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Understanding Mortgages

USDA Loans - do I qualify?

What are USDA Home Loans? Do I Qualify?

Deciding between rural and suburban is one of many choices you'll make along your homeownership journey. And if the countryside is your preference, then you may want to consider applying for a USDA loan. You've probably heard of the USDA loan program, as it's one of the more popular mortgage loans available. However, you may not know too much about the particulars, such as whether you qualify, what closing costs are like and which mortgage lenders offer them. 

You're about to learn more about all this so you can determine if this loan is right for you. 

What is a USDA-RD loan?
The USDA loan program is a mortgage offering backed by the United States Department of Agriculture. More formally known as a USDA-RD loan - the RD short for "Rural Development" - this mortgage product is geared toward families who plan on buying in a rural neighborhood. Rural home loans are designed to provide low- to moderate-income families with more of an opportunity to buy a home at an affordable price. Due in part to high demand and stretched inventory, home prices are on the rise in most locations. Indeed, according to the most recent estimates from the National Association of Realtors, the typical single-family residence in the U.S. costs around $280,800. As of July, existing-home prices have increased for 89 months in a row on a year-over-year basis.

Of course, a USDA loan doesn't reduce the cost of a property's listed price, but it can provide certain benefits that may make it a bit easier for borrowers to qualify. For example, you may be eligible for a lower down payment than you would be with a different mortgage product, perhaps even 0% down.

What are the main advantages of a USDA-RD loan?
Low or no down payment loans often get mischaracterized as mortgages that box borrowers in, leaving them with fewer options in terms of where they can buy their house or for what purposes. This certainly doesn't apply to USDA loans. They allow for a great deal of flexibility. For example, aside from buying a residence, you can also use this mortgage for refinancing or home improvement purposes. Additionally, you may be surprised by the loan amount for which you're eligible. This depends on the state you live in and how much you earn. USDA loans have fixed interest rates and are typically sold in 15-year and 30-year increments. 

Furthermore, closing costs can be arranged so that they're included in the financing or paid in full or in part by the seller. 

Another mischaracterization of rural loans is that since they only apply to rural locations, this prevents borrowers from considering houses that are in or near the city. However, what qualifies as "rural" applies to 97% of America's land area, according to the latest estimates from the U.S. Census Bureau. Translation: You likely have more options to buy outside the city than within.

Picture of a houseWhat's the difference between a USDA direct loan and USDA guaranteed loan?
As a first-time homebuyer, it's important to understand the distinctions between a USDA direct loan and USDA guaranteed loan. While they both are provided through the Department of Agriculture, they're geared toward slightly different audiences. For example, the USDA guaranteed loan is typically taken out by borrowers who earn a moderate income, while the direct loan is designed for families who make substantially less per year than what's typical in their area, or low to very low. What qualifies as "low income," "moderate" and "very low" varies, but generally speaking, low income is 50% or less of the median salary in a given area while moderate is between 50% and 80%.

Another way USDA direct and USDA guaranteed loans differ from one another is who backs or finances them. For the former, it's the USDA directly, but for the latter, private lenders provide the funding.

As you might imagine, the qualifications necessary to be approved for a USDA direct loan versus a USDA guaranteed loan are also a bit dissimilar. Take credit history. For the direct home loan program, applicants need a "reliable" FICO® score of at least 640 ("reliable" in this context means three or more trade lines in the previous two years). For the guaranteed home loan program, the "validated" credit score minimum is 640 ("validated" is defined by USDA as two or more trade lines opened in the previous year or more).   

Which one is best for you? That's something your lender can help you determine based on your needs and financial circumstances. 

Couple sitting with a loan officer

Who qualifies for a USDA loan? 
As with most things in real estate, determining whether you qualify for a USDA is a case-by-case basis. Several factors are taken into consideration. For example, the property you plan on buying must be used as a primary residence - as opposed to a vacation home - fall within an "eligible rural area" as determined by the USDA, and the owner must meet certain income requirements. It's this last factor that has several parts to it:

Location
As the old saying goes, real estate is all about location, location, location. Area influences the style of house you're likely to see and the amount of money you can expect to spend. Not only do prices in regions of the country vary considerably, USDA loans are only available for properties with rural zip codes. Because populations are always changing, what may be considered a rural area today may be different a year or two from now. This makes it difficult to determine with precision whether the property you want is in a rural part of the U.S. Once again, your lender will be able to provide the certainty you need. 

Debt to income
DTI refers to how much of your monthly earning goes toward paying expenses. The lower the percentage, the more money you have to use at your discretion. Generally speaking borrowers should have a DTI ratio no higher than 41%. There may be exceptions to this, which your mortgage lender may point out depending on your financial situation.

  

Credit history
Your credit reflects how consistent you are with making payments in a timely fashion. It's determined through your credit or FICO® score. Factors that influence your score include the amounts you owe, new credit, payment history and types of credit. USDA loans typically require a FICO® score of at least 640. Much like your DTI, your lender may have a different standard and, the credit score you need may also depend on whether you're applying for a USDA guaranteed loan or a USDA direct loan. We'll discuss this further a bit later. 

Income
You'd be hard-pressed to find two borrowers with identical incomes. Similarly, the earnings of eligible USDA loan borrowers run the gamut. The minimum or maximum income amount depends in part on whether you're taking out a direct loan or a guaranteed housing loan. If it's the latter, you may be able to earn more than what the median household income is for your area and still be eligible (up to 115%). 

Mortgage insurance
Surveys show the down payment is one of the more common barriers Americans encounter when deciding to purchase real estate, particularly among first-time buyers. Perhaps the most attractive aspect of USDA loans is the fact that you may not need a down payment to be eligible. Taking advantage of this aspect may require you to purchase mortgage insurance, though, in case of default. What you can expect to spend on mortgage insurance depends on the other aspects of your financial situation in accordance with your lender's purchase or refinancing options. 

house in an hourglass

When will you get a decision about approval? 
Now that you know a little more about some of the qualifications associated with applying for a USDA rural development loan, you may be wondering about how long you can expect to wait before an approval decision. The journey to homeownership can be summed up in three words: It's a process. Lots of factors are analyzed and documents examined (e.g. paystubs, tax returns, proof of assets, employment information, etc.). Since each individual or family's situation is different, approval timeframes can vary. However, the average period is three weeks (this could be different for each state). Part of the reason for this is the multi-step aspect to authorization. In addition to your lender, the USDA also has to sign off on it before the decision becomes final, and prior to that, there needs to be an appraisal done on the property that you seek to buy. 

There are a few things you can do, however, to speed up the process. For example, do your best to have all the information your lender asks for when they need it. This may include two years' worth of W-2 forms, tax returns, your credit report (or Social Security number so your lender can run a check) and a street address for your employer. You may also want to include the phone number of the business you work for as well.

Woman doing paperwork

You should also strive to avoid any drastic expenditures while your application package is processing. Life is literally event-full, involving milestones, memories and major purchases. But while you're awaiting a decision, put any forthcoming changes on the back burner for the time being. For example, if you're looking to buy a new car or go on an all-inclusive vacation, save that for some other day, as large purchases such as these could raise a red flag.

Finally, be reachable. There are a lot of working parts to applying for a rural development loan, and things may come up that your lender may need to talk to you about. Getting back to your lender in a timely fashion ensures that the approval process doesn't take any longer than it needs to. 

If homeownership is your aim, a USDA home loan can help you reach the target. Please contact Residential Mortgage Services - we'll guide you home. 


Understanding Mortgages

Can you refinance a jumbo loan

Can You Refinance a Jumbo Loan?

With apologies to noted author Charles Dickens, "A Tale of Two Cities" might be the best way to describe the current state of housing. On the one hand, you have fixed rates. Unlike the 1970s, where higher interest rates were the norm, they're currently at record lows, averaging 3.75% for the week ending July 25, according to Freddie Mac.

On the other side are home equity and asking prices. With home loan applications moving at a feverish pace, combined with low inventory, home values continue to climb, having risen far beyond 12 months straight - but 88 months in a row, based on the most recent statistics available from the National Association of Realtors. In some metropolitan areas, median existing-home prices are above $500,000, prompting many people to apply for jumbo loans, which are non-conforming mortgages that exceed the limits set by Freddie Mac and Fannie Mae (i.e. $484,350). Although jumbo loans tend to have stricter approval requirements than conventional loans or USDA-RA loans - such as a higher down payment - they can be worthwhile because jumbo loans offer flexibility, with monthly adjustable-rate mortgage payments or fixed-rate mortgage payments.

Woman raising her hands in questionWith these two realities as a backdrop, it raises a key question: Are jumbo loans so flexible as to allow for refinancing? In other words, can you refinance a jumbo loan to take advantage of today's more affordable interest levels, which have dipped rather appreciably since 2018?

The short answer: Yes. But before we get into the finer details, it's helpful to get an understanding of just what refinancing means and why so many people are taking advantage of it.

Why should you refinance?

At its core, refinancing allows you to reduce what you spend in monthly payments. Generally speaking, when people apply for mortgages, it's typically for purchasing purposes, as detailed weekly by the Mortgage Bankers Association. But in recent months, applications are increasingly for refinancing motivations. Indeed, for the week ending July 26, more than half of all applications were filed to take advantage of refinance rates.

Even an incremental difference in lower interest can result in tens of thousands of dollars saved over the life of a loan, hence the reason why more mortgages are taken out for better loan terms and refinancing for a lower loan amount.

All that being said, since the underwriting standards for jumbo loans are more stringent than conventional loans, you may wonder whether the same standard applies to refinance a jumbo. Well, let's take a look:

Scale with a score of 710 highlightedCredit score

Your credit report has a lot of information on it, but the data most relevant to refinancing approval is your FICO® score. The higher it is, the better you are about paying your bills on time. Generally speaking, your score should ideally be above 700, but it's possible to still qualify with a lower score. Just be mindful of the fact that the degree to which your rate is lowered may in part depend on the score spectrum.

Debt-to-income ratio

Your debt-to-income ratio, which is represented as a percentage, shows how much of your monthly income is devoted to ongoing payments. It's determined by adding up what you spend on things like your car loan, credit cards and other installment loans and dividing the sum by what you earn in monthly salary before taxes. For example, if your DTI is 33%, that means one-third of your earnings per month goes toward debt. To get a Qualified Mortgage, the highest ratio allowable is 43%, according to the Consumer Financial Protection Bureau. The same rule holds for refinancing a jumbo loan - the maximum is 43%.

Loan-to-value ratio

Here's another data point that is based on a percentage, only this one tells you how much you're borrowing versus the asset or loan you seek to obtain. Like the DTI, it involves addition and division, but instead of how much you earn, it's based on how much you borrow compared to spend. An LTV of 70%, for example, means that 70% of what you're borrowing is the equivalent worth of the house. The lower the LTV, the less risk involved for your lender because you have more skin in the game, which is usually in the form of a down payment. Generally speaking, refinancing a jumbo loan requires an LTV of no higher than 80%.

Similar to approval for a jumbo loan, refinancing one typically entails a down payment of 20% or more, but in the form of equity you have in the property.

Loan default

Another issue your lender will want to look into is whether you've defaulted on any loans or credit card payments. They'll want to ensure that you haven't experienced bankruptcy within the previous seven years, but again, the specific number of years may be different and taken into consideration in concert with other variables.

Traceable cash flow

Similar to approval for a purchase loan, a refinance loan entails a paper trail. Expect to be asked for at least two years' worth of tax returns, W-2 forms, bank statements from the previous month and pay stubs, usually from the two most recent periods.

A nice living roomShould you refinance?

Refinancing, much like actually applying for a house, is a highly personalized process that is loaded with different factors that ultimately dictate whether you'll be approved. However, just because you can refinance a jumbo loan doesn't necessarily mean that you should. Interest rates may be such that making the move is not in your financial interest. Further, you may have already paid off enough of the principal that refinancing at this point doesn't make sense.

If you still have questions about approval and the documents to gather, talk to your lender. They'll go through it all so you're clear on how - or whether - to proceed.
 


Understanding Mortgages

Jumbo vs Conventional loans

Jumbo vs Conventional Loans: Which Should You Choose?

Throughout your homeownership journey, you'll need to make lots of decisions - none bigger than the property you ultimately wind up selecting, of course. But another major choice is the loan you take out.

Much like houses themselves, there are lots of loan products to pick from. Two of the more common options are conventional loans and jumbo loans. While they have a number of similarities, there are even more differences between them. And while you have probably heard of each, you may not know exactly how they work or what they are. And in the debate over jumbo vs conventional loan products, you may also be wondering which one is right for you.

This explainer should help you find the answer:

Should I use a jumbo loan or conventional loan?

Before you can decide which one is the better fit for you, it pays to know what they're all about. For starters, as the name implies, conventional loans are the most popular mortgage product of them all, largely because they offer the greatest variety of options to borrowers. This includes selecting the length of time you choose to pay off the loan - 30 years being the most common - the down payment amount, and the interest type. A fixed-rate loan means the interest rate stays the same for the life of the loan while an adjustable-rate changes over time, influenced by market dynamics and the terms of the mortgage provider. Interest rates on ARMs may be slightly higher or lower than market value, which makes them ideal for those who are comfortable with variability.

Conventional loans are also conforming loans, yet another term you've probably heard mentioned before. It essentially means that they conform to - or abide by - the terms and conditions established by Fannie Mae and Freddie Mac, which are government-sponsored entities that ultimately buy loans, and then package and sell them as mortgage-backed securities to investors.

That's a thumbnail sketch of what conventional loans are, but they have a number of advantages addressed further a bit later. 

As for jumbo loans, as the term "jumbo" suggests, they're for houses that typically sell for significantly more than the national median. Similar to conventional loans, jumbo loans come with options, as borrowers get to decide the term length - usually in five-year increments - and whether they'll pay interest on a fixed- or adjustable-rate basis. However, unlike conventional loans, these are non-conforming, meaning they don't abide by Fannie and Freddie guidelines and therefore are not backed by the GSEs.

One of those guidelines established by GSEs is how much money would-be buyers can borrow to pay for a home purchase, which is also known as the conforming limit. The maximum can vary depending on the state and county you live in, but generally speaking, the maximum is $484,350. In other words, if you're looking to buy a residence, but the selling price is $500,000 or more, a conventional loan wouldn't be your best option.

That's where a jumbo loan may be a better alternative because it allows you to borrow money above the limits established by Fannie and Freddie. Of course, there's a little bit more to it than price point when choosing between jumbo vs conventional loan products, and these aspects can also help you decide which is the better option.

What are the advantages of jumbo vs conventional loan options?

As noted by The Mortgage Reports, perhaps the biggest upside of conventional loans is that they're among the least restrictive in terms of qualification standards. The down payment is a classic example. Many people rightly assume 20% is a common amount put forward as a lump sum down payment. But that can be a difficult ask for first-time buyers who may be just graduating from college or are raising a family. Fortunately, the down payment can be for much less than this, as low as 3% in some cases.

Requirements for credit scores - which help lenders assess your ability to pay off bills - also tend to be looser. The minimum for conventional loans is a FICO® score of around 620, which is below the overall applicant average of roughly 720, according to estimates compiled by The Mortgage Reports.

Jumbo loans also have their highlights. None is more prominent than the high loan amount you may be eligible to borrow, above $1 million depending on your qualifications, which is determined in the application process. However, because these products involve more money - thus more risk for the lender - the approval standards aren't as lenient compared to conventional loans. For example, while jumbo loans allow you to select how much you want to
spend as a down payment, the minimum is usually 20%, which means you may not need to purchase private mortgage insurance as a result. Your FICO® score will also need to be slightly higher than with a conventional loan.

 

The same goes for your debt to income ratio, or DTI. This calculation is something lenders use to determine how much of your earnings go toward regularly occurring expenses, and is calculated by adding up your monthly debt payments and dividing that sum by how much you make over the same period before taxes are applied. The ideal is a low debt to income ratio - 43% or less, according to the Consumer Financial Protection Bureau. A DTI of 43% is usually the maximum to still be considered eligible for a jumbo loan.

Is a jumbo loan better than a conventional loan?

There's a common saying in the housing industry: All real estate is local.

In other words, what's considered the norm or the rule all depends on where you are, both in geographic location and financial circumstances. With this in mind, there's no such thing a jumbo vs conventional loan being better than the other. If you're in a comfortable situation financially and live in a city where the cost of living is high, a jumbo loan may be ideal. However, if you're just starting out, a conventional loan may be up your alley.

By talking it out with your mortgage loan officer, you'll discover together which mortgage is the best fit for you.


Understanding Mortgages

Rendering of a home with trees around it

Buying a second home: A brief primer on a long-term investment

If you are considering purchasing a second home, you may be wondering how the process works and if it's something you can actually pursue, based on your finances, credit score, existing mortgage rates and other factors that help determine your eligibility. Regardless of the purpose for which you seek to purchase a second home, you may be wondering how the process works.

 

By the end of this article, you should have a better idea on whether buying a second home is a worthwhile consideration for you and your family.

 

Before getting into the specifics, it's helpful to get a better lay of the second-home land, in terms of how many are in the nation's inventory and where they actually exist. According to data released by the National Association of Home Builders in December 2018, second homes in the U.S. total 7.4 million. That figure, of course, can change even on a monthly basis, depending on the level of construction activity going on at any given time, but it at the very least gives you a ballpark estimate as to their numbers.

Perhaps unsurprisingly, a large share of vacation properties are located in Florida. Indeed, the Sunshine State is home to 1.1 million second homes, which amounts to 15% of the nation's overall total. An additional 35% are found in California, New York, Michigan, Arizona, Pennsylvania, Texas and North Carolina. And from a county perspective, Maricopa - located in the Grand Canyon State of Arizona - is home to over 113,500 second homes, more than any other single county, with Florida's Palm Beach and Broward Counties rounding out the top three.

How do you qualify to buy a second home?

Now that you know the hard data, you may be curious about qualification and if it's fundamentally different from the steps involved with buying a primary home. The truth is no two home loan processes are identical. Every buyer has unique circumstances, which is why lenders prefer to have as much financial data on a borrower as possible so they can get a clear picture.

That said, there are a few rules of thumb to better determine your eligibility. For the most part, lenders view mortgages on second homes as not necessarily risky but still higher-risk loans. That's because, as the name implies, these mortgages are often taken out in addition to ones that are already in effect. As a result, qualification standards tend to be more stringent. Your credit score is a classic example. A higher FICO® score suggests borrowers are keeping up with their payments, which may enable them to obtain a lower interest rate.

Your debt-to-income ratio is something else your lender will want to check. This measure assesses how much of your gross monthly earnings go toward paying ongoing expenses. It's pretty easy to figure out if you don't already know it. All you do is take the sum of how much you spend on monthly debt and divide it by how much you make in earnings over the same period before taxes. The lower the resulting percentage, the better. Generally speaking, lenders prefer to see a DTI of 41% or less, but even here, you may have some wiggle room, depending on the size of the loan you're requesting and some of your other financial particulars.

Is a down payment mandatory for a second home?

Most loan programs require that a certain percentage of the house's list price be paid up front. There are some exceptions to this, such as if you're a first-time homebuyer and serve in the military, as VA loans typically do not necessitate a down payment. When buying a second home, though, down payments are mandatory. Generally speaking, expect the down payment to be at least 10% of the purchase price, although some lenders may require it to be larger, the most common being 20%. The amount may depend, in part, on your credit score; the higher it is, the lower the down payment requirement.

 

For many people, buying real estate is the biggest financial decision they'll make in their lifetime. So it's especially important to go into the second-home purchase process with your eyes wide open.

 

What else do I need to know about buying a second home?

If you’re considering renting out your vacation home to tenants, there are income tax implications. It’s important to consult with a tax or financial advisor beforehand so you know what to expect.

It's a lot to think about, but we're here for you. Whether looking at a second home as a vacation property or a second residence for the sake of work, or another reason entirely, it's a good idea to start a conversation with your favorite mortgage loan officer.

Second homes and investment properties
with Residential Mortgage Services

 


Understanding Mortgages

Women using a tablet in a park

How to get an FHA mortgage: A guide for homebuyers

Whether in the city, suburbs or perhaps someplace more rural, owning a home is something virtually everyone sees themselves doing at some point. But when you have a family to support, are on your own for the first time or simply don't have enough saved to use toward a down payment, circumstances of the moment can make homeownership seem like a pipe dream.

An FHA mortgage can help bridge the gap so you can live out your aspirations. Backed by the Federal Housing Administration, FHA loans are available through most mortgage providers and are ideal for individuals who have steady income, but may lack certain other financials that are asked for when filling out a loan application. For example, if your credit score is less than perfect or you can't afford a 20 percent down payment toward a property's purchase price, a loan from an FHA lender can make a lot of sense.

That said, there are a few key aspects that must be fleshed out in order to qualify for an FHA loan. Here, we'll address these elements, as well as a few other important considerations so you can qualify for an FHA on the first try.

How does an FHA mortgage compare to a conventional mortgage?

FHA loans are a lot like conventional loans, in that you can buy them with fixed-rate or adjustable-rate interest - typically in 15-year and 30-year increments - and require an initial down payment, among other similarities. However, the approval process isn't as stringent for an FHA mortgage versus a traditional loan product. For example, instead of a 20 percent down payment, you can put as little as 3 percent down, which is slightly less than what the average is these days (5 percent), according to the National Association of Realtors.

What you spend in interest is largely determined by your credit history, meaning how reliable you are at making your payment on time. Here as well, FHA loans have looser credit restrictions than conventional mortgages. Generally speaking, FHA loans require a minimum credit score to be close to 600.

However, should your down payment be larger - say 10 percent or 15 percent - you may be approved with a FICO® score that's a bit lower. It's worth noting that any down payment that's less than 20 percent requires the purchase of mortgage insurance, which we'll discuss a bit further later on.

Another key distinction FHA loans have versus conventional loans are interest rates. FHA rates are typically lower than conforming loans. But again, your creditworthiness - among other financial characteristics - will factor in to how much you can expect to spend in interest, which is also influenced by market dynamics that are almost constantly in flux.

Calculator with images indicating home, groceries, car and vacation

What should my debt-to-income ratio be?

You've probably heard about debt-to-income ratio, but if you're new to homeownership, you may not be exactly sure what it means. It's pretty straightforward: It basically is an assessment of how much of your gross income goes toward monthly payment expenses. You can calculate this through the use of mortgage calculators, but you can also do it on your own by simply dividing the totality of your monthly debt payments (i.e. installment and revolving, not including household utilities) by what you earn in the typical month, before taxes are taken out. Multiplying the answer by 100 will give you a percentage, which is your DTI.

In order to be approved for an FHA loan, the DTI should be no higher than 43 percent, which is an indication that less than half of your monthly earnings are put toward existing expenses. The lower your DTI, the more likely it is you'll be approved, with the ideal ratio being between 28 percent and 36 percent. However, it's important to emphasize that no single factor will be the deciding one as to whether you'll be given the green light. Lenders take into account the totality of your financial and employment situation.

What's the deal about mortgage insurance?

Although there are exceptions, such as with VA loans, mortgage insurance is typically required on any loan where the down payment is less than 20 percent of the purchase price. This rule applies to FHA loans, regardless of how much money you use toward the upfront cost. Mortgage insurance is included in your monthly mortgage payment. FHA requires mortgage insurance for the life of the loan unless you are able to refinance due to an increase in equity.

What else should I know about FHA loans?

Perhaps the best aspect of loans backed by the FHA is they offer a tremendous amount of flexibility. For example, say that you're able to put 3 to 5 percent toward the down payment of a home, but you'd like to put more money toward the cost so you can pay off your mortgage more quickly. If you've received gift money from a parent or, close friend or relative, you can use these funds so you can pay off a bigger chunk. These gift funds can be used in conjunction with what you spend or can cover the cost in its entirety.

Lastly, you may be wondering the maximum loan amount you can be approved for with an FHA mortgage. The amounts have changed from year to year, and in 2019, the ceiling rose to $726,525, HousingWire reported. That's up from $679,650 in 2018. With the median value for a property among all housing types nearing $250,000, according to the most recent estimates from the NAR, the new maximum loan amount is certainly sufficient to cover the cost of the majority of houses up for sale.

Homeownership is the American dream. The flexibility and payment options available with an FHA loan can help turn those dreams into reality. With the home buying season rapidly approaching, getting in touch with your favorite loan officer to learn more, and let the search begin!


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