The ability to repay a mortgage has always had inherent importance as a factor in the success or otherwise of a mortgage loan application. In January, legislation helped mandate such a requirement.
It is intended to protect borrowers from themselves, and to measure as far as is possible that they are able to repay their agreed mortgage. Adopted by the Consumer Financial Protection Bureau (CFPB), the rule is not only designed to ensure that proper checks are carried out on prospective borrowers, but also to protect them from lending practices that have led to problems in the past.
Here are some of the main points of the new rule.
Verification of Financial Information
In order to establish theer ability to repay a mortgage, lenders must examine documents proving a borrower’s financial status. That includes:
- Employment status
- Existing assets
- Existing debt obligations: credit cards, car loans, other mortgages, etc
- Credit record and history
- Monthly outgoings
- Alimony, etc
Each of these must be documented. This means that ‘no doc’ loans will no longer be allowed. Lenders will not be permitted to offer quick finance without documentation from the borrower. Many past foreclosures were due to lenders failing to identify false financial details from borrowers whose monthly income was too low for the amount of mortgage offered.
Ability to Repay a Mortgage
A mortgage lender must make sure that the borrower has the ability to repay a mortgage before offering it. They should examine the debt to income ratio, and be sure that the monthly repayment can be easily met without hardship. Too many loans have been offered in the past to borrowers who were already overburdened with monthly payments.
Toxic Features Involving Loss of Equity
Loan terms should not exceed 30 years and interest only payments should not be offered. Negative amortization should likewise be stopped. This is the type of loan where the principal increases over time.
These features lead to either static equity at best, or more likely, a loss of equity. The borrower owes more over time than the value of the home. The asset is no longer an asset but a burden: it cannot be sold to cover the amount still owed.
Debt To Income Ratio Caps
In future, mortgages will only be offered where the DTI ratio is less than 43%. It has often been the case that mortgage loans were offered with DTI ratios well above that, which is a strong indication of an inability to consistently maintain repayments. For a limited period, loans will be offered to borrowers with a debt-to-income ratio of more than 43% if they otherwise qualify for a Fannie Mae or Freddie Mac insured mortgage.
Abolition of Excess Closing Fees
Many people who have been offered a mortgage have been hit hard by unexpected closing or upfront fees. There will be a limit placed upon such fees including those paid to brokers and loan officers.
There are several other factors involved in the ability to repay a mortgage that will help to prevent lenders from offering loans to those obviously unable to afford the repayments. This is to benefit both lenders and borrowers, since foreclosures benefit nobody. If you intend purchasing property towards the end of this year, keep the above comments in mind.
If you are in the process of buying a home or just beginning your search, you need to be aware of what NOT to do in order for the process to go smoothly.
The lenders need to see stability in your work history and if you change jobs you are starting the process all over. Plus, they require 1 month pay stubs at the closing of every loan to verify your income and you will not have that by the time your loan closes. Also, if you desire to be self-employed, you must wait until your loan has closed escrow. When self-employed, you are required to have 2 years of tax returns in that profession.
Do NOT open new credit
When you are approved for your loan to buy a home, it is based on the credit history you currently have and the liabilities counted against you. When you open new credit you are telling lenders you are a high risk. Also, it can affect your credit score, which you want to remain as high as possible.
Do NOT buy a new car
This will definitely affect your qualification for buying a home. You should never add more debt when applying for a loan. The new car payment will be counted against you, increasing your debt ratio which ultimately qualifies you for less money. Wait until you own the home before you buy a new car.
Do NOT finance or charge furniture to a credit card
We know how exciting it is when you are buying a house and you want to pick out all your new furniture, but you must wait before you buy the furniture for your home. You don’t want to finance anything in the process of buying a home. You also don’t want to lessen the amount of cash in your bank accounts because lenders like to see 2 months of your funds sitting in your account. So the best thing is to wait to furnish your home until you have the keys in your hand.
Do NOT change your bank
Lenders look for stability when approving a loan for a new borrower to avoid lending to borrowers who are high risk. They need to see 2 months bank statements before approving your loan, so you need to stay with the same bank.
Do NOT be late or miss a payment for any credit account
This is a huge factor. Lenders are providing loans to borrowers who are responsible with credit and can prove they will repay the loan on time. If you are missing payments or have late payments on your credit report, you are telling the lenders you are high risk and they will not lend you the money to buy a home. Be responsible and pay every account on time!
These are a few of the most important things you should not do when buying or thinking of buying a home. Following these guidelines will help your loan transaction go smoothly and get you into your new home faster.
Many times borrowers that are doing a refinance or home purchase don’t realize all the documentation that is needed when applying for a loan. It’s not that the mortgage broker wants to irritate you to see if you know where you social security card is located, or if have your tax returns on hand and in order. These items are crucial and required for all home loans. In fact, most home loans could be completed much faster if all the documentation is provided in a timely manner when requested.
The idea behind this blog post today, is to share valuable information to borrowers about how to create the perfect loan file. We share an article by Mark Greene with our clients when we process their loan because it perfectly explains why so much documentation is needed to process a loan.
What things can you expect a mortgage broker to ask you for?
- Most recent one month of pay stubs
- Most recent 2 years of W2’s
- Most recent 2 years of tax returns
- Most recent 2 months bank statements for ALL your bank accounts
- Your driver’s license and social security card
These are the items needed for a basic loan approval. More complicated files depending on the borrower’s history have to include:
- Divorce decrees
- Child support documentation
- Self-employed borrowers need profit & loss statements
- Real Estate owned documentation
The list can go on and on depending on each borrower’s credit profile and history, but this is just to give you an idea of what is necessary.
Why is all this documentation needed?
Well, the lender is giving you a hefty loan and they need to be 100% sure that you are a person that will pay the loan back on time. They need to make sure you have the assets on hand and make enough income to support the payment.
Mark Greene makes a perfect statement stating, “If the lender asks for a specific document, give them exactly what they are asking for, not what “should be OK,” – because it won’t be.”
We couldn’t have said it better ourselves. This is so true in this industry. Lenders are very specific about what they request, and won’t approve your loan until you provide exactly what they asked for.
This isn’t to intimidate you in purchasing or refinancing a home, it’s meant to prepare you. Work with your mortgage consultant and loan processor and provide the documentation they request. If you aren’t sure what something is, it’s better to ASK than to ASSUME; it will help you from doing things twice. Hoping this information will prepare you and give you a better understanding of what documentation is needed when applying for a loan.
Deciding what down payment to put on a home is one the first decisions to decide when choosing a home loan. This determines the amount of money the borrower will have to part with, how much house a borrower can afford, and it also determines whether the borrower will have to pay monthly mortgage insurance, or upfront mortgage insurance.
Of course, your financial situation will be a big determining factor for which scenario you can choose.
A 3.5% down payment is the most common, especially among first time home buyers. It’s the smallest amount a borrower has to part with. However, when doing a 3.5% down payment with a FHA loan, the borrower will have added costs consisting of upfront mortgage insurance, which is added to the loan balance, as well as monthly mortgage insurance. This ultimately increases the monthly mortgage payment.
The other option is to go the conventional home loan route and parting with a minimum of 5% down. In order for this scenario, credit scores must be good and the home loan has to be under $417,000 according to Fannie Mae and Freddie Mac guidelines. Monthly mortgage insurance is still added to the loan, but it is significantly less than the 3.5% down payment.
A borrower can also put 10%-20% down with a conventional loan in order to avoid mortgage insurance altogether.
Now, keep in mind there is not “wrong” down payment. It is all based on your financial situation, what is available in your savings for a down payment, and how much house you can afford. The main goal is for the borrowers to understand the different loan options available and choosing what works best for their circumstances. Discuss these options with a mortgage broker for more personalized assistance based on your financial situation.
Here is an article we would like to share, courtesy of By Referral Only. These are 5 great tips to help any home buyer make the process easier and less stressful.
1. Get pre-approved for your loan.
If possible, get “pre-approved” for a loan in the amount you’re willing to borrow.
With this pre-approval, you’re in a stronger position to buy a home when you’re ready – rather than finding your dream home, only to lose it to another buyer because you were waiting on the approval.
2. Find a great real estate consultant.
Once you’ve decided to buy a home, find a great real estate consultant. What you’re looking for is a Buyer’s Agent.
This means that the consultant represents YOU as the buyer, rather than the person selling the home. They will have YOUR best interests at heart. Really good consultants know their markets, and will help you find the best match for your needs and wants. They can also recommend mortgage brokers with whom they’ve worked in the past.
3. Look before you leap.
Drive around the neighborhood at different times of day. Get out and walk around and chat with neighbors. Some people like friendly neighbors, others think of them as nosy. Drive to the local grocery store, laundry, anywhere that you frequent.
Visit nearby schools and see for yourself how the kids behave and how the grounds look. The point is to see if this is really the type of neighborhood you want to live in BEFORE you make an offer.
4. Be prepared.
Make sure your contract has reasonable contingencies included to protect you as a buyer. Reasonable can be things like approval by a home inspector, and title clearance. For the long-term investment, make sure that you buy homeowner’s insurance, and upgrade it as the value of your new home and its contents increase.
5. Be reasonable.
No home will be without flaws. Many times it’s these flaws that lend character to older homes, but nonetheless, it will take SOME work to personalize any home.
Preparing yourself with these five simple things – loan pre-approval, a great broker, getting to know the neighborhood, protecting yourself, and being reasonable – will help make the home buying process easier for you and your family.
When buying a home, especially your first home, there is one big factor to take in to consideration before placing an offer.
When you are working with a mortgage broker and your realtor, discuss with them what your ideal monthly payment with EVERYTHING combined.
This meaning, not just the principal and interest, but also the hazard insurance, taxes and HOA fee if applicable.
These factors all add up to your total monthly payment. Here’s an example of how you could be affected by property taxes:
Let’s say you have a budget of only having a $1,500 house payment including taxes and hazard insurance. Well with taxes (about 1.5% = $200/month), the house that you could afford would be approximately $200,000 with a 3.5% down payment. This would give you a $1,500 house payment with everything combined.
Now the opposite example would be buying a home without the concern of property taxes included. To get a $1,500 house payment you could afford a home in the range of $250,000. That’s a big difference, but once you receive your property tax bill, your monthly payment could jump up to about $1,800 on the low end.
The main goal of this example is to provide wisdom to the buyers, especially first time buyers, to be aware of what makes up your total mortgage payment. Ask questions during the process and ask about property taxes. You don’t want to move into your new home, just to find out your monthly payment is nothing you expected, or worse yet, prepared for.
This is an article we are sending to our clients next month that are in the process of looking for a home. This article is courtesy of ByReferralOnly. Great tips on how to beat the stress of buying a home.
Have an ultimate scenario of where you’re trying to be. What will life be like when you get there? How will it be better than where you are now? Dwell on that picture and write it out, fill up at least a page about how it feels in the new place. This is imperative.
Having the goal in front of you at all times energizes you to achieve it, in spite of setbacks and frustrations. Emotions will run high and you need an anchor. You must focus on that future goal when anxiety threatens to get the better of you.
2. Be flexible.
In your monetary calculations, overestimate by a thousand dollars. In this market, anything can happen between contract acceptance and closing. It could be the inspections reveal areas of concern that the seller is unwilling to fix or the repair costs are higher than the amount limited in the contract.
Or the interest rate changes which affects the necessary down payment and closing costs you’ll need to come up with. As your real estate team, we’ll strive to tie up loose ends as quickly as possible, but remember there is no perfect world. Most buyers feel a bit overwhelmed when taking on a new mortgage and the responsibilities of a new home.
We’ve seen many buyers get angry when it seems like the cost just keeps going up. Anger is caused when reality doesn’t match up with the expectations you had in your mind. If you anticipate this happening in advance, you won’t get angry. In fact, it’ll probably go better than you expected.
3. Trust in the process.
There’s just so much to do, it’s easy to panic. You wonder if it will ever work out. In fact, when we bought our house, we couldn’t eat for a day, we felt so sick to our stomachs! You think you’re taking a big chance, but the truth is you’re giving yourself a big chance.
Even though you can’t see every step of the way, as you move towards your goals, the way opens up. We know that you haven’t moved in a long time and it’s a major upheaval in your life. But we’ve been there many times before, and we’ll be looking out for you. Trust that we know the way to get you there.
4. Get knowledge.
One thing you’ll probably feel during this transition time is being out of control. It feels like everyone else has taken over your life. The seller, your Lender, the appraiser, the inspectors, all have the power to say yes or no to your moving plans.
We’ll try our best to let you know ahead of time what your expenses will be, and what the unknowns are. We’ll tie down the loose ends as soon as possible. We’ll try to get your loan approved within a reasonable time frame. We’ll educate you as best we can and let you in “behind the scenes” so you won’t ever feel stupid or out of control.
Where are the best places to live in California?
Money Magazine recently published the top 100 cities to live based on area, population, number of jobs, schools, average income and other criteria. Since we are a California Mortgage Lender, we wanted to focus on the 5 California cities that Money Magazine chose as the best.
California cities that made the list:
Irvine made the top 10 list of the best cities to live in the United States. One of the reasons Money Magazine chose this city was based on the great location in California. Irvine is only 10 miles from the beach and has tons of bike trails and parks for an active lifestyle.
This city has a population of 58,700 and is located in the heart of Silicon Valley. This is city is extremely diverse and highly educated. According to Money Magazine, 60% or more of the population has a bachelor’s degree or higher. If you are looking for high performing schools, then this is the place for you!
#34 Chino Hills
Chino Hills is known for its safe neighborhoods and great schools. According to Money Magazine, this city actually has a higher median income than Beverly Hills! It’s a beautiful area in Southern California with great shops nearby.
#41 Diamond Bar
According to Money Magazine, Diamond Bar is actually most known for their holiday decorating. Neighbors compete in lawn displays and light displays to be known as the best holiday decorator. This city also had the first dog park known as Bark Park. The only negative thing about this city is the high taxes they have to pay.
#42 Yorba Linda
The last California city to make the list (above the top 50) was Yorba Linda. This city is located in Orange County and has great trails to run and hike on. Money Magazine recognized this city for its beautiful horse trails within the community. If you are going to live here, you need to keep in mind the price tag that comes along with it. Most homes are around $500,000 or higher.
In a newsletter we mailed to our clients, we provided 4 questions to ask your mortgage lender before signing their documents. These are the basic questions that help you determine if you are working with the right lender.
If you’re going to live in your new home for less than five years, you may want to consider an adjustable rate mortgage or “ARM.” With an ARM your payments will be lower, but they will go up according to the terms of the loan. If you’re going to live in your new home for over five years, a traditional fixed-rate mortgage may be a better plan.
With whatever lender you choose, you should have the ability to have multiple options to fit your lending needs. If you are a first time home buyer and need down payment assistance, be sure to ask your lender what down payment programs are available. The most popular is the 3.5% down payment with the FHA loan. An experienced lender will give you options to discuss what will be in your best interest.
2. Do you offer written mortgage pre-approvals, not just pre-qualifications?
A pre-qualification is usually a Lender’s opinion of your eligibility for a loan. If you ask to be pre-approved, the lender will actually submit your job and credit history to an underwriter and get a conditional approval for a loan and a loan commitment. The advantage of having a pre-approval is that it will make your offer to buy a home stronger and it will usually allow you to close on the home faster.
At Stateline Funding Corp., we issue pre-approvals. We never let our buyers make offers without have the guarantee that they qualify for the loan.
3. Do you have the ability to handle difficult credit history?
Many Lenders will only work with you if you have perfect credit, and if a problem comes up, they won’t help you. Make sure your lender has reviewed and received approval for you and your specific credit history.
If you have credit issues, ask your lender what steps you need to take in order to be qualified to purchase a home. If they give you steps, make sure you follow them so you can be able to purchase sooner than later.
4. Is the rate you quoted me the rate I’ll get at closing?
Many Lenders advertise their rates in the paper and in homes magazines. These are called “teaser rates” in the industry. The name says it all. After they’ve got you committed to using them, many lenders then tell you what the “real” rate will be. By this time, it’s too late for you to do anything about it.
This happens all the time in our industry. At Stateline Funding Corp. we monitor real time rates. We are able to understand what affects the interest rates and changes them on a daily, even hourly basis. We have even had prospective clients experience this teaser with other company’s, but they are too involved in the process to back out.
We always deliver on whatever we promise. We are not in the industry to manipulate home buyers, we are here to help. You should be working with a mortgage lender that cares about you as an individual, not a number.
So remember as you are looking for a mortgage lender to ask these 4 important questions before you begin the process.
We provide monthly newsletters to our clients who are either shopping for a home or wanting to buy relatively soon. This article, written by Randy Glasbergen (2006) talks about 4 tips that can save you thousand when wanting to buy a home.
Do you want to get the best house you can for the least amount of money? Then make sure you’re in the strongest negotiating position possible. Price is only one bargaining chip in the negotiations, and not necessarily the most important one.
Often other terms, such as the strength of the buyer or the length of escrow, are critical to a seller. This process takes anywhere from a few days to a few weeks depending on your situation. It’s VERY POWERFUL and a weapon we recommend all of our clients have in their negotiating arsenal.
2. Sell First, Then Buy.
If you have a house to sell, sell it before selecting a house to buy!
Let’s pretend that we go out looking for the perfect house for you. We find it and
you love it! Now you have to make an offer to the seller. You want the seller to reduce the price and wait until you sell your house.
The seller figures that’s a risky deal, since he might pass up a buyer who DOESN’T have to sell a house while he’s waiting for you.
So he says OK, he’ll do the contingency but it has to be a full-price offer. So you see, you paid more for the house than you could have because of the contingency. Now you have to sell your existing house, and in a hurry, otherwise you lose the dream house. So, to sell quickly you might take an offer that’s lower than if you had more time.
3. Play the Game of Nines.
Before house hunting, make a list of nine things you want in the new place. Then make a list of the nine things you don’t want. We call this Nine of This and None of That.
You can use this list as a scorecard to rate each property you see. The one with the biggest score wins! This helps avoid confusion and keeps things in perspective when you’re comparing dozens of homes.
When house hunting, keep in mind the difference between skin and bones. The bones are things that cannot be changed such as the location, view, size of lot, noise in the area, school district, and floor plan. The skin represents easily changed surface finishes like carpet, wallpaper, color, and window coverings. Buy the house with good bones, because the skin can always be changed to match your tastes. I always recommend that you imagine each house as if it were vacant. Consider each house on its underlying merits, not the seller’s decorating skills.
4. Don’t Be Pushed Into Any House.
Your agent should show you everything available that meets your requirements. Don’t make a decision on a house until you feel that you’ve seen enough to pick the best one. Review the Multiple Listing printout with your agent to make sure that you are getting a COMPLETE list.
In the late 1980s, homes were selling quickly, usually a few days after listing. In that kind of market, agents advised their clients to make an offer ON THE SPOT if they liked the house. That was good advice at the time. Today there isn’t always this urgency, unless a home is drastically under-priced, and you’ll know if it is.