The Advantages of Using a Mortgage Broker over a Bank

The following is a guest post. Enjoy! 

Dana at Tundra Mortgage Brokers recently shared her opinion on the benefit of hiring a mortgage broker to help with a home loan, instead of going directly to a bank. Whether you’re a first time buyer, a property developer, or an investor; could you really benefit by turning to a broker when it comes to borrowing money?

In this post, we’ll be diving into the advantages of using a mortgage broker instead of applying to a bank directly – and just how much you could save by doing so.

The Potential to Compare Interest Rates

Have you ever actually sat down and tried to compile a list of the different rates offered by banks? Not only do most of those in Australia (and other parts of the world) propose varying rates depending on the type of loans available; there are also fixed and variable ones to consider, too. As you might imagine this process can be quite time consuming and this is actually something that mortgage brokers typically specialize in.

Most will offer effective interest rate comparison services to those in need – and if you hire a great one, you could be looking at a selection of options in the space of a couple of days (or less!)

Recognizing a Great Deal

What’s the one thing that most borrowers will want to make sure they do when applying for a loan? Keep their costs as low as possible, of course. There aren’t many mortgages that won’t go on for at least a decade (or three) and so finding a great deal can make a lot of difference to your future finances.

A good mortgage broker should be able to compare the varying terms and conditions proposed with specific loan packages and hone in on the best available on behalf of a client.

Taking the Stress Out of Applying

Another frequently overlooked advantage of hiring a broker is the fact that they can actually take care of the technicalities, to minimize the stress that you feel when applying for a home loan. As they’ll be the middle-person when dealing with a bank you will often be able to submit your documentation to them directly, so that it can be forwarded to your chosen bank.

This can make it easy for you to minimize the formal activities associated with applying for a mortgage and allow you to focus on what really matters; getting approval.

You might need to cover a small cost when hiring a brokering agency up front, although some are happy to offer their services free of charge to you for commission from a bank, but just imagine the long term financial savings that you could enjoy. For a relatively small fee at first, you could save yourself thousands of dollars by ensuring that you sign up to a cheaper deal than you would have when applying to a bank directly.

Secure Your Future Retirement By Avoiding These Missteps in Your 40s

The following post is by MPFJ staff writer, Melissa Batai.  Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food.  She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.

When you’re in your 40s, you may begin to feel a great deal of financial pressure.  Your children are growing up, and the expenses associated with that begin to pile up.  You may find yourself shelling out money for more expensive extracurricular activities, higher grocery bills thanks to your children’s endless appetites, car payments so your children can begin driving themselves, car insurance payments, and college tuition.

As if that is not enough to put a strain on your budget, this may also be the time when your aging parents need more support, both financially and physically.  You may be helping them out monetarily or helping them out physically, which may mean less time at work for you as well as less income.

This decade, more than any other, is the one where your choices can make or break your future retirement.  This is partly because if you make a mistake financially in your 40s, there is not much time to recover financially, unlike mistakes you may make in your 20s when you have four or five decades to recover before retirement.

In your 40s, be careful to avoid these financial mistakes:

 

Refinancing Your Home and Extending the Life of Your Mortgage

Refinancing your home for a significantly lower interest rate is a smart money move.  However, too often, people refinance to lower their interest rate, but then they also extend the life of the mortgage.  True, this can reduce your monthly payment, which may offer you financial relief now, but it can later wreak havoc with your finances and your target retirement date.

Let’s say you bought a house when you were 35, and you pay on the loan for 10 years.  You are now 45 and have just 20 years left on your loan; you would own the home free and clear at age 65.  This works out rather nicely as 65 is a time when many people retire.  However, if you refinance at 45 and extend the loan back to the original 30 year term to lower your payment and create some financial breathing room in your budget, your home won’t be paid off until your 75.  This can cause quite a strain in retirement.

Many people do not have enough money set aside in their retirement account to comfortably cover a house payment, especially as medical expenses typically increase as you age.

You may say that you won’t retire until the home is paid off, but you can’t always control that.  Sometimes medical issues make retirement come earlier than planned.

 

Taking Out a Home Equity Loan

When you feel a financial crunch, your first thought may be to tap the equity in your house by taking out a home equity loan.  After all, the interest rates are usually much lower than a loan you can take out at your bank or a credit card.  You can also extend repayment time, often to 10 or even 15 years, which is typically not available on a loan that you get from the bank.

However, if you’re unable to make your home equity loan payments, you can lose your house just as you could if you weren’t able to make your mortgage payment.  In addition, if your home loses value during the time you’re repaying your home equity loan, you may find yourself underwater, meaning you owe more on the house than the house is worth.  If you need to sell during this time, you would need to pay the difference between the current value of the house and what you still owe between the mortgage and the home equity loan, which is often tens of thousands of dollars.  Too often, people who are underwater are unable to even put their home on the market because they know they won’t be able to generate the money needed to pay off the house loan when they sell their house.

 

Taking Out a Student Loan for Your Child

When your child is ready to attend college, you may feel a natural instinct to help him.  College is expensive, and you may not want your child saddled with student loan debt.  However, there are plenty of alternatives to taking out student loans for your child.

First, let your children know, from the time they are in upper elementary school, that you will not be able to help pay for their college education.  (Does this sound too harsh?  Trust me, your children will be glad when you’re retirement age and have enough money to take care of yourself because you made saving for your own retirement a priority.  Your children will be glad that you are not their financial responsibility, especially when they’re just starting out.)

By letting your children know this early, they can pick local colleges that will be cheaper, they can apply for scholarships and grants, and they can save money themselves for college.

Yes, if you don’t take out loans for your children, they will probably have to take out student loans themselves.  Remember, they are the ones who may qualify for loan forgiveness based on their career.  That will never be an option when a parent holds student loans.  Also, children with student loans can choose an income-contingent based repayment plan; parents can’t.

The government takes very seriously defaulting on student loans and will recoup their money if you stop paying.  “Federal payments to borrowers who have not made scheduled loan repayments can be withheld to repay the loan, including tax refunds and Social Security retirement or disability benefits” (US News).

Finally, if you don’t take out student loans for your children and you’re doing well financially and saving enough for retirement, you can always choose to help your children pay down their student loans faster.

Simply put—don’t take out student loans for your children.  Just don’t do it.  You and your child will be glad you didn’t twenty years from now.

 

Raiding Your Retirement Account

Once you start to amass a fair amount in your retirement account, you may be tempted to tap into that account when you hit a financial bind, which is likely in your forties.  However, there are significant drawbacks to raiding your retirement fund.

First, you lose the ability for the money you withdraw to continue generating interest and growing your nest egg further.

Second, you’ll need to pay a 10% penalty for withdrawing the money if you’re under the allowable age.

Third, the money that you withdraw will count as taxable income on your tax returns, so you’ll also need to pay taxes in addition to the 10% penalty.

Your 40s can be the time when you secure your retirement funding and can begin to plan for a relaxing, enjoyable retirement.  However, as you face dual financial stress in your 40s from increased financial needs from your growing children and your aging parents, you may feel pressure to find more money to infuse in the budget.  This pressure can lead to any of the above unwise financial decisions that can derail your retirement plans and lead you to a difficult financial position in your 60s and 70s.

How about you all? What financial moves do you suggest people in their 40s avoid to keep their future retirement secure?

Finding the Perfect Mortgage the First Time 

The following is a guest post. Enjoy! 

Every year, millions of first-time homebuyers set out on a search for the perfect piece of property. They scour advertisements; they search through real estate apps; they go on countless tours and stop by untold open houses. Then, when they finally find the home of their dreams, they are utterly unprepared to make an offer.

Buying a home is more than comparing cabinet styles and deciding whether a pool is worthwhile. You must understand your mortgage options before you even consider whether you need or want granite countertops. This guide will help you determine what features you need from your home loan, so you can find and afford your dream home in no time.

Fixed vs. Adjustable

Mortgages last a long time ― typically between 15 and 30 years. Since that is such a significant amount of time for a loan, most lenders offer two options to help you manage your interest rate: fixed or adjustable. Which option you choose depends on your current income, your credit score, and a few other factors.

Fixed Rate

Fixed-rate mortgages are the most common. With these, you can expect the same interest rate for the entire duration of the mortgage loan. The primary benefit of having a fixed rate is knowing exactly what your mortgage payment will be each and every month; your home payment will never be a financial surprise. However, fixed-rate mortgages tend to have a higher interest rate ― at least initially.

Adjustable Rate

Adjustable-rate mortgages are less common but more accessible if you have poor credit. The opposite of fixed rates, adjustable rates will change over time. Most often, adjustable-rate mortgages (ARMs) are actually a hybrid product, as lenders will promise a brief fixed period before adjusting your rate.

Some buyers find ARMs preferable because they seem to have lower interest rates. However, over time, those interest rates will rise, and you likely won’t be able to predict when or how much. Therefore, you can expect financial irregularity for the duration of your loan.

Jumbo vs. Conforming

The cost of your home will also determine the type of mortgage you can obtain. Though you might not realize it, most home loans have a size cap, and not all lenders offer conforming loans, which are the standard size, and jumbo loans, which are substantially larger.

Conforming loans earn their name because they conform to the guidelines of the appropriate government-sponsored enterprise (GSE), Fanny Mae and Freddy Mac.

In 2013, these enterprises determined that the size of home loans should be limited to $417,000 for a single-family home in the United States. The GSE can do this because it purchases and sells mortgage-backed securities, which form the foundation of the housing market. In 2007, the unreliability of these securities incited the Great Recession, so adhering to the size cap for home loans should keep the economy more stable.

Conversely, jumbo loans are available from some lenders for those looking to purchase a home worth more than $417,000. However, such sizeable loans represent a marked increase in a lender’s risk, which means you must have impeccable credit, high income, and a large down payment to qualify. As long as you are prepared for the financial responsibilities of a more expensive home, a jumbo loan is an excellent mortgage option.

Conventional vs. Government-Insured

Finally, not all potential homebuyers have the credit history or liquid assets to purchase a home. Fortunately, the government offers unconventional, government-insured loan programs to help less-advantaged citizens buy property.

The benefit of having a government-insured home loan is that the government promises to pay your mortgage if you default, so lenders see the loan as no-risk. There are three main types of government-insured mortgages:

VA Loans

Typically available only to veterans or their partners, VA loans require no down payment, offer competitively low interest rates, and do not require mortgage insurance. These loans do conform to GSE guidelines, but they are incredibly easy to qualify if you or your spouse served in the Armed Forces.

FHA Loans

The Federal Housing Administration (FHA) also offers a mortgage program to low-income, low-credit homebuyers. Unlike VA loans, FHA loans require a down payment ― though it can be as low as 3.5 percent ― and mortgage insurance. However, interest rates are low.

USDA Loans

If you are willing to move to a rural community, the United States Department of Agriculture will help you secure a mortgage. Your qualification for this program depends on your income; it can be no more than 115 percent of the regional average. However, by participating, you earn exceedingly low interest rates and the opportunity to bypass a down payment, as long as you pay mortgage insurance.

How to Painlessly Switch Mortgages When You Need a New Home

The following is a guest post by George. George writes at Sobredinero.com, a personal finance site for Latinos in the US. Enjoy!

Let me tell you about a man named David. The first thing that attracted David to his condo when he first bought it was how close he was to his job. On top of that, it was near a trendy area packed with nightclubs, bars, and fancy restaurants. It was perfect for David when he was single with no kids. However, David started a family and his housing needs changed.

With a wife, one child, and another child on the way, waiting 10 years to build equity and then liquidate that equity in his condo was not an option for David. He was ready to trade in his two-bedroom downtown condo for a three-bedroom home in the suburbs.

 

Analyze the Options

David knew which house he wanted, but like most people, he could not afford to pay for two mortgages at the same time and even though he was fairly certain that his condo would sell quickly for the asking price, he did not want to risk his family’s financial security.  He thought about moving to the new house and renting out his condo to cover the mortgage while he had the condo on the market. However, after speaking with the condo board president and reading the homeowner’s association paperwork, David discovered that renting out his home would require a lengthy and rigorous vetting process with the board.  He did not have the time or money to do that.

David also considered borrowing against his 401k for the second mortgage, but if he were to leave his job before paying back the loan, he would be obligated to pay the outstanding balance of the loan within 60 days or be hammered with taxes and penalties. He learned fact by reading through the 401k materials he’d received at orientation three years earlier and he also learned that those terms were common for 401k plans. That was a dicey and expensive option.

After thoroughly weighing all of the possibilities, David decided to put his condo up for sale and simultaneously file for a second mortgage. This sounds risky on the surface, but David knew that the bank would only grant the second mortgage after the condo sold. This practice protects the interests of both the lender and the borrower.

 

Factor in the Real Cost

Once David decided on the list and file simultaneously route, he put in some research on mortgage terms. Taking on a mortgage is not just about paying back the amount of the loan itself. Smart borrowers also consider the interest rate, total annual cost, monthly payment terms, and the total payment. Additionally, ancillary costs such as bank fees, housing association requirements, taxes, and transportation need to be factored into the real cost of a new home purchase. David used a mortgage calculator to help him understand the true costs of his mortgage options.

 

Time It

David had everything in place and the only thing left to do was to sign the paperwork. To cancel a mortgage and acquire a new one requires the bank as well as a notary public, so David made sure to schedule the two transactions in one meeting and ensure a smooth process.

This didn’t always used to be the case. Historically, purchasing and selling a home at the same time was a long process. Say for example if David had purchased that condo recently to “flip” (buy for a low price and quickly re-sell at a higher price with inexpensive upgrades), he might not have been able to sell the condo because of restrictions that prevented a home sale if the home been had purchased within 90 days. However, the Federal Housing Administration has eliminated this restriction.

 

Get the Happy Ending

At the end of everything, David and his family turned out just fine. The condo sold, the mortgage terms for the new home were agreeable, and everyone settled into a more comfortable arrangement. Gone are the days of being tied to a house simply because you signed a mortgage. Granted, it’s not as easy to move when owning a piece of property as it is for renters, but it is certainly possible in today’s modern housing market, and the last thing you want to do is be unhappy with your home. Happy house hunting! Be sure to check out more advice about mortgages here, or here.

How to Qualify For a Mortgage When You’re Self-Employed

mortage-self-employed-my-personal-finance-journeyThe following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If you’re self-employed and have applied for a mortgage, you probably have a sense that you were put through a meat grinder. And if you’re self-employed and have merely heard how difficult it is to apply for a mortgage when you’re self-employed, I’m here to tell you that it’s all true.

I spent more than 15 years in the mortgage industry as both an underwriter and a loan originator, and I saw this unfortunate bias against the self-employed again and again. People who are paid by W-2 can often squeak into a mortgage with a shoehorn, but the self-employed must always be prepared to run faster and jump higher.

And even then there may be no guarantees.

The Bias Against the Self-Employed in the Mortgage Industry

I think most of us understand that the job market has become far less reliable since the financial meltdown, and probably going all the way back to the dot-com bust. But in the mortgage universe that doesn’t matter – lenders continue to view salaried employees as if they have a guaranteed income for life.

The reverse is true when it comes to the self-employed. The mortgage industry views the self-employed as if they’re one step away from destitution.

In a way, this view is not entirely without merit. Something like 80% of businesses fail within the first 18 months of operation; if you’re a lender, this is not a statistic that is easily ignored.

Businesses fail for all kinds of reasons, many of which are impossible to know upfront. This is the reason a mortgage lender will generally look for the self-employed person to be in business for at least two years. By contrast, a salaried worker coming out of college can often qualify for a mortgage simply with a promise of employment letter.

If you’re going to apply for a mortgage as a self-employed person, the first step is to recognize that it will be an uphill fight. The second will be to prepare yourself in advance. It’s not impossible to get a mortgage when you’re self-employed – just more difficult. That’s what you have to be ready for.

What the Mortgage Lender Will Be Looking For

The documentation requirements for self-employed borrowers are extensive. The laundry list reads something like this:

  • Evidence that your business has been in existence for a minimum of two years – this may require a copy of a business license, a letter from a CPA, or a letter from a licensing bureau.
  • Income tax returns for the past two years – this includes both personal and business returns, and all schedules.
  • The lender will also verify your income information with the IRS.
  • If any income will be needed from the current year, for which an income tax return obviously has not been filed, you’ll need financial statements provided by a CPA. Under certain circumstances, they may need to be audited statements, which can cost thousands of dollars.
  • Your income will be averaged for the past two years. If your net income (not gross) was $100,000 in 2014, and $50,000 in 2013, your income for mortgage purposes will be $75,000 ($100,000 + $50,000 = $150,000, divided by two years).
  • If your income for the most recent year was lower than it was for the previous year, your income will be based off of the current year, and not averaged.
  • If your income for the most current year is significantly below what it was the previous year, your income may be considered unstable, and the loan application denied.

To put that in perspective, a salaried borrower only needs a copy of a recent pay stub, the previous year’s W-2, a verbal verification from their employer that they are still employed there and likely to be so in the future. The lender will also use current income for qualification purposes (no averaging), even if it has increased substantially from the previous year.

Your Response to Their Demands

If you want a mortgage, your only choice will be to comply with the lender’s requirements. Even if you don’t agree, you will not be able argue around any of those requirements. Since nearly all mortgages are sold to the same agencies (FNMA and FHLMC) or require mortgage insurance from either the FHA or the VA, the guidelines will be the same in all cases.

If you have not been in business for at least two years, you’ll need to be patient and wait until at least that much time has passed. You will also need to make sure that your business shows a pattern of increased earnings from year to year. This is not always entirely within your control, since business cycles can affect your bottom line.

But there is one thing that you can do, and that’s not be overly aggressive with deductions on your income tax return.

All self-employed people have a built-in disadvantage when it comes to applying for a loan of any sort. One of your primary objectives is income tax minimization. You will accomplish that by taking every deduction that the IRS allows. But that strategy works in reverse when you are applying for a mortgage.

The conflict is that filing income taxes focuses on income minimization, while applying for a loan requires income maximization. If you know that you will be applying for a mortgage in the near future, you will do well to go light on your income tax deductions.

Developing Strengths of Offset Your Weaknesses – a.k.a., “Compensating Factors”

A salaried person can often get a mortgage with a minimum down payment, less-than-perfect credit, and even a little bit too much debt. But if you’re self-employed, don’t count on getting similar treatment. Your financial profile will have to present a picture of a stronger borrower.

There is a term in the mortgage industry called compensating factors and while it applies to all borrowers, it’s generally most important to the self-employed. Compensating factors are indirect lending criteria that can make a borrower look stronger, even if that criteria is not strictly required.

Here are some examples of compensating factors that can help you if you are self-employed:

  • Making more than the minimum down payment – if this is 5%, making a 20% down payment will make you a stronger borrower.
  • Strong credit profile – most lending programs require a minimum credit score of at least 620; yours should be well in excess of 700.
  • Cash reserves – this is the amount of cash that you will have available after closing. The typical requirement is liquid savings (not retirement money) sufficient to cover at least two months of the payment on the new home. You should have six months or more.
  • More than the minimum self-employment history – it’s generally at least two years, but you should figure to be in business for at least three years.
  • Not buy more house than you can afford – many borrowers buy a house that’s up to the maximum amount they qualify for. This is usually based on a debt-to-income ratio (DTI) of not more than 36%, and sometimes it can go higher. Make sure that the home you want to buy is keeps your DTI well below 36% .
  • The increase in your house payment should be reasonable – lenders generally consider an increase in your house payment of up to 15% or 20% to be reasonable. A doubling of your house payment could make your loan too risky, and result in a decline.

If you can keep all those factors in mind, and develop a financial profile that largely matches them, your loan will be considered lower risk even though you’re self-employed. No, it’s not fair, but it’s how the mortgage world works. If you are aware of the obstacles – and have a strategy to overcome them – then you’ll get the loan you want.

How about you all? Have you ever applied for a mortgage when you are/were self-employed? What kind of roadblocks did you run into?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/nikcname/4893848354/sizes/q/