Mortgage Tips and Guidelines

Take the advice.

Your real estate agent is your partner and a valuable asset. They know the neighborhoods and schools and will help negotiate a fair price for the house you want. Your Mortgage Lender can answer questions about how much you can comfortably afford and provide guidance at every step. Get opinions from those you trust, such as your family and friends.

Understand your costs.

In addition to your monthly mortgage payment, you also pay interest, taxes, private mortgage insurance (if your down payment is less than 20% on a conventional loan) and several one-time fees at closing. Talk to your Mortgage Lender and make sure you know the total cost.

Know your score.

A good credit score increases your chances of being approved for a mortgage and may lower your interest rate. If your score is low, try to improve it by making your payments on time, paying the monthly minimum (or more) and keeping your existing credit card accounts with zero balances open.

Estimate how much you can borrow.

You can get an estimate of how much you’ll be able to borrow by being prequalified for a mortgage. You will need to provide some basic financial information and a lender determines how much you may borrow. Prequalification is simple and usually can be done in one conversation.

Get organized.

You’ll need to provide various documents, such as pay stubs, bank statements and tax forms. Make sure you know what papers you need and have them readily accessible.  A Mortgage Lender can help you determine what documents are needed or you can print our Mortgage Checklist as a reference.

You can customize your home.

When you own your home, you can turn it into your ideal living space. Unlike renting, you have the freedom to renovate, remodel and even expand.

You may be able to stabilize your housing costs.

With a fixed-rate mortgage, your principal and interest payment will stay the same for the life of your mortgage. That means you’ll never have to worry about your landlord increasing your rent at the end of your lease. The only things that could change are taxes and homeowners insurance.

You can build equity in your home.

As you pay down your mortgage, you build equity in your home. In time, you may be able to use your equity through a Home Equity Loan for home improvements, pay down debt or put toward other financial goals.

Eventually, you'll own the house.

Once you have made all of the mortgage payments, you will own the house. The only payments you'll need to make are to pay your taxes and insurance. Renters will have to pay rent every month indefinitely.

A house may increase in value.

Depending on where your home is located, what kind of home you have and economic conditions, your home may become worth more than you paid for it.

Homeownership offers potential tax advantages.

You may be able to deduct mortgage interest and your local property taxes at tax time. That could save you a lot, especially in the early years of your mortgage, when your payments will be mostly interest. Renters don’t get this tax break. Consult your tax advisor about your personal situation.

Your credit score is the number used to summarize your credit report and help lenders determine your likelihood to repay a loan. Looking at your credit information before you apply for a loan can help you get a complete picture of your credit health. You can get a free copy of your credit information every year through the credit reporting agencies below or by going to annualcreditreport.com.

Your credit report will be created by one of the major credit reporting agencies:

Equifax: 1-800-685-1111

 Experian: 1-888-397-3742

 TransUnion: 1-800-888-4213

Need help understanding your credit report?  Visit with one of our Mortgage Lenders and they will be happy to go over your credit report and answer all of your questions.

• If anything changes in your employment, monthly payments, income or assets, contact your Mortgage Lender.
• Remain in contact with your processor for items needed and respond promptly.
• Make sure you have signed and returned any necessary documentation requested as this can often hold up your process.
• Continue to pay your mortgage payment.
• Continue to pay your other obligations.

• Do not make any major purchases without discussing with your Mortgage Lender.
• Do not apply for new credit without discussing with your Mortgage Lender.
• Do not increase your usage of your revolving debt without discussing with your Mortgage Lender.
• Do not allow your credit to become delinquent with any of your creditors.
• Do not change the status of your credit accounts without discussing with your Mortgage Lender. If there are items on your credit that are inaccurate, discuss resolution with your Mortgage Lender before disputing.
• Do not change your debts or payment habits. Changes may impact your credit score and qualification which can disqualify you or change the fees of your loans.

1) Find a Lender

Your home buying quest shouldn't start with looking for a house — it should start with finding a lender. Mortgages are long-term relationships, and you'll want to be confident that your mortgage provider offers a strong combination of quality service and competitive pricing.

2) Get Preapproved

Most real estate agents need you to get preapproved for a mortgage before they'll take you to look at homes. Doing so will help you save time later in the process and, even more importantly, be in a stronger position to make a credible offer to a seller. A preapproval is a preliminary indication of how large a mortgage you qualify for. The lender will do a quick evaluation of your ability to afford a mortgage payment based on your credit score, income and debts. If you are preapproved, you'll get a preapproval letter to help with your home search. The process may also help identify any potential problems with your credit.

3) Make an Offer

Once you've found an affordable property you like, make an offer. Be sure to put the seller's asking price into context by researching the selling prices of comparable homes in the area. Determine how motivated the seller is to part with his home. Has the house been on the market for a long time — say, more than 90 days? Has the seller been coming down in price? An experienced real estate agent can be very helpful in the negotiation process. If the offer is accepted, you'll create something called a purchase contract, which formalizes both parties' intention to go through with the deal. Send a copy to your lender.

4) Finalize the Loan

If the seller accepts your offer, it's time to finalize your mortgage application. The lender will formally evaluate you through a process called underwriting. The goal is to assess your ability to pay back the money that you borrow. Doing so requires a check of your credit score, income, assets, and past and current debts. This process isn't just about whether the lender will give you a mortgage. It also determines how much you can borrow and the interest rate you'll pay. You may need to submit various documents.  See our Mortgage Checklist. To keep things moving, be ready to quickly respond to any requests for additional documents or details. The underwriter will generate a list of items you must provide to meet the lender's requirements. These tasks constitute conditions for approval and may include:

• Additional documents that prove your income.
  
• Proof of property appraisal.
  
• Sufficient cash reserves to cover your first few monthly mortgage payments.
  

5) Close on Your Home

Closing is the last stage in the mortgage process. It's a meeting of the buyer, seller and other professionals involved in the transaction. At closing, you'll sign documents specifically associated with the mortgage.

1. What type of loans do you offer? What are the qualifying guidelines for each?

 There are many different types of mortgages, including:

• Fixed Rate
  
• Adjustable Rate
  
• Federal Housing Administration (FHA)
  
• Veteran’s Association (VA)
  
• U.S. Department of Agriculture (USDA) 
  

2. What is the interest rate and Annual Percentage Rate (APR)?

The interest rate is going to be based on the size of the loan and on your credit score. Interest accrues over the life of your loan and over a 15-30 year span, can add up considerably. If the interest rate is adjustable (as in an Adjustable Rate Mortgage or ARM), ask how long the rate will remain fixed, the maximum annual adjustment, highest rate (cap), index and margin.  The APR includes both the interest rate and all other lender fees, divided by the loan’s term.

3. What’s the monthly payment going to be?

 As you’re trying to develop a budget after your home purchase, you’re going to need to know what your monthly expenses are going to look like. Make sure you include taxes and insurance in their calculations. Remember that your monthly payment shouldn’t be so large that you can’t also budget for unexpected expenses and a retirement fund.

4. How large of a down payment do you need?

This is important.  Interest rates, and therefore monthly payments, vary considerably depending on the size of your down payment. This also factors into whether you’ll be required to pay mortgage insurance.  Usually, companies will waive PMI (Private Mortgage Insurance) if your down payment is 20% or more of the purchase price. Some loans, (like those offered by the VA, FHA and USDA), will allow for a down payment of zero to 3.5%, but depending on the program, they will require insurance premiums for the life of the loan.  Although it’s certainly possible to obtain a conventional loan with less than 20% down, the interest rates could be higher.

5. Is there a prepayment penalty?

If you think your economic situation might change in the future or you’re saving up to make some extra mortgage payments, it’s important to make sure your lender won’t charge you for paying off your loan early. Some lenders charge an additional processing fee for each overpayment, while others ask for six months of unearned interest.  Others only charge a penalty if you pay off your loan before the first two to five years. Verify if your monthly payments will adjust in line with any additional payments you make and if the penalty applies if you decide to refinance later on.

6. What fees and costs will I have to pay? Can you estimate and explain them?

Every lender will charge differently for this and you’re entitled to know. Costs generally include an appraisal, credit report, title policy, pest inspection, escrow if applicable, recording fees, and taxes. Many of these fees will be included in closing costs, once the transaction is ready to be finalized. Some companies also require you to pay points (1% of the total loan) or origination fees. You can ask if you can waive paying those points in exchange for a higher interest rate. In any case, all costs and fees should come itemized in the Loan Estimate (LE), which must be provided to you within three days of your application, as required by law.

7. Do you offer Loan Rate Locks? If so, how much do you charge for them?

 Loan rates change every day, sometimes every hour. If you feel there is an upwards trend you might want to lock in your rate at whatever it currently is before it rises more. Some companies will charge you zero to one point for the lock. Before you finalize the rate and ask your lender to lock it in, take into account that most locks last between a few weeks to 60 days, and if the loan doesn’t process during that time, you lose the rate. To help you determine when to lock in your rate, ask your lender how long their processing period generally takes and try to get them to lock in the rate for as long as possible. Usually, you should try to get as long a lock-in period as possible, but be aware that may result in a higher rate than if it were shorter.

8. How long does it typically take for a mortgage to close?

 While this varies from lender to lender, a top-rated company should be able to close in less than 30 days from application. In order to expedite this process, it’s a good idea to have all the necessary documentation ready beforehand and stay in constant contact with your lender.

9. What are mortgage or discount points and how do they affect my loan?

One way to get a lower interest rate is through mortgage or discount points. These are fees the borrower can pay the lender in exchange for a reduced interest rate and, consequently, lower monthly mortgage payments. Using this system, buying one point costs 1% of your mortgage amount (or $1,000 for every $100,000). If you plan to own your home for the long term, it’s worth asking your lender whether this is an option for you. If it is, make sure it’s cost-effective by comparing how much you’d be saving each month against how much it costs to buy points.

10. What are closing costs? How much will mine be?

Some of the largest expenses involved in the purchase of a home are closing costs. Closing costs are fees that are paid at the end of the transaction, once the home is ready to be transferred from one owner to another. These costs can be paid by the seller, the buyer, or shared by both. It’s important to ask your lender for an estimate of closing costs up front, as many of the fees associated with closing the transaction can be negotiated or vary from lender to lender. Although the final bill might differ from the estimate the lender provided, there are limitations to how much fees can change. If you find any major discrepancies, be sure to discuss them with your lender.

The decision to buy a new home is an exciting one. Calculating just how much you can afford in terms of a mortgage can be tricky. These guidelines should make the process of buying a home a little less stressful. 

Take All Housing Costs into Account

In order to accurately assess how much you can afford with regard to buying a home, you’ll need to understand how mortgages are structured. A typical mortgage is comprised of principal, interest, taxes and insurance.

Principal – This refers to the amount of the loan itself, before any other costs have been considered. If you have a $150,000 mortgage, the principal of that mortgage is $150,000.

Interest – This is the amount of money the lender keeps from the homeowner’s monthly payments. You can have either a fixed-rate or adjustable-rate mortgage. In a fixed-rate mortgage, the interest rate does not change over the course of the loan. These loans commonly last 30 years, but there are fixed-rate mortgages available that do not last as long. In an adjustable-rate mortgage, however, the interest rate changes after a certain period of time. For example, in a seven-year adjustable-rate mortgage, the homeowner will pay a fixed interest rate for seven years. After that, the interest rate will be reevaluated and changed based on market conditions. Adjustable-rate mortgages are great for homeowners who do not expect to stay in a home for a long time. Common timelines for this type of loan include three-year, five-year and seven-year timelines.

Taxes – Homeowners are required to pay real estate taxes. They have the option of paying them all at once or pay them as part of their monthly mortgage payment and have the lender hold them in escrow.

Insurance – There are two types of homeowners’ insurance: property insurance and private mortgage insurance. Property insurance protects the home from fire, theft, severe weather and other unforeseen circumstances. Private mortgage insurance (PMI) protects the lender if the borrower is not able to pay the loan off. Private mortgage insurance is minimized and not required for homeowners who make a down payment of at least 20%.

Evaluate Your Current Financial Situation

Your current financial situation can help you decide just how much house you can afford. Taking your front-end ratio, back-end ratio and credit score into account allows you to make the best decision on how much you can afford when it comes to a mortgage.

Front-End Ratio – This is the percentage of your gross income that can be dedicated to mortgage payments each month. You can calculate your front-end ratio by dividing your total monthly housing expenses by your gross monthly income then multiplying by 100. 

Back-End Ratio – This refers to how much of your gross income is required to cover your debts, including: credit card payments, car payments, child support or student loans. You can calculate your back-end ration by dividing your total monthly debt expenses by your gross monthly income then multiplying by 100.

Credit Score – Your credit score also plays a role in how much house you can afford. Because a lower credit score indicates a certain amount of risk for the lender, the homeowner’s credit score affects their annual percentage rate (APR). The better credit a homeowner has, the less they will be required to pay in interest and the more house they can afford.

It’s important to take other costs of owning a home into account as well. While you may be able to afford the mortgage itself, other costs related to owning a home, such as maintenance, utilities or association fees, could stretch your budget.

General Rules of Thumb

There are a few different standard rules to think of when calculating how much you can afford in house payments.

• The Rule of 28 – Your monthly mortgage payment should not exceed 28% of your gross monthly income. This is often considered the “Golden Rule,” and many lenders abide by it.
  
• The Rule of 32 – Your total monthly housing payments, including any existing mortgage payments, insurance, taxes, fees and utilities, should not exceed 32% of your gross monthly income. This rule takes into account more factors than the Rule of 28.
  
• The Rule of 40 – Your total monthly debt payments, which include your house payments along with car, credit card or other loan payments, should not exceed 40% of your gross monthly income. This rule takes most of your monthly financial obligations into account.
  
• Conservative Estimates – If you tend to be frugal, you might be more comfortable calculating how much you can afford in a mortgage from your net income rather than your gross income. This will allow you to save more money in the long run.
  

Refinancing your mortgage is one of the biggest investments you can make – but this decision can help you move closer to your financial goals. We’ll look at why refinancing can be the right move, as well as answer the frequently asked questions many have when weighing this important financial decision. There are plenty of benefits to refinancing, but a deeper dive is required to understand if this is the right call for your future. 

Why refinance?  Some benefits include:

• Lowering your mortgage payment
  
• Paying off your mortgage sooner rather than later
  
• Funding home improvements
  
• Freeing up cash to pay for medical or school expenses
  
• Lowering monthly payments to help consolidate your debt
  
• Cashing out to invest or buying additional real estate
  
• Removing a cosigner or borrower after a divorce
  
• Getting out from under a loan with an adjustable rate or a balloon note

Is refinancing a good financial decision?  

In general, we advise against refinancing if the closing costs can’t be recouped through interest savings within 36 months. In cases where the funds are for home improvements or medical expenses, this isn’t necessarily the case.  There may be other ways to accomplish your goals, like a home improvement loan or a home equity line of credit.  

When can I refinance my mortgage?

As many times as it makes financial sense to do so. The only caveat is that you might have to wait six months from your most recent closing if you are taking cash out.  If you decide to refinance, the sooner the better. 

How does refinancing work? 

It’s a five-step process:

1. Apply online, over the phone or in person

We’ll look at your income, assets, debt and credit score to determine if you meet the requirements to refinance and can pay back the loan.
Some documents we may need include: 

• Two most recent pay stubs
  
• Two most recent W-2s
  
• Two most recent bank statements
  
• Copy of current picture identification
  
• Property line survey and homeowners insurance agent’s contact info

2. Lock in your interest rate

You may be given this option so your interest rate doesn’t change before the loan closes. This lock can last anywhere from 15-60 days.

3. Underwriting

Once you’ve applied, we will begin the underwriting process to make sure all the information you provide meets the requirements set forth by FannieMae, FreddieMac, FHA, VA or USDA. 

4. Home appraisal 

An appraisal may or may not be needed. In general, a full application is needed to determine the need for one.  If one is needed, federal regulations require us to order the appraisal.  All you need to do is make sure your home is presentable and that any major renovation projects are mostly complete.

5. Closing the new loan

Once the underwriting and appraisal process is complete, it’s time to close your new loan. Before you close, we will send you a disclosure with all the final numbers and figures for your refinance. Once you’ve closed, you have a few days before it’s considered final. You can always cancel by exercising your right to rescind any time before the grace period ends. 

What options are there other than refinancing to accomplish my goals?

At First State Bank, our mortgage loan advisors are well-versed in the details of refinancing.  Please contact one of our local experts for a free total-cost analysis and to discuss options that will meet your long-term goals.

Call us at 940-665-1711 or visit Mortgage.FirstState.Bank to start your refinancing journey today!