Author: production

After last year’s surge, housing prices are leveling off in some areas as the real estate market cools. And sellers are motivated. Their homes may have been on the market since late winter or early spring. Anxious to sell their properties, they now may be prepared to consider lower offers.

Also, as the school year comes to a close, sellers who are planning to relocate their families and get settled in their new neighborhoods before September know they have a specific time frame within which they must work. They’ll be more open to offers, as well.

If there ever was a time to at least consider looking for a home – for no other reason than to discover what it would take from a financial perspective to become a homeowner – it is now.

Low rates

While rates have shifted upward in the last year, they are still relatively low, historically speaking. Plus, rents in many parts of the country are now higher than it would cost each month to own a home, without adding in other benefits, such as tax write-offs relating to holding a mortgage.

You need to think longer term: Consider the long-term benefits of purchasing a home, such as being able to build up your equity over time. Also imagine the feeling when you finally pay off your mortgage. People who are long-term renters will never know that feeling.

Your mortgage professional would be glad to assist you with any questions you may have about qualifying for a home.

Most people know that discussing options with a mortgage professional is an important step to finding out how much house you can afford to buy. However, few realize that understanding what lenders look for is also critical to the home-buying process.

First, you need to calculate your current debt load and your price range. To determine your price range, your debt load is reduced to two ratios – the Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). These limits may vary, but it’s wise to stick to the guidelines.

The first guideline is that your monthly housing costs (GDS) should not exceed 28 percent of your gross monthly income. The housing cost is your monthly mortgage payments, which includes principal, interest, taxes, and heating expenses. Lenders add up your housing costs and figure out what percentage they represent of your gross monthly income. Note that the better your credit score, the higher your GDS ratio can be.

Your entire monthly debt (TDS) should not be more than 36 percent of your gross monthly income. Again, the better your credit, the higher the ratio. Your entire debt load includes housing costs plus all other debt payments – car loans, credit card payments, loans, lines of credit, alimony, etc.

The maximum home price you can realistically afford depends on a number of other factors as well. These include your household gross monthly income, your down payment, and the mortgage interest rate.

If your calculations show that you are ready to begin the home buying process, then the next step is getting pre-approved. Not only is this confirmation that you are approved for a set amount, it will also lock in a favorable interest rate.

The hardest part for many first-time home buyers is saving for the down payment. There are options available, and first-time home buyers should speak to their mortgage professional.

Debt-to-income ratios seem to generate many questions from borrowers. If you have questions on this subject, the information below may help answer them.

Debt

As well as the mortgage payments you are hoping to take on in purchasing or refinancing your home, your revolving and installment debt represent the greatest concerns to lenders. These include such items as car and credit card payments, as well as other types of loans, if you have them.

Note that lenders usually aren’t concerned about things like gas bills and bills for food and clothing, unless you’re applying for some types of VA loans.

Income

The income that lenders use in their calculations is gross income. This is what you make before any taxes are withdrawn. You will be asked to show two years of income documentation, meaning: full tax returns, W-2 forms, and up to two months of your recent pay stubs.

If you are either self-employed or in a commissioned position, you will have to be able to demonstrate two years of history in that job. If you have previously received a base salary, but have recently begun to receive commissions, these commissions will be prorated over a two-year period.

The Ratio

Your debt-to-income ratio can be found by dividing all your debt by your income. For example, if you make $4,000 per month, and the debt you carry, as described above, totals $1,500 per month, your debt-to-income ratio is $1,500/$4,000, or 37.5 percent. Ideally, your lender would like your ratio to be in the 40 percent range, or lower. In fact, the lower, the better.

In the long term, events such as adding a new family member and changing your employment status can affect your income, and therefore your debt-to-income ratio. These are important items to factor in when considering how much home to buy. Discuss any concerns with your mortgage professional.

In January this year, the federal government implemented its latest set of rules aimed at combating fraud in the mortgage industry. Will they affect you, and if so, how?

Introduced a year ago, these are called Qualified Mortgage (QM) rules, and they’re designed to provide lenders with a high level of assurance that borrowers who are financing a home are sufficiently qualified to meet their payment schedules.

As lenders sell most mortgages after closing to investors through Fannie Mae and Freddie Mac, QM rules are really about proving to Fannie and Freddie that you are a solid borrower.

While these rules have no impact on your ability to qualify for a mortgage, they will ramp up the amount of documentation that you will be asked to provide. Expect to deliver, at a minimum, two full years of tax returns, 30 plus days of pay stubs, and bank statements for any account you plan on using in the transaction.

These documentation requirements will likely have the greatest impact on self-employed borrowers, as they usually are required to present more paperwork than salaried or hourly employees.

For mortgages that fall outside of the traditional 15 or 30-year mortgages – such as interest-only loans, for example – there will be non-QM programs that allow lenders to retain these mortgages in-house. You would still have to qualify for these mortgages using the same guidelines, but instead of being sold to investors, they would be held by the lender and still undergo a very high level of scrutiny.

With the beginning of the competitive spring buying season, you may be interested in buying a fixer-upper. If so, the FHA 203K rehab mortgage is something to consider.

The 203K program allows you to purchase a home and obtain the money to make improvements to it in one mortgage. While it is a more involved process than taking out a traditional mortgage, you can borrow money against a property with a low value in its unimproved state and improve it to increase its value.

Repairs that can be made using 203K money include furnaces, water heaters, carpeting, and roofs, among others.

How it works: The first step is to find a mortgage lender who can process 203K loans. It’s common practice with most lenders to handle these loans; however, some don’t. Be sure your lender offers 203K products.

Then you need to find a fixer property you’re interested in purchasing. Once it’s been identified, you can proceed with the process of applying for the loan; you’ll be facing multiple cost estimates, and a special appraisal will be ordered to calculate the post-improvement value of the property.

A 203K consultant will also be brought into the project for your protection and that of FHA. The consultant will help manage the project from quality and timeline perspectives.

If the cost of the property plus the repairs adds up to less than the appraised value, the mortgage process will continue as it would with most other FHA mortgages. Expect it to take 30 to 45 days from start to finish.

Once you go to closing, money for the repairs goes into an escrow account. Draws are paid to the contractors in stages as the work progresses.

Be aware that there are special rules regarding the hiring of contractors; your mortgage professional can answer these and other questions you may have.

The level of disclosure that needs to be provided to borrowers on or soon after a mortgage application is higher than it has ever been.

This is for your protection, and it’s in your best interest to understand your lender’s paperwork, particularly two key documents: the Good Faith Estimate (GFE) and the Annual Percentage Rate (APR), which complies with the Truth in Lending Act (TILA).

The Good Faith Estimate

The GFE shows the estimated costs and other expenses related to the financing of a property. It’s significant, as it sets out what costs, including origination fees paid to your lender, cannot by law be increased at any point in the mortgage process. It also points out other fees that can be increased, but only up to a certain limit (“tolerance”).

At closing, the GFE estimates are checked against the actual fees you were charged for certain services. If there’s a discrepancy in your favor, or fees were charged that weren’t included on the GFE, there may be a “curing,” or a refund of fees.

Truth in Lending

Under TILA, you are entitled to know the APR of the loan. The APR is your adjusted interest rate after fees have been rolled in. In simple terms, this means that if two lenders have the same interest rate on the same mortgage, the one with the higher APR is charging higher fees.

It may sound confusing, but it pays to fully understand the paperwork.

Your mortgage professional can help decode it for you.

An appraisal is an important part of any home purchase. This is an evaluation, ordered by lenders, that tells them exactly what their money is going towards; because they focus on the actual value of your property, appraisals are different than home inspections. An inspection looks deeply into the condition of a property, but is less concerned with what it is actually worth.

Once you have a signed contract on a property, and your real estate attorney has reviewed it, your lender will order an appraisal. As the buyer, you’ll pay for the appraisal up front, and regardless of the results, the fee is usually non-refundable.

Once the appointment has been made, but prior to the actual appraisal, an appraiser will look online at what similar homes in the area have sold for recently.

These are called comparables, or comps. Since no two properties are identical, the appraiser will make individual adjustments to the comps to come up with a value for the property. Differences in square footage, number of bedrooms, and lot size form the bases for the appraiser’s adjustments.

After completion, the appraiser sends his or her report to the lender. It happens infrequently, but your deal could be in jeopardy because of a low appraisal. More often, there are items listed on the appraisal that need to be addressed before the lender will give you money to purchase the property. Typically, items such as broken water heaters and missing staircase railings will trigger a hold on your loan.

Sellers should never know the appraised value. The only thing your seller should know is whether the buyer side of the transaction found the appraisal acceptable, or if he or she is being asked to fix any of the items on it.

Your mortgage professional can explain the appraisal process and answer any questions you may have.

In the home financing process, there are different ways to buy-down your mortgage rate. One is for the short term, when your payments decrease for a certain number of months or years, and then return to the previous amount.

The other option is a permanent buy-down, which will affect the rate for the entire term of the loan.

In a temporary buy-down, you are paying to reduce the payment, but in a permanent buy-down, you are paying to reduce the rate, which will also lower your payments.

When considering buying-down, you’ll want to ask these two important questions: How much will it cost, and how long do I plan to own the home?

Your recapture period should be your guide. For example, if a buy-down will cost $2,000, but will decrease your payments by $32 per month, that equates to 62.5 months, or more than five years (2000 divided by 32 = 62.5).

If you plan to move within three years, you may want to pass. But if your idea is to live there for 10 years, it might be a good strategy.

Temporary buy-downs are typically available from one to three years. If you are thinking that this initial lower payment enables you to buy more house, note that you will be qualifying based on the payment after the end of the buy-down period. This is called the fully qualified rate, and it helps avoid payment shock when the payments increase again.

Questions? Your mortgage professional can help.

Often the media refers Fannie Mae and Freddie Mac when talking about mortgages. So, just exactly what are these two entities, and what do they do?

Fannie Mae and Freddie Mac are intermediaries between lenders and companies that invest in mortgage-based securities. Officially, Fannie and Freddie are known as Government Sponsored Enterprises (GSEs), and they are overseen by the federal government.

GSEs are important to you

How does this affect you? Basically, whenever you get a mortgage, Fannie and Freddie are likely involved.

Your lender often gives you a mortgage with the intention of selling it to one of these GSEs. Fannie and Freddie take these mortgage loans, bundle them, and sell many of them to investors as what are called Mortgage Backed Securities (MBSs).

MBSs may contain thousands of mortgages and are generally categorized by criteria such as type of mortgage, credit profile of the borrower, or the term of the loan. They may be sold multiple times, as they often are traded from investor to investor.

The process is circular: Money flows from the investors to Fannie and Freddie, and ultimately to the lenders, who then fund additional loans with this money. The lenders then send these loans to Fannie or Freddie to bundle it and send to investors. Investors then send Fannie and Freddie more money to buy more loans.

Fannie and Freddie are also instrumental in the mortgage process in that they write the guidelines that both lenders and investors use when transacting loans.

Buyers – both first-timers and seasoned – seem to have more questions about credit than any other topic in the finance process. As your credit plays a really important role in whether or not you qualify for a mortgage, here are some credit basics you should be aware of.

Your all-important “credit score” is actually the middle score assigned by the three credit bureaus: Trans Union, Experian, and Equifax. These companies collect credit information from creditors and have what are called scoring models. This information is reported to lenders and others who request it.

There are many components that make up a credit score; however, two of these components are of the utmost importance to you as a mortgage consumer: recent payment history and balance-to-limit ratios.

Recent payment history is just as it sounds, and tells potential lenders that you are able to manage the debt you currently have. This is an extremely important factor in their decision about whether you are able to take on additional mortgage debt.

A balance-to-limit ratio compares your overall credit card balances to their limits. Even if you are making your payments on time, you still may be over-extended; your balance should be 30 percent or less of limits.

If you are planning on financing a home, you may want to sit down and figure out where you are, particularly as it relates to the two previously mentioned important items: balance-to-limit ratios and payment history. If need be, pay down some credit card debt, and/or make sure you’re paying your bills on time.

Keep in mind the fact that bureaus can take up to 30 days to report credit information. You should make changes before you apply for a mortgage, so new (positive) information will be reflected when your lender pulls your credit data.

Your mortgage professional can help you with additional details regarding your credit.