Mortgage Central

Mortgage Q&A

Question: How do I know if I can get a loan?

Answer:

                Use a mortgage calculator to see how much mortgage you can pay.  If the amount you can afford is significantly less than the cost of homes that interest you, then you might want to wait awhile longer.  But before you give up, why don't you contact a real estate broker, a mortgage broker, or a HUD-funded housing counseling agency?  They will help you evaluate your loan potential.  A broker will know what kinds of mortgages the lenders are offering and can help you choose a lender with a program that might be right for you.  Another good idea is to get a pre-qualified for a loan.  That means you go to the lender and apply for a mortgage before you actually start looking for a home.  Then you'll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams. 

Question: How do I find a lender?

Answer:

                You can finance a home with a loan from a mortgage broker, a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best prices.  Different lenders can offer quite different interest rates and loan fees; and as you know, a lower interest rate can make a big difference in how much home you can afford.  Talk with several lenders before you decide.  Most lenders need 3-6 weeks for the whole loan approval process. Your real estate broker will be familiar with lenders in the area and what they're offering.  Or you can look in your local newspapers' real estate section --most papers list interest rates being offers by local lenders. 

Question: What will my mortgage cover?

Answer:

                Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you've borrowed; homeowners insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number or mortgage payments you make  in a year.  Most loans are for 30 years, although 15 year loans are available, too.  During the life of the loan, you'll pay far more in interest than you will in principal --sometimes two or three times more! Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments.  In the final years, you'll be paying mostly principal. 

Question: I know there are lots of types of mortgages --how do I know which one is best for me?

Answer:

                There are many types of mortgages, and the more you know about them before you start, the better.  Most people use a fixed-rate mortgage.  In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years.  The advantage of a fixed-rate mortgages is that you always know exactly how much your mortgage payment will be, and you can plan for it.

                Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than a fixed rate mortgage.  But your rate and payment can change either up or down, as often as once or twice a year.  The adjustment is tied to a financial index, such as the U.S. Treasury Securities index.  The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower.

             There are several government mortgage programs, including the Veteran's administration's programs and the Department of Agriculture's programs.  Most people have heard of FHA mortgages.  FHA doesn't actually make loans.  Instead, it insures loans so that if buyers default for some reason, the lenders will get their money.  This encourages lenders to give mortgage to people who might not otherwise qualify for a loan. Talk to your real estate broker about the various kinds of loans, before you being shopping for a mortgage. 

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Qualifying For A Loan: Debt-to-Income Ratio

Written By Lee Ann Obringer

In order to qualify for a mortgage, most lenders require that you have a debt-to-income ratio of 28/36. This means  that no more than 28 percent of your total monthly income (from all sources and before taxes) can go toward housing, and no more than 36 percent of your monthly income can go toward your total monthly debt (this includes your mortgage payment). the debt they look at includes any longer term loans like car loans, student loans, credit cards, or any other loans that will take a while to pay off. 

You also have to think about what you can afford.  The lender will tell you what you can afford based on the lower number in the debt-to-income ratio, but that's not taking any of your regular expenses (like food) into account.  What if you have an expensive hobby or have plans for something that will require a lot of money in five years?  Your lender doesn't know about that, so the $1,400 mortgage it says you qualify for today may not fit your actual budget in five years --particularly if you don't see your income increasing too much over that time span.

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Pre-qualification vs. Pre-approval

Written by Lee Ann Obringer

What's the difference? Getting pre-qualified just means that you have told a lender your income level and your debt and credit information, and the lender has estimated what you can afford.  Pre-approval, however, puts you much closer to the actual loan and means that the lender has done the leg work of pulling your credit report, checking your debt-to-income ratio, and has done a more in-depth analysis of your situation. 

In most case, you're much better off getting pre-approved so you don't have any surprises when a lender checks your credit report--particularly if you haven't checked the report yourself first. You can check your own credit free annually at www.annualcreditreport.com

A lender will look at your employment and your credit history as indicators of how likely you are to pay back your loan.  Lenders want to see stability, which means they will look closely at any late payments during the last two years of your credit history.  They will pay particular attention to any rent or mortgage payments that were over 30 days past due.  They'll look at late payments for credit cards during the last six months. 

Your employment for the last two years is also important.  Lenders look for steady employment with a single employer for the past two years ( or at least employment in the same field).  Other income --such as income earned from part-time, overtime, bonuses, or self-employment --is also acceptable if it has a two-year history.  Don't be afraid that just because you don't have two years with the same employer you won't be able to get a mortgage; you may just have to talk to more lenders and look at different types of loans. 

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What To Bring When You Are Applying For A Loan

1.)     Social security number for both you and your spouse, if both of
          you are applying for the loan

2.)    Copies of your checking and savings account statements for the past 
        6 months

3.)    Evidence of any other assets like bonds or stocks

4.)    A recent paycheck stub detailing your earnings

5.)    A list of all credit card accounts and approximate monthly amounts 
         owed on each

6.)    A list of account numbers and balances due on outstanding loans,
         such as car loans

7.)    Copies of your last 2 years' income tax statements

8.)    The name and address of someone who can verify your employment.

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Credit Scores --What Do They Mean?

Written By Lee Ann Obringer

        A credit score is a number that is calculated based on your credit history to five lenders a simpler "lend/don't lend" answer for people who are applying for credit or loans.  This number helps the lender identify the level of risk they may be taking if they lend to someone.  While the same end result can come through reviewing the actual credit report, the credit score is quicker and less subjective.  The system awards points based on information in the credit report, and the resulting score is compared to that of other consumers with similar profiles.  With this information, lenders can predict how likely someone is to repay a loan and make payments on time.  It's the credit score that makes it possible to get instant credit at places like electronics stores and departments stores. 

        Although there are several scoring methods, the score most commonly used by lenders is known as a FICO because of its origins with Fair Isaac and Company.  Fair Isaac is an independent company that came up with the scoring method and software used by banks and lenders, insurers and other businesses.  Each of the three major credit bureaus worked with Fair Isaac in the early 1980's to come up with the scoring method. 

Think of your credit score like you would a grade in school.  A teacher calculates grades by taking scores from test, homework, attendance and anything else they want t use, weighting each one according to importance in order to come up with the final single number score.  your credit score is calculated in a very similar manner.  Instead of suing the scores from pop quizzes and reports you wrote, it used the information in your credit report.

The number itself can range from 300 to 900. The formula fro exactly how the score is calculated is proprietary information and owned by Fair Isaac.  here is an approximate breakdown of how it is determined:

• 35% of the score is based on your payment history -- This makes sense since one of the primary reasons a lender wants to see the score is to find out if you pay your bills.  The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happen comes into play. The more recent, the worse it will be for your overall score. 

• 30% of the score is based on outstanding debt -- How much do you owe on car or home loans.  How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be.  The rule of thumb is to keep your card balance at 25% or less of their limits.

• 15% of the score is based on the length of time you've had credit --  The longer you've had established credit, the better it is for your overall credit score.  Why? Because more information about your past payment history gives a more accurate prediction of your future actions. 

• 10% of the score is based on the number of inquiries on your report --  If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report.  These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt. The more recent the inquiries are, the worse for your credit score.  FICO scores only count inquiries from the past year. 

• 10% of the score is based on the types of credit you currently have -- The number of loans and available credit from credit cards you have make a difference.  There is no magic number or combination of types of accounts that you shouldn't have.  These actually come more into play if there isn't as much other information on your credit report on which to base your score. 

How to Improve Your Credit Score

Here are some things that some financial advisers say to do to try to improve your score:

• Review your credit report and correct any errors you find. Getting rid of inaccurate (and bad) information can sometimes improve your score dramatically.

• Advice used to be given to close old and unused credit card accounts in order to reduce your "potential" available credit.  The ratio of your debt to your credit limit is more critical, so closing old accounts only raised the ratios--which you don't want to do. Some people have moved debt from several credit cards to one card and then closed the old accounts.  Since creditors look at the debt-to-credit ratio this can have a had affect on your credit score because you have the same amount of debt but less available credit.  so don't close old credit card accounts just because you are not using them.

• Creditors also now look at the average age of your accounts, again keep those old accounts

• Reduce your balances on credit cars to 75% or less of your available credit (25% is preferable).

• Pay your bills on time

• Don't let anyone make an inquiry on your credit report unless you absolutely have to. The more inquiries, the lower your score.

• Don't open new credit card accounts just to increase your available credit in the hopes of raising your score.

The key to get credit only when you need it (unless you're trying to establish first credit), and use it carefully, make your payments on time, and keep your balances low. Remember not to max-out credit cards. 

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