Erin Callahan's Blog
Looking to buy your first home? Unless you have a couple hundred thousand in the bank, a rich family member or a winning lottery ticket, you’re going to have to borrow money. TV ads suggest it’s as easy as clicking your phone, and in some cases it might be, but you should know what kind of financing is available and the advantages and disadvantages of each.
In this option you go to a bank or other mortgage lender, they give you money and you buy your house. It’s straightforward and offers the lowest interest rates. It’s also the hardest to qualify for. That’s because there’s no government agency guaranteeing to step in if you default. If you don’t pay, the bank is on their own in repossessing the property and recovering what they can.
Do I qualify for a conventional mortgage?
Whether you qualify, and what rate you’re eligible for, depend largely on three factors.
Your FICO credit score.
Your Debt-Service Coverage Ratio (DSCR). A measure of your ability to pay: monthly income divided by the mortgage costs.
The Loan-to-Value ratio (LTV). The loan amount divided by the cost of the house. For the most favorable terms this can be no more than 80 percent, which means a 20 percent down payment. If you don’t put 20 percent down, there are other options.
Private Mortgage Insurance (PMI)
Some lenders write conventional mortgages with as little as 5 percent down, but you’ll have to buy PMI. This covers part of the bank’s loss if you default. The premium depends on the three factors mentioned above. It can add up to hundreds to your monthly payment. You’ll never see that money again, but you get your foot in the housing door and enjoy any appreciation that takes place. As your principle goes down and LTV drops under 80 percent, you stop paying those premiums.
Sometimes you can use a second mortgage for some of the down payment. A common variation is the 80-10-10, where you put 10 percent down and borrow 80 and 10 percent on the first and second mortgage, respectively. The rate for the second mortgage will be higher but the overall monthly payment might be lower than with PMI.
FHA and VA mortgages. With these a government agency guarantees the loan. FHA’s can have a down payment as low as 3.5 percent, and VA’s (available to veterans) might have no down payment at all. Interest rates are higher than conventional mortgages.
Floating Rate Mortgages
Most mortgages have an interest rate fixed for the life of the loan. With floating rates, there is an introductory period of a few years with a rate lower than a fixed rate mortgage. After that, the rate varies at a predetermined percentage above the prime rate. This can get you into a home with a low initial monthly payment, and is designed for people who expect their income to increase significantly before the higher rate sets in.
Down Payment Assistance
A federal program, the Freddie Mac Home Possible Advantage, offers 97 percent loan and down payment assistance to low and moderate income buyers. Also, you can contact your state’s Department of Housing and Urban Development (HUD) to see what assistance is available at the state and local level.
Owning a home can be an amazing experience. But interest from your mortgage accumulates over time, leaving you to seemingly pay an arm and a leg to finance your home. But while you may think that paying off your mortgage early is a great idea, that isn’t always the case.
You May Have Other Debt
Paying off your mortgage early can save you on interest costs, but you more than likely have other debt to deal with. If you have other debts — like car loans, student loans or credit card debt — then these should be paid off first. Try to focus on your debts with higher interest rates; these tend to be associated with credit cards. After you’ve paid those debts off, then moving on to pay off your mortgage could be a good choice.
You Don’t Want to Go Broke
Paying off your mortgage may sound great and all, but you must consider all of your expenses, including possible emergencies. Saving on interest is very tempting, but it shouldn’t come at the expense of your emergency fund. You never know when something serious will happen, so do your best to set aside some cash. If you have hefty savings and all of your expenses are accounted for every month, then you can move on to paying off your mortgage early.
Consider Your Future
Many people try to pay as much as they can towards their mortgage, only to find out that they used up all of their money. While they have some big expenses and big life changes that cost money, now they have to save up in order to cover those costs. That being said, it’s best to think about your future before paying more towards your mortgage. Are you planning on having kids? Thinking of going back to school? With how frequent life changes, you never know when you could use money down the road. While it might seem like a great plan to throw money at your mortgage payment, think about your life goals and how your finances fit in that equation.
It Can Be Beneficial
Although we’ve made some points above that suggest that you shouldn’t pay off your mortgage early, it can still be very beneficial to do so. Let’s say your household is doing very well with finances and money is pouring in quickly. If your other debts and finances are taken care of, then paying off your mortgage early can help you save on interest; the larger amount you pay, the more you’ll save on interest. However, this can be a tough choice. Be sure to consider the points mentioned above before paying this loan off early.
When you're considering buying real estate as an investment, it's a good idea to weigh the pros and cons. That's especially important with "subject-to" real estate, because there can be risks and rewards with this type of property that are different from traditional purchases. Here's what you should be considering, before you decide on this investment strategy.
The Pros of "Subject-To" Real Estate
On the "pro" side of buying "subject-to" real estate is the way you can acquire multiple properties for your portfolio. Additional benefits include:
The Cons of "Subject-To" Real Estate
With any real estate transaction or investment of any kind, there are cons that come along with the pros. When you weigh them carefully, here's what you should be thinking about:
Why Choose This Type of Real Estate Investment?
If you don't have the money or credit to buy investment properties, buying "subject-to" can be a good choice if you understand and mitigate the risks. You may also want to choose this option if you're trying to acquire a lot of properties quickly, and you want to save money over traditional purchasing options. For people who buy "subject-to", there can be big opportunities to buy quality properties they might not be able to afford under typical circumstances.
But it's very important that you're aware of the risks and legalities. Getting an attorney to help you with the first few properties, and to collect and make the mortgage payments on all the properties you buy, can be one of the ways you can make this type of transaction safer and better for you and the seller.
As the workforce changes and a growing number of companies seek out contractors and freelancers, many Americans find themselves in a gray area when it comes to their income. They may put in full-time hours, but on their taxes they work for themselves.
Mortgage lenders are cautious about who they lend to. They want to make sure you are a low-risk investment who has reliable, predictable income to ensure that they’ll earn money off of your loan.
This can sometimes make it difficult for freelancers, contract workers, or the self-employed. Not only might your taxes be unconventional, but your income could vary depending on the time of the year and the amount of business you receive.
It’s easy to see why many people would be anxious about applying for a mortgage under these circumstances. However, if you’re self-employed, there’s no need to worry. You can still get approved for a mortgage at a fair interest rate--you just need to do a bit of work to provide the right documents to your lender.
In this article, we’ll show you what documents and proof of income you’ll likely need and how to present it to a lender to make the process run as smoothly as possible to get you approved for your mortgage. Here’s what you need to do.
Organize your records
Before applying for a mortgage, it’s a good idea to take a look at your record-keeping process. As a self-employed worker, you’re probably already used to tracking your own income. However, this will help the lender analyze your income easier and move the process along more quickly.
Having a master spreadsheet of your dated invoices, paid amounts, and the names of your clients is a good place to start. You’ll also want detailed, easy to read information for your previous employers, landlords, references, and any other information you think will be pertinent.
Next, gather your tax documents for the last three to five years. As a self-employed worker, you likely file a Schedule C (Form 1040) and a Schedule SE. Make sure you have copies of these forms.
Dealing with deductions
Many self-employed workers write off business expenses in their tax returns. Travel expenses, internet, and other costs associated with doing business are all ways to save by reducing your taxable income. Doing so can save you money, but it can also reduce your net income which is what lenders will see when you provide them with your information.
If you’re hoping to get approved for a bigger loan, one solution is to plan your taxes in the year prior to applying for a mortgage. Make fewer deductions than you normally would to increase your net income.
Be ready to clarify
When a mortgage lender is reviewing your information, make sure you are open and available to provide any information that can be helpful to them in considering your application. Being prompt and accurate with your responses will signal to your lender that you are willing to work with them.
If you are thinking of buying a home in the near future, there’s one three-digit number that could be oh so important to you. That number is your credit score. Read on to find out how a credit score can affect you and the steps you can take to be sure that your credit is in good standing when you head to apply for a mortgage.
What Is A Credit Score?
Your credit score is checked by lenders of all kinds. Every time you apply for a loan or a credit card, there’s a good chance that your credit score is being pulled to see if you qualify for the loan. Your credit score is calculated based on the information on your credit report. This information includes:
Length of credit history
New credit accounts opened
The areas with the most impact on your score is your payment history and your debt-to-credit ratio. This means that on-time payments are super important. You also don’t want to get anywhere close to maxing out your credit cards or loan amounts to keep your score up.
What’s A Good Score?
If you’re aiming for the perfect credit score, it’s 850. Most consumers won’t reach that state of perfection. That’s, OK because you don’t have to be perfect to buy a house. If your score is 740 and above, know that you’re in great shape to get a mortgage. Even if your score is below 740 but around 700 or above, you’ll be able to get a good interest rate on your mortgage. Most lenders typically look for a score of 620 and above. Keep in mind that the higher your credit score the better your interest rate will be.
What If You Lack Credit History?
Most people should get a credit card around age 20 in order to begin building credit. You can still qualify for a mortgage without a credit history, but it will be considerably harder. Lenders may look at things like your rent payments or car payments. Lenders want to know that you’re a responsible person to lend to.
What If Your Score Needs Help?
It doesn’t mean you’re a hopeless case if you lack good credit. Everything from errors on your credit report to missed payments can be fixed. The most important thing that you can do if you’re buying a home in the near future is to be mindful of your credit. Keep an eye on your credit report and continue to make timely payments. With a bit of focus, you’ll be well on your way to securing a mortgage for the home of your dreams.