What You Ought To Know About Mortgage Underwriting

What You Ought To Know About Mortgage Underwriting- 150x150When buying a home, the home buyer is going to pay hundreds of thousands of dollars over the life of the loan, while the lender is responsible with collecting that money. In order to protect himself, the lender has to closely examine the borrower’s ability to repay the loan. This is done through a process called mortgage underwriting. This is the process that will determine if the home buyer will receive the mortgage loan, and how easy it will be for the applicant to be granted the mortgage loan. Applicants who are regarded as low-risk will face little to no problems, while those regarded as higher-risk will have to provide additional information about certain areas of their financial situations. High-risk borrowers also have a high chance of being denied for a mortgage loan.

Mortgage underwriters are charged with finding any issues that the applicant may have now or in the future and carefully determine how much of a risk they are. Mortgage underwriting will take a close look at the home buyer’s debt-to-income ratio, income and credit score. These are the most important aspects of your financial situation, and the factors that will decide if you will be granted the mortgage loan or not. Mortgage underwriters also look at the applicant’s age, savings accounts, investments and other things.

Debt-to-Income Ratio

The debt-to-income ratio represents how much debt someone has versus their income. Having too much debt when compared to your income level raises a red flag for mortgage underwriters and can jeopardize your chances of receiving a mortgage loan and becoming a home owner. Lenders who give out mortgage loans that are not backed by government agencies such as the Federal Housing Administration or the U.S. Department of Veterans Affairs usually require borrowers to spend 30 percent or less of their monthly income on the mortgage loan. Also, the total percentage of your monthly income that is spent on all your debt should be less than 40 percent. Mortgage loans are sometimes granted to applicants with higher ratios, but it is recommended that the amount spent on debt each month to be as small as possible, in order to increase your chances of being approved for a mortgage.

Income

In order to verify your income, you will most likely need recent pay stubs, W-2 forms, and other documents. Failure to present these documents will usually result in your mortgage application being denied. Also, remember that lying about your income is considered criminal fraud and will attract problems that are much more serious than being denied for a mortgage loan. Providing proof of income may be harder for those who are self-employed, and mortgage underwriters will probably not grant the loan until this proof is provided.

Credit Score

Your credit score keeps track of your record on repaying borrowed money, so your lenders can figure out if you are a high or low default risk. A low credit score means that you have missed payments or even stopped paying your debt in the past, and will probably attract a mortgage application disapproval. High credit scores mean that you are a trustworthy borrower, and a low default risk, so you shouldn’t encounter any issues during the underwriting process.

Mortgage underwriting is necessary because the lender needs to protect himself from losing money when borrowers who can’t afford a mortgage apply for one. Understanding this process will make it easier for you to know what’s requested of you when applying for a mortgage, and what you can do to improve your financial situation in order to increase your chances of being approved for a mortgage loan.

Building Your Own Home? You Can Take Out a Mortgage!

Building Your Own Home-You Can Take Out a Mortgage-150x150If you are ready to become a home owner, but choose to build your own home, you can do it by taking out a type of mortgage known as a construction loan. This type of mortgage loan will allow you to use the borrowed money to build a home. The money will be paid by your lender in stages, based on what stage the construction of the home is in. The lender is involved in the building process for as long as construction takes, and will review the project at various stages.

Borrowers must also apply and get approved for a regular mortgage loan before they can be granted the construction loan. The mortgage loan and construction loan are usually bundled together in a construction to permanent loan, making applying and approval much easier, because you are essentially requesting only one loan.

Steps to Taking out a Mortgage Loan for Building a Home

Like with any other mortgage loan, there are several steps that you need to follow in order to receive a construction loan: find the best option for you, acquire the funds,  and begin building your home. Here are the most important steps to taking out a mortgage for the construction of a home:

  • Find out which type of loan works best for you. Similar to conventional mortgage loans, construction loans come with various options, like fixed-rate or adjustable-rate loans, long term or short term loans. Two popular options are taking out a short term, for example 1 year, loan which you can refinance into a regular mortgage after the construction has finished, or the construction to permanent loan which bundles the construction loan and the regular mortgage loan into a single loan. The second option seems more attractive because you’ll only be paying closing costs one time, unlike with refinancing when you will have to pay closing costs all over again.
  • Get pre-qualified. Getting pre-qualified will allow you to determine how much you can afford to borrow and what your payment will be. Also, before giving out a construction loan, your lender will most likely need to know what your intentions are, why do you want to build a home or if you plan on living in the home after the construction is finished. Depending on your plans and the lender, you may receive various interest rates, and have more or less options.
  • Shop around. Construction loans are a lot less popular than conventional mortgage loans, so you might have a hard time finding one, or finding a loan that will suit your budget and requirements. The best way to find a good construction loan is by shopping around and comparing offers from various lenders who are willing to give out this type of loan. Alternatively, you can hire a construction loan broker who works with several banks, and who can help you find what you’re looking for much easier.
  • Submit your loan application. After finding a good loan, from a lender with enough experience in construction loans, it is time to submit a loan application. Like applying for a conventional loan, you will have to meet certain criteria, and submit additional info about your construction plans. You will also be given the option of locking in the interest rate, or letting it float hoping that the interest rate will decrease before closing.
  • Sign a building contract with a home builder or contractor. The contract between you and the builder is included in something called the builder’s package, which also includes things like the builder’s resume, an item cost breakdown, and a list of all the required materials.
  • Obtain construction insurance. Builders are not required to be insured, but the whole process of obtaining the construction loan will go much faster if the builder has insurance. There are three types of insurance that a builder can have: course of construction, general liability and workman’s compensation.
  • Close on the loan and start building. If you have all the required documents and meet all the criteria, there is no reason why your lender should deny you the construction loan. The only thing left to do is pay the closing costs and start building.

Taking out a mortgage loan in order to build a home is a great opportunity for both people who want a home to their own specifications, and for investors who are looking to build a home and sell it for a profit. The amount that can be borrowed and the interest rates will probably differ between the two cases, but, with some research and proper understanding of how construction loans work, this type of loan can be a very advantageous option.

How to Make a Down Payment and Mortgage on a New Home When Your Current Home Hasn’t Sold

How to Make a Down Payment and Mortgage When...-150x150Whether you have to relocate because of your job, or you just found your dream home, qualifying for a mortgage loan if your old house is still on the market will be difficult. Most likely, carrying two mortgages is out of the question, so you are looking for ways to buy that new home before selling the old one. This wasn’t an issue in the past, but the financial and housing crisis has made it very hard for the average home buyer to receive a mortgage loan in this situation.

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Before the Mortgage Crisis

Being approved for a new mortgage loan before you sold your old home wasn’t very difficult in the past, before the mortgage crisis. The process was as simple as finding a tenant and getting a rental agreement, and then the new lender would credit you with the rent income to compensate for the mortgage payment.

Companies that advocate strategic default have started to encourage buyers to abandon the old home and mortgage as soon as they found a new home and someone to rent the old one. This way they can avoid the negative effect that a foreclosure would have on finding a new home. This has made it a lot tougher for legitimate home buyers to be able to obtain a new mortgage loan in this situation.

Getting a Mortgage Loan Before Selling Your Old Home

Nowadays, requirements for getting approved for a new loan when you haven’t sold your old house have gotten much stricter. Freddie Mac, Fannie Mae, and the Federal Housing Administration (FHA) have made it a lot tougher to borrow money, in order to protect the lenders from people who would take advantage by walking away from their old home.

Federal Housing Administration (FHA) loans can still be given, even if you haven’t sold your old home yet, but there are a few strict qualifications:

  • New job or job transfer to a different location. Having to relocate because you found a new job or you were transferred from your old one and the commute is impractical from your current home.
  • Divorce. You are currently going through a divorce and are buying a new home.
  • Family size. You family’s size has increased so much that there is no longer enough room in your current home to accommodate all the members of your family.

In addition to that, it is required by the FHA that you pay the mortgage balance down to 75 percent of your home’s appraised value before you will be able to close on the new home.

Fannie Mae and Freddie Mac require that, in case your old home isn’t sold yet, but it is in escrow, you must have a reserve fund equal to the payments for 6 months, including property taxes and insurance, and you must bring a valid purchase contract. In case your old home is converted to a rental, you must provide a lease agreement, a copy of the check for the security deposit, and proof that the check was deposited. In order to qualify to use your rent income for the purchase of your new home you must have over 30 percent equity in your old home.

As you can see, buying a new home when your current home hasn’t sold is possible, but you will have to meet certain strict requirements. The best option would be to plan your move ahead, giving you enough time to sell your old home and also saving you a lot of headaches and hassle.

 

What is a Bridge Loan?

What is a Bridge Loan-150x150Also known as a swing loan, or interim financing, a bridge loan is a type of very short-term loan that is normally given out to an individual or a business until they can secure permanent financing. Bridge loans are commonly used in the housing market, and are generally used by home buyers who are buying a new home when their old home is still for sale. Bridge loans feature fairly high interest rates and must be backed by collateral, such as your home.

When you use a bridge loan to purchase a new home, but your old home is still on the market, the current home is used as collateral, and the funds from the bridge loan are generally used as a down payment towards your new home. In this case, the bridge loan will be repaid when the old home is sold.

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Advantages and Disadvantages of a Bridge Loan

When looking for a new home either to live in, or just for a short-term investment, you will most likely need a loan. Unfortunately, securing a conventional loan will take you a lot of time and will require you to respect some strict mortgage loan qualification requirements. Another problem you might face is that, if you plan on buying a new house while your current house hasn’t sold yet, you will most likely be denied a conventional loan, because you will be considered a higher risk for default. Your best choice in this situation is to take out a bridge loan, which features a few distinct advantages over conventional loans. Here are the most important ones:

  • Bridge loans are short-term loans. Most conventional loans are designed for people who want to pay for a mortgage or college tuition, and require you to pay the loan off over a long period of time. A long-term loan will increase your risk of suffering some kind of financial issue. Bridge loans, on the other hand, are designed to be paid off in full before you receive the long-term loan for your new home.
  • The option to choose when to repay the bridge loan. Bridge loans can be repaid before you receive the long-term mortgage loan needed to buy a new home, or after receiving this loan. If you repay the bridge loan in full and on time before you receive the new loan, you will significantly increase your credit score, allowing you to qualify for more mortgage loan options.
  • No set qualification guidelines. Bridge loans don’t come with any set limits or qualification guidelines, like a conventional loan would have. Bridge loans can also be turned into regular mortgages by the lender.

Of course, like any loan, bridge loans come with advantages and disadvantages. Here is what you should keep in mind before applying for a bridge loan:

  • Larger payments and penalties. Being short-term is an advantage that bridge loans have, but this may also be regarded as a disadvantage. Repaying the loan in a short period of time means that the monthly payments will be larger than with a conventional loan. Lenders are also stricter when it comes to late or missed monthly payments on a bridge loan. The fees and penalties are larger for a missed payment on a bridge loan than for missed payments on a conventional loan.
  • Dependent on more permanent financing. You may rely on the mortgage loan that you are applying for in the near future to repay the bridge loan, but there are no guarantees that you will receive that loan. In case not everything goes as planned, you will have to repay the bridge loan from your own pocket. Another choice would be to take out a new loan in order to pay the bridge loan, but that could lower your credit score, create new debt for you, and ultimately make it harder for you to receive financing for a new home.

Before deciding on a bridge loan, make sure that you understand what your rights and responsibilities are, and carefully weigh in on both the advantages and the disadvantages of this type of loan. Your financial situation is the most important factor to be taken into consideration before deciding which path to take.

Top 10 Steps to a Reverse Mortgage

reverse-mortgage-loans-150x150By retirement age, most people will have gone through the mortgage process at one point or another. The mortgage obtained would have been either to obtain a new home, lower a current mortgage rate, take out cash as a result of home equity, or to reduce the term of an old mortgage. At retirement age, a person is finally eligible for a reverse mortgage. Read on to discover the advantages of a reverse mortgage and how to get one.

Advantages of a Reverse Mortgage

  • Tax free cash. A reverse mortgage is not a lump sum or additional income. A reverse mortgage borrower therefore enjoys tax-free cash.
  • No default risk. Unlike other mortgage loans where you risk losing your home and other assets by virtue of default, you could only lose your home if you default on the home equity loan. The lender has no right whatsoever over your assets.
  • Federal insurance cover. The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM). It is federally insured; you still continue to receive your cash payments even if your lender defaults.
  • Home ownership is retained. Unlike other mortgages where the lender maintains the ownership title, you retain the ownership title yourself. You can therefore live there all the time, make changes to the home’s appearance and structures or even sublet some rooms depending on the terms of the lender.
  • Flexible payment options. Depending on your cash needs and financial circumstances, you get to choose how you would like to receive cash payments. You can receive the cash as a lump sum, as a credit line, as an annuity or a combination of the last two methods.

The Steps to a Reverse Mortgage

Basically, the major step towards a reverse mortgage is deciding whether you need one or not. If the advantages it offers are attractive to you, then don’t procrastinate further. These are the steps to a reverse mortgage:

  1. Conduct detailed research on reverse mortgages. Obtain thorough information related to reverse mortgages on the web. If you receive unsolicited invitations, then don’t respond to them because they could be scams. Look to your friends, family members and acquaintances for tips who may have taken reverse mortgages before.
  2. Compare quotes. There are several lenders who will definitely make attractive offers. Compare all of the quotes from these lenders. With the help of a mortgage calculator, find out how much you need to repay monthly without straining your income sources. Pick the lenders with the most competitive rates.
  3. Consult potential lenders. Once you’ve narrowed down the list of potential lenders further, consult necessary resources so that you are sure about the most appropriate lender. For instance, you could find out whether they are registered by the National Reverse Mortgage Lender Association (NRMLA) or the Better Business Bureau (BBB) and whether they are approved by the FHA. Don’t forget to check the testimonials from previous borrowers.
  4. Inquire about all terms and conditions. If you want a HECM reverse mortgage then you should opt for the best terms and conditions because these vary from lender to lender. These include interest rates, credit score qualifications and closing costs, among others. Narrow down to a single lender with the most suitable terms and conditions.
  5. Apply for reverse mortgage. Furnish the lender with your application done in person. The documents which may be required include proof of age (ID card or Driver’s License), proof of your Social Security Number and a copy of your homeowners’ insurance cover. Where applicable, you may also be asked for a complete copy of the family trust, a copy of the power of attorney, an original death certificate and a statement of any mortgages on property. Review your application forms carefully before submitting them.
  6. Get counseled. One of the requirements of HUD is that any reverse mortgage applicant be counseled by a HUD-approved third party. You can choose to attend the counseling session via phone or in person. Loan processing will not commence until you’ve obtained a signed certificate from the counselor. You may attend the training session in advance even before applying for the loan.
  7. Inspect and obtain an appraisal report of the home. With your application forms and counseling certificate, you can now have an appraisal done on your home. The lender will refer you to an FHA-approved appraiser to furnish you with a detailed appraisal report. It is advisable that you are available during the appraisal process so that you make any inquiries and answer any questions from the certified appraiser.
  8. Loan underwriting. Your loan must be underwritten by an underwriter who is approved by FHA. The lender will refer you to an underwriter.
  9. Close the deal. Once underwriting is done, you will arrange a meeting with the lender to finalize the deal. It is important at this stage to review all your application forms once again in order to confirm that all the information you submitted is correct. Confirm all the terms and conditions once again just to be sure of what you are committing to. You can then sign the papers and close the deal. You have three business days after signing the deal to change your mind if you think otherwise—referred to as the rescission period.
  10. Obtain the funds. Once the deal is sealed you will receive the funds. You can choose to receive the funds as a lump sum, a monthly fixed payment, a line of credit or a combination of the last two methods as you deem fit. You can use the cash to pay off your mortgage and any other existing loans as it suits you.

The maximum lending period for a reverse mortgage is 15 years. Re-evaluation of your property will also be taken once every 5 years of the term of the loan. Compared to other loans, this is one you should almost certainly take advantage of!

Top 10 Questions to Ask Your Lender

Model House and a MortgageThe most important step in the home buying process is choosing the right lender. Working with a good lender will guarantee that your home purchase will be successful and relatively hassle free. The quality of service will not only make a difference in how good you are treated, but also in how much money you save. When choosing a mortgage lender, you shouldn’t focus only on interest rates and closing costs, but also on customer service, fees and understanding what your rights are. That is why you should always be prepared before meeting with a lender. Knowing what questions to ask can make the difference between you getting a good deal or a bad deal, and will save you a lot of trouble in the long run. Before you get started, get pre-qualified or pre-approved for loans to make securing a loan an easier process.

How to Find a Good Lender

Before starting your search for a mortgage lender, make sure that you know your budget and the type of loan that you are looking for. Once you have all that figured out, you can start shopping around and comparing lenders. Here are a few things to consider:

  • Reputation. There are plenty of mortgage companies available nowadays. Some of them are big and with a long history, and some are smaller and fairly new. Just because you never heard of a mortgage company doesn’t mean you should automatically dismiss it. Whether it is a well-known or a less known company, you should always do your homework. Check their ratings and feedback with the Better Business Bureau (BBB) and the local Chamber of Commerce, and try to find out as much as possible about them.
  • Customer Service. After choosing a lender, you are going to be working with them for a long time, from when you first apply for the mortgage loan until the closing, and beyond. You should feel comfortable working with your lender, and they should be available to answer all your questions and concerns. If you feel pressured into signing a contract before you are ready, you should look for another lender.
  • Product Selection. Before applying for a mortgage loan you should have an idea of what types of mortgage loans you are considering, especially length-wise. Top lenders offer the most popular mortgage products and will work with you to determine what your best choice would be.

What to Ask Your Lender

Once you have found a few lenders that you are considering working with, make sure you ask them these 10 questions before committing to one of them. If you don’t like the answers that you receive, keep looking until you find a lender that you feel more comfortable with.

  1. Which type of loan is the best for me? A good lender will look into your financial situation before recommending a mortgage loan. Then he or she will explain the differences between each type of loan, and work with you to make sure you choose the one that best suits your budget. 
  2. What will my interest rate be? Depending on what type of loan you choose, your interest rate might be fixed, adjustable, or a combination of both. Keep in mind that the interest rate on a fixed rate mortgage loan will remain the same throughout the life of the loan, unlike the interest rate on an adjustable rate mortgage loan which can increase or decrease multiple times until the loan is paid off.
  3. What will the closing costs and fees for the loan be? Lenders are required by law to provide a good faith estimate which will include a list of fees and costs associated with the loan, such as the appraisal fee, taxes, credit report, the loan application fee and more. Some of these fees can be reduced, or even waived or refunded, so make sure you speak to your lender about that, too.
  4. How much will my down payment be? Some loans require that you pay a 20 percent down payment, but there are others that require a lower percent. The amount that you put down affects how much you can borrow, your interest rate, and the monthly payment, but the down payment mostly depends on your budget. 
  5. What are the qualifying guidelines? Once you choose a type of loan, you should find out if you qualify for it. The qualifying guidelines can relate to your credit score, income, employment status, or properties that you own. Certain programs, such as ones for first time home buyers, offer easier qualifying guidelines.
  6. What documents do I need to provide? Depending on the lender, you will have to provide documents such as proof of assets and income, federal tax returns, a list of credit cards and loans, and others. It’s a good idea to start gathering these documents early, because some of them may take a little while to get a hold of.
  7. How long will it take to process my application? It usually takes between 45 to 60 days for the loan application to be processed. This depends on how quickly the lender can appraise the property and verify your credit report, employment status and bank accounts. You should get loan pre-approval to make things easier. 
  8. How much will my monthly payment be? The amount that you’re going to be paying each moth depends on the type of loan, the interest rates, and the down payment. The lender can switch things around so that your monthly payment will be something that will fit your budget. You should keep in mind that a lower monthly payment doesn’t also mean a lower overall cost of the loan. 
  9. Will I be able to lock the interest rate? The interest rate can fluctuate by a lot between the time you apply for the loan and the closing. Locking the rate will ensure that the interest rate doesn’t increase by the time the loan is closed. It is also important to ask your lender if there is a fee associated with locking the rate. Look here for a list of the top fixed rate mortgage lenders
  10. Is there a prepayment penalty? Prepayment penalties are no longer allowed in some states, but it’s always a good idea to make sure before signing anything. If you think there is a chance you might want to pay off the loan before its due date, find out if there is a prepayment penalty and decide if you are comfortable with it.

Don’t take your mortgage lender choice for granted. Asking these questions will not only help you find out more about different lenders, but it will also show them that you are informed and willing to do research and shop around before committing.

Prequalified or Preapproved?

get-prequalified-for-a-mortgageWhen home buyers or mortgage loan hunters set out to initiate the borrowing procedures to accomplish this task, they invariably try to arm themselves with a bit of negotiating advantage by getting a pre-determined evaluation on their chances. Usually they have preconceived ideas regarding the term ‘prequalified’ and ‘preapproved’ when presenting their credentials to prospective sellers and real estate agents. In the home-buying and mortgage lending world, these terms are quite different.

Prequalification Status

This classification refers to the estimated amount of a mortgage a lender would offer after performing a preliminary investigation regarding a borrower’s current credit status, as well as the overall asset and liability figures presented for evaluation. This information is unverified at this stage, and yields only an estimate of the funding available until further inquiries can be performed. This preliminary status does not indicate a predetermined or ‘approved’ line of credit has been offered by the lender. Prequalification is a term used to describe what a potential lender might approve for the mortgage loan, and is only based on the validity of the unverified information provided by the borrower. It is a basis for the borrower to begin shopping for a home in the general framework of affordability.

Preapproval Status

This classification describes an evaluation that is further along in the loan acquisition process, though it doesn’t represent the lender’s complete and documented commitment toward a borrower’s final approval for the loan. Once a full credit evaluation is completed after acquiring the necessary reports from the credit bureaus will the lender finally commit to providing a mortgage estimate in writing. In recent years, there has been far more scrutiny directed toward complete verification of the stated asset and income figures a borrower provides before a ‘preapproval’ status will have much credibility. Therefore, until a complete application process has been initiated, a lender is not genuinely bound by the preapproval notification to actually honor any real terms in the preliminary agreement. Not until an application is officially filed will a prospective lender get serious about investigating a borrower’s true financial integrity.