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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Cassandra Hubbart/AOL

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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Will 3% Down Mortgages Be a Game-Changer?

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Shutterstock/Karen Roach

Hoping to bust open the mortgage credit box, Fannie Mae and Freddie Mac recently brought back a 3 percent down conventional loan. The aim is to broaden access to homeownership and pull more first-time buyers into the marketplace. Years of tight lending have left scores of would-be buyers on the sidelines.

Both of the government-sponsored enterprises purchased these lower-down payment loans in the past. Fannie and Freddie back about two-thirds of all new mortgages.

Housing economists and mortgage industry insiders have both panned and praised the return of a 3 percent down home loan. Some see it as a slide back toward the lax lending that spurred the subprime mortgage meltdown. Others believe the policy will help give qualified buyers a better foothold in a time of stagnant wages and slowly thawing credit.

“[This] is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage,” Andrew Bon Salle, Fannie Mae executive vice president for Single Family Underwriting, Pricing and Capital Markets, said in a statement. “We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers.”

These buyers will still need to meet credit, income and other underwriting requirements. As with most other conventional loans, buyers who can’t muster a 20 percent down payment will also need private mortgage insurance.

It’s too early to tell whether lenders will get on board. It’s also unclear just how many buyers these 3 percent options could help.

Program Specifics

Requirements for the 3 percent down mortgages vary slightly.

Fannie’s new program is open to qualified borrowers who haven’t owned a home in the last three years. For buyers, these loans can only be used to purchase a single-unit primary residence with a fixed-rate term. Fannie is also offering a 97 percent loan-to-value refinance option for homeowners with a current mortgage owned by one of the government-sponsored enterprises. Borrowers would be able to extract up to $2,000 from their home’s equity to cover closing costs.

Freddie Mac’s 3 percent down loan won’t hit the market until late March. First-time buyers will need to complete a homebuying education program. Freddie will offer a similar refinance option, but homeowners won’t be able to tap into their equity.

Borrowers will need a minimum 620 FICO score to be eligible for the Fannie program. Freddie Mac uses a 660 FICO benchmark. But Fannie and Freddie don’t make loans: Lenders may want to see higher credit scores — sometimes significantly higher.

These lower-down mortgages will give consumers an alternative to FHA loans. Those government-backed mortgage require 3.5 percent down, but they carry particularly expensive mortgage insurance costs, which borrowers now pay for the life of their loan.

Safety & Access

Critics remain wary about how much these loans will help and how well they’ll perform. The first concern may loom larger than the latter.

A recent Urban Institute study showed lower-down payment loans have similar default rates to loans with 5 or even 10 percent down payments. And the $0 down VA home loan program has had a lower foreclosure rate than top-tier prime loans for most of the last six years.

The study’s authors also noted the most likely recipients of these lower-down loans are borrowers with solid credit scores.

And that might leave plenty of prospective homebuyers still on the sidelines.

 

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Ultimate Checklist When Shopping for a Home Loan

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ShutterstockShopping for the right loan becomes an easier process if you know the right questions to ask.

By Rebecca McClay

Amid the euphoria of envisioning your new home comes the sobering reality of shopping for a mortgage. It’s time-consuming, it’s complex, and it’s a little daunting. But if you’re armed with the right questions and come to the table with the right documents, shopping for the right loan becomes an easier process.

Comparing rates and fees and seeing where you can negotiate closing costs can save you thousands of dollars, so putting extra effort into preparing for lender meetings can pay off.

To help streamline the process, this one-stop reference guide suggests the important documents you should bring to each appointment with a lender; you’ll also find a list of key questions you simply must ask to get the best information for cost-comparing loans.

Key documents for lender appointments: Using this list of key documents, gather all the materials into one folder so that you’re never scrambling to find the right paperwork.

o. Copy of your driver’s license or passport.
o. Proof of regular rental or housing payments.
o. Copies of your two most recent paycheck stubs.
o. Copies of your W-2s from the past two years.
o. Copies of your federal tax returns with all schedules for the past two years.

For self-employed income:
o. A statement of year-to-date profit-and-loss for the business.
o. Copy of any corporate tax returns.
o. Copy of all current IRA statements, stock and bond accounts, or any other retirement or investment accounts.
o. Copy of current bank statements for each account for the past 60 days.
o. Documents on the value of personal property like automobiles.
o. Forms showing the face amount and value of life insurance policies.
o. Copy of any lease agreement for a rental property.
o. Copy of any student loan deferment letter or agreement.

Additional documents you may need:
o. If you are divorced, a copy of the final divorce decree.
o. If you have filed for bankruptcy, the complete bankruptcy paperwork.
o. If you are an active veteran, a statement of service and an authorization to live off base.

Key questions for comparison shopping: Print out the following list and keep it on-hand as you start shopping for your home loan. Meeting with loan officers can be overwhelming — this way you won’t forget to ask important questions.

o. Is the mortgage fixed or variable?
o. If the loan is fixed, what is the interest rate or annual percentage rate (APR) of the loan?
o. If the loan is variable, when does the rate change? And how is the rate change determined?
o. How long are quoted interest rates good for?
o. Is the Good Faith Estimate guaranteed?
o. What are the escrow requirements for taxes and insurance?
o. Is there a penalty for paying off the loan early?
o. Do you allow extra principal payments?
o. How long do funds, say for a down payment, need to be in my bank account before closing?
o. What are all the closing costs? Will you provide a written list?
o. Are any of the costs or fees negotiable, or capable of being waived?
o. Which financial firm will service the loan?
o. How long does the funding process usually take? Are on-time closings guaranteed?
o. What changes, such as employment changes, should I avoid before the loan closes?

 

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How Homebuying Can Come Back to Haunt You

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ShutterstockBuying a home can come back to haunt you if you’re not secure about your financial future.

By AJ Smith

If you think your pricey Halloween costume is going to set you back, just wait until you see how many costs come with buying a home. Buying a property is likely the largest financial decision you will make in your life and it’s important to do so thoughtfully. From how much house you can afford to which neighborhood is right for you, it’s important to consider each aspect carefully. Check out the reasons you may regret your decision to buy a home down the road.

1. If You Lose Your Job: Job security should be one of your first thoughts before you purchase a home. If you have reason to believe that you may be out of a job in the foreseeable future, now is probably not the right time. Mortgage lenders are not forgiving on missed payments and it’s a good idea to buy a home only when you are confident in your employment status or ability to afford your monthly mortgage for the future.

2. If You Need to Move – Again: When you make a home purchase, it’s generally a good idea to stay put for at least several years. A buy or rent calculator can help you determine what is the break-even point for you. That’s the number of years when it makes more sense for your net worth to buy instead of continue renting. Buying a property is generally a long-term commitment and probably not for you if you find yourself frequently changing cities. If you have to sell a recently purchased home on short notice it can be difficult to do without absorbing a big loss. Renting may be the better option for you if you find yourself moving more often than staying put.

3. If You’re in an Unstable Relationship: Although many single people buy homes, this is often a decision made with a partner or spouse. If your relationship with the person you’re buying a home with is unstable or the reason you are in a certain area (significant other, family) is not secure, you could face serious buyer’s remorse in the near future.

4. If You Have a Lot of Debt: Whether your debt is of the student loan, credit card or private loan variety, high debt ratios are a sign that you may want to hold off on making such a large financial commitment. If your expenses consume more than 50% of your income each month, you probably can’t secure a mortgage anyways (and even if you do it will likely be at a higher interest rate, which can cost you thousands of dollars over the life of your loan). It’s a good idea to try paying down your debts before buying a home.

Remember, you don’t have to buy a house. If your current personal, financial or employment situation is shaky, you may want to hold off on the purchase for now. Run the numbers to see what’s best for you. Be scared for the right reasons this Halloween season — not because you have found yourself in a costly housing situation that isn’t right for you.

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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Credit Card Strategies That Can Clear Your Way to a Mortgage

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ShutterstockWhich credit cards should you try to pay off first when trying to buy a home mortgage?

By Scott Sheldon

Your ability to purchase a home with a mortgage depends on how much net income you have after all monthly debts. If your debt payments absorb your income, particularly credit card payments, you may have to put the brakes on the mortgage application.

Most homebuyers realize that in order to purchase a home they need at least good credit, and that a better credit score means a better chance of qualifying. One of the ways to build and maintain a healthy credit score is the ability to use and manage credit over a period of time. Using three to five credit cards actively, paying them off in full each month is a fantastic way to support a good credit score, a benchmark factor in qualifying for the prize. However, credit cards are not something to be taken lightly, and you should exercise caution with them, especially if they are not paid off in full every month.

When it comes to qualifying for a mortgage, it’s not what you owe in total that counts, it’s what you pay each month. Most lenders allow a maximum debt-to-income ratio of approximately 45 percent, meaning they allow up to 45 percent of your monthly pretax income for a proposed new mortgage

When it comes to getting a mortgage, the key with carrying a balance on any one credit card is the monthly payment.

payment and any other debts. Let’s take a look at the various credit card scenarios and what you can do to help your chances of qualifying for a mortgage.

1. Spreading Out Your Debt: When it comes to getting a mortgage, the key with carrying a balance on any one credit card is the monthly payment. In most circumstances, the larger the balance on any one credit card, the larger the monthly payment. The higher the monthly payment on any individual card, the more likely you will not be able to purchase as much house. (You can see how much house you can afford here.) Let’s say you owe $10,000 on a credit card and the monthly payment associated with the obligation is $200 per month. To maintain your ability to qualify, a lender would require $400 per month of additional income to offset that debt.

However, if this balance could be spread out over, say, two or three credit cards with lower interest rates that would result in lower payments totaling less than $200 per month, you come out ahead.

2. Credit Card Payoff: If you’re looking to attack your credit card debt and pay it down (you can use the credit card payoff calculator to see how long it will take you) in preparation for qualifying for a mortgage, you might wonder which of your cards you should target.

If you’re trying to buy a home, paying off the higher-rate credit cards first might be a good move if the monthly payment is higher than the cards you have that are 0 percent. In other words, for buying a house, you’ll want to pay down the cards that have the highest monthly payment regardless of the interest rate, because those are the ones that will affect your qualifying ability the most.

So which card should you focus on paying down? Let’s say you have a 0 percent interest credit card with a $2,000 balance and a $150 monthly payment. You also have a 6 percent interest credit card with a $5,000 balance and a $50 monthly payment. You’ll get a bigger bang for your buck paying off the credit card with the higher payment despite the fact that it’s 0 percent. The idea here is that you’ll want to cherry-pick the cards with the higher monthly payment in order of priority to maximize your buying potential. A good mortgage lender can assist you tremendously with this task.

*As a good rule of thumb for financial planning, it does make sense to tackle the higher interest rate credit cards first because of the additional interest expense you’ll pay over time, but that is not necessarily the case when it comes time to qualify for a mortgage.

3. Consolidating Your Cards: Let’s face it, people carry credit card debt because they don’t have the cash to make the purchase outright. Consolidating any 0 percent interest credit cards or even other credit cards into one credit account containing a total new lower payment can help you qualify to buy a home. Why? It has to do specifically with the minimum monthly payment. Even if you choose to make a pre-payment each month in an effort to accelerate the debt payoff, it’s about the minimum obligation per credit card the lender will use in determining whether or not you’ll be able to buy that house, so consolidating may help.

If you have the cash, or are trying to decide whether to use the cash for the down payment or paying off debt, talk to a lender. If you do plan to pay off the credit cards to qualify, this can be accomplished as a special lender exception (not all lenders allow paying off debt to qualify). For example, if you’re in contract to buy a home and your loan gets rejected by the underwriter because your debt-to-income ratio is too high, one way to reduce the ratio to get your loan approved is to pay off your credit card balances in full. This route entails one additional step in order to remove the obligation: You would have to pay off the credit card in full and close the credit account.

In most cases, closing credit card accounts can adversely affect your credit score. However, a new mortgage loan in your name, paid on time every month, can also be instrumental in building a good credit rating.

You can find out how your debts affect your credit scores by checking them for free on Credit.com.

Scott Sheldon is a senior loan officer and consumer advocate based in Santa Rosa, Cali. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.

 

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Expect Low-Down-Payment Mortgages to Require Good Credit

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ShutterstockGuidelines are said to be coming on a plan to offer low-down-payment home loans to borrowers with limited funds.

By Christine DiGangi

Mel Watt, director of the Federal Housing Finance Agency, announced Monday plans to increase mortgage access to borrowers with good credit but limited funds available for a down payment. In a speech at the Mortgage Bankers Association annual convention in Las Vegas, Watt said the FHFA would issue guidelines for making lending to consumers who can afford only 3 percent to 5 percent down payments, according to a transcript of his remarks.

He mentioned the low-down-payment loans once, saying details are forthcoming, but the idea is part of a broader message to lenders that tight credit restrictions have prevented creditworthy borrowers from becoming homeowners. For low- and middle-income Americans to have access to affordable mortgages, lenders need to feel comfortable extending credit — that they won’t suffer the massive

With some of the changes Watt mentioned, consumers with good credit could access government-backed home loans with little money down and better interest rates than are available under current loan programs.

losses they did after the housing bust several years ago. In his speech, Watt sought to reassure lenders that this is the case, as the FHFA refines and clarifies the relationship between lenders and Fannie Mae and Freddie Mac.

Traditionally, consumers should plan to save 20 percent of their future home’s value for a down payment, but that amounts to tens of thousands of dollars, which many consumers may not have at their disposal especially after other homebuying expenses like closing costs. Home prices have gone up, student loan debt has grown, but wages have remained stagnant, further complicating access to homeownership.

With some of the changes Watt mentioned, consumers with good credit could access government-backed home loans with little money down and better interest rates than are available under current loan programs. Interest rates and down payments have a significant impact on how much you pay for a home or whether you can buy one at all. You can calculate how much home you can afford by playing around with these figures, which will help you figure out a plan for becoming a homeowner in the future.

Something to highlight from Watt’s speech: He repeatedly refers to “creditworthy borrowers,” so while lowering credit standards is a part of the plan, consumers will still need to exhibit a positive credit history when applying for home loans. If you’re not sure where you stand or think you need to improve your credit before shopping for a home, make a habit of checking your credit reports and scores regularly. (You can get two of your credit scores for free on Credit.com.)

 

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Mortgage Giants Strike Deal to Loosen Credit, Regulator Says

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APFederal Housing Finance Authority Director Mel Watt, in announcing the deal, called it ‘a significant step forward.’

By Marcy Gordon

WASHINGTON — A federal regulator says government-controlled mortgage giants Fannie Mae and Freddie Mac have reached an agreement with major banks that could expand lending. The head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, announced the deal Monday at a conference of the Mortgage Bankers Association in Las Vegas. FHFA Director Mel Watt said the deal clarifies conditions in which banks could be required to buy back mortgages they sell to Fannie and Freddie for misrepresenting the loans’ risks.

Watt said the agreement in principle is “a significant step forward” that will help make more mortgage credit available without harming Fannie and Freddie’s finances. It’s currently hard for banks to know

An expansion of mortgage credit could help boost the housing market, which has recovered only gradually since the Great Recession.

whether they’ll have to buy back loans, Watt said. That can make banks skittish about lending to borrowers with less pristine credit.

An expansion of mortgage credit could help boost the housing market, which has recovered only gradually since the Great Recession. Big banks in recent years have paid billions of dollars in settlements to resolve government claims of misleading Fannie and Freddie about risky home loans and mortgage securities that they sold before the housing market collapsed in 2007.

Watt also said his agency is working with Fannie and Freddie to develop new guidelines that would allow some creditworthy borrowers to make lower down payments than currently required. Details on the guidelines and the new requirements for banks to buy back mortgages will be issued soon, he said.

The FHFA will set a minimum number of loans linked to misrepresentations by the seller banks or inaccurate data that would require them to be repurchased. That means a pattern of problems must be established, Watt said.

Fannie and Freddie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new mortgages. The two companies don’t directly make loans to borrowers. They buy mortgages from lenders, package them as securities, guarantee them against default and sell them to investors. That helps make loans available.

The government rescued Fannie and Freddie at the height of the financial crisis in September 2008 when both veered toward collapse under the weight of losses on risky mortgages. Together they received taxpayer aid totaling $187 billion. The gradual recovery of the housing market has made the companies profitable again, and they have repaid the government loans.

 

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Fannie Mae, Freddie Mac Reportedly Near Deal to Ease Credit

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The Associated PressMortgage giants Fannie Mae and Freddie Mac reportedly are close to an agreement to loosen lending rules.

By Avik Das

Government-controlled mortgage companies Fannie Mae and Freddie Mac, are close to an agreement with their regulator and lenders that could expand mortgage credit while helping lenders protect themselves from charges of making bad loans, The Wall Street Journal reported.

Fannie Mae and Freddie Mac have recouped tens of billions of dollars in penalties from lenders in recent years over claims that the lenders made underwriting mistakes on loans they sold to the mortgage giants. Lenders have blamed those penalties for tight credit conditions and for prompting them to make loans only to borrowers with near-pristine credit.

If the agreement is completed, lenders may be more willing to lend to borrowers with lower credit scores and smaller down payments, the Journal reported, citing people familiar with the matter. Personnel at Fannie Mae and Freddie Mac were not immediately available for comment.

 

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