Most people make their mortgage payments on the first of the month or a few days before the actual due date. But what about the first payment on a new mortgage loan? Let’s walk through some important details on that initial payment and see how your closing date coincides with when your lender will expect your first payment.
There are two basic components that make up every mortgage payment: principal and interest. In this article, we’ll share everything you need to know about principal and interest in order to help you choose the best mortgage option for you. We’ll cover the differences between the two and help you determine what you owe, or will pay. Keep in mind, there may be other expenses that could find their way into your monthly payment as well.
Taking out a mortgage loan for the first time can be very overwhelming for a lot of people. Thanks to mortgage amortization, there's one thing you shouldn't have to stress about: knowing how much you'll pay each month for your mortgage (before taxes and insurance). In this article, we will guide you through everything you need to know about mortgage amortization and how to calculate yours.
You’ve probably heard the words “forbearance” and “foreclosure” tossed around, but what do they actually mean for you and your mortgage?
You may have financed a part of your home with a lender. In exchange for this financing, you agree to pay the financed amount, also called the principal, back in monthly installments, plus interest. What happens if you’re unable to pay this monthly amount? That’s when words like forbearance and foreclosure might start popping up.
Whether you’re struggling financially or simply looking to brush up on your knowledge of the mortgage industry, we’ve created a guide to help you understand these terms.
Forbearance refers to an agreement made between you and your lender in the event that you’re unable to pay your monthly mortgage amount for any reason. The lender freezes your payment requirements for a set amount of time. After this date, you would be required to continue your normal monthly mortgage payments, and pay back the balance owed, plus any interest or fees that accumulated during your grace period.
You might turn to forbearance if you’re having financial difficulties in the short term and need some time to catch up on payments.
You’ll want to reach out as soon as possible if you’re interested in finding out if your lender would agree to a forbearance. The earlier you reach out, the more likely your lender will be to work with you to come up with a plan that suits both parties’ needs and discuss if forbearance is good idea for you. Here’s how to work with your lender to get a forbearance:
Step 1: Reach Out To Your Lender
The very first step is to contact your lender and let them know about your financial situation. It’s ideal to call and speak to a representative, but some mortgage lenders have online chat options or forbearance application forms you can also use.
Your lender will need some key information and documentation from you. Be ready to provide the following:
An overview of your financial hardship – include what’s causing financial issues and when you expect the struggle to be resolved
Your mortgage loan or account number
Your monthly income before taxes
An itemized list of your monthly expenses
Unemployment benefits information, if applicable
Keep in mind that your lender will want to do everything they can to keep you in your home, paying your mortgage, so don’t be afraid to let them know you need a little bit of help.
Step 2: Request A Forbearance Agreement
There are a few steps the lender must follow before granting you a forbearance. First, they might ask you to try reducing your monthly expenses if there are any red flags or costs that seem unnecessary. Be prepared to speak about these expenses and explain where costs have been cut and why certain items can’t be cut. They may also ask you to prove you’re looking for work or a better-paying job. Once you’ve answered their questions, you can ask them to agree to a forbearance agreement.
Step 3: Submit Financial Records
Next, you’ll want to verify your financial hardships. Send your lender your unemployment award letter, which contains the amount you’re being paid; two of your last W-2s that reflect your minimal or reduced wages, two recent bank statements, a full list of your debts (bills and money you owe) and assets (your home, car and anything else of value) and your last two federal tax returns.
Your lender needs to be able to see your entire financial picture before they can draft and agree to a forbearance. From here, you’ll want to follow up with your lender until they assign a negotiator or loan officer to your account. This person will work with you and be your main point of contact throughout the rest of the process.
Step 4: Wait For Approval
Once you have a negotiator or loan officer, there’s not much to do except wait for forbearance approval. This can take several weeks, but you should diligently follow up to show the lender that you’re taking this request seriously.
Step 5: Receive Your Forbearance Letter
Once you’re approved for forbearance, the negotiator or loan officer will work to draft up a forbearance letter detailing the terms of your agreement. This letter will cover the forbearance period time frame, how much you’ll pay (if anything) during the forbearance period, additional fees or interest to be added to the amount owed and terms for repaying the outstanding balance after the forbearance period. You can talk to your loan officer to try to negotiate these terms if needed.
Step 6: Sign And Return Your Forbearance Agreement
Once you’re satisfied with the terms, sign and return the agreement to the lender. From there, your forbearance period will start. After this period ends, your payments will return to normal and additional payments will be required to cover the outstanding balance.
Let’s say you fail to follow the forbearance terms or cannot make the agreed-upon payments. Your home will likely go into foreclosure.
Foreclosure is a legal process that occurs when you are unable to continue making mortgage payments, and as a result, you forfeit rights to your home. The bank or lender would take over ownership of the property.
Foreclosure is the very last step before you lose ownership of your home. If a forbearance plan doesn’t help you get back on track with your finances, you’ll want to reach out to your lender before your home is foreclosed on.
A new payment plan might be able to help you avoid foreclosure. You can also speak with your lender about a short sale, where the property is listed on the market and sold for less than you owe on the mortgage. This could help alleviate your financial issues – but all the money paid by the buyer will go toward your outstanding mortgage balance.
Let’s say the lender is unwilling to work with you or if you’ve gone too long without reaching out about a payment plan. You’ll want to prepare for the foreclosure process. Here’s what to expect:
Step 1: Your Lender Will Notify You Of Your Mortgage Default
The first step your lender must take before foreclosing on your home is to give you notice of your default, or your failure to pay your mortgage. At this point, you still have options to move your mortgage out of default, including forbearance, short sales or working out a deferment or payment plan with your lender.
This notice is typically sent out after a mortgage has not been paid for 30 – 45 days. It will also detail a time period for repaying the balance owed to put the home loan back into good standing.
Step 2: The Lender Proceeds With Legal Filing
Are you unable to make the payments required or come up with a satisfactory agreement with your lender? If so, they will most likely move forward with legal foreclosure filings. This could happen in two different ways.
Your lender could file a nonjudicial foreclosure, which allows them to take possession of your property. The time frame from filing to foreclosing on the home is detailed in your mortgage paperwork, so be sure to review this contract for more information.
Your lender could also file a judicial foreclosure, which means they’ll file a lawsuit against you in order to receive legal permission to sell your property. This action is typically taken after you default on your home loan for more than 90 days, without making any effort to make payments.
Step 3: The Lender Will Notify You Of A Foreclosure Sale
Federal law states that lenders must wait 120 days before foreclosing on a home, which gives you roughly 4 months to make new living arrangements and move. However, each state has its own rules.
Once the lender has filed for judicial or nonjudicial foreclosure, you’ll be mailed a notice of foreclosure sale, which is a letter that indicates the date you must leave your home. You might need more time to make preparations – you can ask for more time to move out of the property and work out a new date with your lender, but they are not legally obligated to negotiate with you at this point.
The lender can file a lawsuit to have you evicted from the property if you do not leave by the required date. It’s best to work to move out of the home as quickly as possible so you won’t have to deal with further legal action.
Sometimes financial hardships strike when you least expect them, and you might be looking at a mortgage forbearance or foreclosure. Reach out to your lender as soon as possible if you find yourself in a tight financial situation. The sooner you reach out, the more options you’ll have available to help you fix the situation and get back on track.
Work toward a forbearance agreement that you can afford and make sure you make all necessary payments on time to avoid foreclosure. Talk to your lender about the possibility of renegotiating your forbearance agreement or consider a short sale if you find that foreclosure is becoming more and more likely.
The Missouri Housing Development Commission (MHDC) was created in 1969 to help provide home loan funding to qualified first-time home buyers in Missouri.
There are two programs available for Missouri borrowers through the MHDC. The first is the First Place Homebuyer Program, which provides first-time home buyers and qualified veterans an opportunity to take advantage of affordable interest rates, as well as additional incentives offered by MHDC. First Place Loans are 30-year, fixed-rate, first mortgages, and can be used to secure either a conventional, VA, or FHA loan.
There are two types of loans offered through the MHDC First Place program:
Cash Assistance Loan (CAL) - This loan provides down payment and closing cost assistance for first-time home buyers.
Non Cash Assistance Loan (Non CAL) - This loan provides a lower interest rate to first-time home buyers who do not qualify for down payment or closing cost assistance.
The second financial assistance option offered by the MHDC is the Next Step Program. Qualified first-time and non-first-time home buyers can receive up to 4% of the loan amount for down payment and closing costs. This forgivable second mortgage loan does not have to be paid back as long as the borrower stays in the home for ten years.
MHDC loans are mortgage loan products provided by the Missouri Housing Development Commission (MHDC) through USA Mortgage. They are available for properties located anywhere in Missouri and provide up to 4.5% down payment assistance, leaving very little left for the purchaser to pay out of pocket. The MHDC offers both conventional and FHA loans. Rates for these loans are determined by the MHDC and available on their website on a daily basis.
In addition to down payment assistance, the State of Missouri First Place Loan program offers a variety of other incentives such as closing cost assistance, loan forgiveness, and emergency repairs. For eligible homebuyers, this program can provide an affordable path to homeownership without sacrificing important features like quality and location.
To qualify, applicants must first be purchasing a home or property in Missouri. They must meet certain income limits, complete an 8-hour homebuyer education course, and work with an approved homebuyer counseling agency. For more information on the MHDC loans, rates, and other requirements, contact USA Mortgage or visit the Missouri Housing Development Commission website.
There are many people that can benefit from MHDC loans, but if you are within these categories, you may benefit a little more than others:
Clients with little or no money for down payment
First-time homebuyers
Clients who want to buy within the city limit and the house won't qualify for USDA
Clients who wish to use non-owner occupant to help with their debt to income
MHDC home loan income limits are based on the area, what MHDC program you are doing, and the amount of people who are going to be living in the home.
MHDC loan is down payment assistance that goes along with certain loan programs. The minimum down payment depends on the loan program you are doing. MHDC will offer 4% of your loan amount to help you with your down payment.
One of the biggest hurdles for prospective homeowners is finding the right mortgage. And one of the things that can make or break an affordable mortgage is the interest rate. Home loan interest rates can severely impact your long-term costs, so most buyers look for the lowest rates possible. But not every lender or loan is the same. Here’s what you should know so you can get the best mortgage rate and choose the loan type that suits your needs.
When you borrow money to buy a home, you need to repay the institution that lent those funds. But you have to return more than the original amount you borrowed, or the principal. Your lender will also charge you interest on the loan. This is essentially a fee to cover the cost of lending in the first place.
Your lender calculates your mortgage interest as a percentage of your loan. They do this based on a variety of factors, such as your credit score and down payment amount, which can significantly impact how high or low your interest rate will be.
If you make your loan payments according to your amortization schedule, you will fully pay off the loan by the end of its term. However, attractive interest rates may encourage homeowners to consider paying off their mortgage early. And it helps to understand how mortgage interest if that route appeals to you. By making additional payments toward your principal, you can reduce the amount you need to pay interest on, saving you thousands of dollars and shortening your loan term.
Multiple factors contribute to your monthly mortgage payment. By breaking it down, you can better understand principal and interest along with other crucial costs. Some you should know include:
Principal: The principal is the original amount you borrow. A portion of your mortgage payment goes toward it each month, starting out small. As you pay your mortgage, the amount increases, and the portion you put toward interest decreases.
Interest: Interest essentially acts as a fee for taking on the risk of loaning you money. Your interest rate, which is a percentage of your mortgage amount, directly impacts how much you pay in total. A fixed-rate mortgage only has one rate, but adjustable-rate mortgages fluctuate depending on market indexes. Your interest may also compound, meaning interest builds on top of your original loan balance and previously built interest.
Taxes: Some homeowners may pay real estate or property taxes as part of their monthly mortgage payments. The total due splits into monthly payments that you make over the year. Your lender collects them and holds them in escrow until tax time.
Insurance: Certain borrowers may have to pay mortgage insurance in addition to their regular mortgage repayment. This typically applies to borrowers who put less than 20% down, or those with FHA loans.
Term/length: Most mortgages come with 15-, 20-, or 30-year terms. The longer your term/length, the higher your interest rate will probably be. However, since the payments spread out over a longer time, your monthly payments will likely be lower.
Amortization: A mortgage loan comes with an amortization schedule that determines how much you pay per month and the costs that payment covers. A basic mortgage payment goes toward two components: interest and principal. Most of your payment covers interest in the beginning, but as time goes on, the majority shifts to your principal. Homeowners can consult their lender for their amortization schedule and the calculations involved.
There is a wide range of potential borrowers who need loans to buy a home. And each borrower has unique financial needs. Because of this, there are also various types of mortgages available to address those needs. Here are some options you may run into and how interest works with each of them:
Fixed-Rate Mortgages-
Home buyers will typically have to decide between a fixed-rate mortgage and an adjustable-rate mortgage. In the case of a fixed-rate mortgage, your home loan comes with a set interest rate for its entire term. So, the borrower’s repayments of interest and principal stay the same from month to month.
Because of this, borrowers can plan their budget ahead of time without worrying about market changes. As a result, they are a popular mortgage option in the U.S. since they are great for stability. They can also be lower cost if you borrow when interest rates are low. However, when you take out a fixed-rate mortgage you tend to pay higher rates than you would initially with an adjustable-rate mortgage.
Borrowers thinking about a fixed-rate mortgage should know that they:
Come with a locked interest rate so you’ll know what your monthly payments will be. Any changes are usually a reflection of a change in taxes or insurance
Have lifespans of 10 – 30 years (or even 8 years with a Yourgage®)
Often require lower interest rates when the loan term is shorter
Apply more of earlier payments to interest; more goes to the principal as time goes on
Can often be a higher rate than an ARM over time
Are generally good for those who plan to stay in the home long-term
Adjustable-Rate Mortgages (ARMs)-
These are home loans that come with an interest rate that changes over time. Market indexes determine whether the interest rate increases or decreases each time it changes. The frequency of these fluctuations depends on your agreement with your lender.
ARMs usually start out with competitively low interest rates, at least for the initial 5-, 7- or 10- years. However, that period won’t last forever, and the changes can make it difficult to budget. Essentially, you exchange the stability of a fixed-rate mortgage for the potential savings that an ARM can offer.
Borrowers interested in adjustable-rate mortgages should know that:
Monthly payments change over the life of the loan
They typically have caps on how much rate can change
ARMs often charge less during their introductory period compared to fixed-rate mortgages
ARMs use different benchmarks, such as the U.S. Treasury or the secured overnight finance rate (SOFR)
There are different arrangements to choose from, like 5/1 and 5/6 ARMs or 10/1 and 10/6 ARMs
They are often good for those who plan to stay in a home for a few years
Since interest costs on an ARM can drastically increase, make sure you talk to your lender before you agree to one. Ask how the lender determines their interest rate and ensure you are comfortable with that.
Jumbo Mortgage Loans-
You might be looking at properties in some of the more expensive housing markets. In that case, you may need a jumbo loan. Home buyers use jumbo loans when they need a mortgage larger than conventional conforming loan limits allow. That’s why jumbo loans are considered nonconforming; they don’t conform to normal limits.
The baseline limits on conforming loans sit at $726,200 for 2023, as determined by the Federal Housing Finance Agency (FHFA). But limits change from county to county. So, if you find a higher-end property that requires a loan larger than your county limit, you may want to look for a lender that offers jumbo mortgages.
Borrowers interested in jumbo loans should know that they:
Are riskier for mortgage lenders because they can’t be guaranteed by Fannie Mae or Freddie Mac
Have stricter qualification rules
Are for loans over the conforming loan limit
Can be fixed or adjustable
Often come with interest rates slightly higher than other loans
Bills, taxes and other living expenses can stack up, especially as a homeowner. But did you know that it’s possible to use your mortgage to reduce your taxable income? Every year that you pay your mortgage, you can take advantage of the mortgage interest deduction.
Essentially, this tax incentive allows you to count interest paid on your mortgage against your taxable income. As a result, you can lower the overall taxes you owe.
You may need to see what qualifies as mortgage interest for your taxes though. A debt you use to purchase your home may not qualify if it isn’t secured by the home. There are also rules that determine your eligibility. For instance, you cannot deduct mortgage interest if you take the standard deduction. You must itemize your deductions. And it isn’t a dollar-for-dollar reduction. Instead, the mortgage interest deduction depends on your tax bracket.
Mortgage interest can be a significant cost for homeowners in the long run. That’s why it’s vital to explore your options, because it all depends on you. For instance, you may not need a fixed-rate loan if you don’t intend to live on your property long. You can take advantage of the introductory low-interest cost of an ARM instead. Or, you may need to prepare yourself for the possible interest rate on a jumbo loan if you are looking at higher-priced properties.
When funding your mortgage loan, a mortgage lender makes a judgement on your qualifications before taking a calculated risk. In exchange for giving you a mortgage to buy or refinance a home, lenders charge a variety of fees so that they can make money to provide more home financing to others. One of these fees is a mortgage origination fee.
In this post, we’ll go over the origination fee, how to calculate it and when you pay it. We also touch on why they exist, whether all lenders have origination fees and some of the things you have to look out for when comparing the costs charged by various lenders.
A mortgage origination fee is a fee charged by the lender in exchange for processing a loan. It is typically between 0.5% and 1% of the total loan amount. You'll also see other origination charges on your Loan Estimate and Closing Disclosure if there are prepaid interest points associated with getting a particular interest rate.
Also called mortgage points or discount points, prepaid interest points are points paid in exchange for getting a lower interest rate. One point is equal to 1% of the loan amount, but you can buy the points in increments down to 0.125%.
If you're trying to keep closing costs at bay, you can also take a lender credit, which amounts to negative points. Here, you get a slightly higher rate in exchange for lower closing costs. Rather than paying up front, you effectively build some or all costs into the life of the loan.
The origination fee itself can cover a variety of things, some of which may be broken out in your Loan Estimate. It covers things like processing your loan – collecting all the documentation, scheduling appointments and filling out all necessary paperwork – as well as underwriting the loan.
Typically, a loan origination fee is charged as a percentage of the loan amount. Furthermore, lender origination fees are usually anywhere between 0.5% and 1% of the loan amount plus any mortgage points associated with your interest rate.
To put an actual number to that, let’s say a borrower has a $300,000 mortgage approval. The origination fee would be anywhere from $1,500 – $3,000.
Mortgage origination fees are usually paid as part of closing costs. It varies widely depending on the details of the transaction, but closing costs typically range anywhere from 3% – 6% of your loan amount.
Every lender has costs associated with originating a loan. Whether that’s the overhead for their business or paying bankers, underwriters and scheduling appraisals. The goal is always to make enough money to be able to provide loans to help more people with their home financing. Origination fees cover some of these costs.
Not all lenders charge an origination fee, but the majority do as compensation for the services being provided. The origination fee is charged at the discretion of an individual lending institution.
Some lenders make a big deal out of advertising home loans with no origination fee. There’s nothing wrong with this, and it can be good for people who want to save on closing costs. When comparing loan options, you’ll always get a better idea by comparing the APR and. interest rate. If the interest rate isn’t higher, another tactic they might use is to request that fee under a different name than “origination.”
If a mortgage truly has no origination fees, you’ll end up paying a higher interest rate over the course of the loan in most cases. A lender must make money somehow. Depending on how long it takes you to pay off the loan, this could cost you up to tens of thousands of dollars over the life of the mortgage. While you’re saving money up front, it could cost you way more in the long run.
Other Fees That Add Up
It’s important as someone buying or refinancing a home to understand that there are various points at which a fee can be charged. While most mortgage fees not related to the interest rate that you would get are closing costs, there are others. Let’s run through them.
Rate lock: When you lock your rate at a certain level, your lender must hedge against the possibility that interest rates rise in the near future. You pay for this privilege in the form of a rate lock fee. The shorter the rate lock period, the cheaper it will be.
Commitment fees: A lender must set aside funds for a loan in advance of when they actually give it out. In exchange for the guarantee of the loan at some point in the future, they charge a commitment fee. This is a hedge against conditions in the market changing. As long as it was approved, this lets the client get the money as long as they close.
Underwriting or processing fees: If you see an underwriting or processing fee instead of an origination fee, it’s an origination fee masquerading as something different. It’s the charge for the lender processing any provided documentation and making sure you qualify for the loan.
Higher Interest Rates
As mentioned before, if there truly is no origination fee – and for the purposes of this discussion, let’s include fees serving a similar purpose that go by a different name in that category – the lender is likely to make up for it by charging you a higher interest rate to make more money on the back end of the loan.
To help you put some numbers to this, let’s look at an example for a 30-year fixed mortgage on the $300,000 example home. It’s also helpful to know that mortgage closing costs are also often talked about in terms of points. One point is equal to 1% of the loan amount.
With a 20% down payment, your loan amount would be $250,000. First, we’ll look at a rate with one point of closing costs. Perhaps by paying one point at closing, the rate you can get is 3.75% in this hypothetical scenario. You would pay $2,500 upfront and $166,804 in interest over the life of the loan with a $1,157.79 monthly payment.
Now let’s look at that same $250,000 loan with no points paid. Let’s say that rate was 4.5%. Your monthly payment becomes $1,266.71 while paying $206,016.76 in interest. In the second scenario, you end up saving $2,500 upfront, but you also pay more than $39,000 more in interest.
Another thing that’s important to know when you opt for a higher monthly payment is that it will make your debt-to-income ratio (DTI) higher because you’re spending more on a monthly basis to make payments on existing debts. This can impact your ability to qualify for other loans in the future, because DTI is a key metric used by lenders.
You don’t want to take on such a high monthly payment that it’s going to hinder your financial flexibility in the future. If you opt for a no-origination-fee loan, it’ll likely come with a higher interest rate leading to a higher monthly payment. This could push your DTI up significantly.
When lenders are speaking to you about their fees, and in some cases their lack of them, it’s important to figure out what you’ll be paying over the life of the loan and weigh the benefits and downsides of a no origination mortgage. One way to do a quick comparison is to look at the interest rate.
When you shop for different interest rates, there are two interest rates you’ll see. The first one is the interest rate your monthly payment is based upon. The second one is called the annual percentage rate or APR and will be higher. This is your interest rate with closing costs accounted for. When comparing loan options, you’ll always get a better idea by comparing the APR.
Although not every lender charges an origination fee, they typically make up for it by charging a higher interest rate on the loan itself, so always be aware of the upsides and downsides. You may be saving money at closing, but paying more in the long run.
When you receive a home loan, your lender places a mortgage lien on your property to get their owed money if you don’t repay the loan. There are many other types of lien that you may encounter that could impact you and your finances, too. Let’s look at how mortgage liens work and how they can affect your loan.
A lien is a legal right that gives an individual or entity a claim to a collateral property until the outstanding debt is paid off. If the debt goes unpaid, the issuer of the lien has the right to take the property back from the borrower. Although we’re focusing specifically on homes in this article, you could also have a lien on your car or another possession that you pay off over time.
It’s generally considered a negative thing if you have a lien on your home or property. However, lots of people have liens on their homes. In fact, the first type of lien on most houses is actually very helpful: your mortgage.
A mortgage enables you to afford a house over time instead of paying for the entire cost upfront in cash. It gives many of us something to lean on in order to get a permanent place to put our roots down and become part of a community.
When you have a mortgage lien, your house is used as collateral until you pay off the loan. As long as you keep making your payments, the collateral never comes into play.
All liens fall under two fundamental categories: general or specific liens and voluntary or involuntary liens.
General And Specific Liens
A lien can either be general or specific. These two different labels can tell you how a lien will impact you – specifically, the scope of your property it will affect.
A general lien is a claim on all your property assets, including real estate and personal property (e.g., house, bank accounts, cars, etc.). When you owe the IRS taxes, they can apply a claim on all of your property, not just your house, with a general lien.
In contrast, a specific lien is a claim on a particular piece of property or asset. For instance, a specific lien might be incurred when a property owner owes homeowners association (HOA) fees or late mortgage payments on a specific property. A mortgage on a home is an example of a specific lien.
Voluntary And Involuntary Liens
When you have a lien placed on your property, it is also either voluntary or involuntary – meaning you either agreed to it or it was put there against your will.
With a voluntary lien, the property owner gives consent for a claim to be placed on their property by the lender as collateral or security in exchange for repayment. This type of lien allows the lender to repossess the property and sell it if the owner doesn’t repay their debts. One of the most common types of voluntary and specific liens is a mortgage, because a borrower freely enters into it.
An involuntary lien is a claim placed on the property without the owner’s consent. In most cases, involuntary liens happen because of the property owner’s lack of action or inability to pay their debts, such as their mortgage payments or property taxes. A lender can place a claim on the property to warn the owner that they’ll lose legal ownership if the obligations aren't paid.
Beyond mortgages, you usually don’t want any other type of lien on your property. It’s important to know what liens you need to avoid or resolve as quickly as possible. If any debts aren’t satisfied by the time you sell your house, creditors can place liens that will cause trouble later. Let’s look at some common liens you’ll want to stay away from:
Judgment Liens
Judgement liens are intended to compel borrowers to repay a debt. A creditor or an individual may sue you and win a judgment against you in court to gain the right to place a lien on your property until you satisfy the debt.
A default judgement may be placed against you if you fail to appear in court to resolve an owed debt. A deficiency judgement is another type of judgement lien that could be used to seize more of your property if what was already taken is not enough to satisfy an owed debt.
Tax Liens
If you haven’t paid your taxes in a while, the government can also choose to put a lien on your property until you’re current on your payments. There’s an added wrinkle with tax liens.
While most creditors will wait until the property is sold to take a portion of the proceeds to pay off your debt, the IRS has the right to place a levy on your property, meaning they can foreclose on and sell your property, if you continue to fail to make the payments.
Like many others, these liens may also impede your ability to sell a property, and they show up on your credit report. Although it’s probably not going to lead to foreclosure, you can also have a lien placed on your property if you fail to pay local property taxes.
Homeowners Association Liens
If you’re part of an HOA and don’t pay dues, odds are the association will send you letters and assess late payment fees. If that doesn’t work, it may have the power to place a lien on your property based on bylaws or even progress to foreclosure. The association may not want to go this route, though, as it would have to pay the property taxes.
Not only can liens affect the sale of a property, but they can also impact your ability to buy a house or refinance your existing home.
In order to get a new mortgage of any kind, you’ll have to pay off your lien. Depending on the type of loan, this will either have to be paid before the time you apply for a mortgage or at closing. Additional documentation will be required to prove payoff in some cases. The one exception to the above is that certain new FHA loans may be granted if the lien is on a repayment plan. We recommend talking to a lender to see if this applies to you.
In some instances, you may have to reestablish credit for 12 months and have a letter of explanation for all liens and judgments.
Foreclosure
If you have a lien that could eventually turn into a tax or homeowners association foreclosure, it’s important to take care of these items before they get to that point.
If your home does end up going into foreclosure, you usually won’t be able to get another FHA or VA loan for at least 3 years. If you’re looking at conventional loans through Fannie Mae or Freddie Mac, you would have to wait at least 7 years after the foreclosure. You wouldn’t have any mortgage options for the first year after the foreclosure. In any case, this is something you should really try to avoid.
You can’t take care of your liens if you don’t know about them. So, how do you find them? You could start by visiting the website of your county clerk or assessor. Usually, all you need to complete the search is the property owner's name and address. If your county doesn’t make records available online, you could always make a trip to the office and have the staff help you out in person.
You could also consider having a title company complete a title search for you to discover any outstanding liens on the property. You’d usually only do this if you’re ready to get a mortgage, however, since it’s something you’ll have to pay for.
Mortgage liens aren’t always negative for a homeowner. In some cases, a lien is simply a claim to a property or asset as a way for a lender to protect themselves and regain some of their losses if the borrower doesn’t repay their debts. A mortgage on a home is a good example of this. However, some mortgage liens can impact your credit score or even enable a lender to seize your property, so it’s important to talk to your lender if you have concerns and get them cleared as soon as possible.
For many homeowners, the concept of a “prepayment penalty” is odd. Why should you be penalized for paying a loan early? Well, that’s the thing about mortgage loans: Many of them surprisingly come with prepayment penalties, which limit your flexibility and can take a bite out of your wallet – just for trying to do the right thing for your finances. There’s a good reason why lenders might not want you to pay the mortgage off early, and we’ll get to that soon.
When you’re looking at home loans and deciding what type of mortgage is best for you, you should watch for prepayment penalties. They’re sometimes hidden in mortgage contracts, which can make them easy to overlook.. By learning about penalties now, you can approach your mortgage search and eventual contract armed with more knowledge and strategies for finding the best mortgage lender to fit your needs.
A mortgage prepayment penalty is a fee that some lenders charge when you pay all or part of your mortgage loan off early. The penalty fee is an incentive for borrowers to pay back their principal slowly over a longer term, allowing mortgage lenders to collect interest.
Note that it doesn’t normally kick in when you make a few extra payments here and there to pay your principal off sooner, or make principal-only payments. Most mortgage lenders allow borrowers to pay off up to 20% of the loan balance each year. Instead, a mortgage prepayment penalty typically applies in situations such as refinancing, selling or otherwise paying off large amounts of a loan.
Typically, you might think a person or organization that loans money wants it repaid as soon as possible. But here is why mortgage lenders don’t.
The first few years of a loan term are riskier for the lender than the borrower. That’s because most borrowers haven’t put down a significant amount of money when compared to the value of the house. That’s why lenders charge you “interest,” which is protection from a financial loss. If you pay the loan off right away, they lose out on all those interest fees which were included in the loan as an incentive to them to give you, the borrower, a loan.
That’s why many lenders include the mortgage penalty in the first place – they offer it as a way to market lower interest rates, knowing that they will make up the difference over the life of the loan, or in receiving a prepayment penalty should you pay off the mortgage before they have recouped their costs.
As with any financial contract, you should read the fine print. In this case, you’ll want to find out if there is a prepayment penalty clause in your mortgage contract and how to interpret the consequences of triggering the fee.
The good news is that the law requires lenders to disclose prepayment penalties, along with monthly fees and other loan details. As mentioned, you’ll want to read the “fine print” – in this case, the loan estimate or the paperwork that you’ll sign at closing, where you’ll find it mentioned prominently in the addendums and/or disclosure documents with all the other terms of your mortgage loan.
It’s perfectly fine to ask your lender if they charge a prepayment penalty; if they do, ask them to show where in the paperwork you would find the details. If you already have a loan, you can look at your monthly billing statement, as it should be outlined in there.
There are some instances where prepayment penalties are illegal. These include:
Federal Housing Administration (FHA) loans
Department of Veterans Affairs (VA) loans
United States Department of Agriculture (USDA) loans
Student loans or personal loans (It’s true that these loans aren’t mortgages, but it’s still good bonus info to know.)
First, it’s important to know that there are two different kinds of prepayment penalties:
A soft prepay penalty allows you to sell your home without invoking the penalty, so it would apply if you refinanced or just paid off a big chunk during the early years of the loan.
A hard prepay penalty would apply in the above circumstances, plus if you sold the home.
Penalties usually cover the first few years of a loan, because, as we mentioned, those are the riskiest for the lender. So if you refinance early on, you’ll trigger the prepayment penalty. The amount of the fee will differ based on the type of mortgage penalty fee you have.See the above models for an example of what that could be.
As you’re reading through your Loan Estimate and contract, be aware of the type of prepayment penalty that comes with your loan, just in case something happens and you decide to refinance and/or sell. If you’re unsure, ask your mortgage lender before signing the papers and ask them to walk you through the math as it applies to your type of prepayment penalty, your loan amount, your amortization and your interest rate.
No one wants to pay for something extra, especially when they think they are doing something that’s smart for their financial situation. Here are some things to consider before signing:
Run All The Numbers
Even if you don’t think you’re going to ever trigger the penalty, it’s a good idea to know the costs, just in case. In fact, it might make the difference between choosing a loan with a prepayment penalty and one without, if the costs are egregious.
Find out the type of prepayment penalty that comes with your mortgage and compare the cost of staying in your current loan past the penalty date with the cost of paying it off early and invoking the penalty. Each home buyer must consider which route feels best for their personal financial situation.
Should I Sign?
While anything can happen and you can never be 100% certain you won’t sell or refinance your house, these questions can help you determine the likelihood:
Are you planning on selling or refinancing your home relatively soon?
If you know you’re going to be in one place for a length of time (as far as anyone can be certain, of course), the penalty might not ever affect you. And if you already have a rock-bottom interest rate, you’re unlikely to be refinancing.
How important is it to you to have the ability to pay early?
If having long-term debt and the associated monthly payments is too anxiety-inducing, you might want to consider mortgage lenders who don’t charge a prepayment penalty, just in case you come into a windfall and want to pay it all off. You might also choose to refinance your mortgage in the future to consolidate debt. Just remember you also will miss out on the mortgage interest deduction if you do so, so again, it’s important to weigh all financial factors.
Prepare To Negotiate
If you decide to stick with your lender and the mortgage with the penalty, you can try to negotiate a lower fee. After all, even if you plan on staying in your new home for many years, it may be worth it to try negotiating to mitigate your risks in case something changes.
You can always try to negotiate having it removed from the contract; ask your lender if they will waive the fee. If they agree (which is unlikely but always worth a try), make sure you have it in writing. You can also ask your lender for a quote without the penalty, but remember that might increase your interest rate.
And finally, you can look for mortgage lenders that don’t use mortgage prepayment penalties, since that’s one less thing to worry about over the long run.
It is important to understand and think about prepayment penalties before you choose a mortgage option that's best for you. Always verify with your lender if you are unsure whether there's a penalty for prepayment on your mortgage loan.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
While Freddie Mac has no role in setting home prices, it does offer preferential mortgage programs, like Home PossibleSM and Home Possible AdvantageSM.
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.
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.
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.
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.
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.
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.
