How do I know what size house I can afford?
Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first-time homebuyers to purchase a home with a higher value. Contact us today, and we can help you determine exactly how much you can afford.
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What does my mortgage payment include?
- For most homeowners, the monthly mortgage payments include three separate parts:
- Principal - Repayment on the amount borrowed
- Interest - Payment to the lender for the amount borrowed
- Escrow - Escrow accounts are like forced savings accounts. Every month, money is set aside to cover future expenses when they are due. These expenses typically include property taxes and home owners insurance. Escrow accounts are usually required by the lender unless you have 20% or more as a down payment.
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What is Private Mortgage Insurance (PMI)?
If you make a down payment of less than 20% of the purchase price of a home (or if you have less than 20% equity upon refinancing), mortgage lenders generally require that you take out Private Mortgage Insurance (PMI). PMI protects the lender in case you default on your mortgage. Yes, you heard that right. You pay the premium; the lender gets the benefits of the policy.
PMI comes in many different forms. The most common is a monthly premium which is added to your mortgage payment. Some loans allow an upfront premium to be financed into your loan, reducing or even eliminating your monthly premium. And in some cases, the lender will allow you to build the premium into your rate. By taking a higher rate without the monthly premium, your total monthly mortgage payment will usually be less.
We can help you sort through the details, and make sure that you fully understand all the facets of your loan. Contact Us today for more information!
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What is a credit score? What can I do to improve my score?
Your Credit Score is a number that lenders use to help determine the likelihood that you'll repay your loan. Many factors are taken into account, including:
1) Your past payment history
2) Your outstanding debt utilization
3) The age of your accounts
4) The number and type of accounts you have
5) Your short-term pursuit of new credit.
There are three major credit reporting agencies. Each one of them gives you a score. During your application process, we pull all three scores and use the middle of the three to get you qualified.
Because your credit report and credit scores are the foundation of your mortgage approval, we will make sure to review your report with you, to validate its accuracy.
Credit scores do not magically improve over night. You must be proactive, and you must have a plan in place. If you are experiencing some credit challenges, please Contact Us immediately and we will enroll you in our credit repair program. We work with professionals who can coach and assist you throughout the process.
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The Fed just adjusted rates; what does that mean?
When the Federal Reserve (Fed) adjusts rates, they are changing a rate called the "Fed Funds Rate". This is a very short-term rate that impacts credit cards, credit lines, auto loans and the like. Mortgage rates most often will actually move in the opposite direction as the Fed change, due to the dynamics within the financial markets. Contact Us today, if you have additional questions or concerns.
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What is the difference between my Note Rate and APR?
The Federal Government requires that lenders disclose a number call APR (Annual Percentage Rate). This is different from your Note Rate. Your Note Rate is the interest rate that is used to calculate your monthly payments. APR is a rate that is used to help determine the actual “cost” of the loan. To show you how APR is calculated, look at the example below…
Loan Amount: $100,000
Finance Charges: $3,000
Monthly Payment: $599.55
Note Rate: 6.000%
To calculate APR you would first subtract the finance charges from the loan amount, leave the monthly payment the same, and then recalculate the rate.
Financed Amount: $97,000
Monthly Payment: $599.55
APR: 6.286%
The design was that APR would create clarity and make it easier for consumers to compare different types of loans. However, when was the last time the government made things simpler and easier to understand? If you have questions about APR or any other aspects of your mortgage, please don’t hesitate to Contact Us.
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What does it mean to “lock-in” my interest rate?
Due to the nature of interest rate movements, mortgage rates can change dramatically from the day you apply for a mortgage loan to the day you close the transaction. If interest rates rise sharply during the application process, it could make your mortgage payment larger than you previously thought.
To protect against this uncertainty, you are able to 'lock-in' the loan's interest rate, guaranteeing you the prevailing loan rate for a specified period of time (often 30-60 days). In the state of Minnesota, locking in an interest rate with a lender is a legal commitment to do business with them. The state does not allow you to lock-in with more than one lender at a time.
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What are points? Should I pay them?
Points are fees that are paid in exchange for a lower interest rate. One point equals 1% of the loan amount (Loan Amount = $100,000, 1 point = $1,000). As a general rule of thumb, one point will buy your rate down 0.25%. To help understand points better, look at the example below…
No Points
Loan Amount: $100,000
Points Paid: 0% = $0.00
Note Rate: 6.000%
Monthly Payment: $599.55
One Point
Loan Amount: $100,000
Points Paid: 1% = $1,000
Note Rate: 5.75%
Monthly Payment: $583.57
Monthly Savings: $15.98
By buying your rate down you would save $15.98 per month. To calculate your break-even point, simply divide your savings into your cost: $1,000/$15.98 = 62.58. The 62.58 indicates the number of payments it would take for your $15.98 per month to add up to $1,000 (your break-even point). As you can see it’s a little over 5 years. After 5 years, you’re coming out ahead every month, and saving thousands of dollars in interest over the life of the loan.
Paying points to buy your interest rate down, may make sense if you:
1) You plan on staying in your home for at least 5 years.
2) Have the equity, or cash, to afford the points.
If you would like us to run some more specific loan scenarios for you, please Call Us Today!
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What’s next? How does the loan process work?
Buying or refinancing a home can be one of the most exciting and stressful financial transaction you’ll ever make. To help simplify the process we’ve laid out the five basic steps below.
1: Get Qualified
The first step in obtaining a loan is to determine how much money you can borrow. In buying a home, you should determine how much home you can afford even before you begin looking. By answering a few simple questions, we will calculate your buying power, based on standard lender guidelines. Click here to Pre-Qualify.
2: Choose a Loan
Home loans come in many shapes and sizes. Deciding which loan makes the most sense for your financial situation and goals means understanding the benefits of each. By working closely with a professional Mortgage Consultant, you should be able to select the one loan that meets your current needs as well as your future financial goals.
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3: Supply Documentation
In some cases, additional documentation might be required before making a final determination regarding your loan approval.
In order to improve your chances of getting a loan approval:
1. Fill out your loan application completely. You may use our online forms to expedite the process.
2. Respond promptly to any requests for additional documentation especially if your rate is locked or if your loan is to close by a certain date.
3. Do not move money into or from your bank accounts without a paper trail. If you are receiving money from friends, family or other relatives, please prepare a gift letter and contact us.
4. Do not make any major purchases until your loan is closed. Purchases cause your debts to increase and might have an adverse affect on your current application.
5. Do not go out of town around your loan's closing date. If you plan to be out of town, sign a Power of Attorney to authorize another individual to sign on your behalf when your loan is expected to close.
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4: Obtain Approval
Although lenders conform to industry standards set by government agencies, loan approval guidelines vary depending on the terms of each loan. In general, approval is based on two factors: your ability and willingness to repay the loan, and the value of the property. Once your loan application has been received we will start the loan approval process immediately. Our loan processor will verify all of the information you have given. If any discrepancies are found, either the processor or your loan officer will troubleshoot to straighten them out. Our “In-the-Zone” communication practice will ensure you’re kept in the loop on the following topics.
Income/Employment Check
Is your income sufficient to cover monthly payments? Industry guidelines are used to evaluate your income and your debts.
LTV and Debt-to-Income Ratios
LTV or Loan-To-Value ratio is the maximum amount of exposure that a lender is willing to accept in financing your purchase or refinance. Lenders are usually prepared to lend a higher percentage of the value, even up to 100%, to creditworthy borrowers. Another consideration in approving the maximum amount of loan for a particular borrower is the ratio of monthly debt payments (such as auto and personal loans) to income. Rule of thumb states that your monthly mortgage payments should not exceed 1/3 of your gross monthly income. Therefore, borrowers with high debt-to-income ratio may need to pay a higher down payment in order to qualify for a lower LTV ratio.
Credit Check
What is your ability to repay debts when due? Your credit report is reviewed to determine the type and terms of previous loans. Any lapses or delays in payment are considered and must be explained.
FICO Credit Score
FICO Credit Scores are widely used by almost all types of lenders in their credit decision. It is a quantified measure of creditworthiness of an individual, which is derived from mathematical models developed by Fair Isaac and Company in San Rafael, California. FICO scores reflect credit risk of the individual in comparison with that of general population. It is based on a number of factors including past payment history, total amount of borrowing, length of credit history, search for new credit, and type of credit established.
Asset Evaluation
Do you have the funds necessary to make the down payment and pay closing costs?
Source of Down Payment
Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan. It is generally expected that these funds be borrower's own saving, although a borrower may receive non-returnable gifts towards down payment and other loan fees.
Self Employed Borrowers & No Income Verification Loans
Self-employed individuals often find that there are greater hurdles to borrowing for them than a person employed by a company. For many conventional lenders the problem with lending to the self-employed person is documenting an applicant's income. Applicants with jobs at a regular company can provide lenders with pay stubs, and lenders can verify the information through their employer. In the absence of such verifiable employment records, lenders rely on income tax returns, which they typically require for 2 years. An alternative for a self-employed borrower who cannot demonstrate two years of sufficient income from their tax returns would be a limited documentation or reduced documentation loan.
Property Appraisal
Is there sufficient value in the property? The property is appraised to evaluate physical condition, location and zoning.
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5: Close the Loan
After your loan is approved, you are ready to sign the final loan documents. You will review the documents to make sure that the interest rate and loan terms are what you were promised. The signing normally takes place in front of a notary public. At Mortgages Unlimited, we can arrange the signing at our office, a title company, or in the comfort of your home. The closing can take a little or as much time as you’d like. Typically, we encourage you to plan for about one hour.
When purchasing, your loan will normally fund shortly after you have signed the loan documents. When refinancing your primary residence, federal law requires that you have 3 days to review the documents before your loan transaction can fund.
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