Frequently Asked Questions
What is the first step when looking for a home loan?
Most experts recommend that you should get pre-qualified for a loan first. By being pre-qualified, you will know exactly how much house you can afford.
How much house can I afford?
Knowing what you can afford is the first rule of home buying, and that depends on your income and other debt. In general, lenders don't want borrowers to spend more that 28% of their gross income per month on a mortgage payment or more than 36% on total debts including their mortgage payment. The price you can afford to pay is based on 6 factors: (1) gross income, (2) the amount of cash you have available for your down payment, closing costs, and cash reserves required by the lender, (3) your outstanding debts, (4) your credit history, (5) the type of mortgage you select, (6) current interest rates.
How do some of the low down-payment programs work?
Most of the private and government low-down loan programs have special requirements. These rules range from requiring borrowers to be first time homebuyers to limits on family income. In general, cities and counties require that borrowers earn no more than 100% to 120% of the count's average household income.
Is there such a thing as a no-cost or no-fee loan?
In a word, no. While some lenders occasionally promote "no-cost" loans, banking regulators have cracked down on these misrepresentations. Advertised "no-fee" loans actually roll closing costs into the loan at a higher interest rate. A typical no-fee loan is one where all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying on them over the life of the loan. The loan is called a no-fee loan because the borrower is not charged any fees up front.
What is private mortgage insurance?
Private mortgage insurance, or PMI, insures the lender against default. It is required when the borrower is making a cash down payment of less than 20% of the purchase price. PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50% of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process. Lenders generally turn to a list of companies with whom they regularly work when lining up private mortgage insurance. In most cases, PMI can be dropped after the loan-to-value ratio drops below 80%. For homeowners who have improved their properties and believe that their equity has increased as a result, refinancing the property at a loan-to-value ratio of 80% or less is another possible way to eliminate PMI payments.
What is the standard debt to income ratio?
A standard ratio used by lenders limits the mortgage payment to 28% of the borrower's gross income and the mortgage payment, combined with all other debts, to 36% of the total. The fact that some loan applicants are accustomed to spending 40% of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income. Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25% or more of the purchase price.
What are the advantages of a 15 year mortgage versus a 30 year?
The difference in payments and overall savings between a 15-year fixed-rate loan and a 30-year fixed-rate loan depends on the interest rate and the loan amount. Using a $100,000 loan and 7.25% interest rate as an example, monthly payments on the 15-year note would be $912.86. Monthly payments on a $100,000 30-year loan at 7.25% would be $682.18.
Although the monthly payments on a 30-year mortgage are less, the 15-year note offers the opportunity to save considerable money over the life of the loan. The total interest paid on the 15-year loan in this example is $64.316, which is $81,264 less than the $145,580 you would pay on the 30-year loan.
Can someone who is unemployed get a loan?
Generally, lenders will not make loans to unemployed persons because someone without an income would seemingly have no way of making monthly mortgage payments. However, lenders may require little loan documentation if the borrower puts down a sizable down payment, generally 25% or more. These "no-doc" loans are common among self-employed people whose income is uncertain or difficult to prove.
When is the best time to refinance?
The traditional answer to that question is when interest rates fall 2 percentage points below your current mortgage interest rate. However, in recent years some experts have argued that refinancing may be appropriate with a smaller point spread. Some weight is often given to the length of time the owner anticipates holding on to the property. If the owner expects to keep the property for at least three or four years, then refinancing may be worthwhile. While refinancing can involve upfront costs, in many cases it is possible to roll the costs of the refinancing into the new loan and still reduce the amount of the monthly payment.
