First-Time Home Buyer Credit Checklist

For a first-time home buyer, the entire process of acquiring a new mortgage can be quite overwhelming. There are a hundred details to keep in mind, various guidelines and some unavoidable hurdles that you will encounter. Since there are so many considerations, take a look at these buying first home tips and list of Do’s & Don’ts you can follow right through the mortgage approval process and it might help in easing smoothening the path a bit:

 

DO:

  • Continue working at the job you are at

  • Keep all your accounts updated

  • Ensure that you make all your house/rent payments on schedule

  • Ensure that your insurance payments are current

  • Maintain a steady credit – bad credit negatively impacts a loan approval

  • Call Res Mac Home Loans if you need any questions answered

DON’T:

  • Make any major purchases such as a boat, car, home theatre, jet ski etc

  • Open any new credit cards

  • Apply for additional credit

  • Transfer balances from 1 bank account to any other

  • Take out loans for furniture

  • Pay off any collections or charge-off accounts

  • Close any of your credit cards

  • Max-out on credit cards

  • Consolidate your credit debt

Maintain Your Credit- worthiness

One of the most important buying first home tips is that when you are in the midst of applying for a new mortgage, your financial status should be stable till the point your loan gets funded & recorded. Any bad credit/ the inability to make the required down payment can put a damper on your home buying plans. Looking at your credit-worthiness and ensuring that it stays that way is the best way to eliminate some of the uncertainty surrounding the approval of your loan.

There could be instances where even certain minor changes can have a negative impact on your credit rating which could lead to your loan being denied. It’s also important that you get the smallest of doubts about the loan process cleared with your loan officer and maintain a simple buying first home guide. This will go a long way in making your loan approval successful. Speak with experts at ResMac Home Loans for any other information you need.

 

Understanding An Amortization Schedule

By committing to a mortgage loan, the borrower is entering into a financial agreement with a lender to pay back the mortgage money, with interest, over a set period of time.

The borrower’s monthly mortgage payment may change over time depending on the type of loan program, however, we’re going to address the typical 30 year fixed Principal and Interest loan program for the sake of breaking down the individual payment components for this particular article about an amortization schedule.

On each payment that is made, a certain amount of interest is taken out to pay the lender back for the opportunity to borrow the money, and the remaining balance is applied to the principal balance.

It’s common to hear industry professionals and homeowners talk about a mortgage payment being front-loaded with interest, especially if they’re referencing an amortization chart to show the numbers. Since there is more interest being paid at the beginning of a mortgage payment term the amount of money applied to interest decreases over time, while the money applied to the principal increases.

We can better understand mortgage payments by looking at a loan amortization chart, which shows the specific payments associated with a loan.

The details will include the interest and principal component of each periodic payment.

For example, let’s look at a scenario where you borrowed a $100,000 loan at 7.5% interest rate, fixed for 30 year term. To ensure full repayment of principal by the end of the 30 years, your payment would need to be $699.21 per month. In the first month, you owe $100,000, which means the interest would be calculated on the full loan amount. To calculate this, we start with $100,000 and multiply it by 7.5% interest rate. This will give you $7,500 of annual interest. However, we only need a monthly amount. So we divide by 12 months to find that the interest equals $625. Now remember, you are paying $699.21. If you only owe interest of $625, then the remainder of the payment, $74.21, will go towards the principal. Thus, your new outstanding balance is now $99,925.79.

In month #2, you make the same payment of $699.21. However, this time, you now owe $99,925.79. Therefore, you will only pay interest on $99,925.79. When running through the calculator in the same process detailed above, you will find that your interest component is $624.54. (It is decreasing!) The remaining $74.68 will be applied towards principal. (This amount is increasing!)

Each month, the same simple mathematic calculation will be made. Because the payments are remaining the same, each month the interest will continue to be reduced and the remainder going towards principal will continue to increase.

An amortization chart runs chronologically through your series of payments until you get to the final payment. The chart can also be a useful tool to determine interest paid to date, principal paid to date, or remaining principal.

Another frequent use of amortization charts is to determine how extra payments toward principal can affect and accelerate the month of final payment of the loan, as well as reduce your total interest payments.

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How Do I Calculate My Mortgage Payment Without Using A Mortgage Calculator?

Calculating an exact mortgage payment without a calculator on a loan is no small task, but there are some simple rules-of-thumb you can use to get a close estimate.

With the exception of the MIT Blackjack Team, performing this type of complex math in your head often leads to frustrating rants.

When coming up with a rough estimate, it is important to understand the individual components that factor into the overall monthly mortgage payment.

Yes, the thousands of dollars you send to your lender every year may cover more than just the mortgage, but referring to one simple formula will help you gauge what the new payment will be as you’re out looking for new properties that may be in your price range.

What’s In A Mortgage Payment?

A mortgage consists of 4-6 parts:

  • Principal – the balance of the loan
  • Interest – the fee paid to borrow the mortgage money
  • Property Taxes – based on county assessed value and residence type
  • Hazard Insurance – in the case of fire or property damage (may include a separate flood policy)
  • Mortgage Insurance – more than 80% LTV on conventional loans, or with FHA financing

Most lenders use the acronym (PITI), which includes Principal, Interest, Taxes and Insurance.

And in the case where a separate Mortgage Insurance Premium is required, we add another “I” to the end of that creative series of letters.

Another monthly expense that you have to consider is the monthly dues that come with properties that have a homeowner’s association (common in condominiums and other developments). This isn’t a payment made to your lender, but you will have to qualify with that payment and it is also best practice for you to factor that in the monthly cost of your new home.

Confused yet? Don’t worry, this is slightly easier than most state bar exams.

The Mortgage Payment Cheat Sheet:

Ok, you’ve made it this far and haven’t closed your browser, so that is a good thing.

Please keep in mind, this top secret formula will by no means be exact.

Mortgage Payment Formula:

For every $1000 you borrower, your TOTAL monthly mortgage payment will be $8.

So, if you purchase a home for $250,000 with a $50,000 down payment – borrowing a total of $200,000, then a good estimated total monthly PITI payment would be roughly $1600.

But don’t forget to add your homeowners association dues to that monthly payment.

What If I Pay Taxes and Insurance Separately?

Well now we’re at the easy part. If you elect to pay taxes separate from your mortgage, the cheat sheet is reduced from $8 per $1000 down to $6 per $1000.

So there you have it. $8 for every $1000 borrowed.

Again, please keep in mind that this is not going to give you an EXACT payment. You may be purchasing a property with higher real estate taxes or your insurance premiums may be higher than average depending on the state you live in.

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Do I Have To Continue Making My Mortgage Payment If My Lender Goes Bankrupt?

When mortgage lenders go out of business and are essentially taken over by the FDIC, homeowners are left wondering if they still need to make a monthly payment.

Great thought, and a very common question for many borrowers in the 2006-2010 timeframe.

The short answer is YES, you still have to continue making mortgage payments if your current lender files for bankruptcy or disappears over the weekend.

In order to give a more thorough answer to this popular topic, we’ll need to address the relationship between mortgage loans as liens and mortgage servicers who make money by handling payments.

To put this topic in perspective, 381 banks actually filed bankruptcy between 2006 and 2010 forcing them to cease their mortgage lending activities. And a common misconception borrowers have about their mortgage company is that their agreement should become obsolete once the lender files for bankruptcy or goes out of business.

Based on the way mortgage money is made, packaged and sold on the secondary market as a mortgage backed security, the promissory note (agreement) is actually spread between many investors who rely on a servicing company to collect and manage the monthly payments.

A mortgage is considered a secured asset, where the collateral is real estate.  And, the mortgage note has a separate value to investors and servicers based on the interest and servicing fees they have wrapped up in the monthly payments.

This is why many mortgage notes get sold to other servicers who pay for the rights to service your loan. So basically, even if a mortgage company is bankrupt, someone else is willing to take on the job of collecting payments.

Also, by signing a mortgage note, the borrower is committing to continue making the required payments, regardless of what happens to the mortgage company servicing your loan.

Bullets:

  • Your house is an asset
  • The mortgage note has a separate value to investors
  • Regardless what happens to your mortgage company, you need to make your payments

Also, it’s important to continue making your mortgage payments on time, regardless of which servicing company is sending a monthly statement.  Obviously, keep a good paper trail of those mortgage payments in case there is a mix-up between transitions.

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Alternate Sources For Establishing Credit

While the basic Rule-of-Thumb for acceptable credit history is a minimum of four trade lines documented on a credit report, there are alternative methods of building a credit picture that an underwriter can use to make a decision for a loan approval.

For potential home buyers with little or no credit history, keeping records for 12 months of paying bills on time is essential for mortgage loan approval. In fact, loan officers will appreciate receiving proof that you have paid a variety of accounts regularly and on time. Even if you do not have a credit history, or your credit report isn’t as good as it could be, this may enable you to get a mortgage.

The industry term for this is “thin credit.”

Some loan types, namely FHA and USDA, will accept alternative credit sources in order to establish proof of financial responsibility.

Alternative credit is unreported to the bureaus, but will still be verified and can be instrumental in a home loan approval.

Those with thin credit don’t usually have bad credit, but have just not had an opportunity to build enough traditional credit, such as bank/store credit cards, auto loans, etc.

Alternative Sources for Building Credit:

  • Rental History – Canceled checks and letter from property management company
  • Medical Bills – 12 months of statements from medical billing company showing paid as agreed
  • Utilities – power, gas, water, cable, cell phone
  • Auto Insurance
  • Health / Life Insurance – as long as it’s not auto-deducted from pay check

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What’s The Difference Between A Primary Residence, Second Home and Investment Property?

When you are applying for a mortgage loan, your “occupancy type” becomes a major factor in the actual amount of the down payment that is required, the loan program available & the mortgage interest rate. Whether you are buying, doing a term or rate financing/ taking equity out of the property via cash-out refinance- the underwriter will always take the “occupancy type” into consideration.

Types of Occupancy

There are 3 types of occupancy:

  • Owner Occupied or Primary Residence – As per the HUD, a primary residence is essentially a property which a borrower will occupy for a larger part of the calendar year. At least 1 borrower has to occupy that property & sign the security instrument as well as the mortgage-note for that property to be considered as “owner-occupied”

  • Second Home – In order to qualify as a 2nd home, typically, that property should be a minimum of 50 miles from your primary residence. The real-estate should not be acquired for rental investment purposes

  • Investment Property- This type of property is not occupied by the owner and is used only as source of rental income

Down Payment Requirements

The down payment that you make will be dependent on the type.

  • Primary Residence – Purchases for VA & USDA can go upto 100% financing, while the FHA requires 3.5 percent of the purchase price as down-payment. Conventional financing might require the down payment to be in the 5% – 25% range, based on the credit score, property type, county and the loan amount

  • Second Home – An average 10 percent of a down-payment is required for a purchase, and 25 percent equity for any refinance

  • Investment Property – The down payment requirement can be the 20-25% range based in the total number of units. When you are doing a cash-out refinance on any investment property for 2-4 units, the required loan-to-value will have to be 70percent /lower to qualify.

Note- For any kind of high-balance loan amount the mentioned LTV- Loan-to-Value requirements will undergo a change. Certain credit score requirements will also be applicable. To understand more about how the property type affects your down payment, contact ResMac Home Loans today.

What’s My Debt-to-Income (DTI) Ratio?

Debt-to-Income (DTI) is one of the many new mortgage related terms many First-Time Home Buyers will get used to hearing.

DTI is a component of the mortgage approval process that measures a borrower’s Gross Monthly Income compared to their credit payments and other monthly liabilities.

Debt-to-Income Ratios are designed to give guidance on acceptable levels of debt allowed by particular lenders or programs.

There are actually two different Debt-to-Income Ratios that underwriters will review in order to determine if a borrower’s monthly income is sufficient to cover the responsibility of a mortgage according to the particular lender / mortgage program guidelines.

Most loan programs allow for a Total DTI of 43% and a Housing DTI of 31%.

Two Types of DTI Ratios:

a) Front End or Housing Ratio:

  • Should be 28-31% of your gross income
  • Divide the estimated monthly mortgage payment by the gross monthly income

b)  Back End or Total Debt Ratio:

  • Should be less than 43% of your gross monthly income
  • Divide the estimated house payment plus all consumer debt by the gross monthly income

Remember, the DTI Ratios are based on gross income before taxes.  Lenders also prefer to use W2’s or tax returns to verify income and employment.

However, the adjusted gross income is used to calculate DTI for self-employed borrowers on most loan programs.  Since there is room for interpretation on these guidelines, it’s important to review your personal income / employment scenario in detail with your trusted mortgage professional to make sure everything fits within the guidelines.

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Calculating Loan-to-Value (LTV)

Understanding the definition of Loan-to-Value (LTV), and how it impacts a mortgage approval, will help you determine what type of loan amount and program you may qualify for.

Since the LTV Ratio is a major component of getting approved for a new mortgage, it’s a good idea to learn the simple math of calculating the amount of equity you may need, or down payment to budget for in order to qualify for a particular loan program.

The LTV Ratio is calculated as follows:

Mortgage Amount divided by Appraised Value of Property = Loan-to-Value Ratio

*On a purchase transaction for a residential property, the LTV is calculated using the lesser of either the purchase price or appraised value.

For Example:

Sally qualifies for a 96.5% Loan-to-Value FHA program, which means she’ll have to bring in 3.5% as a down payment.

If the purchase price is $100,000, then a 96.5% LTV would = $96,500 loan amount. And, the 3.5% down payment would be $3,500.

$96,500 (Mortgage Amount) / $100,000 (Purchase Price) = .965 or 96.5%

In addition to determining what mortgage programs are available, LTV also is a key factor in the amount of mortgage insurance required to protect the lender from default.

On a conventional loan, mortgage insurance is usually required if you have an LTV over 80% (one loan is more than 80% of the home’s appraised value). On that point, if you are currently paying mortgage insurance and think that your LTV is less than 80%, then it may be time to refinance, or call your lender to restructure the payment.

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Frequently Asked LTV Questions:

Q:  Why do the lenders care about Loan to Value?

Lenders care about the LTV because it helps determine the exposure and risk they have in lending on a certain property. Statistics show that borrowers with a lower LTV are less likely to default on their mortgage.  Also, with a lower LTV the lender will lose less money in case of a foreclosure.

Q:  Can I drop my mortgage insurance on an FHA loan?

The mortgage insurance on an FHA loan is structured differently than a conventional loan. On a 30 year fixed FHA loan, the monthly mortgage insurance can be removed after five years, as well as when the borrower’s loan is 78% LTV.

Q:  What does CLTV stand for?

CLTV stands for Combined Loan To Value. The CLTV calculation is as follows:
(1st Mortgage Amount + 2nd mortgage amount) / Appraised Value of Property = CLTV

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Common Documents Required For A Mortgage Pre-Approval

Today, a number of lenders are quoting 10-minute mortgage pre-qualifications online or over the phone. But only a mortgage approval that has been issued by an underwriter holds weightage, as the person has the opportunity to thoroughly review all the required documents.

The lending guidelines are constantly changing, the government is pulling in the reins on regulations and there is a lot of volatility in mortgage rates. With all these factors in view, most real estate agents require first-time home buyers to have a pre-qualification letter, before they actually show them any new homes.

How a Pre-Approval Helps You

The pre-approval letters helps you in 3 ways:

  • You will know the mortgage amount you qualify for

  • You get a general estimate of what total housing payment will be

  • When you submit a pre-approval letter along with your purchase offer, the seller is more confident that you will be able to meet your end of that agreement

The Documentation

In order to get the pre-approval letter, you are required to fill out a loan application form and submit a few documents, which will be reviewed by the underwriter and/or the loan officer. The common documents that you will have to submit are:

Income / Assets for Wage Earner:

  • Last 2 years W2s & Tax Returns

  • 2 most-recent Pay Stubs

  • 2 most-recent Bank Statements, Liquid Assets, 401(K), Investment Accounts

Income / Assets for the Self-Employed:

  • Last 2 years Tax Returns – Business & Personal

  • Last Quarter’s P and L Statement

Letter of Explanation For:

  • Employment Gap/New Line of Work

  • Late Payments / Bankruptcy on Credit Report /Judgments

Other:

  • Bankruptcy Discharge

  • Any Child Support Documentation

  • Mortgage Payment Coupons (If you own other Real Estate)

  • Lease Agreements (If you own any other Rental Properties)

Be Well-Prepared

The Q&A sessions can sometimes end up being more than just a qualification process and you should have all the right questions & answers ready. In any case, once you have identified a trustworthy loan officer who can meet your expectations, you will need to have all these documents ready. The loan approval process can be very complex and being well-prepared, helps in taking away some of the strain. For more information about the kind of documents you require, contact ResMac Home Loans today.

 

Top 8 Things To Ask Your Lender During The Application Process

The mortgage approval process is a very complicated one. But asking the right questions and getting satisfactory answers is important. Failing to do so in the course of the mortgage pre-qualification stage can end up hurting or frustrating you, because all your expectations were not met. Here is a list of 8 priority questions you should ask your lender during the application process:

What are the documents I will have to keep ready to ensure that I get full mortgage approval?

An experienced mortgage professional can identify all the different challenges that a buyer may face, just by asking all the right questions in the course of the interview and initial application process. Some of the things that your mortgage professional will need to know are:

  • Residence history

  • Credit obligations

  • Marital status

  • Down payment seasoning

  • Employment & Income verification

  • Others

The questions you should be asking are:

How long will the entire process take?

A number of factors have to be taken into consideration in the overall time-line and this is exactly why communication is important. As long as all the questions are addressed in time and the documents are in order, your loan officer will be able to provide you with a time estimate for processing and closure of your mortgage.

Does the payment include taxes and insurance?

Getting the answer to this one will help you understand the impact to the total monthly payment as well as the total amount you have to bring to the mortgage closing.

Are there any chances of my payment increasing post closure?

In the current economic landscape, most homeowners opt for the fixed-rate loans and their loan payment stays the same over the life of that loan. However, if taxes & insurance have been included in the payment, then any changes to these will also increase the home loan payments.

In addition to these questions, you should also ask your loan officer:

  • How to lock-in your interest rate

  • The duration for which the rate will be locked

  • How your credit score impacts your interest rate

  • The amount you will need for closing

Expert and Professional Assitance

Once you get the answers to these 8 basic questions, you will feel a little more confident about finding a lender who will be cater to your specific requirements. The more clarity you have about this entire process, the smoother the approval process will be. We can provide you with complete guidance and assistance with the mortgage loan application process- contact ResMac Home Loans today.