Mortgage Minutes – 10 Common Mortgage Questions

Are you tired or renting, or living at home in your parent’s extra room, and you are ready to buy a new home, but are not sure how it works?  Buying a new home for the first time can seem like a daunting task, so I want to answer some common questions to help you feel more informed as you move forward to get a new home.

1. Do I need to get prequalified for a mortgage?

There are a couple of reasons to get prequalified for a mortgage. First, you’ll find out how much you can afford, and how much the lender will finance when looking for homes. Second, having a written preapproval letter from your mortgage company before making an offer is the standard for real estate agents to present your offer in good faith. There is typically no charge/cost to have a lender provide this.

2. How much mortgage can I afford?

Decide how much you want to spend each month on housing. Remember that amount includes the mortgage loan payment, property taxes, hazard insurance, and potentially Homeowner Association Dues and Flood Insurance. You will want to make sure you are not “house poor” and have enough cash flow each month to do other things as well. Many lenders will approve you at a maximum that may not give you the extra cash each month for other things. Don’t forget to include other expenses for things like cars, food, gas, groceries, entertainment and clothes and potential maintenance repairs. Take time to create a cash flow budget to help you decide.

3. What are the current mortgage rates?

Mortgage rates can change daily, and you will not know your final rate until you have locked your loan (most lenders require an address for the home you want before you can lock your loan). When you get prequalified, it is a good idea to have your mortgage lender prequalify you at a rate above current market rates to account for projected movement in rates. One rule of thumb is to seek approval ½ point above market rates to give a cushion for rate increases. Rate lock means just what it says…lock in the rate you will get on your mortgage. Rate lock periods vary and the longer you want to lock the rate, the higher the rate will be. The average rate lock I see is generally 40 days, but many customers choose to wait to lock the rate (float the rate), hoping rates will decline.

4. What is a debt-to-income ratio?

The debt-to-income ratio (DTI) is calculated by dividing your total loan payments (includes your estimated mortgage, credit card payments, student loan payments and car/other loan payments). each month by your gross monthly income This percentage is your debt-to-income ratio. Lenders typically want the number to be below 43%, but some programs allow it to be higher (FHA and VA often allow higher DTI).

5. What credit score do I need? Your credit score is just one of the variables that determines if a Lender will approve you for a mortgage. The higher the score, the lower your interest rate will be, and of course, there are different minimum score requirements for different loan programs. Don’t be afraid to apply if you have less than perfect credit, as you may still qualify for a mortgage loan even if you have  some collections or late payments or if your score is lower than you would like it to be.

6. What is a down payment and how much do I need?

This is the money you pay upfront at loan closing. Some programs, such as FHA, require as little as 3.5% down payment, and allow gifts of down payment money from sources such as your parents or close relative. To avoid Mortgage Insurance, Lenders typically require 20% down payment. The more money you can put down, the less interest you will pay over the life of the loan. Don’t forget to ask Red Pear about help with closing costs.

7. What is mortgage insurance?

Private mortgage insurance (PMI), protects the lender if you stop paying your mortgage and default on your loan. The yearly cost of PMI is about 1% of your outstanding loan balance and is added to your monthly mortgage payment. Again, if you can put down 20%, PMI is not required, and PMI can be discontinued once your loan is paid down to below 80% of the value of the home.

8. What are the documents needed to apply for a mortgage?

Be prepared for several documents when applying for a mortgage. Have your most recent 30 days of pay stubs (must include YTD earnings), 2 years W-2s, (2 years tax returns if self-employed or 1099), 2 months of bank statements, investment account statements and brokerage account information ready. The mortgage lender will let you know exactly what is needed, but be prepared to have these documents in electronic format to keep the process moving quickly, as most lenders have portals to load these documents to speed up the process.

9. What Is a VA loan?

If you are a veteran or active duty servicemember, or a member of the Guard or Reserve, you may be eligible for a VA loan. However, you still need to meet income and credit requirements. VA loans have low or no down payment options available and do not have a mortgage insurance requirement, resulting in lower monthly payments compared to other options, but may include an upfront funding fee that can be financed in the mortgage. Also, VA requires specific appraisals that meet VA requirements as well and a pest inspection from a Certified Pest Inspector. Your lender will be familiar with the requirements.

10. How fast can I get a mortgage? It typically takes 30 days to get a mortgage, though it can take longer if you cannot provide the documents required. Having all your documents and information ready and working closely with a mortgage lender will help move things along more quickly.

Please feel free to contact me if you have any questions or would like help getting a new mortgage or refinancing your existing mortgage to take advantage of the current rate environment.

Brian Bazar, Sr. Mortgage Banker

NMLS# 1969754

PH 817-403-9181 

E: bbazar@home123.com

402 E Trunk Street, Suite G1, Crandall, Tx 75114 

www.home123mortgage.com

Housing Supply Limited in the ‘Burbs

Mortgage Minutes

Mortgage Minutes defines and describes escrow.

What is Escrow and how does it work? Escrow can be defined as a contractual arrangement in which a third party receives and disburses money or property for the primary transacting parties. The disbursement from escrow is dependent on conditions agreed to by the transacting parties.  For the purpose of this discussion regarding mortgage, escrow is a trust account held in the borrower’s name to pay obligations such as property taxes and insurance premiums on behalf of the borrower.

Federal law allows the mortgage lender to require enough money in the escrow account to cover one full year of the bills (insurance, taxes) plus two months extra cushion. In Texas, Mortgage lenders are not required to pay interest to the borrower on escrow accounts.

When you buy a home, the seller is required to pay the pro-rated taxes to date. For example, if you loan is closing August 31, then the seller would pay 8 months of taxes into the buyer’s escrow account (Jan-Aug), and the buyer would be accountable in the escrow account and the buyer would pay the remainder of the year (Sept-Dec). The escrow account is reviewed and balanced at least once per year to ensure that there is enough money (but not more than allowed) to cover the anticipated tax bills.

It is important to note that when a seller has tax exemptions on a property (such as the over 65 exemption, disability/veteran’s exemptions, etc. that the new buyer will not have on the property, the seller is only accountable to pay the pro-rated portion of the taxes based on the seller’s tax bill, and the buyer could have to pay a higher amount due to the potential loss of those exemptions. Note that the buyer should always follow up to file for the homestead exemption if the home is to be the buyer’s primary residence to get the homestead exemption.

The pro’s of escrow include 1) never having any surprise tax bills or insurance bills to pay, since the mortgage company will ensure these bills are paid from your escrow account each year, 2) allows the borrower to pay monthly for a bill that is due annually, which helps with cash flow budgeting, and 3) provides borrowers the ability to pay any shortfalls due to increased taxes over the following 12 months. The con of escrow is that the borrower is paying monthly for a bill that is generally due at the end of the year, and losing the opportunity to earn investment income and/or interest on those funds.

If you don’t want to escrow, most lenders will charge a higher interest rate or fee (generally 0.25%) to waive escrow and generally require higher down payments (usually 20%). Note that some loans, such as FHA will not allow the borrower to waive escrow. At the end of the day, the decision to escrow or not escrow is a personal decision, based on many factors, including loan type, fees, interest rate premiums, budgeting skills, and market interest rates.

Brian Bazar, Sr. Mortgage Banker

NMLS# 1969754

PH 817-403-9181 

E: bbazar@home123.com

402 E Trunk Street, Suite G1, Crandall, Tx 75114 

www.home123mortgage.com