Author: production

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.

When you are in the early stages of the home purchase process, you may be wondering what you can use for a down payment. The obvious sources are assets in checking and/or savings accounts, or funds from a retirement plan.

The less obvious sources include gifts from close relatives (those related by blood or marriage) or down payment assistance programs. If you receive a gift, both you and the donor will be required to sign a document stating that there is no expectation of repayment.

Allowable down payment assistance programs include plans from city, county, and state sources. Bear in mind, however, that these programs are reserved for needy individuals in the areas that they serve.

Charitable organizations may also provide you with assistance with your down payment, but this must be approved by your lender.

The one from whom you must never expect to receive help in finding down payment cash is your seller. It’s perfectly acceptable to use seller credits for things like closing costs and other expenses, but they are never used for down payments.

The reason for this is that lenders want to know that you have a vested financial interest in the property. This lack of a vested financial interest was a contributing factor in the real estate meltdown, and lenders, as well as the federal government, want to make sure this never happens again.

If you have questions about a source of down payment, be sure to talk with your mortgage professional.

People do (and should) access their own credit reports. You should also be aware of the Fair Credit Reporting Act (FCRA). FCRA is federal legislation that was passed to assist members of the public who find incorrect information in their credit reports.

Bureaus will investigate

In the event you do find that your credit report contains information you believe is incorrect, the legislation allows you to open an inquiry with any or all of the three credit bureaus: TransUnion, Experian, and Equifax. These credit bureaus are responsible for providing the most accurate credit information possible, and when you submit a written request under FCRA, they are required to investigate.

If they find that you are correct and the information is inaccurate, they’re legally obliged to stop reporting it. As you can see, it’s worth your effort to pull your credit report regularly so that you are aware of what the bureaus are reporting, and can take action if necessary.

If you want to pull your own credit report, either talk to a mortgage professional or contact each bureau directly; the bureaus are required to provide you with a copy of your credit report upon request.

Credit reporting agencies

If you are unsure how to address incorrect items, a good place to start is with your mortgage professional. Mortgage professionals aren’t credit repair specialists, but they work with credit reporting agencies (CRAs).

CRAs have direct connections to TransUnion, Experian, and Equifax, and you can pay a CRA to address your items of concern with one or more of the bureaus. If the bureau(s) agree, they’ll remove the incorrect information from your report.

Be aware that negative items-such as late payments-that are legitimately included in your report will not be removed.

Contact your mortgage professional for more details.

Chances are you know you’ll need homeowners (property) insurance when purchasing a home, but are you familiar with mortgage insurance (MI)?

MI is quite different from your homeowners policy, and it works differently: It’s what lenders use to insure themselves should you, the borrower, default on your loan.

MI also behaves differently in conventional (Fannie Mae) mortgages and FHA mortgages. On a conventional mortgage purchase transaction, for example, MI is only required if you are putting down less than 20 percent. In this case, you’ll pay a premium that is based on the amount of down payment, meaning if you put 15% down, you’ll pay a lower premium than if you had a 10% down payment.

With FHA there are actually two MI payments. The first is called an “upfront premium,” and is paid at closing-either by financing it or by paying it out of your pocket. The other is combined with your monthly mortgage payment.

FHA MI tends to be more expensive than conventional mortgage insurance, but the benefit to borrowers of having an FHA mortgage is that the qualification guidelines are less restrictive.

There is another significant difference between conventional insurance and FHA MI: In conventional, you may be able to have the MI removed at some point in the loan’s life by paying down the principal or if the property value increases.

With FHA, MI remains in place for the life of the loan or until you sell the property or refinance into some other type of mortgage program, such as conventional. This is a fairly recent change, and under some circumstances, older FHA mortgages may be grandfathered; those borrowers may be able to have the MI removed.

If you need any other information on mortgage insurance or help deciding whether to go with a conventional or an FHA mortgage, talk to your mortgage professional.

When you are shopping for a mortgage, there are two numbers you need to be concerned with: the interest rate and the annual percentage rate (APR).

The interest rate is the annual cost of borrowing and doesn’t include fees or other charges.

APR reflects the interest rate, but also the cost of financing the transaction over the term of the mortgage. If you have ever financed a car, you have seen the same terminology. The process works in very much the same way with a mortgage.

When you finance a home, you have expenses that you wouldn’t have if you were to pay in cash. This would include lender fees, such as origination charges and processing fees, and non-lender fees, for items such as an appraisal.

If you could pay cash, lenders and lender-required appraisals wouldn’t be necessary, and there wouldn’t be associated fees. If not, these fees and others become part of the financing of your mortgage.

Two lenders may be offering the same rate and same terms for the same mortgage, but the lender’s APRs could be quite different. The one with the higher APR will be charging higher lender fees and has a higher cost for financing your mortgage.

Mortgage companies are now required to display APRs prominently in their mortgage advertising, and often dollar amounts of items included in the APR will be listed in the advertisement.

While APR isn’t the only factor in comparing lenders, it is one way to help you distinguish between offers.

Home buyers, particularly first-time home buyers, typically don’t know a lot about the process of financing a property. To avoid making mistakes, you need to know what you should expect. Below are two important aspects of the process you should consider before launching your search.

Affordability now and in the future

Regardless of the level of income you have today, you need to figure out what the future may hold before you sign on the dotted line. For example, if you’re planning to have kids sometime down the road, how will these happy additions impact your family income? What effect will job changes have on your current income level? And have you planned for monthly payments into your rainy day savings account?

Everyone who looks to buy a home will have a payment amount that is affordable today, but in the face of your answers to the questions above, will that number still work for you down the road? These are some questions to consider as you think about homeownership.

Documentation

Shortly after you close on your home, it is likely that your mortgage will be bundled with other similar mortgages and sold off to investors. To ensure that lenders won’t be asked to repurchase what they call defective mortgages from these investors, they will do everything in their control to deliver a quality product.

What this means is that you as a home buyer must expect to provide lots of detailed documentation to your lender. At times, especially toward the end of the process, you may be asked for things that seem completely unnecessary, such as copies of bank deposits or letters explaining why you had a $40 collection two years prior.

If your lender is asking for something, it’s for a specific reason. To keep the process moving, your best bet is to get the lender what is needed. Quickly.

When you’re considering buying a home, one of your first questions should be, “What can I use as income?”

One obvious answer is salaried or hourly income, providing that it’s stable and you can prove that you expect to continue receiving it for the foreseeable future. Ideally, you’ll have two years of stable work experience to show, but that isn’t absolutely necessary.

Changing/starting a job

If you have changed jobs in the previous two years for either a better position or a pay increase, that’s fine with your lender, as this demonstrates upward mobility.

Recent college graduates, who are usually entering the workforce for the first time, may be asked to provide transcripts showing the dates of attendance and graduation.

Other income

There are other less obvious income sources, such as commissions, self-employment income, Social Security, disability settlements, and unemployment benefits. Some can be used under certain guidelines; some can’t be used under any circumstances.

In applying for a mortgage, you should be able to show earned commission or self-employment income for a minimum of twelve months; ideally, it should be twenty-four months. Expect to provide full documentation: Self-employed borrowers will need tax returns signed by their tax preparer and year-to-date profit-and-loss statements.

Social Security must continue for at least three years, and a disability settlement must have no end date, indicating it is expected to continue. Unemployment can’t be used, as it will eventually end.

Contact your mortgage professional for more information on what does and doesn’t constitute income.

Once you have that signed purchase contract in hand, there are many processes that need to occur before you get from accepted offer to the closing table.

Title

The first is that your lender wants to know all about the property, including who owns it and if there are any liens or claims against it. They do this by what is called “ordering title,” a process by which a representative from a title company pulls ownership papers from the county recorder’s office.

Should there be any type of lien against the property, it will show up here. And this will need to be addressed before anyone can lend money against it.

Property value

The other thing the lender needs to know is the true value of the property. As the lender will only lend money against the lower of the appraised value or the contract price, an appraisal is required; in case the borrower defaults on the mortgage and the property needs to be sold, the lender wants to know what sales price to expect.

Verification

Finally, the lender will need to further verify your income and asset information. Depending on how much of this information you were asked to provide at application, this may amount to quite a bit, and could include tax returns and details of bank deposits.

Commitment

Once all these steps are completed, and the lender is confident that both you and the property meet all the criteria that is required so you can move forward, a commitment letter will be issued to the seller, indicating the lender is ready to move toward closing.

At closing, the seller releases the property, and the buyer assumes ownership. The buyer also will sign paperwork for the lender, reconfirming the terms of your loan. After this, you are “officially” a homeowner, and you can collect the keys to your new home.

Congratulations!

Your initial meeting with your mortgage professional serves two purposes: You’ll provide information to him or her, and your mortgage pro will provide information to you.

Depending on the individual lender, your mortgage professional may ask for a small amount of information on income and assets. Other lenders may want more: paystubs, tax returns, and/or bank statements.

Mortgage pros want a clear picture of you so they can find the best loan product or products for your needs. The more information you can provide initially, the better a profile they can create, and the less documentation you’ll need to provide later.

Once your mortgage professional has gathered this information and run your credit, he or she will explain your options. You’ll have an answer during or shortly after the meeting.

Of course, individuals who are debt free with high income and great credit scores are easy to put into a program, and this can happen quickly. Others may require more time to process. If it’s taking time, it’s because your mortgage pro is shopping for the best program.

Your pro will select a program and ensure you are able to pay the monthly amount. Then a prequalification letter is issued that confirms what you are able to afford. The next step is to approach your real estate agent with the letter and start your home search.

For new buyers especially, this process can be scary; ask your mortgage pro if you have questions or concerns about your mortgage application meeting.