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You don't need to put a minimum of 20% down on a new home. That's the upside. The downside is that you'll need to pay mortgage insurance if your down payment is less than 20%. Read this post to learn the factors that determine if and when you can get rid of your mortgage insurance.
What Determines Mortgage Insurance Removal?
The Type Of Mortgage Insurance
There are two types of mortgage insurance: private mortgage insurance (PMI) and mortgage insurance premiums (MIP). Conventional loans have PMI, while FHA --government-backed loans --use MIP. Knowing which type of insurance you have is important for understanding how you can remove it.
Who Holds Your Loan?
Determine who your loan investor is. Fannie Mae and Freddie Mac have different requirements regarding mortgage insurance elimination. They'll look at your loan's age and the amount of your down payment --among other factors --to see if you qualify to remove MIP.
Conventional loans also have varying qualifying criteria. We'll explain more below.
Loan-to-Value (LTV) Ratio
Most decisions about canceling mortgage insurance are based upon your loan-to-value (LTV) ratio. Your LTV is the amount of equity you've built up in your home versus how much you still have to pay off. Here's a quick example.
Let's say you purchased your home at $200,000 with a $20,000 down payment. Your LTV would then be 90%. As you continue to make payments, your LTV goes down.
An increasing property value also helps to inch your LTV downward. For example, if your home's new appraisal is $225,000, your new LTV would be 80%--a desirable downward trend if you're aiming to cancel your mortgage insurance.
Removing PMI also depends on the type of property. Generally speaking, removing mortgage insurance on a one-unit primary residence is easier than removing it from a multi-unit investment property.
Age Of The Loan
Sometimes the loan's age plays a factor in whether mortgage insurance can be taken off. See below for more details.
Like we mentioned earlier, property value is a factor in determining if your loan is eligible to remove mortgage insurance. If you've made substantial improvements to your home and the value has increased, then you may be able to remove your mortgage insurance.
How to get rid of PMI
Make extra payments and request PMI cancelation when your LTV reaches 80%.
If your property value has increased significantly, request a new appraisal and eliminate PMI based on the new valuation. Note that you'll still have to own your home for more than five years if it appraises 80% LTV or two years for 75% LTV ratio to be eligible for this tactic.
Wait for PMI to drop automatically. Request a PMI pay-off schedule from your lender to see when that will occur.
Refinance! Combined with the appraisal tactic we mentioned above, you can refi into a new lower-rate loan. Not only will you get rid of your insurance payments thanks to a higher valuation, but your new low rate will save you money every month.
How to get rid of MIP
MIP must be paid for the full term on FHA loans with an original LVT ratio greater than 90%.
For LTV ratios that range from 70% to 90%, it must be paid for 11 years.
Again, refinance! When you've achieved 80% LVT, you can refinance into a conventional loan that's mortgage insurance-free!
Almost all loan programs that allow for less than 20% down payment will require mortgage insurance. While it might seem like a hassle, remember that it also allows you to buy a home a lot sooner. It's not permanent --you can remove it or refinance your way out of it.
"This material is not from HUD or FHA and has not been approved by HUD or a government agency."
While the housing market remains vibrant for buying and selling, the supply continues to be an issue in these past years.
Low supply happens when there's an abundance of buyers but not enough houses for all of them. Many call it a "seller's market," which often results in a bidding war as multiple buyers compete for the same property. Here is how you can still get your dream home despite high competition.
The Anatomy of a Bidding War
A bidding war in real estate happens when two or more parties compete for the seller's acceptance of their offer. This stressful situation can be intensified if the owner or listing agent knows there's a lot of interest and propose that everyone submit another higher and better offer.
Thus, you have now entered a bidding war.
It's easy to get caught up in the thrill of outbidding your competitor, but it's essential to watch your step. You don't want to enter into a purchase agreement that you can't afford --all in the name of beating everyone else's offer.
That's why we recommend applying for a mortgage first. Not only will you know right away how much you qualify for, but you'll also have a trusted loan professional crunch the numbers for you, letting you know precisely what your monthly payments can be. And together with your real estate agent, you'll know up to how much you can afford to bid.
But that's not the only benefit of applying sooner rather than later. Read more below.
Get Pre-Approved For a Home Loan
Mortgage pre-approval is a big deal when there are multiple offers on one property. Being pre-approved means that you already have the financial backing that you are claiming in your offer. It also means that you are ready to move forward with the purchase now, without needing to wait for a bank's decision on your home loan worthiness.
Pre-approval also means you're bidding with confidence as well. Homeshopping is stressful enough without a bidding war and the uncertainty of making an offer without financial backing. Boost your confidence (and that of the seller) by going in already approved for a home loan.
Sellers looking to move quickly want as few obstacles as possible. One way to do that is to omit contingencies on your offer. The last thing a seller wants to do is go through all the steps of moving the deal forward and then have to put their house back on the market because the contingency deal fell through.
This may happen with an appraisal contingency where the lender won't pay more for a house than it appraises for. But in a bidding war, you may have to go above the appraised value to win it. How buyers get around this is by paying the difference. For example, you can make an offer of the appraisal price plus $5,000.
Just remember that it's up to you to pay the difference. The lender will only pay up to the appraised value of the property.
Another contingency some buyers drop is the home inspection contingency. Some decide to waive the inspection entirely, while others have an inspection to be aware of possible issues but won't have the sale contingent on the findings.
Motivated sellers love flexibility. For example, a seller may want to delay the closing date to let their children finish the school year before the move. Others may wish to move as soon as possible because they have a job waiting for them in a new city.
Whatever the case may be, the ability to be flexible with these types of situations is a huge bonus for many sellers.
Now that you understand how a bidding war works, you can use these strategies to get your offer to the top of the heap. Ready to get ahead? Start by getting pre-approved for a home loan with us today!
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There are many common mistakes first-time home buyers make. Some are minor, while others can end up being costly. Fortunately, several of these mistakes are avoidable. Please read and share this article with other first-time home buyers to help them spot these common errors before making them.
Mistake #1: Looking For A Home Before Getting Pre-Approved
When you shop for a home before approval, you run the risk of falling in love with a home that's out of your price range --ruining the whole home buying experience before you start.
Instead, focus on the finances first. Make sure you have enough saved for a down payment and the closing costs and get your pre-approval before you start home shopping.
Mistake #2: Buying More Than You Can Comfortably Afford
Many falsely believe that the loan amount they are approved for accurately depicts how much home they can afford to purchase. However, the income and the debt-to-income ratio data that lenders use to determine eligibility don't take into account your monthly expenses like groceries, utilities, gas, or insurance. Instead, use the amount you're pre-approved for as a starting point for calculating your actual "home-owning" budget.
Mistake #3: Forgetting About VA, USDA & FHA Loans
Since a conventional loan is the most well-known mortgage, many forget about the great borrowing opportunities afforded by VA, USDA, and FHA loans. These government-backed loans are often more affordable options, so not inquiring about them could mean missing out on significant savings.
Here's a quick run-down on these loans:
- VA loan - allows you to qualify with a lower credit score and higher debt. It may not require a down payment or mortgage insurance. Available only to those with a Certificate of Eligibility from the VA.
- USDA loan - No down payment required and may be able to roll closing costs into the loan.
- FHA loan - Beneficial for those who may have trouble qualifying for other loans. Qualify with a credit score as low as 580 and a 3.5% down payment.
Mistake #4: Draining Your Savings For A Down Payment
Don't be tempted to drain your savings to come up with enough money to put down on a home either! There are unexpected costs that come with owning a home. So if you don't have money set aside to handle these expenses, you put yourself in a significant financial predicament that could cause you to be unable to keep up with your house payments.
Mistake #5: Forgetting About Moving Costs
With everything involved in buying the house, many first-time homebuyers oversee the moving expenses. So when you start looking for a home, also start saving for moving costs -including boxes, packing tape, packing blankets, bubble wrap, truck rental, and labor.
Mistake #6: Applying For Credit Before Closing
Lenders don't just check your credit during the pre-approval process but also just before your scheduled closing day. So if you apply for credit before closing, causing your credit score to drop, your approval could also change. Instead, wait on opening any new lines of credit until after you close. Also, don't close any accounts or be late on any payments, as these could negatively impact your score too.
Now that you're equipped with first-time home buying tips and know what mistakes to avoid, let us help you get pre-approved and jump-start your home buying journey.
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