FAQ Mortgage Questions By Home Buyers About Mortgage Loans
This BLOG On FAQ Mortgage Questions By Home Buyers About Mortgage Loans Was UPDATED And PUBLISHED On March 13th, 2020
Most home buyers, especially first time home buyers, have many questions when it comes to mortgages and qualifying for a home loan.
- There are countless of consumers who had credit scores in the 400’s to low 500’s have their credit scores jump over 600 FICO plus in a very short period of time by just a few quick credit fixes
- These consumers never in their wildest dreams realized that would eventually be homeowners
- Gustan Cho Associates is proud to be working with our viewers with bad credit
- We help our viewers and clients in answering common FAQ Mortgage Questions to qualify for home loans
In this article, we will discuss and cover the FAQ Mortgage Questions By Home Buyers About Mortgage Loans.
Commonly FAQ Mortgage Questions By Clients
Here are the most commonly asked questions:
How is your first home taken into consideration when purchasing a second home. In terms of debt to income ratios?
- When qualifying for a second home purchase, both the first mortgage payment and housing expenses, as well as the proposed second home purchase mortgage payments and housing expenses, are calculated by lenders
Potential rental can be used on investment properties as long as borrowers put a 25% down payment.
Down Payment Requirements On Conventional Loans
Down payment requirements on a second home and/or vacation home for personal use is 10% down payment and you can only finance it with a Conventional Loan:
- This is because second home and/or investment home financing is not allowed with FHA, VA, and USDA Loans
- FHA, VA, and USDA Loans are for owner occupant primary home financing only
- If you are exiting the primary home and buying your second home as a primary home, then you can convert exiting the property and use that as an investment property
- Can use 75% of the potential rental income if and only if you have at least 25% equity in your exiting primary home
- For example, if exiting property is worth $100,000 and owe $80,000, you can pay down your first mortgage by $5,000 so you have a 75% loan to value
- Therefore, can use 75% of the potential rental income of exiting the property and use that as qualified income
- This holds true even though borrower does not have a renter yet
- So if the potential rental income is $1,000 judged by an appraiser, then you can use 75% of the $1,000, or $750 as qualified income when qualifying for your mortgage loan
- The appraisal is used to determine the value of exiting property and potential rental income is required
Down payment on investment properties is normally a 20% down payment.
How Lenders Calculate Debt To Income Ratios
How to calculate the debt to income ratio?
- Debt to income is calculated by taking the sum of all minimum monthly payments that reflect on the credit report, including proposed principal, interest, taxes, insurance payments on the new home purchase and dividing it by your monthly gross income
- Utilities, cell phone, medical insurance, and private debt that do not report on the credit report is not used to calculate debt to income ratios
Is it wise to use one person’s income & credit for a house?
- A co-borrower is not needed when applying for a mortgage loan and is only used when needed to qualify for an income
- Married folks do not have to add a spouse on the mortgage loan if one person can qualify for the loan
- Both people can go on the title but it does not make sense to add a second person on a mortgage if just one person qualifies for the home loan
This is especially the case when the spouse is a homemaker and has no income.
FAQ Mortgage Questions On Rates On Home Loans
What is a good interest rate and how do you calculate how much you will pay in total on the home with interest?
- Mortgage interest rates will depend on the borrowers’ credit scores with FHA, VA, USDA Loans
- These loans are called government loans
- The lender is insured against borrower’s default and foreclosure so mortgage rates on government loans are normally lower than Conventional Loan Programs
- The down payment a homebuyer puts down has no impact on the mortgage rates on government loans
- This is because these loans are insured by the federal government
- For example, FHA Loans are guaranteed by HUD
- VA Loans are guaranteed by the Department of Veteran Affairs
- USDA Loans are guaranteed by U.S. Rural Development (U.S. Department of Agriculture)
- Interest Rates on government loans are determined by credit scores, property types, and loan amounts
- Single Family Homes have the lowest interest rates and lower loan amounts also require higher mortgage interest rates on both Conventional Loans and Government Loans
Condos and 2 to 4 unit properties yield higher mortgage interest rates because lenders consider them higher risk properties.
FAQ Mortgage Questions On How Mortgage Rates On Conventional Loans Are Calculated By Lenders
Conventional mortgage rates are dependent on credit scores, down payment, loan to value, and property types:
- Loan to value is important
- This is because since Conventional Loans are not insured by any governmental entity
- The lender wants the home buyer to have skin in the game
- The more money a homebuyer puts down on a home purchase, the less likely the borrower is likely to default on their home loan and the less risk the lender has
- Second homes and investment home financing will yield higher mortgage interest rates
- This is because they are considered riskier
- As of how much interest you will pay over the life of a 30-year mortgage loan, we can take a case study
Let’s say that you are purchasing a home:
- the loan amount is $100,000
- have a 30 year fixed rate home loan at a 4.0% interest rate
- monthly principal and interest payment will be $477.42
- the total amount of payments for principal and interest over 30 years will be $171,870
- So the total amount of mortgage interest you have paid over the course of 30 years will be $71,870
Buying Down Mortgage Rates With Points
How does rate buy down work?
- Borrowers can buy down mortgage rates with points
- One point is equivalent to 1.0% of the loan amount
- If a borrower is planning on staying on their home purchase for longer than 10 years and is not planning on refinancing any time soon, they may consider buying down their mortgage rates by paying points
- Since premium on mortgage rates changes constantly, I cannot tell you how much one point will reduce your mortgage interest rates by
- But your loan officer can go over this with you and will advise you whether it is beneficial whether or not to consider paying points to buy down your rates
You can use your sellers’ concessions to pay for points to buy down your mortgage interest rates because points are considered part of closing costs.
FAQ Mortgage Questions On Pre-Payment Penalties On Mortgages
Prepayment penalties, adjustable rates (don’t understand), the difference between signing the mortgage and the note, taxes, and insurance?
- Pre-payment penalties are when the lender will charge you a percentage of the loan amount if you pay off the mortgage loan early
- Pre-payment penalties are illegal with residential mortgage loans and now only applies to commercial loans only
- Adjustable-rate mortgages are 30-year loans but are fixed for a certain period of time and adjusts every year for the balance of the 30-year mortgage payment period
For example, on a 5/1 ARM, the interest rate for the first five years will be the same:
- Starting year 6, it will adjust every year for the remaining 30 years
- The rate is determined by a margin and index
- The margin is fixed and the index will vary depending on what index the lender chooses
- For example, let’s say the margin is 3%
- The index on year 6th when it adjusts is 1.5%
- So on year six, the newly adjusted mortgage rate will be the 3% margin plus the 1.5% index which totals 4.5%
- The index for year 6th will be a 4.5% mortgage rate
- Say on year 7th the index is 2%
Just add the 3% margin to the 2% index and the interest rate on year 7th will be 5%.
FAQ Mortgage Questions On 30 Year Versus 15 Year Fixed Mortgage Rates
Besides length, what are the substantial differences between a 15 year & 30-year mortgage (I read to avoid a 30-year mortgage if possible)?
- The most popular mortgage loan program is the 30-year fixed-rate mortgage loan program
- 15 year fixed mortgage loans do have lower interest rates than the 30 year fixed mortgage loans
- The reason that most folks go with the 30 year fixed mortgage rates
- This is because the payments are lower since the loan balance is spread out over 30 years instead of 15 years
- 15 year fixed rates are great if you can afford to make the higher monthly mortgage payments
You will pay less interest over the life of your mortgage loan and your mortgage rates will be lower than the 30 year fixed rate mortgage loans.
FAQ Mortgage Questions On Paying Mortgage Balance Early With 30 Year Fixed Rate Mortgage
If I went with 30 year, can I make extra payments to pay off early?
- Yes, you can always make extra payments on your mortgage payments
- The extra payments will be applied to the principal on your loan and not the interest
Should I always go with fixed rates?
- Fixed rates are recommended for those homeowners who plan on staying in their properties for a long time and not planning on refinancing in the short term
- Adjustable Rate Mortgages, ARM, have lower interest rates and are recommended to home buyers who are purchasing their first homes
- ARMs are normally for those planning on not living in their home purchase for longer than 7 years
- You can always pay extra payments every month and shorten the term of 30 year fixed rate home loan
- However, if you have a 15 year fixed rate mortgage loan, you can not have the minimum payment reduced if you run into tough times
- The minimum payment due needs to be made in order for your mortgage to be in good standing
FAQ Mortgage Questions On What Determines Mortgage Rates
Besides credit scores, what determines interest rates?
- With FHA Loans, credit scores, types of property, and loan size will determine mortgage interest rates
- Loan to value does not affect mortgage rates
- With Conventional Loans, credit scores, types of property, loan size, and loan to value will determine interest rates
- Prior bad credit, prior bankruptcy, and prior foreclosure will not affect nor determine mortgage interest rates
FAQ Mortgage Questions Bi-Weekly Housing Payments Will Shorten Life Of Loan Term
Can I ask to have the option of paying every 2 weeks instead of once a month?
- Homeowners will save over 6 years from the term of 30-year loan by making mortgage payments every two weeks
- Borrowers can enroll in a twice per month payment program with their lender
FAQ Mortgage Questions On Paying Loan Balance Before Loan Term
Is there a penalty for paying off your mortgage ahead of time or would you still be responsible for that extra interest?
- Borrowers can pay extra every month and the extra payment will go towards paying down principal payment
- There are no penalty in paying extra every month
- Or paying a large sum at once and that will go towards paying down principal loan balance and not paying interest
- If borrowers is paying down loan balance earlier, borrowers are not liable for the interest and there is no penalty to paying off the mortgage loan early
FAQ Mortgage Questions On Discount Points
How much does it usually cost to pay down mortgage rates with points?
- As mentioned earlier, borrowers can reduce mortgage interest rates by paying discount points
- One point is equivalent to 1.0% of your mortgage loan balance
- There are rules and regulations that you cannot exceed 3% of your loan amount on closing costs
- The maximum points you can buy depends on a lot of variables such as the loan size and your other closing costs
You cannot violate QM, Quality Mortgage, which means your total closing costs cannot exceed 3%.
FAQ Mortgage Questions On Home Loan Closing
If at the closing table there is a snag, does that means we start over another day or do we fix whatever is the issue while we are there?
- A closing is not scheduled until both the lender and the title company feels comfortable on all figures and they both feel confident that there are no glitches
- Most closings will run smooth
- However, if there are any glitches, the closing department of the lender and/or title company can normally try to fix it right there on the spot
- This may delay the closing and sometimes it may take a few hours. Very rarely is the closing delayed and postponed to another day
- However, it may happen where the closing is canceled
- You cannot just reschedule it for the next day
The lender needs to re-review the mortgage docs and make sure that the loan does not need to get re-disclosed.
FAQ Mortgage Questions On Insurance Requirements
Can you add insurance through the lender in case of an emergency (death, prolonged sickness) or do you have to find an outside lender to insure you?
- All homeowners insurance is chosen by borrowers and not by the lender
- There are life insurance policies where the mortgage can get paid off in the event if the borrower dies
- However, the homeowner is in charge of choosing the insurance carrier
- Lenders will require homeowners insurance and if they do not have homeowners insurance, the mortgage company will force place homeowners insurance on the property
Forced place homeowners insurance will cost homeowners more than triple the premium of getting their own insurance policy.
FAQ Mortgage Questions On VA Loans
I’m military so I was thinking about the VA home loan process versus other kinds of home buying options. Pros and cons of using the program and if getting a house built is a bad choice for first-time buyers?
- VA Loans are probably the best mortgage loan program out there in today’s market place
- However, VA Loans is only limited to Veterans who have a Certificate of Eligibility
- VA Loans offers those who qualify for a VA Loan no down payment, no mortgage insurance premium
- The best part of it all, VA Loans offer the lowest mortgage interest rates out of any other mortgage loan program
- Homeowners refinancing with a VA Loan can get up to 100% loan to value on a cash-out VA Loan Refinance Mortgage
- VA Loans have very loose mortgage lending requirements and waiting period after bankruptcy, foreclosure, deed in lieu of foreclosure
- Waiting Period After Short sale to qualify for VA Loans is only two years and not three years like FHA Loans
- Borrowers can use VA Loans to purchase a new construction home that is listed by a home builder
- Borrowers cannot use a VA Loan to build a new home
This is because VA Loans are not available on construction loans.
FAQ Mortgage Questions On Loan Programs
What questions do you ask potential mortgage lenders when shopping around for a loan product?
- The first and most important task you should do is evaluate your own credit and financial situation
- Do you have low credit scores?
- Do you have a prior bankruptcy?
- Do you have prior foreclosure, deed in lieu of foreclosure, short sale?
- Do you have outstanding collection accounts and/or charge off accounts?
- Do you have high debt to income ratios?
- Do you have enough money for the down payment and closing costs?
You then can contact several mortgage lenders and ask them about your situation and ask them about their lender overlays.
Common Lender Overlays
Many lenders will have overlays on the following:
- the number and age of the credit tradelines
- collection accounts
- charge off accounts
- debt to income ratios
- credit scores
- verification of rent
- some will not take any borrowers who have recently gotten denied by another lender
What Are Things To Avoid During Home Buying And Mortgage Process
What are common pitfalls to avoid when shopping around for a home loan?
- If you are shopping for a mortgage loan with several lenders, please do not have them pull credit
- All lenders do a hard pull and every single hard tri-merger credit pull will drop credit scores by at least 2 or more FICO points
- Plus, borrowers need to explain to lenders about every single inquiry on the credit report
- Prior to submitting a loan application, talk and interview loan officer and ask questions
- Applying for an FHA Loan with your local bank and getting denied does not mean you do not qualify for an FHA Loan
- Every lender may have their own overlays
- For example, to qualify for an FHA loan, borrowers need a minimum credit score of 580 FICO
- Borrowers do not have to pay off collection accounts or charge off accounts
- Most banks and lenders will require a credit score of 640 FICO
- May ask borrowers to pay off all of the collection accounts in order to qualify with them
- Gustan Cho Associates Mortgage Group is a national mortgage company with no FHA LENDER OVERLAYS
- This means that we just go off the minimum FHA GUIDELINES
- We do not have any additional lending requirements other than those required by HUD
Borrowers with credit issues, lower credit scores, prior outstanding collections and charge offs, and higher debt to income ratios, Google FHA LENDERS WITH NO OVERLAYS and will find a list of lenders who do not have any lender overlays.