Before you even consider WHAT kind of home mortgage loan you’re looking for, you should have a clear idea of HOW MUCH you can afford to pay.
In order to determine your maximum mortgage amount, lenders use a guideline referred to as a debt-to-income ratio (DTI). This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts.
Because there are two calculations, there is a “front” ratio and a “back” ratio and they are generally written in the following format: 33/38.
The front ratio is the percentage of your monthly gross income that is used to pay your housing costs, including principal, interest, taxes, insurance (PITI), mortgage insurance (when applicable) and homeowners association fees (when applicable).
The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses.
A common guideline for debt-to-income ratios is 33/38. In this scenario, a borrower’s housing costs consume thirty-three percent of his/her monthly income. Add in monthly consumer debt to the housing cost and it should take no more than thirty-eight percent of one’s monthly income to meet such obligations.
Of course, this is merely a guideline. If you make a small down payment, for instance, the guidelines are more rigid. They also vary according to loan program. For an FHA mortgage, guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.
If all this seems confusing, take a deep breath. Relax. A mortgage broker can help you understand how to weigh income levels versus home loan expenses. We suggest consulting with one as soon as you can.
If you wish to lock in low home mortgage rates and improve your chances of owning your dream house, you should consider pre-approval on your home loan.
Pre-approval will help you:
- Know how much you can borrow
- Confirm your ability to qualify for a mortgage based on your credit, financial, and employment information
- Strengthen your position to make an offer on a house because sellers are usually more willing to accept offers from pre-approved buyers
Here’s how it works:
The lender will review your credit, financial, and employment information after you fill out an application. If you qualify, you’ll receive a letter that says your mortgage loan is approved for a certain amount of money, for a certain amount of time. Being pre-approved does NOT mean you have to use that lender. You can still shop around and compare.
Pre-qualification is not the same as pre-approval.
Mortgage pre-qualification is a free test run of the loan application process. It usually takes a few hours. The mortgage lender uses your credit, financial, and employment information to come up with an estimate of the mortgage amount you can afford. It’s not binding.
A pre-approval, on the other hand, l may require a complete application, along with an application fee. Usually, a pre-approval is your lender’s guarantee of the amount they will lend you toward a home.
That’s why it provides borrowers with such leverage. If a seller sees that you’ve actually been pre-approved, he/she knows you’re a reliable consumer.
Considering a remodeling project to boost the value of your property? Weighing various home improvement loan options?
Good, you should be.
Here’s a new one to consider:
Before you drop $40,000 or more on a new kitchen or master bath, familiarize yourself the newcomer on the renovation block: a rooftop solar-power system that not only will lower your overhead costs and insulate you from a volatile energy market - but will likely add just as much to your home value over the long haul.
The technology has come a long way in the past 30 years, reports Businsess 2.0 Magazine. Most importantly, what’s starting to be good for contractors is looking efficient for homeowners, too. For starters, today’s solar systems are far more effective than their commercial predecessors; and most are warranted to last 25 years.
Home improvement loan incentives: Here’s something else to consider concerining these unique types of mortgage loans: the federal government and some states are offering serious incentives that can slash the price of installation (typically over $40,000 gross for a full system) in half.
In the California housing market and New Jersey housing market - the first states to allow so-called net metering, whereby homeowners are credited for electricity they generate beyond their own use - going solar can pay for itself in several years.
Home systems are still rare, so their value is difficult to assess, but home appraisers follow this general rule of thumb: Half the gross cost can be recouped in the home sales price as soon as it is installed. Granted, that’s well below the recovery rates for kitchens and bathrooms (which range from 70 to 90 percent), but your kitchen doesn’t pay the power bills.
Moreover, solar’s ability to lower energy costs also adds value. A study in Appraisal Journal found that for every utility-bill dollar saved annually because of an improvement, you gain $10 to $20 in property value. Therefore, if you can zero out a $1,000 annual electric tab by installing solar, you’ll get back $10,000 to $20,000 in home value.
Whether this holds true for you depends foremost on where you live. California and New Jersey lead the nation in offering financial incentives, but states such as Arizona, Colorado, Nevada and New York are ramping up quickly.
Another determinant is your typical electric bill.
“If it’s under $100 a month, people just put in solar because they want to be part of the solution,” says Mike Hall, VP at Borrego Solar in Berkeley. “When you get to $100 to $150 a month, the financial arguments start to take hold. Anything north of $200 a month is a no-brainer.”
As the housing market continues to shift, Tennessee mortgage foreclosures rose by 0.58 percent in the third quarter compared with the second fiscal quarter of this year. While a slight increase, that marks a 7.54 percent decrease compared to Q3 of 2005.
RealtyTrac released the numbers Monday in its quarterly U.S. Foreclosure Market Report. Nationally, the group reported there was a 17 percent increase in home foreclosures compared to the previous quarter.
In Tennessee, 7,502 properties entered some stage of foreclosure during the third quarter of 2006. The Volunteer state had the 12th highest foreclosure rate in the nation this quarter.
Nevada, Colorado and Florida posted the three highest foreclosure rates during the quarter, with Georgia, Michigan, Texas, Indiana, Utah, Ohio and Texas rounding out this undesirable top 10 for the third quarter of 2006.
The warning signs are clear.
“Higher mortgage rates and a general softening of the real estate market are the two key factors contributing to the 43 percent increase in foreclosure filings from the third quarter of 2005,” said RealtyTrac CEO James J. Saccacio.
“What our third quarter research appears to be showing is that the first wave of adjustable-rate mortgages is having a negative impact on the number of homes going into foreclosure. With the volume of these loans — more than $1 trillion of them due to adjust over the next 15 months — this is a trend that definitely bears watching.”
Arkansas, rated No. 16 in the nation, reported 2,696 properties entering a stage of foreclosure, and Mississippi, at No. 46, had 246 for the period, marking respective increases of 13 percent and 60 percent over the second quarter of 2006.
“While the overall number of foreclosures represents a return to more or less normal levels, there are pockets of the country being hit more severely,” Saccacio said.
“States with underlying economic issues, such as high unemployment levels or depreciating home prices, will continue to outpace the rest of the country in the total number and rates of foreclosure.”
Posted by Richard Barber on Oct 31 2006 under Tennessee
The slowing state and national housing market had affected the Albany region in 2006 to the tune of fewer sales. But for the first time since 2000, prices also dropped last month.
The median sale price of a single-family home in the region tumbled 4 percent in September, down to $187,000, compared to the same period of time in 2005, according to figures released Monday by the Greater Capital Association of Realtors.
It was the first time in six years that the median price fell on a year-over-year basis, said GCAR Executive Vice President James Ader. The bad news for sellers looking to turn a profit may be good news for home mortgage loan applicants in the area.
The decline may be temporary, however. Preliminary sales figures for October indicate prices are rising again, Ader said. The official numbers will be released in November.
“It’s a blip,” Ader said of September’s decline. “But it’s a blip that recognizes it’s a different market than we’ve seen in five years.”
The total number of units sold in Albany, Montgomery, Rensselaer, Saratoga, Schenectady and Schoharie counties also continued to decline in September. There were 940 closed sales in September, compared to 1,027 in September 2005.
Through the first nine months of the year, 7,716 homes sold in the six counties, a 2 percent decline over the same period in 2005.
“The regional market continues to perform very well but it appears that buyers have more negotiating leverage now than they have had for several years,” said GCAR President John McNamara. “That change in dynamics has caused sellers to readjust their thinking about what their home might be worth on the market.”
Even with the September-to-September drop in prices, the median sale price through the first nine months of the year in the region grew 6 percent, to $189,900.
GCAR is projecting that the decline in the market will convince more buyers the time is right to make a purchase. The organization expects an increase in applications for New York home mortgages as values remain lowered. That should cause the market to balance out in six or nine months, meaning neither buyers nor sellers will have the edge in negotiations.
The biggest drop in total sales through the first nine months of the year occurred in Schenectady County, where 1,377 homes have sold, an 8 percent decline. Montgomery County continued to buck the trend with 198 homes sold, a 37 percent jump.
The median sales price has also appreciated at the highest rate in Montgomery County so far this year, rising 38 percent to $106,500.
Posted by Jed Moss on Oct 31 2006 under New York
Marian Griffin knew about credit scoring before she visited a mortgage lender to apply for a home loan to purchase a town house.
But she was quite surprised to learn that her actual score was lower than she’d expected, Florida Today reports, despite a lifetime of clean credit.
The issue? Griffin had been late with two Florida home mortgage payments after her husband died, due to funeral expenses, delays in receiving the life insurance payout, and general emotional turmoil.
Each payment was 32 days late. Her loan had a 30-day cutoff.
When she first her mortgage company, she was able to get a 7 percent rate so that she could downsize to a town house.
But, by the time she sold her home and went back to the lender, her loan officer was able to get her a rate at 6.75 percent.
As Griffin found out the hard way, credit’s role in the mortgage process is more than approval or rejection. Credit scores also help determine whether you get the best home mortgage rates available, or pay more to compensate the lender for taking greater risk by approving you.
Credit reporting bureaus use a system to assign a number to each consumer, an indication of the quality of the person’s credit:
- The maximum is 850.
- Higher than 800 is rare.
- Higher than 700 is enough for red-carpet treatment, such as less paperwork and a lower down payment required.
- Lower than 620 spells complications for getting a mortgage.
The solution? Check your report now to give yourself time to clear up any mistakes or bump up your credit score. That’s the best way you can ensure that you’re getting the best treatment with the most important investment you’ll ever make. A bad credit mortgage loan is an option, but it’s an option you’re better off avoiding if you can. Here are some tips for making your score the best:
1. Make payments on time. Late payments are killers, particularly if they occurred within the past six months of your mortgage loan application. A late car payment a few months ago will cause your score to plummet. Rent and especially home mortgage payments are critical to your evaluation, as they show a lender how responsible you’ll be in that area and that you’re not likely to fall into the foreclosure abyss for any reason.
2. Establish credit. An account that shows no activity is inherently worthless. So is avoiding all credit altogether. If you’ve never had a loan of any sort, lenders will have no track record for judging your responsibility. Having 3-5 open accounts to establish a good credit score and keeping it safe by sticking with department store and/or gas station cards is the way to go.
3. Stay below your limit on credit cards. If your credit limit on a card is $1,000, and you carry a $880 balance, you’ll look maxed out, even if your debt obligation is low. Some people intentionally keep their credit limits low, to reduce exposure to fraud and identity theft.
4. Keep debt payments low. If you need to take out a car loan, keep the monthly payment down. Your monthly obligation is more important than the length of the term. Especially when it comes to qualifying for a home loan.
Are interest-only loans necessarily bad?
They can be at times, and often are, under the wrong circumstances for a particular applicant. But Bob Bruss, a real estate broker and syndicated columnist, believes that in some cases, they can work out fine.
In his most recent Q & A session, he addresses the ins and outs of the interest-only mortgage — something many people around the country have gotten quite familiar with over the past few years — and not always for the best.
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Q: I have around $300,000 equity in my home. At the current remaining term I owe only about $34,000 on my mortgage. Although I am a retiree and in good health, I am “only” 64, so a reverse mortgage won’t give me much because I am too young.
I have a decent retirement income, but not enough to afford to go with my friends on cruises and afford other frivolous expenses. My suggests I get a 30-year fixed-rate mortgage with “interest-only” payments for the first 10 years. There is no negative amortization, which you often warn about.
He says I can easily afford the monthly payments, even after they “adjust” in 10 years to pay off the home mortgage loan in 20 more years. My children advise against it. What do you think? Should I go ahead with it?
A: Go for it and enjoy your home equity. Your children probably know you will be spending their inheritance and (at least subconsciously) may want to discourage you from fully enjoying your retirement while you are still in good health — or they just fear interest-only mortgages out of habit.
There is nothing “all bad” with an interest-only mortgage that doesn’t have negative amortization. The mortgage option you describe sounds pretty ideal as long as you can afford the payments on your retirement income, both now and 10 years down the line (when many people don’t plan ahead for) when the monthly payment adjusts.
The type of home mortgages that get homeowners into financial trouble in a hurry are the so-called “option ARMs,” where the monthly payments are so low they don’t even take care of the interest. When that happens, the lender adds the unpaid interest to the principal, resulting in negative amortization where the borrower owes more than the original balance.
That’s what you need to watch out for.
Equity versus liquidty.
In its simplest terms, this is what cash-out mortgage refinancing is all about. Because your home is a potentially large source of money, you need to consider the pros/cons of taking some of that cash out now, as opposed to letting it continue to build.
What is cash-out mortgage refinancing?
Cash-out refinancing involves refinancing your home loan for more than you currently owe. You subsequently pocket the difference. The longer you’ve been making mortgage payments, the lower your principal will be; it’s likely to be substantially lower than what it was when you first moved in.
Such a build-up of equity will allow you to take out a loan that covers what you currently owe … and then some.
For example: You owe $90,000 on a $180,000 house and need $30,000 to add a family room. You could look into a mortgage refinance for $120,000. The bank will then hand over a check for the difference of $30,000.
You can use this cash for anything you want, from home renovations to second-property purchases to college tuition payments. Also, you may be able to get a more favorable interest rate for your refinanced mortgage.
However, if the interest rate offered for your refinanced mortgage is significantly higher than your current rate, this may not be a sensible choice. A home equity loan or line of credit (HELOC) might be a better idea.
Typically, homeowners are allowed to refinance up to 100 percent of their property’s value. However, if you borrow more than 80 percent of this value, you may have to pay private mortgage insurance, or at least a higher interest rate.
Cash-out refinancing versus home equity loans
Owners sometimes confuse these two options for home-financed cash. But you won’t anymore, will you?
Cash-out refinancing is a replacement of your first mortgage; home equity loans are separate loans on top of your existing mortgage. In other words, with refinancing you receive new mortgage, not a second loan against the equity in your home.
Refinancing typically makes sense only when there has been a drop in interest rates and you want to lock in a new mortgage at this lower rate for a longer term than your existing mortgage. In other instances where you need a short-term cash infusion, a HELOC is often a better choice.
Speak with experts and home mortgage brokers today to learn more. They’ll guide you through the important steps of whatever path you choose.
Because they’ve been working for many years and, therefore, are financially stable, Baby Boomers are considered major players in the real estate market.
For that reason, it’s far from ideal news to many insiders that a new study shows this demographis to be lessa in love with second homes than originally believed.
The rate of second-home ownership among 50- to 60-year-olds has remained flat during the 12-year period between 1992 and 2004, according to a report sponsored by Radian Group Inc. and the Research Institute for Housing America of the Mortgage Bankers Association.
Younger boomers were no more likely to own a second home than older generations of homeowners. Moreover, those who do have used a home purchase loan on a second residence are using the property on a limited basis, too: 50% spend two weeks or less and two-thirds spend four weeks or less per year in their second home.
About 12% of second-home owners said they intended to sell their main home and eventually use their second home as their primary address - debunking speculation to the contrary.
Information for the report - Housing Trends Among Baby Boomers - was pulled from a variety of sources, including U.S. Census Bureau information and the 2004 Health and Retirement Study, which is funded by the National Institute on Aging.
“There have been relatively few scientific studies on second-home ownership and mortgage activity,” Doug Duncan, MBA’s chief economist and senior vice president of research and business development, said in a news release. “The report indicates that Baby Boomers are not acting differently than their parents when it comes to second-home ownership.
However, the baby boom cohort is so large, even if they follow typical buying patterns, they will have significant impacts on many local housing markets.”
The study found 43 million U.S. households headed by someone age 50 or older owned their main residence and 6.6 million homeowners of that age group owned a second home. Those second homes were often located in well-known vacation areas.
Typically, this age group helps ensure that sectors such as the Florida housing market remain healthy. If Boomers’ interest in vacation homes continues to wane, it won’t these areas rise up from a slow year any time soon.
With the California housing market slowing from its record highs of 2005, the California Association of Realtors and the San Francisco Association of Realtors are predicting drops in the numbers of real estate agents playing the field, the San Francisco Examiner reports today.
Existing home-sale prices dropped 1.5 percent between August and September of 2006 and only gained 2.2 percent over September 2005 in the Bay Area, a change from the sky-high growth of the region.
“The number of sales are down in the state as a whole about 31.7 percent. It’s a significant number,” said state Realtors’ President Vince Malta, a San Francisco Realtor. “But putting it in context, September 2005 was one of the best months on record. I think 2006 will be remembered as the year of great transition… from a frenzy to a normal year.”
As the market boomed, so too did the number of licensed real estate agents in the state, from 329,815 in September 2002 to 514,284 in September 2005. Because state-issued real estate licenses last for four years, the state Realtors expect that figure to grow to 600,000 in 2007, but believe trade membership as a Realtor will drop in California from the present 210,000 people to 185,000.
As California mortgage demand wanes and housing prices soften, the San Francisco Association of Realtors expects a drop between 7-10 percent in its membership of 5,300, president-elect John Asdourian said.
“In the past five years, in excess of 40 percent of our membership has less than five years as a real estate agent. During the more normal periods, you don’t have quite the high level of influx. Although I have not to date seen a huge attrition of San Francisco in our membership. Our membership continues to grow,” he said.
Statewide, September saw a sharp drop in the number of new licenses being issued by the California Department of Real Estate from the previous year.
Meanwhile, as real estate agents adjust to the new conditions in which buyers are pickier and homes wait on the market longer, pricing houses right and educating buyers and sellers are becoming the most important skills.
Many reported that individual homes are still receiving more than their asking price, provided that the value is right. But others are cutting prices.
Asdourian said he recently sold a Portola District home for $674,000 after a reduction to $679,000 from $699,000. He also priced a Glen Park property at $999,000 where he would once have tagged it at $1.49 million, and still sold it for $10,000 under the asking price.
Harald Stangl of Sotheby’s Real Estate said he made a bid on behalf of a buyer for $40,000 more than the $749,000 asking price on a single-family home in the Mission, and lost out to someone paying over $800,000.
“Good merchandise sells. People who have overpriced stuff and put it on the market, that doesn’t work anymore,” Stangl said. “I think the change is just excellent, because buyers are really getting more savvy. The buyers are savvy, the loans are low, the unemployment is low.”
Trish Wood of Intero Real Estate Services in San Carlos finds the mid-Peninsula unique in terms of the strength of its market, but says pricing right is the “all” right now.
“If you had a house at $800,000 last year and you sold it at $850,000, you want to price it at $800,000 this year,” Wood said.
Realtors caution against pricing too low in a changing market, saying buyers may stick to that price, whereas before it often led to a bidding war.
Educating both buyers and sellers is also a factor right now as each treads carefully on the new landscape, agents said.
Sellers, for their part, may still expect the 20 percent appreciation that characterized the market previously, when mortgage interest rates were at record lows and property values soared meteorically year-to-year. Buyers now have more options, but greater skittishness, about entering the market.
Posted by Richard Barber on Oct 31 2006 under California
