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Mortgage Blog

Apr 3

How to Know When You’re Mortgage Ready

Ready for a mortgage

If you are interested in buying a home, you’ve likely been planning to get approved for a mortgage either actively or passively. You may be monitoring credit scores, debt-to-income ratios, and savings for a down payment, as well as learning about the housing market. But how do you know when you’re really ready to apply for pre-approval? Use this guide to help you assess if you are ready to turn planning into purchasing.

Learn which mortgage is right for you

Your preparation for a mortgage loan will depend on the type of mortgage that you want. For homebuyers who have a smaller down payment, an FHA Loan may be the best option. However, if you have excellent credit and a considerable savings, you may want to look into conventional mortgage loans.

FHA Loans require:

• A down payment of 3.5%

• A credit score of 620+

Learn more about FHA loans.

Conventional Loans require:

• A down payment of 5-20% down (avoids mortgage insurance)

• A credit score of 640+ is desirable (a higher score will provide for  a lower interest rate)

Learn more about conventional loans.

As a part of your preparation, choose which type of mortgage loan fits your situation best. Remember that each mortgage lender may have unique requirements for different types of loans.

When is a down payment ready?

Determining how much you need for a down payment is dependent on a few factors–the type of loan, desired interest rate, preference with regard to mortgage insurance, and actual purchase price of the home.

For an FHA Loan, the down payment requirement is 3.5%, but you will have to pay mortgage insurance for the life of the loan. For a conventional loan, a down payment is typically 5-20%, but you can pay more to avoid mortgage insurance and to reduce your interest rate.

When you are preparing to buy a home, it’s important to focus savings into a down payment. If you have a smaller savings amount, you may want to choose an FHA Loan. Remember, regardless of which loan type you choose, you can pay a larger amount than required to avoid mortgage insurance (conventional loans), influence a lower interest rate, or to put more equity in your home.

Learn more about down payments.

Preparing your credit score

Your credit score has a large impact on the type of mortgage you can choose from. It will also impact your interest rate, monthly payments, and down payment amount.

For an FHA loan, a credit score of 620 or higher is desirable. If your credit score is significantly higher, you may be able to receive a lower interest rate and still benefit from the FHA Loan down payment requirement.

For a conventional mortgage, lenders will have flexibility with the credit score that they find desirable, but it is usually 640  or higher. A higher credit score can allow for lower interest rates.

The higher your credit score, the better interest rate you’ll get no matter the type of loan. You can improve your credit score by doing these things:

  • Pay off debt
  • Keep your credit usage lower than 50% of credit limit on each account
  • Avoid opening too many lines of credit
  • Pay credit bills on time

Learn your debt to income ratio

Your debt to income ratio is the amount of debt that you owe and make payments on in ratio to your earned income. Mortgage lenders will look at debt to income ratio based on a monthly cycle. You can understand your ratio by dividing your monthly debt expenses by your monthly income:

Total Monthly debt expenses ÷ monthly income = debt to income ratio

Most lenders will consider a borrower desirable if their debt to income ratio is less than 43%, thought an FHA lender may allow as high as 55%. You can improve your debt to income ratio by paying off credit, consolidating lines of credit, paying over the lowest payment required on debt, and, of course, increasing your income.

Getting ready for closing costs

Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. The amount can be between 2-5% of the price of your home. Closing costs can be a large expense for a borrower if they are not prepared for them. However, putting savings aside can help you to prepare for this payment. Closing costs may be paid by the buyer, seller, or the lender.

Closing costs can be unique to each home purchase, but they will likely include appraisal and attorney fees, title insurance and services, as well as local and state taxes and recording fees. You can ask your mortgage lender to provide you with a closing disclosure that will inform you of the amount to be paid in closing costs.

Learn more about closing costs.

Create a goal

It’s important to set a goal as you prepare to buy a home. Include a realistic purchase price, the interest rate you want, and the amount you are prepared to pay in down payment.

Set a personal goal as well. Include where you can save money, how you can help your credit, and what you can do to reduce debt.

When you start shopping for mortgages, know that you’ve prepared everything to the best of your ability, and find a mortgage lender that meets your needs. Bring all of your questions to your lender, and be prepared to share your goals and how you have planned to make your best home purchase. It will always pay off!

Find out more about your mortgage options by contacting RatePro Mortgage!

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Feb 2

Why Do Interest Rates Change?

Why do mortgage rates change web

If you are shopping for a mortgage you may notice that interest rates can change almost daily. Although mortgage rates are typically between 3.0% and 5.0%, they may fluctuate between these two figures daily.

Learning how and why interest rates are set can help you to choose the best time to start the homebuying process and help you to prepare for the costs of your mortgage loan. And if you already have a mortgage, watching interest rates could help you to find the best time to refinance your home.

Why do rates change?

Interest rates fluctuate based on the Federal Reserve Monetary Policy, market movements and inflation, and the state of the economy. Anything that ordinarily affects bank rates and stocks could affect current mortgage rates.

Changes to interest rates can affect our spending as consumers, and sometimes will be manipulated to help different marketplaces, including the house market. There are two trends that are affected by the change in interest rates:

  • When interest rates are low mortgage costs are reduced, meaning that more buyers will be active. This can increase the price of homes and help to stimulate the real estate market.
  • When interest rates are high, the cost of homes may be reduced and to compensate for the lack of active buyers. This can affect homebuyers and sellers, which hurts the real estate market.

What do rate changes mean for homebuyers?

When you are shopping for a home, it means that you’ve put in the time and effort the prepare for a major purchase. Likely, you’ve worked hard to save money over time, worked on your credit score, and made a plan for what kind of loan you would like to have.

There will always be information that you can’t anticipate, and one of those factors is the change in mortgage rates over time. Luckily, fluctuation will typically only affect your payments over time. This means that your timeline for buying a home can be maintained.

How will rates affect cost?

A fluctuation in interest rates will only affect the monthly payment of a mortgage and the amount paid over time in interest. Closing costs and down payments are not affected by interest rates. In some cases, a larger down payment may allow you to have a lower interest rate, and your mortgage lender will be able to discuss these options with you.

Should you shop around for lower rates?

Fluctuations in interest rates can occur at any time. If you are shopping for a mortgage lender in the same market, it is likely that rate fluctuation will not vary significantly if you are providing the same information. However, some lenders may have more options available than others, and can lock in better rates for their clients.

That being said, mortgage lenders may provide different rates based on your borrowing profile and risk. Your borrowing profile is made up by credit score, down payment, and debt to income ratio. A risk-based pricing model may be used to determine what interest rate a borrower would qualify for.

Should you refinance when rates are low?

When you refinance a mortgage, your rate will be based on your borrower profile, as well as current interest rates and the type of loan you choose. It’s important to understand what the difference in mortgage rates will be and how that could affect your refinance. Typically, the reasons for refinancing is to make a major purchase or to change your monthly payments, or adjust based on an increase in income or higher credit score. These factors will also affect your borrower profile. Make sure that the interest rate of your new mortgage will correspond with your refinancing goals and will allow you to complete payments.

Want to know more about refinancing? Learn more here!

Making your rate choice

When shopping for a mortgage, it’s important to consider how interest rates will affect your buying decision, monthly payments, and the lifetime cost of your home. Remember that some mortgage lenders will allow you to “lock in” an interest rate on some loans when you begin the pre-approval process, and that can take the pressure off of closing quickly. You can also bank on interest rates being lower on Mondays because there’s less news released on the stock market. If you’re interested in learning more about interest rates and your mortgage options, contact RatePro Mortgage today!

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Jan 6

5 Steps to Getting Mortgage Ready in 2019

5 Steps to Getting Mortgage Ready in 2019 1

 

New Year’s means new goals for many, and buying a house and beginning to gain equity may be one of them. January is a good time to buy, and many young families without school-age children can capitalize on the buyer’s market at this time of year. Here are some things you can focus on for getting a mortgage in 2019.

Check your credit score
Many first time home buyers will have newly established credit showing student loan repayment and beginners’ credit cards. Whether or not knowledgeable about credit scores, you should always check prior to and shopping for a mortgage. Given time and effort, your credit score may improve, and it will be highly effective getting a better mortgage rate and higher approval for a loan. In order to get a Federal Housing Administration (FHA) low down payment advantage of 3.5%, you must have a credit score of 620 or higher.

Determine your price range
Determining your price range will help you to find the right mortgage for you. Your down payment, monthly payment, interest rate, and loan term are all variables that can determine your price range. Having an overall house cost going in is a good idea, and other terms can be determined later, but remember to factor in real estate taxes, homeowners insurance, and any mortgage insurance to determine the overall cost of the home. This is also a good time to your research and home shopping method your areas of interests and their real estate history.

Shop for a mortgage lender
People are going online for services more and more now. Finding a mortgage lender with a reputable website and web presence will help you to find a match. Recently, “quick” loans have become popular as an alternative, but remember that these will incur different costs such as higher interest rates and higher down payments because those lenders are not really taking the time to learn who you are to evaluate your assets. This is why many home buyers prefer to work with a local, established mortgage lender. This is also a great time to determine which type of mortgage you will be shopping for. If you are having trouble finding a good mortgage lender, try going to a realtor first. They will inevitably know people in the business that they can recommend.

Start the pre-approval process
Getting pre-approved with a mortgage lender should be a comfortable process once you have determined the right lender. It will involve going over credit scores, assets, income, employment history, and other elements that will contribute to the pre-approval amount for purchasing a house, as well as the interest rate and term suggestions. Be open to working with the lender, they will be happy to calculate and recalculate new terms until you find an ideal match. Furthermore, ask about rate locks to determine if you can rely on a lender to “lock in” an interest rate before the final mortgage is calculated. Remember that this is not the finite meeting about a mortgage loan.

Get Shopping
Once you are pre-approved and have the confidence of knowing that you can purchase a home at your budget, you should feel eager to start the home buying process. Your realtor will be able to better determine your price range and understand the factors of your pre-approval. Realtors on both sides of the sale will be more open to negotiating to meet your pre-approved budget, as it leads to a quicker home sale and faster resolution for all parties. Remember that pre-approval is not the last meeting that you will have with your mortgage lender, and that there may be flexibility within your pre-approval determined by the cost of the home.

Buying a home may be the largest purchase that you ever make. Being aware of your credit score and income history will go a long way to finding a better mortgage. The New Year is a great time to determine how you can realize your goals of owning a home. Taking the time to meet with a mortgage lender at any point in the buying process will give you the confidence to move forward and to become a homeowner.

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Dec 2

Mortgage Pre-Approval: How To Provide Proof Of Income

Mortgage Pre Approval How To Provide Proof Of Income

When you first speak with a mortgage lender about buying a home, you may hear about providing proof of income and other financial information. Providing these items will allow the mortgage lender to give you an informed expectation for your buying range. Or, if you are looking for a pre-approval, providing these items will allow the lender to get your approval processed.

Because it can be confusing to collect and maintain the information that you’ll need to bring to a mortgage lender, it’s important to understand what your financial assets are. In this article, we’ll help you to figure out what you need to share for proof of income and what other financial assets could factor into your home purchase.

When is the right time to contact a mortgage lender?

Providing proof of income

What income can be used to qualify for a mortgage? Lenders will typically count income that you currently have or can expect, but the weight given to individual types of income may vary based on qualifying factors such as consistency (how regularly the income is received), longevity (how long the particular income has been earned), and continuity (the likelihood that the income will continue into the foreseeable future).

Employment income: salary or wages from an employer

When you first speak with a mortgage lender about buying a home, you may hear about providing proof of income and other financial information. Providing these items will allow the mortgage lender to give you an informed expectation for your buying range. Or, if you are looking for a pre-approval, providing these items will allow the lender to get your approval processed.

• Preferably demonstrable for at least two years.

• Indicated by W2s, pay stubs, and/or verification by the employer.

• Salary is taken at face value, whereas hourly wages may be averaged over the previous two years. 

• Overtime and bonuses are averaged over the previous two years.

Self-employment income: working for yourself or a company you own

• Most lenders will require that you show consistent income from self-employment for at least two years before it can be counted.

• Income will be averaged over the previous two years (meaning they won’t just accept your current earnings or salary).

• Income must show stable or increased earnings; diminished earnings are likely to be considered high risk.

• Self-employed applicants must also provide a history of filed tax returns. 

Rental income: earnings from a rented property

• Earnings will be averaged over the previous two years and must be demonstrable for that length of time.

• Lenders will assess the cost of maintaining the property, including potential depreciation, and deduct that from your net earnings when applying them to income.

• Investment income: earnings from investment portfolios, i.e. stocks

• Certain stocks pay dividends to shareholders, which can count as income. These payments are usually made quarterly, and reflect the health of the company and the value of the stock.

• A two or three-year track record of earnings is required.

• Applicants must demonstrate an asset base sufficient to support claimed investments.

• Applicants must provide a history of tax returns for two or three years.

Retirement income: social security, pensions, etc.

• Award documentation is sufficient for social security and pensions.

• 401k and IRAs require tax documentation to show an asset base large enough for at least a 3-year continuance. 

Military income

The same documentation rules apply for active military and their families. One benefit for our service members is that housing, base, and food allowances can be included as income for mortgage calculations. Those deployed to war zones must provide documented confirmation since income earned in these zones is not taxed. 

Learn about how you could apply for a VA Loan. 

Secondary income: side hustles

For part-time jobs, income must be demonstrable for two years and will be averaged over that period. Substantiated by W2s and pay stubs.

For side businesses, similar qualifications to self-employment income are used. If an applicant cannot demonstrate income from a side business for the past two years, this income may be used by a lender to “shore up” the application. This is called a compensating factor, and may be used to counterbalance low credit scores, high debt ratios, or a low down payment. However, it will not be counted as income.

What about savings accounts?

A savings account may be used for a down payment, which will be an important factor in your pre-approval and loan estimate. However, savings may not count as income because they are accumulated over time and cannot be guaranteed to grow at a specific rate.

Mortgage lenders look at savings accounts as a type of safety net for borrowers. If you should lose your job or temporarily suffer a dip in your monthly income, you can use savings to cover your mortgage payments. Because of this, lenders look at borrowers with sizable savings accounts as less risky.

Other savings, like an inheritance or trust fund, may have a time sensitive disbursement plan, either monthly, yearly, or at other specific times. Even if you receive this money on a regular basis, it is most similar to a savings account, and your mortgage lender will need to understand your access to this asset.

Stock and investment earnings

Certain stocks may contribute to your income in the form of dividends. However, many companies do not pay dividends for stocks, and their value is based on their sale. You may be inclined to sell a stock in order to purchase a home, but you cannot use stocks as a financial asset.

Many people do plan to sell stocks in order to purchase equity, and if you are speaking to your mortgage lender about your home buying potential, it is helpful to know the total value of your holdings.

Equity and investment properties

Any equity that you own has value. However, whether you want to liquidate that value in order to purchase your new home will make a difference with your mortgage.

If you own a home and are selling it to purchase a new home, an appraisal will be an important part of your process. Getting an appraisal will allow a mortgage lender to understand what your home’s value is, and that can help to create a pre-approval amount for you to purchase a new home. When this is done, it is assumed that you will be selling your old home at a similar value to the appraisal cost in order to pay for your new mortgage. This could factor into the cost of the home, your down payment, or be applied to monthly premiums. But once you have a selling contract on your current home, there is no need for an appraisal.

If you are buying a second home or investment property, you may use the equity of your first home as collateral if you have paid off around 75% of your previous mortgage.

Sharing your income information

If you are applying for a mortgage loan, be open and honest about all of your income sources with your mortgage lender. Your lender will let you know about the qualifications of your income and help you through the process of providing proof of income.

Even if your income is not applicable, it may be helpful in determining what type of borrower you will be. A secondary source of income that could contribute to your savings is a positive indicator. And, if it is not able to qualify as income, it may be available to you if you refinance.

What to expect from a lender

A lender will look at your income to determine how large of a PITI—a monthly payment of principal, interest, taxes, and insurance on the home—that you can pay without creating a financial hardship. Most lenders look for a PITI no larger than 28% of your gross income, though this is variable. In addition, a lender may look at other claims to your income, such as credit card payments, and consider them when determining the amount you will be able to handle.

Are you looking to speak with a mortgage lender about your finances? Contact RatePro Mortgage to get more information about your options with a mortgage loan.

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Sep 25

What Homebuyers Need To Know About Homeowners Insurance

What Homebuyers Need To Know About Homeowners Insurance

New homeowners may anticipate closing costs associated with buying a home, but may not anticipate the ongoing costs of homeownership. As you complete your home purchase it is important to understand the cost of homeowners insurance, which will be required by your mortgage lender and is intended to protect your investment.

What is homeowners insurance?
Homeowners insurance is a specific type of policy that protects homeowners against potential losses from disasters such as fire, storm damage or burglary. It will also protect against certain types of personal harm that could happen to others on your property. You may also add coverage for earthquakes or flooding depending on where your property is located. If you live somewhere flooding is likely, your insurance company may require additional flood coverage.

A home insurance policy covers four major areas:

  • Dwelling, which covers damage to the home and attached structures.
  • Additional living expenses, which covers living expenses if your home becomes unlivable.
  • Personal liability protects you against lawsuits from damages or personal injuries that occur on your property.
  • Personal possessions, which covers destroyed or stolen personal property.

How is private mortgage insurance different from homeowners insurance?
Private mortgage insurance (PMI) is paid to protect the mortgage lender and bank from the homeowner defaulting on the loan. PMI is paid until the homeowner owns at least 20% of the home. Although there are variables in policies for PMI, these variables will be decided by the mortgage lender and included in the closing disclosure. PMI may also be included in your monthly mortgage payment.

Homeowners insurance is paid to protect the homeowner throughout the time that they own the home. It may also protect the mortgage lender and bank during the time of the mortgage loan. Homeowners insurance should be paid regardless of your mortgage loan. Homeowners insurance will include many variables that can change to match your preferences and needs.

Learn more about Private Mortgage Insurance.

What does homeowners insurance have to do with my mortgage?
All mortgage lenders will require you to purchase homeowners insurance at the time of your home purchase. Similar to a car dealership requiring proof of insurance, this is to ensure that something will not affect the value of your house after purchase. It is even more important when the homeowner is repaying their mortgage to a bank for the cost of the home. Even if the home is yours, the bank still owns equity in the home, and they will want that equity to be protected.

Your mortgage lender will establish that you have homeowners insurance prior to closing on a home. You will want to speak with your mortgage lender to establish what coverage you will need. Most likely, your policy will need to ensure that 100% of the home’s cost is insured.

Can homeowners insurance be included in mortgage payments?
Yes, it can be. When you pay your homeowners insurance as a part of your mortgage, it’s called having an escrow. Depending on your lender, you may be asked to have an escrow as opposed to seeking homeowners insurance privately if you own less than 20% equity in your home. This is to ensure that your home is protected for both you and your mortgage lender.

If you own more than 20% equity in your home, you may still choose to have an escrow. Some homeowners will do this to minimize the number of payments that they are responsible for or to also include property taxes into their escrow, which is also an option.

Is homeowners insurance required?
Before you close on your home your mortgage lender will likely require you to have a homeowners insurance policy. This is to protect your equity in the home as well as the equity owned by the mortgage lender or bank.

It is possible to sign a home insurance binder, which acts as a temporary policy while purchasing a home. This may be helpful if you are planning to close on a home quickly.

How much should homeowners insurance cost?
The cost of homeowners insurance is highly variable depending on location, risks like flooding or earthquakes, and the value of your home. However, in the US it typically costs between $600-1,200 per year. You can expect to pay about $35 per month for every $100,000 of home value.

When is a certain coverage required?
If your home is going to require additional insurance coverage, such as earthquake or flooding coverage, your realtor and mortgage lender should be aware of this before the home is placed under contract. That’s why it’s important to understand what to expect to pay in closing costs and to have an estimate about the cost of homeowners insurance.

Visit the RatePro Mortgage blog to learn more about closing costs and contact us to answer your questions about mortgage loans.

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