The loan road map

MORTGAGE ROAD MAP     Can Your Afford a Mortgage? Whether you're a first-time buyer looking for the perfect starter house, or a seasoned pro trading up to your waterfront dream home, you are probably asking the same questions: Can I afford this? And is this the right move at the right time? Of course, you can use a mortgage calculator and ask the experts — lenders, agents, and mom — but the reality is that you are the only one who truly knows whether you can afford to buy right now. And, painful as it is, what you need to start with is a detailed expense breakdown. Analyze what you spend — at least get a full month's snapshot. You'll see where you may have wiggle room in your budget and what you can afford for housing. (Be sure to count all those little incidental expenses like dry cleaning and yes, those mid-afternoon Starbucks lattes count in the budget, too!) Sample Budget This sample budget belongs to a single, 35-year-old woman making $68,000 per year, renting a two-bedroom apartment. Her monthly pre-tax income is $5,667. Monthly expenses: Rent $1,600 Car payment $225 Credit card payments $200 Car insurance $75 Groceries $400 Health insurance/renters insurance $208 Electricity $40 Natural Gas $70 Cell phone $49 Home phone + Internet access $72 Cable TV $50 Gas, dining, clothes, dry cleaning, gifts, other expenses $800 Memberships (gym, professional, etc.) $100 Water/sewer/garbage $0 Property tax/homeowners insurance/condo fees $0 Alarm company $0 Lawn $0 Total$3,889 The sample budget may not look like your expense snapshot, but by adding and subtracting your personal budget items with an eye toward true monthly out-of-pocket totals, you get a pretty good picture. Now, add in all of the expenses where the zeros are as well as the increased cost of your monthly mortgage payment (formerly rent). Maintenance costs like condo fees, utilities, the leaky bathroom sink that defies a simple trip to Home Depot to fix, property taxes, closing costs, and furniture for your new home all add to the bottom line. Debt-to-Income Ratios If you figure out that you can afford your projected budget, chances are you'll qualify for a mortgage in your range. Lenders will determine how much loan you can afford by using something called your debt-to-income ratio, which is the ratio of a borrower's total debt as a percentage of their total gross income. Basically, they will look at what's left in your budget after your monthly bills are paid. These include credit card payments, car payments, child support, etc. * Housing ratio (or "front-end ratio"): Lenders want your total mortgage debt (called PITI — an acronym for Principal, Interest, Taxes, and Insurance) and condo fees to be no more than 30 percent of your gross monthly income; 28 percent is standard. * Overall debt ratio (or "back-end ratio"): These are revolving monthly payments, such as credit card, car lease, or loan payments, student loans, child support, alimony, monthly utilities. (They do not include those lattes, but you might want to plug in your lifestyle expenses for your own sake.) The ratio should not be more than 36 percent. Debt-to-income ratio standards differ from lender to lender, and vary based on your loan program, but most lenders will give more weight to your credit history as a factor in determining your particular situation. Here is a typical ratio for a first-time buyer: Monthly gross household income:$5,700Mortgage debt ratio:28% $1,596.0Expenses and overall debt:36% $2,052.0 The mortgage debt of $1,596 is right in line with the current monthly rent payment in the example above. As long as the monthly debt obligations and household expenses are no higher than $2,000-2,300, this borrower should have no problem qualifying. If your credit is stellar, you will be rewarded. Lenders may stretch these ratios to 38/45, allowing you to purchase more home and take advantage of more lending programs. And if you are a first-time home-buyer applying for an FHA or VA loan, you may also be able to qualify with a higher back-end ratio — up to 41 percent of your monthly gross income — and get approved for these federally-insured loans. How It Works So, back to the question: How much home can I afford? Keeping in mind the variables on debt-to-income ratios and the many lending programs available, here is a sample breakdown for a mid-range home. Monthly gross household income (pre-tax):$7,000Mortgage debt ratio28%$1,960Home price$350,00020% down payment$70,000Mortgage$280,000Interest rate on 30-year mortgage6.33%Mortgage payment (principle and interest)$1,739 Here is an example of a lower price-range home, purchased with the same loan terms and interest rate: Monthly gross household income (pre-tax):$3,600Mortgage debt ratio28%$1,008Home price$150,000Mortgage payment (principle and interest)$1,73910% down payment$15,000Mortgage$135,000Interest rate on 30-year mortgage6.33%Mortgage payment (P&I)$838 And the Other Costs... In addition to the monthly mortgage payment, remember to factor in the added costs of home purchase and ownership. Since this buyer above did not put 20 percent down, he will need to add mortgage insurance, also known as PMI, to his monthly payment. PMI protects lenders against losses that can occur when a borrower defaults on a loan, and is required for borrowers with a down payment of less than 20 percent of the purchase price. Buyers also incur closing costs of 2.5 to 3 percent of the total loan amount. This covers the cost of title searches, appraisals, legal fees, etc. So what's left to apply to the down payment? Using the example above, our first-time buyer has $15,000 for the down payment on a $150,000 home, and the closing costs may come to $4,500. The mortgage total just increased to $139,500. Over the 30-year loan period, this brings the mortgage payment to approximately $866 per month. If your head is not already spinning, now tack on mortgage insurance (fees vary based on the loan), homeowners' taxes and condo fees (if applicable), bringing the total monthly payment to approximately $1,038. The good news is this is still well in the range of the acceptable debt ratio. Keep Some Money in Reserve Many buyers invest every red cent they have into their new purchase, but it's a good idea to keep some emergency cash, or "leaky faucet money," aside in the event of emergency repairs or a job loss. So don't completely raid your savings; with home ownership, expect the unexpected.   Learning About Mortgage Lenders Lending companies come in all shapes and sizes. Perhaps the first lender any of us ever used was the "Bank of Mom and Dad." Whether we were trying to buy a video game player, a stereo, or even a car, the parental vault was cracked open to help make it happen. Rates were great. We could borrow money with little or no interest. Perfect! Joking aside, we are facing bigger stakes now: loans for homes. Our needs could be to: * Purchase a home * Refinance an existing mortgage * Open a home equity line of credit (HELOC) For any of those choices, there are many companies out there — banks, mortgage brokers, and e-lenders — willing to help you find a loan. It's not because they think you'll be happy in that Craftsman or that two-bedroom condo in the coolest part of town. It's because they make money lending you money. It's called interest (and fees). That's why it's in your best interest to get the lowest rate possible, and the best terms, which are usually not one and the same. Know Your Lenders Before you get the low-down on amortization schedules or learn about newfangled 50-year notes, it helps to understand your choices when it comes to types of lenders. Most fall into one of four categories: 1. Internet lending resources 2. Mortgage brokers 3. Mortgage bankers 4. Banks and savings and loans 1. Internet Lending Resources Internet lending resources have a wide presence on the Web and not all actually lend money, although it might appear that way. They consist of direct lenders, lending marketplaces, and content sites. * Direct LendersDirect lenders lend their own money and include both traditional and online lenders. Many traditional banks provide helpful online information, including rates, calculators, and educational content. Online lenders, on the other hand, offer loans directly through the Web. They can offer very competitive rates and give you personalized help via phone, e-mail, and even online chat — but you probably won't meet anyone face-to-face during this process. So, if you are comfortable transacting online and want a low rate, this option is worth investigating. Keep in mind that some mortgage bankers offer loans both online and in local sales offices. * Lending MarketplacesLending marketplaces let you fill in one form and then quickly compare quotes from several banks (usually around four). These services make money by charging the banks a fee for the chance to compete for your business. Because banks know you are comparing them side-to-side with others, they offer competitive rates. Once you have filled in your information, they will contact you — usually by phone — to begin the process of finding a loan that fits your needs. * Zillow Mortgage MarketplaceZillow Mortgage Marketplace is a new offering designed to bring borrowers and lenders together in an open marketplace that is secure and anonymous, and free to borrowers as well as to lenders, after a one-time administrative fee. Borrowers submit a request for a loan quote with criteria, and confirmed lenders respond with quotes. Borrowers do not need to supply a name, address, phone number or Social Security number to lenders. Only lenders who have registered, been confirmed as a lender and have created a public profile on Zillow may respond to the requests.
Since borrowers are anonymous in the process, lenders cannot contact borrowers.
Lenders compete on price and customer service, and build reputations through public feedback on Zillow. They are required to disclose all fees and closing costs up front. * Content SitesContent sites focus on offering educational information, content, calculators, and tools. These sites usually make money from advertising and partnerships. Their partners frequently include direct lenders and lending marketplaces. 2. Mortgage Brokers Mortgage brokers are like a matchmaking service since they match you, the borrower, with a lender. They review your personal financial information and look over an array of lenders to try to fit you with one who will give you the best rate and terms. Mortgage brokers usually make their money from the lender since they are bringing a client (you) to them, but fees may also be charged to the client. The advantage is choice since the broker will have lots of suitors to match you with; the disadvantage is that once the match is made, they're out of the picture and you continue the dance with the lender you were matched with. 3. Mortgage Bankers Mortgage bankers (also called mortgage companies) may or may not be affiliated with a bank and their specialty is in providing mortgages. Period. They originate mortgage loans, which means they prepare loan documents, perform credit checks, inspect and appraise the property. Once they issue you a loan, it is then sold to a secondary lender, such as Fannie Mae and Freddie Mac. This is very common. A secondary lender is in the business of buying existing mortgages from the primary lender to keep the pool of mortgage money moving. This creates fierce competition on the primary level, which in turn keeps rates down for consumers. 4. Banks and Savings & Loans Banks and savings & loans are usually "part of the neighborhood" and make their money from the funds generated from their customers who have checking and savings accounts at their bank or from other services they offer. They issue mortgage loans and usually keep control of the loan, but sometimes sell it off to secondary lenders. Other types of lenders include finance companies and credit unions. Whichever lender you use, the bottom line is to do your homework and don't be afraid to ask questions. Want More Information? The two big purchasers on the secondary lending market in the U.S. with the homespun names, Fannie Mae and Freddie Mac, both have free content and tools about lending and homeownership. Visit www.fanniemae.com and www.freddiemac.com. Both the Federal Housing Administration and the Veterans Administration have several loan programs designed to encourage homeownership. * FHA: http://www.hud.gov/fha/loans.cfm * VA: http://www.homeloans.va.gov/veteran.htm   Mortgage Fearbusters #1 Q. The news is full of stories of foreclosures and bad home loans. I really want to own my own house, but I'm scared! What should I do? A. Remember when Mom wouldn't give you an advance on your allowance? She was protecting you from yourself. Now that you are an adult, in theory at least, you need to make sure you don't take on more debt than your "allowance" will cover. In other words, don't buy a house you can't afford. Take a realistic picture of your expenses, then figure out the percentage of your total income that is made up of your debts. What's left over will tell you what monthly payments you can afford, and therefore, what kind of house you can buy. Foreclosures come about when borrowers gamble that they will be able to pay debt later on that they couldn't today. #2 Q. I am so afraid of talking to mortgage lenders. I mean, they speak a different language. (And I failed math in 8th grade.) A. It's okay, lenders are human. But you do need to arm yourself with some basics before you talk to them, such as mortgage types and rates, what fees to expect, and how lenders differ from each other. Either study up yourself, or get a friend to help you, and be sure to use Zillow's Mortgage Calculators. The most important thing is to get a lender you trust: Use Zillow community reviews and ratings, plus references from friends. And prepare a list of questions for potential lenders. If a lender says something you don't understand, don't be afraid to ask him to explain. If he can't, go elsewhere. #3 Q. I think I can afford monthly payments, but I don't have a lot saved for a down payment. Can I ever buy a house? A. Yes, you can, but there is no free lunch. Most lenders like a down payment that is 20 percent of the purchase price, but there are loans that allow you to put as little as 5 percent down.   Mortgage Roadmap Tips Tip #1 When you think about your future budget as a homeowner, be sure to include money for maintenance. Experts recommend setting aside between 1 and 3 percent of the market value of your house annually for maintenance. Tip #2 Savvy borrowers compare three or more lenders before making a decision about who will handle their mortgage. You'll want to compare rates, fees, and points, which you can easily do on Zillow Mortgage Marketplace, but you will also want to ask some other questions. Don't be afraid to ask: Lenders know you have options, so being forthright should not be a problem. Tip #3 How to choose the best lender? The best and time-proven way is to network. Ask your friends and read borrower reviews and ratings, including Zillow Mortgage Marketplace's ratings; if someone else had a good experience (or bad) that is news you can use. And ask for mortgage broker recommendations as well as lenders. Sometimes the brokers can find the best rates. Tip #4 Don't put too much faith in a Good Faith Estimate. It is just that — an estimate made in good faith. There is nothing in it that says unseen fees can't creep in at the last minute.   What to Ask Mortgage Lenders When you ask the questions below, listen carefully to see if the lender is answering in a straightforward way, without using jargon you don't understand. When you ask about fees, do they include them all voluntarily? If you think they are trying too hard to push you in a certain direction, go elsewhere. About the Lender * Are you licensed by the state? * Whom do you represent (e.g., a bank, broker, finance company)? * What are your loan programs? Do you offer VA loans (for example)? * What is the par rate (the actual rate for a particular loan) for a 30-yr. fixed loan? (He should have the answer at the tip of his tongue.) * Can you estimate and explain your fees? * Would you get approval for my loan locally? * Are you going to hold this loan or sell it? * Can I see a Good Faith Estimate? Additional questions for online lenders: * Is there someone I can talk to whenever I need to? * How are you keeping my info secure? * Do you sell my information? Additional questions for mortgage brokers: * How do you get paid, in points or commission? * How much will you make on this loan from the lender? * Name some of your top lenders. About the Loan * What is the interest rate you are offering, and how did you arrive at it? * How do I know this is the best rate? * How will the rate change over the life of the loan? * If an ARM, what is the worst case scenario I could face when the rate resets? * Are you locking in my rate? For how long? What does the lock cost me? * Could you estimate closing costs for my loan? * I need to see what I will pay in addition to the principal. Explain an APR and what is it for this loan? * What is your income from this loan? * What am I paying in points? * What is a Yield Spread Premium and am I paying it as part of this loan? If so, please explain why. * What are my monthly payments? * Do I need to pay PMI? * Are there any prepayment penalties on this loan? * What index is this loan based on, and how does it work for this loan? * For a Reverse Mortgage, who will I be working with after closing? * Here's my timeline. Are you certain you can get this done in time for closing?   Choosing a Mortgage Lender A lender is critical to the cost and success of your home purchase. For one thing, he holds the purse strings. For another, his level of service can make the difference between a happy new homeowner and a disappointed would-be buyer who missed out on a home. Beyond finding a good interest rate, you are relying on a lender to lock in your rate fast — if you want that 6 percent rate, he needs to jump on it because rates can change like the wind. You are also relying on him to close the loan on time; you could lose a house if there is a hang-up for some reason beyond your control. And many fees are determined by the lender, fees that can be negotiable if you know what to ask. Shopping for a lender requires a homework assignment: * Know thyself. Before you even pick up the phone or turn on the computer, figure out what mortgage type you are looking for. Not all lenders handle all loans. You can be more selective if you know what you're looking for. * Know thy prevailing mortgage rates. It's easy to compare rates online, and many sites allow you to see the rates from local lenders for various types of loans, but beware that you might need to enter your name and address to see rates. Or, you can submit a loan request in the Zillow Mortgage Marketplace anonymously (you do not need to enter your name, phone number, or address or Social Security number) and quotes and fees tailored to your situation will be sent back to you so you can compare between lenders' rates and customer reviews. * Understand the players. Study the types of lenders and their advantages and disadvantages for your situation. Some lend their own money, and others find the money for you. * Understand the fees. Beyond the interest rates, there are closing fees and points, and occasionally commissions that you don't see. You will want to compare these for all the lenders on your list. They are broken out in Good Faith Estimates, but they are also detailed earlier in the process in the Zillow Mortgage Marketplace. But Where Are They? As you can tell from the homework assignment, you are going to make this decision based on your individual needs and the costs. You are also going to base it on professionalism, and one time-tested way to do that is through referrals. Most people find their lender or broker through friends or real estate agents, or via customer reviews online. After all, you only have so much time. As one buyer put it, "If you figure someone you trust has done some shopping, it's easy to just get lazy and leverage their work." Often the choice starts with pre-approval. Remember, you should get a pre-approved loan before you shop for a house. You are free to shop around for a different lender after you get it, but buyers usually end up with the first lender. Get your referrals before you head for the pre-approval. Here are some sources for lenders: * Zillow Mortgage Marketplace. Zillow Mortgage Marketplace allows you to request personalized loan quotes anonymously, and get rates and fees, as well as customer ratings, in return. * Agent referrals. Agents want to have the pre-approval in hand before they spend time finding a house. It ensures that you are a qualified buyer, which will help them when they present your offer to a seller. Often they can refer you to some lenders they've worked with before. This is fine if you have an experienced agent who can vouch for the lenders. Good agents have several lenders they can refer you to, and you should ask the same questions you'd ask if you were finding the lender on your own. In case the relationship sounds too close for comfort, the Real Estate Settlement Procedures Act (RESPA) prevents agents from taking kickbacks or referral fees from service providers. But remember the agent's incentive in finding you a good lender is to ensure the transaction closes on time without any hiccups. That's in their best interest as well as yours. * Friend referrals. Friends who have bought or refinanced a house recently make great referrers. Ask them if the lender described the different types of loans available in easily understood language; if he locked in the rate he promised; and how similar closing costs were to the lender's. If your friends were happy with the process, you probably will be too. * Online sources. Many sites offer estimates from lending companies. Sometimes you need to give personal information (such as your Social Security number), but usually you can get a quote without having to talk to anyone. Other sites will have someone call you. There's no risk, until you sign a contract. Decide up front if you need to have in-person service; that will narrow your choices. * Mortgage brokerage. If you don't have time to find a lender yourself, a broker can do it for you. Sometimes you pay him upfront, but usually the bank pays him. Of course, you pay in the end: It's just wrapped up in the interest rate. * Your bank or credit union. You have your money there, so you probably trust it. The loan officer usually controls the loan (even if they resell it eventually) and has authority to make decisions on his own. That can be nice when time is short. Borrower Beware Many states have a requirement that loan originators be licensed, a process that often includes testing, as well as information on criminal history and bad credit on the part of the applicant. Check on your state government Web site to see if the state requires licenses and has a list of brokers who are licensed.  © Zillow, Inc. 2009. Originally posted - Qualifying for a Mortgage 
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