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Mortgage Questions
Some of the most commonly asked questions about mortgages
 What are the differences between mortgage prequalification, preapproval and final loan
approval? Prequalification is the process where the lender will
look at a basic copy of your credit report and use the information you supply to determine how much mortgage you
can afford based on your income. No accounts or employment information is verified. Preapproval occurs when all
credit and employment is verified and the mortgage is approved, subject to the appraisal of the property you have
chosen to buy. Final loan approval occurs when the property has been appraised, all documentation is in the hands
of the lender and all contingencies have been met. For more information, see the section devoted to prequalification and preapproval.
What first-time buyer programs are available? Many first-time
buyer programs are locally developed and administered. Your state, province or local community is much more likely
to have a program available than on a national level. Your Agent can generally review with you the availability
of programs in your area. For information on selecting
and choosing an Agent, see the section devoted to that subject.
There seem to be so many mortgage programs and offers available.
How can I compare them? This can be confusing! You will want
to consult a few sources, including a local bank that has mortgage availability and a mortgage broker, who will
deal with several different lenders. In addition, you may want use one of the online sources such as Quicken Loans. Through a single brief loan request form, you can get up to 4 offers for loans
tailored to your needs. More
information.
Can I use my IRA retirement funds for a downpayment on a house?
For most first time buyers, you can use the funds in these retirement accounts without penalty.
According to the IRS, If both husband and wife are first-time homebuyers,
they each can withdraw up to $10,000 for qualified acquisition costs penalty-free for a first home.
Qualified acquisition costs.
Qualified acquisition costs include the following items.
- Costs of buying, building, or rebuilding a home.
- Any usual or reasonable settlement, financing, or other closing costs.
First-time homebuyer.
A first-time homebuyer is, generally, any individual (and his or her spouse, if married) who had no present ownership
interest in a main home during the 2-year period ending on the date the individual acquires the main home to which
these rules apply.
Should I pay points?
Along with the interest rate, the number of points (up-front interest) is an important consideration when comparing
mortgages. See the guest article Should
I Pay Points? by Randy Johnson, author of the best selling
book on mortgages, How to Save Thousands of Dollars on Your Home
Mortgage.
What mortgage options are there for those with poor credit? There are lenders available for many of those with tarnished credit records.
One of the mistakes commonly made by homebuyers involves their credit report. Some buyers assume that their credit
is worse than it really is, and may well have been able to secure a more advantageous mortgage. Other buyers are
unaware of problems in their credit report and need to scramble to get the problems handled. You can avoid many
of these hassles by getting a copy of your credit report up-front and examining it both for errors that need to
be corrected and accounts that need to be handled. You can get a free copy of your credit report here
as well as 30 free days of the CreditCheck Monitoring Service. Also, you will also find more information on the
page Buying a House When You Have Credit
Problems.
I hear about these different "ratios" when qualifying
for a mortgage. What are front and back ratios? Part of the mortgage
application process will be the determination of how much house you can afford based on your income. The two ratios
that will be computed are the front ratio and the back ratio.
- Front Ratio: The
total mortgage payment including principal, interest, taxes and insurance (PITI) as well as any condominium or
homeowner association fees divided by your total GROSS income. Traditionally this ratio must be below 28% Example:
With a gross income of $3700 per month, a total mortgage payment (PITI) of $973, the front ratio would be 26%.
- Back Ratio: The
total mortgage payment PLUS any car payments, credit card and any other loan payments divided by your total GROSS
income. Traditionally must be below 36%. Example: With a gross income of $3700 per month, a total mortgage payment
of $973, a car payment of $212, 1 credit card payment of $59 and 1 credit card payment of $43 for a total of $1287
with a back ratio of 35%.
What options are there for buyers with no money down and no cash for
closing costs? Although there are some new programs that allow
buyers to purchase a home with little or no cash, you will generally need some funds for downpayment, closing costs
or both. Since a mortgage payment will take a good percentage of your income, lenders will usually want you to
be "involved" (meaning having your money involved) from the very beginning. There are options for low
downpayment (5% or less) mortgages such as FHA mortgages and there is always the possibility that the seller could
absorb some of your closing costs (which are usually 3-5% of the selling price) but to buy a home with no cash down is a rare occurance.
If you have cash for closing costs, though, and excellent credit, there are new options in the conventional loan
arena. See the article on buying a
house with nothing down.
What is PMI (Private Mortgage Insurance? Do I have to pay it? See the complete
discussion on PMI here.
Have a general home buying question? See the section
devoted to that topic.
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Many questions from visitors to this site have been
answered in our monthly newsletter. You can sign up for
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from the last few years.
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