Rachel Lutts' Blog
Refinancing your home can have many benefits. First, you’ll be able to take out money to address immediate needs in your home like improvement projects. These things can only benefit your home’s value in the long term. Before you take the leap to refinance your home, you should be sure that you’re actually ready to take this step. Knowing what you’re in for allows the entire process to go more smoothly. Read on for tip to understand more about the refinancing process and what you’ll need.
Know Your Finances
Just like when you initially purchase a home, refinancing your home will require you to have your finances in order. Take a look at your budget and needs and determine if it makes sense for you to refinance your home. For example, your employment status or distance from life goals like retirement could have a factor on the term of the loan you’re willing to take out. A 15-year mortgage may make more sense than a 30-year mortgage, but your monthly payments will also be a bit higher. You need to take all of this into consideration before you refinance.
Your credit score will also be a factor in refinancing your home just as it was when you initially bought your house. Check your score and see if any red flags pop up. Getting these corrected earlier rather than later can help you to get a better rate on the loan. There are plenty of free services that exist online that allow you to check your credit score.
Know The Value Of Your Home
If you know the value of your home and understand how much equity you’ve built up in the house, it will give you a better idea of your refinancing options. You can’t get more than 70% of what your home is currently worth as a cash-out refinance. If you owe more than your home is worth, you might be in a tighter financial situation than you realize. You can do plenty of things to increase the value of your home; it will just take some time. You may even consider selling your house, making a move, and starting from scratch. Financially, this could be the best option, and you could also end up with a better interest rate.
Getting your finances in order and the simple act of preparing for a home refinance could give you some insight into your financial picture after being a homeowner for some time.
Stay out of debt. Don’t open new accounts. Pay down any debt you may have. That is the standard advice for people who are trying to get in good financial standing before buying a home or refinancing a home.
Do some research and find the best home loan refinance rates around. Then, look into your own finances and decide what’s best for you regarding refinancing your home loan.
If you’re a first-time homebuyer, odds are you’ve thrown the words “prequalified” and “preapproved” interchangeably. However, when it comes to home loans, there are some very important differences between the two.
For buyers hoping to purchase a home with a few missteps and misunderstandings as possible, it’s vital to understand the procedures involved in acquiring financing for a home.
Today, we’ll break down these two real estate jargon terms so that you can go into the mortgage approval process armed with the knowledge to help you succeed in securing a home loan.
Let’s start with the easy part--mortgage prequalification. Getting prequalified helps borrowers find out what kind and what size mortgage they can likely secure financing for. It also helps lenders establish a relationship with potential customers, which is why you will often see so many ads for mortgage prequalification around the web.
Prequalification is a relatively simple process. You’ll be asked to provide an overview of your finances, which your lender will plug into a formula and then report back to you whether or not you’re likely to get approved based on your current circumstances.
The lender will ask you for general information about your income, assets, debt, and credit. You won’t need to provide exact documents for these things at this phase in the process, since you have not yet technically applied for a mortgage.
Prequalification exists to give you a broad picture of what you can expect. You can use this information to plan for the future, or you can seek out other lenders for a second opinion. But, before you start shopping for homes, you’ll want to make sure you’re preapproved, not prequalified.
After you’ve prequalified, you can start thinking about preapproval. If you’re serious about buying a home in the near future, getting preapproved will simplify your buying process. It will also make sellers more likely to take you seriously, since you already have your financing partially secured.
Mortgage preapproval requires you to provide the lender with income documentation. They will also perform a credit inquiry to receive your FICO score.
Mortgage applications and credit scores
Before we talk about the rest of the preapproval process, we need to address one common issue that buyers face when applying for a mortgage. There are two types of credit inquiries that lenders can perform to view your credit history--hard inquiries and soft inquiries.
A soft inquiry won’t affect your credit score. But a hard inquiry can lower your score by a few points for a period of 1 to 2 months. So, when getting preapproved, you should expect your credit score to drop temporarily.
Once you’re preapproved for a mortgage, you can safely begin looking at homes. If you decide to make an offer on a home and your offer is accepted, your preapproval will make it easier to move forward in closing on the home.
Once the lender checks off on the house you’re making an offer on, they will send you a loan commitment letter, enabling you to move forward with closing on the home.
There are a number of programs, government-sponsored and otherwise, that are designed to help aspiring homeowners find and get approved for a mortgage that works for them.
Among these are first-time homeowner loans insured by the Housing and Urban Development Department, mortgages and loans insured by the USDA designed to help people living in urban and rural areas, and VA loans, sponsored by the U.S. Department of Veterans Affairs.
In today’s post, I’m going to give you a basic rundown of VA loans, who is eligible for them, and how to apply for one. That way you’ll feel confident knowing you’re getting the best possible deal on your home mortgage.
What is a VA Loan?
VA loans can provide soon-to-be homeowners who have served their country with low-interest rates and no private mortgage insurance (PMI).
If you’re hoping to buy a home soon and don’t have at least a 20% down payment, you typically have to take out private mortgage insurance. This means paying an extra insurance bill on top of your monthly mortgage payments. The downside of PMI is that it never turns into equity that you can then use when you decide to move again or sell your home.
Loans that are guaranteed by the VA don’t require PMI because the bank knows your loan is a safer investment than if it wasn’t guaranteed
VA loans may also help you secure a lower interest rate, or give you some negotiating power when it comes to discussing your interest rate.
Finally, VA loans set limits on the number of closing costs you can pay in your mortgage. And, if you’ve ever bought a home before, you’ll know how quickly closing costs can add up.
Who is eligible?
There are some common misconceptions about who can apply for a VA loan? So, we’ll cover all the bases of eligibility.
If you meet one of the following criteria, you may be eligible for a VA loan:
You’ve served 90 consecutive days during wartime
You’ve served 181 days during peacetime
You’ve served six or more years in the Reserves or National Guard
Your spouse died due to their work in the military
There are some restrictions to these eligibilities. For example, your chosen lender may still have credit score minimums.
Applying for a VA Loan
There are two main steps for applying for a VA Loan. First, you’ll have to ensure your eligibility. You can do this by checking the VA’s official website. Be sure to call them with any questions you may have.
Next, you’ll need a certificate of eligibility. The easiest way to acquire one is through your chosen lender. If you haven’t chosen a lender, you can also apply online through the eBenefits portal, or by mailing in a paper application.
Once you have a certificate, you can apply for your mortgage and you’ll be on your way to buying a home.
If you’re in the market to buy a home, you’re probably learning many new vocabulary words. Pre-approved and pre-qualified are some buzz words that you’ll need to know. There’s a big difference in the two and how each can help you in the home buying process, so you’ll want to educate yourself. With the proper preparation and knowledge, the home buying process will be much easier for you.
This is actually the initial step that you should take in the home buying process. Being pre-qualified allows your lender to get some key information from you. Make no mistake that getting pre-qualified is not the same thing as getting pre-approved.
The qualification process allows you to understand how much house you’ll be able to afford. Your lender will look at your income, assets, and general financial picture. There’s not a whole lot of information that your lender actually needs to get you pre-qualified. Many buyers make the mistake of interchanging the words qualified and approval. They think that once they have been pre-qualified, they have been approved for a certain amount as well. Since the pre-qualification process isn’t as in-depth, you could be “qualified” to buy a home that you actually can’t afford once you dig a bit deeper into your financial situation.
Getting pre-approved requires a bit more work on your part. You’ll need to provide your lender with a host of information including income statements, bank account statements, assets, and more. Your lender will take a look at your credit history and credit score. All of these numbers will go into a formula and help your lender determine a safe amount of money that you’ll be able to borrow for a house. Things like your credit score and credit history will have an impact on the type of interest rate that you’ll get for the home. The better your credit score, the better the interest rate will be that you’re offered. Being pre-approved will also be a big help to you when you decide to put an offer in on a home since you’ll be seen as a buyer who is serious and dependable.
Things To Think About
Although getting pre-qualified is fairly simple, it’s a good step to take to understand your finances and the home buying process. Don’t take the pre-qualification numbers as set in stone, just simply use them as a guide.
Do some investigating on your own before you reach the pre-approval stage. Look at your income, debts, and expenses. See if there is anything that can be paid down before you take the leap to the next step. Check your credit report and be sure that there aren’t any errors on the report that need to be remedied. Finally, look at your credit score and see if there’s anything that you can do better such as make more consistent on-time payments or pay down debt for a more desirable debt-to-income ratio.
You may have heard of private mortgage insurance, also known as PMI, but you’re probably not sure what exactly it is. If your down payment is less than 20% of the purchase price of the home, then you’ll need to pay for this additional insurance in order to secure a loan for the home. This type of policy protects the lender if you end up in a foreclosure situation. This way, the lender is assured that they will not lose money.
Private mortgage insurance is also required if you refinance your home when it has accrued to less than 20% equity. Again, this protects the lender from losing money if the loan is defaulted on.
The fees involved with private mortgage insurance can range based on a few factors including the actual size of the down payment and your credit score. You can expect the cost of the insurance to be somewhere between 0.3% and 1.5% of the loan amount per year. The PMI premiums are tax deductible some years and other years they are not. It really all depends upon the state of the government and what they have enacted for the particular fiscal year. Private mortgage insurance premiums can be paid either monthly or with a large payment upfront, although most policies will require the borrower to pay on a monthly basis.
This Insurance Can Be Canceled
The lender will automatically cancel your PMI once the loan drops down to 78% of the home’s value. For this reason, you’ll want to keep track of your payments in order to see how far away you are from shedding this monthly fee. When your loan is paid down to 80% of the home’s original value, you have the right to ask your lender to discontinue to insurance premium payments.
What Is The Loan-To-Value Ratio?
This ratio is the amount of mortgage debt in the form a percentage based on how much the home is worth. It’s calculated by the following formula:
Amount owed on the mortgage/Appraised value
This is an important factor when it comes to matters of PMI insurance, as it’s how the required loan payment percentages are calculated. If a home is worth $100,000 and $80,000 is still owed on the home, the loan-to-value ratio is 80 percent. This means the borrower can request the insurance be cancelled.
FHA Loans Have Different Requirements
If you secure an FHA loan, they require the payment of PMI premiums for the entire life of the loan. You can’t exactly cancel these insurance payments but you can refinance the loan in order get rid of the insurance. This means that you will no longer have an FHA loan.
Private mortgage insurance can be a nuisance, however as a first-time homebuyer with little capital, the fees may be worth it when you’re able to secure your first home.