Refinancing Options Regardless of Mortgage Rates
Since the media has over zealously expounded on the issue of tighter bank lending standards, a number of homeowners that could refinance their existing mortgages are overlooking this option due to the concern over being denied for a new home loan.
While, it is difficult to refute the argument that bank mortgage lenders are more conservative in their home loan underwriting practices since the credit crisis began, this by no concludes that mortgage loans for refinance transactions are any more difficult to obtain than one for a purchase. In fact, quite the opposite is true. In general, mortgage loan approvals for a refinance transaction are easier to obtain than a purchase transaction.
A key difference between a mortgage refinance a mortgage for a purchase transaction from the mortgage lenders point of view is the equity in the home or down payment. A standard mortgage is evaluated based only a few factors, the most significant being the credit of the borrower, the income relative to the debt payments and the equity in the home.
The equity is measured by the loan to value. On a purchase, the loan to value is a reflection of the down payment amount where a 10% down payment would lead to a 90% loan to value. With a refinance the loan to value is the loan amount divided by the property value for example; a $100,000 loan request for a property worth $125,000 would have a loan to value of 80%.
Even with the recent reduction of property values over the past years, most homeowners find that their home is their most valuable financial asset and the mortgage they have is their largest debt. Consequently, reviewing the existing mortgage interest rate, monthly payment, mortgage balance and potential mortgage options is a prudent financial decision.
As part of the mortgage review, in order to assess the benefits and costs of a mortgage refinance, a variety of factors should be considered, including: mortgage interest rate, type of mortgage, expected holding period for the mortgage or home and tax consequences.
With mortgage rates at or near record low levels, homeowners that have not refinanced yet or purchased their home during the last period of low rates, should compare their mortgage rate with the current mortgage rates and measure this against the other loan factors such as the length of time to hold the loan and tax savings.
When evaluating the mortgage interest rates, note that mortgage interest rates charged on a home loan will vary greatly depending on the type of mortgage. Fixed rate mortgages offer the benefit of locking in a rate and knowing exactly what the monthly mortgage payments will be for the term of the mortgage. Generally the longer the mortgage term, the higher the mortgage rate. A 15 year term mortgage not only pays the home loan off in shorter time period but generally has a slightly lower interest rate as well.
When reviewing your mortgage options, be sure to factor in how long you intend to keep your home as well as your ability to handle potentially higher rates in the future with ARMs. If you plan to downsize and move to a smaller home in a few years, a 5 year ARM would provide a much lower interest rate than a traditional 15 or 30 year fixed rate mortgage.
For homeowners that itemize your tax deductions, the interest that is paid on a mortgage loan may be deductible. Refinancing a mortgage and taking cash out may provide the money to pay off higher rate loans, such as credit cards or auto loans, and provide a tax deduction as well.
It is possible that a refinance to maximize savings and improve finances can be accomplished in several ways, including:
Lowering the monthly mortgage payments.
Obtaining cash back by accessing the home equity.
Eliminating private mortgage insurance
Using equity to pay off high interest debts such as credit cards or loans.
Changing mortgage terms to pay off the home loan faster.
Switching loans to a fixed rate mortgage from an ARM or adjustable rate mortgage.
Michigan Mortgage Rates June 1, 2010
To choose a home loan in Michigan, prospective borrowers have a number of different options to choose from. To help find the loan that’s best suits an individual’s need, a good starting point is to evaluate the mortgage rates in Michigan from local mortgage lenders and some of the largest mortgage lenders in the U.S. From here the home loan search can be quickly narrowed in on the mortgage rate and costs and quick phone call can help decide which mortgage lender in Michigan offers the right level of service.
Today’s mortgage rate survey from Findlocalmortgagerates.com involves the Michigan mortgage rates from two large local mortgage lenders, Isabella Bank and Monroe Bank and Trust, as well as mortgage rates in Michigan from two of the largest bank mortgage lenders, Bank of America and Chase Bank.
The following list contains the results of the mortgage rate survey form these four banks for home loans in Michigan for a 30 year mortgage and 15 year mortgage for a $225,000 home loan amount with a 20% down payment.
Isabella Bank offers a 30 year fixed rate mortgage with a mortgage rate of 4.875% with zero points and a 4.997% APR.
A 15 year home loan from Isabella Bank has a mortgage rate of 4.25% with no points with an APR of 4.332%.
Monroe Bank and Trust offers a 30 year mortgage rate in Michigan at 4.875% with no points for a 5.003% APR.
The 15 year fixed rate mortgage with Monroe Bank and Trust is at 4.375% and no points with a 4.486% APR.
Bank of America 30 year mortgage rate is currently at 4.875% with 0.625 points and an APR of 4.977%.
The 15 year mortgage rate from Bank of America is at 4.125% with 1.5 points and a 4.43% APR.
Chase Bank, the largest US bank, offers a 30 year mortgage in Michigan with a mortgage rate of 5.00% with 0.125 points and a 5.16% APR.
A 15 year mortgage rate from Chase Bank is at 4.375% with 0.25 points and a 4.54% APR.
Mortgage interest rates in Michigan listed and/or points are subject to change without notice, and may vary based on credit profile of the borrower, the loan amount, property type and other characteristics of the loan request.
Review the current mortgage rates and costs with the lender before committing to a final loan request. Actual closing costs should be provided through a Good Faith Estimate within three business days of the application being submitted to any of these mortgage lenders.
Additional mortgage rates and point options are available from these lenders in Michigan, the following contact numbers can be used to reach the banks listed to find more about their home financing options:
Isabella Bank 800- 651-9111
Isabella Bank was founded in 1903 and has 24 bank branch locations throughout Mid-Michigan.
Monroe Bank and Trust mortgage representatives can be reached at 734-242-2204 or the bank’s customer service number at 800-321-0032
Monroe Bank and Trust is a full service bank with branch locations throughout Monroe and in Bedford, Carleton, Dundee, Erie, Flat Rock, Ida, Lambertville, Milan, Newport, Northville, Petersburg, Plymouth, Taylor, Temperance, Trenton and Wyandotte.
Bank of America mortgage department can be reached at 800-551-7975.
Chase Bank mortgage can be contacted at 800-873-6577.
For information on Chase Bank or Bank of America ceritfictae of deposit rates please visit our affiliate publication, www.selectcdrates.com under Bank of America CD rates and Chase Bank CD rates. For information on the credit cards offered by these banks visit www.bestcreditcardrates.com under best credit card rates.
How Mortgage Rates are Determined
There are many variables that will determine current mortgage rates. When assessing the direction of mortgage rates and the underlying factors that determine mortgage rates, there are two main forces that help shape the interest rates. The first factor involves macroeconomic forces that impact mortgage rates and interest rates and the second is the factors that are impacting a specific mortgage loan request.
Macro economic factors that affect mortgage rates include the inflation rate, economic activity and actions by the Federal Reserve. The rate of inflation is generally one the biggest components of the overall level of interest rates. A modest rate or low level of inflation will almost always lead to low interest rates, while concerns about rising inflation normally cause interest rates and consequently mortgage rates to increase.
Economic activity contributes to the direction of interest rates with brisk activity tending to drive interest rates higher while lower economic production tends to pull rates down. The affect of economic activity is a result of the demand for loans. As loan demand increases with increased economic activity, the interest rates on loans including mortgage loans increases.
The Federal Reserve’s actions have a significant impact on short term bank rates which in turn applies pressure to all rates including longer term rates and mortgage rates over time. The Federal Reserve, implements policies and generally announces its policies which are designed to keep inflation and interest rates relatively low and stable but a number of market forces can force the Federal Reserve to raise short term rates and thus push long term rates higher as well.
Loan specific factors that influence mortgage rates include: the type of home loan, the borrower’s qualifications, the property, the fees and points paid and the mortgage rate lock period.
The type of home loan impacts the mortgage rate because some types of properties have different mortgage rates than others primarily because of historical risk analysis. Condominiums have historically had higher default rates than single family homes especially during market slowdowns and therefore are frequently priced slightly higher than single family detached homes. Multi unit properties may have higher mortgage rates for similar reasons over the risk of default and non owner occupied properties will almost always have a higher mortgage rate due to the increased risk seen by the mortgage lender.
The borrower’s profile affects the mortgage rate based on their inherent risk factors regarding their credit history and financial position. The risk factors are determined by the mortgage lenders and are generally based on quantitative figures such as the credit profile or credit score of the borrower, the down payment amount and the debt ratios of the borrower.
Clearly, a borrower with a poor credit score will have a higher mortgage rate than one with an excellent credit score due to the higher risk of default on the loan.
Similarly, a mortgage loan that was obtained with a larger down payment than one with the minimum down payment will have a lower default risk and generally receives a slightly lower mortgage rate. This is why borrowers will often seen an advertised mortgage rate and then when they apply for the loan find the rate higher if they are placing the minimum down payment to obtain the mortgage loan. Lower down payments are the equivalent to higher loan to values and higher loan to values are seen as a greater risk and will have a higher mortgage rate.
The following items will reduce risk or perceived risk to the mortgage lender and generally lead to a lower mortgage rate: higher credit score, greater equity in the house or a larger down payment, a low debt to income ratio or a better ability to pay with a low debt to income ratio.
Increased points and fees generally lead to a lower mortgage rate while lower points and fees lead to a higher mortgage rate. Mortgage rates and points or total closing costs are often a trade off. A point is equal to 1% of the loan amount. A mortgage loan for $150,000 with a rate of 5.50% and 1 point will have a minimum cost of $1,500.00 or 1% of $150,000.00, in addition to the other closing costs charged by the mortgage lender. In a case such as this, the potential borrower may have the option to pay more points, perhaps 2 points instead of 1, and have the mortgage rate reduced for the additional charge.
There may also be the option to obtain the mortgage loan without points with a slightly higher interest rate. The trade off comes down to the cost of points which are paid at the time of the loan closing versus the mortgage rate which impacts the monthly mortgage payment for the life of the loan.
The mortgage rate lock period or time frame will also impact the mortgage rate. This is the smallest of the factors that will impact the rate but it is important to understand the concept and mechanism of rate locks. The rate lock period is the length of time that the mortgage rate offered by the mortgage lender is good for. Home loan borrowers can choose to lock in a mortgage rate for a period of time that generally runs between 30 days to 90 days but can also be obtained for as long as 180 days.
Without a mortgage rate lock, the mortgage rate is floating or will change as the market changes. When a potential borrower calls a mortgage lender for a rate quote, some mortgage lenders quote short term rate locks since they offer the best rate. A short term rate lock is of little use if the mortgage loan is not going to close or fund within the rate lock time period.
If a mortgage loan request does not close and fund before the lock expires, then the borrower will end up with a mortgage rate that will be at the mercy of whatever changes may have taken place in the market. The longer the lock in period, the more expensive it is to lock. Borrowers can also choose to float their rate initially, and lock in for a shorter period of time once they are near closing date. Floating the rate may save a little money, but it is also has the risk of being stick in a rising rate environment.
In a volatile market, a mortgage shopper may call about mortgage rates at one time during the day only to find out the rate has changed later in the day when they decide on the best mortgage lender to work with. Without the mortgage loan application and the rate lock agreement, the mortgage shopper will end up with the prevailing mortgage rate at the time the application and/or rate lock agreement is executed.
Mortgage rates change by small amounts between 30 and 60 day locks, the 90 day locks and 180 day lock periods will often bring about a measurable higher rate and may even entail and upfront fee for the rate lock. Most long term locks are used for new construction where the time from loan application to loan closing may run for several months.
Top Five Bank Mortgage Rates March 15, 2010
Continuing our series on mortgage rates from the top five bank mortgage lenders, this week’s rate survey from findlocalmortagerates.com shows results on mortgage rates from the top five bank lenders through March 12, 2010 with changes from the previous week.
The five largest U.S. banks ranked by assets are Chase Bank, Bank of America, Citibank, Wells Fargo Bank and US Bank.
Mortgage rates are listed are for borrowers with good to excellent credit with a down payment of 20% or greater for a mortgage loan on a single family owner occupied property. Additional mortgage rates and point options are available from these mortgage lenders. Mortgage rates and points posted are subject to change and all loans would require bank approval. Please note that some of the loan listed may be region specific. All attempts were made to obtain similar rate quotes to help compare offers but data cannot be guaranteed.
Chase Home Mortgage has a 30 year at 5.125% with 0.25 point for an APR of 5.207%. This loan is .125 points ( not interest rate ) higher than the previous week.
Bank of America offers the 30 fixed rate mortgage at 4.875% with 0.75 points and an APR of 5.001%. This mortgage loan offer is 0.25 points ( not rate ) lower than the previous week.
Citibank markets the 30 year with a mortgage rate of 5.125% and 0.125 points and a 5.317% APR. The mortgage rate and points is unchanged from the previous week.
Wells Fargo Home Loan is at 4.875% on the 30 year fixed with 1.00 point and a 5.034% APR. The Wells mortgage rate is also unaltered from the prior week.
US Bank promotes a 30 year fixed rate home loan with a mortgage rate of 5.00% and no points with an APR of 5.066%. US Bank’s mortgage rate on the 30 year is lower by .125% on the week.
All mortgage rates are believed to be accurate and were verified on the date of this publication but interest rates are not guaranteed. For current mortgage rates and loan terms contact the mortgage lenders directly.
Mortgage representative contact information by bank:
Chas Bank 800-873-6577
Bank of America 800-551-7975
Citibank 800-667-8424
Wells Fargo 877-937-9357
US Bank 888-831-7524
Mortgage Rates in Illinois at Harris Bank
Harris Bank is a Midwest bank headquartered in Chicago, Illinois. Harris offers mortgage loans across the U.S. The bank provides mortgage loans and competitive mortgage rates in Illinois as well as other states on a variety of different home loan products.
Harris offers loans for purchasing new homes and refinancing existing home loans. Mortgage loans products include standard fixed rate home loans with different terms, adjustable rate loans with different fixed rate periods and even biweekly mortgage loan programs.
Potential home loan borrowers that are not sure about loan qualifications, Harris has a pre-approval that provides a firm loan commitment from the bank.
Current Illinois mortgage rates offered by Harris Bank include the following products, terms and mortgage rates:
30 year fixed rate mortgage has a mortgage rate of 5.125 with no points and a 5.161% APR.
The 30 year fixed rate loan with 1.0 point has a mortgage rate in Illinois of 4.875% and a 4.999% APR.
On a 15 year term, the fixed rate loan in Illinois offered by Harris has a mortgage rate of 4.500% with no points and a 4.561% APR.
With 1.0 point, the 15 year mortgage rate is 4.250% and an APR of 4.461%.
For Illinois mortgage rates with adjustable rate terms, Harris Bank offers several options.
The five year adjustable rate mortgages with a 30 year terms has a mortgage rate of 4.125% with no points and an APR of 3.510%.
The 5/1 ARM with 1.0 points has a mortgage rate of 3.75% and a 3.458% APR.
The seven year adjustable rate mortgage in Illinois has a mortgage rate of 4.625% with no points and a 3.869% APR.
With 1.0 point, the 7/1 ARM has a mortgage rate of 4.375% and an APR of 3.833%.
The listed mortgage rates in Illinois are based on a loan amount of $250,000.00 with a 20% or greater down payment for a single family owner occupied property. Other mortgage rates in Illinois and point options are available.
Illinois mortgage rates are current as of this publication, March 10, 2010 and are subject to change at anytime without notice. A home loan borrower’s final mortgage rate may vary based on the specific characteristics of their loan transaction including, but not limited to, the region where the loan is originated, any additional loans against the property, the borrower’s credit profile up to the time of closing. All mortgage loans in Illinois are subject to approval by Harris.
Harris Bank is part of the BMO Financial Group and along with mortgage loans, provides a variety of personal, business and corporate clients with banking, lending, investing and wealth management products and services.
Top Five Bank Mortgage Rates March 8, 2010
The top five banks ranked by assets include Chase Bank, Bank of America, Citibank, Wells Fargo Bank and US Bank. All five of these banks offer mortgage loans and mortgage rates in the majority of the states. Mortgage rates offered by these financial institutions provide a good barometer of prevailing mortgage rates and mortgage activity in the lending arena.
The following rates can help borrowers easily compare mortgage interest rates and product information to help find the right mortgage quickly and efficiently.
The rates are for mortgage loans based in California with a 20% or greater down payment for a single family, owner occupied home. If the down payment on a new home purchase is less than 20%, mortgage insurance may be required on the loan. The added cost of mortgage insurance could increase the APR as well as the monthly mortgage payment.
All loans would be subject to bank approval including a credit, income and assets. The mortgage rates were run on sample loan amounts of $175,000.00. Additional mortgage rates, point options and loan amounts are available from the mortgage lenders listed.
Chase Mortgage is currently offering a 30 year fixed rate home loan with mortgage rate of 5.25% and 0.125 points for an APR of 5.343%.
The 15 year fixed rate loan offered by Chase has a mortgage rate of 4.625% and 0.125 points for an APR of 4.782%.
Bank of America Home Loans promotes a 30 year loan with a mortgage rate of 4.875% with 1.0 point and an APR of 5.098%.
A 15 year term loan from Bank of America has a mortgage rate of 4.250% with 0.625 points and a 4.576% APR.
Citibank markets a 30 year home loan with a mortgage rate of 5.125% and 0.125 points for a 5.317% APR.
Citibank has a 15 year mortgage loan with an interest rate of 4.375% and 0.375 points with an APR of 4.773%.
Wells Fargo Home Mortgage markets their 30 year fixed with a mortgage rate of 4.875% and 1.0 point yielding an APR of 5.065%.
The 15 year fixed rate loan from Wells Fargo has a mortgage rate of 4.250% and 1.0 point with a 4.573% APR.
US Bank’s 30 year fixed rate mortgage has a mortgage rate of 5.125% and no pints with a 5.192% APR.
The 15 year fixed rate home loan at US Bank has a mortgage rate of 4.375% and no points and a 4.487% APR.
All rates are believed to be accurate and were verified on the date of this publication but interest rates are not guaranteed. For current mortgage rates and loan terms contact the mortgage lenders directly.
Mortgage Rates from the Big Five Banks February 26, 2010
The five largest U.S. banks, ranked by assets, are Chase Bank, Bank of America, Citibank, Wells Fargo and US Bank. The mortgage rates and mortgage loans presented by these five banks offer a good barometer of the home loans available in today’s mortgage market.
Findlocalmortgagerates.com conducts a weekly survey of the largest bank mortgage lenders and produces a sample of loan rates drawn from the survey.
Current mortgage rates offered by the top five lenders include:
Chase Bank mortgage loans:
30 year fixed rate loan has a mortgage rate of 5.125% and 0.50 points with a 5.227% APR.
15 year fixed rate loan has a mortgage rate of 4.500% and 0.375 points with a 4.690% APR.
A 5/1 adjustable rate mortgage has a mortgage rate of 4.250% and no points with a 3.598% APR.
Bank of America mortgage loans:
30 year fixed rate loan has a mortgage rate of 4.875% and 0.625 points with a 5.040% APR.
15 year fixed rate loan has a mortgage rate of 4.250% and 0.875 points with a 4.570% APR.
A 5/1 adjustable rate mortgage has a mortgage rate of 3.625% and 1.125 points with a 3.493% APR.
Citibank mortgage loans:
30 year fixed rate loan has a mortgage rate of 5.125% and no points with a 5.294% APR.
15 year fixed rate loan has a mortgage rate of 4.375% and 0.250 points with a 4.735% APR.
Wells Fargo mortgage loans:
30 year fixed rate loan has a mortgage rate of 4.875% and 1.0 point with a 5.065% APR.
15 year fixed rate loan has a mortgage rate of 4.250% and 1.0 point with a 4.573% APR.
A 5/1 adjustable rate mortgage has a mortgage rate of 3.750% and 1.0 point with a 3.519% APR.
US Bank mortgage loans:
30 year fixed rate loan has a mortgage rate of 4.875% and 1.0 point with a 5.029% APR.
15 year fixed rate loan has a mortgage rate of 4.250% and 1.0 point with a 4.511% APR.
A 5/1 adjustable rate mortgage has a mortgage rate of 3.375% and 1.0 point with a 3.678% APR.
On the adjustable rate loans listed, interest rates are subject to change and potential increases over the life of the loan once the initial fixed-rate period ends.
Mortgage rates listed are the rates for a single family, owner occupied residence with a down payment of 20% or greater, other restrictions and conditions may apply. Mortgage loans and mortgage rates are subject to bank approval and may change without notice.
The mortgage lenders listed may offer many different loan programs and different mortgage rate and point options. For more information on products or rates not listed, contact the lender directly.
Mortgage Loans and Earnest Money Deposits
Once an interested home buyer wants to make an offer on a property, along with a contract to make the offer, the buyer will make an earnest money deposit to go with the offer.
The earnest money deposit is a good faith deposit to indicate that the buyer is serious about the offer and their intentions to consummate a transaction. The earnest money deposit is not to be confused with a down payment. The mortgage loan approval is not dependent or related to the earnest money deposit.
This deposit money is given to the real estate agent, attorney or seller at the time of the offer and if the seller accepts the offer, the earnest money is held in escrow until closing. If the earnest money is documented properly, it will generally be applied to the down payment or the buyer’s portion of the closing costs when the purchase goes forward.
If the purchase offer for the home is rejected, the earnest money is usually returned, since there is no legal contract between the buyer and seller. If the buyer withdraws the offer or does not fulfill the contract terms after the contract is properly executed by buyer and seller, the earnest money may be forfeited.
The amount of the earnest money deposit varies significantly depending on factors such as local practices in the specific market area, the price of the home, and the supply and demand for homes at that time of contract negotiations.
It is, of course, generally in the seller’s best interest to see a large earnest money deposit. With the larger deposit, the seller is in general more convinced to accept the purchase offer. This is a strategy that is more likely to be utilized in high demand markets where homes are selling at a brisk pace. In other markets, earnest money deposits of $500.00 or $1,000.00 are quite acceptable.
Understanding the market is the principal guideline for determining the amount of the deposit. Real estate professionals will all have opinions on what is a satisfactory amount, but unless the housing market has a strong demand and low supply, a lower earnest money deposit is not likely to dissuade a seller.
The buyer should have a contingency to inspect the property and withdraw the offer within a certain time frame written into the contract, with this in mind; it is in the buyer’s interest to make the smallest amount of earnest money possible. If the buyer cannot obtain a mortgage within a certain time frame, for example, the earnest money will be returned in full if the offer stated such a contingency.
To avoid any complications with a mortgage lender about the earnest money deposit and subsequent credit at the time of the mortgage loan closing, copy the check before submitting it with the contract and then copy the front and back once it clears the bank. The mortgage lender will then have ample proof that the funds deposited were the buyers and have already cleared the bank and the buyer will get a full credit for those funds as they may be applied to the down payment or mortgage closing costs at the time of settlement.
Wisconsin Mortgage Rates at Tri City National Bank
In the search for a mortgage lender with competitive mortgage rates in Wisconsin, one choice is southeastern Wisconsin based Tri City National Bank. Tri City National Bank is located in southeastern Wisconsin and has a service area for mortgage loans that covers properties located in Milwaukee, Racine, Kenosha, Waukesha, Ozaukee and Washington counties in the State of Wisconsin.
Along with home loans, Tri City National Bank offers various deposit products, including savings, investors choice, demand, NOW, and money market deposit accounts. The bank also provides secured and unsecured consumer loans, commercial loans, instalment loans, real estate loans and other loans to individuals, small business, and a range of organizations.
Tri City National Bank offers fixed rate home loans with terms ranging from 15 years to 30 years. Tri City National Bank also offers 1 – 3 year adjustable rate mortgages (ARM). The bank also offers new home construction loans, balloon loans and assisted financing with the Wisconsin Housing Economic Development Association (WHEDA).
Tri City approves and processes mortgage loans locally providing quick and convenient service. Tri City National Bank current mortgage loan products and mortgage rates include:
15 year fixed term mortgage rate at 4.38% with 1.0% origination fee and an APR of 4.53%.
15 year fixed term mortgage rate at 4.50% with 0.0% origination fee and an APR of 4.55%.
20 year fixed term mortgage rate at 4.88% with 1.0% origination fee and an APR of 5.00%.
20 year fixed term mortgage rate at 5.13% with 0.0% origination fee and an APR of 5.17%.
30 year fixed term mortgage rate at 5.00% with 1.0% origination fee and an APR of 5.09%.
30 year fixed term mortgage rate at 5.25% with 0.0% origination fee and an APR of 5.28%.
Mortgage rates displayed assume a fully amortized $150,000 mortgage loan with a 20% down payment and closing costs paid by the borrower. Mortgage rates and annual percentage rates (APR) are subject to bank approval and approved credit with a 20% minimum down payment. Bank rates and mortgage rates are subject to change and additional conditions and other restrictions may apply. For current mortgage rates and home loan information, a bank representative can be reached at 888-874-2489.
Mortgage Approvals and Compensating Factors
Mortgage loans are approved based on a fairly strict set of guidelines. Some of the guidelines are hard rules that can not be broken. An example of hard rule is the maximum loan to value ratios or down payment requirements. If a home loan for a particular 30 year fixed rate mortgage requires a 5% down payment or a loan to value of 95%, 4.75% down payment will not be accepted. On the other hand, some rules are general guidelines.
An example of a general guideline is the debt ratio requirement. Standard debt ratios are approximately 32% for the amount of the borrowers’ gross monthly income that can be used for the monthly mortgage payment and a 38% ratio representing the amount of the gross monthly income that can be allocated for the monthly mortgage payment and all other monthly debt obligations. These debt ratios are guidelines. A home loan applicant that has debt ratios of 33% and 40% may very well be approved for a mortgage loan.
In situations where a home loan borrower has debt ratios that exceed the guidelines or perhaps a credit history that is slightly below the requirements, a mortgage lender will look for compensating factors to justify making the home loan approval.
Compensating factors that may be used to justify approval of mortgage loans with ratios exceeding the benchmark guidelines are evaluated on a case by case scenario. Any compensating factor used to justify mortgage approval must be supported by documentation with the mortgage lender.
Common compensating factors that are reviewed to approve a home loan that is just marginally beneath the loan guidelines include:
The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12-24 months.
The borrower makes a large down payment, one that is above the minimum established for the home loan program applied for, toward the purchase of the property.
The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.
A previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.
The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.
There is only a minimal increase in the borrower’s housing expense.
The borrower has substantial documented cash reserves (at least 3 months worth) after closing. In determining if an asset can be included as cash reserves or cash to close, the mortgage lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so, absent retirement or job termination.
Funds borrowed against these accounts may be used for home loan closing, but are not to be considered as cash reserves. “Assets” such as equity in other properties and the proceeds from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves.
The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations)
The borrower has potential for increased earnings, as indicated by job training or education in the borrower’s profession
The home is being purchased as the result of relocation of the primary wage earner and the secondary wage earner has an established history of employment is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. The mortgage loan underwriter must document the availability of such possible employment.