Getting a Mortgage for Home Improvements
If you are sitting in your home pondering a major expansion in the kitchen, finishing the basement, or completing key repairs of the home, a new mortgage is one potential source of funding for such a project. Of course, there are many sources of funding for these undertakings. Cash on hand, credit cards, or even personal loans can be used to help pay for work on your property.
The key advantage of mortgage funds is that the rate you pay on a mortgage is almost always the lowest rate for consumer borrowing. In addition, the interest paid on mortgage debt is generally tax deductible (seek the advice of your financial planner or tax advisor). Furthermore, if a borrower is to take a mortgage to extract equity or cash out of the property, one of the best uses for this cash is improvements that help increase or secure the value of that property.
The three main choices for getting cash out of your property for home improvements are: a cash out refinance, a second mortgage ( including a home equity loan and a home equity line of credit ) and specialty mortgages such as the FHA sponsored 203K loan and FNMA and FHLMC home loans that are periodically introduced to assist with home improvement financing. Since the 203K loans are a seldom used product and specialty loans come in and out of favor, these home loan types will not be covered.
Before discussing the various home loan options it is important how a mortgage lender determines the equity in your home. The equity in your home is the difference between the value or price of the house and the amount of mortgage loans you owe against it. A house that is valued at $200,000.00 with an existing first mortgage balance of $145,000.00 has $55,000.00 in available equity. Though this may seem like a fair amount of equity, a mortgage lender will provide a new home loan for only a percentage of the homes total value not all of the value. If a homeowner in this scenario were to obtain a cash out refinance for 85% loan to value, the amount of money obtained would be approximately $25,000.00. This is calculated by taking 85% of the home’s value or $170,000.00 and then subtracting the existing first mortgage balance to arrive at a lendable equity figure of $25,000.00.
Mortgage refinances are one of the most common methods for obtaining cash for home improvements. Refinance transactions are often 50% or more of all the loans originated across the nation every week with a great deal of variation depending on the level of mortgage rates. A measurable percentage of these refinance transactions are to extract cash from the property. This cash is used for an assortment of purposes; most mortgage lenders will tell you almost legal purpose is acceptable for a cash out refinance.
Fannie Mae and Freddie Mac do not establish rules on the home improvements a borrower may or may not finance with a new mortgage loan. Therefore an existing homeowner can obtain a cash out refinance to finish the basement, do repairs or add a new room to the structure. There are no limitations on the minimum amount or maximum amount of financing that needs to be spent on repairs. If a borrower obtains a cash out refinance to pay for home improvements the main consideration of the mortgage lender is the condition the property is in as well as what the funds will be used for.
Standard conventional home loans are made based on the existing condition of the property. This approach results in a standard new home loan qualifying based on the as is value of the property not the as-completed value. Deferred maintenance is the term mortgage lenders use to describe a property that is in disrepair. Minor deferred maintenance does not often raise any red flags. Significant deferred maintenance will usually have to be addressed by the appraiser when they inspect your property. The appraiser will generally attribute a dollar value to the amount of deferred maintenance.
If a property is presently in disrepair the mortgage lender will not a grant a conventional loan. If the property is going to have a significant structural change the mortgage lender may also be concerned about approving the home loan. Questions may arise as to who is performing the work as well as how and when it will be completed. Oddly, even though the mortgage lender based the decision on the home loan on the existing property condition and value if a new mortgage loan is going to impact the lenders collateral significantly, they will want to make sure precautions are taken such as a licensed contractor is performing the work. The improvements should be performed by contractors who are licensed, registered, or certified or have the highest level of certification required.
Other than the limitations on the loan to value for a cash out refinance the structural changes that may be performed, a mortgage refinance is straight forward and the guidelines are the same as they are for a purchase regarding credit, income and debt ratios.
Home equity loans and second mortgages are also an option and are considered interchangeable terms. These loans are mortgages you get after you already have a mortgage loan on your property. There two distinct different types of home equity loans or second mortgages, the home equity line of credit and the home equity loan.
The home equity loan is generally a fixed rate loan that taken out for a predetermined amount and is disbursed to you at one time. The home equity line of credit is also a predetermined sum of money but instead of getting the money all at once you are given a checkbook to access the available balance of the loan. Most all home equity lines of credit are based on a variable or adjustable rate.
These loans will have similar qualifying standards as first mortgages. The borrower’s income, debt ratios, credit and the amount of the loan relative to the property value or loan to value will be evaluated. When measuring the loan to value for a home equity loan the mortgage lender will add the first mortgage amount plus the propose second mortgage amount and divide that figure by the home’s value to come with a ratio called the CLTV or combined loan to value. If a homeowner has a home valued at $200,000.00 with a first mortgage of $125,000 and requests a home equity loan of $30,000.00 the original loan to value is 63% and the combined loan to value will add the home equity loan and would be 78%.
One of the main disadvantages of home equity loan is the mortgage rate on these home loan products is higher than the mortgage rates found on first mortgages. A second mortgage home loan is considered to be a more risky loan for a mortgage lender or bank. The mortgage lender charges a higher mortgage rate over a home loan that is in first position.
Aside from acquiring the loan you may need, make sure you pay attention to the increased expenses of home remodeling. Get at least three quotes and stay within a budget. Taking cash out of your property for home improvements is generally one of the best uses of the equity, often the cost of home improvements do increase the value of your home on a dollar for dollar basis.
There is an ample supply of mortgage lenders that will offer home improvement loans available. It is up to the homeowner to decide which one is the most suitable for their needs and budget. The first step should be to find out as much as possible about potential mortgage refinancing, home equity loans and the mortgage lenders. Utilize the mortgage calculators to help determine debt ratios, loan to values and monthly mortgage payments. Closely consider important factors such as mortgage rates, and closing costs. Shop and compare home loans carefully before making a long term commitment.
A New Mortgage Loan, Is It Time To Buy a Home
If you’ve wavering between buying and renting, there is more than the pride of ownership to consider. Buying a home comes with additional costs, but it also has many more perks than renting. Even with the possible financial advantages of homeownership over renting, if you’re beginning to itch to buy your own home be sure you’re truly ready.
A home should be first viewed as a place to live, it can also be considered an asset for future plans, an investment in a community and possibly and financial asset as well. This unquestionably does not mean the house buying is one big bonanza.
Renting allows an individual or family the ability to be generally free of most maintenance responsibilities that would come with a home. By renting you do lose the chance to build equity, by property appreciation and mortgage balance reduction, take advantage of tax benefits, and protect yourself against the inconvenience of rent increases.
For first time home buyers, purchasing a new home can be overwhelming and comes with the uncomfortable process of obtaining financing or getting a home loan. Unfortunately, the home loan process is simply overly complicated because of the confusing expressions and rules in the mortgage lending industry. A few steps taken in advance to prepare for the home purchase can go a long way to facilitating the purchase and mortgage loan transaction.
Given the asset value, stability of payments, freedom, stability, and security of owning a home, potential new buyers have to consider whether they are prepared to make the leap into a new home and new home loan.
You Have the Down Payment
The first step to decide if you can buy a home is not the monthly costs. It is the initial costs of a home. If you can afford a true down payment on a home including closing costs and possible points, it most likely makes sense for you to buy. Home owners get serious tax breaks, but that tax break will be lost if you’re paying a penalty for not having an adequate down payment or are struggling with a subprime mortgage that is too much for your income to bear.
Save at least five percent of the home’s value before purchasing and push for up to 20 percent. In addition to having immediate home equity, you’ll also find that your mortgage loan options are much more attractive without trying to find loans which require low down payments that will also require higher credit scores and mortgage insurance. The exception would be loans for qualified veterans and FHA loans which are subsidized by the government.
Can You Afford It Long Term
A home is an excellent investment, but the bulk of homes are an investment that should be considered over the long-term. Despite television shows to the contrary, flipping a home or selling it after a few well chosen modifications, is often not a lucrative option in the majority of housing markets. Invest your money first is proper securities and market options.
With this sort of investment you are able to access your money quickly in case of emergency. By tying up all of your money in your home and a home loan, you will have to take out a new mortagge loan or sell your home, which can take months, to access funds should a financial crisis arise. And as recent markets have shown, home values can go down as well as up.
You must also consider your income in the long-term. If you’re stretching to meet your monthly mortgage payments, but know that you’ll need a new car in a year or less, buying a home may not be a wise use of your money. Either invest in a smaller, more affordable home, with a smaller mortgage loan or continue renting until your income rises to the level you need to afford the sort of home you’d prefer.
There is a tremendous array of mortgages available today, but all of the varieties fall into two main categories, fixed rate mortgage loans and adjustable rate mortgages - all carry quite long repayment terms.
You Have Done Your Homework
Arranging financing on a home is likely one of your first steps in buying. Begin working with a bank to arrange a prequalification or preapproval which is an estimated amount of financing before making any offers on a home. This will facilitate the sale and make the sale itself much cleaner and faster. To arrange mortgage loan financing, anticipate 6-8 weeks for the complete home loan underwriting process and closing. Home loan preapproval takes far less time, however.
Knowledge is the key to successful homeownership with regards to the dwelling as well the home loan used to secure the purchase. To become a first time homebuyer, it’s important to know where and how to begin the home buying process.
Evaluate whether you have a steady source of income to handle the monthly mortgage payment. Investigate your credit report to see that you have a good credit record and credit score. Look at your outstanding debts as wells, looking especially close at outstanding long-term debts, like car payments. Review your monthly budget to be prepared for the mortgage payment, mortgage loan costs, moving and ongoing expenses such as home maintenance and repair.
Consider Whether You Have Time
Another major consideration for homeownership is that you have the time to deal with the upkeep of that house itself. When will you mow the yard and repair any little problems that arise? Renting makes these little tasks other people’s problems. You can hire a cleaning or lawn service, but you still must be around enough to facilitate any workers in or around your home.
Examine Potential Homes Thoroughly
When it’s time to begin actively searching for a new home, look at all manners of homes within your price range. Travel the area where you’ll be moving and consider various locations and neighborhoods. As you view each house, try to minimize the emotional response, although that is important, and instead work through your checklist. In addition to the features you’ve listed, you should also be comparing each home on the basis of cost, convenience, condition, and capacity. When you compare homes on a logical basis, it will soon be evident which home is the best investment for you and your family.
You’re Staying Put
If you move constantly or have a career that takes you far from home on a regular basis, you may be better off renting a while longer. Owning a home means putting down roots in a particular community. You’ll be paying for the upkeep of the neighborhood as well as school taxes. You will be paying a monthly mortgage payment that requires timely payments. Your children will be friends with other kids nearby and you may enjoy getting to know your neighbors at backyard grills or such.
If you’re constantly moving around the country or even the globe, owning a home may be a commitment you’re not willing to endure. You’ll be responsible for the home’s upkeep even while traveling and selling a home after a short-term will likely cost you far more than you’ve made in equity.
Follow the boy scouts motto and be prepared before you decide the time is right to buy a new home and obtain a new mortgage.
Home Buying and the Final Walk Through
The final walk through inspection is something that is customary for the buyer to do before closing on a new home loan and buying a house. During the walk through inspection, the buyer wants to check that the property to see that it is the same condition as the time of the contract to purchase the home was signed. The buyer should also check to make sure the property is clean and it meets any requirements that may have been established in the purchase agreement.
The final walk through is in essence a final inspection of the property prior to taking possession of the property. This process is established to determine that the property is in the condition it was represented to be in the terms of the contract. If there are problems but they were not stipulated in the contract, then the seller is generally not obligated to remedy these issues. If there are issues that were called for in the contract that were not handled before the walk through then it may be wise to enlist the help of an attorney to negotiate the best settlement.
The biggest problem that arises in a final walk through and inspections is not an issue with the condition of the property as much as it is a question of how to handle the issues that arise. Generally, the final inspection is scheduled within day or two of the mortgage loan closing. Since delaying the home loan closing or settlement is often a difficult undertaking, negotiate problems that are not significantly costly becomes a difficult assessment.
If there are any issues that arise during the final walk through, regardless of the magnitude, these concerns should be discussed before the home loan closing and transfer of ownership. When there are issues that can not be easily settled before the home loan closing and property transfer the tough question arises as whether or not to delay the home loan closing.
When there are disputes about the property conditions that are not handled until the mortgage loan closing the closing can end up lasting for hours and be very unpleasant.
It may appear that the simplest option is to delay the closing until any issues such as repairs or cleaning and removal of personal property is completed. However, more often than not delaying the mortgage loan closing and property transfer is not possible. This may arise because the buyer’s mortgage rate is locked in and the loan lock may expire if the closing date is delayed. In this case, the buyer may be forced to accept a higher mortgage rate from the mortgage lender. Delays in the home loan closing may also result in a charge for a redraw fee from the mortgage lender to prepare a new set of mortgage loan documents.
A delay in the closing may also negatively impact the seller. If the seller may need the proceeds from the sale of his old home in order to purchase a new property with new home loan. In this case, the best thing for both parties is for everyone to meet either at the closing table or preferably before hand and come to a compromise.
Final walk troughs or final inspections are generally regarded as a protection to the buyer. However, delays in the closing with regards to the home loan are the primary responsibility of the buyer since it is the buyer’s mortgage being established. A dispute that can not be resolved may very well up costing the seller money in the end but initially it may cost the buyer different mortgage terms or closing costs.
The mortgage lender is working with the buyer not the seller and the mortgage lender is not involved in disputes unless it entails the value of the property therefore the mortgage lender will not get involved in a dispute and can only charge the buyer if there is a redraw fee or if the mortgage rate has to be relocked.
These disputes are not terribly frequent but they do occur. The best advice is to have an attorney review the purchase contract before it is accepted so you know what your protections are in advance. If a dispute over the condition of the property does arrive, once again it is sound advice to consult your attorney; after all, buying a house is a very large commitment that entails a considerable sum of money.
Home Loan Preparation Tips and Documents Needed
After shopping to find the right mortgage lender, its time to get ready and submit the mortgage loan application. Hopefully, as a prospective new home loan borrower you have already compared the mortgage loans available and are familiar with the loan qualification guidelines. One of the fundamental reasons to at least garner a basic understanding of the home loan process and guidelines is to aim and discover what documentation will be needed from you to satisfy the qualification requirements with the mortgage lender.
The more you know, the easier the process is. Although, it may seem foreign and a difficult task to understand the mortgage business, mortgage lending is far from rocket science.
Much of the information required by the mortgage lender will be requested shortly after or at the same time you fill out the home loan application. It is important to make sure you supply as many supporting documents as possible to the mortgage lender. Rarely do mortgage companies find that a customer supplied too much paperwork. Conversely, numerous customers of the mortgage lender do not provide the proper paperwork requested and subsequently complain about the amount of time it takes to approve the loans and set up the home loan closing or settlement.
Before panic sets in about the documentation required to approve your home loan request, you will not be asked to furnish your grades from high school. More often than not, mortgage loan approvals are completed through an automated underwriting system. These automated underwriting systems have significantly accelerated the time it takes to process a home loan request. The findings or results of the automated approval are the supporting documents that will be required from you by the mortgage lender. Fortunately, the automated systems have generally lightened the load on needed supporting documents for a mortgage loan.
It is important to understand that the loan approval is dependent on your qualifications and the documentation you provide to support your qualifications. To insure a smooth transaction, it is crucial that you have all your documentation in order before the initial application for the home loan.
Here’s a list of the most common documents needed in order to apply for a mortgage loan and meet the needs of the automated underwriting programs. Your loan application will include many of the following but clearly not all of these will be needed. You may be required to supply more or in fact fewer documents depending upon the type of home loan you’re applying for as well as the strength of your qualifications.
Personal Information:
Copy of your driver’s license.
Copy of social security card.
If applicable: copy of complete divorce, palimony, alimony papers.
If applicable: copy of green card or work visa permit.
Employment Information:
Most recent two years W-2’s.
Most recent pay stubs covering one month period.
If applicable: self-employed will need two years tax returns and YTD profit & loss statement.
Tax returns are generally not required for salaried workers or hourly wage earners that do not have commission income or reimbursed business expenses. For those home loan borrowers that do have reimbursed business expenses, commission income, self employment income or rental income, the most recent two years complete tax returns with all schedules will be required.
Savings and Asset Information:
Most recent two months complete bank statements for any and all accounts with all pages.
Most recent statement from retirement, 401k, mutual funds, money market, stocks, etc.
Credit Information:
Name, address, account number, monthly payment and current balance for: installment loans, revolving charge accounts, student loans, mortgage loans, and auto loans. Most of this data is used to fill out your home loan application and actual copies will not be needed by the mortgage lender.
If the Home Loan if for a Purchase:
Legible sales contract signed by buyers and sellers for purchase transactions.
Copy of the earnest money deposit check.
If a Refinance or you own Rental Property:
Copy of note from current mortgage loan.
Copy of hazard (homeowners) insurance policy.
Copy of the payment coupon or monthly loan statement for current mortgage.
If applicable: If the property is multi-unit, you may need the leases.
The end result of a well prepared loan application, supporting documents and understanding of the mortgage loan process is a file referred to as clear to close. The term used to describe the fact that your home loan is ready to be signed and the funds disbursed.
Mortgage Servicing
A mortgage servicer is a company responsible for collecting the monthly mortgage payments, disbursing the taxes and insurance if necessary and crediting the balance to the borrower’s mortgage loan account. The company that handles the mortgage servicing may engage in this activity for another mortgage lender or the company may be servicing the mortgage loan for their own portfolio of home loans.
The mortgage loan servicer receives a fee from each loan for the payment processing involved in servicing that loan. The fee is usually a percentage of the payment on the loan. Approximately ¼ of one percent is the standard fee for mortgage servicing. But the service fees will depend on many factors including the mortgage loan type. Fixed rate mortgages generally pay the smallest servicing fee followed by adjustable rate mortgages and then FHA loans and VA loans. Generally, the more work to do as servicer such as collection calls and notices the greater the servicing fee.
Often a home loan will have its servicing sold shortly after the mortgage loan closing. A home loan may in fact, have its servicing rights sold multiple times over the life of the loan. If your home loan is about to have its servicing sold or transferred to another company, the new servicing company must notify you within 15 days after the transferred occurred. Within the notice, the new servicing company must notify you of:
The new mortgage servicer’s name and address.
The date that your old servicer will no longer be able to accept payments.
The date this new servicer will begin accepting the monthly mortgage payments
A toll free phone number for the new servicer.
If you have optional insurance coverages, the terms to continue must be spelled out.
A statement will be included that clarifies there is no changes to the terms and
conditions of your original home loan and mortgage.
If your home loan has an escrow account, the servicer is required under the RESPA statute, to send an annual statement that illustrates the activity of the escrow account. The statement will show the account balance for the escrowed funds and reflect the payments made for property taxes and insurance over the prior 12 months.
New mortgage loan servicers are not allowed to require an escrow of taxes and insurance if the terms of the original do not call for an escrow.
After the servicing of a loan is transferred there is a 60 day grace period that bars the servicer from charging a late fee should the borrower inadvertently send their mortgage payment to the previous servicer or mortgage lender.
Usually the transition from mortgage loan servicing company to another goes smoothly, but errors do occur. It is always a good idea to check to make sure that the existing mortgage lender is selling the loan or the servicing rights and when they received your last payment. Then, check to see when the next monthly mortgage payment is due and to which address that payment should be sent.
Should you have a complaint regarding the servicing of your home loan, notify the servicer in writing of the complaint with as much supporting documentation as possible. Under RESPA regulations, the servicer has 20 business days from the time they receive your complaint to acknowledge the dispute and 60 business to settle the dispute. If you are not satisfied with the resolution and wish to file a complaint with Department of Housing and Urban Development, the contact location for such a complaint is:
Department of Housing and Urban Development
451 Seventh St. SW Room 9154
Washington, DC 20410
Understanding the Mortgage Loan Application Process
Once you are satisfied with the mortgage lender you have chosen to handle your home loan, the next step is to begin the application process. During the mortgage loan application process be prepared to hear various unfamiliar terms that are often only used in to the mortgage loan process. Terms you may encounter include; 1003, credit score, Fannie Mae, preapproval, prequalification, subprime, FICO score, Tri-merge, compensating factors and a host of others.
Don’t be intimidated, do your research and remember this is your home loan request; you can control many aspects of the process. Use this site to review the mortgage loan terms and loan types before you apply.
Mortgage loan applications are completed primarily in four different ways; over the phone, by mail, via the Internet or in person. Either method ends in the same result, with the submission of a completed mortgage loan application regarding the type of home loan which is a summary of the borrower’s qualifications for that home loan.
The choice of how to complete your home loan application for a mortgage is based on your preference. Almost all mortgage applications, with the exception of home equity loans, use the uniform residential loan application referred to the industry by its code number, 1003 ( pronounced: 10, 0h, 3 ).
Before you complete the mortgage loan application make sure you have studied the various home loan programs available and go one step to further and review the general underwriting conditions needed to qualify for that type of loan. Shopping and comparing home loan programs and mortgage rates should be completed well before the loan application is submitted.
The application that will need to be completed details, among other things, a borrowers income, assets, liabilities and a description of the property for the home loan. The home loan application is summary of the borrower’s asset, credit and income position at a particular point in time. It does not measure your character nor does it measure potential future changes, such as potential employment changes or debts that maybe incurred or satisfied at a later date.
After the mortgage loan application is completed, the underwriter and processor will check the borrower’s credit. Credit checks will serve the purposes of investigating the credit worthiness of the borrower as well as verifying the debts outstanding. The processors and underwriting department will also proceed to verify the borrower’s assets and employment to establish adequate funds to close on the house as well as sufficient debt ratios to qualify.
Be prepared to discuss any unusual circumstances that may put a hick up in the process, such as frequent job changes, erratic income, big deposit and withdrawals in your bank accounts or delinquent credit. Generally speaking, the more information you provide the faster and easier the home loan process will be. And once you know what the mortgage lender is looking for with the mortgage loan application, it is a good decision to get a leg up on the process.
In order to be a step ahead on the home loan application process, a prospective borrower should view their credit report in advance so they know what accounts are in the report, see any delinquent accounts that will need to be explained, the account balances reflected in the credit report as well as any accounts that do not show in the credit report. In addition, take the time to review your income and assets and utilize online mortgage calculators to help determine your debt ratios and loan to value. Try to be precise with regards to calculating gross monthly income and use current mortgage rates to avoid conflicts in the future. A good source for mortgage calculators is www.selectcalculators.com.
Along with filling out the home loan application, a number of supporting documents will be needed so the mortgage lender can process the loan request. The following is a list of commonly required documents and information needed at the time of the home loan application.
Borrowers names, addresses and social security number ( a drivers license and social security is the standard supporting document).
Description of the property to be purchased or refinanced.
Names and addresses of employers for the past two years.
One month worth of paycheck stubs.
Last two years w-2’s.
Last two months financial statements ( bank, investment account, 401k, etc..)
List of all financial accounts.
List of debts, names and account numbers.
Q. A large part of my monthly mortgage payment is the tax and insurance escrow, how is this account established?
A. An escrow account or sometimes referred to as an impound account, is established by a mortgage lender to collect and disburse tax and insurance payments. It is the mortgage lender’s decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. However, most all mortgage lenders require an escrow for loans that have less than a 20% down payment or a loan to value in excess of 80%. Certain government mortgage loan programs and secondary market sales of home loans will often require escrow accounts as a condition of the mortgage loan as well.
Mortgage lenders set up the escrow account to receive monthly payments from home buyers to then in turn pay for these obligations as they come due on the items such as annual insurance premiums, real estate taxes and assessments.
Mortgage escrow accounts work something like a forced savings account for the homeowner’s tax and insurance bill. The money to pay the annual property taxes or semiannual or in some cases, quarterly property taxes is deposited and saved in the escrow account that is managed by the mortgage lender or mortgage servicer and then disbursed by the mortgage lender on or before the tax and insurance due date. The money that is accumulated or deposited in the escrow accounts comes from a portion of the monthly mortgage payment made by the home loan borrower.
There are regulations that limit the maximum amount of funds that a mortgage lender can require a borrower to maintain in an escrow account. During the term of the home loan, RESPA rules prohibit a mortgage lender from charging excessive amounts for the maintenance of an escrow account. Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a mortgage lender may require the borrower to hold in an escrow account for the payment of taxes, insurance, etc. RESPA rules also require that the mortgage lender provide initial and annual escrow account statements.
The amount that needs to be placed in the escrow account initially and the amount of the monthly payments are determined by the cost of insurance and a tax assessment of the property. This amount will often fluctuate each year as insurance premiums rise or maybe fall and property taxes rise or may fall.
Each month the mortgage lender may require the home loan borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the mortgage lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year.
The mortgage lender is required to perform an escrow account analysis once during the year and notify the home loan borrowers of any shortage or excess funds ion the escrow account. Any funds held in excess of $50 or more must be returned to the borrower.
The process for calculating the mortgage escrow account starts with all the payment amounts or disbursements that will be paid out of your escrow account. This is usually the property tax bill and homeowner’s insurance bill. This total amount of insurance and taxes and other assessments if they apply are totaled up and divided by 12 monthly payments.
A trial running balance can then be calculated for the next 12 months listing all the monthly payments into the escrow account and all payments that the mortgage lender will pay out of the account when they are due. From this point, there is generally a time when the escrow account would reach a negative balance. In other words, when the first tax payment comes up there will likely not be enough money in the escrow account by simply adding then previous month’s monthly payments.
The next step is to increase the amount of money deposited so that all the monthly balances in the account, including the lowest point in the account, is at least zero so there is never a negative balance.
Finally, a reserve is added by the mortgage lender which may be added to the monthly balances. The escrow reserve amount may be a maximum of 1/6 of the total escrow charges.
When there is a deficiency in the escrow account which occurs because the mortgage lender has to use their own funds to pay a one of the disbursements, the home loan borrower will have to reimburse the mortgage lender. When the deficiency is less than one monthly escrow payment, the home loan borrower may have to repay the mortgage lender by adding to the next monthly payment to make up the deficiency in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the mortgage lender may require the home loan borrower to repay the amount over a period of 2-12 months.
The annual escrow account statement summarizes all escrow account deposits and payments during the mortgage lenders or servicer’s twelve month computation year. The annual escrow account statement also notifies the home loan borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.
Q. If I am concerned about getting approved for a mortgage loan, what should I do?
A. Of course, the first answer is to do your research. The number one way to help the mortgage loan approval process is to be prepared and understand how the mortgage loan process unfolds.
This may sound too simplified, but with the creation of credit scores and automated underwriting, the home loan approval process is based on the analysis of a series of numbers. Numbers such as, the amount of the down payment, the loan to value ratio, the borrower’s credit scores, debt to income ratios and more are all quantified and evaluated to come up with home loan approval or denial.
What is not included is subjective analysis. Number based assessments help to eliminate discrimination since color and race is not part of the input process. But, numbers can also hurt those borrowers that fell on tough times and are now putting their financial house in order. The mortgage loan approval and application is based on your debts, income, assets and credit at a point in time. Another words, you are approved or denied for a home loan based on your credit and income and other figures today, not where you will be tomorrow.
Mortgage lenders use an automated underwriting program, usually the one’s established by either FNMA of FHLMC, and input data about your current financial situation including your credit, income, debts and assets into these systems. Taking all the necessary information, the mortgage lender determines mortgage affordability. The key to any one individuals loan approval is be prepared and have the prettiest set of numbers for the mortgage lender to input in the automated underwriting system.
One of the most important numbers input or evaluated by the automated underwriting program is the borrower’s credit score. The credit score is one of the primary indicators of your ability to repay the mortgage loan, so it’s a good idea to know it before you apply with a mortgage lender. For the most part, if your score is above 760 you can expect to get the best mortgage rate a mortgage lender has to offer; if your score is below 660 you may have trouble getting approved until you improve your credit and credit score. You can obtain a free copy of your credit report annually at www.annualcreditreport.com.
Debt ratios are another key number quantified by the mortgage lender. Debt ratios are simply a measure of affordability. Debt ratios are measurements of affordability expressed as the percent of a borrowers income used to pay for debt. Mortgage lenders want to make sure a borrower’s monthly mortgage payment does not exceed 28 percent of their income before taxes. The mortgage lender will also look to see that total monthly debt payments including the mortgage payment, car payments and credit cards doesn’t exceed 36 percent of total gross monthly income. These two debt ratios are referred to as the front end and back end ratios in the mortgage industry.
Do the math calculations on your own with one of the mortgage calculators to see how your debt ratios stack up against these guidelines. The web site, www.selectcalculators.com is great site for mortgage calculators. If your proposed housing expenses or monthly mortgage payment is greater than 28% and total debt payments, car loan, student loans and other loans, is greater than 36 percent of your gross income, you may have trouble qualifying for new home loan. In tight situations, you may want to see is if there is a way to reduce some of those monthly debt payments before you apply for a home loan.
The down payment, assets and loan to value are all related measurements. The loan to value measure the loan amount in relation to the value of the home. An 80% loan to value mortgage equates to a home loan that 80% of the home’s value. For a purchase transaction, which would mean the borrower is putting 20% down or a 20% down payment.
The assets the mortgage lender is evaluating are the funds held by the borrower needed to cover that down payment, closing costs and reserves. The reserves are a measure of funds left over after paying for down payment and closing costs as a cushion or safety net. At least two months reserves will be mandatory. This is defined as two months worth of monthly mortgage payments. More reserves will make the home loan approval easier. Once again, the mortgage calculator and a look at your own finances can tell you where your loan to value will be as well as the number of months of monthly mortgage payments you have in reserve.
All of these numbers, debt ratios, credit scores and loan to value are evaluated by the mortgage lender via the automated underwriting program. The better any of the numbers are the easier the home loan approval process will be. Really high credit scores will be approved with less paperwork than lower scores. Larger down payments are processed faster. Low debt ratios will facilitate the approval process as well.
In a perfect world you want to save for a large down payment, improve your credit score and lower your debt-to-income ratio. But, in light of that, you may simply want to know where your weak spots are regarding these factors and see what you can do to improve on them before you apply for new mortgage loan. This is a good rule whether you are applying for a purchase or a mortgage refinance.
Q. How do I find the best mortgage lender?
A. The most important step in the process of finding the right mortgage lender is to do plenty of research. Unfortunately, most consumers will spend more time shopping and comparing the price of a new television set than they do shopping for a mortgage lender.
When shopping for the best mortgage lender is not only important to shop around and compare mortgage rates and costs, it is equally important to investigate the mortgage lender and their services. It’s important that you find a mortgage lender who will work with you to meet your needs and who you feel comfortable with and gives you a feeling of trust. This will entail comparing rates, services and competence.
It’s not that difficult to choose a good mortgage lender, but you do have to be informed and know what you are looking for in a mortgage lender. In order to shop and compare mortgage lenders, you need to fully understand what you are searching for not what they are selling. In order to understand the product, a prospective home loan borrower has to learn about the mortgage loans available, the average mortgage rates, the costs and the terminology involved in the mortgage loan process. With the knowledge of how the mortgage loan decision making process works, a mortgage shopper can better compare mortgage lenders and question the services and products offered.
Above everything else, do your homework before the application process begins. To find the right mortgage lender a consumer will have to question the mortgage lender and loan officer and this will be difficult to do without some understanding of how a mortgage loan is originated, processes and closed.
Once you, as the potential home loan borrower, understand the mortgage loan types and the process involved, its time to quiz the mortgage lender and mortgage loan officers. The first thing to find out is how knowledgeable the mortgage loan officer is about the home loan options and equally important, how well they explain the process and any potential pitfalls to a smooth home loan closing. The mortgage lender or mortgage loan officer should explain the mortgage rate lock process, the mortgage payments, the loan term, when and if you can refinance again and more.
Which mortgage lender has the best mortgage rate will certainly be a consideration. Of course, it is important to discuss mortgage rates and closing costs. This is a big ticket item and the mortgage rate can have a significant impact on the total costs of the loan. Comparing mortgage rates fortunately is fairly straight forward process.
Go online and check the prevailing mortgage rates in your area for the home loan product you are most interested in. Use these mortgage rates as a starting point to compare the mortgage rates of lenders you call and measure how competitive their mortgage rates really are. Don’t choose a mortgage lender based on mortgage rate alone. Make sure the mortgage lender is competitive with their mortgage rates but be sure to investigate the costs and service as well.
Comparing closing costs can sometimes get fishier. Some mortgage loan officers remain intentionally vague about the total closing costs. Other mortgage lenders employ loan officers that just don’t know that much about what they sell. In these cases it may be wise to move on. A representative of any mortgage lender should be able to explain the mortgage costs with great detail. That means they should explain any origination points, the costs of the appraisal, the title insurance costs, the cost for processing, the credit report, the tax service fee and any other fees the mortgage lender will be charging.
Not only should a good mortgage lender explain these costs, they should be able to explain what they are and why you are being charged the corresponding fee. Once you have chosen your mortgage lender and submitted a home loan application, get a Good Faith Estimate in writing itemizing approximate mortgage costs and fees. Pay close attention to all the figures on the Good Faith Estimate.
You should know, up front, how the mortgage lender will evaluate your application. Have the mortgage lender explain the mortgage loan process and the how they come to approve your home loan request all the way up to how and when they set up the mortgage loan closing or settlement. When you speak with the mortgage lender they should explain the automated underwriting process, the verification process, the documents needed by you to support the down payment and your income as well as how long this process should takes.
While the mortgage lender briefly explains the process, find out how accessible they will be while your home loan application is being evaluated and underwritten. With all the transactions now taking place on line including mortgage origination’s, a face to face application or consultation is not necessary with a mortgage lender but you should at least be able to contact your loan officer by phone or email regularly. Some customers can be annoying but the job as the mortgage loan officer to help you get a home loan. You want to be assured it will be easy for you to monitor the status of your mortgage loan application and be able to ask questions along the way.
A final step should be to ask for references. As good mortgage loan officer should be able to immediately provide references of satisfied customer’s even customers that they are presently working with.
In a nutshell, to choose a good mortgage lender you want to research the products they offer and the mortgage rate, the level of service in handling a home loan application from beginning to end and the reputation of the mortgage lender. Mortgage lenders who understand mortgage rates and costs and the whole loan process are most certainly going to be a very knowledgeable and resourceful mortgage loan officer who has not merely a salesman. Be sure to choose a company that gives helpful advice and that makes you feel comfortable.
Q. What is Private Mortgage Insurance and why do I need It?
A. PMI is an acronym for private mortgage insurance also referred to as simply mortgage insurance. PMI is a type of insurance that covers the lender on the event you default on the loan. It is generally required on loans that have high LTV’s or low down payments. Mortgage lenders will normally require private mortgage insurance on home loans that have a loan to value greater than 80%. The loan to value or LTV is measured by taking the loan amount divided by the property value or for a purchase it can also be measured by taking 100% minus the percentage of the down payment. For example a home loan purchase with 10% down payment has a loan to value of 90% or a home loan that is for $75,000.00 on a home that is appraised at $100,000.00 has a 75% loan to value.
The private mortgage insurance covers the mortgage lender but will have top be paid by the home loan borrower as part of their monthly mortgage payment. Private mortgage insurance was established to help home buyers that had less than 20% for down payment. The insurance company absorbs a portion of mortgage lenders losses in the case of default and foreclosure for those home loans with private mortgage insurance that have less than 20% down. Without the added insurance, the mortgage lender would not make the home loan unless the down payment was at 20% or greater.
The private mortgage insurance cost is a reflection of the mortgage loan amount, the type of mortgage loan and the loan to value. The higher the loan amount is relative to the home’s value or the LTV, the greater the private mortgage insurance cost will be. This may seem fairly obvious, the less equity in the home the more the risk to the mortgage lender and therefore the higher the insurance costs.
Higher private mortgage insurance costs due to larger loan amounts is not necessarily a measure of risk but simply a higher cost since private mortgage insurance is priced as a percentage of the mortgage loan amount.
The mortgage loan type can change the private mortgage insurance costs since some home loans have a slightly higher risk of default. The best example for this is adjustable rate mortgages. A higher loan to value, low down payment, adjustable rate mortgage is more risky than a 30 year fixed rate mortgage loan and therefore has a higher private mortgage insurance cost.
Two avoid private mortgage insurance you have to have a 20% equity in the property. Either 20% or more for a down payment on a purchase or for a refinance, the loan to value can not exceed 80%. Stated another way, the new home loan can not exceed 80% of the property value for either an existing mortgage refinance or home purchase.
Some mortgage lenders allow customers to put down less than 20% to avoid PMI by taking two mortgage loans. This is accomplished by obtaining a first mortgage for 80% of the property’s value and a second mortgage loan for 10% of the property’s value. This is commonly referred to as 80-10-10 loan since the first mortgage is for 80% loan to value, the second represents 10% loan to value and the third 10 represents 10% down payment from the borrower. At one point mortgage lenders also allowed 80/20’s in which the borrower obtained two mortgage loans that together were 100% of the value of the home. The 80/20 is pretty much extinct and the 80-10-10 is very difficult to find.
Mortgage insurance is usually set up as addition to the monthly mortgage payment. A standard monthly mortgage payment includes principal and interest as well as taxes and insurance. The insurance usually refers to the homeowners insurance. A loan with private mortgage insurance will have added insurance charge for the private mortgage insurance costs. A change in private mortgage pricing in the past five years set up to alleviate the tax differences between the tax deductible costs of private mortgage insurance and the interest on second mortgages is something called lender paid PMI.
In these situations the mortgage lender covers the cost of the private mortgage insurance and there is no added costs at the home loan closing or added to the monthly mortgage payment. However, the mortgage lender absorbs this added cost by raising the mortgage rate on the home loan to compensate their costs for the private mortgage insurance. This increase in the mortgage rate to cover additional costs is the same technique used in no point / no closing costs mortgage loans in which the mortgage lender raises the mortgage rate to absorb the mortgage loans’ closing costs.