Mortgages for Self-Employed Borrowers | An In-Depth Guide

Mortgages for Self-Employed Borrowers | An In-Depth Guide

Just like every rose has its thorn, self-employment comes with its share of potential drawbacks. This becomes particularly obvious when you set out to get a mortgage for buying a home. Fortunately, while getting a mortgage as a self-employed individual can be more difficult than qualifying for one if you have a regular job, you may still think about becoming a homeowner if you meet some requirements and follow a few measures.


Are You Self-Employed?

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, a sole proprietorship, or a partnership.  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

A lender might also view you as self-employed if a major portion of your income comes from:

  • Royalties
  • Rent payments
  • Interest/dividends


Mortgages for Self-Employed Borrowers 

If you earn any income that comes with a Form 1099, 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.

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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, sellers 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 W-2s?

If you receive 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 last two pay stubs. 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 a mortgage as a self-employed individual requires that you provide different types of documentation. It may include:

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


Are Self-Employed Mortgage Borrowers at a Loss?

Most mortgage providers don’t look at self-employed borrowers as ideal candidates. The reason they look at regular employees with favor is because of their steady and easily verifiable incomes. When compared to self-employed borrowers, regular employees with W-2s need to go through considerably lesser paperwork when applying for mortgages. 

One distinct challenge in applying for a mortgage as a self-employed individual is you’ll need to address business expenses. From the taxation point of view, deducting these costs can help bring down your taxable income. However, when you apply for a mortgage, a lower annual income might lead a lender to wonder if you earn enough money to purchase a home. In addition, lenders commonly seek low loan-to-value (LTV) ratios from self-employed individuals. This usually translates to making a larger-than-usual down payment.


Improving the Odds of Approval

Most lenders look at self-employed mortgage borrowers as high-risk propositions. This is mainly 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 for a mortgage. 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. 

No matter 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. Bear 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 lender offers. For instance, this factor has a significant effect on self-employed mortgage 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.

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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 26%. 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 mortgage.


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 Substantial 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 a mortgage.


Self-Employed Mortgage Loan Alternatives

Self-Employed Mortgage Loan Alternatives

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


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. You’ll also need to DTI ratio of 43% or lower.


USDA Loans

Backed by the U.S. Department of Agriculture, USDA loans are made available for the purchase of rural property as well as homes in suburban areas of large cities. These loans come with no down payment requirements, although you need to show at least two years of self-employed work history. To qualify, you need a credit score of 640 or higher. In addition, your monthly mortgage payment, including taxes and insurance, should not exceed 29% of your monthly income.


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.

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Non-Qualified Mortgages

Non-qualified mortgages (non-QMs) are ones that you may qualify for by providing alternative forms of documentation. Lenders who provide non-QMs tend to follow more relaxed credit requirements than those who offer conventional mortgages. Besides, you may even qualify with a DTI that’s over 43%. Meadowbrook Financial provides non-QMs for people with fair/average credit, for those looking at larger-than-usual loan amounts, for investors, as well as for foreign nationals. 



Self-employed people who have good creditworthiness and earn enough money may think about getting mortgages to go the homeownership way.  While the going might not be as easy as it is for people with regular jobs, you still get different options from which to choose. 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 income for self-employed borrowers or need help to determine which mortgage option might work best for you, consider speaking with a loan officer who works with a reputed mortgage provider.

Find Out if 2022 Is a Good Year to Buy a Home

Find Out if 2022 Is a Good Year to Buy a Home

A significant number of Americans became first-time homeowners during the last couple of years because of historically low mortgage rates. High demand coupled with relatively low supply led to a fairly competitive market. According to RedFin, 53.6% of homes ended up selling for more than their list prices in May 2021, a sharp increase from 26% during the same month in the preceding year. However, with interest rates on the rise, many are starting to wonder if buying a home in 2022 is a good idea.


The Interest Rate Scenario

The Interest Rate Scenario

No matter which way you look at it, it’s plain to see that the Federal Reserve aims to do its best to get inflation under control. There will be some collateral economic damage appears to be a given. The spike in mortgage rates over the last few months is unprecedented. In the week ending on December 22, 2021, the average interest rate of a 30-year fixed-rate mortgage stood at 3.05%. It climbed to 5.30% in the week ending on May 11, 2022, and dropped marginally in the following few weeks. One is yet to see the overall effect of this rapid increase on the housing market. 

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From the policymakers’ point of view, a slowdown in the housing sector might result in a slowing down of inflation. Rising interest rates seem to have had the desired effect in cooling down one of inflation’s most important drivers. For instance, data released by Mortgage Bankers Association shows that mortgage applications for purchasing new homes decreased by 14% from March 2022 to April 2022. Further, data released by Zillow indicates that there is a positive change in inventory levels from March to April. For those wondering if housing prices will drop in 2022, know that they continue to increase gradually at this point in time, and there’s no near reversal in sight.


Will the Housing Market Crash in 2022?

If you’re wondering when the housing market will crash again, the simple answer is – not any time soon. In fact, most experts actually have favorable forecasts surrounding the U.S. housing market for the remainder of 2022. This is because while there has been a relative slowdown in hyperactivity over the last few months, the market continues to witness fairly strong demand as well as an increase in prices. 

Urgency among prospective homebuyers driven by expectations of further increases in interest rates might help the summer market remain upbeat, and sellers who wish to capitalize on the equity they’ve built over the years may also help the cause.

The market might become more favorable for buyers in the coming months as more inventory hits the market. Besides, the market could also experience an uptick in the number of first-time buyers on their way to homeownership.


The Millennial and Gen Z Effect

Data released by Statista shows that millennials(born between 1981 and 1996) accounted for the largest share in the U.S. population chart in 2020, at 21.93%. Although at the third spot, Gen Z (born between 1997 and 2012) was not far behind, at 20.35%. Together, both represent over 40% of the country’s population, which is significant because first-time homebuyers account for the largest segment of people buying homes. It is safe to assume the deep buyer pool that exists will keep demand strong, all the more so because inventory remains low.

A handful of experts making housing market predictions for the next five years agree that a market crash is in the making, although the likelihood of this happening remains extremely slim. This is because there has been no significant increase in inventory over the last decade, and many from Gen Z will soon be ready to go the homeownership way. Further, while demand will remain high in the coming years, inventory is set to remain lower than the demand.

Not surprisingly, the low supply is working as a catalyst in fuelling demand and increasing home prices, which also indicates that the housing market is bound to remain strong. Given that not enough houses have been built over the last 10 years or so, one can expect that it will take several years to add the required inventory to balance the market.

In balanced housing markets, the time it would take to sell all existing inventory at the current pace stands at around four to six months. In April 2022, this number stood at 2.2, highlighting that the market is in favor of buyers. 

Privately-owned housing starts in April 2022 stood at 1,819,000, up by 14.6% from April 2021. However, even this seemingly large number will do little to bring down home prices in the near future. 


Are There Any Warning Signs?

“When will the housing market crash again?” is a question that’s commonly doing rounds for well over a year now.  While many experts feel that the economy is on its way to recovery, others feel that a recession is in the making. This is not without reason, because inflation began to climb in 2021, as did consumer prices.

To deal with the situation, the Federal Reserveincreased the funds rate in May, accounting for the biggest hike in over two decades. Some viewed this as a sign that a slowdown is just around the corner.  While the funds rate doesn’t have a direct bearing on long-term mortgage rates, it impacts short-term rates that come with adjustable-rate mortgages, personal loans, and credit cards. Therefore, an increase in rates can lead to a slowdown in spending.

In its forecasts for 2022, Goldman Sachs predicted that the country’s GDP would increase by just 1.75%. In addition, an April 2022 publication suggests that there is a 15% chance the country might go into recession within the next 12 months, and a 35% chance that it will happen in the next 24 months. If this happens, it will definitely not augment well for the housing market. 


The Russia-Ukraine War

Energy prices were already increasing, and the U.S. and Eurozone ban on Russian oil has amplified the pressure further still. High energy prices do not bode well with rising inflation. With increasing interest rates thrown into the mix, there could be reasons for consumers to cut overall spending. This could also mean that some people might lose their drive to become homeowners, or at least put their plans on the backburner for a while.

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According to the University of Michigan, the index of consumer sentiment stood at 50.2 in June 2022, down from 85.5 in June 2021, a -41.3% year-on-year change, and also its lowest recorded value.  Respondents in the survey highlighted there was anxiety about the effect that the Russia-Ukraine war might have on the American economy, as well as about rising oil prices and high levels of inflation.

America’s ban on Russian oil imports can lead to supply chain problems, which, in turn, may have a dampening effect on already high inflation. Besides, this geopolitical conflict now appears to persist for way longer than originally expected. If the prices of goods increase, there could be a possibility of consumers being uncomfortable when making large purchases – such as buying homes.  


What Should You Do?

Some people are on the fence when it comes to buying a home in 2022, wondering if they should put their plans on hold and wait for prices to drop. However, the possibility of this happening any time in the near future is rather bleak. The existing demand to buy homes and inadequate inventory are bound to keep prices on their upward trend. Besides, Wall Street firms continue to want to add real estate to their portfolios. Consequently, prospective first-time homebuyers are not just competing with each other, but with investors as well. 

On the whole, while some sectors such as the stock market and oil are experiencing volatility, the upward trend in housing prices will continue because of the supply and demand rule.


Are You Financially Sound?

Prospective homebuyers should ideally look at their existing financial situation and determine if the numbers work in their favor. If you plan to buy a new home and live in it for several years, and if you have a stable job that will let you keep up with your mortgage payments, you may consider buying a home in 2022. Given that mortgage rates might increase even more, there is no reason to postpone buying a home if you can afford to at this point in time.  If you feel you’re in a financially secure position, you may well start looking at homes that fit your bill.


Timing the Market

Timing when you purchase a home based on market conditions is easier said than done, and even experts go wrong in their predictions at times. Halfway through 2022, you need to realize that while mortgage rates are on the rise, they’re still affordable.  Consider this for perspective – the average interest rate for a 30-year fixed-rate mortgage stood at over 18% in October 1981. It dropped to below 6% only toward the end of 2002. In July 2008, it breached the 6.5% mark again. 

Anyone expecting to time the market perfectly might be in for disappointment. If you find a home that meets your requirements and is within your budget, signing the dotted line might work well for you. Bear in mind that waiting for longer will result in spending more on rent and you might also be burdened with a higher interest rate than you may get now.


What Can Cause Prices to Drop?

What Can Cause Prices to Drop?

A continued increase in interest rates along with poorly performing financial markets might cause the rise in home prices to slow down or reverse. For instance, if mortgage rates climb to 5.5% to 6% and there’s a pullback of 20% or more in the financial markets, these factors could cause a lull in the appreciation of home prices. In addition, if prospective buyers have reduced purchasing power, the demand for homes might drop. 

A long-drawn war in Europe might have a cascading negative effect on home prices in the U.S., as might the after-effects of the pandemic. For instance, many baby boomers with significant equity in their homes chose not to sell over the last two years. If there’s a change in this trend and they start downsizing their homes, the market might get some added inventory, which, in turn, might lead to price corrections. 

You may expect home prices to reduce significantly in the near future only in case of an event of large proportions, such as a war, a sudden drop in demand, or a rapid addition of inventory. Even if home prices don’t continue to rise at the same rate, existing data suggests that prices are unlikely to nose-dive in the near future. 

The large rate of defaults that took place during the 2008 financial crisis is unlikely to happen again because lenders are way more prudent when issuing mortgages now. Unless history repeats itself in this form or in the form of double-digit interest rates, it looks like existing housing market trends are here to stay.



Don’t let the fear of missing out (FOMO) drive you into purchasing a home that holds the potential to put your finances in disarray. That said, 2022 is definitely a good time to buy a home because the demand continues to overshadow the inventory, and because prices might not rise as quickly and as much as they did in 2021. Prospective buyers also need to understand that there are micro-markets within markets, and some of the submarkets might present more favorable deals than others. 

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Bear in mind that no one can conclusively say when the housing market might crash again. Besides, most experts are of the opinion that while 2023 might witness some slowing down, a crash is highly unlikely.  If you’re still wondering whether 2022 is a good year to buy a home, know that it essentially depends on how ready you are to take the plunge. If you decide to move forward, start by looking at what different types of traditional and alternative mortgages have to offer.

Alternatives to the Traditional Mortgage

Alternatives to the Traditional Mortgage

Not everyone who can afford to buy a home qualifies for a traditional mortgage. Fortunately, there are alternative ways to own a home, one of which involves looking at what unconventional mortgage lenders have to offer. Depending on whether you meet the required eligibility criteria, getting a USDA loan or a VA loan might also work in your favor.


Nonbank/Unconventional Mortgage Lenders 

Typically referred to as private mortgage lenders, nonbank mortgage lenders offer financial products that are largely similar to what you’d find through traditional banking institutions. These include loans for first-time homebuyers, second home/investment loans, jumbo loans, reverse mortgages, as well as refinancing solutions. However, since alternative mortgage lenders don’t have to follow the same stringent regulations as banks, they are able to make way for relaxed eligibility criteria, lower down payments, and quicker processing of applications. Unlike banks, private lenders cannot offer deposit services.


Alternatives to a Traditional Mortgage

First-time homebuyers who do not meet the typically stringent eligibility criteria that come with traditional mortgages as well as investors who are looking for flexible solutions may turn to mortgage alternatives made available by nonbank mortgage lenders. While such alternatives give you the ability to bring down your monthly payments, you also stand the chance to qualify for higher loan amounts than you would through a traditional mortgage.

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You may refer to any mortgage that deviates from traditional mortgage practices as an alternative mortgage. The variation may come in the form of an adjustable rate or more relaxed income/creditworthiness requirements.    


What is a Non-Qualified Mortgage?

Non-qualified mortgages (non-QMs) refer to home loans that do not fall under the qualified mortgage (QM) bracket. Lenders that offer QMs need to determine if borrowers meet the requirements laid out in the ability-to-repay rule. In addition, lenders cannot offer features such as interest-only payments, loan terms of over 30 years, and balloon payments through QMs.

The non-QM market finds favor with people who have less-than-perfect credit as well as with those who cannot qualify for traditional mortgages or QMs for any other reason. Non-QMs, in their basic form, are designed as solutions for individuals who cannot meet the stringent eligibility requirements that come with traditional mortgages. For example, you might qualify for a non-QM as a foreign national or as an investor with fair credit.

One way to determine if you need to look at alternative or non-qualified mortgages is to check if you qualify for a traditional mortgage. General eligibility criteria for qualified mortgages include providing proof of income through paystubs, tax returns, and W-2s, as well as having a debt-to-income ratio of no more than 43%. In addition, fees and points cannot be more than 3% of the amount you borrow.

Given the stringent guidelines that accompany QMs, providers of such loans receive considerable protection from liability by being backed by some government entities such as Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA). Non-QMs, on the other hand, don’t provide lenders with any such safeguard.


Making the Case for Non-QMs

Data released by CoreLogic suggests that the main reasons why non-QMs from 2018 did not fit the QM bracket were:

  • Alternative of limited documentation
  • Debt-to-income ratios of over 43%
  • The need to make interest-only payments

More than 45% of non-QM borrowers had DTIs of over 43%, and over 40% presented alternative or limited documentation. While the share of non-QMs issued to borrowers with DTIs over 43% has increased significantly over the last few years, there has been a phasing out of risky factors such as balloon payments and negative amortization. 

The non-QMs of today have evolved considerably over the last decade and are not quite the same as they were before the financial crisis of 2007-2008. Consider this – the average credit score of non-QM borrowers in 2018 stood at 760. This number for homebuyers with QMs was a tad lower, at 754. In addition, the average first-lien loan-to-value ratio for non-QM borrowers was 79%, whereas it was 81% for QM borrowers.


Pros and Cons of Non-QMs

Determining if a non-qualified mortgage might work well for you requires that you pay attention to the benefits as well as the possible downsides.



  • Lenders accept alternative forms of documentation
  • More relaxed credit requirements than QMs
  • No maximum limit to the number of investment properties
  • Foreign nationals may qualify



  • Might need to make a larger-than-usual down payment
  • Interest rates and fees and typically higher than QMs
  • Risky loan features may put you at risk
  • Not all lenders provide non-QMs

Nonbank/Unconventional Mortgage Lenders 

Your Top Alternatives to a Traditional Mortgage

People who don’t have lengthy enough credit histories, those who have fair/average creditworthiness, foreign nationals with no credit scores, and even those looking for larger-than-usual loan amounts get several mortgage alternatives from which to choose. Selecting the option that works best for you requires paying close attention to different factors, including your own requirements.


Using a Home Renovation Loan to Become a Homeowner

A home renovation loan gives you the ability to buy a fixer-upper home and have adequate funds to carry out required repairs and renovations.

  • 203K. FHA-backed, these loans come in two forms – streamlined and standard. Both do not allow inclusion of luxury items. The streamlined alternative is ideal for homes that require non-structural work such as kitchen/bathroom remodeling, plumbing/electrical repairs, and paint jobs. The standard variant allows for extensive structural changes that might include repairing the foundation or adding new rooms.  
  • HomeStyle Renovation. Backed by Fannie Mae, you may include luxury items in the HomeStyle Renovation loan. When buying a house, you may get a loan of up to 50% of the home’s as-completed value. Your down payment can be as low as 5%. Private mortgage insurance (PMI) stops when you get to the 22% equity mark.


Check if You Qualify for a USDA or VA Loan

Although both the loans in question are backed by government bodies,  they come with features that you would not find in a traditional mortgage. For instance, you may get either without needing to make a down payment.

  • USDA Loans. Guaranteed by the United States Department of Agriculture (USDA), USDA loans are made available to rural homebuyers as well as those who wish to purchase homes in the outer suburbs of large cities. These loans come with more relaxed income and creditworthiness criteria than traditional mortgages. 
  • VA Loans. VA loans are guaranteed by the United States Department of Veterans Affairs (VA). They are made available to those currently serving in the U.S. military, veterans, reservists, as well as eligible surviving spouses. No matter how little you put toward the down payment, you don’t have to get PMI.


Non-Qualified Mortgage Options

Meadowbrook Financial Mortgage Bankers realizes that borrowers looking at what the non-QM market has to offer don’t have many options from which to choose. To fill this relative void, it offers four distinct products.


Credit Ascent

The Credit Ascent loan program is designed to meet the needs of individuals with fair/average credit who’re looking for responsible lending solutions. 

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  • You may qualify with standard or alternative documentation
  • You may borrow any amount between $150,000 to $300,000
  • You may have a loan-to-value (LTV) ratio of up to 90%
  • You may apply with a FICO Score of 600 or higher
  • Your debt-to-income ratio can be up to 50%
  • Making interest-only payments is possible
  • You get a cash-out option


Prime Ascent

The Prime Ascent loan program is meant for qualified individuals who’re looking for larger-than-usual loan amounts. 

  • You may apply with full or alternative documentation
  • You may borrow any amount between $150,000 to $3,500,000
  • You may have a loan-to-value (LTV) ratio of up to 90%
  • You need a FICO Score of 660 or higher
  • Your debt-to-income ratio can be up to 50%
  • You may use this loan to purchase a second home
  • Making interest-only payments is possible
  • You get a cash-out option


Investor Solutions

As the name implies, the Investor Solutions loan program is for investors who’re looking for alternative sources of funding. 

  • Can underwrite to property income
  • Can close as an LLC or a corporation
  • No limit on the number of properties you may finance
  • Borrow any amount between $150,000 to $3,500,000
  • Loan-to-value (LTV) ratio of up to 80%
  • FICO Score of 600 or higher
  • Interest-only payments possible
  • Cash-out option


Foreign Nationals

You may consider taking a look at what this loan program has to offer if you’re a foreign national who wishes to purchase a home or refinance an existing mortgage in the U.S.

  • Second homes and investment properties count as eligible transactions
  • Can use standard documentation or debt-service coverage ratio (DSCR)
  • Loan-to-value (LTV) ratio of up to 75%
  • Borrow any amount between $150,000 to $2,000,000
  • Interest-only payments possible
  • Cash-out option


What About Jumbo Loans?

Jumbo loans fall outside the bracket of traditional mortgages for one simple reason. They come with loan amounts that exceed conforming loan limits (CLLs) set forth by the Federal Housing Finance Agency (FHFA). As per data released by the agency, the CLL for single unit properties is set to be $647,200 in 2022. With jumbo loans, qualified borrowers may get mortgages of up to three million dollars.

Given that the amount involved in a jumbo loan is typically a large sum, you may expect to find more stringent lending criteria than compared with other alternative forms of lending. 

  • You need a credit score of 700 or higher
  • Your debt-to-income ratio should be below 43%
  • You need to make a down payment of 10% to 20%


Who Can Benefit by Getting a Non-QM or an Alternative Mortgage?

Data indicates that the non-QM market closed at around $18.9 billion in 2020, although it is pegged to get to $200 to $300 billion per year in not too distant a future. The projected growth is mainly because an increasing number of prospective homebuyers are unable to qualify for traditional mortgages. The three main segments that stand to gain from non-QMs include:

  • Investors and self-employed individuals with considerable income tax write-offs. Mortgage seekers from this segment typically don’t qualify for any backing from the government or its agencies. Even if you do, navigating through the increasingly tough requirements is easier said than done. As a result, looking at what non-QMs have to offer might serve this group well.
  • Borrowers with less-than-perfect credit scores or inadequate credit histories. A number of entrepreneurs rely on flexible approaches when running their businesses. This might keep them from having credit scores that meet the requirements of traditional mortgages. A businessperson with a DTI ratio of over 43% is a perfect example of someone from this segment. What helps is providers of non-QMs focus more on your ability-to-repay and take into account cash flow from varied sources. 
  • Individuals with unconventional sources of income. Getting a traditional mortgage may seem like an uphill task if your tax returns don’t qualify as proof of income. This can be the case if your income comes from unconventional sources such as property investments, the stock market, alimony, and part-time work. When it comes to non-QM lenders, they may accept bank statements to serve as proof of income.



In an ideal world, there should be no stopping you from getting a traditional mortgage if you have the ability to repay. You would then get the same loan terms and interest rates as your peers who check all the QM boxes. However, not everyone who wishes to and can afford to buy a home qualifies for a traditional mortgage. What helps is that there are a number of alternatives to traditional mortgages, several of which come in the form of non-QMs. These aim to help borrowers with unconventional or unique circumstances. 

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If you’re unsure about which type of mortgage might work best for you, getting in touch with a reliable lender that provides alternative solutions might be in your best interest.

FHA Vs. Conventional Loans: An In-Depth Comparison

FHA Vs Conventional Loans An In-Depth Comparison

FHA and conventional loans are among the two most common alternatives homebuyers turn to when they seek funding to move forward with their purchases.  While you may use either one to purchase a new home, you may also use them to refinance an existing mortgage. Looking at the conventional vs. FHA loan comparison closely before determining which one might work better for you is important because each loan comes with notable differences. 


What is an FHA Loan?

What is an FHA Loan?

Backed by the Federal Housing Administration (FHA), FHA-approved private lenders across the U.S. provide FHA loans. The FHA essentially insures mortgages to safeguard the interest of lenders in case borrowers default on their loans. FHA insures mortgages on single-family homes and multifamily properties alike. However, the home you purchase will need to serve as your primary residence

People with less-than-perfect creditworthiness who feel they might not qualify for conventional mortgages might benefit by looking at what FHA loans have to offer because they come with less stringent credit score requirements. 


What is a Conventional Loan?

Most conventional loans meet the requirements prescribed by Freddie Mac or Fannie Mae, and the ones that do are also referred to as conforming loans. However, they do not come with any type of government-backed guarantee. Unlike FHA loans that you may use to buy only primary residences, you may use the proceeds from a conventional loan to purchase a second home or an investment property.

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Conventional loans that do not meet Freddie Mac and Fannie Mae guidelines surrounding aspects such as maximum loan amounts, applicants’ incomes, down payment requirements, and credit standards fall under the non-conforming loans bracket. Jumbo loans classify as non-conforming loans. Non-conforming loans tend to have a smaller market and come with higher-than-usual interest rates.


Eligibility Requirements

Whether you might qualify for an FHA loan, a conventional loan, or both depends on multiple factors such as your credit score and the down payment amount. However, FHA loans have more relaxed eligibility criteria surrounding acceptable credit scores and debt-to-income ratios, which is why they are listed first in this section of the FHA loan vs. conventional loan comparison.


FHA Loan Requirements


  • Minimum credit score of 500
  • Down payment can be as low as 3% based on your credit score
  • The home must pass a professional home inspection
  • The home needs to be appraised by an FHA-approved appraiser


Conventional Loan Requirements


  • Minimum credit score of 620, although you get better terms with a higher credit score
  • Down payment for first-time homebuyers as low as 3%
  • Down payment for second home needs to be at least 10%


Limits on Loan Amounts

FHA and conventional loans have maximum limits surrounding how much money you might be able to borrow, and these limits vary by county. In addition, these limits are subject to change each year. In November 2021, the Federal Housing Finance Agency (FHFA) announced that the conforming loan limits (CLLs) across most parts of the U.S. for one-unit properties in 2022 would be $647,200. Similarly, FHA’s countrywide floor and ceiling forward mortgage limits for one-unit properties in 2022 stand at $420,680 and $970,800, respectively.


Debt-to-Income Ratio Requirements

Your debt-to-income (DTI) ratio gives lenders an indication of how much money you need to use from your monthly income to make repayments toward your existing debt. Calculating your DTI ratio requires that you divide your total monthly debt payments by your monthly income and multiply it by 100. For example, if your monthly debt payments amount to $1,500 and your monthly income is $4,000, your DTI ratio is 37.5% (1500/4000*100).

The conventional loan vs. FHA loan comparison tilts in favor of the latter when it comes to acceptable DTI ratios. For FHA loans, your DTI ratio should be 50% or lower. When it comes to conventional loans, most lenders look at DTI ratios of 36% or lower with favor. It’s important to note that the maximum allowed DTI ratio does not apply to each applicant. Lenders might view borrowers with the higher end of acceptable DTI ratios with favor if they appear to be strong borrowers through compensating factors such as excellent creditworthiness or access to adequate cash reserves.


Down Payment Requirements

Just how much down payment you need to make when buying a home varies based not just on the type of loan you choose, but other factors as well. While common perception suggests that you need at least a 20% down payment to get a conventional loan, this is far from the fact. For instance, the Conventional 97 Loan is a 3% down payment loan alternative for first-time homebuyers, as well as for homeowners who wish to refinance their Fannie Mae loans, and you don’t have to fall in the low-income bracket to qualify. 

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The minimum down payment you need to provide to get an FHA loan depends on your credit score. You need to provide at a least 10% down payment if your credit score is between 570 and 579. If it’s 580 or higher, you may pay as little as 3%.

You may consider making a large down payment, even more than 20%, if you feel to can afford to because it comes it multiple benefits. With conventional loans, it takes away the need to pay extra for private mortgage insurance (PMI). In both cases, you may look forward to paying lower monthly payments and lower interest charges throughout the course of the loan term. You’ll also get to build equity in your home faster.


Mortgage Insurance Requirements

Mortgage insurance helps safeguard a lender in case you default on your loan. If you plan to get a conventional mortgage and pay less than 20% of a home’s selling price as down payment, you will need to get private mortgage insurance (PMI). Once you build 22% equity in the home, you longer need to make PMI payments.

With FHA loans, while FHA insures your mortgage, you still need to pay mortgage insurance premium (MIP). You need to keep making these payments until you pay off your loan in full.

Since you need to make mortgage insurance payments toward an FHA loan for the life of the loan, PMI might be more cost-effective in the long run, especially if you have good or excellent creditworthiness. This is because your credit score plays a role in the PMI rate you get. 


Property Standard Requirements

The condition of the home you wish to buy plays an important role in the FHA vs. conventional loans comparison. This is because FHA appraisals follow more stringent guidelines than conventional appraisals.  While assessing the value of a home is a part of an FHA appraisal, you may also expect an FHA appraiser to pay due attention to aspects such as adherence to local codes, quality of construction, and overall safety of the property. 

FHA does not require the fixing of problems that do not affect the soundness or safety of a home. If you feel the home you wish to purchase might not pass an FHA appraisal, you may get the seller to make the required repairs beforehand. Alternatively, you may think about applying for a conventional loan that has more relaxed norms surrounding property standards.


The Pros and Cons of FHA Loans

The main advantages of getting an FHA loan include:

  • Down payments can be as low as 3%
  • Low closing costs
  • Lower minimum credit scores required when compared to conventional loans
  • Higher DTI ratios accepted when compared to conventional loans

The possible drawbacks of getting an FHA loan come in the form of:

  • Need to pay mortgage insurance premium through the course of the loan’s term
  • More stringent property standard requirements than conventional loans
  • Need to use the home you buy as your primary residence
  • Interest rates might be higher than conventional loans owing to less stringent eligibility requirements


The Pros and Cons of Conventional Loans

You might benefit by getting a conventional loan in different ways.

  • Flexibility in terms
  • Nonconforming loans come with no maximum limits
  • No need to get PMI if your down payment is 20% or more of the home’s selling price
  • Can use proceeds of the loan to buy a second or an investment home

Like FHA loans, conventional loans also have some shortcomings.

  • Typically stricter eligibility requirements than FHA loans
  • Need a higher credit score to qualify when compared to FHA loans
  • Need a lower DTI ratio to qualify when compared to FHA loans
  • Need to pay extra for PMI if your down payment is below the 20% mark


Tips to Reduce Your FHA or Conventional Loan Expenses

One common factor in the FHA loan vs. conventional loan comparison is that you get the ability to lower your loan expenses in both cases. 


Compare Loans Estimates

It is important that you compare loan estimates provided by different lenders. Doing this requires paying attention to interest rates, monthly principal and interest payments, monthly mortgage insurance payments, total monthly costs, upfront loan costs, lender credits, as well as the amount of money you need to cover closing costs.


Select a Suitable Loan Term

Selecting a loan term has a bearing on the immediate and long-term cost of your mortgage. For instance, a longer loan term would result in lower monthly payments, and the converse holds true as well.  However, the longer the loan term, the more you would end up paying as interest. 


Make a Large Down Payment

Making a down payment of 20% or more can help you avoid the added cost of private mortgage insurance if you get a conventional loan. In addition, a large down payment – toward an FHA or conventional loan – would result in lower upfront fees, overall interest, and monthly payments. You might even benefit by getting a better interest rate.


Reduce Closing Costs

Reduce Closing Costs

Closing costs refer to the costs that users and sellers incur when transferring a property’s ownership. These may include loan origination fees, appraisal fees, title insurance charges, property taxes, escrow deposits, mortgage tax, and underwriting fees. These costs tend to vary from one county to the next, and typically range from 3% to 6% of the loan amount. What helps is you may take measures to lower your closing costs by paying attention to all the fees you need to pay.

The first thing you may do to bring down your closing costs is to get the seller to contribute partially. The possibility of this happening is more likely if you’re buying in a market that’s not favorable for sellers. Another option is to negotiate with your lender, especially if you’ve compared multiple loan estimates and have found lower costs through other lenders. You may also benefit through lower rates and fees if you’ve been a longstanding customer of the financial institution through which you’re seeking a mortgage.

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If you’re unable to fund closing costs on your own, you might ask your mortgage provider to include the same into the loan amount. If your lender agrees, these costs get added to the principal amount, which you repay over time.



You may consider getting an FHA loan if you have less-than-perfect creditworthiness or if you don’t have enough money to make a large down payment. This is also the case if you’re looking at buying a primary residence or if you have a high debt-to-income ratio. While conventional loans tend to come with stricter eligibility requirements, they may lead to savings in the form of low or no mortgage insurance payments. A conventional loan might also work well for you if you wish to buy a home that will not pass an FHA appraisal, if you’re buying a second home, or if you’re in it for the long haul.

If you’re still unsure about whether you should get a conventional or an FHA loan, you may consider speaking with a reputed mortgage provider who can take the specifics of your case into account and then guide you in making a more well-informed decision.

All You Need to Know About Home Inspections and Home Inspection Contingency

All You Need to Know About Home Inspections and Home Inspection Contingency

Buying a home is among the biggest financial moves that most people make, which is why it’s important to tread with caution. After all, homes do not come with warranties, and there’s little you can do if what you thought might be the house of your dreams turns out to be anything but. Fortunately, including an inspection contingency clause in your purchase agreement and following it up with a professional home inspection can help expose any problems you might face in the future.


What is Inspection Contingency?

What is Inspection Contingency?

As with other contingency clauses that you might include in your purchase agreement when buying a home, an inspection contingency clause requires that certain conditions be met before the contract is legally binding. In this case, the home in question needs to pass a professional inspection. When you add an inspection contingency clause to your purchase agreement, you usually get 7 to 10 days to bring up any objections you might have based on the home inspection report. This process essentially gives you time to arrive at a well-informed purchase decision.

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Since rules surrounding inspection contingencies are not the same across the country, consider discussing this aspect with your real estate agent or mortgage provider in advance. With an inspection contingency clause in place, you get the ability to back away from the deal and get back your earnest money if the inspection reveals a problem that the seller is unwilling to address. Alternatively, you may negotiate for a lower price or for the required repair work to be carried out. 

Other than mentioning the time you get to carry out an inspection, an inspection contingency clause should also highlight how you might want to move forward if you wish to raise any concerns after the inspection.


What is Home Inspection?

When your purchase agreement depends on an inspection contingency, you need to use the services of a professional house inspector to evaluate the home you wish to purchase. The process involves getting a knowledgeable and unbiased account of whether the home has any identifiable issues that might affect your purchase decision. While a general house inspector looks at different aspects of a home, you might need the services of a specialist to identify some types of problems.


What’s Covered in a Home Inspection?

According to the Standard of Practice issued by the American Society of Home Inspectors (ASHI), home inspectors are required to check a home’s:

  • Structural system. This includes the foundation, the floor structure, the wall structure, the ceiling structure, and the roof structure.
  • Roof system. This includes roofing materials, drainage systems, flashings, skylights, chimneys, and roof penetrations.
  • Interior. This includes walls, ceilings, and floors; steps, stairways, and railings; countertops and installed cabinets; doors and windows; vehicle garage doors and door operators; as well as appliances such as cooking ranges, ovens, microwave ovens, dishwashing machines, and food waste grinders.
  • Exterior. This includes exterior doors, wall coverings, flashing, trim, attached and adjacent decks, balconies, porches, patios, stoops, steps, eaves, soffits, fascias, grading, surface drainage, retaining walls, vegetation, adjacent and entryway walkways, and driveways.
  • Plumbing system. This includes fixtures and faucets; water heating equipment and hot water supply systems; interior drain, waste, and vent systems; fuel storage and fuel distribution systems; vent systems, flues, and chimneys; as well as sewage ejectors, sump pumps, and related piping.
  • Electrical system. This includes lighting fixtures, switches, and receptacles; heating and air conditioning systems; service drops; service entrance conductors, service equipment and main disconnect; cables and raceways; service grounding; interior components of service panels and subpanels; over-current protection devices; conductors; as well as arc fault circuit interrupters and ground fault circuit interrupters.

You may also expect a house inspector to check the home’s insulation, ventilation, and solid fuel-burning units such as fireplaces.


What’s Not Covered?

While it’s good to know what home inspectors look for, you also need to know the limitations of general home inspectors. For instance, you might need a specialized home inspection when it comes to identifying problems related to:

  • Pest and rodent infestation
  • Exposure to lead, asbestos, radon, or formaldehyde
  • Mold and odors
  • Carpet-covered flooring
  • Snow-covered roofs and outdoor spaces
  • Drainage, sewage, and septic systems
  • Landscaping and sprinkler systems
  • Swimming pools


The Cost of a Home Inspection

Data collated by HomeGuide suggests that the average home inspection cost in the U.S. is $325. While this number can be below $250 for homes that are smaller than 1,500 square feet, you might end up paying upward of $500 for homes larger than 4,000 square feet.  You might need to pay an added $100 to $300 if the inspection is to include mold, lead, radon, or asbestos testing.


Why Get a Home Inspection?

One of the main reasons to get a home inspection is to avoid nasty surprises after the purchase of a home. Buying a home without an inspection, on the other hand, may well be viewed as asking for trouble. This is because while not all homes on sale have problems, there is no way to tell for sure unless you subject them to professional inspections.  From a buyer’s point of view, a home inspection plays a key role in providing peace of mind when moving forward with the closing of a deal. 


Should You Attend the Inspection?

Whether you choose to attend a home inspection or not is entirely up to you. However, it’s fairly common for homebuyers to be a part of home inspections, so your home inspector will not find your request to partake as unreasonable. Besides, a home inspection gives you the right opportunity to get clarification about any doubts you may have about the home’s condition. 

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If you’re the one responsible for scheduling the home inspection, make sure you pick a time that gives you at least three hours of natural light to go through the process. You may take photographs and make your notes, so you may get any doubts clarified once the inspector is done doing his/her job.


The Home Inspection Report

The Home Inspection Report

After the physical inspection of a home is complete, you may expect your house inspector to give you a detailed report. Home inspection reports may include photographs along with detailed descriptions surrounding all the areas that the inspector covered. If the house has any safety issues or if it requires repairs in any form, you may expect to find a mention of the same in the report. Your report will also touch upon factors that might need your attention in the future.

It is crucial that you go through your home inspection report in detail. If you find any aspect to be confusing or if you have any questions, make sure you seek answers from your home inspector before moving forward with the deal. Most home inspection reports include:

  • Table of contents
  • An introduction that outlines important definitions, the date of the inspection, and the age of the building
  • A list of all inspected components such as interior, exterior, roof, and plumbing
  • A summary of defects, shortcomings, and other discoveries that warrant your attention and/or further investigation
  • If you’re wondering what fixes are mandatory after a home inspection, know that the seller is under no legal obligation to carry out any repair work and might choose to sell the house as-is.


What Do You Do After Receiving the Inspection Report?

Once you receive the home inspection report and go through it in its entirety, you get four options from which to choose. Depending on what you find in your home inspection report, you may:

  • Move forward with the deal
  • Ask the seller to lower the selling price
  • Ask the seller to carry out the required repair work 
  • Back out of the deal without incurring any penalty

If you’re unsure about which path to take, you may seek advice from your real estate agent. Bear in mind that almost all home inspections result in highlighting a few problems. If the concerns are small, you may consider moving forward with the deal. If the seller agrees to get the required work done, you may ask your inspector to sign off only after it’s complete. If you think that the issues are big and fail to arrive at a consensus with the seller, walking away from the deal and looking for other alternatives might be in your best interest.


Home Inspection Checklist

While professional home inspectors know just what to look for and where, you might benefit by coming up with your own home inspection checklist before the inspector’s arrival. This way, you can be sure of leaving no stone unturned during the process. Your checklist should include:

  • Appliances
  • Attic 
  • Balconies
  • Basement
  • Ceilings
  • Doors and windows
  • Electrical panel, power outlets, and light switches
  • Exterior paint/stucco
  • Floors
  • Foundation
  • Garage
  • Heating, cooling, and ventilation (HVAC) system
  • Plumbing fixtures, faucets, and water heater
  • Porches
  • Rain gutters/downspouts
  • Roof
  • Steps, stairs, and railings
  • Walkways and driveways
  • Walls


Waiving Inspection Contingency

It is common for buyers to use home inspections as bargaining chips in favorable markets. For example, while a faulty water heater would not present problems surrounding a home’s safety or soundness, it might allow a buyer to ask the seller for a credit or for it to be repaired.

In most situations, waiving inspection contingency is among the top home-buying mistakes you should avoid. This is because the inspection that follows is meant to uncover any possible problem with the home you wish to purchase. By not adding an inspection contingency clause in your purchase agreement, you run the risk of having to spend a considerable amount of money down the line. This is because you assume financial responsibility for any repair work that might follow the sale of the home.

In competitive markets that favor sellers, many buyers draw attention to their offers by agreeing to overlook minor problems. However, instead of waiving home inspection contingency completely, many chose to modify the home inspection contingency wording they use in their offers. For instance, a buyer might agree to overlook repair work that totals to a predetermined amount. Alternatively, you might imply that you’re only looking for serious problems. When it comes to competitive markets, selecting a mortgage provider and getting preapproval before making an offer will also hold you in good stead.

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Getting a professional home inspection before you sign a purchase agreement is an option. This way, you may proceed with the agreement after you receive a favorable home inspection report. If you waive inspection contingency in your purchase agreement, you may still back out of the deal if you receive a negative inspection report. In this case, you’ll end up forfeiting your deposit, which is why you need to compare it with the money you might need to spend on carrying out the required repair work.



Once you narrow down on the house you wish to buy, you’ll need to make an offer and sign a purchase agreement. This is where you get to add contingency clauses that let you back out of the deal without losing money if the home does not meet certain prerequisites. A home inspection gives you the ability to look for any problem in the house, and a home inspection contingency clause lets you back out of the deal if you receive an unfavorable inspection report.

Using the services of a professional home inspector is the way to go because the last thing you want after purchasing a home is nasty surprises. Once an inspector discovers any problems, you may get the seller to address them or lower the selling price. Bear in mind that you can add an inspection contingency clause in your purchase agreement and still make a strong offer by getting mortgage preapproval and agreeing to make a large down payment

How Rising Interest Rates and Other Trends Might Affect the Housing Market

How Rising Interest Rates and Other Trends Might Affect the Housing Market

Interest rates play a crucial role in the U.S. housing market for various reasons. For starters, they have a direct bearing on how much you end up paying to get a mortgage for purchasing a home. This, in turn, tends to have an impact on the value of homes. While low-interest rates usually result in increased demand and a rise in prices, the opposite holds as well. Anyone wondering when housing prices will drop again should realize that while there’s no way to tell for sure, reading existing signs may help determine where the market is headed.


Is a Housing Market Crash Coming?

Is a Housing Market Crash Coming?

According to Freddie Mac, the interest rate for a 30-year fixed-rate mortgage stood at 2.77% in the week that ended on August 4, 2021. In the week that ended on January 27, 2022, it increased to 3.55%. With interest rates moving upward, many probable homebuyers are turning to experts to check if anyone’s coming up with the next housing crash prediction. 

Another reason for concern is the increase in housing prices. Data released by Freddie Mac points out that housing prices increased by 11.3% in 2020 and 16.9% in 2021, respectively. It predicts that the trend will continue and expects a further increase of 7% in 2022.

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However, the consensus surrounding the housing market forecast is that there is little to no threat of a housing market crash in the near future. One reason is that while there has been an increase in interest rates, they continue to remain at near all-time lows. This implies that getting a mortgage might still be worth it for many homebuyers. In addition, many prospective buyers looking at buying their first homes or upgrading might want to make the move to circumvent any further increase in property prices.


What’s Different From 2008?

While one might be inclined to believe that the current U.S. housing market resembles what it did in 2008, this is not the case. For starters, the 2008 crisis came about mainly because there was a significant increase in the number of high-risk mortgages that went into default, starting in 2007. Credit standards at the time were low, and many lenders provided mortgages to people with average and poor credit. 

In the present-day scenario, the absence of easily disbursed loans gives the housing market a sense of security that was absent in 2008. Since then, the government backs loans from Freddie Mac and Fannie Mae have employed more stringent guidelines, which have prevented the system from getting overwhelmed with bad loans. 

Further, supply and demand continue to drive the existing U.S. housing market. While the pace at which young families are moving from cities to suburbs might not be as rapid as the market might like, unless there is a sudden spike in supply, there is no imminent threat of a housing market crash. On the other hand, the demand continues to remain high and supply remains tight, which suggests that little will change from how the market performed in 2021.

Even if the demand is to drop marginally because of high-interest rate expectations, the supply continues to remain low owing to factors such as higher lumber and labor costs that have come to pass because of supply chain problems caused by the pandemic. In addition, a recovering unemployment rate might further help augment the demand.  


The Interest Rate Effect

Officials at the Federal Reserve who seemed confident that the spike in housing prices would reverse as the economy got back on track pretty much abandoned their “transitory” theory after the release of the Consumer Price Index Summary in January 2022. It showed that the all items index increased by 7% percent for the 12 months ending in December 2021, the highest 12-month spike since June 1982. Soon after, Fed Chair Jerome Powell suggested it was time that the central bank looked at speeding up the taper.

The real estate industry was quick to take notice of his comments. If the Fed ends up increasing interest rates and reduces buying mortgage-backed securities, it might lead to higher mortgage rates. The Fed helped bring mortgage rates down to an all-time low during the pandemic, which led to a highly competitive housing market. However, some experts feel that increasing interest rates might have the opposite effect. As probable buyers choose to play the waiting game, it may well slow down the rise in housing prices.

Unfortunately, the housing industry is not in agreement surrounding how high mortgage rates might go in times to come as well as what effect increasing rates might have on the demand front. While some believe that the housing market, in its current shape and form, is strong enough to deal with even a notable rise in interest rates, others feel that it might lead to a downturn. 

Fannie Mae’s mortgage rate forecast released in November 2021 suggests that the interest rate of a 30-year mortgage will average at 3.3% in 2022 and 3.5% in 2023. However, this is not the only prediction of its kind. The Mortgage Bankers Association, through its January 2022 Mortgage Finance Forecast, expects the interest rate of a 30-year mortgage to average at 4% in the fourth quarter of 2022 and 4.3% in the fourth quarter of 2023. It also suggests that the year-on-year change in the FHFA U.S. House Price Index will come down to 5.1% by the fourth quarter of 2022, and drop to 4% by the first quarter of 2023.


Consequent Housing Market Predictions

One probable benefit of rising mortgage rates might be that the market would see fewer speculative buyers because of lower profits. This could prove to be beneficial for average homebuyers. With rising interest rates, most of the people who buy residential properties would do so with the aim of using them as primary residences or second homes. Consequently, a slowdown in demand might result in a correction of prices. 

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The preceding year or so worked relatively well for the U.S. housing market not just because of historically low-interest rates, but also because of a shortage in inventory. Houses ended up selling without spending much time on the market, often for more than their listed prices. In the months that follow, it is safe to expect a low inventory, elevated prices, as well as quick turnarounds. In addition, it will continue to remain a sellers’ market.


Inventory to Remain Low

The problem with the U.S. housing market’s low inventory existed even before the pandemic struck. However, the labor shortage that followed coupled with supply chain problems definitely amplified the effect. While builders across the country are trying to ramp up construction, it’s safe to say that there will be no significant uptick in inventory this year.  A Zillow report on playing catch up highlights that the country has experienced a shortfall of 1.35 million new homes because of the slowdown in construction after the 2008 housing market crash. In its predictions for 2022, it suggests that while the gap has reduced in 2021 and will do so again this year, the housing shortage will continue to remain a problem.


No Drop in Prices

Zillow predicts that home values will increase by 11% through the course of this year. Mortgage Bankers Association’s Mortgage Finance Forecast suggests that while the increase in housing prices might not be as pronounced as it was in 2021, prices will continue to rise. This is because sellers will still have the upper hand owing to factors such as high demand, low inventory, and low mortgage rates.  During the spring and summer period, probable buyers may expect bidding wars on a significant number of homes.  


Young Buyers at a Loss

The affordability factor has affected young first-time homebuyers in the U.S. for some time.  However, the pandemic worsened the problem, and a reversal in this trend might not happen any time soon.

According to data collated by Real Estate Witch, while home prices have increased by 118% since 1965 after accounting for inflation, the increase in median household income stands at a mere 15%. In addition, while Americans needed an average income of $144,192 to afford to buy a home in 2021, their median household income stood at $69,178. 

This puts the younger generation at a disadvantage when compared to older buyers. It’s now common for first-time homebuyers to seek financial help from their family/friends to make down payments, and this too will limit the number of young buyers entering the market.


Best to Be Prepared

Given the fast pace at which homes are selling, you should do your groundwork in advance. This includes keeping an eye out for new listings, being prepared to visit the homes you shortlist, and then being ready to make your offer. If involved in a price war, make sure you don’t end up overpaying or stretching beyond your budget.  Comparing prices of homes that sold in the vicinity during the preceding year is always a good idea. If the asking price of a comparable home seems much higher, you might be better off looking at other alternatives.


Is Now a Good Time to Buy a Home?

Is Now a Good Time to Buy a Home?

Prospective buyers who have access to the required funds might be looking at changes in mortgage rates to determine if they should move forward with the process. However, several first-time homebuyers have other things to worry about as well, which include coming up with down payment strategies and keeping up with monthly mortgage payments. This might result in people looking for less expensive homes or saving aggressively. Some businesses have given their employees the freedom to work remotely, which has resulted in buyers exploring more affordable housing markets, although this is not the case with the majority.

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Some experts predict that there might be a slowdown in demand in the coming months, which would then result in increased availability. This is because, since the inventory remains low, maintaining high sales volumes is not going to be easy. 

Unfortunately, the U.S. housing market continues to bear the burden of multiple unpredictable variables. In such a scenario, buying a home you can afford while still having some savings in the bank might be the best way forward, although you still need to plan for contingencies. For instance, if you plan to buy a house with your spouse, determine if you’ll be able to keep up with the payments in case one of you loses your job. You should also ideally plan to stay in the home you purchase for at least five years or for as long as it takes to cover your closing costs. This way, you minimize the possibility of losing money should you decide to sell the home.



Hoping to time the market when buying a home is not the best way forward, all the more so when there are multiple factors at play. For anyone wondering when home prices go will down again, it’s important to understand that while the price rise might not be as rapid as it was in 2021, the upward trend is expected to continue. A reversal in the slowly rising interest rates is unlikely to happen, although a sudden spike is not in the offing as well. With mortgage rates still near their all-time lows, this aspect should not act as a deterrent for prospective home buyers.

If you plan to buy a house in the near future, you should pay due attention to the long-term affordability factor. Once you decide to move forward, take a look at the different types of mortgages on offer and narrow down on ones for which you qualify. Then, determine which might work best for you after consulting with a reputed mortgage provider. Bear in mind that while mortgage rates need your attention, so do aspects such as flexibility in terms and customer service.

Here’s How to Improve Your Credit Score for a Mortgage

Here’s How to Improve Your Credit Score for a Mortgage

Your credit score plays a key role in whether or not you qualify for a mortgage, the types of mortgage you may apply for, as well as your interest rate. This is because your credit score gives lenders an indication of how well you’ve managed your finances so far, which, in turn, helps them assess the risk you pose as a borrower. If you’re wondering how to increase your credit score to buy a house, you need to start by understanding how the system works and then take corrective measures based on your specific situation.


Which Credit Score Do Mortgage Providers Use?

Which Credit Score Do Mortgage Providers Use?

While lenders rely on different credit scoring models, the U.S. Federal Housing Finance Agency requires providers of conventional mortgages to follow specific guidelines surrounding the FICO Scores they may use. The most commonly used models by the mortgage industry includes:

  • FICO Score 2 (Experian/Fair Isaac Risk Model v2)
  • FICO Score 5 (Equifax Beacon 5)
  • FICO Score 4 (TransUnion FICO Risk Score 04)

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It is common for mortgage providers to seek a single credit report that holds combined information from the reports issued by three credit bureaus – Experian, Equifax, and TransUnion – as well as their associated FICO Scores. Unless your scores from all three credit bureaus are the same, there is no telling which one a mortgage provider may rely on to make its lending decision. While you may check your FICO Score at, this is a paid service, and its basic plan costs $19.95 per month.

Getting a mortgage without a credit score is possible. This is essentially through smaller banking institutions whose loans are not secured by Freddie Mac or Fannie Mae.


The Effect of Your Credit Score on Interest Rates

Interest rates on mortgages continue to hover around their all-time low. According to data released by Freddie Mac, the weekly average interest rate of a 30-year fixed-rate mortgage (FRM) stood at 3.22% in the week that ended on 01/06/2022. Compare this with the all-time high of over 18.5% in the early 1980s, and you’ll realize that now might be as good a time as any to buy a home. However, even though interest rates are low as of now, the rate that applies to your mortgage depends on your credit score.

According to FICO, if your FICO Score is between 760 to 850, you may obtain a 30-year FRM with a 3.036% APR. It changes to 4.625% if you have a FICO Score of 620 to 639. If you get a $200,000 30-year FRM after making a 20% down payment, here’s what the difference might look like:

  • At an interest rate of 3.036%, your monthly payment is $847
  • At an interest rate of 4.625%, your monthly payment is $1,028

The difference in monthly payment is $181. Over the course of 360 months (30 years), this amounts to $65,160.


How to Improve Credit Score to Buy a House

If you’ve heard or read that you can boost your credit score overnight, know that this is not possible. If you, on the other hand, are wondering how to increase your credit score quickly, understand that where your creditworthiness stands has an effect on how much time you need for it to recover.

For instance, if you’ve missed just one payment, you may get back on track fairly quickly by continuing to make all your payments on time. However, if you’ve fallen back on multiple payments or have a poor credit utilization ratio, the road to recovery might take longer. According to data collated by Bankrate, people with poor credit need at least three months to recover if they close a credit card account, nine months if they are late on their mortgage payments, and over six years if they file for bankruptcy.

Raising your mortgage FICO Score, no matter it stands at the moment, requires following the same basic principles. Bear in mind that much like Rome wasn’t built in a day, repairing your credit requires time and effort.


1. Scrutinize Your Credit Reports

Errors or inconsistencies in your credit reports as well as instances of fraud can cause your credit score to drop. Start by taking a close look at your credit reports from the top three credit bureaus – Experian, Equifax, and TransUnion. All three let you get free copies of your credit reports by visiting their websites. If you find any mistakes, initiate the process of disputing the same with the credit bureau in question.

If you are successful in your attempt to get a mistake rectified, you may expect an improvement in your credit score. Even if you don’t find any mistakes on your credit reports, they still give you a clear picture of why your credit score is low in the first place. 

Calculation of FICO Scores is based on five general metrics, which include payment history, credit utilization ratio, length of credit history, mix of credit, and new credit. While the specifics vary slightly across different scoring models, the basic criteria and their importance are essentially the same.


2. Make Payments on Time

Making all your credit card, loan, and utility bill payments on time has a positive effect on your credit score. Payment history accounts for 35% of your FICO Score calculation, making it the most impactful factor. This metric accounts for the number of late payments and their severity as well as repossessions and bankruptcies. Remember that even occasional late payments can have a telling effect on your credit score.


3. Bring Down Your Credit Utilization Ratio

Credit utilization ratio refers to the amount of credit you’ve used from your total available revolving credit. For instance, if you have a combined credit limit of $50,000 through different credit cards and lines of credit and have used $25,000, your credit utilization ratio is 50%.

Raising your credit score to buy a house requires that you get your credit utilization ratio below 30%. This is the case with FICO Score and VantageScore alike. This factor accounts for 30% of your FICO Score calculation and ranks just below payment history.

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While paying off your debt as quickly as possible is one way to bring down your credit utilization ratio, another is by asking your existing credit card provider/s for a credit limit increase. This helps increase the total available credit you have, and thereby, lowers your credit utilization ratio. However, do this only if you’re sure that you won’t end up building more debt. Further, your card issuer might run a credit check before approving an increase. If it ends up finding unfavorable information in your credit reports, it might decide to lower your limit instead. 


4. Keep Your Accounts Active

Keep your credit accounts active even after you finish repaying them completely. While this has a positive effect on your credit utilization ratio, it also helps build the length of your credit history. This factor accounts for 15% of your FICO Score. By keeping your oldest credit accounts active, you add to the length of your credit history, and this has a positive effect on your credit score.  The converse holds true as well, so when you’re working on improving your credit to buy a house, don’t close your old accounts any time soon.


5. Add Some Mix to the Equation

Credit mix accounts for 10% of your FICO Score.  This essentially refers to the different types of credit that show on your credit reports. If you only have credit cards, consider getting a personal loan, a line of credit, or a credit-builder loan to add to the mix. However, do this only if you’re absolutely sure that you’ll be able to make timely payments. 


6. Refrain From Getting New Credit Often

Every time a lender runs a hard inquiry or a hard pull on your credit report, you may expect a small drop in your credit score. You may recover from this drop quickly if you maintain responsible credit behavior going forward. If you apply for new credit often, the impact is greater and you’ll need more time for your credit score to recover. If you plan to get a mortgage to purchase a home in the near future, it is best that you refrain from applying for any other type of credit until you get that out of the way. This factor accounts for 10% of your FICO Score.


How to Increase Your Mortgage FICO Score From Scratch?

If you’ve only just begun your journey to build your credit score and have no credit history to fall back on yet, there are a few ways through which you may work on improving your FICO Score. 

  • Get a secured credit card. Qualifying for a secured credit card is typically easier than for a conventional credit card. This is because you need to pay a security deposit to get a secured card and the same usually functions as your credit limit. Your card provider reports your payments to credit bureaus, and this helps build your credit score.
  • Become an authorized user. If you’re unable to qualify for a credit card on your own, you may ask a family member or friend who has a credit card to add you as an authorized user. In this case, the primary user’s responsible use of his/her card will have a positive effect on your creditworthiness. However, the converse holds true as well.
  • Apply with a cosigner. One way to get past the roadblock of not qualifying for a credit card is to apply with a cosigner who will qualify. In this case too, how well or poorly the other person uses his/her credit card will have a bearing on your credit score.
  • Self-report. You might be able to improve your credit score by self-reporting the payments you make toward rent and utility bills. Experian Boost, a free service, helps you build your credit history by reporting payments you make toward utilities, phone, and popular online streaming services. UltraFICO works along similar lines too.


Getting a Perfect Credit Score to Buy a House

Getting a Perfect Credit Score to Buy a House

The best credit score one can get through FICO and VantageScore models is 850. Data released by FICO surrounding what the high achievers have in common shows that of all the people who qualified to get credit scores in April 2019, 1.6% had perfect scores of 850. If you’re wondering how to increase your credit score to 800 or higher, know that people in this bracket tend to exhibit similar traits. These include:

  • No missed payments 
  • No negative information on their credit reports
  • Well-established lengthy credit histories
  • Low credit utilization ratio
  • Very few inquiries for new credit


What Credit Score Do You Need to Get a Mortgage?

Credit score requirements, as listed by Experian, vary based on the type of mortgage you seek. 

  • For a conventional loan, your credit score should ideally be 620 or higher. 
  • United States Department of Agriculture (USDA) loans require a minimum credit score of 580, but you may qualify with a lower score in some circumstances. 
  • Veterans Affairs (VA) loans have no preset credit score requirements in place. However, lenders typically offer these to people with scores of 620 or higher.
  • With Federal Housing Administration (FHA) loans, you need a credit score of at least 500 if you plan to make a 10% down payment. If you plan to make a 3.5% down payment, you’ll need a credit score of 580 or higher. 

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Check your credit score before applying mortgage because this will give you a clear indication of where you stand. Bear in mind that while your credit score can influence the types of mortgages for which you may apply, it also has a bearing on the interest rate you will receive. This requires that you do your best to improve your credit score before applying for a mortgage. After all, even a small difference in interest rates can have a significant impact on bringing down the cost of your home loan.



14 Mortgage Mistakes to Avoid When Buying a Home

14 Mortgage Mistakes to Avoid When Buying a Home

The process of buying a home can be daunting for many people given the different aspects that require a homebuyer’s attention. Getting a mortgage remains among the most crucial factors in determining what property a buyer ultimately settles on. It determines how much you may qualify to borrow as well as how much the home will end up costing in the long run. As long as you steer clear of making common mortgage mistakes, you should expect to get a good deal through your mortgage provider.

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1. Ignoring Your Credit History

Ignoring Your Credit History

Not paying attention to creditworthiness before applying for a mortgage tops the list of home loan mistakes because this aspect is relatively easy to address.  Bear in mind that your credit score plays a vital role in your ability to qualify for a mortgage as well as the interest rate you get. For instance, people with excellent credit typically receive lower interest rates than people with average credit.

Once you apply for a mortgage, you can expect the lender to pull up a tri-merge credit report that combines your credit information from the country’s top three credit bureaus – TransUnion, Experian, and Equifax. Ideally, you should know what your credit reports hold before your lender does. This is because there might be errors or inconsistencies in your credit reports that can get your credit score to drop. 

Once you spot any such problems in your credit reports, you have the ability to get them rectified by contacting the credit bureaus in question. After they are fixed, you can often expect an improvement in your credit score. This will then hold you in better stead when applying for a mortgage.

2. A High Credit Utilization Ratio

Having a high credit utilization ratio is another common mistake you need to avoid when applying for credit. This ratio refers to the amount of credit you’ve used from your total available revolving credit. For example, if your total available credit limit from all revolving forms of credit is $50,000, of which you’ve used $35,000, your credit utilization ratio stands at 70%.

Lenders view high credit utilization ratios with caution because they feel such borrowers have trouble managing their finances. Ideally, your credit utilization ratio to qualify for the best mortgage and rates should be below 30%.

3. A High Debt-to-Income Ratio

This refers to the link between your income and your debt payments. Calculating your debt-to-income ratio requires adding all your monthly debt payments and dividing the total by your gross monthly income. For example, if the total of your monthly debt repayments is $1,500, and your monthly income is $6,000, your debt-to-income ratio is 25%.

Data from previous mortgage-related studies suggests that people who have high debt-to-income ratios face an increased possibility of having trouble keeping up with their monthly payments. Your debt-to-income ratio should ideally be below 43% because this is typically the highest you can go if you hope to get a qualified mortgage. 

4. Unpredictable Bonuses or Overtime

It’s common to find applicants who wish to include their bonuses or income from overtime on their mortgage applications. However, not many borrowers know that lenders look at a two-year history when it comes to income from such sources. If your overtime income or bonuses fluctuate significantly from one year to the next, there is little chance that a lender will accept it as part of your qualifying salary. To avoid making this mistake on a mortgage application, make sure you account for the two-year factor.

5. Looking at Homes Before Looking for a Mortgage Provider

One of the biggest mistakes when buying a home surrounds looking at possible properties you’d like to buy before narrowing down on a suitable mortgage provider.  If you’re looking to buy a home in a competitive market, getting mortgage pre-approval or having adequate cash in hand is important if you hope for a seller to take your offer seriously. This is because sellers might not want to take risks with buyers who might or might not get qualified for a mortgage, all the more so when they have other offers from which to choose. 

Before you start looking for a home, you should ideally have a pre-approval letter in hand.  In addition to giving you an edge over other probable buyers, it also gives you a clear picture of how much your mortgage provider is willing to lend.

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6. Not Following the Right Path to Savings

You need to start saving for the down payment of your home as soon as you decide you wish to become a homeowner. Besides, when you move your money into a savings account, you stand to earn interest. Think about creating a separate savings account entirely for this purpose and consider feeding it through fixed regular deposits.

It’s also important that you account for closing costs that extend beyond the down payment. These may come in the form of loan origination fees, homeowner’s insurance, private mortgage insurance (PMI), title insurance, property tax, and escrow fees.

While saving as much as you can to put toward the down payment is important, spending much or all of your savings during this stage is a crucial mortgage mistake to avoid. Some homebuyers go that extra mile to get to the 20% down payment mark so they may avoid paying extra for PMI, but this leaves them with little to no savings to turn to should they need to deal with unexpected expenses. Ideally, you should have enough money to cover for six to 12 months of living expenses after meeting all closing costs.

7. Thinking You Need at Least a 20% Down Payment

Assuming that you need to pay at least 20% of a home’s selling price as down payment is another common mortgage mistake. Depending on whether you meet some specific eligibility criteria, you may even find mortgages that require no down payment at all. 

While a large down payment leads to lower interest payments through the course of a loan for anyone who can afford making one, getting a mortgage by making a smaller down payment remains a possibility. However, making a small down payment will require that you pay extra for PMI and your monthly repayment amount will remain on the higher side.

The median down payment in the U.S. stood at 20% in 1989 and at 12% in 2019. It dropped to a low of 8% during 2009 and 2010.

8. Overlooking First-Time Home Buyer Assistance

First-time homebuyer assistance programs and grants may help bring down the cost of homeownership, provided you qualify. These come in the form of FHA loans for first-time homebuyers, homeownership vouchers, programs for service members and veterans, programs for rural residents, as well as various state- and local-run programs.

9. Ignoring USDA and VA Loans

If you, as a first-time homebuyer, have less-than-perfect creditworthiness and have not been able to save much for your down payment, you may benefit by checking if you qualify for a U.S Department of Agriculture (USDA) loan or a U.S. Department of Veterans Affairs (VA) loan. USDA loans are made available for eligible rural homebuyers, homebuyers in suburban areas of large cities, and residents of towns whose populations are below the 25,000 mark. You may qualify for a VA loan if you’re a military veteran, if you’re still in service, if you’re a surviving spouse, or if you’re a reservist.  Both types of loans come with no down payment requirement.

10. Selecting the First Lender That Comes Your Way

Selecting the First Lender That Comes Your Way

If you’re wondering what not to do during the mortgage process, one such thing is getting a mortgage through the first lender you come by. If you don’t compare your options well, you might lose out on the ability to save a tidy sum of money over the long term. Most experts suggest that you should compare at least three lenders before selecting one that works well for you

Try and get quotes around the same time, because interest rates are subject to change often. Take a close look at all associated fees. Pay attention to the customer service you stand to receive because there’s a good chance you’ll be dealing with the same lender for years to come.

A few good questions to ask the lenders that you narrow down on include:

  • What types of mortgages do they offer?
  • What annual percentage rates (APRs) apply to each type of mortgage?
  • What are all the associated fees you might need to pay?
  • What credit score do you need to qualify for the different types of mortgages on offer? 

11. Application Errors and/or Incomplete Documents

Even a single mistake on a mortgage application can result in it being denied, which is why you need to make sure that your application is free of errors, and that you submit all the required documents in time. Understand that a lender would want to get the complete picture surrounding your finances. You typically need to submit copies of your tax returns from two preceding years, recent pay stubs, as well as W-2s.

An inconsistency or a mistake in your loan application may result in a lender viewing it with suspicion. Fannie Mae has provided an extensive list of red flags for lenders with the aim of minimizing instances of mortgage fraud. Lenders may view the presence of one or more such red flags in your application as signs of fraud. This may lead to a slowing down of the process or even your application being denied.

12. Getting Pre-Qualified Instead of Pre-Approved

Getting pre-qualified for a mortgage is simply the first step of getting a loan. This depends on the information you provide to a lender and gives you an approximate amount that the lender is willing to provide. However, there is no guaranty that the lender will provide the said amount. It’s only during the pre-approval stage that a lender takes a close look at your existing finances and creditworthiness. It is after this stage that you get conditional commitment in writing for the exact loan amount you qualify to borrow. Sellers and real estate agents view buyers who have pre-approval with favor because they know that such buyers have pretty much taken care of the funding aspect.

13. Making the Interest Rate the Focal Point

There is no dearth of mortgage seekers who pay too much attention to interest rates and look at little else. This includes people hoping to refinance their existing loans. What you need to understand is that a seemingly high interest rate with low fees might result in lower payments when compared to a low interest rate loan with high fees. Besides, waiting for interest rates to lower might result in you losing out on the house of your dreams. 

14. Borrowing More Than You Can Afford

If you feel you’ll need to stretch your budget to keep up with payments, you might be headed for risky territory. This is because people in such situations tend to face higher risks of foreclosure. Another drawback is that while you’ll get on the homeownership way, you’ll need to monitor your everyday expenses very closely, and probably have to skimp on a few necessities. Keeping up with high mortgage repayments can also affect how you approach the funding required for your children’s education as well as your own retirement savings.

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Getting approved for the right mortgage requires that you pay close attention to the entire process. If you don’t, you may end up with a higher APR than you might actually qualify for, or worse still, get declined. Some of the top mortgage mistakes to avoid surround ignoring your creditworthiness, not looking at the different types of loans being offered, making errors in your application, and not approaching your down payment strategy in a thoughtful manner.

As long as you play your cards in the right manner and have all your documentation in place, you may expect to get the mortgage that works best for you. Lastly, while steering clear of making common mortgage mistakes is crucial, it’s also important that you know which mortgage companies to avoid.



A Guide to Mortgage Contingency and Other Important Contingency Clauses

A Guide to Mortgage Contingency and Other Important Contingency Clauses

It is common for home purchase contracts to include contingencies of different types – mortgage contingencies included. These basically refer to clauses that safeguard the interests of buyers and sellers under different scenarios. Simply put, a contingency clause gives a purchaser the ability to back out of a deal without losing your earnest money based on whether you meet certain predetermined conditions. 


As a homebuyer, it’s important that you learn which contingencies you need to include in your purchase contract. However, adding too many might work as a deterrent in the eyes of sellers, all the more so in competitive markets. If in doubt, it might in your best interest to consult with your real estate agent or attorney.

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What is Mortgage Contingency?

A mortgage contingency, a loan contingency, and a financing contingency refer to the same type of contingency. It is a clause that essentially gives buyers some time to get the required financing they need to move forward with their purchases. If a buyer is unable to get the funds needed to close, he/she has the ability to back out of the purchase contract without losing your earnest money.


A mortgage contingency clause includes a predetermined time period during which you need to get financing. It also specifies a date until which you may terminate the contract or seek as extension. Once this period is over, you become legally obligated to purchase the property. If you cannot, you stand to lose your earnest money. The time period mentioned in financing contingency clauses typically ranges from 30 to 90 days.


How the Process Works

How the Process Works

Once you narrow down on a house you wish to purchase, you need to submit a purchase offer. If you’ve not received a preapproval for a mortgage, or if you‘re unsure about qualifying for a mortgage that would cover your purchase, adding a mortgage contingency clause might be in your best interest. 


Upon signing of the purchase agreement by the buyer and the seller, and after the buyer provides the earnest money, the seller takes the property off the market. The buyer then has until the mortgage contingency date mentioned in the contract to get the required financing, either through a traditional mortgage or in any other way.


Once a mortgage provider approves your application, you’ll receive a mortgage commitment letter. This sets the wheel of closing the deal into motion.


If you’re unable to get a mortgage and fail to get financing in any other way, you may terminate the contract before the mortgage contingency date. You then get your earnest money back and the seller is free to seek offers from other buyers.


Details Found in a Mortgage Contingency Clause

Both parties need to agree to all the conditions mentioned in a mortgage contingency clause for it to come into effect. Typical details that it includes are:

  • Mortgage type. The type of mortgage that you plan to obtain to go through with the purchase – be it a conventional loan, a USDA loan, or a VA loan – typically finds a mention in a mortgage contingency clause.  This way, you’re not burdened with seeking alternate sources of funding at a later stage.
  • Funds required. Just how much money you need to move forward with the purchase plays an important role in mortgage contingency. For instance, if you need a mortgage of $80,000 but get approved only for $60,000, you may back out of the deal without facing any negative consequences.
  • Interest rate. This is the highest interest rate you’re willing to pay toward your mortgage. If you get approved for a mortgage and the interest rate is higher than what’s mentioned in the contingency clause, you have the ability to back out of the deal.
  • Mortgage contingency date. This is the date until which a buyer has the ability to back out of the purchase agreement without losing his/her earnest money. While a buyer may seek an extension before this date, agreeing to it is the seller’s prerogative. 

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While a significant number of real estate agreements include mortgage contingency clauses, some buyers do away with it completely. This might be the case if you’ve already been preapproved for a mortgage or if you plan to fund the purchase by using cash. Sellers in competitive markets might ask buyers to waive off this clause to move forward with their sales quickly. However, doing so is not the best idea if you haven’t been approved for the mortgage you seek and the terms you desire, because you then risk accepting a mortgage with less favorable terms or, worse yet, losing your earnest money.


The Kick-Out Clause

In the presence of a mortgage contingency clause, a seller might choose to add a kick-out clause. This clause gives sellers the ability to continue marketing their house. In such scenarios, if sellers are able to find other buyers who don’t require mortgage contingency, they may proceed with selling their homes to the new buyers. However, they may do so only after notifying the buyers who originally intended to buy their properties and give them a specific time period to get rid of the mortgage contingency clause from their agreements. This is usually 72 hours or three business days. 


What is Appraisal Contingency?

An appraisal contingency clause safeguards buyers’ interests when it comes to the value of the homes they wish to purchase. In this case, the purchase agreement mentions a minimum amount for which the home in question needs to be appraised. If the appraised value of a home is less than this amount, a buyer has the right to withdraw from the deal without losing the earnest money.  


Appraisal contingency clauses typically mention terms through which buyers may proceed with their purchases if the appraised value is lesser than that mentioned in their contracts. In some cases, sellers agree to lower their selling prices to the appraised amounts. An appraisal contingency clause includes a date before which a buyer is required to notify a seller of any concerns surrounding the appraisal value.  


How Inspection Contingency Works

Inspection contingencies are also referred to as due diligence contingencies. It gives buyers the right to get the homes they wish to purchase inspected within a specified time period – typically five to seven days. A home’s inspection includes its exterior and interior, and addresses the condition of electrical, plumbing, the presence of termites, and ventilation systems. 


Depending on the report of a professional home inspector, a buyer may choose to back out of the contract or negotiate for repairs or a lower selling price with the seller. If you feel you need to get an inspector to give the home a second look, you might request for more time. 


Cost-of-Repair Contingency

Some purchase agreements include cost-of-repair contingencies along with inspection contingencies. This clause mentions the maximum amount – usually 1% to 2% of the selling price – that you’re okay with when it comes to carrying out the required repair work. If the home inspection report indicates that repair costs will exceed this amount, you may terminate the contract and get back your earnest money.


Title Contingency

Upon the sale of a property, the title’s ownership changes to the new owner. Any lien that is not satisfied at closing transfers with the property. When you add a title contingency clause in your purchase agreement, you get adequate time to carry out a title search and check if there are any liens attached to the home you wish to purchase other than the existing owner’s primary mortgage. 

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Once you hand over your signed purchase contract to your mortgage provider, it requests for a title search through a title search agency. Since the process may take a week or more, it’s important that you get your lender to initiate it as quickly as possible. Once the title search is complete, you find out if there are any liens attached to the property.  If you find a lien or more through the title search, the seller must settle them at, or prior to, closing. Alternatively, you may back out of the transaction without losing your earnest money. 


A title contingency clause also helps safeguard buyers against real estate transactions that include unresolved title disputes, fraud, and forgery. Without a title contingency clause, you might find yourself in a situation where someone else claims ownership of the property or you become liable to repay the previous owner’s debt.


Insurance Contingencies

Insurance Contingencies

An insurance contingency clause can help if you’re unable to get homeowner’s insurance as required by your lender. For instance, your lender might require that you get homeowner’s insurance before it disburses your loan, and you might have trouble getting the coverage you need because the home you wish to purchase is in a region that has a history of hurricanes, forest fires, or volcanic activity. 


The Fine Print

When it comes to contingency clauses, the devil is often in the details. This requires that you pay close attention to all the important terminology and phrases. Since all it takes is one small omission or addition to swing the ball in someone else’s favor, it is ideal that you get an experienced real estate agent or attorney to go through the purchase agreement.  Factors that need your attention when going through the fine print include:

  • The earnest money. Your purchase contract should clearly mention what happens to your earnest money should you choose to exercise any contingency. It should explicitly state that you will receive the entire earnest money back if you exercise any contingency within the stipulated time period.
  • Deadlines. Depending on the type of contingency, contingency clauses tend to come with deadlines that typically vary from two weeks to two months from the signing of the contract. Make sure you set these deadlines after accounting for how much time it might take to complete the tasks at hand. For example, if you’re not preapproved for a mortgage, two weeks might not be enough to get the financing you need.
  • In writing. Irrespective of the contingency clause you want included in your purchase contract, make sure you put it down in writing. Oral communication of contingencies holds no legal ground. The same holds true for correspondence via email, unless the purchase contract states that you may use emails to send notices. For instance, if your contract comes with a requirement of sending contingency notices via certified mail or fax, sending them via email will do you no good. 

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Number Speak

It is fairly common for homebuyers to include contingency clauses in their purchase agreements. According to data released in the May 2020 Realtors Confidence Index Survey, 76% of buyer contracts came with contingency clauses. This number hasn’t changed much in recent time. It stood at 75% in April 2020 and at 74% in May 2019. Further, data from May 2020 indicates that:

  • 59% buyer contracts included home inspection contingency clauses
  • 46% included appraisal contingency clauses
  • 47% included financing or mortgage contingency clauses
  • 12 % included title contingency clauses
  • 6% included contingency clauses surrounding sale of buyers’ existing homes
  • 4% buyers waived adding any contingencies



Drafting a contingent real estate purchase agreement safeguards your interests should something untoward happen from the time you make your offer and pay your earnest money to the time of closing. While some of the problems that arise during this period might be fixable, others might be big enough to dissuade buyers from moving forward with their deals.

Since sellers might add contingency clauses in purchase agreements, it is important that you go through the paperwork carefully before putting pen to paper. If you’re unsure about any aspect, getting a real estate agent or attorney to go through the agreement might be in your best interest.  It’s also important that you select a mortgage provider based on the type of mortgage you seek.

Paying Your Rent on Time can Improve Homeownership Odds

Paying Your Rent on Time can Improve Homeownership Odds

Until the recent past, your regular payments did not play any role in your ability to qualify for a home mortgage. Fortunately, that has changed owing to a recent announcement by the Federal Housing Finance Agency (FHFA). Now, Fannie Mae will require that lenders consider borrowers’ rent payment histories during the underwriting process.

What Has Changed?

Fannie Mae implemented an update to Desktop Underwriter (DU) – an automated underwriting system that helps mortgage providers make informed lending decisions on government and conventional loans – during the third weekend of September 2021.  All the changes are meant to apply to case files that are submitted or resubmitted after this update.

An important change owing to this update is that positive rent payment history has been added to DU’s risk assessment.

How Will It Work?

If your existing monthly rent is $300 or more, and if a mortgage provider obtains a 12-month Verification of Asset (VOA) report, DU will aim to highlight regular rent payments within the report so they may be used in your risk assessment.  The new risk assessment system will apply to your case file if you meet these criteria:

  • You’re a first-time homebuyer
  • You have been living on rent for 12 months or more
  • You pay at least $300 as rent each month
  • You will use proceeds from the home loan toward a purchase transaction
  • You will use the property you purchase as your principal residence
  • You have a credit score
  • Your lender obtains a VOA report that includes bank statement data of 12 months through an authorized DU validation service verification report vendor.

In case DU identifies a rent payment pattern in your bank account data, it will use the information to aid in your credit risk assessment.  To make sure that DU identifies your rent payments, your mortgage provider needs to:

  • Mention your monthly rent in the DU loan application
  • Get a 12-month VOA report and use the relevant Reference ID in the DU loan application
  • Ensure that the bank account from which you pay rent is in your name and that it finds a mention in the VOA report

Why This Change?

According to Fannie Mae, it has implemented this change in credit risk assessment with the aim of improving borrowers’ homeownership odds. Until now, limited credit history has worked as a barrier for many probable homeowners even if they’ve maintained an excellent rent payment history. While rent reporting through different reporting programs can help improve credit scores, not many landlords report rent payments to credit bureaus. Consequently, renters see no positive effect of their regular rent payments on their credit scores. With the new change, this should no longer be a problem as DU will attempt to detect rent payment histories through applicants’ bank accounts.

Why This Change?

What You Need to Know About Mortgage Underwriting

As a first-time homebuyer, it is important to understand how the mortgage underwriting process works, as it gives you means to improve your odds for approval. The underwriting process begins only after you’ve narrowed down on a house, a lender, and a mortgage. It requires that you agree to the loan estimate provided by your lender and is indicative of your intent to proceed.

The main aim of mortgage underwriting is to ensure that a borrower and the property in question meet the loan’s requirements. While an underwriter might approve or deny your application, you might also receive a suspended verdict that comes with further requirements for reactivation. 

Even though you might have gone through a preapproval process that entails a preliminary credit check, an underwriter is tasked with carrying out an in-depth credit check and quoting an interest rate. During this stage, you need to provide different types of financial documentation. For instance, while paystubs help confirm your income, bank statements offer insight into your existing financial condition and help determine if you have adequate funds to cover for your loan’s closing costs.

The Underwriter’s Role

Depending on the requirements of your application for credit, an underwriter may follow different measures. These include:

  • Investigating credit history. This step involves checking your credit score and taking a close look at your credit reports. Underwriters check for aspects such as credit utilization ratio, late payments, and bankruptcy rulings.
  • Verifying employment and income. An underwriter will go through the documents you provide to verify your employment status and income. If required, the underwriter may call your employer to verify the same.
  • Checking your DTI ratio. An underwriter compares your existing debts with your income to determine if you have access to enough money to keep up with your mortgage payments. Calculating your debt-to-income (DTI) ratio requires that you add your monthly debt payments and divide the total by your gross monthly income. From an underwriter’s perspective, the higher your DTI ratio, the more likely you are to default on your mortgage repayments.
  • Verifying savings and down payment. You may expect your underwriter to take a look at your savings accounts. This is to ensure that you have adequate funds to supplement your income temporarily and to establish if you have enough money to put toward your down payment.
  • Ordering an appraisal. It is the underwriter’s responsibility to order a home appraisal. This step helps determine if the desired loan amount for the property in question matches its actual market value.
Manual Vs. Automated Underwriting

Depending on the mortgage provider you select, the underwriter responsible for assessing your application might choose to proceed manually or use an automated underwriting program. While automated underwriting is typically faster, it comes with some limitations. For example, using automated underwriting software might not be the best idea when assessing applications of people who have inconsistent incomes. In some instances, underwriters gauge risk by using a combination of manual and automated underwriting.

How Much Time Does the Process Take?

Depending on how streamlined a lender’s underwriting process is, how busy a lender is, and whether or not the underwriter handling your case file requires additional information, the process might take anywhere from a few days to a few weeks. Typically, you may expect a loan application to close completely in around 30 to 50 days. How long it takes to close a loan application may well be a standard for selecting a lender.

Possible Outcomes

At the end of the underwriting process, you may receive one of the following decisions:

  • Conditional approval. This implies you may need to submit additional documents such as tax forms, pay stubs, or proof of mortgage insurance. In some instances, underwriters might want to verify sources of large down payments. Once you meet the requirements, your underwriter approves your application.
  • If your application is missing important documentation, making it impossible for an underwriter to verify the information you’ve provided, the underwriter might suspend your application. In this scenario, you need to provide the required documentation/information for the lender to reactivate your application.
  • An underwriter might deny your application after going through your employment and financial information in detail even if you’ve been previously preapproved. You may take remedial measures depending on why your application is denied. Some of the reasons why an underwriter might deny your application include missing information in your application, a low credit score, no credit history, and a small down payment.

What You Need to Know About Getting a Mortgage

While different aspects require your attention when buying a home, getting a suitable mortgage remains among the most important. As a first-time homebuyer who’s looking for a mortgage, it is crucial that you abide by these tips.

Determine How Much You Can Afford

The first step of getting a mortgage is determining how much you can afford.  This involves accounting for your income, assets, expenses, debt, the desired location, and your creditworthiness. You also need to consider the down payment, closing costs, and relocation expenses. While conventional wisdom suggests that you put 20% of a home’s selling price toward the down payment, requirements vary for different types of mortgages. For instance, some government-backed mortgages require no down payment at all.

Determine How Much You Can Afford

Check Your Credit, Strengthen It if Required

Check your creditworthiness by going through your credit reports. You get access to free copies from the top three credit bureaus in the country – TransUnion, Experian, and Equifax. If you find any errors, contact the credit bureaus in question to get them fixed, as they might have an adverse effect on your credit score.

If you don’t have good or excellent credit, work on strengthening it by following different measures. These include making all your repayments on time, bringing down your credit utilization ratio, and limiting how often you apply for new forms of credit.

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Identify Your Alternatives

First-time homebuyers have the option of applying for conventional mortgages. However, they might qualify for other types of mortgages based on different eligibility criteria.

  • USDA Loans. Backed by the United States Department of Agriculture (USDA), you might qualify for a USDA loan to buy a home in a rural area or in eligible suburban areas of cities (typically the outskirts). You might also qualify with less-than-perfect creditworthiness and low to moderate income.
  • VA Loans. The U.S. Department of Veterans Affairs (VA) acts as a guarantor for VA loans. These loans are made available to military veterans, those still in service, select surviving spouses, as well as reservists. They come with lower-than-usual interest rates.
  • FHA Loans. FHA loans are insured by the U.S. Federal Housing Administration. According to the Consumer Financial Protection Bureau (CFPB), borrowers with 10% to 15% down payment and good credit scores typically find conventional loans to be more cost-effective than FHA loans, whereas people who wish to make smaller down payments and have lower credit scores might benefit more by going the FHA loan way.
Compare Multiple Lenders

Narrow down on the top mortgage providers based on the type of loan you wish to get. Then, look at more than just the interest rates on offer. Other aspects that need your attention include different fees you might need to pay, flexibility in the loan’s terms, as well as the level of customer service the lender provides.

Get Preapproved

A prequalification involves an informal evaluation of your finances and comes with an estimate amount that a lender is willing to provide. A preapproval, on the other hand, requires delving deeper into your financial information and looks at your credit score, bank statements, and W-2s. As a result, this step gives you a more accurate number surrounding how much money you qualify to borrow.

Since getting preapproved gives you a clear indication of how much money you may borrow, you get to look for homes accordingly. A preapproval letter also works well in the eyes of real estate agents and sellers, as they know you’re serious about the process. Besides, once you have a preapproval in place, you minimize the possibility of getting nasty mortgage-related surprises down the down.

Mistakes You Need to Avoid

Here are some common home buying mistakes you need to avoid:

  • Looking at homes before considering your mortgage alternatives
  • Going over your budget
  • Using all your savings for the down payment
  • Dipping into your retirement fund for the down payment
  • Making emotion-based decisions

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The recent update to DU implemented by Fannie Mae serves as great news for a number of renters who are hoping to become homeowners – given that their regular rent payments will now play a role in their credit risk assessment. However, if you wish to buy a home in the near future, it is crucial that you start getting your finances and creditworthiness in order because these play important roles in the underwriting process.

Given that there is more to buying a house than getting a mortgage, going through Meadowbrook Financial Mortgage Bankers’ First Time Homebuyer’s Guide might be worth your while.