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Life Events, Mortgage

Open Credit Report Disputes Can Sabotage Your Chance For a Mortgage

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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

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.

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 card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Kate Dore
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Kate Dore is a writer at MagnifyMoney. You can email Kate at

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What to Know About Getting a Mortgage on a Second Home

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Although 36 percent of investors and 29 percent of vacation home buyers pay cash for their properties, many finance their homes, according to a survey by the National Association of Realtors Research Department. But even buyers who finance their second homes have a lot of cash on hand: 47 percent of investors and 45 percent of vacation home buyers finance less than 70 percent of the home’s purchase price.

That’s not to say you can’t get a second home with a smaller down payment, but it’s one of many important things to think about when looking to get a mortgage on a second home.

Is buying a second home right for you?

Before making a huge financial commitment like this, make sure you ask yourself these crucial questions:

Can I afford a second home?

Many families love the idea of buying a second home, but think about all the costs you incurred when buying your primary residence:

  • Down payment
  • Closing costs
  • Monthly mortgage payment
  • Property taxes
  • Property insurance
  • Private mortgage insurance (PMI)
  • Utilities
  • Landscaping and upkeep

You’ll incur many of these same costs with a second home, too. For example, Doug Crouse, a senior loan officer with nearly 20 years of experience in the mortgage industry, says PMI can be especially costly: “When it comes to second homes, PMI rates are about 50% higher than what they would be for a primary residence.”

However, a second mortgage isn’t inherently more expensive than a first mortgage. Dan Green, founder of Growella and a former top producing loan officer with 15 years of mortgage lending experience, says, “There is no closing cost difference on a second home [or] vacation home mortgage as compared to a primary residence.”

Keep in mind that if your second home is in a faraway location, you have to consider the long-distance costs of upkeep.

Will this be a vacation rental or an investment property?

There are typically two reasons people want to purchase a second home: buying it as a vacation home or buying it as an investment property. How you use it will have implications for your taxes.

According to the IRS, your home is a vacation home if you spend the greater of 14 days a year or 10% of the time you rent it to others.

Keep in mind that if you use your home solely for your family to vacation there, you can’t deduct items on your tax returns like utilities and real estate taxes like you would if it was an investment property. While you can deduct mortgage interest on a vacation home like you do for your first home, the new tax law for 2018 only allows you to deduct mortgage interest on your total properties up to $750,000. So if you already own a $750,000 home, you would not be able to deduct your mortgage interest on a second home.

If you use your second home to generate income from rent, you may be able to deduct items on your tax returns like utilities, real estate taxes, the fees you pay your property manager and more, according to the IRS. (Think of it like being a business owner who gets to deduct business expenses versus a vacation home owner.)

If you don’t want to choose between your second home being a vacation home or being an investment property, you don’t have to. It can be used as both, but you have to keep impeccable records that show when it’s being used and how, so you can properly itemize your deductions. For example, if you use it for half the year as a vacation home and rent it out the other half of the year, the IRS says you can only deduct your utilities, etc., on your taxes for the portion of the year you’re treating your home as a business and renting it out. It’s a good idea to consult a tax professional about how such an investment will affect you before you commit to buying a second home.

Is a second home a good investment?

Whether or not a second home is a good investment depends on the individual. Roger Wohlner, a fee-only financial planner, says, “One should be buying a second home for a specific reason such as a family gathering spot, an affinity to a location (a lake, etc.) or some other reason. Because of that, it can’t really compare to another investment.”

In other words, you can’t quantify relaxation, memories or family time as part of a return-on-investment calculation. That’s why it’s crucial you make sure you can afford the second home from the get-go.

If you’re considering a second home strictly as an investment property, whether or not it’s a good decision depends on many other decisions you make along the way, like how much you choose to charge in rent, which improvements you make to the property and how you plan to manage the property, to name a few. Before you decide to rent out an income property, make sure you’ve considered these seven major cost areas.

How to get a mortgage on a second home

What’s the difference between your primary mortgage and your second home mortgage?

There are a few differences between these two mortgages. Depending on your credit score and other qualifications, you may be able to get a conventional mortgage for a primary residence with as little as 3 percent down (but you will have to pay private mortgage insurance, or PMI.) You might also qualify for an FHA loan with 3.5 percent down. Generally, the higher your credit score, the better interest rate you will qualify for, but lenders may consider your application with a 620 or lower credit score. (You can read more here about the most important factors in getting approved for a mortgage.)

For a second home, you could be required to put 10 percent to 30 percent down, depending on your credit or debt to income ratio. Lenders like to see cash reserves, as well, to show that you can cover one to 12 months of payments. Additionally, lenders like to see a 640-700 credit score for second homes, and your interest rates might be a quarter of a point to a half a point higher than your primary mortgage, although Green says, “Mortgage rates on second homes may be slightly higher, or may not be higher at all.”

When it comes to credit qualifications for a second home, Crouse says, “Second home credit requirements are typically the same as primary residence for conventional lending.” Additionally, he says there’s no difference in the approval process. Green corroborates this. He says, “Minimum credit score thresholds aren't usually different for vacation homes as compared to primary residences. However, lenders often ask for additional monies down.”

If you want to find a mortgage for a second home, Crouse says, “Typically lenders who offer primary home loans would also offer second home financing.” Green advises, “The mortgage-comparison process is the same. Do your research, talk to two or more lenders, and choose the lender that works best for you.”

You’ll also want to ask yourself these questions in order to avoid common mistakes:

Can I really afford this place? Wohlner says, “If you don’t have the cash for the down payment on a second home you shouldn’t be buying one.”

What loan terms make the most sense for this property? Just because you have a 30-year fixed-rate mortgage on your primary residence doesn’t mean that’s the right choice for a second home. Crouse says, “A common mistake is not looking at adjustable rate loans as an option,” because second homes are often “a luxury item and therefore something people liquidate when there is a change financial situation.”

Have I explored all my options? Green says, “When you're shopping for a mortgage on a second home, make sure to actually shop.” He adds, “You're looking for the best combination of price and service on your loan. It's good to shop around.”

What are some ways to pay the down payment on a second home?

The best way to pay for a down payment on a second home is to pay for it with cash. Crouse says, in his experience, most people use cash as their down payment on second homes. The reason, he says, is, “Most buyers don’t want to tie up personal residence equity into their second home.”

If you don’t have the cash on hand and you’re committed to buying a second home, you can consider taking out a HELOC on your primary residence and using that money for the downpayment for your second home.

Taking out a HELOC comes with risks, though. You are leveraging your primary residence to purchase a second residence, which could cause you to lose your home if you fail to make your HELOC payments. In fact, Wohlner completely advises his financial planning clients against getting a HELOC to pay for a down payment on a second home. He says you should pay for it in cash.

Alternatives to mortgages for a second home

Getting a mortgage for a second home isn’t the only way to get the vacation property or investment property you want. Here are some other options:

Pay cash

Paying cash for your second home is a great way to ensure you don’t pay interest to a bank. It also means you’ll have no monthly mortgage payments on your second home, and that’s a great feeling. Of course, you’ll no longer have easy access to that money in case of an emergency. You might also prefer to get a mortgage at a low-interest rate and instead invest your cash in the stock market. Again, this is up to you, your risk tolerance and your cash reserves.

Get a joint mortgage with family

Sharing a second home and getting a mortgage with a family member could be a great way to split the costs and responsibilities of having a second home. Of course, involving multiple applicants in the mortgage process may make it a bit more logistically challenging.

You should also know that there are tax implications. When claiming the mortgage interest deduction, you may have to include an attachment in your tax return showing how much of the mortgage interest you paid. If you’re the person who receives the Form 1098 (the mortgage interest statement), you will deduct only the portion you paid and have to let the other borrowers know what their shares are.


Timeshares are an $8.6 billion industry, and the average price of a timeshare interval is $20,040, according to the American Resort Development Association. (A timeshare interval is the set number of days and nights per year an owner uses the property, usually a week, according to the ARDA.)

Now, you can go to large, well-known companies like Disney to find your own timeshare. With a timeshare, you typically get to visit a specific place every year for a set amount of time, like one week. So, you don’t have the flexibility of getting to visit your second home any time you want, but it can be more cost-efficient. Another con is that timeshares come with hefty dues that can increase each year.

Bottom line

Ultimately, buying a second home is an exciting prospect. If you vacation often to the same place, it can be a great way to become an official part of that community. However, buying a second home is a serious financial commitment that requires a large down payment and other maintenance costs. Luckily, if you decide you aren’t ready to buy a second home yet, you can still use vacation rental websites and continue to try new locations until you’re finally ready to take the plunge.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Cat Alford
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Cat Alford is a writer at MagnifyMoney. You can email Catherine at

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Can I Refinance a Mortgage When My Home Is for Sale?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.


If you’re having trouble paying your bills, or if you’d simply like to reduce your monthly expenses, refinancing your mortgage could be a good option. By reducing your interest rate, extending your loan term, or both, you could stand to significantly reduce your monthly payment.

But refinancing isn’t easy if you’re also in the process of selling your home. Many mortgage lenders may be hesitant to work with you, and there are some rules you’ll have to follow before you can even consider it.

This article explains why you might want to refinance your mortgage while your home is for sale, why lenders might be hesitant to allow it, and how you can maximize your odds of success.

Why You Might Consider Refinancing When Selling Your Home — and Why You Should Think Twice

There are a few situations in which refinancing a home you are trying to sell might seem like a good idea. But there are also some downsides to this approach, and in some situations, those downsides will outweigh any potential benefit.

Here are some of the reasons to consider it, as well as some reasons to think twice.

1. Relieve the burden of two mortgage payments

If you have already moved into a new home and you are now dealing with two mortgage payments, refinancing your older mortgage could be a way to reduce your monthly expenses and make this temporary situation a little more manageable.

One issue with this approach is that the upfront closing costs could outweigh the savings you receive on the monthly payment. This is especially likely if you end up selling your home quickly, as there may not be enough time for you to recoup those upfront expenses.

Dan Green, the founder of Growella and the branch manager for Waterstone Mortgage in Pewaukee, Wis., also warns that refinancing is not a cure-all if you’ve gotten yourself into a difficult financial situation. While it may offer temporary relief, the long-term issue of having to afford two mortgages will remain and you might end up spending a lot of money on something that still leaves you in a tough spot.

2. You can do a no-cost refinance

If you plan on selling your home within the next few months, the typical upfront closing costs associated with refinancing are a big obstacle.

But you may be offered a no-cost refinance in which you’re able to refinance your mortgage without closing costs. And that could be helpful in the right circumstances, as long as you understand the pros and cons.

The term “no-cost” is slightly deceptive because the lender isn’t actually giving you a free pass. They are simply rolling the closing costs into the loan, which increases the amount you’re borrowing and therefore increases the long-term cost of the loan.

The upside is that without the upfront costs, you can start saving money immediately as long as you’re able to lower your monthly payment. If you sell your home relatively quickly, you could end up spending less than if you had kept your original mortgage.

The downside is that since you’re taking out a larger mortgage, you’ll have to pay more the longer you hold it. If you have trouble selling the house or if your plans change and you decide to keep it, you could end up spending more than you would have either with your original mortgage or with a traditional refinance.

3. You’re not planning to sell the home anymore

If your house has been on the market for some time without any success, you might be having some doubts. That may be especially true if you’re in a buyer’s market, leaving you with little leverage for getting the price that you want.

In that case, you might simply decide that you no longer want to sell the house. You may even decide to turn the home into an investment property instead and rent it out to tenants.

According to Green, this is the most suitable reason to refinance while your home is for sale. If your plans have changed, a refinance might be the best way to save money over the long term.

Why lenders are wary of refinancing a home that’s for sale

Even if you decide that refinancing is the right move, you may have trouble finding a lender that’s willing to do it.

Lenders always take on risk when originating a mortgage loan, and some of these risks are even bigger when they’re considering short-term financing.

Default risk

Default risk is the risk that you might not be able to pay the loan back, in which case the lender stands to lose money.

On the one hand, if you are refinancing a mortgage on a home that you are trying to sell, it should theoretically be a short-term loan and that may decrease the odds of default.

If, as Green mentions, you are refinancing in an attempt to relieve some of the stress of a difficult financial situation, you might quickly find yourself in even more financial trouble if you aren’t able to sell your home quickly. And that type of situation could make it harder for you to pay back the loan, which increases the lender’s risk of losing money to default.

Early-repayment risk

According to Casey Fleming, mortgage adviser and author of "The Loan Guide", lenders make most of their profit when they sell their loans to investors. So in a situation where you’re trying to take out a loan on a property that you’re trying to sell, the lender faces the risk that you’ll pay the loan off early and eliminate their ability to sell it for a profit.

“A lender doesn't want to book a loan that's going to be paid off after only a month or two,” said Fleming. “The lender stands to lose quite a bit of money if someone takes out a loan and then sells the property.”

Even if the lender does manage to sell the loan to an investor, part of the sale includes representation and warranties that could cause problems in the case of early repayment.

Fleming said, “The lender represents to the investor that the information in the file is true and correct and affirms that the loan will pay off as planned.”

So if you sell the home and repay the loan within just a few months, the lender may be forced to buy the loan back from the investor, resulting in more losses.

How to improve your odds of refinancing

If you’re still convinced that refinancing is the right move, how can you find a lender who is willing to go through with it while your home is still for sale?

The first step is to be honest. If your home is listed, it will show up on a multiple listings service (MLS) that the lender can easily cross-reference, so you shouldn’t try to hide it.

Beyond that, here are three steps you can take to improve your chances of getting approved for a mortgage refinance.

1. Take your home off the market

Most lenders will require that you remove your listing before they consider refinancing.

For cash-out refinance transactions, Fannie Mae, a government-sponsored enterprise that buys mortgages from lenders, requires that your property must be taken off the market before the loan is disbursed. And for limited cash-out refinance transactions, they require that the borrower confirm their intent to occupy the home.

In other words, for the most part you will not be allowed to refinance your mortgage if you are still planning to sell the home. You must have changed your mind, decided to hold onto it, and taken it off the market.

2. Write a letter of intent

Even if you do take your home off the market, lenders may still be wary of proceeding. In that case, a letter explaining your new intentions may help you secure the refinance you’re looking for.

According to Green, Fannie Mae requires borrowers to sign a letter indicating their intention to occupy the home as a primary residence. In other situations, you might write a letter explaining that you’ve decided to turn the home into a rental property rather than sell it.

Whatever the case, explaining your intention to hold onto the property, and providing evidence of that intention if possible, could help your case. For example, a copy of a lease agreement with a tenant could bolster your case that you are truly planning on using the property as a rental.

Again, it’s important to be honest. If you declare your intention to keep the home and then turn around and sell it right away, you could end up in a lot of trouble.

“If you misrepresent your intentions, you’ve committed mortgage fraud,” said Fleming. “The lender could sue you for damages and the federal government could prosecute you.”

3. Shop around

While most lenders will require that you take your home off the market and leave it off the market in order to refinance, some don’t have those restrictions.

“Banks or credit unions that retain some of their loans rather than sell them might be more willing,” said Fleming. “But only on higher-risk, higher-rate loans.”

If you shop around, you may be able to find a lender who’s willing to refinance even if you keep your home for sale. But there’s no guarantee, and you’ll likely end up with a more expensive loan that could hurt you in both the short and long term.

A good place to start shopping refi offers is through MagnifyMoney’s parent company, LendingTree’s mortgage marketplace.

The Bottom Line

If your home is already listed for sale, or if you plan on selling in the near future, refinancing is a difficult proposition. Many lenders won’t even offer a refinance unless you take your home off the market and those that will refinance often charge you higher interest rates.

In the end, it may be better to simply avoid refinancing if a sale is imminent.

But if you’ve had trouble selling your home and you’re having second thoughts, you can improve your chances of getting approved by taking your home off the market and refinancing in good faith.

Doing so could help you secure a lower monthly payment, a lower interest rate, or both, and free up a little extra cash flow for your other needs.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Matt Becker
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Matt Becker is a writer at MagnifyMoney. You can email Matt at


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Is Now the Best Time to Buy a Home?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.


Mortgage applications increased by 7.8% in December 2017 from the previous year, according to the Mortgage Bankers Association. But the fact that more people are buying homes doesn’t necessarily mean it’s the best time for you.

If you’re trying to decide whether now is the right time to buy a home, it’s important to understand how the housing market works and whether you’re financially and emotionally ready to take on such a large commitment.

Here are some of the most important factors to consider.

A snapshot of the current housing market

There are several market forces that influence the overall affordability of housing, and can therefore affect your personal decision.

In this section, we’ll look at the current state of three main factors: mortgage rates, home prices, and inventory levels.

Mortgage rates are rising

As with the stock market, you can’t know for sure how mortgage interest rates will change over time. You can, however, make predictions based on some underlying factors.

According to Tendayi Kapfidze, chief economist at LendingTree, mortgage rates are significantly higher than they were six months ago. Indeed, the following chart from Freddie Mac shows a steady climb starting in September, followed by a sharp climb in rates more recently:

Kapfidze points to two factors that have helped push rates higher.

“The first thing is that the Federal Reserve, since September, has been reducing its holdings of Treasury securities and mortgage-backed securities,” he said.

The Federal Reserve began the program of buying up these holdings in response to the financial crisis that began a decade ago. The idea was to lower interest rates to encourage businesses to invest and help the economy grow.

Kapfidze says that this reduction in the Federal Reserve’s holdings lowers demand for Treasury bonds and mortgage-backed securities, “If you reduce the demand, the price falls,” he added, “which in this case means that interest rates go up.”

The second factor, according to Kapfidze, is the recent behavior of Congress, which passed both the Tax Cuts and Jobs Act and a sweeping budget bill recently.

“Both of those things are projected to increase the U.S. budget deficit pretty significantly,” said Kapfidze. “They’re going to be issuing a lot more Treasury bonds, and because they’re adding a lot of supply and we have a reduction in demand, that’s also pushing up the interest rates.”

Home prices are on the rise

If you thought home prices were high when the housing market bubble burst in 2007, take a look at how they’ve grown since the market recovered.

If you’re concerned that the market will see another correction soon, you might not want to risk getting caught up in it. It’s difficult to predict if and when a correction will happen, so it’s often not advisable to try to time the market.

One thing to keep in mind, though, is the correlation between interest rates and home prices.

“As mortgage rates go up, that does put some downward pressure on home prices, but it does it with a lag,” said Kapfidze. “If you were to run a correlation between mortgage rates going up this year and home prices three years from now, you’ll probably see a little slower appreciation in home prices.”

There are fewer homes available

While mortgage rates may not have an immediate impact on home prices, inventory levels can. Total housing inventory fell 11.4% in December 2017, according to the National Association of Realtors, and was 10.3% lower than the previous year.

With fewer homes on the market and growing demand, sellers have less competition and therefore more opportunity to increase prices. But Kapfidze doesn’t see that acting as a deterrent for homebuyers.

“Given the strength of demand in the housing market today, I think you’ll probably still see pretty strong growth in home sales this year,” he said.

The benefits of buying a home

Buying a home is a major financial commitment and should not be taken lightly. But it also comes with some significant benefits, both financial and otherwise, that may factor into your decision.

Tax breaks

The U.S. tax code allows homeowners to deduct the amount of mortgage interest and property taxes they pay each year from their taxable income. The catch is that you have to be able to itemize your deductions instead of taking the standard deduction.

With the new tax law in effect, the standard deduction has increased from $6,500 to $12,000 for single taxpayers and from $13,000 to $24,000 for married couples filing jointly. As a result, fewer homeowners find it worthwhile to itemize their deductions and therefore take advantage of the mortgage interest and property tax deductions.

You may also receive a tax break when you selling your home down the road. The IRS allows you to up to $250,000 in tax-free gains on your sale if you are single, and up to $500,000 if you are married filing jointly, assuming certain conditions are met.

So if, for example, you buy a house for $200,000 and sell it years later for $300,000, that $100,000 gain would be completely tax-free as long as you meet the eligibility requirements.


So long as home sales remain strong, a home is an appreciable asset, which means that its value typically grows over time. And every monthly payment you make increases the amount of the home that you actually own — your equity — which means that you are building wealth along the way.

Of course, growth isn’t guaranteed. As the U.S. real estate bubble burst a decade ago, the Case-Shiller 20-City Composite Home Price NSA Index fell for almost three years straight.

That said, the long-term upward trend is clear. According to the U.S. Census Bureau, the median home value grew from $30,600 in 1940 to $119,600 in 2000, adjusted for inflation.

All of which is to say that owning a home functions as a sort of forced savings program. By continually contributing money to an appreciable asset, you can build long-term wealth.

Predictable monthly costs

If you opt for a fixed-rate mortgage, your monthly payment is locked in for the length of your loan term. This is in contrast to renting, where your monthly payment can change every time you renew your lease.

That fixed cost can make budgeting and planning a lot easier. With that said, owning your house means that you’re on the hook for maintenance and repairs. These costs can be unpredictable, and sometimes quite high, which is one of the reasons why building an emergency fund can be so helpful.

More control

While homeownership can provide financial benefits, many people simply want the freedom to create a home that makes them happy.

As a homeowner, you don’t have to ask permission to paint the walls, replace the floor, add a room or get a pet. For the most part, you have complete control to do what you like.

Of course, this may mean spending more money on home improvements. But if it’s in pursuit of turning your house into a home, it may be worth the costs.

Running the numbers on buying vs. renting

The choice to buy or rent isn’t always an easy one, even if you’ve done your homework. But it’s always helpful to run the numbers to see which route is more likely to come out ahead.

You can play around with The New York Times’s Buy vs. Rent calculator to crunch the numbers.

It generally makes more sense to buy if you plan on living in the home for an extended period of time.

The less time you plan on staying in the home, and the greater the associated costs of your home are — such as interest rate, property taxes, insurance, and maintenance — the less likely it is that buying will be the better financial decision.

While there is no golden rule, there are certain variables that generally argue one way or the other in the buy vs. rent debate.

Here are some of the major considerations:

Even if you’re ready to take the next step toward buying a house, the process can be daunting, especially if you’re a first-time homebuyer.

As you begin the house-hunting process, here are some tips to help you stay on the right track.

1. Figure out how much you can afford

A mortgage is a long-term investment, so make sure your budget can handle both the monthly payment and all the other expenses that come with owning a home.

“You want to make sure to have a conservative budget, so if any curveballs are thrown at you like a lost job or big unexpected repair, you have the means to tackle them,” said Mike Schupak, CFP®, a fee-only financial planner and the founder of Schupak Financial Advisors in Jersey City, N.J.

You can use MagnifyMoney’s home affordability calculator to get a quick idea of your price range, then focus on homes within that range.

2. Research recent home sales in your area

Given that the housing market crashed not too long ago, and that average home prices have now risen above what they were before the crash, you might be worried about buying at the top of the market and suffering through another downturn.

Luckily, there are plenty of tools that allow you to research the value of recently sold homes in your area, which can help you gauge whether the home prices you see are fair.

Websites like and can be helpful places to start. Zillow allows you to search as many as three years back, and both sites allow you to filter based on a number of variables so that you can get as fair a comparison as possible.

But this is where a good realtor will really shine. Realtors have access to databases that go back even further, and a good realtor will understand how to evaluate that data, find the right comparisons and explain it all in a way that makes sense.

3. Determine how much you’ll put down

A larger down payment will reduce your monthly payment and potentially allow you to avoid PMI, but you have to weigh that against the savings you have available and your other financial needs.

Lucas Casarez, CFP®, a fee-only financial planner and the owner of Level Up Financial Planning in Fort Collins, Colo., says that a 20% down payment is preferred, but not a deal breaker. It typically allows you to avoid PMI and may allow you to secure a lower interest rate.

But putting 20% down isn’t always realistic, and there are plenty of mortgage programs that allow you to buy a home with less. You just need to weigh the pros and cons in light of your personal situation.

4. Get preapproved

You can get a pre-approval letter from a lender before even making an offer on a house. This letter says that the lender will likely loan you up to a certain amount of money, based on a set of assumptions.

And while this isn’t a loan offer or a guarantee, it both allows you to make an offer with more confidence and gives the seller more confidence that you will actually be able to follow through on your offer, increasing your odds of having it accepted.

5. Avoid applying for credit

Every time you apply for a credit card, loan or any other type of credit, the lender does a hard credit check that can temporarily knock a few points off your credit score.

It’s therefore wise to delay new credit activity until after you close on your mortgage in order to keep your credit score from dropping.

6. Get the right loan

There are many different types of mortgages, from conventional loans to non-conforming loans, to programs that allow you to put less than 20% down. You can get a fixed interest rate or an adjustable rate, and you can choose mortgage term that’s typically either 15 or 30 years.

There are many different factors to consider, and a good mortgage adviser can help you understand your options and make the right choice based on your personal needs.

7. Compare mortgage rates

Every mortgage lender has different criteria when underwriting their mortgages, so you have the opportunity to shop around to find the lowest interest rate available to you. You can use this tool from the Consumer Financial Protection Bureau to get a sense of the rates available in your area, and you can apply with several lenders to see what offers you qualify for.

MagnifyMoney’s parent company LendingTree also makes it easy to get quotes from lenders online, using this short online form.

And you don’t have to worry about hurting your credit score by making several applications. As long as they are all within a 45-day window, the credit bureaus will count multiple credit checks from multiple mortgage lenders as a single inquiry.

8. Make a strong but reasonable offer

Once you find the right house, you can work with your real estate agent to make a strong offer that’s within your budget.

At this point in the process, you may be confronted with competing bids, and it’s important not to get caught up in a bidding war that could put you in a difficult situation. You can potentially work with your realtor to make certainly reasonable concessions, but be prepared to walk away if the price gets too high.

The bottom line: Is it time for me to buy a house?

With so many market and financial factors to consider, it can be hard to figure out whether it truly is the right time to buy. Schupak’s advice is to focus on what you can control.

“Don’t try to time interest rates,” Schupak said. “Instead, focus on items like purchase price, expected maintenance cost, insurance, HOA fees and real estate taxes. A forecast miss on those items often turns out to be much more costly than a higher interest rate.”

Casarez encourages people to be conservative and wait until you have a solid foundation in place that can help you navigate the ups and downs of this big transition.

“Sometimes the monthly cost of owning a house can be a big jump, and it can cause a lot of stress,” said Casarez. “The best time to buy a home is when you're financially and mentally ready to do so.”

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Matt Becker is a writer at MagnifyMoney. You can email Matt at


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Most Important Factors to Getting Approved for a Mortgage

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.


When David Inglis and his wife decided to move to San Diego last year, they were expecting a relatively smooth process. They'd keep the house they owned in Los Angeles and rent it out as a source of passive income, then they'd buy a new house in San Diego. They even had a 20% down payment ready to go.

"The problem was that we found renters and had to get out of our current house and close on the new house within 21 days," Inglis, 40, a yacht broker, tells MagnifyMoney. That gave them just 21 days to get a mortgage — easier said than done. As Inglis put it: "Getting approved for a mortgage is a process, to say the least."

With what felt like a moment's notice, the couple had to gather up and submit everything from tax returns to current income statements, and do mountains of paperwork in between to get pre-qualified for a loan. From there, their lender picked through their credit scores, debt-to-income ratio, employment history — you name it. They closed on their new house in the nick of time at the end of 2017, and it was anything but a stress-free experience.

If you're new to the whole buying-a-house thing, locking down a mortgage loan isn't something that happens overnight. That's not to say it isn't worth it though. One recent Value Insured survey found that the vast majority of younger folks—a whopping 83%, in fact—still associate buying a home with the American dream.

At the starting line? There are a number of important factors that go into determining if a lender will approve you for a home loan. Here's everything you need to know.

Getting approved for a mortgage — 5 things lenders are looking for

Credit score

Remember: A mortgage is a type of loan. When you're applying for any type of financing, your credit score is perhaps the most important piece of the puzzle. This three-digit number essentially provides lenders with a general idea of your creditworthiness.

If you have accounts in collections or a history of making late payments, for example, you'll have a lower-than-average score, which directly affects your loan options. That means you could get hit with higher interest rates or bigger mortgage insurance premiums, or both.

"Your credit score is really important on conventional loans,” John Moran, founder of, tells MagnifyMoney. “Some other loan programs are less credit-sensitive."

For conventional home loans, Moran says your credit score has to be at least 620, but for FHA or VA loans, you may be able to get away with a score in the 500s. But it’s not just about getting approved. The lower your score, the higher your mortgage rate will likely be — and that can add tens of thousands of dollars to the cost of your loan over time.

FICO, America's leading credit reporting agency, looks at several important factors when determining your score. Your payment history, amounts owed, and length of credit history are chief among them. If you’re aiming for a home in the next year or two, you’ve got time to improve your credit if you start now.

Trust us — it’ll be worth the effort. You can see below what estimated mortgage rate folks would get based on their credit score and how much it could cost them over time. For our purposes, we’ll assume they’re all getting a $250,000 30-year fixed rate loan.

Score Range


Monthly Payment

Total interest paid

























Source: Calculated using the MyFico Loan Savings Calculator
Rates current as of Feb. 2, 2018.

You can find a detailed breakdown of your credit score by pulling up your credit report for free. Your report unpacks your credit history for lenders, so it’s vital to know what’s on it. This is crucial because you could end up spotting an error that's weighing your score down.

If your credit score could use some work, don't fret—there are plenty of ways to give it a good boost before buying a home. Establishing credit history, keeping your credit utilization ratio below 30%, and making consistent on-time payments are all on the list.

Debt vs. income

Your credit score goes hand in hand with your current debt load. Lenders specifically zero in on how your debt relates to your income. Together, this determines what's known as your debt-to-income ratio (DTI)..

To calculate out your DTI, it’s fairly simple: Add up all your monthly debt obligations (not including your current housing payment unless you own the home and plan on keeping it), then divide that number by your gross monthly income. So if you pay, for example, $2,000 a month toward debt and you're grossing $4,500, your DTI comes in at about 44%.

What’s a good DTI? Strive for 36% or less.

Fannie Mae, which sets the lending standards for the vast majority of mortgage loans, generally requires a maximum total DTI of no more than 36%. However, if the borrower meets certain credit and reserve requirements, they can generally get away with 45%.

Why? A high DTI is a red flag to lenders that you may not be able to afford a new monthly loan payment. In a lot of ways, it's more telling than your credit score.

"The only thing that really matters to lenders is how this new monthly payment and your other debts relate to your income," said Moran. "One of the quickest ways people can turn things around is by paying down revolving debts like credit cards and lines of credit, which increases your available credit and decreases your credit utilization ratio."

He adds that making a smaller down payment in order to pay down revolving debt might improve your chances of qualifying since doing so will boost your credit score relatively quickly. Knocking those balances down also lowers your monthly minimum payment, so you may be able to qualify for a larger loan. In other words, your DTI isn't the end-all-be-all when applying for a mortgage loan, but it’s pretty important.

Down payment

Lenders also look at how much of a down payment you can make, which ties directly back into your debt-to-income ratio. According to Bob McLaughlin, director of residential mortgage at financial services company Bryn Mawr Trust, putting down a higher down payment makes you more likely to get approved since it essentially decreases the risk for the lender. As a result, better loan terms and interest rates will likely be on the table.

"If you have the ability to put 20% down, you also avoid having to pay private mortgage insurance, which makes it easier to qualify," he said.

Another perk is that you'll have more equity in your home as well as a lower monthly mortgage payment. But for many, saving for a 20% down payment is a serious barrier to homeownership. Not surprisingly, a 2016 report put out by the National Association of Realtors found that the average down payment for first-time homebuyers has fallen in the 6% range for the last few years. The good news is that according to Moran, you can still get approved with a lower down payment.

"You can put 0% down for VA loans, 3.5% for FHA loans and even as little as 3% for conventional loans," he said.

"There are people all the time buying homes with these minimum down payments, but it really all boils down to what you're comfortable with and the kind of monthly payment you can handle."

FHA and VA loans are usually the first low down-payment loans that come to mind, but options like personal loans and USDA loans may also be worth considering. Just keep in mind that taking this shortcut could potentially translate to a financial burden — low down payments typically necessitate higher insurance rates and extra fees to protect the lender.

That said, lenders are really looking at your big financial picture, not just your down payment size. If you're putting down less, but have a good score and a steady source of income, you're much more likely to get approved for a mortgage loan than someone with a lower score and/or spotty employment status.

Employment history

Our insiders say that your income and employment history are just as important as your credit score, DTI and down payment size. Again, it all comes down to lenders feeling confident that you can indeed repay your loan.

"You have to fit the underwriting guidelines per your profession, and there is little flexibility there," said McLaughlin.

Piggybacking on this insight, Moran says that the ideal situation is if you've worked for the same employer for two years and you're salaried. The second ideal way to get the green light is if you're an hourly worker who's been with the same company for at least two years.

But all this begs one obvious question: What about self-employed folks? The freelance economy is growing rapidly. According to the latest Freelancing in America survey conducted by Upwork and the Freelancers Union, these folks are predicted to make up the majority of the U.S. workforce within the next decade. Moran says that for these workers to qualify for a mortgage, they'll need to have a two-year work history.

Check out our guide on getting approved for a mortgage when you’re self-employed.

"It's a little bit of a kiss of death to start self-employment right before applying for a home loan," he said.

"Most lenders won't approve you because they want to be sure you'll be able to afford your new loan payment. The only way to really prove you have a steady income is with two years' worth of tax returns."

In rare cases, Moran adds, you may be able to get away with one year, but it’s not the norm. Things are different of course, for self-employed newbies who are applying with a spouse who works a steady 9-to-5, which could tip the scales in their favor. Again, it's all about the big picture. That said, a new salaried position will typically erase doubts stemming from a spotty employment history, as long as you have about two months’ worth of pay stubs, according to McLaughlin.

Loan size

All the factors we're highlighting here are interwoven. The size of the loan you're applying for fits right in. The higher your loan amount, the higher your monthly payment, which impacts that all-important DTI.

This is why you may be more likely to get approved if you're seeking a lower amount. But whether you're looking for $100,000 or $400,000, it really boils down to how big of a monthly payment your budget can absorb. (Lending Tree, which is the parent company of MagnifyMoney, has a Home Affordability Calculator that can help you figure this out.)

The general rule of thumb here is to keep your mortgage loan (including principal, interest, taxes, and insurance) at or below 28% of your total income. Moran has worked with ultra-conservative folks who like to keep that number at 25%, but he says it really varies from person to person.

"Some people like to travel and don't want to be house poor; others are homebodies and just really want a nice house because that's where they're going to spend their time," he said.

"It's all a trade-off, but either way, lenders will only pre-qualify you for what they think you can actually afford."

How to get preapproved for a mortgage

Pre-approval is a term you're likely to hear in the home-buying process. This is when the lender takes into account everything from your credit score and debts to employment history and down payment size to offer you a maximum loan amount.

When you come to the table with a pre-approved offer of lending from a bank, you’re already way ahead of the competition. And this can really give you an edge. When you’re living in a metro where most people are coming with double-digit down payments and pre-approvals to boot, you’re competing with very attractive borrowers.

Pre-approvals will ding your credit score, but the hit won’t be too bad if you complete several mortgage applications over a short time period, like 30 to 45 days. Multiple inquiries should only count as one hard inquiry on your credit report.

A good rule of thumb is to get mortgage quotes before you apply for pre-approval. You can get quotes quickly from different lenders at LendingTree by filling out a short online form.

Included in a pre-approval letter will be the estimated loan amount you might qualify for and your estimated mortgage rate.

The pre-approval process is also meant to prevent you from making offers on homes you can't afford. But this doesn't mean you have to actually take out a loan for the full amount. Many choose to get preapproved for their top number, then dial back during negotiations.

Final word

When it comes to mortgage approval factors, there are a lot of moving parts. Far and away, your credit score and debt-to-income ratio carry the most weight for potential lenders. From there, your ability to prove that you're steadily and reliably employed is equally important.

At the end of the day, all that really matters is that you're applying for a loan that you'll actually be able to repay hiccup-free. The larger your down payment, the better your odds—especially if it eliminates the need for PMI. Either way, it's probably in your best interest to meet with lenders before you start house hunting.

"You don't want to put the cart before the horse by going with a realtor to look at houses, only to fall in love with something you can't afford," added McLaughlin. "Your emotions can definitely make the mortgage application process more stressful, which is why it's best to go through the prequalification process first."

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here


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3% Down? Why Small Down Payment Mortgages Could Be a Bad Idea

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.


For prospective homeowners, the idea of saving up for a 20% down payment — usually tens of thousands of dollars — can often be paralyzing. As a result, small or no down payment mortgages are extremely attractive.

But as usual, taking a shortcut financially can come back to bite you. Mortgage loans that have a low-minimum down payment usually require extra fees or insurance to make it worth the lender’s while.

To determine whether a small down payment mortgage is right for you, it’s important that you know what you’re getting yourself into and how much it can cost you in the end.

Mortgages that require a small down payment

Small down payment mortgages are attractive primarily because they allow people to buy a home sooner than if they had to put a full 20% down.

This can be appealing for personal reasons since owning a house often makes it feel more like home. And it can occasionally be attractive for financial reasons, potentially saving you money compared with renting, particularly if you stay in the house for an extended period of time.

Additionally, there are several home loan programs that offer small or no down payment mortgages to those who qualify:

Veterans Affairs (VA) loans

These loans are insured by the U.S. Department of Veterans Affairs for certain veterans, service members, spouses and other eligible beneficiaries.

They don’t require a down payment or mortgage insurance but do charge a one-time funding fee of 0.5% to 3.3%, depending on the type of loan, the size of the down payment and the nature of your military service.

U.S. Department of Agriculture (USDA) loans

The U.S. Department of Agriculture insures home loans for low- to moderate-income homebuyers in eligible rural areas.

Like VA loans, there is no down payment for a USDA loan. But there is an upfront fee of 1% and an ongoing annual fee of 0.35%, both of which apply to purchases and refinances.

Federal Housing Administration (FHA) loans

Insured by the U.S. Department of Housing and Urban Development (HUD), borrowers can get an FHA loan with a down payment as low as 3.5%.

Additional fees include an upfront mortgage insurance premium of 1.75% and an annual mortgage insurance premium of 0.45% to 1.05%, depending on the type, size and length of the loan and the size of the down payment.

Conventional loans

Some mortgage lenders offer small down payment mortgages — as little as 3% down payment — to borrowers who qualify.

These loans, however, aren’t insured by a government agency, so the lender will require private mortgage insurance (PMI). The cost of PMI varies but is often between 0.5% and 1% of the loan amount. You can typically request to have your PMI dropped once you have at least 20% equity in the home.

Learn more: Planning your down payment

The benefits of small down payment mortgages

These small and no-down payment mortgage options are designed for those with low- to moderate-incomes who either don’t have enough cash on hand for a large down payment or find it difficult to qualify for a conventional mortgage for credit reasons.

For example, you can get an FHA loan with a 3.5% down payment with a credit score as low as 580. VA loans technically don’t have any minimum credit score requirement, although you may still get denied if you don’t meet the lender’s financial criteria.

As a result, these small down payment mortgages are attractive because they make homeownership more accessible. You can save enough for a down payment much sooner than if you had to put the full 20% down, and you can secure a mortgage even if your credit isn’t perfect.

Why a small down payment could end up costing you more

Home loans with a small down payment are often billed as affordable options for homebuyers because of the fact that you don’t have to bring as much money to the table upfront. But the flipside is that you’ll likely spend more money over the life of your loan than if you waited until you had saved enough to make a larger down payment.

For example, let’s say you’re buying a $200,000 home, putting 3% down, and not rolling your closing costs into the loan. On a 30-year mortgage with a 4% interest rate, your monthly payment will consist of the following elements:

  • Principal: The amount of each payment that goes toward reducing your loan balance.
  • Interest: The amount of each payment that goes toward paying the interest on the loan.
  • PMI: Private mortgage insurance paid to a third party to protect the lender in case you default on your loan. For our example, we’ll assume a 0.75% rate.
  • Homeowners insurance: This covers certain damages to your home, the loss of personal belongings and covers your liability in the case that you accidentally injure someone or damage his or her property. Lenders typically require homeowners insurance and collect your payments in an escrow account, making payments to the insurance company for you. We’ll assume a $70 monthly insurance payment for our example.
  • Property tax: Your property tax rate will depend on your state and county. For the sake of simplicity, we’ll use a 1% tax rate for our example.

Using MagnifyMoney’s parent company, LendingTree’s online mortgage calculator, here’s how your monthly payment will break down:

  • Principal and interest: $926.19
  • PMI: $121.25
  • Homeowners insurance: $70
  • Property tax: $166.67

If you total these up, your monthly payment will be $1,284.11.

Now, let’s compare that with your monthly payment if you make a 20% down payment instead.


3% Down Payment

20% Down Payment

Principal and interest






Homeowners insurance



Property tax



Total Monthly Payment



That’s a savings of $283.58 per month, for a total of $102,088.80 over the life of the loan.

What you could do with the money you saved by making a bigger down payment

Even if you don’t plan on staying in the home for the full 30 years, having an extra few hundred dollars per month can make a big difference for your budget. Here are just a few things you can do with that additional cash.

  • Invest: Whether for retirement or some other long-term goal, investing is the best way to get your money to work for you.
  • Pay down debt: Student loans, credit cards, and other debts are easier to pay off when you have extra room in your budget.
  • Save: Saving ahead for home repairs and routine maintenance, as well as building an emergency fund to handle big, unexpected expenses.
  • Travel: More disposable income makes it easier to travel, whether you want to explore somewhere new or simply visit friends and family.
  • Home improvement: If your new house isn’t your dream home, you can use the monthly savings to work on renovations.

If you do plan on staying in your house for the life of the loan, that extra $102,088.80 can go a long way toward securing every part of your financial future.

How to decide if a low down payment mortgage is for you

While it’s generally better to make a bigger down payment, there are some situations in which a small down payment mortgage may be the better option.

You don’t plan on staying in the home very long

Over a 30-year period, you can save tens of thousands of dollars by opting for a higher down payment. But if you’re only planning on staying in the home for a few years, the savings won’t be nearly as high.

That said, it’s important to also consider the transaction costs.

“The cost of buying and then selling a home runs about 8% to 10% of the purchase price, depending on where you live,” said Casey Fleming, mortgage advisor and author of “The Loan Guide.” “Buying with a low down payment only makes sense if you plan on being in the home long enough to make back at least your acquisition and sale costs.”

You need the liquidity

Even if you have enough money to make a large down payment, you may not want to part with all of it. For example, you might prefer to keep your emergency fund intact rather than deplete it. Or you might want to keep some cash available for repairs. Or you might want to invest some of that money with the hope of getting a better rate of return.

“With a larger down payment, you're taking money that's liquid and making it illiquid,” said Dan Green, founder of Growella and the branch manager for Waterstone Mortgage in Pewaukee, Wis. “The only way to get to your money is to refinance, sell your home or take a line of credit. It's very important that before making a large down payment that you have a sufficient emergency fund, a budget set aside for home repairs.”

Ways to build up to a larger down payment

If you’ve set a goal of making a 10% to 20% down payment on your next home purchase, now is the time to start getting your strategy in place. While it can sometimes take years to save that kind of money, there are a few things you can do to speed up the process.

Find extra cash to save

Sometimes the best way to reach a financial goal is a good mix of offense and defense.

On offense, consider finding ways to earn more money either by negotiating a raise, starting a side hustle, getting a second job or booking the occasional side gig.

On defense, create and maintain a budget to find areas where you can cut back. Set a monthly goal for how much you want to save, automate that savings and funnel any extra cash toward your down payment fund. Tools like You Need a Budget and can help you create and execute this plan.


  • The opportunities to earn extra money are virtually endless.
  • You have control over how and where you spend your money.
  • Negotiating a raise at your current job can provide extra money without requiring extra work.
  • Starting a side hustle could bring in extra income long after you’ve reached your down payment goal.


  • These strategies can require more time than other options.
  • If you have a lot of debt and other essential expenses, cutting back can be hard.
  • Creating new habits and sticking to them can be difficult. You have to be committed for the long run.

Borrowing from family or friends

If a friend or family member is willing to loan you money, you might not have to spend time finding extra cash. You may even be lucky enough to receive the money as a gift — subject to federal gift tax rules — which would provide the money at essentially no cost to you.

However, if you are structuring it as a loan, Neal Frankle, a certified financial planner and the founder of Credit Pilgrim, recommends adhering to the current guidelines for Applicable Federal Rate (AFR), which specify minimum interest rates for various types of loans.


  • You’ll get into your new house sooner.
  • You can often get a lower interest rate from family or friends than you’d get from a lender.
  • You may have more flexibility with the repayment terms.


  • It can damage your relationship if something goes wrong.
  • Your family members or friends may not consider you trustworthy enough to loan money.
  • Not all mortgage lenders allow you to borrow your down payment.

Borrow from your 401(k)

Qualified retirement accounts like a 401(k) typically penalize you for taking withdrawals before you’ve reached retirement age.

But many 401(k) plans offer loan programs that allow you to borrow from your account balance, often with relatively low-interest rates even if you have poor credit. And if you are using the money in order to purchase a primary residence, you may be able to pay the loan back over a period of 25 years, as opposed to the standard 5-year term for most 401(k) loans.


  • You can get into your new house sooner.
  • 401(k) loans often have lower interest rates than a personal loan.
  • The interest you pay goes back into your 401(k) account rather than to a lender.


  • You’re forfeiting potential investment gains on the borrowed money.
  • If you leave your employer for any reason, your loan may be due within 90 days, putting you in a difficult financial position.
  • Not all 401(k) plans offer loan programs.

The bottom line

There are certain situations where a small down payment mortgage might be a good idea. It can get you into a home sooner, and many federally-insured mortgage programs can minimize the costs and allow you to buy a home with less-than-perfect credit.

But in many cases, it’s better to go above and beyond the minimum down payment required. A larger down payment can save you money both in the short term and the long term, helping you invest more in your future financial security.

Making the right choice for your personal situation involves both running the numbers and taking your personal goals into account. If you do your due diligence, you’ll be in a better position to make a good decision.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Matt Becker
Matt Becker |

Matt Becker is a writer at MagnifyMoney. You can email Matt at


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Taking out a Mortgage for a Manufactured Home

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.


Looking to buy a place to call home without taking on massive debt? A manufactured home may be the least expensive way to buy a house that meets your family’s needs. The average sales price of a new manufactured home was just under $75,000 in August 2017, according to the Manufactured Housing Survey. That’s less than a quarter of the median price for a new single-family home, which was $314,200 in August.

“More people are turning to manufactured housing to deliver homes that fit their needs and wants, at prices they can afford,” according to Patti Boerger, VP of Communications for the Manufactured Housing Institute. On average, manufactured homes cost about $51 per square foot — that’s nearly half the price of a traditional site-built home, according to 2015 Census data.

However, the inexpensive house often comes with an expensive loan. According to research from the CFPB, between 2001 to 2010, two-thirds (65%) of all manufactured home owners used the expensive chattel loan option to pay for their mortgage. While chattel loans provide a viable solution for buying a manufactured home, many homeowners have lower cost financing options. This is especially true for the two-thirds of manufactured homeowners who own their lot.

Manufactured, modular or mobile? What’s the difference?

Many people use the terms manufactured, modular and mobile homes interchangeably, but there are some distinctions. For a home to be a manufactured home, it must meet Manufactured Home Construction and Safety Standards set up by the Housing and Urban Development department (HUD) in 1976. Homes that meet the standards receive a certification called a HUD tag. HUD tags make the home eligible for a variety of financing including Federal Housing Administration (FHA) insured loans. Fabricated homes built prior to 1976 cannot be HUD certified, so the HUD department calls them mobile homes.

Modern manufactured homes can either be attached to a permanent foundation (like a concrete slab or pier footings) or a temporary foundation (such as a ground and anchor foundation). Homes attached to a temporary foundation could accurately be called mobile homes since you could move them. However, even moving a mobile home is a massive task.

Modular homes are a type of manufactured home that is delivered to the site in multiple pieces. These homes must meet the local standards of site-built houses rather than the Manufactured Home Construction and Safety Standards.

Despite the differences, many companies manufacture and install both manufactured and modular homes.

How to finance a manufactured home


While taking out any mortgage is a huge undertaking, manufactured home mortgages can be especially confusing. Borrowing options for manufactured homes aren’t only limited by your credit, down payment and income qualifications. The home you buy also influences which loans are available to you.

These are the steps you’ll need to take when buying a manufactured home, according to a loan officer who specializes in manufactured-home financing.

Buying a used manufactured home

Buying a used manufactured home is a bit like buying a used car from a private seller. You can get a great deal, but you need to complete due diligence before buying.

  1. Decide whether to buy the lot: Nearly two-thirds of manufactured homeowners own the lot where their home is located. Buying both the lot and the home means you may qualify for conventional mortgages. Homebuyers who plan to rent their lot will only qualify for chattel loans.
  2. Check for the HUD tag: The home needs to have a HUD tag indicating that it meets safety standards. The tag is a metal plate that you should be able to find on the outside of the manufactured home. If you can’t find the physical HUD tag, ask the owner to request a Letter of Label Certification from the Institute for Building Technology and Safety.
  3. Check title history: Every manufactured home has a unique serial number that can be used to look into past ownership information. As a buyer, you’ll want to look into statements of location to determine whether the home has moved in the past. The exact site for searching manufactured home history varies by state. However, the most likely candidates include your state’s department of transportation, department of housing, or register of deeds websites.If you find that a home has moved from its original location, the home won’t qualify for a traditional mortgage (like an FHA, conventional, or VA loan).
  4. Compare loans options: Use the information you gathered in the previous steps and the guide below to help you determine the best loan for your situation. Whether you choose a traditional loan or a chattel loan, you can compare rates from multiple lenders to get the best deal.
  5. Property appraisal: Once you qualify for a loan, your lender will appraise your manufactured home. The lender will also send inspectors to check on the home’s foundation and confirm that it meets current standards.
  6. Close on loan: If the property meets the required standards, you may proceed with the loan closing process.
  7. Transfer title: Following the loan closing, the title will be transferred to you. At this point, you may have to convert the home from personal property to real property (more on that later). Your closing attorney or lender can help you with the conversion.

Buying new

Buying a new manufactured home means you can buy the exact home you want. It also opens up more opportunities to qualify for traditional mortgages (if you also own your lot).

  1. Find lot: Whether you plan to rent a lot or buy one, you’ll need to find a location for a home. Some people will place a new home on land they already own.
  2. Start home design process: In some cases, you may pick a manufactured home right off of a vendor’s lot, but many people choose custom designs for their homes.
  3. Determine loan options: Home manufacturers may point you toward certain lenders, but don’t be afraid to shop around. Comparing multiple lenders often yields a better deal. If you plan to buy land, you can consider using a conventional mortgage.
  4. Property assessment: Before a bank will allow you to close on a conventional loan, they will require a property assessment. This assessment will determine whether the site can hold a proper foundation.
  5. Close on loan: Once the property passes inspection, you’ll close on your home loan. If you’re taking out a conventional mortgage, your initial loan may be a construction loan, but it will convert to a mortgage once the manufacturer completes the home.
  6. Home delivered to property: After the loan closes, the manufacturer will deliver and install the home on the property.
  7. Title property: Once the home has been delivered, you’ll need to title the property. If you’ve taken out a traditional mortgage, you’ll have to title the property as real property.

Choosing the best mortgage for your manufactured home

Traditional mortgages such as FHA loans, conventional mortgages and VA loans offer financing up to 30 years with (potentially) low fixed rates. However, they also have more stringent buying criteria. Chattel loans have higher interest rates and shorter payoff periods, but the criteria for borrowing is a bit looser.

You can use the information below to determine what loan may fit your situation best.


Chattel Loans

FHA Loans

Conventional Mortgage

VA Loans

VA Loans for Manufactured Homes


Best for borrowers who want to buy the home only, and place it in a rented lot.

Best for borrowers with a small down payment who want to buy a manufactured home and the lot.

Best for borrowers with a large down payment who want to buy a manufactured home and the lot.

Best for military members who want to buy a manufactured home and the lot.

Best for military members who want buy a manufactured home and rent a lot.

Credit score required

Ability to pay criteria

500, but banks have minimum underwriting standards


Credit score standards set by lender

Credit score standards set by lender

Down payment required

5% (10% for borrowers with credit scores 500 or below)

Credit score between 500-579: 10%

Credit score at or above 580: 3.5%

5% (10% for people with thin credit)



Interest rates

Average 6.79% in 2014 (most recent data available)

Between 0.5-5.5% higher than traditional loans

Average 4.22%

Average 4.25%


Varies by lender

Upfront financing fee

Up to 2.25% (can be financed)

1.75% (can be financed)


1.25-3.3% depending on your military status, homebuying experience and down payment (can be financed)


Mortgage insurance

Up to 1%


0.5% annually



Mortgage limits

Home only: $69,678

Lot only: $23,226

Home and lot: $92,904

Generally, $294,515 for single-family units, but it varies by location, and you should check the limits in your area

Generally, $453,100

Generally $453,100

Value of home and lot

Mortgage term limits

20 years for home only

20 years for single-section home and lot

15 years for lot only

25 years for a multi-section home and lot

Up to 30 years

Up to 30 years

Up to 30 years

15 years for lot only

20 years for single-wide home

20 years for single-wide home and lot

23 years for a double-wide home

25 for a double-wide manufactured home and lot

Titling requirements

Personal Property

The house must be titled as real property, and you must own the lot where the house is located.

Must own land (or be part of a co-op), and home must be titled as real property.

The house must be titled as real property, and you must own the lot where the house is located.

Personal or real property

Foundation requirements

Foundation anchors or permanent foundation

Permanent foundation (including pier and footing)

Permanent foundation (foundation anchors may be appropriate depending on the manufacturer’s requirements)

Continuous slab or load-bearing piers and footings.

Foundation anchors or permanent foundation

Minimum size

400 square feet

400 square feet

600 square feet


400 square feet (single wide), 700 square feet (double-wide)

Can home move?


Only from manufacturers to permanent foundation (even if purchasing used).

Only from manufacturers to permanent foundation (even if purchasing used).

Must be permanently affixed and titled as real property.


Where to compare lenders

Manufactured Housing Institute

HUD FHA Lender Search

LendingTree mortgage comparison*

LendingTree VA mortgage comparison*

Manufactured Housing Institute (Call to ask about VA loans)

*LendingTree is MagnifyMoney’s parent company.

Personal property versus real property titling

When it comes to financing a manufactured home, one of the most important considerations is how you plan to title the home. Buyers can choose to title a manufactured home as personal property which is how you title a boat, RV or vehicle, or real property which is how you title a traditional home.

In most parts of the country, you have had a permanent foundation to title your loan as real property. Some states require you to own your lot while others allow you to title your home as real property on leased land. You can find out the exact titling requirements in your state by working with the register of deeds in your county.

How you title your property will have a tremendous effect upon your total ownership experience. These are the seven ways titling may affect your experience:

Upfront taxes: When you purchase real property you pay transfer taxes, but when you purchase personal property you pay sales tax. The sales tax rate is generally higher than the transfer tax fee. Some states have sales tax exemptions for manufactured home buyers.

Property tax rate: Real property may be taxed at a higher rate than personal property in your state. If you title as real property, you may pay higher property taxes every year you own your home.

Default process: If you choose to title your home as personal property, your lender can repossess your home if you default. The default process will be governed by the Uniform Commercial Code, so you don’t have the full rights and protection of a property owner. People who title their home as real property have the right to a full foreclosure process which may give them time to get out of default before losing their home. Foreclosure laws vary by state.

Loan modifications: People who are in danger of losing their home often look for loan modifications to make their home affordable again. The largest home loan modification program is the Making Home Affordable Program, which outlines criteria for Home Affordable Mortgage Program (HAMP) loan modifications. HAMP modifications are only available to manufactured homeowners who own their lot and home and have both classified as real property.

Rights of joint owners: Titling your home as personal property also has disadvantages if your spouse defaults on a debt. In some states, manufactured homes that are classified as personal property may be seized for a default on debt, even if the home is owned by both spouses and the default was the responsibility of just one spouse. On the other hand, homes classified as real property do not face that problem.

Borrowing options: If you title your home as personal property, you have the option to take out an FHA chattel loan, a personal loan or owner-held financing solutions. When you opt to title your home as real property you gain the option to take out FHA loans, conventional mortgages, VA loans and other government-backed mortgages. These mortgages tend to be lower cost and have more protections.

Advantages of manufactured homes

Manufactured homes are no longer the boxy trailers of a few decades ago. Buyers can now select a range of new features that are attractive to new buyers including fully-functional kitchens, open layouts and attractive roofs. These features come at about half the price per square foot of site-built homes.

Much of the cost savings come from the manufacturing process itself, which ensures that home building isn’t subject to costly weather delays, and the standardized parts make it easier to build.

In addition to lower construction costs, manufactured homeowners often have lower utility bills than site-built homeowners due to the small size of manufactured homes. Older manufactured homes are notorious for having poor energy efficiency, but manufactured homes built after 1994 are subject to current HUD energy standards for manufactured homes. Some home manufacturers are taking energy efficiency a step further by manufacturing Energy Star-certified manufactured homes which are at least 15% more efficient than manufactured houses built to code.

Disadvantages of manufactured homes

Despite the cost and energy advantages, manufactured homes have drawbacks. Manufactured homeowners who do not (or cannot) choose to title their home as real property has decreased rights if they default on their loan. When titled as personal property, manufactured homes may be repossessed or taken as part of another debt settlement suit (depending on state laws). Manufactured homeowners who don’t own their land may miss out on a wealth-building opportunity since the land may appreciate while home structures tend to depreciate in value.

Finally, the mortgages available for manufactured homes may be more limited than those for site-built homes. In particular, many manufactured homeowners have to rely on high-priced chattel loans rather than mortgages for site-built homes.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

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Understanding Good Faith Estimates and Loan Estimate

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

understanding good faith estimate vs loan estimate

Nearly half of homeowners make a huge mistake during the homebuying process, according to the Consumer Financial Protection Bureau (CFPB) — they don’t compare lenders when shopping for a mortgage.

Not only do many consumers neglect to compare lenders in the process of purchasing a home, but a number of homebuyers express being unfamiliar with important factors that can greatly affect the cost of their mortgage as well, including:

  • The different types of mortgages
  • The money required at closing
  • The process of getting a mortgage
  • The income needed to qualify for a mortgage
  • The down payment requirements
  • Current mortgage rates
  • Personal credit history or credit score

This unfamiliarity increases even more for first-time home buyers. Without knowing what to expect, homeowners can go into the mortgage process unaware of what they are actually getting and paying for. From title searches to pest inspections, appraisals and more, the average homebuyer is purchasing much more than a home.

How much money do you bring to the closing table? Will you pay your taxes and insurance outright or have them escrowed (rolled into your mortgage payment)? What loan fees are set in stone versus ones you can shop around for? Will your loan interest rate remain the same or change at some point?

Depending on your choice for a home loan product, the outcome can have a big effect on your finances. A home is such a significant purchase — in fact, it’s probably the biggest purchase you’ll ever make — that just a few percentage points difference in interest can add up to tens of thousands of dollars saved (or lost) over the life of the loan.

Fortunately, it’s not all that difficult to compare mortgage loan offers between lenders these days. There’s been some standardization in the way banks present mortgage estimates to loan applicants. This is where the Good Faith Estimate (GFE) comes into play.

What is a Good Faith Estimate?

A Good Faith Estimate (GFE) is a standard template used by lenders to give you the rundown on your loan terms: interest rate, origination fees, monthly payments and more. However, you should know that as of October 2015, the Good Faith Estimate document was replaced by a document called the Loan Estimate for most types of loans.

The whole idea behind the GFE aka the Loan Estimate is to help consumers understand all the costs associated with their home loan, from the length of the loan to settlement fees you’ll have to pay at closing. It was also designed to inform consumers of which charges could change and when they could change for closing purposes.

With all of this information provided in a standardized format, the aim was to encourage borrowers to shop around for the best loan and loan terms for their home loan.

Before standardized estimate templates came on the scene, the average Joe consumer had a heck of a time deciphering all the loan “mumbo-jumbo” because there were many ways to state (and maybe even hide) fees associated with obtaining a home loan. Based on all the ways lending costs and fees could be itemized and stated, it became difficult to truly compare rates and get the very best rate for these home loan products.

Though the GFE was a great improvement over prior mortgage estimate methods, there were still more strides to be made in the usability and clarity. In other words, extensive testing showed that the average consumer still needed help with identifying key information pertinent to their loan terms. Enter the Loan Estimate.

GFE vs Loan Estimate: What are the differences?

GFEs were replaced with Loan Estimates after the CFPB initiated the Know Before You Owe mortgage disclosure rule. That effectively replaced Good Faith Estimates with the new Loan Estimate document. You’ll most likely see a loan estimate document when you apply for a traditional mortgage. Loan Estimates do not apply for reverse mortgages, HELOCs, and a handful of other real estate transactions.

According to the CFPB, the main objectives of the Loan Estimate form include helping consumers:

  • Understand their loan options
  • Shop for the mortgage that’s best for them
  • Avoid costly surprises at the closing table

There are some differences in design and usability that make the Loan Estimates different from the GFE in a few ways.

Easier to understand

The Loan Estimate form is designed to help you better identify loan risk factors, such as potential interest rate changes and negative amortization features. In addition, you should be able to see the overall cost of your home loan over both the short and long term. Finally, you should be able to understand, very clearly, what your monthly loan payments will be.

Better comparison shopping

A great thing about the Loan Estimate is that it’s easier to compare offers from competing lenders with a table that is clearly labeled for the sole purpose of comparison. Also, there’s a section on the Loan Estimate clearly labeled “Services You Can Shop For” and “Services You Cannot Shop For” in case there are other areas you can save money in the loan process.

Avoiding costly surprises at the closing table

Jonathan Dyer is a loan originator at Neighborhood Lending Services. He explains how the Loan Estimate further enforces provisions that started with the GFE and its similar predecessors. The Loan Estimate provides additional protections against last minute changes in loan terms and fees.

“Often, some fees [as stated in the disclosure] would be subject to change and would increase at the final hour [before closing],” he told MagnifyMoney. “Regulatory agencies have now prohibited any increase of disclosed fees without a significant change in the loan purpose or loan amount.”

Because of this, there are strict rules around what loan terms can and cannot change at closing. Another plus is that there are provisions that give you the chance to compare your Loan Estimate against your final Closing Disclosure at least three days before you come to the closing table.

Less paperwork

Another improvement with the Loan Estimate came with reducing the number pages consumers receive during the loan application process.The Loan Estimate effectively replaces both the GFE along with the Initial Truth In Lending (TIL) Disclosure and consolidates this into one, shorter form.

You can see example templates of each form before and after to get an idea of the differences (click images below to access to the PDFs). From the thumbnail view, we can see pretty easily that the form is shorter and potentially less confusing for loan applicants.

When do I get a loan estimate?

Now that you know about how the estimate process and documentation have improved for loan applicants, you should know about what starts the clock on when you should have your Loan Estimate in hand.

Loan Estimates must be provided to consumers within three business days of submitting a loan application providing six pieces of information to a lender:

  • Name
  • Income
  • Social security number (for credit reporting)
  • Property address
  • Market value of the property (normally the sale price)
  • Loan amount

According to federal regulations, this is not an optional step. Lenders must provide this document to loan applicants and it has to be within three business days, or they could be in violation of the law.

Key terms to understand

Once you receive your Loan Estimates, pay attention to key terms and make sure you are comfortable with the impact these obligations will have on your overall finances.

  • Loan amount. The amount you are borrowing from the bank. Your loan should be reduced by the amount of your down payment.
  • Rate lock. Explains if your interest rate is locked in or could change before closing.
  • Interest rate. How much interest you will pay the bank as a percentage of your loan. You should also pay attention to if this rate is fixed or variable (Note: Also pay close attention to the APR, which is discussed in the ‘Comparisons’ section below).
  • Monthly principal and interest. This how much you will pay on your home loan each month that will cover the principal loan amount and bank interest.
  • Estimated total monthly payments. This is how much you’ll pay each month for your loan. At minimum, your payment will Include loan principal and interest, but can also include property taxes, insurance, and possibly other fees like HOA dues.
  • Estimated taxes, insurance and assessments. It’s possible that these items will not be in escrow and therefore, not included in your payment. In this case, you will have to pay these fees yourself, aside from your monthly loan payment.
  • Estimated cash to close. This is the amount of money you’ll need to bring at the time of closing.

These are just a few key terms you should understand to start. If you want to understand all sections and terms on your Loan Estimate use the CFPB’s interactive tool called the Loan Estimate Explainer. This tool allows you to hover over sections of the document to get clear explanations of any sections or terms you don’t understand.

How to compare estimates from multiple lenders

Perhaps one of the best things about the Loan Estimate is the ability to compare estimates from multiple lenders. The template’s language is clear and uniform so you can quickly and easily identify areas where you should be comparing rates and terms.

Before you compare your Loan Estimates, make sure you are getting estimates for the same kind of loan from each lender. For example, if you ask one lender for rates and terms on a 15-year mortgage and another for a 30-year mortgage, you won’t be comparing apples to apples.

Next, there are certain sections you should examine to make sure you are getting the best deal from your lender:


On page 3 of your Loan Estimate, you’ll find a section labeled “Comparisons.” It contains a simple table with figures that you’ll want to use for comparing estimates. Once you get Loan Estimates from all the lenders you’re considering, put each lender’s comparison table side by side.

First up, you’ll see a section labeled “In 5 years,” showing how much you’ll pay for your home in the first five years. The first number in this box tells you the total you would have paid in principal, interest, mortgage insurance, and loan costs over the first five years of your home loan. Right below this number, you’ll see the amount of principal you would have paid off as well.

Next in the table, you’ll see the annual percentage rate (APR.) This figure is key because it takes into account all the fees you’ll pay for to purchase your home. Think of it as the bank’s interest rate plus any points, mortgage broker fees, and other charges that you might pay for your loan.

Finally, at the bottom of the table, you’ll see total interest percentage (TIP) will be right under the APR section. It represents the total amount of interest you’ll pay over the lifetime of your loan.


Under the “Costs at Closing” table on page 2, you’ll see a section labeled “Estimated Cash to Close.” For more details on how these numbers were calculated, look at “Calculating Cash to Close” at the bottom of page 3.

This section goes over the cash needed to settle up at the closing table i.e. what you need to bring to closing. Remember, this figure should be not changed drastically from the Loan Estimate once you get the final closing disclosure.

Fees that cannot change at closing include lender fees, other service fees, transfer taxes, and commission fees due to mortgage brokers or affiliates. Fees that can change 10 percent in either direction are recorder fees or service fees related to third-party providers.

If closing costs changed substantially, you may be eligible for a refund of costs that go beyond the allowable limits.

The smartest way to buying a home comes down to understanding your options and choosing the best one. You may feel tempted to go with the nicest lender, or the one with the most brand recognition, or where you already bank.

However, if you don’t compare actual loan terms, you could be forgoing the best possible outcome for your home purchase. Use the Loan Estimate for what it was designed for: comparison shopping to get the best deal on a home loan.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

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How to Budget for Closing Costs and Fees on a Mortgage

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.


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

What costs to expect when closing on a mortgage

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



Appraisal fee

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

Attorney fees

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

Credit report

Some lenders charge a fee for accessing your credit information.

Flood determination

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

Home warranty fees

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

Homeowners association (HOA) fees

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

Homeowners insurance

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

Inspection fees

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

Land survey

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

Origination charges

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

Notary fees

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


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

Prepaid interest

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

Private mortgage insurance premium

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

Property taxes

Six months of property taxes are typically paid at closing.

Recording fees

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

Real estate broker or agent fee

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

Title insurance

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

Title search

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

Transfer taxes

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

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

States with the highest average closing costs were:

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

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

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

States with the lowest average closing costs were:

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

And by percentage:

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

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

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

How to save on closing costs

Step 1: Choose your location

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

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

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

Step 2: Shop around

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

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

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

Step 3: Negotiate

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

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

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

Step 4: Ask the seller to pay closing costs

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

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

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

Step 5: Time your closing

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

Step 6: Sign in person

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

Should I get a no-closing cost mortgage?

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

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

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

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

The bottom line

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

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

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

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How The Simple Act of Negotiating Helped Us Save $40,000

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.


You don't have to be an expert negotiator to leverage the power of persuasion — and ultimately save big. Alison Fragale, negotiation expert and professor of organizational behavior at the University of North Carolina, tells MagnifyMoney that a little preparation can go a long way.

"Any time you have goals you need to achieve, and you need someone else's cooperation to make those goals happen, that's a negotiation," she said, adding that coming to the conversation prepared is often a game changer.

We caught up with a handful of folks who did just that. From talking down debt, to negotiating salary increases, these everyday people successfully haggled their way to some big financial wins — to the tune of $40,000 worth of savings.

Here's how they did it.

I shaved $7,400+ off my student loan balance.

As of 2014, the average college graduate wrapped up their studies with nearly $29,000 in student loan debt, according to The Institute for College Access & Success. But your balances aren't always set in stone.

Danielle Scott, a 30-year-old public relations professional in New York City, used some persuasive bargaining skills to save thousands on her private loans. The inspiration? After several years of just paying the minimum monthly payment and calling it a day, she was discouraged to see that her principal balance was relatively unchanged, thanks to super high interest rates.

"One was as high as 15 percent, and my total loan balance was about $80,000,” Scott told MagnifyMoney.

She called her loan provider, Navient, and cut a deal — if they agreed to lower the interest rate on her loans, she'd up her monthly payments from $400 to $1,500. They agreed, lowering her rate to 1% on one of her two loans, and Scott put everything she had into paying down the debt over the next five years. She paid much more in the short term, but she saved big over the long haul since she was shortening the life of the debt and putting way more toward the principal balance.

Earlier this year, when her balance had gone down to $15,000, her loan servicer reached out to her with a deal of their own. They were willing to reduce her balance to $9,000 if she could pay it off in two lump payments. Scott countered.

"I asked them how low they could go if I agreed to pay it all off in one payment," she recalls. "At first, they said no, but after pushing back a little, and being put on hold for 20 minutes, they came back with $7,600 as their final offer, but I had to make the payment that day."

Scott dipped into her savings to pay it and, just like that, was debt-free.

While you might have some wiggle room negotiating private student loan debt, federal student loans are a different story. If you've defaulted on federal loans and they've been sent to collections, you can use one of the following standard settlements to make good with the U.S. Department of Education, according to student loan expert Mark Kantrowitz:

  • Pay off the current principal balance plus any unpaid interest; collection fees are waived.
  • Pay off the current principal balance plus 50 percent of any unpaid interest.
  • Pay off a minimum of 90 percent of the current principal balance and interest.

Just keep in mind that settlements are generally due in full within 90 days. (FYI: There's also a chance you'll have to pay taxes on whatever is forgiven.)

I talked my way out of $20,000 of medical debt.

In 2010, Robin, a Tampa, Fla., lawyer, was involved in a major car accident that almost cost her her life. The road to recovery was a long one and included multiple surgeries and hospital stays. Despite having health insurance, her bills eventually reached a whopping $197,000. But it wasn't until she really pored over the statements that she noticed some major errors.

"A mix of in-network and out-of-network medical providers were billing me for whatever my insurance company wasn't paying, even after I'd met my deductible," Robin, 57, told MagnifyMoney.  She requested that we not use her full name because she’s still negotiating down her debts.

In many cases, she was getting treated by in-network hospitals, but by medical providers who, she later learned, were out of network. This led to tons of surprise bills; a phenomenon known as balance billing, which isn't always legal in her home state.

"I called each and every medical provider, in some cases threatening to report them to the attorney general," she recalled. "Some bills were forgiven more easily than others; some took years to resolve, but nothing was ever sent to collections."

All in all, Robin has wiped out about $20,000 of her medical debt by directly challenging providers — a wise move considering that the Consumer Financial Protection Bureau reported that medical bills make up over half of all debt on credit reports.

I negotiated a $15,000 raise and promotion.

When it comes to nailing down a raise, getting a pay bump of 2 percent per year is the average, according to the U.S. Department of Labor. But you might be able to get more if you're willing to negotiate.

Ariel Gonzalez, a 33-year-old front end development engineer in Orlando, Fla., has successfully negotiated multiple pay raises over the years. The latest got him a $15,000 pay bump and promotion after a year of working in a junior position.

"My demeanor is typically calm and confident, but firm," he told MagnifyMoney. "I hate talking about money, but I know what I bring to the table as an employee."

Gonzalez is a big believer in coming to salary negotiations as prepared as possible, researching comparable salaries on sites like and Glassdoor. Referencing positive client testimonials in past negotiations has also proved fruitful. He landed his last raise in 2016 by showing up to the meeting with an air of respect and transparency.

"I came to my boss with my number, hat in hand, and said that it was what I needed to be comfortable and that I didn't want to do the whole back-and-forth thing," Gonzalez said, adding that the promotion and raise he was asking for were in line with his performance and proven results as an employee.

The preparation and confidence paid off; his boss had no problem granting his request. The takeaway? Do your homework ahead of time and ask for what you deserve.

Some expert negotiation tips to follow

Whether you're looking to score a raise or buy a new car, Fragale suggests pinpointing the following three terms before beginning any negotiation:

1) What are you trying to achieve? This should be a clear aspiration that's grounded in reality, given your circumstances.

2) What's your walk-away point? Before going in, clarify the point at which you'll abandon the deal. Fragale said knowing this beforehand is empowering because it discourages an "I'll take what I can get" mentality.

3) What's the alternative? In other words, if you don't get what you want out of this deal, what's going to happen? If the stakes are high and your alternative is terrible, you'll be more inclined to settle for less than what you want. (Case in point: You're more likely to settle for a low salary if your alternative is unemployment.)

"If you have the luxury, try and make your alternative as good as possible before negotiating," says Fragale. "That tends to lift the whole boat."

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here