Your debt to income ratio or DTI, is a figure that allows a lender to analyze your monthly spending habits. They use your DTI to determine how you manage your money.
You want your debt to income to be as low as possible to ensure that your chances of being offered a lower rate is better.
How much debt do you have this month?
Think about all of the bills you have to pay for the upcoming month.
Now divide that number by your gross monthly income.
The resulting figure is your percentage of debt to income.
For example, Brandi pays $720 monthly for rent, $235 monthly for her car note, $200 monthly for her car insurance, and she makes about $100 monthly in credit card and utility bills. Brandi earns $4000 every month before taxes. So if we add up Brandi’s debt expenses and divide them by 4000, we get approximately 31%.
An article from consumerfinance.gov recommends keeping your debt to income ratio below 43% based on evidence from studies on mortgage loans. So when our friend Brandi is ready to move from her apartment into a new home, the bank will be eager to get things started for her, knowing that her debt to income ratio is low and that she has the ability to repay her loan.
Debt to income factors
Another factor that can help your debt income ratio is paying your bills on time and in full. Most banks offer the option to have money from your account wired directly to the institution you wish you pay. You can even customize the time and date that the wire will be released. As a result, before applying for a mortgage loan be sure that the job you are currently holding will provide you with the means to pay your current bills and a house payment.
Higher income means more flexibility to play around with financing options. What lenders don’t want to see is that you spend six months at every job and then bail. It shows instability and lenders won’t be so open to lending their money to someone who is in the business of making risky decisions by jumping from job to job.
Be sure to use that steady job to help build your savings. Why? Because of a thing called a Cash Reserve. Your cash reserve is your safety net. Money that you have saved up between your bank accounts will be evaluated by your lender. This extra money lets the lender know that if you fall on hard times or your expenses for some reason go up, you will still have the money to pay your household bills and still make regular payments on your loan, therefore keeping your DTI constant.
What lenders typically look for is a cash reserve that will hold you over for two or more months, so be sure to pad those savings accounts.
The impact of student loan debt
A meaningful proportion of current student loan borrowers will likely be flirting with a risky DTI just from student loan debt. 16% of Student Loan Borrowers Will Likely Have a DTI Over 20% Just From Student Loans. Below shows sample data from Lendedu: 10,000 pre-qualification applicants used.
The above statistics derive from proprietary data provided to LendEDU by student loan lender Funding U. DTI ratios for nearly 10,000 pre-qualification applications for private student loans were calculated by Funding U using metrics like projected first year salary, projected student loan debt upon graduating, and projected monthly student loan debt payments
Debt to income is an important factor when applying for a home loan. Be sure to take this critical component into consideration when you go to speak with your lender.
3 Loan Documents You Should Know
Three Loan Documents You’ll Want to Know
Buying a new home (or refinancing your current home) is a process that requires quite a bit of paperwork. Thankfully, all of the paperwork isn’t thrown at you at once, instead it comes in stages. At each milestone of the loan process (beginning with disclosures and ending with your final loan docs), there is a different wave of documents that you’ll have to read and sign. Depending on your loan terms and any unexpected findings during processing you may even have to sign some documents twice (or as many times as loan terms change). In this article, I’ll provide you with the names and descriptions of a few documents to keep in mind. The following documents are arguably the most important documents that you will encounter during the closing of your mortgage loan.
The Loan Estimate
The Loan Estimate, or LE for short, is a form that you’ll receive after applying for your home loan. You will receive a Loan Estimate from your mortgage lender no later than three days after completing your application. The Loan estimate shows the terms of the loan program you’re applying for, estimated payments based off your desired loan amount, and it shows your closing costs. If you’ve done a mortgage loan before (prior to October 2015), the LE replaces what you formerly knew as the GFE, or Good Faith Estimate. Your loan estimate is designed to clearly explain the cost of closing a loan.
The Closing Disclosure
The Closing Disclosure, or CD for short, is a form that is very similar to the Loan Estimate. The CD has updated fees and loan terms and shows not only what you will pay to close your loan as the borrower, but it also shows what every other party is doing financially. If your lender is giving any kind of credit towards your loan it will show on the CD. The CD also reflects when loan fees will be paid, either before closing, at closing, or by a third party. After you sign your initial Closing Disclosure you have 3 days to ask any questions or change your mind before your final loan docs are drawn up. Every financial transaction that will take place during the closing of your loan will show up on the CD, read it carefully!
The Note in mortgage is the contract you sign at closing that details the amount of your loan, the interest rate, the payment due date, any penalties for late fees and other important financial info regarding your loan. This is the document that marks your home as collateral with your lender. If you were to default on your loan, having signed your Note puts you in a breach of contract and it’s what banks will refer to if you can’t or don’t pay your mortgage. Signing your Note is your promise to pay. Similar to how a car dealer holds the title to your vehicle until you have paid it off, the bank that is lending your home loan holds your Note until your mortgage is paid. Once it’s paid off, you’ll receive a copy (if not the original note) marked “Paid in Full”.
The mortgage loan process can be lengthy and requires a lot of reading and signing on your behalf. It’s important to be familiar with the documents that require the most attention. Proper knowledge and preparation is the key to keeping yourself from getting lost in the mortgage sauce.
When doing your research always be sure to consult great sources. Check out the sources for this article below!
Buying a house is not something you should do without some good financial knowledge and advice. Your first mortgage should be thoroughly thought out and well planned. Now that you’re thinking of purchasing a home, use the next 12-18 months or so to prepare yourself.
Prepare Your Credit Early
Houses are not cheap. In order to pay for one, you’ll have to get a home loan and pay it off in monthly installments. How much you’ll have to pay is dependent upon your mortgage lender and your credit score. You credit can take a while to build and even longer to repair if it’s damaged, so start working on it early. See an article by Megan Ortiz on how to Establish, Raise, and Maintain your credit score HERE . Get into the habit of paying everything on time even if it doesn’t go on your credit report. Make a detailed list or a spreadsheet of all of your financial responsibilities from utility bills to student loans. If you practice good habits, eventually they will become second nature. Be meticulous about getting things paid on time or early if you can. Practice makes perfect.
Pay Off Your Debt
Loan officers are going to calculate your debt to income ratio, so the less debt you have the better. Things like car notes and credit card payments will be looked at and taken into consideration before a lender will agree to give you a loan. If the total amount of the debt you already have plus the debt you will have after being given a home loan will exceed 43% of your total income, you’re going to have a tough time getting someone to lend to you. So be sure to calculate your debt and pay it down to the lowest amount possible.
Visit Valley West Mortgage and Meet with a Loan Officer
Before even looking at homes, it’s a good idea to sit down and chit chat with a loan officer. Let him or her know your intentions, what kind of home you wish to buy and how much you’re willing to spend. He should be able to run some numbers for you and give you a breakdown of how much you can afford and how much his company would be willing to lend to you, including rates and such.You want to feel comfortable doing business with your chosen mortgage company so ask as many questions as necessary. Any loan officer that isn’t willing to take his time with you and answer your questions isn’t worth your time.
Keep Accurate Records
Start keeping your tax returns, pay stubs, and banks statements in a safe and secure place. In this digital age, it’s easy to order your financial documents from the IRS or from your bank, so be sure to acquire and retain a few copies somewhere at home, as these are documents that you will have to provide to your mortgage company when they are processing your loan.
Don’t Over Spend
As we all know, getting a new home is exciting and I’m sure you’ll be busting at the seams with new decorative ideas for your home. However, keep in mind the hefty amounts of money that have to be spent just to purchase the home (closing costs, down payments, etc.). Don’t go spending all of your extra money, preparing for a new home and then end up without a home to put all of your stuff in because your credit report came back indicating that you don’t know how to handle money.
Last but not Least, Keep a Steady Income!
In order to qualify for a loan, you must have a solid work history. The reason why? Because no one is going to want to lend to you if they don’t know that you have the means to repay them. Having a job is good, keeping a job is even better. Another thing is the type of pay you receive. If you’re on salary where you work, you’re more than likely in a career based job, which means you’ve probably been in your position for a while and you aren’t likely to leave that company any time soon. If you’re on an hourly job, and you haven’t been there for a solid 18-24 months you may have a harder time convincing your loan officer that you aren’t going to default on your loan.
The biggest tip that I can give you is to be prepared. Acquiring a new home is a big step, and it’s not one that should be taken lightly. If you aren’t financially ready to buy a new home, take these few steps to get yourself ready. There is nothing more joyous than owning your own home, you deserve it!
WHITNEY RUSH, VALLEY WEST MORTGAGE
What is a Loan?
An amount that you borrow and agree to repay under specific terms.
Usually a formal agreement, loans involve two parties: the borrower and the lender.
The contract specifies the terms and conditions of the loan, and once you sign, you are legally obligated to adhere to it.
Before pursuing and taking out a loan, learn how they work and how you can borrow smartly, safely and at the lowest possible cost.
These are the essentials on how loans work:
You take out a loan when you borrow money from a lender.
The amount you borrow is paid back over time, plus interest and applicable fees.
Lenders will require an application and consider your credit rating, income and other factors when determining loan approval.
Interest rates are determined by your credit rating and other qualifying factors. They can be fixed or variable.
Your loan's term is the amount of time you take to pay back the amount borrowed. Loan terms vary depending on loan type, lender and your credit rating
Considering how much you need to borrow and comparing loan terms across different lenders could help you save money.
The concept of loans is simple on the surface: You borrow money and pay it back. But it's worthwhile to dig deeper. The more you understand, the better you can avoid financial trouble. Being knowledgeable can help you borrow the right amount of money, agree to an affordable payment and payoff term, and find the best interest rate you can qualify for.
There are two basic types of loans: secured and unsecured.
Secured loans are collateralize by money in a separate account, the property you purchase or other assets, such as your home or vehicle. If you don't repay as agreed, the lender can claim the collateral to pay off the debt. Because of this guarantee, the lender's level of risk is low.
Unsecured loans do not require collateral, so they are more of a gamble for the lender.
Common loan types include:
Personal loans can be used to pay for nearly any use, though some lenders have restrictions such as no business or education use. They are often used to consolidate existing debt or finance an upcoming expense, like a wedding. Most are unsecured, though secured personal loans are available.
Business loans are for launching or operating a business. They may be secured (with cash in deposit accounts, property, or business or personal assets) or unsecured.
Student loans are for higher education costs. Federal student loans are offered through the U.S. Department of Education, including undergraduate, graduate and parent loans.
Car loans are used to buy a vehicle such as a car or truck and are typically secured by the vehicle.
Home loans, also known as mortgages,help people buy real estate. As with car loans, the property you purchase usually acts as security for the loan.
The Loan Process
Some types of loans are more involved than others. For example, you may have to submit extensive paperwork in underwriting for mortgages or business loans. But the overall process is fairly consistent with all loan types.
Applying: Some lenders offer prequalification or preapproval, but to actually obtain a loan, you'll ultimately need to fill out an application. A loan application will ask for personal information, typically your name, date of birth, Social Security number, address, phone number and email address. You'll typically need to include income and employment details. Some loan types may require details about your assets (cash in savings and investment accounts, as well as any property) and liabilities (your financial obligations).
Qualifying: Once your application is received, the lender will assess it for approval. This is also known as underwriting. With most loans, this is when a lender will check your credit report and score. At this point, the lender will decide whether you're approved for the loan and if so, what terms you qualify for, such as the loan amount and annual percentage rate. For some loans, like mortgages, loan processing and underwriting may include appraisal, inspection and other steps to gather more information about the property or your financial status.
Disbursement: If you qualify for the loan, the funds will be disbursed to you or a designated recipient, such as a title company for mortgages. Disbursement may also be referred to as loan closing. Disbursement time can vary widely depending on loan type and individual lenders. Online lenders may offer access to funds within 24 hours with an electronic deposit. Disbursement for other loans can take longer. For example, it can take two weeks to two months for a private student loan to be sent to you or your college. Whenever and wherever the money lands, it becomes your debt once it's disbursed.
Paying the balance: The payment amount and due date will be listed on the agreement you signed. A portion of your payment will go toward financing, and the rest will be applied to the principal. If the lender uses the simple interest method, interest will be calculated on the outstanding balance due. If you increase the payment, interest fees will decrease along with your debt. On the other hand, if the lender computes interest prior to, the interest for the term of the loan is already factored in, so you won't reduce interest if you pay the loan early.
The lender may report activity on the loan to the three credit reporting agencies: Experian, TransUnion and Equifax. Paying on time can improve your credit rating and save you money by avoiding late fees.
Refinancing: You might want to change your loan's terms at some point – for example, getting a lower interest rate or extending your loan's repayment term. Refinancing is essentially getting a new loan to pay off an older one, ideally with better terms.
Remember that, as a borrower, you have the power to choose which loan type works best for you. Research the best terms that you can qualify for, then borrow prudently.
We all know things happen that are out of our control. An unexpected medical bill or a car emergency. These types of situations can throw off your whole budget and cause you to worry about missing a mortgage payment or several payments. Do you know what to do?
Contact Your Mortgage Servicer
Always be prepared to tell the why you can't make your monthly payments and whether or not this is temporary or permanent and also provide them with other details about your income expenses. In some cases, your mortgage servicer may have programs in place to help you avoid that dreadful word, foreclosure.
Calling a HUD- approved housing counselor
It's free and can help you find a counselor near you. They can assist to help you figure out if you qualify for help and help you further understand any assistance your mortgage company may have offered you.
Failure to Communicate/Pay
In general, not paying your mortgage will be reported by your lender to the three major credit bureaus and they will lower your credit score. In addition, after a grace period (generally a week to 15 days after the payment due date), a late fee will be added on to the payment you failed to make.**
When you're going through a situation like this, it is imperative to watch out for scams. Never pay anyone to help you to avoid foreclosure. They might tell you they'll save your home foreclosure when they're really just taking your money.
If and when this ever happens make sure you're in contact with your mortgage servicer. They're more likely to work with you if you let them know before you miss a payment.some lenders being willing to offer informal forgiveness or being willing to hold off on late fees or reporting to credit agencies, in some cases people can qualify for forbearance programs. These are formal programs where people facing financial problems can miss a payment or make a lower payment for a period of time while they sort out financial problems.**
* Servicer- The company you make your payments to.
An appraisal is a document provided by an appraiser (the person who conducts the appraisal report) that provides a professional estimate of the value of your home.
Appraisals are conducted by a third-party appraiser who is completely objective in their process. Appraisers do not work in favor of the lender nor the borrower. They simply conduct the appraisal and produce their findings.
Appraisals are most often conducted two ways. The first way an appraiser can conduct an appraisal is by noting comparables. Comparables, or comps for short, are properties within the neighborhood of the home you’re buying that are similar to yours. The appraiser will use the values of the similar properties nearby to determine the value of your home. The second way is by estimating how much it would cost to replace your home should it burn down or be otherwise destroyed. The appraisal will compile all of the findings of the appraiser including:
Comparisons with homes near the subject property
Notes about the real estate market in the area as a whole, including the ages of the homes and the average selling prices of the homes nearby
Notes about the appearance of the inside, outside, and surrounding area of your home
Notes about any visibly unfavorable characteristics about the home like cracked concrete or damaged windows
Pictures of everything that adds value to the home including, bedrooms, appliances, and fixtures
Why Lenders Need Appraisals
Lenders do not want to dish out more than the actual market value of the subject property. An appraiser’s goal is to determine that value. With this figure, the lender knows how much the property will sell for if you default on your loan. They also know how much they can lend to you without taking a loss if you default.
For example: If the subject property is appraised at $150,000 – that’s how much it will sell for on the open market. If your lender gives you a loan of $175,000 and you default on your loan, they now have to try to sell the home at a higher amount than what its appraised for, which can be difficult. If they end up selling the home for the actual market value, they’ve just lost $25,000. It is for this reason that lenders usually give a loan amount that is at or under the appraised value.
Why Borrower’s Need Appraisals
Appraisals are usually buyer paid and can be paid for at closing or during the application process. If you’ve signed a contract to buy a new home for $200,000 and the appraisal comes back valuing the home at $150,000, you should negotiate with your lender to lower the loan amount because you’re paying more for the home than it’s actually worth.
Overall, appraisals are a measure of protection. They ensure that neither party is lending or spending too much during the purchase process of a home.
When doing your research, always be sure to cite great sources! Check out the sources for this article below!
The big question in the mortgage industry is when the rates are going to go up. There’s been talks about it being in March which may be the truth. The Federal reserve is looking to raise its benchmark interest rate this month as long as the economic data remains strong.
The Federal Reserve has hinted March 14-15 will be the meeting that could bring a rate hike. Rate hikes are likely to rise faster this year as the economy appears to be growing with few hurdles and the risks have receded substantially. We will soon see what impact this will have on the industry.
Missing a payment on your mortgage loan may seem like the end of the world. In most cases you know ahead of time that you are going to miss a payment. In a more drastic scenario you may be faced with a situation where you have to use your mortgage money for some other dire expense at the last minute. Either way things happen, and lenders know that. If you’ve reached the point where you can’t pay your mortgage it’s probably safe to assume that your savings are running low and your other bills may be suffering as well. Don’t let things get out of hand. Instead, take control of the situation before it becomes financially overwhelming. Begin by speaking to your lender. It’s imperative that you let them know your financial situation before you actually miss your payment. This is why it’s important to choose the right lender before actually taking out a mortgage loan.
You need to know that if a time of struggle comes, your lender will have your back. Find comfort in knowing that you are not the first nor will you be the last person to miss a mortgage payment. Your lender should be able to design a payment plan to best suit your needs. A payment plan will keep you mortgage paid, keep your lender happy, and keep your credit in good standing.
Missing a Payment is just a bad idea
It’s NOT okay to simply ignore the issue. Ignorance is not always bliss. Banks are experts at knowing where their money is and when it should be coming in, and it doesn’t take them long to figure out when some of it is missing. Some banks will allow a grace period of a few days for you to provide payment without incurring a late fee. Other lenders may even let you skip a payment and make up for it the following month.
Ultimately, non-payment of your loan can and most likely will lead to foreclosure. However, there are steps and programs out there in existence to help you stay current with your payments. Your home loan is one of the biggest investments you will ever make. Because of this, your mortgage payment is going to be amongst the highest of your monthly expenses. The best advice we can give to prospective and even current borrowers is to plan ahead by making sure that you have your own financial safety net. This is one of the things that lenders will check for before granting you a home loan. Don’t deplete that savings account just because you got approved for your loan. You never know when it might come in handy.