Everything You Need to Know About Home Lending: 10 Questions You Should Be Asking
- How can I determine how much home I can qualify for? Through our online pre-qualification process, a Loan Officer will work with you to provide an approximate amount of money you can borrow BEFORE you look for a new home. Once you provide more information and allow your Loan Officer to run your credit report and verify your assets and income, your loan application will be submitted to our automated underwriting system for pre-approval. We can even assist you to obtain a complete written credit approval (subject to an appraisal) before you make an offer on a home.
- What are income and debt ratios? Your income ratio is your total monthly housing expense divided by your pre-tax monthly income. Your debt ratio is your total monthly housing expense plus any recurring debts, such as monthly minimum credit card payment, car payments or other loan payments, divided by your monthly income. Standard underwriting guidelines suggest a maximum of 28% for your income ratio and 36% for your debt ratio. However, these ratios may vary based on your loan program, your financial situation and the amount of your down payment.
- What are cash reserves? Your cash reserves are the funds available to you after your loan closes. They demonstrate your ability to make payments on your loan, and different loan programs have varying cash reserve requirements. Some programs may require you to have assets equal to two to six months of your mortgage payment. Larger cash reserves can be a strong compensating factor, as they are indicative of your ability to consistently keep up with your mortgage payments. Depending on your loan program, cash reserves can be in the form of cash, stocks, bonds or investments.
- What is mortgage insurance? Mortgage insurance insures Lenders in the event of a borrower’s foreclosure. It is paid for by the borrower, and allows Lenders to grant loans that they would otherwise not consider. Depending on credit scores and loan structure, mortgage insurance may be required when the down payment is less than 20%.
- What are VA loans? Can I qualify for a VA loan? VA loans are for veterans who meet certain criteria, but active military personnel may also be eligible. They are guaranteed by the Veteran’s Administration, and they do not require a down payment. In some cases, the seller may be willing to pay for all or part of the closing costs, allowing qualified veterans to purchase a home with little or no money down. To learn if you qualify for a VA loan, obtain an 1880 Form from your Loan Officer. Once you have completed the form, submit the 1880 Form and your discharge papers or DD214 to your local VA office to determine your eligibility.
- What if I have had credit problems in the past or have filed bankruptcy? A good credit history is important because it assures the Lender of your intention to repay your loan. However, a perfect credit history is not necessary. If your credit score is low, there are steps you can take toward improving your score. Contact your Loan Officer for the different program options available.
- What if I recently obtained a new job? While loan program guidelines look for a two-year job history within the same field, a change to a better position is considered favorable. If you are a recent college graduate, you may be able to obtain a loan without a two-year work history.
- What does “loan-to-value” mean? Loan-to-value (LTV) is the amount of the loan divided by the lesser of the sale price or appraised value. If you pay 15% of the total cost of the home as a down payment, you would only need to borrow 85% of the total sales price. Therefore, your LTV would be 85%.
- How do I “lock in” my interest rate? Notify your Loan Officer, and they can lock in the interest rate recently quoted to you. You will be provided with a written Interest Rate and Price Determination Agreement, which details the interest rate and terms of the loan you have requested, as well as the period of time for which the rate is locked. This period may vary between 10 and 60 days, depending on your projected closing date.
- What are an 80/10/10 loan and an 80/15/5 loan? An 80/10/10 is a loan structure that allows for an 80% first lien, a 10% second lien and a 10% down payment. Usually, when a borrower pays less than 20% for a down payment, they are required to pay for mortgage insurance. The 80/10/10 allows for 90% financing without mortgage insurance and splits the loan amount into two liens. In the same manner, an 80/15/5 is an 80% first lien, a 15% second lien and a 5% down payment.
This Q&A is courtesy of The Heyl Group’s preferred lender, Cornerstone Home Lending.
You can reach Cornerstone Home Lending at 469-304-2465 if there are more questions that you would like to ask about the home lending process.
If you’re in the market to buy or sell in Austin, please contact us. You can reach us at (512) 537-6739 or go ahead and email us at email@example.com.
There are many great Austin area homes for sale. Click here to perform a full home search, or if you’re thinking of selling your home, click here for a FREE Home Price Evaluation so you know what buyers will pay for your home in today’s market.
You may also call us at (512) 537-6739 for a FREE home buying or selling consultation, so that we may answer any of your real estate questions.