What Is Debt-To-Income Ratio?

When you apply for a mortgage, car loan, or credit card, lenders consider multiple factors, such as your credit score and debt-to-income ratio. Your credit score is a three-digit number that reflects your history of paying back your debts. However, your debt-to-income ratio (DTI) reflects how you’re currently managing your debt and income. Your DTI compares the monthly debt payments you owe to your monthly income. Together, these factors help lenders understand your risk as a borrower.

By understanding the debt-to-income ratio and how it’s calculated, you can prepare your finances to shop for a house or other big purchases.

How to calculate the debt-to-income ratio

To get your DTI, take all your monthly debt payments and divide that number by your gross monthly income, which is your income, before any deductions like taxes and insurance premiums. Debts may include a mortgage, car loan, student loan, and the minimum balance on a credit card. It does not include rent or monthly bills like utilities or subscriptions.

For example, if a person has a monthly car payment of $400, student loan payments of $250, and minimum monthly payments of $100 on their credit card accounts, their monthly debt payment total is $750. If their gross monthly income is $5,000, dividing $750 by 5000 would provide a DTI of 15%. 

What’s a good debt-to-income ratio?

Lenders generally like to see your DTI around 35% or lower to increase your chances of being approved for a loan. Of course, the lower, the better. A low DTI can show you have enough room in your monthly budget to handle additional debt payments. What is considered a “good” DTI can vary between lenders and the type of loan you’re applying for.

If you’re applying for a mortgage, in addition to the more conventional DTI, your lender may also analyze what’s called a front-end ratio. The calculation of a front-end ratio is similar to that of DTI, but a front-end ratio tends only to include potential housing costs like your mortgage payment, property taxes, and insurance. It would not include other debts you may have, like a car or personal loan.

To find your front-end ratio, add up costs related to your regular mortgage payments and divide by your gross income. For example, if your total mortgage payment of $1,700 (including escrowed taxes and home insurance) is divided by a gross monthly income of $5,000, your front-end ratio would be 34%.

The types of income and debt lenders include in their DTI calculations can vary. If you’re working with a lender, ask how they measure DTI so you can clearly understand how to improve your odds of approval.

When is debt-to-income ratio used?

Your DTI can be considered by lenders for a variety of loans, including credit cards, auto loans, and mortgages, to name a few. A high DTI may indicate your debt load is too high, and it would be risky to lend you additional money. Conversely, the lower your DTI, the more likely you’ll be seen as an eligible borrower and can generally expect better loan terms, like lower interest rates.

Does my debt-to-income ratio affect my credit score?

Your DTI ratio isn’t used in credit score calculations. However, aspects of your credit health can be intertwined with your DTI.

For example, carrying large balances on your credit card accounts can have a negative impact on your credit score since your credit utilization rate is a significant credit score factor. At the same time, if those high balances cause your minimum monthly payments to increase, this could impact your DTI. In short: Your personal finances and credit health are closely related, but your DTI doesn’t directly impact your credit health.

It’s wise to prepare your credit for mortgages, auto loans, and other significant purchases, so you and lenders are confident in your financial standing. In addition, to improve your DTI, paying down debt as efficiently as possible can go a long way.

But that doesn’t mean you have to ignore building your savings. It’s a good rule of thumb to have money saved up for emergencies. Plus, some home loans have down payment requirements you need to be prepared for. Planning large purchases is about finding the right balance so your DTI is manageable and you have enough money on hand for whatever life throws your way. You can learn more money management tips from our blog on how to pay off debt and save at the same time. 

Conclusion

Your debt-to-income ratio - how much you pay in debts each month compared to your gross monthly income - is a key factor when it comes to qualifying for a mortgage. Your DTI helps lenders gauge how risky you'll be as a borrower, and the lower your DTI, the higher chance you can qualify and get approved.

What To Include On Mortgage Application

Here’s a quick tip when filling out your mortgage application: Don’t underestimate the importance of including all of your assets. It could make a difference in the type of mortgage you qualify for and the interest rate you receive. We’ll walk you through the assets you should include ensuring you get the right mortgage loan.

Why Reporting All Your Assets Matters

When applying for a mortgage, it is important to be completely transparent about all of your assets. By accurately reporting all of your assets, lenders can gain an accurate picture of your financial status and determine the best loan option for you. This includes any cash savings, investments, real estate holdings, or other liquid assets that you may have.

When a lender goes over your home loan application, they’ll look at your credit score, total monthly debt, monthly income, and overall net worth. Your net worth matters because it tells your lender how much money you have – between your income and assets.

You might wonder how net worth is calculated. Your lender will subtract all the debts you owe from your total assets to calculate your net worth, giving them a better picture of how much money you actually have.

Your net worth allows a lender to get a better picture of how you will make your mortgage payments, down payments, and closing costs.

They’ll also consider your assets to determine how you’d make your payments if you lost your job – could you stay afloat for a few months? Your lender can decide how risky of a borrower you are by looking at checking and savings accounts and the amount of equity you have tied up in assets.

Assets To Include On Your Mortgage Application

What are assets, anyway? Assets are items you own that have a monetary value. They are usually grouped into three categories: cash, cash equivalents, and property. The value of your total assets usually increases throughout your life.

Your income and salary information will be required on your mortgage application – but this is not an actual asset. Let’s walk through each asset type in more detail so you can be sure you list everything of value on your mortgage application.

1. Cash And Cash Equivalent Assets

Be sure to list all of your cash and cash equivalents on your mortgage application. These assets include any cash you have on hand, the money in all of your checking or savings accounts, money market accounts, certificates of deposit (CDs), and more. In other words, any money you have in accounts that could be pulled out as cash should be listed.

2. Physical Assets

Physical assets include anything tangible that you own that’s valuable – anything that can be touched. Physical assets that can be sold for funds to be used to qualify for a mortgage include – but are not limited to – properties, homes, cars, boats, RVs, jewelry, and artwork.

If you plan to use physical assets as assets to qualify, they'll need to be sold before you close on the home. In addition, property value guidelines and the type of documentation required to qualify vary depending on the type of loan you're getting.

3. Nonphysical Assets

Nonphysical assets aren’t as liquid and don’t have a physical presence like a house or car. Pensions, 401(k)s, IRAs, bonds, stocks, and even royalties fall into this category. You might be able to get rid of them or even borrow from them, but it would require planning.

4. Liquid Assets

Any nonphysical asset you can instantly convert to cash would fall into this category, like readily tradable bonds or stocks. Liquid assets are different from nonphysical assets because you can easily trade them for cash within a short amount of time.

5. Fixed Assets

Some physical assets may take longer to receive cash, such as furniture, some real estate, and antiques. This is because you have to work to sell them – it usually doesn’t happen instantly. Fixed assets’ values can change from the time that you buy them. You can report them as fixed assets on your loan application with their most current value.

6. Equity Assets

If you have any retirement accounts, stocks, or mutual funds, these are considered equity assets. So be sure to include these on your home loan application.

7. Fixed-Income Assets

Fixed-income assets include any investment funds that have been lent in exchange for interest. This typically includes government bonds and some securities.

What Assets Are Most Important To Lenders?

Lenders will consider all of your assets when you apply for a mortgage, but a few tend to carry more weight. Your cash and cash equivalent assets and any liquid assets rank highly because they are easily and quickly accessible. In a bind, you could use these funds to pay your mortgage.

Physical assets also rank high on the list for lenders because you can typically convert them into cash quickly. For example, selling your car or jewelry often does not take long, so if you had to sell one car to make mortgage payments, you could do so in a reasonable amount of time.

How To Calculate The Value Of Your Assets

Some assets have a clear value, like cash and stocks. But you may have questions about the actual worth of some of your physical items, like your car, home, or artwork. The best way to find out the most current value of these items is to hire an appraiser to review them and determine their value.

You can hire a car, real estate, or art appraiser to view the current condition of your assets so you have an accurate number to report on your loan application. You can also use online appraisal calculators, but keep in mind that these calculators will not be as accurate as hiring a professional.

Do I Need To Insure My Assets?

It may be a good move to buy insurance to protect your assets. Some of your assets may already be insured – certain laws or lending regulations mandate that your home or your car are insured.

Your home insurance may cover the value of some of your belongings. Still, if you have high-value jewelry, you might consider purchasing separate insurance or adding on to your existing home insurance plan. For example, you’ll typically pay $1 – $2 for each $100 of value for jewelry coverage.

You can also protect your income in the event that you are not able to work due to a physical injury or illness. Your job may provide disability insurance, but you also might want to purchase your own policy in case you are hurt or injured outside of work.

How Lenders Verify Your Assets

After listing your assets on your application, your lender will verify that all of your financial information is correct. They’ll need to make sure that all assets are really yours and that they are traceable.

This means if you have large amounts of cash deposits going into a checking or savings account and the source can’t be traced, your lender might ask some questions. For example, let’s say you tend to cash your check and then deposit cash for your bills into your account. This could show up as a red flag when your lender reviews your banking history. It’s always better to deposit your check and then pull out the cash you need.

Your lender will also check your overdraft history. If you frequently overdraw on your account – you spend more money than is available to you – this will show up as a red flag during your lender’s verification process. It could cause your lender to deny your loan request.

Your lender might have questions about your physical assets. In this case, you can give your lender your appraisal report or an insurance policy, which should answer any questions about an asset’s current value. This paperwork must be in your name to prove you are the owner.

How To Get Help With Your Assets

Reaching out to a qualified financial professional might be a good idea before you fill out any loan paperwork. Schedule an appointment with your accountant to review your assets and ensure no red flags might prevent you from getting your loan approval.

Don’t have an accountant? You can find one by talking to trusted friends or colleagues, researching the best accountants in your area, or checking with your real estate agent.

What is considered an asset for a mortgage?

Assets can be any item you own that has monetary value. As discussed above, there are several different kinds of assets, categorized based on whether it is a physical objects and how quickly the asset can be turned into cash.

Is cash an asset? 

Lenders do consider cash to be an asset. Your lender may ask questions about where your cash came from if it was recently deposited into your account.

Is my 401(k) an asset?

401(k)s are nonphysical assets, and your lender will likely take them into consideration when assessing your mortgage application. Be sure to consult with a financial advisor to make sure there won’t be negative consequences if you use your 401(k) to buy a house. 

How can I show proof of assets?

In most instances, you’ll need to provide documents to show proof of assets. The specific documents you need will depend on the type of asset, but brokerage statements and bank statements are commonly used to show proof of assets. 

Conclusion

Your assets play an important role in the home loan approval process. You should list all of your valuable assets on your mortgage application to improve your chances of approval on a high loan amount. Make sure you can verify the value of all of your assets and prove that they belong to you through insurance policies or appraisal reports. 

You might need help reviewing your assets and deciding what to include on your home loan application. If that’s the case, reach out to a certified accountant who can review your finances with you.

How To Get The Best Mortgage Rate - 10 Expert Tips

10 Tips For How To Get The Best Mortgage Rate

With mortgage rates, lower is better. So, how do you go about securing a low one? You can employ a few strategies to get the best mortgage rate possible.

Tip 1: Start Saving For A Bigger Down Payment

If settling down in your own home is your dream, the earlier you start saving for a down payment, the better.

How much down payment will you need? It will depend on the type of loan you choose. You’ll need at least 3% for a conventional loan, while an FHA loan requires a 3.5% down payment. You can get a no-down-payment mortgage if you’re able to take advantage of a VA loan or USDA loan.

Many new home buyers are under the misconception that you need a 20% down payment for a conventional loan. That’s not the case. The 20% figure came from the private mortgage insurance (PMI) requirement on conventional mortgages: If your down payment is less than 20%, you’ll need to pay PMI premiums until you reach that threshold of home equity.

Accumulating more assets will help you get a better mortgage rate. Assets are things not related to your annual income that could be used to help pay off your mortgage. This could be proceeds from the sale of property, stocks, bonds, mutual funds, or other investments.

The more assets you have, the greater your ability to repay your mortgage and the lower your interest rate.

Tip 2: Check Your Credit Score And Report For Errors And Problems

Your first active step toward homeownership should be to get your credit report and proofread it carefully to identify errors and get them corrected. This process can take a while, so it’s important to start early and be persistent about getting mistakes corrected.

Tip 3: Work On Improving Your Credit Score

Your credit score is probably the most important single factor in determining whether you’ll be approved and, if so, for how much and at what interest rate. Interest rates reflect factors beyond your control, so the best you’ll be able to do is get the lowest rates available.

But interest rates also reflect your lender’s assessment of the risk you present as a borrower. In addition, your credit score helps lenders predict your future behavior as a borrower based on how you’ve handled your debts in the past.

All lenders look at your credit score and history to determine your mortgage eligibility. In general, the higher your credit score, the lower your rate. You keep your credit score up by making timely payments for your house, car, credit card, etc.

Tip 4: Reduce Your Debt-To-Income Ratio By Paying Off Debt

Your debt-to-income ratio is another important factor that lenders consider to evaluate your ability to repay the loan. For example, if you are carrying a heavy debt load, your lender might find your financial situation unsustainable and set a higher rate to compensate them for being willing to take the risk.

Let’s say you make $5,000 a month, and you pay $1,250 of that toward your student loans and house and car payments. Your DTI is 25%. The lower this ratio is, the less risky you look for the lender – and your rate will be lower.

While you don’t want to close every account, it can be helpful to pay off certain debts. This can help decrease your DTI and free up more money to spend toward your monthly mortgage payment. Less debt can mean a lower mortgage rate.

Should you save for your down payment or pay down debt? It’s important to find the right balance between the two. Lenders don’t expect you to be completely debt-free. Lenders consider some debts as "good debt," particularly student loans and reasonable car loans when reliable transportation is necessary for work.

Other debts, like revolving credit card debts, are frowned upon by lenders. High credit card balances often signify that borrowers are using credit to supplement their income instead of living within their means.

Tip 5: Choose Between A Fixed-Rate And Adjustable Rate Mortgage (ARM)

You’ll have to make several decisions when it comes to choosing among the types of mortgage available when you are planning to buy a house. From a financial perspective, one of the single most important choices you’ll make is between a fixed-rate mortgage or an adjustable-rate mortgage (ARM).

Fixed Rate Mortgages

With a fixed-rate mortgage, the amount of your payment will stay the same over the loan term. That means your lender is making a very large loan to you whose terms can’t be changed for the next 15 – 30 years. So even if interest rates skyrocket, your fixed-term loan payments won’t change.

Because lenders are taking all of the risks that interest rates will rise when they make a fixed-rate mortgage loan, they charge more upfront. There’s a big difference between 15- and 30-year fixed rates as well, which reflects that lenders are assuming that risk for twice as long.

Adjustable-Rate Mortgages (ARMs)

Adjustable-rate mortgages (ARMs) work a bit differently. They typically start with a lower rate. This teaser rate remains fixed for the first several years of the loan – typically a period of 5, 7, or 10 years. After that, the rate will periodically adjust up or down according to the market.

Because you can end up paying much more in interest rates, you are sharing with your lender the risk that interest rates will go up. That’s why they can afford to offer the introductory rate to entice new home buyers.

Fixed-Rate Vs. ARMs: Which Is Better?

As usual, the answer depends. Had you asked during the early years of the COVID-19 pandemic, the answer would have likely been to lock into a fixed rate because mortgage rates were at historic lows. But now, interest rates are on the rise, and ARMs are becoming increasingly popular once more.

If you’re not planning to stay in your new home for longer than the introductory period, or you’re comfortable refinancing your mortgage before the teaser rate expires, an ARM might be your best choice. Be aware, however, that if you don’t sell or refinance, ARMs are much more expensive for home buyers over the life of the loan.

Tip 6: Consider Prepaid Mortgage Points

You can buy your rate down by prepaying interest at closing. This prepaid interest comes in the form of mortgage points or discount points. One point is equal to 1% of the loan amount (e.g., on a loan amount of $100,000, a single point is $1,000). You can purchase points in increments down to 0.125 points. Many of the advertised interest rates have a certain number of points attached to them.

Prepaying this interest will get you a lower rate. The trade-off here is that you have to stay in the home long enough to reach a position where you save money. For example, if buying two points on a $250,000 mortgage (two points equals $5,000) saved you $300 per month on your mortgage payment, you’d have to stay in the home for 17 months to break even. If you plan on staying in the house for several years, buying mortgage points can be a good way to save money.

Tip 7: Choose A Shorter Loan Term

You can save a lot of money over the life of your loan if you choose a 15-year instead of a 30-year repayment term. You can also get a lower interest rate upfront by shortening your loan term. As we discussed previously, it’s far less risky to predict repayment 15 years out than it is to predict 30 years out. You’ll also build home equity much faster, which reduces your loan-to-value ratio and lender risk.

Among the added benefits of a 15-year repayment term is that you’ll reach the 20% home equity mark, meaning you can stop PMI sooner. You’ll also pay off your mortgage loan sooner, removing a huge chunk of your monthly budget.

However, the monthly mortgage payment on a 15-year loan is significantly higher than that of a 30-year mortgage. The pandemic housing market has put purchase prices out of reach for many, so it's important to ensure you can afford your monthly mortgage payment.

Although your monthly payment will be higher on a 15-year loan, you could potentially save tens of thousands in interest over the life of the loan. You will lower your interest rate and pay more toward your mortgage balance faster than you would on a traditional 30-year loan.

Tip 8: Make A Higher Down Payment

A higher down payment at closing will get home buyers a lower rate. Putting down a significant portion of the purchase price lowers the relative risk for a lender. The lower your loan-to-value ratio (LTV), the more you’re considered a good investment. The higher your down payment, the less a lender has to give you so you can afford the home.

Keep in mind, though, that using all your cash for a down payment leaves you vulnerable should some unforeseen circumstances arise. Lenders like to see you have reserve funds to cover up to three months of expenses, just in case.

Tip 9: Raise Your Income

It sounds simplistic, but realizing the road ahead is very expensive can focus your mind on maximizing income. This can be as simple as asking for a raise, looking for a higher-paying job, completing educational requirements, or starting a side hustle. Whichever route you choose, increasing your income before you buy will ease the budgetary burden of homeownership.

Tip 10: Watch And Wait

Keep an eye on interest rates and the housing market while preparing to apply for a mortgage. Although it’s not advised that you attempt to “time the market” – waiting for a perfect moment – it does make sense to act when interest rates are lower, or at least before they get any higher.

Conclusion

Understanding how external and personal factors influence mortgage rates helps you prepare to get the best rate possible. You can also take a few steps to lower your interest rate – as listed above- from paying off debt to shortening your loan term. Securing a lower mortgage rate sets you up for lower monthly payments and more significant savings in the long run.

What is the Average Mortgage Length in the US?

In the market for a mortgage and wondering how long the term is? Like so many things, conventional wisdom around 30-year mortgages has been changing. For many reasons, home buyers and lenders are exploring different options around the length of mortgages. So which length is right for you? Read on to learn more and how to use your term length to your advantage.

Is the Average Term Length Right for Me?

The most common mortgage length is a 30-year or 15-year term, but there are 10-, 20- and 25-year options.

As a rule, shorter loan terms come with higher monthly mortgage payments because you’re spreading your payments out over a shorter length of time. But shorter loan terms also come with lower interest rates. That means you pay less in interest over the life of the loan.

A 30-Year Mortgage Term

The 30-year mortgage is the most popular mortgage offered in the U.S. because it spreads payments out over 30 years, making it more affordable, but you pay more in interest over time.

A 15-Year Mortgage Term

With a 15-year mortgage, you make a higher monthly mortgage payment, but you pay less interest and build equity (the percentage of the home you own) much faster.

The lower interest rates on 15-year mortgages (as compared to 30-year mortgages) can offset the higher monthly mortgage payments because you pay less for the home over time. 

Many lenders offer terms in 5-year increments that range from 10 – 30 years. The monthly mortgage payment and the interest you pay on the loan will largely depend on which mortgage term you choose.

Fixed-rate Mortgage vs. Adjustable-Rate Mortgage

All of the numbers in the table are based on fixed-rate mortgages. Fixed-rate mortgages are “fixed” because the interest on the mortgage never changes. 

Adjustable-rate mortgages (ARMs) have low fixed interest rates during the introductory phase. 

(Sidebar: If you want an interest rate that’s lower than a fixed-rate mortgage’s interest rate, consider applying for an ARM.) 

Once the introductory rate period ends, the interest rate will adjust every year. If you’re a budget-conscious borrower who craves predictable monthly payments, keep in mind that the interest rate on an ARM can increase or decrease by 2% – 5% with each adjustment.

ARMs are an excellent option for those planning to live in a home for only a few years. This allows the homeowner to have the lowest interest rate possible until the point of selling. 

Extra Payments

Not sure you’ll be able to afford the higher payments that come with a shorter mortgage term, but do you want to pay down your loan a little faster? Pay a little extra toward your mortgage principal every month or make an additional payment once a year.

Even a little extra cash applied to the loan’s principal can shave years and thousands of dollars in interest off your mortgage loan.

How Do I Pick a Mortgage Term?

There is no universal answer to the question of which mortgage term is right for you. But there are questions you can ask yourself before you make a final decision.

How Much of Your Income can You Put Toward Your Mortgage?

Ideally, your mortgage payment shouldn’t exceed 28% of your gross monthly income.[4] 

Let’s say you’re considering a 30-year mortgage. You crunch the numbers and discover that 28% of your monthly income will cover your monthly mortgage payment with a couple of hundred dollars or more to spare. 

If you have money to spare and don’t have too much high-interest debt (like credit cards), you may want to take advantage of a shorter 20-year or 15-year mortgage. If not, stick with the lower monthly mortgage payments of longer-term loans. But, of course, you can always make extra payments or refinance your mortgage when you have extra cash.

What are Your Other Financial Goals and Challenges?

If you’ve got lots of debt, like student loans, auto loans, or credit cards, you should focus on paying those off. Getting a longer mortgage with a lower monthly payment can help free up cash you can use to pay off your debts. 

If you’re relatively debt-free and have extra, disposable cash, making higher monthly payments with a shorter mortgage term can help you build home equity faster and save you money on mortgage interest.

How Much Can You Pay Upfront?

If you make a down payment of 20% or less, you’ll pay mortgage insurance every month until you have a loan-to-value (LTV) ratio (the amount you owe divided by the appraised value of your home) of 80% or less.

Most mortgages come with closing costs. The costs are usually around 4% – 6% of the loan. Some lenders will let you fold the costs into your mortgage if you can’t afford to pay your closing costs at closing. That helps lower your upfront costs, but it also increases the total cost of the loan.

Where Do You See Yourself in 5 – 10 years?

The longer your loan term, the more you’ll pay in interest at the beginning of your mortgage term, and the less home you’ll own. If you want to pay down your mortgage faster so you can earn more when you sell your home in 5 – 10 years, a shorter mortgage term can help you build more equity. Equity is money that comes back to you when you sell your home.

Conclusion

You have a lot of options when it comes to selecting a mortgage loan term. Knowing what length of loan works best for you will come down to taking an honest look at your financial situation - and goals.

So, what term is right for you? It's the term that strikes the right balance between affordability and your plans for the home and your future.

How Many Mortgages Can You Have?

There are many reasons you might consider a second mortgage or multiple mortgages. Whether you have your eye on a vacation property or want to invest in real estate, knowing what’s possible is crucial when managing your finances. But after a second mortgage, where’s the limit? Let's take a look.

How Many Mortgages Can You Have at Once?

Technically, there is no limit to how many mortgages you can have. When you demonstrate enough wealth or collateral, few limits are imposed on how many mortgages you can have at once. However, some qualifications may cap your total. Generally, traditional lenders will not finance more than four properties. 

Another consideration is your total debt load. Your total debt service (TDS) ratio, a combination of your total monthly housing plus other debts, should be less than 44% of your gross income.

It’s possible to qualify if your TDS ratio is slightly higher. However, you’re increasing risk, potentially taking on more debt than you can afford.

How to Finance Multiple Properties

Another common question that real estate investors have is, “how to finance multiple properties?” While the investors are allowed to have up to 10 investment mortgages, they certainly can’t do this through typical conventional loans. So instead, these are three different options that investors can utilize to finance their multiple properties.

1. Blanket Loans

A blanket loan typically finances more than one property. By using a blanket loan, a landlord or real estate investor needs one loan to finance multiple properties rather than getting multiple mortgages for each investment property.

Now the question is, “how many blanket loans can you have?”. The answer is the same here as well. In theory, you are allowed to have as many blanket loans as you need. In addition, blanket loans provide an obvious benefit as it offers greater efficiency and saves a lot of time. They also turn out to be cheaper than individual loans as it saves application and closing costs required for each property.

When it comes to how many properties can be covered under one blanket loan, it depends on what your lender allows. They have requirements that are similar to hard money and private money loans. For a blanket loan, the lenders usually tend to focus on the borrower’s cash reserves.

2. FNMA 5-10 Properties Program

FNMA set up a program to allow investors to benefit from 10 investment mortgages. This program is called the 5-19 Properties Program. The requirement for this program varies from conventional mortgage loans in various ways, including the required credit score, down payment, and a few other things. These are the criteria a borrower must meet to qualify for this program.

Criteria-

• A minimum credit score of 720

• Should already own 5-10 properties with financing

• 25% down payment on each property and 30% for 2-4 units

• No late monthly mortgage payments during the past year

• A 30% equity is required in case of a mortgage refinance, regardless of the property type

• Two years of tax returns showing rental income from all properties

• No bankruptcy or foreclosure in the past seven years

• Six months of cash reserves to cover Principal, Interest, Taxes, and insurance on all properties

• Sign a 4506-T form

These requirements are rather strict, which is why not many investors can get approved for it and have to opt for other financing options.

3. Hard Money and Private Money Lenders

A more popular and feasible financing option among investors is Hard Money and Private Money Lenders. The one reason behind it is that these loans are open to negotiation and do not require any hard and fast set of requirements. Private Money Lenders often allow investors as many mortgages as they require depending if they fulfill the lender’s criteria.

These private mortgages are typically for a shorter term compared to conventional loans. As a result, the interest rates on these mortgages are much higher. The lenders usually don’t look at the credit score. Instead, the deciding factor for them is the value of the investment property because the investor is interested in the mortgage rates that the investor is willing to pay.

Due to their flexibility and ease of negotiation, private money lenders and hard money are among the top options for financing multiple properties.

The Risk Of Multiple Mortgages

With many lenders, it’s possible to have four mortgages at once. However, what’s generally allowed and what you can manage are separate issues. Your lender may determine you can afford multiple mortgages, but keeping track of payments and finances can be challenging. 

Some financial institutions or mortgage companies consider homeowners with multiple properties risky investments. The more properties and mortgages you have, the more likely you’ll encounter mortgage difficulties. They may deny your loan or increase the interest rate.

For example, say your rental properties are located in the same region. Then, there’s a sudden downtown in the area’s real estate value. As a result, all your rental properties are less attractive to potential renters.

Consider another scenario: You have multiple residential properties in the same flood zone. When the area experiences flooding, it can lower home values—even if only one of your homes is directly affected.

Benefits of Multiple Mortgages

The benefits of having more than a mortgage depend on whether it’s a residential or commercial property. For rental properties, you may generate more income, build a brand, or enjoy tax benefits. Homeowners with multiple mortgages may benefit from the following:

• A Higher Loan Amount: second mortgages are secured by your first home, which increases your collateral; therefore, you may have access to a higher loan amount.

• Lower Interest Rates: generally, a second mortgage offers a lower interest rate; however, if the property in question has additional risks, or it’s your third or fourth mortgage, the rate may increase.

Conclusion

Whether you're a commercial or residential mortgagor, there are always risks and benefits when it comes to mortgaging multiple properties. Navigating the ins and outs can be challenging, but we hope this article helped. If you still have questions or need help figuring out what you can qualify for, working with a mortgage broker can help you determine what’s appropriate for your property and financial goals.

Tax Benefits of Real Estate Investing

Tax Benefits of Real Estate Investing

Tax benefits of real estate investing can be considerable. In fact, tax deductions are a large benefit that real estate investors enjoy from making new investments in single-family residences, multifamily housing, and other types of property. Therefore, it pays to understand how these investments might impact your income taxes if you’re considering picking up an investment property or adding a rental property to your portfolio. Keep in mind there are many reasons to invest in real estate beyond growing equity or collecting rent.

Let’s take a closer look at how several factors can impact your annual tax bill and dive deep to see the tax benefits from real estate investing you can receive.

Deductible Expenses

Many common costs incurred by real estate investors qualify as deductible expenses that can be claimed on your taxes. This means you won’t have to worry about paying government-imposed taxes on these expenses.

Some aspiring real estate investors even use the process of house hacking to compound deductible benefits, as homeowners can enjoy access to additional tax write-offs when they invest with their primary residence. Just a few of many common tax-deductible expenses that you can potentially tap into as part of real estate investing depending on your property ownership and business dealings include:

• Mortgage interest

• Property taxes

• Property insurance

• Property management fees

• Building maintenance and repairs

• Qualified business expenses

If you have questions about which expenses may be tax deductible, consult a qualified tax professional. You may be surprised at how much money you may be entitled to write off. 

Depreciation

The practice of depreciation helps account for wear, tear, and degradation that occurs on a property over time. In effect, it provides a means for helping real estate investors take tax deductions on rental properties, which inevitably suffer adverse effects of usage over a prolonged period of years.

Depreciation is determined by calculating the useful time frame (aka useful life) of the property and applying a formula to compute how much value is lost each year. Once done, you can claim the annual deduction on your taxes, which can help lower your taxable income.

To calculate property depreciation, start by determining your cost basis in the property, dividing it by the property’s useful life, and computing a depreciation schedule. Once this schedule has been calculated, you can use it to compute and secure annual tax deductions.

When selling your property, be aware of a practice known as depreciation recapture. In essence, applying depreciation to a property lowers your cost basis in the investment holding. At the time you sell the property, the IRS will calculate capital gains tax based on a profit margin that reflects this new cost basis − an example of depreciation recapture at work.

Say you purchase a new property for $250,000 and then apply $50,000 in depreciation, causing your cost basis to become lowered to $200,000. If you were to sell the property for $300,000 later, the IRS would calculate your capital gains tax using a profit margin of $100,000 instead of $50,000.

Passive Income and Pass-Through Deduction

Under the terms of the Tax Cuts and Jobs Act of 2017, a helpful tax deduction was created for real estate investors, small business owners, and self-employed professionals. This deduction is known as the Qualified Business Income (QBI) deduction or pass-through tax deduction in common parlance.

Per the QBI, qualifying parties can receive up to a 20% deduction on income received from pass-through business entities such as partnerships, sole proprietorships, S-corporations, and limited liability companies (LLCs), like on qualified rental income. Real estate income received in such a fashion is often classified by the Internal Revenue Service (IRS) as passive income, even though it can take considerable work to bring in tenants and rental money on a recurring basis.

As such, you may be eligible for further tax-saving benefits and deductions depending on the type of property that you own and how it operates. 

Capital Gains Tax

If you’re currently involved or considering diving into the world of real estate investment, you’ve no doubt heard capital gains tax mentioned. Essentially, whenever you sell an asset that grows in value, you may be required to pay taxes on the profits realized from that investment − single-family homes, multi-family residences, apartment/condo buildings, and other properties included.

Capital gains tax is generally applied to appreciation on your investments but can also vary depending on how much you earn, how long you’ve owned the asset, and your tax filing status.

For example, if your taxable income is under certain present thresholds, capital gains tax may range from 0% – 15% or jump to 20% if your taxable income exceeds these thresholds. It also depends on how long you have held the assets. Here’s a breakdown of the difference between short and long-term capital gains.

Short-Term Capital Gains

Short-term capital gains are profits you’ve earned on assets you’ve had in your portfolio of investment holdings for 12 months or less. These capital gains can have a negative impact on your taxes, as they’re treated as general income and taxed at your marginal tax rate (aka, according to your current tax bracket). If a year passes before you sell the asset and recognize these gains, any profits would be considered long-term capital gains instead. 

Long-Term Capital Gains 

Long-term capital gains speak to profits recognized from assets you’ve held for a minimum of one year or more. Earnings realized as long-term capital gains are taxed at a lower tax rate than those derived from short-term capital gains, generally billed at a rate of 15 – 20% vs. marginal tax rates. If you can, it generally pays to hold onto investments a little longer as a result of these savings opportunities.

Incentive Programs

Depending on how they structure their property ownership and portfolio of holdings, real estate investors may also be eligible to capitalize on various tax incentive programs. These incentive programs allow you to recognize added tax savings on qualifying investments and income but limit eligibility accordingly.

1031 Exchange

The 1031 exchange allows you to sell one business or investment property and purchase another without subjecting yourself to capital gains taxes. However, the exchange must be properly completed and conducted per IRS rules. Your new property must be of the same nature as the original and of equal or greater value than the property sold.

A 1031 exchange effectively allows you to swap real estate investment out in place of another and defer taxes on capital gains. However, note that using a 1031 exchange only lets you put off payment to a later date − not reduce your tax bill or avoid paying taxes entirely.

Opportunity Zones

Created via the Tax Cuts and Jobs Act of 2017, opportunity zones are a way the government encourages individuals and businesses to invest in certain communities to promote economic growth.

These geographic regions have been identified as low-income census areas targeted for job growth and economic stimulus. Real estate investors can capitalize on opportunity zones by rolling qualified capital gains into an opportunity zone fund within 180 days of the sale of an asset. 

Tax-Free or Tax-Deferred Retirement Accounts

Select tax-free and tax-deferred retirement accounts (for example, some 401(k) plans and Roth IRAs) may provide opportunities for you to invest in alternate assets beyond stocks and bonds. These opportunities can include private or commercial real estate, real estate investment trusts (REITs), and other property-based holdings.

However, tax-deferred and tax-free retirement accounts often come with savings contribution limits and requirements attached that vary by account. Therefore, before applying for one, you’ll want to consult with a qualified financial professional to determine to what extent, if any, these accounts can help you lower your tax burden.

Self-Employment FICA Tax

Per the Federal Insurance Contributions Act (FICA), self-employed individuals are responsible for 15.3% of Social Security and Medicare income taxes. However, while rental income is taxable to some extent under standard income guidelines, it is not subject to FICA taxes.

Filing a Schedule E tax form makes the IRS aware of how much rental income you’ve earned and how taxes should be applied here. While Schedule E income is generally not subject to self-employment taxation, certain types of rental activities may trigger self-employment taxes, making it important to be aware of this as a real estate investor.

Conclusion

There are many potential tax benefits to be enjoyed by current or aspiring real estate investors. No matter if you're just looking to pick up a single rental property or build out an entire portfolio of multifamily or multiunit properties, you may be surprised at how many tax deductions stand to be reaped. Because of these upsides, it pays to think strategically when structuring investments.

Common Mortgage Scams

As a consumer in the real estate industry, it is important to understand and be aware of what a mortgage scam is and the different types of scams to protect yourself from falling victim to one of them.

A mortgage scam is when someone intentionally misrepresents information for their own profit or benefit. There are dozens of different mortgage scams which can be perpetrated by mortgage lenders, real estate agents, investors, and others.

Mortgage scams can happen to almost anyone. In 2021, consumers reported a total of 11,578 internet real estate scams, costing victims over $350 million.

The best way to avoid succumbing to a mortgage scam is to educate yourself and stay vigilant. Since mortgage scams can come in many forms, we’ll explain some of the most common ones and how fraudsters may try to trick you into falling for them.

Bait and Switch

A bait-and-switch mortgage scam entails a lender falsely advertising a low-interest rate to attract borrowers (the bait), then sharing a higher rate or additional fees when a borrower expresses interest or submits an application (the switch).

A lender using a bait-and-switch may claim you don’t qualify for the advertised rate or say it’s no longer available. Other red flags include evasive lenders who refuse to show the loan terms in writing, avoid answering questions or change the terms at the last minute.

Borrowers may fall for a bait-and-switch scheme because they think they won’t qualify for a better rate or because they feel invested in the loan after spending time and effort doing all the paperwork.

Foreclosure Scams

Foreclosure scams attempt to take advantage of homeowners by pretending to help them avoid a foreclosure situation.

A foreclosure scam can be as simple as someone claiming to keep your home out of foreclosure for a fee or posing as your lender and asking for money to prevent foreclosure. More elaborate foreclosure scams may involve “temporarily” transferring the deed and ownership rights, with the option to rent the home or buy it back later. 

Unfortunately, once you sign the deed and transfer ownership to someone else, you surrender all your rights to the home.

Telltale signs of foreclosure scams may include someone posing as a foreclosure or mortgage consultant or anyone promising to help you avoid foreclosure in exchange for money or the deed to your house.

If you’re worried about foreclosure, contact your lender directly or speak to a U.S. Department of Housing and Urban Development (HUD) counselor to discuss your options. HUD counselors never charge a fee.

Loan Flipping 

Loan flipping (aka loan churning) happens when lenders convince borrowers to continually refinance their mortgages. Each time a borrower refinances, the lender profits from the fees they charge. While there are many legitimate reasons to refinance, which can benefit the borrower, loan flipping refers to the unethical practice of pushing borrowers to refinance when it isn’t advantageous.

With loan flipping, predatory lenders use deceptive tactics to persuade borrowers to refinance, like pushing them toward a cash-out refinance or claiming there’s a new or better loan product.

Before you refinance, carefully review the new loan terms. Pay particular attention to the mortgage closing costs and fees, the interest rate, your new monthly payment amount, and the length of the loan.

If a lender pushes you to take on a higher interest rate or extend the loan term, it may be a sign they’re attempting to churn the loan.

Reverse Mortgage Scams

Reverse mortgage scams tend to target older adults, with scammers profiting from the reverse mortgage payout. This type of scam can dupe victims into thinking a reverse mortgage will relieve them of a financial burden or persuade them to use the money to buy another property.

Fraudsters in reverse mortgage scams may help homeowners apply for a reverse mortgage only to skim from the proceeds or convince homeowners to use the money they receive for a specific purpose. 

For example, unscrupulous real estate agents or lenders might push someone to use a reverse mortgage to buy a fixer-upper to flip. The scammer tells the homeowner they can profit without putting any money down. Sadly, the lender and real estate agent are conspiring to get a commission and don’t have the homeowner’s best interests in mind.

Another example of a reverse mortgage scam can come from contractors, specifically those who advise homeowners to use a reverse mortgage to pay for repairs or improvements.

Red flags for reverse mortgage scams include unsolicited offers to help you apply for one, asking for upfront payments, or pushing you to use the proceeds to pay for a house or home renovations.

Though they might get a bad rap, there are plenty of times when a reverse mortgage can be the right financial decision.

Equity Stripping

Equity stripping (aka equity skimming) scams usually impact homeowners struggling to make their mortgage payments. An investor will offer to buy the home for the remaining amount on the mortgage to help the homeowner avoid foreclosure. The investor might tell the homeowner they can repurchase the home later and continue living there if they pay rent. 

The homeowner agrees and signs the deed over to the investor, who now has the homeowner’s equity in the property. With the ownership rights to the home, the investor can then raise the rent or evict the previous homeowner, stripping them of the equity they built in the home.

Homeowners who fall for equity stripping schemes usually think the investor is buying their home for a fair price or that they’ll get to keep their home.

You might be dealing with a con artist trying to steal your equity if they offer to pay off your mortgage balance or ask you to temporarily transfer ownership of your home. 

If you find yourself among these higher-risk groups, it's crucial to remain vigilant when shopping for a mortgage. Always check to ensure you're working with a licensed, reputable lender by looking at their website, checking their credentials, and reading online reviews. 

How to Avoid Mortgage Scams

• Avoid unsolicited offers: If you receive a solicitation from someone offering to help you solve a problem, it could be a scam. Unless you reach out and ask, it’s best to avoid any offers to provide you with mortgage relief, a way out of foreclosure, or other unsolicited pitches.

• Verify professional credentials: Do your research and make sure the person you’re speaking to is qualified and licensed. You can verify mortgage professionals on the Nationwide Multistate Licensing System (NMLS) website. Real estate professionals can be verified online by visiting the state real estate commission’s website.

• Shop multiple mortgage lenders: Mortgage lenders should never discourage you from exploring your options. Before agreeing to a mortgage, shop around and get quotes from multiple lenders. To ensure the mortgage is legit, use the NMLS search to verify your mortgage broker. 

How to Report a Mortgage Scam

Mortgage scammers can target anyone and strike at any time. Even those who are well-prepared can fall victim to mortgage fraud, which is why you should act swiftly if you or someone you know suspects mortgage fraud is occurring. 

You can report a mortgage scam by:

• Contacting your mortgage lender

• Reporting suspected fraud to local law enforcement, the FBI, HUD, and the FTC

• Notifying your state's attorney general or department of consumer affairs

• Consulting a HUD-certified counselor

Conclusion

Mortgage scams are scary, but you can have peace of mind knowing that you're the first and strongest line of defense against them. Recognizing the red flags is the first step to protecting yourself. Always trust your instincts and avoid anyone who makes unsolicited offers, discourages you from speaking to your lender, or gets too pushy.

How To Calculate Monthly Mortgage

How to Calculate Monthly Mortgage

When it comes to owning a home, one of the most important things to consider is how much your monthly mortgage costs will be. Calculating and budgeting for these costs on an ongoing basis can help ensure you have an accurate financial plan and avoid getting in over your head. 

Determine Your Mortgage Principle

The initial loan amount is referred to as the mortgage principal. For example, someone with $100,000 cash can make a 20% down payment on a $500,000 home but will need to borrow $400,000 from the bank to complete the purchase. Therefore, the mortgage principal is $400,000.

You'll pay the same amount each month if you have a fixed-rate mortgage. However, with each monthly mortgage payment, more money will go toward your principal, and less will go toward paying interest. 

Calculate the Monthly Interest Rate

The interest rate is essentially the fee a bank charges you to borrow money, expressed as a percentage. Typically, a buyer with a high credit score, high down payment, and low debt-to-income ratio will secure a lower interest rate — the risk of loaning that person money is lower than it would be for someone with a less stable financial situation.

Lenders provide an annual interest rate for mortgages. If you want to do the monthly mortgage payment calculation by hand, you'll need the monthly interest rate — just divide the annual interest rate by 12 (the number of months in a year). For example, if the annual interest rate is 4%, the monthly interest rate would be 0.33% (0.04/12 = 0.0033).

Calculate the Number of Payments

The most common terms for a fixed-rate mortgage are 30 years and 15 years. To get the number of monthly payments you're expected to make, multiply the number of years by 12 (the number of months in a year).

A 30-year mortgage would require 360 monthly payments, while a 15-year mortgage would require exactly half that number of monthly payments, or 180. But, again, you only need these more specific figures if you're plugging the numbers into the formula — an online calculator will do the math itself once you select your loan type from the list of options.

Find Out Whether You Need Private Mortgage Insurance

Private mortgage insurance (PMI) is required if you put down less than 20% of the purchase price when you get a conventional mortgage or what you probably think of as a "regular mortgage." Most commonly, the lender will add your PMI premium to your monthly mortgage payments.

The exact cost will be detailed in your loan estimate, but PMI typically costs between 0.2% and 2% of your mortgage principal.

Frequently, PMI can be waived once the homeowner reaches 20% equity in the home. You also may pay a different type of mortgage insurance if you have another mortgage, such as an FHA mortgage.

Consider the Cost of Property Taxes

A monthly mortgage payment will often include property taxes, which are collected by the lender and then put into a specific account, commonly called an escrow or impound account. At the end of the year, the taxes are paid to the government on the homeowners' behalf.

How much you owe in property taxes will depend on local tax rates and the value of the home. Just like income taxes, the amount the lender estimates the homeowner will need to pay could be more or less than the actual amount owed. If the amount you pay into escrow isn't enough to cover your taxes when they come due, you'll have to pay the difference, and your mortgage payment will likely increase going forward. You can typically find your property tax rate on your local government's website.

Consider the Cost of Homeowners Insurance

Almost every homeowner who takes out a mortgage will be required to pay homeowners insurance — another cost that's often baked into monthly mortgage payments made to the lender.

There are eight different types of homeowners insurance, so when you buy a policy, ask the company about which type of coverage is best for your situation. For example, insurance policies with a high deductible will typically have a lower monthly premium.

With just a little bit of research into loan products and amortization calculators, anyone can easily estimate their annual homeownership expenses—from principal and interest payments to property taxes—and create a realistic plan for meeting their obligations as they progress through their loan term. 

It is important to understand potential risks ahead of time, such as early termination penalties or hazard insurance kicking in after certain thresholds are exceeded, to ensure you have an accurate picture of your future financial obligations before committing long-term to any particular loan option or real estate investment strategy. 

Conclusion

By budgeting wisely and planning ahead, homeowners can protect themselves from potential financial hardship down the line while enjoying all the benefits of owning a home. With just a little bit of research and preparation, you can calculate your monthly mortgage payments to ensure that you're making a wise investment in your future.

Mortgage Forbearance

Mortgage Forbearance

Going into mortgage forbearance might seem daunting for homeowners facing unexpected hardship, but it’s really meant to be a lifeline in those exact situations. Understanding the basic facts about this type of mortgage relief might help alleviate some of the worries. Here, we’ll cover some basic questions you may have.

What is Mortgage Forbearance?

Mortgage forbearance is a form of relief that lets homeowners temporarily suspend or reduce their monthly mortgage payments if they face financial hardship. It is an agreement between the lender and the borrower that allows the borrower to make lower payments, or even no payments at all, for a certain period of time. Initial forbearance plans generally last up to three to six months, but you can usually request an extension if you need more time.

This can be helpful for those who have lost income due to job loss, illness, death in the family, or some other unforeseen event. In addition, the temporary suspension gives borrowers time to get back on their feet without becoming delinquent with payments and risking foreclosure. In most cases, lenders will also waive any late fees or penalties during the agreement.

Whatever your reason for needing a forbearance, it is extremely important to talk to your lender or servicer before you stop making payments altogether. Find out which type of loan you have and what the forbearance terms are to see what works best for you. Stopping payments before you've officially been granted forbearance could make you delinquent on your mortgage and also have a severe negative impact on your credit history.

What are the Requirements for Mortgage Forbearance?

To qualify for a mortgage forbearance, borrowers must provide proof of financial hardship and demonstrate their ability to resume payments at a later date. The exact qualifications and terms vary from lender to lender, so it’s important to speak with your lender about what is needed to be eligible for a forbearance agreement. 

Generally, you can expect some kind of documentation, such as pay stubs or tax returns, to show that you have suffered an income loss due to the current situation. You may also need to agree on a specific timeline for when you will resume making full payments again after the forbearance period is over. However, the exact details of the payment plan will depend on your lender.

What are the Risks of Mortgage Forbearance?

The primary risk associated with mortgage forbearance is that borrowers may not be able to resume making their full payments after the period ends, leading to possible foreclosure or other problems down the line. Therefore, it’s important to ensure that you understand all of the terms and conditions before signing an agreement, as well as what will happen if you cannot resume making payments when the period ends. 

Mortgage forbearance does not appear on your credit report as a negative activity; your lender or servicer will report you as current on your loan even though you’re no longer making payments. Again: You must be in touch with your lender about going into forbearance. Do not stop making payments until you’ve officially been extended that protection. Stopping payments before you’re in forbearance will seriously harm your credit.

Is Mortgage Forbearance the Best Option for Me?

Mortgage forbearance can be a great solution for those facing financial hardship, but it’s important to remember that it is not always the best option. It is often worth exploring other options, such as loan modification or refinancing, before agreeing to a forbearance agreement. 

It is important to remember that borrowers should make sure they understand all of the terms and conditions before signing anything. For more information on mortgage relief options, contact your lender directly or reach out to an experienced real estate professional who can help guide you through the process. Now, let's take a look at a few of the pros and cons that come with mortgage forbearance.

Pros:

• Defers or lowers monthly payments temporarily

• Can help prevent foreclosure, or pause proceedings

• Can still sell the home or refinance

• Potential for flexible payment options

Cons:

• Must repay missed payments either in a lump sum or with a repayment plan

• Payments may increase after the forbearance period ends

• Might not be an option for rental properties or second homes, depending on the loan type

Post-Mortgage Forbearance Options

If you’re nearing the end of your mortgage forbearance period, you have options:

1. If you can afford it, you could repay the missed payments in a lump sum. This will bring your mortgage back to its current status.

2. You could enter into a repayment plan that adds an agreed-upon amount to your regular monthly payments, so you repay the forbearance amount over a more extended period.

3. If you’re still dealing with pandemic hardship, you could ask for a forbearance extension, provided you qualify.

4. You could seek a loan modification, which changes the terms of your mortgage so you can better afford the payments.

5. If you can no longer afford to stay in the home and are willing to move, you could sell it to pay off the mortgage. If the proceeds aren’t enough, you might be able to complete a short sale in coordination with your lender, which can help you avoid some of the more negative impacts of foreclosure.

Conclusion

Mortgage forbearance can be a great way to help with unexpected financial difficulty, but it’s important to make sure you understand the risks and rewards before signing any agreements and keep in touch with your mortgage lender or servicer. Knowing all the facts is essential to making an informed decision that best suits your current situation and helps protect your future. With the right knowledge and guidance, mortgage forbearance can provide homeowners much-needed relief in trying times.

How Much Are Closing Costs?

How Much Are Closing Costs? 

Closing costs are the fees and expenses associated with buying or refinancing a home. We will discuss what these costs are, how much they can add up to, how to keep them as low as possible, and provide tips on budgeting for them when planning a home purchase or refinance so buyers can save money during their transaction.

How is the Closing Cost Estimated?

When it comes to estimating closing costs, there are a few factors to consider. These costs can vary significantly depending on the type of loan, location, and other factors. Common closing costs include mortgage points, loan origination fees, appraisal fees, document preparation fees, title search fees, credit report fees, and government charges such as transfer taxes and recording fees. Buyers should expect to pay for all of the expenses related to the loan. Home inspections and surveys may also be required in some areas.

Additionally, buyers should be aware of government charges that include transfer taxes, recording fees, and other local or state taxes that may apply. The total closing costs will vary depending on the amount of the loan, where it’s located, and what type of loan is being obtained. 

Generally speaking, closing costs can add up to 2 percent to 5 percent of the purchase price. So for a $200,000 property, the closing costs could be anywhere from $4,000 to $10,000. It’s always a good idea for buyers to research closing costs and create a budget for them before entering into any type of home purchase or refinance agreement. Knowing what to expect will help buyers prepare financially and avoid any surprises.

How Can You Keep Closing Costs as Low as Possible?

Closing costs can add up significantly, so it's important for buyers to be aware of ways they can keep them as low as possible. One way is to compare rates and fees from different lenders to get the best deal. Some lenders may offer discounts on closing costs for first-time buyers or those with good credit scores. Buyers should also ask their lenders about any special programs or promotional offers that could reduce their closing costs. In most cases, buyers can also negotiate closing costs with the seller or lender in order to get a better deal on the total cost of their purchase or refinance. Some lenders may even offer discounts on closing costs for first-time buyers or those with good credit scores.

Buyers can avoid overpaying during the purchase or refinance process by doing their research ahead of time and preparing a budget for closing costs. With the right preparation and knowledge, buyers can save money and enjoy the home of their dreams without overpaying during the purchasing or refinancing process. 

It may also be beneficial for buyers to look into government programs like VA loans, FHA loans, and USDA loans which often provide very low rates and reduced closing costs compared with traditional loans from conventional lenders. These programs generally have stringent guidelines, including income requirements but could help some borrowers save money by reducing the cost associated with buying a home.

What About a "No-Closing-Cost" Mortgage?

Despite the name, a no-closing-cost mortgage doesn't mean you get away without paying any closing costs. Instead, your lender either rolls the closing costs into your monthly mortgage payment or charges you a higher interest rate for the life of the loan. Either way, you pay less at the closing table, but the true cost of your home substantially increases. Therefore, it doesn't usually make financial sense to go with a no-closing-cost mortgage. 

Still, a no-closing-cost mortgage can be advantageous for first-time homebuyers who may have trouble coming up with a down payment, let alone closing costs. It can also be a good option if you expect to move or refinance in a year or two before those higher monthly payments or interest rates add up.

Can You Have the Seller Cover Closing Costs?

In most circumstances, it is possible to have the seller cover some of the closing costs, although this will depend on various factors, such as the type of loan being used and the terms of the contract. Buyers should always consult with their lender or real estate agent to determine if it is an option in their particular situation. 

It is important to note that having a seller contribute to closing costs does not necessarily mean that the buyer does not have to pay for anything at closing; rather, it can reduce some of the expenses associated with a home purchase or refinance. For instance, a seller may agree to pay for part or all of the closing costs related to title search fees, document preparation fees, appraisal fees, and transfer taxes. In some cases, buyers can negotiate with the seller in order to get them to pay for all or part of certain items, such as points and origination fees. 

When negotiating with a seller regarding who should cover closing costs, buyers should be aware that if they ask for more assistance than what is customary in their area, they may be less likely to get an offer accepted by a seller. Additionally, while having a seller cover closing costs can reduce out-of-pocket expenses at closing time, buyers should also consider whether they would benefit more from making smaller payments over time due to a lower interest rate on their loan. 

Furthermore, when asking a seller to cover closing costs, it’s important for buyers to understand whether these are non-recurring expenses or recurring expenses. Non-recurring expenses, which include origination fees and points, are one-time charges. In contrast, recurring expenses, such as taxes and insurance, will need to be paid year after year by the borrower. Understanding this difference can help buyers make sure they are getting the best deal possible when negotiating who pays for what at closing time. 

Ultimately, when deciding whether it is feasible or beneficial for you to have a seller contribute to your home purchase or refinance closing costs, there are several factors that need careful consideration before proceeding. It’s important for buyers to do their homework ahead of time in order to ensure that any agreement negotiated between them and the seller is mutually beneficial and results in savings both now and down the road into future payments on their mortgage loan.

Can Higher Closing Costs be a Good Thing?

Higher closing costs can be good if they ultimately save you money over the long run. This happens with mortgage discount points, which increase your upfront closing costs while buying down your interest rate. One point equals 1% of the loan amount, with each point typically shaving one-quarter of a percent off the interest rate. For example, on a $400,000 loan, you would save about $22,000 per point over the life of the loan, assuming an initial 5% interest rate.  

Points generally make sense if you plan on staying in the home long enough to recoup the higher upfront costs. You can use an online mortgage points calculator to crunch the numbers and help you decide.

Conclusion

It is important for buyers to research closing costs before entering into a home purchase or refinance agreement. Knowing what to expect will help them prepare financially and avoid any surprises. Additionally, by negotiating with the seller or lender, shopping around for the best deal, and looking into options like discounts or lower fees, buyers can reduce their closing costs and save money. 

We hope this article has given you a better understanding of closing costs and how to keep them as low as possible. Happy house-hunting!

Are Mortgage Points Tax Deductible?

Are Mortgage Points Tax Deductible? 

If you’re considering refinancing your mortgage or buying a new home, you may wonder if the points you pay to obtain a lower interest rate on your loan are tax deductible. The answer is yes – in some cases, mortgage points can be deducted from your taxes. However, it's important to understand the rules and conditions that must be met before claiming these deductions. 

In this article, we’ll look at what qualifies as a deductible point and how to calculate any potential savings. We’ll also discuss other tax implications associated with taking out a mortgage loan and provide resources for further information. By understanding all of the details surrounding mortgage points and their deductibility, you can make an informed decision about whether or not they're worth pursuing.

First, What Are Mortgage Points? 

Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. They are calculated as a percentage of your total loan amount and can either be paid upfront or rolled into your mortgage loan. Mortgage points can potentially save you thousands of dollars over the life of the loan, but it’s important to consider whether they make financial sense for your particular situation.

For instance, if you have enough cash to cover the cost of mortgage points upfront, then it could be financially beneficial as they will reduce your monthly payments immediately and save you money over time. However, if you don’t have enough cash to pay for these fees upfront, then rolling them into your loan may not be the best option for you. This is because the additional cost associated with the higher loan amount will most likely outweigh any savings from a lower interest rate. 

When deciding how many mortgage points to purchase, it’s important to understand how much each point costs and how much money it would save you in monthly payments or total interest costs over time. Generally speaking, one point costs 1% of your loan amount and reduces your interest rate by 0.25%. Therefore, purchasing two points on a $200,000 loan would cost $4,000 upfront and reduce your interest rate by 0.5%. 

Additionally, it’s essential to consider other factors like prepayment penalties when evaluating the cost-benefit of purchasing mortgage points. Prepayment penalties are generally applicable on loans with fixed rates and require you to pay additional fees if you pay off all or part of your loan early before its term has ended. If this is something that applies to your situation, then purchasing mortgage points may not be a smart choice as it could limit your ability to refinance or pay off debt early in future years when rates drop further, and new opportunities arise. 

Understanding how long you plan on staying in the home is key when considering whether buying mortgage points makes financial sense for you as well. Since there is an up-front cost associated with buying these points (typically 1% of the loan amount), it may not make sense unless you plan on remaining in the home long enough to recoup that initial expense through savings in monthly payments or total interest paid over time.

Are They Tax Deductible? 

Mortgage points are fees that are paid upfront to reduce the amount of interest you pay in the long run on your mortgage. They have been a popular way for homeowners to save money over time, but one crucial question is whether or not they are tax deductible. To answer this question, it is important to understand the differences between two kinds of mortgage points: discount points and origination points. 

Discount points are used to buy down interest rates and are often tax deductible. This means that they may be used as an itemized deduction when filing taxes. Origination points, however, are fees that lenders charge borrowers for making the loan and typically do not qualify as an itemized deduction on federal income taxes. 

In addition to being aware of which kind of mortgage point you have purchased, it is also important to consider when you paid for them. Generally speaking, if you paid for points in connection with purchasing a home or refinancing your existing home loan within the same year, then the cost of those points can be deducted from your taxes. On the other hand, if you paid for points outside of this timeframe – such as at a later date – then those costs will not be eligible for a deduction on your taxes. 

Some other factors that can affect whether or not mortgage points qualify as a deductible include how much money you borrowed and what type of loan you have taken out. For instance, if you take out a loan that exceeds certain amounts ($1 million on personal residence loans), then most of the points associated with that loan will be disallowed by the Internal Revenue Service (IRS). Furthermore, certain types of loans, such as cash-out refinancing loans, may not qualify at all for deductions regardless of how much money was borrowed or when the payment was made. 

Overall, there are many rules and regulations associated with determining whether or not mortgage points can be considered tax-deductible expenses. However, it can be difficult to completely understand all of these guidelines without having detailed knowledge about taxation laws as well as specific information about your own financial situation and loan details. Therefore, it is always recommended to speak with a qualified tax professional or financial advisor before attempting to deduct any mortgage point expenses from your federal income taxes each year.

Are Mortgage Points Worth Your Time? 

While there is no one-size-fits-all answer to the question of whether mortgage points are worth your time and investment, understanding what they are and how they work can help you make an informed decision about your financial future.

Mortgage points, also known as discount points or origination fees, essentially lower the interest rate on your loan over its life span. This lower interest rate may save you money in the long run, which is why many people decide to purchase them upfront. The higher the number of points you buy, the more substantial the decrease in interest rate will be over time. It’s important to note that buying more mortgage points than necessary could lead to a situation where the cost of buying the extra points exceeds any potential savings from having them. 

It’s also important to consider all other costs associated with buying mortgage points, such as closing costs and pre-payment penalties if you plan on paying off your loan early. Additionally, it’s important to think about how long it would take for any financial gains from purchasing mortgage points to outweigh their cost; if you plan on staying in your home for only a few years, then it probably won’t be worth investing in them due to their long-term nature. 

When determining whether or not mortgage points are worth it for your individual situation, there is no clear-cut answer; rather, it depends on factors such as how long you plan on staying in your home and what other associated costs may be involved with purchasing them. It’s always wise to speak with a qualified expert before making any decisions in order to find out not only what options best suit your current needs but also what potential opportunities could arise down the road that would make investing in mortgage points beneficial for you and your family.

Conclusion

In conclusion, mortgage points can be a great way to save money on your loan over its life span. However, it’s essential to carefully consider all of the associated costs and other factors involved before deciding whether or not they are worth investing in for your particular situation. Additionally, you should always consult with an expert – such as a qualified tax professional or financial advisor – prior to making any decisions about purchasing mortgage points so that you have access to sound advice and guidance regarding what options may work best for you. Ultimately, understanding how mortgage points operate and their potential benefits is key when determining if they are right for you.

The Ultimate Guide For First Time Homebuyers

Are you excited but nervous at the same time about buying your new house? Well, it makes sense. Buying your own house is overwhelming, as it can be the biggest purchase in our lifetime, so it's natural to have questions. But, especially if you are a first-time homebuyer, you must know buying your home can be a hectic process. There will be money issues, due diligence, loans, trials, and lots of paperwork. But don't worry; with the right set of checklists, you can go through the process easily. 

Now let's look forward; as a first-time home buyer, what do you need to check first. 

1. Checking What You Can Afford?

 Homeownership is one of the most important financial steps you'll ever take in your lifetime. And if you are a first-time homebuyer, you need to make sure that you can afford the purchasing expense of your desired home before you start visiting open houses.

Buying a house comes with many expenses; you might require a loan to purchase your house. For a loan, you need a lender. And when it comes to buying your first house, there is nothing more frustrating than your mortgage application getting denied. So before you go out home hunting, make sure to assess your finances. 

2. Figuring Out Down Payment

After you've determined what kind of house you can afford, you'll need to figure out how much down payment you'll need. The sort of mortgage you acquire will significantly decide the amount of your down payment. Usually, the down payments of a mortgage typically range from 3% to 5% of the home's purchasing price. But If you want to avoid paying private mortgage insurance, you'll need a 20% down payment.

But there are some types of loans that allow you to purchase a home with no money down.

Regardless of your down payment size, you should set aside some of your savings for closing costs for any problems that your house inspection may discover later. 

3. Finding a Mortgage Lender

Even if you aren't ready to apply, speaking with a mortgage lender should be one of the important steps in your home-buying checklist. A mortgage lender can tell you whether you're financially ready to buy a home, what price range you should look at, or if you need a loan. If not, what are the other options? 

The lender can tell you what measures you need to take as it will not be his first time like yours. And if you aren't in a position to secure a mortgage yet, you should still try. Because rather than making assumptions about what you should do, it's better to seek professional help from the start. As a first-time homebuyer, It's easy to make a mistake and misdirect your efforts.

4. Get All Documents Together

As a first-time homebuyer, you must be experiencing many hectic things, but you have to take everything in an organized manner. It's inconvenient, but you need several documents with you to lend. It can be pay stubs, tax returns, bank statements, or your marriage certificate. Always double-check all these documents because you don't want to rush into the lender's office only to rush back out five minutes later because you forgot your bank statement.

5. Explore Your Options

When most people think of mortgages, they think of expensive fixed-rate mortgages that can't be changed. However, there are some alternative options. Your financial circumstances determine your mortgage possibilities. While some first-time homebuyers may be looking for the smallest down payment possible, this isn't necessarily the best option. Your financial status and interests can add to the options. 

If you can afford higher monthly payments, then a mortgage with a shorter term and cheaper interest rate would be the better option for you. It depends on certain circumstances, but bear in mind that the sooner you pay it off, the less you'll have to pay.

If you don't plan on staying in this house for a long time, adjustable-rate mortgages may be worth considering.

6. Options as a First Time Home Buyer

Some first-time homebuyer programs offer formal loans. You can be eligible for that. Other alternatives include loans from the Federal Housing Administration, Veterans Affairs, or the United States Department of Agriculture, which need little or no down payment.

At this stage, you should look at down payment options and closing cost assistance programs that don't require compensation. Your down payment may be settled if you qualify for an assistance program. So you can be closer to your goal than you think you are.

7. Create a Wishlist

You should know your priorities for buying a house. Make a list of must-haves and nice-to-haves for your house. There are many small details to consider when you're a first-time homebuyer. Whether you're searching for a starter house or a place to call home for many years, you need to be very specific. Here are some of the main ones to consider while making your list:

1. Attached unit or detached house: A classic single-family home is ideal for you if you want a backyard. But, if you want to live in a more densely populated location or don't want to deal with the upkeep, a townhouse can be in your best interest.

2. Choosing your Location: It's time to choose a neighborhood if you plan to stay in a populated area or general area away from the city. Consider things like safety, amenities, and prices (like property taxes). It's also a good idea to think about the school district. Even if you don't intend to have children, the quality of your local schools might affect the value of your property and your resale price if and when you decide to sell it.

3. Future Development: If you are buying a house, you must be planning to spend a lot of years there, So look out for future development projects. They can affect the quality of your life and the value of your house.

8. Hire a Real Estate Agent

Now that you have everything sorted out and know what kind of home you want, let's locate someone to assist you in your search. From knowing the ins and outs of the local market to finding your dream place, real estate agents can help a lot. Searching for a house is difficult, but more problematic is handling the process of determining the worth of the house, offering the price, and negotiating with a seller. An excellent real estate agent can do this easily for you. Having the right real estate agent can make a tremendous impact throughout the process of buying a house.

When you are looking for a real estate agent, ask your friends and family for referrals, see online profiles and reviews, and chat with a few different agents before selecting one.

Furthermore, home purchasers do not need to be concerned about the cost of a real estate agent.

Many first-time homebuyers are unaware that the seller almost always pays both the seller's and buyer's agents. As a result, you can usually get free assistance from a buyer's agent.

9. Begin Shopping

The exciting part begins after you know exactly how much you can spend and that you'll be able to buy any house that fulfills your mortgage lender's requirements. Let's go shopping. You and your agent should quickly learn which areas and property types are a better fit as you fill out the forms and visit more homes.

10. Offer and Negotiate

After finding your dream place, It's time to make an offer. Your real estate agent will walk you through the process and, in many situations, will be in charge.

Your offer will be determined by a variety of variables, including the market value of the house and price range, all additional offers(if available), 

Your purchase offer will be accepted, declined, or countered by the seller. If the seller rejects your offer, you can make a counteroffer. You can also negotiate on the seller's offer after reviewing the house's market value and other factors.

Lets Buy the House!

It is the final and closing tab on your buying process. You are done with a mortgage approval, accepted offer, an inspection of the house, and appraisal. You might need to bring the following items to the closing table:

1. Money for a down payment and closing charges.

2. Documents related to your loan, such as your closing disclosure.

3. Proof of homeowner's insurance is required.

4. Identification such as a driver's license or a Social Security card is required.

Final Thoughts

Buying your first home is an emotional, overwhelming, and subjective decision of your life and comes with lots of nervousness and work. At this time, the best approach to begin hunting for your first house is with complete information. That is why we created the "essential checklist for first-time house buyers in the first place. As you have checked the checklist, you can understand how important these steps are, and if you follow them, you can get your dream home in a less hectic & organized way. 

Found this article interesting and serving the purpose? Explore more exciting articles from KC Mortgage Guy here.

AUTHOR BIO

Will Foster | First State Bank Mortgage Senior Loan Officer

I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.

Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.

The mortgage process can be a little confusing and even overwhelming these days with all of the regulations.  I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.

How to Get a Mortgage as a First-Time Homebuyer

Your first time buying a home is exciting, but getting a mortgage can be a little overwhelming for a first-timer. 

In this post, we’ll give first-time homebuyers what they need to know to confidently navigate the mortgage approval process so they can get closer to their dream of homeownership.

Make Sure You’re Financially Ready to Buy a Home

A lender will take a close look at your financial history to determine your eligibility for a mortgage, so you should do the same and review your finances, so there aren’t any surprises when you’re trying to close on a property. 

Here are a few things that will help you get the home loan you want:

Narrow down what you can afford

It’s important not to borrow more money than you can realistically pay back. 

Take time to calculate how much you can afford to pay for housing every month. Building a budget early on will help you select a mortgage that allows you to meet your financial goals and pay off your property on time. 

Remember that buying a home comes with several up-front and monthly costs aside from your mortgage, including: 

• Home appraisal and inspection fees

• Down payment

• Closing costs

• Homeowners insurance

• Property taxes

• Homeowners association fees

• Maintenance and repairs

Have a steady income and job history

Consistency is key when it comes to showing a lender you’re a good candidate for a loan. Lenders want to see that you have a consistent source of income so you can make your mortgage payments every month. 

A mortgage lender may ask to review your employment history, monthly household income, and other regular sources of income. 

Build A Strong Credit Score

Your credit score is somewhere between 300 and 850 - a higher credit score suggests you’re financially responsible, which can help you qualify for better loan rates and terms. Conventional loans usually require a minimum credit score of 620, but there are other financing options for people with lower credit scores. 
It may be a good idea to spend some time building up your credit before applying for a home loan. Here’s what can help your credit score: 

-Use 30% or less of your available credit

-Pay your bills on time

-Avoid taking out new credit accounts

-Correct any errors on your credit report 

Lower your debt-to-income ratio

Your debt-to-income ratio is how much monthly debt you have compared to your monthly pre-tax income. Your DTI is another way lenders can evaluate your financial wellbeing, and it will be a factor in how much money you can borrow.  
Each lender has a different target DTI ratio, but lower ratios are always better. You can lower your DTI ratio by paying off debt and maximizing your income.  

Take a look at your existing assets

Lenders will also consider how much money you have in savings or assets. More savings and assets are a sign that you’ll be able to pay your mortgage if your income changes in the future. 
Assets may include: 
-Bank accounts

-Retirement savings like a 401(k)

-Investments 

Weigh your mortgage options

There are many different types of mortgages available, but the two most popular types are conventional and government-backed mortgages. 

Conventional mortgages: These are the most common type of home loans. According to Forbes, borrowers typically need to have a minimum credit score of 640, a DTI of 43% or less, and a downpayment of at least 20% to avoid purchasing mortgage insurance. You can get a conventional mortgage with a down payment as low as 3-5% with mortgage insurance. 

Government-backed mortgages: These are most often Federal Housing Administration (FHA) loans suited for low-to-moderate-income buyers or people with low credit scores. According to Nerd Wallet, these loans are typically easier to qualify for but offer fewer options in loan structures.

Ready to get a mortgage? Here are the documents you’ll need

Getting a mortgage involves a lot of paperwork.

Make sure you have basic identification documents on hand when you apply for a mortgage, including your Social Security number and driver’s license. You’ll also likely need to bring documents that show proof of your income, credit history, and assets. 

Proof of income documents

Your lender will likely need several documents to prove your income. These may include: 

• Recent pay stubs and W-2s

• 1099 forms if you’re self-employed 

• Two most recent tax returns

• Legal documents that confirm you receive regular payments such as divorce decrees or child support documents

Self-employed mortgage applicants may need to provide extra income documentation. This may be a cash flow statement or letters from clients stating that you work as an independent contractor. 

Credit report

A lender will request and review your credit report to get a more detailed look at your credit history. Your credit report includes personal information, current and past credit accounts, previous credit inquiries, and public records. 

Before meeting with a lender, check your credit report to confirm all the information is correct.

If you do find an error on your credit report, you’ll need to contact the credit reporting company and the company that shared that information. The Consumer Financial Protection Bureau has a useful guide and templates to dispute an error on your credit report. 

Proof of assets

Your lender will also want to know how much you have saved and any outstanding debt you owe. You may need to provide documents such as: 

• Recent bank account statements

• Recent retirement and/or investment account statements

• Sale documents for assets that were recently sold

• Proof of recent gift funds 

• Information about any other loans you have
  
  

Four basic steps of becoming a homeowner

Reviewing your finances and collecting important documents will make the home buying process much easier. Here’s what you can expect once you get started: 

1. Get pre-approved for a mortgage

Before you start looking for a property, a lender can pre-approve you for a mortgage and make a conditional offer for a loan. 

Getting pre-approved for a mortgage lets you know how much money you’ll receive and can make sellers more likely to accept your offer on their property. 

2. Make an offer on a home

Now that you know how much you can borrow, it’s time to work with a real estate agent to look for a property within your budget. 

3. Verify your financial details and apply for financing 

This is where all of your preparation and documents will really come into play. 

An underwriter will review your loan application and most recent documents. Your lender may also order an appraisal and inspections on the property. 

4. Close on your new home

Once your loan application is approved, you can officially close on your new home and make your mortgage official. Be prepared to pay any closing costs and your down payment on the day you close. 

Sources: https://omahamortgageguy.com/blog/what-exactly-are-closing-costs-and-how-much-should-i-expect-to-pay-for-them 

https://www.consumerfinance.gov/ask-cfpb/how-do-i-dispute-an-error-on-my-credit-report-en-314/ 

https://www.forbes.com/advisor/mortgages/conventional-mortgage/ 

https://omahamortgageguy.com/blog/create-a-budget-to-become-a-homeowner 

https://www.nerdwallet.com/article/mortgages/conventional-mortgage

https://www.investopedia.com/articles/mortgages-real-estate/08/self-employed-mortgage.asp

https://www.cnbc.com/select/what-is-a-credit-report/

AUTHOR BIO

Will Foster | First State Bank Mortgage Senior Loan Officer

I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.

Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.

The mortgage process can be a little confusing and even overwhelming these days with all of the regulations.  I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.