive your interest rate and monthly payment will be your credit history.

Buying or refinancing with bad credit can be challenging, but there are ways to overcome those credit issues if you understand how lenders look at all the parts of your loan application when determining your ability to repay a mortgage loan.

What lenders look at if you are buying a home

  • Down payment: This is the amount required for you to “put down” in order to buy the home. The more you put down, the lower your mortgage payment is. Jump ahead for more details on down payments.
  • Debt-to-income ratio (DTI): There are two ratios mortgage lenders look at. Your front-end ratio is your monthly payment on your home divided by your gross income. Your back-end ratio takes all your debt — such as student loans, car loans, credit cards and other monthly debt, as well as your new mortgage payment — and divides it by your gross income. The back-end ratio is the one that has the biggest effect on your loan approval. Jump ahead for more details on DTI requirements.
  • Credit score: In order to determine your interest rate, loan costs and monthly payment, most mortgage lenders will access credit scores from three credit bureaus, and in most cases take the middle of the three scores. The most common credit bureaus used for mortgage credit scoring are Experian, Equifax and TransUnion. Jump ahead for more details on credit score requirements.
  • Type of property: Condominiums, co-ops, manufactured homes and multi-unit properties have different lending requirements. It’s important to let your lender know if you are buying this type of property, as it will affect your ability to qualify, your interest rate, how much down payment is required and the DTI requirement. In some cases, the property itself will have to go through a separate approval process to make sure it meets the lender’s “project” guidelines.

What lenders look at if you are refinancing a mortgage

  • Credit score: Much like a purchase loan, your credit score will determine your interest rate and how much you can borrow compared to the value of your home. Jump ahead for more details on credit score requirements.
  • How much equity you have: This is determined by the difference between your current mortgage and the value an appraiser gives your home at the time of your refinance. For example, if you have a $250,000 mortgage and your home appraises for $300,000, you have $50,000 in equity. How much equity you can borrow depends on your credit score, the loan program you are eligible for and your debt-to-income ratios. Jump ahead for more details on borrowing limits.
  • Debt-to-income ratio: Lenders look at the same ratios as they do for purchases. If you are taking equity out of your house with a cash-out refinance, lenders may have stricter requirements for your max DTI to make sure you aren’t borrowing too much compared to what your current monthly payment is, especially if your credit scores are near the minimums. Jump ahead for more details on DTI.
  • Type of property: Condominiums, co-ops, manufactured homes and multi-unit properties will not allow you to take out as much cash. Property type may affect your ability to qualify because of stricter requirements for approval, higher down payment requirements and, often, higher interest rates.

What is the minimum down payment to get a purchase mortgage?

Many people mistakenly believe that the changes to the mortgage market made it necessary to save up 20% to buy a home. Lenders have been gradually easing guidelines, and there are a number of programs that allow for a little as 0% down payment.

  • Conventional: Most conventional mortgage programs require at least a 5% down payment. This can be from your own savings, a gift from a relative or a combination of the two.
  • FHA: The HUD-insured FHA mortgage requires 3.5% down and allows for credit scores down to 580. It also allows for down payments from gifts.
  • VA: Qualified veterans can purchase a home with 0% down with verification that their service meets the requirements for the VA home loan guarantee. If you are a veteran, you can determine your eligibility for VA financing by clicking on the certificate of eligibility for a home loan link.
  • USDA: This rural loan program allows for as little as 0% down financing on eligible properties. You can use the online USDA property eligibility tool to find qualified homes.
  • HomeReady®/HomePossible®: Both of these conventional loan programs allow for down payments as low as 3%.
  • Down payment assistance: Government grants, municipal bond programs and income-based housing assistance may be available depending on your income and where you are buying. It’s best to contact your local government housing or nonprofit housing agencies to find out what might be available.

What is the maximum I can borrow for a cash-out refinance mortgage?

  • Conventional: Conventional mortgage programs allow you to borrow up to 80% of the value of your home and don’t restrict what you use the cash out for.
  • FHA: The FHA mortgage is a government loan program that allows you to access up to 85% of the value of your home and does not restrict how you use the cash out.
  • VA: Qualified military veterans can borrow up to 100% of the value of their home, and there are no restrictions on the use of the cash out.
  • USDA: The USDA loan program does allow cash out up to 100% of the value of the house, but only for repair or remodeling of the home. Since the funds have to be provided to a contractor, this is considered more of a construction loan than a cash-out refinance. All funds must be paid to contractors for the repair or construction work.

What is the minimum income needed to get a mortgage?

While most people assume their credit is the most important factor in getting approved for a loan, debt-to-income ratio has the biggest effect on a lender’s decision to make a loan. Lenders look at the total amount of debt plus your mortgage payment divided by your gross income very seriously to make sure you will be able to repay your mortgage.

  • Conventional: The standard qualified mortgage guideline is 43% DTI (back end), although many lenders approve borrowers with a 50% back-end DTI with additional compensating factors (there’s more on that in the next section).
  • FHA: The back-end ratio guideline for FHA is 43%, although loans are approved over 50% with additional compensating factors.
  • VA: VA does not have a maximum qualifying debt ratio, but rather a residual income test borrowers must meet in order to qualify for a loan. This calculation is based on a veteran’s family size and varies by location. The calculation starts with after-tax income and subtracts all debt and a maintenance-and-utility calculation based on the size of the home. If the veteran meets the requirement, the loan can be approved, even with very high debt ratios.
  • USDA: Front-end/back-end DTI maximums are capped at 29%/41%, with exceptions to 32%/44% with compensating factors.
  • HomeReady/HomePossible: The guideline maximum back-end DTI is 50% based on automated underwriting guidelines. The HomeReady program has income limits, but the HomePossible program does not. Be sure to check with your loan officer for the income limits in your area.
  • Down payment assistance: The DTI requirements vary by state and program, so it’s best to contact your local nonprofit or government housing agency to find out what they are in your area.

What is the minimum credit score to get a mortgage?

Many current and aspiring homeowners are surprised to learn that they can get approved for mortgage financing with scores as low as 580 and very little down payment. They are equally as surprised by how much more the monthly payment and closing costs are as a result of their low credit scores.

Refinancing with bad credit costs a lot more in the short and long run — the more you borrow compared to the value of your home, the higher the interest rate is going to be, and the more you’ll pay over the life of the loan. It’s very important to do a cost-benefit analysis with your mortgage loan officer to discuss the financial goals you are trying to accomplish with a refinance, especially if you have bad credit.

Below is a graph showing the effect of credit scores on interest rates for consumers who received loan offers through the LendingTree marketplace in October 2018. (LendingTree is MagnifyMoney’s parent company.)

FICO RangeAverage APRAverage Down PaymentAverage Loan AmountAverage LTVLifetime Interest Paid*

All Loans

5.35%

$59,974

$239,260

82%

$232,857

760+

5.20%

$77,531

$251,149

79%

$225,009

720-759

5.26%

$56,552

$230,775

83%

$227,855

680-719

5.50%

$38,486

$212,562

86%

$240,397

640-679

5.87%

$69,559

$199,357

75%

$259,714

620-639

5.96%

$59,151

$191,106

77%

$264,351

*Lifetime interest paid is calculated based on the overall average loan amount to enable comparison.

Even though borrowers with scores as low as 620 received mortgage offers, the amount of interest paid went up $23,954 for the life of the loan versus borrowers with scores of at least 680.

The minimum credit score requirements for purchases and refinances are the same. Some lenders may require higher minimum credit scores if they don’t specialize in a certain kind of mortgage program (like an FHA or USDA loan), so be sure to shop around if you are being told that your scores are too low for a particular type of mortgage loan:

  • Conventional: 620 is the standard minimum for Fannie Mae and Freddie Mac conventional mortgage loans.
  • FHA: FHA loans will require a 580 FICO score for most purchase and refinance loans. Exceptions can be made for scores as low as 500, but these will require higher down payments for purchase loans, and a higher amount of equity for refinances.
  • VA: Unlike the other programs listed here, the VA does not have an actual published minimum credit score requirement. Most lenders will require a 620 FICO score, although like FHA, exceptions can be made for borrowers with higher down payments or more equity.
  • USDA: Most lenders will require a 640 score, although exceptions can be made down to 580.
  • HomeReady/HomePossible: This program requires a 620 score minimum, but some lenders may require higher score limits.
  • Down payment assistance: Most down payment assistance programs will require at least a 640 credit score, but you’ll want to check, as the guidelines for these programs change frequently.

Ways to overcome credit score weakness: compensating factors

If you’ve been told that you have a low credit score, take heart: Lenders look at more than just your credit score when making mortgage loans. There are a number of things that you can provide to compensate for a weak credit history, and many lenders are willing to take a second look at a loan application they initially rejected if you can provide proof of some of these items.

Keep in mind that lenders are looking at what they call “layers of risk.” That means if you only have one layer — bad credit — but have other good layers, like a stable income and savings, you may still be able to secure approval.

Lower debt-to-income ratios and long-term job stability: If you are able to borrow below the maximum debt ratios, and have at least two years in your current job, you will have a better chance of getting approved, even if your credit scores are near the minimums. This might mean you have to buy a little bit less of a home, so keep that in mind if you are starting the house-hunting process knowing you have some credit problems.

Extra reserves and savings: Extra savings, in addition to other retirement savings, can help offset a bad credit history. These are commonly referred to as “payment reserves” and show the lender that if you had to, you could use these funds to pay your mortgage for a certain time period after closing. Be sure to provide all of the assets you have — that cash-value life insurance policy your grandma got you when you were 18 may come in handy, and any 401(k)s can be used toward a reserve requirement (they don’t have to be liquidated).

Having your own down payment versus a gift of down payment assistance: If you can save your own down payment, it will help show you have already made a financial commitment toward the house.

Minimizing credit use 60 to 90 days before you apply for a mortgage: Hold off on buying that brand new car, and limit your credit use to small purchases on credit cards for 60 to 90 days before you apply for a mortgage.

Credit repair: There are a variety of credit repair companies that can help you, but it may take three to six months, and there is usually a monthly cost involved. Some lenders may suggest rapid rescoring — especially in cases where you may have paid down a balance recently, but it hasn’t reflected on your credit report yet. This allows for corrections to your credit card balances that are reflected within five to seven days, instead of the normal 30 to 60 days it may take a credit repair company to correct the information. As with any financial product, be sure to shop around.

Are there other options for refinancing or buying with bad credit?

If you aren’t able to get a mortgage using the compensating factors outlined here, there are lenders that are beginning to offer programs referred to as “non-QM,” ”non-Dodd Frank” or “alternative” loans.

They allow for borrowers who have had major credit events like recent foreclosures or bankruptcies to borrow money at much higher rates. In most cases the down payment requirement is at least 10%, but usually up to 30% for very low credit scores. For refinances, you’ll be capped at much lower maximum loan amounts, which means less cash back to you.

Be sure to discuss an “exit” strategy with your loan officer if you decide to get this type of loan, so that you can be in a more traditional program with a refinance or pay the entire loan off within a couple of years.

Be sure to get second, and third, opinions

There are many different lenders offering a variety of programs to overcome credit challenges.
Before you apply, compare mortgage offers online so you can see what your payment will look like based on your current credit score.

Whatever your situation, be sure to explain all the details to your mortgage professional, and be prepared to provide supporting documents. If you can show that you understand what caused the credit issues and provide proof of the other good things going on with your income and assets, a lender may be willing to consider your refinance or purchase mortgage application for approval.

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.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

TAGS:

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

Resources for Repairing Your Home After Hurricane Michael

Thursday, December 6, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Taylor Gordon Taylor Gordon
iStock

Hurricane Michael devastated communities in Florida and southern parts of Georgia in October 2018. Since then, federal agencies have committed hundreds of millions of dollars in aid to people affected by the storm.FEMA has approved more than $100 million in housing assistance, and the Small Business Administration has approved over $157.2 million in disaster loans for homeowners, renters and businesses.

If you’re a Hurricane Michael survivor living in a designated disaster area, there’s still time to submit an application for federal aid. The deadline for individuals and households to apply for Hurricane Michael disaster assistance is Dec. 10.

Money from FEMA doesn’t take the place of insurance and is not meant to completely rebuild your home, but the aid could help you get back on your feet. Review your insurance policy to find out what’s covered for repairing and replacing damaged property. Damage that won’t be covered by your insurance could be restored with a low-interest disaster relief loan.

Here are some more resources that can help.

If you’re looking for more general information on options for repairing your home after a hurricane, see our guide here.

Answers to insurance questions after Hurricane Michael

Home and wind insurance

Home insurance covers loss or damage to your home and personal property after events like theft or fire. A home insurance policy may cover accidental injury or death as well. Home insurance policies typically do not provide coverage for damage caused by floods.

Flood insurance is a policy that specifically covers flood-related loss. Flood insurance can be bought through private insurers or the National Flood Insurance Program. Flood insurance comes in two parts — building coverage and contents coverage. Building coverage insures the foundation, electrical, plumbing, air-conditioning, furnaces, some appliances and more. Contents coverage covers personal property like furniture, electronics and other valuables.

Flood insurance isn’t required for all homeowners, but it is required for homes in high-risk flood zones that have mortgages from federally regulated lenders.

Florida has many moderate to high-risk flood zones, so many homeowners affected by Hurricane Michael likely have at least the minimum coverage required by law.

The National Flood Insurance Program has several resources available to help you understand how flood insurance works. If you have insurance through the NFIP, you can learn about the coverage and start the claims process at FloodSmart.gov.

Hurricane and windstorm deductible

For areas along the Atlantic and Gulf coasts, a deductible for hurricanes and windstorms may be part of your home insurance policy. A deductible is the amount of money you pay before insurance kicks in and starts paying for damages.

A hurricane and windstorm deductible is often a percentage of your home’s value instead of a flat rate like other deductibles. The storm deductible is separate from the deductible for other perils (like theft, fire, etc.).

This deductible should not be confused with flood insurance. Unlike flood insurance, the hurricane or windstorm deductible offers protection when rain, snow, sleet, hail, sand or wind causes damage to your exterior or interior. Flooding is a separate issue.

Who can I call for insurance assistance?

Florida Consumer Helpline
1-877-693-5236

Georgia Office of Insurance helpline
1-800-656-2298

Florida residents can call the Florida Department of Financial Services Insurance Consumer Helpline at 1-877-693-5236 with insurance-related questions. The state of Florida has quite a bit of information online to help residents recover from Hurricane Michael as well. The disaster preparedness resources page on the Florida’s Department of Financial Services website explains what to do after a disaster, what to expect when you file a claim, where you can find shelters and other information.

Georgia residents with insurance questions or complaints about a policy can visit the Office of Insurance and Safety Fire Commissioner website or call the office at 1-800-656-2298.

Learn more about how flood insurance and disaster relief work in our complete guide.

Answers to financing questions after Hurricane Michael

A loan can help you finance repairs and damages that are not covered by insurance and other resources. SBA disaster loans are available to homeowners, renters and business owners in eligible counties to repair or replace real estate and personal property.

For business owners specifically, the Florida Small Business Emergency Loan Program in Florida was established after Hurricane Michael to offer short-term, interest-free loans to business owners waiting for insurance claims or federal assistance. The deadline to apply for this program is Dec. 7. Business owners can learn more here.

There’s also FHA Disaster Relief available for homeowners who can’t make payments on their FHA-insured mortgage in Florida’s Bay, Franklin, Gulf, Taylor or Wakulla counties. FHA Disaster Relief may offer a 90-day moratorium on foreclosure. Call FHA’s Resource center at 1-800-304-9320 for details.

Other financing options for homeowners after Hurricane Michael include FHA 203(h) loans, FHA 203(k) loans, USDA Home Repair program, VA rehab loans and Fannie Mae HomeStyle® Renovation mortgages. Learn more about how these options help you after a natural disaster here.

Filing for federal disaster assistance after Hurricane Michael

Currently, FEMA.gov lists the following counties in Florida and Georgia as disaster areas where individuals may be able to get disaster assistance:

Florida

  • Bay
  • Calhoun
  • Franklin
  • Gadsden
  • Gulf
  • Holmes
  • Jackson
  • Leon
  • Liberty
  • Taylor
  • Wakulla
  • Washington

Georgia

  • Baker
  • Calhoun
  • Clay
  • Crisp
  • Decatur
  • Dougherty
  • Early
  • Grady
  • Laurens
  • Lee
  • Miller
  • Mitchell
  • Randolph
  • Seminole
  • Sumter
  • Terrell
  • Thomas
  • Tift
  • Turner
  • Worth

You can apply for assistance online at DisasterAssistance.gov or over the phone. The Disaster Assistance Helpline number is 1-800-621-3362 and it’s open from 7 a.m. to 11 p.m. Eastern, seven days a week. Disaster Recovery Centers are available for in-person assistance, as well, if you have questions about your case. Search for the nearest center on the FEMA.gov website or text DRC and your ZIP code to 43362 (4FEMA). The deadline for individuals to apply for disaster assistance is Dec. 10.

Final thoughts

Residents of Florida are no strangers to hurricanes, but that doesn’t make the damage any less catastrophic. Fortunately, there’s insurance, financial assistance, disaster loans and other support to help you recover.

The DisasterAssistance.gov is a main hub for disaster relief information. Florida offers a wealth of information about Hurricane Michael and how to handle insurance claims at the Chief Financial Officer’s website. You can learn more about disaster assistance in Georgia here.

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.

Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here

TAGS:

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

2019 Loan Limits Increase as Home Prices Rise

Monday, December 3, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Crissinda Ponder Crissinda Ponder
iStock

Home loans backed by government-sponsored enterprises Fannie Mae and Freddie Mac received another annual increase in their limits for 2019.

The maximum conforming loan limit for one-unit properties has increased from $453,100 to $484,350 for most of the U.S., according to a Nov. 27 statement from the Federal Housing Finance Agency (FHFA).

In higher-cost housing markets where median home prices exceed the conforming loan limit for most of the U.S. (the “baseline”), the 2019 maximum loan limit is $726,525, which is up from $679,650 in 2018. This limit is also referred to as a “ceiling,” and it’s equal to 150% of the annual baseline loan limit.

Loan limits for multi-unit properties have increased to the following amounts:

  • Two-unit: $620,200
  • Three-unit: $749,650
  • Four-unit: $931,600

There are 47 U.S. counties or county equivalents that didn’t see an increase in their conforming loan limits, the FHFA said.

Why loan limits change

Conforming loan limits must be adjusted annually to reflect average home price changes. This is a requirement included in the Housing and Economic Recovery Act of 2008. The law also states that in instances when average home prices decrease, conforming loan limits won’t change for the following year.

Loan limit changes are based off the FHFA’s House Price Index (HPI), which the agency releases quarterly. On the same day it announced the new loan limits, FHFA also released the HPI for the third quarter of 2018, which showed home prices increased by 6.3% from Q3 2017 to Q3 2018. Home prices increased by 1.3% when compared with Q2 2018.

The Federal Housing Administration also adjusts its annual mortgage limits and does so according to the FHFA’s conforming loan limit figures. FHA limits are calculated by taking 65% of the national conforming limit amount in low-cost areas. For high-cost areas, the FHA sets limits at 150% of the national conforming amount. New limits for FHA loans are usually announced each year in early December.

What this means for mortgage borrowers

Conforming loans are mortgages that conform to the standards set forth by Fannie Mae and Freddie Mac, which include not exceeding the baseline and ceiling limits issued by the FHFA each year. Borrowers who want to take out a mortgage that is higher than the stated loan limits are typically looking for a non-conforming, or “jumbo” mortgage.

Jumbo mortgages are typically associated with high-priced, luxury homes and come with strict underwriting guidelines, such as a required down payment of 20% or more and a credit score of at least 740.

On average, jumbo loans have recently had lower rates than conforming loans, possibly because of their stricter underwriting standards or increased competition since the housing meltdown. The average rate for a 30-year fixed-rate jumbo loan with at least a 20% down payment is 4.88%, according to the Mortgage Bankers Association’s latest weekly mortgage applications survey. By contrast, the average interest rate for 30-year fixed-rate conforming loans with at least 20% down is 5.12%.

In related news …

New residential sales data for October 2018 was released Wednesday. The median sales price for new homes sold in October was $309,700 and the average sales price was $395,000, according to the joint report from the U.S. Census Bureau and the Department of Housing and Urban Development.

The number of new homes sold in October was nearly 9% lower than September and 12% below the October 2017 rate. There were 336,000 new homes for sale at the end of October, which represents 7.4 months’ worth of housing supply, according to the seasonally adjusted estimate included in the report. That’s an increase from the 6.5 months’ supply available at the end of September.

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

TAGS:

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

5 Reasons You Should Make Biweekly Mortgage Payments

Friday, November 23, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Lindsay VanSomeren Lindsay VanSomeren
iStock

Maybe you’ve heard whispers among friends and family that making biweekly mortgage payments — once every two weeks instead of once a month — can help you pay off your loan sooner. In most cases that’s true, but did you know there are a ton of other benefits, as well?

If you’re intrigued, stay tuned. We’ll show you exactly how to make biweekly payments work for you and the benefits.

The secret extra payment

If you’re like most people paying your mortgage once per month, you’ll get 12 full mortgage payments in a year.

But what if you make biweekly payments? In that case, either you or your lender will split your payments in half and submit a payment twice each month. For example, if you normally make a $1,000 monthly mortgage payment, you’ll instead make a $500 mortgage payment every two weeks.

This leads to the quirk in the calendar that lets you get ahead. There aren’t a uniform number of days in each month, and so by making biweekly mortgage payments, you’ll make 26 “half-payments,” or 13 “full” payments per year instead of the normal 12 payments. In other words, you make one extra full payment per year, and you won’t even feel it because you’ve budgeted for it.

This extra payment might not seem like much, but over the course of the loan, it has huge effects.

Let’s look at an example. Say you just bought a house and have a $200,000 mortgage with a 30-year loan term, and your interest rate is 4.125% APR. Here’s what will happen if you stick to the regular monthly mortgage plan, versus opting for biweekly mortgage payments:

 

Monthly Payment

Biweekly Payment

Payment amount

$775.44

$387.72

Number of payments per year

12

26

Total Paid per Year

$9,305.28

$10,080.72

Number of Years

30

25 years and 10 months

Total Interest Paid

$119,158.25

$100,077.57

Total cost

$325,158.25

$306,077.57

In this example, making biweekly payments allows you to pay off your mortgage a full four years and two months earlier, and saves you $19,080.68 to boot.

One caveat: Rarely, some lenders will charge you to make biweekly payments, since it’s essentially twice as much work for them to process. If your lender does this, it may be better to stick with your normal monthly payment plan. If you want to make biweekly payments, you can still do so manually for free by setting aside a portion of your paycheck on your own, paying your normal monthly payment, and then submitting an extra payment once per year.

The case for making biweekly mortgage payments

1. Build equity faster

Home equity is the amount of your home that you actually own versus how much you owe your mortgage lender. For example, if your home is worth $200,000 and you still owe $150,000 on your mortgage, you have $50,000 of home equity.

One of the biggest benefits of making biweekly mortgage payments is that you build home equity faster. You may not realize it, but when you are in the early years as a mortgage borrower, the vast majority of your mortgage payment goes toward interest — not the principal balance on your loan. And until you are significantly chipping away at that principal loan balance, you aren’t actually gaining equity (unless, of course, the value of the home increases enough to eclipse your mortgage loan balance).

When you make biweekly payments and manage to squeeze in that extra payment each year, you’ll be making extra payments toward reducing the balance of your loan. And that extra payment will give you a small push toward building equity.

There are a lot of advantages to having as much home equity as possible. If you have enough home equity, you can take out a home equity loan to finance things like home repairs or remodels, for example.

Another example where having more home equity can help you is when you sell your house. Many homeowners are surprised how expensive it can be when they go to sell their home, all thanks to closing costs, which can amount to tens of thousands of dollars on top of your original loan.

That’s a big problem if you don’t have enough equity built up in your home to cover the cost. You might end up actually having to pay to sell your home, and losing your down payment money for your next home to boot. One of the best ways to guard against this is to build up as much home equity as you can as fast as you can, and making biweekly mortgage payments is a good way to do that.

2. Pay less interest over time

When you make a mortgage payment, the bank actually splits up up the money and divvies it out to various things. During the first few years after you take out your mortgage, most of the money will be going toward interest and very little will be going to reducing the balance of your loan (sadly). This process is called amortization, and anyone who’s ever had a loan literally had to pay their dues, especially during those first few years.

But, again, here’s where making biweekly mortgage payments can really help you. Since you’ll be making an extra payment each year, you’ll pay down the principal even faster. This means that each interest payment thereafter will be smaller than if you hadn’t made that extra payment.

Over the course of your loan, this can save you a huge amount of money. For example, if you have a $400,000 mortgage, making biweekly mortgage payments can save you over $38,000 in interest.

3. Pay off your mortgage faster

If you make biweekly payments, you’ll be chipping away at your principal balance faster than normal. We won’t lie — it’ll still seem like you’re paying off the mortgage at a glacial pace, but you’ll have a slightly sharper pick than your neighbor making monthly payments.

If you have a $300,000 mortgage and you’re making biweekly mortgage payments, you can actually shave off four years and two months from your loan. Instead of being in debt for 30 years, you’ll only be in debt for 25 years and 10 months.

4. Drop your PMI payment sooner

In 2017, the average homebuyer bought their home with a 10% down payment. That’s not bad, but for most conventional loans (not including FHA, VA and USDA loans), you’ll need a down payment of at least 20% to avoid paying for private mortgage insurance each month. This fee, which is tacked onto your monthly mortgage payment, protects your lender in case you default on your loan. In other words, it doesn’t even protect you—it protects your lender in case you mess up.

Once you reach 20% equity in your home, you can ask your conventional lender to cancel your PMI payments. If you make biweekly payments, you can actually get there a lot faster because you’ll be paying down the balance of your loan quicker than normal.

Let’s look at an example. If you have a $350,000 mortgage and only put down 10% like most people, you’d owe an extra $164.06 each month to pay for PMI. If you make biweekly payments, you’ll hit 20% equity 13 months sooner than if you were making monthly mortgage payments. That’ll save you an extra $2,132.78 in PMI charges.

5. It’s easier to budget

Even if you’re a super budgeter and on top of your finances, saying goodbye to so much cash at once hurts.

If nothing else, biweekly mortgage payments take the stress out of those big payments. If you’re paid biweekly, it’s even easier — just send in the check each time you get paid, if that’s the due date that you agree on with your lender.

That way, the money won’t be sitting in your account until next month, just begging to be spent on something else and leaving you short of the bill when your monthly mortgage payment does come due. Making biweekly payments in this way can save you a ton of stress in addition to all the financial benefits.

Closing

By default, almost everyone is put on a monthly repayment plan. It’s how we’re conditioned to think about debt: after all, just about every type of loan is paid back on a monthly basis, including credit cards, student loans, auto loans and personal loans. In some cases, like for student loans, you may be able to switch to a biweekly payment plan, but it’s not very common.

That doesn’t mean you need to stick with the mold, though. We’ve shown five great benefits to switching over to a biweekly mortgage payment plan. You’ll:

  • Build equity faster
  • Pay less interest over time
  • Pay off your mortgage faster
  • Drop your PMI payment sooner
  • Budget for housing more easily

If you’re interested in switching to a biweekly mortgage payment plan, the next step is to contact your lender to ask about it. Your future self will thank you.

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.

Lindsay VanSomeren
Lindsay VanSomeren |

Lindsay VanSomeren is a writer at MagnifyMoney. You can email Lindsay here

TAGS:

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

After a Hurricane: A Guide to Homeowners Insurance, Disaster Relief and More

Friday, November 16, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Brittney Laryea Brittney Laryea
Hurricane Florence aftermath
iStock

Recovering from a major hurricane can be overwhelming. Many families facing large out-of-pocket storm costs may wonder what the first steps are to begin rebuilding.

To help you get started, we’ve rounded up advice for how to proceed, sort out which insurance will — or won’t —cover and tap financial resources available to the underinsured.

In this article, we’ll cover:

Step 1: Figure out your coverage

Step 2: Document the damage

Step 3: Prevent further damage

Step 4: File a claim with your insurance company

Step 5: File for federal disaster assistance

Where else can you turn for help?

Other financing options

When to consider bankruptcy

Final thoughts

Step 1: Figure out your coverage

The first thing you should do is print out a complete copy of the most recent insurance policies you have on your home, said Amy Bach, co-founder and executive director of United Policyholders, a national insurance consumer advocacy organization.

Many homeowners make the mistake of calling the insurance company and getting things started before they know what kind of coverage they have, Bach said. Many adjusters are overworked, especially right after a natural disaster. “They have lots of clients and sometimes they try to take shortcuts to tell you what coverage you have,” Bach said. “Sometimes they may be right, but they may be wrong.”

She added: “You have the biggest stake in getting the most money out of your insurance so it’s up to you to do your homework.”

You can contact the insurance company directly and ask them to email you a complete copy of your policy. If you worked with an agent, you can try contacting them directly for a copy, too. If you can’t remember who your insurer is or how to get in touch with them, Bach recommends you contact your state’s insurance department for help.

The declaration page

Once you have a copy of the policy in hand, focus on the declaration page, a summary of the policy and how much coverage you have available.

Coverage is usually split into four main buckets:

  • Dwelling: Covers the home itself.
  • Contents (personal property insurance): Covers the items you own inside the home.
  • Other structures: Covers items that are not part of the dwelling but on the property such as detached garages, driveways, fences, sheds and pools.
  • Loss of use: Coverage for any expense you have to incur because you cannot live in your home.

You may or may not have each type of coverage and the extent to which you’re covered will depend on your policy. It may also include personal liability protection and coverage for guest medical payments (when someone else gets hurt at your home).

Flood insurance vs. homeowners insurance

Standard homeowners and renters insurance policies do not cover damage from storm surges and other flooding. That requires separate policies, typically purchased from the U.S. government.

But they should cover damage from, say, a neighbor’s tree that fell on your house and left a hole in the roof where water came through. Questions about claims can generally be answered by your state’s insurance department.

Flood insurance

Homes financed with a federally-insured mortgage in a high-risk flood area, also called a special flood hazard area (SFHA), are required to buy flood insurance from the National Flood Insurance Program, run by the Federal Emergency Management Agency (FEMA), or as a separate policy through a private insurer. SFHAs are areas that have a minimum 1% chance of flooding in any given year. These are also known as 100-year flood plains.

If you live in a moderate- to low-risk area or don’t have a federally-backed mortgage, purchasing flood insurance is optional. However, a lender can also require you to purchase flood insurance, even if you live in a moderate- to low-risk area.

National Flood Insurance Program provides up to $250,000 of coverage for the structure of a single-family home and up to another $100,000 for personal possessions. Alternatively, or in addition to NFIP flood insurance, you can purchase “first dollar” or primary flood insurance policy from a private insurer.

According to federal data, the average paid loss to NFIP policyholders after the four most-recent major hurricanes in 2016 and 2017 were:

  • $55,978 to 581 policyholders after Hurricane Maria in September 2017
  • $115,430 to 75,865 policyholders for Hurricane Harvey in September 2017
  • $47,202 to 21,824 policyholders for Hurricane Irma in September 2017, and
  • $39,249 to 16,547 policyholders for Hurricane Matthew in October 2016

Issues with flood insurance

“The problem with flood insurance is that it does have some very nit-picking requirements,” Bach told MagnifyMoney. Sometimes, companies will say they’ll only pay for items that physically came into contact with water.

That means flood insurance often won’t pay for a damaged foundation or water that ran up a wall, Bach said. Or, it may only provide coverage that can seem partial to homeowners. For example, the coverage may replace the lower cabinets in your kitchen, but they may not match the cabinets that weren’t affected by the flooding.

Problems meeting code. Flood insurance also may not cover code upgrades. If your home was built in the 1960s, for example, and had an old electrical system, the insurance company usually won’t pay to upgrade it, but the county may not allow you to put back old wiring either.

In those cases, Bach said to “go back to the policy and say ‘I cannot replace unless I comply.’” The insurer may require you to provide documentation from the local government as proof. And sometimes, flood insurance policies only cover code upgrades if the damage done to the system is 50% or more.

Finally, Bach tells MagnifyMoney that flood insurance generally does not cover the costs of living elsewhere while your home is repaired. In those cases, your homeowners insurance policy may cover your displacement costs.

Wind. Wind must be insured separately and sometimes this coverage is available only from a state-run insurer of last resort.

What if I don’t have flood insurance?

Excluded from homeowners insurance coverage is flooding caused by rising water, which Bach said is going to be most people’s problem. But, the United Policyholders executive director added: “A little argument goes a long way.”

Homeowners whose insurance does not cover hurricane-related expenses may qualify for disaster aid or low-interest loans, which we’ll cover below.

Step 2: Document the damage

Do the best you can to document all of the damage using pictures and videos. Do this before you start cleaning up or making repairs.

iStock

Step 3: Prevent further damage

Do what you can, within reason and with consideration of your health and safety, to prevent further damage to your home. At this point, you may want to reach out to the insurer and begin the claim process. If your policy covers the cost, the insurer can send someone to help drain the water, patch up holes and dry out your home.

“You want to try to get that done as quickly as possible so that you don’t have a mold problem,” Bach said.
If the insurer cannot get out to your area quickly or your coverage does not cover temporary repairs and drying out, then you may elect to do what you can on your own or hire a professional in your area.

Either way, take care to keep swatches of carpeting, wallpaper, furniture upholstery and window treatments — things that may impact the amount payable on the claim. Try to avoid tossing out damaged items until you file a claim, and the insurance adjuster pays a visit to your home (described below). You can learn more about proper flood cleanup in this federal Homeowner’s and Renter’s Guide to Mold Cleanup After Disasters.

“If you can afford it, you should hire somebody and get them to do it as soon as you can,” Bach said. “But don’t hire the first person you can, because disasters do bring out scam artists.”

If FEMA or state emergency services are in your area, they may be able to assist you with drying out your home. And, if there is a local assistance center set up near you, you can go there for help and information. Find a disaster recovery center near you here.

Step 4: File a claim with your insurance company

If you didn’t notify your insurance company before you started cleaning, you should contact them to file a claim as soon as possible. The insurance company should send you claim forms to fill out and you should try to return them as soon as possible to avoid delay in service.

The insurer should then arrange for an insurance adjuster to come out and assess the damage to the property. The adjuster will inspect the property to estimate how much the insurance company will pay for the loss. They will likely interview you, too.

Be prepared to show the adjuster any structural damage and compile a list of damages so the visit is efficient and you don’t forget anything. If you have receipts for any of the damaged items you should present copies to the adjuster. Be sure to ask any questions you may have about your policy and the coverage it may provide.

Finally, if you had to relocate and your policy covers loss of use, keep those receipts and record all additional expenses you had to take on as part of your temporary relocation since you will need to provide proof of those costs.

Step 5: File for federal disaster assistance

If your home is in a presidentially declared disaster area, you can apply for FEMA individual disaster assistance. If you do not have internet access, you can call 800-621-3362.

Disaster aid may cover:

  • Temporary housing
  • Lodging reimbursement
  • Home repairs
  • Home replacement
  • Permanent or semi-permanent housing construction
  • Child care expenses
  • Medical and dental expenses
  • Funeral and burial expenses
  • Essential household items, clothing, tools required for your job and necessary educational materials
  • Heating fuel
  • Cleanup items
  • Damage to an essential vehicle
  • Moving and storage expenses

However, FEMA disaster grants are generally small — see the following chart for average amounts from recent storms. The organization emphasizes that these figures are from only one program, and housing grant money is intended to help survivors get a roof over their heads and not to rebuild a home to its pre-disaster condition. FEMA encourages homeowners to consider the federal grant program as a last resort after insurance and federal loan programs, and not to factor federal grant assistance into disaster preparedness planning.

Below is a breakdown of the average grant payout for recent disasters from the Individuals and Households Program, one the of several disaster assistance programs FEMA offers.

DisasterAverage IHP award

Hurricane Sandy (2012)

$7,950.17

Hurricane Matthew (2016)

$3,409.11

Hurricane Harvey (2017)

$4,365.75

Hurricane Irma (2017)

$1,354.72

Hurricane Maria (2017)

$2,666.10

Hurricane Florence (2018)

$3,653.18*

Hurricane Michael (2018)

$3,836.98*

*As of Nov. 15, 2018

You can find information about other kinds of individual assistance FEMA provides like disaster unemployment assistance and crisis counseling in this factsheet.

FEMA may require you to provide evidence that your insurance company declined your loss claim and will not cover your disaster-caused loss. When you apply for disaster assistance, you’ll need to provide identifying information like your Social Security number and a current mailing address.

Delays with disaster assistance

It’s important to remember some FEMA funds are funneled through the state government, so depending on how your state allocates its resources, your reimbursement or assistance may take months.

According to a FEMA spokesperson, those still waiting on aid from a previous disaster may qualify for FEMA assistance.

Where else can you turn for help?

Loans are now increasingly needed to help people get back on their feet after a storm. “Insurance does fall short a lot more than you would expect,” said Bach, who has been working in insurance consumer advocacy for 26 years.

Below are a few loan options you can turn to for help.

Government assistance programs

The U.S. government provides the following programs that may assist eligible borrowers who need assistance with home repair, replacement, restoration or improvement financing.

Homeowners with an existing mortgage may also find relief with their loan servicer — many lenders will temporarily reduce or suspend payments in a process called forbearance. The Mortgage Bankers Association says one of your first calls following a hurricane should be to your mortgage servicer. The Consumer Financial Protection Bureau provides information on this and other financial problems following a natural disaster here.

SBA disaster loans

The U.S. Small Business Administration provides financial assistance not only to business owners, but also to homeowners and renters in federally declared disaster areas. These low-interest loans may cover up to $200,000 to repair or replace the primary residence to its pre-disaster condition. Collateral is required to secure loans over $25,000. Secondary homes and vacation properties are not eligible for an SBA home disaster loan. Homeowners may also borrow up to an additional $40,000 with a property disaster loan to replace damaged personal property.

For some homeowners, the SBA may be able to refinance all or part of an existing mortgage up to $200,000 if they:

  1. Don’t have credit available anywhere else.
  2. Suffered a substantial amount of disaster damage that isn’t covered by insurance.
  3. Intend to repair the damage.

If you are already paying back an SBA disaster loan from a previous storm, you can still take out another as long as your home was in a declared disaster area and you are current on all of your payments.

FHA 203(h) mortgage

The Federal Housing Administration’s 203(h) loans are government-insured mortgages that may be used to purchase, improve, remodel or rebuild a home. To be eligible, the borrower must reside in a federally designated disaster area and the home must be damaged or destroyed to an extent that requires reconstruction or replacement.

One of the biggest benefits of a 203(h) mortgage is that it does not require a down payment. However, borrowers must pay closing costs and mortgage insurance, which is collected as one upfront charge at the time of purchase and monthly premiums tacked onto the regular mortgage payment. FHA mortgage limits apply and can be found here.

Other types of government loans

SBA disaster loans and the 203(h) mortgage are programs specially designed for disaster victims, but there are other government programs — available to anyone — to help homeowners who want to make repairs.

FHA 203(k) loans

The Federal Housing Administration’s 203(k) program is designed to fund a home renovation. Homeowners can use this loan to refinance their current mortgage to pay for repairs. The minimum credit score to qualify is relatively low, but there are several requirements you will have to meet, including working with an FHA-approved lender and possibly a 203(k) consultant. Read more about the different types of 203(k) loans here.

You can use the Section 203(k) rehabilitation mortgage program along with the HUD Title I Property Improvement Loan program, described here by LendingTree, MagnifyMoney’s parent company.

USDA Home Repair program

The Department of Agriculture offers the Section 504 Home Repair program for low-income homeowners. The program provides loans to repair, improve or modernize homes. It also provides loans or grants to low-income elderly homeowners to remove health and safety hazards.

The USDA offers repair loans up to $20,000 and grants up to $7,500. You can combine a loan and grant to borrow a total of up to $27,500. The property must be in an eligible area. To learn more about the home repair program, you can contact a USDA home loan specialist in your area. You can check income eligibility here.

VA rehab loans

The Department of Veterans Affairs in April 2018 updated its alteration and repair purchase and refinance loan program. The VA allows eligible borrowers to refinance a mortgage based on what the appraised value of the property would be after renovations, up to $227,500. The borrower can also finance closing costs. You can apply for a VA loan through a VA-approved lender.

Fannie Mae HomeStyle® Renovation mortgage

Fannie Mae offers a HomeStyle Renovation mortgage that can help finance home repairs. Homeowners could, for example, refinance the costs into an existing mortgage. Borrowers can finance up to 75% of the appraised value of the property after the renovations are completed. Read more about the HomeStyle program here.

Nonprofit and charitable aid

You may be able to get assistance from national and local nonprofit organizations or charitable institutions. Such groups include the American Red Cross, Habitat for Humanity, Mennonite Disaster Service and the Saint Bernard Project.

Beyond meeting hurricane victims’ immediate needs, these organizations and others may help rebuild homes in your area, so it may be worth reaching out to a local charity regarding grants and other services.

Habitat for Humanity helps low-income survivors rebuild or repair their home if they meet Habitat’s requirements. Contact your local Habitat for Humanity office.

Other financing options

If you have a good credit score and the project’s costs are relatively low (between a few hundred and a few thousand dollars), you may want to consider taking out a personal loan or using a credit card to finance repairs. Bach told MagnifyMoney you might also elect to do this if you don’t have cash on hand to cover temporary living, cleanup and minor repairs that may be later reimbursed by insurance.

Personal loans

Personal loans typically have fixed rates and terms. You can usually borrow anywhere from $1,000 to $35,000 at rates between 6% and 36% APR. There are a few pros and cons with personal loans:

Pros

  • Unsecured: This means you won’t risk losing an asset if you are unable to repay a personal loan.
  • Fast turnaround: You can generally apply for a personal loan in minutes online and, if you qualify, you may receive the lump-sum amount in your bank account as soon as 24 hours.

Cons

  • Credit requirements: Borrowers generally must have a good credit score and a low debt-to-income ratio to qualify. Borrowers with the highest credit scores and lowest debt ratios generally receive the best terms.
  • Fees: You may be charged a loan origination fee or a prepayment penalty.

To get the best offer available to you, compare loan terms and rates at LendingTree.

Credit cards

If you plan to use a credit card for storm-related expenses, one idea is to apply for a new credit card with a 0% APR introductory offer on all purchases. Note that if you’re still carrying a balance once the promotion ends, the new interest rate on the card will apply to whatever balance is left. Some lenders may charge deferred interest, meaning they may charge interest on everything you’ve charged during the promotional period.

Credit cards charge an average APR around 15%, but there are cards with lower (and higher) rates. Generally, lenders offer the lowest interest rates to borrowers with the highest credit scores.

Credit cards typically charge a variable rate and it may change based on your daily balance, so the minimum amount you are required to pay back each month may fluctuate.

When to consider bankruptcy

A homeowner may consider bankruptcy if the cost of repairs exceeds the value of the property, said John C. Colwell, a bankruptcy attorney and president of the National Association of Consumer Bankruptcy Attorneys. He compared it to a vehicle that’s been totaled in a car accident.

But first, Colwell said, homeowners should check for any state protection that may make bankruptcy unnecessary.

California law, for example, protects homeowners after a foreclosure. If a $600,0000 house with a $400,0000 mortgage burns down in a fire, the homeowner can walk away and let the bank foreclose on the home. If the bank forecloses for $300,000, the original homeowner does not owe $100,000 to the bank to satisfy the mortgage. While the homeowner must face the consequences of a foreclosure, they would not need to file for bankruptcy.

But in most other states, the mortgage company has the legal right to try and sue the homeowner to collect the remaining balance on the mortgage. In those cases, it may be appropriate for a homeowner to file for bankruptcy, Colwell said.

Final thoughts

If you were affected by a major hurricane or other natural disasters, help is available. Sources of financial assistance range from your own insurance policies to government assistance and loans, to charitable organizations, to simply borrowing from a private lender. Rebuilding may be costly and seem overwhelming, so look to resources like United Policyholders and the Insurance Information Institute, or your state’s emergency management office.

We also have a supplemental guide for homeowners affected by Hurricane Florence.

If you need advice when deciding between options, consult a fee-only financial professional who has experience working with homeowners following a disaster.

If you are considering bankruptcy, it’s recommended you speak with a bankruptcy lawyer about the options available to you and any protections provided by your state.

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.

Brittney Laryea
Brittney Laryea |

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

TAGS: ,

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

A Guide to Avoiding Homebuyer’s Remorse

Thursday, November 8, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Brittney Laryea Brittney Laryea
iStock

John Watkins, 27, in Tampa Bay, Fla., set a personal goal in high school to own a home before he turned 30. He accomplished his goal three years ago when he decided on a new build in a quiet but rapidly growing suburb. The home checked all of the boxes on his wish list: It had an open layout, high ceilings and a large master suite.

But coming from living in an apartment, Watkins said he didn’t consider the enormous responsibility that came with homeownership.

“I can’t say that I completely regret the purchase, but I don’t think I would do it again if I had the chance,” Watkins told MagnifyMoney. “I vastly underestimated the time and expenses that go along with having a home, especially in an HOA.”

Watkins may be best described as a conflicted homeowner. While he’s proud to have achieved his goal of homeownership and is glad he bought the home as an investment, (he said similar homes in the area rent for $1,000 more than his monthly mortgage payment), the extra costs and work often outweigh the positives.

In addition to the mortgage payment, Watkins said he now has additional expenses he didn’t think of before, like water softener and salt, cleaning supplies, lawn treatment, pest control and holiday decorations. On top of that, he said, there’s an endless list of things that need to be done with the home.

“Days where I just want to go home and relax, I’m forced to work in the yard or face fines,” Watkins told MagnifyMoney. “Just yesterday I came home after work, opened the door and was smacked with a wave of heat as if I had just opened an oven door.” He spent the rest of his evening unclogging the AC condenser drain line with a shop vacuum.

3 key tips to avoid homebuyer’s remorse

A recent Bank of the West study found 68% of millennial homeowners experience buyer’s remorse for one reason or another. Of those homeowners, 44% reported having issues with space after closing. Most often, they discovered property damage, felt stuck after purchasing or realized the space didn’t quite work for their family. In addition, 41% of millennial homeowners with buyer’s remorse said they felt they had stretched themselves too thin financially with the home purchase.

To help prospective buyers avoid similar regrets, MagnifyMoney asked real estate and financial experts for their best advice for aspiring homeowners.

1. Rent before you buy

“Don’t be afraid of renting if you need a place to live but aren’t committed to the location or can’t find a house that meets your nonnegotiables,” said Arielle Minicozzi, CFP at Chandler, Ariz.-based Sphynx Financial Planning.

You can consider renting a home as a test run. With renting, you will have the opportunity to experience what it’s like to actually live in the home without the commitment to a mortgage. Renting gives you the chance to see if the space works for your family, get an accurate survey of the neighborhood, evaluate the HOA and see if you’re OK with the new commute to work.

“Even though you’re not building equity, renting is far more cost-effective than buying a home and selling it shortly thereafter, and less [of a] headache than finding a renter or making other arrangements if you need to move.”

2. Check out the neighborhood

“Your neighbors and the neighborhood make a world of difference when it comes to loving your home,” said Lorena Peña, chairperson of the San Antonio Board of REALTORS.

Peña suggested prospective buyers drive through the neighborhood at different times of the day to see what the area is like at different times. The drive also serves as a way to test the roads for your commute. Peña recommended going for a test drive in the morning and evening and around school drop-offs and pickups.

“When you visit the home you’re considering buying, take off your blinders. Be sure to notice the lawns of the neighbors, how well kept they are and, if you see any neighbors outside, stop to say hello. The current neighbors have firsthand knowledge about the neighborhood,” said Peña.

If the neighborhood has an HOA, Peña recommended looking at the rules before you buy, as you want to ensure your personal standards align with the association’s.

Jorge Guerra Jr., the residential president of Miami Association of REALTORS recommended you “identify your needs and what you are looking for, whether it pertains to safety, commute or the community,” prior to your test drive so when you go, you can accurately evaluate whether the neighborhood meets your needs.

3. Always get an inspection

“The inspection period is the best time to perform due diligence on ensuring that the property meets your needs or the needs of your family,” Guerra told MagnifyMoney.

Guerra recommended hiring a licensed professional and said that’s especially important for first-time homebuyers.

“Hiring a specialist in the four primary areas of electric, roofing, plumbing and mechanical (A/C) is your best bet — you definitely want to have the expert on your side,” said Guerra.

The inspection will cost a fee that most often won’t be included in closing costs. According to HomeAdvisor, the average home inspection costs around $326. Making sure you get the inspection done can help you avoid more costly or more severe repairs you’d be responsible for if you bought the home as is.

The inspection report should detail cosmetic and structural damage. Once you have the inspection report, you can decide whether to ask the seller to make the repairs prior to closing, or handle them on your own.

4 ways to avoid stretching yourself too thin financially

If it’s not a physical regret homebuyers had, it was a financial one. About 41% of the millennial homeowners with regrets in the Bank of the West study said they felt they had stretched themselves too thin with their home purchase.

Below are a few tips prospective homebuyers can use to keep their home purchase in line with their financial resources.

1. Start planning early

“The two best things a prospective homebuyer can do to avoid feeling stretched too thin are to set a budget well before looking at homes and to save more than he or she thinks is necessary,” Minicozzi told MagnifyMoney.

Saving enough begins with planning early. Like with most financial goals, the earlier you plan, the better. Minicozzi said starting earlier can give you more flexibility when prioritizing your goals and buy some time to weather any market fluctuations so “you can afford to invest your money more aggressively than someone whose time horizon is shorter.”

Minicozzi added taking your time finding a home that meets your budget may take some of the pressure off when you’re deciding on a home.

2. Consider the hidden expenses that come with homeownership

Remember, the down payment isn’t all you’ll be responsible for once you become a homeowner. In addition to the down payment, you may need to pay for closing costs like the application fee, appraisal fee, primary mortgage insurance and other fees. Closing costs generally amount to about 2% to 7% of the home’s purchase price.

Try not to use everything you’ve saved on the down payment and closing costs. If you have leftover funds, Minicozzi said, you can use them to make home repairs or updates, purchase furniture, start an emergency fund or invest.

3. Reduce your down payment

According to the Bank of the West survey, about 56% of millennial homeowners have dipped into retirement funds for down payments. While there are advantages to making a sizable down payment, like avoiding mortgage insurance or qualifying for a better mortgage rate, many options exist for buyers looking to make smaller down payments.

“If a buyer has good cash flow but little savings, using a lower down payment loan — like a conventional 3% down or a USDA loan with 0% down — is a good option, as long as he or she also has an emergency fund or builds one up,” said Minicozzi.

We’ve rounded up some of the best low down payment mortgages here.

4. Shop around with different lenders

Comparing your loan offers with multiple lenders is one of the best ways to save money on your mortgage.

For example, a recent study from MagnifyMoney’s parent company, LendingTree, found borrowers in the Tampa area (where Watkins’ home is) could save $73 in monthly payments or, up to $871 a year on a median home price of $225,000 by comparing rate offers. To get an idea of your potential savings, you can start your loan search here.

What to do if you feel stuck with a home you regret

“When someone purchases a home, the sale is final, even if they regret the purchase,” said Peña. “However, there are options for the new homeowner.” She suggested consulting your real estate agent to weigh your options if you find yourself feeling remorseful after closing on a home. Peña suggests considering the following choices.

Sell the home

You could try to sell the home right away and get out of the mortgage. However, Peña warned: “Purchasing a home is a sound investment and, depending on the market, immediately putting it up for sale does not guarantee you will get the same price from another buyer. “

Rent out the home

You keep the home and use it as an investment property. In this case, you could rent the home out while you build equity and sell it later on. If you don’t have experience or don’t feel comfortable managing the property, you may want to consider hiring a reputable property manager.

Renting is what Watkins is planning to do with his home. He said he and his partner will likely continue to live in their Tampa Bay home for another five years, refinance if possible and then rent it out.

“We should make enough profit from that to fund the majority of our next place (and possibly our forever home), which will be a similar home but with an acre or two of land,” Watkins told MagnifyMoney.

Vacation rentals: If the area is popular with tourists, you may have the option to use it as a vacation rental.

“Those that may regret purchasing a home can easily cover the mortgage with this side business while building equity,” said Peña.

Re-evaluate your budget

If you’re feeling cash-strapped now that you have a mortgage and other auxiliary expenses of homeownership, Minicozzi recommended reviewing your budget to see where you can cut back. If you’ve cut back all you can on discretionary expenses, the next step is increasing your income. Consider asking for a raise, picking up a side gig or possibly selling valuable items.

“If you have extra room in the home, you can even think about renting out some of your space. Just make sure to talk to a financial planner or tax expert to evaluate the tax implications,” said Minicozzi.

Bottom line

You’re pretty much stuck with a home once you buy it, so you should take care and try not to rush your decision-making process. If you are considering a purchase, try out the tips above to feel secure.

Watkins gave the following advice based on his personal experience: “I believe that no matter which path you go down, you’ll always find things that you like and things that drive you nuts. Do more research than you think you should, go visit the neighborhoods that catch your eye and talk to the current residents. Find a place that matches your lifestyle and not just your idea of a perfect 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.

Brittney Laryea
Brittney Laryea |

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

TAGS: , ,

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

Understanding Construction Loans

Thursday, September 13, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Janet Berry-Johnson Janet Berry-Johnson
iStock

Mortgages are typically easy to find. But most home loans are only available for houses that already exist. If you need financing to build a home, a construction loan can help you cover the costs of buying land and building the home of your dreams.

Construction loans bear some resemblance to traditional mortgages, but the process of applying is different in many ways. After all, the loan’s collateral doesn’t exist yet.

What you need to know:

What is a construction loan?

Types of construction loans

How construction loans work

What it takes to get approved for a construction loan

Where to find a construction loan

Is a construction loan right for you?

What is a construction loan?

A construction loan is usually a short-term loan used to pay for the cost of building or remodeling a home.

With a traditional mortgage, the lender pays out the full amount of the mortgage to the seller upon closing. But a construction loan is typically paid out to the homebuilder in a series of advances as the project progresses. For example, the lender may disburse a portion of the funding once the foundation is poured, another portion after framing is completed, etc.

During construction, you typically make interest-only payments based on the funds that have been disbursed, although some construction loans do not require payments until the project is complete. At that time, you will need to either pay off the balance of the loan in a lump sum, convert your construction loan into a traditional mortgage or apply for a new loan.

Types of construction loans

What happens to your construction loan once the project is complete depends on whether you have a one-time close loan or a two-time close loan.

One-time close

One-time close construction loans, also known as “all-in-one loans” or “construction-to-permanent loans,” wrap the loans for construction and the mortgage on the completed home into a single loan. Once your home is complete, the construction loan converts to a regular mortgage. There is no additional approval process or closing costs.

The downside of a one-time close construction loan is that construction projects tend to run over budget. If your project goes over budget, you’ll need to come up with the difference out of pocket or take out a second loan to cover the overages. For that reason, unless you have a solid grasp of the costs and schedule for the project, a one-time construction loan may not be right for your project.

Two-time close

A two-time close construction loan is two separate loans — a short-term loan for the construction phase and a long-term mortgage for the completed home. Essentially, you will refinance your construction loan once the project is complete.

A two-time close construction loan can be more costly because you need to go through the approval process and pay closing costs twice. But you’ll have more flexibility in the loan amount if your project goes over budget.

How construction loans work

Getting a construction loan requires a little more red tape than getting a traditional mortgage. Here’s a step-by-step walk through the process.

1. Get your finances in order

The qualifications for a construction loan will vary from lender to lender. As with any loan, the higher your credit score and the stronger your financial situation is, the more options you’ll have.

Fannie Mae, one of the leading sources of financing for mortgage lenders, requires a minimum credit score of 620 and a maximum debt-to-income ratio of 45%.

Adham Sbeih, CEO and founder of Socotra Capital, a real estate lending and investment firm based in Sacramento, Calif., said borrowers need to demonstrate an ability to handle the monthly payments and handle potential change orders and cost overruns. “Borrowers also need to show they have a viable exit strategy for completing construction,” he said. “After all, construction loans are temporary.”

2. Meet with a lender to get preapproved

Once you have your finances in order, it’s time to meet with a lender to find out how much you can borrow.

The lender will look at your debt, income and asset information. The amount the lender preapproves you for will be an essential part of your discussions with your builder in deciding what to include in your new home. The lender can also answer any questions you have about how construction loans are structured.

3. Create your wish list

Create a wish list and ideas of what you want your home to look like. Keep in mind that you may have to compromise on some of these items if your wish list is larger than your budget.

4. Find a builder

Look for a reputable, experienced builder. Before approving your loan, your lender will review your contractor’s experience, reputation, credit and licenses to ensure your contractor can get the job done on time and within budget.

The builder will put together detailed specifications, including floor plans, a materials list, a line-item budget and a draw schedule. This is sometimes called a “blue book.”

5. Apply for the loan

Once you have a signed construction or purchase contract with your builder, it’s time to complete the application process for your loan. The lender will perform a more thorough review of your finances, review your contractor and the building specifications in detail. They will likely also have an appraiser review the specs of the house and the value of the land to come up with an appraised value for the finished project.

6. Purchase the land

If you don’t already own the land on which you plan to build a home, you’ll need to purchase it. A construction loan can include financing for the purchase of a lot. Your lender will ask for a copy of the contract to purchase the land as part of the loan application.
If you already own the land and have an outstanding loan on the property, the first disbursement of your construction loan will pay off that loan before construction starts on the home.

7. Build the home

Once your loan closes and you’ve purchased your land, construction can begin. Your lender will continue to monitor the progress of the project, pay the builder according to the draw schedule and send an inspector to the property on a regular basis to ensure the project is proceeding as planned.

Sbeih said the two big potential pitfalls borrowers run into during this phase are time and budget. “If construction is delayed and takes longer, the borrower pays interest on the construction funds for a longer period of time, which costs more,” he said. “The more dangerous concerns are change orders and budgets that are not rock-solid. If you do not have a solid budget [that] includes padding for contingencies, you are flirting with disaster. This is how you end up with a project that is 80% complete and has no funding to make it to the finish line.”

8. Transition to a permanent loan

When the home is complete, you will transition to a permanent loan. If you have a one-time close loan, this process is automatic. If you have a two-time close loan, you will need to reapply and pay closing costs on a new loan.
Keep in mind that if you have a two-time close loan, you will need to go through the approval process again to transition to a permanent loan. If your income, credit or financial situation change for the worse during the construction phase, you may be unable to get a mortgage on the completed home and could end up losing the house to foreclosure before you even have a chance to move in.

You can compare loan offers online by using our parent company LendingTree’s marketplace.

LendingTree

LEARN MORE Secured

on LendingTree’s secure website

NMLS #1136 Terms & Conditions Apply

LendingTree is our parent company

What it takes to get approved for a construction loan

The approval process and documentation required for a construction loan vary by lender, but the following list should give you a good idea of what you’ll need.

Documentation

  • If you own the land, you’ll need to show a copy of the deed to the land and the settlement statement for the purchase if you bought it within 12 months of applying for the loan
  • A copy of the contract to purchase the land if you don’t already own it
  • Your contract with the builder
  • Complete information on your builder, including name, address, phone number, etc.
  • Building plans and specifications
  • Proof of insurance from the builder
  • Proof of insurance covering the project
  • Documentation of your income, such as W-2s, tax returns and pay stubs
  • Authorization to perform a credit check
  • Information on your debts so the lender can calculate your debt-to-income ratio

Down payment

Lenders typically require a down payment of 20% to 25% of the appraised value of the home, at a minimum. This ensures you are invested in the project and are less likely to default on the loan or walk away if the project runs into issues.

If you already own the land on which you’ll build, the value of the land can be included in that equity contribution.

Cash reserves

Conventional loans require a borrower to have cash reserves of anywhere from two to 12 months’ worth of mortgage payments. You’ll likely need more for a construction loan because you’ll have to make payments on your construction loan during the building phase, as well as make rent or mortgage payments on your existing home.

Construction Loan vs. Traditional Home Loan

 

Construction loan

Traditional home loan

Down payment

A down payment of 20% to 25% is the norm

You may be able to get a loan with no down payment or only 3% down

Interest rates

Typically variable interest rates during the construction phase. Higher than traditional mortgage rates.

May be fixed or variable

How the loan is disbursed

Paid out in draws to the builder at predetermined project milestones

Paid in full to the seller at closing

Documents required

All the documentation necessary for a traditional home loan, plus information on the builder and detailed building specifications for the project

Requires documentation on borrowers’ finances and appraisal of the property

Term

Typically one year

15- or 30-year terms are most common

Credit required

Excellent credit

Borrowers with credit scores as low as 500 may be able to get approval

Closing

Takes 7-10 days longer than a traditional mortgage

1½ months, on average

Monthly payments

Usually interest-only during construction

May be interest-only or interest plus principal

Where to find a construction loan

Talk to your bank to begin the process of applying and qualifying for a construction loan. Most construction loans are issued by banks rather than mortgage companies, as the bank will hold on to the loan until the project is complete.

Not all banks offer construction loans. Among those that do, interest rates, terms and fees can vary widely. So it’s a good idea to talk to a few different banks to make sure you’re getting the best deal.

Is a construction loan right for you?

Few homebuyers would be able to build a home to their exact specifications if it weren’t for construction loans. But a desire to design your own dream home isn’t the sole factor to consider when deciding whether a construction loan is right for you. They have stricter underwriting requirements, require larger down payments and have higher fees because of the ongoing inspections required during the construction phase.

If you have excellent credit, can afford a substantial down payment and have an adequate financial cushion to see you through unexpected delays and cost overruns, a construction loan can finance building your dream home. But if your financial footing isn’t as solid, you’re probably better off buying a home that’s already been built — or waiting until you can afford to weather the risks and uncertainties inherent in building.

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.

Janet Berry-Johnson
Janet Berry-Johnson |

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

TAGS:

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

What Does a Mortgage Rate Spike Mean for Buyers and Sellers?

Friday, August 10, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Casey Hynes Casey Hynes

Buying a home became more expensive this year but the good news is not by much. Mortgage rates are on the rise, with 30-year fixed mortgages consistently above 4% in 2018 but rates remain at record lows. A decade ago, rates were consistently above 6% and well into the double digits in the 80s and early 90s.

“While rates are certainly going up, the impact to the borrowers is not as drastic as some may think,” said David Gorman, a division executive with Bank of America. “It’s a pretty emotional topic. People hear rates are going up and they jump pretty quickly, but it’s not as aggressive as many would make it sound.”

Although higher rates signal a tighter market for both homebuyers and sellers, it’s important to understand the context in which they’re happening and how you can maximize your opportunities even if rates continue to rise.

In this post we’ll explain:

Why mortgage rates are changing

How rising rates impact homebuyers

How rising interest rates impact sellers

Why mortgage rates are changing

It’s not the Fed’s fault. The Federal Reserve raised its benchmark interest rate earlier this year, a move that consumers sometimes associated with changes in mortgage rates. However, the Fed rate has less influence on fixed-year mortgages than you might think.

For one thing, the Federal Reserve doesn’t set mortgage rates so it doesn’t have a direct impact on the terms of your potential home loan. Jace Stirling, mortgage divisional manager at SunTrust, explained that the federal funds rate, which is the average rate at which financial institutions lend to one another, “is really, really short term” and isn’t necessarily an indicator of what’s going to happen with long-term mortgage rates.

The Federal Reserve benchmark rate primarily affects loans and lines of credit influenced by the prime rate. This means that adjustable-rate mortgages that are approaching reset and home equity loans and lines of credit are susceptible to fluctuations along with the Federal Reserve.

Keep your eye on the 10-year Treasury note. When it comes to long-term fixed mortgages, it’s the 10-year Treasury note you want to watch. This note represents the expected long-term Treasury yield, and it influences not only the Federal funds rate but interest rates on a number of financial products, mortgages included. The Federal funds rate can influence Treasury yields, but it does not directly impact it, according to Pete Boomer, head of mortgage protection for PNC Bank. There have been instances of “flatter or inverted yield curves,” he said. “So while it generally has an influence, they are not specifically tied together.”

Boomer added that similarly, the 10-year Treasury note and mortgage rates “are not tied together, but they do have a close correlation.”

So far in 2018, increases in the Treasury yield rate have influenced the mortgage market this year. “As the 10-year moves up, so will your long-term interest rates,” Stirling said.

Stirling added that the other factor that is currently influencing the cost of homebuying is low real estate inventory, which is driving up valuations for available properties.

How rising rates impact homebuyers

The prospect of higher interest rates motivates some buyers to become more aggressive in their home searches. Gorman said that people who have been considering purchasing a home but have been on the fence may take a more proactive approach in higher rate environments.

“When they hear that rates are going up, they’ll jump in feet first and they’ll start to look to move,” he said.

The impulse to act quickly makes sense, especially since higher monthly payments aren’t the only consequences of rising rates. Higher interest rates may also mean lower approval values on borrowers’ mortgage applications.

“If you’re a buyer, things are going to get more expensive, so you may be able to borrow less money,” said Tendayi Kapfidze, chief economist at LendingTree. “It’s less affordable to purchase a home or get a mortgage.”

But lower approval amounts may not be a bad thing. Buyers sometimes make purchase decisions based on the maximum amount for which they can qualify, rather than based on what makes sense for their budgets, which can lead to long-term financial strain.

“What a lot of people will do is start looking for homes without truly understanding their borrowing power, and then they try to stretch themselves to a point that might not be comfortable,” Gorman said. Instead, he recommended meeting with a loan officer and finding out your borrowing ability, then beginning the search from there.

Keep calm and carry on

It’s also important to keep perspective when you read that interest rates are increasing. Yes, they are higher than last year. But that doesn’t necessarily mean you won’t find an affordable property. Rates are still relatively low, as we noted before.

Stirling said that the lower rates are, the more compressed payments become. In other words, the increase in monthly payments may not be as substantial as borrowers fear. He offered the example of a traditional $300,000 mortgage in which payments on the principal and interest at 4% would be about $1,432. At 5%, he said, the payment would increase to about $1,610.

“The difference isn’t insubstantial but it’s not the end for many people,” Stirling noted. But with rates still closer to the zero end of the spectrum, even a modest increase “still allows [borrowers] to take advantage of the great opportunity of where rates sit today.”

Boomer said rising interest rates could encourage borrowers to look at products they might not otherwise have considered. Rather than choosing a 30-year fixed mortgage to lock in a low rate, they might explore hybrid adjustable-rate mortgages (also known as ARMs) or low down-payment options that have been introduced to the market in recent years.

Hybrid ARMs typically include low introductory rates before the variable rate period begins at three, five, seven or 10 years, depending on the loan structure, Stirling explained. “If the consumer has no intention of living in the property beyond this fixed period, an ARM can be a great option, as the payments on the home will be lower than that of a 30-year fixed rate,” he said.

Boomer noted that products from Fannie Mae and Freddie Mac, as well as those created by lending banks, may offer attractive alternatives to traditional fixed-rate mortgages for some borrowers.

Comparison shopping still key

Whatever type of mortgage you pursue, it’s worth meeting with several different lenders and comparing their products and rates. Even with interest rates increasing, you may be able to find a better-than-average offer, according to Kapfidze.

“Let’s say the average mortgage rate is 4.5%. That means people are getting rates ranging from 4% to 6%, so there’s a wide range of rates available in the marketplace,” Kapfidze said. “The more you shop around, the more likely you are to find a favorable rate.”

The key to making the right buying decision is education. Stirling recommended getting in touch with a loan officer early on to determine your options. Jorge Davila, a vice president in the direct lending department at Flagstar Bank, suggested that borrowers ask questions until they feel comfortable with their purchase decisions and fully understand how the rates they’re offered will impact their payments. “It’s all about understanding what you’re looking for as a buyer, what makes sense for you and your family price-wise,” he said.

You can compare loan offers online by using LendingTree’s marketplace.

LendingTree

LEARN MORE Secured

on LendingTree’s secure website

NMLS #1136 Terms & Conditions Apply

LendingTree is our parent company

How rising interest rates impact sellers

Homebuyers aren’t the only ones who may be calibrating their plans in light of rising interest rates. Sellers, too, will need to decide how they respond to this shift in the market. If buyers move quickly to purchase homes before interest rates rise further, sellers may find themselves able to move their property quickly.

But once they’ve sold their homes, they’ll need a place to move — and that means they may end up having to take out a loan at a higher interest rate than what they pay on their current properties. Kapfidze describes this as a lock-in effect. When rates rise, some owners opt to stay in their homes rather than risk paying more for a new house.

If you choose to stay in your home, you don’t necessarily need to maintain the status quo, though. Kapfidze said that instead of selling, some homeowners will apply for home equity loans or lines of credit and improve their existing houses. Knowing this, lenders may offer competitive terms on home equity products, so sellers should consider a variety of offers before deciding which to accept.

Keeping perspective

Buyer or seller, the consensus among these experts was to maintain perspective and focus less on short-term increases and more on the long-term implications of your buying and selling decisions.

“People are going to consistently be moving for jobs, for schools, for families growing, downsizing, so the housing market will always be one that is necessary and relatively strong,” Gorman said. “So we tend to tell clients, worry less about the rate environment and worry more about what’s best for you.”

Disclaimer: This article may contain links to LendingTree, which is the parent company of MagnifyMoney.

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.

Casey Hynes
Casey Hynes |

Casey Hynes is a writer at MagnifyMoney. You can email Casey here

TAGS:

Disclaimer

AD
Compare Mortgage Loan Offers for Free

Home Purchase Quotes

Home Refinance Quotes

(It only takes 3 minutes!)

NMLS #1136 Terms & Conditions Apply

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments

Advertiser Disclosure

Mortgage

Home Equity Loan vs. Home Equity Line of Credit

Thursday, August 9, 2018

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Pamela Boykoff Pamela Boykoff
iStock

Looking to borrow against the equity in your home? Maybe you have heard the terms home equity loan and home equity line of credit (HELOC) before and wondered what the difference really is. This article will compare the two types of borrowing and take you through the pros and cons of each one.

Comparing home equity loans and HELOCS:

What’s the difference?

Tax changes’ impact home equity loans and HELOCs

Benefits and risks of a home equity loan

Benefits and risks of a HELOC

Which loan type is right for you?

The third option: a cash-out refinance

Closing thoughts

Home equity loan vs. HELOC: What’s the difference?

Home equity loan. With a home equity loan, you borrow a lump sum of cash using the value in your home as collateral. The loan will have a fixed schedule for repayment, usually lasting between 5 and 15 years. They often have a fixed interest rate as well, though adjustable rate versions are available.

HELOC. A home equity line of credit, or HELOC, is an ongoing line of credit that’s backed by your home’s equity — think of it a bit like a credit card. Your bank will authorize a certain dollar amount (similar to a credit card’s credit limit) and period of time during which you can access the line of credit, known as the draw period. Within this time, you borrow only what you need as you need it, though some banks do set a minimum withdrawal. You can make interest-only payments only on the amount you choose to borrow or pay more to start contributing towards the principle.

Next comes the repayment period, where you can’t take out any new funds and need to start repaying the amount you’ve borrowed, if you have not already. Interest rates on HELOCs are variable and often pegged to the prime interest rate.

Comparing home equity loans and lines of credit

 

HELOC

Home equity loan

Interest rate

Variable

Fixed, but sometimes variable

Funds access

Withdraw funds as needed

Lump-sum disbursement

Funds use

No restrictions

No restrictions

Monthly payments

Varies, based on how much you withdraw and interest rate at the time

Fixed for the life of the loan

Closing costs

Yes, but not always

Yes

Collateral

Home equity

Home equity

The two types of borrowing do have two major things in common: They are backed by the equity in your home, and there are no restrictions on what you can do with the cash.

With both home equity loans and HELOCs, the maximum amount you can borrow varies depending on your credit and the lender, but generally tops out at 80% to 95% of the your home equity. To calculate your home equity, start with the valueof your house (from an appraisal, if available) and subtract the amount remaining on your loan. You can also use LendingTree’s home equity calculator to estimate how much you can borrow. (Disclosure: LendingTree is the parent company of MagnifyMoney.)

Since the loans are backed by your home equity, the interest rates are usually lower than for unsecured forms of credit like credit cards or personal loans.

It’s up to you what you do with the money from either type of loan. You can make improvements to your home, pay for a vacation or put your kids through college.

However, Brett Anderson, a certified financial planner and president of St. Croix Advisors, said it’s important to think carefully about borrowing against your home equity, which is likely one of your largest assets.

“Remember these are loans that need to be paid back. A home equity loan isn’t free money, even with these low interest rates,” he said.

Tax changes’ impact home equity loans and HELOCs

New laws have changed tax deductions related to home equity loans and HELOCs. From the 2018 tax year until 2026, the IRS says borrowers cannot deduct interest payments on these types of loans, “unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”

In addition, starting in 2018, taxpayers may only deduct interest on $750,000 of qualified loans, or $375,000 for a married taxpayer filing separately. If you have a HELOC or a home equity loan and a regular mortgage, this limit applies to the combined amount of both loans. This limit is lower than it was previously.

So for example, if you take a $100,000 home equity loan and spend $75,000 on a kitchen renovation and $25,000 paying off credit card debt, only 75% of your interest payments is tax-deductible.

Randy Key, home loan specialist at Churchill Mortgage, told MagnifyMoney he’s seen interest in home equity loans and HELOCs drop after the tax changes.

Benefits and risks of a home equity loan

Given the current economic environment of rising interest rates, one of the main benefits of a home equity loan is having a fixed interest rate for the term of the loan — you get a lump sum upfront and have the same steady payment, even if the Federal Reserve continues to hike rates. That makes a home equity loan easier to budget for, said Anderson.

A home equity loan does have some drawbacks. If you already have a mortgage, you’ll have to keep track of two loans and make two seperate payments every month. A home equity loan also has the same sort of closing costs as a regular mortgage. Those costs can take their toll, especially if you aren’t looking to borrow that much money, Key said.

The rate the lender offers you for a home equity loan depends on your credit score. If your score is under 700, you’ll pay a higher rate to compensate for the risk the bank feels it’s taking on, Key said.

Benefits and risks of a HELOC

A big advantage of a HELOC is the flexibility. You get to withdraw the cash when you need it and only pay interest on the amount you use — however, be aware that most lenders require a minimum withdrawal at the closing.

HELOCs can have lower upfront costs than home equity loans, with some lenders offering to pay for closing costs. Key said if you are willing to base your line of credit off the tax appraisal value of your house, most lenders will do a HELOC without a new appraisal.

The major downside of HELOCs is that they use a variable interest rate pegged to the prime rate, which is set to go even higher this year. This means if you have a HELOC, your interest payments are going to get bigger. You’ll also need a strong credit score to qualify; according to Key, a score around 650 is often required, though it depends on the lender.

Equifax data shows that interest in HELOCs is going down, which Key attributed to both the tax changes and the rising interest rates. He said many of his customers are choosing to refinance to combine an existing first mortgage with a HELOC into one loan.

“With a rising rate market, people are seeing that HELOC rate could be 1% higher next year and thinking, ‘I have to do something about this,’” he said.

Which loan type is right for you?

When choosing between a HELOC or a home equity loan, experts say it is important to consider why you need the money: Is it a set project or a variable need?

Going with a home equity loan instead of a line of credit is usually the best choice to pay for a specific plan, like remodeling a kitchen or buying a vacation house.

“[If] you have a purpose for these dollars today, and you know the amount you’ll need, a home equity loan might be a better alternative,” Anderson said.

A HELOC is generally a better choice if you need some added cash but not a fixed amount or fixed timeline. Key recommends them for customers looking to cover “a tight month in the budget or maybe they are investors who want to be able to tap money quickly.”

The third option: a cash-out refinance

If you are considering a home equity loan or a HELOC, you might want to look at a third option: a cash-out refinance.

A cash-out refinance is designed to improve on the terms of an existing mortgage and provide additional cash at the same time. You’ll be refinancing and taking equity out your home at the same time, leading to one new loan with a larger balance than your previous one.

A cash-out refinance is a good option if you need money and at the same time want to improve the terms of your current mortgage by securing a better interest rate or converting an adjustable-rate mortgage to a fixed-rate one. But be mindful of the fees involved, which can be high depending on the circumstances.

Key has recommended these to a lot of borrowers at the moment who need big chunk of cash for a project like a renovation or putting a pool. With interest rates heading higher, he said, if a borrower needs $100,000 to $300,000, “a HELOC is not a good place to park that much in debt.”

Closing thoughts

Any decision to borrow against the equity in your home should not be taken lightly. The overall volume of both home equity loans and HELOCs has declined since the 2008 financial crisis, when falling property prices burned some borrowers who had borrowed too much against the equity of their homes.

If you need cash and choose to use your home as collateral, a home equity loan is generally the best choice for financing a project with a set cost. A HELOC provides more flexible access to money, but rising interest rates will make these a more expensive choice in the coming year. It’s also worth considering a cash-out refinance, which could potentially improve the terms of your current mortgage while also giving you extra cash to spend.

LendingTree

LEARN MORE Secured

on LendingTree’s secure website

NMLS #1136 Terms & Conditions Apply

LendingTree is our parent company

Disclaimer: This article may contain links to LendingTree, which is the parent company of MagnifyMoney.

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.

Pamela Boykoff
Pamela Boykoff |

Pamela Boykoff is a writer at MagnifyMoney. You can email Pamela here

TAGS: , ,

1
saving

Featured Accounts AD

* Sponsors listed are Member FDIC or NCUA insured.

Recommended by

This Cash Back Number May Surprise You

This Cash Back Number May Surprise You

Best Travel Credit Cards With No Annual Fee

Best Travel Credit Cards With No Annual Fee

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

Getting Approved For 1 Of These Credit Cards Means You Have Excellent Credit

2 Credit Cards Charging 0% Interest until 2019

2 Credit Cards Charging 0% Interest until 2019

Advertiser Disclosure Comments