Is Your Mortgage Forbearance Ending Soon? What To Do Next

mortgage forbearanceSEAN GLADWELL / Getty Images

Millions of Americans struggling to make their monthly mortgage payments because of COVID-19 have received relief through the Coronavirus Aid, Relief, and Economic Security Act.

But mortgage forbearance is only temporary, and set to expire soon, leaving many homeowners who are still struggling perplexed on what to do next.

Enacted in March, the CARES Act initially granted a 180-day forbearance, or pause in payments, to homeowners with mortgages backed by the federal government or a government-sponsored enterprise such as Fannie Mae or Freddie Mac. Furthermore, some private lenders also granted mortgage forbearance of 90 days or more to financially distressed homeowners.

According to the Mortgage Bankers Association, 8.39% of loans were in forbearance as of June 28, representing an estimated 4.2 million homeowners nationwide.

So what are affected homeowners to do when the forbearance goes away? You have options, so it’s well worth contacting your lender to explore what’s best for you.

“If you know you’re going to be unable to meet the terms of your forbearance agreement at its maturity, you should call your loan servicer immediately and see what options they may be able to offer to you,” says Abel Carrasco, mortgage loan originator at Motto Mortgage Advisors in St. Petersburg, FL.

Exactly what’s available depends on the fine print in the terms of your mortgage forbearance agreement. Here’s an overview of some possible avenues to explore if you still can’t pay your mortgage after the forbearance period ends.

Extend your mortgage forbearance

One simple option is to contact your lender to request an extension.

Homeowners granted forbearance under the CARES Act can request a 180-day extension, giving them a total of 360 days of forbearance, according to the Consumer Financial Protection Bureau.

The key is to contact your lender well before your forbearance expires. If you let it expire without an extension, your lender could impose penalties.

“If you just stop making regular, scheduled payments, you could have a late mortgage payment on your credit,” warns Carrasco. “That could severely impact refinancing or purchasing another property in the immediate future and potentially subject you to foreclosure.”

Keep in mind, though, a forbearance simply delays payments, meaning they’ll still need to be made in the future. It doesn’t mean payments are forgiven.

Refinance to lower your mortgage payment

Mortgage interest rates are at all-time lows, hovering around 3%. So if you can swing it, this may be a great time to refinance your home, says Tendayi Kapfidze, chief economist at LendingTree.

Refinancing could come with some hefty fees, however, ranging from 2% to 6% of your loan amount. But it could be worth it.

A lower interest rate will likely lower your monthly payment and save you thousands over the life of your mortgage. Dropping your interest rate from 4.125% to 3% could save more than $40,000 over 30 years, for example, according to the Consumer Financial Protection Bureau.

“Lenders have tightened standards, though, so you will need to show that you are a good candidate for refinancing,” Kapfidze says. You’ll need a good credit score of 620 or higher.

As long as you’ve kept up your end of the forbearance terms, having a mortgage forbearance shouldn’t affect your credit score, or your ability to refinance or qualify for another mortgage.

Ask for a loan modification

Many lenders are offering an assortment of programs to help homeowners under hardship because of the pandemic, says Christopher Sailus, vice president and mortgage product manager at WaFd Bank.

“Lenders quickly recognized the severity of the economic situation due to the pandemic, and put programs into place to defer payments or help reduce them,” he says.

A loan modification is one such option. This enables homeowners at risk of default to change the terms of their original mortgage—such as payment amount, interest rate, or length of the loan—to reduce monthly payments and clear up any delinquencies.

Loan modifications may affect your credit score, but not as much as a foreclosure. Some lenders charge fees for loan modifications, but others, like WaFd, provide them at no cost.

———

Watch: 5 Things to Know About Selling a Home Amid the Pandemic

———

Put your home on the market

It may seem like a strange time to sell your home, with COVID-19 cases growing, unemployment rising, and the economy on shaky ground. But, it’s actually a great time to sell a house.

Pending home sales jumped 44.3% in May, according to the National Association of Realtors®’ Pending Home Sales Index, the largest month-over-month growth since the index began in 2001.

Home inventory remains low, and buyer demand is up with many hoping to jump on the low interest rates. Prices are up, too. The national median home price increased 7.7% in the first quarter of 2020, to $274,600, according to NAR.

So if you can no longer afford your home and have plenty of equity built up, listing your home may be a smart move. (Home equity is the market value of your home minus how much you still owe on your mortgage.)

Consider foreclosure as a last resort

Foreclosure may be the only option for many homeowners, especially if you fall too behind on your mortgage payments and can’t afford to sell or refinance. In May, more than 7% of mortgages were delinquent, a 20% increase from April, according to mortgage data and analytics firm Black Knight.

“When to begin a foreclosure process will vary from lender to lender and client to client,” Sailus says. “Current and future state and federal legislation, statutes, or regulations will impact the process, as will the individual homeowner’s situation and their ability to repay.”

Foreclosures won’t begin until after a forbearance period ends, he adds.

The CARES Act prohibited lenders from foreclosing on mortgages backed by the government or government-sponsored enterprise until at least Aug. 31. Several states, including California and Connecticut, also issued temporary foreclosure moratoriums and stays.

Once these grace periods (and forbearance timelines) end, and homeowners miss payments, they could face foreclosure, Carrasco says. When a loan is flagged as being in foreclosure, the balance is due and legal fees accumulate, requiring homeowners to pay off the loan (usually by selling) and vacating the property.

“Absent participation in an agreed-upon forbearance, deferment, repayment plan, or loan modification, loan servicers historically may begin the foreclosure process after as few as three months of missed mortgage payments,” he explains. “This is unfortunately often the point of no return.”

The post Is Your Mortgage Forbearance Ending Soon? What To Do Next appeared first on Real Estate News & Insights | realtor.com®.

Source: realtor.com

How Much Credit Card Debt is too Much?

Most Americans have credit card debt and will die with credit card debt. It’s one of the most accessible types of credit there is, becoming available as soon as you’re financially independent. It’s also one of the most damaging, as too much credit card debt could hurt your credit report, reduce your credit score, and cost you thousands of dollars in interest payments.

But how much debt is too much? What is the average total debt for American consumers and households and when do you know if you have crossed a line?

How Much Credit Card Debt is too Much?

The average credit card debt in the United States is around $5,000 to $6,000 per consumer. However, this doesn’t paint a complete picture as these figures don’t differentiate rolling balances. In other words, even if you repay your balance in full every month, that balance will still be recorded as debt until it is repaid.

For many consumers, $6,000 is not “too much”. It’s a manageable sum that they can afford to clear. However, if you’re out of work, relying on government handouts and have no money to your name, that $6,000 can seem like an unscalable mountain. And that’s an important point to note, because everything is relative.

To the average American, unsecured debt of $50,000 is catastrophic. It’s the sort of debt that will cause you to lose sleep, stress every minute of the day, and panic every time your lender sends you a letter. To a multi-millionaire homeowner who runs several successful businesses, it’s nothing, an insignificant debt they could repay in full without a second thought.

One man’s pocket change is another man’s fortune, so we can’t place an actual figure on what constitutes “too much debt”. However, this is something that credit reporting agencies, creditors, and lenders already take into consideration and to get around this issue, they use something known as a debt-to-income ratio.

Your Debt-to-Income Ratio (DTI)

Your DTI can tell you whether you have too much debt, and this is true for credit card debt and all other forms of debt (student loans, car loans, personal loans, and even mortgages). 

DTI is not used to calculate your credit score and won’t appear on your credit report, but it is used by mortgage lenders and other big lenders to determine your creditworthiness and if you don’t past the test then you won’t get the money.

To calculate your DTI, simply calculate the amount of debt payments that you have and compare this to your gross monthly income. For instance, let’s imagine that you make $400 in credit card payments and $600 in auto loan payments, creating a total debt payment of $1,000. Your gross monthly income is $4,000 and you don’t have any investments.

In this scenario, your DTI would be 25%. as your monthly debt payments ($1,000) are 25% of your monthly income. If you have a $1,000 mortgage payment to make every month, your obligations increase and your DTI hits 50%, which is when you should start being concerned.

Many lenders will not accept you if you have a DTI greater than 50%, because they are not convinced you will make your payments. $2,000 may seem like a lot of money to have leftover at the end of the month, but not when you factor tax, insurance, food, bills, and everyday expenses into the equation.

If your DTI is below 50%, you may be safe, but it all depends on those additional expenses.

How to Tell If You’ve Borrowed Too Much

Your debt-to-income ratio is a good starting point to determine if you have borrowed too much, and if it’s higher than 50%, there’s a good chance you have borrowed more than you should or, at the very least, you are teetering on the edge. However, even if your DTI is above 30%, which many consider the ideal limit, you may have too much credit card debt.

In such cases, you need to look for the following warning signs:

You Can’t Pay More Than the Minimum

Minimum payments cover a substantial amount of interest and only a small amount of the actual principal. If you’re only paying the minimum, you’re barely scratching the surface and it could take years to repay the debt. If you genuinely don’t have the extra funds to pay more money, then you definitely have a debt problem.

Your Credit Card Balance Keeps Growing

The only thing worse than not being able to pay more than the balance is being forced to keep using that card, in which case the balance will keep growing and the interest charges will keep accumulating. This is a dire situation to be in and means you have far too much credit card debt.

Your Debt is Increasing as Your Take-Home Pay is Reducing

If your credit card bill seems to be going in the opposite direction as your paycheck, you could have a serious problem on your hands. You may be forced to take payday loans; in which case you’ll be stuck repaying these on top of your mounting credit card interest, reaching a point when your debt eventually exceeds your disposable income.

You Don’t Have Savings or an Emergency Fund

A savings account or emergency fund is your safety net. If you reach a point where you feel like you can no longer meet the monthly payments, you can tap into these accounts and use the funds to bail you out. If you don’t have that option, things are looking decidedly bleaker for you.

Dangers of Having Too Much Credit Card Debt

The biggest issue with excessive credit card debt is that it has a habit of sticking around for years. Many debtors only make the minimum monthly payment, either because they can’t look at the bigger picture or simply can’t afford to pay more. 

When this happens, a $1,000 debt could cost them over $2,000 to repay, which means they’ll have less money to their name. What’s more, that credit card debt could impact their credit score, thus reducing their chances of getting low-interest credit and of acquiring mortgages and auto loans.

It’s a cycle. You use a credit card to make big purchases and are hit with a high-interest rate. That interest takes your disposable income away, thus making it more likely you will need to use the card again for other big purchases. 

All the while, your credit utilization ratio (calculated by comparing available credit to total debt and used to calculate 30% of your credit score) is plummeting and your hopes of getting a lower interest rate diminish.

What to do if you Have too Much Credit Card Debt?

If you find yourself ticking off the boxes above and you have a sinking feeling as you realize that everything we’re describing perfectly represents your situation, then fear not, as there are a multitude of ways you can dig yourself out of this hole:

Seek Counseling

Credit counselors can help to find flaws in your budget and your planning and provide some much-needed insight into your situation. They are personal finance experts and have dealt with countless consumer debt issues over the years, so don’t assume they can only tell you what you already know and always look to credit counseling as a first step.

Avoid Fees

Credit card companies charge a higher annual percentage rate to consumers with poor credit scores as they are more likely to default, which means they need those extra funds to balance their accounts. Another way they do this is to charge penalty fees, penalty rates, and cash advance fees, the latter of which can be very damaging to an individual struggling with credit card debt.

Cash advance fees are charged every time you withdraw money from an ATM, and the rate is often fixed at 3% with a minimum charge of $10. This means that if you withdraw as little as $20, it’ll cost you $10 in charges, as well as additional interest fees.

If the cash flow isn’t there, this can seem like a good option, but it will only make your situation worse and should be avoided at all costs.

Use Debt Relief

Debt management, debt settlement, and debt consolidation can all help you to escape debt, creating a repayment plan and clearing everything from credit card debt to student loan debt in one fell swoop. You don’t even need an excellent credit score to do this, as many debt management and debt consolidation companies are aimed towards bad credit borrowers.

Balance Transfers

A balance transfer credit card moves all of your current credit card balances onto a new card, one with a large credit limit and a 0% introductory APR that allows you to swerve interest charges for the first 6, 12, 15 or 18 months. It’s one of the best options available, assuming you have a credit score high enough to get the limit you need.

Monitor Your Situation

Whatever method you choose, it’s important to keep a close eye on your finances to ensure this never happens again. You should never be hit with an unexpected car payment or mortgage payment, because you know those payments arrive every single month; you should never be surprised that you have interest to pay or that your credit score has taken a hit because of a new account or application. 

If you paid attention to your financial situation, you wouldn’t be surprised, you would understand where every penny goes, and as a result, you will be better equipped to deal with issues in the future.

How Much Credit Card Debt is too Much? is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

National Association of Realtors Says Home Prices Are Rising Too Fast

It’s good to be a homeowner these days. After all, home prices are rising at an incredible pace, and have been for nearly a decade now since bottoming out. On top of that, many of today’s homeowners hold fixed-rate mortgages with ultra-low mortgage rates, making it very affordable to own rather than rent. Unfortunately, the [&hellip

The post National Association of Realtors Says Home Prices Are Rising Too Fast first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

What Is a Force Majeure Clause, and What Does It Mean for Mortgages?

RapidEye/Getty Images

In French, it means superior force. However, in legalese, the term force majeure refers to a clause that can allow a person or business to extricate themselves from a contract.

“In general, it’s a force outside the control of a party,” says Denver, CO, contracts attorney Susan Goodman. “What the force majeure clause says is: If there’s an act of force majeure, then performance is excused if the performance is affected by that act.”

In even plainer English, it means: If something completely unpredictable occurs, a contract may be voided.

The current pandemic certainly seems to fit the bill, and will have contract holders invoking force majeure for relief from creditors.

However, mortgage holders looking for a way out of their debt obligations are likely to be out of luck when it comes to following the path of force majeure. Here’s how force majeure works in a contract.

What is an act of force majeure?

Contracts with a force majeure clause often list (very) specific potential calamities. If any of those calamities come to pass, a contracted party is allowed to back out of the deal with no penalty.

Force majeure events often written into contracts include:

  • “Acts of God,” which often include severe weather, floods, earthquakes, hurricanes, fires, etc.
  • Acts of war
  • Acts of terrorism
  • Acts of government authorities
  • Strikes or labor disputes
  • An inability to secure materials
  • Other causes beyond the reasonable control of a party

 

Do all contracts have force majeure clauses?

Force majeure clauses are almost always written into business-to-business contracts.

However, personal mortgages usually do not contain force majeure clauses. Neither do apartment leases or contracts for home improvements.

Commercial leases and development projects often do, and those clauses may be invoked due to COVID-19.

“You’re seeing a lot of activity on the on the [commercial] leasing front now with the argument of force majeure,” says Jack Fersko, co-chair of the real estate department at the law firm Greenbaum, Rowe, Smith, & Davis LLP in New Jersey and co-chair of the American Bar Association’s real estate section committee.

Businesses “can’t use the space—whether it is because of the virus, which has closed operations down, or [because of local] government orders.”

Construction firms might also invoke the clause if they’re unable to meet deadlines or milestones on a development project. Adding to the confusion is that each state has different requirements for force majeure clauses, which means there’s no one-size-fits-all option.

Invoking a force majeure clause

By definition, an act of force majeure must prevent one or both parties from performing a service listed in the contract.

But economic hardship is not a reason to invoke force majeure.

“Anybody can always claim economic hardship. If your company goes into bankruptcy, that doesn’t void a contract, and you can’t get out of it by force majeure,” says Goodman.

As always, the key for consumers is: Be aware of all terms in any contract.

Courts around the country are already investigating COVID-19 and how it might relate to force majeure.

“I think it’s important to point out that this is such a unique situation. We’re already hearing that courts are treating things differently than one might expect—like not calling this an act of God,” Goodman says.

Fersko adds that there isn’t much legal precedent for the current crisis.

“I guess we’ll look to fall back to the early 1900s with the flu. We’ll look to other events in history that may be akin to this, and see what sort of case law evolved from that,” he says.

“In many respects, this being a worldwide pandemic, it’s certainly going to create some novel legal issues.”

Future contracts are likely to include allowance for pandemics

“Force majeure clauses are all written differently,” Goodman explains. She adds that she has seen some clauses with the word “epidemic,” but none with the word “pandemic.”

That will change, of course, after the coronavirus outbreak.

“Most force majeures after 9/11 added terrorism to the clauses. It was never in it before, because nobody really thought of it—because it wasn’t really part of our society,” Goodman says.

“I think pandemics and epidemics are going to be added to every force majeure clause. Attorneys are already advising their clients to do that.”

The key to a force majeure event is its unpredictability. However, if an unfortunate event or disaster was something that you could and should have prepared for, it’s nearly impossible to invoke the clause.

The post What Is a Force Majeure Clause, and What Does It Mean for Mortgages? appeared first on Real Estate News & Insights | realtor.com®.

Source: realtor.com

How to Start Building Credit Once You Turn 18

Good credit is crucial to unlocking many financial opportunities in life. When you have a great credit score, you can get lower interest rates on car loans, credit cards and mortgages. Some employers and landlords even check credit reports before they make a job offer or approve a resident application. While developing a solid credit history takes time, follow some of these tips on how to establish credit once you turn 18 to get started as soon as possible.

1. Understand the Basics of Credit

Make sure you understand the basics of how credit works. Your credit reports are maintained by three major credit bureaus—Experian, TransUnion and Equifax. It contains data on your current and past debts, payment history, residential history and other facts. This data is supplied by lenders, creditors and businesses where you have accounts.

The information contained in your credit report determines your credit score. Higher credit scores are more attractive to lenders and creditors. The factors that influence your score include:

  • Payment history, which is whether you pay your bills on time
  • Average age of accounts, which is how long you’ve had your accounts open
  • Credit utilization ratio, which is how much of your open credit line you’re currently using
  • Account mix, which demonstrates that you can responsibly manage multiple types of accounts
  • Inquiries, which occur when you apply for new credit

As a new adult, some of these factors may not currently apply to you. However, they can all negatively or positively affect your score, depending on your behavior as a consumer. Educating yourself on credit now helps you avoid costly mistakes in the future.

2. Monitor Your Credit Report and Credit Score

Now that you understand the basics of building credit, you need to start monitoring your report and credit score. Monitoring your credit is one of the best ways to learn what will positively or negatively impact your scores. It also helps you catch inaccuracies or signs of identity theft sooner.

You can check your credit report for free annually with each major credit bureau. As you review your report, look for any negative or inaccurate information that could be screwing up your credit. You can also check your credit score, updated every 14 days, for free at Credit.com.

If you’re really serious about understanding your credit reports and scores, sign up for ExtraCredit. With Track It, you can see 28 of your FICO scores and credit reports from all three credit bureaus.

3. Sign Up for ExtraCredit

ExtraCredit does more than just show you your credit scores. Have you recently started paying rent or utilities? BuildIt will add them as new tradelines with all three credit bureaus. That means you’ll get credit for bills you’re already paying—building your credit profile each month.

Sign Up for ExtraCredit

4. Become an Authorized User

If you have a friend or family member willing to add you as an authorized user on their credit card, you can piggyback off their credit card activity to help establish your credit. Even if you don’t use the card, the account can still land on your credit report and potentially positively impact your score.

This method poses some risks to the primary cardholder and you, the authorized user. If you or the primary cardholder rack up too much debt or miss payments, that activity could end up damaging the credit of both parties.

You should also verify that the credit card company in question reports card activity to the credit file of authorized users. If they don’t, your credit won’t see any benefit.

5. Get a Starter Credit Card

Credit cards are one of the best tools around for building credit, but you might have trouble qualifying for one when you have no credit history. Luckily, there are a few credit card options for young people with little or no credit.

Unsecured Credit Cards: If you don’t have the money to make a security deposit, consider an unsecured credit card such as the Avant Credit Card. This card offers a process that presents you with a credit line based on your creditworthiness before you apply. It also has no penalty or hidden fees—a perfect fit for any young adult’s starter card. You do need at least some fair credit history to be approved, though.

Avant Credit Card

Apply Now

on Avant’s secure website

Card Details
Intro Apr:
N/A


Ongoing Apr:
25.99% (variable)


Balance Transfer:
N/A


Annual Fee:
$39


Credit Needed:
Fair

Snapshot of Card Features
  • No deposit required
  • No penalty APR
  • No hidden fees
  • Fast and easy application process
  • Help strengthen your credit history with responsible use
  • Disclosure: If you are charged interest, the charge will be no less than $1.00. Cash Advance Fee: The greater of $10 or 3% of the amount of the cash advance
  • Avant branded credit products are issued by WebBank, member FDIC

Card Details +

Secured Credit Cards: A secured credit card requires an upfront security deposit to open. Your deposit will typically equal your initial credit limit. For example, a $500 security deposit would get you a $500 credit limit. These cards are easier to qualify for, and you can use them to make purchases, just like traditional credit cards, while also establishing some credit history.

OpenSky® Secured Visa® Credit Card

Apply Now

on Capital Bank’s secure website

Card Details
Intro Apr:
N/A


Ongoing Apr:
17.39% (variable)


Balance Transfer:
N/A


Annual Fee:
$35


Credit Needed:
Fair-Poor-Bad-No Credit

Snapshot of Card Features
  • No credit check necessary to apply. OpenSky believes in giving an opportunity to everyone.
  • The refundable* deposit you provide becomes your credit line limit on your Visa card. Choose it yourself, from as low as $200.
  • Build credit quickly. OpenSky reports to all 3 major credit bureaus.
  • 99% of our customers who started without a credit score earned a credit score record with the credit bureaus in as little as 6 months.
  • We have a Facebook community of people just like you; there is a forum for shared experiences, and insights from others on our Facebook Fan page. (Search “OpenSky Card” in Facebook.)
  • OpenSky provides credit tips and a dedicated credit education page on our website to support you along the way.
  • *View our Cardholder Agreement located at the bottom of the application page for details of the card

Card Details +

6. Make Payments on Time

Making timely payments is the most important thing you can do to build credit, as payment history makes up 35% of your credit score. This applies to credit cards, loans, utilities such as cell phone services and any other account that requires a monthly payment. No matter the account type, a late or missed payment that lands on your credit report can do significant damage to your credit score.

7. Maintain a Low Credit Card Balance

Your credit utilization ratio, or the amount of available credit you have tied up in debt, is another major contributor to your credit score. Most experts recommend keeping your credit card balances below 30% of the available credit limit. Ideally, you should pay your balance off in full each month to avoid interest and keep your utilization low.

8. Get a Loan

Getting a loan just to build credit is generally not a good idea, as you shouldn’t take on debt only for the sake of your credit score. But if you have a valid reason, such as needing a car or money for college, a small loan in your name can help you build credit.

As with credit cards, loans only build a good credit history if you pay them on time every month. You also want to ensure your creditor reports payments to the credit bureau. If you also have a credit card, getting a loan can help improve your account mix, which makes up around 10% of your credit score.

9. Keep It Simple for Now

The more credit cards and loans you open, the higher your chances are of falling into debt. When you’re just starting out, you should probably play it safe and manage one basic credit card and/or small loan until you get the hang of things. Trying to manage too many debts at once could get you in over your head.

Over time, you can start to add other credit cards or loans to the mix, diversifying your credit profile and adding more opportunities to build credit. And because the age of your accounts affects your credit score, just keeping accounts open will help you build credit history in the long run. When you’re starting to figure out how to build your credit, do it slowly, carefully and with a constant eye on your statements and credit reports.

The post How to Start Building Credit Once You Turn 18 appeared first on Credit.com.

Source: credit.com

How Much Cash Do You Really Need to Buy a Home?

Are you ready to buy a home? You’re not alone—in 2019, more than five million people bought an existing home. And that doesn’t even include the number of people who purchased new construction.

The point is, the housing market is always bustling and busy. And if it’s your first time buying a home, it might seem a bit daunting. You might have a couple of questions—how much money do you need to buy a home? And how can you even get those funds?

Overwhelmed? Don’t be. We’re here to guide you towards saving up, so hopefully you’ll be able to afford your dream home. Keep reading to learn more!

How Much Do You Need for a Down Payment?

Let’s start with one of the first payments you might have to make—a down payment. When someone takes out a mortgage loan, they’ll put down a percentage of the home’s price. That’s the down payment.

You might’ve heard that down payments are about 20% of the total cost of your new home. That can be true, but it really just depends on your mortgage. There are mortgage options that require little to no down payment, and how much you need often depends on your eligibility for different programs. Here are some different loan options:

1. USDA Mortgage

The USDA guarantees mortgages for eligible buyers primarily in rural areas. These loans do not have down payment requirements. To qualify for a USDA loan:

  • The property must meet eligibility requirements as to where it’s located.
  • Your household must fall within the income requirements, which depend on your state.
  • You must meet credit, income and other requirements of the lender, though they may be less rigorous than loans not backed by a government entity.

2. Conventional Mortgage

Conventional mortgages are financed through traditional lenders and not through a government entity. Depending on your credit and other factors, you may not need to put down 20% on such loans. Some lenders may allow as little as a five percent down payment, for example. But you’ll have to pay private mortgage insurance (PMI) if you put down less than 20%.

3. FHA Mortgage

FHA loans, like USDA loans, are partially guaranteed by a government agency. In this case, it’s the Federal Housing Administration (FHA). A down payment on these loans may be as low as 3.5%. Requirements for an FHA loan can include:

  • You’re purchasing a primary home.
  • The home in question meets certain requirements related to value and cost.
  • A debt-to-income ratio between 43% and 56.9%.
  • You meet other credit requirements, though these may not be as strict as with conventional loans.

How much do you need to make to buy a $200K house?

Given the above information, here’s what your down payment might look like on a home worth $200,000:

  • USDA loan: Potentially $0
  • Conventional loan: From $10,000 to $40,000
  • FHA Loan: As low as $7,000

These are just some options for mortgages with low down payment requirements. Working with a broker or shopping around online can help you find the right mortgage. In addition to the down payment, you do need to ensure that you can afford the mortgage and make the monthly payments.

Don’t Forget the Cash You’ll Need for Closing

Closing costs are typically between three and six percent of your mortgage’s principal. That’s how much you’re borrowing, so the less you put down, the more your closing costs might be.

Here’s a range of closing costs assuming a cost of three percent of the low range home purchase, when buying with less than 20% down:

  • For a home purchase between $500,000 and $600,000, you’ll need at least $15,000 for closing costs
  • Between $300,000 and $500,000, at least $9,000 for closing costs
  • Between $150,000 and $300,000, at least $4,500 for closing costs

Where Can You Get the Money to Buy a Home?

These numbers should give you an idea of how much cash you’ll need for a home purchase. Acceptable sources for procuring cash to close on a house can be one or any of the following:

  • Stocks
  • Bonds
  • IRA
  • 401(k)
  • Checking/ savings
  • A money market account
  • Retirement account
  • Gift money

The key here is that the money needs to be documented. You have to be able to prove you had it and didn’t borrow it simply for the purpose of making your down payment or covering closing costs.

Don’t have cash available from any of the above-mentioned sources? There are other sources you can use as long as they can be paper-trailed, such as your tax refund or a security deposit refund on your current home rental.

Plan for Other Important Costs

While down payments and closing costs are the biggest out-of-pocket expenses involved in buying a home with a mortgage, you may need to cover other costs. There might be some additional home buying and moving-in costs. Those could include inspections, the cost of any necessary repairs not covered by the sellers and moving fees.

Are You Ready to Buy a Home?

Saving up the right amount of money is just one step in buying a home. You must also ensure your credit score is in order. Lenders look at different credit scores when they consider someone for a mortgage. Sign up for ExtraCredit to get a look at 28 of your FICO Scores to understand how lenders might see you as a borrower. Once you check your scores, you can decide whether you need to build your score or start shopping for your mortgage.

Sign up for ExtraCredit today!

The post How Much Cash Do You Really Need to Buy a Home? appeared first on Credit.com.

Source: credit.com