What Is A Verified Approval?

The housing market is about as hot as it’s ever been. The Case-Shiller Home Price Index features a run down of home prices in 20 major metropolitan areas for all transactions and is one of the most cited housing indicators. The supply of existing homes that are preferred by most home buyers is very low relative to the current pace of sales. 

One of the biggest things buyers can do to make sure they’re prepared is to get their financing in order. A mortgage approval is designed to tell you how much you can afford, but not all approvals are created equal.

That’s where verified approval comes in. In this article, we’ll compare a verified approval to other mortgage approval letters and highlight the advantages.

What Is A Verified Approval?

With a verified approval, lenders collect documentation from you to confirm your income and assets that you’ll be using to qualify for your mortgage. They also pull your credit to get a look at your qualifying credit score as well as your existing debts to calculate your debt-to-income ratio (DTI). This information is reviewed by an underwriter.

The result is that you’ll know exactly how much you can afford. This is above and beyond the preapproval letters typically offered in the mortgage industry. It should also give you and your real estate agent as well as the seller and their listing agent confidence that the offer you’re making is verified because your information has been reviewed.

Like other types of approval, this can be used to up your negotiation game. If you find a home for less than the amount of your approval, the amount of your approval letter can be adjusted to keep your maximum approval to yourself. This way you can negotiate in your preferred price range without the seller having to know.

Prequalification

In a standard prequalification, a client gives a verbal or written estimate of their income and assets. A lender may actually pull a client’s credit report or the client may be asked to estimate their credit.

The upside of a prequalification is that you can very quickly get an estimate of what you can afford, especially if you’re honest about your credit qualifications, income and assets. However, because nothing is verified, sellers and real estate agents often won’t accept offers based solely on prequalification.

Preapproval

This is a little stronger from an offering perspective than a prequalification because it features a hard credit pull, so sellers and agents know you’re in decent financial shape to qualify.

It also goes through some computerized checks so that a lender can see if you qualify based on various guidelines put in place by mortgage investors. Finally, preapprovals are reviewed by the banker or loan officer who’s doing the loan.

On the downside, as with prequalification, there’s no documentation collected upfront, so if there’s a problem, you won’t find out until after your offer has been accepted and your loan is sent to underwriting. Having to submit and verify additional or missing documentation could also slow you down in getting to the closing table.

The Advantages Of Verified Approval

A Verified Approval goes beyond the standard preapproval by not only doing a hard credit pull, but also getting income and asset documentation upfront. Not only does this allow you to submit less paperwork later on, but both your banker and an underwriter can use this documentation to show you qualify for the loan barring significant changes.

Moreover, the seller and their real estate agent can be assured that you qualify for the mortgage necessary to back up your offer. One of the biggest worries for any seller is that the deal will fall through, and they’ll have to put the home back on the market. Although other issues could arise, they can be confident in the financing.

If a seller is evaluating multiple offers, chances are that they’re going to be drawn to those that are most likely to close. Having financing in place can give you an advantage over your competition.

Conclusion

Unlike the other common forms of mortgage approval, a Verified Approval allows you to have full assurance that you qualify to make a mortgage offer up to your full approval amount. It’s the only approval that relies on verified income and asset documentation in addition to a hard credit pull to go along with review by both a banker and underwriter.

What Is A Mortgage Commitment Letter

A mortgage commitment letter is a formal document from your lender stating that you’re approved for the loan. Lenders issue a mortgage commitment letter after an applicant successfully completes the preapproval process. The letter tells the applicant how large of a mortgage the lender will likely approve, and the applicant can use the letter to show real estate agents and home sellers that they’re creditworthy and a serious home buyer.

In fact, most sellers won’t consider an offer (other than cash) from a buyer who is not preapproved. That’s why it’s essential you submit a loan application and partially complete the underwriting process to receive a final commitment letter early in the process, so you’ll be well prepared once you find your dream home.

Types Of Mortgage Loan Commitment Letters

There are two types of commitments: conditional and final.

A conditional commitment letter approves the borrower for a certain loan amount, as long as certain conditions are met. This type of commitment letter may contain the following pieces of information:

• Lender’s name

• Borrower’s name

• Statement of preapproval

• Type of loan

• Loan amount

• List of conditions that must be met before final approval

• Amount of days preapproval is valid

A final mortgage commitment is when the conditions have been met and the lender promises to lend you the specified amount. This letter typically contains the following information:

• Lender’s name

• Borrower’s name

• Property address if an offer has already been made

• Statement of approval for loan

• Type of loan

• Loan amount

• Loan term

• Interest rate

• Date of commitment

• Rate lock expiration date

• Commitment expiration date

How And When Do I Get A Mortgage Commitment Letter

To get a mortgage commitment letter, you’ll need to go through the application process to get prequalified and then initially approved. This process may require you to provide documentation, like bank statements and pay stubs, to show you have a steady income and enough money to uphold the financial responsibilities of the loan.

The lender will also review your credit score and credit history to get a better idea of your financial situation, plus the amount of debt you have and how you handle it. This information helps the lender determine how much more debt you’re able to take on.

Does A Loan Commitment Letter Mean I'm Approved?

After you’re preapproved, you’ll receive a conditional mortgage commitment letter. That does not mean you’re approved for the loan. With this conditional approval, you’ll still have steps to take in the mortgage application process.

Lender Conditions Vary

A conditional approval means that certain conditions must be met before the lender can approve your mortgage. Conditions will vary by lender and state law, but a few common conditions you can expect include:

• Purchase agreement

• Submittal of all necessary documents

• Satisfactory home appraisal

• Proof of homeowners insurance

• Ability to pay closing costs and down payment

• Proof of title

• Final underwriting approval

Another important condition is that your financial status and credit report remain essentially the same, with no major changes, until the home loan closes.

Lenders Will Require An Appraisal Of Your Home

Your credit and income are only half of the equation. A satisfactory home appraisal is another major part of getting final approval for your loan. Your lender will not lend more than the appraised value of the home. This can help you avoid paying more for your home than it's worth and the possibility of a mortgage default.

How Much Of A Commitment Does The Letter Represent?

As long as nothing changes financially with the applicant during the house hunting phase and the home’s appraisal value covers the loan amount, the loan commitment generally stands. However, the lender reserves the right to reduce the loan amount or deny the application.

Why Is Having A Mortgage Commitment Letter Upfront Important?

Having the letter indicates to real estate agents and home sellers that you’re a serious buyer. It also shows that you can afford the home and have already started the mortgage process. It can further assure the seller that there could be fewer hiccups down the road. Because of these reasons, this letter can be especially helpful in a seller’s market, when competition among buyers is particularly high.

What Happens After Recieving Your Mortgage Commitment Letter?

Once your mortgage commitment letter has been submitted, you’ve entered the final stage of the mortgage process. The letter is not a final approval, but more so a pledge to the borrower that the mortgage lender will grant the loan if all conditions are met. If there are no loose ends, you should be approved.

Once you’re approved and getting ready to set a move-in date, you’ll need to go through the settlement process of the purchase transaction and mortgage loan. It’s important to note that just because your mortgage company created the commitment letter, doesn’t mean you shouldn’t be able to still back out. Nothing is final for the borrower until the loan is funded and all the closing documents are signed.

Conclusion

A mortgage commitment letter can help you set a home buying budget and gives you a leg up on the competition when putting in an offer on a home by showing you’re a serious buyer. To make sure you’re fully prepared to submit an offer or win a bidding war, you should consider starting the initial approval process.

What Is Mortgage Protection Insurance?

Buying a home is a major financial commitment. Depending on the loan you choose, you might be committing yourself to 30 years of payments. But what happens to your home if you suddenly die or become too disabled to work?

Mortgage protection insurance (MPI) can help your family cover your mortgage under certain circumstances – you can avoid foreclosure if you can no longer work to pay your mortgage. Let’s take a closer look at what MPI is, what it covers and who might need a policy.

What Is Mortgage Protection Insurance?

MPI is a type of insurance policy that helps your family make your monthly mortgage payments if you – the policyholder and mortgage borrower – die before your mortgage is fully paid off. Some MPI policies will also offer coverage for a limited time if you lose your job or become disabled after an accident. Some companies call it mortgage life insurance because most policies only pay out when the policyholder dies.

Life Insurance Vs Mortgage Protection: Key Similarities and Differences

Most MPI policies work the same way as traditional life insurance policies. Every month, you pay the insurer a monthly premium. This premium keeps your coverage current and ensures your protection. If you die during the term of the policy, your policy provider pays out a death benefit that covers a set number of mortgage payments. The limitations of your policy and the number of monthly payments your policy will cover come with the policy’s terms. Many policies agree to cover the remaining term of the mortgage, but this can vary by insurer. Like any other type of insurance, you can shop around for policies and compare lenders before you buy a plan. However, MPI differs from traditional life insurance in a few important ways.

Policy Beneficiaries-

First, the beneficiary of an MPI policy typically isn’t your family – it’s your mortgage company. If you die, your family doesn’t see a lump sum of cash like they would with a typical term life insurance policy. Instead, the money goes directly to your lender. When you receive a lump sum payment from a term life insurance policy, your family is the beneficiary and can spend the money however they please.

Some homeowners think this is a good thing. It can be hard to budget for a massive payout, and MPI guarantees that the money will go toward keeping your family in your home. However, this also means that your family can’t depend on your insurance to cover other bills. You can’t use an MPI policy to fund things like funeral expenses and property taxes.

If you’re looking for insurance to cover other expenses beyond your mortgage, you’ll want to get quotes on additional coverage.

Acceptance Rates And Insurance Premiums-

Secondly, MPI policies have guaranteed acceptance. When you buy a term life insurance policy, the cost you pay each month depends on factors like your health and occupation. You get to skip the underwriting process with an MPI policy, as most policies typically don't require policyholders to submit a medical exam. This can be very beneficial if you’re sick or work in a dangerous or high-risk job. However, it also means that the average MPI premium is higher than a life insurance policy for the same balance. For adults in good health who work in low-risk jobs, this can mean paying more money for less coverage.

Rules And Regulations-

The last difference between MPI and traditional life insurance lies in the regulations involved. MPI policies have several strings attached that can change your benefits. For example, most MPI policies include a clause that states that the balance of your death benefit follows the balance of your mortgage. The longer you make payments on your loan, the lower your outstanding balance. The longer you hold your policy, the less valuable your policy is. This is different from life insurance policies, which typically hold the same balance for the entire term.

Many MPI companies also have strict limits on when you can buy a policy. Most companies require you to buy your insurance policy within 24 months after closing. However, some companies might allow you to buy a policy up to 5 years after you close on your loan. Your MPI company may also deny you coverage based on your age, as older home buyers are more likely to receive a payout than younger ones.

Do You Have To Have Mortgage Protection Insurance?

MPI isn’t a mortgage requirement. No matter which type of loan you choose, you can buy a home without paying for MPI. Though your lender may recommend a policy, it’s completely up to you whether you decide to buy.

MPI Vs. PMI-

Keep in mind that there are different types of morgage insurance and MPI isn’t the same thing as private mortgage insurance. PMI is a type of protection that safeguards the owners of your home loan if you stop paying on your mortgage loan. Many homeowners assume that their PMI will cover their mortgage payments when they die. This assumption is incorrect. As the borrower, PMI doesn’t afford you any type of protection. If you can’t pay your mortgage and you have PMI, your home will still likely go into foreclosure. You will typically be required to pay for PMI if you take out a conventional loan with a down payment of less than 20%. You can only cancel your PMI when your equity reaches 20%.

MPI Vs. FHA Mortgage Insurance-

MPI also isn’t the same thing as the mortgage insurance you pay on an FHA loan. When you take an FHA loan, you must pay both an upfront mortgage insurance premium and a monthly premium. Like PMI, FHA insurance payments protect the lender against default on mortgages. However, FHA mortgage insurance affords you no protection as the homeowner.

Regardless if your loan has PMI or FHA insurance, it can be a good idea to buy an MPI policy if you can’t afford a traditional life insurance policy and want to ensure your home goes to your heirs. They will have the opportunity to take over the payment, but it’s not always easy to budget for a cost you aren’t expecting.

How Long Do You Have To Have MPI?

If you buy a mortgage protection insurance policy, you’ll continue to make monthly premium payments for the duration of the policy term. Your insurance company can cancel your benefits if you stop making your premium payments. Like most other types of insurance, you’re free to cancel at any time. However, keep in mind that you won’t get any of the money back that you paid to your insurance provider when you cancel.

How Much Does MPI Cost?

How much a mortgage protection insurance policy may cost you depends on a few different factors. Insurance companies will examine the remaining balance of your mortgage loan and how much time is left in your loan term. As with a traditional life insurance policy, they’ll also take your age, job and overall risk level into consideration. In general, though, you can expect to pay at least $50 a month for a bare-minimum MPI policy.

Where To Buy MPI?

Do you think that MPI might be right for you? There are a few different ways you can buy a policy, including:

• Through your mortgage lender. When you close on your loan, your mortgage lender might offer you an MPI policy. You might be able to ask a representative or your real estate agent for a referral to a company that offers an MPI policy if your lender doesn’t offer MPI policies. Rocket Mortgage® does not offer MPI policies.

• Through a private insurance company. There are several private insurance companies that specialize in MPI policies. The specific companies you’ll have access to can vary depending on your state.

• Through a life insurance provider. Many companies that offer life insurance policies also offer MPI. If you have another type of insurance with a nationwide insurance provider, you might also be able to save by bundling insurance coverage together.

No matter where you decide to buy MPI, you should make finding a policy your first priority after you close on your loan. Most insurance providers have a limited window in which you can buy a policy. If you miss your window, you might not be able to find an MPI policy. If you’ve already closed on your loan and no longer qualify for MPI, consider shopping for a term life insurance policy instead.

Conclusion: Is Mortgage Protection Insurance Worth It?

The question of whether it’s worthwhile to buy mortgage protection insurance is largely dependent on your specific needs. If you’re a homeowner with underlying health conditions that could affect your long-term well-being, if you’re employed at a high-risk job or if you’re a young person having difficulty getting approved for a life insurance policy, MPI could be a great way to provide you and your loved ones with peace of mind.

However, if you feel as though your family would benefit more from being able to use money from a posthumous insurance payout for things other than your mortgage – like bills, taxes or funeral costs – it might make more sense to pursue a traditional life insurance policy rather than MPI.

It’s a great idea to make sure you understand the key vocabulary before jumping into the world of mortgages, but if you’re home shopping without a mortgage preapproval in hand, we recommend making that your next step. Getting a preapproval can help you understand your options when it comes to types and lengths of mortgages, and it will also put you in position to make an attractive offer if you see a house you like.

What Is Manual Underwriting?

Underwriting is the step in the mortgage process when your lender decides whether you qualify for a loan. There are two ways that a lender can underwrite your loan: automatically or manually. You might be able to increase your chances of getting a loan with manual underwriting if you have a unique financial situation.In this article, we’ll take a look at some of the differences between manual and automated underwriting. We’ll also show you what your lender looks at during manual underwriting and when they might use a manual process.

What Is Manual Underwriting For A Mortgage?

When you initiate your mortgage application, your lender decides if you qualify for a loan by looking at your information and deciding whether you’re likely to pay it back. In the majority of cases, the decision is made by a computer program – not a human being. If you’re self-employed, applying for a Federal Housing Administration (FHA) or applying for a jumbo loan, you can expect to be rejected by the algorithm.

Manual Underwriting vs Automated Underwriting

Automated underwriting uses a computer algorithm to underwrite your loan. The algorithm takes your information and uses it to decide whether your data meets the lender's minimum standards. With just a small amount of inputted information (like your Social Security number and address), the computer can learn about your finances. The automated system compares your credit score, debt and other factors to the requirements and guidelines of the loan you’re applying for. The machine does most of the heavy lifting. After the computer draws a conclusion, your lender will briefly double-check the result and issue a decision. Lenders use automated underwriting because it’s much faster and more cost-efficient than manual underwriting.

Manual underwriting is just the opposite. Instead of using a computer to analyze the borrower’s application data, a human looks at the finances. Manual underwriting takes more time than automated underwriting and requires more documentation. However, if you have a unique financial situation, manual underwriting can improve your chances of getting a loan. 

Underwriting, whether automated or manual, takes place late in the home buying process so if you haven’t been preapproved for a mortgage loan yet, that should be your first step.

When Is Manual Underwriting Done?

A lender might choose to manually underwrite a loan under a few circumstances:

• You’re living debt-free. Paying back debt is the foundation of a great credit score. But if the borrower chooses to live without debt, they might not have much of a FICO® This doesn’t mean that they have bad credit – just that they have no credit at all. If this is your situation, your lender will need to manually consider your repayment ability.

• You’re new to building credit. Building credit can take years. If the borrower is a young adult or they’ve just moved to the United States, they may not have a credit score. In this case, the lender may manually underwrite your loan.

• You’ve had financial problems in the past. Buying a home with a bankruptcy or foreclosure in your past may seem difficult, but it’s not impossible. Even if the borrower has a lower credit score, with a large down payment and plenty of savings, the mortgage lender might decide to give them a loan. However, this requires manual underwriting before approval.

• Your debt-to-income ratio (DTI) is too high. Lenders, or government regulators, put in place DTI and credit score limits to set the borrower up for repayment success. If your DTI is too high but you can show that it’s temporary or a normal part of your business endeavors, you may be able to demonstrate your creditworthiness during the manual underwriting process.

How Does A Manual Underwriting Mortgage Work?

Heres what to expect if your lender manually underwrites your loan.

Collection of your financial information-

Before an underwriter can decide whether you qualify for a mortgage, they need to understand your financial situation. Your lender will ask you for quite a bit of documentation if they’re manually underwriting your loan. Some things you might need to provide include:

• Up to 12 months of bank statements

• Several years of tax returns

• Your resume or CV (for your underwriter to verify your employment)

• Account information from your retirement account or taxable brokerage account

•  Verification of any other assets you own, like vehicles or homes

• Recent pay stubs that prove you have consistent, reliable income

• Profit and loss statements if you’re self-employed or own a small business

Your job is to provide your lender with any documentation or information they need. For fastest results, you’ll need to have all this documentation on hand before your lender asks for it.

Review of your credit report-

Your credit report contains information about your relationship to debt. Your credit report shows your lender things like loans and credit accounts in your name, and it also contains information about any missed or late payments on these accounts. When your underwriter looks at your credit report, they aren’t just looking at your credit score. Additionally, they’re checking to see if you have a history of consistent, on-time payments.

If you don’t have any items on your credit report, your lender might ask you for proof of past payments. Records of on-time rent, utility and even insurance payments can boost your chances of approval during a manual underwrite.

During this stage, your lender might ask you for a letter of explanation. This is a personal letter written by you that explains an item on your credit report. Let’s say you have a foreclosure or bankruptcy on your credit report – your lender will want to know what happened.

Try not to panic or take it personally if your lender asks you to explain an item on your credit report. A request for a letter of explanation won’t stop you from getting a mortgage. On the contrary, this request means that your lender is still considering you for a loan. If you didn’t qualify, the lender would instead outright reject you. Write a short, direct letter explaining any discrepancies to keep your application on track.

Review of your income and assets-

Next, your lender will look at your personal income and assets. Your lender will compare how much money you have coming in to how much you’ll need to pay each month if they give you a loan.

Your underwriter might reach out to your employer to learn more about bonuses, overtime or commissions you earn. They might also ask about your history with the company and how long you’ve been employed there. 

This is to determine the probability of you leaving your job in the near future. Although there can be exceptions, you’re less likely to lose your job and fall behind on your payments if you have a long history with your employer.

Your underwriter will also look at your assets during this stage. Anything that you own that has significant value is an asset. Cash in the bank is the most obvious example of an asset, but your underwriter will also look at your retirement and brokerage accounts as well. 

The goal of analyzing your assets is to ensure that you can cover your closing costs and down payment and to keep up with your loan payments.

Review of your debt and liabilities-

Your lender will next look at your debt and financial liabilities. One of the first things that your underwriter will calculate is your DTI. Your DTI describes how much of your monthly income goes toward expenses. If most of your income goes to things like credit card payments, rent and loan payments, your DTI will be extremely high. 

You’ll have a lower DTI if you have income left over after you pay your bills. Lenders like to see low DTI because they signify that you aren’t overstretched in paying your bills each month.

Underwriters will also look at other regular recurring financial liabilities. Let’s say you pay child support, back taxes or other court-ordered judgments. Your lender will consider this in their decision. Your underwriter wants to know that you’ll be able to afford your mortgage in addition to all of your current debts.

Review of your collateral-

Then, your underwriter considers your collateral – that’s your down payment and your property value.

The larger your down payment, the less of a risk you are to a lender. You borrow less money when you bring a larger down payment to the closing table. You don’t need a full 20% down payment, but you almost always need at least 3% down. 

This down payment must come from your savings or a gift if allowed by your loan type. If you take out a loan to pay for your down payment, that’s a sign of risk for the lender.

Your underwriter will comb through your bank statements to determine where your down payment is coming from. Large or sudden deposits will trigger a red flag. You may need to write a letter of explanation for any unusual deposits outside of your standard income. You’ll also need documentation to back up your claim.

For example, let’s say you sell a car and deposit the money into your bank account. Your underwriter may ask to see the title transfer and proof of sale. The person who gave it to you may need to write a letter confirming that the money isn’t a loan.

Finally, your lender will order a home appraisal for your property. During the appraisal, a home value expert will take a tour of your property and assign an official estimate of value. Lenders require appraisals because they want a professional opinion of the value of your property. You may need to adjust your offer or bring a larger down payment if an appraisal comes back low.

Final Decision

Your underwriter will then issue a final decision on your loan application. The underwriter can deny your loan, approve it, or issue a suspension with contingencies. If your application has contingencies, it means that your underwriter needs more documentation before they can approve you. You might get an approval, a denial or a suspension with contingencies. If your application has contingencies, it means that your underwriter needs more documentation before they can approve you. Be sure to respond to these inquiries quickly to receive a decision.

Conclusion

During manual underwriting, an actual underwriter analyzes your finances and decides whether you qualify for a mortgage. Manual underwriting requires more paperwork than automated underwriting, and it also takes more time. Your underwriter will ask for documents like tax returns and bank statements. They will look at your income, assets, debt, liability and credit report before giving you an approval or denial.

Your lender will automatically choose manual underwriting for your loan if you have no credit, a major financial event on your record or if you’re getting a jumbo loan. You may also be able to request manual underwriting, depending on your lender.

APR vs Interest Rate

You might encounter the terms “APR” and “interest rate” when shopping for a home loan. It’s easy to confuse the two and use them interchangeably, because your interest rate and your APR serve similar functions. However, interest rate and APR have a few differences that you should be aware of.

Let’s learn how to calculate APR versus interest rate, as well as how to compare lenders so you understand the differences before you get a mortgage.

What Is APR?

APR stands for “annual percentage rate.” Your APR includes your interest rate as well as additional fees and expenses associated with taking out your loan, such as any prepaid interest, private mortgage insurance (PMI), some closing costs, mortgage points (also called discount points) and other fees you may need to pay.

What Is Interest Rate?

Your interest rate is the percentage you pay to borrow money from a lender for a specific period of time. Your mortgage interest rate might be fixed, meaning it stays the same throughout the duration of your loan. Your mortgage interest rate might also be variable, meaning it might change depending on market rates.

You’ll always see your interest rate expressed as a percentage. You’re responsible for paying back the initial amount you borrow (your principal) plus any interest that accumulates on your loan.

Let’s consider an example. Say you borrow $100,000 to buy a home, and your interest rate is 4%. This means that at the start of your loan, your mortgage builds 4% in interest every year. That’s $4,000 annually, or about $333.33 a month.

Your principal balance is high at the beginning of your loan term, and you’ll pay more money toward interest as a result. However, as you chip away at your principal through monthly payments, you owe less in interest and a higher percentage of your payment goes toward your principal. This process is called mortgage amortization.

What Is The Difference Between Interest Rate And APR?

The main difference between interest rate and APR is that interest rate represents the cost you’ll pay each year to borrow money, while APR is a more extensive measure of the cost to borrow money that takes additional fees into account. Since APR includes your interest rate and other fees connected with your loan, your APR will reflect a higher number than your interest rate. You can also consider APR to be your effective rate of interest.

Thanks to the Truth in Lending Act (TILA), your lender must tell you both your interest rate and your APR. You’ll see this information on your Loan Estimate (which you’ll receive around 3 days after filling out your mortgage application) and your Closing Disclosure (which you’ll receive no later than 3 days before closing on your home). Remember to consider both the interest rate and the APR when deciding on the best mortgage loan for you.

How Are Interest Rates Calculated?

You may be wondering, “how are mortgage rates determines?” Your lender calculates your interest rate using your personal data. Every lender uses their own formula to determine how much you’ll pay in interest. It’s possible to get 10 different interest rates from 10 different mortgage providers. Lenders also take into account factors like current market interest rates and real estate economy conditions when calculating your rate.

You can get a lower interest rate from your mortgage lender a few different ways. Anything you do to lower the risk for your lender will usually, in turn, lower your rate. The first action you can take is to raise your credit score, which is a three-digit number that tells lenders at a glance how you use credit. If you have a high credit score, you usually make payments on time, and you don’t borrow more money than you can afford to pay back.

Lenders see you as riskier if you have a low credit score. You may have a history of missed payments, so a lender may compensate for the risk that your score presents by offering you a higher interest rate.

Here are some ways to raise your credit score:

• Always make your minimum loan and credit card payments on time.

• Limit the amount of money that you put on credit cards.

• Pay down as much of your debt as possible.

• Avoid applying for new loans when you’re preparing to get a mortgage.

You can also lower your interest rate by choosing a government-backed loan, such as a VA loan, FHA loan, or USDA loan. If your home goes into foreclosure and you have a loan that’s insured by the federal government, the government agency backing your loan will reimburse your lender. 

Consider choosing a government-backed loan, which may have a lower interest rate than a conventional loan, which isn’t government-insured. However, mortgage insurance will factor into your payment, so it’s important to weigh all of your options.

How Is APR Calculated?

Unfortunately, you have less control over your APR than your interest rate. Your lender controls the other factors that go into your APR, like origination costs and broker fees.

Though there are some ways to lower your APR, such as avoiding private mortgage insurance by offering at least 20% down, the best way to secure a better rate is to compare lenders. 

When using APR to look at rates, be sure to compare apples to apples as far as loan programs. In other words, don’t compare the APR on a 30-year fixed-rate mortgage with one lender and a 5/1 adjustable rate mortgage (ARM) with another, since these don’t represent an equal comparison.

Conclusion

While your interest rate is the percentage of interest you pay on a loan, your APR includes your interest rate along with any other fees or expenses you’ll pay your lender. Some of the most common additional fees are brokerage fees, private mortgage insurance and discount points. You can think of your APR as the effective interest rate you’ll actually pay once you have your loan.

Lenders must tell you both your interest rate and APR before you close on a loan. You can lower your interest rate by controlling your credit score and, possibly, by choosing a government-backed loan. However, you have less control over your APR because the lender sets many of these costs. That said, the best way to find a lower APR is to compare similar loan programs from different lenders. Understanding your APR and interest rate is crucial when taking out a mortgage to purchase or refinance a home.

What Are Tax Deed Properties?

Looking to buy a home at a bargain price? A tax deed sale can help. Tax deed sales allow you to purchase a home whose owners have not paid their property taxes.

Just be careful: Buying a home through a tax deed sale comes with more challenges than you’ll face when buying a single-family home or condo in the traditional way.

What Is A Tax Deed?

A tax deed is a legal document that transfers ownership of a property when a home has gone into foreclosure. Tax deed sales are auctions that occur when foreclosed homes are offered for sale to recoup the tax bill by the tax collector.

For example, if you buy a home, you must pay property taxes to the county in which the home resides. These taxes are split up and paid to several organizations, including public schools, fire departments, police departments, public libraries, streets, and sanitation departments. Homeowners typically pay their property taxes once or twice a year, and how much they pay depends on the state they live in.

When homeowners fail to pay their property taxes on time, counties place a tax lien on their properties. Owners then have a set time to pay what they owe. This time limit will vary by state but can run from a few months to a few years.

If homeowners don't pay the taxes they owe? The home goes into tax foreclosure, and tax collectors can then sell the home through a public tax deed sale. This is where investors can find bargains. They can bid for homes being sold at tax deed sales, often buying the property for less than it would sell for on the open market.

However, some states do not offer tax deed sales, so real estate investors and home buyers should research to see if they’re even an option.

How Tax Deed Sales Work

A tax deed sale occurs only after homeowners fail to pay their property taxes, but how the process works depends on the state the property resides.

In every state that allows these sales, a government body – usually the county in which the home sits – must first get a tax deed. This legal document gives the government body the right to sell a home to collect the delinquent taxes it’s owed.

Once the government agency has its tax deed, it can sell the home during a public auction. The county usually sets a minimum bid for the homes it sells. Buyers then bid on the properties, and the highest bidder wins.

If the successful bidder pays more for the home than the taxes owed – which happens often – the excess amount can be paid to the former property owner. However, the former owners need to request the funds. Owners typically have a time limit to request these excess funds, a limit that depends on the state. In Texas, for instance, owners can claim the excess funds within two years of the sale. In Georgia, owners have up to 5 years after a tax deed sale to claim their money.

Say a home has an estimated value of $150,000, and its owner owes $10,000 in unpaid property taxes. The highest bid on the property might be $50,000. If that bid is accepted, the buyer pays the county $50,000. The county would then take the $10,000 it’s owed in property taxes and pay the remainder of the accepted offer – $40,000 in this case – to the former owner.

The investor who purchased the property gets a home with an estimated market value of $150,000 while spending just $50,000.

After you've purchased a tax deed sale, there are still additional expenses. You'll have to pay to get a clean title to the home you've just bought. Homes sold at tax deed sales have what is known as a “cloud” on their title. You won't be able to sell that property until you clear this cloud.

You can do this in one of two ways. You can file a quiet title action, a lawsuit that gives you official title to your new home. This type of lawsuit gets its name because doing this will quiet all other earlier claims on the home's title, including claims from a mortgage lender. The cost will vary, but you can expect to pay at least $2,000.

You can also order a title certification to validate the tax deed sale and foreclosure process. A consultant will work with a title insurance agent to clear the home's title for you. The cost of this can vary, too, but again you can expect to pay about $2,000.

Understanding Redemption Periods

Even if you submit the winning bid during a tax deed sale, you might not become the owner of the home. This is because of the redemption period.

In some states, the owners of properties sold at tax deeds can pay the property taxes they owe, plus fees and penalties, to regain ownership of the home. However, they must do this within a set period of time called the redemption period, which varies by state.

If a homeowner does repay their taxes during this redemption period, you won't be able to take possession of the property. You won't lose any money because you won't actually buy the home, but you will lose out on the investment opportunity.

Usually, if the owners pay their unpaid property taxes before they submit their final payment for a home, they can reclaim ownership of the home.

What Is The Difference Between A Tax Lien And Tax Deed?

Tax deed sales and tax liens might sound similar, but it is important to understand they are two different things.

When the owners of a home don't pay their property taxes, their local government places a lien against their property. As a result, the homeowners can no longer sell or refinance their property until they pay their owed taxes and remove the lien.

If the home's owners don't pay their unpaid taxes during a specific period, the governing body might sell the tax lien at a public auction. The city or county government that issued the lien can only do this after publicly notifying the property's owners.

Investors can bid for the tax lien at the public auction. The winning bidders get a tax lien certificate that allows them to collect the unpaid property taxes plus interest and penalties from the home's owners. If you are the winning bidder, you pay the municipality the entire tax bill on the home. You make your profit when the home's owners repay their unpaid taxes to you plus interest. It's the interest that gives you your profits.

Buying a tax lien does not give you ownership of the home. It only gives you the right to collect unpaid property taxes.

The benefit of buying tax liens is that you can usually get them without spending a lot of money. Although it varies by state, the owners of a property usually have from 6 months to 3 years to pay back their unpaid taxes to remove the lien, a payment the owners make to you. They'll also have to pay interest.

There is a risk, though. If the owners don't pay back their taxes during this period, you have the right to foreclose on the property and take ownership of it. You might not want that responsibility, though.

How To Invest In A Tax Deed Property

The first step to investing in a tax deed property is to find tax deed sales in their counties. Counties across the country handle these sales differently, with some holding them more frequently than others.

If you find an auction and win a bid in a tax deed sale, you now have options for what to do with your new property. You can flip the house by renovating the property and selling it for a profit. On the other hand, you might turn it into a rental property, collecting monthly payments from renters as you wait for the property to increase in value before you sell.

Or, if you bought your home for as little as possible, you might sell your property immediately in as-is condition. This means you can sell the home without making any repairs. Buyers, in this case, might be investors who want to renovate the home and then sell it for a higher sales price.

Conclusion

Buying tax deed properties can net you a profit, but remember there are risks. You might be outbid for properties. The previous owners of the homes might pay their owed taxes before you can take ownership, and you might not be able to sell your new investment for as high a sales price as you envisioned. 

However, if you do your research, study home sales in your neighborhoods and pay a low enough price to acquire a home through a tax deed sale, you could make a tidy profit.

What Is A Silent Second Mortgage?

When you take out a loan (in addition to a mortgage) in order to make a down payment, it’s called a silent second mortgage. And while a silent second mortgage may sound like a nice deal, there is a right and a wrong way to do it. 

Below is a primer on silent second mortgages, the risks, pitfalls, and how to legally take out a second mortgage on a property should you need money for the down payment.

What Is A Silent Second Mortgage

A mortgage is a loan used to purchase a residence or piece of real estate. When a borrower takes on their first mortgage to buy a home, they get the money, but they also use the home as collateral to secure the loan.

A second mortgage is an additional mortgage on one piece of property. It is considered “silent” if that second mortgage or loan is used to secure down payment funds and then not disclosed to the original mortgage lender prior to closing. Failing to disclose a second loan to a lender is very illegal, and borrowers who fail to do so could be prosecuted.

How Do Silent Second Mortgages Work? 

So, how do silent second mortgages work if they're illegal? Second mortgages themselves are commonplace and legal, but when borrowers try to hide loans taken out on a property, the legal boundaries get crossed. Even if you think this isn’t such a big deal, remember that lenders require borrowers to document where any down payment funds came from, so not disclosing a second mortgage (or blatantly lying about where the money came from) makes this practice illegal.

Silent second mortgages exist in the first place because borrowers often need funds to afford the down payment on a home. For example, Davis wants to buy a home for $200,000 but lacks the $40,000 needed for the 20% down payment. He doesn’t want to lose out on the home, so he takes out a loan from a private investor so it won’t appear on his credit report.

The bank has no idea he didn’t use his own money for the down payment, which makes this loan between Davis and the private investor a silent second mortgage, and because it wasn’t disclosed, it’s an illegal practice.

Why Are Silent Second Mortgages A Risk For Lenders?

During an expensive home purchase, the object being bought (the house) is the collateral. So, if another loan exists on the collateral, there will be a problem for the first lender, especially if they need to seize the home in the event of foreclosure. They can’t take clear ownership of the home during the foreclosure process if there are other outstanding liens on the property.

Disregarding the legal aspect, even though buying a house with no money down sounds like a great opportunity, a silent second mortgage is terrible news for homeowners too. With a second mortgage, a buyer is always taking on more debt, often at a higher interest rate than what comes with low mortgage rates, plus they end up paying more in interest over time and having two separate monthly payments.

Not to mention, with no real money down, a buyer will have to wait longer to earn true equity in the home.

How Can I Avoid A Silent Second Loan With A Down Payment Assistance Program?

There’s good news for borrowers who need money for a down payment (and this option is perfectly legal). Borrowers can avoid silent second mortgages by applying for a down payment assistance (DPA) program. 

Currently, several down payment assistance programs are available through local and state governments, as well as at the federal level. If approved, these programs create a second mortgage on the home, but the lender knows about them and often works with them to incentivize buyers toward homeownership.

By pairing a first-time home buyer program with down payment assistance, you can skip the need for a silent second mortgage loan. For instance, let’s say you purchase a home through the Fannie Mae HomePath loan program. You would only need 3% for a down payment, so you could apply for a local or state grant that would cover the remaining balance. Or, if you use an FHA loan, your lender can help you find an assistance program that works for your situation. 

How Do Down Payment Assistance Loans Work?

In order to receive down payment assistance, potential borrowers must meet specific program criteria that are often based on income, occupation, and credit score. However, the eligibility requirements and amount of assistance offered vary by state and program. But in a broad sense, here is how down payment assistance loans work:

The borrower receives a flat amount or a certain percentage of the purchase price in assistance.

The program creates a “soft” second mortgage on the property in exchange for money at closing. The term “soft” is used because the loan terms are incredibly favorable to borrowers; in other words, sub-market interest rates, lenient loan terms, and even full forgiveness in some instances.

If you receive a down payment assistance grant (as opposed to a loan), that’s great! Free money! Sometimes these grants are referred to as silent or “soft” second mortgages, but lenders also know about these, so they are not illegal.

Loans forgiven over time and with 0% interest loans are available through the down payment assistance programs. Still, you won’t know what you qualify for (or even what’s available) without researching or contacting your local Department of Housing and Urban Development (HUD) office.

Freddie Mac - FHLMC

If you’ve ever bought, sold, or considered buying or selling a home, you may have heard of the Federal Home Loan Mortgage Corporation, more commonly known as “Freddie Mac.” Freddie Mac isn’t an actual person but is, along with other semi-governmental entities like Fannie Mae and Ginnie Mae, a government-sponsored enterprise that plays an important role in the mortgage industry and – by extension – the process of buying and selling a home.

What Is Freddie Mac, To Be Exact?

Freddie Mac is an alternative name for the Federal Home Loan Mortgage Corporation or FHLMC. Freddie Mac was created in 1970 as part of the Emergency Home Finance Act to expand the secondary mortgage market in the United States.

Prior to the creation of Freddie Mac, the Federal National Mortgage Association (also known as Fannie Mae) was the only institution that bought real estate mortgages and home loans from issuers (primarily banks and savings and loan associations).

Freddie Mac was initially created as a public enterprise and even had stock listed on the New York Stock Exchange. However, in 2008, during the housing crisis in the U.S., the Federal Housing Finance Agency took over some control of Freddie Mac as well as Fannie Mae. As a result, today, both companies are known as government-sponsored entities (or GSEs) and have privately traded stock.

What Does the FHLMC Do?

Freddie Mac's mission is to provide liquidity, stability, and affordability to the U.S. housing market. It works toward these goals using a variety of tools at its disposal.

Liquidity

Freddie Mac buys home mortgages, primarily from smaller banks, credit unions, and other lenders. In doing so, Freddie Mac keeps its lender network liquid so it can continue making loans. This has proven key to keeping the mortgage industry in continuous operation.

Stability

Freddie Mac pools the mortgages it buys into securities, which it sells to investors on the secondary mortgage market. This provides stability to the overall mortgage market.

Affordability

While Freddie Mac has no role in setting home prices, it does offer preferential mortgage programs, like Home PossibleSM and Home Possible AdvantageSM.

Freddie Mac Mortgages

Many types of mortgages exist, but they fall under two main categories: conforming and non-conforming loans. A conforming loan meets requirements set by the Federal Housing Finance Agency (FHFA). Freddie Mac can’t buy non-conforming loans.

How Does Buying Mortgages Benefit Homeowners?

Many home loans on the mortgage market are for 30 years, and without Freddie Mac, the issuing banks would have to keep the mortgage on their books for the entire term of the loan and assume all the risk of each individual home loan.

Does Freddie Mac Issue Loans Directly?

Freddie Mac doesn’t provide loans directly to home buyers but instead buys bundled mortgages from banks and other mortgage originators. By bundling and selling mortgages to Freddie Mac as mortgage-backed securities, banks can free up their capital to lend money to more Americans.

If Freddie Mac backs your loan, when you make your monthly mortgage payment to your mortgage servicer, the servicer sends the money to Freddie Mac. Freddie Mac then bundles your payment with others, takes a small fee, and passes the rest of the money on to the mortgage-backed securities investors. 

How Does Freddie Mac Affect The Mortgage Market?

Freddie Mac has a generally positive effect on the real estate mortgage market. This is because, without Freddie Mac, mortgage originators would be required to hold mortgage loans in-house.

As a result, these enterprises would assume all the risk and tie up their capital. This would increase the interest rates that banks would need to make a profit and therefore drive up the total cost of homeownership across the country.

Fannie, Freddie, and The 2008 Mortgage Crisis

In the years leading up to the housing crisis of 2007 and 2008, Freddie Mac and Fannie Mae were publicly traded corporations. As such, their CEO and executive team had the mandate to increase profitability.

Since the mortgages they held were backed by the U.S. government and couldn’t default, Freddie Mac and Fannie Mae took increasingly riskier investments, such as subprime mortgages. In September 2008, the Federal Housing Finance Agency put Freddie Mac and Fannie Mae into conservatorship rather than let them go bankrupt rather than letting them go bankrupt.

Conclusion

Freddie Mac works to help support the real estate mortgage market. Without Freddie Mac, Fannie Mae, and Ginnie Mae, all home buyers would pay higher interest rates to get a mortgage if they could find a lender willing to lend them the money.

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.