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 to boost your credit score before applying for a mortgage

By Sabrina Karl

Shopping around to find your best mortgage or refinance deal is always a smart move. But effort put into what you bring to the table – such as your credit score – is just as important.

That’s because mortgages are not “one size fits all”. Homebuyers with better credit are offered lower rates and fees. So if your credit history isn’t all it could be, and you can wait a bit before submitting a mortgage application, a number of savvy credit moves can boost your score to land you a lower-cost mortgage.

Although it’s the most obvious advice, maximizing your on-time payment history can’t be ignored, as it’s the single biggest factor affecting your score. If you have delinquent payments in your report, be sure you’re making all payments on time to extend your streak of no late payments as long as possible.

Almost as critical to your score is your credit utilization rate, which is how much of your combined credit limits you are using. For example, if you have $40,000 in credit available to you over several cards, and your current balances total $10,000, your credit utilization rate is 25 percent. The lower your rate, the better your credit score, so pay down balances where you can.

Then, don’t forget the two easy moves that are really non-moves. First, don’t apply for any new cards or loans in the months leading up to your mortgage application, as new credit requests ding your score. Second, don’t close your old accounts, since the further your credit history goes back, the better your score.

Although more goes into a credit rating than these four factors, these are low-hanging fruit that can make the greatest impact in the shortest time when you’re readying yourself to score the best mortgage you can.

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.