Stated-Income

How Much do Student Loans Affect Buying a House?

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Lenders put a lot of focus on your debt ratio. They want to know that you can afford the new mortgage beyond a reasonable doubt. Without proper proof, you run the risk of default, which can hurt a lender. Even if you’ve kept yourself out of credit card debt, you may still have another debt that can damage your chances of loan approval – student loans.

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This isn’t to say that anyone with student loans cannot get a mortgage, because they can. What it depends on is your debt ratio, not only now, but in the future too. This means that even if you have deferred student loans, it will still affect your loan approval.

Keep reading to see what you can expect if you have student loans.

Using Your Student Loan Payment

If you have student loan debt that you currently pay, chances are your credit report shows the same payment that you make each month. This is what lenders will use to determine your debt ratio. If you aren’t making payments right now, though, things can get a little trickier. Lenders can’t just overlook the impending debt, because you’ll have to pay it someday. Instead, they must include some type of payment when they determine your debt ratio.

Figuring Out Your Payment

If you aren’t making payments right now, you’ll need to know what payment lenders will use to qualify you for a loan. What you should know is that the more proof that you provide of your upcoming payment, the better your chances of approval.

If a lender can’t find sufficient proof of your upcoming payment, they must use 1% of the outstanding balance. That could amount to a very large payment that would probably throw your debt ratio way off where it needs to be. On a $20,000 loan, you’d have a payment of $2,000 used in the calculation. Unless you make a lot of money every month, this wouldn’t leave much room for a new mortgage payment.

If you are in a formal deferment plan, show the lender the paperwork for this plan. It should say somewhere in there how much you are expected to pay once the deferment period ends. If your paperwork doesn’t specify a payment, you can contact your servicing lender to get official proof of the upcoming payment. If you are in a loan forgiveness plan, make sure you have proper proof of when the balance will get forgiven, so the lender can take that into consideration as well.

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If you don’t have paperwork showing an exact payment, but you have proof that the term will be 20 years when you come out of deferment, the lender can do the calculations. They will determine your payment based on the interest rate you have and a 20-year term. This usually comes out much better than the 1% of the balance calculation.

How High can Your Debts Be?

Just how much debt you can have compared to your gross monthly income depends on the chosen loan program. For instance, conforming loans have the toughest requirements. You must have a total debt ratio less than or equal to 36% to qualify. You may find some lenders willing to go a little higher than that if you have compensating factors, though.

FHA and USDA loans allow a maximum DTI of 41% on the back-end and VA loans allow as much as a 43% back-end ratio. The back-end ratio is the total of all of your debts including the new mortgage. It includes things like your minimum credit card payments, installment loan payments, student loan payments, and personal loan payments.

The lower you can get your back-end DTI, the better your chances of loan approval become. But, as we said above, you may be able to get by with a higher DTI if you have compensating factors.

What are Compensating Factors?

Lenders look at the big picture when determining if you qualify for a loan. They don’t look just at your credit score or just at your debt ratio and either approve or deny your loan request. Instead, they look at everything. For example, if you have a high credit score, but also have a high DTI, they still may approve you because of your high credit score. If you had a low credit score and a high DTI, your chances of approval are much smaller.

Aside from credit scores and DTIs, lenders also look at your stability in other areas of your life. Take employment for example. If you have a steady employment history, lenders may use that as a compensating factor for a slightly elevated DTI. If you have steadily increasing income, that could also serve as a compensating factor as it proves that you continually improve your income, which lowers your DTI.

Of course, lenders look at your credit score and DTI the most, but they aren’t the only deciding factors. Make all aspects of your loan application look as attractive as possible in order to get the loan approval that you need. If you do have student loans, make sure that you get as much proof as possible of their impending payment so that you can get qualified for the mortgage you need.

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How Long do you Have to Pay Mortgage Insurance?

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If you put less than 20% down on a home, you’ll likely pay mortgage insurance. This insurance protects the lender should you stop making payments on your loan. The insurance will pay the lender back a portion of the amount they lost by repossessing your home.

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Just how long do you have to pay this insurance? It depends on the type of mortgage you have.

Conventional Loans and Mortgage Insurance

If you took out a conventional loan, such as a Fannie Mae loan, you pay what’s called Private Mortgage Insurance. Lenders require you to pay this insurance if you make a down payment of less than 20%. By law, this insurance must be canceled by the lender once you owe less than 78% of the home’s original value, though.

There’s even better news, though. You can request cancelation of the insurance as soon as you owe 80% or less of the home’s current value. This may happen sooner than your original mortgage documents show, but it’s up to you to prove that you do owe less than 80% of the home’s value.

If you follow the original amortization schedule, you will know the exact month that you will be able to request that the lender cancel your PMI. You must request the cancelation in writing. If you know your home appreciated, though, you may request cancelation sooner. Here’s how.

First, you must order a professional appraisal. While you can likely get an estimated value of your home on sites like Zillow and Redfin, the lender needs solid proof that the home is worth what you say. With a professional appraisal report in hand, you can determine if you owe less than 80% of the home’s new value by dividing the home’s value by the outstanding principal balance on your loan. If it’s less than 80%, you can request cancelation.

Keep in mind, though, that this is up to lender discretion. Some lenders allow you to cancel PMI early if you can prove your home appreciated, while others don’t allow this method. If that’s the case, you must wait until the anticipated date that you will hit an 80% LTV to cancel the insurance.

FHA and USDA Loans and Mortgage Insurance

If you take out a government-backed loan, such as an FHA loan or USDA loan, you’ll also pay mortgage insurance. In fact, you’ll pay mortgage insurance twice with these loans. The first time is at the onset of the loan. You can either pay the insurance upfront at the closing or wrap it into your loan amount.

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You’ll then also pay annual mortgage insurance, which is similar to the conventional loan’s PMI. Unlike conventional loans, though, with government-backed loans, you can’t request cancellation of the mortgage insurance. You pay the premiums for as long as you have the loan.

Luckily, your premiums will drop as you pay down your principal balance, but the insurance never goes away. The lender figures your annual mortgage insurance premium based on the average annual balance of your mortgage each year. They then charge you 1/12th of that amount with your mortgage payment each month.

The only way to get out of paying mortgage insurance on a government-backed loan is to refinance out of that loan program. Many borrowers take an FHA loan because of the low down payment requirements and flexible underwriting guidelines when they first buy a home. Once they are more established and able to qualify for a conventional loan, owing less than 80% of the home’s value, though, they refinance out of the FHA loan. This eliminates the mortgage insurance once and for all.

VA Loans and Mortgage Insurance

The one government-backed loan that doesn’t require mortgage insurance is the VA loan. This program, which is reserved for veterans, requires only a VA funding fee at the onset of the loan. The VA nor the VA approved lenders require mortgage insurance.

The VA does guaranty the loans for the VA approved lenders, though. If a veteran defaults on their loan, the VA pays the lender 25% of the amount lost. This is often much higher than any down payment borrowers make, so it’s a decent risk for lenders to take.

Mortgage insurance is there to help you get a loan with little money down on it. While it seems like yet another pesky fee, it does help you become a homeowner. Without that insurance and/or 20% down on the home, you could find yourself without the home you wanted.

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How Much of Your Monthly Income Should be Spent on a Mortgage?

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Knowing how much mortgage you can afford is one of the most important steps you can take before buying a home. Getting in over your head can cause buyer’s remorse and worse yet, financial troubles. Before you let that happen to you, learn how much of your monthly income you should spend on your mortgage.

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Understanding Gross and Net Income

First, you should know that lenders look at your gross income when qualifying you for a mortgage. This is not your take home pay. In other words, this isn’t the money you see in your bank account. It’s the money you make before taxes and other deductions. If you are being realistic with yourself, you should base how much mortgage you can afford on your net income. This may mean that you take a mortgage that is less than a lender approves you for and that’s okay.

Using the Conventional Guidelines

We prefer to use the conventional guidelines to determine how much mortgage you can afford. While conventional guidelines are a bit more conservative than any other loan program, they help you stay in control of your finances.

According to conventional loan guidelines, your housing payment shouldn’t exceed more than 28% of your gross monthly income. Here’s an example.

Let’s say you make $75,000 per year. Your gross monthly income is $6,250. If you take 28% of that amount, you’d have a mortgage payment equal to $1,750. If your take home pay is 85% of your gross pay, the mortgage payment would actually be 33% of your take home pay. This is why we prefer the conventional loan guidelines as it keeps your mortgage payment as a small portion of your income.

The Total Mortgage Payment

It’s important to understand what goes into the total mortgage payment. When a lender tells you how much mortgage you can afford, the payment will include:

  • Principal
  • Interest
  • Real estate taxes
  • Homeowner’s insurance
  • Mortgage insurance (if applicable)

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The $1,750 we discussed above doesn’t mean all principal and interest. You would have to take out 1/12th of the annual real estate taxes, homeowner’s insurance, and mortgage insurance, if necessary. What is left will cover the principal and interest.

Your Total Debt Ratio

Lenders also look at your total debt ratio. This is the total of all debts compared to your gross monthly income. You don’t have to include debts like utilities, school tuition, or insurance payments. It’s only the payments that are included on your credit report. The most common include:

  • Credit card minimum payments
  • Installment loans
  • Car loans
  • Student loans

A good rule of thumb is to keep your total debt ratio at 40% of your gross monthly income. If you use conventional or government-backed mortgage programs, your absolute maximum debt ratio allowed will be 43% according to the new mortgage guidelines.

If you don’t have a lot of ‘other debts,’ you may have a little more leeway in your mortgage payment. Lenders might be a little more flexible, allowing your housing ratio to hit 30% or so. This will vary by lender, though.

Only you know how much money you are comfortable spending on your mortgage. Don’t take the allowed amount from a lender at face value. Do your homework and figure out what payment will comfortably fit within your budget. Remember, your mortgage is something you may have for the next 30 years. Think about what you planned for your future. Will you have children? Will you go down to a one-income household? These factors will play a role in how much mortgage you should take on to keep it affordable.

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Understanding the Different Types of Mortgage Loans

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Applying for a mortgage loan can be overwhelming. As lenders throw different terms at you, it’s easy for you to get confused. Before you even shop for a mortgage, you should know the type of loans available so that you can make the right choice for you before you even shop for a home.

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Below we discuss the various options available for you to learn the options that may be available to you.

Conventional Loans, Government-Backed Loans, and Subprime Loans

First, let’s consider the type of mortgage you should consider. The most common options are conventional and government-backed loans. If you don’t meet the requirements of either type of these loans, you can opt for a subprime loan.

Conventional loans are loans sold to Fannie Mae and Freddie Mac. They are your ‘general loans,’ that most lenders offer. Typically, you have to have good credit, low debt ratios, and a decent down payment to qualify for this program. In other words, the requirements are the toughest for these programs.

You’ll need at least a 5% down payment for these loans. If you do opt to put down less than 20% on the home, expect to pay Private Mortgage Insurance until you owe less than 80% of the home’s value. If you do put less than 20% down on the home, lenders tend to be a little more cautious about your credit scores and debt ratios, as you pose a higher risk with a higher LTV.

Government-backed loans are those backed by a government agency. The options include FHA, VA, and USDA loans.

  • FHA loans – FHA loans are backed by the Federal Housing Authority. With a 580 credit score, 31% housing ratio, 43% total debt ratio, and 3.5% down on the home, you may be a good candidate for this program. You don’t have to be a first-time homebuyer to secure this loan program, as many people believe. Note that you will pay an upfront mortgage insurance premium plus mortgage insurance for the life of the loan, no matter your LTV.
  • VA loans – Veterans that served at least 90 days during wartime and 181 days during peacetime may be eligible for a VA loan as long as they had an honorable discharge. This loan program doesn’t require a down payment. It also has flexible underwriting guidelines, allowing credit scores as low as 620 and debt ratios as high as 43%. The largest qualifying factor is the need to meet the VA’s disposable income requirements based on your location and family size. You will not pay any mortgage insurance for this loan.
  • USDA loans – Low to moderate-income families that don’t qualify for any other mortgage program may qualify for the USDA loan. The catch is that you have to buy a home in a rural area. The USDA is liberal with their rural boundaries, though. The USDA requires a 640 credit score; 29% housing ratio, and 41% total debt ratio. You will pay an upfront mortgage insurance fee as well as annual insurance for the life of the USDA loan.

Subprime loans are those that don’t fit in the conventional or government-backed loan programs. These loans are provided and held by private lenders. They don’t sell them on the secondary market. This allows the lender to set their own requirements, which may provide you with more options for qualifying. For example, some lenders allow the use of bank statements rather than tax returns for self-employed borrowers. This gives self-employed borrowers a greater chance of qualifying for the loan. Subprime lenders may also allow lower credit scores, higher debt ratios, or make other exceptions that conventional and government-backed lenders cannot provide.

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Jumbo Loans

Finally, if you need a loan amount that exceeds the standard conforming limit, you will need a jumbo loan. This year, these loans exceed $453,100. These loans usually have stricter guidelines than even conventional loans require because of the higher risk of the high loan amount.

You should expect to need a great credit score, low debt ratio, and a large down payment. The requirements will vary by lender, though, so make sure you shop around.

Fixed Rate and Adjustable Rate Loans

Once you determine the type of loan you need/want, you’ll need to look at the type of interest rate you can choose. You’ll hear lenders talk about fixed interest rates and adjustable interest rates.

Fixed interest rates are fixed for the life of the loan. The rate you get at the closing is the rate you keep as long as you keep the loan. It doesn’t matter what happens in the market – your rate never changes. You can usually opt for a fixed rate between 15 and 30 years, but the exact term depends on your qualifying factors and what the lender offers.

Fixed interest rates offer predictability. They never change, so you can always budget for your payment. The downside, though, is if you take the mortgage during a period of higher interest rates, you are stuck with that rate for the life of the loan.

Adjustable rate loans are fixed for a short period and then they adjust, usually on an annual basis. You can usually lock in the ‘introductory rate’ for 3 to 10 years. After that point, the rate is based on the chosen market index of the lender plus the predetermined margin.

The benefit of the ARM loan is the lower interest rate you get for the first few years. This rate is usually lower than the fixed interest rates at the time, allowing you to save money on interest for a few years. The downside is that you cannot predict what interest rates will do in the future, so you don’t know what your payment will be in the future.

Choosing the right loan program is important as it will determine your ability to qualify for the loan as well as afford the payments. Make sure you exhaust all of your loan options and compare them side-by-side so that you can determine the best option for you.

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The Biggest Factors That Affect Your Mortgage Eligibility

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When you apply for a home loan, there are many things that affect your eligibility. Just having a great credit score or a low debt ratio isn’t enough. Lenders look at the big picture. It’s almost like a puzzle. They take each piece of the puzzle and put it together to figure out your level of risk. This means that negative factors can be offset by positive factors and vice versa.

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So what does a lender look at the most when deciding whether to approve you for a loan? Keep reading to find out.

Your Credit Score Affects Your Eligibility

It’s no secret that the first thing most lenders look at is your credit score. This is a snapshot of your financial responsibility. A high score generally means that you are financially responsible. In other words, you don’t overextend yourself and you pay your bills on time. A low score generally means that you are financially irresponsible. You may pay your bills late or your overextended yourself, making it hard to keep up with your bills.

Each loan program and lender has their own credit score requirements. In general, you can expect the following requirements:

  • Conventional loans – 680 minimum credit score
  • FHA loan – 580 minimum credit score
  • VA loan – 620 credit score
  • USDA loan – 640 credit score

Each lender will have their own minimum requirements, but these are the industry standards. As you shop around, you may find that different lenders have higher credit score requirements, especially for FHA loans.

Your Outstanding Debt is a Factor

How much debt you have outstanding know affects your debt ratio. Your debt ratio is one of the largest factors in figuring out your mortgage eligibility. The more money you already have committed to previous debts each month, the higher your risk of default on a mortgage becomes.

Each loan program has their own debt ratio guidelines, but as a general rule, the total debt ratio cannot exceed 43% for any loan. The total debt ratio includes all of your monthly debts, such as car loans, student loans, and credit card debts as well as the proposed mortgage payment.

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The various loan program debt ratio requirements include:

  • Conventional loan – 28% housing ratio and 36% total debt ratio
  • FHA loan – 31% housing ratio and 43% total debt ratio
  • VA loan – 43% total debt ratio (they don’t monitor the housing ratio)
  • USDA loan – 29% housing ratio and 41% total debt ratio

Again, each lender will have their own requirements. In order to lower your debt ratio, it’s a good idea to pay debts down or completely off if you can.

Your Down Payment Affects Your Chances

The more money you borrow in relation to the home’s value, the riskier you become. Lenders look at what they call the loan-to-value-ratio. In other words, how much money do you borrow compared to the home’s value? The more money you put down on the home, the less risk you pose to the lender.

You decrease your LTV by making a larger down payment. Conventional loans are known for their 20% down payment requirement. This is the point where you do not have to pay Private Mortgage Insurance because lenders feel this is enough ‘skin in the game’ to make you stay on top of your mortgage payments. If you put less than 20% down, the PMI covers the lender should you default.

Government-backed loans require little to no down payment, but it may still affect your approval. If you have a low credit score, high debt ratio, and no down payment, many lenders will likely consider you ‘high risk’, which could affect your mortgage eligibility.

Your Employment History Counts Too

Finally, lenders look at your employment history. The industry standard is two consecutive years at the same job. This shows the lender that you are consistent and reliable. What if you change jobs before you hold a job for two years? Are you instantly ineligible?

Today the 2-year history isn’t mandatory, but it’s still desired. The longer your employment history, the more the lender can rely on your ability to stay consistent with your job/income. This helps the lender feel good about the fact that you will be able to make your mortgage payments and won’t make rash decisions, leaving your job and putting your mortgage at risk of default.

Lenders put all of these pieces together to determine your loan eligibility. One ‘bad’ factor won’t automatically disqualify you, just as one ‘good’ factor won’t automatically make you eligible. Make your loan qualifying factors as good as possible in order to provide lenders with the picture that you can and will make your mortgage payments on time for the best chances at approval.

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How Do Interest Only Loans Work?

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A typical mortgage requires principal and interest payments. Each month, you pay a portion of your principal down, this leaves you with equity in the home. Interest only loans, however, do not require principal payments. You only pay interest on the amount of money you borrowed. The principal doesn’t become due until the repayment period.

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We help you understand the process below.

How Much Did You Borrow?

The most common interest only loan is the home equity line of credit. With this type of loan, you get approved for a maximum credit limit. Let’s say it’s $50,000. You then have $50,000 in an account for you to use. It works much like a credit card. You can write a check or use your credit card to use a portion of the money. Let’s say you take out $10,000 of it. You would then owe interest only on the $10,000. The remaining $40,000 remains in the account.

If you decide to withdraw more funds from the $50,000 limit, you’ll pay interest on those funds as well. During the draw period, you only owe the interest payments. You do have the option to make principal payments, but you are not required to do so. Keep in mind, though, the more you borrow, the more interest you pay.

What’s the Term of the Interest Only Loan?

The next step is determining the term of the interest only loan. In the case of the HELOC, you pay interest for the first 10 years usually. After that time, the loan goes into the repayment period. You can no longer draw funds from the account. The draw period becomes closed. You then make principal and interest payments over a period of usually 20 years. The amount of principal you’ll pay would be higher than a 30-year amortized payment, if you didn’t make interest only payments.

Not every interest only loan occurs over the same period. It varies by lender and program. Make sure you ask the right questions and read the fine print. Ask the lender specifically how long the interest only payment period lasts. Also, ask if the rate adjusts at all during that time. Many HELOCs have a variable interest rate that allows the rate to change on a monthly basis.

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Entering the Repayment Period

Once the interest only period ends, you enter the repayment period. This is when you must make principal and interest payments. If you neglect to pay the principal, the lender could mark your loan late. Once you hit 30-days late, it counts against you on your credit report. If you continually avoid making principal payments, the payment becomes 60 and 90-days past due. Once you pass 90-days late, most lenders will start foreclosure proceedings.

The good news is that if you make your principal payments, you’ll start gaining equity in your home. When you made strictly interest payments, you never gained any equity in your home. The principal balance remains the same. Once you start paying the principal down, though, you have more leverage for future financial options.

If you want to tap into your home’s equity again, you may be able to do so with a refinance. You may also use the equity to obtain a cash-out first mortgage that pays off your interest only loan. Then you would only have one mortgage payment you must make each month. The first mortgage is always principal and interest as the QM guidelines don’t allow for interest only payments any longer.

Selling a Home With an Interest Only Loan

The largest risk occurs if you need to sell the home. Since you never paid any principal of the loan down, you may owe more than the home is worth. If the home is worth less than what you owe, you may owe the bank money when you sell your home. Generally, it works the opposite. Usually the seller receives a check from the closing agent at the closing. The check is the difference between the sales price of the home and the amount owed to the lender to pay the loan in full.

An interest only loan may sound like a great choice at first, especially if you know your income may increase down the road. However, there are serious implications it can have on your financial future. Consider your options carefully, comparing a principal and interest payment to the interest only loan. You may find the difference is only a small amount that you can afford. It will work better for you in the long run if you have equity in your home and less worries about selling a home in a depreciating market.

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How to Overcome Being Rejected for a Home Loan

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Being rejected for a home loan is disheartening, but it doesn’t mean you won’t ever get approved. With a few simple steps, you can get yourself back on track. These changes won’t happen overnight, though. It will require some planning. Take your time and figure out what will benefit you the most, then put your plan in action. Before you know it, you’ll turn that direction into an approval!

Determine the Reason You Were Rejected

The most important thing to do is figure out why you were rejected. No two applicants will have the same reason. Any lender that turns you down must supply you with a letter giving you the reasons why. You’ll receive this letter within 30 days. You can also set up an appointment with your loan officer to discuss the reasons.

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Your loan officer will have a copy of your credit report as well as the underwriter’s reasons for turning you down. Since he is an expert in the industry, he can give you advice on what to do. Remember, this will only pertain to this particular lender, though. Each lender has their own requirements. If you plan to shop around, you should do your own homework first. This will help you determine what will help your situation the most.

Fixing Your Credit

A low credit score or damaged credit history are two of the most common reasons applicants get denied for a home loan. If this is the case for you, you’ll need to fix your credit. The most common issues include:

  • Too many late payments – You’ll need to bring your accounts current and continue paying them on time for your score to improve.
  • Too much credit outstanding – Lenders don’t like to see more than 30% of your available credit outstanding. Try paying your credit card balances down or off in order to lower this amount.
  • Too many inquiries – If you have had many recent inquiries, lenders may turn you down because they can’t determine what new credit you’ve taken out. Wait until more time passes for the inquiries to become “old news.”

No matter what you do, don’t close any old accounts, though. This will only lessen your average account age. This can hurt your credit score. Credit bureaus take the average age of all of your accounts. The older your accounts are, the better your score. The ideal situation is to pay your accounts down or off, but keep them open and unused.

Try a Different Loan Program

Chances are that there is another loan program that might suit you better. For example, if the lender says your debt ratio is too high for a conventional loan, you might qualify for an FHA loan. This program offers a little more leniency for debt ratios. The same is true for credit scores and credit issues.

If the lender determines you don’t have enough money for the required down payment, you can try an FHA or USDA loan. The loan you choose depends on the location of the property. USDA loans are for rural properties only. However, you might be surprised to learn which boundaries are rural in your area.

You can always try a subprime loan as well. These are loans that lenders hold on their own books. In other words, they create their own rules. They don’t have to listen to the investors in the secondary market, namely Fannie Mae or Freddie Mac. This means they can make exceptions for certain things that they don’t see as risky.

Shopping around can offer you the most options as well as some of the best deals.

Renegotiate the Contract

Sometimes the purchase price is just too high for you to qualify for a loan. It could be because the home doesn’t appraise for enough money or you don’t have enough for the down payment. Don’t assume the seller won’t negotiate without asking.

Talk to the lender about your options. Be honest about your inability to secure financing at the current purchase price. He may be willing to lower it. You never know how much he was expecting to receive for the home. What if that figure is lower than the amount you agreed to pay? This means there’s some wiggle room in the price. If it’s just a few thousand dollars that makes a difference, then the seller might agree.

Find the right financing option for you.

Wait it Out

If you were rejected for a home loan because your job is too new, you can wait it out. Sometimes lenders use a 2-year average of your income. If you have a new job with higher income, it won’t average out as high as it is with the lower income still included. Waiting until you have 12 months of income at your new job will help you have a higher average income.

This is especially important if you changed jobs and now work for yourself. Lenders don’t want to take the risk on a newly self-employed borrower. They want you to have some type of experience. If they can see a full 12 month cycle of your business, they can have a better idea of the income you make, helping them determine if you can afford the loan.

Talk to the Lender

Don’t be shy about talking to someone that turns you down for a loan. While it might be embarrassing, there’s a lot you can learn. You might not know certain things about your credit history or that your income isn’t as stable as you thought.

Lenders aren’t in the business of turning people down just because they want to. The do it in order to protect you. This is especially important in the aftermath of the housing crisis. Lenders have to be stricter about who they approve. They must follow the Ability to Repay Rules at a minimum. This means the lender does their due diligence in making sure you can afford the loan. If the lender also wants the protection against litigation, they’ll need to follow the Qualified Mortgage Rules. This makes it slightly harder to secure a loan unless you have a cut and dry situation.

Talking to the lender can help you understand what you need to change. You may find that it only takes a few simple changes and a little time to get the approval you need.

Of course, you always have the option to shop around. If you are turned down for a conventional loan, consider a government-backed or subprime loan. If you are turned down for a subprime loan or even a government-backed loan, shop around. Different lenders have different requirements. You won’t know which lenders are more lenient until you shop around. Applying with several lenders in a short amount of time doesn’t harm your credit. The credit bureaus count it as one inquiry because they understand the importance of shopping around.

Whether you do, don’t give up! Being rejected for a home loan isn’t the end of the world. There are other options out there, even if it means you have to wait a little while! Eventually, you’ll get the approval you deserve.

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Are Your Homeownership Dreams Far from Reality?

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Do you feel frustrated that your homeownership dreams seem to be stuck in a limbo? It feels like no matter how you look at it, owning a house will forever remain a dream.

Buying a house is a huge undertaking. However, it doesn’t mean that you can never be the homeowner you wish to be. To be a homeowner entails a lot of sacrifices. If you’re willing to do whatever it takes to achieve your homeownership goals, you’re one step ahead of those who are just stuck in dreaming.

Planning is crucial when you want to purchase a house. It is okay to be ambitious, but you have set goals that are realistic, achievable and incongruent to your present situation.

When we set unrealistic goals that are way too high for us, we may end up frustrated after trying so hard in achieving it and fail. But when we set achievable and realistic goals, we can work more easily towards realizing these dreams.

Here are some things you must consider when planning for a home purchase. These tips will guide you in setting sensible and achievable homeownership goals.

Ask yourself, “Where am I in my life right now?

Ask yourself this basic question to self-assess your current situation. Will your present life situation allow you to afford a mortgage? Will a foreseeable life event prevent you from making monthly payments should you take a loan today?

We look at homeownership as though only our finances affect it. However, all aspects of our life will have a huge impact on homeownership.

If you are planning to get married soon, for example, will this help or make it harder for you to afford a house? If you’re working as a project-based employee, are you sure that you will still have enough funds after your work contract ends?

Where you are at this moment in your life and what things can happen in the near future will play a huge role in your home buying journey. Make sure that you are really ready to take on this big responsibility.

Come Up with a Realistic Budget

We all have a vision of the perfect house we want to have. However, we may not be able to afford it.

Instead starting your homebuying journey by looking for a property, consider having yourself preapproved of a loan first. This way, you will know how much money a lender will be willing to lend you. This is when you will start searching for a house that fits the budget. If you do this, there is a greater chance that you will be able to afford the monthly payments until you completely repay the loan.

On the other hand, if you start by finding the perfect home and then try to squeeze out every dollar from your pocket just to afford it, you may just exhaust yourself and your finances just to keep up with the payments.

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Distinguish Needs from Wants

We all have preferences. However, the essentials should always be on top of the list.

Make a rundown of the house features that you can’t live without and the ones you can let go. Prioritize on looking for a property that has those essential features. the house’s additional features should just be an added bonus.

Perhaps, you’re a home-based professional. Would you really need your own home office or will a multipurpose space work just as fine? Or maybe you really like your home to have a sunroom, but is it worth the price tag?

Know clearly your needs and wants. This dictates the kind of house you should get. Moreover, It will set the property’s price.

Do You have Stable Income?

Income stability is very important for lenders. They need to see solid proof that your income and cash flow are stable enough to afford a mortgage.

Home loans typically require you to be in the same job and with the same employer within the last 30 days, the very least. Hopping from one job to another can be a red flag. But if it’s really necessary for you to find a new one, at least try your best to stay on the same field. Shifting into another field of work not related to the previous one will suggest that you’re most likely to start again from square one.

The FHA, on the other hand, is a good example of a loan that doesn’t require this. There’s no minimum employment period in the same position or employer required. However, the FHA will verify  the most recent two years of your employment. You will have to provide a written explanation for any significant gaps and unusualities in your employment record.

Talk to a lender today, click here.

 

Do you have a stable income but couldn’t qualify for a conventional loan? This can happen to certain people. Some loan applicants may not qualify for a conventional loan due to the lack of some necessary documents to support their income claims.

This is common for self-employed individuals or for those who are earning by commissions. They lack some income verification documents, but this doesn’t mean that they can’t afford a mortgage.The stated income loan can be an option for them. With a stated income loan, a borrower will have to declare their income and the lender will have to take their word for it. You won’t have to undergo the standard income verification process, but the lender will still check for your assets. Of course, you have to be responsible enough to repay the loan completely.

Connect with a state income lender, click here.

 

Final Words

After setting the right expectation and a more realistic goal, it is now time for you to work your way up the homeownership ladder. Start by asking different lenders for the loan rates, down payments and terms.

Shopping for lenders and understanding the available home financing options will help you in finding the perfect program. Once you’ve found the right mortgage loan and the right house to purchase, you are only a few steps away from realizing your homeownership dreams.

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What’s With Nonprime Mortgages? Should You Be Afraid of Them?

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They say nonprime mortgages are coming back. In the second quarter of 2017, securitized nonprime loans reached $1.08 billion per CNBC, citing Inside Mortgage Finance. Still, were they ever really gone in the first place? If so, what were they back then?

Instead of being afraid, try to understand the workings and benefits of nonprime mortgages better. One might just be your ticket to financing your first home.

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Getting to Know Nonprime Mortgages

Let’s get this out. There’s a difference between nonprime mortgages and subprime mortgages during the housing boom. Although back then, mortgages with little to no documentation were considered nonprime.

You can rest assured that exotic mortgages that caused the housing crash won’t come back anytime soon. The creation of the Dodd-Frank Act called for many layers of vetting for mortgages. Today’s loans have never been more pristine as a result. However, lenders ended up tightening the credit box even for those who are qualified.

If lenders have to triple-check a home loan, they’d do so because of regulations. The process takes time in itself, putting conventional loans further out of reach for some borrowers.

This tightening of traditional mortgage credit plus the rigorous vetting of today’s loans gave rise to nonprime loans.

Fear Not Nonprime Mortgages

Specialist lenders make up the non-prime sector. They have their own guidelines with respect to the nonprime mortgages they are making – a departure from the usual lending standards embodied by qualified mortgages.

See how today’s nonprime loans differ from past subprime loans:

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  • Credit: Nonprime lenders are well aware that credit scores can hinder a borrower’s loan prospects, even Fannie Mae has eased up its guidelines with respect to disputed tradelines on credit reports. Thus, nonprime lenders can be more accepting of people with bankruptcy or foreclosure records, checking on their income and cash flows.
  • Income: Verification of income is a must or strictly enforced as one known wholesale nonprime lender said. This is how they gauge the borrower’s ability to repay.
  • Down payment: Nonprime loans have higher down payments than traditional mortgages, say FHA loans with their 3.5% of the purchase price.
  • Loan size: You can find jumbo loans for investment properties that usually exceed the conforming loan limits.

Are Nonprime Mortgages Safe?

During the housing boom, anyone can easily take out a loan without the proper underwriting process. Since the borrower’s ability to repay the loan was not examined, it was also easy for loans to fall into delinquency. Foreclosures were initiated that they hit a record-high 81% in 2008 – a whopping 225% increase from 2006.

Angel Oak, a wholesale nonprime lender that expects its nonqualified and nonprime mortgage originations, e.g. stated income, to reach $1 billion this year, notes that down payments represent life savings for most borrowers. The higher the down payment, the bigger the investment.

Thus, borrowers who put bigger down payments as in nonprime loans are more compelled to meet their monthly dues so they won’t lose their investment. This can be an effective deterrent to delinquencies.

Why don’t you give nonprime mortgages a look? Speak with lenders today.

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Income Matters: How Much Is Required to Qualify for a Mortgage?

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Forget down payment for now. When you plan to get a mortgage, one of the very first things to consider is your ability to repay this debt. That’s why, verification of income on all mortgages, stated income loans included, is an essential step to get approved for the mortgage.

Lenders primarily want to know if you have a steady and reliable income to support your monthly payments. When can a lender say that you are making enough to be able to afford your loan payments? How do you determine this income required for a mortgage?

Find the answer to the question below. Find lenders here, too.

Understanding Income and Mortgage

Stated income loans of yesteryears can attest to this. A decade ago, it was easy to make loans based on the borrower’s word that he/she is earning this much. The stamp of approval did not rely on any verification.

But that’s highly unlikely now. Stricter rules and policies are in place to ensure loans are safe for consumers and lenders. Today’s stated income loans, for example, may forgo tax returns, but alternative documentation like assets and bank statements will be verified.

Income’s importance in mortgage qualification can’t be emphasized enough. And how much you need in order to qualify is a combination of several factors.

Calculating Income Required for Mortgage

To determine the level of income you need to qualify for a mortgage, consider the following:

  1. Monthly housing expenses. This is what you spend on housing, e.g. mortgage payment — principal, interest, property taxes and homeowners insurance (one-twelfth), homeowners association fees — or rent.
  2. Monthly liabilities. This refers to your total monthly expenses, housing and other debt obligations such as car loans, student loans, alimony/child support, and payments on loans that you are a co-borrower to. Utilities are not included.
  3. Mortgage amount. The amount you need to borrow for your home loan.
  4. Mortgage rate. The interest that you’ll receive on your mortgage. If you are getting a fixed-rate mortgage, this won’t change throughout the life of the loan. For an adjustable-rate mortgage, the start rate will adjust periodically. You can get pre-approved to get a definite rate from the lender or shop for mortgage quotes for now here.
  5. Mortgage term. The length of time to pay off the loan. This affects the calculation of your monthly principal and interest payments.

There are online calculators that will crunch the numbers based on those variables.

Knowing Your DTI

Where does your current monthly income fit in all of this?

Lenders use debt-to-income ratio to measure your ability to comfortably take on the loan given your total monthly liabilities including housing costs as noted above and your gross monthly earnings.

To get this DTI, you’ll divide your monthly liabilities by your monthly income before taxes. Your DTI calculation may be different from that of lenders because not all sources of income may be qualified for mortgage purposes.

Nonetheless, your DTI ratio will be your guide in determining your capacity to afford a mortgage for now. Lenders and loan programs have varying standards for DTI ratios. Most recently, Fannie Mae has expanded its maximum allowable DTI ratio to 50%.

Qualifying and verifying income are two different processes and lenders are the best people to ask about their rules. Speak with one today.

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