Mortgage Information Guide

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FHA Loans

FHA financing is excellent source for those buyers who are not working with enough cash for 5 or 10% down payment, and who do not have VA eligibility. FHA(The Federal Housing Administration) was established in 1934 to make home ownership possible for millions of American home buyers. The FHA does not directly lend money but rather insures against losses on real estate loans made by approved lenders. Smaller down payment requirements along with more liberal underwriting guidelines provide easier terms for home ownership. The FHA secures its funds through the imposition of a mortgage insurance premium (MIP). These premiums are used by the FHA to establish a reserve account sufficient to reimburse a lender in the event of a foreclosure. FHA loans typically have lower closing costs and offer interest rates that are competitive with conventional rates. There are 30 and 15 year fixed loans, adjustable rate and buydown FHA mortgages.

VA Loans

VA (Veterans Administration) financing is among the most liberal methods for financing a primary residence. In fact a qualifying Veteran can finance up to 100% of the value of the home with a loan up to $203,000. VA guidelines allow easier qualifying and credit standards and offer competitive interest rates. A seller may also pay all of the closing costs on behalf of the Veteran buyer making it possible to purchase with no cash outlay whatsoever. Reservists that meet certain standards are also now eligible for full VA benefits.

Private Mortgage Insurance

If the down payment on your home is less than 20% lenders will require you to obtain Private Mortgage Insurance, also referred to as PMI.
Private Mortgage Insurance protects a lender from loss due to payment default by the borrower. PMI allows buyers to purchase homes with less than 20% down. PMI is offered exclusively by private mortgage insurance companies. The premium for PMI is determined by the actual percentage of down payment and loan type. Due to the risk, the PMI expense is greater on higher loan to value loans and adjustable rate mortgages. At the loan servicer's discretion PMI can be eliminated upon request after a buyers loan to value has fallen to under 80%.

The Community Home Buyer Loan

The Community Home Buyer Program is a loan that was first designed by FNMA (Federal National Mortgage Association). This loan was provided to create more opportunity for home ownership for thousands of people who might not otherwise qualify for standard lending quidelines. FNMA has determined that an educated borrower is more likely to be able to maintain consistent mortgage payments. This program allows for higher qualifying ratios and lower down payments compared to standard conventional financing. FNMA has also minimized the cash reserve requirements on this program and the interest rates are the same as standard loans. To be eligible for the Community Home Buyer Loan your family income must be lower than the HUD median income limit in your area. You may also own only one home at the time of closing. FNMA has published the Home Buyers Guide that must be reviewed and completed by the borrower. The lender must also provide counseling on the topics in the guide. The borrower may qualify for a loan up to 97% of the home value, with this program.

Adjustable Rate Mortgages

An adjustable rate mortgage is an excellent option for home buyers hoping to save money in the early years of their loan. In fact the right adjustable program could be the right option for anyone thinking of moving or refinancing within the first 4 to 10 years of their loan. Other buyers use the adjustable loans to help them qualify or because of expected advancing income. Most adjustable loans offer protective interest rate caps with each program anniversary and over the life of the loan. On the anniversary, when the loan adjusts, the new rate will be based on an index plus a pre determined margin. Typical adjustable parameters are as follows:

Anniversary cap-2%          Index- 1 or 3 year Treasury Bills

Lifetime cap-6%               Margin- 2.75%

There are many different types of adjustable mortgages to choose from. Normally those programs with shorter initial fixed rate terms will have lower interest rates:

6 month adjustable           5/1 adjustable


1 year adjustable              7/1 adjustable


3/1 adjustable                  10/1 adjustable


3/3 adjustable                  COFI adjustable

How to Qualify For a Mortgage

It is difficult to generalize qualification quidelines due to the many various loan options available. In fact some lenders do not even require the verification of income, employment or assets with a large enough down payment. There are certain similarities among all loan programs described below. The following five criteria are examined on each standard loan prior to approval.

PROPERTY VALUE
The lender is concerned that the loan be based on the true market value of the property. An appraiser will be hired to compare other similar, recently sold, and local properties to determine the best opinion of value. It is also important to verify whether a property's condition, location or current zoning could affect the lenders ability to market the property in the event of foreclosure.

CREDIT
Good credit over the last two years is important to mortgage underwriters. Any outstanding collection accounts or judgments must be paid in full prior to closing. Any lateness will have to be brought current and explained in writing. No established credit history can also be a lender concern. Certain lenders will accept a poor credit history but may require a higher interest rate and a larger down payment.

EMPLOYMENT STABILITY
FNMA requirements indicate that a borrower typically be employed in the same line of work or profession for the past 2 years for that income to be used to qualify. Education in that career path can be considered in the 2 year history. Part time, commission, self employment, bonus and overtime should be in place and will be averaged over a two year period. Lenders are flexible with employment guidelines, but any employment gaps should be explained in writing.

SUFFICIENT INCOME
Lenders will calculate payment and debt ratios to determine sufficient borrower income to qualify. The payment ratio is calculated by dividing the total monthly mortgage payment and any association fee into the gross monthly income. The debt ratio is determined by adding all installment payments, revolving payments, and child care or alimony to the proposed total mortgage payment and dividing that total into the gross monthly income. The payment ratio, referred to as the front ratio, is commonly required to be lower than 33%. The debt ratio, referred to as the back ratio, is often required to be below 38%. On certain 95% loans and adjustable rate loans over 80% loan to value, ratos of 28% and 36% may be required. FHA requires ratios of 29% front and 41% back. VA is even more liberal with a single ratio of 41%. Lenders will often exceed these required ratios if the borrower shows other strong attributes.

ASSETS TO CLOSE
Underwriters will examine two or three months bank statements to confirm sufficient assets to cover down payment and closing costs. Most lenders follow FNMA guidelines which prohibit applicants from borrowing any part of the funds required to purchase. A gift from a family member or a loan secured against any one of the borrowers non liquid assets is allowable. Unless a buyer is putting 20% down, conventional FNMA guidelines require that a borrower have 5 % of her/his own funds involved in the purchase. Conventional loans needing PMI will also require a full two months total payments as cash reserves in the bank after all closing costs and down payments are accounted for. FHA and VA financing does not require cash reserves or 5% to be the borrowers own funds.

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Title Insurance

A clear title is the foundation of property ownership. It is the owners legal right to posess and use that property within certain limitations of the law. A title search is a detailed examination of the historical records concerning a property. The purpose of the search is to certify the sellers right to transfer clear ownership or title to the property. A title search can show possible defects, leans, or restrictions such as unpaid taxes, unsatisfied mortgages, judgments against the seller and restrictions limiting the use of the land. Title Insurance also protects against other hidden defects. For instance the previous owner could have incorrectly stated his marital status, resulting in a possible claim by the legal spouse. Other hidden defects include fraud, forgery, defective deeds, mental incompetence, confusion due to identical names, and clerical error. Title insurance is your protection against loss if any problems or hidden defects cause a loss or a claim against your ownership. If a claim is made against your property, title insurance will, in accordance with your policy, assure you with a legal defense and pay your costs and legal fees. If the claim proves valid, you will be reimbursed for your loss up to face amount of the policy. Title insurance will last as long as you or your heirs retain an interest in the property. Lenders will require that buyers carry title insurance as well as necessary endorsements for additional special protection. The cost of title insurance is normally determined as a percentage of the sales price, and will differ from state to state.

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Tax Deductible Interest

The single largest financial benefit with home ownership is the interest tax deduction. The Federal IRS now allows up to $100,000 of interest paid on a first and or second home to be directly deducted from your taxable income. This is a significant savings and for millions of Americans their largest tax advantage. The points that are often paid, by the buyer or seller, when a home is purchased are also fully tax deductible for the buyer in the same year as the closing. Points paid for a refinance however are deductible over the term of the loan or when the loan balance is paid in full. This type of tax benefit can help save thousands of dollars a year, or even help a family shift into a lower tax bracket. I advise all of my borrowers to sit down with their tax accountant after buying a home to get advice on how to adjust their W-4 form on their jobs. Adjusting the W-4 form is a legal way to ask your employer to take less from your weekly paycheck for federal taxes. This will prevent a tax refund that may seem to large and provide the buyer with a noticeable pay increase. Below is an example of the tax advantage of buying a $100,000 loan at 7.75% interest rate.

Payment for Principal and Interest is $628 per month. In year one most of the payment is interest and deductible. Approx $550 per month.

         
 $550 X 12 is $6,600

The $6,600 represents the income that this borrower will not have to pay the IRS taxes on.

         
 $6,600 X 28% is $1848 (assuming a 28% tax bracket)

The $1848 represents the additional disposable income this borrower will have to spend on the housing expense.

          
$1848/12 is $154

This family now has an extra $154 in their monthly paychecks to put towards the housing payment if they wish.

Your Credit Report

A buyers credit report is an important part of the loan approval process. A credit history is an approximate accumulation of important information on most of a persons installment loans, mortgages, leases, charge cards or debit cards. A credit report will also show to a lender judgments, paid or unpaid collectable accounts, bankruptcies as well as recent inquires, previous addresses and credit scoring information. Underwriters pay particular attention to the outstanding monthly obligations as well as the frequency of lateness. Creditors will report 30, 60, 90 days lateness and collection accounts for up to seven years even if paid in full. Bankruptcies are reported for up to ten years. Most creditors are looking for a borrower who has a history of satisfactory payments. A one time problem in a customers payment pattern may be acceptable if backed up with a good explanation. The last two prior years credit is considered the most important. FHA and VA lenders are often slightly more lenient than conventional. Conventional underwriters may also be more lenient with larger down payments. If your credit is poor and normal loans are not an option, there are many lenders offering loans at higher interest rates with 10% or 20% down payment. It is recommended that everyone check their own credit report every few years for inaccuracies. All three major credit repositories have agreed to provide one free credit report annually upon your written request.

Trans Union
760 West Sproul Road
Springfield, PA 19064

TRW
PO Box 949
Allen, TX 75002

Eqifax
PO Box 740193
Atlanta, GA 30374

If you are buying a home and you would like Scott to review a merged credit report at no charge to you, see Check my Credit on the main menu or click here

The Documentation Needed For a Mortgage Application

1. Sales contract on the Home you are purchasing (Blue copy)
2. Last 2 years W-2's (or 1099's for sub contractor)
3. Last 2 years (personal and Corporate or Partnership) complete 1040 Tax Returns (and all Schedules)
4. YTD Profit & Loss Statement(If self-employed)
5. Most recent 30 days pay stubs
6. Previous 3 Months Statements on all Savings Accounts (Bank/Credit Union/401K/Stock Broker) and documentation to Prove Source of all Recent Deposits over $1,000 (other than pay)
7. Liquidation statements for any CD, Stock, Bond, or 401K being used to purchase the home or liquidated within the last 6 months
8. Coupon Book or most recent billing Statement for all loans and mortgages
9. Checkbook to pay Application Fee
10. Divorce Decree (if applicable)
11. Support or Separation Agreement (if applicable)
12. Last 12 Months canceled Rent or Mortgage Checks (if possible)
13. Landlord Name and Address for 2 years
14. College Diploma or Transcript if student within the last 2 years
15. Listing Agreement or Sales contract on present home, and HUD 1 closing statement when sold
16. Relocation Benefits and copy of Relocation Policy (if applicable)
17. Addresses of Other Real Estate Owned and Leases (if applicable)
18. (FHA and VA only) Social Security Cards and Photo Id's
19. (FHA and VA only) Legal description of new home
20. (VA only) Certificate of Eligibility and DD-214
21. (Refinance Only) Deed of Home being Refinanced

* Ownership in excess of 25% of a company requires personal and corporate 1040 tax returns. Additional information may be required, depending on the type of loan.

Please Note: Providing the information listed above at application will assist
                    in the expedient processing of your loan.

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Understanding Points

One point is equivalent to one percent of the loan amount. Paying points is voluntary, in fact lenders offer options with many choices for points ranging from 0 points to 6 or more. Of course the larger the number of points being paid the lower the interest rate. Paying three points has become somewhat customary and is the most widely selected option. In many cases the seller may also pay points on behalf of the borrower. Another major benefit of points is their tax deductibility. Even if points are paid by the seller towards the buyers closing costs, the buyer may deduct all of the points from their gross taxable income. When purchasing, the points are deductible in the year that they are paid, but with a refinance any points must be deducted evenly over the term of the loan. Customers often ask if paying 3% of the loan is a worthwhile investment. I show this example:

Loan amount $100,000 for 30 years

	3 points	0 points
Interest rate	8%	8.625%
Principal & interest	$733	$777
Actual cost of points	$3000	$-0-
After tax cost of points (28% tax bracket)	$2160	$-0-

Monthly savings is $44
It takes 49 months or 4.09 years to save back the $2160 after tax points that were paid up front. The total savings over the life of the loan could be $15840. Well worth the cost.

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Licensed Mortgage Banker: PA Dept. of Banking
Licensed Mortgage Banker: NJ Dept. of Banking
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