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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.


Helpful Tips

4 easy ways to make your home look and feel more wintry

It only comes around once a year but it truly is the most wonderful time when it does: the holiday season. Whether it's the delicious food, the camaraderie of friends and family or giving and receiving gifts, the activities that define the season are unlike any other. And a great way to get into the spirit is by decking the halls with some of the signature symbols of glad tidings, such as tinsel, wreaths, twinkle lights and miniature villages.

Once the holidays are over and the aftermath of presents and parties are cleaned away, you may take the holiday-themed ornaments and lights down, but you don't have to let go of the wintry revelry. When the weather is frigid and frightful, here are a few simple ways you can make your home look and feel warm and delightful.

1. Craft an outdoorsy vase

The key to adding winter festivity is keeping the cold air out but letting in the look that this time of year is known for, which can be found just outside your window. As detailed by lifestyle blogger Julie Blanner, a birch vase may be just the thing to use as a centerpiece for a post-holiday dinner or merely to place on end table for decoration. To put the piece together, you'll need a small log, tri-flute drill bit, saw and sandpaper. You can use it to go over a thin glass vase or as a vase all on its own, filled with holly branches or winter-themed flowers such as snowdrops, pansies or winter honeysuckle.

2. Design a hot cocoa "bar"

A pot of freshly brewed coffee is often the first thing people fire up on a frosty morning, but an ideal replacement is hot chocolate or cocoa. To make each cup extra special and welcoming for yourself or your family, you may want to design a space that can enhance the sweet and delicious ambience. Pen + Paper Flowers has a mockup version you can use as a template, which features a painted wooden sign, wooden bases for placing creamers and containers and a rack with accompanying mugs. You can make it as extravagant or as simple as you'd like.

3. Set up a scenic winter tablescape

One of the more popular ways to celebrate the holiday season is with those villages that arts and crafts stores sell, many of which have certain themes like Charles Dickens or Charlie Brown. But you don't need to go to extravagant lengths to make a table look wintry. All you need is some evergreen garland or tree scraps (most tree lots are more than happy to let you rummage through the tree trimmings and scraps), battery-powered twinkle lights and evergreen tree ornaments. Given that you may see these snow-covered evergreens just outside your window, they make for eye-catching kitchen and end table settings that can be used in the months after November and December.

4. Make a DIY snowflake

Perhaps nothing is more synonymous with winter than the white stuff that can come in flurries or sheets - snowflakes. It's fitting that no two snowflakes are the same, because the same can be said for how you create them or from what you make them. The Crafted Sparrow offers some suggestions for where to begin. After you collect the necessary supplies, putting it together should take between 45 and 60 minutes. All you'll need is some wooden blocks, white acrylic (or chalky finish paint) a foam brush pre-crafted wooden snowflakes (typically available at arts and crafts stores or through Amazon) and hot glue gun with accompanying glue sticks.

With a little elbow grease and inventiveness, you can create a winter wonderland that can help make the season more enjoyable - without the cold. 


 


Helpful Tips

Thanksgiving leftovers

Turning Your Thanksgiving Leftovers into Delicious Meals

Thanksgiving is one of the most anticipated meals of the year, and you can easily make it the dinner that keeps on giving. Impress your family with these creative and easy ways to repurpose your Thanksgiving leftovers into delicious comfort food for the rest of the long weekend!

Savory waffles:

Pull out that waffle iron that has been taking up space in the back of your cabinet and make a stuffing-based batter. Top your waffles with your favorite Thanksgiving leftovers like turkey, mashed potatoes and gravy and you will have yourself a quick dinner that is the definition of comfort food. See the full recipe here.

Turkey Pot Pie:

Shred turkey and throw in leftover gravy and veggies into a casserole pan and top with a pie crust. Toss it into the oven and get ready for a cozy meal that requires minimal prep time.

Thanksgiving in a Sandwich:

Pull out the wonder bread, cheese slices, leftover turkey, stuffing, gravy, and cranberry sauce. Have your family line up and make their sandwiches to their taste. It’s a meal that caters to picky eaters without lifting a finger.

Turkey Salad:

Pull out the turkey, leftover celery, grapes and apples. Chop everything up and toss it all in a little mayo. Serve on bread as a sandwich or scoop it over a bed of greens and enjoy!

Shepard’s Pie:

Did you end up making too many mashed potatoes? Turn them into a delightful shepherd’s pie with stuffing, turkey, cranberry sauce, gravy and veggies underneath. See Martha Stewart’s full recipe here.

Take a break after making your Thanksgiving meal with easy and quick recipes to use up those leftovers. That way you can spend the rest of your week relaxing with your family!


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.


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