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Understanding Mortgages

Is an FHA 203k loan for you?

Whether you're looking to make some modest updates in the bathroom, or a major overhaul of a kitchen in severe need of modernization, home renovation allows you to put your own personal stamp on your home. In a way, the assembly process is akin to Play-doh - you can shape it, mold it and recreate it in any number of ways, all guided by creativity, imagination and skilled handiwork.

If only the cost of a home makeover was in the same range. Depending on the material used and the magnitude of the restoration project, home renovations can cost tens of thousands of dollars, an amount that few families have readily available.

That's where an FHA 203k loan can make sense. You may have heard of this mortgage offering before and wondered what it was all about. Well, wonder no more. Here are more details about this loan product and how you can use it to design your new house into the dream home you've always wanted.

What is an FHA 203k loan?

When you're in the market to purchase a home but would like to also do some rehab work in the process, an FHA 203k mortgage may be just the product that can help. Backed by the Federal Housing Administration, this loan variety has been around for well over 30 years, but has received renewed interest recently - since the early 2000s - due to the popularity of television programs like "Fixer Upper," "Flip or Flop" and "Property Brothers." In these shows, the hosts may participate in the physical labor portion of rehabbing an existing home or document what the process is like with a different couple in each episode. Viewers get to witness just how beautiful a home can be when you have the resources to make the desired adjustments and seek to replicate what they've seen on TV.

What these home improvement shows don't typically detail, however, is how the projects are actually paid for. While there are a variety of mortgage products that can make sense for home renovation, an FHA 203k loan is among the most popular, particularly among new buyers by allowing them to buy and restore a house with a mortgage that's rolled into one.

What are the qualifications needed for an FHA 203k loan?

Applying for such a mortgage is a fairly straightforward process and requires the type of documents that you would need for most other home loans, These include two years' worth of tax documents, Social Security information, pay stubs from your employer that corroborate how much you earn, a copy of your credit report and a bank statement that details the funds you have available. This paperwork is needed, of course, to ensure you have the financial capability to borrow money that will pay for the home and accompanying renovation work.

Those who are new to the housing hunt often assume that they need to come up with a large down payment in order to buy their house. Given that FHA 203k loans are often more extensive than a standard VA mortgage or USDA-RD mortgage, you may think a 20% down payment is mandatory. It isn't. In fact, you can pay as little as 3.5% down and still be approved.

It's difficult to say with precision the kinds of qualifications you will need in order to get the go-ahead, largely because each applicant is different, as are the plans in place for renovating a property. Generally speaking, though, your credit score should be higher than 500 and you'll need to be current with your other major expenses. For instance, if you're delinquent on any federal tax debt, this could complicate your eligibility. You also need to be a U.S. citizen or an eligible non-citizen and not experienced foreclosure on any loans within the past three years.

Are there any other requirements?

Just as your financial standing entails a formal review process, the same can be said for the project you'd like to have completed. For example, FHA 203k mortgages break down into two categories: limited and standard. The latter of these - standard - requires that the renovation cost no less than $5,000 and that it be overseen by a consultant who's affiliated with the Department of Housing and Urban Development. A limited loan is typically used for larger projects and provides for financing up to $35,000.

There are also general rules that serve as guidelines for what FHA 203(k) loans can be used to pay for aside from the property itself. Here are a few bullet point examples of what the funds can go toward, as detailed by NerdWallet:

  • Install or replace flooring, be it hardwood or wall-to-wall carpeting.

  • Repair, restore or overhaul ceiling or the roof.

  • Introduce new plumbing, electrical or sewer systems.

  • Enhance aesthetic appeal to improve physical features and resale value.

  • Increase energy-efficiency with green-friendly installations and appliances.

  • Most exterior modifications involving landscaping.

However, some major renovation projects may be outside of an FHA 203k loan's purview. For example, if you want to install an in-ground pool, this mortgage product typically doesn't allow for such a project. Similarly, outdoor kitchens usually aren't eligible. It never hurts to ask, though, so speaking to your lender is the best way to know for sure.

What is the maximum amount you can borrow?

FHA 203k loans vary when it comes to how much the mortgage will actually pay for in order to purchase and restore a property. That will depend on where you live as well as your financial capabilities and where your would-be property is. For example, in some counties, the maximum loan amount is cut off at $314,827, but in others, it may be as high as $726,525. Again, you'll want to talk to your loan officer to find out for sure.

Things to keep in mind

There are many working parts to an FHA 203k loan. In addition to your mortgage provider and the party you're actually buying the property from, you're also dealing with the company that will be in charge of the renovation project itself. It can get confusing. Here are a few key elements to remember to keep everything straight.

Need to hire licensed contractor - Generally speaking, you can't be the one who is making the home improvements. A trained and officially licensed contractor needs to do the labor. It's always best to leave fixes to the experts, especially since the updates are designed to make the home more valuable.

Project must be finished within a prescribed period - Another advantage to hiring a professional is timeliness. Your lender will work out a schedule for when the project will begin and conclude, but most require it to be finished within six months. 

Must use property as a primary residence - FHA 203k mortgages are designed exclusively for those who are upgrading a house that they will live in, so flippers and other real estate investors may have to seek a different loan product. It also usually is for rehabbing a single-family residence as opposed to a condominium or townhouse. 

If this sounds like a mortgage that is in keeping with your homeownership goals, Residential Mortgage Services can help you get there. Contact us to find out more about this and other renovation mortgages.


Understanding Mortgages

Busting the biggest conventional loan myths

Busting the biggest myths about conventional loans

When it comes to buying a home in today's real estate environment, certain facts and falsities have proven the test of time. Chief among these truisms is the direction of asking prices. They seem to be going up with each passing month. In fact, they've continuously risen for the last 91 consecutive months, according to the National Association of Realtors.

In contrast, mortgage rates seems to be staying low. While it's true that rates can go up and down due to market fluctuations, they've remained in historically affordable territory for the last several years, as detailed weekly by Freddie Mac. This has led to a surge in applicant activity for various mortgage products, especially for conventional loans. These offer a tremendous amount of flexibility to buyers, but because they're not backed by a government entity - such as the Federal Housing Administration or Veterans Administration - the eligibility standards tend to be a bit more rigorous, particularly in terms of credit score requirements and a few other aspects.

20% down payments are not mandatory

20%
DOWN
PAYMENT

This raised standard may explain what's given legs to one of the oldest myths in the mortgage world: that a conventional loan requires a down payment of 20% or more.

It's time we put this fallacy to rest once and for all. And here's the truth: Down payments come in all sizes. The numbers speak for themselves. In 2019, the median down payment in the U.S. was 12% among all buyers, according to the most recent statistics available from the NAR. For those who were in the market to buy for the first time, the median was 6%.

Meanwhile, for families who had purchased a house previously but were looking to purchase again, their median down payment in 2019 was 16%.

Here's an example that can provide added context, based on the real estate market as it currently exists. Nationally, a median-priced house in September 2019 cost the average family approximately $272,100, according to NAR. With a down payment of 6% - which was the typical percentage among first-time buyers - that equals out to $16,320.

This may seem like a lot, but it's considerably lower than the 20% many people wrongly assumed they need to come up with to be approved for a conventional loan. Using the previous example, a 20% down payment would be around $54,420.

Here's the cool part about conventional loans, though: The down payment can be even lower than 6% - even 3%. This means you could put down as little as $8,163 and still be approved after your other qualifications are examined.

While polls show that most people actually prefer saving to buying, the cost of living makes putting money aside a bit of a struggle. Indeed, according to a recent survey analysis conducted by Gallup, Americans are spending higher dollar amounts on various common expenses today than they have since 2009. Over one-third of respondents said as much, up from 30% in a similar poll last year and double that of 2009, when 17% indicated their costs were higher than normal.

Down payment can come from gifts

The fact that you can reasonably afford a down payment should hopefully provide some sense of assurance that a conventional loan isn't as restrictive as you might have been led to believe. But here's another myth-buster: Down payments don't necessarily have to come from you. In other words, if you were given a large sum of money as a gift from a friend or family member, you can use that as a down payment if you'd like. In 2019, 1 in every 3 first-time homebuyers received help from friends, siblings or parents in order to pay for the down payment on their home loan. This included those for conventional mortgages.

None of this is to say that you shouldn't go with 20% or more as a down payment. If this amount is something you can reasonably afford, by all means go for it. In doing so, it allows you to pay off your mortgage in a potentially quicker time period and also spend less per month over the life of the loan. A 20% down payment may also enable you to avoid purchasing mortgage insurance, which is typically a prerequisite for down payment sizes below this threshold.

Debt-to-income (DTI) ratio standard is 43% or lower

Here's another encouraging aspect of conventional loans: As with most other loan products, the debt-to-income ratio cut-off is 43%. Some believe that since private lenders take on more risk because conventional loans aren't backed by the government, lenders will require you to have a smaller DTI ratio. Not necessarily. Every applicant is different so your qualifications will be considered in their entirety.

There are a lot of myths floating around out there about down payments and how hard it can be to be approved for a mortgage. Hopefully this has helped set the record straight and shown that you have what it takes to be approved. Find out for sure and contact RMS today. We'll guide you home.


Understanding Mortgages

Planning for the New Year

It is the time of the year to start planning for 2020. If buying your dream home is your New Year’s resolution, you can start taking the steps you need to reach your goal now. Saving, Consumer Credit Opt-Out, and Pre-Approval are things that you can do before you start shopping for a new home.

Start Saving:

If you are planning on purchasing a home in the new year, it is important to start saving. There are more upfront costs than just the down-payment on your home.

You should also be prepared to pay for closing costs, which occur when the title of property is transferred from the seller to the buyer.

There could be extra expenses for household items that you may need to purchase like tools, new locks and keys, and things to take care of your yard. Keep that in mind as you start saving for your new home.

Consumer Credit Opt-Out:

When a mortgage inquiry is logged on your credit report, your personal information is then automatically added to lists that are being sold by Experian, Trans Union and Equifax to certain kinds of mortgage lenders.

Predatory lending is a serious issue, especially in times of economic downturn, when unscrupulous mortgage lending companies become more aggressive in luring in home-buyers with bait-and-switch tactics. Additionally, the more companies that have your personal credit data, the greater the risk that you will become the victim of identity theft.

Consumer Credit Opt-Out is a preventative measure that you can take to protect yourself from predatory lending, hassling telemarketers and lower potential risk for identity theft.

Call 1-888-567-8688 or go to www.OptOutPrescreen.com to complete the process.

Pre-approval:

Once you have mapped out your saving strategy and done the credit opt-out, it is time to get pre-approved. A pre-approval saves everyone involved time and money. It is a review of your financial situation and of available loan programs in order to arrive at preliminary determination that you qualify for a loan under the specified criteria. A pre-approval will give you many benefits:

  • You will learn how much you can confidently offer when you find the right home.

  • You’ll be considered a more serious homebuyer by sellers’ agents.

  • You can prepare how much you’ll need for down payment and closing costs.

  • Discover any credit issues to clear up before you become formally involved in the loan process.

Click here to get started on your pre-approval today!

Meet with a real estate agent:

After the pre-approval, you are ready to meet with a real estate agent to help you find that dream home!

Remember, at RMS we're ready to guide you home every step of the way.


Understanding Mortgages

 

Understanding FHA Mortgages Can Help You Get One On Your First Try

The road to homeownership is paved with a plethora of possibilities. Thanks to low-interest financing and closing costs that sellers often agree to pay or split with the buyer, many deals are available if you know where to look and work in close consultation with your lender. In fact, in a recent survey conducted by the National Association of Realtors, nearly two-thirds of Americans believe that the current market is a favorable one to buy. Such optimism may be due to a variety of encouraging developments, such as higher incomes, favorable lending terms and growth in available inventory.

However, with so many loan options out there, it can be difficult to determine which mortgage avenue to pursue. A good place to start is with an FHA mortgage. You've probably heard of this mortgage type before, as it's one of the longest-running home loans out there, around since way back in the 1930s. But have you ever wondered how to actually get an FHA mortgage? The easiest way is by understanding what they're all about. That's what you're about to find out, which can help you better determine if this potential pathway to homeownership is worth traveling down.

But before we get into that, it's helpful to understand what the FHA is and how this government organization works in partnership with private lenders to help more people achieve what remains the American dream.

What is an FHA loan and what's required in order to qualify?

An arm of the Department of Housing and Urban Development, the Federal Housing Administration is a government organization whose primary role is one of oversight. Established in 1934 during the Roosevelt administration, the government agency created FHA loans the same year it debuted.

Instead of selling mortgages directly, the FHA insures FHA loans that are made available through private lenders upon approval. By "insure," this means that should an FHA loan borrower default, the agency provides assurances to the lender that whatever amount remains outstanding will be paid off in its entirety. This added certainty is part of what makes FHA loans popular with first-time homeowners because the terms tend to be looser, which also makes it a bit easier to qualify for an FHA loan versus a conventional loan, for example.

FHA loans require many of the same qualifications that conventional loans do - such as proof of employment, bank statements, two years' worth of tax returns and details of your credit history. However, the extent or degree of those requirements aren't as strict.

Take your credit score as a classic example. Generally speaking, the higher your credit score is, the greater your chances are of being approved, provided the other aspects of your finances all check out. But if your credit score isn't quite as high as you'd like it to be, you may still be approved for an FHA loan.

How does an FHA mortgage compare to a conventional mortgage?

There are a lot of similarities that FHA loans have to conventional loans. Understanding this fact can provide further instruction on how to get an FHA mortgage and determining which  mortgage product is the right one for you.

In addition to both being highly popular mortgage products, their interest rates come as either fixed or variable, down payments are highly affordable - as low as 3.5% for FHA loans - and the length of the loan periods can run between 10 and 30 years.

Overall, though, FHA loans and conventional loans actually have more differences than likenesses. The biggest distinction lies in the fact that conventional loans aren't guaranteed by the federal government. This means that if you were to default, your lender would be on the hook for what has yet to be paid off. As a result of this, it's generally more difficult to gain approval for a conventional loan than it is for an FHA loan.

How does debt-to-income factor into obtaining an FHA mortgage?

There's no magic number, action or sheet of paper when it comes to how to get an FHA mortgage as seamlessly as possible. Every person, situation and FHA loan differs. One of the factors used in approval assessment is your debt-to-income ratio, or DTI. This is a calculation that assesses how much of your earnings goes toward paying down debt on a percentage basis. The higher the figure, the more that you spend on payments. For purposes of mortgages, "debts" are considered credit card bills, credit lines, auto loans, unpaid tuition and other installment loans. Utility bills are not factored into this equation.

Again, there's really no magic number in terms of what DTI ratio you need to be approved for an FHA loan. However, it may not be as low as you think it needs to be. According to the previously referenced FHA report, in 2018, roughly 1 in 4 FHA loans -  went to applicants with a DTI ratio of 50% or more. This represents the largest percentage of FHA loans with DTI ratios above this threshold since the turn of the century. This doesn't necessarily mean anyone with a DTI at or higher than 50% will be approved, of course, but it does further the point that FHA loans are designed to be more lenient when it comes to approval, especially as they compare to conventional loans.

You can calculate your DTI on your own by adding up all your monthly payments (not including utilities, as previously mentioned) and dividing that total by how much you earn each month before taxes are taken out.

What does loan-to-value ratio mean and how does it apply to buying a house?

Another ratio FHA lenders use when evaluating mortgage borrowers' potential purchase of a home is the loan-to-value ratio or LTV.  Like DTI, the LTV ratio is another financial calculation that lenders use, only this one occurs closer to the actual purchase of a house you're interested in. Although it may sound complicated, it's actually pretty simple: It's the size of the loan you seek to obtain versus how much of the house you're interested in buying out of pocket. You divide the amount of the loan by the house's value to get your answer.

Here's an example that can provide added clarity. Say the house you're interested in has a purchase price of $250,000 and you want to put 5% toward it as a down payment, or what amounts to $12,500. The LTV ratio in this scenario would be 95% because you're coming up with 5% of the property's cost.

The higher the percentage, the more risk the lender assumes. For FHA loans, the maximum loan-to-value ratio allowed is 96.5%. This means that you can make a down payment of as little as 3.5% with a loan backed by the Federal Housing Administration.

Is there a maximum loan amount with an FHA mortgage?

If one overarching rule applies to real estate in general, it's the fact that there's a lot of flexibility as it pertains to obtaining a mortgage. A classic example of this is FHA loan limits, which have been known to fluctuate over the years.

For example, the FHA loan limit ceiling rose in high-cost areas last year to $726,525, the government agency announced last December. That's up from a previous ceiling of $679,650. For low-cost areas, the limit among single-family units also rose, to $314,827.  However, in places like Alaska and Hawaii - where the cost of living tends to be a bit more expensive - the maximum loan amount is $1.08 million.

The reason for the wide variation in FHA loan limits is due to the disparity in asking prices from one portion of the country to the next. For instance, in the Northeast, the median price for a single-family residence this past August was $303,500, according to the latest data available from the NAR. But in the Midwest, a median-priced residence went for $220,000. That's substantially below the Northeast, despite jumping over 6.5% from a year earlier.

In short, if you're wondering how much mortgage you can get for your money, your best course of action is to ask your FHA lender. They'll give you a more precise figure, which will largely depend on where you plan on buying. The same goes for closing costs you may accrue. What those are and their amounts will largely hinge on the state you live in or plan on moving to if you're purchasing a place the next state over or one on the opposite side of the country. Generally speaking, as the loan amount increases, so too do average closing costs.

Armed with these facts and figures, you should have all the information you need for how to get an FHA mortgage and whether your current circumstances make you an ideal candidate. If you're still unsure, your loan officer  will be more than happy to point you in the right direction toward the right loan that will lead to success.


Understanding Mortgages

Coffee cup on a desktop, with the words 'bank statements'

"You don't judge a book by it's cover" is a particularly relevant phrase when you're in the market to buy a home. Upon reviewing online listings to see what houses are up for sale, the pictures of the interior can make a property look like the quintessential location, with plenty of space, gorgeous cabinetry, hardwood floors and custom ceilings. Yet upon closer inspection - which usually involves actually visiting the house with a real estate agent - there's much more to the story that the pictures didn't fully capture. Flooring that wasn't depicted may be in severe disrepair, the roof may leak and the wooden cabinetry could be shoddily constructed.

Cardboard house with dollar bills next to itIn short, there's just about always more to the story when it comes to a house up for sale that catches your eye. This same reasoning can be applied to bank statements and why mortgage lenders request them when you apply for a mortgage. You may have the necessary assets, gainful employment or income that makes you eligible to buy a home on paper, but your lender needs to get the back story about various factors. What are those factors? That's what we're about to address, along with tips for what you can do to make this chapter of the mortgage application process seamless.

What do mortgage lenders look for on bank statements?

The overarching reason why your mortgage provider requests a copy of a recent banking statement is to ensure that you have sufficient funds for the house that you're looking to purchase. For most people, real estate is the largest purchase they make in their lives. According to the most recent statistics available from the National Association of Realtors, the typical house in the U.S. costs approximately $265,600. And in certain areas of the country, the median is even higher, such as the Northeast and West ($303,500 and $415,900, respectively).

Examining up-to-date financial records enables your lender to determine if you have the means to pay the asking price of a house and the interest from the loan, whether fixed or adjustable, as well as the closing costs associated with the transaction, whether it’s a purchase or refinance.

Although, it goes a bit deeper than that. In addition to finding out what funds are available, they also need to establish from where they derive. Of course, for most people, the money they earn comes from their employer, and are frequently deposited automatically on a weekly or biweekly basis. That's why in addition to the dollar amount that's deposited, bank statements also detail the date of when the deposits occurred. This helps your lender document consistency and a pattern - or lack thereof - as to how much money is coming in on an ongoing basis and how frequently. For instance, some people - such as those in sales - may receive a commission, so the amounts vary from one pay period to the next. Those who are salaried receive a base pay.

Your mortgage lender doesn't have a preference; they just want to ensure everything makes sense as to how you're paid. The bank statement you provide gives them the context they need to make an informed decision regarding loan approval.

Woman holding her hands up in confusionWhat if my lender can't determine where funds derive?

Although you don't hear about it too often in the mainstream media, Americans usually prefer saving to spending. In fact, according to a recent Gallup poll, most people in the U.S. are saving at least a portion of what they earn and 56% consider themselves to be in "excellent" shape in terms of finances.

But say you have $20,000 in the bank and your lender can't adequately determine where that money came from. If this is the case, you might as well not have it at all. In other words, it isn't enough to have a large sum of money stowed away. Your lender needs to authenticate where, when and over how long a time the funds accrued. In some cases, there may be a simple explanation, such as a gift, end-of-year bonus or lottery winnings. In any of these cases, your lender may need to probe further to obtain greater clarity. This is part of the reason why it's a good idea to work in consultation with your loan officer so you can quickly field questions that arise.

What does the term "seasoned" mean in real estate?

In addition to sourcing, your lender will also check to see if the funds you have are seasoned. As the description suggests, seasoned refers to how long assets or funds have been in your bank accounts. Lenders have different definitions as to the precise time frame that makes assets seasoned, but generally speaking, those that are have been in your account for at least a month. Should deposits exist that occurred in fewer than 30 days, they'll likely ask about what the circumstances were. This may be readily identifiable and not require you to elaborate, but it's important to be familiar with your account activity so you have an explanation for newly available funds. 

All that said, what can you do to make this process go smoothly? Here are a few suggestions:

Woman smiling at a cafe tableBe honest

Any relationship is built upon trust, so if you make assertions about what you earn or where money comes from that is untrue, it will likely disqualify you from obtaining a loan. Transparency and honesty are essential.

Know your numbers backwards and forwards

No one knows your financial situation better than you. Familiarize yourself with your bank statement by checking it regularly. Having answers to your lender's questions will help speed things up considerably.

Avoid overdrawing

Your bank statement is ultimately a "statement" as to how you manage your finances. If you make charges that cause a check to bounce, it may raise a red flag for your lender that suggests you're not a good loan candidate.

Bottom-line: Although your bank statement may be just one page of the mortgage application story, it can serve as a summary that will help your lender come to the right conclusion about loan approval - and the beginning of homeownership


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