Tag Archive for: mortgage application

Down Payment Assistance Options For First-Time Homebuyers

April 17, 2024

New house, moving and happy couple carrying boxes while feeling proud and excited about buying a house with a mortgage loan. Interracial husband and wife first time buyers unpacking in dream home

One of the biggest hurdles for many first-time homebuyers is getting that down payment together. We understand, especially if you’re trying to scrape together 20% of a home’s purchase price [insert large gulp here].

There are two things that many first-time homebuyers don’t realize, though:

You generally don’t have to put a full 20% down on a home.
Tons of down payment assistance programs ready, willing, and able to help you out when buying a home.

What is down payment assistance?

Down payment assistance is a helping hand in the form of grants, loans or gifted funds that can give you a boost in covering that initial down payment requirements that come with buying a home.

There are various programs out there, often funded by government agencies or non-profit organizations, designed to support buyers in becoming proud homeowners. These programs can provide you with the funds for your down payment requirements and some programs will also cover closing costs.

One of the great things about down payment assistance is that it’s not a one-size-fits-all deal. There are different programs with different eligibility criteria, so you can find one that suits your specific situation.

Some programs might be based on your income, others on the location of your dream home, and some might even be tailored for certain professions. It’s like having a menu of options to choose from, making it easier for you to find the right fit.

Down payment assistance may be your ticket to turning that dream home into a reality. In this blog, we’ll explore several of the national down payment assistance programs. It’s important to note that there may be programs offered in your local community or in your specific state. For a comprehensive look at the programs available to you, click here to connect with a Preferred Rate Mortgage Advisor in your area.

Popular Down Payment Assistance Programs

You know who else is ready, willing, and able to help with down payment assistance programs? Preferred Rate.

Let’s deliver that help ASAP by outlining some of the most popular down payment assistance programs. Many loan programs are offered at the state and local government level, as well as the national level. This can give giving first-time homebuyers the financial boost they need when buying a home.

Chenoa

The Chenoa Fund offers down payment assistance to low- and moderate-income homebuyers. Through Chenoa, eligible buyers can receive forgivable loans that cover a portion of their down payment and closing costs. These loans don’t accrue interest and are fully forgiven after some time, typically three to five years.

Within Reach for FHA loans

Another down payment assistance option for first-time homebuyers is the Within Reach program offered by Land Home Financial Services. This program provides low-interest loans as a means of helping with the down payment and offering assistance with closing costs.

By offering down payment assistance at a lower interest rate, Land Home FHA Within Reach helps first-time homebuyers save money on their mortgage payments over the life of their loan.

Lakeview National

Lakeview National is another one of the loan programs that offers down payment assistance. Even better news? This program is nationwide!

Eligible first-time homebuyers can receive grants or loans as a form of down payment assistance and closing cost assistance. These funds can help first-time homebuyers bridge the gap between their savings and the amount they need when buying a home.

1 Percent

The 1 Percent program makes the math easy. It offers down payment assistance of up to 2% of the home’s purchase price (up to $4,500). This program is particularly beneficial for first-time homebuyers, as you are allowed to combine it with many other down payment assistance programs. These are the types of down payment assistance programs we can really get behind!

Fannie Mae HomeReady

Fannie Mae has a great down payment assistance program offering up to $2,500, which you can combine with its HomeReady program. It’s especially helpful for first-time homebuyers who may have limited household income or credit history. That’s because this program allows eligible buyers to qualify for low down payment mortgage loans with flexible underwriting criteria.

The program also offers down payment assistance in the form of grants or deferred payment loans.

Freddie Mac Home Possible

Like Fannie Mae, Freddie Mac offers a similar $2,500 in down payment assistance when coupled with its Home Possible loan program. It offers down payment assistance in the form of low down payment mortgage loans for first-time homebuyers. If you qualify as a first-time homebuyer, you can obtain mortgage loans with as little as 3% down.

The Importance of Consulting a Mortgage Lender

All these down payment assistance programs are crazy exciting—especially for first-time homebuyers—we know. But here’s where we have to slow our roll a little.

While it’s always good to educate yourself on the various types of down payment assistance offered, you need to consult with a mortgage lender before you go too far down the road and start celebrating.

That’s because eligibility requirements and available assistance can vary by program and location. This can be true whether the loan programs are offered through your local government or through major national programs like the U.S. Department of Housing and Urban Development (HUD). On top of that, you want to make sure you and your mortgage lender pick the right down payment assistance programs for you.

Now, you may be thinking, “But any help with the down payment or closing costs assistance is right for me! I just want to save money.”

Totally valid—we hear you. But there are many other factors to consider, like your priorities.

Some types of down payment assistance programs offer a lower interest rate. Others may provide better perks if you have limited household income. Some first-time homebuyers love the idea of forgivable down payment assistance loans, while others will qualify for deferred payment loans.

This is why, in addition to a real estate agent, you need a knowledgeable, trusted mortgage lender in your corner, especially if you’re new to this as a first-time homebuyer. Though the above is just a sampling of the types of down payment assistance programs available, they can certainly bring hope to first-time homebuyers who are working toward buying a home.

Ready to Save Money?

So take advantage of these down payment assistance programs as a first-time homebuyer and achieve your homeownership goals while minimizing your costs. Whether you’re a recent college graduate, a young professional, or a growing family, there may be options out there to make buying a home more affordable and accessible.

Click here to connect with a Preferred Rate Mortgage Advisor today.

Who Qualifies as a First-Time Homebuyer?

April 10, 2024

Multiracial couple holding keys and standing outside their new h

We know the story: Part of you is thinking about homeownership, but another part is unsure whether you’ll qualify as a first-time homebuyer. The mortgage process can seem intimidating the first time around, which is completely understandable. You haven’t owned a home before!

Not to worry, though, because Preferred Rate is here to shed some light on what it means to be a first-time homebuyer, the loan programs available to you, and any questions you may have on items like minimum credit scores, down payment assistance, interest rates, closing costs, income limits, and more.

So let’s get to it!

What Is a First-Time Homebuyer?

Let’s start with the basics: First-time homebuyers are generally defined as those who have not owned a primary residence within the past three years. This definition can vary slightly depending on which loan programs you’re considering.

Who Qualifies as a First-Time Homebuyer?

It may sound strange, but contrary to popular belief, the term “first-time homebuyer” refers to more than just people who haven’t owned a home before. You may still be considered a first-time homebuyer if you owned a home in the past but meet certain criteria.

For instance, if you’ve experienced a significant life event that prevented you from purchasing a home in the past three years, such as a divorce or a foreclosure, you could still qualify for some first-time homebuyer loan programs.

Naturally, the qualifications can vary based on the loan program. With a VA loan, offered through the Department of Veterans Affairs, you must be an active-duty service member, veteran, or surviving spouse of either group. A first-time homebuyer would still have to meet all the qualifications for the VA loan as a first-time homebuyer, in addition to proving their eligibility status.

Can You Have Previously Owned a Home?

As we just touched on, yes. There are instances where you might have owned a home before but can still qualify for a first-time homebuyer program. Typically, the most important stipulation is that you can’t have owned a primary residence within the past three years.

What Programs Are Available to First-Time Homebuyers?

There are lots of loan programs created specifically to help first-time homebuyers achieve their goal of owning a single-family house. These programs are often offered through government entities, such as the Federal Housing Administration (an FHA loan), the Department of Veterans Affairs (a VA loan), and the Department of Housing and Urban Development (a HUD loan).

For example, the FHA loan program provides some benefits to first-time homebuyers, including lower down payment requirements and lower minimum credit scores. VA loans also offer those who qualify as a first-time homebuyer—and who are veterans/active-duty service members/surviving spouses—the chance to purchase a home with no down payment. There’s no better form of down payment assistance than that!

You’ve also got Fannie Mae and Freddie Mac. They offer loan programs that assist first-time homebuyers in accessing affordable mortgage options with competitive interest rates and flexible eligibility requirements. These include financing up to 97% of the purchase price, meaning that you make a 3% down payment.

You can also use nontraditional income sources such as alimony payments, Social Security, rental income, and so on, to qualify for these guaranteed loans. A mortgage lender can give you the lowdown on all the attractive loan programs that may be right for you.

Many people also overlook the various incentives for purchasing in rural areas. The U.S. Department of Agriculture offers loans that are guaranteed by the USDA Rural Development Guaranteed Housing Loan Program. These loans generally offer no down payments and lower interest rates if you buy in rural areas.

Do You Need to Be a First-Time Homebuyer to Take Advantage of Down Payment Assistance?

Down payment assistance (DPA) programs are frequently available to first-time homebuyers to help mitigate the upfront costs associated with buying a single-family home. These can include the down payment and closing costs.

You may assume that these programs are normally for first-time buyers, since they may need the most help on their first single-family home purchase. But many DPA programs are open to other buyers as well. These can include those who meet certain income limits, minimum credit scores, and other criteria, regardless of whether they’ve owned a home before. DPA programs tend to vary by location and may be offered at the federal, state, or local levels.

Need More Help with Your Home Purchase?

The term “first-time homebuyer” can apply to more than just individuals who have never owned a home before. Those who haven’t owned a principal residence within the past three years may still qualify for various loan programs and closing cost assistance programs designed to make homeownership more accessible for everyone.

Even with all this information, it’s important to consult a knowledgeable mortgage lender when determining who qualifies as a first-time homebuyer. Our Preferred Rate Mortgage Advisors can guide you through the process and help you discover which loan programs you qualify for.

Whether you’re interested in an FHA loan, a VA loan, or a conventional mortgage, there are almost certainly options out there that will fit your financial situation.

So we’ll leave you with this: Homeownership is within reach for many, many people, regardless of whether you’re a first-time homebuyer or have owned a home before. With the right resources and guidance, you can achieve your dream of owning a home.

Contact a Preferred Rate Mortgage Advisor today to explore your options and get on the path to homeownership!

8 Questions Homebuyers Should Ask About Mortgages

March 11, 2024

Finally a home of our own. Shot of a young couple celebrating the move into their new house.

We know you know that buying a house is a major investment—one that can pay off in more ways than one, but still a major investment. This can weigh on a first-time homebuyer who has never made such a large financial commitment.

First, congrats on even considering taking this step! Buying a home requires confidence, perseverance, and knowledge. Second, if you’re freaking out because you’re not sure you know everything you should about getting a home loan, fear not.

A real estate agent is there to help you house-hunt and submit an offer on the home of your dreams. A loan officer is there to walk you through the mortgage process. They will help you figure out what your monthly payments might be, the terms of your home loan, and any other financing questions you have when buying a home.

If you’re a first-time homebuyer, you may not know exactly which questions you should ask. Or you may just be too embarrassed to voice them. Understand that there are no stupid questions when it comes to buying a home, especially as a first-time homebuyer. A trusted loan officer not only recognizes that you don’t know what you don’t know, but they are also a pro at walking you through every step of the process.

So let’s answer some of the most common questions homebuyers should ask. That will make it easier to move on to the fun stuff (like imagining the man cave or she-shed you plan to erect in the backyard).

1. How Much Home Can I Afford?

Fact check: Calculating a budget is the first step in the homebuying journey. You’ll want to figure in things like your income, debts, and expenses to come up with a realistic number. Remember, too, that just because you can qualify for a larger, more expensive house doesn’t mean you need to max out your budget.

Reducing that number by thousands of dollars (or tens of thousands of dollars) can make a noticeable difference in your monthly payments. Plus, you will want to save some cushion for all the expenses that come with buying a home. These include a home inspection, homeowners insurance, a home warranty, and some money set aside for repairs or upgrades to major systems.

2. What Will My Monthly Payments Be?

Fact check: Naturally, the monthly payments on a home loan vary for everyone. That’s because there are many factors that go into this calculation. You have to think about the cost of your home, the closing costs associated with the loan (and whether you choose to roll those costs into the mortgage or not), the size of your down payment, your interest rate (and whether it’s fixed or variable), and the term of your loan.

You should remember to add in any homeowners association (HOA) dues. Also consider the cost of private mortgage insurance (PMI) if you’re putting less than 20% down with most loans. Preferred Rate’s Home Affordability Calculator can help you get an accurate sense of what your monthly payments may be, based on a few variables. A Loan Advisor can help you get a good estimate as well.

3. How Much of a Down Payment Do I Need?

Fact check: You will often hear recommendations for a 20% down payment, but many home loan programs offer flexibility by including much lower down payment options.

The amount of the down payment can vary based on several factors, including the type of loan, the requirements, and the buyer’s financial situation. Here are some general guidelines for common mortgage types:

Conventional loans: Typically require down payments ranging from 5% to 20%. Some lenders may offer conventional loans with a down payment as low as 3%, especially for first-time homebuyers.
FHA loans: These loans require a minimum down payment of as little as 3.5% of the purchase price. FHA loans are popular among first-time homebuyers due to their lower down payment requirements.
VA loans: Eligible veterans and active-duty military personnel may qualify for VA loans, which often require no down payment.
USDA loans: These loans, designed for homebuyers in more rural areas, may also offer 0% down payment options.

It’s important to note that a higher down payment typically results in lower monthly mortgage payments. It may also affect the interest rate on the loan. You should carefully consider your financial situation, your goals, and the specific loan programs available to determine the most suitable down payment amount for your circumstances.

Your loan officer can also help with this by reviewing all the pros and cons of each option available.

Down payment assistance (DPA) programs and gift funds can also help you close the gap. Down payment assistance programs often come in the form of grants or low-interest loans, providing a valuable resource for individuals looking to make their homeownership dreams a reality.

Additionally, gift funds from family members or friends can contribute to the down payment, easing the financial burden on the buyer and facilitating a smoother transition into homeownership.

4. How Much Are the Closing Costs?

Fact check: Closing costs typically range from 2% to 5% of the home’s purchase price. They include various fees, including lender fees, the home inspection, the title, and escrow services.

Lender fees are charged by the lender for processing and facilitating the loan. These fees can include a loan origination fee, application fee, processing fee, and underwriting fee. These fees do not necessarily apply to all loans, but your loan officer can go over which fees apply to the options you’re considering. Additionally, your loan officer will provide a full loan estimate at the time of application (or very shortly thereafter) so you can get a clear look at the overall costs.

Getting a home inspection is totally up to you, but it can be a super smart move. It’s like giving your future home a thorough check-up before you seal the deal. This way, you can spot any sneaky issues hiding behind the walls or under the floors before you make it official.

Additionally, there are government-related fees, such as recording fees and transfer taxes, which vary by location and are essential for legally documenting the property transfer. There are also third-party fees, such as title insurance, credit report, appraisal, and escrow fees.

There’s also homeowners insurance to consider. Lenders will ask for it to be in place in time for closing. Also, when you’re sorting out the nitty-gritty at closing, you might bump into some other expenses, like property taxes and HOA fees, which are often prorated and paid in advance at closing.

Your Loan Advisor will provide a detailed breakdown at the start of the process so you can take a look at all the closing costs. They’ll explain the different ways you can cover these fees—including rolling them into your home loan.

5. What Documents Will I Need?

Fact check: When applying for a mortgage, you’ll want to provide financial documentation like W-2s, pay stubs, bank statements, and tax returns. And in a perfect world, you will get pre-approved before you start the house-hunting process.

Each loan program has specific requirements that your Loan Advisor can discuss with you in detail.

6. What Is the Interest Rate, and Should I Lock It In Now?

Fact check: Interest rates play a major role in your monthly payments and overall affordability when buying a house. They also change on a daily basis. This means that the rate you see when you first begin to think about buying a home may not be the rate you’re able to lock in once you complete your home loan application.

Since rates change so frequently, there is no one right answer about whether it’s best to lock in your rate or let it float. What you can do is discuss it with your Loan Advisor, which is why this is one of the best questions to ask when buying a home. Programs like SecureLock™ also offer peace of mind by locking in today’s rates for an extended period.

7. Are There Any Pre-Payment Penalties with This Home Loan?

Fact check: Paying off your loan early can save you thousands of dollars in interest over the long run. However, some loans may have pre-payment penalties where you’re actually penalized for paying your home loan off early.

That’s why this is one of the important questions homebuyers should ask before settling on a loan. It’s perfectly fine if you opt for a loan with a pre-payment penalty if your game plan is to keep the loan through the pre-payment period. But it’s something you’ll want to discuss before you sign on the dotted line. If pre-payment penalties are a deal-breaker for you, then your loan officer should know that.

8. Are There Any Other Things I Should Consider?

Fact check: In addition to the mortgage-centric questions above, there are other factors to think about when buying a home.

As mentioned, you’ll want to conduct a thorough home inspection to identify any problems with the house. Also verify the condition of major systems, including plumbing, electrical, and HVAC. This can help you avoid any surprises that can cost thousands of dollars.

You have to keep in mind that once the sale closes, the house is yours for better or for worse. You can always negotiate on points like which items the seller is including in the sale of the house. And you can certainly request repairs or upgrades in your offer.

But only the items signed off in the final sale will make the cut. Any problems with the house after the fact are now yours to handle. With that in mind, there are a few more questions homebuyers should ask before they get too far into the home search. They include:

How long has the house been on the market?
When was the last time the seller repaired or replaced any major systems?
What items are included in the sale of the house?
Has the homeowner had any problems with the house recently?

Your real estate agent can work to get you these answers. You can also consider buying homeowners insurance and a home warranty. These protections can provide peace of mind if problems with the house do materialize.

Help with Home-Buying

We know that starting the mortgage process is a major step for a first-time homebuyer who’s thinking about buying a home—and we’re here with you and for you. Contact us anytime to get some basic information, have your specific questions answered, or start the home loan process.

How to Set Achievable Financial Goals

January 2, 2024

Happy couple, tablet and planning for finance, budget or application for loan on fintech app in home. Black man, woman or reading on touchscreen ux with smile, financial goals and investment profit

New year, new goals, right? When it comes to personal goal-setting, creating financial goals can be one of the most meaningful things you can do for yourself and your family.

Why? Because money may not be everything, but it can buy us choices. Where we live, what we do for work (and how much we work), what hobbies we’re able to pursue, and whether we’re able to help others in our lives often have strong ties to our financial picture. So, do yourself a favor in 2024 and set some financial goals you can crush.

No matter what your financial goals, remember that a goal without a plan is just a dream. Cheesy? Yes. True? Yes.

That’s why we’re here to show you not just the value of personal goal-setting, but a road map for killing those financial goals.

All Big Dreams Start Small

Whether your goal is to travel the world or pay off student loans, chances are this goal is more complicated than simply snapping your fingers and making it so. If that were the case, it wouldn’t be part of your list of goals. It would be on a to-do list.

So let’s acknowledge upfront that some of these financial goals can seem quite lofty. After all, it takes a lot of financial planning to, say, buy a home or live debt-free. But here’s the thing: Once you set a goal, you can work backward to see how you can achieve it.

For example, let’s say you need $18,000 to pay off your debt this year. That’s $1,500 per month, or about $750 every two weeks. If you know that you can afford to set aside $650 of every paycheck toward paying back debt, that leaves $100 per month you still need to find—perhaps through scrimping, selling, or a side hustle.

Breaking your goal into a smaller time frame helps you see how you can get there, and whether it’s really achievable.

Using SMART Goals

Using the SMART system to achieve your goals is extremely powerful. It’s all about breaking these larger financial goals into bite-sized, achievable pieces.

SMART stands for specific, measurable, achievable, relevant, and time-bound. Sounds fancy, but it’s really just a practical way to turn dreams into reality. Here’s what each component means.

Specific: Define your goal as precisely as you can. Instead of saying, “I need to get out of debt,” perhaps make it, “I want to pay off my credit card debt in a year.”
Measurable: Make sure you can track your progress toward your goal. For example, “On the first of every month, I’ll send $200 to the credit card company.”
Achievable: Make sure your goal is realistic for you. And then outline exactly how you plan to save the money. For example, to save that $200, maybe you commit to stopping buying coffee outside the house and making dinner at home six days a week.
Relevant: Ensure that your financial goals align with your personal life. If you’re ultimately dreaming of homeownership, maybe your priorities are to pay down debt and work on your credit score, rather than saving up for a vacation.
Time-bound: Give yourself a deadline. Saying, “I’ll have $5,000 saved for a down payment in 12 months,” helps you think about what that means on a weekly and monthly basis. It also creates a sense of urgency.

Financial Goals That Are Worth Setting

Let’s get one thing straight: Any goal that’s worth it to you is worth setting. Want to save money so you can buy a piece of artwork? Great. Need extra cash because your living expenses are increasing? Fabulous. Just really love to see a fat number in your savings account? We totally get it.

No two goals are exactly alike because the people setting them are all different. Nevertheless, when it comes to personal goal-setting, there are some financial goals that come up more than others. Here are some ideas for you.

Creating a budget

Perhaps you’re not sure what kind of financial goals to set because you’re not really sure where your money is going. If that’s the case, getting a handle on that is a valid goal for 2024!

Here’s a simple way to get started:

List all your monthly income. List all your sources of income, including your salary, freelance work, rental income, and any other sources of money.
List all your fixed monthly expenses. Fixed expenses are regular and consistent, like rent, utilities, loan payments, and other monthly obligations. For annual fixed expenses like property insurance, divide the total number by 12.
List all your variable monthly expenses. Estimate the expenses that can vary from month to month, such as groceries, gas, clothing, entertainment, and dining out.
Start tracking your spending. Make a spreadsheet to keep track of your actual spending in all the categories you’ve listed. This will give you a clear picture of where your money is going right now.

Once you have some basic information, you can start thinking about areas where you might be able to cut back or set realistic spending limits for yourself.

If you struggle to create a budget—or to stick to one—there are also many apps you can use to keep yourself on track.

Becoming debt-free

Ah, the “D” word. Credit cards, student loans, medical bills, mortgages, car payments, you know the drill. Being debt-free is like shedding a financial weight.

If this is one of your personal goals, then a good plan can be to tackle high-interest debts first. That’s because those interest rates are costing you the most money. You may also want to look into consolidating debt or opening a credit card that offers a 0% APR on balance transfers.

Only consider the credit card option, however, if you’re positive you can control your future spending. Part of the goal of being debt-free is improving your credit score. Getting into even more credit card debt is the opposite of what you want and can prevent you from reaching your financial goals.

For more help on paying off debt, see our blog post with eight practical ideas here.

Saving money

When it comes to saving money, the old set-it-and-forget-it method can be great. An easy way to do this is to auto-allocate a specific amount of money to be transferred to your savings account once your paycheck is deposited.

This is honestly the best kind of New Year’s resolution. You can take some time in January to set things up when your motivation is high, and then you’re done for the year. Goal achieved!

The other great thing about this strategy is it can help you work toward a long-term goal like buying a house, but it’s also great for short-term financial goals like, say, Taylor Swift concert tickets.

And you don’t have to have a spending goal in mind at all! If you want to save money simply to watch your savings account grow, that’s not only an achievable goal, it’s a brilliant one!

Improving your credit score

The credit score: also known as your financial goals’ gatekeeper. We don’t have to tell you that a great credit score opens doors—namely, to the ability to make big purchases by taking on more debt. This privilege can be yours if you work on your credit score.

Remember the SMART goals here. Before you can set a specific goal, you need to know what your starting score is. (You can request a free credit report here.)

Say you have a credit score of 650, and you want to get it up to 700 by the end of the year. Here are some achievable ways to do that:

Be sure to pay your bills on time. This is crucial, so set up reminders or automatic payments if necessary.
Keep your credit card balances low. Aim to keep your credit card balances at no more than 30% of your credit limit.
Keep old accounts open, and avoid opening too many new accounts. The length of your credit history is important. So having long-standing accounts helps you, while opening a lot of new accounts is viewed as risky behavior.
Seek professional help. If you want to improve your credit score before buying a home, a Preferred Rate Mortgage Advisor may be a great resource for getting personalized help on this goal.

Saving for a down payment

One of the most common financial goals involves real estate. This might take the form of buying your first house, a vacation property or adding an investment property to your portfolio. In any case, a down payment will be needed, making this one of the great personal goals for 2024.

Start by setting a specific savings goal for your down payment, then see where you can save—and where you can earn more money—to hit this target. It’s always great to put 20% down if you want to snag better mortgage rates and avoid private mortgage insurance (PMI), but it’s not required. Consult with a Preferred Rate Mortgage Advisor to see if you qualify for down payment assistance and what a good down payment savings goal might be for you.

Saving for retirement

It’s time to play the long game. Long-term financial goals keep your eye on the prize. If your dream is to work less or retire on a beach somewhere, then now is the time to start saving for it. If you haven’t done it already, set up a retirement account, such as a 401(k) or an IRA.

As you begin to save for retirement, you’ll see what compound interest can do to the money you’re stashing away. As you watch this money grow, you can feel confident knowing you’re working toward being financially secure for the rest of your life.

Making career goals a reality

Part of being financially secure is the ability to pursue what’s important to you. When you’re not tied to the punch clock, you can achieve the career goals of your dreams.

For example, maybe you’d like to save enough money to return to school part-time to learn a new skill. Or maybe you have an idea for an entrepreneurial adventure and need startup funding. Or perhaps your goal is to be able to quit your day job entirely to turn your passion project into a career.

The first step, as always, is to write out your plan, including how much it is likely to cost and how long it will take to save for it. But whatever your goals, the ability to invest in yourself will never go out of style.

Celebrate Wins of All Sizes

A large part of personal goal-setting can involve sacrifice. You have to devote the time, money, and energy to creating specific goals. But you also need realistic, actionable plans to help get you there.

Keep in mind that the payoff doesn’t have to be years down the road when you achieve long-term financial goals. Celebrate the short-term goals as well. Did you create a plan and exceed your savings goal in the first month? That deserves some acknowledgment. Plus, recognizing your victories can keep you motivated for the long haul.

Setting achievable financial goals doesn’t have to be a buzzkill. Instead, it’s a positive step toward realizing your dreams.

And always remember, we’re here to help. Whether you’re having trouble establishing goals, aren’t sure of the best ways to save money, or want to understand the SMART goals system better, we’re happy to assist however we can.

What Is a Good Credit Score to Get a Mortgage Loan?

January 23, 2024

credit score concept on the screen of smartphone

Before you go too far down the house-hunting rabbit hole, you’ll want to ensure that you meet the credit score requirements to secure a mortgage loan. After all, this mortgage loan will allow you to purchase your dream home. And while many factors go into qualifying a good credit score is definitely one of them.

We know that getting “rated” can make you feel like you’re back in school. Like in school, however, with a little hard work, discipline, and dedication, you can improve your credit scores quickly!

So let’s jump right in, starting with the obvious.

What Is a Credit Score?

Credit scores range from 300 to 850. The Fair Isaac Corporation, also known as FICO, originally created this scale to help lenders and investors determine the creditworthiness of consumers.

A higher credit score indicates that you’re a lower-risk borrower, which could lead to a lower mortgage rate over the life of the loan. That’s because a good credit score and a strong credit report imply that you can manage your credit wisely and make timely payments. Lenders are more likely to offer you a lower interest rate mortgage loan if you are a high-credit-score (low-risk) borrower.

Other agencies have adopted a similar scale and are expected to start playing a bigger role in credit scoring in the coming years. At the end of the day, your credit score is a tool that provides a snapshot of your credit history to lenders, essentially summarizing the risk of lending to you.

What Determines Your Credit Score?

Five factors help calculate your credit score. Here’s an overview of these elements of the credit scoring model.

1. Payment history (35% of your overall score)

Paying your credit accounts on time—including credit cards, auto loans, student loans, medical bills, and any personal loans—can increase your credit score. In the same vein, late payments can negatively impact your credit score.

The credit scoring model considers the frequency and severity of these late payments. A 90-day late payment, for example, will have a larger negative impact on your credit score than a payment that’s 30 days late. Ultimately, you want to do what you can to pay your bills on time to ensure that you don’t make bad credit worse or reverse all the work you’ve done to improve your credit score.

2. Utilization rate (30% of your score)

The ratio of your credit account balances to your available credit limit is known as the utilization rate. The credit bureaus consider the utilization rate of your individual cards, as well as your overall cumulative credit limits, in this factor. A balance-to-credit-limit ratio below 30% may improve your credit scores, while a ratio above 30% may lead to bad credit.

3. Length of history (15% of your score)

The age of your credit accounts matters. What we mean is that it pays to establish a long history of credit usage and on-time payments. Credit accounts that have been open and utilized for years can improve your credit score.

Many people use their credit cards for their monthly expenses, which earns them perks and helps establish their reputation as responsible borrowers. This is a good idea only if you know you can pay your balance off every month.

With this in mind, you might think that it makes sense to open a bunch of new credit accounts, just as long as you pay off the balance at the end of the month. However, opening new credit accounts lowers the length of your credit history.

This can result in a lower credit score in the first 12 months. Once an account reaches 24 months or longer, however, it becomes a more established account. That’s when you can expect to see a positive impact.

This is also why a mortgage lender may tell potential homebuyers not to open new lines of credit when they’re preparing to buy a house. It can lower your credit score and potentially affect your debt-to-income (DTI) ratio.

4. Type of credit (10% of your score)

Also known as credit mix, credit scoring models consider what type of credit you have. Generally speaking, a mix of different credit types is more favorable than only one type of credit. Various types of credit may include a revolving credit card, an auto loan, and an installment loan, for example. This mix of credit types can produce a higher score than using revolving credit cards.

5. Inquiries (10% of your score)

When a lender pulls your credit, it is considered a “hard” inquiry. That can have a negative impact on your credit score. That means you could be dinging your score every time you apply for a new credit card or loan.

Not all inquiries negatively impact your credit, though. Pre-approval and employer inquiries that check your credit aren’t detrimental and don’t trigger calls and letters from other parties trying to sell you their latest and greatest credit card. Multiple inquiries from mortgage companies made within a 45-day window will ding your credit score only once, allowing consumers to do their research without lowering their credit score.

Of course, not all inquiries negatively impact your credit. “Soft” inquiries, such as a potential employer checking your credit, aren’t detrimental. Multiple inquiries on a single new account, such as multiple credit checks for your mortgage, ding your credit score only once, as long as these checks are all made within 45 days of one another.

What if you want to check your credit scores yourself? Any request regarding your personal credit is considered a soft inquiry and won’t count against you.

What Are the Credit Score Requirements to Buy a House?

Every mortgage lender is different. No magical number will suddenly unlock a home loan, but there are credit score ranges that lenders generally view more favorably than others.

Credit scores are typically viewed this way:

800–850: Excellent
700–799: Very good
680–699: Good
620–679: Fair
580–619: Poor
500–579: Bad
499 and lower: Very bad

A higher credit score can lead to a more favorable home loan interest rate. However, it’s important to note that credit score is just one part of the equation, and other factors such as income and DTI ratio also play a role in home loan qualification.

Each mortgage lender has its own strategy, including the level of risk they finds acceptable for a given credit product. So remember that there’s no standard “cut-off score” used by all lenders. Instead, these general ranges can tell them whether a potential borrower has a good or bad credit score or is somewhere in the middle.

Don’t forget: When it comes to qualifying for a loan, your credit score is only one part of the equation. A borrower can have a perfect 850 score, but if their income and DTI ratio don’t support the loan amount they’re requesting—say they make $30,000 a year and are looking at homes in the $800,000 range with no other liquid assets—their desired amount can still be denied.

How Do You Check Your Credit Score?

You can request a free copy of your credit report once a year from each of the three credit bureaus: TransWestern, Experian, and Equifax. You can contact these bureaus directly or go to Annual Credit Report to get all three.

This is a solid strategy if you’re looking to get a mortgage loan in the next three months. If you have some time and want to improve your credit, you can always request one report from each credit bureau every four months to track your progress.

Once your credit report is in hand, review it for accuracy. Call the credit bureaus if you find any errors or if you have questions about anything in the report.

How Do You Improve Your Credit Score?

If you find that your credit needs some work, remember the five factors determining your score and then set about optimizing your credit.

The most effective ways to do this:

Make payments on time every time.
Pay credit cards down to 30% or less of their credit limits.
Limit the number of accounts you apply for at one time.
Leave established, older accounts open even if they’re paid off.

Keep in mind, too, that you might be able to qualify for a mortgage loan even if your credit score is in the “poor” to “fair” range. That’s because credit is not the only factor considered.

Preferred Rate’s specialty pr ograms can help individuals who have previously had a short sale, pre-foreclosure, or foreclosure reenter the housing market. There is no need to count yourself out of the market just because your credit score is less than perfect. your credit score is less than perfect.

If you have questions about your credit or want to learn more about the homebuying process, click here to connect with an Preferred Rate Mortgage Advisor in your area.

Buy a Home Now, Refinance Later at Reduced Fees

January 16, 2024

Laptop, living room and couple search website information for home investment, loan or real estate property discussion on sofa. Young people on couch with pc internet, planning future together

The real estate waiting game is no fun. But with today’s high-interest rate, some would-be buyers think it’s prudent to play if they want to secure the best homeownership deal. The problem with that is you miss out on homeownership opportunities today, including less competition and falling prices in many markets.

The thing is, once the high-interest rates of today’s market moderate, everyone who’s been sitting on the sidelines may very well flood into the market at once. Yes, that’s right: A lot of other potential homebuyers are taking the wait-and-see approach, just like you are. The likely outcome is that competition will return, and real estate prices may start heading north once again.

Thankfully, Preferred Rate has a solution to get you on the path to homeownership NOW while allowing you to take advantage of lower rates if they materialize in the near future. The Buy-Fi Program lets you buy a home now and then refinance later with reduced lender fees.

Let’s dig into the details of this program.

The Advantages of Preferred Rate’s Buy-Fi Program

Buy-Fi is a game-changing opportunity for potential homebuyers seeking confidence and flexibility in their purchasing decisions. It’s truly the best of both worlds.

Buy now with confidence

Preferred Rate’s Buy-Fi program lets potential homebuyers buy with confidence between November 1, 2023, and March 31, 2024, regardless of current high-interest rates, with the knowledge that they can refinance into a lower rate later for lower fees.

Flexible refinancing options

Participants in the Buy-Fi program can refinance their homes anytime before December 31, 2024. This allows them to capitalize on lower interest rates at any time before that date.

Reduced fees make it a no-brainer

Preferred Rate is committed to reducing the financial burden of refinancing by offering reduced closing costs. These include administrative, application, commitment, technology, processing, and underwriting fees. When you add all those up, that’s a lot of savings compared with another mortgage lender or financial institution!

How to Buy a Home Now, Refinance Later

A few simple steps can help you get into a home now with the Buy-Fi program while taking advantage of lower interest rates that may be forthcoming.

To secure your home purchase loan, you just have to do the following:

Start your homeownership journey by applying with Preferred Rate for the purchase of your new home.
Successfully close on your home loan, securing your foothold in the real estate market.
At that point, Preferred Rate will watch the interest rates for you. When they drop, we’ve got you covered!
You can refinance anytime before December 31, 2024, and we’ll reduce your lender fees.

The Buy-Fi program creates a stress-free homeownership experience without the hassle of waiting for higher interest rates to come down. The strategy to buy a home now and refinance later is a financially responsible way to invest in real estate. These reduced lender fees provide real-world benefits to you in the long run and allow you to start building equity sooner.

Plus, this flexible approach of refinancing when it’s right for you (up until December 31, 2024) allows you to dictate the timing while securing a more favorable interest rate.

Some people think sitting on the sidelines puts them in the driver’s seat in this market. But really, doing your homework, getting creative, and pulling the trigger when the factors are right for you are what really put you in control of your financial future.

Other Things to Consider

Here are a few other things to consider when considering this program.

The federal funds rate and its influence on real estate

Preferred Rate’s Buy-Fi program strategically aligns with market dynamics influenced by the federal funds rate. That’s the rate at which banks, credit unions, and other financial institutions lend one another money. This gives participants in the Buy-Fi program a competitive edge in the real estate market.

In other words, when these high-interest rates finally start moving down, we move to save you money!

A new way to save

An online savings account—not to mention a high-yield savings account—is great, but Preferred Rate’s Buy-Fi program positions itself as a modern alternative to the traditional savings account.

With Buy-Fi, you save money on reduced closing costs on the refinance (via reduced mortgage lender fees). You also save on the lower interest rate after you refinance. And, of course, you can start building equity right away.

Get into the market while the competition is lower

Those high-interest rates do make the housing market more attractive in a few respects. They mean that competition is lower, meaning you’re less likely to get into a bidding war over the home of your dreams. Lower competition usually leads to lower prices as well.

Waiting to Buy a Home Could Cost You

Getting a mortgage from other financial institutions or a mortgage lender comes with fees, including closing costs. The extra money required can strain the homebuying process, and waiting for rates to drop may not necessarily mitigate all these costs.

At the same time, putting the money that would go toward your home purchase into one of these high-yield savings accounts that compounds interest can be attractive. However, the opportunity cost of waiting for lower mortgage rates could lead to missed opportunities for homeownership, impacting your long-term financial goals.

That’s why Preferred Rate’s Buy-Fi program is here to help. By encouraging proactive decision-making, offering flexible refinancing options, and reducing closing costs, Preferred Rate hopes to pave the way for a smart and seamless homeownership experience.

Don’t let the uncertainty of market conditions dictate your homeownership journey. Seize the opportunity with Buy-Fi, and start your journey today!

6 Most Commonly Asked Questions About VA Loans

November 3, 2023

House American Flag Backlit Outside Home Blurred background (1)

If you or a loved one have served your country and are now looking to buy a home, you may wonder if you qualify for a VA loan.

VA mortgage loans offer tons of benefits, like no down payment requirements, no private mortgage insurance (PMI) monthly payment, and flexible underwriting guidelines.

Below are the most commonly asked questions about VA loans. But first, let’s explain who qualifies for a VA loan. You can obtain a VA loan if you are an active-duty service member, veteran, or surviving spouse of a veteran. This includes veterans with service-connected disabilities.

Those who qualify will receive a Certificate of Eligibility (COE) as proof that they are eligible for a VA loan. If you do not have a copy of your COE, your Preferred Rate Mortgage Advisor can assist you.

1. Are There Closing Costs Associated with a VA Loan?

As with many loan programs, VA loans do come with some of the standard closing costs and fees. These include fees you’d see on most loans, including the appraisal, title search, title insurance, recording fee, and other lender fees.

One fee that is specific to VA loans is the VA funding fee. You pay this one-time fee directly to the VA to keep the loan program going. The size of the VA funding fee depends on a few factors.

For first-time use, the funding fee is 2.125% of the total amount borrowed. The funding fee increases to 3.3% for borrowers who have previously used the VA loan program, but it can be reduced by putting money down. Veterans who are more than 10% disabled may be exempt from this fee.

There are a few ways you can avoid paying the VA funding fee out of pocket. You can negotiate to have the seller pay this fee, or you can roll the funding fee into your mortgage and finance it over the life of the loan.

2. What Credit Score Do I Need for a VA Loan?

Credit score requirements are one of the biggest worries for many homebuyers, but are you ready for some good news? There is no credit score requirement for VA loans.

As exciting as this is, remember that although the VA loan program doesn’t set a minimum credit score, individual lenders do. At Preferred Rate, our minimum FICO score requirement is 580 for VA loans, which provides applicants with more leniency. However, it’s important to note that not all lenders have the same requirements.

It’s also important to keep in mind that the better your score, the better your interest rate and loan terms will be. To learn where you stand, you can obtain your free credit report once a year from each of the three credit bureaus—or you can connect with a Preferred Rate Mortgage Advisor by clicking here to set up a free pre-qualification.

If you find that you need help boosting your credit score, our experienced Preferred Rate Mortgage Advisors are always here to help. We’re happy to sit down with you to discuss your financial situation and how you can improve your FICO score before applying for a VA loan.

3. How Many Times Can I Use My VA Home Loan Benefit?

As many times as you like. There’s no limit on how many VA loans you can take out in your lifetime.

The only caveat is that VA loans must be used only to purchase or refinance a primary residence. In addition, your entitlement—the amount the VA is willing to guarantee for your loan—is finite. Some veterans with a partial remaining entitlement can get another VA loan if the remaining entitlement is sufficient. Your Mortgage Advisor can help with that calculation.

Normally, you’d have to sell the home that is financed under the VA loan to restore your full entitlement. However, the Department of Veterans Affairs offers a one-time entitlement restoration for individuals who have paid off their VA loan but still own their property. This perk can be used whether the loan was paid off entirely or refinanced into a different loan, such as a conventional mortgage.

4. Can I Have Two VA Loans?

You sure can. VA loans are technically used for primary residences, but primary residences change all the time—especially for active service members. For example, you can use a VA home loan program to buy your primary residence. Then, if you receive orders to move, you can take out another VA loan to purchase your new primary residence—as long as your entitlement covers both.

The best part about having multiple VA loans is that you don’t have to sell your old home. You can use it as a rental property and earn supplemental income while your original VA loan remains intact.

Naturally, you will have to qualify for the VA loan again. You may also be limited in how much you can borrow the second time around, depending on your VA loan entitlement.

5. Can I Use a VA Loan to Buy Land?

A VA loan doesn’t allow you to purchase land by itself, but it does allow you to buy land that you plan to build on. So you can use a VA loan to buy land if you finance the costs associated with that land and the construction of your new home at the same time.

You could also finance the cost of the land through a conventional loan and then use a VA loan to fund the construction of a home that will sit on that land. Your third option is to finance both the cost of the land and the construction of the home through other means, such as a short-term construction or bridge loan, and then refinance into a VA loan once the home is built.

There are a few more rules you may need to consider before purchasing land using a VA loan. A Preferred Rate Mortgage Advisor can go over those with you.

6. Can I Refinance a VA Loan?

By now you’ve probably gleaned that, yes, you can refinance a VA loan. You can obtain a VA-backed cash-out refinance or an interest rate reduction refinance loan (IRRRL). Like your initial VA loan, you’ll work with a lender like Preferred Rate (not the VA) to refinance your loan.

While the VA IRRRL loan is a streamlined process that requires less paperwork on behalf of the borrower, you will need to supply the lender your COE. For a cash-out refinance, you will need to provide most of the paperwork that comes standard for home financing. There are some restrictions on the equity required for cash-out refinances, but VA mortgage rates are typically in line with other government products like conventional loans.

Closing fees do apply on VA refinances. In addition, there is also a VA funding fee that you can finance into your new loan amount. It’s always a good idea to consult with a trusted Mortgage Advisor to make sure the terms and cost of refinancing are worth it and will save you money in the end.

Taking the First Step

The VA home loan benefit is one of the ways our country and companies like Preferred Rate say thank you to military personnel and their families for the sacrifices they have made in the name of our freedom. Our job is to make the homeownership journey as easy as possible for you and your family.

At Preferred Rate, we truly believe that the VA home loan benefit is one of the best ways to make that happen. For more information on VA loans click here to connect with a Preferred Rate Mortgage Advisor.

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

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.