Category Archive: Mortgage Information

Dec 04

Property and the “Buy to Let” mortgage

If you intend to purchase a property to rent out then you will require a “buy to let” mortgage. If you intend to raise capital from a property that is to be rented, in order to purchase another property, you will require a “let to buy” mortgage.

Either way, the borrowing is secured against the property to be let out and the amount you can borrow is normally dictated by :
The deposit that you are putting down in the case of a purchase,
or the equity in the property in the case of a re-mortgage.
Your borrowing potential is very strongly linked to the amount of rental income to be received however earned income can be used to top it up.

In addition to rental income, there are a number of different factors that can influence a lender’s decision to lend. These include, but are not limited to:

The type of property being purchased – Ex local authority, studio/high rise flats are some examples of property that lenders may find unacceptable
The type of proposed tenant – Some lenders do not accept students, some won’t accept DSS
The type of tenancy agreement – Most lenders insist on a minimum six months assured short hold tenancy
Whether there are any licensing requirements – Certain properties are subject to mandatory HMO* licensing
The borrowers personal financial circumstances – Some lenders require a minimum level of income
Employment status – It may be possible to purchase a buy to let as a ‘house person’
Age – Some lenders have minimum and maximum borrower ages
Mortgage history – It may not be possible to borrow from some lenders if you do not have a current residential mortgage
All lenders offering Buy To Let mortgages differ in their approach and the buy to let market is becoming ever increasingly complicated due to the rapidly changing economy. We will examine all of your options and present them to you in order to come to an informed decision on the most efficient way to proceed.

Nov 30

100% – 105% Home Purchase Only Financing Program

No Prepayment Penalty

Ideal for first-time home buyers and move-up Borrowers
who lack the funds for down payment and closing costs,
and interested in obtaining maximum 15, 20, 25 or 30 year term financing.

With this loan program, the first-time homebuyers or move-up Borrowers get a loan that covers 97% of the homes value and also covers the 3% downpayment, resulting in 100% mortgage financing.

Key Features Overview

Purchase financing has to be a single family residence (no duplex or larger allowed)
Single Family Housing (1-Unit) $322,700 (2003), and up to $333,700 for 2004:

SFRs (Single Family Residence)
Modular (double-wide unit, at minimum, built after June 15, 1976)
PUDs (Property Under Development) (include: modular homes)
Condos
Townhomes

No down payment is required from the Borrower, however, the borrower is required to pay at least 3% of the sales price, all of which may be applied towards closing costs and/or prepaid items (i.e. insurance & taxes etc…).

Acceptable Sources of Down-payment and Closing Cost Funds
(contributions limited to 3% of the lesser of the sales price or appraised value)

Borrower funds on deposit including checking, savings, certificate of deposit, Individual Development Account or other depository accounts.
Borrower’s own secured assets, such as a 401(k) loan.
Grants, Gifts or unsecured loan from a relative, domestic partner, fiancé, or fiancée, nonprofit agencies, nonprofit community organization, government agency, or the Borrower’s employer that need not be repaid.
Unsecured loan from the Borrower’s employer, cannot be due and payable, and the Borrower must retain the right to continue making payments on it in the event that the Borrower no longer works for the employer.
Contribution plus the LTV may not exceed 100%. No Exceptions.
Premium pricing limited to 2% of value. (i.e. 2% of $200,000 = $4,000)
Unacceptable Sources of Funds

Cash-on-hand
Sweat equity

Maximum Financing (multiply home value by .05)
per these guidelines

Borrowers can finance up to 105%
Maximum LTV/CLTV (loan to Value/Combined Loan to Value): 100/105
LTV = Loan Amount divided by Home Value (as appraised)
CLTV = LTV + Secondary Financing

If the CLTV is greater than 100%, the subordinate financing may only be a Community Second. Funds from the Community Second can be applied toward closing costs and prepaid items. Any excess amount after satisfying closing costs and prepaid item requirements is to be applied towards the down payment.
The minimum LTV (Loan divided by value) is as follows:

With no secondary financing, 90% is the minimum LTV
With secondary financing, there is no minimum LTV

Mortgage Insurance (MI) Requirements

Borrower Paid only (TAMI not allowed)
Loans with a representative credit score less than 620:
Require delegated manual MI, and
A-minus rates may apply, and
An MI certificate must be in the loan file prior to closing
For MI requirements for energy-efficient mortgages may differ among lenders
All manufactured housing requires non-delegated manual MI.
An MI certificate must be in file prior to closing.
The certificate must be from PMI, RMIC, or Triad.
Bankruptcy – Discharged with confirmation
Foreclosure – Copy of Satisfaction of Debt (Cancellation of Debt issued by all creditors)

Oct 28

Adjustable Rate Mortgage (ARM)

The interest rate with this program periodically rises and drops based on different market indexes. You will be assuming risk if the market justifies the rate increasing, but can also tremendously benefit if the market justifies the rate to fall. This loan program is popular with homeowners who only plan on being in the home for a short period of time.

There are two main factors that go into determining the rate you pay, the index and the margin.  The index rate is set by market forces and made public by a neutral third party. Margin is the number of percentage points that is added to the index as agreed upon with the loan program, this is how your adjusted rate is determined. Multiple indexes exist and each has its own way of determining fluctuation. CMT, LIBOR, MTA, COFI are examples of the indexes that are used for these loan programs.

It is very important to ask if and what are the limits to what the rate can be raised for the ARM at each review and over the entire life of the mortgage. Limits on a rate increase are known as “caps”, these caps are essential so you will have the ability to predict how your rate and monthly mortgage payment could change.

Dec 16

Real Estate Hiring and Finding Vendors

After the contract has been mutually accepted, Real estate agents will supervise and coordinate of all necessary professionals and vendors while serving as your advocate when working and communicating with each vendor. Real estate agents will make sure that each vendor has access to the home at the agreed upon times to perform their duties of expertise and oversee the completion and execution of those procedures on your behalf.
For example, the property will need a detailed examination and inspection. Working with your chosen lender, you will have to execute a formal appraisal and possibly a survey completed for the property designated in the executed contract. A thorough home inspection, a foundation inspection, and an environmental inspection will also need to be completed to ensure that the home is up to the standards outlined in your written contract. If there are inspection related issues or inconsistencies found during this time, it could possibly delay or even nullify the contract depending on the contingencies and verbiage written in the agreement.
Homeowner insurance is also a very important item that will need to be taken care of, getting multiple quotes from various agencies is always recommended. Insurance professionals advise that you obtain home owners insurance equal to or exceeding the full replacement value of the property. If you do not find and obtain adequate home owners insurance, the closing will not proceed. Having the insurance policy completed in a timely and professional manner that meets all dates and guidelines per the agreement is a must

Nov 27

Hardship Letter For a Short Sale – Proven Tips For Success

Having to go through a short sale is never something, anyone wants to go through. When anyone decides to purchase their home, they plan on staying in it for, well, all their lives. If, on the other hand something bad happens to our economy, their home will either have to be foreclosed upon or sold to their lender at a discounted payoff.

This is what a short sale is. When the homeowner’s property is sold to their lender, at a discounted payoff price. Once the property is sold at a discounted price, the lender can release the lien that is on that property. With knowing what a short sale is, let me show you how to now write a short sale hardship letter to avoid a foreclosure.

When writing the short sale letter to your lender, please be respectful in your words and phrases. This letter will be read by the lender’s loss mitigator. If this letter is to have any effect or evoke any empathy from your lender, remember, they are human too.

As you write your letter, make it as personal as possible. You can talk about how you’ve made your home your own, how you love coming home everyday and being able to call it, home. Let your lender know how you and your family have done in ways of home improvements to increase your home’s value.

When you write this letter, it is best to keep it under a page. This will ensure the lender will read it and give you the benefit of the doubt. It is also a good idea to, in a nutshell; tell the lender why you are writing this letter. In the first paragraph of your short sale letter, tell the lender exactly why you are writing this. They will not want to know why in the last paragraph of your letter.

Remember, even though this letter has to be written, please treat your lender with respect. This is no time for harsh words or attitudes either.

Jul 01

Adjustable Rate Mortgages

Q. I’m a little confused about adjustable rate mortgages. How does an adjustable rate mortgage differ from a fixed rate mortgage?

A. Understanding the complexities of adjustable rate mortgages is no easy task. Unlike a fixed rate mortgage on which interest is paid at the same rate throughout the life of the mortgage, the rate of interest charged on an adjustable rate mortgage (commonly called an “ARM”) will change at least once, and usually many times over the life of the loan. The most common ARMs will provide for interest rate changes either monthly, every 6 months or once every year. The rate changes periodically on a date known as the “change date”.

Q. How is the rate determined on each change date?

A. On each change date, the interest rate which will be charged until the next change date under the terms of the mortgage note is determined by adding a number called the “margin” to an “index” which is commonly published in periodicals such as the Wall Street Journal. A common “index” which is frequently used to determine the interest rate charged by banks on loans is the “prime rate”. On permanent mortgage loans, the most commonly utilized indexes are the yield on the “one year Treasury Bill”, the “6 month LIBOR” (London Interbank Offered Rate), and the “11th District Cost of Funds (commonly called the “COFI”).

On December 31, 2002 these indices had the following values:

6 Month Treasury Bill 1.260%
Six month LIBOR 1.383%
11th District Cost of Funds 2.537%
1 Year CMT 1.45%
Prime Rate 4.25%
On the change date of the ARM the margin will be added to the index to determine the new interest rate. Margins on ARMs typically range from 2.500% to 3.000%. Thus, if the change date were on January 27th, the margin on an ARM were 2.750% and the index for the ARM was the One Year T-Bill, the new rate would be 9.77% (7.020% + 2.750%). The rate which results from sum of the index and the margin is referred to as the “fully indexed rate”.

Q. What is the “start rate” on an ARM?

A. As if the procedure of determining the indexed rate were not complicated enough, there are other factors which can result in a different rate than that derived from the above-described formula. It is not uncommon for ARMs to have a start rate or beginning interest rate that is considerably less than the fully indexed rate.

For example, the note which had a fully indexed rate of 9.77% might have a start rate of 6.250%, far below the fully indexed rate.

Q. What are “caps”?

A. The amount by which the interest rate charged on an ARM can change from one change date to the next (or over the entire life of the loan) is typically limited by what are called “caps”. There are “per change caps” and “lifetime caps”. The “per change cap” limits the amount by which the interest rate can be increased or decreased from one change date to the next. Thus, in our example, if an ARM has a “per change cap” of 2 and adjusted annually, the new interest rate on the first change date would be 8.25%, even though the fully indexed rate might be 9.77%. This is because the rate can never increase by more than 2 percentage points on any one change date. The maximum possible interest rate on an ARM is determined by the “lifetime cap”. Thus, if an ARM has a lifetime cap of 6 percentage points and a start rate of 6.25%, the maximum interest rate to which the loan could increase would be 12.25% (6 percentage points greater than the start rate of 6.25%). Caps are often expressed as two consecutive numbers (e.g. 2/6). The first number refers to the “per change cap” and the second to the “lifetime cap”.

The following example indicates how the interest rate on an ARM would be determined during the first few years of the loan’s term. We will assume that the index on the ARM in our example is the 11th District Cost of Funds (COFI) and that the interest rate adjusts every 6 months. The note evidencing the loan is executed on December 25, 2003 with a first payment due on February 1, 2004. The note provides that the first change date is on June 1, 2004 with a change date occuring on the 1st day of the month every six months thereafter. In this instance the first 6 change dates would be on June 1, 2004, December 1, 2004, June 1, 2005, December 1, 2005, etc. The note has a start rate of 6.50% and caps of 1/6. The margin is 2.750%. From the date the note is executed until June 1, 2004 the note would bear interest at the rate of 6.50%. We will assume that the COFI (Cost of Funds Index) goes up from its current level to 5.387% on June 1, 2004. The indexed rate on June 1, 2004 would be 8.137%. The 1% “per change” cap would, however, limit the new interest rate to 7.500% (1 percentage point over the existing rate). If on the second change date the COFI has declined back to 4.387%. The fully indexed rate would be 7.137%. Because the existing rate of 7.500% is less than one percentage point more than the fully indexed rate, the “per change cap” would have no effect on the second change date. Accordingly, the rate on the second change date would be the fully indexed rate of 7.137%. If the COFI eventually climbed to 10%, the fully indexed rate would be 12.75%. But the lifetime cap of 12.50% would prohibit the rate from changing to that high rate. The rate on that change date would be limited to 12.50% (the life capped rate).

Q. Can I convert my ARM to a fixed-rate mortgage later?

A. On some adjustable rate mortgages you can elect a “conversion option” which will allow you to convert the ARM to a fixed-rate mortgage (at the prevailing 30 year interest rate at the time of the conversion) for a nominal conversion fee. The option must typically be exercised between the 13th and 60th month of the mortgage.

Jun 07

FHA Loans

What Is An FHA Loan?

The FHA does not make loans. It insures, in the event of a default, mortgage loans made by approved lending institutions. FHA’s analysis of the transaction takes into consideration the applicants income, past credit history, work history and ability to save and manage financial affairs. Each applicant is considered individually as no two families have exactly the same situation. Family obligations, responsibilities, future prospects, motivation and spending patterns all widely differ.

Advantages of FHA Loans

Low down payment
Less cash from borrower than a conventional loan
Less stringent loan underwriting guidelines
Fully assumable (with qualifying)
No prepayment penalty
Eligibility Requirements

FHA financing may be by any qualified person, whether a U.S. citizen or not. However, the property must be the occupying borrowers’ principal residence. The borrower must also have a social security number.

FHA Mortgage Insurance

Mortgage insurance is required on all FHA loans. The insurance is collected by the lender and paid to FHA, who in turn reimburses lenders in the event of loan defaults.

MMI & MIP are the two existing types of FHA insurance.
MMI (Mutual Mortgage Insurance) is collected monthly on approved Condominiums. Insurance is paid on the remaining balance of the loan only, therefore the payments will decrease gradually over the life of the loan.
MIP (Mortgage Insurance Premium) is a one-time premium calculated as a percentage of the loan amount that applies to Single Family Residences (SFR) and Planned Unit Developments (PUD). This fee can be 100% financed and added to the base loan.
FHA Loan Programs And Amounts

The maximum FHA loan amount varies by county.

ARM (Adjustable Rate Mortgage) which can fluctuate based on the index (1-year Treasury Bill) and has a 1% annual cap and a 5% lifetime cap.
GPM (Graduated Payment Mortgage) which allows the borrower to qualify at a lower rate but requires a down payment and has negative amortization.
Interest Rates

FHA does not set interest rates. Rates reflect current market conditions. Discount points need not be paid by anyone, but discount points to obtain a lower than market rate can be paid by either the buyer or the seller.

FHA Appraisals

FHA uses the same appraisals for all programs. The appraisals (or Conditional Commitments) are done by FHA assigned/approved appraisers and set forth FHA’s estimate of value. If the appraisal is at a value lower than requested, a reconsideration of value may be requested by sending FHA recent comparables indicating a higher value, or the buyer may pay the additional difference.

Co-signers

FHA allows a borrower to use a non-occupying cosigner for purposes of qualifying for the loan. The co-signer’s income, assets, liabilities and credit history are included in the determination of credit worthiness. The co-signer must be a blood relative or for an unrelated individual there must be documented evidence of a family-type with a long-standing and substantial relationship not arising out of the loan transaction.

Buyer’s Costs

Down Payment
Loan Origination Fee (1% of base loan amount)
Escrow Fee
Appraisal Fee
Credit Report Fee
Recording Fees
ALTA. Lenders Title Insurance Policy
Property Tax Proration and Reserves
MMI Impounds (2 months)
MIP (can be 100% financed and added to base loan)
Hazard Insurance and Reserves
Per Diem interest on new loan, based on closing date
Seller’s Costs

Escrow Fees
Sub-Escrow Fee*
Tax Service Fee*
Revenue Tax Stamps ($1.10 per $1000 sale price, if applicable)
Standard Owner’s Title Insurance Policy
Proration of Property Taxes
Payment of assessments, etc.
Structural Pest Control Inspection and Repairs
Pay Off Existing Trust Deed and Liens
Broker fees
Association Transfer Fees*
Buyers’ Loan Processing Fee*
Buyers’ Loan Document Fee*
And Don’t Forget…

Down payment, closing costs and impounds required for closing must be paid from the buyer’s own funds or can be a non-repayable gift from a relative. FHA does not allow the buyer to pay certain costs and therefore those costs must be paid by the seller (see * items under Seller Costs above). If any other costs other than those FHA non-allowable costs are paid by the seller on behalf of the buyer, FHA requires that the buyer’s loan be reduced by a corresponding amount, saving the buyer very little money because their down payment is increased.

May 27

Glossary of Mortgage Terms

Adjustable Rate Mortgage (ARM)
A mortgage in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.
Adjustment Interval
For an adjustable rate mortgage, the time between changes in the interest rate charged. The most common adjustment intervals are one, three or five years.

Amortization
Literally to “kill off” (root: mort) the outstanding balance of a loan by making equal payments on a regular schedule (usually monthly). The payments are structured so that the borrower pays both interest and principal with each equal payment.

Annual Percentage Rate (APR)
The interest rate which reflects the cost of a mortgage as a yearly rate. This rate is usually higher than the stated loan rate for the mortgage, because it takes into account points and other charges.

Application Fee
The fee charged by the lender to the borrower for applying for a loan. Payment of this fee does not guarantee that a loan will be approved. Some lenders may apply the cost of the application fee to certain closing costs.

Appraisal
The determination of property value based on recent sales information of similar properties.

Assumable Loan
These loans may be passed on from a seller of a home to the buyer. The buyer “assumes” all outstanding payments.

Balloon Mortgage
Behaves like a fixed-rate mortgage for a set number of years (usually five or seven) and then must be paid off in full in a single “balloon” payment. Balloon loans are popular with those expecting to sell or refinance their property within a definite period of time.

Broker
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.

Caps
A set percentage amount by which an adjustable rate mortgage may adjust each adjustment period. For adjustable loans, caps are usually quoted as two numbers as in 2/6. The first number indicates how much a loan may adjust at each adjustment period while the second number indicates how much a loan may adjust over its lifetime.

Loans like the 3/1 and 5/1 adjustable which have an initial fixed period are quoted with 3 numbers as in 2/6/3 which would mean that the first adjustment may be as much as 3%, subsequent adjustments are capped at 2% each, and the lifetime cap is 6%.

Two-Step loans are quoted with a single cap, which is the amount by which the loan may adjust at its single adjustment date.

Closing Costs
Fees paid by the borrower when property is purchased or refinanced. These typically include a loan origination fee, discount points, appraisal fee, title search, title insurance, survey, taxes, deed recording fee, and credit report charges.

Commitment
A written letter of agreement detailing the terms and conditions by which the lender will lend and the borrower will borrow funds to finance a home.

Conforming Loan
A mortgage loan for $322,700 or lower.

Construction Loan
A short term loan for funding the cost of construction. The lender advances funds to the builder as the work progresses.

Conventional Loan
A mortgage neither insured by the FHA nor guaranteed by the VA.

Conversion
The right of a borrower to convert an adjustable or balloon loan into a fixed loan. The Conversion Option column on Microsurf balloon tables indicates the right of a borrower to convert this balloon loan.

Credit Rating
Borrowers are rated by lenders according to the borrower’s credit-worthiness or risk profile. Credit ratings are expressed as letter grades such as A-, B, or C+. These ratings are based on various factors such as a borrower’s payment history, foreclosures, bankruptcies and charge-offs. There is no exact science to rating a borrower’s credit, and different lenders may assign different grades to the same borrower.
Credit Report
A report to a prospective lender on the credit standing of a prospective borrower. Used to help determine creditworthiness. Information regarding late payments, defaults, or bankruptcies will appear here.

Deed
A legal document which affects the transfer of ownership of real estate from the seller to the buyer.

Default
The failure to make payments on a loan.

Down Payment
Money paid by a buyer from his own funds, as opposed to that portion of the purchase price which is financed.

Equity
The difference between the current market value of a property and the principal balance of all outstanding loans.

Finance Charge
The total dollar amount your loan will cost you. It includes all interest payments for the life of the loan, any interest paid at closing, your origination fee and any other charges paid to the lender and/or broker. Appraisal, credit report and title search fees are not included in the finance charge calculation.

Fixed-Rate Mortgage
A mortgage where the interest rate does not change for the life of the loan.

Float
Between the time of application and closing, a borrower may choose to bet on interest rates decreasing by electing to float. Floating is essentially choosing not to lock the interest rate. Since it is the borrower’s responsibility to lock his or her rate before (or at) closing, choosing to float is considered risky and may result in a higher interest rate. Request information from your lender regarding lock procedures.

Foreclosure
A legal procedure in which real estate is sold by the lender to pay a defaulting borrower’s debt .

Good Faith Estimate
An estimate of charges which a borrower is likely to incur in connection with a loan closing.

Gross Monthly Income
The total amount the borrower earns per month, not counting any taxes or expenses. Often used in calculations to determine whether a borrower qualifies for a particular loan.

Hazard Insurance
A form of insurance in which the insurance company protects the insured from certain losses such as: fire, vandalism, storms and certain other natural causes.

Housing Ratio
The ratio of the monthly housing payment to total gross monthly income. Also called Payment-to-Income Ratio or Front-End Ratio.

Index
A published interest rate not controlled by the lender to which the interest rate on an Adjustable Rate Mortgage (ARM) is tied. The index and the interest rate linked to it may increase or decrease.

Interest Rate
The percentage of an amount of money which is paid for its use for a specified time.

Jumbo Loan
A loan above $322,700. These limits are set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Lender
The bank, mortgage company, or mortgage broker offering the loan. Many institutions only “originate” loans and then resell the obligation to third parties.

Life of Loan Cap
The maximum interest rate that can be charged during the life of the loan. Also called Lifetime Cap. This value is often expressed as an increment above the initial loan rate. For example, an adjustable rate loan with an initial rate of 7.25% and a 6% lifetime cap will never adjust above a rate of 13.25% (7.25+6.0).

Loan-To-Value Ratio
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. A LTV ratio of 90 means that a borrower is borrowing 90% of the value of the property and paying 10% as a down payment. For purchases, the value of the property is assumed to be the purchase price, for refinances the value is determined by an assessment.

Lock noun
The period, expressed in days, during which a lender will guarantee a rate. Some lenders will lock rates at the time of application while others will allow the borrower to lock the rate after the application is taken. Request information from your lender regarding lock procedures.

Lock verb
The act of committing to a mortgage rate. This action, taken by a borrower some time between the application and the closing dates, is sometimes accompanied by a payment by the borrower to the lender. Opposite of float

Margin
The amount a lender adds to the quoted index rate for an adjustable rate loan to determine the new interest rate.

Minimum Credit
This field on the Microsurf tables refers to the minimum credit rating a borrower must have in order to qualify for the listed loan.

Monthly Housing Expense
Total principal, interest, taxes, and insurance paid by the borrower on a monthly basis. Used with gross income to determine affordability.

Mortgagee
The lender.

Mortgagor
The borrower.

Net Effective Income
Gross income less federal income tax.

Origination Fee
The fee imposed by a lender to cover certain processing expenses in connection with making a loan. Usually 1% of the amount loaned. Please refer to the Points definition.

Points
Prepaid interest paid by the borrower to the lender at closing. A point is equal to 1 percent of the loan amount (e.g. 1.5 points on a $100,000 mortgage would cost the borrower $1,500). Generally, by paying more points at closing, the borrower reduces the interest rate of his loan and thus future monthly payments.

Prepaids
Expenses such as taxes, insurance and assessments which are paid in advance of their due date and which must be paid by the buyer on a prorated basis at closing.

Prepayment
The ability to pay off the remaining balance of a loan.

Prepayment Penalty
Lenders who impose prepayment penalties will charge borrowers a fee if they wish to repay part or all of their loan in advance of the regular schedule.

Principal
The amount of debt, not counting interest, left on a loan.

Private Mortgage Insurance (PMI)
Paid by a borrower to protect the lender in case of default. PMI is typically charged to the borrower when the Loan-to-Value Ratio is greater than 80%.

Qualifying Ratio
The ratio of the borrower’s fixed monthly expenses to his gross monthly income. Ratios are expressed as two numbers like 28/36 where 28 would be the Front-End Ratio and 36 would be the Back-End Ratio.

The Front-End Ratio is the percentage of a borrower’s gross monthly income (before income taxes) that would cover the cost of PITI (Mortgage Principal Payment + Mortgage Interest Payment + Property Taxes + Homeowners Insurance). In the case of a 28% Front-End Ratio a borrower could qualify if the proposed monthly PITI payments were 28% or less than the borrower’s gross monthly income.

The Back-End Ratio is the percentage of a borrower’s gross monthly income that would cover the cost of PITI plus any other monthly debt payments like car or personal loans and credit card debt.

Please note that qualifying ratios are only a rough guideline in determining a potential borrower’s credit-worthiness. Many factors such as excellent or poor credit history, amount of down payment, and size of loan will influence the decision to approve or disapprove a particular loan.

Settlement Costs
See Closing Costs.

Tax Lien
A claim against real estate for the amount of its unpaid taxes.

Title
A document that gives evidence of an individual’s ownership of property.

Title Insurance
Insurance against loss resulting from defects of title to a specifically described parcel of real estate.

Title Search
An examination of city, town, or county records to determine the legal ownership of real estate.

Total Debt Ratio
Monthly debt and housing payments divided by gross monthly income. Also known as Back-End Ratio.

Variable Rate Mortgage
See Adjustable Rate Mortgage.

May 19

Seven Steps to a Mortgage

Pre-qualification
“Pre qualification” occurs before the loan process actually begins, and is usually the first step after initial contact is made. In a pre qualification, the lender gathers information about the income and debts of the borrower and makes a financial determination about how much house the borrower may be able to afford. Different loan programs may lead to different values, depending on whether you are qualified for them, so be sure to get a prequalification for each type of program you are suited for.

Application
The “application” is actually the beginning of the loan process and usually occurs between days one and five of the loan. The buyer, now referred to as a “borrower”, completes a mortgage application with the loan officer and supplies all of the required documentation for processing. Various fees and down payments are discussed at this time and the borrower will receive a Good Faith Estimate (GFE) and a Truth-In-Lending statement (TIL) which itemizes the rates and associated costs for obtaining the loan.

Pre-Approval
Once you have made application, your lender will submit your file for automated underwriting. The automated underwriting systems will review your income, assets, liabilities, credit scores, loan-to-value ratios, and your proposed loan details. This system will then give an approval or denial within 1-3 days of submission.

Processing
Processing occurs between days 3 and 15 of the loan. At this time the lender orders a property appraisal, orders title insurance mails out requests for verifications, if necessary, for employment (VOE) and bank deposits (VOD) and any other documents needed for processing of the loan. All information supplied by the borrower is reviewed at this time and a list of items not yet received is compiled. The “processor” reviews the credit reports and verifies the borrower’s debts and payment histories as the VODs and VOEs are returned. If there are unacceptable late payments, collections for judgement, etc., a written explanation is required from the borrower. The processor also reviews the appraisal and survey and checks for property issues that may require further discernment.

The processor’s job is to put together an entire package that may be underwritten by the lender.

Underwriting
“Lender underwriting” occurs between days 15 and 25. The underwriter is responsible for determining whether the combined package passed over by the processor is deemed as an acceptable loan. If more information is needed, the loan is put into “suspense” and the borrower is contacted to supply more documentation.

“Mortgage insurance underwriting” occurs when the borrower has less than 20% of the loan amount to put towards a down payment. At this time, the loan is submitted to a private mortgage guaranty insurer, who provides extra insurance to the lender in case of default. As above, if more information is needed the loan goes into suspense. Otherwise it is usually returned back to the mortgage company within 48 hours.

Closing
Closing usually occurs between days 25 and 45 of the loan. At the closing, the lender “funds” the loan with a cashier’s check, draft or wire to the selling party in exchange for the title to the property. This is the point at which the borrower finishes the loan process and actually buys the house.

Closings occur at different places in different states. For instance, some states require that the closing take place at a closing attorney’s office while others use a title or escrow company.

May 05

Qualifying for a Mortgage with Credit Problems

Q. I have had credit problems in the past. Will this affect my ability to obtain a mortgage loan?

 

A. In evaluating an application for a mortgage loan, an applicant’s credit history will be considered as one element in determining the applicant’s qualification for the requested loan. Negative credit histories or a lack of previous credit experience can adversely affect an applicant’s ability to obtain a requested loan. More recent credit information will be weighed more heavily than older information. Also, some types of credit histories may be given greater weight than others. Generally, the applicant’s previous payment history on a mortgage loan is given the greatest weight, followed by major installment accounts (such as auto loans), followed then by major credit card accounts (such as MasterCard and VISA accounts), and finally followed by minor revolving charge accounts such as departments stores and finance companies.

 

Q. My credit problems occured more than three years ago. Will this affect my ability to obtain a mortgage loan?

 

A. In evaluating a loan application, we will look closely at information occurring in the past two years. Generally, a few late payments occurring on installment loans or credit-card accounts more than two years ago will not affect an applicant’s ability to obtain maximum financing (with minimum equity or downpayment) as long as the late payments were isolated and an adequate statement has been provided explaining why the credit problems occurred.

 

Q. I recently filed bankruptcy. Will this affect my ability to obtain a mortgage loan?

 

A. An applicant may be able to qualify for maximum financing with a previous bankruptcy provided that the discharge date is more than two years ago, the applicant has re-established and maintained a positive credit history on at least three accounts since the date of the bankruptcy discharge, and the applicant provides an acceptable explanation for the reason the bankruptcy was filed. Chapter 13 bankruptcy plans (which provide for a restructuring of debt and repayment of all or a portion of the debt over a 3 to 5 year period) must have been fully completed for a two year period to obtain maximum financing at the best available interest rates. However, we offer special loan programs at higher interest rates which allow more recent bankruptcies. These special programs typically require higher downpayments or equity positions than our conventional loans (between 10% to 35%) depending on how recent the bankruptcy.

 

Q. I have very recent late payments on a prior mortgage. Will this affect my ability to obtain a mortgage loan?

 

A. As previously stated, mortgage payment histories are given greater weight than other types of credit information. Thus, late payments occurring on a mortgage within the past two years will typically preclude an applicant from obtaining maximum financing at the best interest rates. However, we offer special loan programs at higher interest rates which allow recent late payments on mortgages. These special programs typically require higher downpayments or equity positions than our conventional loans (between 10% to 35%) depending on how recent the late payments occurred. We even have loan programs for applicants which are currently in default on a mortgage loan or which have experienced foreclosures; however, these programs typically require higher equity positions of between 20% and 35% and have interest rates which are much higher than those offered on other loan programs.

 

Q. How is the amount of the downpayment I will be required to pay determined on these special loan programs allowing derogatory credit?

 

A. The amount of the downpayment required for an applicant with recent derogatory credit is determined on a case-by-case basis. Generally, the more negative and more recent the derogatory information, the higher the downpayment or equity position that will be required. For example, we offer a program which allows a 5% downpayment which permits late payments on a mortgage occurring more than 12 months prior to the application date, and up to three 30-day late payments on other types of accounts during the preceding 24 months. With 10% down, several late payments on a mortgage occurring within the preceding 12 months and a few 30-day and 60-day late payments on other types of accounts will be permitted on these special programs with higher interest rates. Most of these programs also allow higher debt ratios than those programs at more favorable interest rates

 

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