Mortgage Information

Mortgage Information

Lenders usually use two basic formulas to determine how much of a mortgage you can afford. They may vary slightly depending on the lending institution you're using, but all lenders follow the same guidelines. There are many different programs available, both conventional and governmental. Your lender can work with you to find one that fits your specific financial needs.

Conventional loans, with a fixed interest rate, generally require that your mortgage expenses, which include the principal, interest, taxes and insurance (PITI) do not exceed 28% of your income. A fixed loan rate has an interest rate which is constant throughout the loan term. An adjustable rate mortgage (ARM) has an interest rate that fluctuates according to current standards. Mortgage expenses for an ARM are not to exceed 26% of your income. There is another ratio used with long-term debt. Long-term debt is considered to be any payments extending at least nine months. Your long term debt must not exceed 36% of your gross income to qualify for a fixed rate loan. For an adjustable rate mortgage, your long-term debt must not exceed 33% of your gross income. FHA (Federal Housing Administration) Loans, mortgage expenses are not to exceed 29% and your long-term debt to income ratio is to be no more than 41%. For example, if your annual income is $60,000, divide that by twelve and you have a gross monthly income of $5,000. For a conventional loan, you multiply that by 28% which equals $1,400. You should qualify for a conventional loan with payments not in excess of $1,400. The total of your monthly mortgage expense, plus any long-term debt must not exceed $1,800. ($5,000 x 36% = $1,800)

For a quick reference, refer to this chart.

	Max. Monthly Housing Expense	Max. Monthly Housing Expense + long-term debt
Conventional	26% - 28% Gross Monthly Income	33% - 36% Gross Monthly Income
FHA	29% Gross Monthly Income	41% Gross Monthly Income

Mortgage Application Checklist

Copy of driver's license and social security card for each borrower.
Accepted purchase agreement and copy of listing sheet.
Application fee in the amount of $
Income
A: Past two years' history of employment with addresses, phone numbers and length of time on the job.
B: Past two years' W-2 forms.
C: Most recent paycheck stubs (30 day minimum).
D: Verification of other income: social security, child support, retirement, etc.
E: If self-employed: Past two years' tax returns including all schedules and a profit and loss statement for the current year signed by your accountant.
F: Copies of leases for all rental properties.
Assets
A: Most recent statements (for 3 months) for all bank and credit union accounts
B: Stocks and bond: provide copies of certificates or most recent statements from stockbroker.
C: Approximate value of all household goods.
D: Make, model and value of automobiles, boats, etc.
Creditors
A: Credit cards: provide account numbers and statements showing current balance.
B: Installment loans: provide account numbers, balances, monthly payments and addresses.
C: Mortgage loans: provide account numbers, balances, monthly payments and addresses on all properties presently owned or sold within the last two years. Bring proof of sale for all properties sold within the last two years.
D: Amounts for child care expense, if any.
Landlord Information
A: Name and address of all landlords for the past two years.
Bankruptcy And/Or Adverse Credit
A: Bankruptcy discharge and schedule of creditors.
B: Letter of explanation.
Divorce decrees, if applicable, including property settlements, quit claim deeds, modifications, etc.
Copy of contract or listing agreement for home you are selling.
VA Only
A: Certificate of eligibility
B: DD214

Financing Your Home

With a variety of mortgages available today, many home buyers and sellers are finding it necessary and beneficial to incorporate one of the following methods of financing in their real estate transactions.

ASSUMPTION OF MORTGAGE - Agreement by a buyer to pay remaining payments of an existing mortgage. The seller remains obligated if the buyer fails to pay, unless the lender agrees to release him.

(ARM) ADJUSTABLE RATE MORTGAGE - Interest rate is adjustable periodically to market rate and is usually lower initially. However, if interest rates increase, your monthly payment will increase. If interest rates decline, your monthly payment will decrease. When considering an adjustable rate mortgage (ARM), the following points should be reviewed:

The initial interest rate.
The index that the new rate will be measured by.
How often the rate will change.
Whether there is a cap (or maximum) amount that the rate can vary at each adjustable time.
Whether there is a cap (or maximum) interest rate to the entire loan.

BUY DOWN MORTGAGE - An arrangement that allows a buyer to put cash up front in return for a lower interest rate than existing rates.

CONTRACT FOR DEED OR LAND CONTRACT - Agreement to purchase real estate on an installment basis with the title remaining in the original owner's name until the buyer completes all payments.

FIXED RATE MORTGAGE - The interest rate and payment of principal will remain the same for the length of your loan. However, if taxes and insurance are included in your house payment, your payment may change from year to year.

(GPM) GRADUATED PAYMENT MORTGAGE - Payments start at a lower rate and usually increase for the first five to seven years and remain constant for the remaining term of the mortgage.

GROWING EQUITY MORTGAGE - An agreement where a buyer takes a loan at a fixed rate, but agrees to increase his payment two or three percent annually. These increases are applied directly to the loan principal, allowing the loan to be paid off earlier than normal.

PREQUALIFICATION - Informal estimate of how much financing a potential borrower might expect to obtain.

SELLER FINANCING - Agreement of a seller to carry all or part of the financing for the buyer.

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