Lender Checklist: What You Need for a Mortgage
□ W-2 forms — or business tax return forms if you're self-employed — for the last two or three years for every person signing the loan.
□ Copies of at least one pay stub for each person signing the loan.
□ Account numbers of all your credit cards and the amounts for any outstanding balances.
□ Copies of two to four months of bank or credit union statements for both checking and savings accounts.
□ Lender, loan number, and amount owed on other installment loans, such as student loans and car loans.
□ Addresses where you’ve lived for the last five to seven years, with names of landlords if appropriate.
□ Copies of brokerage account statements for two to four months.
□ Copies of your most recent 401(k) or other retirement account statement.
□ Documentation to verify additional income, such as child support or a pension.
□ Copies of personal tax forms for the last two to three years.
Specialty Mortgages: Risks and Rewards
In high-priced housing markets, it can be difficult to afford a home. That’s why a growing number of home buyers are forgoing traditional fixed-rate mortgages and standard adjustable-rate mortgages and instead opting for a specialty mortgage that lets them “stretch” their income so they can qualify for a larger loan.
But before you choose one of these mortgages, make sure you understand the risks and how they work.
Specialty mortgages often begin with a low introductory interest rate or payment plan — a “teaser”— but the monthly mortgage payments are likely to increase a lot in the future. Some are “low documentation” mortgages that come with easier standards for qualifying, but also higher interest rates or higher fees. Some lenders will loan you 100 percent or more of the home’s value, but these mortgages can present a big financial risk if the value of the house drops.
Specialty Mortgages Can:
· Pose a greater risk that you won’t be able to afford the mortgage payment in the future, compared to fixed rate mortgages and traditional adjustable rate mortgages.
· Have monthly payments that increase by as much as 50 percent or more when the introductory period ends.
· Cause your loan balance (the amount you still owe) to get larger each month instead of smaller.
Common Types of Specialty Mortgages:
· Interest-Only Mortgages: Your monthly mortgage payment only covers the interest you owe on the loan for the first 5 to 10 years of the loan, and you pay nothing to reduce the total amount you borrowed (this is called the “principal”). After the interest-only period, you start paying higher monthly payments that cover both the interest and principal that must be repaid over the remaining term of the loan.
· Negative Amortization Mortgages: Your monthly payment is less than the amount of interest you owe on the loan. The unpaid interest gets added to the loan’s principal amount, causing the total amount you owe to increase each month instead of getting smaller.
· Option Payment ARM Mortgages: You have the option to make different types of monthly payments with this mortgage. For example, you may make a minimum payment that is less than the amount needed to cover the interest and increases the total amount of your loan; an interest-only payment, or payments calculated to pay off the loan over either 30 years or 15 years.
· 40-Year Mortgages: You pay off your loan over 40 years, instead of the usual 30 years. While this reduces your monthly payment and helps you qualify to buy a home, you pay off the balance of your loan much more slowly and end up paying much more interest.
Questions to Consider Before Choosing a Specialty Mortgage:
· How much can my monthly payments increase and how soon can these increases happen?
· Do I expect my income to increase or do I expect to move before my payments go up?
· Will I be able to afford the mortgage when the payments increase?
· Am I paying down my loan balance each month, or is it staying the same or even increasing?
· Will I have to pay a penalty if I refinance my mortgage or sell my house?
· What is my goal in buying this property? Am I considering a riskier mortgage to buy a more expensive house than I can realistically afford?
Be sure you work with a REALTOR® and lender who can discuss different options and address your questions and concerns!
5 Factors That Decide Your Credit Score
Credit scores range between 200 and 800, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score:
1. Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filing, liens, and collection activity also impact your history.
2. How much you owe. If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits.
3. The length of your credit history. In general, the longer you have had accounts opened, the better. The average consumer's oldest obligation is 14 years old, indicating that he or she has been managing credit for some time, according to Fair Isaac Corp., and only one in 20 consumers have credit histories shorter than 2 years.
4. How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.
5. The types of credit you use. Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example.
Get Your Finances in Order: To-Do List
1. Develop a household budget. Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills, and groceries.
2. Reduce your debt. Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt — car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income.
3. Look for ways to save. You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often.
4. Increase your income. Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want.
5. Save for a down payment. Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment.
6. Job. While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.
7. Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the entire balance pro
Your Property Wish List
What does your future home look like? Where is it located? As you hunt down your dream home, consult this list to evaluate properties and keep your priorities top of mind.
□ Neighborhoods
What neighborhoods do you prefer?
□ Schools
What school systems do you want to be near?
□ Transportation
How close must the home be to these amenities:
· Public transportation
· Airport
· Expressway
· Neighborhood shopping
· Schools
· Other
□ Home Style
· What architectural style(s) of homes do you prefer?
· Do you want to buy a home, condominium, or townhome?
· Would you like a one-story or two-story home?
· How many bedrooms must your new home have?
· How many bathrooms must your new home have?
□ Home Condition
· Do you prefer a new home or an existing home?
· If you’re looking for an existing home, how old of a home would you consider?
· How much repair or renovation would you be willing to do?
· Do you have special needs that your home must meet?
5 Things to Know About Homeowner’s Insurance
1. Know about exclusions to coverage. For example, most insurance policies do not cover flood or earthquake damage as a standard item. These types of coverage must be bought separately.
2. Know about dollar limitations on claims. Even if you are covered for a risk, there may be a limit on how much the insurer will pay. For example, many policies limit the amount paid for stolen jewelry unless items are insured separately.
3. Know the replacement cost. If your home is destroyed you’ll receive money to replace it only to the maximum of your coverage, so be sure your insurance is sufficient. This means that if your home is insured for $150,000 and it costs $180,000 to replace it, you’ll only receive $150,000.
4. Know the actual cash value. If you chose not to replace your home when it’s destroyed, you’ll receive replacement cost, less depreciation. This is called actual cash value.
5. Know the liability. Generally your homeowner’s insurance covers you for accidents that happen to other people on your property, including medical care, court costs, and awards by the court. However, there is usually an upper limit to the amount of coverage provided. Be sure that it’s sufficient if you have significant assets.
Questions to Ask Home Inspectors
Before you make your final buying or selling decision, you should have the home inspected by a professional. An inspection can alert you to potential problems with a property and allow you to make an informed decision. Ask these questions to prospective home inspectors:
How experienced are you? Ask how long inspectors have been in the profession and how many inspections they’ve completed. They should provide customer referrals on request. New inspectors also may be highly qualified, but they should describe their training and let you know whether they plan to work with a more experienced partner.
Do you focus on residential inspection? Make sure the inspector has training and experience in the unique discipline of home inspection, which is very different from inspecting commercial buildings or a construction site. If your customers are buying a unique property, such as a historic home, they may want to ask whether the inspector has experience with that type of property in particular.
How long will the inspection take? On average, an inspector working alone inspects a typical single-family house in two to three hours; anything significantly less may not be thorough. If your customers are purchasing an especially large property, they may want to ask whether additional inspectors will be brought in.
What’s the cost? Costs can vary dramatically, depending on your region, the size and age of the house, and the scope of services. The national average for single-family homes is about $320, but customers with large homes can expect to pay more. Customers should be wary of deals that seem too good to be true.
What type of inspection report do you provide? Ask to see samples to determine whether you will understand the inspector's reporting style. Also, most inspectors provide their full report within 24 hours of the inspection.
Will I be able to attend the inspection? The answer should be yes. A home inspection is a valuable educational opportunity for the buyer. An inspector's refusal to let the buyer attend should raise a red flag.
Source: Rob Paterkiewicz, executive director, American Society of Home Inspectors, Des Plaines, Ill.