Articles

What is a Prepayment Penalty?

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Most people don’t have resources to pay cash for a house. Instead, they apply for loans. Mortgage lending is a big business; and like any business, lenders are paid for their services. This is why banks charge mortgage loan origination fees and mortgage interest. But there’s one fee you may not expect when applying for a home loan: a prepayment penalty

A prepayment penalty is less common today, but it’s still included with some loans. When a bank gives a borrower money for a home purchase, it doesn’t just want repayment of principal—the bank also wants to earn interest. To earn the most interest, banks need borrowers to keep their mortgages for an extended length of time. For this reason, some banks include a prepayment clause in the mortgage agreement.

A prepayment clause is a statement that gives a mortgage lender the right to charge a fee if a borrower pays off the mortgage before a specified length of time. The fee varies depending on the lender. It can be a percentage of the remaining mortgage balance, or a borrower might be charged five or six month’s interest.

To put it plainly, a prepayment penalty discourages borrowers from refinancing a mortgage or selling a home too soon. A prepayment penalty is basically a bank’s way of guaranteeing a certain amount of interest for a certain number of years. The good news is that some mortgages don’t have this clause. Before agreeing to a mortgage loan, you can check the contract to see if the lender included a prepayment clause.

Of course, there’s nothing you can do about a clause in a mortgage you already have. But even if your existing mortgage agreement includes this clause, the situation may not be as bad as you think. There are two types of prepay penalties: a soft penalty and a hard penalty

1. Soft prepayment penalty. If your mortgage has a soft prepay penalty, the lender will charge a fee only if you refinance the mortgage loan during the penalty period. You can sell the home at any time without penalty.

2. Hard prepayment penalty. In the case of a hard penalty, the lender will charge a fee if you sell or refinance the home during the penalty period.

Prepayment Penalty Rules

A prepayment penalty clause isn’t the most desirable inclusion in a mortgage agreement. There are, however, rules to protect borrowers; and fortunately, mortgage lenders can only charge a prepayment penalty under certain conditions.

If your mortgage agreement includes a prepayment clause, your lender can only enforce the penalty for the first three years of the mortgage. The actual penalty cannot be more than 2% of the outstanding loan balance during the first two years, and 1% during the third year. Additionally, a bank can only impose a prepayment penalty on stable mortgages. Therefore, the mortgage must have a fixed rate, no risk of negative amortization and the mortgage term cannot exceed 30 years.

Unfortunately, new guidelines for prepayment penalties didn’t go into effect until January 10, 2014. Therefore, any mortgage loan with a prepayment clause that originated before this date doesn’t have to comply with the new rules.

What is the Difference Between a Mortgage Broker and a Mortgage Lender

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Now that you’ve made the decision to buy a house, the next step is getting your financing together. Applying for a home loan through your personal bank may seem like the obvious choice, but this isn’t the only place to secure financing. You have the choice of working with a mortgage lender or a mortgage broker.

Some people use the terms “broker” and “lender” interchangeably, but these are not one and the same. Before you can decide which one is the right fit, you have to understand how brokers and lenders differ.

What is a Mortgage Broker

A mortgage broker is not a bank or lender, but rather a middleman that connects borrowers with lenders. Mortgage brokers represent lenders and their loan programs. These professionals are mortgage experts, so they’re in a position to explain and recommend various loan products based on your circumstances.

Shopping around is one of the best ways to find a mortgage with a low interest rate. But since comparison shopping can be tedious, you may not have the patience for the job. A mortgage broker does the legwork for you. Your broker researches programs and presents the findings to you, at which point you can choose a particular loan.

Using a broker saves time because it offers a faster way to find and compare mortgage options. Without a broker’s service, you would have to contact banks individually to learn about their rates and products.

What is a Mortgage Lender?

A mortgage lender is an actual bank. This can include commercial banks, community banks, credit unions, etc. If you have a preexisting relationship with a bank, using this institution for a mortgage can be beneficial. It’ll be easier to speak directly with a loan officer and underwriter; and depending on the strength of your relationship, you may receive a more favorable mortgage rate. When you work with a mortgage broker, the broker communicates with the bank and you might never speak with the decision maker.

Which Should You Choose?

From a financial standpoint, you may save money working directly with a lender. Whether you use a broker or a lender, you’ll pay for services. Brokers receive payment in different ways. The typical loan origination fee for a mortgage is 1% or 2% of the mortgage loan. A bank may only charge a 1% fee, whereas a broker may charge 2% and split the fee with the lender. Then again, a broker may charge a flat fee for services, which is included in your closing costs.

Be aware that some mortgage brokers may increase your mortgage rate as compensation. If your broker can get you to pay a higher mortgage rate, the company may receive a bonus from the lender.

Bottom line: a broker is an excellent choice if you’re seeking information on various loan programs, but you don’t want to contact banks individually. Just make sure you ask questions and understand how your broker gets paid.

Five Things Mortgage Lenders Wish You Knew

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Getting a mortgage can be complicated, so your mortgage lender doesn’t expect you to have all the answers or know everything about the lending process. This is why they provide guidance and offer information on various programs available to you. But although you’re not expected to have an extensive knowledge of mortgages, there are a few things your lender wishes you knew—which can make their job easier and result in a smoother process.

  1. We can help you qualify for a home loan

If the bank denies your mortgage application, don’t disappear on your lender. You may not qualify for a mortgage today, but with the help of your lender you might qualify in the future.

Underwriters know what to look for when approving a home loan application. And if your application falls short of the bank’s requirements, some mortgage officers can help with credit repair or offer a guide for improving your financial outlook. Speak with the lender to find out what you need to do.

  1. We need the truth, no matter how ugly it is

A mortgage lender can only help if you’re honest about everything. Holding back information can hurt your chances of qualifying. Some people lie about assets, not realizing that lenders check bank statements.

If you don’t have enough cash, let your mortgage officer know. Some loan programs have lower down payment requirements, and some community banks offer unique programs that require little or no money down. And when discussing your debt and monthly obligations with a lender, don’t hide child support or alimony payments that you make. These payments don’t show up on your credit report, but they do count as debt, which can reduce purchasing power when buying a home. Marylin Lewis of MSN reports that loan processors will contact “courts and lawyers to confirm whether you are married or divorced and if you owe child support, alimony or a court-awarded judgment.”

  1. You can’t spend your entire paycheck on a mortgage payment

If you’re getting a conventional home loan, your mortgage payment can be no more than 28% of your gross income, and total debt payments including the mortgage cannot exceed 36% of your income.

Some people apply for a mortgage thinking they’ll be able to spend up to 40% to 50% of their gross income on the mortgage payment, but it doesn’t work this way. A lender will not approve a mortgage if the monthly payment takes a big chunk of your income. An overly expensive mortgage payment can complicate your finances. And when your finances are complicated, there’s a greater chance of default. Some home loan programs have higher housing and debt limits. You can get an FHA home loan and spend up to 31% of your gross income on the monthly payment, and your total debts can be as high as 43% of your gross income.

  1. We can’t approve your loan if you can’t show income

If you are self-employed, your tax returns need to show a sufficient net profit. An excellent tax accountant knows how to find deductions to reduce your income and lower how much you owe in taxes. But unfortunately, what helps you on your taxes doesn’t help when trying to buy a house.

A mortgage lender can add some expenses back to your income, such as depreciation, home office deduction and even mileage. But they can’t add back business expenses like supplies, advertising, insurance, etc. If you’re thinking about buying a house, reduce your number of write-offs for at least two years to show as much income as possible.

  1. A pre-approval doesn’t guarantee anything

A pre-approval is the first step of buying a house. The lender looks at your credit and income to see if you’re eligible and determines how much you can afford. Just know that a pre-approval doesn’t mean you’re guaranteed a loan, it only means you’re a good candidate. If you make any sudden moves during the pre-approval process such as quitting your job or acquiring new debt, your mortgage lender will have to take a second look at your income to see if you still qualify for the loan. To avoid any possible setbacks, don’t make any changes to your financial picture until after you’ve signed the mortgage papers and receive the keys to your new house.

Is a HELOC Right for You?

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A home equity line of credit (HELOC) is a second mortgage that uses your home’s equity as collateral. It’s similar to a home equity loan. But rather than receiving a lump sum of cash, you gain access to a credit line up to 80% of your home’s equity. You can withdraw cash on an as-needed basis and use the money for many purposes from paying for college to home improvements. A HELOC may seem like a good idea if you have plenty of equity, but you have to consider whether this is the right choice for you.

Can you afford the monthly payment?

Before getting a HELOC, take a look at your monthly cash flow and determine whether you can afford another monthly payment. And if you can, how much can you afford?

Money you receive from a home equity line of credit isn’t free money. It’s a second mortgage, so you have to repay borrowed funds. Monthly payments are based on your interest rate and how much you withdraw from the account. With cash so readily available, it can be tempting to take large sums from your account. However, it is imperative that you calculate the cost and only borrow what you need. Your home serves as collateral for the HELOC. If you default and stop making payments, the bank can foreclose.

Consider your future cash flow

HELOCs have a draw period up to 15 or 20 years. Many home equity lines of credit have a variable interest rate, meaning the rate can change according to the market. You may receive a low rate today, resulting in low minimum payments. But if your rate increases in the future, so do your minimum payments depending on how much you owe at the time. Regardless of why you need funds, come up with a plan that lets you pay off the line of credit as soon as possible, just in case your rate increases.

How’s your credit score?

You don’t need a perfect credit score to qualify for a home equity line of credit, but your credit rating can affect your interest rate. Before applying for any type of loan or line of credit, pull your credit report and check your credit score. Check your report for errors and make any needed improvements, such as paying all your bills on time and paying off debt. Both efforts can improve your credit score and help you qualify for a better interest rate.

How’s your local real estate market

A HELOC can provide the cash you need if your property has substantial equity. But it’s smart to evaluate your local real estate market before applying for a line of credit. If home values in your area have been on the decline in recent years, getting a home equity line of credit could be dangerous. You might have plenty of equity at present, but if home values were to fall, you could lose your equity. Remember, getting a HELOC reduces the amount of equity in your home. If you borrow against your equity and your home value drops, you could end up owing more than your property’s worth.

How to Prepare a Hardship Letter for Your Lender

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Your financial situation can change at a moment’s notice. An illness, divorce or job loss can make it difficult to stay current on your mortgage loan. And unfortunately, the inability to pay your mortgage can result in foreclosure.

A foreclosure can devastate your credit history, and in many cases, it can be up to seven years before you’re able to qualify for another home loan. The good news is that you have options that aren’t as damaging as a foreclosure. These include a short sale, a mortgage modification or a deed-in-lieu of foreclosure.

These hardship provisions can be less expensive for lenders, but not every homeowner qualifies. Lenders will need to look at your income and assets to make sure you meet the criteria for a hardship provision, plus you’ll need to write a hardship letter.

A hardship letter is basically your explanation of the situation and why you need assistance. Lenders will take the hardship letter into consideration when determining whether you qualify, so it’s important to write a strong, compelling letter. Here are five tips for preparing your hardship letter

  1. The first paragraph of your hardship letter should explain your purpose for writing the letter, and provide information about yourself and the property. Include your name, mortgage account information and the address of the property. Mention whether you’re writing to request a short sale, a mortgage modification, a deed-in-lieu of foreclosure or another viable solution. There are different types of hardship provisions and the lender needs to know your desired outcome.
  1. Include the reason for hardship. Understandably, your personal finances are a private matter. But in this case, you need to be as specific as possible. The more information you provide, the more likely the lender will approve your request. For example, are you unable to pay your mortgage because of a job lost or the inability to work due to an illness. Or maybe you need a short sale—which lets you sell the property for less than you owe–because you’re going through a divorce and need to quickly sell the property.
  1. Make sure your letter includes steps you’ve taken to resolve the matter. Mortgage lenders want to see effort on your part. In other words, what have you done to try and remedy the problem. If you can no longer afford the payment, perhaps mention that the house has been listed on the real estate market for several months with no offer. Or bring up how you’ve been actively looking for better employment or a roommate to share the cost to no avail.
  1. End the letter by including your email and telephone number, and let the lender know you can provide supporting documentation to help your case.

It can take several months to hear whether you qualify for hardship assistance. The lender has to verify that the hardship is legitimate, and you’ll likely need to provide income statements and bank statements. Be patient. Based on the information provided, you’ll work with the lender to come up with a solution, whether it’s a mortgage modification, short sale or another alternative.

Little White Lies That Can Hurt Your Mortgage Approval

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Not everyone qualifies for a mortgage loan, and if you think there’s a chance you won’t qualify, you might be tempted to exaggerate or fudge information to become a more desirable candidate. A little white lie may result in an initial approval, but the lender will learn the truth. And unfortunately, the truth can jeopardize your mortgage approval.

Lenders take a gamble with every home loan. Even if an applicant has a job and good credit, there’s always a chance that he’ll run into hardship and be unable to pay his mortgage at some point during the term.

Lenders only approve those who meet their qualifications, and they don’t take the information you provide at face value. Instead, the bank asks for supporting documentation and verifies all information presented. If a bank learns you purposely lied on your application or submitted false information, it may refuse to do business with you.

Here are three little lies that can hurt your approval.

  1. Lying about your earnings

Exaggerating or slightly inflating your income may not seem like a big deal. However, mortgage affordability is based on your monthly income, and fudging numbers by a few or several thousand dollars makes a difference in how much you actually qualify for.

Mortgage lenders don’t take any chances. The bank will ask for W-2s, tax returns, and some lenders will call your employer to verify how much you’re currently earning. If the bank learns you earn less than your stated amount, this could result in qualifying for much less, which can limit purchasing power.

  1. Lying about the amount of your down payment

It’s important that you’re truthful about the amount of your down payment. Your down payment can determine the types of mortgage programs you qualify for. If you say you’re going to put down a certain amount of cash, your mortgage lender will expect this amount at the time of closing. Showing up on the day of closing with less cash can cause a delay. Also, you must be forthcoming with the source of your down payment. Mortgage lenders will request your most recent bank statements to verify assets. If you’re receiving gift money from a relative to cover your down payment, make sure your lender knows ahead of time. There are specific rules for gift funds.

  1. Lying about how long you’ve been with your employer

Two years of consecutive employment is typically required when financing a home. This includes two years with the same employer and in the same field if you’re a salaried or hourly employee; and if you’re self-employed, you must produce at least two years of tax returns for your business.

If you’ve only been with your employer or self-employed for one year, be honest with your mortgage lender. This doesn’t necessarily mean you can’t qualify for a loan. Some banks maintain their own portfolio of mortgage loans. If the lender doesn’t plan to sell your mortgage, the bank may approve your mortgage although you only have one year of employment history.

Are You Ready to Buy a House? Six Tips for Success

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It doesn’t matter if you’re buying a new home or a resale property, the home buying process can be stressful at best. The good news is that you can get through a purchase with ease. The trick to a smooth experience is advance preparation and knowing how these transactions work.

1. Fix your credit in advance

Don’t wait until you’re ready to buy a house to get serious about credit. It takes time to rebuild a low credit score. If you’re thinking about buying a house in the next six to 12 months, now’s the time to pull your credit history and make needed improvements.

Several issues can lower your credit score, such as credit report errors, paying bills late and carrying too much credit card debt. Order your credit report from AnnualCreditReport.com, and then check your file for accuracy and dispute any errors. Make sure you pay all bills on time and devise a plan to eliminate debt.

2. Spend less on a house than you can afford

A mortgage pre-approval provides a pretty clear estimate of how much you can afford to spend on a house. Only a lender can assess affordability after evaluating your income and current debts. A pre-approval lets you know your max budget, but it’s smart to spend less than you can afford. This ensures you have wiggle room in your budget and disposable cash for other goals, such as building an emergency fund.

3. Research different lenders

There’s probably a mortgage lender on every corner in your city. This doesn’t mean you should choose a random company to work with. Lending requirements and mortgage programs vary by lender, so you need to be selective and request rate quotes from multiple lenders.

4. Interview different realtors

Not only should you shop around for the right mortgage lender, you should meet with different realtors before making a choice. The home buying experience can be stressful and confusing, and you need to work with a professional who has experience and knows the area you want to live in. Don’t be afraid to ask questions. How long has he or she been a real estate agent? Does the agent work full-time or part-time? How many sellers or buyers does the agent currently represent?

5. Get a home inspection

A home inspection is optional when purchasing a home, but you shouldn’t skip this step. Skipping a home inspection could mean buying a home with several problems, which can be costly in the future. A home inspection costs between $300 and $500, depending on your area and the size of your property. The inspector check the home’s electrical system, plumbing, HVAC, roof and foundation for problems and provides an inspection report

6. Don’t buy the first home you see

The first home you see may offer everything you want at a price you love, but never purchase the first property you find. Your realtor may be able to locate a property that’s a better match for you and your family, or a property with a lower sale price and more seller concessions. You don’t have to spend weeks looking for a home, but you should tour at least three properties before making a decision.

What You Need to Know About Home Appraisals

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The appraisal is a critical step in the home buying process. An appraisal is required by mortgage lenders and it estimates the value of a property. A mortgage lender will not lend more than a home’s worth, so the bank will order an appraisal from a licensed or certified home appraiser who’ll assess the property’s market value based on a number of factors, such as square footage, improvements and recent home sales. Sadly, some homebuyers and sellers don’t know how appraisals work, or understand how the appraisal can affect a real estate transaction.

Whether you’re a first-time buyer or a repeat buyer, here are four things you need to know about appraisal.

1. How An Appraisal Differs from a Home Inspection

Both a home inspection and a home appraisal are common practice when buying or selling a property, but there are differences between the two.

With a home inspection—which is optional—a certified home inspector conducts an in-depth examination of the property from top to bottom. He looks for potential defects or problems with the roof, foundation, electrical system, plumbing, and HVAC system. An appraisal, on the other hand, also visually inspects a home. But since his job is to determine the property’s market value, his attention is focused on the home’s size, improvements and overall condition. The appraiser then compares the property’s selling price with recent sale prices of similar homes in the area.

2. Who Pays for a Home Appraisal?

The home appraisal fee is part of a buyer’s closing costs. But instead of paying for the appraisal at closing, it’s usually paid beforehand at the time of the appraisal. Homebuyers are responsible for the fee. The cost of a home appraisal varies, but a typical fee is between $300 and $400

3. Who Selects the Home Appraiser?

A home appraisal needs to be neutral and non-biased; therefore, neither the home seller or buyer selects the appraisal company. The buyer’s mortgage lender chooses the appraiser who physically visits the property. The entire process can take as little as 20 minutes or an hour or more, depending on the size of the property. The appraiser will take note of the condition of the property and provide the bank with a written appraisal within two to five days.

4. What to Do With a Low Appraisal?

Sometimes, homes appraise lower than the agreed-upon sales price of a property. This doesn’t necessarily kill the deal. There are ways to respond to a low appraisal. As the seller, you can reduce the sale price of the house to match the appraisal. If the sale price is $160,000, but the home only appraises for $157,000, lowering the price by $3,000 might be enough to save the deal. You can ask for a copy of the appraisal report and look for errors. The report may include mistakes about your home’s square footage, number of bedrooms or recent upgrades. There’s also the option of getting a second opinion. Some lenders will allow a second appraisal, but the home seller must pay the expense.

Should You Get a Low Down Payment Mortgage?

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After the housing collapse, some mortgage lenders started requiring a 10% down payment for home purchases. Unfortunately, this new requirement made it nearly impossible for many to buy a home. The good news is that low down payment mortgages have made a comeback, and if you’re looking to buy a home, you can qualify with as little as 3% to 5%.

This is an option when you don’t have a 20% down payment. Twenty percent of a $200,000 purchase is $40,000, which isn’t realistic for the average homebuyer. Several mortgages have low down payment options, including FHA loans, Fannie Mae’s HomeReady and Conventional 97, and a standard conventional. These programs let you purchase a property with the least amount of upfront cash. Although an attractive option, a low down payment isn’t the rule, nor does it make sense for everyone.

Benefits of a Traditional Down Payment

Understandably, many homebuyers want to spend as little of their own money as possible on a home purchase. And yes, giving the bank a lot cash at once can be scary. For this reason alone, you may lean toward a smaller down payment. However, if you recently sold a home and proceeds from the sale allow you to put down 20%, or if you have access to other resources, there are reasons to love the idea of a 20% down payment. You don’t have to pay private mortgage insurance with a 20% down payment and you’re able to negotiate a lower mortgage rate. In addition, you’ll borrow less, pay less interest and enjoy instant equity.

Importance of a Cash Reserve

But even if you have funds for a 20% down payment, you shouldn’t give the bank all of your money. Cash reserve requirements vary by lender. Some banks require borrowers to maintain a cash reserve equivalent to one or two month’s mortgage payments. Your lender may not have this specific requirement, but as a rule of thumb, only give the bank a 20% down payment if you’re able to maintain some cash in your personal account.

Some homebuyers make the mistake of cleaning out their savings to buy a home, and they have nothing leftover for an emergency, home repair or other unexpected expenses. Given the number of low down payment options, there’s no reason to wipe out your cash reserve. Rather than a 20% down payment, maybe give the lender a 10% or 15% down payment and keep the remaining cash for a rainy day.

What to do If You Have an Underwater Mortgage

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An underwater mortgage is one of the most stressful situations you can face as a homeowner. Owing more than the value of your property makes it harder to sell or refinance, and it can feel as if you’re stuck. Since it can take years to dig yourself out of a hole, it’s important to understand your options.

1. Be patient and wait it out

An underwater mortgage isn’t the best situation, but the good news is that your property won’t be underwater forever.

The real estate market fluctuates on a constant basis. Home prices can be down one year and up the next year. So if you have an underwater mortgage today, your situation can change considerably over the next few years. In addition, as you pay down your mortgage balance, the amount you owe the bank may become better aligned with the property’s value. You can also recover some of your equity by making additional mortgage payments, which helps pay down the principal faster.

2. Refinance through HARP

Unfortunately, you won’t qualify for a traditional refinance when you’re underwater. Depending on your mortgage program, a traditional refinance requires a minimum 3% to 5% equity.

Refinancing can help you get a lower interest rate and reduce your monthly payment, and it’s the only way to switch from an adjustable-rate to a fixed-rate.

If your underwater mortgage prevents refinancing, talk with your lender about refinancing under the Home Affordable Refinance Program (HARP). This program doesn’t require equity, plus you can refinance up to 125% of your property’s value. There is one caveat. To qualify for this program, you must have a Fannie Mae or Freddie Mac mortgage.

3. Rent out your house

If you’re ready to move but can’t sell because of an underwater mortgage, another option is turning your primary residence into a rental property. The rent you receive from a tenant can cover the payment on your underwater mortgage, and you can get a new mortgage to purchase another property.

In the past, if you wanted to rent out your home and buy a new home, lenders required at least 30% equity in your current home. This rule was established to stop “buying and bailing,” where some borrowers would purchase new homes and then walk away from their underwater mortgages. As of 2015, there are no equity requirements for renting out a primary residence and buying a new property, but your lender will need a copy of your tenant’s rental agreement and proof of their security deposit.

4. Consider foreclosure alternatives

Walking away can seem like the only alternative if you need or have to sell a property, but can’t due to an underwater mortgage. A foreclosure, however, isn’t the only way to deal with an upside down loan. Talk with your lender and discuss your options. You may qualify for a short sale which lets you sell the property for less than you owe, or the bank may agree to a deed-in-lieu of foreclosure. You give the bank the deed to the property, and the bank cancels the debt. Both options will damage your credit score, but the effects aren’t as damaging as a foreclosure.

Facts About a Homebuyers Education Course

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If you are financially and mentally ready to purchase a home, sitting through a homebuyer education course might be the last thing you want to do. However, some mortgage programs require completion of a course.

Instead of viewing homebuyer education as an inconvenience, you should focus on the benefits of the course. A home purchase is a major commitment and a decision that shouldn’t be taken lightly. Therefore, it’s important to have a clear and accurate understanding of the home buying process. Here are three facts about a homebuyer’s education course.

1. You can take a class free of charge

Several lenders and organizations sponsor or offer home buying education courses. Some courses are free, but others charge a fee. Even if your lender or mortgage program doesn’t require completion of homebuyer education, signing up for a class is worth consideration. You can find HUD-approved homebuyer education courses online, or your state may offer a free course. For example, the Virginia Housing Development Authority (VHDA) offers a free class that anyone can take, regardless of whether they’re getting a VHDA mortgage.

2. You can sign up for online or in-class instruction

One of the best features about homebuyer education is that you don’t have to sit in a classroom, or attend a class for several days or weeks. The entire course takes about six to eight hours, and in some cases, it can be completed online or in a classroom. For in-class instruction, you can break up classes over two days, or complete the entire course in a single day—whichever is more convenient for you. An online class lets you complete the course at your own pace. However, in-class instruction can be more advantageous because you’re able to interact with a homebuyer counselor.

3. Receive a comprehensive overview of buying a home

Homebuyer education provides more than an overview of mortgage loans and the lending process. These courses are comprehensive and cover various areas related to homeownership. Too often, borrowers apply for a home loan without understanding how mortgages, credit or personal finances work. You’ll learn how to prepare your credit for a mortgage, the importance of shopping for a mortgage loan, and you’ll learn about different home loan options. As an informed borrower, you’re able to choose the right mortgage for your situation. Additionally, these courses provide information on down payments, the closing process and how to successfully manage a mortgage.

What Information Does a Pre-Approval Letter Contain?

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A pre-approval letter is your biggest bargaining chip when shopping for a home. Getting pre-approved isn’t a requirement. But when you include a pre-approval letter with a home offer, it says you’re a serious buyer and you’ll get the seller’s attention.

 A pre-approval means you’ve submitted an official mortgage application and provided the lender with financial documentation, such as your most recent bank statements, pay stubs, w-2s and tax returns. You also give the lender permission to check your credit.

 Your pre-approval letter, however, is more than a letter saying you qualify for a home loan. It also includes information that you, your realtor and home sellers need to know.

1. Type of mortgage

 There are numerous home loan products, and as the borrower, you need to know the type of mortgage you’re approved for. Your pre-approval letter will indicate your mortgage program, such as FHA, conventional, USDA or VA home loan. This is important because different mortgages have different down payment requirements and minimum credit score requirements, plus your type of mortgage determines how much a seller can contribute to your closing costs. If you have a conventional loan, the seller can contribute up to 3%, whereas FHA loans allow sellers to contribute up to 6%.

 Your pre-approval letter also includes information about your mortgage term—10, 15, 20 or 30-years.

2. Mortgage rate

 A pre-approval letter will also include your mortgage rate. Understand that mortgage rates can fluctuate up or down on a day-to-day basis. So the rate you’re quoted at the time of applying for the mortgage might be different from the rate you receive at closing. To avoid a possible rate increase, the bank may offer a rate lock option. For a fee, you can lock your rate for a certain length of time—typically up to 45 or 60 days.

3. Mortgage conditions

 Your pre-approval letter may be subject to certain conditions. For example, the lender may include a condition that says the mortgage is contingent on your ability to sell your current home. This might be the case if you don’t have resources to carry two mortgage loans. Additionally, the mortgage will be contingent on a home appraisal. A mortgage lender isn’t going to give you $200,000 to purchase a house if the appraisal report says the property is only worth $180,000.

5. Pre-approval date

 Since a mortgage pre-approval usually expires within 90 days, your letter will include an issue date and an expiration date. If you’re unable to find a property within this time frame, the lender will take a second look at your credit and finances before issuing another pre-approval letter.

What You Should Know Before Deducting Home Mortgage Interest

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Home ownership is expensive when you add up the costs to purchase a home, home maintenance and home repairs. However, your home is one of your biggest assets, and ownership can be profitable. But even if the cost of buying a home is more expensive than you expected, you might take solace in knowing you can deduct your home mortgage interest and recoup some of your investment.

Before filling out your tax form, here is what you should know about deducting home mortgage interest.

1. It must be your mortgage

You cannot deduct home mortgage interest on a property that’s in another person’s name. To qualify for this write-off, your name must be listed as a primary borrower or a co-borrower on the mortgage loan. It doesn’t matter if you’re the person paying the mortgage every month. The IRS will not allow the deduction if your name doesn’t appear on the home loan.

2. Your standard deduction may be more profitable

When filing your tax return, you have the choice of itemizing your return or taking a standard deduction. You can only deduct home mortgage interest if you itemize your tax return. Itemizing can be profitable if your total deductible expenses exceeds the standard deduction for the year. For the 2015 tax year, the standard deduction is $6,300 for singles, $12,600 for couples filing jointly, and $9,250 for head of households. If you’re a couple filing jointly and you paid $10,000 in home mortgage interest for the tax year—and you don’t have other deductible expenses—you’ll save more on taxes with a standard deduction.

3. The loan must be connected to your mortgage

Only certain types of loans qualify for the home mortgage interest deduction. This includes first mortgages, home equity lines of credit and home equity loans. The latter two are also called second mortgages. For purchase or acquisition debt—such as your first mortgage—you can deduct mortgage interest up to $1 million. With a second mortgage, you can deduct mortgage interest up to $100,000.

4. You can only deduct interest on one second home per year

The good news is that you can deduct home mortgage interest on your primary residence and a second home. For a property to qualify as a second home, you must live in the home more than 14 days out of the year. But this doesn’t mean you’re allowed to deduct mortgage interest on every property you own. You’re only allowed one second home mortgage deduction per year, which means you can’t write off interest paid for a third or fourth home in the same year. The IRS, however, does allow you to pick which property to use as your qualified second home.

5. Different rules for investment properties

 If you own investment properties you can also deduct mortgage interest paid on these homes, but these properties do not qualify for a home mortgage interest deduction. You must write off the interest as a business expense.

How to Avoid Being Overcharged for a Mortgage

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Buying a house often involves spending your own cash upfront. But even if you prepare financially for a purchase, you may be surprised by the number of fees charged by mortgage lenders and brokers. There are administrative costs associated with each mortgage loan, and unfortunately, you’re responsible for paying these expenses. The amount you’re charged by a bank or broker varies depending on the company you’re working with.

Mortgage fees have a big impact on how much you actually spend for a house, so it’s important that you’re not overcharged. Here’s how to protect yourself.

1.Clean up your credit history

Fixing a poor credit history is one of the best ways to save money on a mortgage loan. You don’t need an impeccable credit history to qualify for a mortgage, but a high score can almost guarantee a low interest rate, plus applicants with the highest scores pay the least amount for private mortgage insurance (PMI). You can qualify for a conventional mortgage with a credit score as low as 620, but you’ll qualify for a more favorable rate with a credit score in the 700s or 800s.

2. Compare mortgage costs with different lenders

Within three business days of applying for a mortgage loan, the lender is required to provide a Good Faith Estimate (GFE) which breaks down the terms of the mortgage loan—interest rate and closing costs (loan origination, appraisal, points, third-party fees). Although a rough estimate, this documents provides an idea of what you can expect to pay.

Mortgage lenders and brokers charge different fees for different services, so it’s important to get a free quote from more than one mortgage provider. If you only receive one estimate, there’s no way to know whether a particular lender’s fees are reasonable or competitive, and you could end up paying more for your mortgage loan. Take the loan origination fee for example. This is the lender’s charge for originating the loan and its paid at closing. Lender’s typically charge between 1 percent and 3 percent to originate loans. For a 30-year $200,000 mortgage, that’s a $4,000 difference.

A Good Faith Estimate contains a lot of figures, but you should review each quote you receive and make side-by-side comparisons to avoid getting robbed by a lender or broker. Also, don’t be afraid to question a particular fee. For example, if you’re working with a mortgage broker and this company charges an underwriting fee, ask the broker to remove this fee. Mortgage lenders underwrite mortgage loans, not brokers. Therefore, this fee is only justified when charged by an actual lender.

Reconsider Discount Points

Discount points are a type of prepaid interest that buys down your mortgage rate. Points can lower your mortgage rate and monthly payment, but buying down your rate may not be necessary.

One discount point equals 1 percent of the loan amount, and on average, each discount point reduces your interest rate by 0.25% APR. If you receive a 30-year $200,000 mortgage loan at 4% APR, paying two points at 0.25% APR per point can reduce your interest rate to 3.5%. This lower rate can also reduce your mortgage payment by $50 a month. But unfortunately, discount points are paid at closing and increase the amount of upfront cash you need to purchase a property. Since you’re paying 1 percent per point, buying down the rate means you’ll pay an additional $4,000 in closing costs.

Mortgage lenders look for different ways to increase their profit, and your lender may recommend that you buy discount points. What you need to realize, however, is that buying down your mortgage rate only makes sense if you’re going to live in the home and keep the original mortgage for several years.

If buying points, you should allow enough time to breakeven and recoup what you paid at closing. So if buying down the mortgage rate saves $50 a month, and you paid an extra $4,000, you shouldn’t sell or refinance the house for at least six or seven years. If you move or refinance sooner, you would have paid the extra money at closing for nothing.

Why You Should Check Your Credit Before Buying a Home

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It’s become harder to qualify for a home loan in recent years. Therefore, it is important to understand what banks look for in an applicant. Getting a mortgage typically requires a down payment and consistent employment, and you have to meet the lender’s credit requirements. However, some applicants never check their credit file before meeting with a mortgage lender.

 If you’re thinking about a home purchase, here are four reasons to check your credit beforehand.

1. Your credit score could be lower than you realize

 Some applicants assume their credit is good, so they don’t check their score or reports prior to applying for a mortgage. But even if you pay your bills on time and have a seemingly good relationship with your creditors, your credit score may not be high enough to qualify for the most favorable interest rates.

 There is no way to know where you stand credit-wise until you order your credit report and credit score. You can qualify for a conventional mortgage with a credit score as low as 620 and an FHA mortgage with a credit score as low as 500 to 580. But if you want an excellent interest rate, you need a credit score in the upper 700 or 800 range.

 Checking your credit ahead of applying for a mortgage also gives an idea of the loan programs you qualify for; and if your credit needs improving, you can take steps to raise your score. Paying down debt and paying your bills on time helps fix a low credit score.

2. Your creditors may report erroneous information

 Checking your credit helps you identify mistakes on your credit file. Creditors may update your credit report with erroneous information that damages your credit score, such as higher account balances or late payments. Mortgage lenders put a lot of emphasis on payment history, and having one or two late payments on your report within the past 12-months can hurt your chances of getting approved for a mortgage. Therefore, it’s important to check your report for accuracy, and then contact your creditors to fix any mistakes you find. If your creditor is unwilling to assist, you can file a dispute with the credit bureaus.

3. You might be a victim of identity theft

 If you never check your credit history or credit score, you could be a victim of identity theft without realizing it. Identity theft can include someone applying for loans and credit accounts in your name and accumulating debt in your name. This type of theft can damage your credit reputation, to the point where you may not qualify for a mortgage. It doesn’t matter if you are innocent and a victim of fraud, a mortgage lender will not approve your application until the issue has been resolved and derogatory items are deleted from your credit report.

 Order your credit report from AnnualCreditReport.com, or request your reports by contacting the three major bureaus (Experian, Equifax and TransUnion). If you’re a victim of identity theft, notify your creditors and the credit bureaus, and then file a police report. You can also report identity theft to the Federal Trade Commission.