Month: August 2015

A title represents the ownership of a property. When you purchase a home, you also will purchase what is called title insurance. Title insurance-which is different from either homeowners insurance or mortgage insurance-protects both you and the lender from claims that have been, or in some cases will be, placed against the property. Without a clear title, you may lose your home.

Title insurance is designed to protect both of you, but the usual situation is that you will be purchasing both policies.

Title companies

A title company is hired by the seller’s attorney to investigate whether there are any claims or liens against the property. This is normally done through the county recorder’s office, where the investigating company can pull the title of the property to see if there are any liens against it.

If there is a lien, it will be reported to the client (the seller’s lawyer), who must report it to you-the buyer. Your lender will then require that the seller pay off the lien so it can be removed from the property’s title. This is most often done at closing. You will then be able to purchase your new home without further concern, as you will receive a title insurance policy guaranteeing that there are no more liens on the property (other than your existing mortgage).

This is binding: If some lien or claim is missed and becomes an issue in the future, you won’t be responsible for paying the costs involved in addressing and/or removing it.

There are several ratios that lenders use in the mortgage qualification process; one of the most important of these is the debt-to-income ratio. This compares how much of certain types of debt you have to how much you earn.

Income calculations are always done on a gross, or before-tax, basis. There are actually two debt-to-income ratios that lenders are concerned with; these are called front-end and back-end ratios.

Debt calculations take into account both fixed and installment types of obligations, such as car and credit card payments. Debt doesn’t include, in all but a few instances, things like utilities, gas, and food expenses. As these don’t appear on your credit report, lenders don’t consider them in assessing your credit.

Front-end ratio

The front-end ratio includes your housing expenses (mortgage payment, taxes, and insurance) divided by your gross income. To put this in real numbers, let’s say that your gross monthly income is $4,000, and the house you are looking to purchase will carry a monthly payment, including taxes and insurance, of $1,000.

This means that your front-end ratio will be $1,000/$4,000, or 25%. However, in addition to this, you have a monthly car and credit card payments of $100 and $150, respectively, for a total of $250.

Back-end ratio

To take this to the next step, we add the $250 ($100 + $150) to the $1,000 to arrive at $1,250 per month. The new back-end ratio is $1,250/$4,000, or 31.25%.

So what does this mean to the home buyer? Lenders like lower ratios, especially when it comes to the front end. Generally speaking, your housing costs are beyond your control; however, you can work with your other debt, such as credit card and car payments. As a homeowner, you can control some portion of your ratio by controlling your debt.

Questions? Ask your mortgage pro.