Shopping for Your Loan Part Five

Shopping for your loan - Part five

I'm a first-time home buyer, are there special mortgages for me?

Yes, if you are a first-time homebuyer, there are a variety of mortgage options that will make it possible for you to buy a home.  Your lender or a housing counseling agency will be able to give your more information about the programs to help first-time home buyers in your area.

What if my down payment is less than twenty percent?

This is where mortgage insurance comes in. If you cannot repay your mortgage and it has mortgage insurance, your lender can foreclose on your home and file a claim with the mortgage insurer to recover some or most of their losses from you not being able to pay your mortgage.  This type of insurance is typically required for borrowers who put down less than a twenty percent down payment.  Keep in mind that this insurance will increase the cost of your monthly mortgage payment.  There are multiple sources for mortgage insurance including private sources and FHA.  The term commonly used for private mortgage insurance is PMI. 

How does my lender decide the loan amount that is affordable for me?

In our previous article, we talked about debt and income.  Your lender will consider a bunch of factors, but one primary tool is the debt to income ration.  This is basically a comparison of your pre-tax income to your house and non-housing expenses.  Remember, long-term debts like car or student loan payments, credit card payments, child support and the like are all taken into consideration when figuring out this ratio.  The FHA recommends your total monthly non-housing expenses should be less than 43 percent of your income and that your mortgage payment be equal to or less than 31 percent.  Your lender will also consider any money you have for your down payment and closing costs. They look at your credit history and other factors when determining your maximum loan amount.

If I'm pre-qualified, does that mean I'm also pre-approved?

They are not the same thing. When you pre-qualify for a loan, a lender looks at your income, expenses and credit history.  Then they give you an estimate for an amount they believe you will qualify for.  When you get pre-approved, you will actually go through the loan application process and you are given approval for a specific amount.  You can purchase this amount of home at a later time.  Unless you get a GFE (good faith estimate) at this time, the lender is not guaranteeing you a home loan.  As your lender if the information they’re asking for is sufficient for you to receive your GFE. Once you receive a GFE, your lender is legally bound.  Being pre-qualified or pre-approved guarantees that you will be loaned a specific amount of money. They home you want to buy and any offer you’ve made to purchase it must meet your lender’s requirements.  As you go through this process, your lender will take a more in-depth look at your finances than during pre-qualifying or pre-approval.  If they discover any information that could impact the amount of money you can borrow, that could affect you being able to buy your home or get a loan at all. 

What is my loan to value ratio? What does it have to do with my loan?

Loan to value (LTV), is the amount of money you borrow compared to the price or appraised value of the home you purchase.  Each loan will have a specific LTV limit.  For example a 90 percent LTV loan on a home priced at $200,000 would allow you to borrow up to $180,000.  You would have to put down $20,000 for you down payment as well as closing costs, any prepaid taxes, homeowner’s insurance and interest.  The LTV ratio reflects the amount of equity you have in your new home.  If your LTV ratio is more than 80 percent, the lender typically requires a mortgage insurance policy.