Mortgages

If you’ve obtained a home loan, called a mortgage, in the past, you should be aware that the rules might have changed a bit since then. Following the 2008 financial meltdown, all lenders had come under federal restrictions that severely limited their ability to make new loans. Fortunately, those restrictions are now easing, rates are low and lenders are more open to lending than at any time in the past decade – but there are still rules.

Types of Mortgage Loans:
1. Conforming Loans – these are loans up to $765,600 for a single-family home and are approved on the standard qualification bases

2. Non-Conforming Loans – these can be loans in excess of $765,600, called jumbos, or require alternative documentation in lieu of the standard income or asset evidence – sometimes called ‘exceptions’

3. VA Loans – these loans are available to those who have served in the military and require no money down if the VA guarantee had not been used for a prior purchase, loans above $765,600 may require a slightly higher interest rate but loan qualification is somewhat easier than conforming loans

4. FHA Loans – these are ideal for resale homes but their restrictions make new home purchases more difficult than other loans that are available

All lenders have to consider 4 aspects of a loan application:
1. Credit – you may have heard of your ‘score or FICO,’ but there are actually 3 scores – one from each of the major credit repositories and most lenders use the average or median score – think of 660 as the starting point but some lenders will consider a 620 and charge a rate premium for making that exception, at 740 or better it is not uncommon for lenders to offer a rate reduction as a way to encourage the application

2. Income – a good rule of thumb is that no more than 30% of your gross income should be used for housing debt (mortgage loan, property tax and insurance), for example at $20,000 per month gross income the payment should top out at no more than $6,000 but in the upper income ranges, this is quite flexible; additionally no more than 45% of your gross income should be used for housing and recurring charges such as car loans and monthly credit card payments.

3. Assets – you will need to prove you have the liquid assets to close on your home purchase and provide bank statements, stock brokerage reports or other definite proof of available funds

4. Property Value – the value of the home you select will be verified by the lender, this is called an ‘appraisal’ – you can be assured that any home from Premium Shore Homes will easily meet this verification standard

What you will need for your loan application to be approved:
1. Paystubs – if you are a salaried employee, all lenders will ask for your two most recent payroll statements showing income and deductions; if you are self-employed you will need to provide your most recent quarterly statements for the year to date

2. IRS Documents – all applicants will need their previous two years 1040 statements or W-2s and it is common for corporate owners to be asked for their 1120s with all attachments

3. Bank Statements – the past 90 days of your bank statements, brokerage reports or other asset sources will be needed; if you are receiving a portion of your purchase price as a gift, your donor will need to make the gift prior to
your approval or provide evidence of their ability to transfer the proposed funds

4. Identity – copies of your driver’s license, green card and social security card are typically requested to evidence you are the borrower

5. Other Real Estate – if your purchase will be a second home, the lender will need to know your plans for your other property – will you be selling it, renting it or keeping it – if you are keeping it, the monthly cost will be used in determining your total expenses (the 45% mentioned above)

Mortgage terms you may encounter:
Some folks in the real estate or lending industry use terms that are unfamiliar or confusing – in most cases these are very simple abbreviations or acronyms for uncomplicated sectors of the lending process that have little or no connection with what the typical buyer will encounter – here are some:

1. Prequalification – this is the process where the borrower speaks with a mortgage lender who reviews the documents that were completed on-line or mailed in and issues a letter to the borrower that their mortgage is approved subject to certain conditions such as the valuation or completion of the selected property. No property will be considered as ‘under contract’ until
this letter is obtained and verified. Be very careful of any lender who charges a fee for this

2. PMI – this is nothing more than an acronym for Private Mortgage Insurance – when a buyer has less than a 20% down-payment, lenders are required to have a portion of the loan guaranteed, this can be by a private mortgage insurer who charges a premium to the borrower; some large lenders will self-insure and charge a smaller premium than the outside companies

3. FNMA – this is the Federal National Mortgage Association who since the late 1960s buys mortgage loans from banks and other lenders so that they can free up their assets to make more loans – the borrower does not deal with them directly although FNMA does have standardized forms and rules that lenders commonly use in their conforming loans

4. Freddie Mac – this is the Federal Home Loan Mortgage Association that was founded in the 1970s to allow Savings Banks access to sell loans as they were precluded from using FNMA

5. Underwriter – once an individual who would review and approve the mortgage application, now it is commonly a computer program that can supply almost instant approvals – although all documents will be verified by the program’s human assistant prior to closing; live underwriters are still often used for Jumbo and Non-Conforming Loans as well as those made by specialty lenders, such as pension funds, insurance companies or private lenders

6. Fixed Rate – these loans have their interest rate locked in for the life of the loan, 15, 20 or 30 years – when interest rates are low these are generally a wise choice

7. ARMs – this is the acronym for Adjustable Rate Mortgage and can cover a myriad of choices – 1, 3, 5 or 7-year fixed periods are typical – these offer a lower rate than a Fixed Rate and may fit in well to your future plans

8. Professional Loans – these loans, originated by large banks, offer very appealing terms to certain professionals such as doctors or dentists – lower rates, lower down-payment requirements and often lower fees make these a bargain for those who fit their licensed professional requirements

9. Points – a ‘point’ is 1% of the loan amount and a fraction of that is typical as a loan origination fee – for example on a $600,000 mortgage a lender may charge .75 points as an origination fee or $4,500 – although an expense, it is deductible as an itemized deduction in the year it’s paid

10. Appraisal – All lenders will require an independent licensed appraiser inspect the location and structure of your new home to compare it to others in the area as well as to determine the quality of the materials that were used. If your home is still under construction, the full set of plans and specifications are provided so the value can be determined – see Property Value, above, a typical lender’s charge for this is in the $300 to $600 range