Most American home buyers need to get mortgages to purchase homes, which is where their creditworthiness enters the picture. Even though lenders might rely on different eligibility criteria when making lending decisions, some aspects remain the same. For example, you may expect your lender to look at the information you provide in your application and your credit score to determine if it should approve your mortgage. In addition, the effect of credit scores on mortgage rates also needs your attention.

 

Effect of Credit Score on Mortgage Applications

Mortgage providers look at applicants’ credit scores to determine how much risk they pose as borrowers. By going through your credit report, a lender is able to take a look at your credit history and see how well you’ve managed your credit in the past. If you’ve missed making payments, have made late payments, or have delinquent accounts, the same will show on your credit report. Any such instance has a negative impact on your credit score.

If you have a poor credit score, getting a lender to approve your application might seem like an uphill task. A good or excellent score, on the other hand, presents you with way more alternatives.

 

What If You Have No Credit Score?

While getting a mortgage in the absence of a credit score or credit history is difficult, it’s not impossible. However, you’ll typically get only a handful of options from which to choose. This is because lenders have no way of determining how well you handle credit, and if you’ll repay the mortgage in a timely manner. If you find a lender willing to give you a mortgage in such a scenario, you may expect to pay a higher-than-usual interest rate. In addition, you might not find the type of mortgage you seek.

If you don’t have a credit history yet, you may consider building it before applying for a mortgage. This will give you access to more options and you may also benefit from a lower interest rate.

Minimum Credit Score for Mortgages

The type of mortgage you wish to get has a bearing on the minimum credit score you need to qualify. In most cases, you may qualify if your credit score is 620 or higher. If you’re looking for mortgages that offer flexibility in this regard, you may benefit by checking what different government-backed programs have to offer. For instance, you may qualify for a United States Department of Agriculture (USDA) loan with a credit score of 640 or higher.

Typically, these are the minimum credit scores you need to qualify for the following types of mortgages:

• Conforming (conventional) loans. 620 or higher
• USDA loans. 640 or higher
• VA loans. 620 or higher
• FHA loans. 580 or higher with a 3.5% down payment, and 500 or higher with a 10% down payment
• Jumbo loans. 700 or higher

 

What’s a Good Credit Score for a Mortgage?

Mortgage lenders across the U.S. use different versions of the standard FICO score when making lending decisions. The score range varies from 300 to 850. The different models include:

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

It’s common for mortgage providers to receive a single consolidated report from the three credit bureaus along with the corresponding credit scores. The range that distinguishes the good from the bad is as follows:

• 300 to 579 – Poor
• 580 to 669 – Fair
• 670 to 739 – Good
• 740 to 799 – Very Good
• 800 to 850 – Excellent

Effect of Credit Score on Mortgage Rate

Lenders look at your credit score to determine the risk you present as a borrower and your ability to keep up with payments. In addition, they also use this number to arrive at an interest rate that can help offset the risk. When getting a mortgage, your credit score has a significant impact on the loan’s terms. More often than not, people with good and excellent credit scores get the lowest interest rates, and the converse holds true as well. Bear in mind that the down payment you make also has an effect on your mortgage’s interest rate.

Even a seemingly small difference in interest rates can have a significant effect on how much you end up paying as interest over the course of the loan term.  The data that follows comes from myFICO, highlighting mortgage rates by credit score and showing how your monthly payments will vary if you get a $200,000 30-year fixed-rate mortgage. The amounts indicate national averages. The mortgage rates are effective as of August 31, 2023.

 

FICO Score – 760 to 850
APR – 6.751%
Monthly payment – $1,297

FICO Score – 700 to 759
APR – 6.973%
Monthly payment – $1,327

FICO Score – 680 to 699
APR – 7.150%
Monthly payment – $1,351

FICO Score – 660 to 679
APR – 7.364%
Monthly payment – $1,380

FICO Score – 640 to 659
APR – 7.794%
Monthly payment – $1,439

FICO Score – 620 to 639
APR – 8.340%
Monthly payment – $1,515

The difference in monthly payments between the top and bottom tiers stands at $218. Over the course of 30 years, this will amount to more than $78,000.

Other Factors That Affect Mortgage Rates

While your creditworthiness plays an important role in the interest rate that applies to your mortgage, lenders look at other factors too. Besides, mortgage rates keep changing based on the Fed’s monetary policy, economic growth, and inflation. When it comes to what a lender looks at to determine interest rates, the factors that make a difference include:

• Location of the home. A report released by the Federal Reserve Bank of Dallas indicates that location plays an important role in mortgage rates, which tend to vary from one metro to the next. This, incidentally, is also the case with rural areas.
• Loan amount and price of the home. If you require a rather small or very large loan amount, you may expect to pay a higher interest rate. The amount you need to borrow is essentially the difference between the home’s selling price and the down payment amount.
• Down payment. Typically, making a large down payment comes with a lower interest rate. This is because your lender will view you as a low-risk borrower, given the equity you hold in your home. If you’re comfortable making a down payment of 20% or higher, doing so might work well for you from the long-term savings point of view.
• Loan term. Shorter loan terms tend to come with lower interest rates when compared to longer terms. However, they require that you make larger monthly payments.
• Debt–to-income (DTI) ratio. Your DTI ratio indicates how much of the money you earn each month goes toward your debt payments. Mortgage providers want this number to be 43% or lower. Lenders view low DTI ratios with favor, which may then translate into a lower interest rate.
• The lender you select. Interest rates may vary even for the same type of mortgage depending on the lender you select. Mortgage providers charge different interest rates based on factors like overhead costs, experience, reputation, and profit margins. Bear in mind that the lender that provides the lowest rates is not necessarily the best because you also need to account for customer service and flexibility in terms.

 

How to Improve Your Credit Score?

If your credit score is not up to the mark, consider improving it before applying for a mortgage. Doing this helps open up more avenues and you may also benefit from a lower interest rate. Following a few simple steps can set you on the right path.

Review Your Credit Reports

Start by getting a copy of your credit reports from the top three credit bureaus – Experian, Equifax, and TransUnion. Go through each carefully to determine why your credit score is low. There are instances when credit reports carry erroneous information, so keep an eye out for these. If you find any error, contact the credit bureau and request it to make the required correction.

 

Pay Your Bills on Time

Among the different factors that affect your credit score, payment history takes the top spot, accounting for 35%. Given the effect this factor has, it’s crucial that you pay all your bills on time. You may keep track of your bills by creating some kind of filing system or setting alerts. Automatically paying your bills by linking them to your bank account is ideal. You may also consider paying your bills using a credit card to earn rewards and improve your credit score, but tread this path only if you’re sure you’ll be able to pay off your credit card balance in full every month.

 

Pay Down Balances

Your credit utilization ratio, which indicates how much of your available revolving credit balance you’ve used, has a 30% weightage in your credit report.  For example, if you have three credit cards with a combined balance of $15,000 and owe a total of $7,500, your credit utilization ratio is 50%. From the credit score point of view, this number should be 30% or lower.

If your credit utilization ratio is over 30%, try to pay off as much of the debt you owe to bring this number down. Getting it to around 10% is ideal if you wish to improve your credit score. Another way to improve your credit utilization ratio is to ask your credit card providers to increase your credit limit. However, it’s best that you refrain from using more credit until you apply for a mortgage.

 

Fix Delinquencies

Fixing a minor credit card delinquency like missing a payment is fairly easy but ignoring any bill over a prolonged period might have serious implications. While the issuer of the credit will close your account, your debt might end up with a collection agency and you might risk facing garnishment of your wages. Besides, its mention might stay on your credit report for up to seven years.

Paying off debt that’s with a collection agency might have a positive effect on your credit score depending on the model in question. If you have serious delinquency, you should ideally start making payments as quickly as possible. Contact the issuer of your card to check if it has any hardship program. Consider settling the debt if you’re okay with making a lump sum payment. Getting in touch with a credit counseling agency to get on a debt management plan might also be an option.

 

Don’t Close Old Accounts

The length of your credit history has a 10% weightage in your credit score, and the longer it is, the better. As a result, if you have any old account you plan to close, think again because doing so may have an adverse effect on your credit history’s length. Closing a relatively new account, on the other hand, will not have as damaging an effect.

Don’t Apply for New Credit

New credit accounts for 10% of your FICO score, and each time you apply for new credit, your credit score goes down by a few points. As a result, it’s best that you don’t apply for any form of credit until you get your credit score on track.

 

Conclusion

Having poor creditworthiness and a low credit score might work as a dampener if you wish to get a mortgage. This is because lenders view applicants from this bracket as high-risk borrowers. Besides, even if you qualify for a mortgage, your credit score still plays a role in the interest rate you get. If you have an average credit score, you may consider improving it before applying for a mortgage because it can pave the way for a better deal.

Now that you know the effect of credit scores on mortgages, determine if yours is good enough to apply for a home loan. If so, consider getting in touch with a mortgage provider to find out if you qualify for preapproval. You may then look for homes based on the amount for which you qualify.

 

 

Disclaimer

The payment on a $300,000, 30-year fixed rate loan at 6.50% and 75% loan-to-value (LTV) is $1,896.20. The Annual Percentage Rate (APR) is 5.692%. Payment does not include taxes and insurance premiums. If you add taxes and/or insurance to your mortgage payment then the actual payment will be greater. Some state and county maximum loan amount restrictions may apply. This is an example and is for illustrative purposes only.

Buying a home can be an exciting yet daunting process, which is why it’s best to tread with caution. If you find a house you like, carrying out an inspection on your own before making an offer is ideal as it can save you time and heartache. While perfection is typically hard to find, an inspection enables you to narrow down on a home that’s in fairly good shape. This DIY home inspection guide highlights why you should go through the process and the aspects that need your attention.

 

Why DIY Home Inspections?

Consider this – you make an offer on a home only to find out through the home inspection report that it comes with some serious flaws. While a home inspection contingency might give you the means to back out of the offer, you would still have spent considerable time in the process, and you’ll need to start over again. Carrying out a DIY home inspection before you make an offer minimizes this risk greatly.

Conducting a DIY home inspection makes it to the list of the top tips for buying a home because it gives you the means to identify existing and potential problems. With a checklist in place, you get an indication of what to look for and where, which helps simplify the process. It also helps avoid surprises in the professional inspection report you get later, because you know of some or most of the problems beforehand.

Bear in mind that while a DIY home inspection is always good, you should still opt for a professional inspection before you make the purchase. This is because a certified home inspector comes with the right training and tools that can help fill any gap you might have in your DIY inspection.

How to Do a Home Inspection Before Buying?

Carrying out a DIY home inspection tends to take time, so it’s ideal that you give yourself a few hours to go through the process. The inspection requires looking at different parts of a house, from its exterior to its attic and basement.  You need to pay complete attention to the process because you don’t want to miss out on any problem.

The Exterior

While most homes can withstand the elements, inclement weather conditions might affect older structures without leaving any visible signs, and this is where a professional home inspection can help.

When carrying out a DIY inspection, look for cracks in the foundation and walls. Inspect the deck and structural boards to see if there’s any rot, especially at the ends. Vines on walls can be cause for concern, as can leaning stairways, bowing walls, cracked/missing siding, dislocated posts, damaged beams, and peeling/flaking paint.

If the home has a septic tank, find out how long it’s been in place. Remember that tanks over 30 years old are near their end and might need replacement soon. In addition:

• If there’s a sprinkler system, test its water pressure and overall functioning.
• Look for holes and cracks in the walkway and driveway.
• See if all the outdoor lights are working.
• Determine the sturdiness of the fence and look for loose boards.
• Determine if the garage door works as it should (especially if it comes with a remote).
• Check for dead patches in the lawn.

The Roof

The roof of a home is among its most important part, which is why its inspection is vital. While the roof is typically difficult to inspect on your own, and climbing it is one way to get a clear picture, you may still identify problems from the ground. For example, you can use binoculars to examine the shingles and look for cracking, cupping, and curling. Loss of texture can indicate that the shingles need replacement. Look for cracks and rust in the roof’s gutters. Other causes for concern include cracked or rusty flashing, painted-over vents, and any obvious sag in the roof.

The Kitchen

When it comes to the kitchen, start by determining if there is enough storage space to meet your needs, as this is something no home inspector can gauge. Check the tiles and countertops for chips and cracks. Open and close drawers and cabinets to ensure they function properly and don’t serve as obstructions. In addition:

• Check if the water faucets work fine.
• Look for leaks under the sink.
• Check all the burners of the stove.
• Turn the oven on to see if it works.
• Check the condition of the refrigerator, dishwasher, microwave, and garbage disposal unit.

The Bathroom

While a certified home inspector is the best person to inspect a bathroom, you may still cover a few important points in your DIY home inspection.

• Check the toilet flush.
• Run water in the tub and sink to see if it drains.
• Check if the tub has cracks, chips, or stains.
• Look for chipped, loose, and broken tiles.
• Ensure that the bathroom is well-ventilated.
• Determine if there’s enough storage space.

Crawlspaces, Attics, and Basements

While it’s common to use these spaces for little other than storage, they feature prominently in most home inspections, all the more so because they usually don’t receive the same level of attention as the rest of the home.  When inspecting any such space, keep an eye out for:

• Inadequate insulation
• Poor ventilation
• Musty or damp smells
• Water stains
• Decaying wood
• Cracks in the foundation

Walls and Ceilings

Check if the walls and ceilings suffer from discoloration because yellow spots are indicative of water-induced damage. Large spots might be cause for concern because they’re typically a sign of leaky roofs or ice dams. Smaller spots, on the other hand, are usually a result of sweaty or leaking pipes, and might indicate significant behind-the-scenes damage.

If you find black spots on walls or ceilings, there’s a good chance you’re dealing with mold. While treating mold is possible, addressing the excessive moisture that results in the mold might not be easy. If you find mold in the bathroom, improving its ventilation might fix the problem. However, mold in the basement might become a recurring problem.

The presence of powdery white deposits in basements along concrete slabs and the foundation typically point to water seepage. This is also the case if you come across corroded concrete blocks or bowed walls. When examining crawl spaces, the presence of musty smells, rotting wood, and mold typically indicate moisture-related problems.

Your inspection should also cover gaps between the flooring and walls, significant cracks, peeling or flaking paint, sagging ceilings, and leaning walls.

Doors, Windows, and Furnaces

Doors play a key role in keeping a home secure, which is why they make it to most DIY home inspection checklists. When inspecting doors, here’s what you need to look for:

• Decaying or rotting wood
• Bowed frames
• Trouble in opening and closing
• Non-functional latches and locks
• Rusted or exposed lintels
• Cracked/broken glass
• Missing/cracked caulk around frames and joints
• Exterior doors with improper weather-stripping

If you come across fogged windows, know that replacing them is not cheap. Windows exposed to excessive condensation might indicate an under-the-weather furnace or heat exchanger. However, it might be hard to spot signs of condensation during the summer. Make sure you find out how old the furnace is and check stickers that indicate its service history. While a well-maintained furnace might last for up to 40 years, the typical lifespan ranges from 20 to 25 years.

The Plumbing

When you turn the water on in the kitchen or bathroom, determine if there’s a drop in pressure after some time. Run the water for a few minutes to check if it drains quickly enough. Determine if all the drainpipes in the kitchen and bathroom go into walls, because if they run directly into the floor, there’s a possibility that the drains are vented poorly. Adding a vent is not easy and requires using the services of a plumber. Other red flags you need to look out for include:

• Gurgling noises coming from pipes
• Leaking or rusty pipes
• Unlevel or unsteady toilets
• Presence of mold
• A buildup of sediment in hot water tanks
• Code violations

Looking to Purchase a Home on Long IslandContact Us

Switches and Electrical Outlets

While there are various aspects surrounding electrical fitting that you should ideally leave to a professional home inspector, there are a few problems you might be able to diagnose on your own. Use a receptacle tester for checking electrical outlets to ensure their wiring is okay. New electrical outlets might indicate a recent wiring job. If you find reverse polarity, it might indicate that a professional did not carry out the job. In addition, keep an eye out for:

• Non-functioning switches and outlets
• Painted outlets
• Three-prong outlets without grounding
• Concealed breaker boxes
• Breaker box switches without labels
• Exposed and uncapped live wires

 

What About a Professional Home Inspection?

While not necessary, you should get a certified home inspector to inspect the house you wish to purchase as this gives you a better picture of its condition. In most instances, the buyer pays for the inspection, unless a seller agrees to as part of the negotiation process.

The average cost of a home inspection varies between $281 and $402. Just how much you need to pay depends on the size of the home, its location, its age, and the checks that the inspection covers. Bear in mind that not all home inspectors cover the same elements, so it’s important to find out what they’ll look at during the inspection.

What’s Home Inspection Contingency?

The contract that you draw up when you make your offer can include different contingency clauses, one of which includes home inspection contingency. This clause implies that you have the right to withdraw your offer or ask the seller to carry out repairs based on the inspection report. If you choose to withdraw the offer, you stand to get your deposit back.

If you include a home inspection contingency clause in your offer letter, you get a predetermined time period to carry out the inspection and potential follow-ups. For example, if the home has an electrical problem and the inspection report suggests getting an electrician to give it a look, you need to do what’s required before the end of the given timeframe. In most instances, buyers get one to two weeks to complete the inspection.

 

The Most Common Problems

While just about every home comes with its own share of problems or shortcomings, some are more prevalent than others. The corresponding do-it-yourself home inspection checklist highlights the most common ones.

• Structural. Foundation problems are typically expensive to fix, and there are instances when you can’t fix them at all.
• Roof. Older homes might have problems with their roofs, and replacing a roof costs a tidy sum.
• Pest infestation. It’s common for home inspectors to find pests, especially termites. This can be a problem because a full-blown infestation might even cause structural problems.
• Mold. Homes in humid climates might suffer from mold, the presence of which can cause illnesses. In addition, mold can spread quickly.
• Plumbing. Running toilets and leaking faucets are fairly common. While relatively easy to fix, these indicate that s home’s overall upkeep is not up to the mark. Clogged drains might indicate more serious problems.
• Electrical. Old homes might have outdated wiring and electrical systems that do not meet modern standards. You need to take electrical problems seriously as they could be potential fire hazards.

 

Conclusion

If you plan to buy a house, a DIY home inspection gives you the means to identify existing and potential problems, which, in turn, gives you an indication of whether or not to make an offer. You should ideally give yourself enough time to go through the entire home carefully, its exterior and interior alike. When it’s time for a professional inspection, you may look for a certified inspector on your own or ask your mortgage provider for references.

Finding out about a denied mortgage application is never easy, given that the person receiving the news is typically looking forward to buying a house. While lenders cannot deny mortgages based on age, gender, religion, race, marital status, or one’s nation of origin, there are other factors that might lead to a denial. As a result, taking a look at common mortgage denial reasons and understanding what you can do if a lender denies your application might help you avoid these pitfalls so you can get approved.

 

Mortgage Application Denials in Numbers

Data released by the Consumer Financial Protection Bureau (CFBC) indicates that the denial rate for mortgage applications in 2020 was 9.3%, which was higher than in 2019 (8.9%). It points out that FHA applications came with a denial rate of around 14.1%, whereas the number for conforming home loan applications stood at 7.6%. The denial rate for Black and Hispanic borrowers was higher when compared to non-Hispanic and Asian borrowers.

 

What Are the Common Reasons a Mortgage Application is Denied?

Mortgage denial reasons come in different forms and understanding them might help you get one step close to homeownership. This is because when you know what might affect your application adversely, you may implement remedial measures to increase the likelihood of success. Here are signs that indicate your mortgage might be denied.

• No/poor creditworthiness. Lenders view people with no or poor credit history as high-risk borrowers. If you fall in this bracket, you might have trouble finding a lender who would approve your mortgage application, although you may have a few options.
• High DTI ratio. Your debt-to-income (DTI) ratio highlights how much you owe in comparison to your income. A DTI of 28% or lower is ideal, although lenders typically want this number to be 36% or lower. If it’s 43% or higher, a denied mortgage application is hardly surprising.
• Problems with the home. It’s common for some types of mortgages as such FHA loans to have strict requirements surrounding the condition of the home you wish to purchase. If the home does not pass the required inspection, a denial of your application is on the cards.
• The appraised value. If the appraised value of the home you wish to buy is less than its selling price, you may expect the lender to deny your application or offer a lower-than-desired amount. In case of the latter, you have the option of paying the difference on your own.
• Job changes. if you get a promotion at work or move to a better-paying job in the same industry, it typically does not have an adverse effect on your mortgage application. However, some job changes might have a negative impact. These include switching fields, new jobs with preset termination dates, and moving from being a salaried employee to a consultant or a freelancer.
• Judgments and liens. Lenders commonly run title searches before closing. If your lender finds any unpaid judgments or federal/state tax liens linked to the home you wish to buy, you may expect it to deny your mortgage application.
• Early retirement. If you’ve retired early and fail to show you have adequate income, your lender might view you as a high-risk borrower even if you’ve already saved seemingly enough money.
• Recent credit activity. Closing a credit card account or more tends to have a negative effect on your credit utilization ratio by reducing your total available credit, which might lower your credit score. As a result, refrain from doing so before applying for a mortgage or its closing. In addition, applying for new forms of credit during this period indicates added liability to your lender, so it’s ideal that you steer clear of doing this as well.
• Student loan. A mortgage can be denied due to a student loan if its outstanding amount leads to a high DTI ratio. A history of delinquent payments toward a student loan is also a possible reason for denial.
• Source of down payment. If you plan to make your down payment through a source your lender cannot verify or by using down payment assistance a seller is willing to provide, your lender will deny your application because it’s against the rules. This also holds true for funds you may receive from any type of non-collateralized loan.
• Multiple Write-Offs. Self-employed individuals who have multiple write-offs when they file their taxes might face problems when they apply for mortgages. While you might turn to business deductions with the aim of saving taxes, lenders would look at your net income after the deductions. As a result, you need to make sure your net income is enough based on the amount you wish to borrow. If it’s not, you might want to go easy on the write-offs.

Mortgage Loan Denied in Underwriting

There are chances of getting denied after pre-approval for a mortgage if your lender finds a suitable cause during the underwriting process. This is because the preapproval stage mainly involves looking at your credit score, monthly income, DTI ratio, and assets. However, during the underwriting stage, lenders take a much closer look at your finances by going through your pay stubs, W-2 forms, bank statements, tax returns, and all other financial documents they might deem appropriate. 

Since the underwriting stage is when a lender gets a clear picture of where you stand financially, it is possible that your application might fail to meet the cut. Besides, any significant changes in your finances from the time of preapproval to the underwriting might also lead to a denial.

What Happens if You Don’t Get Approved for a Mortgage?

If a lender denies your mortgage application, you may expect to receive a denial letter via email or regular mail. Some lenders also inform applicants of their decisions over the phone. It is common for lenders to provide the reason behind the denial, although if this is not the case with your lender, you may choose to call and find out. Once you know the reason, make sure you address it effectively before applying again.

Your Mortgage is Denied – Now What?

If a lender denies your mortgage application, know that this happens with many people. In some cases, simple technicalities can be the cause for denial, which you may rectify by providing any additional information that your lender requires. However, there are instances when you might have to explore other options.

Speak With Your Lender

The law requires that a lender should inform you of why it is denying your mortgage application. At times, lenders deny applications because of inadequate paperwork or not having access to the required information. Once you know the reason for the denial, you might be able to speak with your lender and provide the documentation it needs. In some instances, explaining your specific situation over the phone can help an underwriter reconsider the decision.

Check Your Credit Reports

If you failed to review your creditworthiness before applying for a mortgage and it is the cause for denial, you need to go through your credit reports carefully. Bear in mind that you ideally need good creditworthiness to qualify for a mortgage, and if an error in your credit report is causing your credit score to suffer, you might be able to fix it. Remember that mistakes in credit reports are not uncommon, and according to a study by Consumer Reports, 34% of consumers have at least one error on their credit reports.

If you spot an error on any of your credit reports, contact the credit bureau in question and request it to make the required correction. This process tends to take time, which means you might have to back out of your existing offer.

Look at Government-Backed Loans

If a lender denies your application for a conventional mortgage because of a less-than-perfect credit score or inadequate down payment, you may consider looking at what government-backed loans have to offer. These typically come with less stringent creditworthiness and down payment requirements, although you need to meet other conditions.

• USDA loans. The U.S. Department of Agriculture (USDA) works as a guarantor for these loans. You may get a USDA loan to buy a home in a rural area, a small town, or an eligible suburban area. These loans are ideal for low- and moderate-income applicants. They require no down payment.
• VA loans. The Department of Veteran Affairs guarantees these loans. You may apply for a VA loan as a military veteran, a military member on active duty, a reservist, or an eligible surviving spouse. These loans come with no down payment requirement.
• FHA loans. The Federal Housing Administration (FHA) backs these loans. You might qualify for one with a credit score as low as 500. Depending on your credit score, you may make a down payment of 3.5% or 10%,

Ask for a Lower Amount

Among the most common mortgage denial reasons is the loan amount. For example, while a lender might be unwilling to lend you $750,000, you might qualify if you seek $600,000. Remember that your income has a direct bearing on the loan amount for which you might qualify, so you need to pay due attention to this aspect. If you consider buying a more affordable home or can manage to make a larger down payment, you may consider applying for a new loan, albeit for a smaller amount.

Think Down Payment Assistance

The more money you can put toward your down payment, the lesser you need in the form of a mortgage. While this does not guarantee the approval of your next mortgage, it does increase the odds of success. Most down payment assistance programs tend to favor first-time homebuyers, but this is not always the case.

You might qualify for down payment assistance if you have low/moderate income, you don’t have poor creditworthiness, your debt-to-income (DTI) ratio is within desirable limits, and you wish to live in the house you buy.

Down payment assistance may come in the form of one-time grants, matched-savings programs, forgivable loans, and low-interest loans. Repayment terms depend on the one for which you qualify. For example, you don’t need to repay a forgivable loan if you live in the home you purchase for a predetermined time period that’s typically upward of five years.

Get a Co-Signer

If your mortgage application is denied because of poor creditworthiness or insufficient income, applying with a co-signer who has a good credit score might work well for you. This is because mortgage providers consider co-signers’ credit scores and income when making lending decisions. A co-signer’s good credit score might also result in a lower interest rate. However, finding a co-signer might not be easy, given that getting a mortgage is typically a long-term commitment.

Wait Until You Fix All Issues

If you’ve run through all your alternatives, you have no other option than to wait until you fix all the issues that are currently keeping you from becoming a homeowner. For example, if you have a less-than-desirable credit score, you need to start by getting it in order, which could take a few months, a year, or even longer. If your income is the problem, you may consider getting a second job. If you don’t have enough money to make the required down payment, you’ll need to start saving.

 

Conclusion

Applying for a mortgage can be a daunting task, all the more so because of the intricacies involved in the process. Often, simply not submitting a required document might result in a lender denying your application. As a result, it’s crucial that you look at the common mortgage denial reasons because this gives you the ability to increase the possibility of your application’s success.

If your mortgage is denied, start by getting in touch with the lender to determine if there’s a possibility of a reversal in the decision. If not, contact a different mortgage provider and look at the options it has to offer. If you feel you might still not qualify for a mortgage, address all possible issues before you apply again.

Given the shortage of affordable housing options across the U.S., down payment assistance programs offer a lifeline to homebuyers who are looking for some type of financial support. As housing prices continue to rise, the dream of homeownership seems increasingly out of reach for many low- to moderate-income families. Fortunately, down payment assistance programs provide the required support by making homeownership more affordable.

 

What is Down Payment Assistance?

Various local and state housing agencies, nonprofit organizations, and private-sector lenders offer down payment assistance (DPA) programs. These programs typically come in the form of loans and grants, and you get to use the funds you receive to cover your home’s down payment. While some down payment assistance programs let you use the funds you receive to cover closing costs, others might prohibit you from doing the same.

There are more than 2,000 programs available nationwide, and each program varies depending on its location and its source of funding. Some of these programs give priority to first-time homebuyers, and others favor specific groups such as teachers, healthcare workers, and veterans.

 

How Does Down Payment Assistance Work?

Down payment assistance programs come in different forms and might have unique requirements. Here are the most common.

One-Time Grant

This type of assistance typically comes in the form of a grant, especially when the amount is relatively small (usually lower than $5,000). Down payment assistance grants help bring down administrative costs associated with getting a mortgage. More often than not, you don’t have to repay the money you receive through a grant.

Matched-Savings Program

With a matched-savings program, you typically need to hold your savings in an individual development account (IDA) with a bank, community organization, or government agency. The institution in question then matches your deposit amount. For example, if you deposit $2,500 in your IDA, you’ll receive $2,500 from the participating institution that you may use to cover your down payment. You don’t have to repay the funds you receive through a matched-savings program.

Forgivable Loan

A forgivable loan functions as a second mortgage that does not require repayment provided the homeowner stays in the home for a predetermined number of years. These loans come with 0% interest, and lenders typically forgive them after five or more years. However, if a homeowner moves or sells a property before the end of the forgiveness period, he/she may need to repay all or part of the borrowed amount.

For example, if your lender requires that you live in the home for a minimum of 10 years but you move out after seven years, it’s likely you’ll need to repay a portion of the loan. The money you receive through forgivable down payment assistance is usually enough to cover a home’s down payment entirely.

Low-Interest Loan

This type of assistance might require that you make regular repayments or your lender may choose to defer payments until you sell the home. The terms and conditions vary depending on the agreement between a homebuyer and a lender.

Shared-Equity Model

Under this model, you receive all or a portion of the down payment amount. You need to share a small percentage of the home’s appreciated value upon its resale, and you also need to repay the entire down payment loan amount.

 

The Need for Down Payment Assistance

Apartment List’s Millennial Homeownership Report for 2022 points out that affordability has become a major concern for millennials making housing-related decisions.

It indicates that close to two-thirds of millennials who wanted to buy homes in 2021 had no savings at all, and only 15% said they had saved in excess of $10,000. Even this amount is considerably lower than the median down payment amount on single-family homes bought using financing in the first quarter of 2023, which stood at $26,250.

It’s fair to say that the inability to make a down payment stands in the way of several potential homebuyers. Fortunately, buyers don’t necessarily have to make a 20% down payment because different types of mortgages have varied down payment requirements. Besides, down payment assistance programs can help bring them one step closer to their homeownership dream.

 

Are You Eligible for Down Payment Assistance?

Most down payment assistance programs typically cater to first-time homebuyers. However, repeat buyers have a few options too, provided they have not owned a home or more in the preceding three years. Not everyone qualifies for down payment assistance because each program comes with its own set of rules and eligibility criteria. These guidelines tend to remain the same.

• You have low to moderate income
• The house you purchase will be your primary residence
• The home is in a particular county or locality
• The home’s price falls within local purchase limits
• You don’t have poor credit history
• Your debt-to-income (DTI) ratio is not very high
• You have completed a homebuyer education course
• You plan to get a loan from an approved mortgage lender

Remember that down payment assistance programs tend to come with their own nuances, and eligibility criteria may vary based on the program you select and where you live. Buying a home in some areas might make you eligible to qualify easily and even get more money. You may get information about these areas from your real estate agent or mortgage provider.

 

Finding Down Payment Assistance Programs

While there are a few national down payment assistance programs, most are run at the state, county, or city level. One way to look for DPAs is to ask your loan officer, as he/she should ideally have the required information about local and acceptable options. In addition, you may carry out an online search by using the name of the state, country, and city in which you reside.

Bear in mind that agencies, organizations, and institutions that offer down payment assistance programs usually refrain from spending funds on advertising because of which not many people get to know about them. The U.S. Department of Housing and Urban Development (HUD) provides information about local home buying programsin different states, but it does not offer a comprehensive list of all the down payment assistance programs in the country. As a result, it’s imperative that you carry out a thorough search based on where you live.

Before you apply for any DPA, it’s important to go through its terms and conditions to determine if they align with your goals.  For instance, some might require that you live in the house you purchase for a predetermined time period, and others might need you to get a Federal Housing Administration (FHA) loan. In addition, applying for down payment assistance may slow down the home buying process.

 

How Much Down Payment Assistance Can I Get?

Almost every down payment program has its own guidelines and there is no uniformity in the amount you may expect. While some provide a fixed amount, others provide a percentage of the home’s purchase price up to a predetermined maximum limit.

The Down Payment Assistance Loan (DPAL) offered by the State of New York Mortgage Agency (SONYMA) covers 3% of a home’s purchase price (maximum of $15,000). The HomeFirst Down Payment Assistance Program, on the other hand, offers up to $100,000 to cover down payment or closing costs if you plan to purchase a home in any of New York’s five boroughs.

Depending on the location of the house you wish to purchase, you may receive a few thousand dollars or considerably more. The program you select will also have a bearing on whether or not you need to repay the funds you receive.

 

What Type of Mortgage Can You Get?

If you wish to apply for down payment assistance, there’s a good chance you’ll need to work with an approved mortgage provider. In some instances, you might have to get a specific type of mortgage. More often than not, down payment assistance programs cover all popular mortgage types. These include:

• Conforming loans – guaranteed by Freddie Mac or Fannie Mae
• USDA loans – guaranteed by the U.S. Department of Agriculture
• VA loans – guaranteed by the U.S. Department of Veterans Affairs
• FHA loans – guaranteed by the Federal Housing Administration

How Much Down Payment Do You Need?

A big misconception about the home buying process is how much money one needs for the down payment. According to a post published on the National Association of REALTORS website, 35% of homebuyers feel they need to make a down payment of 16% to 20%, whereas 10% feel they need more than 20%. In reality, you might not need to make any down payment if you qualify for the right type of mortgage.

Here are down payment requirements for different types of mortgages:

• Conforming loans – 5% to 20%
• VA loans – 0%
• USDA loans – 0%
• FHA loans – 3.5% if your credit score is 580 or higher, or 10%

The same National Association of REALTORS post indicates that first-time home buyers have typically paid a down payment of 6% to 7% since 2018, although the average down payment for repeat buyers increased from 13% in 2014 to 17% in 2021.

 

Pros and Cons of Down Payment Assistance

You need to pay due attention to every aspect of the home buying process, and getting down payment assistance is no different. While qualifying for down payment assistance comes with benefits, there are possible drawbacks you need to be aware of as well.

Pros

• Become a homeowner sooner. Qualifying for down payment assistance takes away the need to save money for a down payment, which could take a few years. Consider this – you need a mortgage of $400,000 and have to make at least a 10% down payment. That amounts to $40,000, which might take a while to save.
• Avoid PMI. If you get a conventional loan and offer less than 20% as down payment, you need to get private mortgage insurance (PMI). If down payment assistance helps you get to the 20% mark, you don’t need to pay extra for PMI.
• Get better mortgage terms. Lenders ask for down payments to minimize their risk, and the larger the down payment you make the more favorable the terms you may expect. This is because a large down payment brings down the loan-to-value ratio, which lenders view with favor.
• Have money after closing. If you intend to use all your savings to make a down payment, down payment assistance can ensure that you still have some money after the closing.
• Possibility of no repayments. Depending on the down payment assistance program for which you qualify, you might not have to repay the money you get. This is typically the case with grants.

Cons

• Long-term costs. If your down payment assistance program comes in the form of an interest-bearing loan, you could end up paying more than you would without the assistance.
• Financial burden. While down payment assistance might help you purchase the home of your dreams, you need to think twice about the financial impact it will have over the course of time. Make sure you take a close look at your budget before you decide to move forward.
• Longer to close. Getting down payment assistance adds another step to the home buying process, and often increases the time it takes to get to the closing table.
• Occupy home for a preset timeframe. Some down payment assistance programs require that you use the home you purchase as your primary residence for a predetermined time period that might vary from three to 10 years.

 

Conclusion

If you wish to buy a home but don’t have enough money to make a down payment, you may take a look at what different down payment assistance programs have to offer. These typically come in the form of one-time grants, matched-savings programs, forgivable loans, and low interest loans. Bear in mind that the availability of these programs depends largely on where you live, and their eligibility criteria tend to vary as well. If you’re unsure about the programs for which you may qualify, asking your mortgage provider might be the way to go.

Applying for a mortgage can be a daunting process, especially because of the number of options from which you get to choose. Besides, while you might qualify for a particular type of home loan, you might not for another. Looking at the pros and cons of different types of mortgages is also important when it comes to making a selection. Here, you get to learn what sets USDA, VA, and conventional loans apart, and this may help you determine which one might work best for you.

 

Property Type

If you get a USDA loan or a VA loan, you need to use the home you purchase as your primary residence. However, this does not mean you need to be a first-time homebuyer. All it requires is that you move into the house after the purchase, and not use it as a second home or for investment purposes. Conventional loans don’t come with any such restrictions, and you may use the proceeds from a conventional loan to buy a vacation home or an investment property.

 

Eligibility

Whether you wish to get a USDA, VA, or conventional loan, you need to show that you have a steady source of income. However, income requirements vary from one loan type to another. Other eligibility criteria also vary based on the type of mortgage you select.

USDA Loans

You need to be a resident of the U.S., a permanent resident alien, or a noncitizen national to apply for a USDA loan. You need to live in the home you purchase and it should serve as your primary residence. The home you wish to purchase needs to be in an eligible rural area, as designated by the U.S. Department of Agriculture. You may use the department’s property eligibility site to determine if any specific area makes the cut.

Income plays a key role in qualifying for a USDA loan because it is for families that can demonstrate financial need. As a result, your adjusted gross income needs to be less than or equal to your area’s median income. The exact number depends on the state and county you reside in; the number of people in your household; and the number of under-18-year-olds, full-time students, and disabled people who reside in your home.

You may expect lenders to look at your debt-to-income (DTI) ratio, which should ideally be 43% or lower. Your DTI ratio highlights where you stand when it comes to your recurring debts and income.

While there are no minimum credit score requirements to qualify for a USDA loan, most lenders look for scores of 640 or higher.

VA Loans

Qualifying for a VA loan requires that you or your spouse meet the eligibility criteria laid out by the Department of Veterans Affairs (VA). You need to meet your lender’s income and credit requirements, and you also need to get a certificate of eligibility (COE).

Minimum active-duty service requirements are not the same for service members, veterans, National Guard members, and Reserve members. If you’re a service member, you need to have been in service for a minimum of 90 days (with no break). For veterans, National Guard members, and Reserve members, these requirements vary depending on when and the duration for which they served.

Surviving spouses of veterans may qualify under different circumstances such as if a veteran dies in service, is missing in action, or has become a prisoner of war.

Lenders that offer VA loans require that you provide a certificate of eligibility (COE). This sheds light on whether your VA entitlement may help you qualify for a VA loan. While most lenders that deal in VA loans look for credit scores of 620 or higher, some are willing to provide these loans to applicants with credit scores of over 500.

Your DTI ratio should ideally be no more than 41%, although there can be exceptions for applicants who have high residual income. It’s also important for you not to have defaulted on any type of federal debt in the past.

Conventional Mortgages

While some people use the terms conventional mortgages and conforming mortgages interchangeably, they are not the same, although the eligibility requirements are largely similar.

What sets a conforming mortgage apart from one that’s not is that the former needs to adhere to terms and conditions that meet the criteria set by Fannie Mae/Freddie Mac, mainly when it comes to the maximum loan amounts.  In 2023, the upper limit for single-unit properties located in high-cost areas is $1,089,300, and this limit is subject to change every year.

Most providers of conventional mortgages require borrowers to have credit scores of 620 or higher. They also look for DTIs under 43%, although this number can be even lower if you have average creditworthiness.

 

Loan Size

The maximum you may borrow through any type of mortgage depends on your income, assets, and credit history. However, you may also be subject to specific limits depending on the type of loan you wish to get.

USDA Loans

USDA loans come with area loan limits that may vary based on the county in which any given property is located. For example, this limit stands at $377,600 for most eligible counties across New York (and the rest of the country). However, it changes to $581,200 for Orange County and to $871,400 for Putnam County.

VA Loans

Since 2020, eligible veterans, existing service members, and survivors who have full entitlement don’t have to worry about the $144,000 maximum VA loan limit. You receive full entitlement by meeting any of these conditions:

• You have never made use of your VA home loan benefit.
• You’ve repaid a previous VA loan completely and sold the home.
• While you’ve used your VA home loan benefit, you were involved in a compromise claim or a foreclosure and repaid your loan completely.

If you have remaining entitlement, you may use it to get another VA loan, although you are then subject to the county-specific loan limits that apply on conforming loans.

Conventional Loans

If you plan to purchase a single-unit home by getting a conforming loan backed by Fannie Mae or Freddie Mac, you need to account for conforming loan limits (CLLs). In most counties across the U.S., this limit stands at $726,200 in 2023, up from $647,200 in 2022. In some high-cost counties, this number increases to $1,089,300.

If you get a non-conforming conventional loan, the maximum you may borrow depends on the lender you select. Some lenders provide jumbo loans of up to $2 million, although they typically require borrowers to have excellent credit scores and make large down payments.

 

The Down Payment

The USDA vs. VA loan comparison stands in the balance when it comes to down payment because both come with a 0% down payment requirement. This means you may get either one without making any down payment.

When it comes to conventional mortgages, first-time homebuyers may pay as little as 3% toward down payment, although this depends on their income and creditworthiness. People who are buying their second homes or earn less than 80% of their area’s median income might need to pay 5% to 10%. If you plan to purchase a home that’s not a single unit, you may need to pay at least 15%.

 

Interest Rates and Fees

Since the government backs USDA loans and VA loans, they usually come with lower interest rates than conventional loans. However, the interest rate you get depends on the lender you select, your income, your credit score, the down payment amount, the loan term, and other factors.

If you get a USDA loan, you need to pay a one-time 1% guarantee fee and a 0.35% annual fee (charged monthly). With a VA loan, you need to pay a VA funding fee that varies from 0.5% to 3.3% of the loan amount. Whether or not you’ve taken a VA loan previously and the down payment you make has a bearing on the funding fee you need to pay.

For example, if you’re getting a VA loan for the first time and are making a 5% down payment, you’ll need to pay 2.15% as funding fee. If your down payment increases to 10% or higher, the funding fee drops to 1.25%. If you’ve used a VA loan in the past and make a 5% down payment toward your new VA loan, you pay a 3.3% funding fee, and it reduces to 1.25% if you make a down payment of 10% or more.

No matter which type of loan you get, you also need to account for closing costs. These may come in the form of application fees, loan origination fees, appraisal fees, attorney fees, rate lock fees, and underwriting fees.

Mortgage Insurance

The down payment you make toward a conventional home loan affects whether you need to pay extra for private mortgage insurance (PMI). If your down payment is less than 20% of the home’s selling price, you need to get PMI. This stays in place until you build at least 20% equity in your home.

When it comes to mortgage insurance, it may appear that the USDA loan vs. conventional loan comparison tilts the balance in favor of the former. However, while USDA loans don’t require you to pay extra for mortgage insurance, you need to pay an annual guarantee fee that’s typically included in your monthly mortgage payment. Your lender then pays this fee to the USDA.

The VA loan vs. conventional loan comparison is not very different for mortgage insurance. While you don’t have to pay extra for mortgage insurance if you get a VA loan, you need to pay a funding fee that your lender charges as a percentage of the loan amount. You may pay this at closing or as part of your monthly mortgage payments.

 

Applying for a Mortgage

You may apply for a VA loan through any lender you select after getting a Certificate of Eligibility (COE), which you may obtain online, via mail, or through your lender. If you wish to get a USDA loan, you need to limit your search to the department’s list of approved lenders. You get considerably more lenders from which to choose if you plan to apply for a conventional loan.

Seek Preapproval

Consider this – after looking for your dream home, you narrow down on one that costs $750,000. However, once you apply for a mortgage, you find out you qualify to borrow just $500,000.Getting preapproved gives you an indication of how much money a lender is willing to lend to you and this gives you the ability to look for homes accordingly. Besides, a preapproval indicates to a seller that you’re serious about the process and have the backing of a lender.

Bear in mind, though, that a preapproval does not come with a guarantee because your lender would review your creditworthiness when carrying out the underwriting process as well.

Compare, Apply, Wait, and Close

It makes sense to get a preapproval from more than one lender as this gives you a better indication of where you stand. If you’ve skipped this stage, get quotes from multiple lenders and compare them across interest rates, fees, and loan terms. Look at what previous customers have to say about their services, because getting a mortgage is usually a long-drawn affair. Select a lender you’re comfortable with and submit your application.

Processing a mortgage application may take time, so it’s best to be patient. Respond to queries or requests from your lender quickly as this helps hasten the process. Upon your loan’s approval, go through your closing statement and prepare to complete the final paperwork.

 

Conclusion

Now that you know the differences between USDA loans, VA loans, and conventional loans, determine which one might work best for you based on eligibility criteria, the type of property you wish to purchase, loan amounts, and the down payment you wish to make. Once you decide on the type of loan you want, look for a mortgage provider that strikes a balance between affordability and service.

Homeowners insurance offers financial protection to deal with different disasters or accidents that involve your home.  Once you get homeowners insurance, your insurance provider is typically responsible for covering losses to your home, your belongings in the home, as well as any other structure on the property. If you experience a sudden or accidental home-related loss, you stand to receive a payment to cover the same up to a predetermined coverage limit, minus any applicable deductible. However, there’s more to homeowners insurance than that and understanding the intricacies might help you choose the right alternative.

 

Who Needs Homeowners Insurance?

Statistics collated by ValuePenguin show that more than 85% of the country’s homeowners have homeowners insurance. There is no legal requirement to get homeowners insurance. However, if you plan to get a mortgage to buy a home, there is a good chance your lender will require you to get homeowners insurance.

Mortgage providers usually require borrowers to get homeowners insurance because it safeguards their interests by providing the required money to repair or rebuild a home that’s damaged or destroyed by a tornado, lightning, fire, or any other force.

 

How Much is Homeowners Insurance?

According to insurance.com, the average cost of homeowners insurance in the U.S. stands at $2,777 per year. Not surprisingly, premiums for homeowners insurance have increased consistently over the last two decades. According to data released by Statista, the country’s average annual homeowners insurance premium stood at $536 in 2001, and it increased to $1,272 in 2019.

How much you need to pay toward homeowners insurance costs depends on where you live because pricing varies from one state to another.

Insurance.com indicates that Hawaii offers the most affordable homeowners insurance across the U.S., with an average cost of $582 per year. California is second on the list, followed by Washington D.C., Vermont, and New Hampshire. Oklahoma, with an average annual premium of $5,317, holds the distinction of offering the most expensive homeowners insurance in the country.Insurance.com also points out that the average cost of homeowners insurance in New York stands at $1,388 per year.

 

What Does Homeowners Insurance Cover?

It is common for most standard home insurance policies to provide coverage for the actual structure, personal belongings in the home, liability, and additional living expenses. The coverage typically includes your furniture, electrical appliances, electronic gadgets, heating/cooling systems, jewelry, clothing, and other belongings.

Liability coverage may come in handy if someone who does not reside in your home, but is injured on your property and needs money to cover medical expenses. If you are temporarily displaced from your home owing to a covered loss, additional living expenses coverage helps cover the hotel and food costs you incur during this period.

Coverage for additional structures on the property such as garages, sheds, barns, patios, swings, fireplaces, and fences is usually part of the parcel. However, if you have a pool or any other type of high-risk recreational feature, you might need added liability coverage.

What Does Homeowners Insurance Not Cover?

Homeowners insurance companies refrain from covering damages caused by earth movement, be it in the form of an earthquake, a sinkhole, a landslide, or subsidence. If you live in a region that is prone to experiencing natural disasters, you may want to look at specific types of homeowners insurance. These may come in the form of catastrophe insurance, flood insurance, or windstorm insurance.

If you live in an area where your home faces a risk of hurricanes, it is ideal that you have adequate coverage to safeguard your interests. Since a regular homeowners insurance policy does not provide coverage for hurricane damage, getting a hurricane insurance policy might be the order of the day. A hurricane insurance policy is basically a combination of home, flood, and windstorm insurance.

While homeowners insurance typically covers flooding caused by interior problems, this is not the case when it comes to flooding caused by external factors. If you live in a flood-prone area, there’s a good chance your mortgage provider will ask you to get a separate flood insurance policy.

 

Types of Homeowners Insurance

There are eight different types of homeowners insurance to choose from. The one you should select depends on the type of house you wish to insure and the coverage you seek. Knowing how one differs from the other may help you make a suitable decision.

HO–1

If you’re looking for the cheapest homeowners insurance, HO-1 policies deserve your attention. This is homeowners insurance in its most basic form and offers coverage for your home’s structure, attached structures, and basic features. Since it does not provide coverage for liability, personal property, third-party medical expenses, and additional living expenses, it is not the most popular option.

As a named perils policy, an HO-1 policy only provides coverage to your home in specific circumstances. These include:

• Fire/smoke
• Theft and vandalism
• Lightning, hail, and windstorms
• Volcanic eruptions
• Explosions
• Damage from vehicles or aircraft
• Civil disobedience/riots

HO–2

Much like an HO-1 homeowners insurance policy, an HO-2 policy also provides coverage only for named perils. However, unlike an HO-1 policy, an HO-2 policy provides coverage for your home as well as personal belongings. Commonly referred to as “broad form” coverage, an HO-2 policy might include liability coverage and additional living expenses coverage.  This type of policy covers the same perils as HO-1 policies along with a few added ones. These include:

• Accidental discharge of water/steam from an appliance or a sprinkler, heating, air conditioning, or plumbing system
• Freezing of an appliance or a sprinkler, heating, air conditioning, or plumbing system
• Cracking, burning, bulging, or tearing apart of a sprinkler, heating, air conditioning, or plumbing system
• Ice-, snow-, or sleet-inflicted damage
• Falling objects
• Accidental and sudden damage owing to an artificially generated electrical current

HO-3

The most commonly sought-after homeowners insurance policies come from this segment. An HO-3 policy provides coverage to your home’s structure and personal belongings as well as liability in case of injury or damage. In addition, a typical HO-3 policy also covers medical expenses and additional living expenses. Some homeowners insurance companies let you choose from add-ons such as smart home kits and virtual maintenance services that you may bundle with your HO-3 policy.

Often referred to as a “special form” policy, insurance companies offer it to owners of standalone homes and not to those who live in duplexes or condominiums. An HO-3 policy is an open perils policy, wherein it offers protection from all types of disasters unless it lists any exceptions.  However, personal possessions remain subject to the named perils listed in your policy.

The perils typically excluded from HO-3 policies include:

• Wear and tear
• Hurricanes, earthquakes, and floods
• Bird-, rodent-, and/or vermin-infestation
• Poor maintenance
• Neglect
• Mold and fungus
• Damage caused by pets
• Actions carried out by the government
• Intentional actions
• Enforcement of ordinances or building codes
• Vandalism at vacant homes
• Problems with the foundation
• War
• Nuclear hazards

The named perils that provide coverage to personal property through an HO-3 policy are:

• Fire/smoke
• Snow- or ice-inflicted damage
• Plumbing- or HVAC-related water damage
• Damage owing to electrical current
• Freezing of pipes
• Theft and vandalism
• Falling objects
• Lightning, hail, and windstorms
• Volcanic eruptions
• Explosions
• Damage from vehicles or aircraft
• Civil disobedience/riots

HO-4

HO-4 policies are not for homeowners but for renters. This renters insurance policy provides protection if your personal possessions get damaged under specific circumstances. In addition, most HO-4 policies come with liability insurance as well as additional living expenses coverage. Since this insurance is not for homeowners, it does not provide coverage for a home’s structure. The perils that an HO-4 policy covers include ones that an HO-3 policy covers for damage to personal property.

HO-5

If you’re looking for the best homeowners insurance policy, consider taking a look at what HO-5 policies have to offer. Often referred to as a “comprehensive form” policy, it provides coverage to your home as well as personal belongings on an open perils basis. It also comes with liability insurance, additional living expenses coverage, and medical expenses coverage.

When compared to HO-3 policies, HO-5 policies tend to offer higher limits for valuables such as jewelry and antiquities. Not everyone qualifies for an HO-5 policy because insurance companies tend to follow more stringent guidelines while issuing these and usually offer them to homeowners with new houses that face low risks of loss. If your home is in an area that has high crime rates or is prone to wildfires, getting an HO-5 policy might not be possible.

Even though an HO-5 policy is an open perils policy, certain exclusions still apply. Some of the common ones include:

• Earth movement
• Bird-, rodent-, and/or vermin-infestation
• Law or ordinance
• Government action
• Mold
• Intentional actions
• Vandalism at homes vacant for over 60 days
• Theft in an under-construction home
• Problems with a home’s foundation
• Water damage from sewer backup pr floods
• Mechanical breakdown
• Wear and tear
• Neglect
• Pets owned by the insured
• War
• Nuclear hazards

HO-6

Insurance companies provide HO-6 policies exclusively to condo owners and homeowners who live in co-op units. In this case, you are, in all likelihood, responsible for any damage to your unit. However, the condominium or homeowners association (HOA) is responsible for insuring the property’s common areas, which you help pay for in the form of HOA or condo fees.  An HO-6 policy provides unit/dwelling coverage, personal property coverage, medical payments/personal liability, loss of use coverage, and additional living expenses coverage.

Like other types of homeowners’ insurance, HO-6 policies also come with a list of exclusions. The common ones include:

• Law or ordinance
• Government action
• Earth movement
• Intentional damage or injuries
• Water damage from sewer backup pr floods
• Wear and tear
• Neglect
• War
• Nuclear hazards

HO-7

If you have a mobile or manufactured home such as a modular home, a trailer, a recreational vehicle (RV), or a sectional home, you may insure the same by getting an HO-7 policy. While it offers an open perils system for the property, a named perils system applies to the personal property inside the unit. An HO-7 policy offers coverage to the primary unit as well as detached structures such as garages and fencing. If a covered loss damages or destroys your property, your insurer pays the claim based on the unit’s replacement cost and not its market value.

The named perils for coverage of personal property in an HO-7 policy include:

• Fire/smoke
• Theft and vandalism
• Damage owing to electrical current
• Falling objects
• Plumbing- or HVAC-related water damage
• Snow- or ice-inflicted damage
• Freezing of pipes
• Explosions
• Civil disobedience/riots
• Lightning, hail, and windstorms
• Volcanic eruptions
• Damage from vehicles or aircraft

HO-8

Insuring an old home can be challenging, especially if its value is less than the money it would take to repair the home. This is where an HO-8 policy can help. Homeowners insurance companies typically provide these policies to people who own historically or architecturally significant properties as well as to those who own homes built using methods that are no longer prevalent.

An HO-8 policy provides coverage for the property, your personal belongings, medical payments, liability, and additional living expenses. However, coverage of the home and your personal property rely on a named perils system. The perils on the list include:

• Fire/smoke
• Theft and vandalism
• Explosions
• Civil disobedience/riots
• Lightning, hail, and windstorms
• Volcanic eruptions
• Damage from vehicles or aircraft

Conclusion

If you own a home or plan to buy one, getting homeowners insurance can come with peace of mind, where you know you have the required financial protection to cover possible losses to your home and belongings. If you plan to get a mortgage, there’s a possibility your lender will require homeowners insurance. In any case, make sure you look at all available options and select one based on your individual needs and requirements.

Buying a home is usually the biggest purchase people make, and the path to arriving at the right decision is often daunting. This is because even a slight oversight may lead to negative consequences in the future. To make matters even more complicated, prospective homebuyers have to find their way around various home buying myths.

While family and friends offer well-meaning advice, with some even suggesting that buying a house is a waste of money, bear in mind that not all you hear about buying a home might be true. Real estate agents and mortgage providers do what they can when it comes to debunking home buying myths, and most experts from this realm mention having to deal with similar misconceptions.

 

1. Renting is Cheaper Than Buying

Whether it’s cheaper to buy a home than continue living on rent depends on where you live. According to a report released by Realtor.com, buying a home in January 2020 was as affordable as renting, if not more, in 15 of the country’s 50 largest metros. Bear in mind that this only highlights the monthly costs involved in buying a home and living on rent. While the rent you pay is never coming back, your mortgage payments help you build equity in your home.

 

2. You Start the Process by Looking for a Home

One of the top myths about buying a home is that you need to start the process by looking for a suitable property. However, this might not be in your best interest because you may set your mind on a house, only to find out you do not qualify for the required mortgage amount. In this case, you’ll need to begin the house-hunting process again, already having wasted valuable time.

Ideally, you should begin the home buying process by ensuring that your finances and your credit score are in order. Then, you seek preapproval for a mortgage. Once you know how much you qualify for, look for homes accordingly.

 

3. Preapproval Comes with a Guarantee

Unfortunately, getting preapproved for a mortgage does not guarantee that a lender will approve your loan. For example, if your employment status changes after you receive preapproval, a lender might reconsider your application. This is also the case if there’s a change in your income or overall financial situation. While lenders review your creditworthiness before granting preapproval, they do so during the final underwriting as well.

4. A 20% Down Payment is Necessary

When it comes to the most commonly spread home buying myths, this one probably takes the cake. Sure, making a 20% down payment is a good idea. However, you may qualify for different types of mortgages by paying less than 20% upfront. When it comes to how much down payment you need, it boils down to your specific situation and the type of mortgage you’re after.

• Conventional mortgage. You need to pay 5% to 15% as down payment, and you also need to account for private mortgage insurance (PMI).
• S. Department of Veterans Affairs (VA) loan. Eligible applicants don’t need to make any down payment.
• S. Department of Agriculture (USDA) loan. If you qualify, you may choose to make no down payment at all.
• Federal Housing Administration (FHA) loan. These loans come with a minimum down payment requirement of 3.5%.
• Jumbo loans. Down payment for these loans can be as low as 10%.

In addition, first-time homebuyers should ideally check if they qualify for any down payment assistance programs run by state and local government agencies.

 

5. People With Poor Credit Cannot Buy Homes

There is no minimum credit score that will disqualify you from buying a home, although the lower it is, the more difficult it becomes to find a mortgage. If you’re looking for a conventional loan, your credit score should ideally be over 620. However, people with slightly lower scores who have high incomes or are willing to make large down payments might also qualify.

When it comes to FHA loans, people with credit scores of over 580 may qualify if they meet a few other eligibility criteria. This is also usually the case with VA loans. If you wish to get a USDA loan, know that most lenders require scores of 640 or higher.

 

6. People With Student Loans Cannot Get Mortgages

Whether or not people who have student loans may qualify for mortgages depends on their specific situations. For example, if you’ve been making all your payments on time, have a low debt-to-income ratio, and have a good credit score, you might find it easy to qualify for a mortgage. However, the reverse holds true as well.

If you have a student loan, make sure you look at your DTI before applying for a mortgage. You should ideally try to get it to less than 36%, although some lenders consider applicants with DTIs as high as 43%. The lower it gets, the better.

7. The Down Payment is the Only Upfront Cost

Your down payment accounts for a major chunk of the money you need to pay upfront, but you need to account for other costs as well. As a buyer, you are also responsible to cover your loan’s closing costs. Closing costs may vary from 3% to 6% of a home’s selling price, and the state in which you purchase a home also has a bearing on how much you need to pay.

 

8. Your Mortgage is Your Only Expense as a Homeowner

One of the key facts about buying a house is that you need to account for more than just your monthly mortgage payment.  For example, you need to pay property taxes that vary based on where you reside. If you get a conventional mortgage and your down payment is less than 20%, you need to pay extra for private mortgage insurance (PMI).  Buying a house also requires paying homeowners insurance, which, according to Policygenius, averages at $1,899 per year.

As a homeowner, you’re responsible for your home’s ongoing maintenance.  In this case, you may expect to spend around 1% to 2% of the home’s buying price each year. Depending on where you buy a home, you might also need to pay homeowners’ association (HOA) or condominium association fees.

 

9. A 30-Year Fixed-Rate Mortgage is the Best

While 30-year fixed-rate mortgages find several takers, they don’t work equally well for everyone, which is why this is among the top mortgage myths. Bear in mind that you get several alternatives from which to choose. These include adjustable-rate mortgages, balloon mortgages, interest-only mortgages, as well as 10-. 15- and 20-year fixed-rate mortgages.

People who opt for 30-year fixed-rate mortgages do so because of two basic reasons. First, the interest rate remains the same over the course of the loan term, so there’s no variation in monthly payments. In addition, the monthly payments of a 30-year mortgage are noticeably lower than that of a 10- or 20-year mortgage.  However, the interest you end up paying for a 30-year mortgage will be significantly higher than that of a 15-year mortgage.

The mortgage that works best for you depends on your financial situation as well as the duration you plan to stay in the house you purchase. Consequently, it’s ideal that you learn about the effect of interest rates and loan terms on mortgages before making a decision.

 

10. Select the Lender With the Lowest Interest Rate

Interest rates play a key role in deciding which mortgage provider to select, but there are other factors to consider as well. For instance, a lender might offer a low interest rate and make up for the same by charging steep fees. When you’re comparing lenders, you should stick to looking at the annual percentage rate (APR) because it gives you an indication of how much you’ll end up paying as interest and fees combined.

Given that paying off a mortgage is typically a long-drawn affair, it’s important to look at the level of customer service a lender provides. Selecting the right mortgage provider also requires looking at flexibility in terms, which may come in the form of weekly/biweekly/monthly payments, payment pauses, and redraw facilities.

 

11. Interest Rate Are Increasing

This makes it to the list of myths about home ownership because although interest rates increased significantly in 2022, one needs to look at the bigger picture. For instance, 30-year fixed-rate mortgages came with interest rates of around or over 7% during the 1990s, and stood largely above 6% before the Great Recession (2007 to 2009).

In addition, while the average interest rate for a 30-year fixed-rate mortgage peaked at 7.08% in October and November 2022, it dropped to 6.09% in the week ending on February 1, 2023. Most experts predict that this number may vary from 5.5% to 6% for the rest of the year. 

 

12. Buying a Fixer-Upper Saves Money

If you think you might be able to save money by buying a home that is a bad shape and fixing it on your own, you might want to give your decision some serious thought. For starters, you should have some knowledge about construction and making renovations, as well as the required skills and tools.

What attracts homebuyers to fixer-uppers is that they get the opportunity to spend less upfront. However, you need to account for the money you’ll need to spend on repairs and renovations, because the total cost may exceed the cost of a comparable home that’s ready to move in soon after the purchase.

13. There’s No Need for Professional Home Inspections

This is one of those home buying myths that might end up costing you a tidy sum in the long run. Even if you think another prospective buyer might beat you to the finishing line by choosing to skip the home inspection stage, it’s best to err on the side of caution. Remember that checking a home on your home is not the same as getting a professional to carry out the process.

While a professional home inspection comes at a cost, it may help you save money in the long run or even steer clear of making a bad decision. The American Society of Home Inspectors (ASHI) Standard of Practice indicates that a home inspection involves checking a home’s:

• Interior
• Exterior
• Structural system
• Roof system
• Plumbing system
• Electrical system

 

14. You Should Buy a Home During the Spring Season

Sure, the real estate industry is typically buzzing with activity during the spring season, but this does not mean you need to restrict yourself to buying a home during this period. Besides, the truth about buying a house is that you don’t really have to wait for the perfect time to move forward.

While the spring season usually sees more real estate transactions than other periods, high competition may leave little room for negotiation. The fall, on the other hand, usually brings with it a fair amount of inventory along with reduced competition. This means you may land a good deal even if you choose to buy a home in the fall.

 

15. Schools Don’t Play a Role if You Don’t Have Children

Prospective homebuyers who don’t have children might have heard that there’s no need to pay attention to schools. However, there’s more to schools in a neighborhood than just educating children. This is because the presence of good schools is typically an indication of good neighborhoods. Besides, homes in reputable school districts tend to have higher values, and they usually manage to find takers even the real estate market is down.

 

Conclusion

Debunking home buying myths is crucial because there is no dearth of prospective homebuyers who approach the process with various misconceptions. For example, while some might lead you to believe you’re better off as a renter, you might actually benefit by buying a home instead.

More often than not, working with a realtor or a real estate agency is ideal. This is because you then have a professional doing all the groundwork for you as well as someone you may turn to for advice. Once you decide you wish to buy a home, it’s also important to find a suitable lender and get preapproval. This way, you know just how much money you may get in the form of a loan.

When the COVID-19 pandemic struck, a significant number of people across NYC, as well as other parts of the country, found themselves working from home. Many decided to purchase new homes, partly enabled by historically low interest rates on mortgages. Consequently, home prices started to rise. However, these trends did not last for long, given that mortgage rates doubled in a matter of months during the first half of 2022. While that’s the overall outlook of the country’s housing market, the NYC housing market is no different.

 

The NYC Housing Market in 2022 

Data released by RedFin shows that home prices in New York in December 2022 were 0.32% lower in comparison to the same month in the preceding year, selling at a median price of $790,000. It also highlights that homes stayed on the market for an average of 70 days in comparison to 63 days in 2021. In addition, while December 2021 accounted for 3,901 sales, the number dropped to 2,395 in December 2022.

According to Realtor.com, the median listing price of homes in New York stood at $729,000 in December 2022, an 18.1% year-over-year decrease. Further, the median home selling price was $615,000.

The New York State Association of REALTORS Inc., in its 2022 annual report, shows that the Bronx saw a total of 1,773 closed sales in 2022, which was down 3.6% from 2021. However, the median price in 2022 stood at $470,000, up from $450,000 in 2021. The total number of closed sales in other parts of NYC also saw a decline, and some areas witnessed slight drops in median prices as well.

Moving From 2022 to 2023

With 2022 behind us, buyers are hoping for some positivity. People who wished to buy homes in New York had to deal with rising interest rates, and property prices in most neighborhoods increased as well.

According to the Elliman Report for the second quarter of 2022, the average median sale price stood at a staggering $1,250,000, and the period saw 3,834 closed sales. This was around the same time when mortgage rates were on an upward spiral. Now, there’s been some respite in mortgage rates, and property prices in several parts of New York have fallen fall too.

However, buyers need to understand that the drop in prices does not indicate a much larger shift. This is because unless a recession actually hits, expecting prices to drop drastically might not be the best way forward. If anything, there’s a possibility of NYC housing prices hitting a plateau and mortgage rates stabilizing around 5.5% to 6%, which may help probable homebuyers. Some might even benefit by looking beyond the metropolitan region, even as far as Long Island.

Manhattan Real Estate Prices Chart 2022

Property Shark’s Long Island for the third quarter of 2022 shows that there was a 16% drop in year-over-year transactions and a 5% drop in year-over-year median prices. This is what median prices looked like in different neighborhoods across Manhattan.

• Central Park South: $6,200,000
• Hudson Yards: $4,900,000
• NoHo: $4,062,500
• TriBeCa: $3,450,000
• Hudson Square: $2,740,000
• NoLIta: $2,625,000
• NoMad: $2,209,072
• SoHo: $2,200,000
• Two Bridges: $2,162,690
• Carnegie Hill: $1,950,000
• Chinatown: $1,947,500

NYC Real Estate Market Forecast 2023

The housing market in NYC will continue to witness changes in the coming months, all the more so if interest rates keep dropping at the current pace. Home prices and rents might fall in 2023, although the desired relief for renters might take longer to come. This is because rents grew exponentially in the previous year.

Data from Zumper shows that there was a 20% increase in the median rent of a two-bedroom home from January 2022 to January 2023. Median rents for one-bedroom units increased by 15% during the same time period. With a fair amount of construction activity taking place in New York, people might look forward to an improvement in inventory shortages.

Besides, with a significant number of employees now working from home, Manhattan’s under-utilized office spaces may also present an opportunity to fill housing supply gaps in the city. In addition, even though the NYC real estate market continues to shift, there is no dearth of people who wish to move to this part of the world.

RedFin points out that 3% of the nation’s homebuyers look for homes with the aim of moving to New York from outside of metros. In addition, 73% of homebuyers from New York look for homes with the aim of staying within New York’s metropolitan area. Consequently, it’s safe to assume that prospective buyers won’t disappear completely at any time in the near future, barring a recession-like situation, which might or might not amplify.

Mortgage Rates to Decline

People who’ve signed new mortgages over the last two years probably know of the volatility interest rates experienced after the COVID-19 pandemic struck. Mortgage rates were reducing gradually since the end of 2018, and the pattern continued well into the COVID-19 pandemic.

Interest rates hit an all-time low of around 2.65% for a 30-year fixed-rate mortgage (FRM) in January 2021, and they remained fairly steady throughout the year, peaking at around 3.18%. The period from December 2021 to November 2022 saw a dramatic increase, with interest rates crossing the 7% mark toward the end of October 2022.

Fortunately, interest rates have dropped fairly regularly since then. In the week ending on January 25, 2023, the interest rate of a 30-year FRM stood at around 6.13%. During the course of 2023, one may expect the interest of a 30-year FRM to vary from 5.5% to 6%. A drop in interest rates may play a substantial role in how much you end up paying for a home.

The Federal Reserve’s drive to hike interest rates through 2022 happened with the aim of reigning in inflation, and as inflation continues to slow down, homebuyers may expect further respite in interest rates. However, just how quickly there’s an ease in inflation depends on multiple factors, which include the job market’s resilience. What helps on this front is that the unemployment rate in NYC dropped from 6.7% in December 2021 to 5.3% in December 2022.

If the job market performs even better and if there’s quick relief from inflation, there is a possibility that mortgage rates might fall below 5.5%. However, interest rates may remain stagnant or even increase slightly if inflation is hard to beat.

Besides, since unemployment levels have still not reached pre-pandemic levels, homebuyers might need lower than usual debt-to-income ratios or higher credit scores in order to qualify for the mortgages they seek, even if they plan to go the refinancing way.

Home Prices to Stay Stagnant or Reduce

According to the Zillow Home Value Index (ZHVI), the average home value in New York stood at $782,365 in December 2022, which was a 5.8% year-over-year increase. However, 68.5% of sales took place at less than their listing prices. Besides, the median listing price of homes in New York saw an 18.1% year-over-year decrease from December 2021 to December 2022.

This is not because of a lack of inventory, but mainly because of elevated interest rates and a slowdown in demand that have prevailed over the last few months. However, this year might see fewer listings making their way to the market, and low inventories will ensure that prices do not plummet completely.

The Luxury Apartment Market Faces Pressure

A property report in The Wall Street Journal indicates that the luxury apartment market (of units priced $4 million and over) in NYC witnessed the sale of more than 1,300 units in 2022, accounting for over $10 billion. While the market performed reasonably well in comparison to the last decade, most sales took place before July, and there has been a slowdown in activity since then.  This is not without reason.

People who work in the financial sector have often used their bonuses to make down payments. However, given that there’s been a lull in deal-making, there’s a good chance that people will receive smaller payouts. This, along with a weakening stock market and high interest rates, may well create pressure on NYC’s luxury apartment market. For instance, a number of prospective buyers are choosing to wait and watch unless major life events are driving their needs. In addition, some large apartments have sold for less than their asking prices.

The Wall Street Journal report suggests that a few developers have started offering concessions in different forms. For example, you may find a deal where a developer is willing to cover common charges for up to six months or the costs involved in a temporary buydown of your mortgage’s interest rate.

 

Should You Buy Now or Wait?

Given that there’s been no real stability in the inventory of active listings across New York since the beginning of the COVID-19 pandemic, with there being intermittent ups and downs, this is one aspect that homebuyers might choose to overlook for now. This is because a fair amount of the competition remains glued to the sidelines, so there’s a possibility that prospective buyers might find homes at relatively affordable prices.

People who wish to move forward with their purchases need to account for the fact that there’s no telling which way inflation might go in the near future. As a result, one should ensure having access to enough funds to keep making mortgage payments for at least six and ideally up to 12 months. If you wish to buy a home with the idea of making money when you sell it, make sure you plan to stay in it for at least five years.

Looking for listings that re-enter the market might work well because these homes may come with lower asking prices than they originally did.

Buying a home when inflation is high requires doing the math in advance. If the numbers don’t add up, waiting might be in your best interest because you would not want to put undue pressure on your finances. Besides, not keeping up with your mortgage payments may result in you losing your home to foreclosure, and you might end up financially poorer than when you started out.

While not buying a home might mean continuing to live on rent, you may be in a better position down the line by investing your money suitably and waiting for the market to become more buyer-friendly. However, remember that home prices don’t fall automatically when inflation goes down.

Narrowing Down on a Mortgage Provider

If you decide to buy, it’s important that you select a suitable mortgage provider. For example, a lender should be able to provide you with different alternatives such as conventional mortgages, VA loans, USDA loans, Jumbo Loans as well as a handful of other mortgage solutions. While the interest rate you need to pay requires your attention, so do all associated fees because they can add up to a tidy sum. Customer service levels and flexibility in terms also require your attention.

 

Conclusion

It’s plain to see that the long-term effects of the COVID-19 pandemic, mainly in the form of high interest rates, continue to have a bearing on the NYC housing market, given that 2022 didn’t go particularly well. While median prices have decreased in several parts of New York, the number of closed sales has fallen as well. Since interest rates have started falling and there’s hope that they might go down further, there’s a possibility of more buyers entering the market. This, in turn, might have an effect on NYC housing prices.

If you feel you can afford to buy a home at this point in time and have accounted for unexpected turn of events, you may consider moving forward. This is because while there’s no clear indication of how low interest rates might go, the prices of homes could start rising. Once you decide, make sure you work with a reliable mortgage provider than can guide you through the process.

A reverse mortgage might work well for you if you’re a senior who is in need of cash and you have most of your net worth tied up in home equity. However, understanding the intricacies of these loans and taking a look at the associated costs is crucial because they don’t work equally well for everyone. For example, while a reverse mortgage might help secure your retirement, losing your home to foreclosure is a possibility if you’re not careful with your finances.

 

Numbers Speak

A press release shared through the National Reverse Mortgage Lenders Association website highlights that the housing wealth of seniors (62 years and older) grew by $520 billion or 4.91% in the first quarter of 2022 when compared to the fourth quarter of 2021. It also touched a record high of $11.12 trillion. The release suggests that the main driver behind this rise is an increase in home values by around $563 billion or 4.4%, with a $43 billion or 2.09% increase in the debt that seniors hold working as a compensating factor.

Data released by Statista shows the origination of more than 49,000 home equity conversion mortgages (HECM) in the United States in 2021. This was significantly more than 41,859 in 2020 or 31,274 in 2019. The number hovered between around 48,000 and 60,000 from 2012 to 2018. The period of the Great Recession from 2007 to 2009 saw a significant number of reverse mortgages, with the number reaching a peak of 114,692 in 2009.

While there are predictions of the U.S. going through a recession in 2023, not all financial experts, Goldman Sachs included, are on the same page. Besides, with home prices being on the higher side, it might be a good time for seniors who’re thinking about tapping into their home equity.

 

What is a Reverse Mortgage?

In simple terms, a reverse mortgage lets homeowners who are 62 years of age or older borrow a part of the equity in their homes. The key difference between a regular mortgage and a reverse mortgage is that the mortgage provider pays the homeowner in the case of the latter. The money you receive through this type of mortgage could be tax-free, although you need to consult with a tax advisor.

A reverse mortgage gives you the ability to keep living in your house if you’re having trouble keeping up with your finances and are considering selling because you need the money. The lender receives the funds it provides after everyone in household has passed away, if you sell the home, or if you relocate permanently.

What Are the 3 Types of Reverse Mortgages?

Reverse mortgage solutions come in three basic forms. These include ones insured by the Federal Housing Administration (FHA), proprietary mortgages not insured by the FHA, and single-purpose reverse mortgages provided by state/local governments. FHA-insured home equity conversion mortgages (HECMs) account for the most common type of reverse mortgages.

Home Equity Conversion Mortgages 

The U.S. Department of Housing and Urban Development (HUD) is responsible for creating and regulating HECMs. While mortgage lenders issue these loans, the FHA insures them. FHA receives a mortgage insurance premium (MIP) upon the closing of your loan. This stands at 2% of the appraised value of a home or FHA’s lending limit of $970,800 (the lower of the two).  The insurance is in place to safeguard a borrower in case a lender stops making payments and to protect the lender if the amount received upon selling the home is not enough to repay the mortgage completely.

From 2010 to 2013, borrowers got to choose from two variants, Standard and Saver. A Standard HECM came with a larger loan amount, where proceeds varied from 62% to 77% of a home’s appraised value, and borrowers needed to pay an upfront MIP of 2%. Saver HECMs came with smaller loan amounts, where proceeds varied from 51% to 61% of a home’s appraised value. In this case, borrowers needed to pay just 0.1% as MIP.

Proprietary Reverse Mortgages 

Some lenders provide proprietary reverse mortgages tailored for homeowners who wish to get loans for high-value homes. While these loans are not subject to regulations that govern HECMs, most lenders tend to follow and offer the same consumer protections, with mandatory counseling being a part of the parcel. Since lenders usually provide these mortgages toward homes that value at $1 million or more, referring to them as jumbo reverse mortgages is fairly common. 

Single-Purpose Reverse Mortgages

Single-purpose reverse mortgages offered by some state and local governments require that you use the proceeds you receive through the loan for specific purposes such as paying property taxes or carrying out repairs. These mortgages are typically for low- to moderate-income homeowners. Like proprietary reverse mortgages, these are not FHA-insured.

 

How Does a Reverse Mortgage Work?

Even if you’ve paid off your primary mortgage and own 100% equity in your home, there’s little chance that you might be able to borrow as much as its appraised value. The amount you can borrow depends on various factors in addition to your home’s appraised value. These include the age of the youngest borrower on the application, the HECM mortgage limit, and existing interest rates. For 2023, the HECM mortgage limit stands at $1,089,300.

Borrowers usually receive higher loan amounts as they grow older, and low interest rates also play a favorable role in the amount you may receive. In addition, you may qualify for a higher loan amount through a variable-rate reverse mortgage when compared to a fixed-rate alternative. 

If you opt for a fixed-rate HECM, you receive a single lump-sum payment. With variable-rate HECMs, you may choose to receive the funds in different ways.

• Receive equal monthly payments if at least one of the borrowers uses the home as his/her primary residence.
• Receive equal monthly payments for a predetermined time period.
• Get access to a line of credit that runs until you max it out.
• Receive equal monthly payments and get access to a line of credit until you keep living in the home.
• Receive equal monthly payments and get access to a line of credit for a predetermined time period.

Much like a regular mortgage, interest on a reverse mortgage keeps accruing every month. In addition, you also need to account for the money you’ll need to cover ongoing maintenance costs, homeowner’s insurance, and property taxes.

Using a HECM to Buy a New Home

Seniors may think about buying a new home by looking at what a HECM for Purchase mortgage has to offer. In this case, you get the freedom to decide how much money you wish to pay each month, with not needing to make any payments also being an option.

The Three-Day Right to Cancel

Most reverse mortgage companies give you the right to cancel the agreement within three business days of the loan’s closing without incurring any penalties. If you wish to make use of this right to rescission, you need to notify your lender in writing. As a result, it’s best that send your cancellation notice by certified mail and keep the return receipt. Once the lender receives your notice, it gets 20 days to return any money you might have paid in the form of fees or charges.

 

Pros and Cons of a Reverse Mortgage

Getting a reverse mortgage comes with its share of possible pros and cons. For example, if you’re having trouble meeting your financial obligations, a reverse mortgage might be an effective way to secure your future. However, getting one is not free and comes with various fees and charges. 

The other benefits of getting a reverse mortgage include:

• You may keep living in your house instead of selling it to get the money you need.
• You may use proceeds from a reverse mortgage to pay off your existing mortgage.
• The money you receive through a reverse mortgage is tax-free.
• You or your heirs don’t have to worry about paying any balance if the amount your home sells for is less than the amount owed toward the reverse mortgage.

If you’re wondering what the downside to a reverse mortgage is, here’s what you need to know.

• You face the risk of losing your home to foreclosure if you’re unable to keep up with property taxes, HOA fees, homeowners insurance, and other costs related to being a homeowner.
• Foreclosure is also a possibility if you don’t occupy the home in question as your primary residence.
• Since a reverse mortgage lowers the equity you have in your home, your heirs stand to inherit less.
• Getting a reverse mortgage might have an effect on you being able to qualify for government programs such as Supplemental Security Income (SSI) and Medicaid. 

What Are the Eligibility Criteria?

Not everyone who owns a home and is over 62 years of age may qualify for a reverse mortgage. The other eligibility criteria include:

• You use the home as your primary residence and spend most part of the year there.
• You’ve paid off your mortgage completely or have a low outstanding balance.
• You don’t have any federal debt such as a student loan or outstanding income taxes.
• You have adequate funds to keep meeting the costs of being a homeowner or agree to use part of the proceeds from the reverse mortgage for the same.
• Your home meets the required standards.
• You go through the required counseling from a HUD-approved agency.

 

Is a Reverse Mortgage Right for You?

It’s common for some people to confuse reverse mortgages with home equity loans and home equity lines of credit (HELOCs). While both give you access to funds based on the equity you’ve built in your home, the similarity ends there. This is because you don’t need good or excellent credit to qualify for a reverse mortgage, and you don’t need to make repayments until you sell your home or die. 

A reverse mortgage might work well in giving you access to your home equity without selling it if you:

• Don’t want the hassle of making monthly repayments
• Cannot afford to make monthly repayments
• Are unable to qualify for cash-out refinance or a HELOC

 

Reverse Mortgage Scams You Need to Avoid

If a contractor suggests getting a reverse mortgage so you might be able to pay for repair work easily, it’s reason enough to be wary. This is because contractor scams related to reverse mortgages are not uncommon, where they try to pressurize unwitting seniors into getting expensive reverse mortgages.

It’s also important to steer clear of ads that claim to offer special reverse mortgage deals for veterans, imply approval from the Department of Veteran Affairs (VA), or offer payment-free alternatives. Bear in mind that every reverse mortgage comes at a cost.

Who Owns the House in a Reverse Mortgage?

When you get a reverse mortgage, the title of the home remains in your name. This is why you continue to remain liable for paying property taxes, homeowner’s insurance, HOA fees, and maintenance-related costs. If you default on any of these payments or fail to maintain your home in the right manner, the lender may choose to foreclose on the home. Once foreclosure proceedings are complete, the lender takes possession of the home and becomes its legal owner.

 

Conclusion

Just like there are alternatives to the traditional mortgage, people thinking about getting reverse mortgages have other options too. For instance, if you’re okay with making monthly payments, you may look at what home equity loans and HELOCs have to offer. If you still have an existing mortgage, you may consider refinancing it after comparing interest rates. Downsizing might also be an option if you can do with a smaller space, as you’ll get a new home and some extra money.

If you’ve decided to move forward the reverse mortgage path, it’s important that you partner with a reliable lender. If you’re wondering how to choose the right mortgage provider, bear in mind that you need to look at factors such as interest rates, flexibility, and the level of customer service you receive.

Can changing jobs while buying a house have an effect on your ability to get a mortgage? The short answer to this is yes, even if you’ve already received pre-approval. This is because your income and employment history play key roles in your ability to qualify for a mortgage. However, a change in employment does not necessarily have a negative impact on the home buying process. For example, if you move to a better paying documented job, you might not face any disruptions in the approval of your mortgage.

 

Employment and Income From the Lender’s Perspective

Unless your job comes with an end employment date, you may expect a mortgage provider to view it as ongoing and permanent. If you’re wondering how long you have to be at a job to get a mortgage, with most types of mortgages, you need to show a two-year work history. If you’ve worked at the same job or in the same industry for two years or more, you typically don’t need to answer any more questions on this front.

If you wish to get a mortgage without two years of work history, you may expect mortgage providers to look at various aspects. These include:

• Your qualifications
• The financial health of your employer and its industry
• Periods and reasons of unemployment
• The frequency at which you change jobs
• Any recent increase in pay/responsibilities

 

What Mortgage Providers Wish to Know About Job Changes

Getting approved for a mortgage usually requires that you provide at least a two-year work history. If the time you’ve spent at your existing job falls short of this mark, or if you’ve switched jobs recently, you may expect your mortgage provider to seek more information. Most importantly, your lender would want to know what impact the change has had on your income, and thereby, your ability to make repayments.

Your lender might ask you why you changed your job. If you’ve changed jobs multiple times over a short span of time, you might need to explain the reason.  

You may actually change your job a few weeks or months before you begin the process of getting a mortgage without it affecting the outcome of the process, provided it comes in the form of a better position or higher pay.  However, if a lender looks at your new job less promisingly than you do, you might have trouble getting the desired mortgage.

 

Can You Change Jobs While Buying a House?

Changing jobs while buying a house, especially if you’ve already applied for a mortgage, may lead to delays, and it also brings with it the possibility of a reversal in the lender’s decision. Once you switch jobs, underwriters need to take a complete relook at your application, basing it on details from your new job. Besides, depending on the type of switch you make, a lender might view the stability of your employment.

If you’ve changed your job after receiving preapproval, proactively informing your lender about it and providing the offer letter, a written Verification of Employment (VOE), and your most recent pay stub is a good idea. Even in this case, you may expect some delays.

 

Acceptable and Inappropriate Job Changes

Just what happens if you change jobs while buying a house depends on what the switch entails. In case you think that your loan officer might view the change as a red flag, you may want to delay changing the job until the closing is complete.

Acceptable Changes

Some instances of job changes don’t hamper the loan application process.

Higher income, same industry.

Consider this – you’ve been working at the same hotel for over 10 years, and you have a job offer from a competitor that comes with a 20% increase in income. In this case, you check all the basic parameters for getting a mortgage. You have work history that is more than two years, you’ve held on to your last job for a while, your new job belongs to the same industry, and your industry (hospitality) is fairly stable. If anything, the hike in pay will only work as a plus.

Moving to the next level.

If your new job involves moving up the ladder, such as advancing from being the vice-principal of a school to a principal, a lender would view this change as favorable, all the more so if the new job comes with a lengthy contract.

 

Inappropriate Changes

Even if your new job pays you more than your existing one, it’s not necessary that a lender would look at it with favor. For example, letting go of a salaried job to work on a commission or bonus structure might not bode well with your lender even if the latter involves making more money than you do now. This is also the case if you switch from being a W-2 employee to a contract employee or a self-employed individual, because it interrupts the paper trail of your work history.

Moving to a different industry, taking up a lower position, or switching to a job that comes with no change in pay or responsibilities might get your lender to think twice. If your new job comes with a preset termination date of three to five years, it’s reason enough for your lender to be wary. A lender might also refrain from approving your application if it feels you can’t hold on to the same job for an extended duration and are prone to job hopping.

 

What Else You Should Not Do While Getting a Mortgage

While changing jobs when trying to buy a house might not have a detrimental effect on the process, there are a few things you should avoid, not just before applying for a mortgage, but until the closing is complete. This is because your mortgage provider may pull your credit report at any point until this stage.

Steer Clear of Making Large Purchases

You should ideally avoid making large purchases before or during the home buying process, no matter whether you pay for it using credit or cash. If you make a large purchase on credit, it has an adverse effect on your credit utilization rate and debt-to-income (DTI) ratio, both of which play crucial roles in determining your creditworthiness. If you pay for a large purchase with cash, it brings down the amount you may put toward your home’s down payment. Consequently, it’s best that you delay making any large purchase until the closing of your mortgage.

 

Refrain From Opening New Forms of Credit

Every time you apply for any type of credit, be it a credit card or a personal loan, your credit score drops by a few points. Given that a mortgage provider can pull your credit report at any time before the loan’s closing, a negative change in your credit report may have an adverse effect on the approval of the loan or the terms you get.

For example, a slight drop in your credit score may get it to move from excellent to very good, or from good to fair. In case of your former, your lender might still offer you the mortgage, but with a higher interest rate. In case of the latter, it may even choose to withdraw its offer completely.

This also applies when it comes to co-signing a loan, because, you, in essence, are a co-borrower, and the lender will pull your credit report. If you co-sign on a loan, you may expect it to increase your DTI ratio. Co-signing a credit card will have a bearing on your credit utilization rate. Besides, if the primary borrower misses making payments or defaults on the loan, it will have a negative effect of your credit score.

 

Closing Existing Revolving Forms of Credit

While paying off your debt is great, you might want to think twice before closing any revolving forms of credit. These include credit cards as well as lines of credit. Closing an existing credit card (or line of credit) brings down the average age of your credit accounts, and the older the account, the more pronounced the effect.  In addition, closing an existing account may increase your credit utilization rate, which, in turn, has a negative effect on your credit score. As a result, if you plan to close any type of revolving credit account, consider waiting until the closing of your mortgage.

Missing Making Payments

Payment history plays a key role in the calculation of your credit score so it’s crucial that you make all your payments on time. These include credit card and loan payments as well as utility bills. Remember that even a single late payment has a negative effect on your credit score, and this can be a bigger problem than you imagine if it happens after the pre-approval of your mortgage and before its closing.

 

Depositing a Lot of Money

If you’re making a large deposit into your bank account during the process of getting a mortgage, you may expect extra scrutiny. While payroll deposits and bank account transfers are typically alright, prepare to offer an explanation if you’re making any other type of large deposit. Even if you have a perfectly valid reason, the to-and-fro usually leads to slowing down of the process.

The reason for the scrutiny is lenders wish to ensure that the money comes from a legitimate and documented source. If the deposit comes with a paper trail, you’re usually good to go. If you’re anticipating receiving a gift to help with your down payment or plan to deposit cash that you’ve been saving for years, it’s best that you inform your loan officer about it at the onset to avoid any complications at a later stage. If you don’t plan to use the money for down payment, consider putting off depositing it into your account until the closing of the mortgage.

 

Not Anticipating Right

A 2021 Bankrate/YouGov survey shows that 33% of baby boomer buyers (57 years to 75 years old) have some regrets about the home they purchase, and this number increases to 64% with millennial homebuyers (25 years to 40 years old). While 21% of millennials said that maintenance costs are higher than estimated, 13% feel that their mortgage payments are too high. 13% of millennials also think that they end up overpaying for their houses.

Bear in mind that once you buy a house, it’s not easy to recuperate your money by hoping to sell it quickly. In fact, if you have to sell your home because you can’t keep up with your mortgage payments, there’s a possibility that you’ll end up losing money in the process because of all the fees and taxes associated with buying and selling a home.  Therefore, it’s crucial to determine how expensive a house you can actually afford before you apply for a mortgage.

 

Not Knowing How Loan Points and PMI Work

You should ideally understand how private mortgage insurance (PMI) and loan points work before applying for a mortgage. Loan points let lenders reduce the interest rates of loans and are typically best used if you plan to live in the home you purchase for seven years or more. PMI, on the other hand, lets you pay less than 20% as down payment. You stop making payments toward your PMI once you acquire 20% equity in your home.

 

Conclusion

Changing a job shortly before or after you apply for a mortgage typically does not have an adverse affect if the switch entails a higher paying job in the same industry. However, if you move to being a contract employee from a W-2 employee or move to a new industry, your lender might not view the switch with favor.

It’s also important that you refrain from making large purchases, applying for new forms of credit, and being lax about your creditworthiness. Calculating just how much money you’ll need to spend as a homeowner is equally important. If you’re in doubt about any financial aspect of buying a home, it’s ideal that you discuss every aspect with your mortgage provider ahead of time.