Articles about Mortgages

If you’re looking to buy your first home, or if you’ve purchased before, there are a number of things you need to know about a down payment, asset reserves and other matters. First, you’ll likely have to obtain a conventional or a Federal Housing Administration (FHA) mortgage.

If you’re looking for a conventional mortgage, you’ll typically be looking at putting down between 5% and 20%. It will depend on what your credit looks like, because most conventional mortgage holders will have credit scores above 720. Scores below that will have some type of premium associated with them and make for a more costly loan.

Conventional mortgages require a minimum of two months of asset reserves as well as mortgage insurance on purchase transactions with less than 20% equity.

FHA mortgages require a minimum of 3.5% down and, depending on the lender, will allow you to have a credit score in the 640-to-660 range.

Unlike conventional mortgages, there are no asset reserves that are required. However, monthly mortgage insurance is always required, regardless of the amount of down payment.

The greatest difference between conventional and FHA mortgages lies in what is called up-front mortgage insurance. Up-front mortgage insurance is basically a onetime premium that is paid by you, at closing, to the lender. The premium can be financed.

Being that the FHA is allowing lower credit scores and lower down payments than conventional mortgages are, there is more risk in lending the money. Lenders offset this risk with more coverage for themselves.

When buying a home it’s important to understand the basics of mortgage insurance.

What is it? How does it work? What does it mean to you as a home buyer or homeowner?

First, mortgage insurance is taken out by the lender to provide protection against you defaulting on your mortgage. However, you usually pay the premiums on this insurance each month, as opposed to your lender paying them.

When most people think of mortgage insurance they think of it on a property that’s being purchased or refinanced where there’s less than 20% equity. This is true for conventional mortgages but slightly different for Federal Housing Administration (FHA) mortgages.

On conventional mortgages, the monthly premium will vary based on factors such as down payment, credit score, etc.

Borrowers with riskier credit and a lower down payment will pay more than someone with great credit and a larger down payment will.

If you get an FHA loan, the mortgage insurance works slightly differently. In addition to the monthly premium that is in place - as is the case with conventional mortgages - there is also an up-front premium. This premium can be financed into the loan itself.

Most FHA mortgages, regardless of the down payment, require both up-front and monthly mortgage insurance.

While insurance for FHA mortgages is a bit pricier than for a conventional mortgage, there are two advantages to the FHA mortgage borrower.

The first is that the credit requirements for insurance for FHA mortgages are more lax than they are with conventional mortgages.

The second is that a buyer can often put down less money on a home with an FHA mortgage and still qualify.

Ask your mortgage professional for more details.

If you’ve been thinking about purchasing or refinancing a home, now might be a good time to act - or at least explore your options.

After all, mortgage rates are at historical lows.

Opportunities that are available now may soon vanish when the housing market straightens itself out.

You could see benefits for years to come by capitalizing on current interest rates.

Following are some of the benefits:

Purchases

While home values in many parts of the country continue to fall, buyers may be holding out until they feel that the real estate market in their area has reached the bottom. Truly rock-bottom deals exist but are less common these days, especially in the case of foreclosures, as banks would rather sit on homes than give them away.

Looking at a purchase transaction as a long-term investment means that market fluctuations down the road, either way, should have only minimal influence on your decision to buy.

Refinance Transactions

As much as falling home prices are a benefit to homebuyers, they can represent challenges for those looking to refinance their existing homes. Regardless, saving a percentage point or two on a mortgage rate can add up to thousands or even tens of thousands of dollars over the life of a mortgage. There are programs that allow a refinance with little or no equity in a property, and existing Federal Housing Administration borrowers may even be able to refinance without having to get an appraisal.

Adjustable-rate mortgages are often an attractive option to their fixed-rate counterparts, as the rates are often significantly lower.

But are adjustable-rate mortgages a good fit for you?

For some period of time after you take out an adjustable-rate mortgage, it has a fixed rate.

After that time period has expired, the rate fluctuates based on an agreed-upon index.

The time period is often anywhere from one to seven years.

In the past, part of the attraction of adjustable-rate mortgages was that the initial qualifying rate was low.

This often allowed homebuyers to purchase a home that would have been out of reach had the qualifying rate been higher.

This was great in the first part of the loan.

However, as payments went up and incomes either stayed the same or decreased, challenges for borrowers arose.

This clearly came to light during the recent mortgage meltdown.

To address this situation, mortgage guidelines were updated to require that people qualify for their adjustable-rate mortgage at the highest rate that it could ever go.

Even in light of the fact that the initial rate is lower in the adjustable-rate mortgage, the stable payment over the life of the loan makes the fixed-rate an attractive option.

Adjustable-rate mortgages do have their merits, though.

For example, adjustable-rate mortgages are ideal if you’re going to be in the property for a few years and then sell it before any rate adjustment takes place.

Want more details about adjustable-rate mortgages?

It is best to contact a mortgage professional for advice on such options.

Your credit score can affect your ability to get a mortgage. Mortgage professionals rely on such scores to assess whether you’re a candidate for a loan.

A credit score is more or less a rating of how a person is able to manage the credit that he or she has available.

Creditors, such as credit card companies and the like, report information such as payment history to credit bureaus, the primary ones being TransUnion, Experian and Equifax.

When your mortgage professional pulls your credit, he or she will receive information from all three bureaus. The middle score of the three will be used to determine the credit score that will be used by your lender.

All three bureaus have scoring models, which take many factors into consideration when determining a score for you. The scoring models are similar from bureau to bureau, but individual scores may vary depending on what information they have when your report is run. The most significant of these are recent payment history and how much debt you have in relation to how much credit you have available to you.

Recent payment history is significant in that if you’re having challenges keeping up with your current debt in a timely fashion, adding more debt to the mix, as in a mortgage, will draw attention from lenders.

Balance-to-limit ratios on your revolving debt, as in credit cards, are indicators of how well you manage the credit that’s available. Having multiple cards that are close to their maximum limits may indicate that you are overextended. Keeping your balances low keeps your credit scores higher.

Buyers need to think about many things when considering the purchase of a home.

Financing, of course, is one of the most important items.

To determine whether you qualify for financing, lenders look at something called debt ratio.

The debt ratio often determines whether or not a buyer can qualify for a mortgage.

Calculating the debt you carry is based on a number of things.

There are different kinds of debt.

For conventional and Federal Housing Administration loans, lenders look at revolving and installment debt.

Revolving debt includes mostly credit cards and other types of debt, where monthly balances can fluctuate as they are paid down then increased as the line is accessed.

Home equity loans are calculated as if the balance is as high as it can go.

Installment debt includes any kind of fixed-payment obligation, such as an automobile loan, where the interest rate and payment amounts are fixed for the life of the loan, which has a specific end date.

Installment loans with fewer than 10 remaining payments will be excluded from debt ratios, so if you are close to having that car paid off, it need not be a factor in your debt calculations.

Items such as utility bills, food, clothing and gas for the car are excluded from debt ratios.

Student loans are another thing lenders consider.

Often, student loan payments are deferred until the student graduates.

Even when payments are showing as deferred on a credit report, lenders can and often do use them in the calculation of debt ratios.

This will help the lender get an accurate picture of what the debt profile will look like at some point in the future.

One of the most important components of any home financing transaction, be it a purchase or refinance, is the appraisal.

An appraisal is the process of valuating the property. The purpose is to give the institution that is lending money an idea of what the property is worth should the borrower be unable to make payments once the financial transaction is complete. The value of the property will be based on what similar homes in the area have been selling for in recent months. These other properties are called comparables.

While no two properties are completely identical, appraisers can make adjustments to account for such things as different square footages, number of bedrooms and lot sizes.

Appraisers must use properties within a close proximity to the subject property, usually within a mile radius, and those that have sold within the past several months.

In the event there are few or no comparables that can be used, as often happens in areas with low sales activity, the appraiser can go outside of the immediate area.

The appraisal process itself can take a few days to a few weeks, depending on factors such as the workload of the appraiser and what comparables are available.

Rules were put in place under the Home Valuation Code of Conduct in an attempt to keep appraisers and lenders separate from one another. As a result, most lenders are now ordering appraisals through appraisal management companies.

These third parties complete the appraisals and then forward the completed appraisals to the lender.

When you qualify for a mortgage, regardless of what type it is or the amount of it, you go through the same basic process to get approved.

Following is a rundown of the basics of what lenders are looking for and how you can prepare yourself before you even apply for a mortgage:

Income: Lenders are looking to see two years of your income and employment history when applying for a mortgage. Be prepared to show full tax returns, and if you have changed employers in that period of time, have contact information for them as well. Self-employed and commissioned salespeople especially need to document their income.

Assets: Lenders of conventional loans are looking for two months of reserves so that borrowers have enough to cover the mortgage, along with property taxes and property insurance.

Borrowers looking for money under the Federal Housing Administration loan program must have enough income to qualify for both the mortgage payment itself plus other debts, including typical homeowner expenses like utilities and other payments.

Credit:  This may very well be the most important of the three categories, in that even if you have a high income and lots of assets, you will have challenges getting financed unless you have demonstrated, via your credit history, that you are able to manage debt.

Lenders verify your credit history via a credit report, which consists of scores from the three credit bureaus, which are TransUnion, Experian and Equifax.

Making your payments on time is critical to keeping your credit score high.

Keeping balances on revolving trade lines like credit cards low, relative to their limits, tells lenders that you are able to handle the debt that you already have without needing to rely on all of your available credit each month.

If you’re looking to buy a townhouse or condominium, it’s important to note there are some significant differences between the two.

A condo is more of a legal definition than anything, referring to how the property is owned and managed.

If you were to purchase a condo, as opposed to a townhouse, you would own just the structure. The land under it would be part of the large parcel on which all the units and the common areas sit. In a townhouse, you own the land under your home.

In a condo, you pay into a blanket condo insurance policy that covers the unit itself.

This insurance, by the way, covers the structure but none of the contents of individual units. In a townhouse, you pay for your own individual policy.

Services such as landscaping and repaving of the common parking lots will often be handled by both types of associations, but condo associations will be more likely to manage minor items such as trim painting and snow removal and major maintenance such as roof replacement.

Roof replacement is more specific to condos in that they are more likely to share common roofs. Thus, it would be challenging to replace specific sections of one part versus the entire roof itself. For this reason, condo association dues can be significantly higher than dues for a townhouse.

When you’re looking to purchase a condo, make absolutely sure that you understand how much the fees are. They will increase over time as maintenance expenses rise.

Now more than ever, opportunities to purchase and profit from investment properties are everywhere.

If you’re thinking about purchasing an investment property, though, there are a number of things you need to know about the financing. For example:

Down Payment:

Expect to put down a minimum of 25%. While minimums used to be much lower and are currently much higher than what you would expect to put down on a property in which you intended to live, lenders are protecting their interests by requiring investors to have a significant stake in the property. You are much more likely to want to make an investment property work for you, through thick and thin, if you have a significant financial interest in it.

Assets:

Be prepared to have six months of liquid assets on hand for each investment property that you own. Lenders are requiring this, as they expect some type of vacancy rate in the property, and you will need to be able to cover the mortgage during these times.

Credit:

As you might imagine, credit requirements are steeper than they would be if you were purchasing your own home. Look to have a Fair Isaac Co. (FICO) score above 700 and no major credit dings, such as bankruptcies or foreclosures, for many years prior. If you are overextended with your existing debt, you will have more of a challenge qualifying.

Types of Mortgages:

Typically, when you buy an investment property, you will use conventional financing requirements. The only exception to this would be Federal Housing Administration loans whereby you can purchase a multiunit property under the condition that you live in one of the units.

Down payments will be lower than with conventional arrangements, but you will still have to pay for mortgage insurance.