1. How much house can I afford?
Answer: The amount of loan for which you may qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts. A fairly standard ratio is 28/36. Certain mortgage plans sometimes use more liberal ratios. Use our mortgage calculator to see how much your monthly payments would be.
Here is how it works: With a 28/36 ratio, you are allowed to spend up to 28% of your gross monthly income for mortgage payments.
The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 33% of your gross monthly income. To calculate how much you may be able borrow, you also need an estimate of current interest rates. For example: Suppose you had $1,000 a month for mortgage payment; at 7% that would let you borrow about $160,000 on a 30-year loan. At 6% the loan amount would be nearly $175,000. If your rate were 8%, the loan amount would be a bit less than $150,000.
As part of this calculation, you also need to estimate and include the property taxes, homeowners insurance, and homeowner association fees (if applicable) you might need to pay, which are considered part of your monthly expense.
2. Why do I need to check my credit prior to purchasing a house?
Answer: Even if you are sure you have excellent credit, it is wise to double-check at the outset. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you are waiting for mortgage approval.
You may see disputed items, in addition to errors caused by a faulty social security number, a name similar to yours, or a court ordered judgment you paid off that has not been cleared from the public records. If such items appear, write a letter to the appropriate credit bureau. Credit bureaus are required to help you straighten things out in a reasonable time (usually 30 days).
3. How much do I need for a down payment?
Answer: Most lenders expect buyers to make a down payment of at least 5% of the value of the home. If you can afford to put more money toward a down payment, it will reduce the amount of your monthly mortgage payments. Some loan programs offer 3% down payments if you meet certain income standards. The Veterans Administration (VA) and the Rural Housing Service (RHS) offer no-down-payment loans for qualified borrowers.
The lender will want to know how much money you plan to put down and the source of those funds. Sources you may draw upon include savings, stocks and bonds, pension funds, real estate holdings, life insurance policies, mutual funds, and employee savings plans.
You may also use a gift of money from a family member that need not be repaid. If you do this, you will need to present a letter to your lender that states the amount of the gift that is signed by the giver.
You are also now allowed to withdraw up to $10,000 from both traditional and Roth Individual Retirement Accounts (IRAs) with no early withdrawal penalty, if used toward buying your first home.
Under some mortgage programs, such as the Fannie Mae Community Home Buyers Programwith the 3/2 Optionpart of your down payment may come from a grant from a nonprofit housing provider in your community.
Content Provider: Fannie Mae
4. How is pre-qualification different from pre-approval?
Answer: The prequalification process includes analyzing your income, assets and present debt to estimate how much house you can afford.
A pre-approval means that you have in hand a lender's written commitment to put together a loan for you (subject to verification of income and employment).
Pre-approval makes you a stronger buyer, welcomed by sellers. With most other purchasers, sellers must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing.
5. What is the difference between conforming and nonconforming loans?
Answer: The term "conforming," as opposed to "nonconforming," is sometimes used to explain loans that offer terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These are the two private, congressionally chartered companies that buy mortgage loans from lenders, thereby ensuring that mortgage funds are available at all times in all locations around the country.
One of the important differences between a loan that conforms to Fannie Mae/Freddie Mac guidelines and one that does not is its loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit.
If your loan amount will be for more than the conforming loan limit, the interest rate on your mortgage may be higher or you may have slightly different underwriting requirements, particularly in regard to your required down payment amount. Check with your lender about this if you are taking out a large loan amount.
TIP: Nonconforming loans are sometimes called "jumbo loans."
Content Provider: Fannie Mae
6. Should I choose a fixed or adjustable-interest rate mortgage?
Answer: You can choose a mortgage with an interest rate that is fixed for the entire term of the loan or one that changes throughout. A fixed-rate loan gives you the security of knowing that your interest rate will never change during the term of the loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate and consequently to your mortgage payments
Content Provider: Fannie Mae
7. What are points?
Answer: In the special vocabulary of mortgage lending, "points" are a type of fee that lenders charge (the full term to describe this fee is "discount points".) Simply put, a point is a unit of measure that means 1% of the loan amount. So, if you take out a $100,000 loan, one point equals $1,000.
Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your loan. Usually, for each point on a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point.
TIP: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.
Content Provider: Fannie Mae
8. What is APR (Annual Percentage Rate)?
Answer: Annual Percentage Rate (APR) factors interest plus certain closing costs, any points and other finance charges over the term of the loan. The APR must be disclosed to you according to federal Truth-in-Lending laws within three business days of when you apply for a loan, or prior to or at closing for a refinance.
Content Provider: Fannie Mae
9. What are closing costs?
Answer: On the day you actually buy your new home, in addition to your down payment, the prepaid property tax and homeowners insurance premiums, you will need cash for various fees associated with the purchase. These expenses are known as closing costs and can be paid by both buyers and sellers.
Some closing costs you pay up-front when you apply for a mortgage loan. Those include money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you do not eventually receive the loan, that money is not refundable.
Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but not limited to:
• Title insurance fee
• Survey charge
• Loan origination fee
• Attorney fees or escrow fees
• Garbage or trash collection fees
• Points - up-front interest paid in return for a lower interest rate. Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points.
10. What is PMI (Private Mortgage Insurance)?
Answer: If you put less than 20% down on most loans, you will be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This charge adds approximately an extra half a percent onto the loan.
FHA mortgages, in return for their low-down-payment requirements, also charge for mortgage insurance premiums (MIP).
You can often avoid PMI by doing a 1st and 2nd mortgage. The payment is usually similar to a 1st mortgage with PMI and has the added advantage of tax deductibility on the interest portion (check with your accountant or tax preparer).
|
