The VA home loan is a phenomenal mortgage program, unlike any other available in today’s mortgage marketplace. The VA loan’s most visible feature is the lack of a down payment requirement. VA loans ask for zero down yet still provide some very competitive mortgage rates. And even with a zero down program, there is no monthly mortgage insurance premium payment found with other low money down government or conventional loans, helping more borrowers qualify. Veterans are also limited to the types of closing costs they’re allowed to pay. No money down, low payments and restricted closing costs make for a very attractive financing package when it’s time to buy and finance a home.
But the VA loan also has an important feature that can be used again after the home has been purchased and it’s called the Interest Rate Reduction Refinance Loan, or IRRRL. Lenders often refer to the IRRRL as a streamline loan due to the vast reduction in documentation required. When you first got your VA loan your eligibility was confirmed by your certificate of eligibility which showed your entitlement amount. When refinancing, the lender will once again request the certificate of eligibility to document the borrower’s eligibility yet this time when refinancing, it takes much less time and much less paperwork.
With the IRRRL, the borrowers do not have to show proof of income. That means no pay check stubs are needed nor is there any reason to provide the last two years of W2 forms. No federal income tax returns, either. If fact, the lender doesn’t verify employment at all. There’s no need for a property appraisal either which saves on the cost of refinancing. Borrowers can even be “upside down” with their mortgage and still be able to refinance with the IRRRL. The only qualifications are the interest rate on the newly refinanced loan must be lower than the current one or the borrowers are switching out of an adjustable rate loan and into a fixed.
The VA IRRRL, or VA streamline, is quite possibly the easiest loan to qualify for as well as document. There’s even no need for a minimum credit score. The only credit history the lender looks for is to make sure that within the previous six months there are no payments made more than 30 days past the due date and no more than one such payment over the past year.
Shopping around for interest rates at some point can get a bit overwhelming. There are so many different loan programs from which to choose and each individual program has a variety of interest rates from which to choose…for the very same loan. You can get a rate quote for 15 days or for several months. You can get a rate quote today and tomorrow it might be a little different even if nothing has changed except the day of the week. To easily clear up the confusion and compare rates the smart way, here are some tips that will make the process go easier.
Stick to It. One thing you absolutely must do is to decide on a loan program and stick to it. But don’t do this on your own but speak with an experienced loan officer who carries the full suite of mortgage options from government-backed loans to conventional. After a conversation with your loan officer you’ll identify the type of loan that’s best for you. When you compare rates from one lender to the next you need to compare the exact same loan program. A rate on a 30 year loan will be slightly higher compared to a 15 year for the same loan amount.
Check Your Calendar. Lenders check various indexes each morning before setting their interest rates for the day. Lenders will issue new rate sheets on a daily basis which means if you get a quote from lenders on one day then continue to contact other lenders the next, rates might be higher or lower compared to the previous day. Lenders all establish daily rates based upon the same general set of indexes. Make sur you do your rate shopping on the same day.
Check Your Watch. To take it a step further, not only should you get interest rate quotes on the same day but also around the same time of day. It doesn’t happen very often but there can be an intra-day price change. Indexes can have a good day or a bad day and if the impact of some economic or political event is so great, lenders may change their rates during the day. When this happens, you can call in the morning for a rate quote and call the same lender later in the day and get a different quote.
That’s pretty much all there is to it. Just remember that once you decide on a loan program, stick to it and get your rate quotes on the same day around the same time of day.
There are so many people that have thought about buying and owning their own home but don’t think they can afford it. Surprisingly though, mortgage payments can be lower than rent payments while at the same time creating wealth with ownership. But if you’re of the notion that you can’t afford a home but you’re renting now, let’s pull back the curtains a little bit and show you how lenders determine affordability.
First, lenders take into consideration your gross monthly income. Not take-home income, but the amount before any deductions are taken out. Then, the lender looks at any monthly credit obligations you may have such as a car payment or a credit card payment. Items that won’t appear on a credit report such as food or utilities are not included in the affordability factor. Lenders then calculate a mortgage payment that would be approximately one-third of gross monthly income using today’s interest rates. In this payment is included principal and interest, an amount for property taxes and insurance. Lenders refer to this as PITI. This ratio is also referred to as your “front ratio.”
Next, lenders then add up your monthly credit obligations to your PITI and compare that to your gross monthly income as your “back ratio.” This ratio should be somewhere in the neighborhood of 40-43% of gross monthly income. If your gross monthly income is $6,000 per month then your total monthly payments should be around $2,600.
Take a look at your gross monthly income and add up your monthly payments and then look at what you’re now paying in rent. Our guess is you’re paying more now in rent than what you could be paying with a mortgage.
It doesn’t take much to speak with a loan officer over the phone who can give you an idea of what you could qualify for. If you’re not sure you can afford a home, it only takes about 10 minutes of your time to find out. You’ll be surprised.
There are ways home owners can restructure their home loan. Typically, when changing the nature of an existing mortgage it means refinancing out of one loan and into another. For those who might consider refinancing a mortgage, the biggest reason is usually because rates are lower than when they locking in the interest rate on their loan while it was being approved. Interest rates don’t have to fall to a “magical” level in order for a refinance to make sense. Instead, borrowers should compare how much they would save each month with the closing costs involved in the transaction. Doing so will provide how many months it will take to “break even” as it relates to closing costs. It’s less about the interest rate and more about recovering the cost of refinancing through lower payments. Once accomplished, it’s a real money saver.
But there are costs involved, no doubt. Borrowers can work with their lender to see if a closing cost credit is available but there are fees nonetheless. However, borrowers can restructure their loan without refinancing simply by making additional payments. Mortgages today have no prepayment penalties so any extra payments will go toward the principal balance and shortening the loan term. This applies to fixed rate programs. When making extra payments to an adjustable rate mortgage, the monthly payments drop but the term remains the same.
The third way to restructure a mortgage is with what lenders refer to as a recast. A recast is a transaction where the borrowers make a lump sum payment to their loan balance and the lender then reamortizes the loan for the remaining term. Let’s say that someone has a 30 year loan but is 10 years into it. The borrower gets a bonus from their employer and the borrower decides to pay down the mortgage. But instead of just paying down the mortgage balance there is a request for a recast. The borrower pays the lender a lump sum of say $25,000. The lender lowers the principal balance by that amount and the lender then amortizes the loan over the remaining 20 years. This means less interest to the lender over the remaining 20 years and lower monthly payments.
If you’re teetering on the brink of a refinance but you’ve yet to move forward, it’s very likely it’s because you’re waiting for interest rates to go down a bit more. After all, if it does make sense to refinance now but rates might go down even further then you’ll save even more, right? But let’s step back a bit from the interest rate question or even looking into the future and dig a little deeper.
If your loan officer has suggested a refinance it’s because rates have fallen compared to what you now have, changing loan terms saves long term interest or you’re getting out of a hybrid or adjustable rate loan into the stability of a fixed. That means should you decide today to go ahead and tell your loan officer you’re ready to close the deal it will be a wise choice. Yet many are out there trying to make it wiser by waiting. Here’s our advice- Assume whatever you decide it will be the wrong decision. How’s that?
Let’s say that right now you would benefit from a refinance. So you tell your loan officer to lock in your rate and draw your closing papers. Then a few weeks later you notice rates have fallen. If only you had waited you could have gotten the lower rate. It’s not much lower, but lower still.
Now let’s say that you would benefit from a refinance and you decide to wait to see if rates go down.
Don’t depend upon your loan officer to tell you what to do in this situation, it’s really your decision to make. Okay, so you decide not to lock in right now but rates start to creep up. You’re checking on rates every day and your loan officer is giving you the bad news. It’s still good to refinance just not as good as it was a couple of weeks ago. You keep waiting, hoping rates will fall back to where they were. But they don’t. In fact, now they’re so high it no longer makes sense to refinance. The window has closed.
Okay, so which way would you rather be wrong? Locking your rate now and getting a good deal or waiting and rates rise and never look back? We thought so. No one knows where rates are headed. No one. You can only deal with the facts in front of you. If you’ve got a refinance application approved right now, you may think about locking in.
For those with bad credit, getting a home loan seems as likely as flying to the moon. It’s just not going to happen. Yet there are lenders who do offer loan programs for those with damaged credit. There was a time however that such loan programs essentially vanished from the lending landscape just about 10 years ago when toxic loan programs began to falter. Today however, lenders have opened up home financing to those with bad credit in many instances. How do lenders approve bad credit and why do they do it in the first place?
The so-called “subprime” market refers to the mortgage marketplace where the loan programs cater to those with damaged credit. There are some variances on lending guidelines but in essence they all share the same basic characteristics. Applicants must be able to verify stable employment and income. They should be employed for at least two full years and be able to provide copies of their most recent pay check stubs and W2 forms.
These loans will also ask for a sizable down payment from the borrowers. You won’t find any 3.0% down bad credit home loans but you can find such loans with a down payment of at least 20%, more with some programs. Funds for down payments and closing costs must be verified by providing copies of recent bank statements showing sufficient funds to close.
Interest rates for such loans will of course be higher than those for traditional mortgages and can vary based upon the down payment, credit score and the loan program. Bad credit loans are also shorter term in nature and typically in the form of a hybrid mortgage. A hybrid is an adjustable rate loan that is fixed for an initial period, say three to five years. The strategy is to obtain financing while making the mortgage payments on time, gradually improving credit scores to the point where the loan can be refinanced into a conventional loan.
Lenders offer these loan programs to those who need it because a) there’s a market for them and b) it helps the real estate market in general. When there is a larger pool of buyers that allows homes to sell more quickly, increasing demand. Not all lenders participate in this market but those who do really are doing a service to not only the real estate industry but to the bad credit home buyers themselves.
Most people who decide to buy a vacation home typically get the idea as the result of actually renting a vacation home instead of staying in a hotel. The home rental business is booming as vacationers can now search for homes to rent instead of looking at a hotel. A home is more relaxing and can be more cost effective compared to a pricey hotel room. But before you get too much further, here are three things you need to know about buying a vacation home.
Maintenance. You know that owning your own home also requires maintenance. When the hot water heater goes on the blink, you’ll need to call a service company or buy and install a new hot water heater. You have to pay utilities, property taxes and insurance on top of what pay each month on your mortgage. When you’re looking at a potential purchase, do some research about what the property uses in utilities each year. You can get that information from various utility companies. Second, you’ll need to have someone maintain the property while you’re away.
Second Home? Mortgage lenders make a clear distinction between a second home and a vacation or rental property. Technically, if you rent out the property more than two weeks in a year it’s a vacation home. A second home is one where you spend an extended period of time there and is at least 50 miles or more away from your primary residence. A vacation home can’t be one across town. The reason this distinction is important is that second homes require less down payment and ask for lower rates compared to a vacation or beachfront property.
Managing. If you do plan to rent the property while you’re away who will collect the rent each month? Who will answer the maintenance call when the sink disposal stops working? Who will show the property to potential vacationers? You might want to consider enlisting the services of an experienced property manager who can take care of all the day-to-day duties while you’re at home. Most real estate companies that sell and rent in vacation areas also provide property management services and they’re worth it.
Do you have an FHA loan? Are you thinking of refinancing to get a better rate, change the term of the loan or switch from a variable rate loan to the stability of a fixed? Then you may also want to tap into the equity you have while you’re in the process of refinancing your existing FHA loan. There are two types of FHA refinancing. The most common is what lenders refer to as a “streamline” refinance. A streamline is an option when replacing one FHA loan with a new one. It’s referred to as a streamline due to the reduced documentation needed to close the loan.
How much documentation is reduced? There are no credit report or credit score requirements. There is no need to verify employment or even income. There’s no need for an appraisal, either. As long as there is no more than one payment made more than 30 days past the due date over the past 12 months and no such payments within the previous six, the existing FHA loan is eligible for the streamline process.
However, should you decide that you want to pull some equity out while refinancing in the form of cash in your pocket, the loan will be processed in a similar manner as a purchase loan. This means you’ll need to provide recent pay check stubs and bank statements. Your lender will also order an appraisal to get an update on the current market value of your home.
Let’s say you purchased your home using an FHA loan a few years ago. Rates have fallen and you decide it’s time to refinance and switch to a 15 year loan. Your property value has increased since you purchased the home and after the appraisal has been completed you see there is an additional $50,000 in equity you gained over time. You have the ability to borrow enough not just to pay off the existing FHA loan but take care of your closing costs as well. You can then take part or all of that $50,000 as cash in your bank account.
When you pull out cash during an FHA refinance you can use the money for anything you want. You can pay off higher interest rate credit cards, take care of outstanding student loans, pay off your automobile loan or even take a family vacation. The equity is yours and you can do whatever you want to with it.
You may have heard that real estate has created more wealth for more people than any other asset class but you may not be clear on how and why. There are those that invest in real estate and hold onto the property for both positive cash flow and property appreciation. Such investors may own multiple single family homes for those reasons and for some that’s their full time job. But you don’t have to be a real estate investor to take advantage of the benefits home ownership provides. Real estate investors charge more than enough rent to pay for all the expenses of owning the property including the mortgage payment, property taxes and insurance plus all maintenance costs. If you’re ever heard the phrase “let your tenant pay your mortgage for you” that’s what it means.
When you send your rent payment each month in return you get a place to live. But that’s a negative cash flow and an expense. You don’t get anything in return when you mail your rent check other than a roof over your head. Yes, that’s certainly important but owning rather than renting builds wealth. How so? Two reasons.
First, each time you make a mortgage payment, part of the payment goes toward interest (tax deductible, by the way) and part toward your loan balance. As you pay down your loan your equity in the property increases over time doing nothing more than paying what you already would do by renting.
Second, property values increase over time. The difference between the current market value of the home and the loan balance also belongs to you and the longer you own the home the more wealth you create. If for example your loan balance is $100,000 and your home is valued at $150,000, your equity in the property is $50,000. Five years later your loan balance might be $85,000 and the value at $185,000 so your equity is $100,000. Again, all you did was make your mortgage payment.
This is how and why real estate creates wealth for home owners. The property belongs to you as well as the equity in the home. We’re not really suggesting you should buy a home as an investment, you should buy for a host of reasons, but as long as you need a place to live, why not create wealth while you’re at it?
For those who currently have a mortgage and are perhaps curious about refinancing, is there a bona fide way to determine if refinancing is a good idea or not? Simply making a few queries about refinancing and soon online ads appear wanting to know if you’d like to refinance and why you should. But is there an independent method to find out if a refinance makes sense? Is there truly a value refinancing a mortgage? Yes, but it does take a little math to get to that point.
Home owners can have various motivations about refinancing. For most refinance transactions the primary reason is because interest rates have fallen and current market rates are lower than what is currently on the note. Mortgage rates have been at or near historical lows for years now and even though most expect rates to gradually rise over the next several months and perhaps into 2018, rates are still very attractive. All one needs to do is research where the 30 year fixed rate has been over the past 20 years to see that. Yet the value of a lower rate means borrowers can pay less interest each month to the lender, saving them money and increasing liquidity.
Another solid reason to consider a refinance is to shorten the term of the loan. Most loans issued are fixed rate loans and most fixed rate loans are of the 30-year variety. For someone who has had a 30 year loan for a few years and wants to reduce the interest paid to the lender then a shorter loan term can be a strong motivator. A shorter term means less long term interest paid to the mortgage company and kept in the borrower’s bank account.
Finally, for those who elected to take out an adjustable rate loan in the form of a hybrid, such as a 5/1 ARM, it might soon be ready to change out from the initial five year fixed term and into an adjustable rate mortgage that can adjust once per year. By refinancing out of the hybrid and taking advantage of today’s low fixed rates, there’s still an opportunity. If the borrowers intend to keep the property much longer than originally intended, then refinancing now is probably a pretty good idea.