How to Get a Mortgage With Only 3% Down

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There’s potentially some good news for millions of Americans who have had trouble trying to get into a new home. Bank of America plans to offer a 3% down conforming loan aimed at giving low- and moderate-income homebuyers more access to mortgages, including counseling before and after the loan process.

Called the Affordable Loan Solution, the new mortgage product is available through a partnership with Self-Help Ventures Fund and Freddie Mac, and will let borrowers avoid private mortgage insurance (PMI), a product usually required for low-down-payment loans that can add significantly to monthly mortgage repayments.

“There is a need in today’s marketplace for more responsible mortgage products that enable creditworthy homebuyers, who meet certain income limits and other requirements, to become homeowners at an affordable entry point with comprehensive counseling,” D. Steve Boland, consumer lending executive at Bank of America, said in a statement.

While the lower down payment can be attractive to buyers without ample savings, it’s important to remember that you’ll typically pay more for the home through interest on a larger loan amount than you would with more cash down. (You can go here to figure out what your down payment should be.)

Here’s what you need to qualify for Bank of America’s new loan.

  • The 3% down payment.
  • You must purchase a primary, single-family residence, with no reserve funds required in most situations.
  • Borrowers may use secondary financing, such as an affordable second loan, grants, or even cash they have on hand. The program will also consider non-traditional forms of credit to demonstrate credit history.
  • Loan amounts will be within conforming loan limits (up to $417,000), and applicants’ income cannot exceed 100% of the HUD area median income.
  • Applicants must occupy the property, and first-time buyers will need to participate in homebuyer education through Bank of America counselors.

Bank of America said the loans will be available through all of Bank of America mortgage sales channels. According to The Wall Street Journal, the bank plans to ensure that applicants’ debt-to-income ratio of is no more than 43%.

The bank is partnering with Self-Help, which will provide post-closing counseling to any borrowers who might be experiencing payment difficulties. Loan servicing will be immediately transferred after origination to Self-Help’s designated specialty servicer, who will handle all loans regardless of future performance. Freddie Mac will purchase all of the eligible affordable mortgages originated via the Self-Help and Bank of America partnership.

Getting a Mortgage With a Low Down Payment

Lenders typically require prospective homebuyers to contribute a down payment equal to 3-20% of the sales price of the home. Loans below the 20% mark, including the 3.5% down payment mortgages offered by the Federal Housing Administration, generally require you to pay for PMI, though there are some federal programs in place that let qualified borrowers secure 100% financing. Veterans and current military members, for instance, may be able to utilize the VA loan program, which comes with no down payment or private mortgage insurance requirement.

Keep in mind, even with their relaxed or different credit standards, low down payment loans can be tricky to obtain – and, as previously mentioned, could prove expensive when it comes to fees and interest. Consumers should look into all options, including conventional financing, when buying a home. You should also check their credit scores, since a good one will generally entitle you to better terms and conditions on all home loan types. (You can do so by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your two free credit scores each month on Credit.com.) Tips for improving your credit include paying down high credit card balances, addressing unpaid collection accounts and disputing any errors with the major credit reporting agencies.

 

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Could Your Car Lease Prevent You From Buying a Home?

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By Scott Sheldon

Getting a mortgage can be difficult. Sometimes, to increase the odds of being approved or to qualify for a larger loan, prospective borrowers will pay down debts or eliminate existing loan obligations. Often, the process for doing so is simple, but there’s one type of financing that could trip up your efforts: a car lease. Here’s a breakdown of why — and what you can do to so avoid any snags.

What’s Your Debt-to-Income Ratio?

When you apply for a mortgage, a broker is going to tally up all of the monthly payments you make on existing obligations, including credit cards, student loans, personal loans, car debts and other mortgages. That number gets measured against your income. This debt-to-income ratio helps determine your monthly mortgage payment. (So does your credit score. You can see where yours currently stands by getting your free credit scores, updated each month, on Credit.com.) Sounds easy and simple enough, right?

Well, the concept is, but if more than 25 percent of your income is already going towards debts, you may not be able buy as much home as you think. When you have other existing obligations, your ability to borrow can be reduced tremendously. That $300 per month car lease, for example, can be severely hampering your buying power.

Mortgage Tip: Remember, lenders will use only what you’re obligated to pay on existing loans in calculating your debt-to-income ratio. Choosing to pay more on your debts can be a good financial move, but mortgage lenders generally don’t give you any benefit for choosing to do so.

Why a Car Lease Can Trip You Up

Unlike an auto loan, a car lease can be trickier to workaround if you’re trying to pay off debt to qualify for a mortgage. Let’s say your credit report shows a car lease payment at $300 per month. There is a balance on the credit report of $6,000 due, which is the remainder of the lease. If you had a car loan with these exact terms, you could write a check to pay off the $6,000 obligation. Case closed.

Unfortunately, that option doesn’t apply to a car lease. You can give the car back and pay the $6,000 balance that is due. However, to qualify for a bigger mortgage, the lender will need to verify there is no obligation due for a car. If you give the car back, the mortgage company may ask what you’re going to drive instead — especially if there is a commute time from where you work to where you plan on residing.

Should you find yourself in this predicament, here are some options to consider.

  • Call your car dealer. You can ask if they have any specific options for getting out of the lease. You’ll need to make it crystal clear that you must be out of the lease obligation completely.
  • Transfer the lease to someone else. Your mortgage company should be OK with this option as long as you can verify the obligation is completely out of your name and that there is no obligation associated with it. You can search online for options if your car dealer doesn’t have any transfer suggestions.
  • Pay out. Give the car back, pay the balance due and either buy a new vehicle in cash, removing any debt-to-income ratio predicament, or finance a car that has a lower monthly payment. The key here is that the payments need to be reduced or totally removed if you want to maximize your buying power.
  • Consider your priorities. A great deal on your car lease may not matter if you are serious about buying a home, plain and simple. Ask yourself: Is the car more important than the house?

Paying Off Debt for a Mortgage

Paying off debt to qualify for a mortgage usually needs to be documented in the following ways.

  • Money used to pay off the obligation cannot come from the reserve requirement your lender almost certainly has. Lenders usually want you to have at least three to four mortgage payments in the bank, called reserves, as a cushion when granting your loan request.
  • You’ll need to produce a paper trail showing money leaving your bank account and going to the creditor to pay off debt or provide a copy of the canceled check to show you no longer owe the obligation.

All of these steps may seem unnecessary and overly repetitive, but they are a byproduct of the current mortgage lending world. Remember, stringent underwriting requirements help to ensure lenders are making good loans and, more importantly, that you can actually afford the house you are looking to buy.

 

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How to Avoid Being Turned Down for a Mortgage

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By Teresa Mears

If you’re trying to buy a house, there is nothing worse than finding your dream home only to be turned down for a mortgage.

But that won’t happen if you do your mortgage shopping the right way.

“You should be working with somebody who picks up the phone and says, ‘We have this problem, and let’s see what the solutions are,'” says Sylvia Gutierrez, a mortgage professional in Miami and the author of “Mortgage Matters: Demystifying the Loan Approval Maze.”

The right mortgage professional, whether it is a bank loan officer or a mortgage broker, will evaluate your credit profile before you ever reach the application process, help you solve problems and steer you to appropriate loan products. You could qualify for one mortgage program but fail to meet the requirements for another.

That’s important, because if you apply for a mortgage and are declined, it may hurt your credit score. Plus, the form you receive from the lender declining your application won’t tell you why your application was rejected.

“The form we send out to a borrower who’s turned down tells you nothing,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area. That makes it important to work with an actual human loan officer who can answer questions. “There isn’t anybody else who can tell you why you’re been declined,” Fleming says. “The underwriter’s not going to talk to you. Nobody’s going to talk to you.”

When you apply for a loan, lenders look at three major issues: your credit, income and assets. Any one of those factors could hurt your chances, though Fleming says credit issues, including having too much debt, are the most common roadblock.

Since the mortgage crisis, lenders have become much more careful about verifying income sources. That makes it especially important for freelancers and contract workers to deal with a loan professional who knows how to make their applications attractive to lenders by providing the correct documentation.

If you’ve decided to buy a home, you should find a good loan officer and get pre-qualified for a mortgage before you ever look at houses. If there are any problems such as errors on your credit reports, collections issues or any income that won’t be counted, you want to be aware of that before you find your dream house.

“Fixes are very rarely quick,” Fleming says. “They’re usually something you have to do over months.”

Here are seven things to do to avoid being turned down for a mortgage:

1. Get your credit reports early.

You want to look at your reports from all three major credit bureaus (Equifax, TransUnion and Experian) to make sure there are no errors. If you’ve got collection accounts or a few late payments, ask the creditor to remove those, Fleming suggests. If your credit score is low, meet with a mortgage broker or credit counselor and ask for suggestions to improve it.

2. Know what income a lender will count.

Lenders like to see a two-year track record in your job, though a new job in the same field probably won’t be counted against you. A lender may be happy to work with you even if you’re in a first job in a field you studied in college. But if you’ve just switched from dentistry to business management, a lender may not be willing to count your income until you show two years of earnings.

3. If you’re a freelancer, plan way ahead.

If you’re self-employed or own a business, a lender will want to see two or three years of tax returns, to start. If you take a lot of deductions to cut your taxable income, know that a lender will consider only your net income, not your gross income. If you work on contract, you may need to provide verification from the employer that the contract is going to continue. “Freelancers are tough,” Fleming says. If you’re independent, “you’d better have income on your tax returns, or you’re not going to get anywhere.”

4. Pay off any debt you can before you apply.

When deciding whether to grant a loan, a lender will consider all your debt, including student loan debt, credit card debt and car loans. If the debt-to-income ratio is too high, you won’t get a loan. For most mortgages, the debt-to-income ratio for all debt can’t be higher than 43 percent.

5. Be able to source any funds you play to use.

The lender will want to know where you got your down payment. If it’s a gift or a loan from family, you will need to specify which and document that the family member has the money and can afford to give it to you. If your parents give you money, for example, they will need to show bank statements and provide a gift letter.

6. Find a good mortgage broker or loan officer.

All brokers and loan officers are not alike. Get recommendations from real estate agents, friends, colleagues and professional contacts. Ideally, you’ll interview several loan officers and then choose the best. A good mortgage broker is going to shop your loan among multiple lenders to find the best deal for you. The expertise comes in when the broker evaluates your situation and then puts the package together to submit to lenders. “It’s very important for the borrower to have these conversations with the lender,” Gutierrez says. “There are a lot of technicalities that could mess it up along the way.”

7. Do not apply for a loan until you talk to an actual person.

Many of the online sites that say they offer loans really are lead generation sites that sell your information to mortgage brokers. Your best option is to find a local mortgage broker with strong recommendations. But if you choose to work with an online lender, make sure you have a specific loan officer you can talk to by phone assigned to your case for the duration of the process. This is not something that can be automated.

 

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When Prepaying Your Mortgage Is Not the Best Idea

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By Karin Price Mueller

Q: I have paid almost $6,000 extra toward my mortgage principal. Isn’t my new payment supposed to go more toward principal and less for interest for the next payment? — Paying it down

A: Here’s how it works.

When you took out your mortgage, assuming it was a fixed-rate loan, there was an amortization schedule set by the lender. That schedule doesn’t change during the life of the mortgage, said Jim McCarthy, a certified financial planner with Directional Wealth Management in NewJersey.

“Your interest payments are based on your outstanding loan balance, not on your monthly principal payment,” McCarthy said. “If you pay next month’s principal payment, you will save a little interest, but not that much because your overall balance hasn’t been reduced by that much.”

For example, if the mortgage interest rate is fixed at 4.5 percent, a month’s worth of interest on a $100 prepayment of principal is 37.5 cents, McCarthy said.

But, he said, if you keep making additional principal payments every month, you can significantly reduce your interest payments over time.

“The benefit in prepaying your mortgage isn’t in reducing intra-month interest expense,” McCarthy said. “It comes from paying down your outstanding loan balance with additional principal payments, thereby paying off your mortgage in less time and reducing your total interest expense over the life of the mortgage.”

While you may want to pay down your mortgage faster, it may not be the best overall strategy for your finances.

Keeping extra cash on the side — having liquidity — may be more beneficial in the long run, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in New Jersey.

“Problems always happen, and you always need a Plan B,” Lynch said. “If you lose your job or get hurt, the bank does not care that you paid them an extra $6,000 last year, and you can’t get it back.”

The lender wants your monthly payment when it’s due, so you need to make sure you have savings to cover you in an emergency.

Lynch said rather than prepay the mortgage, he’d prefer to see you invest that extra cash monthly in a taxable account that takes on only moderate risk.

“With a 4 percent mortgage and a 30 percent tax bracket, we only need to beat 2.8 percent on an after-tax basis to have more gain in that side account,” he said. “If you have a problem, you have access to the funds, and at the end, after you have this fund for a while, you can always liquidate the account and pay off the mortgage.”

If you already have that kind of liquidity, then Lynch said paying down the mortgage is a fine strategy. Just make sure you have access to cash first.

 

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4 Reasons Your Mortgage Application Might Be Rejected

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By AJ Smith

So, you’ve thought about whether renting or buying your next home is the right decision for you. If you decide to buy, you’ll likely have to prepare for financing your purchase with mortgage payments. Here’s where things can get a bit tricky.

While getting a hold on the costs involved with home buying can help you determine if you are ready and what you can afford, you also need to prove to lenders that you can and will make your payments. To understand why some people get approved while others are turned away, check out four reasons your mortgage application might not be successful.

1. Poor Credit

If you have a low credit score, lenders likely will be reluctant. If a lending company is willing to work with you despite a rough credit history, it may bump up the interest rate or offer unfavorable terms. But even if you have experienced bankruptcy or home foreclosure in the past, bad credit is not a permanent condition. It’s a good idea to check your free annual credit reports and make sure they don’t have errors. Then, work toward paying down credit balances and make payments on time so your score can rebound. You can also check your credit scores for free every month on Credit.com.

2. Outstanding Debt

Applicants with too much debt often get rejected for mortgages. All lenders have a debt-to-income ratio they work with and if your ratio falls outside the desired proportion, they will not approve you. If you have a lot of debt, it may be a good idea to focus on paying down your debt and/or increasing your income before applying for a mortgage.

3. Unrealistic Expectations

Having an idea about what size mortgage you will qualify for is important. Since affordability is based on various factors, it’s important to understand what you can really afford going into the process. (To understand how much you might qualify to borrow and how much payments would be, try using a free online mortgage calculator.)

4. Employment Doubts

Affordability criteria is taken very seriously. You must have enough income, but also the right type of income. Lenders tend to prefer employment that provides a regular and consistent income. If you are self-employed or work on commission, you may need to prove that you have been profitable for at least two years. If your income is too irregular or there are significant gaps in your employment history, your application might be rejected.

Before you start applying for mortgages, make sure these variables are in order to speed the process and increase your chances for achieving homeownership soon. Consider researching by studying top real estate books and get ready to present your best case for lenders.

 

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What You Need to Know About Closing Costs

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Break down of the real estate closing cost
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By AJ Smith

So you’re ready to buy a house. Or are you? The selling price is not the only cost you need to prepare for if you are seriously considering making a home purchase. Often forgotten in the equation are the closing costs.

What Are We Talking About?

Closing costs are the fees paid at the closing of a real estate transaction, when the title to the property is transferred to the buyer. They are charged by lenders and third-party service providers. You will have to pay these in addition to the down payment on the home and any principal and interest related to the mortgage. It’s important to factor closing costs into your homebuying budget. (You can use this tool to figure out how much house you can afford.)

How Much Will I Have to Pay?

The exact cost will be difficult to estimate, but it’s a good idea to expect the total to be between 2% and 5% of the price you are paying to buy your home. This amount can either be financed with your loan or can be paid in cash, similar to your down payment. Your lender is required to provide a good faith estimate (GFE) of closing costs within three days of when you submit a loan application, but the GFE is subject to change by up to 10%.

What Charges Make Up the Total Closing Costs?

Closing costs vary based on things like where you are buying a home and your mortgage provider. Your total closing cost amount can be broken into lender charges, settlement services, and pre-paid and escrow costs. Lenders charge an origination fee for the service of getting you a loan and “points” that you may sometimes pay in exchange for a lower interest rate. The amount of these costs often depends on your credit. (You can see where you stand by taking a look at a free credit report summary from Credit.com.)

Settlement fees cover the administrative and legal work needed to finalize a home sale such as an appraisal fee, a credit report fee, flood certification, title services and lender’s title insurance, owner’s title insurance, home inspection, a survey, attorney costs, a government recording fee, transfer tax and all necessary postage or courier services.

The final costs of the closing process are amounts you have to pay in advance for items you will be paying regularly as a homeowner. This includes homeowner’s insurance, property taxes and daily interest. Some of these payments are placed in a special holding, or escrow, account that provides a reserve in case the deal falls through or you can’t pay at some point in the future.

When you are considering the total cost of home ownership, there are some things you can do to minimize closing costs — but understand they will rarely be completely avoidable.

AJ Smith is an award-winning journalist with more than a decade of experience in television, radio, newspapers, magazines and online content. She currently serves as the managing editor for SmartAsset.

 

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How to Keep Your 2015 Homebuying Resolution

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If your New Year’s resolution is to take the leap and buy a home, you may be in luck. Whether you’re a first-time buyer or considering jumping back in, 2015 offers some encouraging signs after a tough time for the housing market.

Mortgage credit and underwriting requirements are thawing as the economy continues to recover. Government-backed mortgage giants Freddie Mac and Fannie Mae recently rolled out conventional mortgage options with a 3 percent down payment. And average interest rates continue to dip below 4 percent.

With conditions looking good for buyers, here’s a look at four tips to help prospective homeowners follow through on that resolution.

Get your credit in order

After years of tight lending, there are continued signs that mortgage lenders are loosening credit requirements. The average FICO score for a closed loan in 2014 was 726, compared to 738 the year before, according to mortgage software firm Ellie Mae.

Buyers without top-tier credit scores may now have a better chance to secure loans. While benchmark scores for conventional loans hover around 720 or higher, FHA and VA loans usually require about a 620.

While the mortgage market has been volatile, credit-building strategies remain the same. Get free copies of your credit report from AnnualCreditReport.com. Scour them for mistakes, bad accounts or other issues.

Some consumers work to pay down high-interest debt, while others try to build momentum by focusing on smaller accounts. Choose the strategy that best fits your lifestyle and budget.

Low down payments and interest rates are great, but you can’t tap into either without first clearing a lender’s credit-score hurdle.

Build a nest egg

Buying a home comes with a host of potential upfront costs. Even with reduced requirements for down payments, putting 3 percent down on a $150,000 loan means you’re parting with $4,500 on closing day. You may also need money for an earnest money deposit, inspections, appraisals, closing costs and more.

Upfront costs will vary based on a variety of factors, including the lender and the loan type. FHA loans require a 3.5 percent down payment, while qualified veterans and service members can use a VA loan to purchase with no money down.

Be sure to create and stick to a budget that allows you to put some money into savings each month. Having healthy assets puts you in solid position to purchase a home this year and deal with upfront and unexpected costs along the way. It will also make your loan file look that much stronger.

Learn about loans

Get a solid understanding of the mortgage options you might qualify for, along with their benefits and drawbacks.

No down payment or not paying private mortgage insurance are big-time benefits; however, only a small portion of the population is actually eligible for a VA home loan. But you may be able to secure a zero-down loan using the USDA home loan program.

If you can swing a 5 percent down payment but come up short on credit, FHA financing might be an easier path than conventional loans.

Consider the pros and cons of each in the context of your own financial situation and your short-term and long-term homeownership goals.

Get preapproved

Loan preapproval is critical in the current home-buying climate. This step involves more paperwork and documentation than prequalification, but it gives buyers a clear sense of their purchasing power and what they can realistically afford. It also shows sellers and listing agents that you’re a serious buyer likely to make good on an offer.

Following these steps can help you on your way to fulfilling your New Year’s resolution and let you head into 2016 as a new homeowner.

 

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Is This the Right Time to Refi? 8 Tips to Smooth the Way

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Ready to consider refinancing your mortgage? It can seem like an overwhelming prospect. So we broke it down into the key tasks you’ll need to take care of. Here are eight checkpoints that can help make sure you’re on track, each step of the way. But it’s important to remember that every situation is unique: Consider consulting a real estate or financial professional to evaluate your specific scenario.

1. Identify Your objectives.

Are you trying to save money by reducing monthly payments, or do you want to take out equity from your home? Interested in switching from an adjustable-rate mortgage to a fixed-rate mortgage? (Or vice versa?) When you shop around with lenders, they’re going to want you to be able to answer these questions. Make sure you can clearly articulate why you’re looking to refinance.

2. Refresh old paperwork.

Remember all that paperwork you needed to obtain your first mortgage? Yep, you’ll need to dig it up and update each piece. (Remember, it’s important to be truthful.) Get a copy of your most recent credit report and make sure that you understand your score and take steps to correct any errors. (And remember, now is not the time to apply for a new card. Every time you open a new account, your credit score is affected — and lenders can (and will) check your credit again, sometimes days before closing on the refi.

3. Crunch the numbers.

Not a math genius? No problem. You can use online tools such as Trulia’s refinancing calculator to figure out what makes sense for you. Don’t forget to consider closing costs when you evaluate totals: Even “no-cost” refinancing options can have associated fees.

4. Shop around.

Again, just like in your first go-round shopping for mortgages, you’ll want to choose multiple lenders and submit an initial application with each. Comparing rates and fees can save you serious cash, so it’s worth it to make sure you interview potential lenders and weigh their pros and cons.

5. Submit your application.

Gather all the required documents for prequalification. (Yes, it’s worth it.) Required documentation can include recent pay stubs (or other proof of steady employment) and bank statements. Lenders will probably also ask to see your tax returns from the last two or three years. Take care to have all of your paperwork in place beforehand so that you’re not wasting precious time that your lender could have used to approve you.

6. Pick your loan.

Consider the terms and fees of each loan, and make sure that you don’t just read the fine print, but that you understand it. Be certain to look at the “true” long-term cost of refinancing, along with the immediate financial benefits. For example, refinancing into another 30-year fixed-rate mortgage may lower your monthly payments upfront, but you’ll have to weather many more years of additional payments.

7. Get an appraisal.

The appraisal report will be an important factor in determining the success of your loan application — and you have to pick up the bill (anywhere from $300 to $500). It’s important to understand why the appraisal is a crucial component of the process. Unfortunately, there’s the very real possibility that you find out your home is worth less than you thought. The good news is that there are steps you can take to fight that low appraisal.

8. Be prepared to wait.

Delays are common in the refinancing process, so you’ll want to factor in a few extra days for the unexpected. Since you’ve already done your homework and compiled all the relevant paperwork, you should be able to respond quickly to requests from your lender to help speed up the process.

 

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How Much Could Lower FHA Mortgage Insurance Costs Save You?

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NOBUHIRO ASADA/ShutterstockThe White House cited $900 a year as the typical savings, but the number would be higher for buyers with larger loans.

By Alison Paoli

In an effort to make homeownership more accessible and sustainable, President Obama announced last week the Federal Housing Administration (FHA) will reduce annual mortgage insurance premiums by 0.5 percentage points. On a $175,000 home loan with less than 5 percent down, that reduction would mean a savings of $818 per year, or $3,932 over five years.

FHA annual mortgage premiums are paid in 12 monthly installments every year, and are paid on top of principal, interest and insurance. For new FHA loans, they last for the entire life of the loan, regardless of whether you have more than 20 percent equity in your home.

The announced changes will take the annual mortgage insurance premiums from 1.35 percent to 0.85 percent for loans with less than 5 percent down, and from 1.30 percent to 0.8 percent for loans with more than 5 percent down. According to the White House, the lowered premiums will help more than 800,000 homeowners save on their monthly mortgage costs and enable up to 250,000 new home buyers to purchase a home.

Annual Savings in FHA Mortgage Insurance Premiums on a $175,000 30-year Fixed Loan

Years

3.5% Down

5% Down

1 Year

$818

$805

5 Years

$3,932

$3,863

10 Years

$7,421

$7,276

20 Years

$12,669

$12,375

30 Years

$14,709

$14,338

Methodology: Zillow calculated the monthly mortgage insurance premium payment by applying the annual fee (in basis points) to the average annual outstanding balance after accounting for upfront fees, as described by the FHA.

 

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5 Tips To Raise Your Credit Score in 2015

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By AJ Smith

The new year is a time for resolutions, new beginnings and (hopefully) a higher credit score. It may be the last thing you are thinking about right now, but your credit score can affect your mortgage, your job potential and, ultimately, your life. So now is the time to start thinking about, monitoring and improving it. Make 2015 the year you improve your credit score with these five tips.

1. Check Your Current Reports & Scores

Before you try to improve your credit profile, find out where you stand. (You can get two of your credit scores free every month on Credit.com.) It’s also smart to check your credit reports from each of the three credit reporting agencies. (You can get these free once a year under federal law.) The information used to calculate your credit scores comes from these credit reports, so it is important to be sure they are accurate. If you see information that is not accurate, dispute it.

2. Reduce Your Debt

Your debt-to-credit ratio is a major factor in your credit score — the smaller the percentage, the better. It’s best to go no higher than 20% to 25%. So if your debt is higher than that, make it your goal for the new year to lower it. Look for ways to reduce your monthly spending or up your monthly income so you can put more money toward your debts. Total your debts and get a pay-down plan in place that you can comfortably follow. As your balances decrease, your score should rise.

3. Raise Your Limits

Credit agencies look at individual card limits as well as your overall level of credit. You can contact your credit card issuer about increasing your limit. Boosting your limits can reduce your debt usage ratio. It’s important to be sure you do not use the new, higher limit as an excuse to start spending more.

4. Pay on Time

Paying your monthly bills on time can help improve your credit score. If you have trouble with this, set up reminders or work with your bank to establish an automatic bill payment system. Your payment record accounts for approximately 35% of the score, so consistently paying on time can make a difference.

5. Consider Keeping Old Cards Open

Canceling a credit card you’ve had for a long time can potentially hurt your scores. If it’s a card you no longer use much, you might want to keep it active by using it for a recurring charge such as a utility bill. In a similar vein, it’s a good idea to only apply and open new credit cards as needed.

In truth, the best way to improve your credit score is by being a smart and careful consumer — be on the lookout for ways you could sink your score and avoid them. Make payments on time, understand credit information, check your credit reports regularly, and do your best to pay off debt and keep your balances low.

 

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