Securing a mortgage in the current housing market can be challenging. With rising mortgage rates, soaring home values, and a pace of home price appreciation that far exceeds wage growth, getting a mortgage approval is far from guaranteed. This blog post aims to clarify the mortgage approval process, highlight typical obstacles, and provide advice for prospective homeowners.
The Mortgage Underwriting Process
Mortgage underwriting is where lenders assess your financial situation. This process involves a detailed examination of your financial documents – bank statements, tax documents, W-2s, pay stubs, and any additional information requested by the lender. The objective is to determine whether you qualify for a loan.
The traditional, more subjective methods of assessing creditworthiness have been replaced by automated underwriting software systems like Desktop Underwriter for Fannie Mae loans or Loan Product Advisor for Freddie Mac loans. These systems use algorithms to approve, reject, or request more information from applicants.
Top Reasons for Mortgage Application Denial
1. Credit Issues
Your credit score is a crucial factor in the mortgage process. While higher scores (above 740) often get the best rates, you can still qualify for certain mortgages with lower scores. It’s essential to check your credit score, correct any errors, and maintain your score during the mortgage application process.
2. Income Shortfalls
Lenders look at your debt-to-income (DTI) ratio to determine if you can handle an additional loan. A DTI ratio above 43% is typically undesirable, with 36% being more favorable. If you have substantial debts, such as student or car loans, it’s advisable to reduce these before applying for a mortgage. Self-employed individuals might face extra challenges due to irregular income or the way tax write-offs impact reported income.
3. High Loan-to-Value (LTV) Ratio
A high LTV ratio, which compares the loan amount to the property’s value, can be a red flag for lenders. A larger down payment, resulting in a lower LTV ratio, can improve your loan approval chances.
4. Financing Challenges for Certain Properties
Some properties, like condos or manufactured homes, can be more difficult to finance. Structural issues or other property-related concerns can also hinder loan approval.
5. Recent Financial Instability
Financial stability is important to lenders. Recent changes in your job, a history of sporadic employment, or unusual banking activity can impact your loan approval.
What to Do If Your Application is Denied
If your mortgage application is denied, use our qualifier wizard on our website and schedule a consultation. Whether it’s addressing credit issues, lowering your DTI or LTV ratios, choosing the right type of property, or ensuring financial stability we can do a deep dive and see what best fits your needs!

For this month’s market watch we are seeing home prices continue to climb as well as sales of existing homes according to a recent report by the National Association of Realtors (NAR), even in the traditionally quieter month of January.
A Glimpse of Hope in Existing Home Sales
Interestingly, the market is witnessing a slight resurgence in the sales of existing homes. These are properties that have been previously occupied, as opposed to brand-new constructions. This increase is attributed to more listings becoming available. According to the NAR’s chief economist, Lawrence Yun, while sales figures are still lower compared to a few years back, the rise in January indicates a balance beginning to form between supply and demand, thanks to modest increases in listings and homebuyers capitalizing on currently lower mortgage rates. The trajectory of the housing market in the coming months is expected to be significantly influenced by the direction of these mortgage rates.
Trends in Existing-Home Sales
The statistics for existing-home sales, encompassing all completed transactions of non-new-construction homes, showed a national increase of 3.1% month-over-month in January 2024, reaching an annual pace of 4.0 million homes. Despite this uptick, the figure represents a 1.7% decrease year-over-year.Regionally, the West saw a 4.3% monthly increase, while the South experienced a 4.0% rise. The Northeast remained unchanged monthly but saw a 5.9% annual decrease, and the Midwest increased by 2.2% monthly, with a 3.1% annual decline.
Home Prices: Continuing to Climb
The median sale price for existing homes nationally was $379,100 in January, marking a 5.1% increase from last year and the highest price for January on record. This trend reflects a persistent rise in home prices, with the median reaching its peak at $413,800 in June 2022. This increase has been a part of a remarkable run in the U.S. housing market, with a record streak of year-over-year median sale price increases.
All four major U.S. regions experienced annual price increases in January, with the West leading at $572,100, up 6.3% from a year ago.
The Challenge of Low Housing Inventory
The total housing inventory at the end of January was 1.01 million units, slightly up from December but still indicative of a market short of the five to six months’ supply needed for a balanced market. This limited inventory is partly due to the reluctance of homeowners to sell, especially those who secured mortgages at lower rates in the past.
Key Takeaways for Homebuyers and Sellers
For prospective homebuyers and sellers, these trends offer both challenges and opportunities. Buyers face high prices and mortgage rates, yet there’s a growing inventory of existing homes. Sellers, on the other hand, are in a strong position due to high demand and limited supply, but must navigate the implications of current mortgage rates. Of course if you want to review options schedule a free consultation on our website.

Buying a home is a big milestone, but with it comes the responsibility of choosing the right homeowners insurance. This key step in the homebuying process protects you from financial loss in the event your most expensive investment is damaged or destroyed. As a new homebuyer, understanding the nuances of homeowners insurance is crucial for safeguarding your property and peace of mind.

The Importance of Adequate Coverage

On average, homeowners spend about $1,687 annually for insurance on a property valued at $250,000. However, standard policies may not cover all risks. It’s important to explore policy endorsements or add-ons for more comprehensive coverage, especially for specific risks like flooding or earthquakes. If you’re in the process of buying a new home, need an endorsement your current carrier doesn’t offer, or are facing increased rates at renewal, it’s time to shop for new insurance.

How to Shop for Home Insurance

Purchasing homeowners insurance can be more straightforward than you think. The process typically involves determining what you need to insure, researching insurance companies, exploring coverage add-ons, comparing quotes, and finally buying the policy. When evaluating what to insure, consider not only your home’s structure but also personal property and detached structures like garages or sheds. Research should focus on finding a company that aligns with your needs, whether that’s through digital tools, customer service options, or specific coverage offerings.

Evaluating Your Coverage Needs

When you take stock of your belongings and your home’s features, like upgraded appliances or hardwood floors, you’ll get a sense of the personal property coverage required. High-value items like jewelry or antiques often need additional coverage since standard policies have limits. Similarly, coverage for other structures on your property, typically a percentage of your dwelling coverage, should be assessed based on the replacement cost of structures like pools, sheds, or fences.

Comparing and Choosing the Right Policy

After narrowing down your choices, compare quotes to find the best rate. The cost of similar coverage can vary significantly among providers due to different discounts and personal rating factors. When you’re ready to buy, review the key coverage details of your policy to ensure it meets your needs. Standard policies typically include coverage for the dwelling, other structures, personal property, loss of use, liability, and medical payments. Be sure to understand each aspect and adjust as necessary.

Timing Your Insurance Shopping

You can shop for home insurance at any time, but certain moments, like moving to a new state, experiencing a rate increase, or needing a specific endorsement, can be particularly opportune. If you’re a new homebuyer, start early to find the best policy and price. Remember, if you’re planning to switch insurers, it’s advisable to secure the new policy before canceling the old one to avoid any coverage gaps.

Navigating the world of homeowners insurance as a new homebuyer can be daunting, but it’s a vital step in protecting your investment. By understanding your coverage needs, comparing options, and choosing the right policy, you can ensure that your new home and belongings are adequately protected.

When we had historically low interest rates, people didn’t ask about ARM loans as much but today we hearing more questions, so a good explainer always helps even if you’re a mortgage pro – here’s a refresher. Adjustable-rate mortgages (ARMs) offer upsides and downsides, providing homeowners with an opportunity to capitalize on initially lower interest rates. Among the various ARMs available, the 5/1 ARM has emerged as a popular choice. This post delves into the mechanics of a 5/1 ARM, its advantages, disadvantages, and how it compares to other mortgage options.

What is a 5/1 ARM?

A 5/1 ARM is a specific type of adjustable-rate mortgage. The “5/1” denomination signifies two critical components of the loan: the first number (5) represents the duration in years of the initial fixed-rate period, while the second number (1) indicates the frequency in years of rate adjustments post the fixed-rate term. In essence, for the first five years, the interest rate remains constant, and thereafter, it adjusts annually based on prevailing market rates.

Example Scenario
Consider a 5/1 ARM loan for $300,000 at a 6.5% starting interest rate. For the first five years, your monthly payment would be about $2,045. With a potential 5% lifetime cap, the maximum payment could reach around $3,140.

Key Components of a 5/1 ARM
Introductory Rate: Often lower than fixed-rate mortgages, this rate applies during the initial five-year period.
Adjustment Intervals: Post the fixed-rate term, this is the frequency at which your rate will change.
Rate Caps: These include initial, periodic, and lifetime caps, setting limits on how much your interest rate can increase at each adjustment and over the life of the loan.
Pros and Cons of a 5/1 ARM

Pros
Lower Initial Payments: Initially, the payments are generally lower than those of a 30-year fixed mortgage.
Potential for Rate Decrease: If market rates fall, so could your payments after the fixed period.
Cons
Risk of Higher Rates: Post the fixed period, if rates rise, so will your payments.
Complexity: Understanding rate caps, indexes, and resets can be daunting.
Interest-Only Payments: Some ARMs allow interest-only payments initially, but this can lead to higher future payments and potential negative equity.
Comparing 5/1 ARM to Other Loans

5/1 ARM vs. Other ARMs: Longer-term ARMs like 7/1 or 10/1 have higher initial fixed rates but offer longer stability.
5/1 ARM vs. Fixed-Rate Mortgage: A fixed-rate mortgage offers payment certainty over its life, unlike the potential fluctuations of a 5/1 ARM.
When to Consider a 5/1 ARM

Short-Term Ownership: Ideal if you plan to sell or refinance before the rate adjusts.
Income Growth Expectations: Suitable if you anticipate a higher income in the future.
Financial Flexibility: If your budget can handle potential rate increases, a 5/1 ARM could be a viable option.

The 5/1 ARM offers a potentially lower-cost pathway to homeownership, with the trade-off of future interest rate uncertainty. It’s crucial for prospective borrowers to weigh this balance of initial affordability against the potential for higher future costs. Understanding your financial situation, future plans, and the intricacies of ARMs is key to making an informed decision so please schedule a call or meeting on our website and we can see what best fits your situation!

Understanding Mortgage Proof of Funds (POF) Letter: A Key Document for Homebuyers

When you’re stepping into the world of homebuying, especially with a mortgage, a critical piece of paperwork you’ll encounter is the Proof of Funds (POF) letter. This document is not just a formality; it’s an essential part of the buying process, assuring lenders and sellers of your financial readiness. Let’s dive into what a POF letter is, why it’s needed, and how to obtain one.

What is a Proof of Funds Letter?

A Proof of Funds letter is your financial passport when buying a home. It demonstrates that you have the necessary liquid assets – be it cash, checks, or money in accounts – to cover the purchase costs, including the down payment and closing fees. For cash buyers, this letter shows you can cover the entire home cost. Without this assurance, sellers are often hesitant to consider offers seriously.

Why is it Important for Homebuyers?

The primary role of a POF letter is to legitimize your home purchase offer. In competitive housing markets, this letter can be a game-changer, setting you apart from other buyers who may not have immediate access to funds. However, in some scenarios, like a sale by owner without an agent, this letter might not be as crucial.

Acceptable Funds for Mortgage Proof

Various funds can make up your POF, including:

Money in checking and savings accounts
Liquidated investments or retirement accounts
Gift funds or grants
Bridge loans
Proceeds from pending sales
Remember, the key is liquidity. Assets like mutual funds or life insurance may not count if they can’t be readily liquidated.

Distinguishing Between Preapproval and Proof of Funds Letters

It’s important to differentiate between a mortgage preapproval letter and a POF letter. The former is a tentative nod from a lender about your loan eligibility, while the latter is concrete evidence of your financial capacity to make the purchase.

Getting Your Proof of Funds Letter

So, how do you get this all-important letter? Here are the steps:

Consolidate Your Funds: Ideally, merge your funds into one account well before seeking mortgage preapproval. This ‘seasoning’ of funds makes the process smoother.
Request from Your Bank: You might need to fill out a request form or visit your bank in person. Banks usually provide the letter within a few days.
Provide the Letter to the Seller: Once you have the letter, promptly share it with the lender and the seller, and keep a copy for your records.
Example of a Proof of Funds Letter

Here’s a sample template you might come across:

[DATE]
[NAME OF BANK]
[ADDRESS OF BANK]
[CONTACT INFORMATION]

Dear [RECIPIENT’S NAME],

This letter certifies that [NAME OF INDIVIDUAL/COMPANY], a client since [YEAR], is in good standing with our bank. They hold a total balance of USD $[AMOUNT] in cash deposits.

Attached are the account statements for verification.

For further inquiries, contact us at [CONTACT INFORMATION].

Sincerely,

[SIGNATURE]
[BANK REPRESENTATIVE’S NAME]
[TITLE]

Navigating the homebuying process requires understanding various documents and procedures. The Proof of Funds letter is one such document that can significantly impact your homebuying journey. By ensuring you have this letter, you demonstrate financial readiness and seriousness as a buyer, potentially making your path to homeownership smoother and more assured.

For many homeowners who opt for a conventional mortgage with less than a 20 percent down payment, Private Mortgage Insurance (PMI) becomes a necessary part of their monthly expenses. PMI is an additional charge on your mortgage payment, primarily designed to protect the lender in case of default. However, there are several ways to eliminate this extra cost, which can save you a significant amount over the life of your mortgage.

When Does PMI Go Away?

The Homeowners Protection Act of 1998 set forth guidelines for the automatic termination of PMI. According to the Act, PMI must be removed by the lender once the borrower attains a 78 percent loan-to-value (LTV) ratio. This means that when you have paid down your mortgage to 78 percent of the original purchase price of your home, PMI should be lifted automatically.

For instance, if you bought a home for $300,000, PMI would be removed when your mortgage principal falls to $234,000. It’s important to note that PMI costs decrease as you pay down your loan, and are completely removed when you reach the required LTV ratio.

How to Get Rid of PMI

While PMI can add hundreds to your monthly mortgage payment, there are several strategies to get rid of it:

1. Wait for Automatic or Final Termination
Under the Homeowners Protection Act, PMI is automatically terminated once your LTV ratio hits 78 percent. Alternatively, PMI must be cancelled at the midpoint of your loan’s amortization schedule, regardless of LTV ratio. This applies if you’ve been making regular payments and are in good standing with your lender.

2. Request PMI Cancellation at 80 Percent Mortgage Balance
You can request to cancel PMI when your mortgage balance reaches 80 percent of your home’s original value. This requires a proactive approach, including a written request to your lender and ensuring you meet other lender-specific requirements.

3. Pay Down Your Mortgage Early
Making larger or additional mortgage payments can expedite reaching 20 percent equity, allowing you to request PMI cancellation sooner.

4. Refinance Your Mortgage
Refinancing might be an option if you’re close to the 20 percent equity mark, especially if you can secure a loan that doesn’t require PMI.

5. Reappraise Your Home
In a thriving real estate market, your home’s value might increase enough to push your equity over the 20 percent mark, qualifying you for PMI cancellation.

6. Home Improvements
Significant improvements to your home might increase its value, potentially raising your equity to the required level for PMI cancellation.

Caution: Don’t Drain Your Assets

While eliminating PMI can be financially beneficial, it’s crucial not to deplete your savings or investment accounts in the process. Maintaining a balance of liquid assets for emergencies is a wise financial strategy.

Know Your Rights Under Federal Law

The Homeowners Protection Act ensures your right to eliminate PMI under specific conditions. Familiarize yourself with these provisions and keep track of your mortgage payments and home value. If you believe your lender is not complying with PMI removal regulations, you can file a complaint with the Consumer Financial Protection Bureau.

Conclusion

Paying off your PMI can be a financially savvy move, saving you thousands over the life of your mortgage. By understanding the rules and keeping a vigilant eye on your mortgage balance and home value, you can take steps to remove this extra charge as soon as you’re eligible. Remember, the responsibility to initiate PMI cancellation often lies with you, the homeowner, so stay informed and proactive in managing your mortgage costs.

Homeowners often overlook the financial potential of their home equity, a valuable asset that can be used to purchase a second home. This equity, calculated as your home’s value minus any outstanding mortgage, can be accessed through two primary methods: a home equity loan or a Home Equity Line of Credit (HELOC). A home equity loan offers a lump sum with a fixed interest rate, ideal for significant one-time expenses. In contrast, a HELOC provides a flexible, revolving line of credit with variable interest rates, akin to a credit card.

Using home equity to buy another home offers several advantages. It enables you to access substantial funds without depleting personal savings and allows you to retain ownership of your current home. Additionally, it can position you as a more competitive buyer, with the ability to make larger down payments or even full cash purchases. However, it also carries risks, such as the potential loss of your primary home if you cannot repay the loan, the burden of additional debt, and the possibility of negative equity in a declining market.

There are tax implications to consider when using home equity for real estate investment. Typically, the interest on home equity loans is tax-deductible when used for improvements on the property securing the loan. However, this deduction may not apply if the loan is used to purchase a separate property, like a vacation home.

For those considering using home equity for an investment property, it’s crucial to weigh the potential for high returns against the risks of financial strain. Investment properties can offer significant income opportunities, but they also pose the risk of underperformance, which can lead to financial challenges if the property doesn’t generate expected income.

Besides home equity loans and HELOCs, other financing options include obtaining a new mortgage on the second property, taking a loan from retirement savings, opting for a personal loan, considering a cash-out refinance, or exploring reverse mortgages (for homeowners over 62). Each option has its unique features and implications so please schedule a consultation on our website and we can review your individual options.

In 2024, new homeowners are seeing mortgage interest rates have more than doubled since 2021, making the dream of home ownership with the traditional down payment of 20% seem like a bridge that is very far.
However, there are many options and programs that don’t require 20% down. Some loan programs now allow for a much lower down payment, requiring as little as 3 percent in cash. This development significantly eases the burden for homebuyers, especially first-timers.
Understanding 3 Percent Down Mortgage Options
These low down payment mortgages are often part of special programs, typically targeting first-time homebuyers or those who haven’t owned a home in the recent past. Here’s a closer look at these options:
1. Conventional 97
• Backed By: Fannie Mae
• Key Features: Only 3% down required; down payment can be a gift, grant, or other assistance.
• Qualifications:
• Must be a first-time homebuyer or not have owned a home in the past three years.
• Homebuyer education course required for all first-time buyers.
• Minimum credit score of 620.
• The home must be a primary residence.
• Conforms to loan limits (e.g., $766,550 for a one-unit property in most areas).
• Additional Info: Requires private mortgage insurance (PMI) until 20% equity is reached.
2. Fannie Mae’s HomeReady Program
• For: A wider range of properties, including multi-family units.
• Qualifications:
• Open to those who haven’t owned a primary residence in the past three years.
• Credit score minimum of 620.
• Income cannot exceed 80% of the area’s median income.
• At least one unit must be the owner’s primary residence.
• Unique Feature: Counts rental income towards income requirements; down payment can be entirely from gifts or assistance.
3. Freddie Mac’s HomePossible Program
• Distinctive Feature: Allows non-occupying co-borrowers to contribute to the down payment.
• Qualifications:
• Homeownership education for first-time buyers.
• Credit score of 660 or above.
• Income limits apply.
• Must live in the home as a primary residence.
• Additional Info: PMI required until 20% equity is achieved.
4. HomeOne by Freddie Mac
• Target Audience: First-time homebuyers and those looking for cash-out refinances.
• Qualifications:
• At least one applicant must be a first-time homebuyer.
• Usable credit score required.
• Property must be a single-unit primary residence.
• No Restrictions: No income or geographical limitations.
Other Low-Down Payment Options
• FHA Loans: Minimum 3.5% down. Available to a broader audience, including those with lower credit scores.
• USDA and VA Loans: No down payment required, specific to rural area borrowers (USDA) and military personnel (VA).
The path to homeownership in 2024, despite the daunting landscape of high interest rates and challenging savings goals, is made smoother with these innovative low down payment mortgage options. Whether you’re a first-time homebuyer or someone looking to re-enter the housing market, these programs offer a ray of hope and an opportunity to achieve the dream of owning a home. Fill out our easy pre-qualifier on our website and we can see what program best fits your needs!

As we enter 2024, inflation is improving while home prices remain high, if you are planning on buying a home in 2024 here are 5 key steps to take to get ready.
1. Put Savings In A High-Yield Account
If you are planning on buying you will need your money to be “liquid” or relatively easy to access for a down payment.
2. Check Your Credit
You may have heard this before but it’s important, so we’ll say it again. Review your credit report to make sure there are not any errors or attempts at identity theft that can erroneously lower your credit score.
3. Down Payment or Closing Costs Assistance
It’s a good idea to check to see if you qualify for down payment or closing cost assistance or grants.
4. Monitor Your Market Real estate is local as they say so keep an eye on the areas you are looking to buy to see if there are trends in prices and inventory
5. Get Preapproved!
You can fill out our approval qualifier on our website and we’ll help you see how much you can qualify for and pre-approval, this will help you to know you’re buying range.