Mortgage Self Assessment Guide

The more you know about home loans and the mortgage lending process the less likely you are to make a costly mistake. Your home may be the biggest investment you ever make. Since you’ll probably be paying on this investment for 30 years, it’s worth the time to do the research necessary to become an informed purchaser.

How much does home insurance cost? How can I avoid home insurance when purchasing a home?

If you get a conventional loan, you will have to pay private mortgage insurance (PMI) unless you have enough money to make a 20% down payment. PMI helps protect the lender in the event you default on your loan. It will cost you between 0.5% and 1% of your loan amount annually. PMI is usually added to the mortgage payment you make every month.

Example: If you borrow $100,000 and your PMI is 1%, you will pay $1,000 a year or $83.33 monthly.

If you are getting an FHA loan, you will pay mortgage insurance upfront and then every month. You will pay 1.75% of the mortgage amount at closing. This amount can be rolled into your loan. You will also pay from 0.45% to 1.05% annually in 12 monthly installments.

Example: You borrow $150,000. Your upfront insurance premium will be $2,625. Your monthly premium will be from $675 to $1,575 a year.

At closing, you will probably be required to show proof you have paid a year’s worth of homeowner’s insurance. Lenders will not release the money without it. If you have car insurance, contact your agent and discuss bundling your car and home in one package. You may get a discount.

Will my debt be an issue? How much does my debt influence the mortgage I will be able to get?

Before a financial institution will lend you money it wants to have some confidence you will be able to pay it back. If you have too much debt, you won’t get a loan. For a conventional mortgage that means a debt-to-income ratio of no more than 43%. FHA allows a debt-to-income ratio of 50%, but that’s the maximum. The lower your debt-to-income ratio is the more likely you are to get a loan with a low, fixed rate of interest.

To figure out what your debt-to-income ratio is, you add up your debts (don’t include monthly expenses like food and dry cleaning), and divide the total by your gross income (salary before taxes). If the percentage you get is high, your best bet is to pay down your debt before you go shopping for a home loan.

What about a down payment? Do I need money to put down on a mortgage? Can I get a home with no money down?

If you’re getting a conventional loan, you will need a minimum of 3% of the purchase price as a down payment. Your credit score will have to be at least 620 to qualify for that kind of down payment. If your credit score is lower, you may be required to make a 10% down payment.

If you are looking at an FHA loan, you will need a minimum of 3.5% of the purchase price to put down. Your credit score will need to be 580 for this down payment.

The good news is that almost all states offer grants for qualified first time home buyers to help with down payment and closing expenses. You may also qualify for a second mortgage to cover the cost of your down payment. A lot of these second mortgages are deferred until a date in the future or forgiven entirely after you have lived in your house for a period of time.

Do I have the necessary paperwork? What paperwork will I need to have when I go through the mortgage process?

The documents you need may vary depending on your lender, but they will most likely include the following:

• Identification and Social Security card
• Proof of income (for all sources of income)
• Pay stubs
• Federal tax returns
• Debt information (car payments, credit card balances, student loans, etc.)
• Bank Statements
• Real estate holdings information

Who can help me? I’ll want someone to help me assess my mortgage options. Who can I go to for help?

You have to help yourself first. That means knowing your credit score and correcting any errors on your credit reports. You should know exactly how much debt you have and what your debt-to-income ratio is. If your debt is too high, pay it down.

Assess how much money you have to use for a down payment, and if it’s not enough, begin a savings plan. If you have just started a new job, you may want to wait six months or so so you can show a stable income.

Once you are in a position to start house hunting, your local mortgage broker will be a good resource for information about mortgage options. State College mortgage broker Principle Home Mortgage has experience with all types of mortgage options, and they specialize in exceptional customer service. Contact them at their State College offices today at (814) 308-0959.