As mortgage professionals we get asked a lot of questions. One of our jobs is to answer those questions the best way we can so that the average consumer better understands the mortgage process and what to expect when purchasing or refinancing their home. We have put together some of the most common questions that we get asked and answered them below. If there is a question we haven’t answered, give us a call and a licensed mortgage advisor will help you.
- Before Your Purchase
- During Your Purchase
- After Your Purchase
The short answer is a resounding, yes! When you approach a mortgage lender to apply for a loan, they will review two things above all else:
- your income relative to your debts
- your credit score
The first item helps them measure the amount you can afford to borrow. The second item (your credit) shows how you’ve managed your credit in the past. Lenders use this to assess the risk associated with lending you money.
Here’s the short, if you try to purchase a house with bad credit, you probably won’t get approved for a loan. And if by chance you do get approved, you’ll pay a higher interest rate. So before you try to purchase a house, do your best to know your score and improve it!
Most mortgage lenders use 640 as a minimum credit score requirement, because that requirement is passed down from the secondary market. The secondary mortgage market consists of Fannie Mae, Freddie Mac, Wall Street, and other organizations and entities. If a mortgage lender is to sell their mortgage into the secondary market, they must use the minimum credit score requirement established if they want to sell those loans.
Below are various loan programs and the acceptable credit score requirement.
- VA or FHA: 640
- USDA: 640
- Conventional: 660 and higher
The two don’t really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity, take advantage of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.
Owning a home has many benefits. When you make a mortgage payment, you are building equity. And that’s an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities- like insurance, real estate taxes, and upkeep- which can be substantial. But given the freedom, stability, and security of owning your own home, they are worth it.
You can find out by asking yourself some simple questions:
- Do I have a steady source of income?
- Have I been employed on a regular basis for at least 2 years?
- Is my current income reliable and consistent?
- Do I have a good history of paying my bills?
- Do I have few outstanding long-term debts, like car payments?
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional costs?
If you can answer “yes” to most of these questions, you are probably ready to buy your own home.
Having an accurate idea of how much you can spend on the purchase of a home is a great idea. There are several factors that determine the loan amount and purchase price that you can afford. For qualification purposes, lenders look at your income, debt, assets and your credit. There are many different loan programs that offer different terms and rates, and some require lower down payments than others and offer more flexibility in credit and income. Depending on which program you may qualify for you may be able to afford more or less on a new home.
The best thing to do is get pre-approved so that you know what loan programs you qualify for, the price range you can afford, and what your monthly payments will be. Lenders will often provide a pre-approval at no cost.
Traditional financing requires a down payment of 5% to 20% of the purchase price of the home. In addition to the down payment, there are other fees associated with purchasing a home.
You’ll also need money to cover your closing costs, which includes fees, taxes and other expenses. They can add up to about 3 to 5% of the total loan amount, and must be paid on closing day.
The lender considers your debt-to-income ratio or DTI. DTI is a comparison of your gross (pre-tax) income to your housing and non-housing expenses. Ideally, monthly mortgage payments should be no more than 36% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 45% of income. The lender also considers compensating factors such as cash available for down payment and closing costs, credit history, etc. when making their determination.
Even though the two terms sound similar, they are slightly different. A pre-qualification is an estimated figure of how much you can afford based on a few pieces of information you provide directly to your mortgage broker. There is no application required. Whereas pre-approval is a much more in depth process that yields a more accurate number of how much you can afford.
To get pre-approved, you must fill out a mortgage application. A lender will then complete the application process by pulling credit, verifying income, and assets for down payment. It also saves you valuable time because you already know how much you can spend and don’t waste time looking at homes outside your price range.
Choose your lender carefully. Look for financial stability and a strong reputation for customer satisfaction. Doing some research online can go a long way in finding a lender that is a good fit for your particular needs. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it’s beneficial when the lender knows home values and the unique conditions for your local area.
A typical escrow period is 30 days or less. The escrow period, defined on the purchase contract and agreed upon by both buyer and seller, is usually what dictates when your loan closes. If you have already entered into a contract and are closing in less than 30 days, you can still close your loan on time as long as you are hyper responsive to the needs of your mortgage advisor. We have closed loans in as little as 17 days!
By being highly responsive to the requests from your mortgage advisor and support staff throughout the process but especially upfront. By providing all your document upfront and e-signing your disclosures in a timely manner you are putting yourself in the best possible position to close on time. It also critical you schedule your home inspection and pay for your appraisal right away to make sure they are completed in time to meet your financing contingency dates negotiated on your sales contract.
To make the process much faster and easier, you should have these items available when you’re ready to complete your pre-approval:
- W2s or Tax Returns (last 2 years)
- Pay Stubs (most recent 30 days)
- Bank Statements (last 2 months)
Most buyers will put down what is known as earnest money to secure a sales contract and demonstrate to a seller they are qualified and a serious buyer. This is usually in the form of a check ranges anywhere from 1% to 3% of the sales price. When a seller accepts an offer, the earnest money check is held in escrow usually by the buyer’s agent to secure the contract and later applied towards the down payment at closing. In the event the buyer is not able to perform in getting financing secured with the financing contingency date, the buyer’s earnest money will be returned.
A financing contingency is a clause in a home purchase agreement that states your offer is contingent on being able to secure financing for the house. Typically 14 to 21 days is negotiated for you to apply for your mortgage through an application (credit, income check, work verification, etc) and get a full underwriter approval to secure financing for your new home.
Having a financing contingency in place protects a buyer in the event they are unable to get approved for a loan.These reasons or stipulations can be specific or general in nature with the overall goal to make sure the buyer in not put in a liability position if their approval falls through. Most financing contingencies will stipulate that the buyer gets their earnest money back if their loan is not approved.
Although a home inspection is not required, it is a good idea to obtain the services of a professional, qualified inspector to help you determine the condition of the home you are looking to purchase. A professional inspector will look for any structural issues as well as mechanical problems that may exist in the home that could cause problems in the future. In addition to a structural review, an inspector will also check faucets, toilets, appliances, and other items in the home to make sure everything is in working order. If something needs to be repaired prior to you purchasing the home, you can address them with the seller prior to closing. Your real estate agent will assist you in this process to have the most favorable outcome.
When you buy a house, you have to pay annual property taxes on that home. The amount you pay is determined by the assessed value of the home and land. The total amount of the previous year’s property taxes is usually included in the listing information. If it’s not, ask the seller for a tax receipt or contact the local assessor’s office.
Tax rates can change from year to year, so these figures may be approximate. Many contributing factors are included in this like if you will pay both city and county taxes. Or if the home you are considering is in a good school district or not. Keep in mind that your mortgage interest and real estate taxes will be deductible. A qualified real estate professional can give you more details on other tax benefits and liabilities.
In a nutshell, closing costs are the costs associated with processing the paperwork to buy your home. Closing costs are paid at closing and typically average between 2% to 4% of the purchase price. These costs cover various attorneys’ fees, fees your lender charges and other processing expenses associated with your loan.
When you apply for your loan, your lender will give you an estimate of the closing costs, so you won’t be caught by surprise Lenders are required by law to disclose in writing your estimated closing costs and fees. This is known as a “loan estimate.” Additional costs might apply depending on your state, loan size and down payment amount. Before your closing, you’ll receive a document that outlines the exact costs you’ll pay at closing.
Technically, no, you don’t need one.
But to give an honest opinion, if you are buying a home, you should have a real estate agent advocating for you. Buying a home is one of the biggest financial transactions you will ever make, so it’s always wise to have professional help.
Your agent will also work with your lender to help you find homes that match your price range and desired features. He or she will also assist you in navigating the home search process, write up the purchase offer, help you negotiate with the seller, and guide you through the rest of the home buying process.
In many cases with a smart negotiation from your real estate agent you can save thousands and even get the seller to pay your closing costs or help finance them into the new loan. This strategy is very effective when wanting to reduce your “cash to close”. Do yourself a favor and work with a local, experienced, and trusted real estate expert. Asking your mortgage advisor for a referral is a great place to start.
The majority of mortgage payments are broken down into 4 parts:
- Principal: the repayment of the amount you actually borrowed
- Interest: payment to the lender for the money you’ve borrowed
- Homeowners Insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders.
- Property Taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year.
Mortgage insurance is a 3rd party, financial guarantee for the lender that helps to reduce or eliminate a loss in the case of a default by the borrower. It is almost universally required on loans where there is less than 20% equity.
That means if you are purchasing a home with less than a 20% down payment or if you are refinancing more than 80% of your home’s value, you are going to be required to pay mortgage insurance. Typically, once a mortgage is paid down to 80% equity, mortgage insurance can be requested to be removed.
In most cases, after your loan is closed you will be allowed the option to enroll in automatically debited mortgage payments. You may have to provide a voided check or sign an authorization in order to enroll. Your automatic payment is usually scheduled to be debited on the same day every month.
The due date for your mortgage is usually told to you by your mortgage advisor and should be listed on your monthly statement. Keep in mind that it is very important to pay your mortgage on time. Late mortgage payments can cost you late fees and negatively affect your credit score.
The escrow account associated with your mortgage is used to hold money to pay bills such as homeowner’s insurance and property taxes. These funds are collected by your lender and held in escrow until they are due. These annual fees are paid monthly by estimating the yearly charge and dividing that number by 12. Having these payments set up in this manner and added to your principal and interest payment makes it much easier to budget for these yearly costs. In some cases having an escrow account for these charges is a requirement.
The answer to this really depends on your specific situation. Most people who refinance do so to lower their rate and/or their monthly mortgage payment. Another popular reason is to get cash out to pay off debt or to do home improvements. Don’t make a mistake on your refinance, to see if you can benefit from a lower rate or payment, give us a call and go over your situation with a licensed mortgage advisor. We will be able to tell you fairly quickly if a refinance might help you.
Every refinance is different, so it really depends on what your current situation is and why you want to refinance. If you currently have a high interest rate, it might make sense to see how much you could save by getting into a lower one. If your goal is to pay off your mortgage sooner, you may end up saving a lot more in the long run. Call us and talk to a licensed mortgage advisor about your situation and what your goals are, we are here to help.
The majority of the refinance loans we do close well within 30 days from the time you apply. As long as you are hyper responsive to the needs of your mortgage advisor and your loan processor, closing your loan in 30 days shouldn’t be an issue. We utilize industry standard technology to make sure delivering and signing documents is as easy, instant and secure as possible. With the help of extremely prepared and prompt clients we have even closed refinance loans in as little as 17 days!
Depending on what kind of refinance you are doing and the particular situation you are in, the documents that are needed can vary. The most common documents that are required are the following:
- Previous 2 years of W2’s
- 30 days of pay stubs
- 60 days of bank statements
- Recent mortgage statements
- Proof of homeowners insurance
If you think you are ready to refinance your home and would like a more detailed list of what you will need and more information about the process, give us a call.
The answer to this depends on the reasons for your bad credit. Even if you have less than perfect credit, there are still options available depending on your situation, including government backed options. The best way to find out for sure if you are eligible to refinance with bad credit is to talk directly with a licensed mortgage advisor.
That should not be an issue at all. Any current mortgage is paid off during the refinance. Your loans can be consolidated into one, new mortgage and only one payment per month. However, if you would prefer to keep your second mortgage and just refinance one of your loans, this is also a possibility. Give us a call so we can discuss all your options with you.
The costs that come with refinancing can differ from lender to lender. The fees that will always be applicable to a refinance are things like:
- Credit report pull
- Title search
- Notary and recording fees
Other fees include the following
- Lender processing fees
- Appraisal fee
- Closing costs
- Property taxes
- Homeowners insurance (if applicable)
In some cases if you have enough equity in your current home, there may be ways to include these fees into your new mortgage. Again, when it comes to a refinance, every situation is unique, so give us a call to discuss your options.
100% yes! A cash out refinance is a common thing. It involves borrowing more than you currently owe on your mortgage and using the difference to pay down on debt or for home improvements. For example, if your current mortgage balance is $200,000 and your home is valued at $350,000 it would be possible to take a new mortgage, at a lower rate, for $250,000 and use the $50,000 cash to improve your home!
Yes. Doing a cashout refinance can help to consolidate high-interest credit. Mortgage rates are generally lower than credit card and bank rates. By consolidating these types of debt into a mortgage it’s possible to reduce your monthly debt payments overall. Another bonus of mortgage interest versus credit card interest is that, in some cases, mortgage interest can be tax deductible.
When you do a cashout refinance, there are federal regulations that require a 3 day recession period. This period gives you the right to cancel your loan. Because of this regulation, your funds are usually given out on the fourth business day after your loan documents have been signed.
This depends on what time of refinance you are doing. In order to get cash out, most refinance programs will require you to have an appraisal done. If you are refinancing to get a lower rate or payment you may not need an appraisal. It’s best to speak to licensed mortgage advisor about what exactly you are looking to get from your refinance.