Down Payment Assistance Programs

Understanding Seasoned Funds

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Did you know that when you take out a mortgage, you can’t just use any money that you come across for your down payment or closing costs? Lenders want what’s called ‘seasoned funds.’ Just what does this mean and how does it affect you?

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Keep reading to find out.

What are Seasoned Funds?

Seasoned funds, in the eyes of the lender, are funds that have been in your bank account for at least 60 days. They are seasoned because they have been in your account for at least two months. That’s plenty of time for any loans, such as a second mortgage or a personal loan, to pop up on your credit report. Lenders can then put two and two together, figuring out that you borrowed the money for the down payment.

If the money sits in your account for at least 60 days and there aren’t any new loans on your credit report within that time, the money is considered sourced. The lender won’t ask for proof of origination. Instead, they consider it your money and you are free to use it for the down payment, closing costs, or qualifying purposes.

Why can’t you Just Add Money to Your Account?

It seems silly that you just can’t add money to your account, right? It’s your money after all. But, lenders need to protect themselves against default. They need to know that the money in your account belongs to you and you are free to spend it without the worry of repayment.

Even in situations, such as receiving a bonus from work, getting a tax refund, or receiving money for your wedding must be sourced or you must wait until the funds are in your account for at least 60 days. Fortunately, it’s easy to source money from most situations, such as:

  • Selling property
  • Selling a car
  • Selling stocks or bonds
  • A bonus from work
  • A tax refund

If you can provide proof of the funds, you can use them even when they aren’t yet seasoned. If you can’t provide proof of origination, wait at least 60 days or you risk loan denial.

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Lenders need to protect themselves. They need to know that you can easily make the mortgage payment. If you can’t source the money, they assume one of two things:

  • You borrowed the funds and must pay them back
  • You are just using the funds to inflate your account to get qualified

Obviously, inflating your account doesn’t work. You need the money for the actual down payment and closing costs. Borrowing funds affect your debt ratio and your ability to repay the mortgage, which could lead to a loan denial.

What Funds Don’t Need to be Seasoned?

While it all sounds complicated, there are some funds that you don’t have to worry about seasoning:

  • Automatic deductions – If you have a portion of your paycheck deducted every pay period and placed in a savings account, lenders can see the pattern. You don’t have to wait until all the money is in there for 60 days. The proof from the last several paychecks will be plenty to prove your intentions.
  • Retirement accounts – If you are a first-time homebuyer or you are of retirement age, you may take funds from your retirement account. Providing your retirement statement and your deposit ticket is plenty to prove where the funds came from. You don’t have to wait until you have the funds in hand for 60 days.
  • Gift funds – Family, close friends, employers, and charitable organizations may provide you with gift funds. This is money they give you rather than loan you. With proper documentation, you don’t have to worry about seasoning these funds.

Most loan programs allow the use of at least some gift funds. In order to accept them, seasoning or not, you need a gift letter and proof of the funds’ transfer. The gift letter must include:

  • Name and identifying information for the donor
  • Relationship between you and the donor
  • Amount of the gift
  • Reason for the gift including the property address
  • A statement that the money isn’t a loan and no repayment is expected
  • Date of the gift

Lenders use the gift letter along with proof of the deposit on your end to accept gift funds. If they are worried about where the funds came from, they may ask the donor for proof of funds’ origination. Providing the last two months of bank statements, investment statements, or the bill of sale of an asset will suffice.

If you are unsure about whether your funds are seasoned or not, talk to your loan officer. As a general rule, if the funds are in your account for 60 days, you’re good. Of course, every lender has its own rules. Some may still require proof of the funds’ origination if it’s an extra-large deposit. Carefully evaluate your steps before applying for a mortgage for the best results.

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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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How to Correct Mistakes on Your Credit Report

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Have you checked your credit report lately? If not, you should. Did you know that more than 40 million Americans have mistakes on their credit report? Many people don’t even know it because they don’t check their credit regularly.

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First, we’ll discuss how to check your credit report and then help you learn how to fix any mistakes you find.

How to Check Your Credit

Did you know that you have access to a free copy of your credit report annually? In fact, you have access to three credit reports per year – one from each credit bureau. Trans Union, Equifax, and Experian each have their own credit report for you. If you visit www.annualcreditreport.com, you can get access to your free report every year.

We suggest that you pull one report every few months throughout the year. This way you spread out how often you check your credit report. This gives you a better chance of catching errors early on and fixing your credit score before it gets too damaged.

Fixing Errors

Now that you have your credit reports, go over them with a fine-toothed comb. Look at every line. Do the trade lines belong to you? Are the balances right? Is the payment history correct? Do you notice anything that is incorrect?

Don’t forget to look at all the data. This includes personal information, public records, and all financial information. Anything that is incorrect should be fixed.

You’ll need to file a dispute with the credit bureau. Make sure you contact the bureau that has the incorrect information. Sometimes it’s just one bureau and other times it’s all three. If the mistake was on the part of the credit bureau, chances are that only one will have the mistake. If the creditor made the reporting mistake, though, it’s worth checking all three credit reports for the inaccurate information.

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You can file the dispute online, via phone, or regular mail. Each bureau has its own requirements, but in general, you must:

  • Provide the information about the dispute. Tell the credit bureau in detail why you think the information is incorrect. Are numbers transposed? Does the trade line not belong to you? Is the payment history incorrect? Give as much detail as possible so that the credit bureau is able to change it effectively.
  • Provide information about the dispute to the creditor. You should also let the creditor know about the incorrect information. Provide the creditor with the same information you gave the credit bureau including the reason why you think the information is incorrect.
  • Provide as much proof as possible. The credit bureau and creditors may or may not take your request seriously if you don’t have proof. Gather as much paperwork as you can to prove your point and supply copies to the credit bureau and creditor.
  • Ask for a specific action. Think about what you want out of your dispute. Do you want the information deleted? Do you just need the data corrected? Be specific with your request so the outcome is the one you desire.

Credit bureaus typically have 30 days to investigate your request. The issue may not get resolved in 30 days, but the credit bureau must start the investigation within that time. The exact time that it takes depends on the willingness of the creditor. If they drag their feet, it may take longer. That’s why it’s important to stay in contact with the creditor too.

How to Handle a Dispute That Doesn’t go Your Way

Your dispute may or may not go your way, there’s no surefire way to tell. If the creditor denies your dispute, you can request that the credit bureau put a copy of the dispute on file. They can also add a statement to the trade line stating that you dispute the tradeline and the reason.

Future creditors will see the dispute and decide how to handle it. Some may ask you questions about it. Others may just look over the tradeline, especially if it has negative information reporting. The exact circumstances of the situation will determine the outcome.

The most important thing you can do is stay on top of your credit information. You’ll need a good credit report to get new loans, get insurance, rent a home, buy a home, and even sometimes get a job. Be vigilant in checking your credit report and requesting changes if there are any errors. It’s worth the time and effort it takes to fix the errors on your report.

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How Money Distribution Works at a Real Estate Closing

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You are ready to close on your loan – it’s an exciting time! As you sit down at the closing table, you may wonder how the money distribution works. Who pays out the funds from the loan? How do they receive the money?

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Keep reading to find out.

Who Distributes the Money?

First, let’s clear the air. The bank or lender that wrote and funded your loan isn’t the entity distributing the funds. Instead, there’s a third party called the closing agent. The closing agent typically works for the title company. If not, it could be a representative from your attorney. The agent receives the money, typically as a wire, from the bank and handles the disbursement at the closing.

Receiving the Funds

First, the closing agent must receive the funds. As we discussed above, the bank typically wires in the loan amount. But, buyers often have to bring funds to the table too. Buyers must bring a cashier’s check in order for the closing agent to accept it. You can’t bring cash or a personal check. You can also opt to have the funds wired, but you must arrange this ahead of time.

The closing agent or title company will have the appropriate amount of funds to disburse to the appropriate parties. They use your cashier’s check or wired funds to reimburse what they had to put into the transaction. Everyone is aware of the amount of money needed at least three business days before the closing when the Closing Disclosure gets released.

Disbursing the Funds

In general, closing agents pay the sellers’ mortgage company receives first. This payment is crucial in order for the property to exchange hands. The seller’s mortgage lien must be cleared from the property. After the first and any subsequent liens are cleared, the closing agent can disburse the remaining funds.

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After the seller’s mortgage company, the closing agent pays:

  • Third parties – There could be numerous third parties involved in the transaction, but in general, there are appraiser, attorney, and title company fees. The closing agent will also pay any necessary government fees, such as tax service or recording fees.
  • Real estate agent – The closing agent will pay the real estate agent from the proceeds of the sale. This money doesn’t come from your loan directly. It comes off the top of the seller’s proceeds. Realtors charge up to 5% of the sales price of the home. The seller and realtor agree on this amount before working together. The closing agent disburses the funds for the seller at the closing so the seller doesn’t have to come up with the funds himself.
  • Escrow account funds – If you are setting up an escrow account (most loans do), you’ll need funds to set it up. At a minimum, lenders require 2 months of taxes and insurance to set up the account. Depending on the due date of the taxes and insurance, though, the closing agent may need more funds to ensure there are enough funds to cover the costs.
  • Paying off any liens – If there are any other liens on the property aside from the seller’s mortgage, those most be paid at the closing too. Property liens transfer with the property, not the person, so it’s often a requirement as a part of funds’ disbursement.

The final funds remaining are for the seller. After all third parties, mortgage companies, and other creditors receive their funds, the seller gets the proceeds. Sellers know before the closing how much they will receive, just as buyers know how much they must bring to the closing. The Closing Disclosure shows both sides of the transaction.

If you have any questions about money disbursement at a real estate closing, make sure to ask the closing agent before the actual closing. The three business days before the closing that you have the Closing Disclosure is meant to give you time to digest the figures and ask any questions you may have.

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How Does Mortgage Insurance Work?

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Many loans today require mortgage insurance including conventional, FHA, and USDA loans. You can only avoid mortgage insurance if you put down at least 20% on a conventional loan. All FHA and USDA loans carry mortgage insurance regardless of the amount of your down payment. Knowing how it works and what to expect can help you prepare for a mortgage.

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What is Mortgage Insurance?

If you have to pay mortgage insurance, know that it’s coverage for the lender, not you. You pay the premiums, but the protection covers the lender should you stop making your payments. Government-backed loans require the insurance in order for the FHA and USDA to guarantee the loan. The FHA and USDA don’t write or fund loans – instead, they guarantee them for the lender. This is how lenders are able to give loans with flexible guidelines, like credit scores as low as 580 or debt ratios as high as 41%.

Conventional loans require PMI or Private Mortgage Insurance if you put less than 20% down on the home. Without 20% down, you pose a higher risk of default. In order for lenders to write the loan, they want the protection of Private Mortgage Insurance. If you stop making payments, the lender will receive reimbursement from the insurance company.

How Government-Backed Mortgage Insurance Works

If you use FHA or USDA financing, you actually pay mortgage insurance twice. The first time is at the closing. You’ll see it called the upfront funding fee or upfront mortgage insurance. This money goes straight to the FHA or USDA. The FHA charges 1.75% of the loan amount upfront and the USDA charges 1% of the loan amount. You can pay the fee in cash at the closing or wrap it into your loan amount.

The FHA and USDA also charge annual mortgage insurance. The name is deceiving, though, since you pay it monthly. The lender pays the premium to the insurance company on your behalf once a year, but you pay 1/12th of the premium each month with your mortgage payment.

Government-backed mortgage insurance lasts for the duration of the loan. If you take out a 30-year loan and you keep the loan for the entire term, you pay mortgage insurance the entire time. The only thing that differs is the amount of the premium that you pay. FHA loans, for example, charge 0.85% of the outstanding premium each year. The lender calculates your premium based on your average outstanding balance each year, as you pay the balance mortgage balance down, your premium decreases.

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How Conventional Loan Mortgage Insurance Works

Conventional loans have Private Mortgage Insurance because they aren’t backed by a government entity. The PMI comes from several different companies – each lender typically has a company they prefer to use. Each insurance company has different pricing too.

You only pay PMI if you put less than 20% down on a home, though. The amount you pay remains the same for the term you must carry it. This is where PMI differs from government-backed mortgage insurance, though. You only pay PMI until you owe less than 80% of the home’s original value. You can determine when this will occur by looking at your PMI Disclosure or amortization table.

Once you owe less than 80% of the home’s value, you can request PMI cancelation in writing. The lender will evaluate your situation and decide at that point if you qualify to cancel the insurance. Lenders look at:

  • Your payment history – Do you make your payments on time?
  • Your current housing history – Are you current on your payments?
  • The home’s current value – Did the home’s price remain stable or appreciate?

If you make your payments on time and are current on your payments, most lenders will allow cancellation of your PMI.

If you don’t cancel the PMI once you hit the 80% point, the lender must cancel it once you owe less than 78% of the home’s original value – it’s the law.

The lender reserves the right to not cancel the insurance if your home’s value decreased or you are behind on your payments. Remember, the insurance protects the lender should you default on your loan. They take a big risk when letting the insurance go.

Getting Rid of Mortgage Insurance

Whether you have a government-backed loan or a conventional loan, there’s one way to get rid of mortgage insurance once and for all – refinance. Of course, you need all of the right pieces to fall into place.

If you have a government-backed loan and you owe less than 80% of the home’s value, you can refinance into a conventional loan. If you have a conventional loan, but have paid the balance down significantly or the home appreciated a lot, you may refinance the loan, order a new appraisal and get rid of the PMI.

Mortgage insurance seems like a nuisance, but it helps you get the financing you need. With an insurance policy in place, lenders are more likely to give you the financing you need, even if you have a high LTV or even a low credit score.

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Higher Interest Rates – What Happens to Homeowners?

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If you own a home, you may not care about the interest rates. Yes, they are rising, but you are in your home, so it doesn’t matter. But does it? Higher interest rates do affect homeowners in several ways. Keep reading to find out how.

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Refinancing May not be Possible

First, you may be stuck in your current mortgage. Depending on how high rates get, it may not be worth it to refinance. This means a few things:

  • You may be stuck with your current term
  • You may be stuck with an adjustable rate loan that could adjust drastically
  • You may not be able to tap into your home’s equity

If you are stuck with an ARM loan, that could get risky. Your ARM loan is tied to an index. Your adjusted rate depends on that index every year. If rates keep rising, you may find yourself with an unaffordable interest rate. If you didn’t already find out the worst-case scenario for your adjusted rate, now’s a great time to find out before it’s too hard to refinance.

Perhaps the largest downside of rising rates is the inability to tap into your home’s equity. If you want to make home renovations, pay for college, or just need an emergency fund, you may not be able to get to your home’s equity. It depends on the interest rates at the time. A home equity loan or line of credit may not be too hard to get, but refinancing your first mortgage in an increasing rate environment can be more difficult, not to mention costly.

Home Values May Fall

Interest rates and home values aren’t directly related, but one can affect the other. If interest rates continue to rise, the housing industry may naturally slow down. As it becomes harder to qualify for a loan, fewer people buy homes. With fewer homes moving, home values naturally decrease.

A lower home value could affect you in a couple of ways:

  • You’ll get less money for the home if you sell in the near future
  • You won’t have as much equity if you need/want to refinance

Rising interest rates could affect you in an indirect way. Unless you plan to keep your home and your mortgage for the remainder of its term, changing interest rates could affect you in ways you never saw coming.

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Your Home May be Harder to Sell

Rising interest rates also affect your ability to sell your home. Higher rates make it harder for borrowers to get a loan. With fewer qualified buyers coming through, your home may sit on the market much longer than you anticipated.

Even if you do find a buyer, you may find yourself agreeing to a lower price than you anticipated. Whether your home sits on the market for a long time and you just want to get rid of it, or you need to go lower to make the mortgage more affordable, you could find yourself stuck.

How Will Rising Rates Affect You?

Stop and think for a minute about your situation. How much time do you have left on your mortgage? Is your payment affordable as is? Do you have equity that you may want to tap into? If you have any idea of making a change, consider doing it soon. This way you can take advantage of the lower rates before rates increase.

If you don’t think you’ll stay in the home or you won’t tap into the home’s equity, then you have decisions to make. If you want to sell, you may consider doing it sooner rather than later. Higher rates could make it harder to sell your home or leave you with less profit than you anticipated.

If you’re happy where you are at and are happy with your current mortgage payment, you can leave things as is. Just know that you may need to ride out the storm of rising interest rates for a while. Constantly stay aware of the mortgage interest rates and what they are predicted to do in the near future. You can then make an informed decision and not find yourself stuck with a mortgage that you don’t want, but with nowhere else to turn.

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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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FHA Loans Seem Easy – What’s the Catch?

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FHA loans have flexible guidelines. You can even get a loan with a credit score as low as 500. That opens up doors for a lot of people that otherwise wouldn’t qualify for a mortgage. But, what’s the catch? There has to be something, right?

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FHA Guidelines

First, let’s look at the FHA guidelines so you can understand how easy it is to qualify. FHA loans require:

  • Minimum 580 credit score with a 3.5% down payment
  • Minimum 500 credit score with a 10% down payment
  • Maximum housing ratio of 31%
  • Maximum total debt ratio of 41%
  • Proof the home is your primary residence
  • No defaulted federal loans in the past
  • Stable income and employment

That’s all FHA loans require. You don’t need to be a veteran, live in a rural area, or be a first-time homebuyer. You can even accept 100% of your down payment as gift funds if you have a credit score of at least 580.

It all sounds amazing, so there has to be a catch, right? We discuss the potential downsides below.

The Downsides of the FHA Loan

So you can get a loan with a low credit score and high debt ratio. But what do you have to do in exchange for the loan?

It comes down to mortgage insurance. Lenders take a big risk lending you money when you have low credit scores and high debt ratios. That’s a true recipe for default. In exchange for the flexible loan, the FHA requires you to pay mortgage insurance. This isn’t mortgage insurance like you would pay on a conventional loan. It’s insurance you pay for the life of the loan. In other words, unless you refinance the loan or sell the house, you’ll pay mortgage insurance.

You pay the mortgage insurance directly to the FHA. They charge it in two ways:

  • Upfront mortgage insurance
  • Annual mortgage insurance

Upfront mortgage insurance is a one-time charge. You pay it every time you take out an FHA loan. Right now, borrowers pay 1.75% of the loan amount. If you have a $200,000 loan, you pay $3,500 at the closing. You can get assistance from the seller, a family member, or a down payment assistance program if you don’t have the funds. You may also be able to wrap it into your loan amount. Just be careful if you choose this option. When you increase your loan amount, you increase your monthly payment as well as the amount of interest you pay over the life of the loan.

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Annual mortgage insurance is what you pay for the loan’s term. It’s equal to 0.85% of your loan amount. You pay this amount based on the average principal balance for the year. This means the amount you pay does decrease slightly every year as you pay down the principal balance, but you’ll pay premiums until you pay the loan off in full.

Compare this option to conventional loans. Yes, you have to have higher credit scores, but you are rewarded for those higher scores with mortgage insurance you can cancel. You can put down as little as 5% on a home and you will pay mortgage insurance. But, you can cancel it once you owe less than 80% of the home’s original value. In order to get out of FHA mortgage insurance, you must refinance into a conventional loan.

The final ‘catch’ or downside is the fact that some sellers don’t like FHA loans. They still believe the common myths that sellers have to pay all of the closing costs or that their home has to be perfect. Neither is true, but it’s a reputation that FHA loans have carried through the years. You may come across sellers that won’t accept FHA financing, which may limit the houses you can buy.

The FHA Advantages

Of course, FHA loans have so many advantages that greatly outweigh the downsides including:

  • Low down payment requirements
  • The ability to accept gift funds
  • The ability to get financial assistance from the seller
  • High debt ratio allowances
  • Low credit score requirements

FHA loans are among one of the most flexible programs available today. It’s worth looking into and comparing it to your other options, especially if you don’t have the credit score (typically at least a 680) to qualify for conventional financing. FHA financing is often the next best option for borrowers.

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What’s the Cost to Stage a House?

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If you are selling a home, you must stage it. What if you don’t have the first clue how to do so? It’s worth paying someone. Yes, it costs money to stage a house, but you’ll make it up hand over fist in the selling price. Buyers rely on their first impression of your home. If your home’s not properly staged, it may not be the reaction you want.

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We’re not going to sugarcoat it, home staging is expensive. But again, it’s worth it in the end.

What’s the Average Home Staging Cost?

First, know that you’ll be on the hook for a contract of at least two to three months. That may not sound like a lot, but we didn’t get to the cost yet. Even if your home sells in 48 hours, you’ll pay the full contracted amount as if you didn’t sell the home for three months.

Home stagers charge two fees:

  • Original consultation fee
  • Monthly staging fee per room

The original consultation fee runs between $300 and $600 on average. The monthly staging fee starts around $500 average per room. If you have a five-room home, you’re looking at $2,500 per month plus the original consultation.

What Goes into the Staging Cost?

Home stagers obviously stage your home. They try to use the items you already have to make your home look as appealing as possible. Sometimes, though, the cost goes up if the stager needs more items. Stagers often buy fresh items or small trinkets to spruce up a home. They have an eye for detail and know what buyers want.

If you have a vacant home, it’s a whole different story. Now the stager must rent furniture and knick knacks to fill up the room. On top of the home stager’s fees, you must pay to rent the items to fill the home up again.

In some (rare cases), stagers may recommend painting the home or making specific repairs. Again, they are the experts and know what people in the area want. They’ll give you their best advice – what you do with it determines your success.

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Saving Money on Home Staging

If you don’t have thousands of dollars to pay a home stager, there are ways to save. First, stick with the consultation. Get the home stager’s advice and the do it yourself. Sure, it may not be as pretty as it would if the stager did it, but at least it’s something. If you have no clue where to start, this is a great way to get your feet wet.

If you aren’t the DIY-type person, choose a few specific rooms for home staging. Kitchens, family room, and master bedrooms are typically the main focus. Hire the professional to handle these rooms and you use the advice provided to spruce up the other rooms in the home.

Finally, ask your real estate agent for staging advice. If you hire a reputable realtor, he or she should have staging experience. While it may not be to the degree of a professional stager with interior design experience, it’s better than you could do on your own. The realtor’s staging advice comes included with the commission you already pay, so you don’t have to shell out more money.

Staging a house is expensive, but if it can net you a selling price that’s thousands of dollars higher than without, it’s worth it. Find out the average price in your area and consider if you’ll see a higher sales price. If you want to start small, go for the consultation or just choose one or two rooms. If your home doesn’t sell quickly, you can always increase your requests, but without the upfront investment before seeing the home’s performance.

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What Documents do you Need for Mortgage Pre-Approval?

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Obtaining a mortgage pre-approval is one of the most important things you can do before shopping for a home. Without it, how do you know how much house you can afford? Do you like shopping outside of your budget? Probably not, which is why you need to take this step.

We recommend getting quotes and possibly an approval from at least three lenders. This way you have a better idea of what you can afford and at what terms. Below we will discuss the documents you’ll need to provide the lender in order to get the answer you need.

Personal Identifying Information

First, you’ll need to provide your personal identifying information. This means your name, address, birthdate, and social security number. If you have lived at your current address for less than two years, you’ll also need your previous address that covers a span of two years.

The lender will ask you to sign a mortgage application as well as a document that allows them to pull your credit. They need to know your credit score and/or credit history in order to pair you up with the right loan. Without this information, your approval would really just be a guesstimate.

Income Documents

Next, you’ll need income documents. What you need to provide may vary depending on your type of employment. For example, the self-employed borrower will need many more documents than the employee that receives a salary.

If you are a salaried employee, you’ll need:

  • Paystubs – You’ll need to cover the last month of your employment. If you get paid monthly, you need one paystub (some lenders may require another). If you are paid bi-weekly, you’ll need two paystubs and weekly, you’ll need four.
  • W-2s – You’ll need to dig up the last two years of W-2s from all of your jobs during that time. If it’s the beginning of the year and you have not filed the prior year’s taxes yet, you can provide the most recent W-2s you have.

If you are self-employed, you’ll need:

  • 1099 forms – If you are a contractor or received 1099s for any work you did, you’ll need to provide any you received over the last 2 years
  • Taxes – You’ll need to provide the last 2 years of tax returns including all schedules. If you filed business taxes, you’ll need to provide them with all of their schedules as well.
  • Year-to-date Profit and Loss Statement – The lender needs to see how you are faring so far this year. They will compare the P&L to the income reported on your taxes to see if you are on track to earn the same amount of money this year
  • Leases – If your income is real estate focused, you’ll also need to provide the signed and executed leases for any properties you own/rent.

Asset Documents

If you’ll be putting money down on the home or paying closing costs, you’ll need to prove you have the assets available. The lender will need:

  • Bank statements – Lenders usually need 2 months’ worth of bank statements. This lets them see your pattern of deposits as well as look for any unseasoned funds. Any new large deposits that don’t coincide with your income could require further evaluation to make sure they are not a loan.
  • Investment statements – If you’ll use any of your investment money for the down payment or closing costs, you’ll need two months of these statements as well.

If you’ll receive a gift for a portion of the down payment or closing costs, you’ll also need a Gift Letter from the donor. This letter should document the amount of the gift, the reason, and the fact that it is a gift and not a loan.

Purchase Contract

If you happen to have a purchase contract already, you can supply this to your lender. However, it’s best if you do this process before you shop for a home. This way you have a better chance of winning a bidding war and/or just winning the seller’s trust. If the seller can’t confirm that you qualify for financing, they may not accept your bid on the home. If you are lucky enough to find a willing seller to accept your bid without the pre-approval, you’ll need to supply the contract to the lender.

The lender will go over each of these documents and determine how much they may lend you. Notice, we said may lend. This doesn’t mean it’s any type of guarantee. This letter is usually good for a few months. If you don’t find a home within that time, you’ll have to reapply.

Even if you do find a home within that time, you’ll have to meet the conditions the lender states in the pre-approval letter. You may need to supply updated financial documents if too much time passes and you’ll definitely have to find a property that meets the lender’s requirements.

Overall, though getting pre-approved gives you the advantage when it comes to shopping for a home. You’ll know ahead of time what conditions you’ll need to satisfy and how much money you can afford to borrow. It’s a win-win for everyone even if it takes you a little extra time.