One of the main hurdles in a contract is financing. This is why their are two points at which sellers ask for verification from the buyers that things are moving forward. Most people are familiar with the first, a pre-approval letter. Buyers are often encouraged to get a pre-approval letter before looking for houses and most sellers require to see the letter before considering an offer.
Sellers and buyers are often not familiar with the second "checkpoint" that is built into the contract. This is called the Loan Commitment Letter.
The pre-approval letter is the bank communicating that they have reviewed the buyers information and believe they will be able to get a loan. The loan commitment letter will generally come around 30 days after ratification. This letter usually comes after the underwriters have reviewed the buyer and house in more depth.
It is best practice to make sure you have the loan commitment not contingent upon the appraisal. There will always be contingencies to the loan commitment but a letter contingent upon an appraisal means that it the report hasn't been turned in yet, the underwriter flagged items on the report, or the underwriter hasn't reviewed it.
Like many terms in the real estate industry, it can be hard to really get a handle on what a term like "PMI" means, but we’re breaking down the facts behind PMI once and for all. Read on to see what it actually means, how it works, and why it may have gotten a bad rap.
So, what exactly is PMI?
“PMI” stands for Private Mortgage Insurance.
These days, it’s common for lenders to require it in order to be approved for a mortgage if you plan on putting less than 20% down on the home.
Since buyers who make lower down payments have less automatic equity in the home, they’re considered a bigger risk. Therefore, banks require these buyers to take out a mortgage insurance policy for their protection. These policies shield the bank against loss in the event that the buyer stops making mortgage payments. And, if the buyer defaults on the loan, they have the ability to recoup their investment through the policy.
It’s important to note, however, that this policy will not protect you, as the buyer, if you decide to stop making mortgage payments.
If that happens, your credit score will suffer and you could end up losing your home to foreclosure.
How does PMI work?
How your PMI functions will depend largely on the loan program you choose, so you’ll want to ask your lender to go over the specifics with you in depth. That said, there are a few factors that impact every policy.
Again, the rate you pay will depend largely on the loan program that you choose. FHA loans are standardized while conventional ones are more variable. With a conventional loan, your rate is determined by the lender, based on your credit score and loan-to-value ratio, or how large of a down payment you’ve made. Typically, the higher both those things are, the lower your rate will be.
As a general rule, PMI tends to run anywhere from $30-$70 dollars per month for each $100,000 that was borrowed. If, for example, you purchased a $300,000 home, you could generally expect to pay between $90-$210 per month towards your policy.
Payment methods also vary by policy. However, there are a couple of common options. All FHA loans, as a rule, are paid in the same manner. They come with an initial upfront payment towards your premium and then a recurring annual payment each year that you hold the loan.
Conventional loans, on the other hand, work on a case-by-case basis. In some instances, your PMI is tacked on to your monthly mortgage payment, along with your mortgage interest and other fees. Like these fees, this portion of the payment does not go towards paying down your principal or building equity.
In other cases, you may have the option to make lump-sum payments or to finance your entire premium through a smaller loan.
Length of policy
This is another instance where FHA and conventional loans differ. Since FHA loans are government-backed, they require that you pay PMI for the entire length of the loan. Conventional loans, on the other hand, typically will allow you to drop your PMI once you build up more equity in the home. Usually, once you’ve paid off over 20% of the loan. However, you’ll want to check with your lender to verify the details of your specific policy.
How to avoid paying PMI
If you’re against paying PMI, you do have some options to avoid having to take out a policy.
These are the most common ones:
Typically, if you can qualify for a conventional loan and make a down payment of 20% or more, you won’t be required to take out a policy.
Thanks to the GI bill, the PMI requirement is waived for qualified veterans. You also have the ability to finance up to 100% of the home’s value.
Many physician loans also forgo this requirement.
Since portfolio and non-conforming loans each have their own unique set of terms, you may be able to find some options without a PMI requirement.
Piggybacking” refers to the practice of taking out an additional, smaller loan to cover your entire PMI premium upfront. However, keep in mind, that with this tactic, you’ll have an additional monthly payment to contend with, one that may come with the higher interest rates that are common among smaller loans.
Though having to pay PMI is not the most fun thing in the world, it’s not always the root of all evil either. It’s crucial to talk your lender about the loan as a whole before choosing the best option for you.
Often, the PMI requirement gives banks enough security to allow them to offer you better interest rates than they would if it wasn’t there, meaning you may actually end up paying less in fees over the life of your loan, all things considered. Be sure to do your research before agreeing to any specific loan terms.
This article originally appeared on OpenListings.
Fannie Mae and Freddie Mac support mortgages with as little as 3% down. This is a significant drop from their previously supported 5% minimum down payment.
This will help low income and first time home owners be able buy a home. However, borrowers will still need to be required to meet strict criteria to qualify for the this type of mortgage. To qualify, buyers will need to have a minimum credit score of 620, offer detailed information on employment and assets, and attend home ownership counseling.
Further good news to buyers potentially interested in this type of loan, private mortgage insurance (PMI) will drop after the mortgage balance is less than 80%. In contrast, FHA loans require a minimum of 3.5% down and the PMI remains active for the life of the loan.
Ask your mortgage broker to see if you can qualify for this program. If you want recommendations, contact me bellow.
Avoid Changing your Financial Profile
If you have your house under contract, this probably means that you have gotten a pre-approval/qualification letter. Your lender will now make a formal loan application. This application is based on your finances at that point. It is vital that you don't make significant changes to you finances until after you close. Problems can occur if you buy a car, open new lines of credit, change jobs, acquire other significant debt, etc. It is a good idea to talk to your lender before making significant purchases that would out you into debt. You also don't want to spend your down payment/ closing costs.
From there, you will have a number of items to complete before closing. See the check list below.
Contract to Closing Check List
Finding extra money each month can be difficult. It may seem that when you are able to put money into your savings account one month, you end up needing it the next month. So, how can you go about saving for a new house? Here are some tips that could help make the process easier.
Sure, this seems obvious but this can be the best tool to help you save! Budget for every dollar you earn in a month and set an achievable savings goal. Then, just track the amount you spend to make sure you don't go over budget. If you stick to your budget, you will be able to put money away. I find that even if unexpected things come up or you don't stick to the budget perfectly, you will still save a lot more if you are trying to adhere to a budget.
Saving For Your First House?
If you are saving for your first house, I would recommend opening a money market account with an institution such as Vanguard. What you want to look for is an account that gives the best returns with the least amount of fees. Money market accounts won't give you amazing returns but they will give you more than most savings accounts. Also, if you want to take money out of your account, it can often take 2 days to post into your personal account. This can be helpful for savings as it may not feel as accessible.
It my also be helpful to figure out how much you will need to save. Let me know if you have questions.
Plan on Selling a House to Buy the New One?
If you already own a house and you are planning on selling it to buy another house, first check with me to see what the house would be worth in today's market. The lack of inventory has made housing prices go up over the past year. You may find that you are in a better position than you thought.
If you still need to save money, try paying off the mortgage as a form of savings. By doing this, you are guaranteed to save(gain) your interest rate. This is likely better than any other savings account or money market account you can find. Furthermore, the more you pay off of a mortgage, the more your monthly payment goes towards principal instead of interest.
Most people who dream of buying a house usually will begin by scouring sites like Zillow for their dream home. If one comes up that they are interested in enough, people often call the listing agent, or another agent they know, to go see the house. Is this the best way to begin the home buying process?
This is certainly not a bad way to start the process. However, if you find your dream home on the internet and then fall in love with it in person, it can be somewhat devastating to learn that you may not be comfortable with or able to make the monthly payment. With this in mind, I would urge everyone to speak with a bank before getting too invested in the search process.
Furthermore, you will need to have a pre-approval letter from a bank to make an offer on a property. In Harrisonburg/Rockingham's current market, desirable houses that are priced well do not last long. Should your perfect house come on the market, you will want to have the ability move quickly. For perspective, I have recently sold two houses before they hit the market. So, having your pre-approval letter ready to go is vital.
If you or someone you know is looking to star the home buying process, contact me for recommendations on lenders and next steps: Phone or email.
Many investors will argue different sides on this topic. Some investors will say that more cash flow with a 30 year mortgage is more advantageous because it frees up your money to do what you please, including reinvest. While other investors will argue that you pay less interest with a 15 year mortgage. Also, you pay the loan off more quickly and at that point get more cash flow.
So is there a clear answer? I have my opinions but I think that looking at the numbers will be more helpful.
To help see the numbers, lets create a hypothetical rental that you are purchasing and how the numbers play out on a 15 year note and a 30 year note.
Purchase Price: $144,000
Down Payment: $28,800
Loan Amount: $115,200
I think a hybrid approach can also be a good approach if you have the discipline. That is, put the loan on a 30 year note but pay it down on a 15 year schedule. This way, should you need more flexibility one month, you are able access more of the cash flow.
So what are your thoughts? Comment below as to what you think is the best route to take.
If you are looking to buy a house you will most likely need to apply for a mortgage. To do so, you will need to go through the application process. This article will help you understand what you will need.
A Mortgage adviser will ask you to prove your last month of pay by providing two pay stubs.
You will also need to provide your 2 most recent W-2 forms.
Bank and Investment Documentation
Your mortgage adviser will ask you to provide bank and investment statements for the past 30-90 days.
Depending on your situation, you may be asked provide a few additional documents. Contact me if you would like local suggestions.
As you can see, rates have been hovering for the past few months. One of the clear advantages of today's market is being able to borrow at rates this low. This will save you a lot of money whether you are looking ot buy your primary residency or an investment.
If you want recommendations on excellent local mortgage advisers, call me at 540-246-9067.
If you are a first time homeowner, or not owned a home as your primary residence for the past 3 years, you could be able to benefit significantly from a VHDA Mortgage Credit Certificate (MCC).
It's actually significant. Most people will take the interest they pay on their mortgage and deduct that from their taxable income. So, they wont pay taxes on the money earned that went to the mortgage interest. These savings depend on the tax bracket you are in. The MCC credit will let you take 20% of the interest you pay off of your total tax bill. You are then able to deduct the rest of the interest in the normal way.
The video below spells out the savings pretty well. If you don't want to watch it, here are some screen shots that will explain the savings.
This is what the normal deduction would look like. They are simply reducing their gross income by the interest they paid on their mortgage. This leaves them owing $6,000 in tax.
Now lets look at how their taxes would look like with an MCC credit.
Here we can see that their income and mortgage interest are still the same. However, they are only able to reduce their taxable income by 80% of the mortgage interest they paid because the other 20% is being applied through the MCC credit. As you can see, the total taxes they owe are $1,700 less with the MCC.
If you are interested, be sure to watch the video below. Also check out VHDA's website for more information: