Articles about Mortgages

Credit is a significant component in enabling you to qualify for a mortgage, whether it’s a new purchase or a refinancing. Here are some of the basics you need to know about credit to help you become a more informed consumer.

Your credit score

Your lender will access your credit score to evaluate your creditworthiness. The term “credit score” refers to the middle of three scores, obtainable through three credit bureaus that provide scores: TransUnion, Experian and Equifax.

Several factors will affect your credit score, but there are two that play more significant roles than the others:

1. Revolving debt, such as credit cards that are over their limits, and

2. Recent late payments.

Pay down your cards

Credit cards that are over their limits, especially when you have several of them, indicate that you are overextended with the credit that you have available to you.  This weighs on your credit score in that lenders may be reluctant to give you more credit if you are having challenges with the debt that you currently have.

There is a solution to this. Often you can have a positive effect on your credit score simply by paying off or paying down credit card debt to show that the amount of credit available to you is much larger than what you owe.

Recent late payments are another flag for lenders who are looking at your credit profile and assessing your ability to pay back the loan.

Over time, many items on a credit report will either fall off or have a minimal impact on your score.  It is, however, the most recent items on the report that give lenders an idea of your payment habits.

If you have had a number of late payments in the past several months, you may be sending out signals that this will be your behavior after receiving a mortgage.

In any real estate transaction, your money couldn’t be better spent than on the services of a real estate attorney. Here are some reasons why you need a real estate attorney and what he or she can do for you.

In the course of any real estate transaction, you will be presented with all types of documents, and it is very important that these  be examined by an attorney specializing in real estate. These include the purchase contract, the home inspection, the appraisal and the settlement documents when you get to closing.

As knowledgeable as your real estate and mortgage professionals are about the inner workings of a real estate transaction, questions may arise that are outside  their areas of expertise. They will be the first to tell you that their expertise is limited to their respective fields and that questions on contractual issues are best left to a good real estate attorney. They also will suggest that your attorney is the one to ensure that the other party in the transaction (buyer or seller) is complying with the terms of the contract.

A real estate attorney is totally neutral in your transaction.  He or she is paid the same regardless of how much your home costs and can bring an objective eye to all the documents and other elements involved in your sale or purchase. This is especially important when you are purchasing a short- sale or foreclosure property.

In looking for a real estate attorney, try to find one where real estate transactions represent a sizeable percentage of their business. Those who handle more than a few transactions a month will be more up-to-date on the legal aspects of real estate.

Parents whose children will be moving to attend school might want to consider the Federal Housing Administration (FHA) Kiddie Condo program.

In a nutshell, this program allows parents to buy a home that their child can live in and also collect rent from their child’s roommates.

The program is a Housing and Urban Development (HUD) program administered by the FHA. Students and their parents can purchase a home together as a primary residence.

Keep in mind that if this were to happen in a program other than the Kiddie Condo program, the property would be considered an investment property. Thus, it would involve much larger down payments and the interest rate would be much higher.

Many students have little or no income or assets to bring to the table. This is where the parents come in. The benefit to the student is that he or she can have a mortgage payment history by the time he or she graduates from college.

When qualifying for this program, keep in mind that the student by himself or herself may be unable to qualify from an income perspective.

He or she will have to demonstrate some type of minimal positive credit history. At a minimum, he or she needs to have no adverse items such as late cell phone or credit card payments and a student’s credit score must be high enough to qualify on his or her own.

Ask your mortgage professional for more details about this program.

If you’re looking to purchase a home, the most traditional way to obtain financing is to use a Federal Housing Administration (FHA) mortgage or a conventional mortgage.

Each has its advantages and disadvantages.

FHA Mortgages

The FHA is a division of the U.S. Department of Housing and Urban Development.

These mortgages have become more popular over the last few years because the qualification guidelines are more relaxed than those for conventional mortgages, though they are a bit pricier to obtain.

To purchase a home with an FHA mortgage, you must put down at least 3.5% of the purchase price. This must come from your own documented funds or from those of a close relative.

You’ll pay two types of mortgage insurance. The first is called upfront mortgage insurance, which can be financed. The other is monthly and will last a minimum of five years into the loan.

Credit guidelines vary from lender to lender and you will likely need a credit score of around 640 to qualify. There are normally no asset reserves required with FHA mortgages.

Conventional Mortgages

If you want to go with a conventional mortgage, the requirements are a little steeper, but the overall cost is lower.

Minimum credit scores will be a bit higher, close to 720, without a premium attached.

Buyers must also be able to show two months in asset reserves. If you can meet these two requirements, you can bypass upfront mortgage insurance, which can be significant.

Monthly mortgage insurance applies only if you are putting less than 20% down.

For more details on each of these programs, contact your mortgage professional.

While home buyers typically think of home inspections as being required solely for the purchase of homes that are in a state of needing repair, the truth is that they benefit all types of buyers.

Why do you need a home inspection?

The answer is simple.

If there is a problem with the property that the seller either is attempting to hide or is truly unaware of, you need to know about it before you purchase the home.

Most real estate contracts provide a window, often five days, within which a potential buyer is able to obtain a home inspection.

If issues arise, the buyer has the opportunity to bring them to the attention of the seller.

The seller is under no obligation to address them, but at the same time you are able to walk away from the property if you choose.

An inspection isn’t required by a lender, so the request has to come from the buyer.

Though an inspection can be pricey, it’s a bargain if an issue arises that could wind up costing thousands of dollars.

Inspections cover all major areas of a home, from electrical and plumbing to structural.

A good inspection can and should take several hours to complete.

When looking for an inspector, it’s wise to seek a recommendation from a real estate agent or a home inspector association.

Try to find an inspector with some type of license and/or certification and who specializes in areas such as radon or mold.

Home buyers and homeowners often have questions about debt and income ratios when they enter into a home finance transaction.

Following are answers to some common questions:

How Is My Income Calculated?

When looking at your income, lenders start with your gross, or before tax, income, regardless of what tax bracket you might be in or what other deductions might come out of your pay before you see your net amount.

If you are on Social Security, for example, where there are no taxes, you would do something called “grossing up.”

You take whatever you receive and multiply it by 1.25 to arrive at what you would be able to use as income on a mortgage application.

How Is My Debt Calculated?

There are two ratios that lenders look at.

They are the front-end ratio and the back-end ratio.

Front-end Ratio

The front-end ratio is purely housing expense. This is your mortgage, plus taxes, plus property insurance, plus mortgage insurance, if you have that.

Back-end Ratio

The back-end ratio includes everything in the front-end ratio plus all of your installment and revolving debt.

Items here include car payments, credit card payments and any other type of debt for which you are obligated to make some type of payment monthly.

How Are Home Equity Loans Calculated?

Home equity loan payments are calculated as if the balance were as high as it could go.

Items that aren’t included on most mortgages, with the exception of Veterans Administration loans, are items such as food, gas and cable TV bills.

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.