Getting pre-qualified for a mortgage is a great first step to kickstart your homebuying journey. Pre-qualification gives you a picture of how much you can afford based on your credit, income, and debt. It helps you determine your budget, understand estimated monthly payments, find the right loan program, strengthen your offer, and save time.
When you apply for a home loan, several documents are requested to confirm your ability to make monthly mortgage payments. Here are a few items you will likely will need to submit:
• Income history and employment verification from the past two years, such as tax returns, W-2s, and 1099s (if applicable)
• Asset statements for bank, retirement, and brokerage accounts
• Monthly debt payments, including any outstanding loans and credit cards
• Records of rent payments, divorce, bankruptcy, or foreclosure
There is no one-loan-fits-all. Supreme Lending offers a wide range of mortgage programs to choose from depending on what may be the most beneficial for your circumstances. Your Loan Officer can present different scenarios to see what best aligns with your goals—whether a fixed-rate or adjustable-rate mortgage, or a Conventional loan or government-backed loan, such as FHA, VA, or USDA.
A monthly mortgage payment includes several components often referred to as PITI: principal, interest, taxes, and insurance. Any condo fees or homeowners association fees may also be factored into a monthly payment.
Closing costs are paid upfront for necessary expenses associated with purchasing a home. When
applying for a loan, you’ll receive a Loan Estimate outlining these settlement charges for added fees like loan origination, appraisal, credit report, title insurance, document preparation, prepaid interest, and other miscellaneous fees.
Two challenging questions that surround every loan are – How does a lender determine my interest rate? What can I do to ensure I get the best possible rate? To answer these questions, we must consider three criteria on which a lender bases their decision.
Credit Rating – The credit score is the most important point in mortgage lending. The credit score is not the only aspect considered in lending, however in most cases it is the most crucial. Lenders will also look for multiple late payment occurrences over the last two years.
Ratios – Secondly, the borrower’s monthly obligations (this does not include utilities, phone, or items generally not reported on a credit report) are calculated and reviewed by lenders. Two ratios are determined, front-end and back-end. For most lenders, a “grade A” conventional loan is one in which a borrower has a front-end ratio less than 28% and a backend ratio less than 36%. For example, a borrower has a gross monthly income of $4,000, a car payment of $350, a credit card payment of $55, and a new house payment of $1,000. The calculations are as follows:
Down Payment – Thirdly, the lender factors in the amount of a borrower’s initial down payment. The less money spent on the down payment means a higher interest rate charged by the lender. Simply stated, more risk for the lender equals a higher rate for the borrower. Even if a borrower has perfect credit and wants to put 0% down, their rate will generally be about ½% higher than a person who puts 10% down.
After a lender has considered the three points described above, the borrower’s application must pass the specifications set by an underwriting department for the loan to be approved.
Lenders generally charge discount points for the following purposes. 1 discount point equals 1 percent of the loan amount. Discount points are used to lower the interest rate. The discount fee is normally charged as a line item on your Closing Disclosure at the time of closing.
Your closing costs depend on the type of loan you decide is best for you. Depending on your home state, you normally pay the following amounts:
Many of these costs are third party charges and cannot be negotiated by you or the lender.
There are many differences between conventional and FHA loans. In this portion we will outline some of the major differences for you.
On FHA loans, the minimum down payment is 3.5%. On a conventional loan, the down payment can be as low as 3% depending on a consumers credit scores. Additionally, the money on a conventional loan must be “seasoned” (60 days in the bank) prior to purchasing the home or be proceeds from the sale of your existing home.
A FHA loan requires an upfront Mortgage Insurance payment; a Conventional loan does not. Both do require monthly Mortgage Insurance premiums based on the LTV.
The taxes will be the same on either type of loan. A common mistake is that people believe is their taxes will vary depending on the loan they choose. The title company that closes the loan submits the taxes directly to the lender. If you reside in an attorney state, your representation is the one who orders the tax certificate from the appraisal district. Taxes reported to the lender will be included in your monthly loan payment. There is no mark-up or service charge over and above the actual tax amount.
Homeowner’s insurance works the same as taxes. You pay the lender for your policy amount on a monthly basis. The lender will escrow this amount and send it to your insurance company at the end of the year when renewal is due.
Interest rate differences will vary depending on the lender you choose. Most importantly, ALWAYS ask for the lowest rate for the type of loan you are obtaining.
The principal and interest portion of the payment is calculated by configuring the loan amount (MIP rolled into the balance on FHA) and term into an amortization schedule to calculate the payment amount. Ask your Supreme Lending representative for additional information on conventional and FHA loans.