Planning to Buy a Home: Do You Know Your Debt-to-Income Ratio?

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Young couple having bills to pay.

When you’re planning to buy a home, one of the factors that will determine whether or not you’ll be approved for a Texas home mortgage loan is your debt-to-income ratio (DTI).

What is a DTI, and how is it determined?

This is the number that reveals what percentage of your monthly income goes directly to pay debts, before you begin paying for other necessities such as food, clothing, fuel for your vehicle, etc.

To calculate that number, you simply divide your monthly debt by your monthly income. Not surprisingly, a monthly mortgage payment will probably be the largest item in the debt column.

As an example: If your monthly income is $6,000 and your monthly debt is $2,000, you have a 33% debt to income ratio. ($2,000 divided by $6,000.)

On the debt side, list all of your monthly debts, including credit card payments, installment payments such as the monthly payment on your car, student loans, alimony, and child support payments. When calculating credit card payments, use the monthly minimum, even though you may be paying more in an effort to eliminate debt.

Since you don’t yet have a mortgage payment, your lender will first calculate your DTI without the mortgage payment. Then he or she will do a second calculation using the projected payment on your new mortgage loan, including taxes, homeowners insurance, and mortgage insurance.

Your credit report will show most of the debt you owe, but you may also be asked to show credit card statements or installment contracts. Do NOT acquire any new debt once your lender has calculated your DTI. Your credit report will be checked again just prior to closing, and new debt will either cause your interest rate to rise or cause the loan to be denied.

On the income side, list your wages or salary and any verifiable income from part-time jobs, self-employment ventures, alimony, and income producing assets such as real estate or stocks.

To verify income, your lender will need to see recent pay stubs and W-2 forms for the past two years from all of your employers. To verify self-employment income and income from assets, you’ll need to show tax returns and bank or brokerage statements. You may also need rental agreements.

Debt-to-income ratios are calculated on your pre-tax income, not the actual dollars that go into your pocket.

The lower your DTI, the better your lender will like it.

Why? Because the Consumer Financial Protection Bureau says that consumers with high debt to income ratios are the most likely to fall behind on mortgage payments or lose their homes to foreclosure. A prolonged illness or accident that prevents work can spell financial disaster.

Low debt-to-income ratios say you can probably keep making your mortgage payments even if your income takes an unexpected drop.

Of course the risk is tied to the income. Consider that at 50% debt-to-income, a person earning $15,000 per month has considerably more disposable income after debt service ($7,500) than a person earning $5,000 ($2,500).

What is an acceptable debt-to-income ratio? Some lenders quote 36%. Others say 43% is the cut-off point.

Here at Homewood Mortgage, the Mike Clover Group, we don’t have a cap on DTI.  Whatever the software will accept, via Freddie Mac and Fannie Mae, we will do. We typically see Texas home loans getting approved up to a 50% debt to income.

Before you begin shopping for a home, contact us at the Mike Clover Group. We’ll help you get pre-qualified so you can make a solid offer on that Texas home.

We’re known all over Texas for our friendly service, low fees, and fast closings, so get in touch today.

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4 Steps to a successful Texas home mortgage loan

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In spite of what the ads promise, getting a home mortgage loan is not as simple as clicking a mouse or making a quick phone call. And no, it can’t be done in one day.

Step #1: Become pre-approved for your mortgage loan before you go shopping.

When you want to purchase a home in Texas (or anywhere else) the first step is to become pre-approved for your mortgage loan. Note that I didn’t say “pre-qualified.” They are two different things, and only the pre-approval has meaning.

A pre-approval is an actual commitment from a mortgage lender to fund your home purchase up to a set limit. It is also your shopping guideline and will save you from the heartbreak of falling in love with a house you cannot buy.

This commitment will remain in place as long as your financial status doesn’t change between the time of the approval and the closing on your home purchase.

In order to become pre-approved, you’ll have to provide your lender with:

  • Two years of federal tax returns
  • Two years of W-2 forms from your employer
  • Pay stubs from the past 30 days, showing your year to date income
  • 60 days or a quarterly statement of all your asset accounts. This would include checking and savings accounts, investment accounts, stocks, and bonds.
  • Information on all real estate you currently own.
  • Residential history for the past two years: proof of mortgage payments made or rental receipts and landlord contact information.
  • Proof of down payment funds.
  • Information regarding your financial obligations.

The lender will also access your credit history and learn your credit scores.

Step #2: Find a home, get an offer accepted, and pass the home appraisal.

Before a lender will agree to finance your home purchase, they’ll want to be assured that the house is actually worth what you’ve agreed to pay. The house will serve as collateral for your loan, so they want to know that they can re-sell it for enough to cover the loan should you default on payments.

Your lender will order the appraisal, which will hopefully come in at or above the selling price. If it comes in high, that’s wonderful! You’ll be gaining instant equity.

If it comes in low, you have 5 choices:

  • You can negotiate with the seller to lower the price down to meet the appraisal.
  • You can make up the difference in cash out of your own pocket.
  • You can appeal the appraisal. Perhaps your agent or the listing agent can provide the appraiser with newer or better comparable market data, which would justify the price you’ve agreed to. If you file an appeal, the appraiser will be obligated to take another look. Do be warned – appraisers don’t appreciate having their judgement questioned.
  • You can order a second appraisal. If the initial appraiser isn’t willing to adjust the outcome, but you and the agents involved think the price is right, you can get a second opinion. It may be that your first appraiser was prejudiced about the neighborhood, just didn’t like the house, or was non-local and really didn’t know the comparables. The problem with getting a second appraisal: You’ll have to pay for it a second time.
  • You can walk away. Maybe you’ve come to agree with the appraiser and the sellers aren’t willing to lower the price. If so, it’s time to start over.

Step #3: Get through underwriting – Do nothing to alter your credit score or your financial position as you wait for your purchase to close.

I can’t tell you how many prospective home buyers have destroyed their chance at home ownership by doing something foolish at this time.

They seem to think that an approval is a one-time thing. It is not.

In fact, your credit score will be checked again just prior to closing. If you’ve done anything to change it, one of two things will happen:

  • Your interest rate will change
  • Your loan will be denied

With this in mind:

Don’t open any new credit accounts or even let a retailer check your credit scores. Don’t make any large purchases that have to be financed. Remember that your scores are based in part on how  much credit you’re using.

Don’t close old credit accounts. Again, your scores reflect how much of your available credit you’re using. 30% of less is good. If you have unused credit cards, they increase the credit available. If you close them, your debt to credit utilization will increase – making you appear to be a greater risk.

Do make every payment on time. Even one late payment can reduce your credit score dramatically. Don’t let it happen!

The underwriter will also review the appraisal to make sure it does match the loan you’re requesting, and he or she may contact your employer to verify that you are still working at the job and at the income you’ve listed on your loan application. Some will also re-verify the bank balances you had when you were pre-approved.

In other words – your pre-approval will only stand if you have not done anything foolish prior to closing.

Step #4: Carefully review the closing disclosure form

By law, your lender must provide you with a closing disclosure at least three business days prior to closing. This is a follow-up to the good faith estimate you received upon application.

The closing disclosure outlines the financial details of your home purchase, so you need to make sure that everything is correct and “as promised.” A REALTOR® Association survey revealed that approximately 50% of agents have found errors on closing disclosures, so take this responsibility seriously.

With your good-faith estimate in hand, sit down with your agent and compare it to the closing disclosure. Check and triple-check that the following are accurate:

  • Your name(s). Are they spelled correctly? Are they consistent throughout all documents – as in, did you use a middle name in one place and a middle initial in another?
  • The loan type. Is it fixed rate or adjustable? If adjustable, is the adjustment period correct?
  • The loan term. Is it 15 years, 30 years, or something else?
  • The interest rate. Is this the rate you were quoted?
  • Cash required to close – are the down payment and your share of closing costs accurate?
  • The loan amount. Do the numbers add up?
  • Estimated monthly payment.
  • Estimated taxes, insurance, mortgage insurance, etc.

If you find an inaccuracy in any of these, contact your lender immediately. Remember that once the errors are corrected, the clock will re-set and you’ll have to wait 3 more days to close. If you were only 3 days out from closing, your agent will need to contact the seller’s agent to get a closing date extension.

Are you ready for that pre-approval?

If so, and if you’re planning to buy anywhere in the great state of Texas, we at Homewood Mortgage, the Mike Clover Group, would love to help you.

We’re known in Texas for our friendly service, low fees, and fast closings, so get in touch today.

Call today: 800-223-7409

 

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Which is smarter – to buy or build a house?

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Should you buy an existing home, buy a newly constructed home, or have a custom home built?

The relative purchase price of each is one consideration – but only one. And the purchase price is only one piece of the price puzzle.

After doing a bit of research on homeadvisor.com, Realtor.com, Zillow, and others, we find that nationwide, the average price of a newly constructed home in June 2018 was $316,500, while an existing home was only $279,300.

That doesn’t tell you if the houses were similar in size, so upon looking a little further, we learned that the median price per square foot for an existing house in the U.S. was $123, while the median cost of a newly constructed home was $150.

Naturally, the numbers vary from one location to another. You could purchase an existing home in Detroit for as little as $24 per square foot, while the median in San Francisco was $810. New construction will also vary a great deal, since the price of a building lot will vary based on location, size, etc. Labor costs and permit fees also vary widely from region to region.Top of Form

So far, it appears that buying an existing home is less expensive, but what about maintenance and repairs?

Will your newly purchased existing home need improvements right away?

  • Will you be happy to move in without repainting the walls, installing new flooring, or revamping the kitchen or bathroom?
  • Will the roof need attention within a few years?
  • How about the heating and air conditioning systems?
  • How old is the water heater?

If you purchase a newly constructed home or have a home custom built, you’ll have a contractor’s warranty to fall back on if any of the newly installed systems are faulty. Some builders offer a 10-year warranty on their new construction.

Yes, you can buy a home warranty for your “used” house, but the operative word is “buy” and you’ll still have to pay a deductible.

What about alterations?

Few houses are a perfect fit. Will you need to make changes to the existing home you buy? Maybe you’ll want to remove a wall to open up a space. Maybe you’ll want to add a bathroom or a deck.

Most new houses today are built with Internet use in mind. If you purchase a home built 30 or 40 years ago, will it have the electrical outlets you want and need? Will it have the cable connections? Or –  will you be hiring an electrician?

All the changes you make will add to the cost of your home.

Think about the ongoing costs of ownership.

Depending upon the age of the pre-owned home you buy, you may end up paying more in heating and cooling costs. New homes are built for greater energy efficiency, from the insulation, to the type of windows, to the heating and air conditioning units. If your older home came with appliances, they too are apt to be less energy efficient than the appliances you’ll buy for a new home.

One survey reported that homes built after 2000 consume 21% less energy than older homes.

Landscaping

One advantage of purchasing an older home is that the landscaping is probably mature. It may have an established lawn and attractive shrubbery, along with trees for protection from the sun and wind.  The U.S. Forest service estimates that strategically placed mature trees can save up to 56% on air conditioning costs.

Of course, if you buy your own building lot and have a home built, you can instruct the builders to leave a few well-placed trees, but you’ll still have to deal with installing a lawn and other plantings.

The Stress Factor

Most of us think we’d like to design and build our own home, but it isn’t for everyone. Simply getting two or more family members to agree on a floor plan can be stressful. After that come a myriad of other decisions: the flooring, the counter-tops, the fixtures, the appliances, and even the paint colors can be up for debate – and argument.

One more benefit of purchasing an existing home: You can have it right away.

Whether you choose a builder’s plan or contract to have a custom home built, you’ll be waiting a few months before your new home will be move-in ready. It may be worth the wait, but it is definitely a factor to consider.

If you decide to have a home built… Choose carefully.

First, choose a building contractor who comes highly recommended – even if he or she charges a bit more than some of the others. Go see a few of the homes and talk to owners who have occupied them for at least several months.

Choose a building location that promises to remain desirable in the future. Discuss this with your agent.

Choose features and amenities that will stand the test of time. If something seems “faddish” leave it alone. This also goes for colors. Remember the pink and green wall tiles in bathrooms? How about the harvest gold bathroom and kitchen fixtures? They scream “Old house!” and replacing them is an expensive endeavor. (There is a reason why bathtubs are installed in homes during the framing stage – before the exterior walls are closed in or interior walls are sheetrocked.)

Stick to neutral colors for anything that would be difficult or expensive to change when styles change. You can use the “Color of the year” on a wall that can easily be repainted.

The bottom line: While the purchase price of an existing home may be lower, a new home is likely to be less expensive in the long run.

Whether you’re buying an existing home or having one built, Homewood Mortgage, the Mike Clover Group, is here to help with the financing. We offer fast, friendly service, together with the lowest rates and fees you’ll find anywhere in Texas, and we pride ourselves on the lack of red tape connected with our construction loans.

Call today: 800-223-7409

 

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Real Estate and the Supreme Court

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While news commentators go on and on about how confirmation of Donald Trump’s pick for the Supreme Court might affect issues like abortion and immigration, there’s been little or no discussion about how it could affect real estate.

In fact, we don’t often think about the Supreme Court and real estate, but it has a huge impact over the years.

Judge Brett Kavanaugh is a conservative and is said to be a strict Constitutionalist. As such, he might be expected to favor less governmental interference in property matters. His record as a circuit court judge seems to support that assumption.

What property-related issues are likely to come before the Supreme Court in the immediate future?

Back in 2005, in Kelo v. City of New London, the court ruled in a 5-4 vote that local governments could use eminent domain to take private land when private redevelopment would benefit the community economically.

While the Supreme Court does not usually reverse its rulings, a case centered on a new aspect of eminent domain could bring about such a reversal.

One such case that is expected to be heard this fall is Knick v. Township of Scott, Pennsylvania. The case revolves around Mary Rose Knick, who challenged a local ordinance requiring her to open her property to the public during daylight hours because grave markers have been found there.

The issue in this case is whether property owners can take their cases directly to Federal courts or must first exhaust all of their legal options in State courts.

Kavanaugh’s vote might reduce regulatory powers.

It’s no secret that he’s not a fan of what he believes is government overreach. One agency he believes has overreached its authority is the Environmental Protection Agency.

If brought before the Court, he could be expected to permanently suspend the Waters of the United States rule of 2015, which placed thousands of acres of wetlands and bodies of water under government jurisdiction.

This rule has, in many areas, prevented the construction of new housing developments and impaired property owners’ rights to make certain improvements on their own land.

Could it become a contest between environmentalists and developers?

Possibly. Developers would be glad to see clearer regulations, fewer required permits, and fewer fees. The result would likely be new communities on land where building is now disallowed.

Environmentalists will likely protest that action – citing the Endangered Species Act and wanting to keep wetlands safe for wildlife.

This year, that issue will come before the Supreme Court in Weyerhaeuser Company v. United States Fish and Wildlife Service. The case revolves around the dusky gopher frog, and private land in Louisiana that some believe is critical habitat for that frog.

While Kavanaugh is not anti-environment, his presence on the Supreme Court could mean a weakening of environmental protections.

Consumer protections could be affected.

Judge Kavanaugh has let it be known that he believes the structure of the Consumer Financial Protection Bureau is unconstitutional. This is the agency that was created by Congress and signed into law by Barack Obama in the midst of the financial crisis.

Kavanaugh believes this bureau wields too much power, especially in light of a director who can only be fired for neglect of duty or inappropriate conduct. Some worry that a lessening of that power could make it more difficult for consumers to bring suit against lenders.

Just as important as the decisions made: Which cases will be chosen to come before the Supreme Court?

You or I can’t just get frustrated and demand that our case be heard by the Supreme Court. It doesn’t work that way.

Cases are presented and the judges decide which they will hear. It takes four of the nine judges to say yes. In other words, the interests and concerns of each judge will ultimately determine the issues that come before the court.

What interests Judge Brett Kavanaugh?

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Is there a lien on your property?

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Your first impulse might be to say “Only my home mortgage,” but you could be mistaken. Your home could have a lien that you are not aware of.

Liens fall into four primary categories:

Mechanical liens: These could result from work you had done. Perhaps the contractor didn’t perform as promised and you refused to pay part or all of the bill. He or she could place a lien on your property with or without your knowledge. If you‘ve purchased new construction, the lien could stem from a subcontractor or materials supplier the builder failed to pay.

Tax liens: This could be from unpaid Federal, State, or local taxes, including property tax.

Judgment liens: These are liens authorized by the courts. They could stem from a lawsuit in which you refused to pay another party, unpaid child support payments, medical bills, or unpaid credit card debt. You may not have even been present at the hearing at which the lien was authorized – failure to appear often results in an automatic “loss.” Numerous people in past years have found themselves dealing with this unpleasantness over unpaid gym memberships – when they had unsuccessfully attempted to cancel.

Errors: You may find a lien on your property for a debt that was paid long ago. In one case we found that a mortgage that had been refinanced years earlier had never been cleared from the books. The original lender had been bought out by another bank and the records were in storage. It took several weeks to jump through all the hoops and get that lien released.

In other instances, the error could be simply that: an error.

Before you offer your home for sale, check to be sure there will be no surprise liens on the title when its time to go to closing.

It’s also a good idea to check the status of a home you’re considering for purchase.

Checking is easy…

In many states you can access records on line. Search by address with the county recorder, the county clerk, or the county assessor’s office. In other states you’ll have to visit those offices in person. Call ahead to learn where you should go to do your research.

You can also hire a title company to do the research for you. You’ll probably pay for a preliminary report, then be credited for it when your home is sold and you purchase the actual title insurance.

What if you find a lien?

If the lien has already been paid, you’ll need to contact the appropriate parties and get a lien release. If you have a lien release in your own files, simply take it to the recorder’s office so that it can be filed of record. Then, if closing is imminent, take proof of that to the title company.

If the lien against your property is legitimate, you’ll need to take steps to pay the related bill or to negotiate with the entity you owe.

Should the IRS have a lien, you may be able to negotiate a partial payment and a schedule of future payments in exchange for lifting the lien to let your sale proceed.

If your proceeds from the sale are enough to cover all outstanding liens, you can simply instruct the closer to pay them from your funds at closing.

Liens won’t go away without help…

The bottom line is that no attorney or title company will allow a sale to finalize unless the seller is able to provide a clear title – so the liens will have to be addressed.

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Can Your Mortgage Loan be Assumed by a New Buyer, or Does it Have a Due on Sale Clause?

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The general assumption today is that all loans have a due on sale clause. This is the clause that simply says “If you sell the house, you have to repay the loan in full.” It only makes sense, because the house was the collateral for the loan.

Contrary to popular belief, not every loan is “Due on Sale.”

Conventional loans always have a due on sale clause, but can be assumed under special circumstances, such as death and divorce. In addition, VA, USDA, and VA loans are assumable, but permission to do so isn’t automatic. The new buyer must meet certain qualifications, depending upon the type of loan.

Here’s the breakdown:

VA Loans are assumable in deference to the fact that service members seldom stay in one place for long. However, only buyers who meet income and credit standards may assume such loans.

VA loans that closed before March 1988 were freely assumable, but since it’s now been 30 years, you aren’t likely to find one.

FHA loans may also be assumed by buyers who meet lender qualifications. Only FHA loans that closed by December 1989 are assumable without lender approval.

USDA loans can be transferred with lender approval, and only to buyers whose income does not exceed requirements.

Why would anyone want to assume a loan?

One reason would be to save on closing costs. The new buyer merely pays a nominal fee to assume the existing loan. In addition, no down payment is required by the lender.

The buyer does, however, have to pay the seller for his or her equity. This can be in cash, or via a second mortgage. The catch: second mortgages come at higher interest rates, so any savings could be lost.

Today, because interest rates are low, most would not want to assume a loan. However, in years when interest rates were high, it might have been beneficial. If a seller had a loan at 10% and you’d have to pay 16% for a new loan, you’d be very happy to assume the old loan. The problem, as already noted, might be the amount of down payment you’d need to bridge the difference between the selling price and the assumable loan.

The next pitfall is that unless they get a written release from the lender, the original borrowers will still be responsible for repayment of the loan. Should the new buyer default, the foreclosure will still show up on the old buyer’s credit report.

Exceptions to the rules:

In accordance with the Garn-St. Germain Act of 1982, all lenders are required to allow transfers in specific situations. These situations include:

  • Transfer to a living trust, as long as you occupy the property
  • Transfer from one ex-spouse to another, as long as they continue to live in the house.
  • Transfer from a borrower to a spouse or child
  • Transfer to a relative upon the death of the borrower.

Transfers to a spouse or other relative are relatively simple and are done by making additions or subtractions to the deed. There are no new loan documents and the new owner simply takes over payment of the mortgage.

Living Trusts

Note that one exempt transfer is from the borrower into a living trust. This transfer is a bit more complicated, because first the living trust must be established. This is typically done by a lawyer and involves assets in addition to the residence.

Such trusts are created to avoid the time, trouble, and expense of probate when the owner of the house and other assets dies.

After transfer, the trust officially owns the home. It pays the mortgage as long as it is occupied by the former owner. After his or her death, the title and mortgage are transferred to the beneficiaries.

With today’s still-low interest rates, a new loan is probably the best idea…

If you’re ready to make that home purchase, call us at Homewood Mortgage, the Mike Clover Group. We offer fast, friendly service, low interest rates, and minimal closing fees.

Call today: 800-223-7409

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Down Payment Myths to Ignore

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If you’ve begun saving up for the down payment on a home, and if you’ve mentioned your goal to friends and family, you’ve probably been getting plenty of advice.

Some of it, of course, is good advice. For instance, Mom or Dad might tell you that small savings do add up – so skip the morning stop for coffee and brew yours at home. Also, skip the visits to the local café or deli and take your own lunch to work.

Other advice you’ll get is not so good. In fact, some of it is pure myth. For instance:

You must have 20% down.

Once upon a time that was mostly true. Today it is not. Today’s truth is that if you want to avoid paying mortgage insurance on a FHA or Conventional loan, you must have 20% down.

FHA (Federal Housing Administration) loans require only 3.5% down, while a VA (Veterans Administration) or USDA (United States Department of Agriculture) loan can be approved for 0% down. Conventional loans can also be approved with less than 20% down, but you will pay for Private Mortgage Insurance (PMI).

What is PMI? It’s insurance you buy to cover the lender’s loss in the event that you default. It does not insure your interests in any fashion. The cost, which is added to your monthly payment, is generally ½ to 1% of the loan amount.            On a $200,000 loan with a 1% PMI fee, a borrower would pay an additional $2,000 per year, or $166.67 per month.

It’s smart to pay as little down as possible, even with PMI.

The theory is that even if you have the money to pay 20% down, you should pay as little as possible and keep your cash in the bank for emergencies. There’s some value to that idea, but do calculate the cost before making a decision. That extra $2,000 per year in the example above could be going back into a savings account.

You should also consider the type of loan you’ll be getting.

If yours is a conventional loan, the PMI will “fall off” when your principal balance drops to 78% of the purchase price. If it’s an FHA loan, the mortgage insurance will remain until the house is paid off or you refinance into a Conventional loan with at least 20% equity.

You should never pay more than 20% down.

Some will say “Why pay more than you have to?”

For two very good reasons:

  • First, the less you owe, the smaller your payment will be and the less you’ll pay in interest over the years.
  • Second, making a higher down payment can lower your interest rate, which also means you’ll have a smaller payment and pay less interest in the long run. The interest rate should drop with 25% down, and drop even more if you can pay 35%.

It’s easy to get assistance with your down payment.

Sorry – that’s not true. Assistance can be had in some cases, but it’s not “easy” to locate those assistance programs, nor to qualify for help.

There are no national assistance programs, and there are very few state-run programs. Most are locally run, sometimes by a county or even by a city. The Department of Housing and Urban Development lists a few options, but you’ll have to dig to find them.

It never hurts to ask, however, and a top real estate agent will know about any programs specific to his or her area.

In most cases, you’ll have to be under a certain income to qualify for assistance – usually the median income in your County. Special circumstances, such as single parenthood or employment in specific occupations, may apply. Some programs add additional requirements, such as the number of hours per week you work, or your credit scores.

“No problem – just borrow the money for the down payment.”

This one NEVER works. For one thing, that loan would simply add to your debt to income.

You CAN get help – but it must be in the form of a gift. Depending upon the loan program, your benefactor can provide some or all of your down payment and possibly all of your closing costs.

The rub is that the benefactor must sign a gift letter swearing that the money is a gift, not a loan. Of course you and they can lie – but you do so at your great risk. Lying on a mortgage application is a felony.

The bottom line: If you plan on buying a home in the future, begin building your down payment funds right away.

Mom and Dad are right – small savings do add up, so if you‘re willing to make the effort, you can have that money saved faster than you might think possible.

Most of us do spend money on things that are “unnecessary,” like eating out, going to concerts, and buying that extra pair of shoes that caught your eye.

It’s a matter of deciding what matters most to you. If you’re focused on home ownership as your long term goal, eliminate the unnecessary and watch your bank account grow.

Would you like to know what kind of loan you could get right now, with the money you currently have at your disposal? We at Homewood Mortgage, the Mike Clover Group, would be pleased to chat with you and show you the possibilities.

When you’re ready, we’ll also be happy to get you pre-approved for a loan, so you can shop with confidence.

Call today: 469.621.8484

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Understanding Real Estate Jargon

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When you set out to purchase or sell a home, you’ll likely be confronted with an abundance of terms that you simply don’t use in everyday life. Your agent, your lender, and others associated with the real estate industry use these terms every day, so often forget that that they aren’t familiar to everyone.

Rather than ask, many home buyers and sellers simply try to guess, and are often confused.

Here then, is a short primer on the terms you’ll encounter between the time you make the decision to buy or sell and the day your transaction closes.

Home Search Terms:

As you go through the listings on MLS (the Multiple Listing Service, which lists all homes offered for sale through licensed agents in a given area), you Should see either “active” or “pending” on each of them.

Active listings are those that are currently offered for sale and is available.

Pending listings are those on which an offer has been accepted, but the sale has not yet closed (or finalized).

You’ll also see abbreviations, both in the details listed and in the narratives offered by individual agents.

The most common of those abbreviations are:

BA: Bathroom (toilet, sink, and shower, tub, or both)
HB: Half bath (just a toilet and sink)
BD or BR: Bedroom
DR: Dining room
FP: Fireplace
LR: Living room
SQ FT or sf.: square footage
HOA Fee: Homeowner’s Association Fee
W/D: Washer and dryer

Some agents get creative in writing narratives, because the MLS allows only so many characters and they want to convey more. So don’t be surprised if you run across an abbreviation and can’t figure out what it means. You’ll also find that some agents can’t spell – leaving you to puzzle over what they meant to say.

Home Value Terms:

Fair market value: This is the value that an agent and and/or an appraiser believe a home is worth at that time in that market. This value changes constantly because it is derived by comparing the subject house to similar houses in that neighborhood or similar neighborhoods that have closed recently.

Appraised value: This is the “official” value estimated by a paid professional appraiser. This is the value the bank relies on when making home loans. Obviously, banks don’t wish to lend more than a house is worth.

Comps or Comparables: These are the similar homes that have been sold recently. To form a complete picture of the current market, appraisers (and agents) also make comparisons to similar homes that are currently for sale and to homes that expired off the market unsold.

Assessed Value: This is taxing authority’s estimate of the home’s value, and is used in determining the size of the homeowner’s property tax assessment. Although taxing districts often claim to assess at current market value, this number is often far different from the appraised value. It could be higher or lower.

Transaction Terms:

Good Faith Estimate: This is a document provided by the lender to the borrower after the borrower has made a loan application. It lays out the expected costs and fees, the down payment, the interest rate, and other financial details.

Earnest Money deposit: This is a good faith sum paid by the buyer upon presenting an offer on real property. The amount depends upon local customs and upon seller preferences. Typically, it might be 2% to 3% of the purchase price. The money is held in a trust account belonging to a broker, an attorney, or a title company. If the transaction is completed, it becomes part of the down payment. If contingencies of the purchase cannot be met, it is returned to the buyer. If the buyer simply changes his or mind, it often goes to the seller as damages. In some cases, the disposition of earnest money becomes a matter for mediation or for the courts.

The down payment: The amount of money you come in with at closing that goes directly to the sales price of the home.

Closing costs: Both buyer and seller incur closing costs in a real estate transaction. The seller generally pays the real estate agents’ commission, the buyer’s title insurance, plus fees related to the paperwork. The buyer generally pays for the appraisal, the inspection, the bank’s title insurance, fees related to the paperwork, and pre-paid amounts for taxes and insurance that go into the escrow account. Sellers may pay all or a portion of the buyer’s closing costs, depending upon the loan program and the local market.

Escrow: An account with a neutral third party who holds the funds prior to the closing of a sale. In the event of a seller-financed transaction, an escrow company collects funds from the buyer, transfers those funds to the seller, calculates interest per month, and keeps accurate records for both. Also – the entity that holds monthly tax and insurance payments for the borrower and the lender and issues on-time payments to the insurance company and the property taxing authority.

Contingency: Mot home offers contain one or more contingencies – circumstances or conditions which must be met before the contract becomes legally binding. A common contingency is one of financing. The offer will state that the borrower must be able to obtain a loan for $X at an interest rate of no more than X%. Other contingencies might be based on a home inspection, an appraisal, the condition of a well or septic tank, or the location of an easement across the property.

Under Contract: A home is under contract when the seller has accepted an offer but the transaction has not yet closed.

The Closing Disclosure: This is a final statement of costs, fees, loan amount, and other terms related to the loan. It replaced a document known as the HUD-1. The lender must provide this document to the borrower at least 3 business days prior to closing so that the borrower can compare the actual terms to those in the good faith estimate and can have any errors corrected before closing.

Arms-length transaction: This is a transaction between two unrelated parties who have no influence over each other due to family relationships, business relationships, or friendship. In some cases, such as a short sale, the lender will require that the sale be an arms-length transaction.

The Deed: This is a signed document recorded with the county that proves ownership.

Home Financing Terms:

A Conventional Loan: These come in both 30-year and 15-year fixed rates, with the 15-year loan offered at a lower rate. The interest rate is set at the beginning and does not change over the life of the loan. The payment can change, but only based on the escrow for property taxes and insurance. When the borrower pays at least 20% down, there is no private mortgage insurance.  Generally, the borrower will need good credit scores to qualify.

Adjustable Rate Mortgage: This is the loan program that got so many people in trouble during the recent mortgage crisis. It starts out with a low interest rate that allows people to qualify for the loan, then after a specified number of years, the interest rate – and thus the payment – increases. Many were operating under the theory that they could refinance before the interest rate reset, but when values plummeted, that became impossible. In other words, this can be a dangerous program.

FHA (Federal Housing Administration): This is a loan that can be obtained with a small down payment and lower credit scores. However, it comes with the requirement to pay for private mortgage insurance for the life of the loan.

VA (Department of Veterans Affairs): VA loans are for veterans, active duty military, and their spouses. They can be obtained with no money down and the seller is allowed to pay some or all of the borrower’s closing costs. There is a VA funding fee, however.

Which loan program is right for you?

The answer depends upon your circumstances and is a question you should discuss with your mortgage broker. He or she will lay out your options and explain what each means to you financially.

PMI (Private Mortgage Insurance): This coverage protects the lender in the event that you default on your home loan. It does not help you pay for the home or insure you in any way against loss. It is mandatory with FHA loans and with Conventional loans of more than 80% of the home’s purchase price.

APR (Annual Percentage Rate): This is the total cost of borrowing money to buy a home. It includes the interest rate, plus discount points, closing costs, and other fees you pay to obtain your home loan. This APR, then, will be higher than the interest rate you’ve been quoted.

LTV (Loan to Value): This is the amount of the loan compared to the value of the house. With a zero down loan, your loan to value would be 100%. If you pay 20% down and borrow 80%, your loan to value would be 80%. The higher the LTV, the more risk to the lender, which generally results in a higher interest rate for the borrower.

Equity: The value of the house less debt owed against it. If your home has a fair market value of $300,000 and you owe $200,000, you have $100,000 equity. When you purchase with 20% down, you immediately have 20% equity in that home.

Mortgage Points: These may also be called discount points or be referred to as a loan “buy down,” or “buying down the rate.” Points are paid up front in order to reduce the interest rate on the loan going forward. Each point is equal to 1% of the loan amount, so one point on a $240,000 loan would be $2,400. What it amounts to is pre-paid interest. It reduces the risk for the lender because it’s money they’ve already collected that does not go toward reducing your loan balance.

Rate Lock: When interest rates are bouncing up and down, as they sometimes do, borrowers can “lock” the rate for a certain period of time. This, of course, is a gamble. You could expect rates to rise so lock in – and then rates could go down. This is something to discuss seriously with your mortgage broker before making a decision.

PITI: An acronym that stands for Principal, Interest, Taxes, and Insurance. Lenders prefer that you pay taxes and insurance into their escrow account monthly, so they can pay these bills when they come due. This protects the lender from loss should you fail to insure and the house is destroyed. It also protects them from having a taxing authority place a lien on the house.

Preapproval and prequalification: Potential buyers can become prequalified for a loan simply by making a phone call to a lender and explaining their financial situation. The lender will say yes or no based on a good faith assumption that the borrower is truthful, that he or she hasn’t forgotten anything, and that there are no surprises in the credit report. (For instance, a lien that the individual was not aware of.) A lender’s assurance of prequalification means very little. To have a real assurance of your credit-worthiness, it’s best to become preapproved.

Preapproval involves the same steps that borrowers go through to obtain the actual mortgage loan. The lender gets verification of employment, income, assets, debts, credit ratings, etc. before issuing a letter of pre-approval.

Why is it important? Because a pre-approved borrower knows how much he or she can pay for a home, AND because the seller has assurance that the potential buyer can carry through and close on the purchase. In a multiple offer situation, the preapproved buyer will get better consideration than a prequalified buyer.

Insurance terms:

Title insurance: This is a one-time fee paid to a title company to assure you that the seller does own the property in question and that there are no outstanding liens that won’t be eliminated by pay-offs during the closing. In other words, that you (and the lender) will have free and clear title to the home.
The seller pays a portion to protect the buyer and the buyer pays a portion to protect the lender. Although title companies do extensive searches and follow the chain of title as far back as possible, surprises do occur. If you’ve purchased title insurance, the title company will pay for those surprises.

Homeowner’s Insurance: This is the insurance that protects you in the event of damage to your home. It pays to repair or even rebuild the house. Most homeowner’s insurance also contains a provision for replacing your personal possessions if they are damaged or destroyed.

You may come across additional terms…

If so, please don’t hesitate to ask for their meaning – or to ask for clarification of any of the terms listed here. We at Homewood Mortgage – the Mike Clover Group – are always happy to talk with you.

We’ll also give you further explanation of the various loan programs and show you in real numbers how each of them might affect you in your specific situation. Then, when you’re ready, we’ll be pleased to get you pre-approved for a home loan, so you can shop with confidence.

Call today: 469.621.8484

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Pay attention! Your Closing Disclosure Form is important.

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First, what is a Closing Disclosure Form? It’s a document that outlines the terms and costs of your home mortgage.

When you first applied for your loan you were given a Loan Estimate, also known as a good faith estimate. This document showed you the approximate costs related to purchasing your new home.

This document could only be approximate because at that time no one knew the exact closing date or whether any of the costs (such as appraisal or title fees) might change in the time between the estimate and the closing. Unless you locked in an interest rate, that could change as well.

The Closing Disclosure Form is not approximate. This document sets forth the exact terms and costs.

On August 1, 2015 the Closing Disclosure Form took the place of the HUD-1 settlement statement, and the rules changed.

In the past, the HUD-1 was presented to buyers on the day of closing. If there were mistakes or unwanted surprises, the buyers had no time to address them before closing.

Under the new rules, the Closing Disclosure Form must be presented at least 3 business days prior to closing. This gives buyers time to compare the actual costs to the estimated costs on the Loan Estimate and time to address any errors.

Don’t wait until the last day to go over this document. Should there be errors, your closing may be delayed. If the corrections are significant, a new Closing Disclosure will be issued and you’ll once again have 3 business days in which to review the document.

And errors are common.  When the National Association of Realtors surveyed members, they learned that half of the agents surveyed have detected errors on the Closing Disclosure. The errors – usually typos – range from misspelled names or addresses to incorrect numbers.

Errors or discrepancies between the estimate and the actual costs should be brought to your agent’s and your lender’s and closer’s attention immediately. Your lender should be able to clearly explain why the numbers don’t match.

What to look for as you review your Closing Disclosure:

Spelling: Minor misspellings in your name or the addition or omission of a middle initial can cause big problems later. Lenders want your name to appear the same on every document. Also check to see that the property address is correct.

The loan term: Most are 15 or 30 years. Check to see that you’re getting what you expected.

The loan type: If you asked for a fixed interest rate, you don’t want to be stuck with an ARM (adjustable rate mortgage). Conversely, if your strategy is to start with an adjustable rate, you’ll want to ensure that you’re getting that program.

Your interest rate: If you locked in a rate, it should be the same. If you didn’t, it is probably different from the rate on your original estimate.

Cash to close: This is the dollar amount you’ll need to bring to the closing table. It includes your down payment and the closing costs you’ve agreed to pay up front. This is typically paid with a cashier’s check or a wire transfer from your bank to the closer’s account.

BEWARE: if you’re doing a wire transfer, get the account number directly from the closer – NOT via an email. More than one buyer has lost all of their funds due to email hacking, and once that money has been sent offshore, you won’t be getting it back.

Closing costs: These are fees paid to third parties, such as the appraiser, the underwriter, the title company, and even the service that delivered documents to you. These can legitimately be subject to slight changes, but if the comparison to your Loan Estimate shows a significant change, talk with your lender immediately. Some closing costs are paid at closing and some can be rolled into the loan. This is a decision you and your lender should have made early on.

Taxes, insurance, and homeowner’s association dues. Your Closing Disclosure will state these amounts as of the time of closing. Check to see that they are correct.

The Loan Amount: If you’ve chosen to roll closing costs into the loan, this will be higher than the estimate. Again, if you have questions, speak with your lender.

Your estimated total monthly payment: In most cases, your total payment will include principle, interest, and an impound for real estate taxes, homeowners insurance, and homeowner’s association dues, if any. If an FHA loan, it will also include the mortgage insurance payment.

Since taxes, insurance, and homeowner’s association dues are included, your monthly payment can change over time. The initial payment will be based on those costs at the time of closing.

If you have questions about any of these points, get in touch with your agent and your lender. They should be able to explain any discrepancies – or take action to have corrections made.

While the Closing Disclosure is supposed to be simpler and easier to understand than the old HUD-1, it can still be confusing. Therefore, it would be in your best interests to go over the form ahead of time and become familiar with what it means.

We at Homewood Mortgage, the Mike Clover Group, would be happy to go over a sample disclosure with you line by line, so you’ll know what to expect and how to read your own document when it arrives.

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Which loan is right for you – Conventional or FHA?

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When you’re planning to buy a house and will need a mortgage, and you’ll have choices. While a few do qualify for VA or Farm Home loans, most must choose between Conventional and FHA.

Right now, about 40% of all home loans are FHA – which means they’re insured by the Federal Housing Administration. Each type has advantages and drawbacks, beginning with the loan requirements. Here, in general, are the differences between the two. (Some lenders may deviate slightly from these generalizations.)

 

loan-requirements

Most Conventional lenders are looking for borrowers with steady income, solid assets, and well-seasoned credit scores. They want to see a debt-to-income ratio of 43% or less – which means that all of your debt, including car loans, student loans, credit card minimum payments, and your new mortgage payment will be 43% or less of your gross income. However we can go up to 50% debt to income. 43% is a lender overlay that we don’t have.

For example: If you earn $4,000 per month, your total debt must be no more than $1,720.

Most will tell you that Conventional loans require a 20% down payment, but that’s inaccurate. You can get a Conventional loan with as little as 5% down. However, to do so you will be required to pay for private mortgage insurance. This insurance, which ranges from 0.3% to 1.15% of your loan amount, can be paid entirely as an up-front fee or as an up-front fee combined with a monthly fee. Its purpose is to protect your lender should you default on the loan.

When your down payment is 20% or more of the sales price, you won’t be required to buy Private Mortgage Insurance.

FHA lenders are willing to take on more risk, because their loans are insured by the Federal Housing Administration.

These are good loans for buyers who have marginal credit and less cash to use as a down payment. While regulations say the borrower must provide 3.5% – those funds MAY be in the form of a gift from an approved source.

Approved sources include:

  • A family member or close friend with a defined and documented interest in the borrower.
  • The borrower’s employer or labor union
  • A charitable organization
  • A governmental agency or public entity with a program to assist low to moderate income families and/or first time homebuyers.

The funds may NOT come from anyone with an interest in the purchase and sale – such as the seller, the real estate agent, or the home builder.

The requirement for a 580 credit score is also flexible. Applicants with scores as low as 500 may be granted a loan if they make a down payment of at least 10%.

As already noted, FHA loans allow a debt to income ratio of 50%, so if your income is $4,000, your total debt can be as much as $2,000.

The drawbacks of an FHA loan…

First, these loans are generally capped at $417,000. (In some high-cost areas, the cap is $625,000.)

In addition, borrowers pay a mortgage insurance premium for the life of the loan. At present borrowers pay an up-front premium of about 1.75% and annual mortgage insurance of about 0.85% of the loan amount. The up-front fee is rolled into the loan, so if you’re borrowing $100,000 your loan amount will be $101,750. The annual fee is becomes part of the monthly mortgage payment.

If you’re not sure which loan is right for you, call us at Homewood Mortgage, the Mike Clover Group. We’ll be happy to discuss your situation and show you the differences in real numbers. We’ll also be happy to get you pre-approved for a home loan, so you can shop with confidence.

Call today: 800-223-7409

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