Pensions and Social Security in the Mortgage Process

With our aging population, more and more borrowers are in their later years and have sources of income that are, at least in part, passive. This means they have an income stream coming in without actively working for it. Two sources of passive income are Social Security benefits and pension income.

The important question regarding the mortgage process is how this income can be used to qualify for a home loan.

The first thing a lender like me will want to know is how long you expect the income stream to last. Both Social Security and pensions will most likely continue through your lifetime and potentially through that of your spouse, but this must be confirmed.

The second important thing to note is how the income will be entered on a mortgage application. Pension income will be entered as if it were earned at a job. On the other hand, Social Security income has no taxation, so it is referred to as “grossed up.”

This means that the amount you receive will be artificially inflated to a more realistic number. For example, if you are receiving $1,500 per month in Social Security benefits, the lender will take that amount and multiply it by 1.25.

In our example, the $1,500, after being multiplied by 1.25, works out to $1,875. This is the amount that would be used on your mortgage application.

Other passive income to be considered includes dividend income or some type of regular income stream you receive from a retirement account and use to fund your household budget. The lender will review what this has looked like over the past two years to get an idea of what to expect in the future.

One source of income that would be ineligible for a mortgage application is an unemployment benefit, due to the fact that this will eventually run out.

Do you have additional questions? Please feel free to contact me with any questions you may have.

What Employment History Do I Need to Purchase a Home?

With the possible exceptions of recent college grads and those who have been out of the workforce for an extended period to raise a family, the expectation is that everyone who applies for home financing will have some type of work history.

The formal guidelines on employment history state that you should have at least two years of work history in order to purchase a home. However, these are just that: guidelines, not hard-and-fast rules.

What lenders are looking for is consistency and a job history that makes sense. What does this mean?

If you have changed jobs in the past few years, but have done so to further your career, as in getting a higher salary or taking on more responsibility, that would make sense to lenders. Also, events such as medical conditions may keep people out of work for an extended but explainable period of time.

What lenders are leery of are gaps in employment without a reasonable explanation. In our current economy, events such as plant closings, layoffs, and other reductions in force are commonplace and can be easily explained.

What you do to put yourself in a buy-ready position after going through any of these situations is what interests lenders.

One employment scenario that might prove challenging for mortgage approval is a recent move from a salaried or hourly position to self-employment, as you may have little or no history of being in business for yourself.

If you have questions about how your employment history may affect your qualifications, please contact our office to discuss your options.

What Are Fixed, Adjustable, and Balloon Mortgages?

Of the three mortgage types – fixed, adjustable, and balloon (all of which I can offer you) – the most familiar is probably the fixed rate loan.

With a fixed rate loan, your mortgage payment is the same each month, excluding taxes and insurance, throughout the life of the loan.

The ARM, or adjustable rate mortgage, has an initial fixed rate period and then becomes subject to change based on whatever economic indicator it is tied to.

The third type, the balloon loan, is a little bit different from the fixed rate loan and the ARM. The rate is fixed through the balloon period, which can be between three and 10 years. That’s simple enough so far.

But there’s a twist: At the end of the balloon period, the entire remaining balance of the loan is due to the lender.

At this point, if you are still living in the property, one option is simply to refinance the loan.

So why would anybody ever want a balloon loan?

Let me explain.

Just as with other types of loans, there are pluses and minuses to a balloon mortgage.

The plus side is that you can get a balloon loan at a lower rate than you can get a traditional 30-year fixed rate loan, which means you’ll have lower payments.

The minus side is that at the end of the balloon period, when you are in the position of having to refinance, you are subject to whatever interest rates are available at that time.

The new rates could be lower or higher than what you were previously paying. Nobody knows, especially three to 10 years out.

For this reason, this is a great option to explore if you’re planning to finance a home and are absolutely sure that you are going to be out of the property before the balloon period ends.

Is this a good choice for you? Give me a call, and we can review your options.

Do Lenders Know Where Interest Rates Are Going?

The short answer to this question is that nobody, including mortgage professionals like me, can predict where interest rates are going. Any lenders who tell you that they can predict this are misinforming you and should be avoided at all costs.

The fact is, in our age of instant information, consumers and mortgage professionals typically have access to the same market information.

What factors should we consider as we review this information? Interest rate fluctuations can occur due to both domestic and foreign activity. US sources of rate changes may include the revelation of some key economic statistic such as job reports, or changes made to interest rates by the Federal Reserve Board.

Foreign influences may include wartime events such as invasions, or other destabilizing events such as impacts on oil supplies.

Part of the challenge in all of this is that buyers who are in the process of purchasing a home only have a short window in which to lock in a rate. Buyers want to know, on a daily basis, what rates are doing, and they can look to their lender for direction. But at the end of the day, this is the buyer’s decision alone. Since no one can say for certain where rates are headed, if buyers have access to a good rate, it could be a good time to jump on the opportunity.

It’s also important to note that many lenders allow buyers to lock in a rate only once they are approved. Why? It’s costly for lenders to lock in a rate for buyers when there is still some question as to their ability to qualify.

To lock in a rate as soon as possible, buyers should submit any requested information and documents as quickly as they can. By working with us to keep things moving, buyers can enjoy a smoother transaction.

Can I Pay My Own Taxes and Insurance?

Escrow accounts are a common aspect of mortgage terms and agreements. These accounts hold the funds that will be used to pay the taxes and insurance on a home.

Each month, the buyers pay a portion of these fees with their regular mortgage payment. The lender then holds these funds until the insurance or taxes are due and disburses the payments appropriately.

In many cases, these escrow arrangements are required by the lender as part of the terms of the mortgage.

But what if you want to pay your own taxes and insurance? You may or may not be able to do this. The answer depends on a couple of factors.

First is your loan type. FHA requires that you keep an escrow account. With conventional mortgages, you may have the option of paying your taxes and insurance on your own, but there are usually stipulations. The lender may add a premium to your interest rate, which your payment will reflect. They may also ask for a higher down payment or require a higher credit score for you to qualify for a loan without an escrow account.

Why are lenders so concerned with these payments?

In many cases, the taxing body (county, city, state, or other entity) has the right to take possession of your home if you get behind on your taxes. They may be able to do so even if you are current on your regular mortgage payments. This is the last thing you and your lender want.

Keeping insurance current is also important. If your coverage lapses and a disaster occurs, the lender may be left holding the note on a pile of rubble.

With these situations in mind, it’s easy to see why a lender wouldn’t be willing to take the risk of allowing buyers to control their tax and insurance payments.

Still, lenders allow buyers to do so in some situations. Each lender has guidelines on what they will accept.

Contact our office to review the escrow and tax payment options available to you.

When Should You Refinance Your Home?

Mortgage interest rates are at near-record lows. If you think you may want to refinance your home, now is a good time to at least look at your options.

You might want to refinance for one of several reasons. The first is to lower your monthly housing payment. The second could be to pull cash out of your home. Last, you may want to change the type of mortgage you have.

Moving from an FHA loan to a conventional loan could lower or eliminate your mortgage insurance premium, thereby saving you money each month. You may also want to consider switching from a 30-year mortgage to a 15-year term. With this option, your monthly payment could actually increase, but looking at the big picture, your interest savings over the life of the loan could make the move worth it.

The HARP program, which allowed refinance transactions for borrowers with little or no equity, ended at the end of 2018. However, you still have options. The good news is that both Fannie Mae and Freddie Mac have programs that can address some of the concerns that HARP loans addressed.

Another important point to keep in mind is that, unlike with purchase transactions, you can finance your closing costs in the course of a refinance transaction.

Do these options sound appealing? Are you wondering whether your home’s value would qualify your mortgage for a refinance?

Contact our office with any questions. We can discuss your options to see whether you could start saving money by refinancing your home.

A Look at Low and No Down Payment Options

Of all the options that you have for financing or refinancing a home, you will more than likely be taking out a conventional, FHA, or VA loan. While the Veteran’s Administration loan is the only one of the three that offers a true zero down payment option, each of the three options has its pluses and minuses.

VA loans: The challenge of VA loans is qualification. Only buyers with military backgrounds are eligible.

Conventional loans: These loans follow the underwriting guidelines of Fannie Mae and/or Freddie Mac. A down payment of just 3% is available with conventional loans, but the credit score requirements are much higher than those of either of the other two programs. This disqualifies many buyers.

FHA loans: These loans have a minimum down payment of 3.5%. FHA is the option many buyers take when they want a low down payment but their credit is less than stellar. These loans are fairly easy to qualify for; however, they can prove costly over time.

This cost lies in the mortgage insurance. Unless you are putting down at least 10% (which is contrary to the idea of a low down payment), the mortgage insurance will remain in place until the loan is paid off through a refinance, the sale of the property, or the end of the term of the loan. This extra fee can add up over the life of the mortgage.

Which loan type is best for your situation? Get in touch with your questions so we can discuss low and no down payment mortgage options that may be available for you.

Yes, There Are Alternatives to a 30-Year Mortgage

Mortgage rates have risen over the past year, and they could continue to do so in 2019. With this in mind, buyers planning to purchase or refinance a home may want to consider 15-year and 10-year mortgage options.

Why? There are a couple of reasons.

First, interest rates on shorter-term loans are normally lower than they are on loans with 30-year terms.

The second reason is that, over time, you could save tens of thousands of dollars in interest expense with a 10-year or 15-year loan.

Of course, since your payments are spread over a shorter period of time, each payment will be higher.

To compare the two, let’s use a $125,000 mortgage as an example. This loan, at 4.5% for 30 years, will carry a payment of $633.36 before taxes and insurance. The same loan amount with a 15-year term and a rate of 4.25% will have a payment of $940.35. The 10-year option will carry a payment of $1,280.47.

Yes, there is a significant difference in the amount of the payment, but, over time, you’ll make $228,009.60 in payments on the 30-year loan, $103,009 of which is interest. With the 15-year option, you’ll spend $169,263 in payments, of which $44,263 is interest.

The difference in interest expense between the two is $58,746.

If you’re unable to swing the higher payment but want to reduce your interest expense over time, you could add additional money to your monthly payment.

In fact, on a 30-year mortgage, if you add just 1/12 of your principal and interest to your payment each month, you’ll reduce your total loan term by close to four years. In our example above, this would require paying an additional $52.77 with the $633.36 monthly payment.

Interested in paying off your house faster? To learn how you can save on your mortgage, contact me to review your payment options. I’m here to help!

Biggest Financing Mistakes Buyers Make

Successfully financing a home requires several key steps. Too often, buyers are unaware of what is involved in this process, and they suffer from missteps. Here are three of the most common blunders (and how to avoid them):

1. Failing to Think Long Term

Purchasing a home is one of the most significant financial investments you’ll ever make. You’ll probably do this only a handful of times in your life, so you must really think it through.

The key is to think long term. Consider: Will the loan payment you are taking on remain manageable for the foreseeable future? Will changes in family status or employment status impact your ability to continue to make your payments month after month? Will you still be able to save money each month after covering all your expenses?

Carefully considering these questions up front will help you avoid making a purchase that you later regret.

2. Underestimating the Cost

Unless you qualify for certain Veteran’s Administration loan programs, you’ll need some sort of down payment to purchase a home. Beyond this, you will also need to cover closing costs, and you may have to come up with cash for taxes and/or other escrow reserves.

Be sure to incorporate all these costs as you determine your price range and negotiate your purchase.

3. Ignoring Their Personal Credit Profile

More than anything else, your credit will determine what loan terms you’ll qualify for and the interest rate you’ll pay. Your credit report is a window into your finances. Take a look through it. Your lender will. Depending on what they see, the lender may ask you to pay down or pay off debt to improve your score before you can purchase a home.

While this may be simple enough to do, it may also take time. This makes it important to determine your credit needs early in the process.

Reach out to learn how you can put yourself in the best possible position to purchase a home.

What Is Home Equity and What Does It Mean for Me?

Equity is the difference between what you owe on your home and what it’s worth. If you purchase a home using a small down payment, you’ll have a small amount of equity.

However, as time passes, your mortgage balance will decrease and (hopefully) your property value will increase. This will strengthen your equity position.

There are several things you can do with this built-up equity in the property. If you decide to sell the property, you could take that equity and use it as a down payment for the next property you buy.

You may decide to stay where you are and use the equity in the property for your own purposes. Some property owners use their equity for home improvement, to pay down higher-interest debt, or to pay for college for their kids.

How would you access this equity? Your lender could help you take out a home equity loan or establish a home equity line of credit.

Each has both benefits and challenges. The home equity loan will most likely give you a fixed rate, but once you take it out, you would need to pay back the entire loan before being able to reuse that portion of your equity.

The home equity line of credit, on the other hand, works similarly to a credit card. You can pay it down or off, then reuse the same money again and again. But your variable interest rate is tied to an economic indicator, meaning your payment could go up significantly over time.

Get in touch with our office to learn more about your equity loan options.