Loan Types

Something that I have started to learn is that most people don’t realize how many loan options there are out there. Loan type options can be just as important as creating a budget. There are so many options to think about. What is most important to you: Low monthly payment? No mortgage insurance? Having liquid funds leftover for emergencies? Once these questions are answered, if you qualify for many different options, you have the ability to choose what works best for you and your family.
I’ve mapped out the basics of the most common loans below. There are certainly other options out there, and some of that will vary from lender to lender or state to state, so remember to ask questions! It will be easy to see the advantages and disadvantages to all of them just by these basic summaries.

Conventional – Conventional loans, which you may also have heard referred to as a conforming loan, generally is the most simple loan product available. When I have a customer who has a very straightforward file (down payment, funds for closing costs, no credit issues, steady income, etc…) I typically suggest a conventional loan as long as it meets their overall goals

Information on Conventional Loans

• Minimum of 5% down (Mortgage Insurance is required for anything less than a 20% down payment)
• Minimum Credit Score of 640
• No upfront funding fee
• Typically higher rate than government loan BUT lower monthly payment due to lower mortgage insurance and higher down payment amount.
• Can be used for purchase, refinance, second home options, and investment property
• Gift funds can be used for down payment.

FHA – Federal Housing Administration loans, or FHA loans, are a great option for a homebuyer who needs a lower down payment option. The buyer does not need to be a first time homebuyer to take advantage of this program. There are no income or property restrictions for an FHA loan.

Information on FHA Loans

 • Minimum of 3.5% down (FHA requires mortgage insurance of 1.35% of the purchase price until customer has 22% equity AND it has been paid for 5 years. If a customer pays down the balance in a 3 year time, they are still required to keep it for a full 5 years)
• Minimum Credit Score of 620
• Government loans typically have a lower interest rate. With decreased down payment and increased mortgage insurance, the monthly payments are generally higher than a conventional loan.
• There is an upfront funding fee of 1.75% of the purchase price. This can be financed into the loan.
• Can be used for purchase and refinance
• Gift funds can be used for down payment.

USDA RD – United States Department of Agriculture Rural Development loans (that’s a mouthful, we’ll just stick to RD going forward!) are a great option for a home that is a more rural area and for buyers who are interested in 100% financing. The mortgage insurance (which is referred to as the annual fee) is much lower than FHA but does stay for the entire life of the loan.

Information on RD loans

 • No required down payment (RD charges an ‘annual fee’ which is broken down into a monthly payment similar to mortgage insurance – this stays for the life of the loan. It is .04% of the purchase price).
• Minimum Credit Score of 640
• Government loans typically have a lower interest rate. With decreased down payment and increased mortgage insurance, the monthly payments are generally higher than a conventional loan.
• There is an upfront funding fee of 2.00% of the purchase price. This can be financed into the loan.
• There are income limits for RD loans – the buyer must be equivalent or less than 115% of the median income of the surrounding area for their household size.
• There are property limits for RD loans- the home must be located in an approved area designated by USDA.
• Can be used for purchase and refinance.

VA– Veterans Affairs loans are an option for active duty and honorably discharged qualifying veterans. There are some added benefits to having a VA loan, including a set appraisal price which can be a savings. There are more stringent requirements for being approved (maintenance based on square footage, day care costs and family size are taken into consideration on this loan).

 Information on VA loans

 • No required down payment and no mortgage insurance required.
• Minimum Credit Score of 620
• There is an upfront funding fee of 2.159% for first time users and 3.309% for subsequent users. This can be financed into the loan.
• As a government loan, there is typically a lower interest rate. Without the requirement of having mortgage insurance, this is often the most advantageous program for those who qualify.
• Can be used for purchase and refinance.

To reiterate, my advice is to come in knowing what you can afford monthly (Remember we talked about that here) and how much you would like to put down for a down payment and closing costs. That combined with knowing what you’re truly looking for out of your home loan will help to narrow down and choose what is best for you.
Good luck!
-Brandi

Income

It is time to get into some of the nitty-gritty. One of the items that I see makes or breaks a loan most often is income. Most people think income is very straight forward- “I make X so it should all be counted”. Well, to be honest, I agree with you, but that just is not how it works.

There are many situations where I am not able to count parts of income that you receive. This may be if you’re self-employed, receive commission income, bonus income, part-time income, rental income, automobile allowance, income from tips, military income, seasonal work, unemployment compensation…

Obviously the list can go on and on.   So, I’ll break down the scenarios that are seen most often and talk about what we can use to qualify a borrower. Remember that all files are done on a case to case basis, so these are general guidelines. Contact me if you have more in-depth questions!

• Commission Income/ Bonus Income – Must have two years of consecutive income that is likely to continue for the next three years. This income is verified by collecting W-2 statements, Paystubs, and Tax Returns. For example: If commission or bonus in 2012 was $85,000 and commission in 2013 was $100,000 we would take the average of the two ($92,500) and divide by 12 to determine monthly income allowable. In this case, we would show an income of $7708.33 per month.
• Overtime/ Shift Differential- In order to use overtime or shift differential, the borrower must have a history of two years of consecutive income in these categories. The income will be analyzed based on hourly rate, number of hours worked, and the amount most likely to continue for the next 3 years.
• Tip Income- Tip income must be consistent for two years. If there is any fluctuation, an analysis must be done to determine the amount of income that is likely to continue for the next 3 years.
• Automobile Allowance- If automobile allowance has been consistent for two years, it can be added to the borrowers monthly income.
• Military Income- If income including pay entitlements (flight duty, hazard duty, clothing or housing allowance) is received, these can be included if they are likely to continue for the next 3 years.
• Part-time Income- A consistent two year history of income from a part-time job is required and must be likely to remain for the next 3 years.
• Rental Income- Rental income can be used when the borrower has received payments for the previous 12 months. Rental income cannot exceed 30% of gross monthly income.
• Alimony/Child Support/Separate Maintenance- If the payor of alimony, child support, or separate maintenance has been making payments for the most recent six months and is obligated to make payments for the next three years, it can be counted.

Other things to note:

• If business expenses are noted on the tax return, we must deduct that from your adjusted income.
• If you are more than 25% owner of a company, you are considered self-employed (even if you get a W-2).
• W-2’s, tax returns, and 30 days worth of pay stubs will be requested to prove income.

As you can see, this is one of the most complicated parts of the mortgage process. If you have a complicated income situation, it is best to speak with your lender about it. When I see situations that are somewhat confusing, I request what is called a credit underwrite. I have an underwriter review the income and liabilities and confirm what can be accepted using the guidelines just to make sure calculations are viewed the same throughout the process. This helps avoid any surprises at the end.

-Brandi

Making a budget

One of the first questions I ask every time I speak with a customer is “How much are you looking to spend each month?” This is a loaded question, and sometimes, they don’t know how to answer.

Making a budget can not only be stressful, but it is very helpful and  can be eye opening. I would venture to say that a large number of people who make budgets leave out several important factors when considering how much they can afford.

Some things to consider when making a monthly budget – Taxes: income, state, property, etc…; retirement and savings contributions; health insurance/medical costs; tithes/charitable donations; groceries; eating out/entertainment; gasoline for your vehicle; insurance for your vehicle/boat/rv; utilities; cable; cell phones; gym memberships; clothing; toiletries; grooming (e.g. Haircuts); pet costs; home repair and maintenance. If you have children, child care and costs associated with their needs will need to be added in as well.

With some exception (like a VA loan), mortgage guidelines don’t necessarily take those types of things into account. Affordability usually comes from a percentage of gross income. This is not to say that everyone who goes this route is unable to afford their monthly obligations, but some may run into trouble.

Example:

Let’s do some math, shall we? (Don’t worry; I’ll do the math for you!)

Some key words you will see throughout this post:
Gross monthly income: income before all deductions (401k, taxes, health insurance, cafeteria plans, etc…)
Liabilities: Monthly bills due that report on a credit report
Mortgage payment: For the point of this post I am including principle, interest, taxes, and insurance.

John Smith comes to the bank to apply for a loan. He makes $75,000 per year (gross income). He has not prepared a budget ahead of time and asks how much he can afford. To be extremely conservative, an estimate of no more than 40% of the gross income allocated to be used towards liabilities, including the mortgage payment, so the answer would be $2500 per month ($75,000 / 12 months = $6250. $6250*.40 = $2500).

We pull John Smith’s credit report and he has the following liabilities:
Car loan $450
Student loans $275
Credit Card $60

Mr. Smith may try to get a mortgage an estimated amount of $1715.00 ($2500-450-275-60) based on that figure and his liabilities.

Now, let’s look at what else Mr. Smith pays each month:

Income taxes (25% of his income) – $1562.50
Retirement (5% of his income) – $125
Heath Insurance – $125
Tithes/Charitable donations – $250
Groceries – $225
Gas for vehicle – $175
Insurance for vehicle-$75
Entertainment/Eating Out- $250
Money for emergency savings – $150
Electric/Gas- $150
Water/Sewer/Trash – $50
Cable /Internet – $50
Cell Phone – $100
Gym membership – $80
Doctor visits/Copays – $25
Prescriptions – $25
Clothing/toiletries – $200
Pet food/grooming/vet – $50
Haircut- $25
Fund for Home maintenance/Repairs – $100

Now, if you weren’t doing math right along with me, I’ll tell you that Mr. Smith would not actually be able to afford that mortgage payment (that would add up to $6292.50 which is $42.50 more than his monthly income). So what would he have to do if that is what he had? Perhaps he would stop putting money into his savings account, stop donating to charity, have to eat at home more often and miss socializing with friends, and cancel his gym membership? Most people do not want to have to do those types of things. This could have been avoided by a budget prepared in advance.

A great worksheet that can be used monthly to help with trial and error can be found here. Not only will this help with monthly budgets but there are options to plan for vacations, pets, and other custom goals.

Other tips:
Think about expenses that come up but aren’t monthly (new tires, for example).
Consider if you have special events you attend and will take a gift for- weddings, baby showers, birthday parties.
Look through your bank statement over the past few months to help guage what you’re spending in each category every month. (You can also try a website like http://www.mint.com to help track that)
Consider your goals – do you have certain savings/retirement goals?  Are you trying to afford a vacation or special purchase?
Review your accounts to see if you are receving promotional pricing and if that obligation is likely to increase.
Be realistic when making your budget.

-Brandi

 

First Meeting

Welcome to Committing To The Keys!   A blog dedicated to educating buyers, sellers, and real estate professionals about mortgage lending.

To start off, I thought I would address one of the most common questions that I get:

What to expect when you’re meeting with your lender for the first time.

You probably want to get comfortable and a grab a beverage… we may be awhile!

You may be asking yourself – where do I start to find a lender? If you don’t know of any lenders (hint, hint… you’re ‘talking’ to one), ask your friends and family if they have any suggestions.  If you have a realtor in mind, you can even ask them for a lender reference.  If no one is able to provide a reference, you can go to your financial institution and ask to speak with their mortgage officer.

I suggest that if you’re looking to purchase a home you find a lender and get prequalified first. While it is not a requirement, I find that it is helpful for most borrowers. When you’re prequalified you will be able to narrow down the price range.  Not only will you be able to narrow down your choices, but you can feel confident when you put an offer in on the home that you will be able to get the financing you desire.

Depending on your schedule and your lender, you may have the option to do everything online and through text and email.  I offer this as an option to all of my customers, but I am just as happy to make appointments with them throughout the week to explain things in person.  If a lot of explanation is important to you and you don’t feel confident and comfortable reading through the information on your own, I suggest that you meet with your lender in person.  If you’ve been through the process or have any sort of knowledge and feel comfortable getting started using technology, go for it! You can always follow up and meet in person if needed.

An important step to take before entering the meeting – make a budget!  I cannot stress this enough.  You won’t want to wait for a lender to tell you what you can afford; decide that before going in.  If you feel that based on your income and other monthly expenses that you can afford no more than $1200 per month (or whatever figure works for your family!), your lender should be able to reasonably give you a price range to look in based on loan type and estimated taxes and insurance (If you plan to escrow!).  You will also want to review your assets and decide what portion you are able to use for your down payment, closing costs, and prepaid items.

To get started, your lender will need an application.   Typically you have the option to fill one out in person, online, or over the phone.  The application will ask for things like your name, social security number, date of birth, gross monthly income (income before your deductions), liquid assets, etc…  It is important to be accurate with your information.  Your lender will review that information as well as pull your credit report before discussing all of your options.

All of the information that you submit will need to be verified.  Prepare yourself in advance to be an open book with your lender.  We aren’t trying to make the process difficult on you, I promise!

To help expedite the process, it can be helpful to bring items in advance for your lender. Every situation is different, so you would bring what is applicable to your situation.

When a customer comes in to be prequalified, I typically request the following:

• Photo Identification – You will want to provide a government issued ID.  Your state ID card or drivers license is perfectly fine.
• Your social security number
• Your residential (and mailing address, if different) for the past 24 months
• Your employer for the past 24 months – if you were in school at any time in the previous 24 months, you’ll want to bring your transcripts (don’t worry- your GPA doesn’t matter to us!)
• Paystubs covering the most recent month of your income (if you get paid weekly you will need 4; if you get paid bi-weekly or twice per month you will need 2; if you get paid monthly you will need 1)
• W-2’s for the previous 2 tax years
• Tax returns (personal and corporate) for the previous 2 tax years – Please include all schedules.
• If you receive retirement income, please provide a copy of your 1099 as well as two months of statements showing the income deposits
• Two months of statements for all bank accounts (checking, savings ,money market) and investment accounts
• Copy of trust agreement
• Copy of complete divorce decree
• Copy of bankruptcy papers, including list of debtors and copy of the discharge
• Current lease on investment property you already own
• Number of dependents and their ages

Additional items if you have already have a contract:

• Copy of the purchase contract, signed by all parties
• Copy of earnest money check (front and back)
• If you have picked out an insurance agent, please bring their information
• If you have a preference on a title company, please bring their information
• Some lenders will request that you provide a check to cover the appraisal.  Typically this is held until closing and returned to you.

Keep in mind that based on your specific situation additional information may be requested.  Your lender will be able to provide you a more detailed list after reviewing your application.

From the information you provide, your lender will discuss the term you want, interest rate options, down payment options, loan types, mortgage insurance, and closing time frames.  Prepare to spend quite a bit of time at your first appointment because it is possible there are a lot of options available to you.

My number one piece of advice when meeting with your lender is to ask questions.  If something was not addressed or you need more clarification, ask.  The old saying “There are no stupid questions” could not be more applicable!  Mortgage can be complicated but with the right lender, it should be smooth and easy for you!

If you made it through that novel, congratulations! I hope you’ll be back next week when I discuss the making a budget and the costs associated with purchasing and owning a home.

 

-Brandi