Welcome to the Mortgage Center!
This page will help you understand the mortgage you will need
to purchase a home. Below you will find three important steps to a
mortgage. To learn more click a category below.
Understanding how much you can afford is one of the most
important rules of home buying. Depending on your individual situation,
your budget can effect everything from your neighborhoods where you look, to
the size of the house, and even what type of financing you choose.
Bear in mind, however, that the lenders will look at more than just your income
to determine the size of the loan. Likewise, you may find that there are
some creative financing options that can help boost your buying power.
Loan prequalification vs. preapproval
One of the best ways to determine your budget is to have your real estate
agent or lender prequalify you for a loan. Prequalification is different
from preapproval, because it is only an estimate of what you will be able to
afford. On the other hand, preapproval is a more formal process where a
lender examines your finances and agrees in advance to loan you money up to a
specified amount.
What
factors are important to lenders?
Banks and lending institutions will use several criteria to determine how
much money they'll agree to lend. These include:
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Your gross monthly income
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Your credit history
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The amount of your outstanding debts
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Your savings - or the amount of money you have available for a
down payment and closing costs
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Your choice of mortgage (i.e. 30 year, FHA, etc.)
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Current interest rates
Two important ratios
Lenders also use your financial information to figure out two, very
important ratios: the debt to income and the housing expense ratio.
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Debt to income ratio
Many lenders use a rule of thumb that the amount of debt you are paying on each
month (car payment, student loan, credit card, etc.) shouldn't exceed more than
36 percent of your gross monthly income. FHA loans are slightly more
lenient.
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Housing expense ratio
It is generally difficult to obtain a loan if the mortgage payment will be more
than 28 to 33 percent of your gross monthly income.
Down payments make a difference
If you can make a large downpayment, lenders may be more lenient with their
qualifying ratios. For example, a person with a 20 percent down payment
may be qualified with the 33 percent housing expense ratio, while someone with
a 5 percent down payment is held to a stricter 28 percent ratio.
Other ways to improve your improve your purchasing power
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Gifts
If you're having trouble saving money, many lenders will allow you to use gift
funds for the down payment and closing costs. However, most lenders
require a "gift letter" stating the gift doesn't have to be repaid, and will
also require you to pay at least a portion of the down payment with your own
cash.
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Negotiating Closing Costs
Through negotiation, some sellers may agree to pay all or most of your closing
costs (for example, if you agree to meet their full asking price). If you
choose to try this, make sure to ask your real estate agent for advice.
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Loan Programs
Many local governments have special loan programs designed to help first-time
home buyers. Loans will be available at reduced interest rates, or with
little or no down payments. Check with your local housing authority for
more information.
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Loan Types
Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial
rates. Others opt for 30-year loans because they have lower monthly
payments than 15-year loans. There are significant differences between
different loans, so make sure to discuss the pros and cons of different loans
with your agent or lender before making a decision.
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Excluding property taxes and insurance, a traditional
fixed-rate mortgage payment consists of two parts: (1) interest on the
loan and (2) payment towards the principal, or unpaid balance of loan.
Many people are surprised to learn, however, that the amount you pay towards
interest and principal varies dramatically over time. This is because
mortgage loans work in such a way that the early payments are primarily in
interest, and the later payments are primarily towards the principal.
In the beginning---you pay interest
To help calculate monthly payments for loans based on different interest
rates, lenders long ago developed what are known as "amortization tables."
These tables also make it fairly easy to calculate how much money of each
payment in interest, and how much goes towards the principal balance.
For example, lets calculate the principle and interest for the first monthly
payment of a 30-year, $100,000 mortgage loan at 7.5 percent interest.
According to the amortization tables, the monthly payment on this loan is fixed
at $699.21. The first step is to calculate the annual interest
by multiplying $100,000 x (.075)(7.5%). This equals $7,500, which we
divide by 12 (for the number of months in a year), which equals $625.
If you subtract $625 from the monthly payment of $699.21, we see that:
Next, we subtract $74.21 (the first principal payment) from the
$100,000 of the loan, we come up with a new unpaid principal balance of
$99,925.79. To determine the next month's principal and interest
payments, we just repeat the steps already described.
Thus, we
now multiply the new principal balance (99,925.79) times the interest rate
(7.5%) to get an annual interest payment of $7,494.43. Divided by 12,
this equals $624.54. So during the second month's payment:
Note: In Canada, payments are compounded semi-annually
instead of monthly.
Equity
As you can see from the above example, even though you pay a lot of
interest up front, you're also slowly paying down the overall debt. This
is known as building equity. Thus, even if you sell a
house before the loan is paid in full, you only have to pay off the unpaid
principal balance--the difference between the sales price and the unpaid
principle is your equity. In order to build equity faster--as
well as save you money on interest payments--some homeowners choose loans with
faster repayment schedules (such as 15 year loan).
Time versus savings
To help illustrate how this works, consider our previous example of a
$100,000 loan at 7.5 percent interest. The monthly payment is around
$700, which over 30 years adds up $252,000. In other words, over the life
of the loan you would pay $152,000 just in interest.
Bear in
mind that shorter term loans are not the right answer for everyone, so make
sure to ask your lender or real estate agent about what loan makes the best
sense for your individual situation.
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The bundle of fees associated with the buying or selling of a
home are called closing costs. Certain fees are automatically assigned to
the buyer or seller; other costs are either negotiable or dictated by the local
custom.
Buyer closing costs
When a buyer applies for a loan, lenders are required to provide them with
good-faith estimate of their closing costs. The fees vary according to
several factors, including the type of loan they applied for and the terms of
the purchase agreement. Likewise, some of the closing costs, especially
those associated with the loan application, are actually paid in advance.
Some typical buyer closing costs include:
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The down payment
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Loan fees (points, application fee, credit report)
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Prepaid interest
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Inspection fees
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Appraisal
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Mortgage insurance
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Hazard insurance
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Title insurance
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Documentary stamps on the note
Seller closing costs
If the seller has not yet paid for the house in full, the seller's most
important closing cost is satisfying the remaining balance of their loan.
Before the date of the closing, the escrow officer will contact the seller's
lender to verify the amount needed to close out the loan. Then along with
any other fees, the original loan will be paid for at the closing before the
seller recieves any proceeds from the sale. Other seller closing costs
can include:
Negotiating closing costs
In addition to the sales price, buyers and sellers frequently include
closing costs in their negotiations. This can be for both major and minor
fees. For example, if a buyer is particularly nervous about the condition
of the plumbing, the seller may agree to pay for a house inspection.
Likewise, a buyer may want to save on the up-front expenditures, and so agree
to pay the seller's full asking price in return for the seller paying all the
allowable closing costs. There is no right or wrong way to negotiate
closing costs; just be sure all the terms are written down on the purchase
agreement.
Prorations
At the closing, certain costs are often prorated (or distributed) between
buyer and seller. The most common prorations are for property taxes.
This is because property taxes are typically paid at the end of the year for
which they were assessed. Thus, if a house is sold in June, the
sellers will have lived in the house for half the year, but the bill for the
taxes won't come due until the following year. To make this situation
more equitable, the taxes are prorated. In this example, the sellers will
credit the buyers for half the taxes at closing.
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