Four Important Questions to Ask Your Mortgage lender Before You Sign Any of Their Documents

1. Do you have a variety of loan programs to fit my cash flow and expected length of ownership needs?

If you are going to live in your new home for less than five years, you may want to consider an adjustable rate mortgage or “ARM”.  With an ARM your payments will go up according to the terms of the loan.  Most people aren’t aware that with a standard 30-year mortgage they’ll be paying 2.5 times the amount of the mortgage in payments.  If you are going to live in your new home for over five years, a traditional fixed-rate mortgage may be a better deal.

2. Do you offer written mortgage pre-approvals, not just pre-qualifications?

A “pre-qualification” is usually a lender’s opinion of your eligibility for a loan.  If you ask to be pre-approved, the lender will actually submit your job and credit history to an underwriter and get a conditional approval for a loan and a loan commitment.  The advantage of having a pre-approval is that it will make your offer to buy a home stronger and it will usually allow you to close the deal faster.

3. Do you have the ability to handle difficult credit history?

Many lenders will only work with you if you have perfect credit, and if a problem comes up, they won’t help you.  Lenders look at your credit history to figure out how much they will lend you and how much they will charge you to lend it.  Before you make an offer on a home, make sure your lender has reviewed and received approval for you and your specific credit history.

4. Is the rate that you quoted me the rate I will get at closing?

Many lenders advertise their rates in the paper and in homes magazines.  These are what are called “Teaser Rates” in the industry.  The name says it all.  Lenders will lock in points for 45-60 days.  If the interest rates are dropping, the lender will work quickly to close the locked-in rate.  After they’ve got you committed to using them, many lenders then tell you what the “real” rate will be.  By this time it’s too late for you to do anything about it.

Here’s A Quick Way to Figure Out How Much House You Can Afford

The stock answer given to this question is – if you rent and have cash for a down payment, you can purchase a home.  But what if you don’t rent?  Then here’s the simplified version of what a mortgage broker woud do with you.

Step One: (Annual Salary / 12)

What is your gross monthly income from all sources?  If your annual salary is $75,000, divide this by 12 and you’ll see that your monthly income is $6,250.

Step Two: (Monthly salary x percent you want to spend)

Brokers and financial planners will recommend that you spend anywhere between 29% and 45% of your monthly income on household expenses.  We’re going to use 36%.  $6,250 x .36 = $2,250.

Step Three: (Calculate your debt)

Add up your current monthly debt.  This includes things like a car loan, insurance, school loans, credit cards, child support, and any other personal debt you may have.  All of this added together gives you your total debt.  Just a guess, but lets say that these add up to $750 a month.

Step Four: (Amount you want to spend – total debt)

Now, take that total debt and subtract it from the amount that you were willing to spend per month to get to your maximum monthly payment. $2,250 – $750 = $1,500.

Step Five: (Monthly payment x12)

Multiply that house payment by 12 months, and you have $18,000 to spend each year.

Step Six: (Annual payment / interest rate)

Divide this annual amount by the current interest rate (I’m using 10% because it’s a nice round number, and a good average).  So, $18,000/.10 leaves you with $180,000 available for a mortgage!

Step Seven (Mortgage + down payment)

Now, take the amount that you have calculated that you can afford to pay for a mortgage, add the amount of cash that you have on hand to make a down payment, and you get your purchase price!  So, using the current example: The mortgage was $180,000 plus you have $20,000 on hand for a down payment, then you can afford to purchase a home for $200,000.

Now, did that REALLY seem like algebra to you?

Although this is a quick and easy estimate, you should work with a mortgage lender so that you know EXACTLY how much you can afford.

Here’s A Way You Can Save Thousands of Dollars In Interest and Pay Your Mortgage Off Years Sooner!

Most people think when you get a mortgage you’re stuck with it for 30 years, but what they don’t realize is by using a couple of easy and painless ways to make some extra principle payments you can cut years off the life of your mortgage and save thousands of dollars in needless interest costs.

Here are a few easy strategies you can use:

1.  Round up to the nearest hundred

This is an easy strategy to take advantage of, and the results are dramatic!

Let’s say you have a mortgage of $100,000 over 30 years at 8% interest.  The monthly payments would be about $734 dollars a month.

Now, lets see what would happen if you rounded that payment to the next $100 by increasing your payment by $66 extra each month.

By paying $800 a month you will shorten the length of your mortgage by 7 1/2 years.  Just this one simple strategy will save you over $48,000 in interest payments over the life of your mortgage!

2.  Use Your Income Tax Refund To Make One Time Pre-Payments

Let’s say you have the same $100,000 mortgage, and you have a $1000 tax refund this year. (Very possible with your new homeowner deductions). 

If you take that $1000 and apply it to your mortgage…you’ll save over $8600 and shorten your mortgage by 1 year and 1 month!

Not bad for a simple one time pre-payment.

3.  Start Out With a 15 Year Mortgage

One of the best things you can do — if you can afford it — is to start out with a 15-year mortgage instead of 30.  It’s actually not that much more expensive, and the interest you save is incredible.

With the same $100,000 mortgage at 8% over 15 years, your payment would be about $200 more ($955) and you would be paying $72,017 in interest over the life of your mortgage instead of $164,160!

By rounding up, using your tax refund, and taking a shorter mortgage, you can save thousands and be free of your mortgage years sooner!

Now that’s worth considering!

What Is Debt Ratio…And How Does It Impact My Loan?

Debt ratio is a number used by lenders to determine if you qualify for their loan program.  Lenders have a wide range of acceptable debt ratio numbers.  If your ratio is high, however, you will sometimes have to pay a higher interest rate to get a loan.  Because the debt ratio is such an important factor in loan program qualification, you have to be very careful with credit purchases while you are working on buying a home.

For example, let’s say you make $5,000 per month.  You have debts of $450 for a car, $300 for credit cards, and $250 for student loans.  Your total debt is $1,000.  The program you want to qualify for allows a 45% debt ratio.  So take $5,000 and multiply it by the 45% debt ratio.  The result is $2,250.  Then subtract your debt of $1,000.  That leaves $1,250 for you to use for a house payment.  To find out how much house that is, multiply it by 100.  Roughly you can afford a $125,000 home on this program. 

Now let’s play with this a little.  You lender finds another program which will allow you to have up to a 55% debt ratio.  $5,000 times the new ratio of 55% equals $2,750.  Subtract the $1,000 in debt and you have $1,750 remaining for a house payment.  Multiplied by 100 equals $175,000 home that you can qualify for. 

You are really happy with the new program at 55% and go fall in love with a home for $168,000.  In the midst of your excitement, you decide to go buy that beautiful bedroom set and dining room piece that you have been watching for so long.  The store is having a wonderful special – 18 months no interest.  Your paments are only $150 per month.  Well, now the lender has to add this to your debt.  So instead of subtracting $1,000 from the $2750, they have to subtract $1,150.  This results in $1,600 total payment…only a $160,000 house.  You have just lost the home of your dreams…

While you are in the process of getting a home – do not buy anything on credit (furniture, a car, new school loan, etc).  Even a little purchase can make a big impact on your buying power. 

Here’s How Credit Reports And Credit Scoring Affect How Much House You’ll Be Able To Buy

There is a new "buzzword" in the mortgage industry.  Actually, it’s two buzzwords:  Credit Scoring.

In their never ending search to find an easier way to rate a person’s financial ability, mortgage companies are using a new system called credit scoring (Also called "FICO" score – I won’t even tell you what that means).

When lenders pull up your credit report, they can look at all of the debts that you have, how much you owe, how well you make your payments, and many other things like if you’ve had any bankruptcies within the last several years.

With your credit report, lenders now get a "credit score" which takes all of this information and creates a number that lenders use to decide which types of loans that you will be able to get and be eligible for.

As with all new things, there is controversy over these credit score.  Some types of loans require that you have a certain credit score to get a loan – no exceptions.  And credit scores change over time.  As a matter of fact, just applying for credit can lower your credit score.

Now that you know what a credit score is, here’s how to make sure you have the best one possible…

First of all, don’t apply for any new credit cards or consumer loans.

Don’t go down to the furniture store and take them up on the "No interest, no payments, no nothin’ for one year" financing program — and of all things, don’t go out and finance a car!

You can do all of these things after you buy your house and get your mortgage, but for your own sake, don’t do it before.  Buying things on credit not only hurts your credit score, but it also leaves less money for you to use for a house payment.

Lenders look at this figure also to determine how much money they will lend you, and how much they will charge you to lend it.

So wait until after you’ve bought your home and moved in to get that new couch or big screen T.V. And there is another reason to wait.  After you buy your home, you can get an equity loan for up to 80% of your home’s value to buy whatever you want.  And when you get a loan against your home, all of the interest you pay is tax-deductible.

Inside Secrets Of How To Get A “Yes”

Lenders approve loans based on their impression of your ability and INTENT to pay it back.  To figure this out, they look at 5 things:  creditworthiness, income, job stability, and future income prospects.  We’ll tell you how to make sure you look good in each of these things, so that you’ll get a "YES" when you want to borrow money for your new home.

1.  Creditworthiness

Creditworthiness is your history of borrowing and repaying against things like loans, credit cards, rent and whether you’ve ever filed bankruptcy.  Find out what credit bureau the lender uses, then call or visit that same bureau for a copy of your credit report.  Some are even available on-line.

This is to make sure that there are no errors or surprises that you’ll have to explain to the lender.  If there are mistakes, it can take a few months to resolve, so it’s good to have a compelling explanation ready when the lender sees it!  The best way to demonstrate that you are "creditworthy" is to pay your bills in full and on time, particularly for the year or two before you want to get a loan.

2.  Income

Lenders want to know that you have a history of sufficient and consistent income-so that you’ll be able to repay the loan.  So, when you submit your paperwork to a lender, make sure to take a letter verifying your employment (how long and what your salary is), your last couple of paychecks, and your last couple of W-2 forms.

3.  Job Longevity

Lenders are looking for borrowers who have a stable source of income.  If you can show that you’ve been employed at least a year in the same company, you should be fine.

4.  Job Stability

Again, lenders like stability-they tend to think that your loan payment behavior will reflect your employment behavior.  So, don’t make lateral moves between companies just for the sake of change.  If you make moves, do it for promotion, or to earn more money.

5.  Future Income Prospects

Because most loans are paid back in 15-30 years-lenders are interested in people who will have income for that amount of time.  Young professionals, or those with high demand skills, are the most appealing to lenders because their income will only increase over time.  If you can demonstrate that you have a career plan that only gets better over time, you’ll be in a strong position to borrow.

So essentially, pay your bills on time, stay with an employer, and have a career path that shows potential, and you’ll be sure to get a "YES" when you borrow.

Here’s Why You Shouldn’t Buy A Car Right Before You Buy A House…

When an individual’s income starts growing and they manage to set aside some savings, they commonly experience what may be considered an innate instinct of modern civilized mankind:  The desire to spend money.

Since North Americans have a special love affair with the automobile, this becomes a high priority item on the shopping list.  Later, other things will be added and one of those will probably be a house.  However, by the time home ownership has become more than a distant and hopeful dream, you may have bought the car.

It happens all the time, sometimes just before you contact a lender to get prequalified for a mortgage.  As part of the interview, you may tell the loan officer your price target.  He will ask about your income, your savings and your debts, then give you his opinion.

“If only you didn’t have this car payment,” he might begin, “you would certainly qualify for a home loan to buy that house.”

You see, when determining your ability to qualify for a mortgage, a lender looks at what is called your “debt-to-income” ratio.

What are debt-to-income ratios?

A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt.  This will include your monthly housing costs-including principal interest, taxes insurance, and homeowner’s association fees, if any.  It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and…. CAR PAYMENTS!

How a New Car Payment Reduces Your Purchase Price

Suppose you earn $5000 a month and you have a car payment of $400.  At current interest rates (approximately 8% on a thirty-year fixed rate loan), you would qualify for approximately $55,000 less than if you did not have the car payment.

Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours.

Buying things on credit not only hurts your credit score, but it also leaves less money for you to use for a house payment.

Lenders look at this figure also to determine how much money they will lend you, and how much they will charge you to lend it.

If you haven’t already bought a car, remember one thing:  Think ahead.  Think about buying a home first.  Buying a home is a much more important purchase when considering your future financial well being.

Conventional Financing Advantages/Disadvantages

Advantages

• Processing Time-The typical processing time on most conventional loans is about 2 to 4 weeks compared to 5 to 6 weeks on a VA and FHA loans.
• Easy to Obtain– In times when money is plentiful, conventional loans are easily obtained.  Even rural areas usually have a savings and loan association which will make conventional home mortgage loans.
• Few Requirements on Appraisals– Conventional loans have higher maximum loan amounts then FHA and VA.  Therefore, higher priced property may be financed using conventional financing.  Loans are available up to $2,000,000 in some areas.
• No Discount Points Required– Conventional loans usually do not require the seller to pay discount points.  In some areas it is customary for conventional loans to have 1 to 3 discount points;  however, these points may be paid by the buyer or the seller.  Occasionally, discount points may be used to obtain a lower interest rate on the conventional loan, and once again, these points may be paid by the buyer or seller.  If the buyer pays his own discount points they may be tax deductible ad prepaid interest.

Disadvantages

• Money May Be Scarce– In times of tight money, conventional loans may very difficult to obtain, or discount points may be charged for making money available.  In some areas conventional lenders only want to make adjustable rate mortgages, not fixed rate mortgages.
• Cash Outlay is Greater– Conventional loans generally require more down payment than FHA or VA loans, and the closing costs are usually higher than FHA or VA loans.  90% and higher conventional loans require the payment of private mortgage insurance.
• Buyer Qualification– Conventional buyer qualifications are more stringent than FHA or VA and thus fewer buyers can qualify for loans.
• Interest Rates– Traditionally, the interest rates on conventional loans were higher than the interest rates on VA or FHA loans – although today they should be almost identical.

Here’s What It Helps To Know About Interest Rates, Points And The “Mysterious” APR

When you get a mortgage, there are three important terms four you to remember.

• Interest Rates
• Points, &
• APR

I have combined these three terms here because they are related, and you will understand them better if I explain them together.
Interest Rate
“Interest Rates” are the price that lenders charge for the use of their money.  So, when interest rates are high, it’s because lenders are charging more to use their money right now.
Again, it’s a trade-off between now and later.  Lenders are only going to give you so much money to use over the next 15-30 years (the life of your mortgage).  They work backwards from that figure using interest rates.  If you have a higher interest rate, you have less money to spend now.  If you have a lower interest rate, you have more money to spend now.
Points
Now I want to tell you about a word – it’s one of those words that doesn’t mean what you might think it means when you hear it. (You know, when the waiter at the restaurant ask you if you would like your “Check”…and somehow you that what they really mean is your bill, but you say “Oh yes, thank you.”)
When you hear the word “points” what do you think of?  Maybe points in a football game?  Maybe a test score?  Well, some smart person in the mortgage industry started using the word “Points” to mean one percent of your entire loan amount, that you get to pay up front, as a fee for certain things.
So let’s say your mortgage is for $200,000.  One “Point” would mean $2,000.  Now I will tell you about the third term and how it relates to the first two.
APR
“APR” stands for “Annual Percentage Rate.”  Now that sounds friendly, too, doesn’t it?  The APR is what you get when you add the interest rate, the points, and all the other fees together and then calculate what the loan will cost you each year, based on all of the fees added together.
Make sense?
Lenders are required to tell you what the APR is on any loan that they are offering to you so that you can know what the real interest rate is, including all of the additional costs.
So when you are calling around looking for the best rates, make sure and ask what the APR is on each loan that you are being told about!

13 Questions to Ask a Lender

1. What is your rate with zero discount points?
2. How long can I lock in the rate at no cost?
3. What are your closing costs (quoted as a dollar amount) ?
4. Can you fax me a good faith estimate of closing costs?
5. What is the fee for an extended lock in term?
6. Do you have an interest rate float down policy?
7. How long will it take to process my loan and receive a commitment for loan approval?
8. Do you require an escrow account?
9. Do you have an in-house underwriting – Why is it important?
10. Will you be present at the closing of the loan?
11. How much is my up front PMI payment going to be? (quoted as a percentage to loan amount)?
12. Do you have an alternative loan program to PMI?
13. Do your closing cost include the following?

•  
  • Appraisal
  • Credit Report
  • Recording Fees
  • Survey
  • Origination Fee
  • Attorney Fee and Title Search
  • Lender’s Title Insurance
  • Underwriting/Processing Fee
  • Document Preparation Fee
  • Tax Certificate