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Mortgage

Tips for Getting an FHA Construction Loan

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For some homebuyers, their dream home doesn’t yet exist. Rather, they can visualize the home that they want to live in and make plans to build it from the ground up. If you want to turn such a vision into reality, not only will you need a loan to cover the cost of the house, you may also need to come up with financing for the construction of the house. In this scenario, a construction loan may be your ideal solution.

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Construction loans provide funding for the building or renovation of a house, along with the financing for the house. They are typically more difficult to get than a mortgage loan for a house that’s already been built, said Peter Grabel, managing director of Luxury Mortgage Corp. in Stamford, Conn. Many lenders consider construction loans to be riskier than conventional mortgages because borrowers not only need to be able to handle the costs of building the house, they may need to pay for a place to live while the house is being built, Grabel said.

Plus, there is also the chance that something could go wrong during the construction process. “If you purchase a house for a million bucks and you stop making payments, the bank can repossess it and they can sell it,” Grabel said. “When you have a house that’s under construction, it’s kind of worthless until it’s finished.” Because there is more risk involved, construction loans tend to have higher interest rates than conventional mortgages.

Another factor that makes construction loans more complicated than traditional mortgage loans is that many lenders require homebuyers to take out two separate loans — one for the construction of the house and one to finance the mortgage. However, the Federal Housing Administration (FHA) offers options that let homebuyers take care of all of the financing in a single loan. Here’s how those options work:

2 types of FHA construction loans

Construction to Permanent loan

A Construction to Permanent loan covers the cost of building the house, as well as financing for buying the house. One of the greatest advantages of taking out an FHA Construction to Permanent loan is that you only need to be approved for one loan, rather than two. That might not seem like a big deal, but if you have to take out two loans, as some private lenders require, you may have to be approved and pay closing costs twice. FHA Construction to Permanent loans also allow you to reap the benefits of the FHA home loan program, such as lower down payments and less stringent credit requirements.

203(k) loan

While Construction to Permanent loans can be a good choice for new construction, a 203(k) loan covers the cost of purchasing a house that needs major improvements and the financing of repairs. A rehabilitation loan can also be used to refinance your current home and make major improvements. One of the greatest advantages of a 203(k) loan is that it lets you roll the costs of repairs into the mortgage. You also can take advantage of other features of the FHA loan program, such as down payments as low as 3.5 percent of the purchase price.

An important distinction to note: 203(k) loans fall under two different categories:

  • Standard 203(k) loans cover repair work that costs a minimum of $5,000. However, the property’s total value after the rehabilitation must be within the FHA’s mortgage limit for that area. (You can look up the FHA’s mortgage limit for your area here.) Because the work done with a standard 203(k) loan is typically extensive, you must work with a 203(k) consultant, an inspector who can identify what improvements need to be made and come up with an assessment of how much they will cost. You can find a 203(k) consultant on the website of the U.S. Department of Housing and Urban Development (HUD), or your lender can help you find someone.
  • Limited 203(k) loans are ideal if you need less extensive work done. Under the limited 203(k) program, you can finance up to $35,000 in repairs, and you don’t need to work with a 203(k) consultant.

How to apply for an FHA construction loan

If you’re interested in getting an FHA construction loan, you must first find an FHA approved lender.

Lenders consider a number of factors when determining whether you’ll be approved. For instance, to qualify for maximum financing from FHA loans, you’ll need a credit score of at least 580. Lenders will also consider your income, assets and debts.

In the case of a Construction to Permanent loan:

  • Applicants must have a contract with a licensed general contractor who will be making the improvements. If the borrower wants to make his or her own improvements, he or she must be a licensed general contractor.
  • In order for a property to be eligible, the borrower must purchase the land when the construction loan closes, or have owned the land for no more than six months.

In the case of a 203(k) loan:

  • Borrowers must complete repairs within six months of the loan’s closing. However, there may be exceptions depending on how extensive the work is.

Alternatives to FHA construction loans

While FHA construction loans offer a number of advantages, they aren’t your only option for financing new construction or making major renovations. Here are some other ways you can get the funds you need:

  • Many private lenders offer construction loans that are not part of the FHA program. Some require homebuyers to take out two separate loans — one that provides money to get the house built and the other to cover the mortgage. Others offer Construction to Permanent loans like those backed by the FHA. Keep in mind that private lenders will have their own set of requirements for borrowers. Because construction loans are considered riskier than traditional mortgage loans, many lenders who offer them require higher credit scores and more of cash cushion than they do for traditional loans, Grabel said.
  • If the improvements you will make to the house will lead to energy savings, you may qualify for an Energy Efficient Mortgage, or EEM. These loans are backed by the FHA or the U.S. Department of Veterans Affairs (VA), and they let homebuyers finance the cost of the upgrades or improvements by rolling the fees into the mortgage.
  • Another way to finance major improvements to a house you already live in is to take out a home equity line of credit, or HELOC. With a HELOC, you can borrow against the equity in your house to pay for renovations. HELOCs come with a “draw period,” a time during which you can withdraw money as often as you want. However, when the draw period is over, some HELOCs require you to pay the entire balance at once. If you plan to finance expensive renovations, make sure you would be able to pay the loan back once the balance is due. One of the risks of using a HELOC to finance repairs is that if you can’t make the payments, you could lose your house.

Finding the right solution

Building a house from the ground up or making major renovations to an existing house can be complicated. FHA construction loans can make things easier by offering a streamlined financing approach. However, make sure to consider all of your options to come up with the best solution for you.

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Mortgage

How to Recover From Missed Mortgage Payments

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

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

How missed mortgage payments affect your credit

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

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

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

Recovering from missed mortgage payments

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

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

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

Extra help for homeowners affected by COVID-19

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

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

Federally backed mortgages include loans insured by the:

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

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

How many mortgage payments can you miss before foreclosure?

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

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

30 days late

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

45 days late

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

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

60 days late

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

90 days late

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

120 days late

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

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

Can you get late mortgage payment forgiveness?

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

Your letter should include:

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

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

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

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

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Mortgage

What Is the Minimum Credit Score for a Home Loan?

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

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

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

What are the minimum credit scores for home loans?

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

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

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

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

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

What is a good credit score to buy a house?

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

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

Annual percentage rates by credit score

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

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

FICO Score

APR

Monthly Payment

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

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

Steps for improving your credit score

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

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

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