Down Payment Assistance Programs

When is Private Mortgage Insurance Required?

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If you qualify for conventional financing, but you put less than 20% down on the home, you’ll pay Private Mortgage Insurance. It’s a cost that has many would-be-buyers shuddering and it makes some avoid taking out the loan altogether.

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Is PMI as bad as people make it seem? It has its good and bad sides – keep reading to see how it may affect you.

The Benefits of Private Mortgage Insurance

PMI is an extra charge every month, but there are certain benefits that it does allow:

  • You don’t need a large down payment – You can get a loan with as little as 5% down in some cases. Of course, you have to qualify with your credit score and debt ratio to prove that you can afford the loan, but if you qualify, the PMI helps you. The PMI helps lenders know that they will still receive most of the money that you borrowed even if you default. That extra charge every month gives you the boost you need for approval.
  • You can buy a home sooner – Without the need to save for a 20% down payment, you can likely become a homeowner much sooner than if you needed 20% down on the home. Let’s say you wanted to buy a $200,000 home, a 20% down payment would be $40,000. If you only needed a 5% down payment, you’d only need a down payment of $10,000. Chances are that it is a lot easier to save $10,000 than $40,000.
  • You can request lender paid PMI – If you don’t want the extra charge on your mortgage payment each month, you can ask for lender paid PMI. The lender will pay the total cost of the loan’s PMI upfront for you. In exchange, they charge you a slightly higher interest rate. If the extra interest charges are less than what the PMI would cost, it may make sense for you to do so.
  • You can cancel PMI – You don’t have to pay PMI forever, unlike FHA and USDA loans. You can request cancellation of the insurance once you owe less than 80% of the home’s value. You have to request the cancellation, which means keeping tracking of your home’s appreciation and your outstanding principal balance. You can request cancellation in writing. If you don’t cancel at that point, the lender must cancel it automatically once you owe less than 78% of the home’s original value.

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The Downsides of Private Mortgage Insurance

There are downsides of PMI that you should know about just to make sure it’s right for you:

  • PMI raises your debt-to-income ratio – You pay PMI on a monthly basis, which means it makes your mortgage payment higher. This makes your housing ratio and total debt ratio higher. Conventional loans allow a 28% housing ratio and 36% total debt ratio. If you are near that before the PMI, the Private Mortgage Insurance may set you over the limit.
  • You can’t count on your home appreciating – The housing crisis taught us that home values could drop fast. If you count on canceling the PMI in a few short years, yet your home’s value drops, you won’t be able to cancel it.
  • It’s an added expense – If you look at the big picture, Private Mortgage Insurance can cost you thousands of dollars on top of the actual cost of the home. Even if PMI costs you an extra $50 a month and you pay it for 10 years, that’s an extra $6,000 that you won’t see again. You don’t get reimbursed for the insurance premiums that you pay.
  • The insurance is for the lender – Even though you pay the premiums for the insurance, it protects the lender. If something happens to your home or you can’t make the payments, it’s the lender that has coverage, not you. The only coverage you have is your homeowner’s insurance, which covers you in the event of a disaster that occurs to physically harm the home.

Private Mortgage Insurance has good and bad sides. Generally, it helps buyers afford the home that they want/need. Before you accept PMI, make sure you explore all of your options. Ask about the actual cost of the PMI as well. Each buyer pays a different amount as it’s based on your LTV and credit score.

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What are the Requirements for First-Time Home Buyer Programs?

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Many loan programs are only for a first-time homebuyer. Does that mean only those that have never owned a home? It may shock you to hear that the answer is ‘no.’ There are other stipulations that can make you a first-time homebuyer and therefore eligible for a variety of great programs.

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The True First-Time Homebuyer

Of course, the true first-time homebuyer is the person that never owned a home before. Maybe you rented or you lived with your parents. Whatever the case may be, you never signed on the dotted line on a mortgage.

First-time homebuyers typically have a hard time coming up with a large down payment. Because they don’t have a home with equity to sell, they have to rely on their savings. This is why many programs cater to the ‘true’ first-time homebuyer because they need help with the down payment.

The ‘Other’ First-Time Homebuyer

There are first-time homebuyers that have owned a home before. It sounds strange, but it’s the homeowners that owned a home before and now they don’t. Typically, you have to be without a home that you own for three years in order for loan programs to consider you a first-time homebuyer again.’

The borrowers that typically fit this mold are those that either sold their home for one reason or another and now rent or those that lost their home in foreclosure. Whatever the case may be, if you don’t have a home now and you haven’t owned one for three years, you may qualify for the first-time homebuyer benefits.

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Divorced First-Time Homebuyers

If you were married before but aren’t now, you may qualify as a first-time homebuyer. Here’s how. Did your spouse own the home before you got married? Or did your spouse buy the home in his name only even after you were married? If you didn’t sign your name on the dotted line on the mortgage, you may qualify as a first-time homebuyer.

Qualifying for Loan Programs as a First-Time Homebuyer

Before you start applying for loan programs, whether you are a first-time homebuyer or not, you should know how to maximize your chances of approval:

  • Maximize your credit score – Government-backed loan programs have low credit score requirements, but that doesn’t mean you shouldn’t try to increase your score. The higher the credit score you offer a lender, the better terms you’ll get. Try to achieve the highest score possible so that you can obtain those great terms.
  • Save as much money as you can – You’ll need some type of down payment unless you qualify for VA or USDA financing. The more money that you have to put down on the home, the better your chances of approval becomes. Even if you don’t put all of the money you saved down on the home, it puts you in a good light with the lender if you have reserves on hand.
  • Keep your debts down – Lenders don’t like you to have other debts. You need to try to pay off as many debts as possible. This way your income compared to your debts is low enough for lenders to feel comfortable giving you a new mortgage.
  • Have stable employment/income – You may not need a 2-year history at the same job anymore, but any consistency that you can show a lender, the better your chances of approval become. Lenders want to see that you are at least working in the same industry and have income that is either stable or rising over the years.

First-time homebuyers have many loan options available to them. If you want to apply for special programs or grants for first-time homebuyers, you’ll need to be an actual first-time buyer or one that hasn’t owned a home in at least three years. If you don’t qualify as the first-time buyer, there are plenty of other government-backed and conventional loan programs that you can use as well.

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What Upgrades and Renovations Reliably Increase Home Value?

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Not all home renovations provide a decent return on your investment. In fact, some investments that cost thousands of dollars give very little return back to the homeowner. Before you jump in headfirst and make renovations to increase your home’s value, learn which renovations will actually increase your home’s value.

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Paint the Interior or Exterior of the Home

Paint is inexpensive, yet it can add tremendous value to your home. Inside, paint can give a home that warm, cozy feeling. Just by switching the paint colors, you can transform a room from boring to amazing. Whether you have a home with old, peeling paint or the paint is just outdated and needs a fresh coat, it can add tremendous value to your home

Exterior paint can have the same effect. The exterior of your home offers the first impression of your home for many people. If the paint looks faded and worn, it may turn people off. A fresh coat of paint can bring the house back to life, making it look newer and brighter, again for only a small investment, which you’ll see, reflected in your home’s new value.

Fix Up the Kitchen or Bathroom

Kitchens and bathrooms get the most use and therefore have the greatest return on their value when renovating them. Luckily, you don’t have to do major renovations to either room to see a good return on your investment.

Minor renovations in the kitchen and bathroom include refinishing the cabinets, replacing the appliances, or changing the flooring. These changes, whether you choose one or all, typically return at least 80 percent of your investment.

A few other ways to moderately renovate a kitchen or bathroom include changing out the faucets or lighting and repainting either room. What you get when you are done are two rooms with great function and new beauty. Having updated kitchens and bathrooms also help you sell your home faster, as they are the two areas most buyers look at first.

Update the Curb Appeal

Many people focus on interior renovations when fixing up a home, overlooking one simple change they can make outdoors – updating the curb appeal. Making your home look impressive from the outside doesn’t require extensive work or a lot of money, though. Simple changes like adding some landscaping, trimming the grass and bushes, and fixing any broken shutters, gutters, or fencing all increase the value of your home.

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Buyers use your curb appeal to determine what the inside of your home looks like before even stepping inside it. If the outside of the home is well kept, passerby assumes that the inside is just as immaculate. If the outside looks trashed and overgrown, it gives a bad vibe regarding the inside too.

Update the Flooring

Changing the flooring can increase your home’s value too. Even though it’s not something you probably notice right away, since the human eye naturally looks up, flooring is important.

If you have torn carpet, damaged wood floors, or torn linoleum, new floors can add tremendous value to your home. If you can afford it, go for the wood floors, as they add the most value. If you don’t prefer wood floors or it’s not in your budget, ceramic or linoleum work well too.

Make Energy Efficient Changes

Buyers love energy efficiency in homes. If you change out the appliances, add solar panels, or the utilities with energy efficient options, you’ll see an increase in your home’s value. Today, consumers want everything energy efficient. It helps reduce the wear and tear on your appliances and utilities and it helps reduce your utility bills.

Small home improvement projects can have a major effect on your home’s value. If you want to increase your home’s resale value, consider any of the above changes. We also recommend talking to a local real estate agent or appraiser before making any renovations to your home to see what people in the area want to see. The professionals working in your area see firsthand how people react to freshly painted walls, energy efficient appliances, and updated flooring, giving you the best chance at increasing your home’s value.

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What are the Disadvantages of Seller Paying a Buyer’s Closing Costs?

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If you find yourself coming up short on your closing costs, you may ask the seller for assistance. The seller paying the closing costs is common and is even acceptable in many loan programs. However, it may not be the right choice for everyone. Before you jump at the chance to have help with your closing costs, learn the disadvantages of doing so in order to make the right decision.

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The Seller Isn’t Really Paying the Costs

While it seems like the seller is doing you a tremendous favor by crediting you thousands of dollars at the closing, they truly aren’t paying the fees for you.

When you look closely at the process of the seller paying the closing costs, you’ll see that when you ask the seller for help, he or she agrees to in exchange for a higher sales price. In other words, the seller makes the same amount of money on the sale whether he pays your closing costs or not. When you agree to the higher sales price, you end up taking a higher loan amount. This results in a higher monthly payment, more interest, and more money out of your pocket in the end.

The Appraisal Could be an Issue

If you raise the selling price of the home, the home must appraise for that amount. Anyone could increase the asking price of a home and give seller concessions, but if the market data doesn’t support the value, a lender won’t allow the higher sales price.

If the appraisal comes in lower than the sales price, it puts you right back in the same position. You can either:

  • Walk away from the sale. This is often the best idea since who wants to pay more for a home than it’s worth, right?
  • Pay the difference in cash. If you didn’t have the cash to cover your closing costs, you probably don’t have the cash to pay the difference, so this probably isn’t an option.
  • Negotiate a lower sales price. If you still need help with the closing costs, your seller may not want to lower the price, which could leave you back at square one – walking away from the sale.

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The Real Estate Commission Increases

While you don’t technically pay the real estate commission (the seller does), it still affects the bottom line. If you raise the asking price of the home in order for the seller to cover your closing costs, the seller has to pay a higher commission to the real estate agent.

Many real estate agents make between 3% and 5% of the sales price of the home. While 5% on even $5,000 is only $250, it’s still another higher expense the seller and in return, you have to pay for the home. Plus with the seller paying the closing costs, it’s more money out of the seller’s pocket right away.

You May Have Mortgage Approval Issues

Each loan program has different allowances for seller concessions. The FHA and USDA loan allow up to 6% of the sales price in seller concessions. But conventional loans allow different amounts depending on your down payment. For example, if you put down less than 10%, the seller can only give you up to 3% in seller concessions. If you put between 10% and 25% down on the home, the seller can give you 6% back and if you put down more than 25%, the seller can give you as much as 9% back in seller concessions.

Just because the mortgage program allows it, though, doesn’t mean the lender has to approve it. Each lender has their own rules regarding what they’ll accept. You may find lenders that don’t approve of seller concessions or if they do, they limit what sellers can give you. This could make it harder to get your loan approval.

Having the seller paying the closing costs has its pros and cons. Make sure you look at both sides before deciding what to do. The biggest issue is the larger amount that the closing costs will cost you in the end. With the interest on the loan for a possibility of 30 years, you could greatly increase the amount you pay for that ‘assistance.’

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Should You Use Your 401(k) for Down Payment?

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If you don’t have money to put down on a home, but you have a sizeable 401K account at work, you may consider using that money for your down payment. While you probably know that withdrawing the funds prior to retirement results in a penalty and taxes, there is a way around it. You may be able to borrow the money from your 401K to purchase a home.

Keep reading to learn how this might work.

Borrowing Money From Yourself

Essentially, when you borrow money from your 401K, you borrow money from yourself. Keep in mind that this is a loan with interest and due dates. The difference between a 401K loan and withdrawal is the penalties and taxes. When you borrow the money, you don’t pay penalties or taxes. When you withdraw funds, you do, but you don’t pay the funds back.

Before you start, though, you’ll have to make sure that your employer allows 401K loans. Most employers do, but some don’t. In general, most companies allow you to borrow up to 50% of your vested balance. So if you have $50,000 fully vested according to the company’s terms, you could borrow up to $25,000 for a down payment.

Paying the Loan Back

Just like any other loan, you must pay the 401K loan back in full. Because each company has different rules, you should check with your plan sponsor to see the exact terms of your loan. Typically, you have up to five years to pay the loan back (plus interest). If you leave the company (either voluntarily or involuntarily), you have a short amount of time to pay the loan back in full (typically 60 – 90 days).

The amount you pay back will include interest. Typically, you pay 2 points more than the current prime rate in interest. This interest doesn’t go to a bank though; it goes directly into your 401K account. Consider it the funds to make up for the money you would have made had you left the funds in your account to grow.

Does the 401K Loan Affect Your Debt Ratio?

A large part of your mortgage application is your debt ratio. This is a measure of your current debts to your gross monthly income. Lenders look at debts like your installment loans, mortgages, and credit card loans. If you borrow the money from your 401K loan, though, they will need to include that payment as well since it’s a debt you have to pay back.

If your debt ratio isn’t close to the maximum allowed for each loan program, you may not have anything to worry about. However, if your DTI is close to the maximum allowed, the 401K loan might put you over the edge, making it harder to get approved.

Is it Smart to Use Your 401K?

Even if you know you can borrow from your 401K account, is it right to do so? Some people have no problem borrowing from themselves, knowing that the interest they are paying is going right to them and not to a bank. But, there are some things you may want to consider before doing so.

First, ask yourself, do you need the down payment? If you have no money of your own for the down payment, you may not have a choice but to borrow from your 401K unless you are eligible for a 0% down payment loan, such as the USDA or VA loan. If you have some money, though, and it meets the minimum requirements for the loan program, you may want to leave your 401K alone.

You should also consider your other options, even if you don’t have any money to put down on the home. Have you exhausted any gift options or looked at down payment assistance programs in your area? If you haven’t, you should consider exhausting all available options to you so that you can leave your 401K alone if possible.

While a 401K loan is possible, it shouldn’t be your first option. Make sure you look at all other options to determine if you can get the money you need for a down payment elsewhere. If you can’t and you need the 401K loan, make sure you understand the terms and the maturity date so that you can make good on the loan.

Is an Economic Recession a Good Time to Buy a House?

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The Housing Crisis of 2008 had long-lasting effects on homeowners. It took almost a decade to see changes in home values or at least worthwhile changes. Now there’s the coronavirus pandemic and we’re in another recession, but this time it’s different.

We aren’t dealing with rock-bottom housing prices or mortgage lenders facing repeated losses due to a multitude of foreclosures. While millions of Americans are out of a job still, the housing market hasn’t nosedived yet.

But since we’re in the midst of the recession, now may be a great time to buy a home, here’s why.

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Low Interest Rates

We can’t love coronavirus for the toll it took on many lives, but it lowered interest rates. If there’s a silver lining, there it is.

Interest rates are the lowest they’ve been since the housing crisis. If you’re waiting for the ‘perfect payment,’ you may get it now. While the Fed keeps its rates low to keep money moving in the economy, it’s a great time to take advantage of mortgage rates and buy a home.

Choose a fixed rate loan to have that rate locked in and you don’t have to worry about what happens in the next few years.

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Lower Housing Prices

Anyone selling their home now needs to move. They aren’t doing it because they want to size up or moving just for the fun of it. They either can’t afford the mortgage, but don’t want a foreclosure or their job moved them.

Either way, sellers are motivated, which makes them more likely to negotiate.  While you can’t steal the homes, you may pay much lower prices than during a regular economy.

Sellers Give More

Motivated sellers provide more help. If you want the window treatments or furniture included, sellers may oblige. If you need closing cost assistance or can’t close for 60 days, sellers may agree. They know buyers are scarce, so they won’t run you off by saying no to your demands.

Less Competition

Even with low rates, many buyers can’t get a loan. Many potential buyers don’t have the down payment or don’t have a job so they can’t borrow money. This means fewer buyers in the market. With fewer buyers bidding for the same home, you get what you want without hassle.

Homes Sit Longer

Recessions make qualifying for a mortgage hard. If buyers can’t get financing, homes don’t sell. The longer homes sit on the market, the more desperate sellers get. If a home sits long enough, sellers may lower the asking price before you even bid. Once you find the home and negotiate, you get quite the deal on the home.

Watch out When Buying a Home During a Recession

Buying a home during a recession has many benefits, but there are downsides.

  • What happens if you lose your job? No job is 100% secure, especially during a recession. Even with the best deal, if you don’t have a job, a mortgage may be unaffordable. Now you put yourself at risk of foreclosure.
  • Banks get tougher. Recessions affect banks too. They won’t lend to just anyone. Lenders make sure you can afford the loan. They may require you to have liquid assets in an emergency fund too. They have to protect themselves from loss.
  • Investors may be lurking. Recession prices are an investor’s goldmine. Buying homes at rock bottom prices and selling them for a lot more when the economy improves is the perfect recipe for investors. With more buyers in the market, competition increases.

Buying a home during a recession may have a great outcome. Do your homework like you would during any economy. Check the loan’s affordability, the home’s historic values, and make sure you love the neighborhood. A home is one of the largest investments you’ll make in your life; enter the transaction with caution for the best results.

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Down Payment Requirements for Conventional, FHA, VA, and USDA Loans

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If there’s one thing that holds many potential homebuyers back from buying a home, it’s the down payment or lack thereof. It’s hard to save money while paying rent and dealing with the standard cost of living. Many people avoid buying a house because they don’t have the standard 20% down payment that they assume that they need.

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In reality, this isn’t the case. Even conventional loans don’t require a 20% down payment. Keep reading to learn the minimum down payment for each program to see which one you may qualify for after all.

Conventional Loan Down Payment Requirements

Conventional loans carry the myth that you need to put 20% down on them, but you don’t. You can get away with a down payment as low as 5%. Let’s look at how different that looks.

Let’s say you want to buy a home for $200,000. If you abided by the 20% rule, you would need $40,000 for the down payment. If you put down the minimum down payment, though, you’d only need a down payment of $10,000. That’s a difference of $30,000 and probably many years of saving for a down payment.

Conventional loans do require you to pay Private Mortgage Insurance if you do put less than 20% down on the home, though. This shouldn’t be a deal breaker though. PMI is insurance that protects the lender as long as you owe more than 80% of the home’s value. Once you owe less than 80% of the home’s value, though, you can have the lender eliminate the PMI from your loan without requiring you to refinance the loan.

Conventional loans do have stricter guidelines than other loan programs. You will need:

  • 680 credit score or higher
  • 28% housing ratio (your mortgage payment can’t exceed 28% of your gross monthly income)
  • 36% total debt ratio (your total mortgage payment can’t exceed 36% of your gross monthly income)
  • Stable employment and income
  • FHA Loan Down Payment Requirements

FHA loans require an even lower down payment. You can put down as little as 3.5% of the home’s purchase price and get an FHA loan. This could save you 1.5% compared to the conventional loan. FHA loans do charge mortgage insurance on your loan as well. The difference with FHA loans, though, is that they charge you mortgage insurance no matter how big or small your down payment is on the home.

FHA mortgage insurance also lasts for the life of the loan. Unlike conventional loans, you can’t get it eliminated. As long as you have the FHA loan, you pay the mortgage insurance. The only way to eliminate it is to refinance the loan into a conventional loan once you owe less than 80% of the home’s value.

The FHA loan has more flexible guidelines than the conventional loan:

  • 580 credit score
  • 31% housing ratio
  • 41% total debt ratio
  • Stable income and employment
  • Proof that you’ll live in the home as your primary residence
  • No defaulted federal debt

The FHA also has one exception to the credit score rule. You may be able to get away with a credit score as low as 500 (if you can find a willing lender). The difference is that you will have to make a minimum down payment of at least 10% if you have a credit score lower than 580.

VA Loan Down Payment Requirements

If you are a veteran of the military, you have the good fortune of securing the VA loan. You need to prove that you are entitled to this benefit by providing your Certificate of Entitlement. You can obtain this if you have served at least 90 days during wartime or 181 days during non-wartime. If you served in the National Guard or Reserves, you must serve at least 6 years. No matter your branch of the military, you must also have an honorable discharge.

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If you are eligible for the VA loan, you don’t need a down payment. You can get a 100% loan. This makes it much easier for veterans to become homeowners. The VA is able to offer this option because they guaranty the loans. In other words, they back the lenders up if you default. The VA will pay the lender back 25% of the amount that they lost.

VA loans don’t require mortgage insurance. You do pay an upfront funding fee equal to 2.15% of your loan amount for regular military members and 2.4% for members of the National Guard or Reserves.

VA loans also have flexible guidelines:

  • Minimum 620 credit score
  • Maximum 43% total debt ratio
  • Enough disposable income to meet the requirements for your area and family size
  • Proof that you will live in the home as your primary residence
  • No defaulted federal loans

USDA Loan Down Payment Requirements

USDA loans are another 0% down payment option. In order to be eligible for the program, you must purchase property in a rural area according to the USDA standards. You must also have a total household income that is equal to or less than 115% of the average for the area.

If you are eligible, you won’t need a down payment for the USDA loan. You can borrow 100% of the home’s purchase price as long as it’s a modest home for the area. The USDA does charge both upfront and annual mortgage insurance. You pay the annual mortgage insurance for the life of the loan, as you do for the FHA loan. The only way to cancel it is to refinance the loan into a conventional loan.

In order to qualify for a USDA loan, you must:

  • Have a 640 credit score or higher
  • Have a maximum 29% housing ratio
  • Have a maximum 41% total debt ratio
  • Prove that you will live in the home as your primary residence
  • No defaulted federal loans

As you can see, you have many options for loans even when you don’t have a 20% down payment. Explore your options and see which loan will work the best for you to become a homeowner.

Meta Description: You don’t need a 20% down payment for most loan programs today. Learn the lowest amount you can put down for each of the loan programs today.

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Seasoning Guidelines for Your Down Payment

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When you make a down payment on a home, you can’t just use random money to make it. Lenders need to know where the funds originate. In other words, they need the funds to be seasoned. Just what does that mean and how do you prove it? Keep reading to learn all about it.

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What are Seasoned Funds?

Lenders will ask to see your bank account statements for the last 60 days (2 statements). On these statements, they will look for large down payments that don’t’ coincide with your income. If there are large deposits during this time, you can expect the lender to inquire about the source of the funds.

If a lender asks about the deposit, you need to provide proof of where the funds originated. For example, did you get a tax refund or a bonus from work? Those funds are easy to prove and typically acceptable with a lender. If you can’t prove the origination of the funds, though, the lender may assume that the money is from a loan. Lenders cannot accept down payment funds that come from a loan. This affects your debt ratio and your ability to secure the new mortgage.

What’s the Problem With a Down Payment Loan?

Many lenders shy away from borrowers that have to borrow the funds to put down on a home because it puts another lien on the home. If you don’t have any of your own money invested in the home, you pose a higher risk of default. What if you run into financial trouble? Will you care if you walk away from the home? If you didn’t have any of your own money put down on the home, it may be easier to just walk away from it.

Proving Your Funds are Seasoned

So how do you prove that you have seasoned funds? It’s simple – have them in your account for at least two months. Lenders are comfortable with this method because if you did in fact take out a loan for the down payment funds, it would show up on your credit report within that 2-month period. Even if your funds are ‘seasoned’, you can’t hide the loan from the lender.

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Now, what about funds that are legitimate, but may not be seasoned? There are a few exceptions to the rule:

  • Regular contributions to your savings – If you have payroll deductions or other automatic savings plans set up to create your down payment, you don’t have to wait 60 days after you hit the down payment threshold. You can show the lender your pattern of regular savings contributions, which is usually enough to consider the funds seasoned and available for use.
  • Gift funds – If you have a family member or close friend that is giving you gift money for your down payment, you don’t need to wait 60 days after you receive the funds. You do, however, have to have a paper trail to show that the funds are a gift. This includes a gift letter from the donor, proof of receipt of the funds with a deposit ticket, and proof of deposit in your own account.
  • Retirement funds – If you use your 401K or IRA savings to put money down on a home, you don’t have to season those funds either. Again, you’ll need that paper trail to show lenders where the money came from and whether or not it’s required to be paid back, (401Ks usually have to be paid back).

Have Explanations

The best thing you can do if you have unseasoned funds is have an explanation for the lender. Anything that you can put in writing and include proof of the origination of the funds will help. Lenders are going to scrutinize every deposit you make unless they know it’s tied to your income. The more proactive you are with supplying the proof of its origination, the better your chances of the lender accepting it.

Your explanation must be detailed and truthful. Again, the paper trail speaks for itself. It gives the lender something to rely on rather than just your written word. If you have a decent explanation of the origination of the funds and it’s clear that it’s not any type of loan, you may be able to get away with using it for your down payment.

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Finding the Best Home Renovation Loan Program

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Home revocations are expensive. Fortunately, there are programs available today that make them more affordable. Tapping into your home’s equity, you can invest the funds right back into your home with one of the many home renovation loans available today.

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Keep reading to learn which program may be best for you.

The Home Equity Loan (Line of Credit)

Most people think of a home equity loan or line of credit for home renovations. This is probably the simplest loan program since it’s a second lien on the property. You can typically borrow up to 85% of the home’s current value with either loan option.

The home equity loan is a fixed second loan that provides you with a lump sum of funds to make the renovations. Upon receiving the loan, you start making principal and interest payments right away on the full amount. Most home equity loans have a term of 20 years and a fixed interest rate. You receive the funds once and that’s it. The home equity loan is good for projects that have a set budget and you will only need one time.

The home equity line of credit is a revolving loan. It works like a credit card. You get a credit limit to spend and access to it. You don’t have to draw any funds out right away. If you do draw funds out, you pay interest only on those funds. You can choose to make principal payments on top of the interest, but it’s not required. If you do pay the principal back, you can reuse the funds for up to 10 years.

After the 10-year draw period ends, you must make principal and interest payments for the next 20 years. You cannot withdraw any funds once the draw period ends. The HELOC is good for borrowers that don’t have a fixed budget in mind for the home renovations or that will need repeated access to the funds.

Refinance Your First Mortgage

You can also wrap all of your needs into one loan with the cash-out refinance. If you don’t have a great interest rate on your first loan right now, taking a cash-out refinance can simplify things. You borrow as much as you need to pay off your existing mortgage, plus any cash you need for home renovations. You can typically borrow up to 80% of the home’s value with a cash-out refinance, if you qualify.

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Cash out refinances work like the home equity loan. You receive your equity in one lump sum. You can do what you wish with the funds. You’ll pay principal and interest payments on the amount borrowed right away. The interest rate on a cash-out refinance may be a little higher due to the risk the lender takes, so make sure you pay careful attention to the mortgage payment amount.

Take Out a Rehab Loan

There are several rehab loans that you can take out to renovate your home too:

  • FHA 203K – This government loan has flexible guidelines like the standard FHA loan. It provides you with funds to refinance your existing loan plus the cost of home renovations on your primary residence. You can borrow up to 110% of the home’s after-improved value for home renovations. You’ll need a 3.5% down payment and minimum 580 credit score. You can opt for the Streamline FHA 203K that allows up to $35,000 in renovations with no structural changes or the full FHA 203K with stricter requirements, but that doesn’t have a limit on the dollar amount or type of renovations.
  • HomeStyle Loan – The Fannie Mae HomeStyle Loan is the conventional version of the rehab loan. You’ll need a slightly higher credit score of 620 and at least a 3% down payment. Conventional loans have slightly stricter underwriting guidelines, but the HomeStyle Loan allows you to renovate your primary, investment, or second home. You can borrow up to $484,350 with the renovations taking up no more than 75% of the after-repaired home value.

The best home rehab loan for you depends on your circumstances. Do you like your current first mortgage? If you’d rather leave it untouched, you’ll need to take out a home equity loan or HELOC. If you aren’t attached to your first mortgage and don’t mind refinancing it, any of the rehab loans or the cash-out refinance can be a good option. Think about your qualifying factors and if you need the FHA loan for its flexible guidelines. If you qualify for conventional financing, your best bet is to try the cash-out refinance or Fannie Mae HomeStyle loan.

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Understanding Discount Points

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When you take out a mortgage, you have to lock in your interest rate. It’s a big decision as it affects your mortgage payment and the total cost of your loan. In the process, your lender may offer you the option to pay discount points. Before you jump at the chance, you should understand what they are and how they affect your loan.

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What are Discount Points?

A discount point is a fee you pay upfront (at the closing) to lower your interest rate. You may hear lenders say that you are ‘buying down your interest rate.’ You can consider it prepaid interest. Rather than the lender charging you a higher interest rate, they charge you a fee upfront. You pay the interest ahead of time in order to get the lower interest rate.

How Much do Discount Points Lower your Rate?

The question everyone wants to know is how much they will save. This does vary by lender. In general, lenders lower your interest rate by 0.25% for every point you pay. One point equals one percent of the loan amount. If you borrow $200,000, one point equals $2,000 and is paid at the closing.

Again, the exact amount varies by lender. Always ask the details about the discount points. Ask to see both interest rates – the rate without points and the rate with points so that you can make an informed decision. Some lenders may offer the option to pay a full point, half a point, or even one and a half points. Every situation is different.

What do Points do For You?

If you pay discount points, it lowers your interest rate for the life of the loan. As long as you keep the same loan, you keep that rate. You don’t have to pay any fees in the future, either. It’s a one-time fee. Lenders charge it to collect the interest they otherwise would have earned on your loan over its lifetime. The lender comes out the same in the end – it’s you that sees the difference.

Is it Worth it?

This is what you should really focus on – is it worth it to pay points? Looking at it from the surface, who wouldn’t want to lower their interest rate, right? But sometimes it doesn’t make sense to do so.

You should figure out your break-even point. This is the point that you pay back the money paid for the points and start reaping the savings of the lower interest rate. Here’s how it works.

Figure out how much you’ll save on your monthly payment by paying the discount points. Let’s say the difference in payments is $100. Next, determine the exact cost of the points. Let’s say the points cost you $2,000. It would take you 20 months to pay back the money paid for the points:

$2,000/$100 = 20 months

This is your break-even point or the point that you start reaping the savings of the new, lower payment. Use that break-even point to decide if paying the points is worth it.

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Think about how long you’ll be in the home. Let’s say you plan to move in three or four years. It may not make sense to pay the fee upfront just to save $100 for a few months or even two years. If you know that this is your ‘forever’ home and you don’t plan to refinance in the near future, paying the points makes sense. You’ll save $1,200 per year on the interest. Add that up over 10 or 20 years and you’ll save a lot of money.

If you aren’t sure of your plans, you may want to skip the discount points, or keep them as low as possible. For example, maybe you split the difference with the lender. Rather than paying a full point, you pay a half of a point and lower your interest rate slightly. This way you still save money and it’s not the end of the world if you end up moving or refinancing in the near future.

Of course, before you pay points, assess your financial situation. Will it hurt you to pay those points upfront? If you need the money for your down payment, closing costs, or just to get into the home comfortably, don’t pay it. You can use the money now and pay the loan down as you can. You can always make extra principal payments toward your loan in the future, which ultimately decreases the total amount of interest that you pay over the life of the loan.

Whether or not you pay discount points is a personal decision. Compare all of your options not just from one lender, but several. This way you can choose the loan that makes the financial sense now and well into the future. Remember, buying a house is one of the largest investments you’ll make in a lifetime.

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