What is an FHA mortgage?

By Sabrina Karl

Mortgage shopping will pit you against numerous terms and acronyms that may leave you scratching your head. One you’re likely to encounter is an FHA loan, and though some 8 million U.S. homeowners have this type of mortgage, you may be unfamiliar with what it is.

A FHA loan is a mortgage backed by the U.S. Federal Housing Administration. In the same way that private mortgage insurance, or PMI, guarantees conventional mortgages for those putting down less than 20 percent, the FHA provides mortgage insurance on FHA loans.

This backing makes lenders willing to extend mortgages to homebuyers they would have otherwise turned down. Namely, FHA insurance makes it possible to secure a mortgage with as little as 3.5 percent down, and/or a credit score as low as 580 (or possibly even lower), bringing homeownership into reach for many more low-income buyers than conventional loans would serve.

FHA loans can also allow gift money to be used for the down payment or closing costs, and can be less restrictive on required debt-to-income ratios for the buyer.

Of course, there are trade-offs. The biggest is that FHA borrowers must pay two different fees in exchange for FHA insurance. First, a one-time mortgage insurance premium of 1.75 percent of the loan amount is applied at the time of closing. Second, a modest ongoing premium, ranging from about half to one percent of the loan amount annually, will be due each month for the life of the loan.

Since FHA interest rates may or may not be better than conventional rates, borrowers with ample down payment funds and a decent credit score might be better served with a standard mortgage. But if your down payment or credit rating are stumbling blocks, an FHA loan may be your ticket to getting into a home.

What deductible should you choose for your homeowners insurance?

By Sabrina Karl

No smart homeowner would risk leaving their home uninsured, and if you have a mortgage, your lender will absolutely require homeowners coverage. Still, plenty of savvy homeowners find themselves scratching their heads when it comes to deciding an important element of their policy: the deductible.

In both health and homeowners insurance, deductibles function the same way: Anytime you need or want your insurance company to foot the bill, the deductible is a specified amount you are first required to cover. By paying your share, the insurance company will then cover the balance.

Most homeowners policies stipulate either a dollar amount or a percentage deductible. In the dollar amount scenario, deductibles of $500, $1,000 or $1,500 are typically offered, though most insurance companies will accommodate higher dollar amounts, whether it’s $2,500 or $10,000, or even $100,000 for owners of multi-million dollar homes.

The other option is a percentage deductible based on your home’s value. For example, if your home is worth $200,000 and you choose a 0.5 percent deductible, you’d be on the hook for $1,000 when filing a claim.

So how to choose? Of course everyone would like to pay less to repair damage caused by a kitchen fire or a fallen tree. But the lower the deductible you choose, the higher your annual premium. That’s because insurance companies reward those choosing higher deductibles by charging them lower prices, since it reduces the small claims they’ll have to process.

So what’s important when policy shopping is to assess the premiums associated with different deductibles, and calculate how much you’d save over a number of years and how much you could cover out-of-pocket. It’s a balancing act, with unknowns you can’t predict, but the higher the deductible you can handle, the more you stand to gain over time with lower premiums.

What’s included in your mortgage payment? Think PITI.

By Sabrina Karl

If you’ve ever played with a mortgage calculator to test monthly payments for different terms and rates, you know these calculators will spit out a payment amount that’s precise to the penny. The only problem? For most people, your monthly payment will be higher. And likely a lot higher.

The reason is that mortgage calculators compute only one thing: the amount you’ll owe the lender for your loan. Spread your loan amount over the term of your mortgage, then add interest, and this gives you your monthly payment to the lender.

This portion of the payment is called principal (P) and interest (I). But owning a home includes two additional expenses that aren’t optional, and they come with the letters T and I.

T stands for taxes, or the property tax that will be assessed on your home. While these taxes are due just once a year, most homeowners pay 1/12th of the annual amount into escrow once a month, tacked onto their monthly principal and interest payment.

Then comes I, for insurance. Everyone with a mortgage is required to carry homeowner’s insurance. Like property taxes, the insurance premium is usually due once a year, but is often escrowed in 1/12th payments that are also added to your mortgage payment.

For homeowners putting less than 20 percent down on their home, private mortgage insurance (PMI) will also be required, until your equity in the home builds to at least 80 percent. For these homeowners, PMI is a fifth component in your monthly payment.

Put these all together and a homeowner’s “all in” payment every month is characterized as PITI. So go ahead and start with that initial mortgage calculator number, but then determine what you’ll need to tack on for taxes and insurance to calculate your actual monthly obligation.

What is a mortgage broker, and should I use one?

By Sabrina Karl

If you’ve begun shopping for a new mortgage, you may be feeling daunted. With so many competing lenders and mortgage options, finding the best loan can easily overwhelm even the best of us.

Fortunately, you don’t have to go it alone. Whether you want help making the best mortgage choice, or don’t have time to manage the cumbersome back-and-forth process, or simply want to secure the very lowest rate possible, a mortgage broker may be the perfect professional to enlist.

Mortgage brokers serve as an intermediary between you and an ultimate lender. But before reaching a final selection, the broker does all the legwork of collecting your documents, checking your credit, income and employment, and applying for several loans on your behalf.

In addition to serving as a mortgage concierge, brokers also offer access to a wide variety of lenders and products. Because they typically have relationships with a stable of lenders, and will also seek out any additional mortgage products that might well suit your needs, brokers can often lead you to a lower rate or better terms than you would have unearthed yourself.

And that’s just the shopping and selection process. After choosing a lender, the mortgage broker also helps you complete the loan’s underwriting and closing.

Of course, you’re right to assume this service comes at a cost. Mortgage brokers are licensed and regulated professionals, and generally are paid by charging a loan origination fee. The typical fee is 1 percent of your loan amount, so closing on a $250,000 mortgage would carry a $2,500 mortgage broker’s fee.

For that price, mortgage brokers can transform the entire home loan process from lengthy, time-consuming, and sometimes confusing to a much easier and efficient process that may additionally save you money over the life of your mortgage.

Top 3 reasons mortgage applications are denied

By Sabrina Karl

It’s estimated that about 1 of every 8 mortgage applications is denied. And the vast majority are rejected for one of three reasons. 

According to a Federal Reserve study of 2015 mortgage application data, the No. 1 factor behind mortgage denials is failing the lender’s debt-to-income (DTI) ratio test. This calculation indicates what proportion of your monthly income is allocated to recurring debts, including your new mortgage payment.

If the sum of your monthly payments to credit cards, car loans, student loans and your new mortgage totals $3,000, and your monthly gross income is $6,000, your DTI would be 50 percent. But lenders want to see that ratio at 45 percent or lower, so exceeding it will likely get your application stamped “Denied”.

 Almost as common in triggering rejections is an inadequate credit score or history. If your score is too low, that’s an obvious red flag. But a decent score isn’t enough on its own. Lenders also want to see a sufficient length and breadth of credit history, meaning someone with a single credit card on their report, opened in the last year or two, won’t give the lender ample evidence to predict your payment behavior.

 The third most common reason for denial is a problem with the property’s price. If the appraisal finds the price is significantly higher than the home’s fair market value, the lender won’t be willing to fund the originally requested mortgage amount. This often happens in bidding war situations, where the price is driven high enough that the winner actually becomes a loser in finalizing the mortgage.

All of these problems can be solved by the applicant either over time or by choosing a different property. But being aware of these factors in advance may save you from being rejected in the first place.

Should I pay my 2018 property taxes by December 31?

By Sabrina Karl

If you’re like most American homeowners, an envelope recently arrived in your mailbox detailing what to cough up for this year’s property taxes. But the bill comes with a choice: Should you pay this year or in January?

As with many questions, it depends. How you expect your taxable income next year to compare to this year’s is one factor, as is the amount of your property tax.

First of all, the date you pay any property tax, not the date it’s assessed or applied, determines when you can deduct it on your tax return. Pay by Dec. 31 and you can make a deduction on your 2018 tax return.

But if you know you’ll owe more income tax next year, due to increased income or selling assets, then paying in January allows you to take the deduction on your 2019 return, offsetting an otherwise increased tax hit. The converse is also true: if you expect your income to be higher this year than in 2019, paying by Dec. 31 will likely garner a bigger tax break

It’s even possible to hold one year’s tax payment for January and then pay the next year’s in December, creating a tax year with a double deduction. But although this is still allowed, changes to this year’s tax law make that work for fewer people.

That’s because the IRS now caps the annual deduction for property taxes plus state income taxes at $10,000. If your area has high property taxes or state income taxes, the new limit won’t accommodate deducting two years’ tax bills at once.

Most homeowners with steady tax scenarios are best served by simply sticking to the same payment schedule every year. But a bit of forecasting can help determine if December or January is your better bet.

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.

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.