Is a VA mortgage right for you?

By Sabrina Karl

For homebuyers with a military connection, a VA loan offers perks that other Americans can’t access. But there’s a trade-off, so it’s critical you understand the details of these special mortgages.

VA loans are offered by private lenders, but the U.S. Department of Veterans Affairs provides insurance that reduces the lender’s risk should you default. As a result, VA loans do not require homebuyers to pay for private mortgage insurance (PMI).

Other advantages include a potentially lower rate than on a conventional mortgage, relaxed credit score thresholds, and no down payment requirement.

VA loans are available to veterans, active military, reservists, National Guard members, and qualified survivors of a deceased veteran. The loan must also be for a primary residence.

So with no down payment, competitive rates, easy credit score requirements, and no PMI, what’s the catch? The trade-off is the VA Funding Fee. At 1.25% to 3.3% of your total loan amount, this fee can be heftier than many homebuyers expect.

Though you can roll this one-time cost into your total loan package, it will raise your monthly payment, and may even raise your interest rate. So it’s worth considering how to lower the fee.

The No. 1 way to do this is by making a down payment. Putting 5% down will drop the fee by a substantial amount, and 10% down will drop it to its lowest level. Your category of military service and whether you’ve previously taken out a VA loan also determines the fee.

If 5% down isn’t an option, and you have a low credit score, a VA Loan could still be your best bet. Just be sure to carefully compare what you’d pay for PMI if you go with a conventional mortgage vs. what the VA Funding Fee will cost you.

How much homeowner’s insurance will my mortgage lender require?

By Sabrina Karl

If you’ve invested tens of thousands of dollars in buying your home or have signed your name to a five- or six-figure mortgage, it’s easy to see the good sense of insuring your home against damage. But determining how much homeowner’s insurance you need is far less straightforward.

That’s because homeowner insurance requirements vary by state as well as by mortgage lender. Only homeowners without a mortgage can opt out of coverage. But even then, conventional wisdom dictates you insure your home anyway, as catastrophic damage to your home would likely be catastrophic to your finances.

For everyone with a mortgage, taking out a homeowner’s insurance policy is mandatory, and activating it at closing is necessary to complete the mortgage process. That’s because homeowners with mortgages share ownership of the home with their lender. If damage to your home impacts its value, the bank’s asset is degraded, potentially dropping it below the value of the loan they’ve extended. So homeowner’s insurance protects your finances as much as it protects your lender’s bottom line.

So what do lenders require? Lender stipulations dictate two types of coverage: the dwelling itself and your liability. Dwelling coverage addresses the cost of repairing or rebuilding the home to restore its value, while liability coverage prevents anyone from going after your home in a lawsuit.

Not required for purposes of a mortgage are coverage for the land, your belongings inside the home, any external structures, or the cost of living elsewhere while your home is restored. Clearly these are important additional protections for most homeowners.

Depending where you live and who your lender is, the minimum dwelling and liability coverages will be communicated to you. But be prepared to discuss all the coverage options with potential insurers to establish a policy that fully protects your interests.

How much homeowner’s insurance will my mortgage lender require?

By Sabrina Karl

If you’ve invested tens of thousands of dollars in buying your home or have signed your name to a five- or six-figure mortgage, it’s easy to see the good sense of insuring your home against damage. But determining how much homeowner’s insurance you need is far less straightforward.

That’s because homeowner insurance requirements vary by state as well as by mortgage lender. Only homeowners without a mortgage can opt out of coverage. But even then, conventional wisdom dictates you insure your home anyway, as catastrophic damage to your home would likely be catastrophic to your finances. 

For everyone with a mortgage, taking out a homeowner’s insurance policy is mandatory, and activating it at closing is necessary to complete the mortgage process. That’s because homeowners with mortgages share ownership of the home with their lender. If damage to your home impacts its value, the bank’s asset is degraded, potentially dropping it below the value of the loan they’ve extended. So homeowner’s insurance protects your finances as much as it protects your lender’s bottom line.

So what do lenders require? Lender stipulations dictate two types of coverage: the dwelling itself and your liability. Dwelling coverage addresses the cost of repairing or rebuilding the home to restore its value, while liability coverage prevents anyone from going after your home in a lawsuit.

Not required for purposes of a mortgage are coverage for the land, your belongings inside the home, any external structures, or the cost of living elsewhere while your home is restored. Clearly these are important additional protections for most homeowners. 

Depending where you live and who your lender is, the minimum dwelling and liability coverages will be communicated to you. But be prepared to discuss all the coverage options with potential insurers to establish a policy that fully protects your interests.

6 fee-free ways to pay your mortgage off early

By Sabrina Karl

Almost everyone with a mortgage has received an offer to help pay off their loan ahead of schedule, for a fee. The solicitation always lays out how the charge is offset many times over by the amount of interest savings the homeowner will enjoy by retiring the mortgage early.

The math of these offers isn’t wrong nor dishonest. But many homeowners will be able to do even better by employing one of many free, do-it-yourself approaches instead.

Before trying this, make sure your lender will apply extra payments to principal, and not save it for next month’s payment. Also check that you won’t incur a prepayment penalty.

If you’re clear on both fronts, the obvious way to retire your mortgage early is to pay more than your regular monthly payment. There are lots of ways to do this.

First is to simply pay extra when your budget allows. Whether it’s an extra $20 or $200, all extra principal will shorten your mortgage and reduce how much interest you ultimately pay.

Another common approach is to make a large lump-sum payment when you receive an annual bonus check or commission, or enjoy an unexpected windfall.

For those preferring a steadier path, set up monthly auto payments for an easy rounded amount above your minimum payment. Or use an online mortgage calculator to figure out how much to pay each month to retire your mortgage by a certain year, and set your auto-payments accordingly.

Lastly, the popular method of making one extra payment per year can be simply accomplished by boosting your payment by 1/12th every month, or paying half your monthly amount every two weeks.

The beauty of these methods is that they cost you nothing while saving you hundreds or  thousands in interest, while being flexible to your personal situation.

6 Fee-Free Ways to Pay Your Mortgage off Early

By Sabrina Karl

Almost everyone with a mortgage has received an offer to help pay off their loan ahead of schedule, for a fee. The solicitation always lays out how the charge is offset many times over by the amount of interest savings the homeowner will enjoy by retiring the mortgage early.

The math of these offers isn’t wrong nor dishonest. But many homeowners will be able to do even better by employing one of many free, do-it-yourself approaches instead.  

Before trying this, make sure your lender will apply extra payments to principal, and not save it for next month’s payment. Also check that you won’t incur a prepayment penalty.

If you’re clear on both fronts, the obvious way to retire your mortgage early is to pay more than your regular monthly payment. There are lots of ways to do this.

First is to simply pay extra when your budget allows. Whether it’s an extra $20 or $200, all extra principal will shorten your mortgage and reduce how much interest you ultimately pay.

Another common approach is to make a large lump-sum payment when you receive an annual bonus check or commission, or enjoy an unexpected windfall.

For those preferring a steadier path, set up monthly auto payments for an easy rounded amount above your minimum payment. Or use an online mortgage calculator to figure out how much to pay each month to retire your mortgage by a certain year, and set your auto-payments accordingly.

Lastly, the popular method of making one extra payment per year can be simply accomplished by boosting your payment by 1/12th every month, or paying half your monthly amount every two weeks.

The beauty of these methods is that they cost you nothing while saving you hundreds or  thousands in interest, while being flexible to your personal situation.

How much house can you afford? Consider the 28/36 rule.

By Sabrina Karl

The best time to decide how much you can safely spend on a new home is before you begin looking, to avoid falling in love with a house that would stretch your finances too thin. Fortunately, there is a tried and true method for determining what’s “too much”.

It’s called the 28/36 rule and it’s been a standard lenders tool for decades. But it’s also a homebuyer’s tool, enabling you to calculate what’s reasonable based on your income and other debts.

Here’s how it works. The number 28 refers to 28% of your monthly gross income (so, pre-tax) and represents the maximum monthly housing payment you should consider taking on. So if you make $5,000 per month, the rule suggests you cap your housing costs at $1,400.

Note that housing includes not just your mortgage payment, but also your monthly share of property taxes and homeowner’s insurance, as well as private mortgage insurance and homeowner association fees, if those apply.

As for the 36, lenders are checking that your total debt obligations each month don’t exceed 36% of your monthly income. This includes not just your housing expenses, but all your debt, such as payments on auto loans, student loans or credit cards.

Using the same $5,000 monthly income example as above, this allows for a total debt obligation of $1,800. So if your existing debt is $400 or less, you’d still be within the boundaries to take on $1,400 in housing costs. But if your monthly debt is already $800, you’d have just $1,000 available for housing.

Since the 28/36 rule is a guideline rather than a federally mandated rule, lenders are sometimes willing to flex the ratios if you have excellent credit. But keep in mind that the rule can still be useful for keeping yourself in check.

How long after bankruptcy can I apply for a mortgage?

By Sabrina Karl

Bankruptcy is a serious financial event that can leave you feeling its impacts for years after filing. But that doesn’t mean you can’t ever apply for a mortgage again. You just have to understand what timing is realistic, and what smart moves to make while you wait.

The first thing to know is that there will be a waiting period, starting at your bankruptcy’s discharge or dismissal date, not the filing date. But the length of that period varies according to whether you filed for Chapter 7, 11, or 13 bankruptcy, and what type of mortgage you’re considering.

Depending on your situation, you’ll need to wait at least one year, and usually two, but perhaps 3-4 years. If you’ve filed more than one bankruptcy, or have also undergone a home foreclosure, the period may be extended up to seven years.

Fortunately for some, if your bankruptcy involved extenuating circumstances, like a one-time income hit from job loss, divorce, or medical bills, you may be able to shorten your wait.

But even after the period concludes, the mortgages you’ll qualify for may not have very favorable rates. That’s why it’s important to play it smart during your waiting period.

First, you’ll want to build up your credit history, establishing an on-time payment track record for at least 12 months and not using your full credit limit (aim for using less than 30 percent).

Second, save as much for a down payment as possible. The more funds you can put down on a new house after bankruptcy, the better the mortgage deal you’ll be able to secure.

Bankruptcy can certainly complicate or delay securing a new mortgage. But focusing on your credit score and down payment savings while you wait for the green light is your best path toward a new home.

Should I consider a balloon mortgage?

By Sabrina Karl

Virtually every mortgage shopper has the same goal: find the best loan for your money. With the most obvious measure being the interest rate, it’s no surprise that the low APRs and reduced monthly payments of a balloon mortgage can be tempting. But, buyer beware.

Like adjustable rate mortgages, or ARMs, balloon mortgages offer fixed payments for a set term, often five to seven years. But whereas an ARM continues after shifting into an adjustable-rate period, balloon mortgages terminate with the borrower on the hook to repay or refinance the remaining balance. The large size of this balance is the “balloon payment” that gives the loan its name.

Balloon mortgages can make sense for anyone certain they’ll sell their home within the 5- or 7-year loan period, since the sale proceeds can pay off the loan balance. But without that certainty, there are significant risks to balloon mortgages.

First, you may not be able to sell your home for the price or timing you need. You could have difficulty finding a buyer, or decreased home values may mean your sale price won’t cover the balloon payment.

Second, you may encounter trouble refinancing. Again, dropping home values could prevent a lender from offering you a sufficient loan. But credit changes also pose a risk. If your credit score drops substantially, it may be hard or even impossible to refinance.

In either case, if you can’t come up with the balloon payment, you could face foreclosure. Some lenders may try to help you move into another loan to avoid this, but there are no guarantees or requirements that they do so.

The initial savings of a balloon mortgage may be worth the risk in a small number of scenarios. But for the majority of homebuyers, the gamble far outweighs the limited upside.

3 Things To Do Before Applying for a Mortgage

By Sabrina Karl

If you’re considering buying a new home, first ask yourself where you stand financially. How strong or shaky you are on three factors lenders care about — your credit score, cash on hand, and debt — will determine how favorable (or not) a mortgage you’ll be offered, or if you’re approved at all. So you may want to bolster these before applying.

Start by looking up your credit score, as well as that of anyone else who will be on the mortgage. Unless you’re already above 760, boosting your score can land you better rate offers from lenders.

Raising your score can generally be done by making all of your payments on time, paying down debt, and not opening any new cards or loans shortly before applying for a mortgage.

Reducing debt is doubly important because it also lowers your debt-to-income ratio. Lenders use this calculation to compare your income to your total debt (including car loans, student loans, credit cards, and any other debt), and the lower your monthly debt obligation, the stronger your application.

Although paying off a loan or card entirely is great, any debt reduction will improve your ratio. Consolidating multiple debts into one lower monthly payment can also help.

The third critical lender consideration is how much cash you have. In addition to wanting to see you’ll have funds in reserve after making your down payment, they’ll also look at how much you had two months ago, not just today. So save as much money as you possibly can, and don’t rely on a large cash gift from a relative right before applying.

When aiming to maximize the size and rate of your new mortgage, fortifying your credit score and savings, while reducing your debt, are surefire ways to put your best application forward.

Is your ARM set to adjust? Here are your options.

By Sabrina Karl

If your home is financed with an adjustable rate mortgage, or ARM, you’ll eventually be faced with a decision. That’s because ARMs have a fixed rate only for an initial period of 3, 5, 7 or 10 years. After that, your lender will start adjusting your rate every year.

If your timing is lucky, you could see a downward rate adjustment. But often, you’ll find yourself looking at higher monthly payments for the next year.

Once in the adjustment period, your lender will recalibrate your rate every 12 months, and you have three main options on how to respond. You can do nothing and accept the new rate. You can refinance into a new ARM, starting over with a new fixed-rate period. Or you can eschew adjustments by refinancing into a fixed-rate mortgage.

Your best choice will depend on a number of factors. Certainly, if your adjustment will lower your payment, you’ll want to do nothing and enjoy your good fortune. But that scenario isn’t especially likely for those with ARMs currently moving into adjustment, as rates have inched upwards over the last 5-6 years.

If your rate will go up significantly, refinancing can be a smart option, with ARMs making good sense if you expect to move in the next handful of years, and fixed-rate mortgages being better if you plan to stay for many years.

Another consideration is the cost to refinance. Though moving out of one ARM into another with a lower rate can be attractive, the gains must be weighed against the refinancing expenses you’ll incur. Keeping your current ARM could turn out to be more economical.

Of course, if you don’t refinance, this decision will come upon you again in a year, when your next rate change is announced. And all of the same considerations will apply.