Can I get a mortgage without a credit history?

By Sabrina Karl

When you apply to a lender for a home mortgage, one of the most important things they consider is your credit score. But what if you don’t have a credit history? Can you still get a mortgage?

 

Your credit report rates your worthiness to receive new credit by scoring the length of your history with credit cards and loans, along with your pattern of on-time vs. delinquent repayment. But for consumers who have shunned credit cards and who have never taken out a car or home loan, there is little or no information to inform their credit score.

 

If you’re in this situation and want to buy a home, your path will be a little trickier, or at least more cumbersome. But it’s not impossible to find a mortgage and a lender that will qualify you using nontraditional credit evaluation.

 

There are two main paths forward for homebuyers without a credit score: apply for an FHA mortgage or find a lender that does “manual underwriting”.

 

FHA mortgages explicitly allow for applicants who have a thin or non-existent credit file. In lieu of a credit history, FHA underwriting can evaluate your history of paying rent, utility bills, and insurance premiums. It also offers the ability to buy a home with a lower down payment of 5 percent or even less.

 

But FHA loans come with certain fees in exchange for their easier qualification terms and government backing. So if you have more than a 5 percent down payment available, you may instead want to look for a lender that offers manual underwriting.

 

These lenders aren’t common, but check smaller banks, online lenders, and local credit unions for this option. And be prepared to provide documentation of 12 months’ payment history for your rent and your utility, phone, and insurance bills.

Watch out for check overpayment scams

By Sabrina Karl

As sure as the sun rises, fraudsters will always try to separate people from their money. Bank accounts are particularly susceptible since they don’t carry the maximum liability protection that credit cards do. But knowing the most common scams can help you keep your account — and your money — safe.

 

Various agencies accept and track consumer fraud complaints, including the Federal Trade Commission, the Consumer Financial Protection Bureau, and the Better Business Bureau. In addition, many states also have their own consumer protection department.

 

From the millions of complaints received by these agencies, we know what the most commonly reported scams are, and one of these is the check overpayment scheme.

 

The scam targets those who are selling something via Craigslist, the classifieds, or another public avenue. The seller will get an offer, sometimes a generous one, from someone who appears very motivated to secure the deal and move the transaction quickly along.

 

After reaching an agreement, the buyer will later tell the seller some reason why their check will be for more than the purchase amount. They may say it was an error, or that the extra funds will cover fees they’ll incur from an agent or shipping representative. They then request that, after you deposit their check, you wire the surplus to a certain account or Western Union location.

 

The scam is that the check they’re providing will bounce, as it is counterfeit or forged. Your bank may not catch it immediately, but once they do, you will be out the full amount, and perhaps also your sale item if you shipped it.

 

Any check overpayment with a request to return the difference is a red flag, and you should abruptly end the transaction. In addition, it’s recommended you report the experience to all of the agencies above.

Does the first-time homebuyer credit still exist?

By Sabrina Karl

One of the consumer benefits that emerged from the Great Recession was the first-time homebuyer credit. Enacted by the Bush administration in 2008, the program provided a tax credit to Americans buying their first home.

Part of the Housing & Economic Recovery Act, the tax credit was available to first-time buyers who purchased their home in 2008, 2009 or 2010. Although the credit has since been retired, you may still be in luck if you qualified with a home purchase during those years and neglected to file the credit, or you became a first-time buyer later.

 

If you closed on your first home between April 9, 2008, and September 30, 2010, you could still qualify. A number of variables come into play, so the best way to determine your eligibility is to consult a tax accountant.

 

You’ll want to consider a few things before going down that path, however. For instance, on first homes purchased during the eligible 2008 dates, the credit is not in fact a true credit, as it requires repaying it with your annual tax return for 15 years after the home’s purchase. So someone claiming the maximum $7,500 credit would repay $500 per year over 15 tax returns.

 

In 2009, the Obama administration revised the program slightly, upping the credit to an $8,000 maximum and forgiving its repayment for those living in the home as their primary residence for at least 3 years after taking the credit. So if you bought during 2009 or 2010, but sold or moved within 3 years, you’re out of luck.

 

For first-timers who bought after the program’s 2010 sunset date, you may still have options. Many state and local governments offer their own programs for first-time buyers, so researching what’s available in your area could turn up other financial benefits.

When will my first mortgage payment be due?

By Sabrina Karl

If you’re contemplating how much to stretch on a down payment for a new home, or how much of the closing costs you can afford to pay on closing day vs. folding them into your loan, you might find yourself projecting what your cash flow will be after closing. Fortunately, mortgages have some built-in good news for you there.

 

The day of the month you close will impact how much is due at closing. But one thing won’t change, no matter when you close: You won’t have to make a mortgage payment the next month.

 

That’s because mortgages are paid in arrears, meaning for the month already passed, in contrast to how rent covers the coming month. In addition, the official due date of every mortgage is the first of the month, making it a payment for the previous calendar month.

 

Since people close on all different dates, but mortgage payments need to be the same every month once they start, your closing process evens things out by charging you the interest required to cover the remainder of the current month. Close on the 5th and about 25 days of interest will be charged at closing. Close instead on the 28th and you’ll only owe about two days of interest.

 

What happens as a result is that no one owes a mortgage payment on the first of the month following closing, since you’ll have squared up already for that month at closing. In turn, that means your very first mortgage payment won’t be due until the 1st of the second month after you close.

 

In other words, if you close on any date in April, you’ll get to skip May and your mortgage payments will begin June 1st, giving you a little cushion of time to rebuild your cash reserves.

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.