Tag: Loan

Taxes and homeowners Perspectives

How The Tax Bill Affects Homebuyers

For years, the US tax code has encouraged Americans, especially first-time homebuyers, to get “a piece of the American dream” by becoming homeowners. Since the 1940s, America has seen the positive effects of building credit and building equity through homeownership.

America is one of the few countries in the world to offer potential homeowners a fixed-rate 30-year mortgage product. Homeowners have benefited for decades from tax incentives that allow us to deduct mortgage interest from our tax bill, and from home equity lines of credit that can help pay for a child’s college tuition.

Get ready for some changes in 2018.

This week, both the US House of Representatives & US Senate passed the most sweeping changes to the US tax code since 1986. The new tax bill cuts the corporate tax rate, revises the existing tax bracket structure at every income level, and includes several significant changes to deductions that historically offered incentives to first-time homeowners.

The bill is ready to be sent to President Donald Trump, and could be signed into law before Christmas, so we at STEM Lending wanted to tell you about several specific changes that are likely to affect your search in 2018:

tax code us tax bill

How The New 2018 Tax Bill Could Affect You:

Mortgage Interest Deductions

Mortgage interest deductions were once thought to be untouchable as a strong incentive for first-time home buyers. The history of this incentive was originally a part of a 1913 tax provision which allowed business owners (ex. farmers) to deduct any interest they paid on business expenses. The mortgage-interest deduction now lets people who buy homes deduct part of the cost of their mortgage on their taxes. According to the Joint Committee on Taxation, MID saved Americans $77 billion last year!

What was finalized in the new tax bill, however, caps the limit on deductible mortgage debt at $750,000 for loans taken out after Dec. 14, 2017.  If you took out a mortgage loan before Dec. 14, you will still be able to deduct interest on mortgage debt up to $1 million. Mortgage interest on second homes can be deducted but is subject to the $750,000 limit.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Mortgage interest

You may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately) on your primary home and a second home.

For homes bought before Dec. 15, 2017, no change. But for homes bought Dec. 15, 2017, or later, you may deduct the interest you pay on mortgage debt up to $750,000($375,000 if married filing separately).

Property Taxes

Currently, taxpayer can fully deduct what they pay in state and local property, income, and sales taxes from their federal tax returns. The new tax law in 2018 caps these total deductions at $10,000. This new law may have a very real affect on your bottom line if you reside in a state with above-average local and state taxes like New Jersey, New York, Oregon, or California. *One caveat* the $10,000 cap can be any combination of property, income, and sales taxes. This compromise between House & Senate Republicans was very closely watched, and will surely be a rallying point in the coming months, when midterm elections are held.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Property taxes

You may deduct the property taxes you pay on real estate you own.

You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.

Capital Gains Exclusion

If you’re planning on selling your house in 2018, you know that capital gains taxes = the difference between the price you paid for the house and the price you ultimately sell it for. If you have not lived in the home you are selling for at least two years, your capital gain is treated as taxable income under the ‘ordinary income’ tax brackets (which also just changed). Home sellers can benefit by excluding up to $500,000 for joint filers or $250,000 for single filers for capital gains when selling a primary home as long as the homeowner has lived in the residence for 2of the last 5 years.

Current Tax Law Through December 31, 2017

New Tax Law in 2018

Capital gains

In order to qualify for this provision, it is mandatory that you have lived in the home as your primary residence for at least 2 of the last 5 years, before selling.

With all the 2018 tax changes set to take effect January 1, 2018, how will this affect your decision to buy a home? If you are looking at getting pre-approved, or already searching with a real estate agent, give us a call at 646-798-1800, or email us at support@stemlending.com so we can help find you the best mortgage loan. Visit STEM Lending to apply online, or learn more about the mortgage process.

We look forward to helping you find your dream home in 2018.

co-borrowers Perspectives

Should I Add a Co-Borrower to my Mortgage Application?

Getting approved for a mortgage loan is the first step toward the milestone of becoming a homeowner. It is also the beginning of a serious, long-term financial commitment. For many first-time homebuyers, getting approved on your individual finances or as a co-borrower is a difficult decision.

According to data analysis released by Zillow, 70% of prospective home-buyers frequently search for a home with their spouse or partner.

But when you are actually applying for the mortgage, should you & your spouse both apply as co-borrowers? Or, should you try qualifying for the mortgage on your own?

Education continues to be a distinguishing factor in the first-time homebuyer decision making process, so let’s start there.

Mortgage Definitions

Co-borrowing vs. Co-signing

It’s important to understand the differences between a Co-signer and a Co-borrower. Remember, if you have any additional questions, you can always call STEM Lending, and we will connect you with a mortgage specialist.

Co-Borrower: this is someone whose name is on loan documents along with yours. Both people are equally responsible to repay the loan in this situation. Taking both the primary and co-borrower’s income, assets and creditworthiness into consideration for the loan application may help qualify for a mortgage loan with better rates.

The co-borrower has what is called an “ownership interest” in the home or condominium you are looking to purchase. Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower’s income, assets, liabilities, and credit history are considered in determining creditworthiness.

Co-Signer: a Co-signer is a person whose assets, income and creditworthiness are taken into consideration to help qualify you for a mortgage. Co-signers are liable to repay the loan, but they have no ownership interest in the house.

Co-borrowers

Obviously, having someone with a substantial credit history (ex. a parent, grand-parent, uncle, aunt) co-sign on the home loan can help you get a mortgage with the best interest rates. The benefit for the co-signer (aside from helping you buy your house) is that the regular monthly payments made by the homeowner reflects well on his/her credit report.

Co-signers are liable for repaying the mortgage obligation and must sign all documents with the exception of the security instruments. The co-signers income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.

As you can see, the downside of co-signing a mortgage loan is the risk of default. If you (homeowner / occupier) cannot afford to make monthly payments, your co-signer is liable to repay the loan. This is an extremely important point for all parties to understand upfront.

Non-Occupant Co-Borrower

There is a third, but less known option — the “non-occupant co-borrower.”

A non-occupant co-borrower is a person who is co-borrowing on a home, but not living in it. Non-occupant co-borrowers are a step above co-signers — they’re “partners” in the home’s ownership. This person may be added to a mortgage loan to help you qualify for a mortgage. A non-occupying co-borrower is beneficial from an income or credit perspective.

Some lenders who allow non-occupant co-borrowers, such as Fannie Mae (HomeReady) and Freddie Mac and some conventional home lenders, require a non-occupant borrower to be a relative of the person who will be residing in the home. The non-occupant borrower must be related to you by blood, marriage or law to qualify as a co-borrower who will not reside in the home. FHA loan programs allow non-occupant co-borrowers for home buyers who have little or no income for income qualification so they can meet the necessary debt to income ratios.

As a non-occupant co-borrower, you get the same notices as the borrower so you know if they’re not paying on time; and, you put yourself in position to force a home sale if the primary borrower is not fulfilling their duties to your arrangement.

When you apply for your mortgage, just tell the lender that you’ll be using a non-occupant co-borrower on the loan. Your lender will know what to do.

Fact vs. Fiction

Many non-homeowners think that if they are married, applying for a mortgage as co-borrowers is a requirement: 

Applying for a mortgage as Co-Borrowers is NOT a requirement.

Another commonly held belief is that, by bringing a Co-borrower onto your loan application, you will always improve your chances of being approved.

However, it is crucial to understand that the federal agencies (Fannie Mae, Freddie Mac, Ginnie Mae) that oversee and buy loans from lenders will generally require lenders to use the lower scoring borrower’s credit score (specifically, the median score from  Experian, Equifax, or TransUnion credit reports) to underwrite the loan.

So, even if your co-borrower’s credit is well established and 780, if you have poor credit, it’s very possible that your co-borrower’s credit won’t help you in determining creditworthiness.

What’s the Right Move?

Ultimately, adding a co-borrower to your mortgage loan application will result in having your income history, assets, liabilities, and credit assessed for eligibility and creditworthiness. The interest rate you both are quoted and your overall eligibility will be influenced by each other’s personal financial history, so it’s always a good idea to strengthen your credit as much as possible before applying.

Since you will both have equal responsibility to repay the loan, if you choose to bring on a co-borrower or co-signer, make sure you understand the legal differences. Additionally, given that many co-borrowers are related or spouses, you should discuss what will transpire if things go south (e.g. divorce, sudden death, job transfer, etc…)

Again, for more information on your specific situation, shoot us an email at support@stemlending.com or visit www.stemlending.com for more details.

News

Home Loan Toolkit

Consumer Financial Protection Bureau has published a valuable guide, Your home loan toolkit: A step-by-step guide, to help homebuyers navigate the complexities of home buying process. We at STEM Lending are committed to help demystify the home buying process for first time mortgage seekers.

A few excerpts from the toolkit (Full Home Loan Toolkit referenced below) follow:

Choosing the best mortgage for you:

1. Define what affordable means to you

Only you can decide how much you are comfortable paying for your housing each month. In most cases, your lender can consider only if you are able to repay your mortgage, not whether you will be comfortable repaying your loan. Based on your whole financial picture, think about whether you want to take on the mortgage payment plus the other costs of homeownership such as appliances, repairs, and maintenance.

2. Understand your credit

Your credit, your credit scores, and how wisely you shop for a loan that best fits your needs have a significant impact on your mortgage interest rate and the fees you pay. To improve your credit and your chances of getting a better mortgage, get current on your payments and stay current. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. That’s why you may want to consider paying down some of your debts.

3. Pick the mortgage type—fixed or adjustable—that works for you

With a fixed-rate mortgage, your principal and interest payment stays the same for as long as you have your loan.

  • Consider a fixed-rate mortgage if you want a predictable payment.
  • You may be able to refinance later if interest rates fall or your credit or financial situation improves.

With an adjustable-rate mortgage (ARM), your payment often starts out lower than with a fixed-rate loan, but your rate and payment could increase quickly. It is important to understand the trade-offs if you decide on an ARM.

  • Your payment could increase a lot, often by hundreds of dollars a month.
  • Make sure you are confident you know what your maximum payment could be and that you can afford it.

Planning to sell your home within a short period of time? That’s one reason some people consider an ARM. But, you probably shouldn’t count on being able to sell or refinance. Your financial situation could change. Home values may go down or interest rates may go up.

4. Choose the right down payment for you

A down payment is the amount you pay toward the home yourself. You put a percentage of the home’s value down and borrow the rest through your mortgage loan.

5. Understand the trade-off between points and interest rate

Points are a percentage of a loan amount. For example, when a loan officer talks about one point on a $100,000 loan, the loan officer is talking about one percent of the loan, which equals $1,000. Lenders offer different interest rates on loans with different points. There are three main choices you can make about points. You can decide you don’t want to pay or receive points at all. This is called a zero point loan. You can pay points at closing to receive a lower interest rate. Or you can choose to have points paid to you (also called lender credits) and use them to cover some of your closing costs. The example below shows the trade-off between points as part of your closing costs and interest rates. In the example, you borrow $180,000 and qualify for a 30-year fixed-rate loan at an interest rate of 5.0% with zero points. Rates currently available may be different than what is shown in this example.

6. Shop with several lenders

You’ve figured out what affordable means for you. You’ve reviewed your credit and the kind of mortgage and down payment that best fits your situation. Now is the time to start shopping seriously for a loan. The work you do here could save you thousands of dollars over the life of your mortgage.

Explore Options

Reference: CFPB Home Loan Toolkit

Notes

Buying a home? Check your credit before mortgage

Consumer Financial Protection Bureau (CFPB) has published an essential set of guidelines for consumers looking for a mortgage. CFPB highlights:

Buying a home is one of the most important financial decisions you’ll make. Choosing a mortgage to pay for your new home is just as important as choosing the right home. You have the right to control the process.

Research shows that people who plan carefully for big purchases, like owning a home, are less likely to run into financial trouble later. So if you are thinking about buying a home this year, the first step is to check your credit. It’s always a good idea to review your credit reports and scores periodically, even if you’re years away from shopping for a home and a mortgage. If you’re planning to buy a home this year, we recommend checking your credit reports and scores as soon as possible.

The better your credit history, the more likely you are to receive a good interest rate on your mortgage loan. Lenders will use your credit reports and scores as important factors in determining whether you qualify for a loan, and what interest rate to offer you. If there are errors on your credit report, you may have trouble qualifying for a loan. So, don’t delay in checking your credit. Review your credit reports and take steps to fix any errors.

Credit basics

A credit report contains information about your credit such as the status of your credit accounts and your payment history. Lenders use these reports to help them decide if they will loan you money, and at what interest rate. Credit reporting companies (also known as credit bureaus or consumer reporting agencies) compile these reports. Credit scores are calculated using a mathematical formula — called a scoring model — that companies and lenders use to predict how likely you are to pay back a loan on time. Your credit scores are calculated from the information in your credit report.

Your credit report

Here’s a step-by-step guide to getting, reviewing, and understanding your credit reports.

1. Request your free credit report online or over the phone.
There are three major credit reporting companies – Equifax , Experian , and TransUnion . Each company maintains a separate report. You have the right to a free copy of your credit report once per year from each of the three companies at www.annualcreditreport.com . You can also call 1-877-322-8228.

If you review your credit report from one of the major companies every four months, you can get a good idea of your credit throughout the year at no cost. However, if you are planning to start the homebuying process within the next six months to a year, you may want to request and review all of them at once to check for errors or issues. Checking your credit report will not hurt your credit score.

Your free credit report does not include your credit scores – keep reading to learn how to check your scores.

2. Review your credit report.
Once you get your credit report, you will want to review it carefully. Ordering it is not enough — you have to read it. Credit reports may have mistakes. And if there are mistakes, you are the one who is most likely to find them. Incorrect information can appear on your report because the credit bureaus processed the information incorrectly or because lenders or debt collectors sent flawed information to the credit bureaus or did not update the information they previously reported. Incorrect information may also be a result of fraud, such as when someone uses your identity to open accounts or takes on debt without your knowledge. You should review your credit report for any errors or fraudulent activity.

When you review your credit report, look for:

  • Incorrect first and last names
  • Addresses of places where you did not live
  • Names of employers you did not work for

Review each account listed on your credit report. If you see any of this information, highlight it:

  • Accounts you don’t recognize
  • Accounts that are listed twice
  • Accounts that have been closed but are listed as still open
  • Incorrect current balances
  • Incorrect negative account information, such as late payments and missed payments
  • Negative account information, such as late or missed payments, that is more than seven years old

Check the credit inquiries section of your credit report:

Look at the section labeled “inquiries that may impact your credit rating” or “inquiries shared with others.” Are there any companies listed that you don’t recognize? This section should only include companies that you have applied for credit with in the past two years.  Inquiries listed in sections labeled “inquiries shared only with you,” “promotional inquiries,” or “account review inquiries” do not impact your score.

Check the “negative information” section:

  • Are there accounts placed in collection that you don’t recognize or that are more than 7 years old?
  • Are there public records such as civil lawsuits, judgments, or tax liens that you don’t recognize or that are more than seven years old?
  • Are there bankruptcies that are more than 10 years old?

With each credit report you get, use this checklist to help you review and check for errors.

You can use CFPB’s printable Credit Report Review Checklist to help you review each section of your credit report. We recommend using this worksheet for each credit report you get throughout the year. Then, keep the completed checklist with your credit reports.

3. Report any errors, fraudulent activity, or outdated information.
If you find errors or fraudulent activity after your review of your credit report, you have the right to dispute inaccurate or incomplete information. Keep in mind that there’s a difference between inaccurate or incomplete information and negative but accurate and complete information. Both can lower your credit score, but a credit reporting company will only correct information that is inaccurate or, incomplete, or outdated.

To dispute an error, you should contact both the credit reporting company and the company that provided your information to the credit reporting company. For example, if you review your report and find a listing for a student loan you never took out, you should contact both the credit reporting company that provided the report and the student loan company listed. Be sure to include supporting documentation with your disputes to both companies. The companies must conduct an investigation and fix mistakes as needed.

The three major credit reporting companies provide instructions for filing a dispute online: Equifax , Experian , and TransUnion . You can also submit a dispute by phone or paper mail. The CFPB provides a sample dispute letter that you can use if you want to submit your dispute by mail.

No matter how you submit your dispute, make sure to include:

  • Your complete name
  • Your address
  • Your telephone number
  • A clear description of what you are disputing (e.g., wrong name, not my account, wrong amount, wrong payment history)
  • If you are disputing something about a specific account, a clear description of which account, including the account number if possible
  • Copies of any documents you have that relate to the inaccurate or incomplete information

Beware of any service that says it can dispute inaccuracies for a fee. You have a legal right to dispute inaccuracies yourself, at no cost. If you find an error on one of your credit reports, check your credit reports from all three reporting agencies. Lenders operate differently from one another, so while one may pull your Experian report, another might pull your TransUnion or Equifax report. It’s important to make sure they’re all accurate.

If you find outdated negative information on your credit report, contact the credit reporting company and ask that it be removed. Bankruptcies are considered outdated if they are more than 10 years old. Most other negative information is considered outdated if it is more than 7 years old.

Your credit scores

A credit score is a number based on information contained in your credit report. You don’t have just one credit score. There are many credit scoring formulas, and the score will also depend on the data used to calculate it.

Different lenders may use different scoring formulas, so your score can vary depending on what type of score the lender uses (a mortgage score or an auto score, for example). Today, most mortgage lenders use a FICO score when deciding whether to offer you a loan, and in setting the rate and terms. Your FICO score will differ depending on the credit bureau and FICO scoring model your lender uses – so you have an Experian FICO score, an Equifax FICO score, and a TransUnion FICO score. Also, be aware that your score changes as the information in your credit report changes.

Different scoring formulas may come up with somewhat different numbers for your credit score, but they are all based on the same key information:

  • Your payment history: How you’ve handled loans and credit cards. This category includes details about whether you’ve made payments on time, missed payments, or had accounts in collection.
  • How much you owe: The amount of debt you’re carrying compared to your available credit line or the original loan balance.
  • Length of credit history: How long you’ve been borrowing money.
  • Credit mix: Your history managing different types of loans.
  • New credit: How many accounts you’ve applied for or opened in the past six to twelve months.

Most FICO scores range from 300-850. A higher score makes it easier to qualify for a loan and may result in a better interest rate. As of March 2015, the median FICO score nationwide was 721. The best rates go to borrowers with credit scores in the mid- to high-700s or above.

How to get your credit score?

There are several ways to get a credit score, some of which are free. When choosing how to get a score, pay attention to the fine print about how the score is calculated. Some companies that offer credit scores use different scoring models than lenders use. Here are 4 ways to get a score:

Check your credit card or other account statement (free). Many major credit card companies and some banks and credit unions have begun to provide credit scores for all their customers on a monthly basis. The score is usually listed on your monthly statement, or can be found by logging in to your account online.
Talk to a non-profit counselor (free). Non-profit credit counselors and HUD-approved housing counselors can often provide you with a free credit report and score and help you review them. A counselor may also be able to help you with the homebuying process.
Buy a score (comes with a fee). You can buy a score directly from the credit reporting companies. You can buy a FICO credit score at myfico.com . Other services may also offer scores for purchase. If you decide to purchase a credit score, you are not required to purchase credit protection, identity theft monitoring, or other services that may be offered at the same time.
Credit score services (can come with a fee). Many services and websites advertise a “free credit score.” Some sites may be funded through advertising. Other sites may require that you sign up for a credit monitoring service with a monthly subscription fee in order to get your “free” score. These services are often advertised as free trials, but if you don’t cancel within the specified period, you could be on the hook for a monthly fee. Before you sign up for a service, be sure you know how much it really costs.

Source: https://www.consumerfinance.gov/about-us/blog/buying-home-first-step-check-your-credit

For more insights, follow STEM Lending:

Join STEM Lending

News

Lower mortgage rates yielding steady mortgage applications

Total mortgage application volume rose 0.6% on a seasonally adjusted basis from the previous week. Volume was nearly 14 percent lower compared with the same week one year ago, according to the Mortgage Bankers Association, when lower interest rates sparked a refinance boom.

Low rates are giving refinances another slight boost. Refinance volume for the week was 2 percent higher than the previous week but still about 30 percent lower than a year ago.

Join STEM Lending

Source: CNBC Real Estate

 

Perspectives

Demystifying the Mortgage Down Payment

When you’re thinking about buying a house, the amount of your down payment plays a critical role in the process.

Your down payment is a percentage of your home’s purchase price that is paid upfront by you, in cash, when you close on your Home Loan.

Whether you’re getting your loan from a bank or a non-bank mortgage company, lenders will look at this down payment amount as your equity investment in the home, and that amount (%) plays a vital role in determining not only how much you’ll need to borrower, but also:

Which type of loan is best suited to you  a Fixed Rate Mortgage or an Adjustable Rate Mortgage.

Whether your lender will require you to pay for private mortgage insurance (often referred to as “PMI”). This typically happens if you put down less than 20% of the home’s purchase price.

Your interest rate. Because your down payment represents your investment in the home, your lender will often offer you a lower rate if you can make a higher down payment.

So, do you absolutely need to have 20% to buy a home? No.

Among Millennials especially, there is a lot of confusion about the minimum down payment needed to buy a home, and we at STEM Lending are here to make that clear.

An outlook study conducted by United Wholesale Mortgage (UWM) along with Michigan State University found that 67% of millennials thought the 20% down was indeed necessary, while only 7% were aware that a down payment can be 5% or less.

As a Millennial homebuyer, you should know that there options available to you to purchase a home with less than 20% down payment.

Additionally, you should be aware of the potential consequences of having a down payment lower than 20%, and we’ll spell that out below:

Private mortgage insurance (PMI)

For conventional financing, if your down payment is lower than 20%, your loan-to-value ratio will be higher than 80%. In that case, your lender may require you to pay private mortgage insurance, because they are lending you more money to purchase the home and increasing their potential risk of loss if the loan should go into default.

With PMI, a homebuyer can put down less than 20% of a home’s purchase price and still qualify for a conventional mortgage loan. But a homebuyer will have to make larger monthly mortgage payments (since they’ll have to pay PMI).

As a prospective homebuyer, it is essential that you think about your lender’s requirements and what a higher or a lower down payment will mean for your monthly cashflow and your ability to repay the loan. Ultimately, you have to determine if it is worth it to pay PMI each month in order to receive the other benefits of homeownership vs. saving for a larger down payment of 20% or more and avoiding PMI, even if that means waiting longer to buy a home?

Programs That Allow for Less Than 20% Down

Freddie Mac has long allowed for 5 percent down, and their Home Possible AdvantageSM mortgage is available to qualified borrowers with as little as 3 percent down, which can even be raised by a gift from a family member or employer or a grant from a government agency.

Fannie Mae announced in 2015 the “Home Ready” Buyer program, under which qualifying first-time homebuyers can have down payments as low as 3%. Both first-time or repeat home buyers are eligible. In late 2015, this program replaced Fannie Mae’s ‘MyCommunityMortgage’ program.

To receive the 3% rebate, homebuyers must complete an online homebuyer education course. Fannie Mae said that it is partnering with Framework, a nonprofit created by the Housing Partnership Network and the Minnesota Homeownership Center, to create the homebuyer education course, which is 100% online.

Down Payment Assistance Programs

Down Payment Assistance Programs can be run by your direct lender, a non-profit organization, or local and state housing authorities where you live. As a NeighborWorks Housing Survey showed in 2014: “70% of U.S. Adults are unaware of down payment assistance programs available for homebuyers,” and that’s why our STEM Lending Blog is helping to make you aware. These programs are an important tool you may be able to leverage towards homeownership, provided you qualify.

The three main types of down payment assistance are grants, second mortgage loans, and tax credits.

Grants – Grants are funds that you do not have to pay back as long as you own and occupy your home for a certain period of time.

Second mortgage loans – The most common down payment source, many second mortgage loans offered by state and local governments have low or zero interest rates, and the payments are deferred over a specified time span and, in many cases, the loan is completely forgiven over time.

Tax credits – Certain states and local governments, including housing finance agencies, issue mortgage credit certificates, which reduce the amount of federal income tax you pay. This makes more money available upfront for your down payment or closing costs.

The U.S. Department of Housing and Urban Development (HUD) provides grants to state and local organizations through the HOME Investment Partnerships Program and the Community Development Block Grant Program.

To find the programs in your state, go to HUD’s on-line listing or the handy new tool from Down Payment Resource.