,

How to Use Real Estate to Hedge Against Inflation

If you’ve watched the news lately, you’ve likely heard about the risks of inflation. It’s coming at us at a much higher speed than normal as the economy and business world work their way out of the pandemic state they were in for over a year.

In many markets, inflation is as high as 5%, which is an unprecedented rate compared to the past few decades. Fortunately, you can use real estate to hedge against inflation.

Here’s how.

Understanding Inflation

Inflation is a decrease in your purchasing power. The dollar becomes worth less than it was yesterday, which means it takes more money to buy the same products, assets, or investments.

It happens when there’s more money available (stimulus money) and a higher demand for products and services. When people are willing to pay more for things, it drives up prices and drives down the value of the dollar.

As prices increase, the value of the dollar decreases, which can make even the best investments worth much less than before.

Inflation Predictions for 2022

Experts so far believe we’ve seen the worst of inflation as of the last quarter of 2021. As you might have seen, gas prices decreased slightly in December which was the first sign of good things to come.

Experts believe we won’t see an increase in inflationary rates that hit almost 7% in 2021 in 2022. It will take a while for the economy to settle down again, but as supply increases and demand settles, inflationary rates will slow down too.

However, this doesn’t mean you’ll see prices fall. The higher prices we’ve had to adjust to quickly are here to stay. Some higher prices won’t affect you as much, like a gallon of milk or a carton of strawberries. Even if they cost 20% more than before, it won’t cause you to go bankrupt.

Where it can affect people the most, though, is in larger assets, like real estate. If a home costs 20% more than last year and it originally cost $200,000, you’re looking at a price of $240,000 this year – that’s a difference of $40,000.

That being said, real estate can be a great way to hedge against inflation, so it’s important to position yourself so you can buy real estate and possibly avoid other inflationary-prone assets.

Why you Should Worry about Inflation

Inflation is always an issue, even when we aren’t in periods of high inflation like right now. Each year, the Fed predicts an inflationary rate of at least 2%. Again, that doesn’t sound like much, especially when you’re talking about low-ticket items.

But over time, that inflationary rate cuts your purchase power by the double digits. A 3% inflationary rate, for example, can almost cut your purchasing power in half in the next 40 – 50 years.

So, it’s not something you have to lose sleep over tonight because it will affect your ability to buy groceries tomorrow, but it is a concern that you should keep at the forefront of your mind as you consider your investment options.

Is Real Estate Inflation Real in 2022?

You probably wonder will the inflationary rates continue to affect real estate in 2022? With the crazy increase in prices and values over the last year, it can’t last forever, right?

While we might see real estate values settle slightly, there are still many reasons experts believe values and prices will continue to soar.

Millennials can Finally Enter the Market

Millennials have been at a disadvantage for years. They entered adulthood just as the housing market crashed and they watched millions of people lose money. Most millennials held off from investing in real estate and instead rented.

Fast forward to today, millennials are turning around 33 years old and are ready to settle down and buy real estate. This means millions of people are going to want in on real estate this year which will keep driving prices higher.

This means there will continue to be a higher demand for real estate and most people believe this will go on for at least 5 years.

Supply Chain Issues are Still a Problem

Supply chain issues have affected everything from the food you buy at the grocery store to the materials used to build homes and it’s not going to fix itself overnight.

A smaller supply of materials means fewer homes built and higher prices to make up for the cost of materials. Unfortunately, there doesn’t seem to be an end in sight as one of the largest producers of steel (Beijing) put its production on hold to limit pollution during the Winter Olympics.

As if supply issues weren’t enough, there is still a labor shortage too. With fewer people to build homes, builders can build as fast as they used to. This means demand will likely continue to outpace supply, keeping prices high.

Is Real Estate a Good Hedge Against Inflation?

If you’re looking for a good hedge against inflation, you might wonder if your stock portfolio is good or bad.

Unfortunately, there’s not a straight answer because it depends on many variables. However, growth stocks tend to perform poorly during periods of inflation, whereas value stocks perform better. But there’s really no way to predict how stocks will perform.

Real estate, on the other hand, has a positive history during periods of inflation. But how do you hedge against inflation using real estate? It helps to understand how real estate hedges against inflation first.

How Real Estate Hedges Against Inflation

Your primary residence may or may not hedge against inflation, but any investment properties you have might just do the trick.

Here’s why.

Investment Properties Earn Rent

If you own investment properties and rent them out, you receive monthly income. If you have short-term leases, you can increase the price of rent annually or whenever you turn over a new lease.

This helps you keep pace with inflation since it’s a natural increase. If you had a non-appreciating asset or one you couldn’t increase your earnings on, it wouldn’t hedge against inflation because your earnings would be worth less than before.

Home Prices Rise during Inflation

Typically, home prices increase during inflation. This means it costs more to buy a house, which is bad if you’re in the market to buy, but good if you own a property.

Higher sales prices mean higher home values. A higher value means a lower loan-to-value ratio. For example, if you owed $100,000 on your home that was worth $200,000 last year, but your home is now worth $210,000 this year, your LTV fell from 50% to 47.6%. You have more equity in the home. If you were to sell it today, you’d make more money than last year.

Debt Depreciates during Inflation

If you have financing on the property, your mortgage payment won’t change (if you have a fixed-rate loan) but you’ll earn more income from the higher rent. This keeps your earnings up and your debts down. Your mortgage payment won’t increase or change during inflationary periods, but the amount you can earn from the property might.

4 Ways to Use Real Estate to Hedge Against Inflation

Fortunately, there are many ways to use real estate to hedge against inflation. Here are the top ways.

Buy a Multi-Unit Property

While any investment property can be a good hedge against inflation, multi-unit properties provide even more protection.

When you own more than one unit, you have more opportunities to raise the rent, increasing your earnings. Again, if you keep short-term leases, your properties will turn over more frequently, giving you the option to increase rents. Even if you get the same tenants renewing the lease, if you have the provision in the lease to increase the rent, you can increase your earnings.

Buy Land

If you don’t want to invest in properties themselves, consider investing in land, especially farmland. Since land is limited, the opportunities to make money on land you own are endless.

Like real estate, land appreciates. If you just hold onto it and sell it for a profit, you can hedge against inflation by making more on the property than you paid for it. But, if you want to increase your chances of hedging against inflation, consider renting farmland to farmers. You get annual cash income from the crops the farmer plants and sells plus monthly rent if you charge rent for land use.

When you sell the property, you also earn the profits from the land appreciating, especially if you sell during a period of inflation.

Passively Invest in Real Estate

If investing in real estate directly doesn’t entice you, consider passively investing in real estate with real estate crowdfunding.

You can invest in a property’s debt (be the lender) or equity (earn dividends from the income). Like regular crowdfunding, you invest in the property with other investors, so you own a small portion of the property, not the entire thing.

The nice thing about REITs is you don’t have to deal with the property itself. You have no responsibilities to manage it, sell it, or maintain it, but you earn the profits from investing in real estate.

Refinance your Current Loans

If you have an adjustable-rate loan, it pays to refinance it before or at the start of inflationary periods. Inflation usually means higher interest rates, which can negatively affect your mortgage payment on an ARM loan.

To hedge against inflation, refinance out of your ARM into a fixed-rate loan. If you, do it before the inflationary period is predicted, you’ll get the lowest rates, but if not, the sooner you refinance the better.

You also have some control over the rates you get. The better situation you pose to the lender (high credit scores, low debt ratios, and stable employment), the better rates they can offer.

Diversify your Portfolio to Hedge Against Inflation

Like any investment, it’s always a good idea to diversify. We aren’t saying to only invest in real estate and forget everything else.

Putting all your eggs in one basket is never a good idea. Instead, spread your money throughout various assets. This gives you a chance to earn money in some sectors when others aren’t doing so well and vice versa.

You won’t find two sectors that react the same way to politics, the economy, or other outside factors, but when you diversify your investments, you make the best of it.

A portfolio heavy in stocks, for example, is at the mercy of the stock market. If it crashes, like it did during the pandemic, you lose most of what you have. But, if you diversified and had money in stocks, bonds, and real estate or other hard assets, you would likely ride out the storm at a much more even pace.

Whether you’re ready to invest in a multi-unit property, land or you just want to get your feet wet with a real estate investment trust, add real estate to your portfolio to hedge against inflation.

Final Thoughts

Always be thinking about how to stay two steps ahead of inflation. 2022 will be another year of inflationary prices and the more you prepare yourself, the better you’ll come out of it financially speaking.

If you’re ready to explore your options to invest in real estate, let’s connect. Our experienced loan officers can help you find the perfect loan to help you hedge against inflation. You don’t need a lot of money to invest in real estate today. With 20% – 30% down, you can leverage your investment, diversify your portfolio, and come out ahead of inflation.

Mortgage Broker vs Mortgage Lender – Which is Right for You?

If you’re in the market to purchase a home or refinance your current mortgage, you have choices. You can work with a mortgage broker or a mortgage lender. Both can get you the loan you need to finance the property, but they operate differently.

Explore the mortgage broker vs mortgage lender concept below to decide which option is right for you.

What is a Mortgage Broker?

A mortgage broker is a third party that works with sometimes hundreds of lenders. They have many loan options at their disposal to match you with, helping you get the right loan for your needs.

Mortgage brokers work as the middleman between you and the lender. All communication goes through the broker, who talks to the lender on your behalf to process and close the loan. Think of a mortgage broker as your advocate finding you the perfect loan for your needs.

What do Mortgage Brokers Do?

Mortgage brokers don’t underwrite the loan. They also don’t fund it. Instead, they work with lenders who do the underwriting and funding. Mortgage brokers usually have access to wholesale pricing that is oftentimes better than retail lenders. Mortgage brokers basically shop for the borrower to find them the best loan to fit their specific needs.

Mortgage brokers work with many lenders so borrowers have more options when finding the right loan. Instead of applying with multiple lenders and comparing each loan yourself, a broker does this for you, helping you find the most attractive loan for your needs.

Mortgage brokers do not set the interest rate, terms, or fees on the loan. The lenders set these parameters and brokers pass along the information. The only fee a broker may be in control of is the fees they charge, but most brokers get compensated from the lender for bringing them the business.

How do Mortgage Brokers Work?

The mortgage process looks similar with a mortgage broker vs mortgage lender. Here’s how it works:

  • Complete a loan application
  • Provide your financial information (pay stubs, W-2s, bank statements, letters of explanation, etc.)
  • Get pre-approved
  • Choose a loan
  • Find a house
  • Submit the sales contract
  • Order the appraisal and title work
  • Satisfy any outstanding conditions
  • Close the loan

Here’s where they differ, though. Instead of having one or two loan options, you may have many. Mortgage brokers look at all possible options with lenders they work with and present them to you.

Together you decide which loan makes the most sense based on the interest rate, fees, terms, and the loan’s overall cost.

What is a Mortgage Lender?

A mortgage lender is a financial institution that underwrites and funds loans. It may be a bank or strictly a mortgage company. They offer a handful of loan options that borrowers must meet to secure financing with them.

Lenders have underwriting guidelines, sometimes slightly different guidelines for each loan, but they can only offer the loans they underwrite and fund. Lenders set all parameters of the loan including the interest rate, terms, and fees.

What do Mortgage Lenders Do?

Mortgage lenders provide mortgage loans directly to borrowers. Depending on the type of lender they are, they may offer government-backed loans (FHA, VA, etc.), conventional loans (Fannie Mae and Freddie Mac), and portfolio loans (loans they keep on their books and make the requirements).

Mortgage lenders underwrite and fund the loans with their money. They may sell the loans to a secondary market or investor, such as Fannie Mae or Freddie Mac after funding, but the process starts with them.

How do Mortgage Lenders Work?

Mortgage lenders set the parameters for their loans including the rate, terms, and fees. There are a few different types of mortgage lenders you can work with including:

Banks

Your local bank may offer mortgage loans. They typically have fewer options than other financial institutions because of the overhead and risk. A few examples are Chase and Bank of America.

With most banks, you can apply for a mortgage online or visit your local branch and work directly with a loan officer. If you’re a current customer of the bank, you may be eligible for a small rate discount.

Banks often times have high-cost structures and a limited amount of programs available to them. For many borrowers, a mortgage broker will have more options to fit their specific needs.

Credit Unions

If you belong to a credit union (you must be a member), you may be eligible for one of their mortgage programs. Credit unions often charge lower rates and fees because they are not-for-profit and are member-owned. If you aren’t a member of a credit union, though, you can’t use their mortgage services.

Financial Institutions/Mortgage Lenders

Some financial institutions only handle mortgages; they don’t offer other banking services. You’ll find these lenders mostly online, such as Rocket Mortgage, Quicken Loans, and Loan Depot. Most of the process with these lenders is online, but you can talk to a loan officer over the phone if needed.

8 Reasons a Mortgage Broker is Better

Understanding the mortgage broker vs lender difference is important, but you should also know why a mortgage broker is better. Here are the top 8 reasons.

1.     More Options

Mortgage lenders can only offer the products they have which can make it harder to find the right fit. Mortgage brokers, however, work with hundreds of lenders and can give you multiple options.

Whether you want to look at ARM loans versus fixed-rate mortgages, 15-year vs 30-year terms, or compare the same loans but from different lenders, mortgage brokers help you do just that. They’ll match you up with as many loan options as they see fit and show you how they would pan out not only monthly, but over the life of the loan too.

2.     Lower Mortgage Rates

Most mortgage brokers can get you lower interest rates because they work with so many lenders. If you don’t like the rate one lender offers, the broker can keep shopping until they find a lender that will give you the low-interest rate you want.

3.     Specialized Service

If you work with a lender or bank, you’re just a number. They look to see if you fit within their parameters and if you don’t qualify, they move on to the next borrower.

That’s not the case with mortgage brokers. Because brokers work with hundreds of lenders, they have many options. If the first lender or two brokers try to match you with doesn’t work, they usually have many more options available.

Brokers provide specialized service that includes getting to know you and your financial needs so they can find the right loan for you rather than trying to fit you into a loan that isn’t in your best interest.

4.     Brokers can Negotiate

Brokers have the option to negotiate with lenders. Since they bring the business to the lender, they have the upper hand. If a broker feels the borrower deserves a lower rate or better term, they may go to bat for them, trying to get the perfect terms.

Lenders often oblige if you meet the requirements because they want the business. Think of your mortgage broker as your advocate – they work to get the loan that is within your best interest.

5.     Brokers Offer a Free Service

Borrowers don’t pay for the broker’s service – the lender compensates the broker by paying them a commission for every loan they close. Think of a broker as the salesperson. If they can match you with a loan and you close it, they get paid.

In the meantime, you get the stellar personalized service brokers offer because they need to get to know you and your financial situation to fit you into the right loan. Most brokers have hundreds of loan options at their disposal, making it easy to match you with the right loan.

6.     Mortgage Brokers only Work with Mortgages

If you work with a bank or credit union, you may work with a professional that handles multiple financial products, not just mortgage loans. While it’s nice to know your contact has access to other financial products, they may not have the expertise a mortgage broker has who only deals with mortgage loans.

Whether you have a simple or complicated financial situation, finding the perfect mortgage is the key to financial success. Your home is one of the largest investments you’ll make in your lifetime. Securing the most attractive loan will help make your financial decisions even more successful.

7.     Flexibility

Mortgage brokers offer the utmost flexibility for loans. They work with you to get you the lowest rate possible while also working with various lenders to find a loan that you qualify for.

If you have unique circumstances, especially if you are self-employed or are using asset depletion, a mortgage broker can find a lender that will accept your qualifying factors versus a lender with more black and white requirements that you can’t workaround.

8.     You only get Hit with One Credit Inquiry

When you shop around with different lenders, completing an application for each lender, you get hit with multiple credit inquiries. This can damage your credit score significantly if you have too many inquiries.

When you work with a mortgage broker, you only complete one application, and your credit is pulled one time. This means you get hit with only one credit inquiry which shouldn’t hurt your credit score much.

FAQ – Mortgage Broker vs Mortgage Lender

Is a mortgage broker the same as a mortgage lender?

 Looking at a mortgage broker vs mortgage lender you’ll see some similarities, but there are many differences. Most borrowers get more options when they work with a mortgage broker, and they have to do less work. The mortgage broker does the ‘shopping’ for the right mortgage loan for you. When you work directly with mortgage lenders, you have to do the legwork to find the right lender.

Is it easier to get a loan with a mortgage broker?

 It is often easier to get a loan with a mortgage broker versus a mortgage lender because you only have to complete the application one time. You also have to provide your qualifying documentation once.

When you work with individual lenders, you’ll complete a loan application with each lender and provide the qualifying documentation to each lender. It can be time-consuming and more frustrating to do this on your own when a mortgage broker can do the legwork for you.

Do mortgage brokers charge a fee?

 Mortgage brokers are required by law to disclose any fees they charge. Most mortgage brokers, however, get paid by the lender they connect a borrower with when they close the loan. Lenders pay brokers a commission for bringing them the loan. Brokers must disclose the Yield Spread Premium (commission) they earn, but the money typically doesn’t come from your pocket.

Do mortgage brokers offer pre-approvals?

 Just like a mortgage lender can pre-approve you for a mortgage, so can mortgage brokers. Your broker is your spokesperson with individual lenders. They submit your information and secure the pre-approval you need. They’ll tell you if any other information is required or what rate/terms lenders pre-approve you for when you apply.

Final Thoughts – Mortgage Broker vs Mortgage Lender

If you’re in the market for a mortgage, consider using a mortgage broker. You’ll get many more benefits, not to mention save a lot of time and headaches.

Whether this is your first mortgage, or you’ve had them before, a mortgage broker is your ally throughout the process, helping you secure the mortgage that makes the most financial sense. At Choice Home Mortgage our professionals are ready to help you secure the mortgage with the best rate and terms. Contact us today to see how great it can be to work with a mortgage broker!

What is a Reverse Mortgage and How Does it Work?

Millions of retired Americans find themselves without enough money during retirement. If that sounds like you but you have equity in your home, you may be a good candidate for a reverse mortgage in 2022.

A reverse mortgage offers seniors the best of both worlds – you can stay in your home yet use the equity in it to enjoy retirement.

If you have equity in your home and you’re over the age of 55, keep reading to see how a reverse mortgage in California can help you.

What is a Reverse Mortgage?

A reverse mortgage, as the name suggests is a reverse way to receive cash from your home. You don’t have to leave your home to use the equity AND you aren’t required to make payments.

It sounds too good to be true, but it’s a program that helps seniors use the equity they’ve worked so hard to build up in their home so they can enjoy it during their golden years while remaining in the home.

To use the program, you must meet the eligibility requirements and prove you can afford the home’s upkeep including the real estate taxes and homeowner’s insurance. It can be a great way to access your home’s equity but still stay in the home you love.

How Does a Reverse Mortgage Work?

When you take out a reverse mortgage, you don’t get the full value of your home. You’ll receive a percentage of your home’s value based on your age or the age of the youngest borrower if there are multiple borrowers.

You’re more likely to receive more money the older you are, the lower interest rates are or the more your property is worth. It also helps if you don’t have a current mortgage balance or if it is a low balance. The amount you receive is based on the home’s value and your life expectancy. The older you are, the less risk the lender takes of having an outstanding loan for a long period, so you’ll receive more money.

Interest accrues on the loan throughout the time you have the funds outstanding, however, you do not have to make payments. The loan doesn’t become due and payable until you move out of the house, you sell the home, or you pass away.

Anyone is welcome to make payments during this time, though but you aren’t penalized if you don’t make payments.

Who is Eligible for a Reverse Mortgage?

Unlike a traditional mortgage, the eligibility and qualification requirements for a reverse mortgage in California are much more relaxed.

Let’s start with the eligibility requirements since they are the strictest.

All Borrowers Must be 55+Years Old

To qualify, all borrowers must be at least 55+-years old. We must use the age of the youngest borrower to determine how much you can receive. The younger you are, the less you’ll receive since you have a longer life expectancy than an older homeowner.

The Home must be your Primary Residence

You must prove you live in the home full-time to qualify. It must be your primary residence where you live most of the year. If you become hospitalized or must leave the home to live in a nursing home for more than 12 months, the loan can become due and payable.

If you die, the loan also becomes due and payable, but your heirs can pay it off with your estate.

You Must Own the Home

To qualify for a reverse mortgage in California, you must own the home free and clear. If you still have a mortgage on it, the balance should be small enough that you can pay it off with some of the proceeds, but still, have enough funds available to receive as income.

You Must Take HUD-Approved Reverse Mortgage Counseling

You must take a counseling course approved by HUD that helps you understand the reverse mortgage, how it works, and the consequences when you no longer live in the home. There are many third parties that provide the counseling and we can help you get set up with it.

You Must Prove you can Afford to Keep up the Home

You must be able to afford the home’s upkeep which means a few things:

  • You can afford the real estate taxes

The real estate taxes must be paid on time, and you must be able to prove you can afford them.

  • You can afford the homeowner’s insurance premiums

You are also required to keep homeowner’s insurance on the property, just like with a traditional mortgage. This protects everyone involved should total disaster strike your home, you’d have insurance coverage to rebuild it.

  • You can afford to maintain the home

The average home costs 1% of its value to keep up every year. You must prove you can afford the costs to maintain the home.

Ways to Receive your Funds

The home equity conversion mortgage offers several options to receive your funds. Think about how you’ll use the funds to determine which option is right for you.

Lump Sum

If you receive all your funds at one time, you can get a fixed interest rate, which means you don’t have to worry about changing rates. Interest accrues at the same rate throughout the term of the loan.

Equal Monthly Payments

This plan lasts for the lifetime of the borrowers. Even if one borrower dies, as long as the other borrower remains in the home, he/she will receive equal monthly payments which are based on the appraised value and your age.

Term Payments

You choose the term that you’ll receive equal monthly payments. For example, if you choose 10 years, your payment is based on the amount you were approved for spread out equally over 10 years.

Line of Credit

You get a line of credit (like a home equity line of credit) to use as you want. You only accrue interest on the amount you withdraw from the line, though. If you never touched the line, you never have to pay interest on it.

Equal Monthly Payments Plus a Line of Credit

You receive equal monthly payments and the remainder of what you’re offered sits in a line of credit. You can use or not use the line of credit. Any amount you don’t use doesn’t accrue interest but it’s there if you need it.

Term Payments plus a Line of Credit

You receive equal monthly payments for a set term, such as 10 years. Any amount you don’t use goes into a line of credit that you can access as needed. Any amount you don’t use doesn’t accrue interest.

How do you Pay Back a Reverse Mortgage?

You are not required to pay back a reverse mortgage while you live in the house, but you can make payments if you want. Any money you pay toward the loan while you’re still in the home will reduce the amount owed when you no longer live in the home.

When you or your heirs sell the home, though, the money from the sale goes toward the loan balance first, just like it would if you had a traditional mortgage. Think of it as using your home’s proceeds before selling the home.

If your heirs want to keep the home after your passing, they must refinance the home into their own name, using a traditional mortgage. They’ll pay off the reverse mortgage and have a regular mortgage.

Pros and Cons of a Reverse Mortgage

Like any loan program, there are pros and cons you should consider before taking out a reverse mortgage in California.

 

Pros

No Monthly Payments

You don’t have to worry about making a monthly mortgage payment with a reverse mortgage. You don’t have to make any payments if you don’t want, but if you want to bring the balance down, you can make payments.

You Can use the Funds How you Want

You can use the funds for any reason. We don’t tell you how to use the funds. Whether you use the funds to pay off debt, take a vacation, or for living expenses, the choice is yours!

Surviving Spouses can Remain in the Home

If one spouse dies, the surviving spouse can remain in the home even if he/she is a non-borrowing spouse. As long as the surviving spouse lives in the home, the loan is not due and repayable.

You can Choose How you Receive the Funds

You can choose from the various methods of receiving funds based on the reason you want them. For example, if it’s a one-time use, you may want the fixed interest rate provided with a lump sum payment. If you want the funds for an emergency fund or regular monthly income to supplement your retirement, you may choose from the other options.

It’s a Non-Recourse Loan

A reverse mortgage is non-recourse which means if the home’s value drops, you only have to pay the amount the home is worth and not more. This prevents seniors from going ‘upside down’ on their loans.

Cons

You Must Prove you can Afford the Home

Even though there aren’t any mortgage payments, you must prove you can afford the real estate taxes, home insurance, and the cost to keep up the home. You must also make sure you keep up with these expenses throughout the time you have the reverse mortgage.

The Younger you are the Less you Receive

The amount you receive is based on your age. Even though you are eligible as soon as you are 62-years old, if you borrow when you’re 62 versus 70, for example, you’ll receive less funds.

You Must Live in the Home Full-Time

A reverse mortgage is only possible if you live in the home full-time. It’s not available on vacation properties or second homes.

Can you Lose your Home with a Reverse Mortgage?

Like any mortgage, there is the risk of losing your home, but it’s less risky with a reverse mortgage. As long as you follow the requirements, you aren’t at risk. Here are the top reasons seniors lose their home with a reverse mortgage.

You Don’t Live in the Property

If you vacate the home for a long period (usually 12 months), your loan could become due and payable. This means you will likely need to sell the home to pay off the loan and the interest that accrued.

You Put the Home up for Sale

If you put the home up for sale and don’t live there, but the home doesn’t sell for over 12 months, the loan could become due and payable. If you put the home up for sale, try to do so when a spouse still lives there to avoid this from occurring.

You Don’t Keep up with the Home

As a part of the agreement of the reverse mortgage, you must keep up with the real estate taxes, home insurance, and home maintenance. If you don’t, you violate the terms of the agreement and risk losing your home.

Final Thoughts

A reverse mortgage is a great way to access your home’s equity when you’re retired. It works best when you don’t have an outstanding mortgage and you can afford to keep up with the home’s responsibilities.

You can use the funds however you want, and the interest rates are attractive to help make it affordable to access your home’s equity.

If you’d like to tap into your home’s equity during your senior years, contact us today! We’ll show you all the options available to you and help you choose the most financially responsible option to make the most out of your home’s equity.

The Top Mortgage Programs you Must Know

If you’re in the market to purchase or refinance you should know you have many loan options available to you. Whether you have perfect credit or just okay credit, a lot of debt or a little, or a large down payment or small, there are options for everyone.

Here’s what you must know.

Conventional Mortgage

The conventional mortgage is your standard mortgage. It’s for borrowers with good credit and a low debt-to-income ratio. You can put down as little as 3% on the home if you’re a first-time homebuyer or 5% if you’ve owned a home before.

Conventional loans aren’t government-backed and require Private Mortgage Insurance if you put down less than 20%. You pay PMI until you owe less than 80% of the home’s value, at which point you can request to cancel it.

By law, lenders must cancel PMI once you owe less than 78% of the home’s value if you didn’t request it beforehand.

Conventional mortgages are great for purchases and refinance. Here’s how to qualify.

Qualifying for a Conventional Mortgage

To qualify for a conventional mortgage, you must meet the following:

  • Minimum 660 credit score (higher is always better)
  • Maximum 36% – 43% debt-to-income ratio
  • Stable income and employment for the last 2 years
  • Proof of your income with paystubs and W-2s or tax returns if self-employed
  • No recent bankruptcies or foreclosures
  • At least 3% or 5% to put down
  • Proof you have the assets to make the down payment and cover the closing costs

FHA Loans

FHA loans are a government-backed program. This doesn’t mean you go through the FHA to get the loan, though. You still apply with a lender, but they must be FHA-approved.

The FHA sets the guidelines FHA lenders must use to qualify you for the loan. If you meet the FHA guidelines, the FHA will guarantee the loan for the lender. This means if you default on the loan, the FHA will pay the lender back the money they lost.

FHA loans require just 3.5% down on the home and some borrowers can even use 100% gift funds for the down payment. They also have more lenient credit and debt-to-income ratio guidelines.

Like conventional loans, FHA loans require mortgage insurance, but you can’t cancel it. You’ll pay MI for the life of the loan. FHA loans have an upfront mortgage funding fee of 1.75% of the loan amount and 0.85% of the loan amount annually (divided into 12 monthly payments).

FHA loans are great for borrowers with less-than-perfect credit as they have more lenient guidelines than conventional loans. You can use FHA loans for a purchase or refinance.

Qualifying for an FHA Loan

To qualify for an FHA loan, you must meet the following:

  • Minimum 580 credit score
  • Maximum 43% – 50% debt-to-income ratio
  • 5% down with a 580+ credit score
  • 10% down with a 500 – 579 credit score (in some situations)
  • Stable income and employment for 2 years
  • Proof of your income with paystubs and W-2s or tax returns if you’re self-employed
  • No recent bankruptcies or foreclosures
  • Proof of assets for the down payment and closing costs or proof of gift funds approved by the underwriter
  • Proof you’ll live in the property as your primary residence

USDA Loans

USDA loans are also government-backed loans, but they are for low to moderate-income borrowers buying in a rural area. The USDA has much looser guidelines regarding what is considered rural.

Like FHA loans, the USDA sets the guidelines for USDA loans, but you get the loan from a USDA-approved lender. If you meet the guidelines, you can get a USDA loan which doesn’t require a down payment and has flexible qualifying requirements.

USDA loans also require mortgage insurance for the life of the loan, but the rates are much lower than traditional loans. Borrowers pay 1.0% of the loan amount upfront and 0.35% of the loan amount annually. Like FHA loans, you cannot cancel the mortgage insurance even when you owe less than 80% of the home’s value.

USDA loans have slightly stricter qualifying guidelines than FHA loans, but they are still flexible.

Eligibility for a USDA Loan

USDA loans have one unique aspect – you must be eligible for it before you see if you qualify. Eligibility is based on your total household income, not just your income. The USDA offers the programs to families with total household income lower than 115% of the area’s average income.

Qualifying for a USDA Loan

To qualify for a USDA loan, you must meet the following:

  • Minimum 640 credit score
  • Maximum 41% debt-to-income ratio
  • No down payment required
  • Stable income and employment for the last 2 years
  • Proof of income with paystubs and W-2s or tax returns if you’re self-employed
  • No recent bankruptcies or foreclosures
  • Proof you’ll occupy your home as your primary residence
  • Proof of any assets you’ll use for the down payment (optional) and your closing costs

VA Loans

VA loans are loans for veterans of your military. If you served at least 90 days during the war or 181 days during peacetime in any military branch or 7 years in the Reserves or National Guard, you may be eligible.

VA loans don’t require a down payment, and they have flexible underwriting guidelines for veterans that served our country. Unlike FHA loans, VA loans don’t require mortgage insurance, but most veterans pay a 2.3% upfront funding fee.

VA loans are a great option to help veterans own a home much sooner with the no down payment requirements.

Qualifying for a VA Loan

Qualifying for a VA loan is simple for veterans. Because the VA guarantees the loans for VA lenders, they can offer these simple guidelines:

  • No minimum credit score requirement, but most lenders want at least a 620
  • Maximum 43% debt-to-income ratio (some lenders go up to 50%)
  • No down payment required
  • Stable income and employment for the last 2 years or at least a written job offer with a job starting in the near future
  • No recent bankruptcies or foreclosures
  • Proof you’ll occupy your home as your primary residence
  • Proof of any assets for the down payment (optional) and your closing costs
  • Proof of your eligibility for a VA loan (most lenders can help you get this)

Jumbo Loans

Jumbo loans are loans that exceed the conforming loan limit. The loan limits change every year, but for 2022, conventional limits are $647,200. If you must borrow more than that, you’ll need a jumbo loan.

Jumbo loans are non-conforming which means they don’t have any specific guidelines that all lenders must follow because lenders hold these loans on their books. There isn’t any government-backing or a federal agency like Fannie Mae or Freddie Mac buying the loans.

Each lender sets their own guidelines, but there are some guidelines most lenders have in common.

Qualifying for a Jumbo Loan

Jumbo loan qualifications vary by lender, but here’s what you can expect:

  • High credit scores of at least 700
  • Maximum 43% debt-to-income ratio
  • 20% – 30% down payment
  • Stable income and employment for at least 2 years
  • No recent bankruptcies or foreclosures
  • Proof of the assets you’ll use for the down payment and closing costs

Non-QM and DSCR Loans

Some borrowers can’t qualify based on their paystubs or tax returns. Whether you don’t receive paystubs, or your tax returns show so many write-offs that you have negative income, you may not qualify for conventional financing, but non-QM loans may be an option.

Examples include bank statement loans which allow you to qualify for a mortgage with your bank statements instead of paystubs or tax returns. Other options include DSCR loans which are for real estate investors. If you already have leased properties, you can qualify for a new loan based on the annual net rental income rather than your employment income.

Non-QM loans have higher interest rates and fees but are good for borrowers with less than traditional qualifying factors that wouldn’t allow them to qualify for a conventional loan.

Non-QM loan requirements vary by lender, but here are some of the common requirements:

  • 640+ credit score
  • Stable income (no matter how you verify it)
  • No recent bankruptcies or foreclosures
  • Higher down payments (20%)
  • Low debt-to-income ratios

Reverse Mortgage

A reverse mortgage allows you to tap into your home’s equity while you still live in the home. Unlike a traditional mortgage, though, you don’t have to make payments. Interest still accrues, but payments aren’t due until you either move out of the home or pass away.

Your only obligation when you have a reverse mortgage is to keep up with your real estate taxes, home insurance, and home maintenance. A reverse mortgage is for homeowners ages 62 or older and the older you are, the more you can borrow against your home’s equity.

Homeowners are required to take reverse mortgage counseling before taking out a reverse mortgage to ensure you understand the loan and how it works, but it’s a great way to use your home’s equity while you are alive and still live in your home if you choose to age in place.

Loan Options

Each of the loans above have options that you can choose to find the loan that’s most affordable for you.

30-Year Fixed Loan

A 30-year fixed loan is the most common mortgage loan. Your payments are spread out over 30 years, which makes the principal payment the lowest out of all loan options. The interest rate on 30-year fixed loans is the highest out of any loan program, but they are still usually competitive.

With the 30-year fixed rate loan your rate never changes and neither does your payment. You keep the same payment and just pay more toward the principal as you get further into the loan term. At the start of the term, you pay much more interest than principal, but the interest charges decline as you pay the mortgage balance down.

15-Year Fixed Loan

The 15-year fixed loan is another popular option, but the payments are higher. You’ll pay more toward principal than interest on this loan since you have half the time to pay it off in full versus a 30-year loan.

15-year fixed loans have a lower interest rate because they aren’t as risky for lenders, but you must be able to afford the higher payment. Like the 30-year fixed rate loan your rate and payment never change over the 15 years.

Adjustable-Rate Loan

The adjustable-rate loan offers an attractive interest rate, usually lower than any fixed rate, but it’s only temporary.

ARM loans have a fixed rate for the introductory period and then they adjust every year on the anniversary date of your mortgage.

You can get adjustable-rate loans in 3-, 5-, 7-, or 10-year increments. The shorter your introductory period is, the lower the interest rate you’ll get to start the loan. Your adjusted interest rate is dependent on the loan’s margin and index.

The lender will choose an index to base your rate on, such as LIBOR or the Prime rate. They also assign your loan a margin, or the amount they’ll add to your rate when they adjust it. The better your qualifying factors are the lower your margin will be.

ARM loans are great for borrowers that won’t be in the home for the long-term or who want the lower rate and know they will refinance in the future. While the uncertainty of an adjustable rate can be scary, the introductory rates often make it worth it.

How to Choose the Right Mortgage Loan

It can feel overwhelming to choose the right mortgage, loan, but here are some questions to ask yourself to help you decide.

  • Do you qualify for a VA loan or USDA loan?

You can rule these loans out as options quickly if you aren’t a veteran or don’t live in a rural area. If you think you qualify, check the parameters to see if you are a good candidate.

  • Do you have great credit and a low debt ratio?

To get a conventional loan, you need great credit and a low debt ratio. If you know you had credit issues in the past or you have a lot of debt, a conventional loan may not be a good option, but an FHA loan can be a great backup.

  • Can you afford a 15-year payment?

As you look at the terms, look at the 15-year payment. Can you make it? Will it be a struggle? If you aren’t sure, take the 30-year mortgage and make 15-year payments when you can. This way you have the 30-year payment as your required payment and won’t get in trouble if you can’t make the full 15-year payment some months.

Final Thoughts

Choosing the right mortgage program is the key to a successful mortgage. Taking on a mortgage can be overwhelming, but when you understand the programs and choose the option that’s right for you, you’ll enter homeownership with your best foot forward!

We are here to help you every step of the way through the mortgage process. Whether it’s your first mortgage or you’ve had them before, we know how overwhelming it can be to buy or refinance a home.

Our professionals will walk you through the process and help you compare your loan options side-by-side. We will figure out which loan will suit your finances and your financial goals the best so you can make the most of your mortgage!

, ,

Key Steps in Buying a Home

Key Steps in Buying a House

Buying a home can be fun and stressful at the same time. You’re searching for your dream house – the place you will call home with your family for at least the next few years, if not forever. It’s a big job!

The buying process can take many months and involves many steps, some of which you should take long before you even look at homes.

Here are the key steps in buying a house to make it as stress-free and successful as possible for you.

Step 1: Determine if you’re Ready to Buy a Home

Before you buy a house, you should determine if you’re ready. A house is likely one of the largest commitments and investments you’ll make in your lifetime so it’s important to take the time to make sure the timing is right.

What is your Credit History?

Your credit history is the first thing lenders look at when deciding if you qualify for a loan. Bad credit history can make it hard to get approved. If you do get approved, it may be at a higher interest rate or worse terms.

Pull your free credit report and see if you have any negative credit information, such as:

  • Late payments (any payments made over 30 days late)
  • Credit cards or credit lines with over 30% of the credit line outstanding
  • Collections
  • Public records (bankruptcy or foreclosure)
  • Excessive use of revolving debt (credit cards)

You may also see your credit score for free if you sign up for Experian or use your free credit reporting options from any of your credit cards or even bank accounts.

Ideally, you should have a 660 or higher credit score, but you may get away with a lower score in some cases. Look at your credit history and decide if it’s in good enough shape or if you have enough credit. Some people have a ‘thin’ credit profile and don’t qualify because lenders don’t have enough information to use to make a decision.

 

Is your Income and Employment Stable?

Lenders look at your last two years to see if your income and employment are stable. This doesn’t mean you can’t change jobs during that time, but you should be able to show stability.

Ask yourself, are you in your career, or are you still trying to figure out what you want to do? Income stability is key to affording a home. Even if you can afford the payment now if you don’t have stable employment, how will you afford it in the future?

Are your Debts Under Control?

Your debt-to-income ratio is another major factor in your loan approval. If you have too many debts, you may not be able to afford the mortgage.

Lenders look at your debt-to-income ratio, which compares your total monthly debts to your gross monthly income (income before taxes). Ideally, your DTI should be 49% or less, but some loan programs allow a DTI of over 50% in certain situations.

It’s a good idea to calculate your DTI to determine if you should pay any debts off before you apply for a mortgage. Remember, your DTI includes the new mortgage payment, so make sure to include an estimated payment in your calculations.

If your DTI is too high, work out a debt repayment plan before you apply for a mortgage to get your DTI to a manageable level.

Do you Have Enough Assets?

You’ll need money to put down on your home and money for the closing costs. You must be able to prove that you have the funds in your possession and the money didn’t come from a loan.

Your assets must be liquid, such as in a checking, savings, CD, or stocks you can sell right away. In other words, you must have immediate access to the funds or liquid assets that you can sell to use for the down payment and closing costs.

Down Payment Funds

Most loan programs require a down payment starting at 3% or more. You must prove you have the funds in your bank account and that the funds belong to you.

While some loan programs don’t require a down payment, such as VA and USDA loans, it’s always best to prepare with a down payment. Even if a program doesn’t require it, making a down payment gives you instant equity in your home and may give you access to lower interest rates or better terms.

Closing Costs

Closing costs are something many homebuyers overlook. The total cost can be 2% – 5% of your loan amount. It varies by borrower and lender, but it’s a good idea to work them into your budget so you have enough liquid assets available when you’re ready to apply for a loan.

Step 2: Determine how much House you can Afford

To determine how much house you can afford, it’s best to get pre-approved for a mortgage. A pre-approval will tell you how much a lender will lend you, what the payment is, and the total cost of the loan.

You don’t have to borrow the full amount you’re pre-approved for, but you’ll know the maximum amount we can offer.

You can use the payment, which will include principal, interest, real estate taxes, and homeowner’s insurance to see how it fits within your budget. We won’t pre-approve you for any amount that exceeds the general debt-to-income ratio guidelines, which can range from a 36% DTI to a 50% DTI depending on the loan program.

Documents Needed to Get Pre-Approved

To get pre-approved, you’ll need to provide the following documents:

  • Paystubs covering the last 30 days of employment
  • W-2s for the last 2 years
  • Tax returns for the last 2 years if you’re self-employed
  • Bank statements for the last 2 months
  • Proof of employment
  • Letters of explanation for any gaps in employment or negative credit in the last 2 years

Using your Pre-Approval Letter

Once you’re pre-approved for a loan, we’ll issue a pre-approval letter. The letter will state how much loan you can borrow, the type of mortgage program, the required down payment, and the loan terms.

The letter will also state what conditions you must satisfy to close on the loan, which will include conditions about the property you choose too.

Step 3: Find a Real Estate Agent

Your next step is to find a real estate agent. They can be instrumental in helping you find the right home and pay the right price.

We suggest interviewing at least three real estate agents to see which one fits your needs. Each agent has a different philosophy and methods to handle the home search. Find an agent that works with clients like you, communicates in the way you prefer and is good at what they do.

Some questions to ask real estate agents include:

  • How long have you been doing this?
  • What types of homes do you help clients buy/sell?
  • How do you communicate new listings that you find?
  • How often do you contact your clients?
  • How long does it take to find your clients their ‘dream home’?

Step 4: Look at Homes and Make an Offer

It’s finally time to look at homes and make an offer on them. Your real estate agent can help you find the homes that fit your needs and even your wants. Together you can discuss the pros and cons of each home, and then ultimately decide.

Once you find ‘the home,’ you can make an offer. Your real estate agent will handle this for you. Of course, the offer should be within your pre-approved amount including the amount of the down payment you will make.

Determining the Terms of the Sale

When you make an offer, you’ll make it based on many factors including not only the price, but also the contingencies you want to include, the closing date, and the earnest money deposit.

Contingencies

Contingencies are terms of the sale that give you a ‘way out’ of the contract without losing your earnest money. A common contingency is the home sale contingency. It gives you the right to back out of the contract if you can’t sell your home by the specified date.

Other contingencies include a home inspection, home appraisal, or financing contingency. Each option gives you a way out of the contract if you can’t meet the terms. But the more contingencies you have, the less likely a seller is to accept your offer.

Closing Date

The closing date is when you propose to have your financing in order and can take possession of the house. Every seller has a different timeline, so it helps to know what they need when proposing a closing date.

Earnest Money

The final part of your contract is your earnest money. This is the amount you promise to put down in an escrow account. If you back out of the contract for a reason other than a contingency, you will forfeit the earnest money, giving it to the seller. This shows sellers how serious you are about buying the house.

Step 5: Order the Inspection and Appraisal

Once you have an executed sales contract on a property, you can order the inspection and appraisal. An inspection isn’t required to get loan approval, but it can protect your investment.

If the home has major issues, you may want to request that the seller fix the issues, renegotiate the contract, or you may want to back out of the sale altogether.

The appraisal is required by lenders as it determines the home’s value. It’s what we use to determine your loan amount. The home must be worth at least as much as you’re borrowing. If it’s not, you have a few options:

  • Renegotiate the sales price to meet the appraised value
  • Pay the difference between the sales price and appraised value
  • Back out of the sale

Step 6: Finish Underwriting

While you wait for the appraisal, you can satisfy your other conditions. Using your pre-approval letter, determine what is needed to clear your loan to close.

The underwriter will take care of clearing the property’s conditions, including ordering the appraisal and title work.

Your job is to provide any outstanding documentation, keep your credit in good standing, and don’t make any major financial changes.

Verifying your Conditions Before Closing

Right before the closing, the underwriter will pull your credit again, reverify your employment, and check your assets.

To keep your approval, make sure you take care of your credit, don’t change jobs, and don’t make any large deposits or withdrawals from your bank accounts.

Communicate with your Loan Officer

In the meantime, make sure you stay in contact with your loan officer. He/she is the key to communicating any outstanding conditions or documents. The faster you can satisfy any conditions, the faster you’ll get to the closing table.

Step 7: Close on your Loan

Your final step is to close and become a homeowner! By the closing date, you’ll need a paid-in-full receipt for 12 months of homeowner’s insurance and a cashier’s check or wire for the amount of your down payment and closing costs.

At the closing, you’ll sign a stack of papers that include your new mortgage and note so you understand the obligation you’re taking on and the consequences of not paying your loan back.

Final Thoughts

These 7 steps help you navigate your way from thinking about buying a house to becoming a homeowner. With our support, you can buy your dream home and have a stress-free time securing your financing.

Our professionals are ready to help you understand your loan options, how to qualify for a loan, and to walk you through the process once you find your dream home and are ready to close on your loan.

Fannie Mae vs Freddie Mac – What you Should Know

Fannie Mae vs Freddie Mac – What you Should Know

Fannie Mae and Freddie Mac are government-sponsored agencies that help lenders back the loans they fund. They provide liquidity in the mortgage industry and are vital to the well-being of most lenders.

Here’s what you must know.

What is Fannie Mae?

Fannie Mae is a mortgage institution backed by the federal government. Their job is to buy mortgages from banks, so banks have more capital to keep lending funds. Without this task, banks would have limited capabilities of funding mortgage loans, which would hurt the mortgage and housing industry.

This government-sponsored enterprise’s name is short for Federal National Mortgage Association (FNMA). From 1939 to 1968, FNMA was the only GSE on the market. This meant it was the only entity buying federally backed mortgages (FHA and VA) from banks.

In 1968, Fannie was made into a private shareholder-owned company rather than a government agency to free up government funds. During this time, FNMA was also approved to buy not only FHA and VA loans but also conventional loans. This opened up even more possibilities for banks and helped grow the housing industry.

Fannie Mae was entirely responsible for creating an option for affordable housing and for creating the long-term fixed-rate mortgage.

What is Freddie Mac?

Freddie Mac was created much later than Fannie – with its origins starting in 1970. The Federal Home Loan Mortgage Corporation came into existence thanks to the Emergency Home Finance Act. Its sole purpose was to expand the secondary mortgage market or the market where investors bought mortgage-backed securities to keep the funds flowing to banks.

Freddie Mac from the start didn’t hold onto the mortgages it bought – they sold them directly to the secondary market. Their focus too was not large banks like Fannie Mae, but rather small, private banks that needed more help.

How are Fannie Mae and Freddie Mac Similar?

Fannie Mae and Freddie Mac have many differences, but there are a couple of similarities to understand.

Sell Loans on the Secondary Market

Both Fannie and Freddie buy loans from banks and then sell them as mortgage-backed securities on the secondary market. This provides lenders and banks with more liquidity so they can keep funding mortgages while keeping FNMA and FHLMC with enough capital flowing to continue helping banks.

Government Run

Prior to the housing crisis of 2008, both FNMA and FHLMC were privately owned and run. But the housing crisis changed all of that. Both companies are now government-run to get the housing and mortgage industry back on track. Today they are a government-sponsored enterprise working under the Federal Housing Finance Agency.

 How are Fannie Mae and Freddie Mac Different?

It’s a lot easier to point out the differences between Fannie and Freddie as there are many.

Where they Get Mortgages From

FNMA and FHLMC both work in different financial sectors. Fannie Mae buys mortgages from large, commercial banks – the banks you see on every corner and everyone knows their name no matter what state you live in.

Freddie Mac is the purchaser of mortgages from smaller banks. These are the more private banks that don’t have branches throughout the country. Many only have one or two branches.

Qualifying Requirements

Both Fannie and Freddie have different qualifying requirements. You might qualify for a loan from one agency and not the other. This is especially true if you need a low down payment loan. Freddie Mac has more lenient guidelines for low down payment loans. It’s best to work with a lender that offers both FNMA and FHLMC loans, so you have options.

Fannie Mae has Been Around Longer

Fannie Mae started the GSE movement. In existence since 1938, FNMA was started to combat the financial issues hitting most banks during that time. When the Depression started, banks were facing an excessive number of foreclosures, but banks could only withstand so much.

Eventually, they had all their capital outstanding, which left them with no money left to lend. This is when FNMA stepped in and created the liquidity banks needed to continue writing loans. This helped create more jobs and higher home values, which helped the economy.

Freddie Mac was Created to Create Competition

As with any industry, when one company has the reins on everything, it has a monopoly effect, which can be bad for the economy. Freddie Mac came into existence around 1970 to create the competition needed to give lenders more options. This was done to keep costs down, but it also created a competitor for FNMA, which is still the case today.

Are Fannie Mae and Freddie Mac Owned by the Government?

Fannie Mae and Freddie Mac are under government conservatorship. It doesn’t mean they own them, but they do have the right to buy their stock at any time if they feel it’s required.

The conservatorship of FNMA and FHLMC is currently in court, but for now, the entities run as usual, but the government does benefit from their dividends.

 

How do Fannie Mae and Freddie Mac Help you Save Money?

Fannie Mae and Freddie Mac don’t fund loans. You don’t interact with them at all when you get a mortgage, actually, but they do a lot behind the scenes that helps keep your loan costs down.

Here’s how it works.

  • You apply for a mortgage from a lender that offers FNMA or FHLMC loans
  • The lender sells loans to FNMA or FHLMC depending on which qualifications you meet
  • The money from FNMA and FHLMC go back into the lender pool of funds for lenders to write more loans
  • The demand keeps going, which keeps costs down

Without FNMA and FHLMC keeping the liquidation going, there wouldn’t enough mortgage funds to go around. This will means there would be a higher demand than supply which would drive prices up like crazy. Fortunately, with Fannie Mae and Freddie Mac, this isn’t an issue.

What are the FNMA and FHLMC Guidelines?

Every conventional lender has slightly different guidelines, but they base their loans on what Fannie Mae and Freddie Mac say.

Like we said earlier, both agencies have slightly different requirements. If you have a lot of risk factors, you may find that Freddie approves you versus Fannie. But if you have great credit and a low debt ratio, you may get a Fannie loan.

Either way, they both offer low costs, great rates, and attractive terms. In general, here’s what you can expect:

Loan Limits

The loan must fall within the conforming loan limits. The Federal Housing Finance Agency changes the conforming loan limits each year based on the average cost of housing each year. In 2022, the limits increased to $647,200. Any borrower that needs over this amount wouldn’t be eligible for a conforming loan.

Loan Term Limits

Conforming loans cannot exceed a 30-year term. There are other options too. If you can afford a larger payment, you can take a 10, 15, 20, or 25-year term to lower your interest rate and overall interest costs. You’ll also own the home faster with these terms.

Proof you can Afford the Loan

Fannie and Freddie task lenders with the responsibility of ensuring you can afford the loan beyond a reasonable doubt. If you can’t prove your income with the requirements they set (paystubs, W-2s, or tax returns) for example, you can get a conforming loan.

To prevent another housing crisis, all loans must have proof of income that leads lenders to believe the borrower can afford the loan without issue.

What Happens if you Don’t Meet the Guidelines?

Fannie Mae and Freddie Mac don’t approve every loan. They need to keep their risk down to keep the process going. But if you don’t meet the guidelines, there are other loan options to choose from, they are just non-conforming loans. You can find options with attractive loan terms, just like you could with Fannie or Freddie.

Must you Know Fannie Mae and Freddie Mac Guidelines?

Here’s the best part.

You don’t have to know anything about Fannie or Freddie to get a loan. What you should focus on is maximizing your credit score, keeping your debt ratio down, and making your loan application as attractive as possible.

Here’s how to maximize your chances of approval.

Improve your Credit Score

Pull your credit and look for any of the following:

  • Late payments
  • Over 30% of your credit line outstanding
  • Collections
  • Too many credit accounts open compared to your installment loans
  • Too many inquiries

Bring your late payments current, pay your balances down, take care of your collections, and refrain from applying for any new credit. If you have too many credit cards compared to installment loans, close some credit accounts to balance them.

Pay your Debts Down

If you have a lot of debt, pay it down as quickly as you can. It’s best if you pay your revolving debt off in full, but that’s not always possible. At the very least, pay your credit card debts down to 30% of the total credit line.

For example, if you have a $1,000 credit line, don’t have more than $300 outstanding at one time.

Stabilize your Employment

It’s best if you have a 2-year stable employment, but any stability is good. It shows that you can afford the loan and that your income is predictable. If you changed jobs recently, try to keep it within the same industry or be prepared to prove you have the credentials to succeed in the new industry, such as training or education.

Have Money for a Down Payment

If there’s one thing Fannie Mae and Freddie Mac have in common, it’s the need for a down payment. First-time homebuyers need only 3% down in most cases, but you might need as much as 5% or higher, depending on your qualifying factors.

You must prove you have the funds for a down payment by providing your bank or investment statements. The statements must show ownership of the funds and not have any large deposits that could indicate the funds were borrowed.

FAQ

Is Fannie Mae more lenient than Freddie Mac?

Many mortgage applicants wonder which mortgage agency is more lenient, especially if they have bad credit or a high debt-to-income ratio. Freddie Mac is the winner in this debate. Fannie Mae has stricter credit and DTI requirements than Freddie Mac, so if you’re on the fence, choose Freddie Mac.

Is a conventional loan Fannie or Freddie?

Conventional loans or conforming loans, conform to the current conventional loan limits. In 2022, that means they are less than $647,200. But, a conventional loan can be either Fannie or Freddie – your qualifying factors determine which is right for you.

How much of a down payment do you need for a Fannie Mae loan?

Both Fannie Mae and Freddie Mac have 3% down payment options, especially if you’re a first-time homebuyer. If you don’t qualify for the 3% down payment, you’ll need a minimum of 5% down on your home.

Final Thoughts

You’ll never deal directly with Fannie Mae or Freddie Mac yourself, but they are your biggest supporters in getting a mortgage. Without them, lenders wouldn’t be able to fund as many loans as they do.

The regulations set forth by both entities differ slightly and they both work with different banks. Fannie works with larger, commercial banks and Freddie works with smaller, private banks.

No matter which type of loan you end up with, they both have favorable terms and can help you get the funds you need. Contact us today if you’re ready to see your eligibility for either loan type and how we can help you!

,

What is a Jumbo Mortgage Loan?

If you’re in the market to buy a home, but need a loan for high amounts, you may need a jumbo loan. The name sounds ominous, and most people believe jumbo loans are impossible to qualify for or are too expensive. Neither is true. Jumbo financing is a great financial tool if you’re in the market to buy a home that exceeds the standard loan limits.  Here’s everything you must know about jumbo financing, how it works, and whether it’s right for you.

What is a Jumbo Morgage Loan?

A jumbo loan is financing for a home that’s higher than the conventional limit. In 2022, the conventional loan limit is $647,200. Any loan higher than this amount requires jumbo financing or non-conforming financing.

The exception to this rule is high costs areas such as California. For example, in Los Angeles, the conventional loan limit for 2022 is $970,800

The premise is the same for conforming and non-conforming loans – you must qualify for financing, but because it’s unconventional, there aren’t any government agencies backing up the lender. Fannie Mae and Freddie Mac back up or guarantee conventional loans. If a borrower defaults, they have the bank’s bank, ensuring they don’t lose their neck on the deal.

Jumbo lenders don’t have this guarantee which is why they have tougher requirements to ensure you can afford the higher loan payment and terms. It’s a precaution for you and the lender. You don’t want to get into a loan you can’t afford as much as they don’t want to lend you the money you can’t afford to pay back.

How Does a Jumbo Mortgage Work?

Jumbo financing works on all home types including single-family homes, condos, and townhomes. You can use the financing to buy a home or refinance an existing home. You can even use it as a cash-out loan, tapping into your home’s equity.

Jumbo Loans for a Home Purchase

Just like any loan, you must prove you qualify for the loan to use jumbo financing for a home purchase. Most jumbo loans are available from $548,251 to $2.5+ million. It’s possible to borrow more than $2.5 million too, but with even tougher qualifying requirements since the risk of default increases with the loan amount.

Jumbo Loans for a Rate and Term Refinance

A rate and term refinance are a refinance to either lower your interest rate or change the loan’s term to make it more affordable. In 2021, for example, millions of people refinanced their loans because interest rates dropped so low, even for jumbo loans. It was a great opportunity for many people to save money on interest and/or make their loan payments more affordable after a difficult year.

The rate and term refinance are also great for those who need a different term. Whether you took a 15-year term but it’s more than you can afford or you took a 30-year term but can afford more now, you can take advantage of the current low rates and refinance the loan.

With the jumbo rate and term refinance, you don’t take any cash out of your home’s equity. You simply restructure your loan so that it’s more affordable or to help you save money on interest over the life of the loan. 

Jumbo Loans for a Cash-Out Refinance

If you have equity in your home (you owe less than the home’s value), you may tap into it with a cash-out refinance.

Unlike conventional loans, though, you’ll need more equity before you can tap into it if you need a jumbo loan. The amount varies, but, you’ll need at least 30% equity before you can take equity out of your home.

Cash-out refinance loans have higher interest rates and tougher qualifying requirements because of the risk they cause. But if you’ve invested most of your money in your home and now need it for an emergency or future expense, a cash-out refinance may be an option.

How to Qualify for a Jumbo Loan

The question everyone wants to be answered is ‘how do I qualify for a jumbo loan?’ You know the requirements are tougher, but what do you need? Here’s a quick breakdown.

Minimum Credit Score

The exact credit score you need varies based on your loan amount and qualifying factors, but in general, borrowers need a 700+ credit score.

In other words, you need great credit to get jumbo financing. Again, it’s to account for the risk jumbo loans create. A borrower with a great credit score poses a lower risk of default which means you’re less likely to end up in foreclosure.

If you don’t have a 700+ credit score, you may still qualify if you have compensating factors or factors that make up for the risk a lower credit score creates.

Maximum Debt-to-Income Ratio

The next largest factor when determining your eligibility for a jumbo loan is your debt-to-income ratio. This compares your gross monthly income to the debts you have outstanding plus the new mortgage.

The DTI measures how well you can afford the mortgage. A high DTI means you may not be able to afford the mortgage, and a low DTI means you have more affordability and are at a lower risk of default. 

The exact DTI needed varies by borrower, but overall, a 40%-45% DTI is the maximum most borrowers can have to secure jumbo financing.

Employment Verification

If you’re employed by someone, you must be able to prove your employment with paystubs, W-2s, and a verbal/written Verification of Employment. If you are self-employed, you must provide proof of your income with your bank statements and tax returns. You’ll also need a statement from a third party, such as your CPA stating you are self-employed and the income you reported is accurate. 

Asset Verification

All borrowers must prove their assets by providing the last couple of months of bank statements. The bank statements must show the assets you claimed on your application and the deposits should be in line with the income you claim too. If there are large deposits, you may need to write a Letter of Explanation to explain where the deposits came from and to prove they are not funds from another loan.

Cash Reserves

Some borrowers need cash reserves to qualify for jumbo financing. Reserves are money you have set aside ‘just in case.’ If you lost your job or had other financial issues, the cash reserves could help cover your mortgage payments. Cash reserves are calculated based on the number of mortgage payments it could cover.

For example, if your mortgage payment is $2,000 and you have $16,000 in reserves, you have 8 months of mortgage payments set aside. This can help your chances of loan approval. 

Appraisal

All jumbo loans require an appraisal and the appraisal must state the home is worth at least as much as you agreed to pay if you’re buying the home. If you’re refinancing, it must be worth enough for you to refinance your current loan and still have the required amount of equity in it.

Sometimes jumbo financing requires a second appraisal to ensure the first appraisal was an accurate reflection of the current market rates. 

Jumbo Loans vs Conforming Loans

Since you must jump through a ton of hoops to get jumbo financing, you may wonder how it differs from conforming loans since they too have strict requirements. Here are the largest differences.

Credit Scores

Conventional loans are usually more lenient than jumbo loans because there’s less at risk and Fannie Mae or Freddie Mac backs up the loan. While you still need good credit, it doesn’t need to be perfect.

Loan Amount

The largest difference is the loan amount (the amount you can borrow). Conventional loans only go up to $548,250 (except for certain high-cost areas), whereas jumbo loans go much higher. Both loans, however, only allow you to borrow the amount you can afford. The limits are a generalization and aren’t a guarantee that you can borrow as much.

Stricter Underwriting Guidelines

Jumbo financing has stricter underwriting guidelines including a larger down payment, lower debt-to-income ratio, and more cash reserves. Both loans use compensating factors to make up for a ‘bad factor,’ such as a low credit score or high DTI, but jumbo financing may be less forgiving than conventional. 

 

Pros and Cons of the Jumbo Loan

Like any mortgage financing option, there are pros and cons of the jumbo loan that you should understand.

Pros

  • You can borrow more money, allowing you to buy a more expensive home. This is helpful especially in high-cost areas where the home prices greatly exceed the conforming loan limit.
  • You can avoid taking out two loans as conforming loans would require. With two loans, you’d need a first loan for 80% of the sales price and a second loan, such as a home equity loan for the remainder minus your down payment.
  • There are many loan options including fixed-rate and adjustable-rate loans, as well as 15 – 30 year term options, giving everyone a chance to choose the loan that suits them.
  • Jumbo loans still have the flexibility and great interest rates. As long as you work with a quality lender, you’ll get the same flexibility you’d get on a conventional loan.

Cons

  • You need great credit. A 700-credit score is typically the lowest you can have to qualify for the financing, which for some people is unachievable.
  • You need a lot of cash reserves. Conventional loans don’t require cash reserves for most borrowers, but jumbo financing may require reserves of 3 to 6 months of mortgage payments for you to qualify.
  • You need a large down payment. This ties up your money in your home which isn’t liquid. If you need to access the cash, you’ll need to qualify for a mortgage refinance or sell the home.

Are Jumbo Loan Interest Rates Higher?

Everyone wants to know about the interest rates. If the risk is higher on a jumbo loan, the rates are likely higher too, right?

They could be, but it’s not a necessity. When you work with a quality lender, you may secure competitive interest rates compared to conventional loans. The key is having great qualifying factors.

The lower your credit score and debt-to-income ratio, the higher your chances of securing a low-interest rate. If you have less-than-perfect qualifying factors, determine what compensating factors you may have that can offset the risk so you can secure the competitive interest rates.

Is a Jumbo Loan Right for You?

If you’re buying a home in an expensive market and don’t have the down payment to bring your financing needs below the conventional or high-cost limit you’ll need jumbo financing.

It’s not right for everyone since it is more expensive. Even with low-interest rates, the principal payment itself is higher than a traditional loan, so exercise caution before taking out a jumbo loan.

Make sure you can afford the payment not only today but, in the future, too. You’ll likely have the mortgage for 15 – 30 years, so think about your future. Will you have the same income or higher? Will you go down to one income when you start a family? Do you want a mortgage that takes up a large portion of your income?

Answering these questions honestly can help you choose the right mortgage. If you decide jumbo loans are the way to go, work with a reputable lender that offers competitive interest rates, forgiving guidelines, and exceptional service. A mortgage is one of the largest personal finance decisions you’ll make in your lifetime so make sure it’s an informed decision.