Knowing The Role Of Mortgage Brokers, Mortgage Lenders & Banks For Owning A Home In Texas
If you have been looking for a mortgage company then you will have noticed that there are large mortgage companies and banks, and also mortgage brokers. So is there actually a significant difference between them?
What are the pros and cons involved in using a mortgage broker versus going through a bank?
In this article, we will be explaining all of the major differences between Mortgage Brokers and Banks, along with the pros and cons of each so that you can make an informed decision on which is the best option for you and your situation.
What Is A Mortgage Broker?
This professional is an individual who acts as the middle man between the mortgage lender and the homeowner. A broker is able to prepare your financial documents, loan applications and provide you with mortgage pre-approvals just like lenders are able to do.
A mortgage broker will work with several different banks and mortgage lenders and submit your loan files to these financial institutions for them to issue you a loan. The broker’s commission is paid by the lenders for completing your documents and mortgage application.
How Do Direct Lenders & Banks Work?
A direct mortgage lender or Bank is the company that is funding the loan. The loan officer is the person you will be working with and they work for the Bank. Banks are usually licensed in all or most of the 50 states.
Who Can Provide You With A Better Deal, A Mortgage Broker Or A Mortgage Company?
There are important things to take into consideration when choosing whether you want to work with a Bank/Lender or a mortgage broker. Although it might seem like working with a mortgage broker will save you money due to the fact that they have access to numerous lenders and programs, that is actually not always true.
The mortgage company pays the broker’s commission and some lenders pay higher commissions than others. In some cases that can generate a conflict of interest.
One lender might pay a small commission but offer the best deal. Another loan company might pay brokers a higher commission but be more expensive for borrowers.
Which Lender Is The Broker More Likely To Choose?
When you work with a Bank, your loan officer will only have access to the mortgage rates and mortgage programs that their Bank offers. You could potentially get a better deal from a different Bank.
Just be sure to shop around at all times, whether you are working with a Bank or a mortgage broker. You always should speak to at least two lenders or brokers and compare their loan offers. That way you can ensure that you really are receiving the best deal on a home loan.
That is how you save money on your mortgage.
How To Shop For A Mortgage
When you are shopping around for a mortgage loan it is a good idea to talk to both direct lenders and brokers. Mortgage brokers do have access to many different loan programs and hundreds of lenders.
They can shop for interest rates on your behalf and help you with comparing different terms like 15-year and 30-year terms, adjustable-rate mortgages vs. fixed-rate mortgages, and provide you with advice on other things so that a loan can be tailored that is ideal for you.
Using a broker instead of a direct lender can be advantageous if you have imperfect credit since there will be more programs available that you might qualify for.
Pros & Cons Of Both
Advantages of Working with A Mortgage Broker:
Working with an independent mortgage broker does have several advantages associated with it compared to going through a mortgage banker or bank. Brokers have the ability to submit your loan application to several different lenders. That can make them a very attractive option, particularly for borrowers who have a hard time getting a loan due to issues having to do with their income or low credit scores.
In these situations, there are several lenders that the broker has access to that might have programs with lower requirements. That can save you money and time in having to apply with multiple lenders in order to find one that will provide you with a loan.
Access to multiple lenders for finding the lowest fees and rates
Usually more knowledgeable
More options available for individuals with bad credit
A majority of brokers work for or own a small company which can make it easier to get in touch with them than a loan officer who works for a large bank or lender.
If the mortgage broker is located nearby, then you can meet with them in person
Disadvantages of Working With a Mortgage Broker:
There are some drawbacks as well to working with a mortgage broker instead of with a direct lender. The broker, in some cases, might charge a higher origination fee. They are not actual lenders, so it might take longer to get your loan processed sometimes when you go through a mortgage broker.
Independent mortgage brokers often do not have an in-house underwriter that they have direct communication with, so they will need to submit your loan application to the lending institution’s underwriter. That can delay closing since it causes additional overlays.
They charge higher fees sometimes.
You might not get the best deal (they could have a preference for lenders that pay the highest commissions)
Delays In Closing
Advantages of working with Direct Lenders and Banks:
When you work with an actual lender instead of a middleman you will be able to avoid some of the fees you would need to pay to a mortgage broker. Your loan officer will get paid a commission when they close your loan.
On the other hand, mortgage brokers might not be that interested in finding the best deal for you, and instead, choose to work with the lenders that pay the highest commissions.
Loans might not have as many overlays since it is a completely internal process
If you use a Local Bank you might know the banker already who is processing your loan, which allows you to speak to the lender directly without having a middle man.
A conflict of interest is not created by the commission that is paid
You can save on fees that are charged by a broker
Disadvantages of Working with a Direct Lender or Bank:
Directly working with a lender does have some disadvantages. The loan programs with a Bank tend to be more rigid and come with higher requirements. If your credit score is low many local lenders and banks might not be able to assist you unless you have a 620 credit score at least.
Since the loan agent will not have multiple companies that can be compared, you cannot be sure you are receiving the best interest rate on your mortgage.
Fewer mortgage options
Sometimes the loan officer might be inexperienced
You might not get the lowest rate
Requirements are less flexible
To speak with one of our experienced mortgage professionals directly, just call us anytime or use any of the interactive tools that we provide throughout our website. We look forward to meeting and working with you.
If you have any questions, please feel free to contact us today!
Owning a home is an investment, however, it actually is not. Home-ownership is an essential wealth-building tool, apart from the fact that it can be financial suicide. Historically, owning a house outpaced stocks, but they actually do not.
Rent Or Buy: Which Is Better?
Home-ownership in the past was an affordable, accessible option. However, the recent financial crisis saw the value of homes drop dramatically, with home prices reaching astronomical levels now due to a shortage in housing, things have changed dramatically over the last ten years. Finding affordable housing can result in increased commute times and having to move away from jobs, which explains the increase in “super commuters” all across the United States.
Is it still worth it to own a home? The answer varies depending on whom you ask, the inputs that are included in the financial model, and one’s general investment philosophy – so that answer is “it depends” most of the time.
There are numerous online tools that are available to assist you in assessing whether or not your current financial situation would result in monthly mortgage payments that are lower than your current monthly rent. However, there are many other factors that need to be considered before you make what will probably be the biggest purchase you ever make in your life. We have attempted to simplify the arguments for reasons why you should and should not buy a house. If you are a longtime renter who struggles to wrap your head around the question, the following are two opposing perspectives on the great home-ownership debate.
Why Should You Buy A House?
There are many financial advisers and academics, equipped with economic models and spreadsheet, who are very happy to show off their fiscal wisdom and arriving at the following conclusion: in terms of dollars and cents, it doesn’t add up to own a house. However, when trying to determine whether to buy a house or not, you need to consider qualitative factors as well as quantitative ones. Ultimately, you need someplace to live.
1. The Shelter Is One Of Our Basic Human Needs
Frequently the benefits over home-ownership are discussed on the basis of return on investment. However, that is not the best way to think about this issue. One of our most important human needs is shelter. It will not make financial sense for everybody in every location to buy a house, but for many people, it will. If it does for you, the reason you should buy a house is due to needing shelter.
Anybody who has been following current events over the past two years most likely has an increased awareness of just how fragile our organizing principles and institutions are that provide us with a certain degree of societal stability for debating home-ownership from the perspective of an investment rather than a basic need. If any massive shift were to occur in our government or political alliances, personally, I would much rather own the house I lived in than be subject to the wishes and needs of a landlord. That might sound a bit paranoid, but do you want to find out whether or not it is paranoid thinking when you currently have the option to purchase a house?
2. It Isn’t An Investment, But It Is Also Not Financial Suicide
Fact: You shouldn’t purchase a home thinking that you are going to get rich off of the appreciation of its value or believing it will pay for itself ultimately. That might be true in some markets. However, it is better to not view owning a home as an investment asset such as bonds and stock, but more as the four walls or more where you live.
However, if you do your research to ensure this is the right time for you to purchase a home financially, professionally, and personally, then it won’t be a bad investment for you, no matter where you happen to live. That is due to the fact that the underlying supply and demand conditions will, over time, continue to push the value of your home up to at least keep pace with inflation.
Although the supply of houses is being restricted currently by numerous public policy positions and economic factors, the number of people who need shelter will continue to increase (unless, of course, a catastrophe strikes which would make the question of whether you should own a home or not the last thing that you need to worry about).
It is true that it is overly simplistic to state that the prices of houses will always increase, as anybody who has lived through the last 10 years knows. However, the underlying conditions that have resulted in a fairly swift recovery for housing should continue.
3. It Is Easier To Retire As A Homeowner
I’m sure you have noticed that it is pretty expensive to be old, due to healthcare’s skyrocketing costs. When you add in rising housing prices, a social safety net that is increasingly in jeopardy, and the strong likelihood that you will be living on a fixed income and have a lower earnings potential, it is easy to see how not needing to worry about paying rent on a monthly basis could be very beneficial. You will still need to pay insurance, property taxes and other maintenance expenses, but there is a very good chance that it will be less than the amount that you pay in rent.
The detractors of home-ownership often bring up the opportunity cost that is involved in investing in a house. If you assume that stocks outperform house appreciation, and that is a completely reasonable position to take, then you may think you would be better off putting your money into equities and then buying a house with the proceeds when you reach retirement age or use the money to pay your rent with.
You can definitely take that route. However, it is a fairly roundabout way of securing a house when you could simply use the money directly to purchase a home. There are also added risk with the stock market’s higher returns. What will you do if the market is down when you get to retirement age and you don’t have enough money to purchase your house? Or what if your investments end up going bad and you are completely wiped out?
You should seriously consider playing it safe, and simply purchasing a house, and do it before your generation hits retirement age and the housing market is overwhelmed. If you can pay off your house completely, or something close to that, you will always have the option of trading down to a less expensive house and pocketing the difference, which will give you a place to live during your golden years – and have some extra money, also.
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Feel free to contact us or call us today!
A Perfect Guide To Finding A Suitable Mortgage In Texas
For most people, a mortgage will be the largest long-term debt they will ever have. This is why you need to take the time to get the best possible mortgage rate. Doing so will help to minimize the overall costs of owning your own home. If you are unsure about how to start shopping around, there are some tips that you can use to unlock the best rates possible.
Know Your Credit Score
Your credit score will be used by potential lenders to determine if you qualify for a loan and the interest rate you will pay. The higher your credit score, the better the terms of your mortgage will generally be. This is why you need to be proactive and scrutinize your credit report at least 6 months before you start applying for loans. This will give you time to identify and correct any errors.
The first is conventional loans which make up around 65% of all the mortgages which are issues. These loans will be offered by private enterprises such as mortgage companies, commercial banks, and credit unions.
The second is government-backed loans. While these loans are obtained through private lenders, they will be fully or partially insured by the American government. These loans will often have less-rigid requirements, smaller down payments, more flexible income requirements, and low credit expectations. The one thing with these loans is that the property will need to be owner-occupied and not an investment or rental property. Low-income individuals and first-time buyers should consider this type of loan.
After looking at the type of mortgage you can get, you need to consider the financing category that the loan falls into. There are two categories that you need to be aware of.
The first is the fixed-rate mortgage. As the name suggests, this mortgage will have a set rate that does not fluctuate throughout the loan term. This is ideal for borrowers as you have predictable payments for the entire mortgage term.
The second option is adjustable-rate mortgages which are also known as variable rate. These mortgages will have interest rates that change periodically and in relation to an index. The introductory rate for these loans is usually lower than the fixed-rate mortgages, but this will change after a set period of time. These loans can be favorable to buyers as the interest rates could decline.
Contact Several Loan Providers
It is important to note that loan officers are not all-knowing. This is why you need to do some homework and understand what the pros and cons of the different mortgage products are. You can hire a mortgage broker to help with this as they source mortgages from lenders and help to facilitate the transaction.
However, these brokers will take fees from lenders in exchange for sending customers to them even if the mortgage product does not suit the customer. Any recommendations you get from a broker should be considered carefully. Never blindly trust the recommendation provided by a broker.
Include The Additional Costs
Borrowers are often distracted by the low advertised interest lenders advertise and overlook the many fees which can increase the overall costs of the mortgage product. This is why you need to take the time to consider all of the costs such as appraisal costs, application fees, underwriting, loan-origination and broker fees. There could also be settlement costs to look out for.
Linked to the interest rates are points which are fees that are paid to lenders and brokers. The more points paid, the lower the interest rate will be. A single point could cost 1% of the loan amount and reduce the interest rate by 0.25%. To fully understand what you will end up paying, you will need to ask that the points be quoted in dollars.
All lenders have to legally provide a three-page loan estimate which details the costs associated with the mortgage you want to get. This has to be provided within 3 days of application. The information on this estimate will include the monthly expenses, the total closing costs, and the estimated interest rates. It is important to note that this is not a loan offer, but it does obligate the lender to accept the listed terms if you have the available finds and meet the required credit approval.
Get It In Writing
If you are happy with the terms proposed, you need to ask for a written rate lock or lock in on the estimate. This needs to include the agreed rate, the term of the loan and the number of points that have to be paid. The majority of lenders will charge a non-refundable fee for locking the terms, but this is generally worth paying as there are a lot of issues that can occur on the road to approval.
Once you have chosen a lender, you will get a pre-approval letter. This is a legally binding agreement to lend the money after income verification, credit checks and funding is secured.
Choose The Best Rate
Completing some online searches and using mortgage rate calculators can help you get a better idea of what is on offer. However, it is important to note that interest rates fluctuate and different lenders could have offers on certain loan products.
Choose The Best Lender
When it comes to choosing the lender, you need to consider the customer service on offer. Loan applications require a lot of paperwork and information which is why you need a reliable point of contact. This contact will answer any questions that you have and will make the entire application process easier. Good customer service also ensures that the approval schedule stays on track and that all the documentation is signed in an efficient and timely manner.
The Online Option
Human interaction is generally preferred, but you can save some money by choosing a mortgage with online lenders. These lenders will theoretically have lower overheads and can offer better rates and lower fees. However, if you would prefer more hand-holding through this process, a traditional lender might be better.
Shopping around for the best mortgage rate is important and you need to be focused. You need to understand the terminology used and choose the right type of mortgage. Your mortgage is something that you will live with for many years to come and it is vital that you choose correctly.
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Feel free to contact us or call us today!
The Different Types Of Mortgages In Texas: Which Is The Right One?
A potential homeowner who approaches a lending institution for a mortgage loan should be knowledgeable on the different kinds of mortgages that exist. Furthermore, they have to understand the advantages and disadvantages of each type of mortgage facility. This article takes a deep dive into the following mortgages: fixed rate, adjustable rate, 2-step, 3/3 and 3/1 adjustable rate, 10/1 adjustable rate, 5/25 mortgages, 5/5 and 5/1 adjustable rate and balloon mortgages.
As the name indicates, a fixed-rate mortgage has the same interest rate throughout the entire loan period. These mortgages are quite popular accounting for 3 out of every 4 home loans taken. The period of the loan agreement can be 10, 15 or 30 years. The 30-year mortgage is a favorite of many people. Though the 30-year mortgage is the preferred choice for a lot of people, it builds up equity very slowly. The 15-year option provides the fastest equity accumulation.
The major edge of the fixed-rate mortgage is that the homeowner is certain on the principal and interest payments throughout the term of the loan. Certainty on payments allows the homeowner to plan their finances with ease as they are sure that the repayment amount is constant.
Due to their predictability, fixed-rate mortgages are favored by homeowners. The interest rate is fixed, the percentage agreed upon on commencement of the loan term does not vary. Payments are constant hence the homeowner knows the exact amount to pay each month. This provides for better insight during budgeting. A borrower who takes up a mortgage during a high-interest rate environment can refinance the mortgage when the rates move lower. However, for refinancing to occur closing costs have to be paid.
The table below provides a comparison of the current interest and the corresponding monthly installments for the different types of home loans.
One Year Adjustable Rate Mortgages
These have adjustable rates. This means that the interest rate for an ARM (adjustable-rate mortgage) changes based on a predetermined periodic schedule after the fixed-rate period at the beginning of the loan elapses. It is a risky alternative as the payments fluctuate significantly from one period to the next. To compensate for the excessive risk taken by the homeowner, a lower interest rate than that of the 30-year fixed rate is applied. Simply put when one borrows using a one year ARM they will have acquired a 30-year loan where the interest rate is reset each year on the loan commencement anniversary date.
Using the one-year adjustable-rate option allows the homeowner to be approved for a higher loan limit, therefore, affording them the opportunity to acquire a higher value house. Homeowners with substantial mortgages can use ARMs and then refinance each year. Lower rates provided under the option will enable them to purchase more valuable homes. Also, they make lower monthly repayments as long as rates remain low.
For the 10/1 ARM, the interest rate for the first ten years of the mortgage is fixed. Once the ten years are over, the rate changes after every year for the remainder of the loan period. The life of the loan is thirty years, so the customer will have the stability of a 30-year fixed-rate mortgage for the first ten years at a lower cost than that of a fixed mortgage loan with the same tenure. However, the adjustable-rate mortgage is not the top option for individuals keen on owning the same house for more than 10 years unless they are accelerating loan repayment through extra payments with the intention to clear their loan in advance.
A 2-step mortgage is an ARM that has a constant rate for a fraction of the loan and another rate for the remaining section. The interest rates are aligned or changed with respect to the prevailing market rates. The customer might be accorded the chance to choose between a fixed interest rate and a variable rate on the variation day.
Borrowers who choose a two-step mortgage carry the risk that the rate on their mortgage loan will be adjusted upward once the fixed-interest rate stretch is over. Customers who use two-step mortgages usually have intentions of refinancing in the future or are likely to move out of the house before the loan period comes to an end.
5/5 And 5/1 ARMs
5/5 and the 5/1 ARMs are variations of adjustable-rate mortgages where the interest rate and the monthly installment remain constant for five years. The interest rate is usually adjusted at the beginning of year six. Henceforth, for the 5/1 ARM, the interest rate is adjusted after every year while for the 5/5 the change is effected after every 5 years. These ARMs work best for homeowners who intend to stay in the home for more than five years and are open to fluctuations in payments later on.
This mortgage is also referred to as a “30 due in 5” where the interest rate and the monthly installment remain constant for a period of five years. After the end of the five years, the interest rate is changed to correspond to the prevailing current rate. This means that over the remaining mortgage tenure the payment will not vary. This is an excellent option if the customer is comfortable with a single variation of the payment over the mortgage period.
3/3 And 3/1 ARMs
3/3 and 3/1 ARMs are housing loans where the interest rate and the monthly payment remain constant for 3 years. Changes to the interest rate only occur after the end of the third year. At the start of year 4, the interest rate is changed, for 3/3 ARM the change is after every three years. On the other hand, the 3/1 ARM’s rate changes each year. If a homeowner is considering an adjustable-rate after three years this type of mortgage is a perfect solution.
They are similar to a fixed-rate mortgage on the way they work and last for a short duration. Usually, monthly installments are significantly lower due to the large lump-sum payment at the end of the mortgage. Basically, only interest is being paid on a monthly basis hence the lower payments. Balloon mortgages are highly suitable for responsible customers who plan to sell their home prior to the expected date of the balloon payment. This is a risky option. If homeowners are unable to meet the balloon payment on the due date they might be necessitated to refinance the balloon payment from the initial lender of the mortgage.
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Feel free to contact us or call us today!
How Long Does It Take To Buy A Home In Houston Texas?
Are you planning to purchase a house in Houston, Texas for the very first time? If you are then over the years you might have heard “rumors” about how long it can take to purchase a house.
Some individuals might have told you it is 30 days and others will say it is 60 days. However, in reality, every individual’s experience is solely based on things such as the state of the Real Estate market when it was purchased, real estate demand, and whether or not a buyer could get pre-approved before looking for a house to buy.
How Long Does Buying A House Take?
Say you know the kind of house in Houston Texas you want to purchase all the way down to the specific area, as well as features and amenities inside of the house.
If that is the case, after you have found a house, and have submitted an offer for it, it can take 30 to 60 days from contract to closing.
Why Does The Process Take So Long?
That’s a good question. Every lender has its own process they follow when it comes to the home appraisal process it can take as long as 30 days for the lender to get their appraisal process completed.
While the lender is undergoing through the home appraisal process, as a buyer you can help yourself by hiring a house inspector on your own to have the house checked from the top to the bottom and also you should review the property disclosure statements to ensure there isn’t anything wrong with the house.
If You Are Just Beginning The House Buying Process
If you just getting started with the house purchasing process, then you should take the time at first in order to identify what you are looking for in a house before hiring a Realtor since that will make the job that your agent is to do help you a lot easier.
Once you know what you want in a house, then you should get pre-approved to get a mortgage loan so that you can move forward with purchasing a home without having any questions regarding the financing of the property.
The Texas Mortgage Pros
The team at Texas Mortgage Pros is comprised of experienced mortgage professionals all across the state of Texas. We are fully committed to providing the highest quality service to all of our clients for all of your mortgage needs. Multiple loans programs from your local area – San Antonio, Tomball, Dallas, Austin, the Woodlands, Spring, and Houston, Texas are combined with the lowest interest rates. Our excellent mortgage professionals have years of experience and will work closely together with you to ensure you get the home loan that is specifically tailored to meet your expectations and specific situation. So whether you are buying your first house, your dream home, consolidating your debt, or refinancing a loan that you currently have, our highly experienced loan officers can assist you with finding the best loan program for you at the lowest possible rate.
The ultimate goal that we have is to create long-lasting relationships with all of our clients so that we can continue providing outstanding service well into the future. Unlike many big national mortgage companies, we will keep all of your information secure and private. We are a trusted name within the lending community that you can rely on.
To speak with any of our experienced mortgage professionals directly, just give us a call or use any of the interactive tools that are located on our website. We look forward to assisting you. Visit our blog for more related articles on how to execute the best SEO in Houston!
With interest rates on the rise, you might want to seriously consider purchasing a house sooner instead of later. The next thing that you might be thinking about is whether you can qualify to get a mortgage or not given where interest rates are currently.
Although lenders have somewhat relaxed their standards since the height of the financial crisis that started ten years ago, there are certain minimum standards that you will need to meet in order to qualify for certain mortgages.
Specific financial documents, a decent debt-to-income ratio, and good credit scores are a few things that you will need for applying and qualifying for a home loan.
The specific requirements will mainly depend on the kind of loan you apply for. Therefore, in this guide, we have broken the lending requirements down for several different kinds of loans.
Requirements of FHA Loans
One of the easiest types of home loans to obtain is a mortgage from the Federal Housing Administration. Because insurance is provided on the mortgage by the FHA, quite often FHA-approved lenders can offer terms and rates that are more favorable.
Also, lenders are more comfortable with borrowers who are potentially more riskier given that 90 of the mortgage is backed up by the FHA. FHA mortgages have lower downpayment requirements which make them good for first-time homebuyers who might not have enough money in saving to make the regular 20% downpayment is when buying a house.
For FHA-approved mortgages, the following are the current minimum requirements:
A minimum 3.5% downpayment and credit score of 500 at least. A 10% downpayment may come from your personal bank account, a local downpayment assistance program, or gift from one of your relatives.
The debt-to-income ratio on FHA mortgages is set by the Department of Housing and Urban Development (HUD). The front-end ratio currently is 31% with a 43% back-end. The front-end ratio only considers housing-related costs, like the monthly mortgage payment, insurance, and property taxes. The back-end ratio considers all monthly debt, which includes housing costs, credit card payments, car loans, and any other forms of recurring debt.
The house must be your primary residence for the first year at least. That includes whether you are purchasing a single-family house or a four- or two-unit property.
You are required to have proof of employment and steady income for the past two years, along with explanations if you have frequent employment changes.
On an FHA loan, you are required to have mortgage insurance no matter how much your downpayment is. On FHA loans you need to pay two different mortgage insurance premiums – an upfront mortgage insurance premium payment and your monthly mortgage insurance payments that are paid each month for the entire life of your loan. The upfront mortgage insurance premium that must be paid is 1.75% of the balance of your loan. It is due at closing and normally financed as part of your loan. Once you make your 3.5% minimum downpayment, then you will need to pay a yearly 0.85% fee of the total amount of your loan. That amount is divided by 12 and then is part of your monthly payments for the life of your FHA loan.
Requirements On Conventional Loans
A conventional 15-year or 30-year mortgage as requirements that are slightly stricter compared to an FHA loan. However, it does come with some longer-term benefits and flexibility.
There are some lenders that might let you make as low as a 3% downpayment in order to qualify to get a conventional mortgage, but you will be required to have mortgage insurance. Some low downpayment programs might have income limits, so make sure you check the address on the properties along with your loan officer to find out if there are any restrictions or not.
On a conventional mortgage, you are not required to carry private mortgage insurance (PMI) and pay for it every month if you can make at least a 20% downpayment on the property. However, if you pay a lower downpayment, then you will need to pay 0.15 to 1.95% of the balance on your loan in FMI fees every year.
Another benefit that conventional loans offer is that after you have the principle down to 78% of the original property value, the lender is required to stop charging mortgage insurance if you make your payments on time. On an FHA loan, when you make a minimum downpayment, the only thing that you can do to eliminate monthly mortgage insurance is refinancing your loan.
On a conventional mortgage, the minimum score that you need to have is 620. However, there are some lenders that might require a 640 minimum score. Remember that having a better (higher) credit score will allow you to receive a better interest rate along with a lower mortgage insurance monthly payment.
Proof of regular income is required by lenders and they will look more closely at your earnings and employment history from the last two years.
Conventional lenders, as of 2018, allow for up to 50% DTIs in certain cases. For any with a debt ratio more than 45, there is one caveat: For people with higher debt ratios, Numerous mortgage companies now require a 700 minimum credit score.
Requirements For VA Loans
The Veteran Affairs Department offers a mortgage for active-duty military personnel, veterans, reservists, and their families. Part of the loan is guaranteed by the VA, which allows lenders to offer military personnel more favorable terms.
Certificate Of Eligibility
In order to qualify to receive a VA mortgage, you also are going to need to get a VA loan certificate of eligibility. It verifies that the military service requirements are met by the applicant in order to be eligible to get a VA mortgage. Certain identification and documents. Veterans and military personnel may apply, by mail, or via a lender after the form is completed.
There is no downpayment that is required.
There are no PMI fees that come with VA loans. However, a funding fee is charged. It is charged at closing and normally is financed with the loan amount. The funding fee amount will depend on whether or not it is the first time that the veteran is using their eligibility. If an applicant has a disability that relates to her or his military service, then the funding fee might be waived.
There is no minimum credit score requirement on VA loans. However, a majority of lenders funding VA loans do have a minimum 620 credit score requirement. The VA loan program just requires the lender to review the whole loan profile in order to ensure that the veteran applying for the loan has the ability to repay it.
No minimum income threshold must be met, although applicants do need to provide steady income proof.
It is recommended that your debt-to-income ratio be no higher than 41% to qualify for VA loans. A higher debt ratio might be approved since a VA lender will also look a the residual income of the veteran, which is calculated based on the borrower’s after-tax income, less expense along with a monthly maintenance calculation that is based on the number of members in the veteran’s family and size of the home.
Requirements for USDA Guaranteed Loans
A mortgage program is offered by the U.S. Department of Agriculture to give low to moderate-income families the opportunity to own their own house in designated rural areas. Applicants may relocate, improve, rehabilitate, or build a dwelling that is located in an eligible rural area. 2010 U.S census data on population is used to determine the rural designated areas.
On USDA-guarantee loans, the program backs 90% of the amount of the loan, and that enables USDA-approved lenders to take borrowers into consideration that might not qualify to get a conventional home loan. A 640 minimum credit score is required on UDA mortgage loans to be automatically approved – as long as the other requirements are met as well. However, homebuyers that have lower credit scores still might be considered for a loan that is underwritten manually.
Special eligibility requirements for your state must be met in order to qualify for a USDA mortgage. The USDA online tool can be used to determine whether or not the property is in a designated rural area. You will have to enter the address, city, and state of the house into the tool. That will confirm whether or not the house you are interested in buying is in one of the USDA designated rural areas or not.
The USDA map can be used to choose your state and then determine whether you meet the income eligibility requirements. The income limits vary based on family size, county, and city.
The homebuyer must meet the following basic requirements as well in order to qualify to get a USDA mortgage:
Agree to personally occupy the house as their primary residence. The home cannot be rented out or used as a second house.
Must be either a qualified alien, noncitizen national or U.S. citizen.
Can incur a loan obligation legally. That just means the homebuyer hasn’t been declared to be incompetent and has the ability to enter into legally binding contracts and understand what the debt obligations are.
Has not been banned or suspended from participation in federal programs.
Indicate a willingness to meet their loan obligations on time.
Buys a property that satisfies all of the criteria of the USDA program, including being located in a rural designated area.
For UDA home loans, the standard DTI ratio is 29%/41% of the gross monthly income of the applicant. On a UDA loan, the maximum allowable DTI is 32%/44% of the person’s gross monthly income, when all of the applications of a loan have credit scores of 680 at least. Under some circumstances, higher ratios are allowed by the USDA on a case-by-case basis. In order to get a waiver for a higher ratio, the borrower must request it from a USDA-approved lender and have it documented by them.
Requirements For HomePossible & HomeReady Loans
The HomeReady mortgage program is offered by Fannie Mae, which is a government-sponsored agency.
The programs are designed to assist prospective homebuyers with low and moderate incomes and limited funds for a downpayment on a house.
A 3% downpayment is required from a gift or the borrower’s own funds.
A minimum 620 credit score is required.
For homeowners lacking a credit score due to not having a credit history, a HomeReady loan can be a good solution. They can offer financial statements as a substitute such as on-time rental payments for 12 months or other types of monthly payments such as utility bill payments that don’t appear on a credit report.
The HomePossible and HomeReady programs may be approved with up to a 50% debt-to-income ratio with strong credit along with other compensating factors like retirement funds or extra savings for reserves.
This program is managed by Freddie Mac.
The HomePossible mortgage is similar to the HomeReady one, but there is one key difference between them. The HomePossible programs allow a borrower to include a non-borrower’s income into the financial calculations – which is income from another individual or individuals who are living in the house to count towards the total monthly income, even when those people are not on the mortgage loan. That can frequently benefit a homeowner who is taking care of a family member who lives in their home who receives Social Security or disability.
A minimum 620 credit score is required.
There is a 3% minimum downpayment required, and additional flexibility in terms of what the source is for the downpayment. The HomePossible guidelines allow the total downpayment now to come from sweat equity, meaning that the borrower can contribute handyman skills rather than money towards their downpayment.
There is a 43% maximum DTI, but there are exceptions up to 50% depending on how strong the borrower’s credit and income are, and whether or not they have any extra money in their bank account (reserves) for making future mortgage payments.
Key Mortgage Documents
Before you apply for a mortgage, the process can flow a lot smoother if you organize all of the paperwork and financial documents that are typically required by lenders on the loan application.
They may include:
Pay stubs for the past 30 days
W-2’s for all jobs that go back two years
A signed purchase agreement with the home’s seller
Tax returns dating back two years
Bank statements for the past 60 days
If you are self-employed, 1099 forms
Homeowners insurance proof
Documented sources of income such as stock earnings and dividends
Proof of any bonus income
If applicable, disability or Social Security income award letters
Securities documents like life insurance policies, bonds, and stocks
Some lender might require written verification of your position and salary, printed on the company letterhead of your employer. The might send a form for verifying employment to the human resource department of your employer to complete.
Before shopping for a house, it is wise to find out the amount you potentially will qualify to borrow. This means you don’t have to waste your time looking at houses that are outside of your price range. When you have a mortgage pre-approval, that means that the lender has examined your current finances, income stability, and credit history, and is prepared tentatively to provide you with a loan on a house.
You will need to provide the following in order to obtain a pre-approval from your lender:
Your social security number and identification.
All of the banks on your bank statements from the two most recent months.
Employment verification, which consists of either W-2’s for two years (or if you are self-employed tax returns) or a month’s worth of pay stubs.
Your credit report will also be pulled by the lender.
Usually, a mortgage pre-approval is good for a maximum of 90 days. Once that time has passed, a creditor will normally want to review your fiance again to see if there have been any changes.
You don’t need to worry about having several inquiries on your credit report if you obtain pre-approval from several different lenders. All of them will count as just one hard inquiry when they are done within a short period of time (typically 15 to 45 days).
Purchasing a house is a major financial commitment and culminates a lifelong dream for many people. Texas Mortgage Pros can assist you with comparing mortgage offers and products. It might be a long road to homeownership, but it doesn’t need to be a rocky one. If you arm yourself with the necessary information ahead of time about various loan programs that are available and what the minimum requirements are for each of them, and the financial documents that you will need to have, then you will have taken the important first steps towards smoother mortgage processing.
The Texas Mortgage Pros
Our team at the Texas Mortgage Pros is comprised of mortgage professionals all across the state of Texas. We are dedicated to providing all of our clients with the best service possible for all of your mortgage needs. When combined with the lowest interest rates and the multiple loan programs that are available in your local area – Houston, Austin, Dallas, the Woodlands, Tomball, San Antonio, and Spring, Texas. Our mortgage professionals have years of experience and will work personally with you to ensure that you receive a home loan that is specifically tailored to meet your expectations and situation. Whether you are consolidating debt, refinancing your existing loan, buying your first house or dream home, our highly experienced loan officers can assist you with finding the best loan programs at the lowest possible rate.
Our ultimate goal is to develop a lasting relationship with all of our clients so that we can continue providing them with outstanding service for many years into the future. Unlike many large nationwide mortgage companies, we will keep all of your information private and secure. Throughout the entire lending community, our name is a highly trustworthy one.
To speak with one of our experienced mortgage professionals directly, just call us anytime or use any of the interactive tools that we provide throughout our website. We look forward to meeting and working with you.
If you have any questions, please feel free to contact us today!
Understanding Soft Credit Check & Its Impact On Your Credit Score
Your credit history does influence a significant part of your financial life choices. A soft credit check is mostly done for promotional or informational purposes at is one of the methods you can employ to ensure that you stay on top of your credit score. Three top-end credit bureaus – the Equifax, Experian, and TransUnion – handle credit reports for consumers and provide one free report annually.
Every time you or any other party checks your credit, it will be reflected in your credit reports. Given this fact, have you ever received an offer for a credit card via email or postage and wondered who the credit card companies knew you would need one or qualify for a credit card? They probably did a soft credit card check to determine if you are eligible for such an offer.
Why Soft Credit Check?
As stipulated by the Fair Credit Reporting Act, all consumer credit reporting bureaus are required to keep a record of all the parties (businesses or organizations) that review your credit score.
In most cases, the soft credit check is done without your knowledge, and you do not get to initiate these inquiries, such as when applying for new credit. But there is an exception to it, which is only when you check your credit score yourself.
The soft credit inquiry may be:
A review of your credit history and score by a lender from whom you requested your current line of credit
Pre-approved credit offers
Review of your credit for certain purposes such as security insurance
Review requests from your landlord
The soft credit checks will be reflected on your credit history reports for two years so that they highly all the parties (individuals, businesses, or organizations) that reviewed your credit. Fortunately, the soft inquiries do not dent your credit score or history.
A Soft Check Vs. A Hard Check, What Is The Difference?
A hard credit check is initiated when you request for a line of credit such as an auto loan, credit card, personal loan, or a mortgage. After submitting your application to the lenders, they will make inquiries into your credit history and score to find out if you qualify to get the line of credit.
In comparison to the soft credit check, hard inquiries can hurt your credit history and score. One of the top reasons is the fact that the hard check will highlight high credit risks that the lender will take into consideration when approving your loan request. The more the hard inquiries, the less favorable things are for you since they make it appear as though you are having a tough time managing your finances.
On the other hand, soft credit inquiries are never included in the risk calculation since the checks are conducted without you knowing are for promotional or informational purposes. As such, your credit score is never dented irrespective of the many soft inquiries that are done and appear on your credit history report.
What Are The Benefits Of A Soft Credit Check?
The soft credit inquiries have few drawbacks that are quickly overshadowed by the benefits that include:
The queries offer for new and better lines or credit as well as credit cards
You can manage to maintain or increase your credit score thanks to the regular inquiries.
The checks can help you get pre-approved for better mortgages
They can help landlords distinguish you from other tenants when you are interested in leasing an apartment with controlled rent.
Overall, the soft credit checks will let you know the number of inquiries made and by whom, and when. All this information can be reflected in a section of your credit history report. Moreover, you also can review your credit details when you see the need, and you do not have to worry about being penalized.
Texas Loan Companies: What You Need To Look Out For
We have all been there. You have an emergency or bills to pay but have no money at all. A personal loan is the first thing that comes in mind when in a tight spot and need cash fast. With dozens of loan companies at your disposal, you are spoilt for choice, or are you? You, however, shouldn’t borrow from the first company you come across.
There are several important factors that one should consider applying for a loan from any company.
Understanding Personal Loans
A personal loan can be defined as money borrowed from a lender to be paid back with interest at a later time. Lenders have to determine a person’s eligibility for a loan before processing or approving a loan application. Lenders will look into an applicant’s:
Credit history and score
After submitting the loan application papers, the lender starts processing the loan immediately, then calculates how much you should pay for the same. You will, however, get these details once the loan has been approved. Should you be unable to repay the loan in full, the lender might choose to use debt collectors or even use legal action against you.
Why Should You Get A Loan?
Most people are eligible for different types of loans. Nonetheless, you should go about applying for loans simply because you can borrow. Financial experts advise against this and only recommend going for one for genuine reasons. Personal loans should, therefore, be treated with the utmost care to avoid building a mountain of debt on yourself. You should also avoid inquiring about a loan too often, as this too can affect your credit score.
Outlined below are some of the good reasons why people get personal loans.
1. To Pay For Medical Expenses
You can never prepare adequately for a medical emergency. Even your medical insurance might not be enough to cover for all expenses. If your savings are running low and unable to settle the medical debt, you can apply for a personal loan. With the personal loan, you should be able to clear the expenses more conveniently. The loan repayment plans are more manageable as compared to having to pay a lump sum at once.
2. For Home Improvement
A home improvement project can help give your home a value boost. That said, some projects can be too costly for the homeowner, forcing him/her to seek financing instead. A personal loan will come in handy in funding some of the expensive projects such as roof replacement or extensions. Some of these improvements tend to pay the loan off in one way or another.
3. Debt Consolidation
There are times when you will have several loans to service. This means some of the loans might end up being forgotten, forcing you to make late payments. Going for a debt consolidation loan can however help you manage these loans at once. The loans are consolidated into one, meaning you only have to think of one loan from that moment on. This reduces the risk of late payments and additional charges that may come with late payments.
4. Significant Purchases
Big purchases may put a huge dent to your savings account. Some investments, such as when you need to replace appliances in the house, or need to buy a car require lots of money. You can take a personal loan to help top up the amount you already have. Many people take loans to pay for their cars and other major purchases in the house. As long as you are confident, you’ll be able to repay the loan on time, then taking a personal loan can be beneficial.
Factors To Consider When Looking For A Loan Company
As mentioned earlier, it wouldn’t be wise of you to apply for a loan from the first company you see. Shopping around can land you a better deal. Here are some of the factors you need to consider when looking for a lender.
1. Interest rates: Check to see how much the company charges in interest. Variable interest rates may seem enticing but are riskier in the end. 2. Reputation: Look for a company reputable enough to stick to the terms of the contract. In addition to this, the company shouldn’t share your information with other companies or advertisers.
Important Things You Should Know About Home Equity Loans
Home equity loans offer a way to borrow money to purchase big-ticket times. It is critical to understand the facts about these loans to ensure that you make the best financial decisions.
If you are thinking about taking a home equity loan out, first you should know about the 13 things below.
1. What Is a Home Equity Loan? (HEL)
This type of loan is where a borrower uses the equity in their home as collateral on the loan. Home equity loans let you borrow a large lump sum of money based on your home’s value, determined by a professional appraiser, and the current equity in your property.
There are both adjustable-rate and fixed-rate home equity loans that are available and they also have different amounts of time for repaying the debt, and typically range from 5 to 30 years. There are also closing costs that must be paid, but they are much less than the ones paid on a full mortgage.
Fixed-rate home equity loans offer the predictability of a fixed interest rate from the very beginning, which is preferred by some borrowers.
2. What Are The Best Uses For A Home Equity Loans?
Usually, home equity loans are best used for individuals who need money to pay for a major expense, such as a home renovation project. One thing that home equity loans are not especially useful for is to borrow small sums of money.
Typically lenders don’t want to deal with making small home equity loans. About the smallest amount that you can get is $10,000. For example, Bank of America has a minimum of $25,000 for its home equity loan amount, while Discover offers $35,000 to $150,000 home equity loans.
3. What Is a Home Equity Line of Credit? (HELOC)
This is a revolving line of credit that is based on your home’s equity. After the limit has been set by the lender, you will be able to draw on the line of credit whenever you want to over the life of your loan by simply writing a check against this line of credit.
A HELOC in some ways is similar to credit cards: you don’t have to borrow the entire amount of the loan, and your available credit gets replenished as you continue to pay it back. You could, in fact, pay the loan back in full over the draw period, then re-borrow the total line of credit amount, and then repay it once again.
Typically the draw period will last around ten years with a repayment period of 10 to 20 years. You only pay interest on the amount you borrow from the total amount that is available, and usually, you are not required to repay the loan until the draw period closes.
Sometimes HELOC loans also have an annual fee. The repayment period for a HELOC has adjustable interest rates, and usually, they are based on the prime rate, although often they can be converted over to a fix-rate loan following a certain time period. Also, there are usually closing costs that need to be repaid on a loan.
4. What Is A Home Equity Line Of Credit The Best For?
A HELOC is usually best for individuals who are expecting to need a varying amount of money over time. For instance, to get a business started. If you do not need as much as is required by a home equity loan, you can choose a HELOC instead, and borrow only what you actually need.
5. What Are the Benefits of Home Equity Lines of Credit and Home Equity Loans?
Beyond having access to large amounts of money, home equity lines of credit and home equity loans also have the advantage is usually the interest that you pay is tax-deductible for people who itemize deductions, since it is same as conventional mortgage interest.
Federal tax law lets you deduct mortgage interest on home equity debt of up to $100,000 ($50,00 each for married people who file separately). However, there are some limitations, so consult with your tax adviser in order to determine what your eligibility is.
Because home equity line of credit and home equity loans are secured by your house, the interest rates tend to be lower as well compared to what you would pay on an unsecured loan or credit card.
6. What Are the Main Disadvantages of Home Equity Lines of Credit and Home Equity Loans?
The debt that you are taking on from a HELOC or HEL is secured by your house, which means that your property is the collateral on the loan and may be at risk if you do not make all of your loan payments. You could potentially be foreclosed on your home and lose if you are delinquent on your home equity loan, and also the same thing is true on your main mortgage.
In the event of a foreclosure, the first to be paid off is the primary mortgage lender, then the home equity lender gets paid with whatever is remaining.
If the value of your home declines, you might go underwater and end up owing more money than your home is worth. Rates on HELOCs and HELs also have a tendency to be higher than what you would pay currently on a mortgage and then fees and closing costs can start to add up.
7. Can I Determine What My Equity Is?
If you have an interest in learning how you can qualify to get a home equity loan, the first thing that needs to be determined is the amount of equity you have in your home.
Equity is the part of your house that you own, while that part that you owe is owned by the bank. If your house has a $250,000 value and you owe $200,000 still on your mortgage, and the equity that you have is $50,000, or 20%.
This information is commonly referred to as the loan-to-value ratio – which is the balance that is remaining on your loan that is compared to the value of your property – and in this case, it is 80% ($200,000 is 80% of $250,000).
8. How Can I Qualify To Get a Home Equity Loan?
In general, lenders will usually require you to have an 80% loan-to-value ratio at least that remains after a home equity loan to be approved. This means you will need to own over 20% of your home before being able to qualify to get a home equity loan.
If you own a $250,000 house, you need 30% equity at least – a mortgage loan balance of a maximum of $175,000 – to qualify to get a home equity line of credit or equity loan of $25,000.
9. If I Have Bad Credit Can I Still Get A Home Equity Loan?
Many lenders require a good or excellent credit rating in order to qualify to get a home equity loan. To get a home equity loan it is recommended to have a credit score of at least 620 and to get a home equity line of credit you might need to have an even higher score than that.
However, there are some situations where someone with bad credit might still be able to get a home equity loan if they have a low debt-to-income ratio and have a high amount of equity in their house.
If you believe you will be shopping for a home equity line of credit or home equity loan fairly soon, you should first consider taking the steps to improve your credit.
10. How Soon Will I Be Able To Get A Home Equity Loan?
You can technically get a home equity loan right after you buy a house. However, home equity usually builds up slowly, and that means it may be a while before you have built up enough equity in order to qualify for a home equity loan.
It may take five to seven years to start to pay down on the principal of your mortgage and start to build equity.
The normal processing time for a home equity loan can be anywhere from two to four weeks.
11. Is It Possible To Have More Than One Home Equity Lines of Credit?
It is possible to have more than one home equity lines of credit, but it is rare, and not many lenders offer multiple ones. You would need to have excellent credit and substantial equity in order to qualify for multiple home equity lines of credit or loan.
If you apply for two HELOCs at once but from two different lenders but do not disclose them it is considered to be mortgage fraud.
12. How Are The Best Banks To Get Home Equity Loans From?
Brokers, mortgage lenders, credit unions, and banks all provide home equity loans. A little shopping around and research will help you determine which of the banks are offering the best interest rates and home equity products for your situation.
Start with the credit unions and banks where you have a relationship already, but also ask for referrals from family and friends who have received loans recently and also make sure that you ask about fees. Insight can also be provided by real estate agents.
If you are not sure of where to get started, the following are a couple of options for you to consider:
-Lending Tree works along with qualified partners in order to the best interest rates and provides an easy way of comparing lending options.
-Discover provides home equity loans range from $35,000 up to $150,000 and they make it very easy to apply for loans online. At closing, there is no cash required or application fees.
-Bank of America on primary homes provides HELOCs of up to $1,000,000, makes it very easy to apply for online, and for existing bank customers offers fee reductions, but does have higher debt-to-income ratio requirements to many other lenders.
– Citibank has options for applying in person, over the phone, or online for both HELOCs and HELs. Citibank will also waive closing costs and application fees – but on HELOCS there is an annual fee that they charge.
– Wells Fargo currently only offers HELOCs with fixed rates, but discounts are offered to Wells Fargo customers, and reduce interest rates if the closing costs are covered.
13. How to Apply for a Home Equity Loan
Before you are able to apply for a home equity loan there are certain requirements that must b met. Follow the five steps below to improve your chances of getting approved for a home equity loan:
– Check your credit score. Having a good credit score makes it easier to qualify for a home equity loan. Before you apply for a loan, review your credit report first. If your credit score is less than 620, and you aren’t desperate to get a loan, you might want to take the necessary step to improve your credit before applying.
– Determine what your available equity is. The amount of your equity will determine how large of a loan you are able to qualify for. You can get a general sense of the amount of equity that your house has by checking websites like Zillow in order to determine what its current value is and then deducting the amount that you owe still. The lending institution’s appraiser will determine what the official value of your house is (and therefore what your equity is) when you apply for the loan, but you can get a pretty good sense of the amount of equity you might have by doing a bit of research first.
– Check your Debt – YOur likelihood of qualifying for a home equity loan will also be determined by your debt-to-income ratio. If you have lots of debt, you might want to work at paying it down first before applying to get a home equity loan.
– Research rates at various lending institutions and banks. NOt every lending institution and bank will require the same qualifications, fees, or rates on their loans. Do your search and before you start the application process, review multiple lenders.
– Collect the required information. It may be a lengthy process to apply for a home equity line of credit or home equity loan. You can speed up things by collecting the necessary information before you get started. Depending on the lending institution you work with, you might have to provide tax returns, pay stubs, a deed and more.
If you need to have a loan to help with covering your upcoming expense, be sure that you are prepared. Check our Loan Learning Center to review more resources on different kinds of loans that are available.
FAQs on Home Equity Loan
The following are a couple of the more commonly asked questions on home equity lines of credit or home equity loans:
Why is a home equity loan a good option for financing?
Usually, home equity loans come with a lower interest rate compared to another form of credit or traditional loan. Also, it is a secured loan and your house is the collateral. Therefore, the bank views the loan as less risky. Also, as previously mentioned, it is a tax-deductible form of financing.
Variable or Fixed Interest Rate?
Home equity loans have a fixed interest rate since it is considered to be an installment loan. But a home equity line of credit might have an interest rate.
Why does a home equity loan have closing costs?
Closing costs are necessary to set a home equity line of credit or home equity loan. These closing costs may cover the property appraisal fee for finding the value of the house, title and property insurance, mortgage filing and preparation fees, a title search on the property, attorney’s fees, and application fee. Overall, fees might total up to two to five percent of the total amount of your loan.
The Loan-to-Value Ratio is one of the most important basics when it comes to applying for a mortgage.
If you are shopping for a new home or are already applying for a mortgage then you will have heard of the loan-to-value ratio before. The acronym LTV is used a lot in the news, as well, and cropped up frequently when people found themselves in negative equity when the housing market crashed over a decade ago.
No matter what the situation in the housing market, it is important that you understand LTV, and that when you apply for a home loan you get the best deal that you can. Having an LTV that is too high can mean that you have to pay a lot more for your mortgage and that your refinance options and loan eligibility become poorer.
The LTV ratio is easy to calculate:
Just divide the loan amount you are applying for by the appraised value of the property.
That gives you the ‘loan to value’.
The hard part is determining the true value of your home.
The LTV ratio is the amount of the mortgage loan, divided by the purchase price or the appraised value of the property (whichever is lower).
If you are refinancing a mortgage, then the LTV is the outstanding loan balance divided by the property’s appraised value.
Lower LTV figures are better when it comes to getting a good rate on your mortgage.
Let’s take a look at a few simple calculations
Let’s calculate a typical LTV ratio:
Property value: $600,000
Loan amount: $450,000
Loan-to-value ratio (LTV): 75%
In the above example, we would divide $450,000 by $600,000 which gives us a result of 0.75, or 75%
You can do calculations like that in your head, or using a standard calculator. There is no need to use an online “LTV Calculator”. The arithmetic is not complicated and it’s a one-step process. It’s something that anyone can do, and it will arm you with some useful information for getting ready to apply for a mortgage.
Once you know your loan to value, that gives you an idea of the equity you hold in the property. In this case, your loan is for 75% of the property, so the remaining 25% of the property is the ownership that you hold.
It is important to know your proposed (or current) LTV so that you can show to the lenders that you actually have some money to put into the property. Lenders like to know how much of a risk they are taking when they allow someone to borrow from them.
Lower LVR ratios mean you own more of the property and are likely to get a better mortgage rate. The more equity you have or the bigger the downpayment you can put in, the better. Low LTV means less risk and less interest.
If someone has more ownership then they are less likely to end up falling behind on their payments and the mortgage company is less likely to need to foreclose on them because the homeowner has more to lose.
If they do end up struggling with payments, they could sell the property and not be faced with a massive loss.
Mortgages are tiered, with the tiers based on the LTV ratio. Someone who has a lower LTV ratio will be able to get lower interest rates, and those who have a higher LTV will have to pay a bigger mortgage or more closing costs.
Let’s consider a situation where you have a less than perfect credit score, and lenders want to charge you more interest. The adjustment you are faced with will grow even more if you have a higher loan to value ratio because that means even greater risk.
If you have a loan to value ratio of 80 percent and a poor credit score then that could mean you are faced with a .25 percent higher mortgage rate. If your loan to value ratio was 90 percent then the hit could be 0.5 percent. That might not sound like a lot, but over the term of the mortgage, it could see you paying an awful lot more. It makes sense to find ways to make a bigger down payment and to bring your mortgage as low as possible.
If you can, try to repair your credit score over a few years as well so that you have more loan options open to you, regardless of your equity and downpayment.
The 80% LTV Threshold Matters
It is important to keep your LTV below 80% That will help you to secure a lower interest rate for your mortgage It will also help you to avoid Private Mortgage Insurance Most borrowers will elect to put down a deposit of at least 20%l so that they can avoid mortgage insurance and pricing adjustments
You don’t always need to put down 20% to get the benefits of having a lower LTV, though.
Looking at our first example once more, let’s raise the initial mortgage to $480,000 and add an additional mortgage of $60,000. This gives a combined loan-to-value ratio of 90% since the total amount borrowed is $540,000 on a $600,000 property.
The first mortgage is for 80%, and the second mortgage is for 10%.
Breaking up home loans into ‘combo mortgages’ allows you to keep the loan to value below the threshold, reducing the interest rate and also avoiding the need for private mortgage insurance. Many borrowers opt to do this.
Banks and mortgage companies do have limits on the LTV and CLTV that they allow, so you are not going to be able to borrow more than the property is worth. Many lenders set their thresholds at 80, 90 and 100 percent depending on the value of the property and the credit history of the borrower. These limits were introduced when the credit crunch hit, and they are gradually being relaxed, but it still makes sense to be cautious with borrowing.
If you are looking for a mortgage at the moment, then you are likely to have heard a lot about loan to value ratios. Hopefully, those figures will have cleared things up for you, and you will have some idea of what you should be aiming for. If you want to minimize the interest that you pay and improve your prospects of getting accepted by a good lender for the property of your dreams then you would do well to try to reduce your loan to value as much as you possibly can.
Out of all of the elements of working out mortgage eligibility and how much interest you might pay, figuring out the loan to value ratio is perhaps the easiest. Just divide the amount of the loan by the appraised value to get the LTV.
The hard part is often working out the value of the property.
The loan to value ratio, or LTV, is the value of the being applied for divided by the worth of the property (defined as the lower out of the appraised value and the purchase price).
In the case of an existing mortgage, this is the outstanding loan balance, divided by the most recent appraised value.
The lower the number that you get when you calculate the LTV, the better.
If you are lucky enough to be dealing in fairly round numbers, you should be able to calculate the LTV in your head, for example:
Property value: $1,000,000
Loan amount: $700,000
Loan-to-value ratio (LTV): 70%
All you have to do is divide the loan amount ($700,000) by the value of the property ($1,000,000). This gives us 0.7, or 70%.
You can do this on a calculator, or in your head. There is no need to use a specialist LTV calculator, although if you’re already on a mortgage website then you might want to try it just to use their other tools as well.
The result, 70% is good, because it means that the hypothetical borrower has 30% ownership of the property. This means that lenders will view them as fairly low risk and that they might get a good rate for their mortgage.
Lower LTV ratios mean that you own more of the property
Lenders see this as a good thing and offer better rates
A low LTV means more equity in the property or a bigger down payment
More equity means less risk for the lender
There are ‘breakpoints’ where if you get the LTV below that level you will be offered more favorable mortgage rates from the mainstream lenders
The lenders know that if someone has more ownership they are less likely to fall behind on their loan repayments and that in the event that they do fall on hard times they are more likely to be able to just sell the property without ending up facing a loss. This means that it is safer to lend to those people and that they will get better prices. In many cases, those with very low LTV ratios will not just see lower interest rates, but also lower closing costs. Keeping the LTV below 80% is valuable too because it helps to avoid private mortgage insurance.
Someone who has a poor credit score should look to avoid a high LTV because they will already be getting charged more for their mortgage. By reducing their overall risk they can reduce the negative impact that their poor credit score is having on them, although improving the score as well will go a long way.
Someone who has a poor credit rating and pays 0.25% more than average for an LTV or 80% would likely end up paying 0.5% more for an LTV that is above 90%. It makes sense, then, for those who have poor credit histories to look for ways to reduce their LTV to below the 80% threshold. The lower the loan to value ratio is, the better, for any borrower but especially for those who have a poor credit rating.
In the long term, building a good credit history is the best option for anyone, whatever their situation. Those who are planning to apply for a mortgage should definitely investigate their credit history.
The Crucial 80% LTV Threshold
You should always aim to have an LTV of below 80%
This will save you a lot of money
Lower LTV ratios mean lower interest rates
An LTV below 80% will allow you to avoid private mortgage insurance (PMI) too
The traditional way of avoiding higher LTVs is to put down a deposit of 20% when you buy a home so that you can reduce the total amount you pay over the term of the mortgage
You don’t have to do that though, there are other ways to save money on your mortgage and reduce the LTV.
One option is to take out a first and a second mortgage. The total (or ‘combined loan to value ratio’) of the two mortgages may be above 80%, but each mortgage will have a lower loan to value.
For example, you could borrow $800,000 on one mortgage and $100,000 on another, for a combined loan to value of 90% on a $1,000,000 property. The bigger of the two mortgages, however, would still be just 80%. The CLTV would be 90% because the other mortgage has an LTV of 10%.
Combo mortgages can help to keep the LTV on each mortgage below key thresholds, and this will help you to avoid higher interest rates and the misuse of private mortgage insurance. There are limits on the size of the total loan that you can take out and you will not usually be able to borrow more than the total value of the property. Many lenders prefer people to not borrow more than 90 percent of the property value, depending on your credit history.
There are different limits depending on the type of home that you want to buy.
FHA loans can often be as much as 96.5%
Conforming loans may reach 87%
VA and USDA loans are often allowed to be zero deposit/100% LTV
If you are buying an investment property, jumbo or cash-out refi then you are likely to see more restrictions on the total amount that you can borrow. Non-government loans are likely to be more restrictive than a government one as well. Refinances can sometimes be less flexible than loans to purchase a house in the first place.
Loan amounts are increasing. It wasn’t all that long ago that the limit for an FHA loan was 95%, but now Fannie Mae and Freddie Mac are in competition against the FHA which is driving loan amounts up.
Veterans and those who live in rural areas may be able to borrow more than those who are in bigger cities. It is a good idea to shop around, wherever you are buying a property because there are a number of options to buy properties from private lenders that may be willing to offer more flexible financing. There is no need to head straight to the lenders that are advertising on TV. A little legwork could save you a lot of money.
If you have a higher LTV than you would prefer, the good news is that there are a number of ways that you could potentially reduce it.
Borrowers Have Options to Lower Their LTV
For a home purchase loan, use a larger downpayment. Ask for gift funds as a way of making your downpayment greater. Break your mortgage up into a combo loan. Make additional payments or put in a lump sum payment and refinance so that the LTV is lower when you apply. Wait for amortization and appreciation of the home to reduce your LTV over time.
If you’re purchasing a new property, then the main option is to save and have a bigger downpayment. Yes, that’s not always easy, but it is often possible.
Ask if someone is willing to act as a co-borrower for you or to gift you the money.
Alternatively, look into ways of breaking up the financing into separate loans, and having a first and second mortgage.
With refinancing, you have the option of paying the balance down more aggressively before you apply. Make extra mortgage payments, or wait a bit longer before refinancing.
This could help you if you are close to the LTV threshold, or you need to get below a conforming loan limit.
It’s important to pay close attention to the LTV, because if it is above 80% then you may be paying more than you need to. There are other thresholds, too, where if you can reduce the LTV you may pay less interest.
If you aren’t under urgent need to refinance, then why not take the zero effort approach to reduce your LTV. Just sit back and watch as your house value increases over time. This will lower the LTV in the process. Of course, that isn’t guaranteed to happen. Home values can fall as well as rise.
In general, real estate prices rise over the long term, so your best bet is to be willing to ride out the changes, and to refinance at a time when it is financially suitable for you.
With people who are looking for a cash-out refinance, a jumbo loan, or to acquire some investment property, there are far more restrictions. The Loan to Value is likely to be limited to 70 or 80% at most.
Be aware that if you borrow a lot of money you are taking a big risk. There are borrowers who are now in negative equity because they owe more on their current mortgage than the value of the property today. This can happen for many reasons, and since the housing market is cyclical, you can never be sure that your ‘expensive’ house today will still be in demand in ten year’s time.
Having negative equity (an LTV ratio that is over 100%) is not a problem if you can meet the repayments on your mortgage and you are not planning on moving. It is a problem if you need to move home or if you need to refinance your mortgage. It’s also a problem if you are on a mortgage that is not fixed rate, and the lender charges you more because your LTV is so high.
The Home Affordable Refinance Program has helped a lot of ‘underwater’ homeowners to get back into the black by refinancing on a lower rate without a limit to their LTV. You will need to have a loan that is under Fannie Mae or Freddie Mac if you want to take advantage of that refinance option. There are similar options such as FHA streamline refinance for FHA loans or the VA IRRRL for VA mortgages.
Underwater borrowers can recover. It may take them some time to get back to the same financial standing as someone who bought when the property market was low, but it is possible for them to build equity if they are patient and think long term.
Home buying should not be a hasty decision. It is something that you should work on steadily.
Remember the following:
Lower LTV ratios mean bigger savings
You will usually get lower interest rates with bigger deposits
Long term, you will pay less to repay the mortgage
Put more of your money towards paying off the principle by having a low LTV
Keep your LTV under 80% to avoid PMI
You will have access to more lenders if you have a lower LTV
Even people who have a poor credit rating can save money by using a bigger deposit
You are more likely to get approved for a mortgage if the lender sees you as being lower risk.
Before making a decision, let one of the experts at The Texas Mortgage Pros help you find out exactly what loan is best for you. Contact us today Or Call Us @ (866) 772-3802