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How your ability to repay impacts your ability qualify for a mortgage loan.

Resources

Quick Facts video 3: How capacity (your ability to repay) impacts your ability qualify for a mortgage loan.

How likely are you to be able to pay back your mortgage?  Steady employment is the best determinant of your ability to repay.  W2 wage earners are viewed as most stable from an underwriting standpoint because their income is easily documented.  Overtime, commission, and self employment income are considered less stable and are more difficult to document.

YES!               W2’s and tax returns prove steady employment

Maybe             Overtime, commission, self employment

NO way!         stated income loans (no documentation)

In our current market, full income documentation in the form of W2s and/or tax returns are required whether you’re self-employed or a wage earner. Stated income programs, which don’t require proof of income, are a thing of the past.

What is DTI?  Debt-To-Income ratio or DTI expressed as a percentage is the most important ratio to know when qualifying for a mortgage. You compute your DTI by dividing your total monthly obligations by your monthly before-tax income.

Debt-To-Income Ratio or DTI  =  Monthly obligations / Monthly pre-tax income

For example, if a borrower has a $250 auto payment, $150 in credit card payments, and a mortgage payment of $850 per month, then monthly obligations total $1,250. If your gross income is $4,000 a month then your debt to income ratio is 32%. A good rule of thumb is that you want a DTI no higher than 40%.

$250 + $150 + $850 = $1250 (monthly obligations)  /  $4,000 Monthly Income (pre-tax)  = 32%

Recommended DTI is 40% or less.

Another factor that impacts your ability to repay is the amount of liquid assets you have. Lenders want to see that you have enough cash reserves to cover your mortgage in “case of a rainy day”. Acceptable assets for reserves include checking, savings, and retirement accounts, as well as any other liquid cash accounts.

Saving for a rainy day pays off!

Checking, Savings, and Retirement Accounts as well as any other liquid assets make you more likely to be able to repay your mortgage.

Thanks for viewing our quick facts Capacity video, I hope you found it helpful.  If you have any questions please feel free to call us, our loan officers are friendly and ready to help!

Our loan officers are happy to answer any questions!  So give us a call at 800-Homestead-8! (A text file of this video can be found on our website)

Quick facts video 2 – How do I get approved for a mortgage loan and improve my credit score?

How does my credit score impact my ability to qualify for a mortgage?

Let’s start with some basic information about credit.

There are three major credit bureaus:  Equifax, Experian, and TransUnion.

These credit bureaus document payment histories for mortgages, auto loans, personal loans, credit cards, and other consumer debt.  They also track and report derogatory information such as collections, foreclosures, judgments, charge offs, liens and bankruptcies.  From this compilation of debt and payment history a credit score is computed.

My credit history (list below) rent, utilities, mastercard, visa, student loans,

OH NO!!! (list below)  collections, foreclosures, judgments, bankruptcies…

Understanding credit scores

Credit scores range from 300 to 850 and have proven to be highly predictive of future repayment performance.  Lenders therefore depend on an individual’s credit score to determine the risk of a borrower defaulting on their mortgage loan.

In the past a credit score of 580 was commonly used as the lowest score acceptable for obtaining a mortgage, however after the 2008 mortgage crisis this score is now considered too risky and a score of at least 640 is now typically required.  Scores above 720 are considered “good” credit since they represent a low risk of default and therefore the best pricing is obtained by borrowers with the highest credit scores.

300 NO WAY!

580 Sorry – won’t work today

640 Acceptable – but by improving your score – you could save!

720 WAY TO GO! That’s going to save you some bucks!

850 Are you kidding? You go you little credit master!

How do I improve my credit score?

  1. Well – make payments on time! This may seem obvious to some, but making your payments consistently on-time over the years is the most critical component of your credit score.
  2. Check your credit on a regular basis and if there are any errors have them corrected immediately.  Federal law entitles you to one free credit report annually which can be ordered at freecreditscore.com
  3. Keep your credit card balances to no more than 1/3 of the outstanding limit. Maxing out your available credit negatively impacts your credit score, even if you pay your bills on time.
  4. Don’t close that account!  Keeping revolving accounts open especially over time improves your score.
In brief 

1. Make Payments ON TIME!!

2. Check your credit at freecreditscore.com.

3. If your Visa limit is $15,000 don’t let your balance go above $5,000.  Maxing out your cards damages your credit score!

4. Don’t close that account, even infrequently used accounts can improve your score.

Thanks for viewing our quick facts Credit video, I hope you found it helpful.  If you have any questions please feel free to call us, our loan officers are friendly and ready to help!

Our loan officers are happy to answer any questions!  So give us a call at 800-Homestead-8! (A text file of this video can be found on our website)

 

Adjustable Rate Mortgages (arm)

An ARM loan or Adjustable Rate Mortgage,  is a mortgage with a rate that can adjust. While the term has been vilified as one of the causes of the dreaded, “mortgage meltdown”, not all ARM’s carry mortgage rates that are unreasonable. Just like most anything, all it takes is a little effort to understand the different ARM programs and to see if they would be beneficial to you./wp-admin/post.php?post=669&action=edit#

To understand an ARM correctly, we need a few definitions along with our example:

John, in Chesterfield Missouri, has a mortgage application that has a start rate of 2.50%, 5/1 ARM with 5/2/5 “Caps”, and 2.75% “Margin” with the 1 Year US Treasury as the “Index”.

Index

An Index is a guide used to measure interest rates. Examples of interest rate changes are, 1 year LIBOR(London Interbank Offered Rate, 1 year treasury, and Prime).  This is available on any financial website. Your interest rate is computed based on the index, the month before your adjustment period ends.

Margin

An easy way of thinking of Margin is as the lender’s markup on funds.  It’s added to the index. If you don’t know your index, its normally available on your note, or ask you loan officer if you are yet to close. This is where you need to pay close attention. Abusive lending practices were introduced into margins. A normal margin is about 2.75%, however during the time where the causes of the mortgage meltdown happened, some margins were as high as 8%.

Adjustment Period

The adjustment period is the disclosure of periods the rate is fixed before it adjusts. In our example, John from Chesterfield Missouri mortgage has a 5/1 ARM means the interest rate is 2.5% for the first 5 years, adjusting on the 61st month, then every 1 year thereafter.

Interest rate Caps

Cap on a mortgage discloses the maximum percentage an ARM can adjust per period and over the life of the loan, or “Capped”.  For example, the 5/2/5 caps means John in Chesterfield’s ARM can’t adjust to more than 7.5% on the first adjustment, no more that 2% per year thereafter, and no more than 7.5% over the life of the loan. Again, this is also a place to pay close attention. ARM caps are there to protect the consumer against unreasonable interest rate jumps. A normal ARM cap for the 1st adjustment is 2-5%. During the pre-mortgage meltdown days, we saw no cap and a life cap of up to 18%!

So How is my ARM rate computed?

Index + Margin = Interest rate, limited by the interest rate cap.

So, using our example above.  John from St. Louis (Chesterfield) has had his ARM mortgage for 5 years now and the US Treasury is at 1%.  So Index of 1 + margin of 2.75=3.75% will be John’s new interest rate for the next 12 months.

When Should I choose an ARM?

Provided this isn’t your first rodeo owning and financing a home, you could consider and ARM if:

  1. You plan on being in your home for the a time period less that the fixed period of the ARM. Say, if you are planning on moving in 4 years, a 5/1 ARM may work well for you.
  2. You have additional income coming in soon. Say, you are first in line for the next promotion and Junior’s college fund has not yet been fully funded.

So, to conclude, ARM’s aren’t for everybody, and they can have some tricky parts. However, provided you’ve done your research, they can be of benefit in the right circumstances.

 

So kids, you want to buy a home in St Louis?  Homestead Financial is a Mortgage Company in St Louis and Kansas City with answers to the most common questions and the information you will need to qualify for a mortgage loan.

  • How do I qualify for a mortgage?
  • What does my credit score need to be?
  • How do I improve my credit score?
  • How much down payment do I need?

Let’s start with the 3 C’s of qualifying for a mortgage: Credit, Capacity, and Collateral.

Credit, Capacity and  Collateral

CREDIT: You used to be able to get a decent interest rate and big mortgage with a credit score at or around 580. Now it takes at least a score of 640, if you are below that, you’ll have to work on improving your credit.

580 with X thru   640 underlined or circled

There are many ways to improve your credit score, but paying bills on time and keeping balances low are the best places to start.

Ways to improve your credit score:

Rule no. 1   Pay bills ON TIME

Rule no. 2    Keep credit card (and other monthly debt balances) LOW

CAPACITY: You need to be able repay your mortgage loan and support that ability to repay with documentation. Borrowers must prove sufficient income as well as demonstrate an acceptable debt-to-income-ratio. In other words, your documentable income must be good, but you also cannot be carrying a lot of debt. It’s a good idea to reduce your credit card debt as much as possible before beginning the home buying process.

Most recent pay stubs, W-2 (last 2 years), tax return (for self employed last 2 years)

A debt-to-income ratio below 40% is recommended   for example: $2000 monthly obligations/$5,000 gross mo income = DTI of 40%

COLLATERAL:    Today most banks want borrowers to put down 20% of the purchase price of the home. However, there are many programs offered by the FHA as well as Mortgage Insurance Companies that insure mortgage lenders against loss while providing options to help consumers buy or finance homes with less than 10% down.

Recommended down payment is 20% of the home purchase price

OR

Reduce required down payment amount with:

FHA programs (such as 1st time home buyer programs)

PMI (private mortgage insurance)

Thanks for viewing our 3C’s quick facts video, I hope you found it helpful.  If you have any questions please feel free to call us, our loan officers are friendly and ready to help!

Our loan officers are happy to answer any questions!  So give us a call at 800-Homestead-8!

Clinically put, Private Mortgage Insurance, or PMI or MI, is insurance that will help to protect a lender from loss in the case of a default by the borrower. MI is almost always required on loans with less than twenty percent equity. That means, if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your home’s value, you will be required to pay mortgage insurance. While it is a payment that the borrower pays to insure another party, it does have its benefits.

How is mortgage insurance charged?

There are a couple of ways MI is charged. There is Monthly MI, which is computed based on various factors such as credit score, LTV(Loan to Value), and term, then there is MIP(Mortgage Insurance Premium) which is charged up front, and most of the time added to the loan amount. Some programs charge one or the other, while some, (Gulp) charge both. In some cases, there is an add on to the interest rate which pays the premium, called Lender Paid MI. (LPMI)

Why should I pay MI?

Simply put, if you don’t have 20% to put down on a mortgage when you purchase or refinance, then be happy you get to pay MI. For example, in Kansas City and St. Louis, the average home sales price is right at $145,000. I don’t know about you, but I didn’t have 20% down ($29,000) sitting around in my checking when I purchased my first home.

Having MI to purchase a home allows most buyers to get into a home with as little as 2.5% down in some cases. So without the benefit of MI, purchasing a new home would be very difficult.

However, here are some tips to be as efficient as you can with the premiums you pay.

How to pay as little MI as possible

  1. Save as much money as you can. The larger the down payment, the lower the MI, and/or MIP.
  2. Keep your credit score as high as possible. Remember, the minimum score to get a home loan these days is 640. The higher the score, the lower the MI.

How to get out of paying MI if you are already paying

  1. Most MI contracts cancel when you pay the loan amount down to 78% of the original value of the home at purchase or value on the last refi. However, that takes almost 10 years if you put down 5%.
  2. The 2nd way to get out of paying MI, is by refinancing your home assuming you have built up 20% equity through a combination of principle payments and appreciation. However if you are content with your existing loan, you should call your lender to see on what conditions they will cancel your MI.

To summarize, while MI is a premium you pay to insure someone else’s interest, it helps people buy homes and refinance homes with less that 20% equity and with some good planning and discipline, there are ways to keep the premiums to a minimum.

 

Of the potential borrowers that apply through either of our St. Louis or Kansas City mortgage offices that get turned down, the major reason is due to credit score (minimum required is 640) and the other is due to value.

While there is nothing we can do in the near term about value (from the housing crisis), here are some tips to improve your credit score that can help you in the next 30-180 days.

1. Pay your bills on time. Do not pay them late. Call this the sarcastic “OMG” part of our blog, but this makes up 35% of your credit score. It is important to note, that paying your bills late, also means:

  • Paying late, but paying the late fee. You are still marked as paying late.
  • No longer paying your car loan because you “gave it back” is still paying your bills late. “That’s not a repossession, we gave it back”, is not a viable argument.
  • Allowing a debt to go to collection because you “disagreed” with the charge is still marked as paying late. You need to pay the debt to avoid the late mark then get your money back from the creditor.

2. Keep the Balances on Revolving Accounts Low.

For example, if you have a credit card with a $10,000 limit, and:

  • You owe $10,000, that is bad. This means you are maxed out.
  • You owe $100, that is Good! This means you have financial room.
  • You haven’t used that credit card for a while, don’t close it out. The capacity to have access to credit helps your score.

3. Adding a Spouse as an Authorized User:  This works for the situation where one spouse has a higher, qualifying score, but the other does not, but both borrowers income is needed to qualify for the loan.

If your spouse has available credit on their credit cards when you have little credit or little available, then ask to be added as an authorized user. This will help both borrower’s score if you need a few more points.

4. Adding a Secured Credit Card: I’ve mentioned before that credit card utilization accounts for 30% of your score, so if you’re having trouble getting a credit card, then apply for a secured credit card. We’ve had success referring borrowers to Orchard Bank, www.orchardbank.com.

5. Use Department Store Credit Cards as a Last Resort: While they can help, department store credit cards usually keep a low credit limit, consequently, are easy to max out, and can’t be used at a wide variety of stores.

By using a couple of these tips, hopefully that may result in an increase in score just enough to qualify or keep the rate you qualify for as low as possible.

Should I cut my credit cards up, so I Never use them Again?

Effective credit card utilization makes up 30% of your score so Listen UP! We often hear our customers say, “I’m closing this credit card and cutting them up” believing this will help their credit. However, I’m here to tell you that it helps in some cases, but hurts in others. Here are some helpful tips.

If You Don’t use it, Don’t Lose it.

One of the criteria we are scored on by the credit repositories is length of credit history. So don’t close that credit card even if you haven’t used it for a long time. Closing out old credit cards shortens that history, and consequently makes your credit viewed as riskier than borrowers with longer histories.

If there’s a balance, don’t close it.

This is the proverbial frustrated couple that says, “I’m closing out those credit cards and cutting them up”. Closing a credit card with a balance is like a double whammy. When you close a credit card with a balance, your total available credit and credit limit report as $0, but now has a balance. So the credit card that had available credit on it now looks like a maxed out credit card, which is very bad.

If your credit card is your only one, Don’t close it

Since part of your credit score (10%) is based on the different types of credit you have, keeping a credit card in the mix will add points to your credit score. Leave your credit card open to show that you have experience with this type of revolving account. Frequently, if we are trying to get a customer to qualify for a mortgage, and they score just short of the 640 minimum score, we often direct them to a bank that offers a secured(one that requires a deposit) credit card to raise their score to qualify.

So after all that, when should I close one?

Close credit cards if you have enough other revolving accounts with low balances and/or the terms or conditions are such that the drawbacks or costs outweigh the benefits of having them. In this market, a couple of points to your score means a lot in terms of qualifying for a mortgage or getting the best interest rate possible.

So to wrap it all up, in rare cases, cutting up your credit cards and never using them again helps in some cases, however, in more cases that not, its best just to have a little bit of discipline, organization and good old common sense.

Understanding the new HARP home refinance program.

Effective December 1st, 2011 new changes to the government’s Home Affordable Refinance Program (HARP) offer hope for homeowners paying their mortgages on time, but unfortunately owe more than their home is worth.

Here’s a look at some of the key elements of the changes to the government-backed mortgage refinance program, announced by the Federal Home Finance Agency (FHFA).

Loan-to-value restriction reduced

The first thing that jumps out is how far your home has fallen in value since you took out your mortgage is no longer a consideration.

Previously, HARP limits triggered if your mortgage balance exceeded your home value by more than 25 percent. That limit has been totally eliminated, making refinance even if your home value is a third of what you owe on your mortgage, or even less!

Fees Reduced

The new HARP rules waive certain fees charged at closing, particularly for borrowers who choose to refinance into 15- or 20-year fixed-rate mortgages. Closing costs have been seen as a barrier to HARP financed transactions, so FHFA is hoping that waiving these fees will attract more interest to refinance. With values no longer an issue, appraisals are no longer required, provided a reliable automated estimate is available, provided participating lender overlay’s do not say otherwise.

Some fees associated with closing costs on the new loan, however as customary with most refinance transactions, can be financed into the new mortgage.

What types of Loans are covered under HARP?

HARP transactions are available to borrowers who have mortgages backed by Fannie Mae or Freddie Mac. To find out if your loan is already owned by Fannie or Freddie, you can check on their websites at www.fanniemae.com or www.freddiemac.com . The Fannie or Freddie owned loan must have been on their books prior to May 31st, 2009. One to 4 unit dwellings.

Who’s eligible?

Provided your loan is already owned by Fannie or Freddie, you are required to have been current on your mortgage payments for the last six months and been late a maximum of once in the last 12 months.

How much can I save?

Underwater borrowers refinancing through the program will save an average of $2,500 a year on their mortgage payments, or more than $200 a month, according to Shaun Donovan, Secretary of the Department of Housing and Urban Development. The government estimates the changes to the program will benefit up to 1 million people, although Moody’s Analytics puts the figure at 1.6 million. The Obama administration may be a bit cautious after their original estimates for borrowers helped by the current version of HARP and its companion HAMP loan modification program turned out to be too optimistic.

What kind of loans can I get?

This is a significant change from the current HARP. The administration is encouraging underwater borrowers to refinance into short-term 15- and 20-year fixed-rate mortgages by waiving most or all program fees for those loans. The current program mandates that borrowers refinance into 30-year fixed-rate mortgages only. Homeowners will still be able to refinance into 30-year loans if they wish, but they’ll have to pay more fees if they do. Combined with the ultra-low rates now available on 15-year mortgages, that’s a significant prod for borrowers who’ve been in their homes a number of years to shorten up their term and start building back more quickly toward positive equity.

For many small business owners, the economy has been tough. With tightening mortgage regulations, qualifying for a mortgage has been tougher, causing many applicants to ask, “How can I qualify for a mortgage if I’m self employed”.

Here are 5 tips for a smooth mortgage application for a self employed person.

1.      Understand the income you make:

Ever heard of the saying, “Give me the bottom line”? The saying has roots in the financial industry.  Sure you may have grossed $150,000 last year(Top Line), however, writing off $140,000, leaves you with a Bottom Line of….you guessed it $10,000. So lenders are forced to qualify a borrower making $10,000 per year which won’t buy you much of a home in this day and age.

Gone are the days of writing your income on a loan application with no supporting documentation. Today all qualifying income must be documented. Continue reading “How Can I Get a Mortgage if I’m Self Employed”