mortgage loans

Am I Really Ready to Buy a House?

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Q: I’ve saved a down payment, narrowed my choices of neighborhoods and drawn up a wish list of what I’m looking for in a home, but I’m getting cold feet. How do I know if I’m really ready to buy a house?

A: It’s perfectly normal to feel hesitant about going through with what may be the biggest purchase of your life. To help put you at ease and to make sure you’re really prepared for this purchase, we’ve compiled a list of questions to ask yourself before buying a new home.

Man and woman looking at lady using laptop in office setting.

Can I afford to buy a house?

Before viewing properties, remember that purchasing a new home will cost more than just the down payment. Buyers also need to cover closing costs, which typically run at 2-4 percent of the total purchase, as well as moving costs, and possibly new furniture and renovations for their new home.

Can I afford the monthly mortgage payments?

Most lending companies will grant a loan to a home buyer if the monthly mortgage payments do not push the buyer’s debt-to-income (DTI) ratio above the recommended 43 percent. This means that the total monthly debt the buyer carries, including their mortgage, credit card, loan, and car payments, do not exceed 43 percent of their monthly income. You may want to work out the total for your pre-mortgage debt before applying for a loan so you have an idea of how much house you can afford.

When determining whether you can actually afford your monthly payments, though, remember that there’s more to home ownership than a monthly mortgage payment. Be sure to include calculations for taxes, insurance and a possible increase in utility bills. A mortgage lender should be able to provide some of these numbers for you.

Am I ready to settle down? 

The average length of time that homeowners in the U.S. live in a house is only seven years. Buyers who don’t plan on staying in their homes long-term may end up incurring a loss. Consider factors like your career, family planning, changing demographics of a neighborhood and more when trying to answer this question. Experts advise buyers to only purchase homes they plan on living in for a minimum of five years.

Does buying a house in my neighborhood make financial sense? 

Many Americans view home ownership as a rite of passage into adulthood, but that doesn’t mean purchasing a home always makes financial sense. In some neighborhoods, rentals are relatively cheap while houses sell for far more than they are actually worth. In these neighborhoods, buying a home may not be the logical choice, even if the buyer can easily afford the purchase.

Is my credit score high enough?

A fairly decent credit score is necessary to qualify for a home loan. Most lenders will only grant a home loan to borrowers with a credit score of 650 or higher. A score that doesn’t make the cut can be increased by being super-careful about paying all bills on time, not opening new credit cards in the months leading up to the home loan application, paying credit card bills in full each month and keeping credit utilization low.

Do I have a plan in place for repairs? 

When a renter has a leaky faucet, they call the landlord and the problem becomes theirs. When a homeowner has a leaky faucet, it’s their own problem. They can either fix it or hire someone to do the job, but it’s a good idea to have a plan in place before the first thing in a new home needs fixing. If you’re handy enough to handle repairs on your own, you’ll need to be ready and willing to give up some of your free time on weekends to tend to things around the house.  Otherwise, it’s best to have a tidy sum put away to pay for necessary repairs before purchasing a home.

Sometimes, an appliance or a system in the house will be broken beyond repair and will need replacing. Homeowners need to have enough money stashed away in their emergency fund or rainy-day account to cover these purchases, too.

Buying a first home is an exciting milestone that only happens once in a lifetime. If you think you’re ready to take this step, first make sure this purchase is the right choice for you at this time on a financial and practical level.

Your Turn: How did you know you were ready to buy a house? Share your thoughts with us in the comments.

Why Do I Need To Get Preapproved For A Loan?

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Q: I’m in the market for a new home, and everyone I talk to, from friends to financial Home with Sold Sign in frontadvisors, suggests I get preapproved for a mortgage before I start house hunting. Why is this so important?

A: You’re actually on the receiving end of great advice. When looking to take out a large loan, whether it’s for purchasing a home or buying a car, having that preapproval in hand before you start your search is crucial.

Depending upon the type of loan, the process of getting preapproved for a loan can take time. The lender will begin by asking for your financial history and other personal information. If you have a co-borrower, the lender will need this information about them as well.

You’ll be asked to provide your Social Security Number (SSN) and for permission to allow the lender to access your credit report. If the information you provide is satisfactory, as is your credit report, the lender will begin constructing the details of your loan. When they have determined how large of a loan you will be eligible for, they will grant you a preapproval letter. The letter will also detail your estimated interest rate on the loan, though that will sometimes also depend upon the specifics of your purchase, such as the year and condition of a car or appraisal on a home.

Having your preapproval letter will shorten the loan process significantly when you’re actually ready to take out the loan. However, that is only a small benefit of getting preapproved before you start “shopping.”

Here are some other advantages of getting preapproved for a loan:

1.) You’ll know what you can afford

Your preapproval will tell you exactly what you can afford. This way, you’ll avoid being disappointed later when you have your heart set on a certain home only to be told you can’t swing it financially. Knowing how large a loan you’ll qualify for will simplify your search and get you into your new home or car sooner.

Be sure to calculate other monthly costs, such as property taxes, home insurance and increased auto insurance rates when determining the actual amount of money you’ll need to shell out each month.

2.) Don’t get taken for a ride

Picture this scene at a car dealership:

Salesperson: So, you’re here to buy a new car! What are you looking for?

You: Well, I want something with a smooth ride and –

Salesperson: Got it. And how much of a monthly payment can you afford?

You: Weeelll, I think I can swing up to $200 a month, but I’d rather something closer to $150 if you —

Salesperson: Step right this way please! Let me show our new line of Camrys at just $205 a month! They have the most luxurious feel and the ride is smooth as butter!

What happened here is, quite simply, a salesperson looking to make the most money out of a customer. When you’re unsure about how much you can spend, the dealer will capitalize on your uncertainty and try to sell you a car that just barely skims the maximum amount you’ve decided you can afford.

Also, when you name a monthly payment you can manage, the dealer will work with that number instead of talking about the price of the car. They may try to inflate the payment with charges and fees just because they fit within your named payment amount.

In contrast, when you show up at the dealer with a preapproval in hand, the salesman will have to show you cars with price tags that fit within your loan amount.

Don’t get taken for a ride; get your preapproval before you set foot in the dealer shop!

3.) Be taken seriously

A car dealer will take you a lot more seriously when you wave that preapproval in their face, since having that information in hand shows you’re ready to buy.

When purchasing a home, the same rule holds true. A realtor will be able to assist you more efficiently when you know exactly how much house you can afford. They may also give you better service since you’re showing that you’re serious about buying a home. In fact, many realtors refuse to show homes to buyers who don’t have a preapproval in hand.

4.) Know you have financing you can trust

When you show up at the car dealership with a preapproval from your credit union, you know the deal is in your best interest. Many auto shops have access to several financing options and they’re almost always going to put customers into financing options that are in their own wallet’s best interests.

5.) Purchase your dream home

A preapproval makes you a valuable customer. It also helps you stand out from the pack. If you’re looking to buy a home in a competitive market, you may be competing with several other buyers for the same house. Having your preapproval will give you a leg up on bidding wars. A seller will be more eager to work with someone who’s already started the mortgage process. You can end your search sooner with a preapproval!

In the market for a new home or car? Don’t forget to call, click, or stop by Destinations Credit Union to hear about our fantastic rates on mortgage and auto loans!

Your Turn: Based on your own experience, why do you think it’s important to get preapproved for a loan? Share your thoughts with us in the comments!

SOURCES:
http://www.investopedia.com/mortgage/pre-approval/ 
https://www.nerdwallet.com/blog/loans/advantages-of-getting-pre-approved-for-a-car-loan/
https://www.google.com/amp/s/www.zillow.com/mortgage-learning/pre-approval/amp/

The Pros And Cons Of Bridge Loans

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Buying your second home is nothing like buying your first. This time around, you’re bridge loancoming to the table with the experience of being a homeowner. You know what to expect throughout the buying process, you know what to look for in a home and you know what you can afford. After all, experience is truly the best teacher.

Another major difference this time around is that you’re likely counting on proceeds from the sale of your first home to help cover the down payment and the closing costs of your new home.

But what happens if selling that home is taking a bit longer than you’d anticipated? What if you need to move immediately because of a job opportunity, or because there’s a great home on the market that will be snatched up if you don’t grab it quickly? How are you going to come up with the funds if your own home isn’t selling quickly?

This is where bridge loans come in. A bridge loan provides temporary financing until more permanent financing can be obtained. When taking out a bridge loan, it’s understood that once permanent financing is in place, some of those funds will be used to pay back the bridge loan. Bridge loans are most commonly used to help the borrower span the gap between the sale of one home and the purchase of another.

Terms vary tremendously, so take the time to talk with your loan officer. Some will completely pay up the outstanding mortgage on the old home, while others will only pay off a portion of it, leaving the borrower with two mortgages, or simply lumping the loans together.

Bridge loans understandably have shorter terms than other loans, and are typically more expensive as well. Also, a lender will usually only extend a bridge loan if the borrower agrees to finance their new home’s mortgage through the same institution.

Bridge loans seem to provide the ideal solution to a less-than-ideal situation: You can now house-hunt freely and without waiting for your current home to sell. However, bridge loans are not as simple as they may seem.

Let’s take a look at some of the pros and cons of taking out a bridge loan.

Pros

1.) Freedom to house-hunt

The most obvious benefit of taking out a bridge loan is also the most significant. With this financing in place, you’ll be free to buy the home of your choice, without being bound by the sale of your previous home.

2.) Short lending term

Another big benefit of bridge loans is their short lifespan. Bridge loans usually run for six-month terms, though they can span anywhere from several weeks to several years. In contrast, most conventional loans are structured around a long payback term that can last for decades. The longer the payback term, the more likely it is that the borrower will suffer from a financial setback, which makes repayment challenging or impossible.

This, in turn, can give rise to further financial challenges as the borrower is hit with various penalties and fees, or is forced to take out another loan. The short payback term of bridge loans assures that this loan will not be a source of financial stress for years to come.

Cons

1.) Total debt increases

Any loan a buyer takes out will cause their total debt to climb. Sometimes, a bridge loan will split the purchase of the second home into two mortgages, leaving a buyer with three monthly mortgage payments; one from their previous home, and two from their new one. Other times, the buyer will be left with two mortgages to pay, which can also be a strain on their budget. In either case, an increase in debt means an increase in monthly financial obligations.

2.) High interest rates and fees

To compensate for their short lifespans and the amount of work the lender has to do for them, bridge loans generally have high interest rates, generally reaching between 8.5 – 10.5% of the total loan. There are also various fees involved, such as closing costs, origination fees and more.

3.) Risky contingency

Bridge loans are usually taken out with the understanding that the sale of your existing home will allow you to repay the loan. But what if your house doesn’t sell before the loan is due? This can happen even if you have an interested buyer – they may not get the financing they need or they may back out. This will leave you with a huge debt on your hands that you can’t afford to repay.

It’s important to speak to a Realtor about market conditions before taking out a bridge loan, even if you think you have a buyer. Make sure the odds are in your favor and that it is likely your home will be sold on time before committing to a loan that is contingent on its sale.

If you really need the funds from the sale of your home before the transaction is finalized, but the thought of taking out a bridge loan makes you uneasy, you may want to consider other options. You can take out a HELOC, borrow against a 401(k) plan or take out a loan secured by stocks, bonds or other assets.

And of course, don’t forget to call, click, or stop by Destinations Credit Union for guidance throughout the process of buying and selling a home.

Your Turn: Have you bought a second home recently? How was the purchase different than your first time around? Share your experience with us in the comments!

SOURCES:
http://www.bankrate.com/finance/mortgages/bridge-loans-ease-the-transition-from-one-home-to-another-at-a-cost.aspx 
https://en.m.wikipedia.org/wiki/Bridge_loan 
https://www.thebalance.com/what-are-bridge-loans-1798410 
http://m.finweb.com/real-estate/the-pros-and-cons-of-bridge-loan-financing.html  

Private Mortgage Insurance – What You Need To Know

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Whether you’re a long-time home owner or you’ve just started shopping for your dream house, you’ve seen stacks of papers full of acronyms. Buried amid the dense undergrowth of legalese are three letters that could be costing you more than you think. Be on the lookout for PMI: Private Mortgage Insurance. 

PMI in a nutshell 

Close your eyes and imagine yourself as a venture capitalist, like those you may have seen on “Shark Tank.” An inventor comes to you and says they’ve got a killer new product. They need $300,000 now and they’ll repay it with 4% interest over the next 30 years. If they don’t, you can take the manufacturing equipment they’re going to buy with your loan, which is worth about $250,000.

This isn’t a great deal for you – the venture capitalist – since you’re putting the remaining $50,000 on the line, and that’s not considering the cost of selling their equipment! They’re not risking anything. The equipment was bought with your money. You need to know they’ve got something at stake, too. So, they put up $30,000 of their own money. This is a better deal, but you’ve still got more to lose than they do.

This is where an insurance company comes in and says that, for $3,000 a year, they’ll protect the loan. If the inventor fails to deliver, they’ll repay the balance of the loan at that point. Sounds great, but who’s going to pay it? If you do, that just raises the amount you’re going to lose on this deal. Instead, you make the inventor pay it.

That’s how PMI works. The home buyer, in this example, is the inventor, and the lender is the venture capitalist. To make the mortgage an attractive option for lenders where scenarios like this happen, the home buyer needs a way to ensure the lender will be made whole (paid back in full) if something goes wrong. Importantly, PMI is protection for the lender, not the borrower. If you fail to make your mortgage payments, you will still face foreclosure even if you’re paying for PMI. All that changes is the institution that issued your loan can recoup its losses. 

Who has to pay for it? 

Not all mortgages require PMI. In general, loans made where the principal total is 80% or less of the sale price of the home don’t require PMI. If you put 20% down, lenders see that as a sign that you’re a safe risk. You’ve got as much skin in the game as they do.

Home buyers with a down payment of less than 20% may have to pay for PMI. Typically, costs are between 0.5% and 1.0% of the total value of the loan, with riskier loans requiring higher PMI payments. Sometimes, lenders offer loans to these home buyers that exclude PMI, but in order to make the increased risk worthwhile, such loans come with a higher interest rate.

PMI premiums can be made one of two ways. You may notice a line item in your mortgage estimate or statement that identifies your monthly premium for PMI. In other cases, it may be included with the closing costs as a lump sum. Some loans require both a payment at closing and an additional monthly premium. 

When can I stop paying for PMI? 

The 20% rule is a helpful one here, too. Once you’ve paid down enough of the loan to have 20% equity in your home (meaning your loan amount is less than 80% of the home’s market value), most lenders will no longer require PMI. Every month, a portion of your mortgage payment goes to paying interest, and a portion goes to paying the principal. The second part is how you increase your equity. Think of it as gradually buying your home back from the lender. Of course, you can make extra payments beyond the mortgage payment to reduce the principal faster and increase the percentage of home that you own.

Even with a 20% stake in your house, you may have to pay for PMI a little longer. Policies are generally purchased for a year, and monthly payments are held in escrow to cover yearly premiums. You may have to continue paying the premium until the year in which you reach 20% equity ends. Also, if you happen to live in an area where home values have risen, investigate the ability to get a new appraisal if you are paying PMI. If your home has gone up in value enough to get you pas that 20% threshold, you may be able to request cancellation of the PMI on your loan.

While PMI may seem unfair, remember that without it, lenders would be less likely to issue mortgages in the first place. PMI helps borrowers qualify for loans on homes they might not otherwise have been able to purchase. That means it helps put you in a nicer house without saving more for the down payment.


SOURCES:
http://homeguides.sfgate.com/role-underwriter-mortgage-2051.html
http://www.consumerfinance.gov/askcfpb/122/what-is-private-mortgage-insurance.html
http://www.consumerfinance.gov/askcfpb/202/when-can-i-remove-private-mortgage-pmi-insurance-from-my-loan.html
http://www.bankrate.com/finance/mortgages/removing-private-mortgage-insurance.aspx

http://www.interest.com/mortgage/news/what-you-need-to-know-about-private-mortgage-insurance/