Category: Mortgage

Things To Avoid After Applying For A Mortgage

Maui mortgage
Once you’ve applied for a mortgage, there are some key things to keep in mind before you close the transaction. It’s exciting to start thinking about moving in and decorating your new place, but before you make any large purchases, or move your money around, be sure to consult your lender. Here’s a list of things you shouldn’t do after applying for a mortgage. They’re all important to know – or simply just good reminders – for the process.

Depositing Cash

Lenders need to source your money, and cash isn’t easily traceable. Before you deposit any amount of cash into your accounts, discuss the proper way to document your transactions with your loan officer.

Large Purchases

New debt comes with new monthly obligations. People with new debt have higher debt-to-income ratios. Since higher ratios make for riskier loans, qualified borrowers may end up no longer qualifying for their mortgage.

Co-Signing Other Loans

When you co-sign, you’re obligated. With that obligation comes higher debt-to-income ratios as well. Even if you promise you won’t be the one making the payments, your lender may have to count the payments against you.

Applying for New Credit

It doesn’t matter whether it’s a new credit card or a new car loan. When you have your credit report run by organizations in multiple financial channels (mortgage, credit card, auto, etc.), your FICO® score can be impacted. Lower credit scores can determine your interest rate and possibly even your eligibility for approval.

Closing Credit Accounts

Many buyers believe having less available credit makes them less risky and more likely to be approved. This isn’t true. A major component of your score is your length and depth of credit history (as opposed to just your payment history) and your total usage of credit as a percentage of available credit. Closing accounts has a negative impact on both of those determinants of your score.

Get The Best Rate Possible On Your Mortgage

Maui mortgage

There’s no way around it, mortgage rates have been on the rise in 2022. With the uncertainty of where rates may go, you should do everything in your power to increase your chance at getting the best rate available to you. Your mortgage rate will depend on things such as your personal credit profile, income, current debt load, and down payment amount.

Improve your credit score

Your lender will check your credit score and report with the three major credit bureaus before they can secure the best rate for you. If your score is below 740, it’s worth the effort to boost your credit score. First, look for any errors on your report and dispute them with the bureau reporting it. Next, make steps to pay down all debts and maintain low credit card balances. Don’t close any accounts though, this will reduce the available credit you have. You should aim to use no more than 30% of the limit on any credit card while continuing to make payments on time.

Reduce your debts

If earning extra income isn’t possible, cutting expenses may be the way to lowering your debt-to-income ratio, also known as your DTI. Decrease entertainment related purchases, forgo the vacation this year and eat out less. Lenders use your DTI as a representation of your personal financial fitness and ultimately, as a way to judge how much of a risk you are to lend to. Ideally, your DTI should be around 36% or less making you a better candidate for a lower mortgage rate. For example, if you make $8,000 a month and you’ll only be spending $2,800 (35% of your income) on your mortgage payment and other debt payments.

Save for a bigger down payment

Most loans require a minimum down payment amount, with USDA and VA loans being the exceptions. Putting down more than the minimum shows the lender that you’re willing to invest more in the property, making you less risky and therefore eligible for a more attractive interest rate. If you put down less than 20% on the loan, you’ll most likely be required to have private mortgage insurance (PMI). Having to pay PMI premiums will affect you the same as a higher rate will be increasing your monthly payment and total borrowing costs.

Look into a shorter term loan

When you select a 15 year fixed rate mortgage instead of a 30 year fixed rate mortgage, the interest rate will typically be lower. Although this may mean a slightly higher monthly payment, you’ll have the benefits of paying interest on the loan and also paying off the home in half the time, potentially saving you thousands over the life of your loan.

Current market conditions, your credit history and other details about your financial life will be how lenders personalize your interest rate. Since you can’t control the markets, it’s up to you to build your creditworthiness and obtain the best interest rate available to you.

Ways To Utilize Your Home Equity

Maui home equity
Your equity is a powerful tool that can help you achieve your goals as a homeowner. And chances are, your equity grew substantially over the past year. According to the latest Equity Insights Report from CoreLogic, homeowners gained an average of $51,500 in equity over the past year. If you’re looking for the best ways to use your growing equity, here are some options:

Buy A Bigger Home

If you’re finding you no longer have the space you need, it might be time to move into a larger home. Or, it’s possible you have too much space and would like something smaller. No matter the situation, consider using your equity to power a move into a home that fits your changing lifestyle. Moving into a larger home can provide extra space for remote work or loved ones. Downsizing, on the other hand, may mean saving time and money by caring for a smaller home.

Relocate

If the size of your home isn’t a challenge but your current location is, it could be time to relocate to a new area. Maybe you enjoy vacationing in the mountains, at the beach, or another area, and you’re dreaming of living there year-round. Or perhaps the distance between you and your loved ones is greater than you’d like, and you want to close the gap. No matter what, your home equity can fuel your move to the location where you really want to live.

Start A Business

If you’re not ready to move into a new home, you can use your equity to invest in a new business venture. While it’s not recommended that homeowners use their equity for unnecessary spending, leveraging your equity to start a business that you’re passionate about can potentially grow your nest egg further.

Higher Education

Whether you have a loved one preparing to head off to college or you’re planning to go back to school yourself, the thought of paying for higher education can be daunting. In either situation, using a portion of your growing equity can help with those costs, so you can make an investment in someone’s future.

First Home Buying Tips

Maui real estate
It’s an adventure when you’re ready to go house hunting. It’s even more exciting when you are ready to search for your first home. Whether you’re moving out of your parent’s house, or you have been renting and are ready to finally own your own place, you’re taking a big step in life. Here are some helpful tips which will make buying your first home a positive experience.

Budget Wisely

Far too many people make the mistake of buying a home that is beyond their means. This only adds stress to their lives and can even lead to moving out if the mortgage is too much to handle. Sit down and work out your budget. Look at all of your monthly expenses and remember that you’ll want to continue to set aside savings for a rainy day. Once you see how much is left for a mortgage payment, give yourself some wiggle room.

Location, Location, Location

If you’re going to take the plunge as a first-time homebuyer, be strategic about your search. What area calls to you? A great price or a beautiful home will not be enough if you’re unhappy with the location. Consider the school district if you have children and think about access to your favorite stores. Figure out if you want neighbors nearby or if you would prefer your own space. Perhaps most importantly, decide if you’re comfortable with the quality of the surrounding area you’re moving to. This will help you to trim down your list of potential homes.

Establish Financing

This may be the most important tip in obtaining your first home…make sure you have your financing in order before you go home shopping. Seek out a licensed mortgage professional in your area and begin the pre-qualification process. Getting pre-approved before you start looking at homes is extremely important in the event you decide to write an offer on one. In the competitive housing market we’re currently in, offers from pre-qualified buyers go to the front of the line.

Getting Pre-Approved Makes A Big Difference

Maui home mortgage
It’s important to get pre-approved at the beginning of the homebuying process, but what does that really mean, and why is it so important? Especially in today’s market, with rising home prices and high buyer competition, it’s crucial to have a clear understanding of your budget so you stand out to sellers as a serious homebuyer.

Being intentional and competitive are musts when buying a home right now. Pre-approval from a lender is the only way to know your true price range and how much money you can borrow for your loan. Just as important, being able to present a pre-approval letter shows sellers you’re a qualified buyer, something that can really help you land your dream home in an ultra-competitive market.

With limited housing inventory, there are many more buyers active in the market than there are sellers, and that’s creating some serious competition. According to the National Association of Realtors (NAR), homes are receiving an average of 5.1 offers for sellers to consider. As a result, bidding wars are more and more common. Pre-approval gives you an advantage if you get into a multiple-offer scenario, and these days, it’s likely you will. When a seller knows you’re qualified to buy the home, you’re in a better position to potentially win the bidding war.

By having a pre-approval letter from your lender, you’re telling the seller that you’re a serious buyer, and you’ve been pre-approved for a mortgage by your lender for a specific dollar amount. In a true bidding war, your offer will likely get dropped if you don’t already have one.

Every step you can take to gain an advantage as a buyer is crucial when today’s market is constantly changing. Interest rates are low, prices are going up, and lending institutions are regularly updating their standards. You’re going to need guidance to navigate these waters, so it’s important to have a team of professionals such as a loan officer and a trusted real estate agent making sure you take the right steps and can show your qualifications as a buyer when you find a home to purchase.

In a competitive market with low inventory, a pre-approval letter is a game-changing piece of the homebuying process. Not only does being pre-approved bring clarity to your homebuying budget, but it shows sellers how serious you are about purchasing a home.

Do You Have Enough Saved For A Down Payment?

Maui real estate
How big of a down payment do you need for a house? That’s going to depend entirely on the type of mortgage you choose. For some, it could be literally nothing — not a dime. Most will need at least 3% or 3.5% of the purchase price. The down payment amount you’ll need depends on what type of mortgage loan you choose. Here are the minimum down payments for different home loans:

VA loans ($0 down)

To get a zero-down VA loan (backed by the Department of Veterans Affairs), you need a Certificate of Eligibility. And the VA has strict rules about those. Veterans, active-duty service members, members of the National Guard, and reservists typically qualify — along with some surviving spouses. You’ll need an “acceptable” credit history as well. Some mortgage lenders are happy with a credit score of 580, but many want 620-660 or higher.

USDA loans ($0 down)

USDA mortgages are backed by the U.S. Department of Agriculture as part of its rural development program. Like the VA loan program, USDA allows a 0% down payment (though you still need to pay closing costs out of pocket). You’ll have to buy in an eligible rural area to qualify. However, your occupation doesn’t have to be connected to agriculture in any way.

Conforming loans (3% down)

Fannie Mae and Freddie Mac (the agencies that set rules for conforming mortgages) require a down payment of only 3% of the purchase price. If you can qualify, conforming loans may be better than those from the FHA. That’s because they let you stop paying mortgage insurance once your equity (the amount by which your home’s market value exceeds your mortgage balance) reaches 20%. FHA makes you keep paying mortgage insurance premiums until you sell, refinance, or finish paying down your loan.

FHA loans (3.5% down)

The smallest down payment you can make on an FHA loan is 3.5%. That’s a bit higher than for conforming loans. And, as we mentioned, FHA loans have you paying mortgage insurance premiums until you sell, refinance to a different type of mortgage, or simply pay off the loan, usually after 30 years. Often, an FHA loan can be a shortcut to homeownership. And if you’ll move or refinance within the next few years, those mortgage insurance payments aren’t as big of a deal.

Conventional loans (5-20% down)

Most conventional loans fall into the ‘conforming loan’ category regulated by Fannie Mae and Freddie Mac. The least you can put down with these is 3 percent. The next step up for a conventional loan is 5% down on a single-family primary residence. But with 5% down, you’ll be paying mortgage insurance until your equity rises to 20 percent. And you may find other types of mortgages more attractive if you’re in that situation. If cash isn’t an issue, you can go ahead and put 20% down right away. This will earn you the lowest mortgage rate and help reduce your monthly mortgage payments as well as your total interest cost.

3 Ways To Tap Your Home Equity

Maui home equity

If you’re a homeowner in 2021, there’s a very good chance that you have a fair amount of equity due to recent market appreciation. So if you’re wanting to take advantage of historically low borrowing rates and pay off debt or do some home improving, there are a few ways to go about it.

There are three main ways to tap into home equity and we’ve boiled down what you need to know about some of the most common home financing options—cash-out refinance, home equity loan, and home equity line of credit.

Cash-out refinance

A cash-out refinance replaces your existing mortgage with a new loan that’s larger than what you currently owe—and puts the difference in your pocket. With a cash-out refinance, you’re able to receive some of your home’s equity as a lump sum of cash during the process. You can use this money for whatever you want—upgrades to your house, even a vacation. Another positive? If interest rates are lower than when you first got your loan, you’ll get to lock in lower interest rates than you’re paying now.

Home equity loan

Unlike a cash-out refi, which replaces your original loan, a home equity loan is a second additional mortgage that lets you tap into your home’s equity. You’ll get a lump sum to spend as you see fit, then you’ll repay the loan in monthly installments, just as you do with your first mortgage. The home equity loan is secured by your house, which means that if you stop making payments, your lender could foreclose on the home. A home equity loan lets you keep your existing mortgage, so you don’t have to start over from year one. Your interest rate is typically fixed, not adjustable, so you know exactly what your monthly payment will be over the life of the loan. And, another plus is your interest may be tax-deductible.

Home equity line of credit

A home equity line of credit, aka HELOC, is similar to a home equity loan—it’s a second mortgage that lets you pull out your home equity as cash. With a HELOC, however, instead of a lump sum amount, it works more like a credit card. You can borrow as much as you need whenever you need it (up to a limit), and you make payments only on what you actually use, not the total credit available. Since it’s a second mortgage, your HELOC will be treated totally separately from your existing mortgage, just like a home equity loan. Most HELOCs typically require the borrower to pay interest only during what’s known as the draw period, with principal payments kicking in later during the repayment period.

Mortgage Insurance vs. Homeowners Insurance

Maui mortgage

If you’re obtaining a mortgage to buy a house, then you could have two types of insurance, homeowners insurance and mortgage insurance. Homeowner’s insurance is sometimes referred to as hazard insurance. These policies cover damage to your property and losses you might suffer in a natural disaster, flood, break-in or other unexpected circumstance. Much like your car or health insurance, you file a claim when an event occurs, pay any deductibles or co-pays, and the insurance covers the costs of the rest. Despite its similar-sounding name, a mortgage insurance policy functions very differently.

About Mortgage Insurance

Home, car and health insurance protect you, the policyholder, in the event of loss. Mortgage insurance, on the other hand, protects the lender — not you or your property. Instead, these policies pay for the lender’s losses if you fall behind on your mortgage and fail to repay your loan. This protection lowers the risk for lenders, and it may even allow them to approve borrowers who wouldn’t have otherwise qualified.

Types Of Mortgage Insurance

Mortgage insurance is required on all FHA loans, and it’s sometimes required on conventional mortgages, too. The cost of this insurance varies. On conventional loans, you’ll only need private mortgage insurance (called PMI) if you make a down payment under 20% — and even then, not always. If your lender does require PMI, you can cancel the policy once you have 20% equity in your home. Freddie Mac estimates that PMI costs around $30 to $70 per month on conventional mortgages. With FHA loans, your premium will depend on your loan balance and your down payment size. You’ll also pay the premium both upfront — at closing — and monthly.

In some cases, you can cancel your FHA mortgage insurance (called MIP) after 11 years. For many borrowers, this insurance will be required for the entire loan term. If this is the case on your FHA loan, the only way you could remove the insurance is through refinancing.

Depending on what mortgage product you choose and how much you put down, you may very well need both home insurance and mortgage insurance. To find out exactly what insurance your home purchase will require, talk to your lender or loan officer. They should be able to tell you the costs of the insurance as well, so you can properly budget for these expenses before moving forward.

What Not To Do After Applying For A Mortgage

Maui home mortgage

Once you’ve found the right home and applied for a mortgage, there are some key things to keep in mind before you close. You’re undoubtedly excited about the opportunity to decorate your new place, but before you make any large purchases, move your money around, or make any major life changes, consult your lender – someone who is qualified to tell you how your financial decisions may impact your home loan. Below is a list of things you shouldn’t do after applying for a mortgage.

Don’t Make Random Cash Deposits

Lenders need to source your money, and cash is not easily traceable. Before you deposit any amount of cash into your accounts, discuss the proper way to document your transactions with your loan officer.

Don’t Make Any Large Purchases

New debt comes with new monthly obligations. New obligations create new qualifications. People with new debt have higher debt-to-income ratios. Higher ratios make for riskier loans, and then sometimes qualified borrowers no longer qualify.

Don’t Co-Sign Other Loans

When you co-sign, you’re obligated. With that obligation comes higher ratios as well. Even if you promise you won’t be the one making the payments, your lender will have to count the payments against you.

Don’t Change Bank Accounts

Remember, lenders need to source and track your assets. That task is significantly easier when there’s consistency among your accounts. Before you transfer any money, speak with your loan officer.

Don’t Apply for New Credit

It doesn’t matter whether it’s a new credit card or a new car. When you have your credit report run by organizations in multiple financial channels (mortgage, credit card, auto, etc.), your FICO® score will be impacted. Lower credit scores can determine your interest rate and maybe even your eligibility for approval.

Don’t Close Any Accounts

Many buyers believe having less available credit makes them less risky and more likely to be approved. Actually, a major component of your score is your length and depth of credit history (as opposed to just your payment history) and your total usage of credit as a percentage of available credit. Closing accounts has a negative impact on both of those determinants of your score.

Explaining Some Common Mortgage Programs

Maui mortgage types

When you get a mortgage in Maui, there are several options you can choose from, including FHA, VA, and USDA mortgages. The one you select will determine how big a down payment you’ll need, what credit score you should have and all the other requirements you’ll need to meet. But choosing the right mortgage product can be difficult — especially if you’ve never bought a home before.

FHA

FHA mortgages are insured by the Federal Housing Administration. They allow for lower credit scores than most other loans. In fact, with some lenders, you may be able to get approved with a credit score as low as 500.

The one caveat with FHA loans is that they require a Mortgage Insurance Premium both at closing and as part of your monthly payment. The exact cost of this varies based on your loan balance and down payment.

VA

VA loans are mortgage loans that are guaranteed by the Department of Veterans Affairs. Only homebuyers who are military veterans, current military members or their spouses can qualify for a VA loan. Applicants also need to meet certain service requirements, as well as obtain a Certificate of Eligibility from the VA.

VA loans come with some of the lowest interest rates around, and there are also no minimum credit score or down payment requirements.

USDA

USDA loans are mortgages backed by the U.S. Department of Agriculture. They’re reserved for buyers in more rural parts of the country, and they’re only available in certain areas. Borrowers also need to fall under the set income threshold for their community. Like VA loans, USDA loans require no down payment.

If you’re still not sure whether an FHA, VA, or USDA mortgage is the best fit for your home purchase, give us a call at [phone]. We can help point you toward the best option for your budget and goals.