1. How much house can I afford?
The amount of a loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a “safe” amount for your mortgage payments. A fairly standard ratio is 28/33. Certain mortgage plans sometimes use more liberal ratios-for example, the Fair Housing Authority currently uses 29/41.
Here’s how it works: With a 28/33 ratio, you are allowed to spend up to 28% of your gross monthly income for mortgage payments.
The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 33% of your gross monthly income.
To calculate exactly how much you may borrow, you also need an estimate of interest rates. For example: Suppose you had $1,000 a month for mortgage payment; at 7% that would let you borrow about $160,000 on a 30-year loan. At 6% the loan amount would be nearly $175,000. If your rate were 8%, the loan amount would be a bit less than $150,000.
As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and homeowner association fees (if applicable) you might need to pay, which are considered part of your monthly expense.
2. Why do I need to check my credit prior to purchasing a house?
Even if you’re sure you have excellent credit, it’s wise to double-check at the outset. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you’re waiting for mortgage approval.
You may see disputed items, in addition to errors caused by a faulty social security number, a name similar to yours, or a court ordered judgment you paid off that hasn’t been cleared from the public records. If such items appear, write a letter to the appropriate credit bureau. Credit bureaus are required to help you straighten things out in a reasonable time (usually 30 days).
3. How much do I need to put down for a down payment?
This depends on many factors. For purchases, we have loan programs that allow financing from 95%, 97%, to even 100% of the home value. Of course, loans with a loan-to-value ratio (LTV) of greater than 80% will likely require private mortgage insurance (PMI) by the lender. For refinance loans, we have several “no out of pocket” loans available. For exact amounts, please contact us.
4. How is pre-qualification different from pre-approval?
Any reputable real estate broker will “pre-qualify” you for a mortgage before you start house hunting. This process includes analyzing your income, assets and present debt to estimate what you may be able to afford on a house purchase. Mortgage brokers, or a lender’s own mortgage counselor can also calculate the same sort of informal estimate for you.
Obtaining mortgage “pre-approval” is another thing entirely. It means that you have in hand a lender’s written commitment to put together a loan for you (subject to verification of income and employment).
Pre-approval makes you a strong buyer, welcomed by sellers. With most other purchases, sellers must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing.
5. What is the difference between Conforming and Non-Conforming loans?
Conforming loans are loans that comply with the guidelines set forth by the federal government for “conforming” lending. Some of the guidelines are borrower credit scores, and total loan amounts.
Non-conforming loans to do not abide by these guidelines. Non-conforming loans have higher loan limits. They can also be advantageous to borrower with credit scores that make conforming loans unavailable to them.
6. Should I choose fixed or adjustable interest rate mortgage?
Interest rates are usually expressed as an annual percentage of the amount borrowed. You can choose a mortgage with an interest rate that is fixed for the entire term of the loan or one that changes throughout. A fixed-rate loan gives you the security of knowing that your interest rate will never change during the term of the loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate and consequently to your mortgage payments.
7. What are points?
In the special vocabulary of mortgage lending, “points” are a type of fee that lenders charge (the full term to describe this fee is “discount points”). Simply put, a point is a unit of measure that means 1% of the loan payment. So, if you take out a $100,000 loan, one point equals $1,000.
Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your loan. Usually, for each point on a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point.
TIP: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.
8. What is APR (Annual Percentage Rate)?
“APR” is a yearly rate that captures the total cost of the mortgage; such as Interest, Mortgage Insurance (MI), Loan Origination Fee (Points), lender Funding Fee, etc.
9. What are closing costs?
On the day you actually buy your new home, in addition to your down payment, the prepaid property tax and homeowners insurance premiums, you’ll need cash for various fees associated with the purchase. These expenses are known as closing costs and are paid by both buyers and sellers.
Some closing costs you pay up-front when you apply for a mortgage loan. Those include money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don’t eventually receive the loan, that money is not refundable.
Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to:
- a. Title insurance fee
- b. Survey charge
- c. Loan origination fee
- d. Attorney fees or escrow fees
- e. Document preparation fee
g. Points-up-front interest paid in return for a lower interest rate. Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points.
- f. Garbage or trash collection fees; and the big one
10. What is LTV (Loan To Value)?
LTV is the ratio of the loan amount to the appraised value of the property. LTV will effect the kind of rate and programs available to a borrower. The lower the LTV the better terms and programs offered by the lenders.
11. What is Mortgage Insurance (MI)?
MI is an insurance required by the lenders for loans over 80% LTV (Loan To Value) of the property.
12. What is a Rate Lock or Locking in a Rate?
Signing an agreement with a lender that a borrower will be guaranteed a special Interest Rate if the loan is closed within a specific period of time (Lock Period), which is usually 30 or 45 days.