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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 Downpayment 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 2.5-3% 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:tmackinnon@metlifehomeloans.com
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