Articles about Mortgages

Prequalified and preapproved are two common terms you hear when it comes to getting a mortgage.

But it’s important to know they are very different things.

Prequalification

A prequalification takes 15 to 30 minutes and involves a few quick questions.

You typically do this before you look for a home.

At this point, the lender takes your word that everything you state is correct and will verify it at a later date.

A credit check is run, then all the information provided is put through an automated underwriting system, which will provide a preliminary status.

At the end of the process you’ll have an idea of how much money you can borrow, and often you will be issued a prequalification letter that states that a credit check has been run and, based on the information provided but not yet verified, you qualified for a specific dollar amount.

Real estate agents will often ask for prequalification letters in the same amount of an offer they intend to submit on a property.

Sellers, knowing that a buyer can afford much more than they are asking for a property, will be less likely to negotiate downward or offer concessions.

Preapproval

A preapproval letter is much more involved.

It will only be issued after all the paperwork is received by the lender.  This includes so much more than income and assets, such as the sales contract, the title to the property and an appraisal, most of which are sought after a contract is submitted and accepted by the sellers.

Lenders issue a conditional commitment letter between the contract date

Federal Housing Administration (FHA) and conventional financing loans are undoubtedly the most common ways of getting money to purchase a home.

FHA Loans

An FHA loan is for you if you are either asset- or credit-challenged, or both, as the minimum down payment is just 3.5%. Very few lenders, however, will fund FHA loans to buyers without a minimum credit score of 640.

According to the website LoansGuide.org, an FHA loan doesn’t require a minimum monthly income, but it does require the buyer to have no delinquent federal debts and to have steady employment.

The drawback to an FHA loan is that mortgage insurance premiums are much higher than with conventional loans.

Conventional Loans

Conventional loans are typically for borrowers who have more money to put down on a home and have better credit scores.

They require a down payment of between 5% and 20%.

Conventional mortgages typically require two months of asset reserves for mortgage, taxes and property insurance.

There are a number of types of conventional loans - from fixed and adjustable rate to biweekly.

Whatever your situation, talk to your mortgage professional about your options with regard to the two programs. A mortgage professional can help you make the best choice.

With summer well under way, many of you, especially those in areas where the weather is more adverse during the winter months, may be undertaking some of those long-overdue projects around the house.

But the cost of some larger projects like additions or remodels may prevent them from getting done.

The good news is that even with more conservative mortgage lending guidelines, using equity in your home to complete some projects could be a great idea.

Following are a few reasons why.

In the face of credit card interest rates that are at astronomical levels, tapping into a source of funding that can offer much lower rates, and interest that may be tax deductible to boot, makes a lot of sense.

Check with your tax professional for more details about your specific situation.

Home equity products come in two main types: home equity lines of credit and home equity loans.

Home equity loans, the more widely used of the two, are often of the variable-rate type and come in interest-only and amortized versions.

Rates on variable-rate loans are usually based on some economic indicator such as the prime rate.

With prime being at a historical low at this time, borrowing money for projects has never been as inexpensive as it is right now.

Home equity loans usually come with higher rates and require principal repayment each month.

Even though many homeowners may now have less equity in their homes than they used to in years past, they still have a great resource to draw on.

All in all, home equity products are a great way to go, considering some of the benefits that they offer, and should be at least looked into when considering a funding source for your next project.

With all the changes that have affected the mortgage industry over the last few years, it is now easier to get the very best loan for your needs.

When looking to purchase or refinance a home mortgage, the first question you need to ask is: How long do I plan to own the property?

If you are quite certain that you are going to be there only for a set number of years, it would be best to find a loan that will provide you with the best rate for the least cost for that period of time.

After you have decided what your needs are, it is time to go and find a mortgage. New disclosure laws that went into effect at the beginning of this year should help you compare apples to apples as far as information you receive from different lenders.

Lenders have, for some time, been required to disclose to you within three business days of application what they plan on charging you for a mortgage, both in rate and fees. Did you know that the final costs now need to be within certain percentages of the initial estimates or the broker/bank is responsible to make up the difference?

There are, of course, changes in circumstances that can occur as a result of market conditions, such as interest rate changes. You are again covered, though, as the lender is now unable to surprise you with points or fees at the closing table.

Always check with multiple lenders, and have someone you trust who is mortgage-knowledgeable, such as a real estate attorney, review anything you sign.

With the different number of financing options available these days with which to purchase a home, the Federal Housing Administration (FHA) loan may be the right choice for you as it has lower credit score requirements than does its conventional mortgage counterpart.

Following is a comparison of some of the features of both types of loans:

With credit score requirements much higher than they were even one year ago, if you want to go with conventional financing but are below the minimum of 720, you will wind up paying a premium to the lender, and often a hefty one.

If you go the FHA route, the minimum score you are looking at will be around 640.

FHA has lower score requirements, but the individual lenders can and do set their own minimums based on the risk they want to take. Some will go lower than 640 but will undoubtedly charge a premium for this extra risk.

Downpayment and asset reserves are another area where you might fare better with an FHA loan than a conventional one.

The minimum downpayment for FHA is 3.5%, whereas the minimum on conventional is 5%.

Conventional mortgage guidelines call for two months of asset reserves at closing, meaning two months of mortgage payments, including taxes and property insurance.

FHA has no reserve requirements.

If there is one drawback with FHA it is the cost of doing the loan.  Unlike conventional loans, there is a 2.25% up-front mortgage insurance premium.

The good news, though, is that it can be rolled into the loan.

All FHA loans have a monthly mortgage insurance premium, regardless of the downpayment, as do all conventional loans where there is either less than 20% down or less than 20% equity in the property in the case of a refinance.

Many homebuyers and potential homebuyers know that there can be tax benefits to owning a home versus renting one. So it might be helpful to break this down to see exactly what the savings are. Always check with your tax professional for information on your specific situation.

For this example, we’ll use a married couple that makes a combined income of $50,000 per year and is renting an apartment for $1,400 per month. The couple is looking to purchase a home for $175,000 and has 3.5% to put down on a Federal Housing Administration loan.

The payment on a 30-year mortgage at 5.5%, including mortgage insurance and taxes, is $975. Municipal taxes and property insurance bring the total up to $1,402 per month.

The taxes on the property are $300 per month, or $3,600 per year. The mortgage interest that the couple would pay for the first year comes out to $9,392.88. They now have $12,992.88 worth of deductions toward their tax returns. We’ll leave out mortgage insurance for this example.

Our couple, making $50,000 gross per year without other deductions, is in the 15% tax bracket. This means that if the couple were still renting, before other deductions they would pay $7,500 ($50,000 x 15%).

Now, with the $12,992.88 home ownership benefit, their taxable income is $37,007. At the 15% tax bracket, the new income tax due is $5,551.07.

This is a savings of $1,948.93 ($7,500 - $5,551.07) over the course of a year. This comes out to $162.41 per month.

With record-low housing prices and the record number of foreclosures and short sales that are available these days, potential homebuyers are coming out in droves for the right properties at the right prices.

This is especially true with first-time homebuyers.

First-time homebuyers are getting deals one homes that even a year or two ago might have been out of reach.

But there is a drawback.

When looking at short sales and foreclosures or other distressed properties, it’s important to keep in mind that the taxes might be higher than you think.

This is an issue that needs to be addressed when you go to get pre-qualified.

Prior to being distressed, the properties had some assessed values that either the county or other taxing authority had placed on them.

When a property’s price was dropped by the seller, the tax or assessed value most likely remained the same.

Let’s say you are a first-time homebuyer who can afford $1,400 per month for mortgage, taxes, property insurance, etc., each month. When you get qualified, your lender might assume, for example, a tax rate of 2.5% per year on any property you look at.

If your total payment comes to $1,400 per month, and then you go and look at a property where the assessed value is double the contract price then your effective tax rate is now 5%, doubling the tax component of your payment.

This can easily lead to frustration for all involved.

Homebuyers must know how much of the payment quoted by the lender is for taxes.

If you’re looking at distressed properties, then your effective tax rate will be the same as if you had purchased it at a pre-foreclosure or pre-short sale price.

In an effort to keep fraud in the mortgage industry to a minimum, a new set of laws was introduced in 2010 to address how lenders must disclose important information to borrowers.

The laws attempt to do two things.

The first, part of which has been in place for some time already, is to disclose information to borrowers in such a way that they can shop around and compare options.

The second is to disclose fees in such a way as to avoid surprises at the closing table, specifically for people purchasing a home as opposed to just refinancing.

Fees are disclosed on what is called the good faith estimate at the time of application. The costs disclosed in these estimates must fall within certain tolerances of the actual numbers that borrowers will see at the closing table.

The costs can definitely go up in certain circumstances, such as in the case of rate spikes, but this information must be disclosed to a borrower well in advance of closing so the borrower can decide whether or not to proceed with that lender. Should there be huge overages in the costs from an initial estimate, the lender must absorb the difference. The new rules will permit borrowers to compare apples with apples when looking for a mortgage.

When reviewing offers, however, keep in mind that a lender might charge a higher fee but offer a lower rate that might pay for the fee many times over and could be a better deal than a no-closing-costs loan with a higher rate.

A mortgage is a major obligation. People look at their annual mortgage statements to see what they paid, but they rarely think what can be done with their mortgages.

What to look for

When reviewing your mortgage, look at the renewal date, interest rate and prepayment options. By looking these things, it may be possible to find a way to pay off your mortgage faster or save money.

The renewal date is the date your mortgage has to be renegotiated. Knowing this date tells you how long you will be paying the current interest rate.

Take a look at the rate

Reviewing the interest rate is important. It may make sense to get a new mortgage if your interest rate is higher than current rates.

The things to think about when setting up a new mortgage are prepayment penalties, lawyer fees and other expenses.

The question to ask is “Will I save money?”  You may also want to think about other debts you have. Would you save money on those debts if they were included in your mortgage?

Look at the pre-payment options. Making prepayments will cut the interest you pay by thousands of dollars unless there are penalties. How much would you save if you used some or all of your prepayment options?

Look at the type of mortgage you have. Is it the right type of mortgage for your current situation? What are the risks attached to the type of mortgage you have? What will happen to your payment if interest rates change?

Your annual mortgage review will tell you if your mortgage is right for you and if you will achieve your mortgage goal.

The calculations can be complicated and you may want to ask your agent for help.

With home prices and interest rates at historical lows, now is the ideal time to at least be looking into your options with regard to purchasing an investment property.

Whatever your intent, your best bet is to start by doing two things. First, sit down and figure out what your goals are in purchasing a property, both short and long term. Second, figure out if it makes sense on paper.

A good real estate agent or appraiser should be able to help in determining property values in a given location, with specific attributes such as venue, square footage and number of bedrooms, and what those properties would bear in a rental market as well.

Looking at foreclosures, short sales and bank-owned real estate is a good place to start looking for properties, as they are often below market value. Keep in mind that they may need a bit of work.

Financing an investment property is similar to financing a primary residence, but the rates are higher as are the reserve requirements.

Also, investment properties are financed primarily by conventional loans, as the Federal Housing Administration lends only on homes where the buyer intends to live, with the exception of multiunit properties where the buyer plans on living in one of the units.

Plan on putting 25% to 30% down, and have six months worth of assets in the bank with which to make the payments. This is a bit steep, but lenders want to know that you are committed to making it work.