Mortgage Financing Notes
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Lenders
use several criteria to qualify a home buyer for a mortgage
loan.
The most important criteria include the following:
- the home appraisal
- your credit rating (discussed
in Step 1)
- your capacity to repay the loan (income
ratios)
- your employment
Regardless of what you are willing to pay for the
home, lenders would be taking a sizable risk if you
defaulted on the loan.
That is why lenders complete a home appraisal before
they qualify any mortgage loan amount.
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which means that they will underwrite a loan that
is 80% of the appraised or purchase value of the home
(whichever is lesser in most cases).
This requires the home buyer to raise the other 20%
— your down payment.
we
have an LTV calculator that estimates your required
down payment
The 80/20 rule also forces the home buyer to have
some vested interest in their real estate purchase.
With a 20% equity position, home buyers are more likely
to keep the home value up by making repairs and improvements.
There are some mortgage products that allow lenders
to lower the 80/20 rule — meaning that the lender
will approve loan amounts at 85%, 90%LTV or more.
These loans are generally government sponsored programs
that insures the bank from loss in the event of a
default. Click
for product information at: PickMyMortgage.com
Lenders will also extend loans at levels greater than
80% if the home buyer obtains private mortgage insurance.
See
our notes on mortgage insurance.
What's it worth?
Order your personal home valuation report
property reports:
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If capacity ratios are too high, you will need to
change one of the following parameters in order to
qualify for a mortgage loan:
- reduce your borrowed amount
- increase your amount of down payment
- qualify for a mortgage loan that has a lower
rate
- apply for federal assistance sponsored loans
- increase your income
- pay off outstanding debts
The total cost of your mortgage loan (PITI) will
be used to calculate these ratios. See
our discussion on PITI.
Lenders use two debt
ratios
1: The "housing
ratio": calculated by dividing monthly
housing expenses by your gross monthly income. As
a basic rule, the housing ratio should not exceed
28%.
What are your monthly housing expenses:
- mortgage loan payment on your new home including
interest and principal
- real estate taxes
- hazardous insurance
- private Mortgage Insurance, if any
- other mortgage related insurance
- homeowner's association dues
- ground keeping fees
- property leases
- other special assessments and financing
Monthly Income includes the following:
- employment income
- overtime bonuses and commissions
- net self employment income
- alimony, child support and income from public
assistance
- social security, retirement, and VA benefits
- workman's compensation or permanent disability
payments
- interest and dividend income
- income from trust, partnerships, etc.
- net rental income
Housing Ratio Calculator:
Input the following data to calculate your housing
ratio:
If you don't have your real estate tax or insurance
figures, the American
Housing Survey shows that the median taxes paid
averaged $12 per $1,000 in home value. The property
insurance paid averaged $30 per month.
You can lookup your property tax assessments by community:
http://www.statelocalgov.net
Private Mortgage Insurance (PMI) will be required
if your down payment is less than 20% of the home
purchase price. Your PMI monthly cost will average
0.005 of the borrowed amount divided by 12.
For a discussion on real estate taxes and insurance,
plus calculating your monthly mortgage and escrow
payments, see our escrow payment
notes.
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Lenders like to see mortgage applicants in steady
jobs with verifiable income.
Lenders will likely call your employer to verify your
employment position and salary/wages.
Any discrepancy in your reported employment and income
may raise additional questions that can disqualify
you for a mortgage loan.
These documents will include your personal tax filings
and other information as required.
see items required
for submitting your application.
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The following information was obtained from the Federal
Consumer Information Center
Buying Your Home: Settlement
Costs and Helpful Information
http://www.pueblo.gsa.gov/cic_text/housing/settlement/sfhrestc.html
- RESPA disclosures help consumers become better shoppers
for settlement services. RESPA requires that borrowers
receive disclosures at various times.
- These disclosures lists the costs associated with
the settlement, outline lender servicing and escrow
account practices and describe business relationships
between settlement service providers.
- RESPA requires that within the next three business
days after submission of your mortgage application,
the lender or mortgage broker must provide you a Good
Faith Estimate of settlement service charges you will
likely have to pay.
- Note that the amounts listed on the Good Faith Estimate
are only estimates. Actual costs may vary at time
of closing.
- RESPA requires the lender or mortgage broker to
tell you in writing, when you apply for a loan or
within the next three business days, whether it expects
that someone else will be servicing your loan (collecting
your payments).
- When a lender, real estate broker, or other participant
in your settlement refers you to an affiliate for
a settlement service, RESPA requires the referring
party to give you an Affiliated Business Arrangement
Disclosure.
- Affiliates are businesses that are owned or controlled
by the parent company, such as the lender, real estate
broker, or other involved in your settlement. You
are not required to use these affiliates and under
certain circumstances, you are free to shop for other
providers.
- One business day before the settlement, you have
the right to inspect The HUD-1 Settlement Statement
itemizes the services provided to you and the fees
charged to you. This form is filled out by the settlement
agent or attorney who will conduct the settlement.
- You have the right to inspect this statement one
business day before settlement. Be sure you have the
name, address, and telephone number of the settlement
agent if you wish to inspect this form.
- Your lender may require an escrow account for the
prompt payment of taxes and insurance premiums. To
start the escrow account, you will probably an initial
amount and a cushion to ensure that the lender has
enough money to make the payments when due. RESPA
limits the amount of the cushion to a maximum of two
months of escrow payments.
- Your lender or servicer is required to review the
escrow account annually and send you a disclosure
each year which shows the prior year's activity and
any adjustments necessary in the escrow payments that
you will make in the forthcoming year.
Mortgage Submission Protection
Laws
There are several federal laws which provide you with
protection during the processing of your loan. The Equal
Credit Opportunity Act ("ECOA"), the Fair
Housing Act, and the Fair Credit Reporting Act ("FCRA")
prohibit discrimination and provide you with the right
to certain credit information.
- No Discrimination. ECOA prohibits
lenders from discriminating against credit applicants
on the basis of race, color, religion, national origin,
sex, marital status, age, the fact that all or part
of the applicant's income comes from any public assistance
program, or the fact that the applicant has exercised
any right under any federal consumer credit protection
law. To help government agencies monitor ECOA compliance,
your lender or mortgage broker must request certain
information regarding your race, sex, marital status
and age when taking your loan application.
The Fair Housing Act also prohibits discrimination
in residential real estate transactions on the basis
of race, color, religion, sex, handicap, familial
status or national origin. This prohibition applies
to both the sale of a home to you and the decision
by a lender to give you a loan to help pay for that
home. Finally, your locality or state may also have
a law which prohibits discrimination.
- Prompt Action/Notification of Action Taken.
Your lender or mortgage broker must act on your application
and inform you of the action taken no later than 30
days after it receives your completed application.
Your application will not be considered complete,
and the 30 day period will not begin, until you provide
to your lender or mortgage broker all of the material
and information requested.
- Statement of Reasons for Denial.
If your application is denied, ECOA requires your
lender or mortgage broker to give you a statement
of the specific reasons why it denied your application
or tell you how you can obtain such a statement. The
notice will also tell you which federal agency to
contact if you think the lender or mortgage broker
has illegally discriminated against you.
- Obtaining Your Credit Report.
The Fair Credit Reporting Act ("FCRA") requires
a lender or mortgage broker that denies your loan
application to tell you whether it based its decision
on information contained in your credit report. If
that information was a reason for the denial, the
notice will tell you where you can get a free copy
of the credit report. You have the right to dispute
the accuracy or completeness of any information in
your credit report. If you dispute any information,
the credit reporting agency that prepared the report
must investigate free of charge and notify you of
the results of the investigation.
- Obtaining Your Appraisal. The lender needs
to know if the value of your home is enough to secure
the loan. To get this information, the lender typically
hires an appraiser, who gives a professional opinion
about the value of your home. ECOA requires your lender
or mortgage broker to tell you that you have a right
to get a copy of the appraisal report. The notice
will also tell you how and when you can ask for a
copy.
- Prohibited Fees. It is illegal
under RESPA for anyone to pay or receive a
fee, kickback or anything of value because they agree
to refer settlement service business to a particular
person or organization. For example, your mortgage
lender may not pay your real estate broker $250 for
referring you to the lender. It is also illegal for
anyone to accept a fee or part of a fee for services
if that person has not actually performed settlement
services for the fee. For example, a lender may not
add to a third party's fee, such as an appraisal fee,
and keep the difference.
- Permitted Payments. RESPA
does not prevent title companies, mortgage brokers,
appraisers, attorneys, settlement/closing agents and
others, who actually perform a service in connection
with the mortgage loan or the settlement, from being
paid for the reasonable value of their work. If a
participant in your settlement appears to be taking
a fee without having done any work, you should advise
that person or company of the RESPA referral fee prohibitions.
You may also speak with your attorney or complain
to a regulator listed in the Appendix to this Booklet
- Penalties. It is a crime for someone to pay
or receive an illegal referral fee. The penalty can
be a fine, imprisonment or both. You may be entitled
to recover three times the amount of the charge for
any settlement service by bringing a private lawsuit.
If you are successful, the court may also award you
court costs and your attorney's fees.
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Notes:
Closing on a Home Equity Product
- Once homeowners raise their required down payment,
they have little extra cash available to complete
home improvement projects on their new home.
These projects include: home repair, furniture purchases,
landscape design, kitchen renovation, etc.
Some homeowners will borrow against their down equity
to reinvest these funds back into the home.
For more information about 100% LTV home equity product
for new homeowners: http://www.YourEquity.com
- Closing a home equity carries similar costs as with
closing a home mortgage.
These costs include: title search, title insurance,
appraisal, loan preparation, etc.
Since many of these same tasks must be completed to
close a home mortgage, many lenders will bundle a
home equity product under that same closing procedures
without incurring any additional closing costs.
As consumers, you can save time and money by requesting
that your lender add a home equity product to your
mortgage closing.
- Home equity interest rates can vary depending on
your type of home equity product (loan or line) and
your LTV position.
Homeowners who borrow their full down equity will
borrow up to 100% LTV. These rates are typically higher
than for homeowners who borrow at 80%LTV or lower.
For information about LTV position, visit our sister
site: www.YourEquity.com
- If you desire to process and close your home equity
along with your mortgage loan, request from your lender
to bundle a home equity product with your mortgage
application.
Begin
your application submission!
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