One of the common myths of renters is that they haven't saved enough money to put down on a home purchase or that they can't afford the monthly payments on a new home. It's interesting to note that there are many mortgage programs available that require little money down and that in certain situations the monthly payment can actually be lower than the payment that some renters make once they take into consideration the tax deductibility of the interest and taxes on their new home. There has never been a better time to buy a home when one factors in all of the benefits of home ownership.
There are a multitude of questions that you need to ask yourself when you calculate how much you can afford and how much you really want to pay each month. In the mortgage industry, the traditional lender will suggest that 28% of your gross monthly household income can go towards your PITI (Principle, Interest, Taxes & Insurance). This is considered to be what's referred to as your Front End Ratio. The other equation that they consider is your outstanding revolving & installment credit obligations. This figure coupled with your proposed PITI should not exceed 36% of the gross monthly household income. This is referred to as your Back End Ratio or your DTI (Debt to Income) ratio. Some borrower's feel that they can afford to pay more while others feel that this calculation is a bit too aggressive. In many cases Rockford Mortgage will pay less attention to your ratios, looking instead at the relationship between your present housing payment, income, credit, assets and the home you are purchasing.
PRE-QUALIFICATION vs PRE-APPROVAL
Pre-Qualifying for a Mortgage on a new home with your lender is not the same as obtaining a Pre-Approval for your Mortgage. A Pre-Qualification is generally an approval pending approval, meaning that the lender has not verified any of the information that you may have provided such as Income, Assets, credit, etc... In some cases the lender hasn't even pulled the borrowers credit report which is in most cases one of the most important pieces to the mortgage puzzle.
With a Pre-Approval, the lender has verified employment, assets, and credit and is confident that the borrower can obtain a mortgage for a specific dollar amount. The only contingencies would be an acceptable appraisal on the property being purchase as well as a clear title and final underwriting approval.
A Pre-Approval can often be a determining factor in winning the contract in a competitive bid situation.
YOUR APR vs YOUR INTEREST RATE
APR - the Annual Percentage Rate is outlined on your TIL (Truth in Lending) disclosure that you will receive shortly after applying for your home mortgage.
The APR is often higher than the quoted interest or note rate. The APR is different than the rate that you were quoted because it includes, in addition to interest, some of the additional costs of obtaining your mortgage financing. Simply stated, if there were no costs in obtaining financing your mortgage interest rate and your APR would be the same.
WHICH MORTGAGE PROGRAM IS BEST FOR ME AND MY SITUATION?
Your Rockford Mortgage Professional will help you to decide which of the hundreds of mortgage programs we offer would best suit your needs.
Here are some of the basic mortgage programs that are available from Rockford Mortgage:
30/25/20/15 & 10 Year Conventional Fixed Rate Mortgages
These are Mortgages that have Interest rates that are fixed for the life of the loan. If you are conservative by nature or plan on being in your home for over 5 years, it often makes sense to take advantage of one of these mortgage programs. If interest rates go up, you are protected in that your interest rate is fixed. If interest rates go down, you can always refinance to take advantage of the lower interest rates.
The shorter the term on a fixed rate mortgage the higher the payment along with less interest paid (more money goes towards principle each month).
5/25 - 7/23 Mortgages
These are mortgage programs that have lower interest rates than the standard fixed rate mortgages. A 5/25 would have a rate that is fixed over the first five years of the mortgage with an option to renew for the balance (25 years) of the mortgage. The borrower would have to qualify for a new mortgage once the initial 5 years had lapsed.
The 7/23 mortgage works the same way with the first 7 years being fixed and the option to renew for the remaining 23 years.
Both the 5/25 & 7/23 have payments that are amortized over 30 years.
If a borrower plans on moving in 3 - 7 years, these programs might be well worth exploring.
6 MONTH ARM, 1/1 ARM, 3/1 ARM, 5/1 ARM , 7/1 ARM & 10/1 ARM Mortgages
An ARM ( Adjustable Rate Mortgage ) mortgage is a mortgage that has a fixed rate for a limited period of time and then the interest rate adjusts semi-annually or annually depending on the particular program. For example the interest rate on a 6 month ARM would be fixed for the first six months and then would adjust every six months thereafter. A 5/1 ARM would have a fixed rate for the initial 5 years then it would adjust annually. The "adjustment" is based on a particular index (typically the 1 year treasury bill index). coupled with the margin. There is usually a cap (maximum that the interest rate can go up or down) when it adjusts. Most ARMs have an annual cap of 2% per adjustment period or 6% over the life of the loan. Make sure that you review the ARM Disclosure with your Rockford Mortgage Professional.
It can be very beneficial to select an ARM over a Fixed Rate Mortgage if you are confident that you will not own the home for an extended period of time. By choosing the appropriate ARM, a borrower has the potential of saving thousands of dollars over the life of their loan.
There are also " Interest Only ARMs" which require the borrower to pay only the interest on the Mortgage for a fixed period of time. These ARMs can give a borrower the ability to purchase much more home than if they were obtaining a Fixed Rate Mortgage. It is important to understand that there can be significant risks with an Interest Only ARM.. The borrower must keep in mind that they are not paying down their mortgage and that if property values were to drop for some reason, they could end up owing more for their property than it is worth. Ask one of our Rockford Mortgage Company professionals about our Interest Only ARM programs.
PIGGYBACK LOANS (80/20 - 80/10/10 - 80/15/5)
Piggyback loans involve borrowing a lower amount on the first mortgage and then supplementing it with a home equity loan. This strategy can enable borrowers to avoid paying PMI (Private Mortgage Insurance) It may also keep the borrower interest rate down because the first mortgage is a "conforming" loan.
CONFORMING LOANS
A conforming loan is a loan that is no larger than $359,650.00 and is generally high in demand.
JUMBO LOAN
Jumbo loans (Non-Conforming) are loans that are over the conforming limit of $417,000 and typically carry a higher interest rate because there is generally more risk to the lender.
SUB-PRIME/SPECIAL SITUATION MORTGAGES
The Sub-Prime Mortgage is sometimes referred to as the Special Situation Mortgage because it helps borrowers with less than perfect credit obtain a home mortgage. These
mortgages typically have interest rates higher then the Conventional Fixed Rate Mortgages in that they propose a greater risk to the lender funding the loan. They do, however, give borrowers who might not qualify for a conventional mortgage the ability to purchase a home or refinance the mortgage on their existing home.
YOUR CREDIT HISTORY/YOUR CREDIT SCORES
If you were to survey lenders and ask them "what would be the single most important factor that you look for when you sit down with a perspective home buyer?", the answer would most probably be your credit history. There are many different variables that are used in calculating an individuals credit scores and there are three different Credit Bureaus that track and report your scores. The three bureaus are Experian, Equifax & Transunion. It's interesting to note that all three bureaus could, and often do, report different credit scores. Here are some of the factors that could adversely affect your credit scores:
• Too many open lines of credit.
• A history or making slow or late payments
• Judgements
• Charge-offs
• Collection Accounts
• Too many high balances
• Too many inquires (people pulling your credit with or without your permission)
• Previous Bankruptcies
Ask one of our Rockford Mortgage Professionals to go over your credit with you.
DOCUMENTATION REQUIRED AT APPLICATION
When you are ready to apply for your mortgage you'll need to pull together the following documentation (in many cases less documentation is required):
• Copy of Purchase Agreement & Listing Profile Sheet if purchasing a new home.
• Realtor or FSBO (For Sale By Owner) information (name & phone #)
• Copy of Earnest Money Deposit
• Most recent three consecutive months Bank Statements (all pages)
• Most recent thirty days pay stubs showing year-to-date earnings.
• Most recent three month IRA, Mutual Fund or 401K statements (all pages).
• Last 2 years 1040's (all schedules) & W2's.
• Homeowners Insurance Information (Declaration page of policy) along with agent name & phone number.
• Application Deposit
If you are self-employed you may need to provide a year-to-date Profit & Loss Statement.
