Category Archives: Mortgages

How to Prepare to Finance a Home

Develop a budget.

Instead of telling yourself what you’d like to spend, use receipts to create a budget that reflects your actual habits over the last several months. This approach will better factor in unexpected expenses alongside more predictable costs such as utility bills and groceries. You’ll probably spot some ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often.

Reduce debt.

Lenders generally look for a debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt—car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income.

Increase your income.

Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want.

Save for a down payment.

Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with 5 percent down or less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment.

Keep your job.

While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.

Establish a good credit history.

Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off entire balances as promptly as possible.

Start saving.

Do you have enough money saved to qualify for a mortgage and cover your down payment? Ideally, you should have 20 percent of the purchase price saved as a down payment. Also, don’t forget to factor in closing costs, which can average between 2 and 7 percent of the home price.

Obtain a copy of your credit report.

Make sure it is accurate and correct any errors immediately. A credit report provides a history of your credit, bad debts, and any late payments.

Decide what kind of mortgage you can afford.

Generally, you want to look for homes valued between two and three times your gross income, but a financing professional can help determine the size of loan for which you’ll qualify. Find out what kind of mortgage (30-year or 15-year? Fixed or adjustable rate?) is best for you. Also, gather the documentation a lender will need to preapprove you for a loan, such as W-2s, pay stub copies, account numbers, and copies of two to four months of bank or credit union statements. Don’t forget property taxes, insurance, maintenance, utilities, and association fees, if applicable.

Seek down payment help.

Check with your state and local government to find out whether you qualify for special mortgage or down payment assistance programs. If you have an IRA account, you can use the money you’ve saved to buy your first home without paying a penalty for early withdrawal.

Source: National Association of REALTORS®

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Questions to Ask When Choosing a Lender

Loan terms, rates, and products can vary significantly from one company to the next. When shopping around, these are a few things you should ask about.

General questions:

What are the most popular mortgages you offer? Why are they so popular?

Are your rates, terms, fees, and closing costs negotiable?

Do you offer discounts for inspections, home ownership classes, or automatic payment set-up?

Will I have to buy private mortgage insurance? If so, how much will it cost, and how long will it be required?

What escrow requirements do you have?

What kind of bill-pay options do you offer?

Loan-specific questions:

What would be included in my mortgage payment (homeowners insurance, property taxes, etc.)?

Which type of mortgage plan would you recommend for my situation?

Who will service this loan—your bank or another company?

How long will the rate on this loan be in a lock-in period? Will I be able to obtain a lower rate if the market rate drops during this period?

How long will the loan approval process take?

How long will it take to close the loan?

Are there any charges or penalties for prepaying this loan?

How much will I be paying total over the life of this loan?

Source: National Association of REALTORS®

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What to Know About Credit Scores

Credit scores range between 200 and 850, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score:

Your payment history.

Did you pay your credit card bills on time? Bankruptcy filing, liens, and collection activity also affect your history.

How much you owe and where.

If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, spreading debt among several accounts can help you avoid approaching the maximum on any individual credit line.

The length of your credit history.

In general, the longer an account has been open, the better.

How much new credit you have.

New credit—whether in the form of installment plans or new credit cards—is considered more risky, even if you pay down the debt promptly.

The types of credit you use.

Generally, it’s desirable to have more than one type of credit—such as installment loans, credit cards, and a mortgage.

Source: National Association of REALTORS®

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How to Prepare to Buy a Home

Talk to mortgage brokers.

Many first-time home buyers don’t take the time to get prequalified. They also often don’t take the time to shop around to find the best mortgage for their particular situation. It’s important to ask plenty of questions and make sure you understand the home loan process completely.

Be ready to move.

This is especially true in markets with a low inventory of homes for sale. It’s very common for home buyers to miss out on the first home they wish to purchase because they don’t act quickly enough. By the time they’ve made their decision, they may find that someone else has already purchased the house.

Find a trusted partner.

It’s absolutely vital that you find a real estate professional who understands your goals and who is ready and able to guide you through the home buying process.

Make a good offer.

Remember that your offer is very unlikely to be the only one on the table. Do what you can to ensure it’s appealing to a seller.

Factor maintenance and repair costs into your buying budget.

Even brand-new homes will require some work. Don’t leave yourself short and let your home deteriorate.

Think ahead.

It’s easy to get wrapped up in your present needs, but you should also think about reselling the home before you buy. The average first-time buyer expects to stay in a home for around 10 years, according to the National Association of REALTORS®’ 2013 Profile of Home Buyers and Sellers.

Develop your home/neighborhood wish list.

Prioritize these items from most important to least.

Select where you want to live.

Compile a list of three or four neighborhoods you’d like to live in, taking into account nearby schools, recreational facilities, area expansion plans, and safety.

Source: National Association of REALTORS®

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How to Recognize a Qualified Buyer

Offers can be exciting, but unless your potential buyer has the resources to qualify for a mortgage, you may not really have a sale. Your real estate professional will try to determine a buyer’s financial status before you sign the contract. But it’s good for you to know what buyers with follow-through potential looks like.

They are prequalified—or even better, preapproved—for a mortgage.

Such buyers will be in a much better position to obtain a mortgage promptly.

They have enough money to make a down payment and cover closing costs.

Ideally, buyers should have 20 percent of the home’s price as a down payment and between 2 percent and 7 percent of the price to cover closing costs. If they plan to make a smaller down payment, they will need to purchase mortgage insurance, through either a government guarantee program or a private mortgage insurer. Their ability to provide earnest money in a timely fashion will be an indicator of liquid reserves.

Their income is sufficient to afford the home over the long term, too.

Ideally, buyers should spend no more than 28 percent of their total income to cover the principal, interest, taxes, and insurance associated with the sale (often abbreviated as “PITI.”)

They have good credit, which they are monitoring and maintaining.

They will have recently reviewed their credit report and have actively worked to correct any blemishes or errors found.

They’re not managing too many other debts to take on a mortgage.

If buyers owe a great deal on car payments, credit cards, and other debts, they may not qualify for a mortgage.

Source: National Association of REALTORS®

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What to Know About the Appraisal Process

Once you are under contract, the buyer’s lender will send out an appraiser to make sure the purchase price is in line with the property’s value.

Appraisals help guide mortgage terms.

The appraised value of a home is an important factor in the loan underwriting process. Although lenders may use the sale price to determine the amount of the mortgage they will offer, they generally only do so when the property is sold for less than the appraisal amount. Also, the loan-to-value ratio is based on the appraised value and helps lenders figure out how much money may be borrowed to purchase the property and under what terms. If the LTV is high, the lender is more likely to require the borrower to purchase private mortgage insurance.

Appraised value is not a concrete number.

Appraisals provide a professional opinion of value, but they aren’t an exact science. Appraisals may differ quite a bit depending on when they’re done and who’s doing them. Changes in market conditions also can dramatically alter appraised value.

Appraised value doesn’t represent the whole picture of home prices.

There are special considerations that appraised value doesn’t take into account, such as the need to sell rapidly.

Appraisers use data from the recent past.

Appraisals are often considered somewhat backward looking, because they use sold data from comparable properties (often nicknamed “comps”) to help come up with a reasonable price.

There are uses for appraised value outside of the purchase process.

For selling purposes, appraisals are usually used to determine market value or factor into the pricing equation. But other appraisals are used to determine insurance value, replacement value, and assessed value for property tax purposes.

Source: National Association of REALTORS®

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Is Your Buyer Qualified?

Unless the buyer who makes an offer on your home has the resources to qualify for a mortgage, you may not really have a sale. If possible, try to determine a buyer’s financial status before signing the contract. Ask the following:

  1. Has the buyer been prequalified or preapproved (even better) for a mortgage? Such buyers will be in a much better position to obtain a mortgage promptly.
  2. Does the buyer have enough money to make a downpayment and cover closing costs? Ideally, a buyer should have 20 percent of the home’s price as a downpayment and between 2 and 7 percent of the price to cover closing costs.
  3. Is the buyer’s income sufficient to afford your home? Ideally, buyers should spend no more than 28 percent of total income to cover PITI (principal, interest, taxes, and insurance).
  4. Does your buyer have good credit? Ask if he or she has reviewed and corrected a credit report.
  5. Does the buyer have too much debt? If a buyer owes a great deal on car payments, credit cards, etc., he or she may not qualify for a mortgage.

Source: National Association of REALTORS®

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A Big Mistake Mortgage Shoppers Make

About one-third of recent home buyers failed to shop around for a mortgage, saying they were satisfied with the first quote that a lender gave them, according to Fannie Mae’s National Housing Survey. But that could be a big mistake.

Researchers found that higher-income, younger-aged, and minority borrowers were the most likely to gather multiple quotes when shopping for a mortgage.

On the other hand, “first-time home buyers and lower-income borrowers are more likely to say that referrals from friends, family, or co-workers had a major influence on their choice of lender,” note Sarah Shahdad and Qiang Cai of Fannie Mae’s
 Economic & Strategic Research Group in commentary at Fannie Mae’s website. “Only first-time home buyers are more likely to say that a real estate agent’s or mortgage specialist’s referral influenced their choice of lender. … These findings suggest that there is an opportunity to help consumers be better informed and improve upon the mortgage shopping process.”

Shahdad and Cai urge that consumers be provided with more information about mortgage product choices and that buyers be encouraged to seek multiple sources of information.

“As large and infrequent as the mortgage transaction is in most people’s financial lives, borrowers may be leaving money on the table by not shopping around and negotiating for the best terms they can get,” Shahdad and Cai write. “Getting a better deal can help borrowers sustain their mortgage even in the case of unexpected increases in expenses or decreases in income. The level of influence of referrals on today’s first-time and lower-income home buyers suggests that finding a lender who delivers on other dimensions, such as efficiency and customer service, also is a key area of focus for many.”

Source: “What Is the Mortgage Shopping Experience of Today’s Homebuyer?” Fannie Mae (April 13, 2015)

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Specialty Mortgages: Risks and Rewards

In high-priced housing markets, it can be difficult to afford a home. That’s why a growing number of home buyers are forgoing traditional fixed-rate mortgages and standard adjustable-rate mortgages and instead opting for a specialty mortgage that lets them “stretch” their income so they can qualify for a larger loan.

But before you choose one of these mortgages, make sure you understand the risks and how they work.

Specialty mortgages often begin with a low introductory interest rate or payment plan — a “teaser”— but the monthly mortgage payments are likely to increase a lot in the future. Some are “low documentation” mortgages that come with easier standards for qualifying, but also higher interest rates or higher fees. Some lenders will loan you 100 percent or more of the home’s value, but these mortgages can present a big financial risk if the value of the house drops.

Specialty Mortgages Can:

  • Pose a greater risk that you won’t be able to afford the mortgage payment in the future, compared to fixed rate mortgages and traditional adjustable rate mortgages.
  • Have monthly payments that increase by as much as 50 percent or more when the introductory period ends.
  • Cause your loan balance (the amount you still owe) to get larger each month instead of smaller.

Common Types of Specialty Mortgages:

  • Interest-Only Mortgages: Your monthly mortgage payment only covers the interest you owe on the loan for the first 5 to 10 years of the loan, and you pay nothing to reduce the total amount you borrowed (this is called the “principal”). After the interest-only period, you start paying higher monthly payments that cover both the interest and principal that must be repaid over the remaining term of the loan.
  • Negative Amortization Mortgages: Your monthly payment is less than the amount of interest you owe on the loan. The unpaid interest gets added to the loan’s principal amount, causing the total amount you owe to increase each month instead of getting smaller.
  • Option Payment ARM Mortgages: You have the option to make different types of monthly payments with this mortgage. For example, you may make a minimum payment that is less than the amount needed to cover the interest and increases the total amount of your loan; an interest-only payment, or payments calculated to pay off the loan over either 30 years or 15 years.
  • 40-Year Mortgages: You pay off your loan over 40 years, instead of the usual 30 years. While this reduces your monthly payment and helps you qualify to buy a home, you pay off the balance of your loan much more slowly and end up paying much more interest.

Questions to Consider Before Choosing a Specialty Mortgage:

  • How much can my monthly payments increase and how soon can these increases happen?
  • Do I expect my income to increase or do I expect to move before my payments go up?
  • Will I be able to afford the mortgage when the payments increase?
  • Am I paying down my loan balance each month, or is it staying the same or even increasing?
  • Will I have to pay a penalty if I refinance my mortgage or sell my house?
  • What is my goal in buying this property? Am I considering a riskier mortgage to buy a more expensive house than I can realistically afford?

Be sure you work with a REALTOR® and lender who can discuss different options and address your questions and concerns!

Source: National Association of REALTORS®

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What to Do When the Sale Price Leaves You Short

If you’re thinking of selling your home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale. A short sale is one where the net proceeds from the sale won’t cover your total mortgage obligation and closing costs, and you don’t have other sources of money to cover the deficiency. A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

1. Consider loan modification first. If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if it has any programs to help you stay in your home. Your lender may agree to a modification such as: Refinancing your loan at a lower interest rate; providing a different payment plan to help you get caught up; or providing a forbearance period if your situation is temporary. When a loan modification still isn’t enough to relieve your financial problems, a short sale could be your best option if:

  • Your property is worth less than the total mortgage you owe on it.
  • You have a financial hardship, such as a job loss or major medical bills.
  • You have contacted your lender and it is willing to entertain a short sale.

2. Hire a qualified team. The first step to a short sale is to hire a qualified real estate professional and a real estate attorney who specialize in short sales. Interview at least three candidates for each and look for prior short-sale experience. Short sales have proliferated only in the last few years, so it may be hard to find practitioners who have closed a lot of short sales. You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won’t try to take advantage of your situation or pressure you to do something that isn’t in your best interest. A qualified real estate professional can:

  • Provide you with a comparative market analysis (CMA) or broker price opinion (BPO).
  • Help you set an appropriate listing price for your home, market the home, and get it sold.
  • Put special language in the MLS that indicates your home is a short sale and that lender approval is needed (all MLSs permit, and some now require, that the short-sale status be disclosed to potential buyers).
  • Ease the process of working with your lender or lenders.
  • Negotiate the contract with the buyers.
  • Help you put together the short-sale package to send to your lender (or lenders, if you have more than one mortgage) for approval. You can’t sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that the buyers can get clear title.

3. Begin gathering documentation before any offers come in. Your lender will give you a list of documents it requires to consider a short sale. The short-sale “package” that accompanies any offer typically must include: 

  • A hardship letter detailing your financial situation and why you need the short sale
  • A copy of the purchase contract and listing agreement
  • Proof of your income and assets
  • Copies of your federal income tax returns for the past two years

4. Prepare buyers for a lengthy waiting period. Even if you’re well organized and have all the documents in place, be prepared for a long process. Waiting for your lender’s review of the short-sale package can take several weeks to months. Some experts say:

  • If you have only one mortgage, the review can take about two months.
  • With a first and second mortgage with the same lender, the review can take about three months.
  • With two or more mortgages with different lenders, it can take four months or longer.

When the bank does respond, it can approve the short sale, make a counteroffer, or deny the short sale. The last two actions can lengthen the process or put you back at square one. (Your real estate attorney and real estate professional, with your authorization, can work your lender’s loss mitigation department on your behalf to prepare the proper documentation and speed the process along.)

5. Don’t expect a short sale to solve your financial problems. Even if your lender does approve the short sale, it may not be the end of all your financial woes. Here are some things to keep in mind:

  • You may be asked by your lender to sign a promissory note agreeing to pay back the amount of your loan not paid off by the short sale. If your financial hardship is permanent and you can’t pay back the balance, talk with your real estate attorney about your options.
  • Any amount of your mortgage that is forgiven by your lender is typically considered income, and you may have to pay taxes on that amount. Under a temporary measure passed in 2007, the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act, homeowners can exclude debt forgiveness on their federal tax returns from income for loans discharged in calendar years 2007 through 2012. Be sure to consult your real estate attorney and your accountant to see whether you qualify.
  • Having a portion of your debt forgiven may have an adverse effect on your credit score. However, a short sale will impact your credit score less than foreclosure and bankruptcy.

Source: National Association of REALTORS®

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