HOME LOAN ADVICE
is available with a simple click of the mouse everywhere on the internet. There is plenty of free material on the internet; enough to confuse the average homeowner into making perhaps the largest mistake ever made. Our goal is to share with you our extensive knowledge based on our 25+ years of lending experience.  We will do our best to explain things in simple layman's terms so as to help you make informed decisions about financing or re-financing of your home or investment property.

How your loan application is viewed by the banks and mortgage companies

Ability-to-Repay Rule

 
When you apply for home financing, lenders are required to ensure that you have the ability to repay the loan. This is done through the use of the following underwriting criteria:

  • Current income or assets 
  • Monthly payment on mortgage(s)
  • Monthly payments on all other obligations
  • Final debt-to-income ratio
  • Credit history

How much do you make?


Lenders will qualify you based on your Gross (before tax) income. You must have a source of income to qualify for a home loan. Sources can include wages, self-employed income, interest, investment income.

​Other forms may also be considered as long as they can be documented either with tax returns or in some cases, bank statements.

The simplest income calculations are for W-2 employees. Your current base pay is used.  If you receive a bonus or overtime, a two year average will be considered (must be able to prove 2 years consecutive bonus/overtime pay).

If you are self-employed and own more than 25% of a business, one to two years adjusted gross income as shown on your tax returns will be used.  There are variables here so do not attempt to calculate on your own.


The total of all of your minimum monthly payments is added together. Included hereto: car payments, minimum monthly charge card payments, student loans, other loans.  Not included: utility bills, medical bills.


The Final Numbers
 

The total of all monthly payments is divided into your monthly gross income.  Generally speaking, the lender is looking for a maximum of 50%. This means that your total payments above cannot exceed 50% of your income.  This figure varies slightly depending on your particular transaction. In some cases, the maximum will be limited to 43% while others - FHA loans for instance, the maximum debt load can be extended to 55%.




How's Your Score?


Choosing a lender isn't the first step in becoming a homeowner. In reality, the home buying process starts and ends with your finances. To make your goal of home ownership realized, you must consider your FICO score along with the type of lender for which you'll qualify.

A FICO score is a review of your years of credit history based on an instrument developed by Fair Isaac and Company. The score ranges from 300 to 850, with the majority of people traditionally having a score of 650. Job loss has been common in the last few years, but FICO scores aren't necessarily adjusted "on a curve." A low score is a low score and that often means you can't get credit extended to you via a mortgage loan.

Some of the factors in calculating your FICO score include:

  • Payment History — Do you pay your bills on time each month?
  • Credit to Debt Ratio — How much do you owe versus how much credit you have available?
  • Credit Inquiries — How many times has your credit history been accessed by someone other than you?
  • Types of Credit — Do you have a healthy mix of credit cards and loans?
Lenders want to ensure that giving you a loan is a safe move. Your FICO score gives lenders an insight into what type of borrower you'll be solely because of your credit history. You'll need a score of at least 740 to get a decent interest rate. If your score is lower, you can still qualify for a loan, but the interest accumulated over the life of the loan could be more than double the amount of someone with a near perfect FICO score.

How do you obtain a stronger score? Improving your FICO score takes time. It can be difficult to make a significant change in your FICO score with quick fixes, but your score can improve in a year by keeping tabs your credit report and by using your credit wisely. The most important thing is to know your FICO score.

Here are some ways you can improve your credit score:

  • Even out your debt. At first, this doesn't sound like a good idea. But, you want to avoid of having one card that is at the limit and have your remaining cards at a zero balance. It's better to have each of your cards at about 30% of their credit limit than to have all of your debt taking up the balance a single card.
  • Apply for service station cards or chain store credit. For those who have no credit or less-than-stellar credit, retail credit cards and gas credit cards are ways to establish your credit history, increase your credit limits and keep up your payments, which will raise your credit. You must always beware of keeping a high balance for more than a couple of billing cycles because these types of cards usually have a higher interest rate.
  • Keep your cards in rotation. Whether you have older cards, or are just getting started with credit, be sure to use your cards so that your accounts maintain an active status. But, make sure you pay them off in one or two payments.
  • Stay on top of payments. Payment history is a huge factor in your FICO score. It's one of the reasons people who have recently experienced job loss see the biggest dip in their credit score. Yes, it takes longer to build up your credit with payment history, but it's the most reliable way to prove that you're responsible enough to make payments to a lender.
  • Ensure that your credit history is correct. If you find mistakes on your credit report, write to the bureau asking that the item be removed. If you have a common name or the same name as a family member, you'll want to give extra care to make sure the activity reported is correct.
  • Get more information by visiting myFICO.com, Fair Isaac's informational site and review your credit history for free at annualcreditreport.com. And, for a small payment, you can get your FICO score from each bureau on their websites: equifax.com, experian.com and transunion.com.

Now that you're better informed about credit reporting, you'll be able to successfully take the first steps to home ownership, and that is improving your FICO score. Remember that when it's time to apply for a loan to purchase a house, you'll want to keep your lender applications within a two-week window to avoid adverse effects on your credit score.

Loan Types and Down Payment Amount

Mortgage lenders offer many different loan terms ranging from 10-year, 15-year, 20-year and 30-year terms.  A 30-year loan will keep your mortgage payment as low as possible however, longer terms typically have higher interest rates.  You should compare the cost of different mortgage terms and interest rates to help determine what is within your range of affordability. The amount you put down on a purchase or the amount of equity you have when shopping for a refinance plays a huge part in the rate and cost of the loan too. Typically, the more equity, the better security the lender has which translates to better overall terms for you. 


There are costs associated with Every Loan Transaction.  Either You or your lender will pay all or some of these fees.

Loan-Related Closing Costs

Loan Origination Fee This covers the administrative expenses in setting-up and processing the loan. The loan origination fee may be a percentage of the mortgage amount.

Points (optional) An option for the home buyer is to pay points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount. For example: on a $150,000 loan, 1 point would equal $1,500.

Appraisal Fee The fee for having the house appraised may be incorporated into the closing costs or payment may be required by the lender at the time the loan application is submitted.

Credit Report The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.

Interest Payment Typically the buyer is required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins. For example: If closing is on May 15. Your first monthly payment begins to accrue interest on June 1 with your first mortgage payment due July 1. At closing an interest payment covering the accrual period between May 15 and May 31 may be required.

Escrow Account At closing a payment may be required to fund the escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account.

MORTGAGE INSURANCE FAQ

What is Mortgage Insurance (MI)?
Mortgage Insurance - also known as 'MI', protects a lender's investment in the event a homeowner should default on a home loan. Mortgage insurance is a financial guaranty business in which the insurer assumes a portion of a lender's risk in making a mortgage loan. Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%

Why is private MI needed?
Experience shows that homeowners with less than 20% invested in the cost of a home are more likely to default, making low-down-payment mortgages riskier for lenders and investors. To offset that risk, lenders and investors typically require mortgage insurance for loans with down payments of less than 20%.

What's the difference between Mortgage Insurance and FHA insurance?
Mortgage Insurance is the private sector alternative to Federal Housing Administration (FHA) mortgage insurance, which is a government program backed by taxpayers. Private MI typically may be cancelled sooner than FHA and is often less expensive.

Are private mortgage insurance and mortgage life insurance the same thing?
No. Private MI is not mortgage life insurance, which pays off a mortgage if the homeowner dies or becomes disabled.

Are private MI and homeowners insurance the same thing?
No. Homeowners insurance protects homeowners from loss due to theft, fire or other disaster. Private MI protects the lender and investor from loss, not the borrower.

Are MI premiums tax-deductible?
Borrower-paid MI premiums may be tax deductible. We are not legally able to provide Tax advise. You should contact your tax adviser. You can also check the IRS website for assistance.

The Better Tax Deductible Alternative to a Loan with Mortgage Insurance

Lender Paid Mortgage Insurance (LPMI)  
LPMI offers a better income Tax deduction for those who are not eligible to deduct their mortgage insurance. Generally speaking, the overall payment comparison between a loan with Mortgage Insurance V. one without favors the one without.

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 Our Lending Group is spearheaded by a 25 Year experienced Licensed Broker who will be your Single Point of Contact throughout the entire loan transaction.

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