Tag Archive for: home loan

What You Need to Know About Cosigning for a Mortgage

August 17, 2023
Smiling daughter and mother shopping online with credit card on laptop

Sometimes, we get by with a little help from our friends…or family. 

There are many reasons someone may need help to qualify for a mortgage. They may just be starting out and haven’t established a good credit history yet. Or perhaps they’re just getting out of a tough financial situation that they’re turning around. 

When it comes to cosigning for a mortgage, the cosigner is essentially boosting the financial profile of the mortgage application, while signing up to share responsibility for the loan should the primary borrower stop making their monthly mortgage payments. 

Questions About Cosigning

Cosigning can be an amazing thing to do for someone, especially your children or other loved ones, but it comes with a lot of financial responsibility on your part. Before cosigning for a mortgage, you need to understand all the implications, risks, and potential consequences. 

Does cosigning for a mortgage affect my credit?

Cosigning for a mortgage loan impacts your credit. The loan will show up on your credit report, meaning that it will impact your debt-to-income (DTI) ratio and overall credit utilization. Additionally, any missed or late payments by the primary borrower will impact everyone’s credit score—the primary borrower’s and the cosigner’s. 

Now for the good news: If the primary borrower consistently makes their monthly mortgage payments on time, it can improve everyone’s credit score. It’ll all come down to the primary borrower and their ability and willingness to pay on time.

With this in mind, it is always a good idea to maintain an open and honest line of communication with the primary borrower. This ensures that mortgage payments are made on time and creates good credit for everyone.

Does a mortgage count as debt? 

A home loan is a form of debt. Cosigning for a mortgage means you’re assuming responsibility for the debt alongside the primary borrower.

As mentioned, the mortgage debt will factor into your debt-to-income ratio, which lenders analyze to determine your ability to manage additional credit. It’s important to consider the impact of this debt when applying for other loans or credit lines in the future.

What are the risks of cosigning a loan? 

It’s a cold, hard reality that if the primary borrower fails to make timely monthly mortgage payments or defaults on the loan, the responsibility for this debt will fall on the cosigner. This could lead to financial strain, credit score damage, and even potential legal action as the lender attempts to collect the outstanding debt.

Remember, too, that since your debt-to-income ratio will be affected by cosigning for a mortgage, your ability to obtain credit in the future may be impacted. This is why you should think long and hard not just about whether you feel that the primary borrower can consistently pay their home loan, but also about any large purchases or credit lines you may need in the future. 

Reduced borrowing capacity could really hurt you if, say, you’re looking to finance a new car, help out a child with a student loan, refinance your own home, or invest in a second property. 

Can a cosigner be removed from a mortgage? 

The option to remove a cosigner from a mortgage loan depends on several factors. In some cases, mortgage lenders may consider removing a cosigner if the primary borrower has made consistent monthly mortgage payments.

It’s not as easy as just removing the cosigner’s name from the loan, however. The primary borrower typically has to refinance the home loan, putting it in their name alone. This means the primary borrower will have to take interest rates, credit score requirements, debt to income ratio, and their current financial circumstances into account. In essence, they would have to be sure they’ve cleared up the reason they needed a cosigner in the first place.

Trusted mortgage lenders can help you understand the specific requirements and conditions for removing a cosigner from a home loan.

What happens if a cosigner doesn’t pay?

We know what happens if the primary borrower doesn’t pay: The mortgage lender will come looking for the cosigner. But what happens if the cosigner also doesn’t pay? 

When a cosigner fails to make the mortgage payments, the lender will typically pursue both the primary borrower and the cosigner for payment. If neither party fulfills the financial obligation, they can both be subject to legal action and collection efforts.

What’s the difference between a co-borrower and a cosigner? 

A cosigner is someone who agrees to assume responsibility for the loan if the primary borrower cannot meet their obligations. On the other hand, a co-borrower (or co-applicant) is equally responsible for repaying the loan and shares ownership of the property.

While a cosigner’s name may appear on the loan documents, a co-borrower has equal rights and responsibilities, along with a stake in the house. 

What else do I need to know before cosigning?

You need to give cosigning for a mortgage loan a lot of thought. Assess the primary borrower’s financial stability, including their income, employment history, and credit history.

If you’re willing to consider cosigning a mortgage loan for them, you probably know the potential primary borrower pretty well. Use this relationship to your advantage as you think about how responsible they are in general. Do they always do what they say they’re going to do? Are they quick to shirk blame? Do they go out of their way to rectify problems, or do they avoid them like the plague? 

You want to be confident that your credit score, borrowing ability, and—most of all—good name will not be ruined by cosigning for a mortgage.

Next, ensure that you can comfortably handle the financial responsibility of the mortgage payment in case the primary borrower is unable to fulfill their obligations.

Finally, consult with a knowledgeable mortgage advisor like Preferred Rate to gain a comprehensive understanding of the specific loan terms, interest rates and any mortgage insurance requirements associated with the home loan. 

Pros and Cons of Cosigning for a Mortgage

You’ve now got a lot of information about what it takes to cosign for a mortgage. But let’s weigh out the benefits and risks so you can really hone in on whether this is the right move for you. 

Pros

  • Cosigning can help a loved one achieve their dream of homeownership.
  • It allows the primary borrower to qualify for a mortgage they might not otherwise have been eligible for.
  • On-time payments can, over time, help improve both the primary borrower’s and the cosigner’s credit scores and credit history.

Cons

  • Cosigning for a mortgage comes with financial risks, including knocks to your credit score and being held responsible for the other party’s missed payments or default.
  • It can limit your borrowing capacity, as the cosigned mortgage becomes part of your debt-to-income ratio.
  • The relationship between the cosigner and the primary borrower may become strained if payment issues arise.

Taking the First Steps

Cosigning for a mortgage is a big decision and a long-term commitment. So you have to weigh the risks and benefits carefully, considering both your financial situation and the primary borrower’s ability to fulfill their obligations. Sit down and have an honest conversation with the primary borrower. Make sure you lay the foundation for a healthy, open, and communicative relationship going forward.

Once you’re ready, bring a professional like a Preferred Rate mortgage advisor into your corner to make sure cosigning for a mortgage aligns with your financial goals and responsibilities.

If you’re at that point now and want to get started, give us a call today. We’re always here to help.

Is Buying a Home for a College Student a Good Investment?

August 4, 2023
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Tuition, books, transportation, room and board…the cost of college adds up fast. At first glance, then, it may seem crazy to consider buying a home for a college student, but is it? 

The truth is that there can be many benefits when you buy any property, and this scenario is really no different. In fact, when you consider the high cost of both on-campus and off-campus living in an expensive college town, buying a house that your student can use during their college years begins to make a lot of sense. 

The High Cost of College Room and Board

According to Credible, on-campus room and board runs about $12,680 or more annually for private four-year colleges and $11,140 or more for public, in-state colleges. Of course, these numbers can be much higher in certain areas, or at certain schools.

The cost of off-campus housing in college towns varies widely depending on a number of factors. These can include location, the type of rental it is, the number of bedrooms, the number of roommates, and the community amenities. However, since food, utilities, cable/internet, and transportation to and from campus are not included, SharedEasy estimates that these costs come to an average of about $27,180 for the nine-month academic year. 

Then, don’t forget, you will have to multiply those costs times four—or more—to account for your college student’s full academic career. During that time, the cost of room and board on campus, not to mention the rents off campus, are almost certain to increase annually.

What if you put those five figures of expense to work for you instead? With some planning, you could buy a property that could initially house your college student and then later function as an investment property after they’ve graduated. It’s definitely worth weighing the pros and cons of this room and board option.

Considerations in Buying a Home for a College Student

Let’s think through a few of the pros and cons to see if buying a home for a college student may be the right option for your family. 

Lowering room and board costs

One big pro is the potential financial benefit. Buying a home or condo can significantly lower the financial burden of off-campus housing or room and board, which can result in massive student loan debt with high interest rates. This is especially true if the property has room for multiple roommates, which would garner rental income for you. 

Providing your child with stability

Another advantage of buying a home for a college student is their stability and convenience. Owning your child’s home can eliminate their need to find a new place and move every year. It also cuts down on storage costs over the summer, as well as security deposits every fall.

Turning a profit through appreciation

Home appreciation can be a potential benefit, especially if you buy in a high-growth area. There is the possibility of making a nice profit if you sell when your college student graduates, or you could make this home an investment property and collect rental income.

Buying a house in a college town can be very strategic, as there will always be a need for housing as more students enter the school every year. Real estate agents can tell you more about renting to students, but it’s great to have a built-in renter base as long as the college or university is there!

Risks of home depreciation

Speaking of college students, depreciation is something to consider carefully. Tenants are always plentiful in college towns, but students aren’t necessarily the best renters when it comes to taking care of a property. Your property could lose value if your student renters don’t maintain it well, or if they do something illegal while living in the home. 

It’s important to have a conversation with your child about the responsibilities of being a good tenant—especially for their parents! You should have the same discussion with any of your child’s roommates. It’s also a good idea to involve the roommates’ parents. After all, many parents co-sign leases for their students. As a result, they should also be informed about what you expect, as well as any house rules. 

You might also consider paying to have the home’s basic maintenance and landscaping needs taken care of by a professional on a regularly scheduled basis. Your student likely won’t have time for maintenance and repairs, and this step can help your investment retain its value.

Tax write-offs

Now for some more good news: Buying a home typically comes with tax benefits. These could pertain to the interest on the monthly mortgage payment, mortgage insurance, and any repairs or updates you make to the home.

Tax write-offs can vary by state and can also depend on how you use the property. For example, there are different tax implications if you buy a property and allow your college student to stay in it rent free, vs. renting it out to other roommates. That’s why it’s always a good idea to check with your tax advisor before buying a home for a college student.

Your student’s independence

Owning the home means your student will always have their own private space and can personalize it any way they would like. They will also be able to choose their own roommates, do their own cooking, and control the noise level of their space. 

Retirement potential for yourself

It’s also never a bad idea to take your retirement strategy into consideration if you’re thinking of buying a home for a college student. Buying a property in a college town can be a great long-term plan. Consider that your child can live in it when they are in school, you can use it as an investment property and accrue rental income when they graduate, and then you can move into the property yourself when you’re ready to retire.  

Are You Ready to Buy a Property?

Now let’s look at all the costs associated with buying a house—whether you’re buying a home for a college student or not. There is the sticker price of the home, of course, but there is also the down payment, the closing costs, the monthly mortgage payment, the possible mortgage insurance (if you put less than 20% down), and the cost of any work that may need to be done to the home.

You also need to think about interest rates at the time you’re looking to buy. And you’ll definitely want to schedule a home inspection. The house may have served as student housing previously, and as mentioned, students aren’t always the most conscientious tenants! 

To help make the final decision, look at the bottom line costs. Consider these three possible scenarios for housing during your child’s college years:

  • Your college student lives on campus and pays for room and board, likely through student loans.
  • Your child rents a property off campus. Consider that they will have to set up accounts for all ongoing living expenses, get themselves to and from campus, and remember to pay each individual bill on time.
  • You buy a home for your college student and house them yourself for four or more years. After they graduate, you will have the option to sell the home or convert it into an investment property that earns ongoing rental income.

All in all, purchasing a home in a college town is something to consider—but it’s far from a no-brainer. It can, however, be a great way to skirt some of the college debt for you and your child; ensure that they’re housed in a safe, clean environment; and possibly earn you some money in the process. 

Are you ready to discuss this idea further? Preferred Rate is here to go over all your options and create a plan that’s right for you. Contact us today to speak with a Mortgage Advisor. 

How to Qualify for a Second Home Loan

July 25, 2023
Island with house, cottage or villa in Thousand Islands Region i

The American dream is not one size fits all. Some borrowers want to purchase a second home where their family can vacation for part of the year. Buying property as a second home could mean a cabin in the mountains, a beachside bungalow, or anything in between.

The vision is up to you. But what’s important is that you understand that buying a second home is completely attainable for many people. That’s right: Buying property as a second home can be within your reach, but it starts with understanding the second home mortgage requirements.

Second Home vs. Investment Property

Let’s clear one thing up before we discuss second home mortgage requirements. While an investment property may in fact be the “second home” you purchase—after your primary residence—that is viewed as a different product with a different purpose in the eyes of mortgage lenders.


A second home is an additional dwelling for you and your family. It can act as a personal vacation home, a place to stay when visiting family, or as your retirement home in a few years. While you may be able to rent out your second home on a short-term basis, the primary purpose of this property is for you and your family. With that in mind, you cannot rely on the rental income this home may generate when qualifying for a second home loan.

Down Payment

Most lenders require at least 10% down on a second home, though 20% down tends to be standard. Lenders need to see that you’re committed to buying a second home, as it’s easier to walk away from a home that isn’t your primary residence. A larger down payment may also help you avoid higher interest rates. 


As with a primary residence, you can obtain your down payment by tapping into savings, utilizing a monetary gift from a relative or domestic partner, or liquidating investments. You may even be able to use some of the equity in your primary residence when buying a second home by using a cash-out refinance or home equity loan. Your loan adviser can help you navigate this process.


You might be thinking, “But there are loan programs that don’t require any money down,” and you would be right. However, these are government-backed mortgages or down payment assistance, which cannot be used for second home purchases. Most second home loans are conventional loans, although FHA loans can be used as well.

Credit Score

Every lender is different, but credit standards tend to be a bit tighter when qualifying for a second home mortgage. That’s because a primary residence provides shelter, whereas a second home is a “nice-to-have,” not a necessity.


Lenders may consider applicants with a score of 620 or higher, though a score above 700 is preferable when qualifying for a second home mortgage. Naturally, lenders will also want to look at your credit history, taking into account any late mortgage payments, exorbitant credit card balances, and bankruptcies. The more you are extended with various debt payments, the higher risk you may be for the lender.

Debt-to-Income (DTI) Ratio

You’re not a stranger to this; you’ve been around the block before when you purchased your primary residence. Like last time, lenders will want to analyze your debt-to-income ratio—or the amount of money going out versus the money coming in.


You need to understand that this time your existing mortgage payment will be factored into your DTI, along with other monthly payment debts, including credit cards, student loans, and auto payments. Remember, too, that you cannot offset your DTI by factoring in any forward-looking rental income that you may be able to collect by renting out your second home. That would make this an investment property. Investment properties come with investment property mortgages, with a different set of mortgage requirements. 


When qualifying for a second home mortgage, lenders generally want to see that your debt, which would include your new mortgage, will represent 43% or less of your pre-tax monthly income. This number can sometimes vary depending on your credit score and down payment.

As with a primary mortgage, you can get pre-approved for a second home loan, so it’s always a good idea to talk to a loan officer before you enlist a real estate agent to search for properties.

Reserves

Things happen. Mortgage professionals know this more than anyone, which is why they like to see some liquidity from second home buyers. This comes in the form of reserve funds.

Well-qualified borrowers generally need to show at least two months of reserve funds that can cover both their primary and secondary mortgages, property taxes, and insurance should their income or employment change. Weaker borrowers and those who are self-employed may need to show six months of reserve funds.

Is a Second Home Right for You?

Though the process of qualifying for a second home mortgage isn’t that different from qualifying for a primary home, borrowers may face a little more scrutiny and tighter lending standards on these properties. You should also keep in mind that these homes may have tax implications, short-term rental restrictions, and additional condo or HOA fees. These are all things to consider when determining whether a second home is right for you.


Preferred Rate is always standing by to help with your housing-related needs. Give us a call today to go over your unique financial situation and the process of qualifying for a second home loan.

Second Home vs. Investment Property: What’s the Difference?

July 7, 2023
Two kids happily splashing on the edge of a pool

You own your primary residence, but you’re thinking about buying a second home. Congrats! Being in the financial position to make that kind of real estate investment is a major accomplishment, and you should be proud of that.


The first thing you’ll want to do after celebrating your awesomeness is to determine the function of this new home. There are second homes that are exactly that—additional dwellings regularly used by you and your family as a vacation home. And then there are investment properties that are purchased with the explicit intent of renting them out as a source of income.


There are a few key differences between a second home and an investment property. They can impact your interest rate, down payment, ability to qualify, and even taxes. So make sure you’re clear on the goals for your new property from the start. You can also turn to Preferred Rate or a trusted real estate agent for additional information on these non-primary residences. 

Interest Rate Differences

There is a noticeable difference between a mortgage rate on second homes vs. investment properties. Second home loan rates are more like those of primary residences, while an investment property will typically have much higher interest rates. Rates on investment properties are usually 1 to 3 percentage points higher, depending on credit and loan-to-value ratio.


Why is there such a difference between the two types of homes? It’s because a rental property is not occupied by the borrower, and most borrowers will be relying on the income that the property generates to fund the home. Those two factors make these loans a much higher risk for mortgage lenders.


Remember that for both second homes and investment homes, your mortgage rate is also influenced by both your credit and your down payment. Of course, the better your credit score and the higher your down payment, the better your rate.

Down Payment Requirements

A typical down payment on a second home is 20%. However, you can find options to put as little as 10% down, depending on your credit rate and other qualifiers. Investments like rental properties, on the other hand, tend to require 20% to 25% down.


A larger down payment can sometimes lower your mortgage rate, regardless of whether you’re thinking about a second home vs. investment property. Keep in mind, too, that items like the interest rate and down payment will impact the size of your monthly mortgage payment. 

The Need for Reserves

Reserves are savings balances that will be there after you close on your home purchase. These are seen as emergency funds that assure lenders that you will be able to continue making payments should any unforeseen expenses or income loss come your way.


Some lenders require reserves on second homes, and they almost always require them on a real estate investment like a rental property. These reserve requirements can range from two months to more than six months of your total housing payments. You will want to consider this when determining the amount of your down payment so you don’t completely liquidate your savings.

Debt-to-Income Ratio Calculation

Since this new home will be in addition to your primary residence, you’ll have to include the mortgage on your primary home, plus this new mortgage, into your debt-to-income (DTI) qualifying ratio.


Though you may be able to rent out your second home on a short-term basis, you cannot count that anticipated income in your DTI calculation. If your home is an investment property, however, lenders will generally allow you to count up to 75% of your expected rental income toward your DTI. This can require additional paperwork and even a special appraisal to ensure that your rental figures are comparable to the ones in the rest of the neighborhood.

Proximity to Primary Residence

For your new home to qualify as a second home, lenders will generally require that it be located at least 50 miles from your primary residence. An investment borrower, on the other hand, can live as close or as far from their rental properties as they like.


Regardless of their proximity to their real estate investment, these landlords should have a property manager or property management plan in place to maintain the day-to-day operations and maintenance required for an investment property.

Credit Score Requirements

As you would expect, a high credit score is always favorable for any type of additional home purchase. A borrower buying a second home will typically need a score of at least 640. This can hold true for investment buyers as well, though a score above 680 is preferable. 

Tax Benefits and Considerations

Rental income is taxed differently depending on whether you have a second home vs. investment property.


If you own an investment property, the rental income must be declared as part of your taxable income. Those who own a vacation home don’t have to do this as long as their property is rented out for 14 days a year or less.


Investment homeowners do get a few tax benefits, though. They are able to deduct depreciation, in addition to property maintenance, advertising, insurance, and utility expenses. As you might guess, these deductions can go a long way toward offsetting the overall tax impact of the asset’s rental income.


However, if you’re using the property as a second home, you can deduct mortgage interest (up to $750,000 in mortgage debt), property taxes, and mortgage insurance payments.

Discuss Your Real Estate Investment with a Pro

The discussion over whether to purchase a second home vs. an investment property is a personal one. It really boils down to your goals. Are you looking to generate income? Will this be a long-term or short-term rental? When you picture this home, do you see yourself living in it for part of the year, or do you fantasize more about increased cash flow?


There are pros and cons to all types of real estate investments, so establishing what you hope to achieve through this purchase will help determine how you should invest in real estate. 

Here’s something else you need to know: You don’t have to make these decisions alone. Reach out to a mortgage advisor at Preferred Rate —we are here to assist you in this process.


Contact us today to learn more about these two home purchase options and which one may be best for you based on your situation

Six Ways to Beat Inflation by Buying a Home

February 2, 2023
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High inflation is no fun. Though everyone pays the same higher prices, periods of rising inflation don’t have the same impact on all Americans. A person’s investment strategy—including real estate, investments in the stock market and S&P 500, and their retirement plan—can be a good inflation hedge. 

While inflation slowly chips away at your dollar’s buying power, putting those dollars into investments can allow that money to grow faster than the rate of inflation. One of the best ways to beat inflation in 2023 is by buying a home—and we’ll show you how.

1. Lock in Your Interest Rate Now

The Federal Reserve combats high inflation by raising interest rates, thereby making it harder—and more expensive—to borrow money. So far this hasn’t done a lot to curb spending, and the Federal Reserve has made it clear that it intends to keep raising rates. This means borrowers who wait may face even higher rates. 

2. Buy Before Inflation Rises Again

As we mentioned, the actions of the Federal Reserve haven’t done enough to bring inflation down. Is there a threat that inflation will continue to rise? Absolutely. If and when that does happen, everything will get more expensive—including homes. Higher home prices mean larger loans, down payments, and closing costs, since all three of these are based on a percentage of the home’s price. It’s the ultimate example of a rising tide (aka rising inflation) lifting all boats. 

3. Stop Renting

Do you know what else is likely to go up during periods of high inflation? Rent. Because it’s a cost, right? So there’s a good chance it’ll head north as landlords use these rent increases to beat their inflation. Buying a home is a long-term investment that can save money—money that is currently only helping your landlord. Excellent inflation hedge for them; no help for you. 

Real estate is a part of any good, diversified investment strategy. Plus, it can lock in your expenses for the long term. No more worrying about rent increases or lease renewals. 

4. Utilize Preferred Rate’s Interest Rate Hack

Want to shave a few figures off the current advertised interest rates? You can with Preferred Rate’s interest rate hack. We have programs that will allow you to decrease your interest rate for either the life of the loan or the first two years. This can save money, prevent higher interest rates from crushing your dreams of homeownership, and allow you to make a long-term investment in your financial future, all while you beat inflation.

5. Appreciate Depreciating Debt

When you buy a home, that asset tends to appreciate in value over time (minus a few ebbs and flows inherent in the market). You know what does the opposite? Debt. Debt actually depreciates in value with the rate of inflation. 

Think about it this way: You know those folks who are always saying, “In my day, you could buy a home for $44,000”? Well, they’re not lying. Years and decades from now your debt will be worth far less. Your monthly mortgage payment won’t change, but with the rate of inflation, it will be worth less than it’s worth today. At the same time, your home is likely to go up in value. That’s a win-win, especially if you were renting before. 

6. Supplement Your Income with an Investment Property

Some Americans have extra cash lying around, becoming vulnerable to inflation because of the current economic uncertainties. If cash is sitting in a savings account earning next to nothing, then this much is certain: Inflation has won, and you’re no further ahead. 

Some people thinking about how to beat inflation have realized that an investment property may be the way to go, as that long-term investment can produce supplemental income. Extra income is extra appreciated with price increases, making this a smart inflation hedge. 

Every investment carries risks and rewards, and in a market like this, conditions can change in either direction—becoming more or less favorable. However, many individuals feel empowered when they take action. 

Though we can’t control periods of high inflation, we can respond to them by setting ourselves up for the best possible outcome. For some, that inflation hedge strategy will include locking in their investment costs, mortgage interest rate, and debt now to stave off any further price increases.

Preferred Rate has seen many market cycles, and we’re well-versed on the impacts of inflation. An experienced mortgage advisor is happy to talk anytime to determine if buying a home is the right move for you right now. 

Disclaimer: Preferred Rate – Partnered with American Pacific Mortgage is not a licensed CPA or financial planner. We advise you to consult your tax or legal professional as needed in order to make the right decision for you. Equal Housing Lender, NMLS #1850.

© 2023 Preferred Rate – Partnered with American Pacific Mortgage Corporation (NMLS 1850). All information contained herein is for informational purposes only and, while every effort has been made to ensure accuracy, no guarantee is expressed or implied. Any programs shown do not demonstrate all options or pricing structures. Rates, terms, programs, and underwriting policies are subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans are subject to underwriting approval. Some products may not be available in all states, and restrictions apply. Equal Housing Opportunity.

Can I Qualify for a Mortgage With Student Loan Debt?

May 11, 2022
mortgage blog, student loan debt, graduation

Graduation season is here! For many college graduates, student loan debt can turn into long-term financial stress. Even years after graduation, student loan debt can keep people from realizing dreams of homeownership. Add the recent economic shifts and inflation, and buying a house right now might feel downright impossible. This article can help bring some good news and help you make a plan.

If you’re getting ready to buy a house for the first time, but you’re worried about how your student loan debt will affect your mortgage, keep reading. A steady job and a good handle on your monthly expenses will take you farther than you think, especially if you’re a first-time homeowner. 

One of the best moves you can make is to lock in your rate today by getting pre-approved, which we blogged about here.

How to Buy a House With Student Loan Debt

This article will explain how student loans affect your home loan eligibility and how to qualify for a mortgage. Specifically, how to apply for a mortgage and get a home loan while you’re still paying off your student debt. 

A great first step is to connect with a mortgage advisor. You’ll be able to get personalized advice about your situation and find out about custom mortgage options. Start here to find a local advisor.

Three Factors That Affect Your Eligibility When You Apply for a Mortgage

#1 Debt to Income Ratio (DTI)

Your debt-to-income ratio impacts your buying power the most. Lenders compare your gross monthly income against your monthly debt obligations to determine how much you can afford to borrow. A DTI ratio higher than 43% can make it difficult to qualify. But there are select options for borrowers with student loan debt.

#2 Credit Score

A good credit score will get you a better home loan and a lower mortgage rate. But there are also special programs available for first-time homebuyers who have a lower credit score.

It’s always a good idea to download a free copy of your credit report. This will allow you to fix any errors, dispute incorrect information, and know your credit score.

#3 Down Payment

A larger down payment can often lock in a better rate and a more affordable mortgage payment. Ask your mortgage advisor about using investment stocks, retirement funds, gift funds, or borrowing from other sources.

Related: How to FAST TRACK your mortgage pre-approval

Best Home Loan Options for Homebuyers With Student Loan Debt

Related: Does every mortgage need an escrow account?

How Debt-to-Income Ratios Affect a Mortgage Application

When you apply for a mortgage, your debt-to-income ratio directly impacts your eligibility, your rate, and your loan terms.

Why? Lenders compare your total monthly income with monthly debt repayments to determine how much you can afford. For this reason, it can be difficult to qualify if your monthly debt payments are higher than 40% of your pre-tax income.

This is where student loan payments make a significant impact.

Student loan payments are automatically included in your monthly debt balance, so they directly affect how much you can afford for a home loan. Since there are different student loan repayment programs, the structure of your specific student loan payment plan can make a big difference.

First, let’s look at how debt-to-income ratios are calculated. Then you can decide whether or not it’s a smart idea to restructure your student loan debt.

How to Calculate Your Debt-to-Income Ratio (DTI)

Figuring out your debt-to-income ratio (DTI) is easy.

First, write down your gross monthly income, then list all your recurring monthly payments.

Leave out expenses that vary each month, such as utility bills, entertainment, groceries, transportation, etc.

To calculate your DTI, combine your required monthly payments such as:

  •  Monthly rent or mortgage payment
  •  Student loan payment
  •  Minimum credit card payment
  •  Monthly car payment
  •  Any court-ordered payments (child support, back taxes, etc.)

Related: Boost your credit score in less than 60 days

Example: Calculating Your Debt-to-Income Ratio with Student Loans

For example, if your gross monthly income is $6,000, 43% would be $2,580. This is the maximum amount a lender would approve for a monthly mortgage payment for a conventional loan.

Next, it’s time to subtract your monthly debt repayments. For example:

  • Monthly car payment = $200
  • Credit card payment = $135
  • Student loan payment = $250

In this scenario, your monthly debt repayment would be $585. From the lender’s perspective, this means you have $1,995 available to make a monthly mortgage payment ($2,580 – $585 = $1,995.)

Note that your new monthly payment will need to cover your mortgage payment, homeowner’s insurance, property taxes, and mortgage insurance if required.

There are several loan options and custom mortgages available. Many home loans for first-time homebuyers offer home loans with 0-5% down. FHA loans only require a 3.5% down payment. Conventional 97 requires only a 3% down payment.

How Different Student Loan Repayment Programs Affect Your Mortgage Application

Finally, restructuring your student loans can help lower your debt-to-income ratio and be a better option than paying off your student loans.

Why? To apply for a mortgage, you’ll want to have a down payment ready as well as emergency funds. So you don’t want to deplete your savings to pay off your student loans.

If your monthly student loan payment is high, you might consider restructuring your student loan debt to lower your monthly payment. This will help lower your DTI.

Contact your student loan program and ask about the following options:

  •  standard repayment plan
  •  deferred student loan
  •  income-driven payment plan
  •  graduated payment plan

Don’t Let Student Loans Keep You From Buying a House

Buying your first home might be closer than you think, even while you’re paying off student loans. And several loan programs can work to your advantage, especially for first-time homebuyers.

Plan for your down payment, find out your credit score and calculate your debt-to-income ratio. Once you have a clear financial picture, you can consider restructuring your student debt to lower your DTI ratio.

Taking Action

Working with a local mortgage advisor can help you compare your best mortgage options, lock in the lowest mortgage rate, and secure the best home loan that fits your life goals. Even with student debt. Connect with a local mortgage advisor to discuss your options and save money on your mortgage. We’d love to help.

Why Title Insurance is a Good Idea for Every Homeowner

December 28, 2021
mortgage blog, title insurance, preferred rate

Homeownership is one of the biggest financial commitments that most people will ever make. You’ve probably heard of title insurance, but is it really necessary? If you are applying for a mortgage, your mortgage lender will most likely require title insurance. But even if it’s not required, title insurance offers clear benefits for new homeowners. 

Related: How to fast track your mortgage and get pre-approved for your best mortgage rate

Do I really need title insurance?

When you’re ready to buy a home, you’ll want to protect your investment in every way that you can. And if you have a mortgage, your mortgage lender will most likely require different types of insurance since your home is collateral for your loan. 

This is where title insurance comes in. Title companies verify the legal history of your home and make sure your new home has a clear title free from liens, outstanding debts, and public ownership claims.

During the transfer of ownership, you don’t want to be surprised by legal problems that show up, such as back taxes, ownership disputes, forged titles, or outstanding debt. 

Title insurance is specifically designed to protect both you and your mortgage lender from any disputes over the ownership of your new home. If a dispute does come up, the title company works on your behalf to clear the claims and verify home ownership. If there are fees during the process, the title company would be responsible for paying those fees.

Without title insurance, you’d need to face the battle on your own and pay any fees that could be required.  

What kind of policy is best for me and my home?

There are two primary types of title insurance policies: one policy for the mortgage lender and one policy for the homeowner.

When you apply for a mortgage to purchase your home, the mortgage lender will very likely require title insurance. This protects them from financial complications associated with any title disputes or other ownership complications. If you pay cash for a home or do not have a mortgage, then you will not be obligated to purchase a policy specifically for the mortgage lender. 

The title insurance policy for the homeowner protects you and anyone listed on the title or deed to the home. This policy is usually not mandatory but will protect you from legal and financial disputes. This is even true if the seller presents the warranty deed, confirming the title is clear. Despite this presumed protection, anything can happen.

Related: How to FAST TRACK your mortgage pre-approval

What are my coverage options for title insurance?

After purchasing your home, title insurance can offer protection against common disputes if any issues come up. These are common situations that a new policy covers:

  • Deeds that have been altered or forged 
  • Fraudulent claims 
  • Outstanding tax liens or other debts  
  • Encroachments or property line disputes 
  • Family members who may lay claim to claim the home 

Related: Does every mortgage need an escrow account?

How do I buy title insurance?

Your local mortgage advisor or real estate agent will most likely suggest a title insurance company. Since your local mortgage advisor works with thousands of home loans every year, it’s a wise move to follow their direction. That said, the choice is ultimately yours. Before you sign, you can always talk with your mortgage advisor about recommendations and research title companies.

Before offering you a policy, a title company will perform a title search, which is a process that searches for outstanding debts, loans, or ownership complications. This ensures that the seller has clear ownership of the title and has a right to sell the property. 

Once the title company has completed its research, it will offer a quote based on its findings. However, the title company may decline to offer a policy if the property is considered high risk. 

In the rare instance that title insurance is declined, your mortgage advisor can help you through the process and discuss your options. Your real estate agent is another partner that will be very helpful.

Is title insurance included in closing costs?

Typically, title companies charge 0.5% to 1% of the home’s final sale price, and it’s due at closing. However, this number can vary from state to state. Other risk factors could also influence the cost of the policy, such as the home’s age and the property’s legal history.

Total closing costs run anywhere from 2-5% of the home loan amount and typically include title insurance, appraisal fees, property taxes, loan origination fees, and other items.

If you’d rather not pay your closing costs out of pocket, schedule a time to talk with a local mortgage advisor about possible options

Related: How to roll your closing costs into your mortgage

Taking Action

When you’re ready to buy a home and apply for a mortgage, title insurance will keep you and your home protected. Getting pre-approved for a mortgage is the best first step you can take when you’re shopping for your next home. Connect with a local mortgage advisor to discuss your loan options and save money on your mortgage. We’d love to help.

How to Get a Fast Mortgage Pre-Approval

November 30, 2021
mortgage blog, mortgage pre-approval, preferred rate

Whether you’re getting ready to move up, move out of state, or buy a home for the first time, getting a mortgage pre-approval is the best move you can make in today’s housing market.

Mortgage rates dropped again with the news of the new covid variant, but they’re expected to rise again right along with inflation. Meanwhile, housing prices are still climbing, and homeowners are buying and selling amidst cash offers and bidding wars.

Getting a mortgage pre-approval sets you up for success no matter what kind of competition you face. With a mortgage pre-approval, you’ll know exactly how much you can afford. But more importantly, you’ll have the confidence that your loan is already approved! 

What’s the Difference? Getting a Mortgage Pre-approved vs. Pre-qualified

A mortgage pre-approval is way ahead of getting pre-qualified for a mortgage. When you get your mortgage pre-approved, your mortgage lender has approved your home loan amount. To do so, the lender has reviewed all required documentation such as income, debt-to-income ratio, credit report, employment, investments, and bank account statements. For this reason, your mortgage lender gives you a formal letter of approval. Once you have an offer, underwriting can fund the loan immediately.

A pre-qualification is simpler but you run the risk of getting your loan rejected. At its core, a pre-qualification tells all interested parties that you’ll most likely for a certain amount. With a pre-qualification, the mortgage lender only requires a few pieces of general information such as your income and a current credit report. Since they don’t run all the numbers, you face the possibility that your loan won’t fund when the time comes.

When you find your dream home, the last thing you want is to watch your loan fall through after you’ve made a competitive offer. Start here.

How to Fast Track Your Mortgage Pre-approval

When you decide to get pre-approved for a mortgage, the mortgage lender does the extra work to verify your income, credit, and the documentation required for a home loan. After your mortgage is pre-approved, you’ll receive a mortgage pre-approval letter to present with every offer. As a buyer, you’ll be confident knowing that your loan is approved up to the maximum amount designated. What’s more, realtors and sellers will know that you’re a serious buyer who can close fast.

An experienced mortgage advisor will discuss your loan options, financial goals, current mortgage rates, and your ideal budget. 

Step 1: Estimate how much you can afford.

Use a mortgage calculator to find out how much you can afford. The results will only be a ballpark figure, but it can help set expectations. Decide on your price range, then connect with a mortgage advisor to discuss your homeownership goals.

Check out this mortgage calculator to see how much you can afford

Step 2: Connect with a local mortgage advisor.

Talk with a mortgage advisor as soon as you’re thinking about getting a home loan. A local mortgage advisor will understand the unique challenges of the housing market in your specific area. An advisor can offer invaluable guidance regarding your loan options, and get your documentation moving quickly through to underwriting. A mortgage advisor is your greatest asset in the loan process, so be sure to work with someone who understands your goals. An advisor can start the mortgage pre-approval process right away while you start shopping for your next home.

Find a qualified mortgage expert in your local area

Step 3: Download your free credit report.

You can download a free credit report once every 12 months. It’s a good idea to find out your credit score and check the report to see if any errors need attention. Your credit score will have a direct impact on the terms of your loan and your mortgage rate. By getting a free copy of your credit report early, you can resolve any errors ahead of time.

Click here to download your free credit report

Step 4: Gather required documentation.

Ask your mortgage advisor for a quick list to help keep things on track. An experienced mortgage advisor will provide a checklist to follow and will make sure the process runs smoothly. Most mortgage lenders require similar documentation, with a few exceptions. Start gathering paperwork you’ll need to verify income and assets, employment information, bank statements, and tax returns.

  • Identification such as a passport or driver’s license
  • Employment verification
  • Proof of income (e.g., pay stubs, W-2 statements, bonuses, alimony)
  • Tax returns for the past two years 
  • Recent bank statements
  • Investment account statements

If you’re self-employed or plan to qualify using non-standard income, your advisor can talk with you about additional information that will be required.

Related: Boost your credit score in less than 60 days

Step 5: Take your mortgage pre-approval letter & make competitive offers.

Typically, a qualified borrower can get a mortgage pre-approval letter in just a few days. Depending on your situation, it might take a bit longer, which is why it’s wise to start early.

Connect with a local mortgage advisor so you can make sure all your documentation is in order. If you have good credit and verifiable income, getting pre-approved for a mortgage is a quick process.

If you have a financial situation that is less common, getting pre-approved for a mortgage is even more important, so you aren’t faced with holdups when you’re ready to make an offer. A qualified mortgage advisor can keep things moving quickly.

Once you’ve got your mortgage pre-approval letter, it’s time to make those offers!

Taking Action

Getting pre-approved for your next mortgage is the best first step you can take, especially in today’s housing market. We can help get your loan pre-approved so you know exactly how much you can afford and make a competitive offer. Connect with a local mortgage advisor to get started. We’d love to help.

Buying a Condo in 2022: Five Steps to Ownership

January 11, 2022
mortgage blog, buy a condo, 2022, preferred rate

Buying a condo in 2022 can be a smart move for first-time homebuyers and investors alike. Condos provide homeownership at a purchase price typically lower than single-family homes, along with a lot less maintenance.

For first-time homebuyers, buying a condo can put you on a faster path to homeownership, with an affordable mortgage and a low-maintenance property. For homeowners ready to invest in a second property, buying a condo in 2022 can help build wealth and financial security through rental income and home equity.

Want to buy a condo in 2022? This article can help you make the right moves.

5 Steps to Buying a Condo in 2022

Whether you’re a first-time homebuyer or a current homeowner thinking about investing in a second property, these five steps can help guide the process.

When you find your dream home, the last thing you want is to watch your loan fall through after you’ve made a competitive offer. Start here.

1. Decide if a condo will meet your financial goals and fit your lifestyle.

Buying a condo in 2022 could be a smart move to build financial security, but it’s worth thinking about balance and lifestyle. If this will be your primary residence, consider the benefits. Condos offer the opportunity to live in a close community with your neighbors along with shared amenities such as a pool, tennis courts or a fitness gym. In addition, condos provide a low-maintenance property while someone else maintains the landscaping and grounds.

On the other hand, if you love backyard entertaining or gardening, buying a condo might not be the best fit. Check with the HOA to determine what types of restrictions they may have. Many HOAs have regulations for overnight guests, pets, parking and more.

As an investor, are you ready to become a landlord? You can hire a property management company or manage the property yourself. Consider how you’ll manage ongoing maintenance and any issues that arise with tenants.

An experienced mortgage advisor can discuss your homeownership goals, current rates, and your ideal budget. 

2. Partner with an experienced realtor who knows the area.

Buying a condo in 2022 is different than buying a single-family home. Be sure to work with an experienced real estate agent who specializes in condominiums and townhouses. They will often have better advice and be a strong asset when you’re ready to make an offer.

A qualified real estate agent will know the resale values in the area and which condominium developments offer the best value in your price range. They will also know about any HOA issues, maintenance problems, or infrastructure issues that have come up in particular developments.

Check out this mortgage calculator to see how much you can afford

3. Find out the current HOA fees and any special assessments.

HOA (homeowner association) dues are often paid monthly or quarterly when you buy a condo. The fees are established by the HOA and are typically used to cover ongoing maintenance for all shared grounds, parking structures, amenities, landscaping, and shared community spaces.

That said, HOA fees vary widely across condos. Compare the HOA fees with other condos in the area to evaluate if the fees are worth the cost. Does the condo have the amenities that are important to you (accessible parking, fitness center, children’s park, pool or tennis courts, etc.) Find out what the HOA fees cover and what they do not.

Whether this will be your primary residence, or if you’re buying a condo in 2022 as an investment, take the cost of HOA fees into account. These fees are ongoing and will be on top of your mortgage and property taxes.

Find a qualified mortgage expert in your local area

4. Ask about rental policies for the condo development.

Knowing the rental policies is important when you buy a condo. As an investor, you’ll want to ask if there are any restrictions about renting the condo for 2022. Often the HOA will place restrictions on the number of rental units allowed and other restrictions. 

Even if this will be your primary residence, you may want to rent the property after a few years. On the other hand, maybe you want to live in a condo development with few renters. Will it lower your resale value if most units are rental properties with short-term tenants?

5. Make sure to get the right financing to buy a condo in 2022.

Ask your mortgage advisor for a quick list of documentation you’ll need to help keep things on track.

Financing a condo is different from applying for a single-family home mortgage. Mortgage lenders have some regulations that are unique to buying a condo. As a result, there can be obstacles along the way that make it more difficult to get approved quickly.

Be prepared with a 20% down payment if possible and all your documentation in order. If you’re planning on a lower down payment, ask about an FHA loan. FHA loans are easier to qualify for, but they have stricter requirements for condo developments. For example, FHA loans require that at least 80% of the condos are owner-occupied. FHA loans also require a stricter inspection process, including the overall development and grounds in addition to the specific condo unit you want to buy.

If you’re self-employed or plan to qualify using non-standard income, your advisor can talk with you about additional information that will be required.

Related: Boost your credit score in less than 60 days

Finally, get pre-approved to secure the lowest mortgage rate.

Typically, a qualified borrower can get a mortgage pre-approval letter in just a few days. Depending on your situation, it might take a bit longer, which is why it’s wise to start early.

Connect with a local mortgage advisor so you can make sure all your documentation is in order. If you have good credit and verifiable income, getting pre-approved for a mortgage is a quick process.

If you have a financial situation that is less common, getting pre-approved for a mortgage is even more important, so you aren’t faced with holdups when you’re ready to make an offer. A qualified mortgage advisor can keep things moving quickly.

Once you’ve got your mortgage pre-approval letter, it’s time to make those offers!

Taking Action

If you’re ready to buy a condo in 2022, getting pre-approved can put you on the fast track to homeownership. Whether you are a first-time homebuyer or a homeowner ready to invest in a second property, we can help you secure your best mortgage. Connect with a local mortgage advisor to discuss your loan options and build financial security. We’d love to help.