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|  | How is pre-qualification different from pre-approval? | | | | Any reputable Mortgage Banker will "pre-qualify" you for a mortgage before you start house hunting. This process includes analyzing your income, assets, and present debt to estimate what you may be able to afford on a house purchase. Real estate brokers can also calculate the same sort of informal estimate for you. Obtaining mortgage "pre-approval" is another thing entirely. It means that you have in hand a lender's written commitment to put together a loan for you (subject to verification of income and employment). Pre-approval makes you a strong buyer, welcomed by sellers. With most other purchases, sellers must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing. | | | | | |
| | | How much do I need for a down payment? | | | | Most lenders offer financing programs that allow the borrower to finance up to 100% of the sales price of a new home. However, if no down payment is made, the borrower will be required to pay for private mortgage insurance (PMI), see question ten, below, for further information on PMI. If you can afford to put more money toward a down payment, it will reduce the amount of your monthly mortgage payments. Some loans programs offer 3% down payments if you meet certain income standards. The Veterans Administration (VA) and the Rural Housing Service (RHS) also offer no-down-payment loans. The lender will want to know how much money you plan to put down and the source of those funds. Sources you may draw upon include savings, stocks and bonds, pension funds, real estate holdings, life insurance policies, mutual funds, and employee savings plans.You may also use a gift of money from a family member that need not be repaid. If you do this, you will need to present a letter to your lender that states the amount of the gift, is signed by the giver, and is notarized by a third party. A gift letter "form" may be obtained from your lender.You are also now allowed to withdraw up to $10,000 from both traditional and Roth Individual Retirement Accounts (IRAs) with no early withdrawal penalty, if used towards buying your first home.Under some mortgage programs, such as Fannie Mae's Community Home Buyer's ProgramSM with the 3/2 Option, part of your down payment may come from a grant from a nonprofit housing provider in your community. | | | | | |
| | | How much house can I afford? | | | | The amount of a loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a "safe" amount for your mortgage payments. A fairly standard ratio is 28/36. Certain mortgage plans sometimes use more liberal ratios-for example, the Fair Housing Authority (FHA) currently uses 29/41.
Here's how it works: With a 28/36 ratio, you are allowed to spend up to 28% of your gross monthly income for mortgage payments.
The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 36% of your gross monthly income.
To calculate exactly how much you may borrow, you also need an estimate of interest rates. For example: Suppose you had $1,000 a month for mortgage payment; at 7% that would let you borrow about $160,000 on a 30-year loan. At 6% the loan amount would be nearly $175,000.
As part of this calculation, you also need to estimate and include the property taxes, homeowner's insurance, and homeowner association fees (if applicable) you might need to pay, which are considered part of your monthly expense. Please see our Mortgage Calculators, and click on, "How much will my mortgage payments be?" for estimates of property taxes and homeowner's insurance costs.
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| | | Which is better -- a fixed or adjustable rate mortgage? | | | | It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:
• the interest rates and mortgage options available when you're buying a house
• your view of the future (generally, high inflation will mean ARM rates will go up and lower inflation means that they will fall)
• your personal financial and investment goals, and
• how willing you are to take a risk.
When mortgage rates are low, a fixed rate mortgage is the best bet for many buyers. Over the next five, ten, or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARMs teaser rate will adjust up soon and you won't gain much if you plan to stay in the house more than a few years (the broker can tell you your break-even point). In the long run, ARMs are likely to go up, meaning many buyers will be best off locking in a favorable fixed rate now and not taking the risk of much higher rates later.
Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. For example, if you take out a fixed rate loan now, and several years from now interest rates have dropped, refinancing will probably be an option.
There are several downsides to refinancing. Unless you can negotiate a low-cost refi, you may have to pay the same fees and points as for an original mortgage. This means you may reduce your monthly payment right away but not actually begin to save money on the refi for several years. (Again, your broker can tell you when you will break even.) So, if you think you will be moving again soon, it may not make sense to refinance.
Second, if you default on a refinanced mortgage, your position under your state's law can get worse. In California, for instance, when a homebuyer defaults (stops paying the mortgage) on a purchase mortgage, the lender can foreclose on the house but take nothing else from the homebuyer, while on a refinanced mortgage it can go after the homebuyer's cash and other assets, after the house, to satisfy the debt.
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| | | What's the difference between a fixed and adjustable rate mortgage? | | | | With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end.
With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate that is lower than the rate for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years, or "option ARMs" that allow you to choose, on a monthly basis, whether to pay a minimum amount, an interest-only amount, an ordinary principal plus interest amount, or an accelerated payment amount
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| | | What is private mortgage insurance (PMI)? | | | |
Private mortgage insurance or "PMI" policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%.
Premiums are usually paid monthly and typically cost around one-half of one percent of the mortgage loan. You can normally cancel the PMI once your equity in the house reaches 20-25%, so long as you've made timely mortgage payments.
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| | | What are low down payment options, for buyers who can't afford a 20% down payment? | | | | Assuming you can afford (and qualify for) high monthly mortgage payments and have a high credit score, you should be able to find a low (5% to 15%) or even no down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment.
If you put down less than 20%, you may have to either pay for private mortgage insurance (PMI) or, to avoid PMI, take out two separate loans (a first mortgage and a second mortgage).
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| | | Where should I shop for home loans or mortgages? | | | | Many entities, including banks, credit unions, savings and loans, insurance companies, and mortgage bankers, make home loans. Lenders and terms change frequently as new companies appear, old ones merge, and market conditions fluctuate. To get the best deal, it's a good idea to compare loans and fees with at least a half a dozen lenders -- or to get the help of an experienced mortgage broker, who can help you sift through the latest offerings.
Because many types of home loans are standardized to comply with government rules, comparison shopping isn't difficult. (The Federal National Mortgage Association or "Fannie Mae," as well as other quasi-governmental corporations set these rules as a condition for buying loans off the lenders.)
However, you'll need to decide what type of mortgage you're interested in first, whether it's a fixed rate, adjustable rate, or one of the many hybrids available now. Once you've narrowed your sights to a particular size, type, and length of mortgage -- such as a 30-year fixed term mortgage for $300,000 -- you'll be ready to compare apples to apples.
Mortgage rates and fees are usually published in the real estate sections of metropolitan newspapers and on mortgage websites. It's wise to do some advance research even if you decide to work with a loan broker, so that you'll have a sense of the market. Some loan brokers charge the consumer directly, others collect a fee from the lender (though this ultimately adds a little to what you pay for your mortgage).
Be sure to check out government-subsidized mortgages, which offer both no-down-payment and low-down-payment plans. Also, ask banks and other private lenders about any "first-time buyer" programs that offer low-down-payment plans and flexible qualifying guidelines to low- and moderate-income buyers with good credit.
Finally, don't forget private sources of mortgage money -- parents, other relatives, friends, or even the seller of the house you want to buy. Borrowing money privately is usually the most cost-efficient mortgage of all. And its popularity is increasing as investors turn to real estate as a high-appreciation place to put their money.
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