Smart Moves in Financing Your Purchase

Mortgage Articles and Advice

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How Much House Can You Afford?

   Debt-to-income Ratios

   Your Monthly Income - the way Lenders Figure it

   Your Maximum Monthly Mortgage Payment

   The Rest is Easy - Sort of

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Your Down Payment Affects Everything Else

   Analyzing Your Savings - the First Step

   Mortgage Program Choices

   Shopping for Interest Rates

   Writing Your Offer

   Conclusion - Look at Your Savings First

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Documenting Your Assets & Verifying Your Down Payment

   You can't just "come up" with the money

   Checking, Savings, & Money Market Accounts

   Stocks, Bonds, Mutual Funds, etc.

   Gifts from Family Member

   401K or Retirement Accounts

   Selling Personal Property

   Help from Employers

   Savings Bonds

   Borrowing to Come up with a Down Payment

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Where Does Mortgage Money Come From?

   The Olden Days

   How it works now

   Mortgage Backed Securities

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Different Types of Lenders
   Mortgage Bankers
   Mortgage Brokers
   Wholesale Lenders
   Portfolio Lenders
   Direct Lenders
   Correspondents
   Banks
   Savings & Loans
   Credit Unions

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Advantages of Different Types of  Lenders
   What kind of Lender is Best?
   Portfolio Lenders
   Banks and Savings & Loans
   Mortgage Bankers
   Mortgage Brokers
   Wholesale Lenders

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When Realtors or Builders Recommend a Lender

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Things You Need When You Apply for a Home Loan
   "Alternate" Documention versus Full Traditional Documentation
   The Actual List of things you need to get a quick loan approval

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Closing Costs When Buying or Refinancing a Home
   Introduction
   Lender Associated Costs - the "normal" ones
   Lender Associated Costs - the "other" ones
   Items Paid in Advance
   Impounds or Reserves
   Costs not Associated with the Lender
   Refinancing Associated Costs
   Asking the Seller to Pay Closing Costs - Advice and Rules

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Mortgage Interest Rates - How it Works
   A Loan Officer's Rate Sheet
   Pricing the Loan
   Quoting Rates to You
   Locking in Your Rate
   Shopping for Rates
   Getting Reliable Quotes

 

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Before You Look at Your First House

Experienced home buyers know that one of the first-steps in beginning a successful search for a new house is taking a hard, objective look at finances. Determining how much money you can dedicate to the purchase of your new house affects almost every aspect of buying a new home - including how we write the offer, which mortgage programs you will qualify for, shopping for the best mortgage and which homes are truly in your price range.



Here are the questions that each home buyer should ask:

  • How much cash is available for a down payment? The amount you have available for a down payment will affect what types of loans for which you can qualify. 
  • Am I ready to write a check for the earnest money? Earnest money is a cash deposit made to a home seller to secure an offer to buy the property. This amount is often forfeited if the buyer decides to withdraw his offer.
  • How much additional cash will be available to pay for closing costs? There are certain standard costs associated with closing the sale of a house. These fees are split between the buyer and the seller, as spelled out in the sales contract. 
  • What is the maximum monthly mortgage payment that I can afford? Most lenders will use the 28/36 rule to determine the maximum mortgage payment you can afford.

The 28/36 Rule
No more than 28% of your gross income can be applied to your mortgage, real estate taxes and insurance. And no more than 36% of your gross income can be applied to your mortgage expenses plus your regular debt expenses (car payments, credit cards, other loans, etc.).

 

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Buying Worksheet

Available Cash
Sale of Assets (stocks, car, boat, etc.)  ____________________
 
Sale of Previous Home                     ____________________
 
Other Cash (savings, gift, etc.)          ____________________
 
Total Cash Available                      ____________________
 
Minus Closing Costs                       ____________________
Cash available for Down Payment                 ____________________
 
 
 
Determining Monthly Gross Income
Annual Salary of Buyers                    ____________________
 
Other Annual Income                        ____________________
 
Total Annual Income                        ____________________
 
Divide by 12 mos.
 = Gross monthly income                    ____________________
 
 
Listing your Fixed Monthly Debts and Expenses
Auto Loans, School, Personal Loans          ____________________
 
Total Debt                                  ____________________
Multiply gross monthly income by 28% (0.28)
for maximum allowable P.I.T.I. Multiply gross
monthly income by 36% (0.36) for maximum
total debt.                                       ____________________
 
Deduct taxes and insurance from P.I.T.I. 
to get actual affordable monthly principal
and interest. Calculate loan amount by using
an amortization table.                            ____________________
 
Down payment plus maximum loan amount 
= Maximum Purchase                                ____________________

 

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Loan Application Checklist

In general, the documentation you will need includes:
Check for application fee
Property Information (if you already have a contract on a house)
Purchase Agreement.
Copy of legal description and MLS sheet.
If you are selling your current home, copy of listing contract.
If you have sold your current home, copy of settlement statement (HUD-1).

Income & Assets
Pay stubs for the last 30 days.
  For the past two years:
 

Names and addresses of each employer.

W-2s
Statements for each bank, mutual fund, and/or investment account for the last three months.
Estimated value of personal property and furniture.
  If you have made any large deposits to your accounts:
 

Explanation and source for deposit.

If large deposit was a gift:
 

Signed gift letter (lender can supply).

Copy of gift check.

Copy of deposit receipt.
  If you own more than 25% of a business:
 

Corporate or partnership tax returns.
  If self-employed:
 

Tax returns for the last three years (with schedules).

Year-to-Date Profit and Loss Statement prepared by an accountant.
  If you own rental property:
 

Tax returns for the last two years and current rental agreements.
  If you are retired:
 

Pension Award Letter.
  If you receive Social Security:
 

Social Security Award Letter.
  If you are counting child support as income:
 

Copy of divorce settlement.

Copy of twelve months of cancelled child support checks.

Debts
Names, addresses, account numbers, balances and monthly payments on all current loans.
Explanation of credit report anomalies, including:
 

Late payments, credit inquiries in the last 90 days, charge-offs, collections, judgments and/or liens.

Bankruptcy filed within last seven years (bring a copy of your bankruptcy papers).

VA Loans
Copy of DD Form 214, Report of Separation.

Miscellaneous
Photo ID and proof of Social Security number.
Residence addresses for the past two years.
If applicable, a copy of your divorce decree.
If you are not a citizen, a copy of the front and back of your green card.

Glossary of Mortgage Terms

Adjustable -rate mortgage (ARM) A mortgage for which the interest rate and the payments change during the life of the loan. A fixed rate mortgage is fixed for loan's term.
Amortization A plan for gradually repaying, in periodic payments, money borrowed.
Conventional Loan A loan not guaranteed by the VA or insured by the FHA.
Debt-to-income ratio A percentage arrived at by dividing the borrower's fixed monthly obligations by the borrower's monthly income. Allowable lending ratios vary from lender to lender. Fig. used below are averages.
Life-of-the-loan cap A consumer protection on some adjustable loans. It limits the total upward adjustment that may occur during the life of the loan. Also known as the overall cap.
Lock-in rate A rate commitment made by lenders when making a mortgage loan to commit.Lock-in periods vary depending on your lender.
Rate Cap Interest rate cap on an ARM loan; it restricts the upward movement of the loan's interest rate at the time of adjustment.
Account points & Origination Fees Fees charged by the lender. Points are loan with each point equal to 1% of the loan. Origination fees vary.
Index A reference used to measure fluctuations in particular factors of economic activity. For an ARM loan, an index of interest rates is used to calculate periodic adjustments in the rate and payment on the loan.
Jumbo Mortgage Loans that go over $214,600 Fannie Mae & Freddie Mac limit
7/23 and 5/25 mortgages Mortgages with a one-time rate adjustment after seven and five years respectively
3/1, 5/1, 7/1, and 10/1 ARMs Adjustable rate mortgages in which the rate is fixed for 3,5,7 & 10 year periods, respectively, but may adjust annually after that time.

The Down Payment

The amount you have available for a down payment will affect what types of loans for which you can qualify. Down payments typically range from 3 to 20 percent of the sales price for the property.

Tips for Accumulating a Down Payment

  • Save
    Look for ways to reduce your monthly expenditures to save toward a down-payment. You could enroll for an automatic savings plan at your bank to have a portion of your payroll automatically transferred into savings. Most people save a couple of years for their down payment.

  • Borrow the down payment from your retirement plan
    Check the provisions of your retirement plan. You can borrow funds from a 401(k) plan for a down payment or make a withdraw from an Individual Retirement Account. Be sure you understand the tax consequences, repayment terms and/or possible early withdrawal penalties.

  • Move
    You may be able to save additional funds if you can move into less expensive housing.

  • Reduce other higher interest rate debt
    Paying off credit cards will initially reduce your savings, but the money you will save from higher interest rates will pay-off in the long run.

  • Make a deal with the seller
    In some circumstances, it is appropriate to ask the seller to carry a second-mortgage to cover your down payment. Typically, you will pay a slightly higher rate for this second mortgage.

  • Sell some investments

  • Get a second job and save your earnings

  • Skip a year's vacation

  • Gift from Family
    Parents and other family members are often anxious to help children buy their first home and may have the means to give you a gift of money for a portion or all of your down payment.

Alternative Sources

  • No-down and low-down Mortgages

    • FHA Loans
      The Federal Housing Authority (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), plays a significant role in helping low- to moderate-income families qualify for mortgages. FHA assists first-time buyers and others who would not qualify for a conventional loan, by providing mortgage insurance to private lenders. Interest rates for an FHA loan are usually the going market rate, while the down payment requirements for an FHA loan are lower than conventional loans. The required down payment can be as low as 3 percent and the closing costs can be included in the mortgage amount.
       

    • VA Loans
      VA Loans are guaranteed by the U.S. Department of Veterans Affairs. Service persons and veterans can qualify for a VA Loan, which usually offers a competitive fixed interest rate, no down payment and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.
       

    • Piggy-back Loans
      A second mortgage that closes with the first. Often the first mortgage is for 80% of the purchase price and the "piggyback" is for 10%. The home buyer covers the remaining 10% with their down payment. (Some lenders will write a second mortgage of 15% or even 20% of the purchase price.)
       

    • "Carry Back" Mortgage
      In the case of the seller "carrying back a second mortgage", the seller loans you part of his or her equity. In this scenario, you would finance the majority of the loan with a traditional mortgage lender and finance the remaining amount with the seller. Typically you will pay a slightly higher interest rate on the loan financed by the seller.

  • Housing Finance Agencies
    These agencies offer special loan programs to low- and moderate-income buyers, buyers interested in rehabilitating a home in a targeted area, and other groups as defined by the agency. Working through a housing finance agency, you can receive a below market interest rate, down payment assistance and other incentives.

    • The primary mission of Housing Finance Agencies is to boost home ownership in targeted areas, among first-time buyers and those with little money for down payments. Most of these non-profit agencies were funded with state government seed money and now operate independently.

  • Documenting Your Down Payment

    Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.

    Take extra care to document the sources for any monies to be used for the down payment or closing costs.

    Acceptable Down Payment & Closing Costs Sources

    • Cash in a bank account
    • Mutual funds / stocks / IRA / 401K
    • Proceeds from the sale of another property
    • Gift from an immediate relative

 

The Cost of Your Mortgage Loan
Locking-in the Rate

When shopping for a mortgage, the lender may give you a quote for the mortgage interest rate and points (additional fees charged by the lender usually paid at closing by the borrower). These only represent terms available at the time of the quote. They may not be available by the closing date (which may be weeks or months in the future). To ensure the rate and points are the same at closing as they are when quoted, you'll need to lock-in the interest rate (also known as a rate lock or rate commitment).

Obtain a Written Agreement

Floating the Rate

Buyers opt to float the loan when they believe interest rates will drop after their loan application date and prior to closing. The risk is that rather than dropping, interest rates rise, increasing the mortgage payment.
 

Most lenders will commit, in writing, to a mortgage interest rate for a specified time period while your loan application is processed - this is known as "locking-in" the rate.

If you elect to lock-in an interest rate, it is best to deal with a lender who provides a written lock-in agreement. Be sure to read this agreement carefully, some lock-in agreements become void due to actions beyond your control - such as a change in the maximum rate for VA-guaranteed loans.

Lock-in Options

The following lock-in options are common among lending institutions. Be sure to ask the mortgage lenders you are considering which lock-in options they offer.

  • Lock-in interest rates and points.
    This will give you a clear understanding of how much your mortgage will cost. Neither your interest rate nor points increase during the lock-in period. This protects you against rising market conditions.

  • Lock-in interest rates and floating points.
    Your interest rate is locked-in and will not change for the lock-in period, while your points may rise and fall with market conditions. With this option, your lender may allow you to lock-in the points at the current market condition some time between submitting the loan application and closing.

  • Floating interest rates and floating points.
    This gives you the option to lock-in the interest rate at some time between submitting the loan application and closing. This puts you at risk if interest rates and points rise and may not be best for a homebuyer with a tight budget.

The Cost of Locking-in the Rate

It is not unusual for a lender to charge a fee for locking-in an interest rate and points. This fee may vary depending on the amount of time you want to lock-in the rate (the lock-in period).

The fee may be charged when you lock-in the rate (and is rarely refundable if you withdraw your application, if your credit is denied or if you do not close on the loan) or it may be included in your closing costs. The amount of the fee and when it is charged will vary among lenders.

The Lock-in Period

Most lenders will offer lock-in periods of 30-60 days. Some lenders may only have short lock-in periods. And still others may offer a longer lock-in period (expect higher fees for longer lock-in periods).

The lock-in period should be long enough for the loan approval process and to allow for any other contingencies that may delay closing.

The Lock-in Expiration Date

If unexpected circumstances prevent the loan from settling prior to the last day of the lock-in period (whether caused by you or others in the process - including the lender), you lose the interest rate and points that were locked. Prevailing interest rates and points are usually charged under these circumstances. Be sure to ask your lender before you lock-in what interest rates and points will be charged if the loan is not closed before the lock-in period expires.

 

Mortgage 101

Here are a number of useful tools and links. 

No endorsement is made of any of the lenders linked here. Information is provided for comparison purposes only. .

If you choose to use any of the programs offered by Mortgage101or any other lender we link to,  you do so at your own risk of providing any confidential information requested. No representations or endorsements are made herein.

CALCULATORS

RATES

Blended Mortgages

What's a Blended Mortgage Program? Generally this program consists of two separate mortgage loans on the property you're buying that co-exist together. The first mortgage is usually written for 75% of the purchase price. This loan can be a fixed or adjustable rate mortgage, whichever the borrower prefers.

The second mortgage is usually written as a fixed rate with a 15 year payment. The second mortgage can be written in one of two ways.

What's the purpose of this Program? It's designed to offer the buyer the ability to waive Private Mortgage Insurance (PMI) when they are putting less than 20% down on the purchase of their next home.

Here are two examples to show you the differences in the payments on a $33,750 loan.

Great Links

If you want to get an idea of what your money buys in MetroWest,
call Sally Vetstein at 508-589-2003 or email: svetter@metrowest-ma.com

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