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.

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.

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.

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.

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.

The Federal Housing Finance Agency announced a new baseline conforming loan limit for Fannie Mae and Freddie Mac in 2021: $548,250.

This is a 7.5% increase from 2020’s limit of $510,400 and marks the fifth consecutive year of increases from the FHFA. In 2016, the FHFA increased the Fannie and Freddie conforming loan limits for the first time in 10 years, and since then, the loan limit has gone up by $131,250.

The conforming loan limits for Fannie and Freddie are determined by the Housing and Economic Recovery Act of 2008, which established the baseline loan limit at $417,000 and mandated that, after a period of price declines, the baseline loan limit cannot rise again until home prices return to pre-decline levels.

For high-cost areas, where 115% of the local median home value exceeds the baseline conforming loan limit, the maximum loan limit is higher than the baseline loan limit. HERA establishes the maximum loan limit in those areas as a multiple of the area median home value, while setting a “ceiling” on that limit of 150% of the baseline loan limit.

Median home values generally increased in high-cost areas in 2020, driving up the maximum loan limits in many areas. The new ceiling loan limit for one-unit properties in most high-cost areas will be $822,375 — or 150% of $548,250.

Special statutory provisions establish different loan limit calculations for Alaska, Hawaii, Guam, and the U.S. Virgin Islands. In these areas, the baseline loan limit will be $822,375 for one-unit properties.

These increases in the baseline loan limit and the ceiling loan limit will drive the maximum 2021 conforming loan limits higher in all but 18 counties or county equivalents in the U.S.

Click here to see a map of the new conforming loan limits across the U.S.

A new study shows that forty-three percent of 30-year mortgage holders are eligible for a refinance that would lower their mortgage rates. That means their credit rating is at least 720, they have at least 20% equity in their homes, and they can reduce their mortgage rate by at least 0.75% through refinancing, according to data compiled by research company Black Knight. Homeowners could save an average of $297 a month by refinancing. Mortgage rates have dropped to record lows, below 3%, in recent weeks.

The states with the largest populations have the most eligible homeowners for refinancing, a new breakdown of state-by-state eligibility compiled by Forbes Advisor shows. The highest number of eligible borrowers lives in California, where the population that would benefit from a refinance is more than double that of second-place Florida. Forty-five percent of homeowners in California could lower their mortgage payments by refinancing and could save an average of about $405 per month. Borrowers eligible for refinancing are seen most in California, Florida, Texas, New York, and Illinois.

Meanwhile, the five areas where borrowers may see the greatest savings by refinancing are Hawaii (a potential monthly savings per borrower of $483); Washington, D.C. ($445), California ($405), New York ($399), and New Jersey ($354).

Credit scores are the key to unlocking lenders’ lowest mortgage rates. The states with residents with the highest average FICO scores are Minnesota (734), South Dakota (728), Vermont (728), and North Dakota (727), according to Forbes Advisor’s analysis.

Why are so many homeowners hesitating to refinance? Some are leaning on credit to pay bills or hoping to see an even lower rate. They also might be concerned about having to pay high closing costs from refinancing. Some lenders may offer “no-closing-cost refinances.” They add the closing costs to the principal so the borrower doesn’t have to pay a large upfront sum.

Homeowners interested in a refinance should attempt to lock it in before Dec. 1, when the Federal Housing Finance Agency will charge an “adverse market fee.” That will add a 0.5% surcharge to most mortgages backed by Fannie Mae and Freddie Mac that are refinanced into lower rates, meaning borrowers may have to pay the extra fee. Homeowners refinancing mortgage loans with balances below $125,000 will not be charged the new fee.

Refinance Roadmap from Forbes