Mortgage

Q&A

Obtaining a mortgage in today's ever-changing market is often complicated. Numerous products serve varying needs depending on a home owner's future income, length of occupancy, and current real estate trends. Here are answers to some of the most common questions about mortgages:

Q: What advatages does pre-approval offer to home buyers?

A: When a borrower applies for a mortgage before finding a house, and receives a written commitment from a lender to finance a suitable property when found, the buyer has several advatages including: House hunting made easy. Pre-approval  lets the home buyer know exactly how much he or she can afford. Home finding is focused on a precise price range.

Cash buyer status. The buyer has the increased negotiating leverage of cash buyer status, because the mortgage is already in place.

Accelerate the mortgage process. Significant time is saved because a large part of the mortgage has already been processed.

Q: How do underwriting or qualifying ratios work?

A: Qualifying ratios are precentages of a home buyer's gross income that can prudently be allotted for debt. These calculations help the mortgage lender determine whether the borrow will be able to make mortgage payments in a timely and consistent way. The most commonly used rule of thumb is 28% or 36%, which limits the sum of monthly mortgage principle, interest, property taxes and insurance payments (PITI) to 28% of the home owner's gross monthly income and further limits the total of all long-term debt payments to 36%. Lenders may relax these limits to allow a financially stable borrower to qualify for a larger loan amount. Compensating factos that count include an excellent credit history, a consisten savings pattern, or a future increase in income. Moreover, borrowers who are being relocated by their employers are eligibal for qualifying levels of 33% and 38% (vs. 28 and 36) because as a group they show a track record of lower risk of default, and they move more frequently than other home owners.

Q: What costs are incurred at a typical closing?

A: In addition to the "points" you elect to pay when applying for the mortgage, at closing you will be required to pay a down payment, closing costs and prepaid costs. Points are fees paid to the lender to obtain a lower interest reate. A point equals one percent of the loan amount. Points are usually paid at the time of closing. Discount points are paid by the buyer to reduce the loan's interest rate. Paying one discount point  normally reduces the rate by 1/8%. If the home buyer plans to keep the residence for five more years it is worthwhile to pay as many discount points as possible to reduce the monthly payments and achieve greater savings over the life of the mortgage.

The down payment is the difference between the price of a house and the mortgage amount. Part of the down payment is usually paid as "earnest money", or deposit, when the contract is signed by both buyer and seller. The balance of the down payment is due at the closing.

Closing costs are the other charges the buyer must pay to obtain a loan. These usually include taxes, which are charged in most states, and title insurance, which protects the borrower and the lender in the event anyone can prove that the borrower is not the proper owner of the house.

Q: How much will these closing costs actually be?

A: If the mortgage is for more than 80% of the price of the home, private mortgage insurance protecting the lender may be required. Closing costs also include the cost of a property appraisal and credit report. Prepaid items are held in an escrow account for the borrower. The down payment will depend on the mortgage you have obtained. It can be as little as 3% (and occasionally, even zero) or as much as 30% or more of the purchase price. Points will add another 1% to 3% of the purchase price. In some areas, closing costs add up to another 5% of the mortgage ammount and in the New York area, may be even higher. That means, for example, if you buy a $90,000 home you will need at least $2,700...and more likely...$4,500 for a down payment, plus another $5,000 to $7,500 for closing costs. When applying for a mortgage, your mortgage counselor will provide a good faith estimate of the closing costs as part of the applications package you receive.