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Buying a Home with Challenged Credit

Buying a home with poor credit can be a challenge, but it’s not impossible. Your credit score – whether it’s good or bad – is just one of the factors your home lender will use to decide whether you’re eligible for a loan. 

What is a Bad Credit?

Bad or “low credit” typically means your FICO score is under 600. FICO credit scores range from 300 to 850 and represent how likely you are to pay back a loan. Your score is calculated based on your payment history, amount owed, length of your credit history, new credit, and the mix of credit you have. Your score is using by lending agencies to determine whether you’ll be eligible for a loan and at what interest rate. The closer your score is to 800, the more loan options and lower interest rates you’ll have access to. Lenders tend to define the scores as: 

Exceptional: 800+  
Very good: 740 – 799 
Good: 670 -739 
Fair: 580 – 669  
Very poor: 300 – 579 

To check your credit report annually, you can visit annualcreditreport.com to see what your current FICO score is. It’s free to use once a year and it won’t impact your credit rating. 

Minimum Credit Score Needed for a Home Loan?

There isn’t a universal minimum credit score needed to get a home loan. Instead, each mortgage lender decides the minimum credit score they’ll accept. But when a score is under 600 it’s classified as “subprime” and your loan options drop significantly. A score under 550 is going to have very limited loan options with very high interest rates. 

Other Factors Lenders Consider

Besides your FICO score, a lender will evaluate how much money you have for a down-payment, how much debt you already have, your credit history, and your income. To increases your chances at getting a loan with bad credit, the best option is to have as large a down payment as you can afford to minimize your risk to the lender.  

A potential borrower with a low credit score but a sizeable down payment and a decent credit history is more likely to be approved for a loan than someone with low credit, a small down payment, and no credit history. 

Long-Term Cost of Low Credit Scores

Since early 2020, interest rate on mortgages have dropped. Lower mortgage rates mean smaller monthly payments for principal and interest – and a lower cost for the loan over its life. That said, there’s still a big difference between how much someone with good credit will pay compared to someone with a bad credit score.  

From the chart below, you can see a borrower with a credit score of 639 will end up paying $93,638 more in interest over the lifetime of the loan than a borrower with a credit score of 760. 

MyFICO Loan Savings Calculator for $300,000 mortgage 
FICO score APR Monthly payment Total interest paid 
760 – 850 2.377% $1,166 $119,856 
700 – 759 2.577% $1,201 $132,310 
680 – 699 2.776% $1,229 $142.389 
660 – 679 2.99% $1,263 $154,750 
640 – 659 3.42% $1,334 $180,158 
620 – 639 3.966% $1,426 $213,494 

Home Loan Options for Someone with Bad Credit

FHA loans are insured by the Federal Housing Administration and are designed specifically for borrowers with low credit and lower-to-middle income. You’ll need a down payment to qualify for FHA loans, but your mortgage lender may be able to secure a loan through them even if you have a FICO score as low as 500. 

The best way to evaluate your loan options is to speak with a local mortgage expert. Based on your financial goals, loan eligibility, and local real estate conditions, they’ll be able to help you find the right loan for your needs. 

What is a home equity line of credit?

A home equity line of credit (HELOC) uses the equity you’ve built in your home as collateral to get an additional loan. Since you’re using your home as collateral, lending institutions generally are able to offer much more favorable interest rates than you would get from an unsecure borrowing source (like a credit card company).  

How much money can you get from a HELOC?

Each lending institution has different guidelines that dictate how much they can lend you. Their guidelines are usually based on your loan-to-value ratio (LTV), which is the amount of principal on your mortgage compared to your home’s appraised value. Most often, you’ll need at least 20% equity in your home (which is a LTV of 80%) to qualify. As example, if your home’s current value is $300,000 and the remaining balance on your mortgage is $250,000, you would have an LTV of 83%. For many lending institutions, you would not qualify for a HELOC.  

However, if your home’s current value is $300,000 and the remaining balance on your mortgage is $175,000, your LTV would be 57.9% and you would normally qualify for a HELOC for up to 80% of the equity in your home. In this example, you may have access to $65,000. 

Be aware that many lenders won’t give you a HELOC for less than $25,000.  

How do you get the cash?

Much like a credit card, you’ll have a revolving line of credit available. You can access your funds through an online transfer, a check, or a credit card. As you borrow more from your line of credit, your payments will increase though the rate of interest will remain the same.  

When Do You Pay Back HELOC Funds?

Most have two phases. The first is the “draw period” which may last years (often up to 10) during which you can access your available credit. During the draw period, you’ll make monthly interest-only payments on the funds you withdraw. At the start of the second phase, you’ll no longer have access to your funds and you’ll have to start making regular principal-plus-interest payments until your balance is $0. Most lenders allow the second phase to last around 20 years. 

Benefits of a HELOC

Even if you get a HELOC, you don’t have to use the funds. As long as your lender doesn’t require you to do minimum draws, it could be a good source of emergency cash or a temporary safety net. If you do need to use the cash, the interest rates are lower than the rates tied to credit cards. 

Cons of a HELOC

The rate on your HELOC might fluctuate, and if it goes too high, you may have a hard time paying off your interest. Furthermore, your lender may decide to reduce your line of credit if your home’s value takes a drastic dip. And, don’t forget your overall debt load will increase with a HELOC or any other second mortgage. 

Is a HELOC right for you?

If you have enough equity built into your home and need cash for a home improvement, to cover medical bills, to pay off credit cards, or to sustain your lifestyle after losing a job, a HELOC might be a great solution. To find your home’s current value and how much you could get from a HELOC, contact your local Mann Mortgage expert today. 

Alternative options

One potential alternative is a cash-out refinance, which you could also use to pay for a home renovation or to pay off credit card bills. Learn more about cash-out refinances. If you have questions on HELOCs or other programs that will let you leverage your home equity, please get in touch with one of our local mortgage experts today.

6 things you shouldn’t do when you’re pre-approved for a mortgage

Just because you’re pre-approved for a loan doesn’t mean you’re guaranteed to get final approval on your loan. When your offer has been accepted and it’s time to begin closing on your loan, your mortgage lender is going to take another detailed look at your credit history, assets, income, and FICO score. You want to make sure you look just as good as you did the day you got pre-approved. How can you do that?  

1. Don’t miss payments   

They’re going to see whether you’ve been late or missed any payments on your credit cards or loans since you were pre-approved. Just one 30-day late payment can negatively impact your credit report by many points. Make sure you have all your medical bills, parking tickets, and utility bills up-to-date and paid too! 

2. Don’t apply for new credit 

Applying for new credit will lower your credit score and, if you’re approved, increase your debt-to-income ratio – a key factor lenders consider when you apply for a mortgage. These changes could affect the terms of your loan or get it denied altogether.

3. Don’t change jobs  

This might be out of your control, but it’s best to stay with the job you had when you had your loan pre-approval. Switching jobs could signal a change in income, which may impact the amount you’re approved to borrow.

4. Don’t make large purchases

You might be tempted to start shopping for furniture or appliances for your new home, but you shouldn’t do it. If you put the charges on your credit card, your debt-to-income ratio will change. And if you pay cash, you’ll have less money for a down payment or as an asset. Hold off on any large purchases until you’ve closed on your new home!

5. Don’t make a large cash deposit 

Any big cash deposits into one of your accounts prior to your mortgage closing looks fishy to an underwriter. They’re trained to spot evidence of borrowers needing to be gifted money for their mortgage – a clear sign the borrower may default. If it’s inevitable that you’ll have a deposit over $1,000, expect to be able to show the origin of the funds to your mortgage company. Transferring money between your accounts is generally fine.

6. Don’t refinance for lower rates    

Don’t refinance your loans for a lower rate until after your home loan has closed. Refinancing is considered taking out a new line of credit, which isn’t good for someone looking for a mortgage. An established loan you’ve been making regular payments on looks better to mortgage underwriters than a new lower-interest loan you haven’t made many payments on yet.

What should you do? 

Talk to your mortgage expert if you have any question on your current credit score or how your actions will affect your pre-approval. Your local Mann Mortgage branch is dedicated to making your experience both personalized and hassle-free.

Closing on a home – how to prepare

You’re getting ready to close on a new home – congratulations! You’ve completed your house hunt, you negotiated the price, and your offer was accepted. Before you get handed the keys to your new house, there’s one final step you’ll have to complete – closing on your home.

What is closing?

It’s the final step to transfer ownership of the property to you once all contingencies for the sale have been eliminated. To prepare for closing, your lending agency will originate and underwrite your loan and the title company will prepare paperwork for you to sign and make the transfer of ownership legal.

What happens during closing?

As soon as the seller accepts your offer and all contingencies have been met, the sale of the home is “pending” and closing begins. A thorough home inspection will be completed by a professional inspector to uncover any defects or local building code violations that might impact the value of the house. Your mortgage company will begin the time-consuming task of originating and underwriting your loan. They will be taking a very close look at your finances to decide whether you’ll repay the thousands of dollars you’re asking them to lend you.

Pre-approval helps

Being pre-approved for a loan means your lender already pulled your credit score, verified your income, and gave you an idea of the type and size of mortgage you qualify for. Having this information makes it likely you’ve selected a home you can afford and your lender will help you finance. But being pre-approved is not a guarantee you’ll be given a final approval for your loan. If anything has happened since you were pre-approved that might affect your finances (losing a job, taking out another loan, missing payments on your mortgage, etc.), you could be denied the loan.

How long does closing take?

It took an average of 49 days in November 2020 for all the paperwork to be completed and the transfer of ownership to be finalized. The number fluctuates a bit every month, but 30 to 60 days is a good estimate. The dedicated loan officers at Mann Mortgage strive to close loans in 30 days or less.

Have your documents in order

During closing, be ready to hand over a lot of documents to your mortgage company for final approval of your loan. Your loan officer will likely have a lot of questions for you. Answer their questions quickly to avoid delays in your closing date.

You’ll probably need the following:

  • Your last two tax returns
  • Your last two pay stubs
  • Your last two W2 statements
  • Your bank statements for the last one to three months

You may also need:

  • Credit card statements
  • Settlement statements
  • Verification of rent
  • Divorce decree
  • Bankruptcy documents
  • Statement of Social Security or retirement income
  • Copies of rental lease agreements on rental units
  • Contact information for your homeowner’s insurance agent
  • A profit and loss statement
  • Proof of additional income

Expect to pay closing costs

Some common closing costs are listed below. All of them have to be paid when closing on your new house.

Unless otherwise negotiated by your Realtor,
the buyer pays all the following:

  • Home inspection fee ($500 to 1,000)
  • Loan origination and underwriting fee (0.5% to 1% of the loan amount)
  • Credit check fee ($25 to $60)
  • First month’s interest (varies)
  • Flood certification fee ($15 to $25)
  • Title/escrow services and insurance ($200 to $400)
  • City or county recording fee (varies)
  • Transfer taxes (varies)
  • Realtor or broker fee (2% to 7% of the home’s price)

This isn’t an exhaustive list of every document and fee you’ll pay, but it will give you a good idea of where to start. If you have trouble finding documents your loan officer requests, ask them if there are alternative documents you can provide in their place.

Be prepared for closing day

Closing day might start with a final walk-through of the house to make sure it is in good shape and the seller met all contingencies. At the appointed time, you and the seller will meet and sign documents with your title or escrow agent, real estate agent, and possibly an attorney. Take as much time as you need to make sure you understand what you are signing.

Once all the paperwork is signed and any fees are paid, the ownership of the house it transferred to your name and the home is yours.

At any point, if you have any questions about your closing costs, loan options, or getting pre-approved, be sure to talk to your local loan expert at Mann Mortgage. We are here to help you make your closing as seamless and quick as possible.

What is a cash-out refinance?

So What is a cash-out refinance?

A cash-out refinance is a type of loan where a borrower has a mortgage they are currently paying off and they replace it with a new mortgage for more than their remaining principal. The difference between the principal balance of the first mortgage and the new one is given to the borrower in cash.

Cash-out refinance vs a standard refinance

In a standard refinance, borrowers work with their lender to get a lower rate of interest or a new payment schedule. Once the standard refinance is secured, they have a new monthly payment amount based on the new agreement – but their balance on the loan remains the same. In a cash-out refinance, a borrower works with their lender to pay off their home’s mortgage balance with a new loan based on their home’s current value. The difference between the original mortgage the borrower is paying off and the new loan is kept by the borrower. In order to have some equity in their home, most cash-out refinances limit the amount a borrower can receive at 80-90% of their home’s equity in cash (VA refinances don’t have this requirement).

In other words, don’t expect to pull out all the equity you’ve built into your home. If your home is valued at $350,000 and your mortgage balance is $250,000, you have $100,000 of equity in your home. You could do a cash-out refinance of somewhere between $80,000 to $90,000.

Benefits of a cash-out refinance

If interest rates are at a new low, you have equity built into your home, and if you would like cash on hand to pay off high-interest credit cards or fund a large purchase, a cash-out refinance is something you might want to consider.

Cons of a cash-out refinance

There are fees involved in a cash-out refinance, and you’ll have to make sure your potential savings are worth the cost. Like any refinance, you’ll pay closing costs of around 2% to 5% of the mortgage. And if your lender allows you to take out more than 80% of your home’s value, you’ll have to pay private mortgage insurance (PMI). Freddie Mac estimates most borrowers will pay $30 to $70 per month for every $100,000 they borrowed.

And, don’t forget your overall debt load will increase with a cash-out refinance.

Alternative options

One potential alternative is a home-equity line of credit (HELOC), which you could also use to pay for a home renovation or to pay off credit card bills. Learn more about what HELOCs are and how they work.

Should you get a cash-out refinance? If you have enough equity built into your home and you get a great rate, they might be a great solution for a home improvement or renovation. To find out what the current rates are and to check your home’s current market value, contact your local Mann Mortgage expert today.

How much will your down payment on a house be?

What is a down payment on a house?

A down payment is a minimum cash payment a buyer makes during the closing process to secure a loan on a home purchase. Down payment requirements vary for different types of loans, and can range from as low as 0% of the total purchase with a VA loan to as much as 20% or more for conventional or jumbo loans. Similar to your mortgage rate, your down payment amount will be determined in large part by your credit score, the purchase price of the home, and the type of loan you and your loan officer determine will help you the most given your circumstances.

How much should you put down on a house?

The amount you need depends on the type of loan you get. Below are the six most common types of home loan options and their minimum down payment requirements.

Conventional loan

Minimum down: 3%

These loans are used for purchasing a primary residence, secondary home, or investment property. Though you can put down 3%, you will have to pay private mortgage insurance (PMI). It ranges in cost from 0.55% to 2.25% of the original loan amount per year and is broken down into monthly payments. It ranges in cost from 0.55% to 2.25% of the original loan amount per year and is broken down into monthly payments. Once you own 22% of your home, you can stop paying PMI. You can avoid PMI altogether with a 20% down payment.

FHA loan

Minimum down: 3.5%

Depending on your credit score, you may be able to secure a loan guaranteed by the Fair Housing Administration (FHA) with as little as a 3.5% down payment. FHA loans are available to people with lower credit scores (as low as 500), higher debt-to-income ratio (up to 50%), and with smaller down payments than some conventional loans allow. FHA loans allow the money for a down payment to come from a gift or charitable organization. Borrowers will need to pay an annual mortgage insurance premium (MIP) of between 0.45% to 1.05% of the loan amount – this fee will be paid annually but broken down into 12 payments and added to the monthly mortgage bill. If borrowers put down a 10% down payment, they’ll pay MIP for 11 years. If they put down less than 10%, they’ll pay MIP for the lifetime of the loan.

Jumbo loan

Minimum down: 20%

When someone needs a loan for more than conforming loans allow ($548,250 is most states), a jumbo loan is an option. Since they are too large to be guaranteed by Fannie Mae or Freddie Mac, qualifications to get this loan are tight and borrowers will need an excellent credit score. A 20% down payment is standard, but some lending institutions may require more.

USDA loan

Minimum down: 0% Down

These loans are designed to improve the economy and quality of life in rural America. If you’re buying a primary residence in a rural area, you may qualify for a USDA loan. You’ll need a credit score of 640 (though some lenders will offer loans for less) and meet income restrictions for the area you’re buying in. Borrowers will pay an annual fee equal to 0.35% of the loan balance (broken down into 12 monthly payments and added to the mortgage bill) as well as a one-time funding fee of 1% of the loan amount due when the loan closes.

VA loan

Minimum down: 0% down

If you’re an active member or veteran of the U.S. military (or a surviving spouse) you may be eligible for a Veterans Affairs (VA) loan. The VA doesn’t set a minimum credit score requirement for VA loan eligibility, but lenders typically will. Normally, it’s around 660, but you’ll need to check with your individual lender to see what their qualifications are. Borrowers will need to pay a one-time funding fee of 1.4% to 3.6% of the loan amount and can be paid upfront or rolled into the loan amount. There are no private mortgage insurance fees associated with a VA loan.

What’s the right down payment for you?

Finding the down payment amount depends on your financial goals, your loan eligibility, and other factors. Work with your loan officer at Mann Mortgage to identify the loan programs you qualify for and to help you decide which is best option for achieving your home buying goals.

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