Some of the most commonly asked questions about mortgages
What are the differences between mortgage pre qualification, pre approval and final loan approval? Pre qualification 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.
Can I use my IRA retirement funds for a down payment 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 home buyers, 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.
- 1. Costs of buying, building, or rebuilding a home.
- 2. Any usual or reasonable settlement, financing, or other closing costs.
First-time home buyer. A first-time home buyer 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 home buyers 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 score up-front. You can get a free copy of your credit score here. 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.
- 1.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%.
- 2.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 down payment, 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 down payment (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.