Mortgage Information Guide
Learn About:
* FHA Loans
* VA Loans
* Private Mortgage Insurance
* Community Homebuyer Programs
* Adjustable Rate Mortgages
* How to Qualify For a Mortgage
* Title Insurance
* Tax Deductible Interest
* Your Credit Report
* The Documentation Needed For a Mortgage Application
* The Benefit of Points
FHA financing is excellent source for those buyers who are not working
with enough cash for 5 or 10% down payment, and who do not have VA eligibility.
FHA(The Federal Housing Administration) was established in 1934 to make home
ownership possible for millions of American home buyers. The FHA does not
directly lend money but rather insures against losses on real estate loans
made by approved lenders. Smaller down payment requirements along with
more liberal underwriting guidelines provide easier terms for home
ownership. The FHA secures its funds through the imposition of a
mortgage insurance premium (MIP). These premiums are used by the
FHA to establish a reserve account sufficient to reimburse a lender
in the event of a foreclosure. FHA loans typically have lower
closing costs and offer interest rates that are competitive
with conventional rates. There are 30 and 15 year fixed
loans, adjustable rate and buydown FHA mortgages.
VA (Veterans Administration) financing is among the most liberal methods
for financing a primary residence. In fact a qualifying Veteran can
finance up to 100% of the value of the home with a loan up to $240,000.
VA guidelines allow easier qualifying and credit standards and offer
competitive interest rates. A seller may also pay all of the closing
costs on behalf of the Veteran buyer making it possible to purchase
with no cash outlay whatsoever. Reservists that meet certain standards
are also now eligible for full VA benefits.
If the down payment on your home is less than 20% lenders will require
you to obtain Private Mortgage Insurance, also referred to as PMI.
Private Mortgage Insurance protects a lender from loss due to payment
default by the borrower. PMI allows buyers to purchase homes with less
than 20% down. PMI is offered exclusively by private mortgage insurance
companies. The premium for PMI is determined by the actual percentage
of down payment and loan type. Due to the risk, the PMI expense is
greater on higher loan to value loans and adjustable rate mortgages.
PMI can be eliminated upon request after a buyers loan to value has
fallen to under 80%, and must be released by the lender when the loan
to value has fallen to 78% or below.
The Community Home Buyer Program is a loan that was first designed by
FNMA (Federal National Mortgage Association). This loan was provided to
create more opportunity for home ownership for thousands of people who
might not otherwise qualify for standard lending quidelines. FNMA has
determined that an educated borrower is more likely to be able to
maintain consistent mortgage payments. This program allows for
higher qualifying ratios and lower down payments compared to standard
conventional financing. FNMA has also minimized the cash reserve
requirements on this program and the interest rates are the same as
standard loans. To be eligible for the Community Home Buyer Loan your
family income must be lower than the HUD median income limit in your
area. You may also own only one home at the time of closing. FNMA
has published the Home Buyers Guide that must be reviewed and completed
by the borrower. The lender must also provide counseling on the
topics in the guide. The borrower may qualify for a loan up to 97%
of the home value, with this program.
An adjustable rate mortgage is an excellent option for home buyers
hoping to save money in the early years of their loan. In fact the
right adjustable program could be the right option for anyone thinking
of moving or refinancing within the first 4 to 10 years of their loan.
Other buyers use the adjustable loans to help them qualify or because of
expected advancing income. Most adjustable loans offer protective
interest rate caps with each program anniversary and over the life
of the loan. On the anniversary, when the loan adjusts, the new
rate will be based on an index plus a pre determined margin.
Typical adjustable parameters are as follows:
Anniversary cap-2% Index- 1 or 3 year Treasury Bills
Lifetime cap-6% Margin- 2.75%
There are many different types of adjustable mortgages to choose from.
Normally those programs with shorter initial fixed rate terms will
have lower interest rates:
6 month adjustable
1 year adjustable
3/1 adjustable
3/3 adjustable
|
5/1 adjustable
7/1 adjustable
10/1 adjustable
COSI adjustable
|
It is difficult to generalize qualification quidelines due to the
many various loan options available. In fact some lenders do not even
require the verification of income, employment or assets with a large
enough down payment. There are certain similarities among all loan
programs described below. The following five criteria are examined
on each standard loan prior to approval.
PROPERTY VALUE
The lender is concerned that the loan be based on the true market
value of the property. An appraiser will be hired to compare other
similar, recently sold, and nearby properties to determine the best
opinion of value. It is also important to verify whether a property's
condition, location or current zoning could affect the lenders ability
to market the property in the event of foreclosure.
CREDIT
Good credit over the last two years is important to mortgage
underwriters. Any outstanding collection accounts or judgments
must be paid in full prior to closing. Any lateness will have to be
brought current and explained in writing. No established credit
history can also be a lender concern. Certain lenders will accept a
poor credit history but may require a higher interest rate and a
larger down payment.
EMPLOYMENT STABILITY
FNMA requirements indicate that a borrower typically be
employed in the same line of work or profession for the
past 2 years for that income to be used to qualify. Education
in that career path can be considered in the 2 year history.
Part time, commission, self employment, bonus and overtime
should be in place and will be averaged over a two year period.
Lenders are flexible with employment guidelines, but any
employment gaps should be explained in writing.
SUFFICIENT INCOME
Lenders will calculate payment and debt ratios to determine
sufficient borrower income to qualify. The payment ratio is
calculated by dividing the total monthly mortgage payment and
any association fee into the gross monthly income. The debt
ratio is determined by adding all installment payments,
revolving payments, and child care or alimony to the proposed
total mortgage payment and dividing that total into the gross
monthly income. The payment ratio, referred to as the front
ratio, is commonly required to be lower than 33%. The debt
ratio, referred to as the back ratio, is often required to be below 38%.
On certain 95% loans and adjustable rate loans over 80% loan to value,
ratios of 28% and 36% may be required. FHA requires ratios of 29%
front and 41% back. VA is even more liberal with a single ratio of 41%.
Lenders will often exceed these required ratios if the borrower shows
other strong attributes.
ASSETS TO CLOSE
Underwriters will examine two or three months bank statements to
confirm sufficient assets to cover down payment and closing costs.
Most lenders follow FNMA guidelines which prohibit applicants
from borrowing any part of the funds required to purchase. A
gift from a family member or a loan secured against any one of
the borrowers non liquid assets is allowable. Unless a buyer is
putting 20% down, standard conventional FNMA guidelines require that a
borrower have 5 % of her/his own funds involved in the purchase.
Conventional loans with only a 5% down payment will require a full two months
total payments as cash reserves in the bank after all closing costs
and down payments are accounted for. FHA and VA financing does not
require cash reserves or 5% to be the borrowers own funds.
A clear title is the foundation of property ownership. It is the owners
legal right to posess and use that property within certain limitations of
the law. A title search is a detailed examination of the historical
records concerning a property. The purpose of the search is to certify
the sellers right to transfer clear ownership or title to the property.
A title search can show possible defects, leans, or restrictions such as
unpaid taxes, unsatisfied mortgages, judgments against the seller and
restrictions limiting the use of the land. Title Insurance also
protects against other hidden defects. For instance the previous
owner could have incorrectly stated his marital status, resulting
in a possible claim by the legal spouse. Other hidden defects
include fraud, forgery, defective deeds, mental incompetence,
confusion due to identical names, and clerical error. Title
insurance is your protection against loss if any problems or
hidden defects cause a loss or a claim against your ownership.
If a claim is made against your property, title insurance will,
in accordance with your policy, assure you with a legal defense
and pay your costs and legal fees. If the claim proves valid,
you will be reimbursed for your loss up to face amount of the
policy. Title insurance will last as long as you or your heirs
retain an interest in the property. Lenders will require that
buyers carry title insurance as well as necessary endorsements
for additional special protection. The cost of title insurance is
normally determined as a percentage of the sales price, and will
differ from state to state.
The single largest financial benefit with home ownership is the
interest tax deduction. The Federal IRS now allows up to $100,000
of interest paid on a first and or second home to be directly
deducted from your taxable income. This is a significant savings
and for millions of Americans their largest tax advantage. The
points that are often paid, by the buyer or seller, when a home
is purchased are also fully tax deductible for the buyer in the
same year as the closing. Points paid for a refinance however
are deductible over the term of the loan or when the loan balance
is paid in full. This type of tax benefit can help save thousands
of dollars a year, or even help a family shift into a lower tax
bracket. I advise all of my borrowers to sit down with their
tax accountant after buying a home to get advice on how to adjust
their W-4 form on their jobs. Adjusting the W-4 form is a legal
way to ask your employer to take less from your weekly paycheck for
federal taxes. This will prevent a tax refund that may seem to large
and provide the buyer with a noticeable pay increase. Below is an
example of the tax advantage of buying a $100,000 loan at 7.75% interest rate.
Payment for Principal and Interest is $628 per month. In year one most
of the payment is interest and deductible. Approx $550 per month.
$550 X 12 is $6,600
The $6,600 represents the income that this borrower will not have to pay
the IRS taxes on.
$6,600 X 28% is $1848 (assuming a 28% tax bracket)
The $1848 represents the additional disposable income this borrower will
have to spend on the housing expense.
$1848/12 is $154
This family now has an extra $154 in their monthly pa checks to put towards the
housing payment if they wish.
A buyers credit report is an important part of the loan approval process.
A credit history is an approximate accumulation of important information on
most of a persons installment loans, mortgages, leases, charge cards or
debit cards. A credit report will also show to a lender judgments, paid
or unpaid collectable accounts, bankruptcies as well as recent inquires,
previous addresses and credit scoring information. Underwriters pay
particular attention to the outstanding monthly obligations as well as
the frequency of lateness. Creditors will report 30, 60, 90 days
lateness and collection accounts for up to seven years even if paid
in full. Bankruptcies are reported for up to ten years. Most
creditors are looking for a borrower who has a history of satisfactory payments.
A one time problem in a customers payment pattern may be acceptable if
backed up with a good explanation. The last two prior years credit is
considered the most important. FHA and VA lenders are often slightly
more lenient than conventional. Conventional underwriters may also
be more lenient with larger down payments. If your credit is poor
and normal loans are not an option, there are many lenders offering
loans at higher interest rates with 10% or 20% down payment. It is
recommended that everyone check their own credit report every few
years for inaccuracies. All three major credit repositories have
agreed to provide one free credit report annually upon your written request.
Trans Union Consumer Relations
P.O. Box 1000, Chester, PA 19022 - (800) 888-4213
Experian Consumer Realtions
PO Box 2002, Allen, TX 75013 - (888) 397-3742
Eqifax Consumer Relations
PO Box 740241, Atlanta, GA 30374 - (800) 685-1111
If you are buying a home and you would like Scott to review a
merged credit report at no charge to you, see Check my Credit
on the main menu or
click here
- Sales contract on the Home you are purchasing
- Last 2 years W-2's (or 1099's for sub contractor)
- Last 2 years (personal and Corporate or Partnership) complete 1040 Tax Returns
(and all Schedules)
- YTD Profit & Loss Statement(If self-employed)
- Most recent 30 days pay stubs
- Previous 3 Months Statements on all Savings Accounts (Bank/Credit Union/401K/Stock Broker) and documentation to Prove Source of all Recent Deposits over $1,000 (other than pay)
- Liquidation statements for any CD, Stock, Bond, or 401K being used to purchase
the home or liquidated within the last 6 months
- Coupon Book or most recent billing Statement for all loans and mortgages
- Checkbook to pay Application Fee
- Divorce Decree (if applicable)
- Support or Separation Agreement (if applicable)
- Last 12 Months canceled Rent or Mortgage Checks (if possible)
- Landlord Name and Address for 2 years
- College Diploma or Transcript if student within the last 2 years
- Listing Agreement or Sales contract on present home, and HUD 1 closing
statement when sold
- Relocation Benefits and copy of Relocation Policy (if applicable)
- Addresses of Other Real Estate Owned and Leases (if applicable)
- (FHA and VA only) Social Security Cards and Photo Id's
- (FHA and VA only) Legal description of new home
- (VA only) Certificate of Eligibility and DD-214
- (Refinance Only) Deed of Home being Refinanced
* Ownership in excess of 25% of a company requires personal and corporate
1040 tax returns. Additional information may be required, depending
on the type of loan.
Please Note: Providing the information listed above at application will
assist in the expedient processing of your loan.
Click here to return to the Mortgage Information Guide index
One point is equivalent to one percent of the loan amount.
Paying points is voluntary, in fact lenders offer options with
many choices for points ranging from 0 points to 6 or more.
Of course the larger the number of points being paid the lower
the interest rate. Paying three points has become somewhat
customary and is the most widely selected option. In many
cases the seller may also pay points on behalf of the borrower.
Another major benefit of points is their tax deductibility.
Even if points are paid by the seller towards the buyers
closing costs, the buyer may deduct all of the points from
their gross taxable income. When purchasing, the points are
deductible in the year that they are paid, but with a refinance
any points must be deducted evenly over the term of the loan.
Customers often ask if paying 3% of the loan is a worthwhile
investment. I show this example:
Loan amount $100,000 for 30 years
| |
3 points |
0 points |
Interest rate |
8% |
8.625% |
Principal & interest |
$733 |
$777 |
Actual cost of points |
$3000 |
$-0- |
After tax cost of points (28% tax bracket) |
$2160 |
$-0- |
Monthly savings is $44
It takes 49 months or 4.09 years to save back the $2160 after tax points
that were paid up front. The total savings over the life of the loan
could be $15840. Well worth considering.
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