Mortgage Questions & AnswersClick on the Question to view the Answer
To find out how much you will be able to pay for your new home, you need to analyze your income along with the amount of debt that you have to pay off each month. If it is your main residence that you are going to purchase, calculate approximately 30% of your income to make all of the payments associated with the house such as Principle and Interest, Taxes, Insurance, Mortgage Insurance and Homeowners Association Fees.
Next, you need to calculate 45% of your gross income and from that, deduct all of your other monthly payments such as car loans, credit card bills and other such debts. The lesser of these two calculations will be used to determine how much of your income may be used towards housing related payments, including your mortgage.
Apart from what the ratios tell you, you should make calculations of your own to determine how much you can afford. If the payment amount you are comfortable with is less than 30% of your income you may want to settle for the lower amount rather than stretch yourself financially. The items you should not worry about when calculating the above numbers are items such as car insurance, gasoline or utilities on the house. While these numbers are important, lenders only look at those items you MUST have or have contractually been obligated to pay. Nobody requires you to have a car, so you may not have car insurance or gasoline charges.
A home inspection is a visual examination of a house by a qualified licensed professional to determine the overall condition of the home. When conducting a proper inspection, an licensed home inspector should check all the major components of the house such as the roof, ceilings, walls, and floors along with other systems such as the electrical, heating, plumbing and drainage and weather proofing. The inspector usually gives the results of the inspection in writing to the home owner within 24 hours of the inspection. You may also choose to get other separate inspections such as Lead Based Paint, Radon or Mold. These tests are at an additional cost and you may want to do them or the inspector may point out an issue that warrants further evaluation. Some homes with septic and well will require a separate well and septic test at an additional cost. The lender will require such tests to be sure the home is in livable condition.
It is always advisable to get a home inspection done before making a purchase decision. A thorough inspection is likely to clear a majority of the doubts that you might have when purchasing a home. The inspection gives an idea about the quality of the construction and indicates whether any major repair work will be required. It may also point out whether work was performed on the house with or without village permits. This allows you to calculate all the add-on costs before making the final decision. An inspection will definitely give you a more secure feeling about your purchase decision by removing most of your doubts.
There are 3 major types of loans that will dictate the minimum down payment requirement.
VA loans are loans offered to active or retired military personnel and require a 0% down payment. In this market they are the only option that offers such 100% financing.
FHA loans require a minimum down payment of 3.5% and all of that down payment requirement may be your money or in the form of a gift from an immediate family member such as parents, grandparents, adoptive parents, brothers and sisters.
Conventional Loans require a minimum down payment of 5% of your own funds. You may receive a gift for any amount of down payment above and beyond the 5% of your own money but you must have at least 5% of your own money.
When it comes to down payments, another rule of thumb is that no down payment money may be borrowed. You cannot take a cash advance from a credit card to pay for the down payment. You cannot get a loan from a family member or friend for the down payment.
As a foot note, in this market we live in today, there are times when banks will require a greater down payment than those stated above. If a market is deemed a “declining market”, banks may require more down-payment or if the property is in a high rise they may require a greater down payment. Always consult with your mortgage professional about your specific circumstances.
Pre-Qualification is a mortgage professionals estimate of how much you can afford based on the mortgage professionals experience and knowledge. I caution you though. If your mortgage professional, or the internet website you visited does not ask you the right questions or if you don’t answer truthfully, you may think you can get a loan only to be turned down at a later date. The Pre-Qualification is a representation that you can get a loan based on the verbal information you provided.
Pre-Approval is achieved only after you have signed the loan documents attesting that the information you provided is true and accurate, you have provided all of the requested documentation (photo ids, pay stubs, W2’s, Tax returns, Bank Statements and Debts and MOST IMPORTANTLY, an underwriter has reviewed those documents and issued their findings. If someone speaks to you on the phone and says they pre-approved you, know that they are lying. They have pre-qualified you. Most good realtors will not even take you out to view properties without the pre-approval.
Mortgage Insurance is an insurance policy provided to a lender against default on mortgage installments, when the down payment amount is less than 20%. Like any other insurance, mortgage insurance too requires payments. The Mortgage Insurance Payment amount can vary between 0.55% to 1.25% of the loan amount depending on the amount of the loan.
A conventional mortgage is any loan that is not a government loan. So FHA and VA loans would not be a Conventional Mortgage.
Bankruptcy (BK) is a very difficult period in a persons’ life. FHA loans require a minimum of 2 years after the BK has been discharged (not the date you started the process, but the date the court decided it was completed.
Most Conventional Lenders require 4 years after the discharge to acquire a new loan. However, this is not the time to sit back and WAIT for your score to magically change. This is the time to build your scores up. Call and let’s discuss strategies for you to utilize.
To make your mortgage application process as simple and lucid as possible, it is advisable that you collect all these documents beforehand so as to avoid any interruptions later.
- Identification such as your driver’s license or passport.
- Living arrangements for the past 2 yrs. Whether you are married and how many children you have.
- Most recent 30 days worth of pay-stubs.
- Analysis to determine if salary matches stated income. Does overtime match stated income. Does bonus match income stated.
- W2’s for the past 2 years.
- Federal Income Tax returns for the past 2 years.
- Are you self employed, hourly employee, commissioned income, do you receive bonus income and how long you have been on the job.
- Proof of financial assets through 60 days worth of bank statements.
- This is what’s known as seasoning of funds. Any large deposits must be documented to verify they are not hidden loans or undisclosed debts.
- Source and amount of down payment.
- If gift, gift letter must be filled out and documented
- Proof of source of funds for the closing costs.
Remember a good Mortgage Professional will know all the right questions to ask such as listed above.
If you are paying child support/alimony to another person, you must declare that as any other debt would be declared. Today, most everything is reviewed when applying for a mortgage so be sure to disclose everything.
If you are receiving child support and alimony from another person, the amount paid to you will be added to your total income before determining the mortgage that you will qualify for. However, you will be required to produce a regular receipt for the same for a set time period as specified by the lender. This is important to understand, if your spouse is not paying you consistently, the bank will not allow you to use that income. Also, child support/alimony income must be documented that it will continue for a minimum of 3 years after the closing.
A fixed rate mortgage’s interest rate is pre-determined at the beginning of the loan term, which can range from 10 years to 30 years. The advantage of this type of mortgage is that it offers a security of knowing your monthly payments beforehand and allows you to plan accordingly.
In a variable or floating rate mortgage, the payments are fixed for a period of one to seven years but the interest rates can fluctuate depending on the market conditions. If the interest rates drop, more of the payment goes towards reducing the principal; if the rates go up, a larger portion of the monthly payment goes towards covering the interest. The interest rate is based on a predetermined formula which is a combination of Index and Margin. A common description might say 5/1 ARM. This means the loan’s interest rate will begin at a pre-determined interest rate, let’s suppose 4.25%. After 5 years, the rate will be adjusted to the combination of the current index plus the margin (we’;; cover that in a minute). Then the rate will change with the same logic 1 time per year every year after that initial period of 5 years. So what is MARGIN and INDEX. Your loan documents will tell you what the pre-determined MARGIN is (often times it is either 1 yr treasury note or the 1 yr LIBOR rate). Both of those indexes are readily available f you go to the internet and google them. The INDEX is what the bank pre-determined will be there charge for the loan. Let’s supposed that is 2.25%. So in this example, after 5 years, if the loan was adjusting, and the current 1 yr LIBOR is 2.000% and the MARGIN is 2.250%, the new loan would adjust to 2.000% plus 2.250% or 4.250%.
Call Bruce Beddard at (847) 772-1780 for any of your Mortgage Questions.