All About Mortgages
Owning a home is the largest investment that you will make. Choosing the right type of mortgage is very important as well. Having the wrong mortgage or interest rate could cost you thousands of dollars. If you don’t have a good working knowledge about mortgages, that is ok. Educate yourself and have a comprehensive understanding of them before you decide which mortgage fits you best.
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Qualifying for a Mortgage
Most lenders require that your monthly payment range between 25-28% of your gross monthly income. Your mortgage payment to the lender includes four items… PITI. PITI is principle, interest, taxes, and home owner’s insurance. Remember, when you buy a home all interest is tax deductible, so you will qualify for a major tax advantage that will effectively increase your take-home pay. Your total monthly PITI and all debts (from installments to revolving charge accounts) should range between 33-38% up to 43% of your gross monthly income. This is a general rule of thumb, but other key factors specifically determine your ability for a home loan. These factors are:
- INCOME: History of employment, stability of income, potential for future earning, education, vocational training and background, and any secondary income such as bonuses, commissions, child support, etc.
- CREDIT REPORT: History of debt repayment, total outstanding debt and total available credit. If you have concerns about your credit report, consider contacting one of the major credit bureaus for a copy of your file: Equifax or by phone 1-866-349-5191, Experian or by phone 1-888-397-3742, TransUnion or by phone 1-800-916-8800.
- ASSETS: Cash on hand, other liquid assets such as savings, checking, CDs, stocks, etc.
- PROPERTY: The home you are buying must be appraised to determine that it has adequate value and is marketable to ensure it will secure the loan.
Loan Application Checklist
When you are buying a home a lender will ask you for a lot of different documents. They are doing this so they can completely evaluate your financial history. They want to make sure that you are a good borrower and that you can make the mortgage payment. The lender does not want the property back. Below is a list of financial documents a lender might ask for. Some things may not apply to you. If you are thinking about buying, I would get these documents in order before you meet with a lender so that you are prepared.
- Picture ID with Social Security Number
- Payment to cover application fee.
- Name and complete address of all landlords (past 2 years).
- Employment history, including names, addresses, phone numbers, and length of time with that company (past 2 years).
- Copies of your most recent pay stubs and W-2 form (past 2 years).
- Verification of other income (social security, child support, retirement).
- If you are self-employed: Copies of signed tax returns including all schedules (past 2 years), and a signed profit and loss statement of the current year.
- If you are retired: Tax returns (past 2 years).
- If you have rental property income: Copies of all lease agreements.
- Copies of all bank statements from checking/savings accounts (past 3 months).
- Copies of all stock/bond certificates and/or past statements/retirement accounts.
- Prepare a list of household items and their values.
- Copies of title documents for all automobiles, boats, or motorcycles.
- Face amount, monthly premiums, and cash values of all life insurance policies (Cash value may be used for closing costs or down payments.
- You need documentation from the carrier indicating cash value).
- Credit cards (account numbers, current balances, and monthly payments).
- Installment loans (car, student, etc.) Same details as for credit cards.
- Mortgage loans (property address, lender with address, account numbers monthly payment and balance owed on all properties presently owned or sold within the last 2 years). Bring proof of sale of properties sold.
- Childcare expense/support (name, address, phone number).
- Bankruptcy – bring discharge and schedule of creditors.
- Adverse credit – bring letters of explanation.
- Divorce – bring your Divorce Decrees, property settlements, quitclaim deeds, modifications, etc.
- VA only – bring Form DD214 and Certificate of Eligibility.
- Retirees – bring retirement and/or Social Security Award Letter.
What is a Mortgage?
So what is the definition of a mortgage? A mortgage is a loan taken by a buyer to invest in land or property, with the value of the property as the “security” against the loan, until it’s settled or paid off. The typical period to pay off a mortgage is between 15 and 30 years, during which time you make monthly payments that go toward the principle and the interest of the loan.
There are many different types of mortgages to fit just about everyone’s needs. Looking at your financial history and current situation will determine which loans you may qualify for. There are two main types of loans:
- Conventional – Loans that are not backed by the government
- Government Backed Loans – Loans that are insured by the government like FHA, VA loans, and USDA
- Non-Conforming Conventional – Loans that are above $417,000. These are generally called Jumbo Loans.
Below is a list and description of the different types of mortgages.
- FHA loan
- FHA Back to Work loan program
- FHA 203K renovation loan
- VA loan
- VA second-tier loan
- Conventional Loan – 5% – 20% down
- Adjustable rate mortgages
- 80/20 loan
- Jumbo Loan
- Physician Loan
- Georgia Dream down payment assistance loan
- Reverse mortgage
- Homestyle Renovation Loan
Government Backed Loans
An FHA loan is one loan that insured by the Federal Housing Administration . The federal government backs (insures) loan for FHA approved lenders. They do this to reduce their risk of a loss if a borrower defaults (does not pay) their mortgage payments.
- Down payment – FHA loans have a downpayment of 3.5%
- Upfront funding charges of FHA – FHA has an upfront funding gee of 1.75% that is rolled into the loan. For every $100,000 there is a fee of $1750
- Mortgage Insurance – the fee for mortgage insurance is 0.85% of the loan value. For example, a $100000 loan would have a mortgage insurance of $850 a year or $70.83 a month
- FHA Guidelines – are more strict than conventional loans – the house to be in livable condition
- Re-inspection – If an FHA appraiser sees anything on the house that would not be within FHA guidelines (like missing flooring in the house) The repair would have to be done before the appraiser would sign off and finalize the appraisal. If the appraiser has to go back and check on repairs that he stated – it would be and additional charge of $125.
FHA Back to Work Mortgage Program
The FHA Back to Work Mortgage Program was introduced in 2013. This program facilitates borrowers who have reasons like a foreclosure; short sale; bankruptcy (chapter 7 or 13); loan modification; or ‘Deed-in-lieu’ of foreclosure. It has waived the waiting period of 3 years for a foreclosure. You may be eligible to apply for this loan if you fall in any of these above-mentioned situations. However, to be eligible there are certain criteria that you must meet.
- A borrower must meet FHA loan requirements
- Have documented the financial event that resulted in financial hardship
- Established a credit history (Minimum of 12 months)
- Must complete a Hud-Approved Housing counseling
While the economic hardships could include loss of job or income; the counseling program includes your knowledge on loan options, your obligations, and evaluation of your household budget with futuristic changes.
HUD 203(K) Renovation Loan Program
The HUD 203k Renovation Loan Program is an excellent way to purchase a property and complete basic renovations and repairs without having to pay for it with your own money.
How HUD 203(k) Renovation Loan Program Works
Most people buying a home in Metro Atlanta will need some kind of financing (loan). Most mortgage financing plans offer only permanent financing. If renovations are involved, lenders will not complete permanent financing on the home until the renovations are finished. There are three basic steps when using the HUD 203(k) Renovation Loan Program:
- Get financing to purchase a home
- Get additional financing to complete renovation construction
- Obtain permanent financing (30 year fixed loan) when work is complete
The HUD 203K Renovation Loan Program allows the borrower to get one mortgage at a long term fixed rate (or adjustable) rate. This mortgage allows anyone who is buying a home to purchase the home and renovate it all at once.
There are specific criteria for eligible homes for a HUD 203(k) Renovation Loan Program they are:
- One-to-four unit dwelling that has been completed for at least one year
- Single family homes or multi-unit properties must comply with local zoning requirements
- Homes that are demolished or will be razed are eligible provided some of the existing foundation remains in place
- Can be used to convert a one family dwelling into a 2-4 family dwelling or an existing multi-unit dwelling could be decreased to a one-to-four unit dwelling
- An existing house or modular unit can be moved on the new home site
What is VA loan?
The US Department of Veteran Affairs exclusively designed Veterans Affairs (VA) loan to benefit veterans. It has created a set of rules and requirements to be eligible for this loan. VA loans can be used to purchase single-family residence, condos, townhouses, and manufactured homes.
Types of VA Loans
- Purchase Loans, which help offer competitive interest rates and even no down payment, at times.
- VA Refinance Loans, which enable you to either use it for ‘cash out’ refinance, or to refinance lower interest rates.
Home Loan Guarantee: If you are short of money to repay, the VA stands behind you to guarantee a portion of the payment.
Eligibility: Anyone who is a Veteran, spouse (if not remarried), National Guard members, or Active-duty personnel, or spouse (if not remarried) is eligible for VA loans.
Benefits of VA Loan
- Low interest rate
- No down payment for lesser or equal appraised value
- No private mortgage insurance premium required
- Limited closing costs through VA rules
- Sellers may pay the closing costs
- No penalty from lender when you pay the loan off early
- VA may assist you when you run into payment difficulties
- You don’t have to be a first-time buyer
- The benefit is reusable
- The loans are assumable given that the person assuming is qualified
The process of applying for VA loans varies based on the type of loan you opt for.
Second-Tier Entitlement for a VA Loans
People who are in the military, reserves, or retired, have the option to use a Veterans Administration Loan Program (VA). A VA loan is a loan program that allows buyers that have current or past military service to buy a home with no down payment or mortgage insurance. The misconception about a VA loan is that if you use it a homeowner will have to sell your home or pay it off before they can use the program again. In most cases that is true, but there are some cases where you can get a Second Tier Entitlement VA Loan.
Veterans and active duty military are entitled to this program the second time around- they just need to accomplish the basic eligibility requirements. A Second-tier VA loan must still be issued by a VA approved lender.
The best way to see if you qualify for a second-tier entitlement loan is to talk with a mortgage broker who is knowledgeable about VA loans.
- First-time homebuyer
- Not owned a home in the past three years
- Buy a home in qualified GA Dream Loan Program area
- Are at or below the income requirement
- Have liquid assets not more than $20,000 or 20% of the sales price (whichever is greater)
- Have to meet standard mortgage loan credit requirements
- Complete a Home Buyer Education class and provide certificate of completion
- Contribute a minimum of $1,000 to purchase transaction (earnest money)
Georgia Dream Loan Program – Income Criteria
There is an income criteria to be eligible for the Georgia Dream Loan Program. Where you live will determine what the income qualifications are. If you live in the Metro Atlanta area which includes:
Barrow, Bartow, Butts, Carroll, Cherokee, Clayton, Cobb, Coweta, Dawson, DeKalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Haralson, Heard, Henry, Jasper, Lamar, Meriwether, Newton, Paulding, Pickens, Pike, Rockdale, Spalding or Walton Counties, your total family income cannot be greater than:
- One to two persons $69,000
- Three or more person $79,500
*Sales price of the home cannot exceed $250,000
If you live anywhere outside the Metro Atlanta area you income cannot be great than:
- One to two persons $59,500
- Three or more persons $68,500
*Sales price of the home cannot exceed $200,000
Invest Atlanta Home Loan Program
Atlanta is trying to revitalize areas of downtown Atlanta and the belt line. A variety of mortgage loan programs are available to assist borrowers who want to buy in the revitalization areas. These program are under the InvestAtlanta website. Just like the Georgia Dream, it does have income requirements. There are four different loan programs that have different criteria. These loan programs are:
- Home Atlanta 4.0
- Invest Atlanta Down Payment Assistance Programs – there are three programs under this category
Home Buyer Requirements from Invest Atlanta Website
- Must qualify for 30-year fixed rate FHA or VA first mortgage loan with an Invest Atlanta Participating Lender
- Income cannot exceed program income limits
- Must have a minimum credit score of 640 and debt-to-income ratio of 45%
- Must contribute $1,500 of own funds towards closing
- No first-time home buyer requirement
- Homebuyer cannot own any other property at closing
What Type of Home Can I Buy?
- The property must be located in the city limits of Atlanta
- Maximum purchase price is $374,268
- Single family detached homes, 2-4 units; townhomes and condominiums; newly constructed or existing
- No manufactured homes
- Property must be owner-occupied, primary residence
- To determine if property is located in the city of Atlanta,click here, type in the property address and look for the three qualifying indicators (Neighborhood, NPU and Council District)
What is Reverse Mortgage and How Does it Work?
A Reverse Mortgage is a Federal Housing Administration (FHA) insured mortgage program that allows seniors to convert the equity in their home to cash. A reverse mortgage is different from a traditional mortgage. A traditional mortgage the homeowner would make monthly payments. In a reverse mortgage the homeowner does not make monthly payments to the lender. They will pay the loan back when one of three conditions take place. The homeowner dies, moves from their home, or does not honor the loan requirements such as paying homeowner taxes or maintaining the home.
A Reverse Mortgage was designed to provide the borrower (homeowner) with a percentage, generally between 45-80% -depending on age), of the homes value. It also allows the borrower to retain ownership (title) to the home. The homeowner or heirs will never owe more than the home is worth. A reverse mortgage is primarily used for cash flow and the money the homeowner receives can be used for anything. To find out if you qualify use a Reverse Mortgage Calculator.
According to the U.S. Department of Housing and Urban Development (HUD) the amount a homeowner can borrower is based on:
- Age of the youngest borrower
- Current interest rate
- Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price; and
- Initial Mortgage Insurance Premium–your choices are HECM Standard or HECM SAVER
The borrower has different options of getting the money. There are five basic payment plans and the most popular is a line of credit.
Basic Payment Plans
- Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term – equal monthly payments for a fixed period of months selected.
- Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure – combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
(From website of U.S Department of Housing and Urban Development)
You can change your payment plan option for a fee of $20.
What are the Requirements?
According to the U.S. Department of Housing and Urban Development there are three areas of requirements. They are borrower, property, and financial. The following is the criteria for a Reverse Mortgage (HECM).
- Be 62 years of age or older
- Own the property outright or paid-down a considerable amount
- Occupy the property as your principal residence
- Not be delinquent on any federal debt
- Participate in a consumer information session given by a HUD- approved HECM counselor
These are just a few of the requirements for the loan. For more information about the requirements for a Reverse mortgage, requirements, and fees please click on the link below
A conventional loan is a loan that is not insured or guaranteed by the federal government. It is typically a fixed rate and term mortgage. These loan are for buyers with excellent credit.
Benefits of a conventional loan
- No Upfront funding fee
- Lower Private Mortgage insurance than an FHA
- Flexible payment terms – Conventional loan offer 10, 15, 20, 25, 30 year payment terms
- More competitive mortgage (interest) rates
Qualifications for a conventional loan
- A credit score of 650 or higher (this number could be higher or lower depending on the lender)
- Downpayment of 5-20%
- Debt to income ratio of 45% (this could be higher or lower depending on lender)
A Jumbo loan is any amount above conventional conforming loan limits. In monetary terms, any loan over $417,000. These limits are set by the Office of Federal Housing Enterprise Oversight (OFHEO) and are set annually.
Like todays conforming and FHA mortgages, jumbo mortgages are widely available. What’s different is that jumbo loans are often expensive. The reason jumbo loans are expensive is very simple, the government does not back jumbo loans and because they are a much higher risk.
General Guidelines – they can changed depending on lender
- Must have at least a 680 or better.
- Down payment will be higher – Depending on lender or program guidelines
- Credit score of: 660 – 25% or more downpayment – 680 – 20% downpayment – 740 – 10% dowpayment
- Jumbo rates have typically .5% – 1.0% higher interest rate
- 6-12 month cash reserves
- The higher the loan value the more money they will want buyer to put down.
- Any down payment less than 20% will have mortgage insurance payments and those could be very high depending on the size of loan.
- Must be 43% or lower of borrowers total income
These are guidelines. Each lender may have some variations to these Jumbo guidelines. I would suggest talking to three different lenders that have jumbo loans.
A Physician Loan is a special product designed to meet the unique needs of recent graduates from medical school who want to become homeowners. Lenders realized they had neglected untapped potential by not making more exceptions for new physicians who were in debt from student loans, but had incredible future earning potential.
The Benefits of Physician Loans are:
- Down payment is typically 10 % or less and some cases zero down
- No private mortgage insurance required
- Adjustments are made to count for future earning potential
- Require employment contract in lieu of pay stubs
- Usually a 30 year fixed rate
- Special underwriting and more flexibility
- Higher loan amounts
To qualify for a Physician Loan you should be one of the following: licensed medical doctors (MD), new doctors, incoming and existing residents and fellows and medical students. Each Lender has specific guidelines and types of medical doctors that are covered.
Homestyle Renovation Loan
This is a conventional renovation loan. It can be used for primary residence or an investment property. In metro Atlanta it has a maximum loan limit that cannot exceed $417,000. It is the best renovation loan out right now.
Terms Associated with Mortgage
- Collateral: Collateral is the “security” you – the borrower, would offer the lender. Usually, it could be your new property or any of your existing assets. In case you are not able to repay the loan within the given period, it would be a foreclosure. In other words, if you fail to repay, the lender takes possession of your property to compensate the money due. In such a case, you not only lose the property but will also not be eligible for future mortgages or purchases.
- Principal: This is the total amount you borrow from a lender.
- Interest: A determined percentage of the principal you agree to pay to the lender every month. Almost every buyer, who applies for a loan, chooses to make a down payment, which is between 3.5 – 20% of the total home price, to reduce the monthly payments.
- Taxes: Every property owner has to pay annual property tax to the government, which is a percentage of the market value of your property. The percentage varies between cities and states and is used for public works like road repairs, construction of public buildings, etc.
- Mortgage Insurance: An insurance policy, for the lender, to protect them in the event you default on the loan
- Fixed Rate Mortgage: The interest remains the same for the entire length of the loan.
- ARM Mortgage: Adjustable Rate Mortgage (ARM) has interest rates that fluctuate according to the current market.
- VA Loan: The US Department of Veteran Affairs has exclusively designed Veterans Affairs (VA) loans to benefit veterans. It has created a set of rules and requirements that set out the eligibility for this loan.
- FHA Loan: An FHA loan is insured by the Federal Housing Administration (FHA) and has certain borrower guidelines. An FHA loan requires 3.5% as a down payment.
- Homeowner’s insurance – is a policy that covers damage to your property and your liability, for any injuries or property damage, you or members of your family cause to other people.
As you can see, there are many different loan choices out there. Finding the right one to fit your needs can be challenging. Take the time to talk to your lender about all of your options. If you have questions, or need a lender, please contact me (link). I will be glad to assist anyway I can.