Mortgage basics-
About Down Payments, Points, Credit, credit scores, Prequalifying, PMI, and DTI / Front & Back Ratios

We could write a book about mortgages and the variety of mortgage products, but there are already hundreds of books out there and we don´t have the time today. But we can touch on some of the other important considerations you should have in mind when shopping for a mortgage. A few of the most important topics include:

Credit scores 

Understanding Your FICO Scores and How it Affects Home Buyers Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers. Credit scores only consider the information contained in your credit profile.  They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your score.  What is a credit score?  A credit score is a number that lenders use to estimate risk. There are three main credit bureau that rate you and give you that fico score.  They are experian, Equifax, and Transunion.  Each one of them operate separately and have their own formula for determing a credit score.  Your scores will most likely be different from each company because they may not have all the same information or they may place more value on certain items.  Credit scores range from 350 - 850.  Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.   How are credit scores calculated?  Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't  use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.  More on credit scores, how to improve your credit score, best credit is unused credit, imperfect credit and want a home, how to read a credit report, reducing your debt

Pre-qualifying/ Preapproval

Closing costs

 I have two pages on  closing costs.  If you don't have the money for closing costs talk to your Realtor or your mortgage person.  They can help you get the money for closing cost through seller's concessions or a no closing cost loan.  Closing cost page 1, closing cost page 2

PMI

Down Payment

A major consideration home buyers have is how much money they will need up front to acquire a new home. The requirements vary widely. Some lenders offer loans with no money down and VA loans are often available without a down payment required. Other lenders may require 10 percent of the purchase price or more (up to 25 percent down with certain non-conforming loans) as a down payment. Some buyers prefer to make a substantial down payment, even more than what is required by the lender, to keep their monthly payments lower. In addition to the down payment, closing costs can be significant, up to 5 percent or more of the loan amount and are payable in cash at closing, although some lenders will allow you to add the closing costs to your loan principal, reducing your payout at closing but adding to your monthly payment.

Points

Points are an industry term that sounds more confusing than than it is. Simply put, one point is 1 percent of the loan amount and points are payable to the lender at closing. Points are really paying interest in advance. Some lenders will allow you to reduce your interest rate by paying points; for example, an 8 percent loan may be able to be reduced to 7.5 percent if you pay two points or to 7 percent if you pay four points. You may be able to finance the cost of the points, but then you will paying interest on the interest you paid, so it is wise to have your lender and/or mortgage broker run the numbers to see if paying points is more advantageous for you. You don´t have to pay points at all if you don´t want to.

Credit

Your credit fitness will go a long way in determining what kind of loan you will qualify for and what interest rate you will pay.

Before you go out looking at homes, you should prequalify for a mortgage. A lender will analyze your income, debt and credit and preapprove a maximum amount of home loan you qualify for. This does not mean you are approved for that exact amount until you formally apply for a loan and are actually approved for a loan.

DTI Debt to income ratios-Front and Back Ratios

When you shop for a mortgage or other loan, one of the key factors a lender takes into consideration before granting approval is your debt-to-income ratio. This is the ratio between how much you owe each month ( the total monthly debt payments) and how much you earn (gross). This ratio calculates the percentage of debt you are carrying in relation to how much money you are making and gives lenders a good indication of how much additional debt you´ll be able to handle.  Each lender has guidelines on how much the Debt  to income ratio (DTI) can be.  The usually DTI ratio is about 28% - 36%.  Though there are lenders that allow up to 50% debt to income ratio.   But the higher the ratio, the higher the rate usually.  There are exceptions.  FHA allows up to 41%.  If you have good assets, good reserves, (money in retirement accounts, mutual funds, stocks, bank accounts) and good time on your job the lender may give you a great rate and an exception to the rule.

Determining how much house you can afford is based largely on income and expenses. Lenders used ratios to determine your maximum loan amount:

• Front ratio: The front ratio is your total projected mortgage payment (PITI) plus any homeowners association or condominium association fees divided by your gross income. For example, if your PITI plus fees is $1,500 per month and your total monthly gross income is $6,000, your front ratio would be 25 percent. Traditionally, your front ratio must be less than 28 percent.
• Back ratio: The back ratio is your total projected mortgage payment (PITI) plus any homeowners association fees or condominium association fees PLUS any car payments, credit card debts and other loan payments divided by your total monthly gross income. For example, if your PITI plus fees plus all other loan payments is $2,000 and your total monthly gross income is $6,000, your back ratio would be 33.3 percent. Traditionally, your back ratio must be less than 36 percent.