The opportunity of homeownership should be accessible to everyone, especially our self-employed clients! While there are so many benefits to being your own boss, you may find that qualifying for a mortgage can present some challenges. Throughout the mortgage process, you will be required to provide proof of income, which may not be as straightforward as you may think. In this article, we’re sharing everything you need to know about qualifying for a mortgage as a self-employed clients and how our Non-QM programs could be the solution for you!

Are You Self-Employed?

From a lender’s perspective, you may qualify as a self-employed borrower if you have at least 25% ownership in a business, be it a corporation or a partnership. In case of a sole proprietorship, you’ll need to show 100% ownership. Independent service providers and contractors fall under the self-employed bracket. You’ll also qualify as a self-employed borrower if you work for a business as a gig worker and receive Form 1099-MISC instead of Form W-2.

You may also fulfill this aspect of self-employed mortgage loan requirements if a major portion of your income comes from:

• Royalties
• Rent payments
• Interest/dividends

Home Loan Requirements for Self-Employed Borrowers

If you earn any income that comes with a Form 1099 MISC, you can be sure that a lender will view it as self-employment income. In this case, you’ll need to get through a few roadblocks before you may qualify for a mortgage. People who don’t plan to include their self-employment income in their mortgage applications need to realize that lenders will still look at their tax returns to determine how much money they make or lose. Further, if you plan to write off business losses against income, you run the risk of an underwriter subtracting the losses from your otherwise-qualifying income.

Just how much scrutiny your application receives depends on the mortgage provider you select, your income, as well as the type of business you run. Since there is no formal contract of employment to fall back on, lenders typically ask for proof of income to determine if a borrower can afford to make monthly payments. Asking for additional proof to ensure that there is stability in income is common, as is determining if you have adequate cash flow to deal with low-earning periods.

The Two-Year Requirement

Even before looking at your income, most lenders will want to determine if you’ve been self-employed for a minimum of two years. According to Freddie Mac, lenders might be able to justify providing mortgages to borrowers with at least 12-month self-employment work histories, provided they meet certain criteria. For instance, you may qualify if you’ve been self-employed for 12 months and held a job in the same field for at least two years prior to the switch.

Do You Receive Form W-2s?

If you receive Form W-2s, documenting your income for a mortgage application is fairly easy. All you need to do is provide copies of your W-2s for the preceding two years along with your preceding month’s paystubs which can be more than two if you’re paid weekly. You don’t need to provide tax returns unless you have considerable tax-deductible employee expenses or you earn a tidy sum as income from investments or commissions.

Self-employed borrowers with W-2s may also submit copies of their bank, retirement, and investment account statements. In this case, there is an increased possibility of approval if an underwriter finds your income to be adequate and your credit score to be satisfactory.

Self-employed individuals who don’t receive W-2s have to follow a more difficult path. While they need to provide copies of their personal accounts, they typically also need to submit their personal tax returns, business account statements, business tax returns, profit and loss statements, as well as year-to-date balance sheets.

Self-Employed Mortgage Documents

You may expect a lender to look at your income stability and the nature of your self-employment before making a decision. Applying for self-employed home loans requires that borrowers provide different types of documentation. It may include:

• Bank statements
• Personal and business tax returns (including schedules K-1, 1120, 1120S, and 1065)
• Profit and loss statements
• Balance sheet
• Relevant state or business license

Self-Employed Mortgage Loans – The Alternatives

Much like homebuyers who have regular jobs, self-employed mortgage seekers also get multiple options from which to choose. These include alternatives to traditional mortgages as well as conventional mortgages.

Non-Qualified Mortgages

It’s common for self-employed borrowers to ask, “What is a non-QM loan?” Simply put, non-qualified mortgages fall outside of the qualified mortgage (QM) bracket, and you may qualify for one by providing alternative forms of documentation.

Non-QM Loan Requirements

If you look at the qualified mortgage vs. non-qualified mortgage comparison, you’ll see that non-QMs tend to follow more flexible credit requirements. Besides, you may even qualify with a debt-to-income (DTI) ratio that’s over 43%. You typically need a credit score of over 600 to qualify, although this might increase to 660 for some non-QM loans. If you’re a foreign national, you may use the debt-service coverage ratio (DSCR) or standard documentation.

Are Non-QM Loans Safe?

Non-QM loan borrowers may have to make larger-than-usual down payments, and they typically end up paying higher fees and interest rates when compared to conventional mortgages. While non-QMs tend to come with higher risks than QMs, non-QM lenders have to abide by regulatory and underwriting guidelines. However, borrowers should ensure understanding the terms of their non-QMs and partner with reputable lenders. 

Meadowbrook Financial offers among the best non-QM loans for people with fair/average credit, for those looking at larger-than-usual loan amounts, for investors, and for foreign nationals.

Conventional Loans

A majority of the mortgages issued in the U.S. classify as conventional conforming loans, guidelines for which are set by Freddie Mac and Fannie Mae. Lenders that provide conforming loans require self-employed applicants to show at least two years of self-employed work history. You typically need a credit score of over 620 to qualify for a conventional loan. The debt-to-income ratio for self-employed borrowers in this case needs to be 43% or lower.

VA Loans

The U.S. Department of Veteran Affairs backs VA loans. While you may apply as a military veteran, you can also apply if you’re still in military service, a surviving spouse, or a reservist. As a veteran, you don’t have to make any down payment. There is no prescribed minimum credit score requirement, which is why it may vary from one lender to the next.

Improving the Odds of Approval

Most lenders look at self-employed mortgage borrowers as high-risk propositions because of the preconceived notion that self-employed individuals can come with highly unpredictable income patterns. While people from this bracket find it harder than regular employees to get mortgages, following a few measures may help improve the odds of a successful application.

Scrutinize Your Finances

Take a close look at your personal and business finances to determine your existing financial situation even before you start looking at home loans for self-employed borrowers. Ideally, you should keep your individual and business accounts separate. This is because lenders can have a tough time distinguishing between the two if there’s any kind of overlap.

Whether you’ve filed your personal and business income separately or together, it’s crucial that you document all the sources of your income to build a stronger application for the underwriter. Keep in mind that while a lender would want to look at your personal finances, it would also want to determine how well your business is doing.

Here are some questions that can help you establish where you stand:

• How much do you currently owe toward personal and business debt?
• Do you make enough money through your business to cover your mortgage and other payments?
• How much can you afford to pay toward monthly mortgage payments?
• How much can you afford to pay to cover closing costs and as down payment?
• Do the preceding two years as a self-employed individual show steady or an increase in income?

Look at Your Credit Score

Your credit score plays a crucial role in whether or not you qualify for a mortgage and the terms that a self-employed mortgage lender offers. For instance, this factor has a significant effect on interest rates.

Lenders typically request your credit reports from all three credit bureaus, along with corresponding FICO Scores. This helps them evaluate the risk you pose as a borrower. Ranging from 300 to 850, the higher your credit score, the better the chances of approval. Besides, lenders tend to offer the lowest interest rates to applicants with exceptional credit scores.

It’s important that you look at your credit score before a lender does. This way, if you have less-than-perfect credit, you may work on improving it before applying for a mortgage. This step also helps you identify any possible errors in your credit reports that might cause your credit score to drop. If this is the case, you may contact the credit bureau in question to get the error fixed.

Inspect Your Debt-to-Income Ratio

Debt-to-income (DTI) ratio refers to the percentage of your gross monthly income that’s required to make your monthly debt repayments. For example, if your gross monthly income is $5,000 and your combined monthly debt payments amount to $2,000, your DTI ratio is 40%. Lenders pay close attention to the DTI ratios of self-employed mortgage seekers, and they view applicants with high DTI ratios as high-risk borrowers.

According to Fannie Mae, the maximum allowed DTI ratio for a manually underwritten mortgage is 36%. It can go up to 45% if a borrower fulfills credit score and other specific requirements. In addition, there can be exceptions in some cases such as cash-out refinance and high LTV refinance transactions. If your DTI exceeds 45%, consider bringing it down before you apply for a self-employed mortgage loan.

Offer to Make a Large Down Payment

Lenders view borrowers who start by having higher-than-usual equity in their homes as less likely to default on their mortgages. As a result, offer to make as large a down payment as possible without stretching your resources.

Have Significant Cash Reserves

If you’ve saved a substantial amount of money, it shows lenders you can continue making monthly payments even if you suffer a temporary financial setback. Ideally, you should be able to show enough cash reserves to cover 12 to 24 months of mortgage payments, insurance payments, property taxes, and the home’s regular upkeep.

Paying off as much of your consumer debt as possible before you apply for a mortgage is ideal. While this helps bring down your DTI ratio by reducing your monthly payments, the additional cash flow you have access to might also result in a lender offering you a higher loan amount.

Select a Suitable Lender

Not all mortgage providers view self-employed applicants in the same manner. For example, most big banks follow stringent eligibility criteria that might not work well for self-employed individuals. Specialized mortgage lenders, on the other hand, tend to offer self-employed people with good credit scores and adequate income a better opportunity to qualify for mortgages, be it in the form of non-QMs or QMs.

Conclusion

While the process and programs may be different that traditional mortgages, it is definitely possible for self-employee people to qualify for a mortgage. What’s important is for you to look at your existing financial situation and your ability to make payments going forward.

If you’re wondering how to calculate self-employed income for mortgagesor need help to determine which option might work best for you, consider speaking with a loan officerwho works with a reputed mortgage provider.

Moving to a new and smaller home can be a daunting and time-consuming process. In addition, while downsizing homes might work well for some, it does not for others. This requires that you consider various aspects before determining if this is the right path to take.

If you look at recent downsizing statistics, you will find that a majority of homeowners in the U.S. aged 60 years and older plan to stay put in their existing homes. Unlike in the past, when homeowners from this age group commonly downsized their homes, many are steering clear of this approach because of retiring later in life as well as no certainty surrounding which way interest rates might go.

If you plan to move into a smaller home, looking at what homeowners wish they knew about downsizing before making their decisions is the ideal way to go. This includes checking the pros and cons and understanding how the process works.

The Benefits of Residential Downsizing

Downsizing homes can come with multiple benefits, and here’s what you might expect if you’re thinking about buying a smaller home.

• Savings. This is among the top reasons for downsizing. If your existing home is mortgage-free, you might be able to buy a new home and still have some reserve money. If it’s not, you may look forward to reduced monthly payments with your new mortgage. Downsizing can lead to reduced property tax, insurance costs, and maintenance costs as well as lower utility bills. Downsizing to pay off a mortgage might also be an option if you can use the equity in your existing home to purchase a smaller home.
• Reduced clutter. Home downsizing gives you a great opportunity to eliminate things you don’t need or use. You might be surprised to find out just how many of your existing possessions end up making it your new home, simply because they provide little to no value.
• Easier to maintain. A smaller space reduces the time and energy you put toward maintenance, be it day-to-day or long-term. With less time spent on everyday upkeep, homeowners have more free time on their hands.

Possible Reasons Not to Downsize

While moving to a smaller home comes with benefits, you also need to be aware of possible drawbacks that you might have to face.

• No spare room. A spare room comes in handy when you have to deal with someone who wishes to sleep over after a late night, or when you have out-of-town guests. When you downsize, you can say goodbye to your spare room. However, you’ll still have the couch in your living room.
• Fewer belongings. You will, in all likelihood, give away, throw, donate, or sell a number of your possessions before you shift into a smaller home. Some people might have a hard time dealing with this aspect, especially when it comes to items that could not make it because of lack of space or ones that have emotional value.
• Space restrictions. People who are used to living in large homes might feel cramped for space in smaller homes. In addition, fewer rooms might result in reduced privacy.
• Changes in social life. This essentially depends on the locality of the new home. If it’s in the same neighborhood as the existing one, there shouldn’t be too many changes. However, relocating to a new area might require adapting to big changes. For example, how quickly would you be able to make a few friends?

If you are downsizing to be mortgage-free or reduce your home loan expenses, other ways to go about the process might need your attention. For instance, you could consider switching from making monthly repayments to bi-weekly repayments. Refinancing your existing home loan might also work in your favor, given existing interest rates.

How to Go About the Process?

Once you’ve decided you wish to buy a smaller home, you will need to pay attention to several aspects. Streamlining the process ensures that you minimize the possibility of encountering problems along the way.

Plan for the Long-Term

Do not make a spur-of-the-moment decision when you plan to downsize your home. Take into account any extra space you might need, be it for working from home or having your grandkids over. Only you can determine just how much space you might need down the road.

Think About Hidden Costs

Buying a smaller home might lead to lower mortgage payments. However, you need to consider other costs as well. For instance, does your existing home need repairs? If so, how much might you need to spend to make it market-ready? In addition, will your existing furniture and appliances fit into your new home, or will you have to budget for new purchases? You also need to take into account the actual cost of moving as well as possibly higher property taxes and housing association fees.

Focus on Functionality

You obviously cannot take everything from your existing home to your new home when downsizing. When deciding what to take and what not to, your main focus should be functionality.

• Decide on big items first. Scan every room in your house and identify all the big items. Among other things, these include all your large appliances such as dishwashers, refrigerators, and TVs. Does the new home have any of these? If not, will the ones you have fit well into the new space? Will the cost of moving a heavy item outweigh the cost of making a new purchase?
• Donate, sell, or throw away. Create separate spaces for items you wish to take with you, as well as for ones you will give away, donate, sell, or throw in the trash. Items you can consider giving away may include family heirlooms and possessions that carry sentimental value. This way, you know they’ll be taken care of well. Consider selling items of value you no longer need, as this gives you some extra cash. Donate items that aren’t valuable and you no longer need but still serve their purpose. Salvation Army gives you easy means to schedule a free pickup from your home for most types of items. Anything that does not make it to these three piles should head to the trash.
• Check storage and infrequently used spaces. Over time, various items get to spaces in homes that are rarely entered or used. When you start to clear out your existing home, begin by checking your attic, basement, closets, spare rooms, bathroom cabinets, and storage units in the kitchen. What you end up finding will include items you can sell, items that bring about fond memories, and just plain junk. Place them in the relevant piles you create.
• Furniture comes next. Moving into a new home does not imply that you revamp your furniture completely. Identify pieces of furniture that will fit comfortably in your new home and also serve a purpose. Make sure that the doors and passageways of your new home are big enough to move the existing furniture you plan to take. The furniture that’s left goes into the give, donate, sell, or throw piles. With furniture you wish to donate, the Furniture Bank Network can work well in finding households in need that cannot afford to buy new furniture.
• Check all other spaces. This step requires that you go through each room with a fine-tooth comb, one by one. With the kitchen, you’ll probably find more items you wish to take than leave behind. This is because most of the things in kitchens tend to find frequent use. However, keep space restraints in mind when thinking about taking appliances, unnecessarily large utensils, and crockery/silverware that can do with replacement. When you move to the other rooms, such as your living room or bedrooms, make de-cluttering your main aim. Each time sentimentality creeps in, remind yourself of the all-important functionality.

In case you end up with a significant number of items you wish to hang on to, but don’t have the required space in your new home, you might consider renting a storage unit.

Should You Buy or Sell First?

Generally, it’s a good idea to sell an existing home before buying a new one. This way, you don’t have to worry about your emotions getting the better of you. However, buying before selling might be the order of the day in some markets. This is an aspect that you need to discuss with your real estate agent in detail.

Buying First

Buying first makes sense in case you’re looking for a home in a market where sales are happening quickly. In such a scenario, you should be able to buy with cash or have a pre-approval for a mortgage. You might also consider buying first in slow markets where sellers might be more willing to accommodate your requirements. For instance, you could make a conditional offer that links to the sale of your existing home.

In case you plan to rent your existing home, you can expect most lenders to consider 75% of the rent amount as income, provided there’s a signed lease in place.

Selling First

A conditional offer linked to the sale of your existing home might not work, especially if a seller has multiple offers. Most real estate agents suggest selling first mainly because they view this as a safer bet in terms of not losing out on commission.

Once you agree to vacate your home in a given time period, you might feel pressed to settle for a home that is not up to your liking. If a seller knows you’re in a hurry to make a purchase, negotiating for a better price becomes even harder.

If you’re selling first, make sure you negotiate terms that would offset problems you might face with your impending purchase. For instance, you can ask the buyer for more time until closing, which could be 90 days as opposed to the usual 60 days.

Alternatively, you can ask the buyer to consider renting the home to you for a short time after the closing, which could be a month or two. In this case, you should ideally offer a reasonable security deposit, as well as rent that covers the monthly cost of the new owner’s mortgage. If this is possible, both parties need to determine if their homeowner’s insurance companies provide suitable cover during temporary rent-backs.

Do You Need Two Real Estate Agents?

If you’re wondering whether you need to use the services of a real estate agent in the first place, know that while you need to pay a commission, it takes a lot of guesswork out of the process.

It’s not uncommon for people thinking about downsizing homes to wonder if they need two real estate agents – one to buy and another to sell. To some degree, this depends on the localities of your existing and new home. For instance, out-of-area agents are not appreciated by local agents in some places.

Go through home pricing and comparable sales. This way, if an agent has contacts in your area, and your home is easy to price, the actual location of the agent doesn’t matter. Besides, if you get an agent to handle both transactions, you might even be able to negotiate on commission.

Downsizing Home Checklist

Before making your decision to downsize your home, consider these points.

• Are you happy about your plan to downsize, or might you feel better if there’s another solution such as refinancing your existing mortgage?
• If you’re happy with the idea of moving, determine where you wish to live. Do you want to live in the same neighborhood, move away from the city, or find a home by the sea?
• Look at homes that appeal to you and check if they fit in your affordability bracket. This gives you an indication of whether you might have to compromise on your needs.
• If you have an existing mortgage, would you want to pay it off completely before the sale?
• How comfortable would you be in getting rid of some of your possessions, be it selling things or giving them away?
• While you’ve purchased a home in the past, are you aware of all the possible home buying mistakes you need to avoid?

Conclusion

Several people are happy with the idea of downsizing homes. The trick, in a way, is to find the right balance between what you really need and what you can do without. While the process might seem intimidating at first, following some simple guidelines can ensure that you come out on top. If you need assistance after you decide to downsize your home, professional help is typically easy to come by. This includes finding a suitable lender, should you need a new mortgage.

 

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

When you decide to buy a home, you come across different alternatives in the form of single-family homes, multifamily homes, townhouses, condos, co-ops, and apartments. For someone who is unfamiliar with the real estate world, having to choose the right option can be confusing. Since buying a home is such a major purchase, it’s very important to understand what your needs are and which type of home suits you best. Keep in mind that there is no single best type of house to buy, and you must pay attention to your individual requirements before moving forward.

Houses or Single-Family Homes

It is common for homebuyers to refer to single-family homes as houses. A single-family home comes in the form of a standalone unit with its own foundation, and it does not share any walls or common spaces with other homes. Single-family homes tend to have vacant land, the area of which may vary greatly.

One potential drawback of buying a single-family home is that it tends to cost more than a townhouse, condo, or co-op. According to Redfin’s U.S. Housing Market Overview, the median sale price of single-family homes in December 2024 stood at $443,370. The median sale price for townhouses during the same period was $377,611. Condos were the most affordable of the three, with a median sale price of $366,100.

Pros

• You get more living and outdoor space, along with increased privacy.
• You have the freedom to customize and renovate the home based on your needs and unique style.
• Absence of co-ownership problems.

Cons

• They are more expensive than most other types of homes, driving up the cost of your down payment.
• You are responsible for the property’s overall maintenance and repairs, and the costs they incur.
• You might need to pay higher property taxes than for other types of homes.

Multifamily Homes

A multifamily home is a part of a building that has more than one unit, accommodating two or more families. Every individual unit has a separate entrance, with its own address, utility meter, kitchen, and bathroom. Multifamily homes can come in the form of two-, three- or four-storied buildings. High-rise apartments typically fall under this bracket.

The pros and cons of buying a multifamily home depend on whether you plan to live in the home you purchase or use it as an investment.

Pros as a Residence

• Probable savings in overall maintenance costs.
• A lower cost of living lets you use your money for other purposes.
• Good option for people who wish to live close to family while retaining privacy.
• They typically provide better security than single-family homes.

Cons as a Residence

• Neighbors live in close proximity.
• Share walls and common spaces with neighbors.
• Need to follow rules for renovation.
• Need to follow coexistence rules.

Pros as an Investment Property

• Multiple rental units can generate reliable and consistent cash flow.
• You might have an opportunity for tax savings (which you should discuss with your financial consultant).

Cons as an Investment Property

• New investors may find the upfront cost to be expensive.
• You might need to hire a property manager if you own multiple properties.
• You may have to pay high insurance rates and property taxes.

New Construction Homes

Data released by the United States Census Bureau indicates that homebuyers purchased around 683,000 new construction homes in 2024, up 2.5% from 666,000 in 2023. Their median sale price in December 2024 stood at $427,000, putting them in line with single-family homes on the affordability front. While buying a new construction home might not appear at the forefront of your options, it can come with multiple benefits.

Pros

• Good option in hot markets where pre-existing properties are sparse.
• You may benefit from incentives offered by builders.
• It might be possible to customize your home while its construction is underway.
• New construction homes tend to come with energy-efficient design, lighting, and fixtures.
• Your home might come with a warranty.
• You’ll spend less on maintenance during the initial years.
• These homes follow the latest building codes and regulations.
• If it is part of a community, you may look forward to a swimming pool, gym, and other amenities.

Cons

• A new construction home might cost more than a comparable pre-existing home.
• You may need to wait for the construction to complete.
• The landscaping might not be up to the mark in the beginning.
• The neighborhood may seem empty at the start.
• You might need to pay higher property taxes than for a pre-existing home.

Condos

A condominium or condo is a part of a multi-unit building or property that typically has shared amenities like swimming pools, gyms, clubhouses, dog-walking areas, walkways, driveways, and parking lots. Is it a good idea to live in a condo? Well, it can be, especially if you want to keep the hassles of home maintenance to a minimum and don’t mind using shared services. This is because a homeowners association (HOA) is responsible for maintaining the outside of properties and shared areas, which it does by charging residents a monthly fee.

Pros

• Condos are typically more affordable than single-family homes.
• You benefit from using different shared amenities.
• You may find opportunities for socializing and can get a sense of community living.
• Several condominium associations hire security firms and implement different measures for heightened safety.

Cons

• You’ll need to pay HOA fees that may vary from a few hundred to over a thousand dollars each month.
• You will need to follow your condominium association’s rules.
• You don’t own the land your home sits on; instead, you own the home and share a nonexclusive interest in the community property which the condominium management controls.
• You might find fewer buyers if you wish to sell because many homebuyers steer clear of condos.

Townhouses

One key difference in the townhouse vs. condo comparison is that condos share walls with adjoining units, making them less private. Given that a townhouse is part of a multi-unit property, it tends to look very similar to the ones that surround it, and it might come with a front yard, backyard, and garage. A townhouse can have two or more floors.

In addition, while HOAs are responsible for many such multi-unit properties, owners are typically responsible for maintaining the inside and outside of their properties. Like owners of condos, townhouse owners may get to enjoy various shared amenities like gyms, swimming pools, and dog-walking areas. HOA fees are part of the parcel.

Pros

• Townhouses are usually more affordable to buy than single-family homes.
• You get access to various amenities.
• You own all the land that comes with a townhouse.
• An HOA is responsible for providing security.
• You pay lower property taxes than a single-family homeowner.

Cons

• Shared walls result in less privacy than single-family homes.
• You need to follow HOA rules.
• You might have to do with a limited piece of vacant land.
• The more the number of floors, the more stairs you need to climb, which is important to consider if you are elderly or have a disability.

Co-Op

While co-ops share similarities with condos, there is one key difference. When you buy a condo, you own the unit you purchase and also hold an interest in the common areas. However, when it comes to a co-op, you don’t own the unit in which you reside, but own a share of the overall property. In addition, a co-op has a board of directors and not an HOA.

Residents in co-ops have proprietary leases that allow them to occupy the units in which they reside until they transfer or sell their shares. In addition, residents who own more shares might be entitled to larger living spaces than others.

Pros

• They serve as affordable alternatives in some large cities like New York and Washington D.C.
• All shareholders have a vote in the management of the building/complex.
• They can come with amenities like swimming pools, gyms, parks, play areas, tennis courts, and rooftop recreational areas.

Cons

• Co-ops are very stringent when it comes to the approval process, often requiring background checks, referrals, and extensive interviews.
• Co-op boards can turn down buyers for varied reasons, so selling might not be easy.
• You need to pay a monthly maintenance fee.
• You need to follow all co-op rules.
• They are not very common in many cities across the U.S.

Renting Apartments

If you look at the condo vs. apartment comparison, you notice that the main difference revolves around ownership. This is because you cannot buy an apartment and you need to pay monthly rent, either to a landlord or a property management company. Before you move in, you sign a lease that states how much the rent is and the duration of the agreement. Once the lease period ends, you might have the option to renew it, although you may expect an increase in rent.

Apartment residents don’t need to pay HOA fees, and they are not responsible for the maintenance and repairs of their units or the common areas. Since there is no buying involved, there is no need to get a mortgage.

Common reasons people choose to live on rent in apartments include proximity to their workplaces, flexible leasing options, access to shared amenities, and testing neighborhoods in which they might buy homes later. The rising prices of real estate also drive many toward renting apartments.

If you find this alternative interesting, you might want to determine if you’re better off as a renter or a homeowner first. For example, if you plan to live in a neighborhood or a city for less than five years, renting might be the better option for you. This is also the case if you’re finding it hard to save enough money for a down payment without breaking your back.

Pros

• Renting is typically more affordable than buying.
• You get access to all shared amenities.
• You have the flexibility to move out.
• You don’t have to worry about maintenance at all.
• Renters insurance is cheaper than homeowner’s insurance.

Cons

• You don’t get to build any equity.
• You need to follow the landlord’s rules.
• You cannot make changes (like fixtures and paint) without asking the landlord.
• The rent can increase upon the renewal of the lease.
• You might need to vacate at a short notice.

Getting a Mortgage

The type of mortgage you may get depends on the type of house you buy and the eligibility criteria you meet. Whether you wish to buy a single-family home, multifamily home, new construction home, townhouse, or condo, you may think about applying for a conventional mortgage. However, if you plan to purchase a home that’s part of an HOA, you may expect a lender to seek additional information in the form of questions about the project, its insurance, and the number of owner- vs. tenant-occupied units.

Depending on the type of home you wish to buy, you may also consider getting these mortgages, although you need to meet their specific eligibility criteria.

• USDA loans. Backed by the United States Department of Agriculture (USDA), USDA loans come with a no down payment requirement.
• VA loans. Backed by the United States Department of Agriculture (USDA), you may apply for a VA loan as a veteran or a veteran’s spouse.
• FHA loans. The Federal Housing Administration (FHA) backs these loans. While you may get an FHA loan for an FHA-approved condo project, you cannot get one for a co-op.

Conclusion

Having gone through the alternatives, you should have some indication of which is the best type of house to buy for you. No matter which option you select, keep in mind that qualifying for a suitable mortgage is a crucial step toward homeownership. As a result, getting pre-approval from a reputable mortgage provider ahead of time is ideal as it gives you a clear picture of where you stand.

When you take a home loan, you end up repaying significantly more than you borrow. This is because the loan attracts a tidy sum as interest, as well as fees in different forms. The amount you borrow, the loan term, and the interest rate have a direct bearing on your monthly repayments. If you, as a probable or existing homeowner, wish to reduce your home loan expenses, you may do so in different ways. Here, you’ll find answers to questions like, “How can you decrease the real cost of a loan?” and “How to lower mortgage payment?”

New Home Owners

If you wish to keep mortgage expenses low, you must compare multiple mortgage providers. While selecting the right mortgage lender requires that you pay close attention to interest rates and fees, you also need to consider aspects such as flexibility in terms and customer service. There are other ways in which new homeowners may decrease the cost of a loan.

Select a Suitable Loan Term

This aspect works in two ways. If you wish to reduce monthly payments, consider opting for a longer loan term. However, while this reduces the amount you need to pay each month, you end up paying more through the course of the loan in the form of added interest.

If you, on the other hand, wish to lower the overall cost of your loan, selecting a shorter loan term may work better for you. This way, while you end up paying less in interest, you need to make higher monthly repayments.

Make a Big Down Payment

Some people might qualify for a home loan without making a down payment, or by paying less than the usually required 20%. However, consider paying as much as you can if you wish to decrease the real cost of a loan. Making more than a 20% down payment comes with the following benefits:

• Less interest to pay through the course of the loan.
• Reduced upfront fees.
• Lower monthly repayments.
• No need to pay for private mortgage insurance (PMI).
• Possibility of getting a more competitive interest rate.

Get an Interest-Only Mortgage

If you’re wondering how to lower monthly mortgage payments when buying a house during the early years of a loan, getting an interest-only mortgage might work well for you. A typical interest-only mortgage is broken down into two phases. In the first stage, you make payments only toward the interest of the loan, and this helps keep your initial repayments low. In the second stage, you make repayments toward the principal and the interest. Keep in mind that these mortgages offer no more than temporary respite. In the second phase, you will be burdened with a higher-than-usual repayment.

Lower Your Closing Costs

The money you end up paying toward closing costs can be significant, which is why it’s fair to wonder how to reduce closing costs for buyers. In most cases, closing costs account for around 3% to 6% of the loan amount. So, if you borrow $300,000, you may pay $9,000 to $18,000 as closing costs. If you pay attention to the process, you may take measures to reduce the closing costs.

• Compare loan estimates. Compare loan estimates provided by different lenders because these give you a good indication of how much they charge as closing costs in the form of various fees. Make sure you get legally binding loan estimates, and not just closing costs or fee itemization worksheets.
• Identify probable savings. If the service is one that you’re allowed to shop for, choose the service provider that works best for you and that may help reduce fees. The types of services that you may be able to shop for include title search, title insurance, settlement services, pest inspection, and surveys. Comparing service providers across these realms may lead to savings. If you plan to compare title and settlement service providers, remember that they usually require adequate time to carry out research and prepare documents.
• Pay close attention to fees. Some lenders charge separate fees for services such as loan origination and underwriting, and other lenders may combine these types of charges under a single fee. This is normal. However, if you come across any fees on the Loan Estimate that you do not understand, you have reason enough to be wary. If you’re unsure, do not hesitate to ask the lender why it is charging the particular fee.
• Get the seller to contribute. If the market is not favorable for sellers, you might be able to convince a seller to contribute toward closing costs. However, this might not happen when inventories are low, and there is stiff competition between buyers.
• Finance your closing costs. If you don’t have enough money to cover closing costs, you might consider financing the closing costs into the loan amount. This may help if you plan to get a mortgage to buy a new home, and even if you wish to refinance your existing mortgage. In this case, you don’t need to pay the closing costs when you get the loan. Instead, the amount you need to pay as closing costs is added to the principal amount. In some instances, closing costs are replaced with a higher interest rate on the loan.
• Negotiate. There is often room for negotiation when it comes to closing costs, especially if you take the time to understand all the fees and discuss them with your lender. Comparing multiple offerings from various lenders puts you in a better position at the negotiating table. Also, some lenders are known to provide incentives for home loans to existing customers. These may come in the form of discounted fees or more competitive interest rates.

Existing Home Owners

Existing homeowners who wish to make their mortgages more affordable or reduce mortgage repayments may use a different way to get the results they seek.

Think Forbearance

If you’re having trouble making your monthly payments on time, consider applying for mortgage forbearance. If your lender or loan servicer approves your application, you delay making your monthly payments or make lower payments for a predetermined time. Keep in mind that forbearance only provides temporary relief and interest continues to accrue on the amount you owe. Also, once the forbearance period is complete, you will need to start making payments.

You may qualify for mortgage forbearance in instances that include major illnesses, natural calamities, or loss of employment. Whether or not the forbearance is reported on your credit report depends on the terms and conditions laid down by your lender and/or applicable laws and regulations. If you’re facing financial hardship, consider applying for forbearance before you miss a payment.

Refinance

Refinancing your home loan can lower the cost of your loan in two different ways.

• Extending loan term to reduce monthly payments. If you wish to refinance your home loan to lower your monthly repayments, consider opting for a longer loan term. For instance, if you have a 15-year mortgage, refinancing to a 30-year loan will result in a significant drop in monthly payments. If you have an existing 30-year mortgage and have paid it off for a few years, refinancing to another 30-year loan may also have a similar effect. However, this will mean that you end up paying more interest in the long term.
• Reducing term of mortgage to decrease interest. If you’re looking at long-term savings, refinancing into a reduced loan term might be the way to go. While this results in lesser interest accruing through the course of the loan, you will need to make higher monthly repayments.

Make Extra Repayments

This might work well for you if you’re wondering how to lower your mortgage payments without refinancing, provided you have adequate funds. In most scenarios, you are well within your rights to make an extra payment toward your home loan at any time during the year.

When you make extra payments, you need to specify that the money is to be applied toward the principal. Remember that the extra payment does not automatically go toward the principal. In the absence of your specific instructions, your extra payments will go towards the next regular principal and interest payment and may not pay off the loan as quickly.

You may choose to make a lump sum payment at any time, you may make larger than required monthly payments, or you may simply make one extra payment each year. At existing rates, making one extra payment each year toward a 30-year mortgage can reduce the loan term by around four years. In addition, you would also save a tidy sum as interest you don’t have to pay. So, the answer to, “Can I lower my mortgage payment by paying down the principal?” is in the affirmative.

If you have less than 20% equity in your home, making extra repayments can help you get to the 20% mark faster. By doing this, and depending on the type of loan you have, you may no longer have to pay for mortgage insurance. For instance, FHA loans have mortgage insurance for the life of the loan. However, you can drop the mortgage insurance on an FHA loan if you refinance into a conventional loan, where private mortgage insurance can be canceled after you build 20% equity.

Switch From Monthly to Bi-Weekly

Several lenders give borrowers the ability to choose between making monthly and bi-weekly payments. Opting for the latter gives you an easy way to repay your mortgage faster. This, in turn, results in lesser interest that you need to pay through the course of the loan.

How this works is simple. When you make monthly payments, you end up making 12 payments in a year. When you switch to bi-weekly payments, you essentially make half a payment every two weeks. This amounts to 26 “half payments” in a year, or 13 complete payments in all. What you do when you switch from monthly to bi-weekly payments is add an extra payment each year.

Work on Cancelling Your PMI

If you have a zero or low down payment loan, or if you’ve paid less than 20% toward the down payment of your home, you keep paying for private mortgage insurance (PMI) until you build at least 20% equity in your home. Keep in mind, though, that the mortgage insurance might remain in place for longer depending on the type of loan you have, with FHA loans being a prime example. As a result, the first step is to contact your lender and determine if you still need to keep paying for mortgage insurance.

If you have a conventional loan, you need to build at least 20% equity in your home and only then can you ask your loan servicer to cancel the mortgage insurance. With a conventional mortgage, once the loan-to-value (LTV) ratio drops to 78% of your home’s original appraised value, PMI cancels automatically. The PMI also cancels if a new home appraisal puts your LTV ratio below 78%.

Consider a Loan Modification

If you feel you might fall behind in keeping up with your regular mortgage payments, think about asking your lender if you qualify for a loan modification. You may also think about requesting a loan modification if you do not qualify for a refinance loan.

If your lender approves your application, you may be able to modify certain terms surrounding aspects such as monthly repayment amount, loan term, and even interest rate. More often than not, a loan modification results in a lower monthly repayment.

Loan modification might involve changing the type of your loan from a fixed-rate mortgage to an adjustable-rate mortgage (ARM), or vice versa. It may result in an extension of the loan term, a temporary or permanent reduction in interest rate, or bundling all past due amounts and the principal, to be amortized over a new loan term.

The benefits of opting for a loan modification program include lowering monthly payments, resolving a delinquency status, and avoiding foreclosure.

Look At the Property Tax You Pay

Take a close look at how much you pay as property tax. According to statistics released by the National Taxpayers Union, around 30% to 60% of all property in the U.S. is over-assessed. Simply put, this leads to inflated property tax bills. Unfortunately, less than 5% of taxpayers think about challenging their assessments. Incidentally, many people who do tend to get partial refunds.

If you feel your property might be over-assessed, you need to file a formal appeal to dispute this. The process varies from one state to another, and in some cases, even from county to county. While you might be able to file your appeal online in some states, others may require that you appear physically in court. In case you think that the discrepancy is huge, it might be worth your while to seek professional legal assistance.

Conclusion

Whether you need a loan to purchase a home or already have an existing home loan, there are steps you may take to reduce your financial burden. However, what you need to determine ahead of time is if you are looking for short-term relief or long-term gains. This is because lowering your monthly payments usually translates into a more expensive loan.

If you need a new home loan or are thinking about refinancing an existing loan, contact a reliable mortgage provider to check if you might be able to reduce your home loan expenses in the process.

 

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

If you’ve been paying off your mortgage for years, chances are you have built up excellent equity. After all, building equity is one of the biggest benefits to owning a home. Did you know you can tap into that equity? We’re breaking down all the ways you can utilize your home equity to improve your financial circumstances.

How to Use Your Home Equity Wisely?

According to the Home Equity and Underwater Report for the second quarter of 2024, 49.2% of mortgaged homes in the U.S. are equity-rich. This means the outstanding loan balances on these homes are less than half of their estimated market values.

Not surprisingly, it’s common for homeowners who are equity-rich to ask questions like, “How can I use my home equity to my advantage?” “What do most people use home equity for?” “How do I get the most out of my home equity?” and “How can I make money from my home equity?” The answers come in varied forms, and what might work best for you depends on your circumstances.

Pay Off High-Interest Debt

Data collated by the Consumer Financial Protection Bureau indicates that the average annual percentage rate (APR) on credit cards increased from 12.9% in 2013 to 22.8% in 2023. In December 2024, this number stood at over 23%.

On the other hand, the average home equity loan rate currently stands at less than 8.5%. Given that credit cards typically attract much higher interest than home equity loans, it might make sense to use the latter to pay off the former. This can also be the case if you’re paying off a high-interest student loan.

Repairs and Renovations

A distinct benefit of using the proceeds of a home equity loan or line of credit to carry out your home’s repairs or renovations is that the interest you pay might be tax-deductible. However, you should consider seeking advice from a tax consultant to get case-specific information about this aspect. Projects that typically qualify include:

• Adding a bathroom.
• Adding a swimming pool.
• Adding a porch, deck, or patio.
• Upgrading an HVAC system.
• Installing a new roof.
• Driveway resurfacing.
• Insulating walls, doors, and windows.
• Replacing plumbing/electrical systems.

Buy a Second Home

Using the equity from your home to buy a second home can be tricky, but it is possible. For starters, you need to look at existing interest rates and determine if they work in your favor. When done right, investing your equity in a second home can result in rental income that can help pay off the mortgage to some degree. Alternatively, you may even profit by fixing and flipping a home.

Launch a Business

One reason why people think about using their home equity to start a business is that qualifying for business loans can be challenging and they tend to come with high interest rates. If you plan to tread this path, remember that it may take several years before you start seeing profits, depending on the type of business you run. You should also:

• Have a business structure that presents no risk to your house.
• Have suitable liability and business insurance.
• Have a conservative projection of income that allows you to repay your debt.

If you’re new to the business world, account for the fact that around 20% of businesses fail within the first year of operation, and think about using your home equity only if you’re sure of succeeding in your venture. Seeking advice from a business consultant might be in your best interest. You should also create a strong business plan and budget for unexpected expenses.

Fund Higher Education

Given that most of the top colleges in the U.S. and globally offer online courses, it’s easy to access education from practically anywhere, and if you opt for an expensive course, you may consider tapping into your home’s equity. One benefit of getting a home equity loan over a private student loan is that the former tends to come with a lower interest rate. In addition, the interest you pay can be tax deductible, details of which you should confirm with your tax advisor/consultant.

One potential drawback of using your home equity to fund higher education is that a change in your financial situation might make it challenging to keep up with mortgage payments. Besides, you might take longer than expected to complete the course. Before you decide to study further, it makes sense to determine the value you stand to receive beyond the certification and how it will help in your career’s progression.

Pay Medical Expenses

There is no single best time to take equity out of your home, and in some instances, it’s to deal with medical expenses. Medical debt can add up very quickly, and things can get further out of hand if you use high-interest products like credit cards to pay the bills. While a home equity loan or line of credit can help you get rid of high-interest medical debt, it can also give you access to funds to take care of ongoing treatment.

Use It for Retirement

Homeowners who are close to retiring or have retired already get different ways to use the equity they build in their homes. There is no single best way to use home equity in retirement and the one that works best for you depends on your requirements and goals. While you have the option of getting a home equity loan or line of credit, both require that you repay the money you borrow. Other more suitable alternatives for retirees include:

• Reverse mortgage. Some feel that the best way to use home equity in retirement is to opt for a reverse mortgage, and you can get one if you’re 62 years old or older. In this case, you don’t have to make any payments. Instead, the lender pays you money, either in a lump sum or in the form of monthly payments. Repayment enters the picture after you pass away, sell the house, or move. You heirs get the option to repay the debt and purchase the home, after accounting for your equity that remains. Please note that you must maintain and occupy the property, as well as pay all real estate taxes on time.
• Downsize. Another good way to use home equity in retirement is to downsize, provided you don’t mind moving into a smaller home. This way, while you continue to remain a homeowner, you get access to some extra money as well.

How Not to Use Your Home Equity

If you plan to take a home equity loan to consolidate debt, make sure you address why you’re in debt in the first place. After all, it does not make sense to consolidate your existing debt if you continue spending indiscriminately and lead a lifestyle that’s out of your means. Here are a few other ways that you should steer clear of in using your home equity.

• Funding a lavish wedding or vacation.
• Buying an automobile.
• Buying luxury items.
• Making speculative investments.
• Paying for minor repairs and emergencies.
• Paying for your children’s college education.

How to Get Equity Out of Your Home Without Refinancing?

While refinancing a mortgage comes with multiple benefits like the possibility of a lower interest rate and the ability to choose how much you wish to borrow, there are other ways to tap into the equity you build in your home.

• Home equity loan. A home equity loan comes with a lump sum payment that you may use in any manner. You need to repay the money you borrow along with interest within a predetermined time period that typically varies from five to 15 years. Home equity loans tend to come with fixed interest rates.
• Home equity line of credit. A home equity line of credit (HELOC) gives you access to a revolving line of credit over a period of up to 10 years. While you must make interest-only payments during this period, you may also choose to make payments to bring down the principal amount. The repayment period follows, and it can vary from 10 to 20 years. HELOCs typically come with variable interest rates.
• Cash-out refinance. A cash-out refinance allows you to borrow more than how much you owe on your existing mortgage, and you may use the difference for any purpose. This can be a good option if you’re getting a noticeably lower interest rate than your existing one, if your home’s value has increased significantly, or if you need funds to manage investments.

Getting Pre-Approved

Whether you wish to get a home equity loan or a HELOC, getting pre-approved gives you a clear indication of how much a lender is willing to lend and the interest rate that might apply to your mortgage. Much like when you got your original mortgage, you may expect the lender to go through details surrounding your creditworthiness, employment, income, savings, and debt. In addition, while most lenders look for credit scores of 680 or higher, a few are willing to go as low as 620.

Conclusion

How do you smartly use home equity? As you can see, there is no surefire answer to this question, and it’s crucial for you to analyze your situation before deciding to move forward. Whether you want to use the money to consolidate high-interest debt, renovate your home, or buy a second property, make sure you weigh the pros and possible cons at the onset. Once you decide to move forward, contact a reputable mortgage provider that offers home equity loans, and get a pre-approval.

Buying a home is an exciting time, but also one where you have to tread with caution. After all, even a seemingly inconsequential oversight can come with significant consequences. Ensuring that you have a smooth sailing homebuying experience requires you to learn how to spot and avoid potential real estate red flags. Fortunately, doing this is not as hard as it might seem.

Beware of Fraud

Numbers released by CertifID in the 2024 State of Wire Fraud Report indicate that over one in 20 consumers involved in real estate deals became victims of fraud in 2023. Median consumer losses were in excess of $70,000 per incident, which came in the form of down payments from buyers and sellers’ net proceeds. Further, more than 50% of consumers did not have enough information about wire fraud before they got to closing.

While the real estate and banking industries are committed to combating fraud, nefarious elements continue to look for new and innovative ways to circumvent existing safety measures. In recent years, the U.S. has witnessed a rise in the number of non-owner-occupied fraud cases. This is when fraudsters turn to public records to find rental or vacant land properties with no attached mortgages or liens.

When it comes to avoiding real estate fraud, here are the warning signs to look for before making an offer on a property.

• Free and clear property
• Seller in a hurry to sell
• Seller willing to accept a low offer
• Seller unwilling to meet in person
• Signatures in documents don’t match
• Grammatical and typographical errors in documents
• Seller’s location is unclear
• Seller wants the money wired to a foreign bank account
• Seller wishes to use his/her/their own notary

Why the High Vacancy Rates?

Denoted in percentage, vacancy rates indicate how many properties are available for rent within a specific area. When this number is high, it can indicate a decline in property values as well as unfavorable market conditions for buying a home. Other factors that may lead to a high vacancy rate include:

• Increase in crime
• Unpopular developments
• Economic slowdown
• Fewer opportunities for employment
• Decline in the quality of schools

Keep in mind that high vacancy rates can be misleading in some scenarios. For example, non-local buyers tend to buy property in popular tourist places and leave them vacant. While this results in new buildings that sell out, they do not add to the rental inventory. Given that these owners don’t live in the homes and don’t rent them out by choice, they work in artificially inflating vacancy rates.

A Shaky Foundation

If you ask professional home inspectors, “What is the biggest red flag in a home inspection?” many will go with foundation issues. This is because the foundation serves as the core of a home, and if you spot any signs of trouble here, you might have to deal with considerable structural problems later. Cracks can appear in a foundation for different reasons, which include:

• Poor construction
• Poor drainage
• Plumbing leaks
• Expansive soil
• Soil not compacted suitably prior to construction (soil creep)
• Natural disasters

Signs to watch out for when looking for foundation problems include:

• Cracks in ceilings and/or walls
• Cracks in drywall
• Cracks in concrete
• Exterior wall cracks
• Uneven floors
• Sinking ground
• Sagging ceilings
• Bowed walls
• Cabinets separating from walls
• Difficult-to-open and close windows and doors
• Gaps around windows and doors
• Tilted chimneys
• Dampness in crawlspaces

If you notice foundation issues in a home you wish to purchase, make sure you get a professional home inspector to give it a good look. This is because foundation problems can become serious when left unchecked, causing a house to tilt/lean, and carrying out repairs can become rather expensive.

Nobody Likes Pest Infestation

Of all the red flags to look for when buying a house, this one is particularly important, not only because no one wants to live with mice, termites, or roaches, but also because of the health hazard pest infestation presents. Signs to look for when you carry out a DIY home inspection include:

• Unusual odors
• Droppings
• Nests/hives
• Scratching, scurrying, squeaking, or whining sounds from the walls or basement
• Holes in wooden surfaces
• Discolored wood or paint
• Mud tubes underneath paint layers or wood
• Chewed wires/cables
• Buildup of dirt and grease
• Erosion of soil
• Discarded wings of insects

When you approach a home, check how much distance separates the soil from the home’s bottom lap. Ideally, this should be six inches or more, because any lesser can increase the risk of termite infestation.

Even if you don’t see signs of infestation, you should consider getting a pest infestation inspection before closing. In this case, adding a home inspection contingency clause in your offer is ideal. Depending on the outcome of the inspection, you may decide how best to proceed. For example, if the inspection reveals rodent infestation, you may ask the seller to fix the problem or lower the selling price.

Water Flows Where It Can

Water can cut through most materials, be it wood, stone, or metal, which is why one of the key problems to look for when buying a house is water damage. If the weather permits, try inspecting the house on or soon after a rainy day because this is the perfect time to spot leaks and build-ups. If you ignore water damage, the consequences you’ll have to face in the future include the growth of mold, health-related issues, and structural damage.

If you notice water stains on the walls or ceiling, know that they might indicate leaking pipes or a leaky roof. Other signs to look out for include:

• Paint discoloration
• Peeling paint
• Peeling wallpaper
• Musty odors
• Mold
• Dampness
• Wet spots
• Pooling/flooding
• Bubbling underneath surfaces
• Imperfections in surfaces
• Buckled or warped floors
• Swollen drywalls

It is important to check the attic and basement, and look for signs of leaks under all sinks. You should also make sure that the home’s drainage flows away from the foundation. If in doubt, seek assistance from a professional home inspector.

Plumbing Goes a Long Way

Plumbing tends to run throughout a house, including within walls, under floors, and, at times, even through ceilings. After all, it needs to reach every fixture like faucets, sinks, showers, and washing machines; and it also needs to carry wastewater away. Faulty plumbing can lead to water damage and mold, and carrying out repairs can burn a hole in your pocket.

On your own, make sure you look around toilets and under sinks to check for leaks. However, a professional plumber is in a better position to look at the plumbing’s overall condition. Signs you may look for include:

• Leaking pipes/faucets
• Low water pressure
• Slow drainage
• Foul smelling drains
• Gurgling sounds from pipes
• Water stains
• Damp spots
• Cracks in pipes
• Running toilets

Is the Vinyl Hiding Damage?

You need to be particularly careful with homes that have vinyl siding because it could be an attempt to hide damage. This is because vinyl works particularly well in hiding imperfections like unevenness, small cracks, and rot owing to its texture. While there’s no way of telling what’s underneath without taking the vinyl off, signs of damage or rot in the basement or attic increase the likelihood of damage under the siding. Keep in mind, though, that vinyl typically fails to hide large cracks, structural problems, and water damage.

Why Is the Roof Wavy?

Among other hidden things to look for when buying a house comes a wavy roof. One of the most common reasons for this is improper installation, where the alignment between tiles or shingles is incorrect. Alternatively, it might be because of poor-quality decking that has warped with time, inclement weather conditions, or the roofing material’s natural aging process, as is the case with asphalt shingles.

A slightly wavy roof can also indicate two layers of shingles. While the best method of reroofing homes is to remove the old shingles and replace them with new ones, building codes in some areas permit two layers of shingles, as is the case in New York. While doing this adds unnecessary weight to a structure, it might also void the new shingles’ warranty. Besides, a second layer might be an indication of an unrepaired first layer.

Is the Heating and Cooling in Order?

When you’re buying an old home with a heating, ventilation, and air conditioning (HVAC) system, make sure you check its date of installation because most such units come with a lifespan of 15 to 20 years, after which they typically require extensive repairs or replacement. A faulty HVAC system counts among the top real estate red flags not only because it can lead to steep energy bills and uncomfortable living conditions, but also because it can serve as an indication of how the existing owner maintained the property.

Signs to look for in a faulty HVAC system include:

• Poor airflow
• Grinding, rattling, or loud humming sounds
• Inconsistent temperature control
• Frequent on-and-off cycles
• Foul smells
• High energy bills
• Water leaks

Going through an HVAC system’s maintenance records can give you an indication of its current condition. However, a trained HVAC technician can perform a thorough inspection and identify all existing and potential problems.

The Presence of Environmental Hazards

Depending on where and how old a home you plan to purchase, one of the key problems to look for when buying a house is its exposure to environmental hazards like asbestos, radon, lead, mold, moisture, radiation, water pollution, and sound pollution. Signs to look for include:

• Date of construction because pre-1978 homes might have lead-based paint.
• Inadequate ventilation in basements and ground floors because it can lead to concentration of radon.
• Use of asbestos in roofing and insulation.
• Presence of mold and moisture.
• Water contamination.
• Proximity to continual loud sounds.
• Proximity to nuclear facilities.

While real estate agents are typically aware of local environmental hazards, you can also ask for an environmental search report that highlights any given area’s environmental risks.

What About Real Estate Agent Red Flags?

Moving from the red flags to look for when buying a house to the red flags you need to avoid when selecting a realtor or real estate agent, the one that tops the list is poor communication skills. After all, a real estate agent with poor communication skills might not fully comprehend your needs and might fail to pass on information clearly. It is also important that you ask the right questions. Other signs you need to look for include:

• Poor knowledge of the area. If it seems like you know more about the area in which you wish to buy a home than your real estate agent, you might want to move to your next option. After all, part of your agent’s role is to offer insights into the desired neighborhood.
• Lack of knowledge. Real estate agents need to have in-depth knowledge about the areas they serve and the home-buying process, failing which they might not be able to provide the guidance or information you need.
• If a real estate agent brushes away your concerns, you might have reason to be wary. This is also the case if an agent is being pushy about you exceeding your budget or pressuring you to make a decision.
• Few clients. It’s typically best to avoid part-time real estate agents because they have other avenues to pursue as well. Ideally, you should partner with someone who has extensive experience and a long list of clients. This demonstrates that the agent in question has what it takes to crack deals.

Conclusion

Now that you know how to spot common real estate red flags, make sure you approach the home-buying process in the right manner. In addition, consider contacting a mortgage provider and getting pre-approved for a loan before you begin your search for homes. This way, you’ll know how much a lender is willing to lend to you and you can carry out your search accordingly.

House flipping is when someone buys a house, typically at an auction, intending to fix it and sell it at a profit somewhere down the road. While you can make a tidy sum by doing this, a bad decision may lead to unrecoverable losses. As a result, first-time flippers must know how the process works before jumping on this bandwagon.

According to data released by ATTOM Data Solutions, house flippers in the United States flipped 79,540 single-family homes and condominiums in the second quarter of 2024, generating an average gross profit of around $73,500 per home. A fairly steady upward trend has been in place since 2011.

How Do I Start Fixing and Flipping?

If you’re wondering how to flip a house for the first time, you need to pay attention to three crucial aspects. These include comparables, numbers, and speed. Do you need a license to flip houses? The answer is no.

Comparables

Taking a close look at the prices of recently sold comparable homes in the area is important when arriving at a suitable selling price. While there could be a wide range of comparables, you might be better off looking at the lower end of the spectrum. This is because when you budget for the lower side of selling prices, you get more leeway in budgeting for renovations.

 It’s important to determine how much time homes tend to remain unsold in any given area. You also need to find out if flipping houses for profit in the area is possible in the first place.

Numbers

You need to create a detailed renovation budget and add at least a few thousand dollars more to cover unexpected expenses. Your house-flipping business plan should also account for maintenance, closing costs, property tax, property insurance, interest, and agent commission. In some cases, the added costs exceed the actual cost of renovation.

Speed

The job schedule of a renovation determines just how quickly you may get a house back on the market. It makes sense to keep a backup list of contractors, in case the one you hire decides not to show up. Keep in mind that even slight delays in getting houses on the market can lead to significant losses.

What First-Time Flippers Can Do

Just about everyone who offers advice for first-time flippers stresses the importance of getting as much information about the process as possible. While online research is valuable, it might also be worth your while to learn from people who have already mastered the craft.

Real estate events give you a great opportunity to see how other people have gone about their home-flipping businesses. Seminars give you easy access to hands-on training as well as a variety of resources. You also need to develop and polish various skills needed to flip houses.

Polish Your Communication Skills

You will need to interact with people at every stage of the fixing and flipping process, which means you need to develop great communication skills. You need to be respectful toward everyone you interact with, be it sellers, property managers, loan officers, contractors, or construction workers. A friendly and positive approach can make all the difference between a successful fix and flip and one that is not.

Get Organized

If you hope to find success as a fix and flipper, take time to improve your management skills. Try to make your day as productive as possible, even it if means carrying out online research while watching a game on TV. Create a schedule that includes tasks you need to complete every day, as well as throughout the week. Once you create and stick to a schedule, working on increasing your return on investment (ROI) becomes simpler.

Know Your Finances

Ensure that you have enough money to take you through the carrying costs for the entire duration of your being a homeowner. Arrive at a drop-dead rate at which you need to sell the house, and work on creating a realistic deadline surrounding the completion of all work. Taking longer than previously planned might eat into your profits. Also, if you don’t have enough money at hand, hanging on to the house for longer than expected can make matters worse.

The costs you need to account for include:

• Down payment of around 20% to 45% of the home’s selling price.
• Holding costs such as HOA fees and insurance payments.
• Renovation costs.
• Closing and realtor costs.

When borrowing money to buy and renovate a home, there are multiple options from which to choose. First-time fix and flip loans can come in the form of:

• Loans for investment properties
• Home renovation financing
• Lines of credit or home equity loans
• Personal loans
• Business lines of credit
• 401 (K) financing
• Seller financing
• Hard money loans
• Loans from family members or friends

Learn About the Area

Take adequate time to learn about the neighborhood and its vicinity. Find out if there are good schools and hospitals in the area, as these are right up there when it comes to what buyers are after. Think twice about buying in areas that have upcoming industrial parks or highways, as these might affect home prices adversely. No matter how much time and effort you put into a fix and flip, selecting the wrong neighborhood might lead to disappointment and losses.

Find Motivated Sellers

If you’re thinking about making money by flipping and fixing a house, focus on finding short sales or foreclosures. These present great opportunities when buying a home for cash, and this keeps you away from the open market. Motivated sellers can also come in the form of owners of dilapidated homes, couples who are getting divorced, and families looking for larger homes. If you manage to find a motivated seller, you get to close on your investment quickly and minimize your initial expenses.

Determine Your Renovation Goals

Not doing enough to fix a house before you put it on the market might be just as bad as doing too much. Cutting corners when renovating a home is not the way to go because potential buyers can see through your efforts. In such a scenario, expecting someone to pay the market price would be foolhardy. Going overboard with your improvements, on the other hand, can cut into your profits. As a result, you need to determine just what’s required as well as what’s not.

Don’t forget to take care of easy fixes such as changing worn-out switchboards or light fixtures. Make sure you do away with any big-ticket plans you might have.

Pay Attention to Curb Appeal

When it comes to selling a home, first impressions matter. What potential buyers see at the curb can work in making or breaking a deal. The home you wish to sell should look good at first glance. Make sure the landscape looks appealing and not unkempt. Invest in a paint job and get new curtains or blinds.

Data suggests that curb appeal can add up to 10% to your home’s after-repair value (ARV). You don’t need to build a gazebo or install a fountain as these expenses may eat into your profit, and probably limit your audience. What you need, on the other hand, is a cleanup and a well-maintained garden.

Know What Buyers Want

Sure, fixing and flipping a home allows you to get your creative juices flowing. However, you must not let your whims and fancies get in the way of creating a home that finds appeal with potential buyers. If you follow a very specific design and want to make the home trendy, you might limit the number of people interested in the property. This is because most buyers want to do up their homes in their own way. The best way forward is to play safe and try to create a home that is as neutral as possible.

Learn About Taxes and Fees

Depending on the location of the house you wish to fix and flip, property taxes can be a major burden or a minor inconvenience. If the property tax is very high, it might serve as a deterrent for potential buyers. Besides, you will need to keep paying the property tax for as long as the house does not sell. How much you might need to pay as homeowners association fees also requires your attention, because this may put a dent in your budget.

Use Professional Help

Before buying your first flip house, get a professional home inspector to give you a clear picture of what you might be up against. While this requires that you spend some money, it’s better than getting nasty surprises down the road. When fixing a house, don’t attempt to carry out tasks that are beyond your expertise. Remember that errors in plumbing and electrical work can lead to major damage. Installing new flooring is also best left to the experts.

Mistakes Fix and Flippers Need to Avoid

Not all people who attempt to fix and flip homes for profit find success. This is because they tend to make mistakes along the way. To maximize the possibility of succeeding, you need to steer clear of certain mistakes, which include ones you might make when buying a home.

Overlooking the Neighbors

Fix and flippers usually like buying homes that are not much to look at, and more importantly, ones that sell underpriced. However, are other homes in the vicinity also in similar condition? If so, the other homes will probably remain the same, even when your house is all spruced up and ready to be sold. From a buyer’s perspective, other eyesores in the neighborhood can make your house less desirable.

Ignoring the Bathroom

A shabby-looking, leaky, or damp bathroom is almost certainly a deal-breaker. If you can budget your way to give the bathroom a makeover, it might be well worth the effort and money. Several real estate experts suggest that kitchen and bathroom renovations provide similar ROIs.

Forgetting Building Permits

Even the slightest of unlicensed construction may lead to unwelcome consequences. If a potential buyer or a buyer’s lender discovers permit problems late in the sales process, you might have to face legal challenges. Before working on any aspect related to a home’s structure, as well as its electrical, gas, or plumbing system, make sure you get approval from the relevant local body.

Now Working With a Real Estate Pro

The internet serves as a treasure trove of resources, but you need to get some real-world exposure as well. Local real estate agents can provide help in various ways, from looking for suitable homes to determining a home’s ARV to putting it back on the market.

Staging on Your Own

As a first-time flipper, it makes sense to use the services of a home stager to prep a home for its open house. Follow what the stager does to increase the appeal of the house and present it in the best possible way. You can use this information to good effect in your subsequent efforts.

Setting Unrealistic Deadlines

There’s no point in giving more priority to speed instead of doing a good job. Potential buyers, and the inspectors they bring with them, can easily tell the difference between a job well done and one that simply tries to cut corners. Making a couple of extra mortgage payments might be a better idea than trying to rush through renovations, especially when they don’t account for much.

Taking on Multiple Projects

The last thing you need on your plate as a first-time flipper is too much. The only way to make sure you do a great job is to give your first project your undivided attention. Remember that while you might be able to delegate much of what needs to be done, your continued presence at the site is crucial if you want things to go exactly as planned.

Conclusion

Now that you know how to flip a house for the first time and plan to move forward with the process, contact a mortgage provider to determine how much you can borrow. This gives you a clear picture of the kind of homes you can afford, while also taking into account money you might need to spend on the renovation.

Once you fix and flip a house, keep in mind that the market will dictate its selling price. If you end up overpricing the home, buyers’ agents will tell their clients that, and your home will remain unsold. As a result, spend no more than you need to make the house look and feel presentable.

 

Disclaimer:

30-Year Fixed-Rate Mortgage: The payment on a $200,000 30-year Fixed-Rate Loan at 3.875% and 80% loan-to-value (LTV) is $940.14 with 0 % points due at closing. The Annual Percentage Rate (APR) is 4.026%. Payment does not include taxes and insurance premiums. The actual payment amount will be greater. Some state and county maximum loan amount restrictions may apply.

If you apply for a mortgage, you may expect a lender to consider different aspects when evaluating your application. Two very important factors include your employment and income, given that both play crucial roles in your ability to repay the money you borrow. From a lender’s perspective, it is important to establish that you have a steady source of adequate income. So, can you get a mortgage after a new job, and if so, how do you go about the process?

Can I Get a Mortgage if I Just Started a New Job?

The short answer to whether you can get a mortgage if you’ve just started a new job is yes, although this depends on the type of job change. For example, if a lender finds your job change acceptable for qualification, you might not face any problems with your application. However, getting approved for a mortgage can be challenging if a lender feels your job change is not acceptable.

Acceptable Changes

If your overall work history is over two years and you’ve maintained a steady career before your last switch to a higher-paying job in the same industry, you should be good to go. The added income might even work as a benefit. Lenders also view promotions within the same company or a move to a higher position in a new company in positive light.

Inappropriate Changes

Moving from a salaried job to a bonus- or commission-based structure, even if it means earning more money, might not hold much ground at an underwriter’s table. You may expect the same if you break your work history’s paper trail in any other way, like switching from being a W-2 employee to a self-employed individual.

A lender might view a preset termination date in your new job’s contract as a red flag, especially if it does not extend beyond five years. Other inappropriate job changes that can hamper your chances of qualifying for a mortgage include moving to a lower position or a different industry, or switching to a job that does not come with a hike in pay or a higher position.

Prepare to Explain the Change

If you’re wondering how to get a mortgage after a new job, remember that you need to be ready to explain the change to your lender. This is because your lender will want to know how your decision will affect your ability to make your mortgage payments.

• Changing industries. While lenders typically view job switches across industries as a risk factor, it does not have a negative effect in all instances. For example, if you worked in the construction industry for several years and earned a degree from a culinary institute at the same time, then transitioned to being a chef at least 12 months ago, and now make more considerably money than before with consistent hours/pay, your application may well stand a chance.
• Salary to commission. When lenders look at employment and income, they’re essentially looking for consistency and stability. Given that a salary pretty much translates into predictability, shifting from a salaried job to commission-based income causes lenders to be wary. Justifying this switch will require demonstrating that you stand to earn more money and have better career prospects, while also showing a history of commissions for at least 12 months.

How Long Do You Have to Be at a Job to Get a Mortgage?

Underwriters verify your income and employment by looking at documents related to your work history for the preceding two years. These include recent pay stubs, tax returns, and W-2s or 1099s, and sometimes, tax returns and verification of employment (VOE) from your employer. Typically, applicants who have worked for the same employer for at least two years find it easier to get past this hurdle.

So, how long do you have to be at a job to get a mortgage? The answer depends on different factors and can vary from 12 months to two years. If your job or industry has remained unchanged for the last two years, you should not face any problems on this front. However, if this is not the case, your lender might seek additional explanation and documentation surrounding:

• Reasons for the latest switch.
• Reasons for previous breaks in employment.
• Recent hikes in pay.
• The performance of your employer and the industry it belongs to.
• Your educational qualifications.

Can You Use a Job Offer as Proof of Income for a Mortgage?

Does a job offer count as proof of income? Yes. However, it needs to meet different conditions so you may use it to qualify for a mortgage. When people who apply for home loans use job offers as proof of income, underwriters rely on them to determine future earnings, while also looking at past earnings and education qualifications (when applicable).

If you plan to qualify for a mortgage based on your job offer, it should ideally demonstrate long-term earning potential and job security. You may think about using a job offer in your mortgage applications if:

• You have moved to a better position in the same industry.
• You move to a lateral role in the same company.
• Your job offer is the result of a recent promotion.
• You are a recent graduate with a job offer that can support your application.

For a lender to consider your job offer as proof of income, it needs to meet these conditions.

• It should be a signed contract.
• It should include a start date.
• Must begin the job and get a regular paycheck prior to loan closing
• It should mention your salary.
• It should not depend on any contingency.

In addition, while a job offer can count as proof of income, you still need to meet other criteria of the underwriting process.

How Lenders View Different Types of Income

The duration of employment notwithstanding, lenders also look at the type of qualifying income you earn, and they break it down into four basic categories.

• Salary: An annual salary lets lenders calculate your qualifying income easily; all they have to do is divide your gross annual salary by 12.
• Hourly: Calculating qualifying income under this bracket can get tricky, especially when it comes to non-guaranteed work hours. In this case, lenders typically rely on two-year averages based on the preceding two tax returns. With guaranteed work hours, the typical method to follow is to multiply the work hours by the hourly rate and then annualize.
• Variable: Income from commissions, bonuses, and overtime falls under this bracket. While most lenders rely on two-year averages based on previous tax returns, some accept 12-month averages too.
• Fixed: Payments from Social Security, VA disability, pensions, and annuities classify as fixed qualifying income provided they continue for at least three years from the date of your first mortgage payment.
• Year to date income is verified to make sure it is in line as well.

Keep an Eye on Your Credit Score and DTI

While your employment and income are big factors in which way your application for a mortgage goes, so are your credit score and debt-to-income ratio (DTI). This is because even if you’ve been at the same job for several years but falter on these counts, the chances of your application’s approval remain slim.

Remember that most lenders look for credit scores ranging from good to excellent, and depending on the type of mortgage you seek, you might need a minimum credit score of 620 or 640. It changes with FHA loans, where the requirement drops to 500 or 580 depending on the down payment amount. However, if you plan to get a mortgage after a new job, the higher your credit score, the better the odds of your application’s approval. Higher credit scores also usually mean lower interest rates and vice versa

Similarly, mortgage providers also look at your debt-to-income (DTI) ratio when making lending decisions. This number indicates how much of your monthly income goes toward servicing your existing debt, and helps lenders determine your ability to repay. Typically, you should have a DTI ratio of 36% or lower. When it comes to getting a mortgage after a new job, the lower this number, the better it is for you.

The Effect of the Down Payment

If you’re wondering how to get a mortgage after a new job, know that making a large down payment can work in your favor. This is because the main reason lenders shy away from providing mortgages to people in new jobs is the perceived risk. If you make a large down payment, you can assuage their fears by reducing the risk they face.

While making a large down payment brings down the principal amount, it also increases the equity you hold in the house. In addition, making a down payment of 20% or more eliminates the need to pay extra for private mortgage insurance (PMI).

But reserves are also a factor. The more assets your have after closing also lowers your risk. Don’t use all your money on the down payment.

Checklist to Increase the Odds of Success

Do you have to be at the same job for two years to buy a house? Not necessarily. While working with the same employer for two or more years indicates to lenders that you have a predictable and stable income, what’s more important is your ability to demonstrate that you will be able to make your monthly payments without any problems.

When you apply for a mortgage after a new job, keep these points in mind.

• Prepare to explain why you switched jobs.
• Your new job offer is valid, with a date and signature.
• There is no contingency clause in the job offer.
• You will start your new job prior to closing and receive a paycheck evidencing income.
• You have adequate savings to cover all your expenses until you receive your first paycheck.
• Your new employer is not a family member or a party linked to your intended purchase.
• Don’t add future performance-linked bonuses in your application until they come with an established history.

Recent graduates may use their degrees/transcripts to demonstrate they have the knowledge/skills to perform in their new roles. Veterans applying for VA loans can show how their military service aligns with their new jobs. If you have recently completed advanced certification or training from a trade school, you may mention the same as it can demonstrate a higher earning potential.

Remember that the answer to, “How long after starting a new job can I get a mortgage?” is “almost immediately.” However, you will need to provide the reassurance that a lender needs to approve your application. It is possible that you might face stricter guidelines, given that the lender would want to verify various details.

Consider Getting Pre-Approved

Given that the mortgage application process – from start to finish – can take some time, it’s good to know where to stand in advance, and you may do this by applying for a pre-approval. This is particularly important if you’re starting a new job because you will find out if a lender is willing to consider your application for any given type of mortgage.

If a lender’s answer is in the affirmative, you get to know how much money you qualify to borrow. This allows you to base your search for homes on a predetermined budget. Getting pre-approved can also help at the negotiation table in competitive markets because it indicates that you are serious about making the purchase.

The pre-approval stage is not as intensive as the underwriting process, but it still involves going through your employment history, income, and credit reports, as well as your existing debt and assets.

Conclusion

You probably know by now that the answer to, “How long should you be at a new job before getting a mortgage?” can vary based on different factors. For example, if you have a consistent work history and have moved to a better-paying job in the same industry, you should not face any problems on this front. However, if your new job involves switching industries, you might have some explaining to do or even wait for a few months.

Remember that getting a mortgage after a new job is possible in several scenarios, and if you convince a lender that you’ll be able to make your monthly payments on time, the odds of approval can work in your favor. If you’re unsure about whether you might qualify or need information about the types of mortgages for which you can apply, getting in touch with a reliable mortgage provider might be in your best interest.

Once you decide you wish to buy a house, you need to determine what type of mortgage might work best for you. For instance, you may benefit by applying for a USDA loan or a VA loan, provided you meet the required eligibility criteria. Two aspects that remain common no matter what type of loan you get include interest rates and loan terms. So, what are the different types of loans and what are the different types of interest rates in loans?

Fixed-Rate Mortgages

A fixed-rate mortgage is a loan in which the interest rate is determined beforehand, and remains constant with on-time payments. The interest rate depends on the market rate at the time of your loan’s origination, to which your lender might add a spread or margin. Changing market interest rates have no impact on the interest you need to pay through a fixed-rate loan. This ensures that your monthly repayments remain the same for the entire loan term.

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) is a loan in which the interest rate can change, based on the prime rate or index rate, over the course of the loan. After the fixed-rate period, the interest rate of an ARM may change monthly or annually, depending on the market index. A mortgage provider might also place a cap on the maximum interest you’ll need to pay.

With an ARM, part of the interest rate risk shifts from the lender to the borrower. As a result, borrowers commonly use ARMs in situations where fixed-rate alternatives are prohibitively expensive or difficult to obtain.

While a majority of lenders in the U.S. use the United States Treasury rate as a basis to determine the interest rates of most ARMs, some rely on the London Interbank Offered Rate (LIBOR).

Different Types of Adjustable Rate Mortgages

Adjustable mortgages for home purchase come in three basic forms that include conventional variable rate mortgages, hybrid ARMs, and option ARMs.

Conventional Variable Rate Mortgages

Getting a typical ARM requires that you prepare yourself for adjusting rates for as long as you do not repay or refinance the mortgage. The rate usually reflects a third-party index, and includes the margin a mortgage provider applies. Rates adjust based on a predetermined schedule, which can be monthly, every six months, or every year.

Hybrid ARMs

Hybrid ARMs, also referred to as fixed-period ARMs, come with a fixed rate for a specific period of time, and an adjustable rate follows. The fixed-rate periods may vary from three (3/1) to five (5/1) to seven (7/1) to even 10 (10/1) years. When the initial fixed-rate period is long, the difference between the interest rate of an ARM and that of a fixed-rate mortgage is small. The converse holds true as well.

The date when the switch takes place is the reset date. Then, the interest rate is assessed and recalculated every year. Some ARMs, such as 3/3 and 5/5 ARMs, come with more than one interest rate adjustment per year. However, these are not easy to find.

Option ARMs

If you go the option ARM way, you get to choose from four monthly payment alternatives. These include a predetermined minimum payment, a 15-year amortizing payment, a 30-year amortizing payment, or an interest-only payment.

What Attracts Borrowers to Adjustable Rate Mortgages?

Most people who benefit from getting ARMs plan to sell their homes in a few years or ones who plan to refinance their mortgages down the line. This is because the longer you plan to draw out an ARM, the riskier it can get. After all, while the interest rate is typically low when you start, it can get noticeably higher once rate adjustments begin. An example in case is the period during the subprime crisis. After rates began to adjust, several borrowers with ARMs found that their monthly payments increased drastically.

How Do Cap Limit Adjustments Work?

Several ARMs come with cap limits on adjustments. This ensures that the interest you need to pay through the course of the loan will not exceed a predetermined mark. For example, if your mortgage comes with a two percent cap, and market rates increase by three percent, the interest rate on your mortgage will increase only by two percent. ARMs can come with caps for the first few years, periodic caps, as well as lifetime caps.

Consider a 3/1 ARM that comes with a cap limit structure of 2-3-7. What this basically means is the interest rate can increase by a maximum of 2% after the initial three-year fixed-rate period. In subsequent years, the rate may increase by a further 3% every year. The maximum interest rate hike that a loan may attract during the entire loan term, in this case, limits to 7%.

In case you start with an initial interest rate of 4.1% for the first three years, the interest rate in the fourth year can increase to a maximum of 6.1%. In the fifth year, it may increase by up to 3%, getting to no more than 9.1%. Going forward, the interest cannot increase to more than 11.1%, which is 7% more than the loan’s original interest rate.

The cap works in reducing your risk slightly. However, the difference in monthly payments can be noticeable in some instances. For example, if you take a $200,000 ARM at 4%, and the interest rate increases to 10%, your monthly mortgage payment would increase by around $800. Just how much the rate adjusts depends on the ARM’s index rate.

Should You Get a Fixed- or Adjustable-Rate Mortgage?

Various aspects require your attention when determining if a fixed or adjustable-rate mortgage might work better for you.

Interest Rate Prediction

Since the 1990s, interest rates have decreased gradually, although there have been periods of movement in both directions. However, one should not take historical trends for granted when it comes to predicting future performance. Besides, predicting the timing, direction, and speed of adjustments is not easy, especially when it comes to getting all three right.

When existing interest rates are low and there is speculation about a hike, opting for a fixed-rate mortgage might be the way to go. This is because the low interest rate will stay in place even if the market rate climbs to a higher level. However, if there are predictions that interest rates might fall, you may want to consider getting a mortgage with an interest rate that fluctuates over time as market rates change.

The Certainty Factor

If you are already on a tight budget, you don’t want to worry about unfavorable changes in interest rates denting your ability to make timely repayments. In such a scenario, while a fixed-rate mortgage would come with higher monthly payments initially, it would offer peace of mind down the road, with you knowing that your repayments will not change through the loan term.

Making Prepayments

If you plan to make aggressive prepayments to try and pay your mortgage off ahead of time, you can benefit by getting an ARM. This is because if you manage to pay a significant portion of the loan during the fixed-rate period, interest rate hikes in the later stage might not have too much of a negative effect on an already reduced loan balance.

Time Period

People who plan to repay or refinance their mortgages in short timeframes tend to favor ARMs over fixed-rate alternatives. For instance, a borrower who intends to keep a loan for around six to eight years might be comfortable taking an ARM that is set to adjust in five or seven years.

Amortization Period

Your amortization schedule will give you a clear indication of your periodic loan payments. In it, you get to see just how much of the payment you make each month goes toward reducing the principal amount and paying off the interest. With a long amortization period linked to an ARM, changing interest rates can have a considerable impact on your monthly payments. This is not the case with fixed-rate mortgages, where your payments remain the same throughout.

The bottom line is that getting an adjustable-rate mortgage might work well for you in a decreasing interest rate environment. However, the flip side is that any rise in interest rates will translate into higher monthly repayments. Keep in mind that many borrowers could not keep up with their rising payments because of steep interest rate resets during the 2007-2009 Great Recession.

What’s an Interest-Only Mortgage?

An interest-only mortgage gives you the option of making considerably low monthly payments for a predetermined time period, where the payments you make only go toward the interest that your loan attracts. Once the introductory period ends, you will need to start making payments toward the principal, which would be more than it would through a conventional fixed-rate mortgage.

In the long run, interest-only mortgages turn out to be more expensive. However, such mortgages might work well for first-time homebuyers who expect their careers to improve soon as well as for individuals who have limited resources at first.

What Is a Loan’s Term?

A loan’s term refers to the time you get to repay the loan in full, including the principal amount and the interest it attracts. Loan terms are typically easy to identify. For example, a fixed-rate 30-year loan requires that you repay it completely within 30 years.

The term of a loan has a bearing on how much it ends up costing, because it affects the interest you pay directly. The relationship is simple; the longer the loan term, the more you pay as interest. So, while a longer loan term might seem tempting because it comes with lower monthly payments, you’ll end up paying more in the form of interest. The reverse holds true as well.

As a result, you’ll end up paying considerably more through a 30-year mortgage when compared to a 15-year mortgage. The question is – how much can you afford to repay each month?

Common Loan Terms

• 30-year mortgages. A large majority of borrowers opt for 30-year mortgages, making it the most common loan term. This is probably because long loan terms reduce the financial burden of home ownership, and it also gives borrowers the ability to buy more expensive homes.
• 20-year mortgages. If you get a 20-year mortgage, not only do you pay your loan off sooner, but you end up saving a tidy sum in the form of interest. The interest rate you get will also be slightly lower than that of a 30-year mortgage.
• 15-year mortgages. These mortgages come with the most competitive interest rates. This ensures that your repayments are not twice as much as they would be through a 30-year mortgage. In addition, the reduced loan term means you end up paying considerably lesser as interest in dollar value.

What Are Combination Mortgages?

If you cannot make a 20% down payment and want to avoid paying private mortgage insurance (PMI), consider taking a look at how combination mortgages work. Typically, you would take one loan to cover 80% of the home’s value, and another to cover the remaining 20%. The mortgage industry refers to this as an 80/20 combination loan.

In such a scenario, the first loan for the higher amount usually has a lower fixed rate, whereas the second loan comes with a higher and/or variable rate. Depending on how quickly you expect to repay the second loan, you might be better off getting a combination loan instead of PMI. However, you must do your math in advance.

 

Conclusion

The interest rate attached to your mortgage and the loan’s term can have a telling effect on how much you end up paying over time. If you get an ARM, in which the interest rate may fluctuate up or down during the term of the loan, a hike in rates may affect your ability to make timely repayments. Fixed-rate mortgages, on the other hand, are the safer approach to home ownership. To determine which type of interest and what loan term might work well for you, take your existing and predicted financial situation into account while talking to your loan officer, and don’t forget to factor in contingencies.

It’s no surprise that purchasing a home is a massive financial decision. While the investment is incredibly rewarding, saving up enough to become a homeowner can be challenging. However, certain options you can consider throughout the process of buying a home that can remove the burden of these costs. In this blog post, we’re explaining discount points, lender credits, and seller concessions and how you may be able to benefit.

What Are Discount Points on a Mortgage?

Discount points or mortgage points give you the ability to lower the interest rate on your mortgage. You may view discount points on a mortgage as a trade-off, where you pay more money at the closing and the lender lowers the interest rate.

Data collated by the Consumer Financial Protection Bureau indicates that discount points were rather popular with homebuyers in 2023’s first three quarters. During this period, 58.7% of buyers with home purchase loans used discount points. This number stood at 56.2% for buyers with non-cash-out refinance loans and a staggering 88.5% for borrowers who opted for cash-out refinances.

How Discount Points Work

Each discount point costs around 1% of the mortgage amount and brings the interest rate down byan average of 25 basis points (0.25%), although it may vary from 0.125% to 0.375%. Keep in mind that the interest rate reduction can vary from one mortgage provider to the next. When you get discount points, your lender charges a one-time fee that you need to pay at the time of closing.

If you’re thinking about refinancing your existing mortgage, you might not have to pay for discount points at the closing because some lenders roll these costs and other closing costs into the new loan. In this case, while you need to pay less at the closing table, it affects the equity you have in the home.

Are Discount Points Worth It?

The answer to “Is it worth it to pay points for a lower interest rate?” is that they make sense if you plan to stay in the home you purchase for a few years. Referred to as the break-even period, this is the time it takes for the gains from the lower monthly payments to equal the initial cost of purchasing the points.

If you intend to keep living in the home beyond the break-even period, paying for discount points might work well for you. This is because once you cross this stage the lower interest rate will lead to savings for the remainder of the loan term.

Discount points might not be worth it if you sell or refinance your home before crossing the break-even period. If you foresee this happening, you might be better off putting the money toward your down payment and increasing your equity in the home.

How Many Discount Points Can I Buy?

The Lender determines the maximum number of discount points you may buy. Most lenders let borrowers buy up to four discount points. This, on average, can bring your interest rate down by 1%. Data released by Freddie Mac indicates that a typical 30-year fixed-rate mortgage comes with 0.5 to 0.7 discount points, and the number is lower with adjustable-rate mortgages (ARMs) because these borrowers tend to refinance or sell sooner.

What Is a Lender Credit on a Mortgage?

While discount points help lower the interest rate on a mortgage and require you to pay an upfront cost, lender credits can work well for borrowers who wish to reduce the burden of closing costs. So, what are lender credits and how do they work?

Lender credits give you the means to bring down your closing costs in exchange for a higher interest rate. This allows you to lower your upfront expenses and spread them over a prolonged period. However, you can use lender credits only to cover closing costs and for no other purpose.

Are Lender Credits Worth It?

Getting lender credits might work well for you if your main aim is to get some financial assistance or flexibility at the closing table and don’t mind paying a slightly higher interest rate. Given that closing costs can go up to 6% of a home’s selling price and that you also need to account for the down payment, lender credits can help bring down your initial expenses.

Oftentimes, assistance with closing costs helps borrowers come up with the down payment they need to buy a home, allowing them to get on the path to homeownership sooner. In addition, if you plan to refinance or sell in the near future, the shorter timeframe can help override the effect of the higher interest rate.

One potential drawback of getting lender credits is that the higher fixed interest rate will stay in place for the entire loan term, and you might end up paying significantly more than the original amount. This can be a problem if you’re already stretching your budget, because a higher interest rate translates into higher monthly payments. In addition, the higher interest rate might put you at a disadvantage if you plan to refinance at a later stage.

How Much Lender Credit Can I Get?

How much lender credit you can get depends on the type of mortgage you select, the amount you wish to borrow, and your lender. (Lender credits are not always available. Please check with your lender for details). Factors that can work in your favor include a good credit score, a large down payment (20% or more), and a low debt-to-income ratio.

What Are Seller Concessions?

As the name implies, seller concessions refer to concessions the seller of a home offers to a potential buyer. In this case, a seller might offer to cover one or more costs associated with buying a home to reduce a buyer’s upfront expenses.

If you look at seller concession examples, you’ll notice they come in different forms. One of the most common types of seller concessions is a seller agreeing to cover all or part of the closing costs. If, during an inspection, you find a problem that needs fixing, you may ask for a concession to cover the cost of repairs. In some instances, sellers agree to cover appraisal fees, loan origination fees, and attorney fees.

Keep in mind that while you may request seller concessions, whether or not sellers agree is their prerogative. In addition, remember that these concessions don’t come in the form of hard cash and typically find their way into bringing down your closing costs.

Who Benefits?

When offered, seller concessions tend to benefit buyers and sellers alike. While the buyer enjoys a discount, the seller manages to make the sale. However, where and when you wish to purchase a house might have an effect on whether you might get a seller concession.

Asking for seller concessions makes sense in a buyer’s market where the supply of homes for sale exceeds the demand. In this scenario, given the low demand, a seller might be more inclined to offer a concession and offload a property faster. However, the situation tends to reverse in a seller’s market, where a seller might have no inclination to offer concessions because of the high demand.

Pros and Cons

The biggest advantage of a seller concession is that it brings down the closing costs and makes the home you purchase more affordable. While this can help you make a larger down payment than you initially planned, it can also leave you with more savings in your bank account.

One potential drawback of asking for a seller concession is that it might make your offer seem less appealing, especially in a seller’s market. Besides, when it comes to homes that receive multiple bids, sellers may choose to disregard offers that come with requests for concessions. In this case, you might be better off making a lower offer and covering the closing costs on your own.

Seller Concession Limits

Regulatory bodies like the U.S. Department of Housing and Urban Development (HUD) and Fannie Mae have set seller concession limits to prevent housing market inflation and ensure stability in prices. These limits vary based on different types of loans.

Conventional Loans

Seller concession limits for conventional loans depend on the down payment amount for primary residences and second homes. Investment properties are 2% max on all combined loan-to-value (CLTV) ratios.

• Less than 10% down payment – Seller concession of up to 3%
• Down payment of 10% to 25% – Seller concession of up to 6%
• Down payment of over 25% – Seller concession of up to 9%

Remember, if you’re getting a conventional loan to purchase an investment property, the seller concession cannot exceed 2%.

USDA Loans

If you plan to get a U.S. Department of Agriculture (USDA) loan, the seller may contribute up to 6% of the loan amount. The home’s selling price or the down payment you make does not have an effect on the seller concession limit in this case.

VA Loans

Getting a Department of Veterans Affairs (VA) loan qualifies you to get a seller concession of up to 4% of the home’s selling price. Other than for closing costs, you may use these concessions for paying VA funding fees as well as to pay existing debts and judgments.

FHA Loans

The seller concession limit for Federal Housing Administration (FHA) loans stands at 6% of a home’s selling price. While you may use these concessions to cover closing costs, you can also use them to pay for appraisal fees and other home purchase-related expenses.

Seller Concession vs. Price Reduction

While a seller concession is usually specific to a buyer’s request, a price reduction typically applies to all potential buyers. Both are fairly common in buyer’s markets, where sellers either want to attract attention to their properties or speed up the sale.

Although a seller concession and a price reduction might seem the same from the cost perspective, know that they work differently, especially if you’re getting a mortgage. Consider an example where a buyer plans to purchase a house for $100,000 and make a 10% down payment of $10,000. Closing costs stand at 6% or $6,000.

With a 6% seller concession, the closing costs are covered. However, in case of a 6% price reduction, the overall cost of the house reduces to $94,000. To cover the closing costs, the buyer still needs to pay $5,640. In this scenario, if you wish to bring down your upfront costs, a seller concession works better.

Which Should You Get?

If you think you may need some assistance to cover the closing costs of your mortgage, find out if you can get a seller concession to pay for the same. Alternatively, you may also request a seller concession if you find a problem during a home’s inspection and will need to spend money to fix it after the purchase.

If you’re unable to get a seller concession to cover the closing costs for any reason, you may consider requesting a lender credit. The former is a better option because it works more like a discount, whereas you have to pay for the latter. Besides, while seller concessions bring down the cost of homeownership, lender credits might have the opposite effect.

Prospective homebuyers who wish to lower their interest rates might benefit by buying discount points. While you’ll need to pay extra at the closing table, you stand to gain in the long run, provided you live in the house for a prolonged period.

Conclusion

When it comes to dealing with discount points, lender credits, or seller concessions, making an informed decision requires paying attention to different aspects. These include your existing financial situation, upfront costs, how long you plan to live in the home you purchase, and the potential for long-term savings. Discussing your requirements with your financial advisor and a reputable mortgage provider is ideal.