The Road to Enlightenment

How you finance your home will determine how good your investment will be. Many home buyers pay too much interest, points and other fees to lenders. Other's may not find the right lender and not even get the home at all. This page will explain mortgage basics to you and help you understand the overall world of financing a home.

We have pulished a FREE Report that will explain these and many more items of interest for Home Buyers entitled 'Avoiding 8 Costly Home Buyer Mistakes'. If you would like to receive this valuable FREE consumer report please click here or call us at 614-451-4433.

Conventional loans are popular loans for most people. Most programs require that you put at least 5% down. If you put less than 20% down you will be required to pay a private mortgage insurance premium to insure against default. Generally speaking, Conventional loans are more difficult to qualify for than FHA loans.

FHA loans are insured by the Federal Government. You pay a mortgage insurance premium like on a conventional loan, but the FHA program allows for a little more flexibility than most conventional plans. There are maximum loan limits established depending on where you live. Typical FHA loans are available with as little as a 3% down payment. FHA also has rehabilitation loans available for owner occupants, lower down payment plans for veterans and inexpensive homes, condominium and multi-family property financing.

VA loans are available only to eligible veterans and to the veteran’s unmarried surviving spouse if the veteran died of a service connected disability. The primary advantage of VA loans is that they offer no down payment financing to the veteran. VA loans are almost always the best way for a veteran to buy a home.

Mortgage Qualifying Basics: Generally to qualify for a home mortgage you need to have the following: Reasonably good credit, stable income, enough money for the down payment and closing costs, and not too much debt in relationship to your income.

Credit Qualifying: Underwriters are looking for current stability. Your last 2 years of credit history will have the greatest impact on whether you qualify for a loan or not. For most loans, you should not have any payments more than 30 days late on rent or a previous mortgage for the one year period preceding your mortgage application. Late payments (over 30 days late) on rent or previous mortgages during the last two years will make it very difficult to qualify. For other bills there should not be any late payments for the last 6 months and there should not be many late payments on your entire history. Most credit problems that are more than 3 years old will probably be ignored if you haven’t had any problems recently.

Generally, a Chapter 7 Bankruptcy must be over 2 years old. If you are in Chapter 13, you may qualify for a loan while still in the Chapter 13, provided that you have made regular payments and have permission from your trustee. Loan programs vary on the number of payments made in the Chapter 13 program before you can qualify. Interestingly enough, many lenders view using Consumer Credit Counseling the same as a Chapter 13 Bankruptcy.

Any foreclosure or deed in lieu of foreclosure must be completed 3 years prior to you getting another home loan. Any outstanding judgments and collections will normally have to be satisfied. Tax liens can sometimes be worked around. We can usually help you if you have had problems in the past, if your current credit is good. Never prejudge your credit unless you have had a history of problems and you are experiencing problems right now.

Income - Debts - Stability: Generally speaking your house payment shouldn’t exceed 28% of your monthly income before taxes. In other words, the maximum mortgage amount you are likely to qualify for is roughly 2.5 times your annual income before taxes. These figures assume you have little in consumer debt. The total of your monthly payments on consumer debt and your projected house payment should not exceed 36% - 41% of your monthly income. If you pay child support or alimony, it will be considered a monthly debt. Generally speaking, if you receive child support or alimony, and have received it for one year or more and will receive it for at least 2 more years, you may count it with your income.

Employment stability will be evaluated by how long you have been working in your job field. Generally, two years are required in your job field. Some exceptions include having education in the field you are working in, being active duty military or changing job fields for an increase in pay. Income from part time, overtime, bonus income, commissions and self employment require a two year history to be used.

Down Payment: Different loan programs have different requirements. Eligible veterans can get loans with no down payment. Some loans in certain areas require no down payment. I also have lenders that offer No Down Payment - 100% financing products, even if you are not a first time home buyer or a veteran! Typical conventional loan products require 5% or more down. FHA loans are available with as little as 3% down including closing costs.

Closing Costs: Closing costs are the necessary evils people have to pay to buy a home. They include the following fees: Credit report; Appraisal; Closing Company; Origination; Tax Service; Document Preparation; Survey; Title Insurance; Flood Certification; Hazard Insurance; Mortgage Insurance, Tax Escrow; Discount Points and more! The costs vary depending on the property, your lender and the arrangements you have made with the seller. There are also programs available where the buyer pays reduced or no closing costs! I’ll be happy to share these with you and tell you if you qualify for these programs.

Fixed rate mortgages: If you get a fixed rate mortgage, the interest rate of your mortgage will not change over the life of the loan. Fixed rate mortgages are generally best for people who will live for more than 3 or 4 years in their home or cannot afford the potential increases an adjustable mortgage may have.

Adjustable rate mortgages: These mortgages have interest rates that adjust at regular intervals as stipulated in your note and mortgage. Typical adjustable rate mortgages adjust up or down once a year. However, there are products where the rate changes every six months. Other products have a rate that is fixed for the first few years of the mortgage and adjusts after the 3rd to 5th year.

An adjustable rate mortgage has two components. The first is the index; the second is the margin. The index is the amount that changes every year on your mortgage’s change date. An index might be the 30 year treasury bond, the federal cost of funds index or any other number of things. The margin is a fixed percentage that is added to your index each year on the change date to determine your new interest rate. The annual rate change is limited by caps. Caps are the maximum amount the loan can change each year and over the life of the loan. FHA loans have caps of 1 and 5. This means the rate cannot change more than 1% each year and it cannot go above or below the start rate by more than 5% over the life of the loan. Conventional loans typically have annual caps of 2% and lifetime caps of 6%. VA no longer has adjustable rate mortgages.

The main advantage to adjustable rate loans is that they start at a lower rate than fixed rate mortgages. This generally allows people to qualify for a more expensive house than normal. Additionally, if you are going to live somewhere for a short period of time an adjustable rate mortgage may save you money.

Mortgages can be confusing! Mistakes can cost you thousands of dollars. If you have not yet requested our FREE consumer report entitled 'Avoiding 8 Costly Home Buyer Mistakes' then do so now by clicking here or calling me at 614-451-4433.

Here are some sophisticated calculators, Interest Rate Information and much more that will help you figure out cost and payments of your new home.