Ratios That Mortgage Lenders Use in Reviewing My Application

There are three ratios lenders use when they review your mortgage application. One relates to the equity in your home. The other two are related to your debt. We’ll get into each of them here.

Loan-to-value ratio. This is how much you are borrowing from your lender relative to how much your home is worth.

Let’s say that you plan to purchase a home with an appraised value of $100,000. If you are putting down $20,000, or 20% of the purchase price, you would be borrowing $80,000, or 80% of $100,000. Your equity position in the property is 20%.

With some lending programs (often with conventional loans), the more you put down on the property, the lower the interest rate you can get. This is because should you default and the lender has to sell the property, the likelihood is higher that they will recoup their investment.

Lenders look at two debt ratios. They are called the front-end and back-end ratios.

Front-end ratio. In simple terms, this is how much your housing expense costs you each month compared to how much you make. To be clear, your housing expense includes your mortgage payment, property taxes, homeowners insurance and association dues, if you have them.

Example: If your housing expense is $1,000 per month and your income before taxes is $4,000 per month, your front-end ratio is $1,000 / $4,000 or 25%.

Back-end ratio. Continuing the above example, if you add to your housing expense a monthly car payment of $400, your back-end ratio becomes ($1,000 + $400) / $4,000 or 35%. Minimum ratios will vary among loan programs.

When you finance again, call or email me, and I can help you calculate your equity and debt ratios on your home buying or refinancing journey. I am always here to assist and make the process as smooth as possible.

Fixed-Rate Mortgages vs. Those with Adjustable Rates

Fixed-rate mortgages have rates that stay the same, and adjustable-rate mortgages have rates that change. But beyond that, why would someone want one over the other?

Part of the answer lies in how long you plan on living in the property, for two reasons.

The first reason is that most adjustable-rate mortgages have a fixed-rate period at the beginning of the loan. This period is called the initial fixed-rate period and can be one, three, five or seven years long.

The other reason is that the fixed-rate period is often the lowest of any other time during the life of the loan.

Let’s say you were going to buy a property and planned on living in it for just five years. You could likely get an adjustable-rate mortgage, having an initial fixed-rate period of five years, with a lower interest rate than you would be able to get on a fixed-rate mortgage.

There are two considerations to keep in mind here. The first is that if you wound up staying in the property for more than five years, you could potentially see your interest rate increase over time.

The other is that when you qualify for an adjustable-rate mortgage, you would need to show enough income to make the payment as if it were as high as it could ever go.

Let me help you find the best type of mortgage for you, fixed or adjustable, on your next purchase or refinance transaction. I am just a call or email away.

What Fees Will My Lender Charge Me on My Loan?

While there are many fees that you’ll pay in the course of purchasing a home, and they can all be very confusing, only some of them are related to the financing of it. These other fees, in other words, would exist even if you were to pay cash for the property.

Origination Fee. This will likely be the highest of the several lender fees that you will pay. To go into a little more detail on this, the income that a lender makes comes in one of two forms. The first is through origination fees paid by you, the borrower. The other source of income is from the investor who buys your loan from your lender once it closes. The higher your interest rate, the more money the lender can charge in the sale of the loan to the investor.

That being said, though, to be competitive in the marketplace, a lender needs to be as low as possible on both the fees and interest rates they charge while still having something left over to pay their own bills. If you find yourself coming up short on funds to close, the option of accepting a higher interest rate to lower your lender fees (and hence closing costs) may be an option for you.

Processing Fees. These are just as they sound. There is quite a bit of overhead that a lender puts into a file before it is ever reviewed by an underwriter, which, if done in-house, is in itself another lender fee. Processing fees include various verifications, ordering of title, flood certification fees and others.

Remember that it costs nothing to meet with me to learn more about lender and other fees. I’m always here to help you understand all of the costs that you’ll come across when you finance a home.

Difference between Pre-approval and Pre-qualification Letters

While the terms “pre-approval letter” and “pre-qualification letter” sound similar, they are different in what they provide to you as a borrower.

A pre-qualification letter, the more basic of the two, is something you get from a lender after they verbally collect information from you (for example, relating to income or assets) but before they have documentation from you to support what you have told them. Before issuing a pre-qualification letter, though, they will likely run your credit report to see if, from that perspective, you are able to qualify to purchase a home.

At this point, the lender will give you a letter saying that, pending further verification, you will qualify for a certain payment amount. However, if information they later find tells them something else, then you may either qualify for a lower payment or potentially no amount at all.

Getting a pre-approval letter is a much more involved process where you show items such as pay stubs, tax returns and bank statements, to name a few. This is the letter you want to be showing a real estate agent when you go home shopping, and many will ask for one before they spend time with you.

If you are thinking about purchasing a home and want to get pre-qualified before you start any type of search, call or email me. I’ll help prepare you to be able to put your best foot forward when you go out to find the home of your dreams.

Using Funds in Your Retirement Plan to Purchase a Home

A great place to look for funds to help you when you are purchasing a home is your employer retirement plan, also called a 401(k). Options here may include different types of loans and withdrawals, including what are called hardship withdrawals. It is a great resource if you are able to access the funds. Different plans will have different provisions, so check with either your human resources department or your 401(k) plan administrator.

With general purpose loans and primary residence loans, there will be limits as to how much you can access, and you may be asked to provide documentation, such as a signed sales contract, for a primary residence loan to prove that you are, in fact, purchasing a home.

Another way to access funds is through a hardship withdrawal. A hardship is a specific circumstance when you can access funds from your 401(k) when you otherwise wouldn’t be able to.

While purchasing a home wouldn’t necessarily be a hardship for you, it is one of several housing-related reasons that the IRS allows you access to your money. Other similar reasons include the need for funds to avoid eviction or foreclosure. 401(k) plans, by the way, aren’t required to offer either loans or hardship withdrawals, so contact your plan administrator or search your plan’s website for more information. The document you’ll be looking for is called the 401(k) Summary Plan Description. This can often be dozens of pages long, but it covers all aspects of the plan, including what access you have to your money.

Keep in mind that any type of withdrawal will often be subject to taxation and may have early withdrawal penalties associated with it.

Let me help you review your options when taking money from your 401(k) to purchase a home. I am just a call or email away.

What Is a Balloon Mortgage and How Does It Work?

A balloon loan is a mortgage where, at some point in the life of that loan (at perhaps three, five, seven or 10 years), the entire outstanding balance must be paid in full. To be clearer on this, the loan would more than likely paid back by refinancing it into a new loan.

So how does it work to begin with? A balloon loan is similar to a 30-year fixed-rate mortgage in how you qualify for it, meaning the same income, credit and asset requirements.

The reason that someone might want to take a balloon loan, as opposed to a 30-year fixed-rate loan, is that the interest rate (and hence, the payments) are normally lower on the balloon loan. People who take balloon loans often enter the transactions with the expectation that they will be selling the properties before the balloon payments become due.

The drawback to a balloon loan, if there is one, is that if and when you reach the point where the balloon payment is due, to get into your new loan, you could be paying a significantly higher interest rate than the one with which you started.

For this reason, if you are looking to take out a balloon loan, you want to make reasonably sure that you are going to be out of the property when the loan comes due, or perhaps stay with the 30-year or even a 15-year fixed-rate option.

Would you like to learn more about balloon loans? Call or email me and we can go over the details and what is the right fit for you.

What Is a Bridge Loan and How Does It Work?

A bridge loan is used to span the time between two other mortgages. Say you are in the process of purchasing one home while you sell another. To keep you from having to carry two mortgage payments at the same time plus providing a down payment for the new property, you might seek out a bridge loan.

In certain circumstances, this may be of benefit to you: for example, if you are trying to purchase your new home in a competitive seller’s market. If you are bidding alongside other bidders, they may look more attractive to sellers due to the fact that they have no homes to sell. A bridge loan could help your chances.

How does a bridge loan work? There are several types to choose from.

One type is where the bridge loan completely pays off the existing mortgage. At that point, you just make payments on your new mortgage, then pay off the bridge loan once your existing property sells.

Another type is where you take out an additional mortgage on your existing home and use those proceeds strictly as a down payment on the new property. You would still be carrying two mortgage payments at this point.

Keep in mind that interest rates for bridge loans are much higher than those for traditional mortgages, making them expensive. Another point to note is that they can only be taken out for so long.

Before entering into any bridge loan, you want to be reasonably certain that you are going to be able to sell your existing home at close to the price you need to get for it.

If you find yourself in a situation where a bridge loan could get you from one home to the next, let me help you sort it all out. Call or email, and we can go over the options that work best for you.

The Importance of HOAs in Financing Condos

Condominiums are great for the people who live in them, as they offer lower-maintenance living, including landscaping and other services, in the monthly association dues.

Financing a condominium is similar to financing a single-family residence, with a few exceptions.

These differences are important to lenders, specifically the fact that condos have homeowners associations, which run the operations of the subdivisions or developments and determine the direction in which they are headed.

These associations are so important to lenders that the lenders reference what is called an approved condo list in determining if they want to lend money within a development. Real estate agents are able to determine if the development is on the approved list before you start looking at condos.

There are companies that regularly send out authorized people on behalf of lenders to do both a physical inspection of the property and a thorough assessment of the finances of the association as well as the rules and regulations of the development. What they are looking for are trends and signs that the association is well managed and financially sound, both now and into the future. This is for the benefit of both the lenders and the people who borrow money from them, but mostly for the lenders.

If you are in the market for a condo, let me guide you through the process of finding and financing an approved condo. I am always here to help, and I am just a phone call or email away.

Financing an Investment Property That You Can Rent Out

From a financing perspective, an investment property is similar to a property you would purchase to live in, although with different guidelines. So what exactly is an investment property?

For our purposes here, it is a property that has 1-4 units. Anything larger would fall into what would be considered commercial financing. Being that FHA, VA and other programs only offer financing for properties where owners plan to live, your financing choices will, by and large, be limited to conventional financing, which means a Fannie Mae or Freddie Mac program. Along these lines, if you do plan on buying a multi-unit property and plan on living in one of the units, only then can you use primary residence financing.

As far as a down payment on an investment property, you can expect it to be 20% of the purchase price. Lenders want to know that you have a vested interest in this transaction and want to make it work.

With regard to credit, it needs to be nothing less than stellar. This means high credit scores and, more importantly, no recent major blemishes, such as bankruptcies or foreclosures.

As far as asset reserves go, you can expect to need up to six months of your monthly expenses of principal and interest, property taxes, and homeowners insurance.

In some cases, you can use the income from the rental property itself as part of your income. Keep two things in mind, though. One is that the allowable income from the property will be reduced by 25% for what is called an occupancy factor. The other thing is that an appraiser will determine the fair market rent that you can use as income.

I am here to answer all of your questions and provide financial guidance with regard to your next rental property purchase. Please give me a call.

What Exactly Is a Jumbo Loan and Who Can Get One?

When a home buyer or existing homeowner takes out a mortgage to purchase or refinance a home, they are often taking out either a conventional (meaning Fannie Mae or Freddie Mac) or FHA mortgage. This is all well and good, but these mortgage types have limits as to the dollar amounts that can be had, and the limits vary in different parts of the country.

In 2020, the Fannie Mae limit, also called a conforming limit, is between $510,400 and $765,600.

The range for FHA mortgages is $331,760 to $765,600, and the numbers quoted above are for one-unit properties. Limits are higher for 2-4 unit properties.

However, people in many parts of the country (specifically, on both coasts) live in areas where loan amounts far exceed these limits.

What people looking to finance properties in these areas do is take out what are called jumbo loans. These jumbo loans look similar to traditional mortgages in that they offer 10-, 15-, 20- and 30-year terms and are available in fixed and variable rate versions.

How jumbo loan borrower profiles differ from the traditional borrower profiles includes the debt-to-income ratios. They are lower with a jumbo loan, meaning that a lower percentage of income may be used to put toward the house payment.

Some lenders will also require two appraisals to make sure that the property is worth what they think it is worth.

I am your jumbo loan expert and want to answer all of your questions. I am just a phone call or email away.