Provided to You by Tom
Mackinnon
Ten Things to Know About Home
Mortgages
"Knowing how obtaining a home
mortgage works can help you get the best deal and avoid
unnecessary anxiety and stress"
Getting a
mortgage for a home can be a complicated and stressful process.
As with anything else, getting all the information you can
before you dive in is a good idea. This report is intended to
provide you with information about how a mortgage company works
– behind the scenes. Knowing how obtaining a home mortgage works
can help you get a better deal and avoid unnecessary anxiety and
stress. Here are ten facts you need to know.
Qualifying for a Mortgage
There are several factors that go
into determining if you are qualified for the mortgage you want.
These factors will also help determine the type of mortgage you
get and the interest rate on that loan. These factors are:
• Your Job – Lenders want
to know if you have been in your current job and/or profession
for at least 2 years. They also want to know if you are retired
or self-employed.
• Your Income – your gross
monthly income (income before taxes). You will need to have 30
days of pay check stubs and W2’s for 2 years to prove your
income. If you are self employed, and proving your gross income
is difficult, you can perhaps get a “stated income” loan. In
that case, your income must be “reasonable” for your profession
and you will have a higher interest rate – stated loans are
riskier for the lender.
• Your Credit History –
Lenders need to know that you have a history of paying your
bills on time. This is reflected in your credit report and
score. If you have bad credit, you are NOT automatically
disqualified from getting a mortgage, but you may have to pay a
higher interest rate – sometimes much higher.
• Your Debt – You can have
a great job with lots of income and great credit, but if you are
carrying too much long term debt, you may not qualify for the
loan you want. See the next section for more details.
• Your Assets – Lenders
need to know if you have the cash necessary to pay any down
payment and closing costs, and that you have “reserves”
available to make the loan payment. Usually, the lender will
require 3-6 months reserves (this can be in a 401K or other
retirement account that you can extract funds from)
• The Loan Amount You Want
– if the loan you want is all out of proportion to your ability
to pay, you will not be qualified. Be reasonable in this regard
– don’t expect to buy a lot more house than you can afford. This
will just make you “house poor” and get you in financial
trouble. Lenders would much rather you make your monthly
payments – everyone loses if they have to foreclose
How the Interest Rate on YOUR
Loan is Determined
First, the market place determines
the range of interest rates available for any mortgage. This
rate range changes daily. The specific rate you will get is
based on what you qualify for, and the type of loan you want.
Your interest rate is based on:
• How Good Your Credit Is –
as shown in your FICO score from the credit bureaus. The credit
score goes up to 850 and anything above about 720 is considered
excellent. Bad Credit DOES NOT MEAN you will not get a loan, you
may qualify anyway. BUT, you will pay a higher interest rate
than someone with better credit.
• How Much Down-payment You
Will Make – the amount of your down payment determines the
amount of your loan (purchase price – down payment = loan
amount). This is called Loan to Value. See below for more
details.
• How Much
Debt You Have – the more debt you have (other than the new
loan) the riskier the loan is for the lender. Lenders use
“debt-to-income” ratio to determine qualification. See below for
more details.
• The Type
of Loan You Want – 40 year fixed, 30 year fixed, 20 year
fixed, 15 year fixed, Adjustable Rate, etc. All these loan types
have different interest rate ranges.
Locking
the Loan (or Interest Rate)
Once you have
talked to a lender, completed a loan application, determined
what type of loan you want, and qualified for that loan, you can
“lock” the interest rate for that loan. This means that, for the
period of the “lock”, you are guaranteed that interest rate.
Lock periods are typically 15, 30 or 60 days, although you may
be able to get an extended lock period.
Two Points to
Remember:
1) If you do not complete the loan (close) before the lock
period expires, you will NOT have a guaranteed interest rate
anymore. And, the longer the lock period, the higher the rate
will be. For example, a 15 day lock may be at 6.125%, a 30 day
lock at 6.25%, and a 60 day lock at 6.375%. So, before locking
your loan, be sure you are not locking for too long a time or
for too short a time. 2) Interest rates may go up or down in the
future, so by locking your rate, you are effectively betting
that rates will go up in the future. Please keep that in mind.
“Buying
Down” the Interest Rate
If you are
willing to do so, you can reduce your mortgage interest rate by
paying “points” at closing. A point is 1% of the value of the
loan, so a point on a $100,000 loan is $1,000, $2,000 on a
$200,000 loan, etc. A lower interest rate means lower monthly
payments and less interest paid over the life of the loan. But,
buying down the rate means more cash out of your pocket up
front. Carefully weigh each side of this equation before
deciding what to do – you may be able to earn more by investing
the money you would use to buy down the rate than you will save
in lower monthly payments.
Closing
Costs & Fees Explained
There are three
types of closing costs and fees: those charged by the mortgage
company and/or mortgage broker, those charged by 3rd party
vendors, and those charged by the title or escrow company or
attorney. A good rule of thumb for closing costs is that they
will usually be 3 to 5% of the loan amount. If they exceed that
for your loan, check each line item on your settlement statement
carefully!
Mortgage
Company/Broker Fees
– these can
include loan origination fees and Broker fees (usually a
percentage of the loan amount); processing fees, underwriting
fees, administrative fees and application fees. These last fees
usually run from $100 to $500, and ALL of these are negotiable.
The truth is that these are just additional fees that mortgage
lenders and brokers charge you to get more of your money.
3rd Party
Vendor charges
– these are
charges collected by the mortgage lender and paid to outside
companies that provide a service. These are not usually
negotiable and can include appraisal charges, flood
certification fees, courier charges, document prep fees,
mortgage lender attorney fees, etc.
Title Company
charges
– these are the
fees charged by the title or escrow company. They are usually
set by the state and are not negotiable, and include title
insurance, attorney fees, state/county/city registration fees,
etc.
In addition to
all these fees and charges, there are pre-paid charges as well.
The buyer will pre-pay taxes and insurance to establish an
escrow account (if you are waiving escrows you will need to show
proof you have paid the taxes and insurance), and will pre-pay
interest on the loan until the end of the month in which the
loan closes.
Loan To
Value Ratio (LTV)
This is the
percentage of the value of the house that the mortgage will
cover (loan amount divided by purchase price times 100). For
example, if the house is selling for $150,000, and you want a
mortgage for $120,000 (you have $30,000 for a down payment), the
LTV for this is 80%. It is possible to get a loan with an LTV of
100% or greater. Ask your lender about this.
A related ratio
is Combined Loan to Value (CLTV). This ratio is used when 2
loans (or liens) are used to finance the home purchase. You may
see or hear terms like “80-20” or “80-15-5”. This refers to the
1st
lien percentage (80), the 2nd
lien percentage (20 or 15) and the down payment
percentage (5).
Debt to Income
Ratio (DTI)
This is the
percentage of your income that you owe in debt on a monthly
basis. For example, if you make $5,000 per month, and have debt
payments (car loans, credit cards, student loans, etc.) of
$2,000, your DTI ratio is 40%. The higher this ratio is, the
less likely you will be to qualify for a low interest rate.
Why the
Closing Date Matters
The day you
close determines the amount of pre-paid interest you will have
to pay. The closer to the end of the month the loan closes, the
less pre-paid interest you will pay. For example, if you close
on March 1st,
you will pay 31 days of pre-paid interest. If you close on March
31st,
you will pay 1 day of pre-paid interest. But, no matter what day
of the month you close on the loan, you will not have your first
loan payment due until a month has past. So, if you close in
March, your first payment is due in May – you get April for
free!
Private
Mortgage Insurance Explained
Private
Mortgage Insurance (PMI) is required on all loans that exceed
80% of the purchase price or home value (whichever is less).
Although you pay this insurance premium every month as part of
your monthly payment, it does not protect you, it protects the
mortgage lender. In case of default on the loan (you stop
paying), the mortgage lender is paid a percentage of the loan
amount (usually 25% to 35%) by the insurance company.
One GOOD Point
about PMI:
until December of 2006, PMI payments were not tax deductible for
you as the home owner. However, Congress passed a new law in
December of 2006 that made PMI tax deductible for all tax payers
who make less than $100,000 in income. This means that if you
are paying PMI, it may be tax deductible for you!
Mortgage
Brokers versus Mortgage Lenders/Bankers
Mortgage
Brokers are independent businessmen who will shop your loan to
many different mortgage lenders. By using several mortgage
lenders, Brokers can shop for you and perhaps get you a low
interest rate. But, they charge a fee for this service, above
and beyond what the mortgage lender will charge. They also have
no control over the processing and closing of the loan – they
just collect the paperwork from you and pass it on.
Mortgage
lenders/bankers have one set of interest rates to offer, so you
may not get the lowest rate. But, you will not be paying extra
fees, and the loan officer you deal with should be able to
control the loan process to some extent – the processing,
underwriting and closing happens in their offices and they can
easily check on progress.
There are many
more things to know about getting a mortgage, much more than I
can tell you in this report. But this is a good starting point.
None of this information is secret, but many mortgage brokers
and lenders would rather you didn’t know it. (They make more
money that way).
If you found
this FREE Report of value, and want more information, please
contact me! I am happy to assist you in any way I can.
Tom
Mackinnon
METLIFE HOME LOANS
4000 Horizon Way Irving, TX 75063 Toll Free: (800) 615-0822 ext.
17428 Direct: (214) 441-7428 Email:
tmackinnon1@metlife.com
Mortgage Loan DISCLOSURE REQUIREMENTS
REVISED
The new requirements will apply to loan
applications filed on or after July 30, 2009.
New requirements that apply to all mortgages secured by a
borrower's home:
Ø
Lenders must give good faith estimates of mortgage loan costs
within three business days after the consumer applies for a
loan. The lender may not collect any fees before the
disclosure is provided, except for a reasonable fee for
obtaining a credit report.
Ø
The closing may not take place until expiration of a seven-day
waiting period after the consumer receives the early
disclosure.
Ø
If
the annual percentage rate (APR) increases by more than 0.125
percent, the lender must provide a corrected disclosure to the
borrower and wait an additional three business days before
closing the loan.
Ø
The consumer may modify or waive both waiting periods for a
documented personal financial emergency, but must receive the
disclosures no later than the time of the modification or
waiver.
Just A
Reminder
Limits
decline for the JUMBO Real estate loan!!!
On January
1st 2009 the current loan limit that Fannie
Mae and Freddie Mac will buy is dropping from $729,750 to
$625,500 a $104,250 difference. As an added catch underwriting
standards will increase; most buyers will be required to put
down a minimum of 20% and also carry a debt to income ratio of
30 percent.
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