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What Does It Really Take to Qualify for a Mortgage Now?

August 25th, 2010

The majority of the mortgage news you hear about these days has to do with how low the rates are and that it is a great time to refinance.  While this is true, these low rates also make it a great time to buy a home.  I thought this might be a great time to review really what it takes to buy a home in our current market.  When working with a client, The Kunselman Team review five key components: Property, Assets, Credit, Income and Transaction or PACIT.  If you want to buy a home, here is what your PACIT needs to look like.

Property: This one is really straight forward but there are a few key points to address.  The property has to be livable, you can’t buy a dump.  Additionally, a property has to appraise for what you have offered for it.  Very unique properties or the largest in the neighborhood can sometimes have trouble with this but a skilled REALTOR can help you with this.

Assets:  FHA loans require a 3.5% down payment or $7,000 for a purchase price of $200,000.  (Note: there is a program that does not require a down payment but it is both income and location restricted. Contact us for details.) Lenders will also sometimes require reserves in addition to your down payment.  Reserves are monies you have left in the bank after your down payment that can be used to help cover unexpected expenses so you don’t miss your mortgage payments.  FHA does not have a reserve requirement but most conventional loans require at least two months of reserves and the more reserves you have, the stronger your loan application becomes.

Credit: You have to have a minimum credit score of a 620 to get a new mortgage now a days.  In addition, to the score, you will usually have to have at least three trade lines reporting to the credit bureaus for at least 6 months but sometimes as many as 12 months. These trade lines are things like credit cards, card loans, student loans.

Income: Income has to be documentable for it to be counted on a mortgage application.  The type of documentation varies with the type of income but a few examples are pay stubs and W-2s for employed borrowers, tax returns for self-employed borrowers, Stamped court papers and proof of receiving the funds for child support and alimony, and award letters for pensions and social security.  The income you have is used to calculate your debt to income ratios or DTI. There are two ratios that are looked at, a front end or housing ratio and a back end or total debt ratio.  The typical ratios a borrower needs to work within are 29/41. If you wanted to buy a $200K home, you (and all borrowers) would have to document about $55K a year income.  That is one borrower who makes about $26.50/hr or two borrowers that each make $13.25/hr.

Transaction: A purchase or refinance.

If you think you might be ready to buy a home, give us a call. Rates are REALLY good right now.    Let The Kunselman Team find the right mortgage to fit your needs!

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Posted in Know Your Mortgage, Mortgage Industry, News, Real Estate Industry, Uncommon Useful Knowledge

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FHA Streamline Refinance

July 30th, 2010

If you currently have an FHA Mortgage on your home, you may qualify to save hundreds of dollars on your monthly mortgage payments.  As with the Fannie Mae and Freddie Mac programs that we have been talking about for the last few months, you may not have to have an appraisal.  In addition, this program does not have any debt to income ratio requirements.  As long as you have not had any late payments on your mortgage (more than 30 days) in the last 12 months, you may very well qualify for an FHA Streamline Refinance.

The biggest differences within this program are determined by whether or not an appraisal is done.  If you are like me, the first question that comes to mind is, “If it is not required, why would you do an appraisal?”  If you decide NOT to do a new appraisal, the new refinanced loan cannot add any of your closing costs to the new loan balance (except odd days interest).  That means that you would either have to have your closing costs covered by the lenders wholesale credit or you would have to bring money to closing.  This option is actually a great value for many borrowers.  Particularly if you feel that your home’s value has declined since you took out your last mortgage.  Rates are so good right now too that you could probably get a rate in the 4% without having to bring more than one month’s payment to the closing table.  If you choose to get a new appraisal during the loan process, you will be allowed to roll any necessary closing costs into the loans so you can maybe get a lower rate without the out of pocket expense.

The other thing to remember with FHA mortgages is the up front mortgage insurance premium.  This is the amount collected by FHA upfront and is usually rolled into the new loan. (Please note that if you choose to use the no appraisal options, this is not a cost that can be rolled in.)  The good news is that on an FHA Streamlined refinance, you will get a portion of your existing upfront mortgage insurance credited back to you.  If you have had your FHA mortgage for a short period of time, the percentage of your credit will be high and the opposite is true too.

Rates are REALLY good right now.  If you have been thinking of refinancing your current home or buying a new one, now is the time.  Let The Kunselman Team find the right mortgage to fit your needs!

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Posted in Know Your Mortgage, Mortgage Industry, News, Uncommon Useful Knowledge, Understanding Your Mortgage

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Top 10 Terms You Should Know about Mortgages

May 4th, 2010

Everyone knows that you should never sign on the dotted line without reading the contract.  This same term applies to loans.  Signing a loan without knowing the terms and what everything means can be detrimental to your finances, credit and future investments.  Before you sign on the dotted line, make sure that you know these terms and how they will apply to you.

1.  Interest rate.  The interest rate is the percentage of your loan that is added on every month.  The percentage will vary according to the economy and will make a difference in your payments.

2.  Fixed Rate.  A fixed rate will be an interest rate that stays at the same percentage throughout the entire period of your loan.

3.  Variable Rate.  A variable rate will change according to the economy and the charts that are stating what the rates should be for interest.  A variable rate usually changes every year and adjusts according to a specific given range of percentages.

4.  Principal.  The principal is what you will be paying on your actual house.  Whatever you pay on your principal is what you will see in the end as your investment.

5.  Escrow.  This is similar to a savings account of your loan.  Whatever you put in escrow will accumulate without paying directly into the loan.  At the end of the term you can use it to finish paying off the loan or to invest in another loan.

6.  Title.  A title will be what you get to your home after it is officially yours, stating that the property belongs to you.

7.  Deed.  A deed will most often be used as a title for a commercial area.  Instead of giving ownership it shows that the property is leased to the one who is using it as a business.

8.  Home Equity.  This is a loan or line of credit that you can get for your home.  It will finance up to eight percent of your other loan and get paid back later.  This helps if you want to consolidate loans or invest more into the property.

9.  Appraisal.  After an inspection of the home is made, an appraisal will be made.  This will be an estimated value of what the home is worth.

10.  Equity.  This will be the actual amount of the property that you own.  Most likely, it is what is being paid off of your principal amount.

Once you know some of these basic terms, you will be able to expand on your knowledge and find the exact loan that will fit your needs.  These basic definitions will help you in making the right decision for the type of loan that you want.

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Posted in Know Your Mortgage, Mortgage Industry, News, Real Estate Industry, Uncommon Useful Knowledge, Understanding Your Mortgage

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What Makes Up My credit Score?

May 4th, 2010

One, if not the, most important factors in determining what kind of mortgage you qualify for is your credit score.  The problem is that how the credit score is calculated can be a bit confusing.  The scores can range from 300 to 850. Now while the formulas used to calculate a credit score are proprietary information, here is an approximate breakdown of what makes up your credit scores:

  1. 35% of your Score is Payment History. This includes late pays, collections, bankruptcies, & foreclosures.  Additionally, the more recent derogatory credit is, the more it affects your score.
  2. 30% of your score is based on your outstanding debt.  How much do you owe on loans cars or homes?  What percentage of your revolving credit accounts are in use?  General trigger levels are 30, 50 and 70% of your credit limits.
  3. 15% of your score is based on your length of credit history.  The longer you’ve had the accounts, the better.  A common mistake people make is closing credit cards after they pay them off.  If it is an old account, this can drastically lower your average length of credit history.
  4. 10% of your score is based on new credit.  Opening new credit accounts temporarily lowers your credit score.  This is to prevent a run of opening up excessive credit before history with new accounts can be established.  This also includes hard inquires (inquires you authorize).
  5. 10% of your score is based on the types of credit you have.  It is good to have a balanced mix of both revolving account (credit cards) and installment loans (Car loans & Mortgages).  This shows you know how to manage all types of credit.

There are three separate credit bureaus Experian, Equifax and TranUnion.  They each use their own variation of the Fair Isaac credit model. (This accounts for some of the variations in each score).  Additionally, creditors can choose to report payment history to one, two or all three credit bureaus.

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Posted in Know Your Mortgage, Mortgage Industry, News, Uncommon Useful Knowledge, Understanding Your Mortgage

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7 Things You Should Never Do When Applying for a New Mortgage

April 1st, 2010

This is a list of things to steer clear of when you are seeking to obtain financing for a home. The following items may prove to be a detriment when you wish to move forward with the loan process.

  1. Don’t open any new credit accounts, especially buying or leasing a vehicle!  Brand new lines of credit can bring your score down by lowering your average history length of your credit accounts. Lenders also look carefully at your debt-to-income ratio or DTI. A large payment such as a car lease or purchase can greatly impact those ratios and prevent you from qualifying for a home loan.
  2. Don’t transfer your assets between bank accounts!  Moving money around ends up complicating things because the transfer of money must be documented.  In addition, if you have any unusual deposits of cash, the lender is going to want to know where it came from. You can consolidate your accounts later if you need to.
  3. Don’t change jobs!  A new job may involve a probation period, which must be satisfied before income from the new job can be considered for qualifying purposes.
  4. Don’t make any large purchase during or right before the loan approval process. (This includes furniture and appliances for the home.)  New purchases can increase your debt to income ratio to the point that you will no longer qualify for the mortgage you are applying for.
  5. Don’t put your information on “lending” websites like LendingTree.com or anything similar.  These website are not lenders but marketing companies that sell your information to multiple lenders (I have seen as many as 25).  Each of these lenders will pull your credit to see what you qualify for.  ALL inquires must be explained during the lending process and too many pulls can lower your credit score.
  6. Don’t transfer balance around on your credit cards.  An experienced lender can advise you if any money should be transferred and how much.  Also, if you recently paid off or substantially reduced the balance on debt, contact the company and get something on their letterhead stating your new balance.
  7. Do not pack away your important documents. (Tax returns, W-2s, Bank Statements, Military Paperwork, Bankruptcy Paperwork, divorce/child support papers, etc.)  These things are crucial to the loan process and having to dig through boxes to find them will only waste valuable time.

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Posted in Know Your Mortgage, Mortgage Industry, News, Uncommon Useful Knowledge, Understanding Your Mortgage

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