Mortgage Advice

How to Get a Mortgage

Once a simple task that meant comparing fixed rates from among perhaps a dozen or fewer savings and loan companies, the mortgage hunt today is like finding your way through a maze.

There are dozens of loan types and hundreds of loan programs available through thousands of mortgage brokers, bankers, lenders, finance companies, credit unions, even stock brokerage firms.

Contrary to popular belief, finding a mortgage doesn’t begin with an application.

Education is a better first choice. Mortgage information sources are as vast as the number of mortgages available. Web sites, topical newspaper articles, mortgage books, consumer seminars and workshops, financial planners, real estate agents, mortgage brokers and lenders are all available to assist you along the way. 

First and foremost, you must determine how your mortgage payment will fit your current budget and, to some extent, your future obligations 15 to 30 years down the road.

If you discover too late that you can’t afford your mortgage, you’ll not only face the possibility of losing the roof over your head, but you could also damage your ability to purchase a home later.

Examine your finances If you can afford to buy a home, you must then determine how much mortgage you can afford. Lenders are apt to put your loan application in the best light and qualify you for as much as they are willing to lend, which can be more than you can afford.

It's up to you to take stock of your income and expenses, both current and projected, to determine what you can comfortably manage each month. Along with your mortgage payment, don't forget related insurance, taxes, homeowner association dues and any other costs rolled into the mortgage payment.

Shopping for a loan

When you are ready to shop for a loan you have two basic types of mortgage stores to shop -- direct lenders and mortgage brokers.

Direct lenders have money to lend. They make the final decision on your application. Brokers are intermediaries who, like you, have many lenders from which to choose. Lenders have a limited number of in-house loans available. Brokers can shop many lenders for each lender's store of loans. If you have special financing needs and can't find a lender to suit them, an experienced broker may be able to ferret out the loan you need. Mortgage brokers, however, are paid with a slice of the amount you borrow, some more than others, some less. Internet brokers today perhaps receive the smallest cut, sometimes none at all, and can prove to be a real bargain.

Along with shopping the source, you'll also have to shop loan costs, including the interest rate, broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal and a host of others.

Apply for a loan

The application process is the easy part -- provided you've gathered documents necessary to prove claims you make on the application.

The application will ask for information about your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses and others).

The lender will run a credit check on you to take a look at your credit status, but you'll have to supply additional documentation including paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation. If the lender deems you creditworthy, it will likely hire a professional appraisal to make sure the value of the home you are about to buy is truly worth your loan amount. Article provided by Realtor.com

Mortgage Advice

As you think about applying for a home loan, you need to consider your personal finances. How much you earn versus how much you owe will likely determine how much a lender will allow you to borrow.

First, determine your gross monthly income. This will include any regular and recurring income that you can document. Unfortunately, if you can't document the income or it doesn't show up on your tax return, then you can't use it to qualify for a loan. However, you can use unearned sources of income such as alimony or lottery payoffs. And if you own income-producing assets such as real estate or stocks, the income from those can be estimated and used in this calculation. If you have questions about your specific situation, any good loan officer can review the rules.

Next, calculate your monthly debt load. This includes all monthly debt obligations like credit cards, installment loans, car loans, personal debts or any other ongoing monthly obligation like alimony or child support. If it is revolving debt like a credit card, use the minimum monthly payment for this calculation. If it is installment debt, use the current monthly payment to calculate your debt load. And you don't have to consider a debt at all if it is scheduled to be paid off in less than six months. Add all this up and it is a figure we'll call your monthly debt service.

In a nutshell, most lenders don't want you to take out a loan that will overload your ability to repay everybody you owe. Although every lender has slightly different formulas, here is a rough idea of how they look at the numbers.

Typically, your monthly housing expense, including monthly payments for taxes and insurance, should not exceed about 28% of your gross monthly income. If you don't know what your tax and insurance expense will be, you can estimate that about 15% of your payment will go toward this expense. The remainder can be used for principal and interest repayment.

In addition, your proposed monthly housing expense and your total monthly debt service combined cannot exceed about 36% of your gross monthly income. If it does, your application may exceed the lender's underwriting guidelines and your loan may not be approved.

Depending on your individual situation, there may be more or less flexibility in the 28% and 36% guidelines. For example, if you are able to buy the home while borrowing less than 80% of the home's value by making a large cash down payment, the qualifying ratios become less critical.

Remember that there are hundreds of loan programs available in today's lending market and every one of them has different guidelines. So don't be discouraged if your dream home seems out of reach.

In addition, there are a number of factors within your control which affect your monthly payment. For example, you might choose to apply for an adjustable rate loan which has a lower initial payment than a fixed rate program. Likewise, a larger down payment has the effect of lowering your projected monthly payment.

Just plan on contacting and investigating a number of lenders to find a loan program that meets your needs. Article provided by Realtor.com

I want to review some of the costs you can expect to pay associated with any new home loan. With any luck, the builder or seller will agree to pay at least some of these expenses for you.

But regardless of who pays them, these costs are part of the price of buying your next home, so let's take a look. They are closing costs, loan discount points and prepaid items.

Closing costs are the actual expenses that the lender incurs in the origination of a new home loan. Some of the costs are related to your loan application, such as the expense of newly updated credit reports on all applicants. Other fees are related to the house itself, such as the appraisal of the property. Others are payment to the lender for processing your application, such as the loan origination fee. All these costs are lumped into a broad category called "closing costs." Unless the seller offers to pay them for you, this area of expenses is charged to the buyer, and often runs between 2 and 3 percent of the amount being borrowed. It's important that you talk with a reputable lender ahead of time about what costs you can expect to pay.

Loan discount points are, in essence, a form of prepaid interest. One discount point is exactly equal to one percent of the amount being borrowed. It is paid in cash at closing to the lender as a form of interest. Discount points have the effect of lowering the stated interest rate you will pay on the loan you obtain. For example, a lender might offer you a 30 year fixed rate loan at 8% with zero points or the same loan at 7.5% with 2 discount points. Because the points are considered interest, the yield to the lender is approximately the same. So why, you are asking, would I want to pay points? You probably won't, but sometimes new home builders or employers will offer to pay up to a certain number of points as an incentive.

Last, there is the issue of prepaid items. Most home lenders want you to set up what is called an "escrow" account. This is nothing more than a savings account that the lender holds. Every month you will, in addition to your regular loan payment, deposit a sum for property taxes and for homeowner's insurance into this account. And when the next bill comes due for taxes or insurance, your lender will make the payment for you. The reason that all this matters today is that, on the day of your purchase, you will be required to set up an escrow account with about 9 months worth of taxes and about 2 months worth of insurance payments. In addition, you will have to pay for the first year's insurance policy in full. These costs are called prepaid items, and you must pay for them yourself.

Because regulations and customs vary from NC & SC, the amount you need at settlement may be more or less than the amounts discussed here. Talk to a reputable lender to get an accurate estimate of how much you will need to buy your next home. Article provided by Realtor.com

The good news is that there are folks out there who will lend as much as 95 percent of the purchase price of your home, at very favorable interest rates. Furthermore, they are willing to spread out the payments over a long period of time so that you can afford the house you want.

If you have a steady job and a reasonable credit history, there is a good chance that you can find a home lender who will lend you most of the purchase price of your new house. Home loans are also called "mortgages," which comes from a Latin phrase meaning "pledge unto death." While lenders don't take your promise to pay quite that seriously, they DO expect to get repaid on time. Just to make sure you remember, lenders take an ownership interest in your house until the loan is paid in full.

Home loans typically are offered in amounts of 80 percent, 90 percent and 95 percent of the price you are paying for the house. You are expected to pay the remaining amount in cash from your own savings. As you might imagine, the lower percentage loans are somewhat easier to qualify for.

The reason the lender is willing to lend you up to 95 percent of the value of your house is that history has shown real estate to be such an excellent investment. Lenders expect that your home will be worth more in the future than it is today - so their investment in your home is considered very safe.

That's also why the interest rate you can obtain on a home loan is one of the best around. Consider that America's largest and strongest corporations borrow at what is called the "prime rate," and that today you can borrow a home loan - fixed at the same rate for many years - at substantially less than the prime rate. Lenders have found that home loans tend to be excellent investments, and you benefit every month when you make your loan payment.

Finally, home loans are available to be repaid over terms of usually 15 or 30 years. The shorter term loan offers a slightly lowered interest rate, so if you can afford the higher monthly payments, you'll save in interest costs by choosing the 15 year loan. At today's interest rates, a 15 year loan costs about 27% more than a 30 year loan in terms of your monthly payment. But the amazing thing is that lenders are even willing to offer a fixed rate loan for that time period. It's better financing than you can get on just about any other investment. Article provided by Realtor.com

No doubt you've thought of how nice it would be not to write a rent check every month, but have you done the math? Nothing can make you feel more secure than owning your own house unless buying a home will create financial problems of its own. Here's a discussion of the most important financial costs associated with home buying to stack up against your monthly rent check.

Instead of the standard deduction on your income tax return, most homeowners itemize their deductions, allowing them to deduct the following (and save on taxes): home mortgage interest, property real estate taxes, state income taxes, gifts to charity, medical and dental expenses over 7.5% of your income, personal property taxes, and most moving expenses.

Figure your monthly payments if you were to buy. Compare your monthly rent to a calculation of the following: purchase price and down payment of your home, your annual income (and debt!), property tax rate, home insurance rate, interest rate and length of loan.

Other costs

Expect other costs to home owning. Along with your monthly mortgage and down payment, there's property tax and homeowners insurance premiums, and fees known as "closing costs." These include everything from a credit check to "points"- interest paid up-front in return for a lower interest rate. Others: title insurance fee, survey charge, attorney/escrow fees, and loan origination. So do your research!

Long-term equity

No discussion of home ownership is complete without considering the long-term benefits of owning. What your house will be worth when you sell depends on the state of your mortgage and the housing market, in particular. Consult with our real estate professionals, read up, and do your math to get a realistic sense of your future home value.

Lifestyle and mobility

Mobility is part of renting. Freedom to take the next job or move for a relationship is easy to come by when you rent a home. And when you do move, there's often more choice of specific location, and price, when you seek rental housing.

Many renters say they love knowing they're not tied down - and don't have to assume financial responsibility for their living space. This is of course a big difference from home ownership: who does the work.

Who does the work

While you don't receive the joys of making a place truly "your own," you do have limited costs in renting. Landlords are responsible for general upkeep and safety, allowing you to focus on the fine points. Home owning, in contrast, puts you in the driver's seat. You shoulder the expenses and reap the rewards of home improvement - both great and small. Think about whether you want to put in additional time and money.

Choices, choices

Whether you decide to take the step of home ownership is a personal choice with its own ups and downs. Hopefully we've helped dust off the magic ball a bit; what you see in your future is up to you! Article provided by Realtor.com

Your home is collateral for your mortgage loan, which is also a legal contract you sign to promise that you'll pay the debt, with interest and other costs, typically over 15 to 30 years.

If you don't pay the debt, the lender has the right to take back the property and sell it to cover the debt. To repay the debt, you make monthly installments or payments that typically include the principal, interest, taxes and insurance, together known as PITI.

Principal -- The principal is simply the sum of money you borrowed to buy your home. Before the principal is financed you can give the lender a sum of cash called a down payment to reduce the amount of money that will be financed.

Interest -- Usually expressed as a percentage called the interest rate, interest is what the lender charges you to use the money you borrowed. As well as the given rate, the lender could also charge you points, and additional loan costs. Each point is one percent of the financed amount and is financed along with the principal.

Principal and interest comprise the bulk of your monthly payments in a process called amortization, which reduces your debt over a fixed period of time. With amortization, your monthly payments are largely interest during the early years and principal later.

In addition to your principal and interest, your mortgage payment could include money that's deposited in an escrow or trust account to pay certain taxes and insurance.

Generally, if your down payment is less than 20 percent, your lender considers your loan riskier than those with larger down payments. To offset that risk, the lender sets up the escrow account to collect those additional expenses, which are rolled into your monthly mortgage payment.

Taxes -- The taxes are property taxes your community levies based on a percentage of the value of your home. The tax is generally used to help finance the cost of running your community, say to build schools, roads, infrastructure and other needs. You must pay property taxes even if you don't need an escrow account and even after your mortgage is paid off. Article provided by Realtor.com

How well you have handled your credit obligations in the past is of utmost importance to lenders today. The good news is that this information, for the most part, is available to you.

Your credit history is maintained by three different private companies called credit reporting agencies: Equifax, TransUnion and Experian. Their websites and phone numbers are listed at the end of this article. You can order your report by phone and charge it to your major credit card if you like. It usually takes about a week to arrive. You can even order your report online directly from each of the three agencies, but they have to verify your identity before you can obtain any private information.

Avoid services that offer to obtain all your reports for you in exchange for a fee. You want the information directly from the reporting agency, blemishes and all.

It's a good idea to get a copy of all three reports, because if an error exists on even one of the reports, it may negatively affect your chances of getting the loan you want. Your credit report lists all the consumer credit that has been extended to you over the past seven years. It will show what your highest balance has been and what your current balance was on the date last reported by the creditor. It will also show how many payments you made on time and how many late payments were late. Late payments are grouped into categories showing how late you were. But if payments were over 60 days late four times, over 120 days late two times and over 180 days late one time, you have had a serious problem. That problem is going to impact your ability to borrow money.

Regardless of how many credit problems you have had in the past, there are two good points to remember.

First, negative credit information can be reported in your credit file for only seven years. After that, it drops out and cannot even be considered. The one exception is bankruptcy, which can be reported for 10 years. But after that you start with essentially a clean slate.

Second, lenders are much more concerned about how you have handled your credit recently than with what happened several years ago. Even if you have had a bankruptcy, if you have kept your nose clean and paid your bills on time since then, it is possible you could qualify for a loan after as little as two or three years.

One of the best developments in the world of lending has been risk-based pricing. That's a five dollar term for the ability of lenders to offer higher priced loans to borrowers based on their demonstrated ability to repay. In other words, even if you have slightly fractured credit, you can still likely get a loan. It just may cost you a little more.

Equifax (www.equifax.com) can be reached at 800-997-2493. TransUnion (www.transunion.com) can be reached at 800-888-4213. Experian (www.experian.com) can be reached at 888-397-3742. Article provided by Realtor.com

A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15 and 20-year term loans are also available.

What Are My Mortgage Options?

A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15 and 20-year term loans are also available.

Shorter term loans come with cheaper interest rates. A 15-year mortgage's interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you'll also pay less over the life of the loan than you would if you borrowed the same amount of money with a long term loan.

Monthly payments of a shorter term loan, are generally higher than the same loan for a long term because the larger payments of the short term loan are necessary to repay the debt sooner.

A long term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage.

Whatever term you choose, fixed rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate should rates fall.

The second major category of mortgages are ARMs. They come with interest rates that adjust up or down, depending upon current economic trends.

An ARM's rate is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages. ARMs might also be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.

To come up with the ARM rate, the lender will add a "margin," usually two to four percentage points, to the index.

Initially, the ARM rate is lower than the fixed rate, from about a quarter point to two points or more, depending upon the economy. When the first adjustment occurs (from six months to many years) and how often the rate adjusts, depends upon the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year, or during larger periods. The adjustment period is disclosed in the loan.

ARMs generally have limits or "caps" on how high it can adjust during each adjustment period as well as over the life of the loan.

The caps protect you from drastic market changes, but ARMS don't offer the stability of a fixed rate loan. ARMs' lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you'd have to pay for the same mortgage with a higher fixed rate. And if index rates fall with an ARM, of course, so does your monthly mortgage.

ARMs could also be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate's periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice. Article provided by Realtor.com

When you get a raise or accumulate some savings, you may find yourself confronted by an innate instinct of modern civilized men and women. The desire to spend money.

It begins simply, by going out to restaurants, then accelerates to purchasing clothing, electronic gadgets, and since North Americans have a special fondness for the automobile, you may even buy a "brand new car."

If you're married or ambitious, a few months later your thoughts eventually turn toward buying your own home. Or a move-up home, if you are already a homeowner.

Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down. You provide your income and may even supply pay stubs and W2 forms. The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).

"If only you didn't have this car payment..."

Debt-to-Income Ratios and Car Payments

You see, when determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and….

…car payments.

How a New Car Payment Reduces Your Purchase Price

For example, suppose you earn $5000 a month and you have a car payment of $400. Using an interest rate of 8.0%, you would qualify for approximately $55,000 less than if you did not have the car payment.

Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender.

Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down. You provide your income and may even supply pay stubs and W2 forms. The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).

However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well being.

Do not buy the car. Buy the house first.

Most buyers do not have enough cash available to buy a home, so they need to obtain a mortgage to finance the purchase. Since you will probably make your purchase contingent upon obtaining a mortgage the seller has the right to be informed of your financing plans in order to evaluate them. That is one of the major reasons that financing details are included in your offer.

Down Payment

As part of your offer, you will need to disclose the size of your down payment. Once again, this allows the seller to evaluate your likelihood of obtaining a home loan. It is easier to get approved for a mortgage when you make a larger down payment. The underwriting guidelines are less strict.

Interest Rate

Another reason for including financing information in your offer is to protect yourself. If interest rates suddenly become volatile and rise quickly, as sometimes happens, you may looking at a mortgage payment much higher than you anticipated. By putting a maximum acceptable interest rate in the offer, you are protecting yourself from such an occurrence.

At the same time, the seller will probably want to see that you have some flexibility in the financing terms you are willing to accept. If interest rates are currently at eight percent and you indicate this is the highest rate you will accept, you would be able to cancel the contract without penalty if interest rates rose past that point. The seller would suffer because they have lost valuable marketing time and may have made their own plans based on successfully closing the transaction.

Asking for Closing Costs and Financing Incentives

There may be times when, as part of your offer, you request the seller to pay all or a portion of your closing costs, or provide some other financial incentive. One common request is asking the seller to provide funds to temporarily buy down your interest rate for the first year or two. Such incentives can be especially effective if a buyer is tight on money or pushing their qualifying ratios to the limit.

Whenever you ask for incentives such as these, you will probably find the seller less willing to negotiate on price. After all, what you are really asking for is have the seller to give you some money to help you buy their house. The end result is that, for a little relief in the beginning, you are willing to pay a little more in the long run.

Seller Financing

Another occasional request is to have the seller "carry back" a second mortgage to help facilitate your purchase of their home. In cases when the seller does not need all the proceeds from their sale in order to purchase their next home, this is an option. The advantage to the buyer is that by combining your down payment and the second mortgage from the seller, you may be able to avoid paying mortgage insurance and save yourself some money.

If such a carry-back is part of your offer, you should include the terms you wish to pay on such a second mortgage. Keep in mind that your first trust deed lender needs to know this information so they can underwrite your loan, and they have certain minimum requirements. The minimum term of the second mortgage can be five years. The minimum payment can be "interest only." Longer mortgage terms and payments that also include principle are also acceptable.

Cash Offers

If you are one of those rare individuals making a cash offer to buy a home, it makes sense to provide some documentation with your offer that shows you have the funds available. A bank statement would be fine. If you have to liquidate stock or some other asset, your offer should give a timetable on when you will provide proof you have converted the asset to cash.

Other Financing Details in Your Offer

Your offer should also contain information on whether you are obtaining a fixed rate or an adjustable rate mortgage. It should also state whether you are obtaining conventional financing or obtaining a VA or FHA loan.

If you are obtaining a VA or FHA loan in order to finance your purchase, you must include that information in your offer. This is because government loans place additional financial and performance obligations on the seller.

Non-Allowable Fees

First, VA and FHA loans prohibit buyers from paying certain types of fees that are often charged by lenders, escrow companies, settlement agents, and title companies. They are called "non-allowable" fees. They still get charged anyway, but as the buyer, you are "not allowed" to pay them. The result is that the seller ends up paying them instead of you.

Most of these "non-allowable" fees come from your lender. By the time you are making an offer you should have already been pre-qualified by a loan officer, so you or your real estate agent can ask how much the lender’s non-allowable fees will be. Experienced agents should also have an idea of what non-allowable fees will be charged by the escrow or settlement agent and the title insurance company.

Since these are fees the seller would not pay on an offer with conventional financing, this information must be included in your offer. You should also realize that since the seller will be paying these additional fees, they may be a little less negotiable on the price.

VA and FHA Appraisals

Home appraisal inspections on FHA and VA loans are a little more detailed than on conventional loans (and more expensive). The appraisers are required to perform certain minimum inspections as well as evaluate the market value of the property. Although these inspections are not as detailed as a professional home inspection and should not be considered a substitute, sometimes repairs are required.

These are additional costs the seller would not be obligated to pay for someone obtaining conventional financing, so your offer should include a maximum figure for these repairs. Otherwise the seller is signing the equivalent of a blank check, and they do not want to do that.

At the same time, whatever figure you put in will most likely affect the seller’s willingness to negotiate on price. If you put $500 as an estimate, the seller may be $500 less negotiable on their price. If no repairs are required, you may have been able to get the house for $500 less than what you and the seller agreed on as the price. The solution is to add a clause to your offer that goes something like this. "If required repairs cost less than the maximum amount allowed, the excess will be credited toward buyer’s closing costs.