Down Payment Assistance Programs

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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What Does Seller Assist Mean?

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If you don’t have enough money for a down payment on a home, you may wonder about the seller’s ability to help. While the seller can help with many different costs regarding your home purchase, the down payment is not one of them. If a seller were to help you with the down payment, it could be considered an inducement to purchase – or in other words, a bribe.

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What’s an Inducement to Purchase?

If you are hemming and hawing about whether you want to buy a home or not, the seller could sway you by telling you he will help with the down payment. That could convince you to buy the home, even if it wasn’t your original intent. If you meet with financial difficulty down the road, you could blame it on the seller and the fact that he ‘bribed you’ to buy the home.

Other Ways Sellers Can Help

Luckily, there are other ways that sellers can help you with your loan. If you can’t get a down payment, consider the VA or USDA loan program. If you are a veteran, you can use the VA loan program, if you buy a home in a rural area and are a low to moderate-income family, you can use the USDA program. If neither of those options work, the FHA loan requires just 3.5% down on the home.

Once you figure out your loan program, you can have the seller help you with the closing costs. This is called seller concessions. This is money the seller gives you to help you cover the closing costs. Most loan programs allow the seller to contribute up to 6% of the sales price of the home. This is separate from the down payment, though. The seller can help you cover any lender fees as well as third-party fees. Keep in mind, though, the money the seller gives you is really money you are borrowing from the bank to buy the home. The seller increases the price of the home accordingly, which means you borrow the money to cover the closing costs.

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Here’s an example:

You agree to buy a home for $150,000. Before you sign the contract, you decide to ask the seller to help you with the closing costs. The total closing costs are $8,000. The seller agrees to pay them, but you have to increase the sales price to $158,000. As long as the home appraises for at least $158,000, you should be okay. This means that your monthly payment is now a little higher and you pay interest on the $8,000 that the seller will give you at the closing. The seller walks away with the same amount of money whether he helped you with the closing costs or not.

Who Can Help You With the Down Payment?

What if you truly cannot come up with the down payment? Who can help you? While it’s not the seller – anyone that isn’t involved in the transaction, such as the real estate agent, can help you. Typically, this means family members. They can give you gift money, but this gift money is different than the gifts you receive on your birthday.

Lenders need to trace the origination of the gift money. In other words, they need to make sure that it’s not a loan somewhere down the road. They will need a gift letter from the donor, stating that the money is a gift, the purpose of the gift, and that it doesn’t need to be repaid. The donor must include your name and the address the money is meant to help purchase. The donor must then sign and date the letter.

The donor will also have to provide proof of the funds’ origination. Typically, lenders require only 2 months of bank statements to show that the donor has possession of the money. If there are any large deposits that don’t coincide with the donor’s income, the lender may need further proof of the funds’ origination to make sure there isn’t a loan hidden down the line somewhere.

The bottom line is that the seller can help you, but not with the down payment. If you need help with your down payment, you’ll need either a no down payment loan program, such as the VA or USDA loan, or you’ll need to receive the funds as a gift from a family member.

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When is Private Mortgage Insurance Required?

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Private Mortgage Insurance, or PMI, is an insurance that protects conventional lenders. In other words, if you take out a Fannie Mae or Freddie Mac loan, you may pay this insurance. It only applies to borrowers that put less than 20% down on their home, though.

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If you qualify for conventional financing with a down payment less than 20%, you’ll pay PMI, which is a percentage of your loan amount. The exact amount you pay depends on your credit score and your loan-to-value ratio.

Typically, the less money you put down, the more insurance you will pay. The same is true with your credit score. The lower your credit score is, the more insurance you will have to pay.

What is Private Mortgage Insurance?

PMI or Private Mortgage Insurance is a policy that covers the lender – not you. So even though you pay the premiums, it’s insurance to protect the lender. Because the lender takes a risk giving you a mortgage with less than a 20% down payment, the insurance is required. This gives the lender a little relief should you default on the loan.

How Much is PMI?

As we stated above, the amount you pay will vary. On average, though, borrowers pay 0.3% to 1.5% of their loan amount annually. The lender will charge you 1/12th of the annual amount with each mortgage payment. This figure gets included in your debt ratio to help lenders determine if you still qualify for the loan.

Can You Cancel PMI?

There are several ways you can get out of paying PMI. At the onset of the loan, though, there is no way around it. If you put less than 20% down on a conventional loan, you must pay the insurance.

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Moving forward, though, you may be able to get out of paying the insurance for the long-term using one of the following methods:

  • Pay your principal down faster. If you make just the minimum mortgage payments required, you will stick to the standard PMI schedule as it shows on your amortization schedule. If you make extra payments towards the principal, though, you may knock the principal down faster. This means you’ll hit 80% LTV faster, which means quicker elimination of the PMI.
  • Keep track of your home’s appreciation. If you notice homes in the area are selling for more than what you thought your home’s value was, consult with a professional. An appraiser will be able to tell you if your home appreciated enough to help you eliminate PMI. If it did, you can pay for a professional appraisal and petition the lender for the elimination of the PMI.
  • Make home improvements that increase your home’s value. If you plan to renovate your home, make improvements that will increase your home’s value. If it increases enough and you pay the principal down far enough, you may see 80% LTV sooner rather than later, allowing you to remove PMI.

PMI is Different than FHA MIP

Don’t confuse conventional Private Mortgage Insurance with the FHA’s Mortgage Insurance Premium. The FHA insurance is government-backed and required for the life of the loan on every FHA loan. With the FHA loan, it doesn’t matter how much you put down on the home. The minimum requirement is 3.5% of the home’s purchase price. If you put down more, it doesn’t help your MIP. You pay the same amount as every other FHA borrower, which right now equals 0.85% of your loan amount.

The only way to get out of FHA MIP is to refinance the loan into a conventional loan. If you do this, though, it’s best to wait until you owe less than 80% of the home’s value. This way you won’t be stuck paying PMI too and you can start fresh on your conventional loan.

PMI does offer some benefits, even though it’s another charge on your mortgage payment. Without PMI, you might not be able to get a conventional loan with less than 20% down on a home. This makes the guidelines a little more flexible and conventional loan programs more accommodating.

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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.

 

Understanding the Mortgage Note

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The mortgage note goes by a few names – promissory note and deed of trust note. You sign this document at the closing, when you finance a home. The note is one of the most important documents, next to the deed of trust that you sign.

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Keep reading to learn why this document is so important.

What is a Mortgage Note?

The mortgage note is a contract between you and the lender. You give the lender your home as collateral for the money they lend you to buy the home. The note gives the lender the right to take your home (repossess) it if you don’t make your payments. The contract spells out the details of the agreement- read them carefully.

Your local county recorder will record the note, making it public record. The record shows the amount of the note and the lender that holds the lien on the property.

What’s Included in the Note?

Aside from the promise between you and the bank, the promissory note includes the following:

  • The amount you borrowed
  • The interest rate agreed upon
  • The loan’s term
  • The monthly due date
  • The amount of late fees and circumstances in which the lender charges them

Who Holds the Mortgage Note?

Originally, the lender that provides the mortgage note holds it. But this may not be the case forever. Lenders sell mortgages on the open market every day. Your mortgage may start with one lender and move through a few others before the end of your term.

Lenders don’t need your permission to sell the note, either. They must provide you with notice before they sell it so that you know where to send your payment. They must also provide you with an extended grace period to offset any issues with making payments to the new lender.

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No matter how many times your note changes hands, your terms don’t change. Everything on the note, including the loan amount, rate, term, and due dates remain the same. The only change you’ll see is who and where you make your payments. Rather than making your checks out to Bank A, for example, you’ll make them out to Bank B.

Do You Need a Copy of Your Note?

No one is going to come to ask for a copy of your mortgage note, but you should always have it. You receive a copy at the closing. Keep it in a safe place and if possible, create a digital version in the event that you have a fire or your documents get stolen.

If you don’t have a backup copy and you lose your original, you can get another copy of your mortgage note in one of the following ways:

  • Search the county records and request a copy
  • Contact your loan servicer and ask for a copy

What is the Deed of Trust?

People often confuse the mortgage note with the Deed of Trust, but they are two different things. The note is like the IOU. It’s the document that states that you owe the bank money and its terms.

A Deed of Trust or mortgage is the document that creates the lien on the property. In other words, if you don’t make your payments as promised in the note, the lender can take your home. They have first lien rights on the home.

The bottom line is that once you have a mortgage note, you must make your payments. If you fall more than three payments behind, the bank has the right to start foreclosure proceedings. In other words, the bank can take your home. The process takes as long as 12 months in some cases and you may be able to pay the past due amount and stop the foreclosure, but it will cost you a pretty penny.

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