Some Facts To Help You Determine Your Home Affordability
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Before applying for a loan to get a home, you should ask yourself – “How much home can I afford?” The answer will let you know the range of homes you can afford.
4 factors lenders consider when determining your ability to repay
• Monthly gross income: The more your monthly gross income is, the more expensive home you can afford.
• Credit score: A high credit score means you can apply for a greater loan amount.
• Down payment: If you can pay 20% of the sale price as upfront money, then, you don’t have to pay for private mortgage insurance (PMI).
• Monthly repayment: The amount you can afford for monthly repayment, calculating your monthly debt amount (like auto loan, credit card bills etc). The more your debt amount is, the less expensive home you can afford.
Some tips to follow before you apply for a loan
There are some factors which you need to keep in mind before you answer the question: “How much home can I afford?”
If you buy a large house with garage and duplex facility, then, it will increase your buying power. You can rent out a part of your home and the rent you will get can be a part of your monthly repayment.
It will be wiser to go for a 30-year loan, because, monthly repayments will be much lower and you can qualify for a bigger loan. You can also make prepayments to pay off the loan in 15 years.
You also need to keep in mind the closing costs you need to pay.
If you are thinking, “How much home can I afford?”, you can take help of mortgage affordability calculator which will enable you to estimate a loan amount based on your income, debt, down payment etc.
Home Mortgage Rates And Your Credit History
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A borrowers record of various personal debt ie: credit cards, consumer debt, etc. and whether payments were made on time. Mortgage lenders will review the borrowers credit history to help determine their loan qualifications and the terms of the loan.
With recent changes to the laws concerning your credit report, you can now obtain a free annual credit report from each of the three major credit reporting bureaus. By using this free credit report to protect your good credit rating, or discover why your credit is bad, and you can ensure that you qualify for the best loan rates available.
Although identity theft is getting a lot of attention, credit reports are more likely to have inaccuracies that can cause problems. For example, an account may be reported as “paid”, but still show a balance due. Also, some small creditors are really good at reporting late payments, but not so good at reporting paid off accounts. Occasionally, a creditor will give an account to a collection company, and both will continue to report delinquencies, although only one is legally entitled to.
Correcting inaccuracies in your credit report is as important as looking for evidence of identity theft.
Having a good credit history means it will be easier for you to get loans and lower interest rates. Lower interest rates usually translate into smaller monthly payments.
As negative items in your credit history get older your credit will improve and your credit scores should increase. Your credit history plays the biggest role in determining your credit score and should not be taken lightly. Your credit payment history accounts for 30-40% of your entire credit score.
If you have a dispute in your credit history notify the consumer credit agencies. If the inaccuracy cannot be verified or is inaccurate, they are required to remove the information.
Your credit history plays an important part in determining the level of risk associated with lending you money. Borrowers whose credit history show timely payments and responsible use of credit are considered low risk. These borrowers receive the best rates and have more loan options available to them.
Your credit paying history is not the only factor that counts towards evaluating your credit worthiness. There are many factors that contribute to your credit ranking, including: debt service ratio’s, length of credit, new credit, credit inquires to just name a few.
Your credit history or lack there of will determine your credit score. If you have credit cards that are at there limits or multiple late payments on your credit report will lower your credit score and increase your interest rate when applying for a mortgage loan.
Before applying for a mortgage loan, it’s a good idea to order your own credit report to see if their are any errors that need to be disputed. Innacuracies on your report can drop your score significantly. You will pay for a lower credit score with a higher interest rate, which may cost you thousands of dollars in higher monthly mortgage payments over the life of the loan.
Closing Costs Explained
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Certain areas of the country may have added closing costs, but these are the general types of closing costs you might see at closing:
Attorneys or escrow fees
Property taxes
Pre-Paid Interest
Loan Origination fee
Recording fees
First premium of mortgage Insurance
Title Insurance
Loan discount points
First payment to escrow account for future real estate taxes and insurance
Paid receipt for homeowners insurance policy Underwriting fee
Tax service fee
Broker fee
Appraisal Fee
Always take your Good Faith Estimate with you to compare to the fee’s on the final HUD statement. You want to make sure that there were no extra added fee’s.
Recording Fees are the costs to record any documents that needed to be recorded at the county clerk’s office. The most likely documents that are recorded are the mortgage agreement, the note, and the deed. Recording is often done by the title company.
The Settlement document containing the final closing costs or HUD may also be referred to as the HUD-1 or HUD-1A
It is a good idea to look at both the good faith estimate (GFE) and the truth in lending (TIL) when shopping for a mortgage.
The closing costs usually can be broken down into three basic areas. 1) Costs from the lender 2) Costs from the broker (if any) and 3) Costs from third party service providers and government agencies.
In states such as New York, one of the largest closing costs to be aware of is mortgage recording tax, a fee charged by your county. To determine how much mortgage tax will be payable at the closing of your mortgage refinance, contact us at .
Always ask questions about any fees that you do not know what they are for, especially if you notice a big difference between the fees listed on your Good Faith Estimate and your final settlement (HUD-1) paper. Closing costs are generally broken down into a few categories: lender fees, mortgage professional fees, title fees, and state/county/city fees and pre-paid items (such as escrowing for taxes and insurance and prepaid interest). Understanding where the fees and costs are going will sometimes help to understand the necessity and reasons for some of the costs.
Closing costs are fees associated with any real estate loan transaction.
Federal law requires the lender to disclose all reasonable fees at the origination of the loan on a ‘good faith estimate’ within 3 days of application.
All actual closing costs are then again disclosed on the closing documents , commonly called the HUD .
On a purchase loan, the buyer can negotiate vender invoices to be included as seller closing costs to be paid out of escrow.
Whether or not you chose to escrow taxes and insurance is your option, and it often has an effect on the rate of the loan, so make sure to be clear to your broker on what your intentions are for payments of taxes and insurance.
What comparing closing cost between mortgage brokers and lenders it is also good to have the Truth N’ Lending (TIL). Some lenders will have higher closing costs with a lower rate, and vice versa. The TIL will help you compare the cost the entire loan package between lenders.
Property taxes may be credited to you if they are paid in the back or you may have to pay the property taxes if they are prepaid in that particular state.
Always ask for a copy of the final Hud-1 24 hours from closing to give you a chance to look through the fees and compare.
Most closing costs are not set in stone, and are negotiable. Some closing costs may depend on which loan program you decide to go with, and or what interest rate you qualify for.
In most states, there are transfer taxes that must be paid at the time of a home purchase. These taxes are usually split between the seller and the buyer.
Prepaid interest is the interest per day that the lender charges for using the money. For example if you close on the 10th of the month you will pay interest for aproximately 20 days (in a 30 day month) for using their money for 20 days then on the first of the following month your interest will start to accrue daily for the full month. The purpose is so that when you make your first mortgage payment you are only paying the 30 days worth of interest and some to the principal compared to paying for 50 days worth of interest if you were not to pay the prepaid interest.
What Is Annual Percentage Rate (APR) For Home Mortgages
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The annual percentage rate (APR) is the cost of a loan and is calculated by using a standard formula. This yields an interest rate that includes all fees related to the loan, including the mortgage insurance, points, interests, etc.
It is important to know that the amount of money you pay monthly is not affected by the APR. Monthly payments are determined by the term of your loan and the interest rate.
However you must take the APR into consideration when you are contemplating any given home loan. A loan that boasts a low interest rate but has a high APR is not a good bet. Always talk with a qualified mortgage specialist at your financial institution for sage advice.
The APR will be different for loans that are of different durations. For example, a 20 year fixed rate loan will have a different annual percentage rate than will a 30 year loan that also has a fixed rate.
In order to compare the costs from one loan to another it is wise to consult the Good Faith Estimate (GFE). The APR is important but it is only one of many important aspects of a home loan.
When you compare the APR from one financial institution to another, make sure that they are on a level playing field. In other words compare loan programs that are the same, as opposed to completely different. Remember though that the APR will be different depending on the amount of money you wish to borrow. A loan for $250,000 will have a lower APR than will a loan for $100,000 even thought it has the same interest rate. Keep in mind as well that an adjustable rate mortgage loan has an APR that is aware that the loan is indexed and as such that it does not change from its beginning value.
Other Important Aspects of the APR
What else is the APR? It is also the “cost of credit to the borrower in relation to the amount borrowed.” This is always calculated as an annual rate. This is a necessity as stipulated by the Federal Truth in Lending Act, Regulation Z.
A number of items are used to effectively calculate the APR. These include private mortgage insurance (PMI), origination and discount points and prepaid interest. This also takes into consideration any lending fees such as processing, credit reports and underwriting. As well, application fees, administrative fees and tax service fees are a part of this.
Be aware that not all mortgage lenders use the same fees which which to calculate the true cost of a mortgage. APR is a useful tool but be forewarned about the different ways it may be used.
The Federal Truth in Lending Act is a disclosure form that by law must be given to all individuals looking to apply for a mortgage loan. When rates are advertised, the APR MUST be disclosed. All of the bank fees that a lender could charge are here which is why it works well for the purposes of comparison. The true cost of a mortgage loan when you get down to the nitty gritty is what the APR constitutes. The APR helps to keep lenders honest because upfront costs and fees cannot be disguised behind interest rates that are advertised as low.
To use an example from the real world- if you visit one lender and are offered a loan with an interest rate of 6.25 percent with one discount point and another lender offers you a loan with an interest rate of 6.5 percent and zero points then how do you decide which one is the better deal of the two?
Whichever loan has the lowest APR would be the most suitable choice. Bear in mind however that this does not take into account other aspects of the prospective borrower’s financial situation such as his job stability, how much money he has in reserves and how longs he plans to reside in the home he wishes to purchase.
Be aware that the APR is not the same as a note rate. When you have a credit card the APR is often the exact same as the interest rate. However when you take out a mortgage, the APR will be higher than the interest rates you pay due to closing costs.
Mortgage Loan Origination Fees And Charges
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You may wonder how many origination points you can legally be charged by your mortgage broker. The maximum fee cap varies from state to state. Wisconsin for example the broker is capped at 6% total commission. This means that you could be charged up to 6 points origination fee by your broker. This can also be split up between lender paid Yield spread rebates to the broker and origination fees.
Depending on your situation you may want to re-think the question. It isn’t how many points can I be charged but instead should be “how many points will I allow myself to be charged”? Many direct lenders charge a lot of points. One way to avoid being overcharged is to work with a broker or mortgage professional that is not a direct lender. Look over your good faith estimate and make sure your comfortable with the charges.
As a rule of thumb, 1% percent is what most reputable brokers will charge for an origination fees, if the loan falls within normal loan amounts.
Your loan officer is probably willing to work with you on how they make their money. For example, if you want lower closing costs, they may increase your interest rate to be paid yield spread from the lender that completely covers their fees. On the other hand, if you want the lowest interest rate, they may put all of their fees in ‘origination fee’, and you will pay for it out of your closing costs. Tell your loan officer what is important to you, and they should be willing to work with you on it. If not, you might consider finding a new one.
Not only does the maximum fee or number of points that a mortgage broker can charge vary by state, but it also varies by each lender. Each lender has their own policy in force that determines how much they will let a loan officer charge a customer. Many lenders are starting to cap the maximum points that can be charged to a borrower to 5%.
Usually, depending on the loan program, things such as points are negotiable. Very rarely will the number of points charged be at the maximum amount possible.
If you are wondering whether the mortgage broker you are working with is charging the maximum number of points allowed, you may consider working with another broker. However, there are situations that can exist, that would merit an unusually high fee (points) be charged for a loan. If you are wondering, call two or three other mortgage brokers and explain your scenario with great detail to see where your deal ranks with what they may be able to do for you.
