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Understanding Mortgages


Understanding FHA Mortgages Can Help You Get One On Your First Try

The road to homeownership is paved with a plethora of possibilities. Thanks to low-interest financing and closing costs that sellers often agree to pay or split with the buyer, many deals are available if you know where to look and work in close consultation with your lender. In fact, in a recent survey conducted by the National Association of Realtors, nearly two-thirds of Americans believe that the current market is a favorable one to buy. Such optimism may be due to a variety of encouraging developments, such as higher incomes, favorable lending terms and growth in available inventory.

However, with so many loan options out there, it can be difficult to determine which mortgage avenue to pursue. A good place to start is with an FHA mortgage. You've probably heard of this mortgage type before, as it's one of the longest-running home loans out there, around since way back in the 1930s. But have you ever wondered how to actually get an FHA mortgage? The easiest way is by understanding what they're all about. That's what you're about to find out, which can help you better determine if this potential pathway to homeownership is worth traveling down.

But before we get into that, it's helpful to understand what the FHA is and how this government organization works in partnership with private lenders to help more people achieve what remains the American dream.

What is an FHA loan and what's required in order to qualify?

An arm of the Department of Housing and Urban Development, the Federal Housing Administration is a government organization whose primary role is one of oversight. Established in 1934 during the Roosevelt administration, the government agency created FHA loans the same year it debuted.

Instead of selling mortgages directly, the FHA insures FHA loans that are made available through private lenders upon approval. By "insure," this means that should an FHA loan borrower default, the agency provides assurances to the lender that whatever amount remains outstanding will be paid off in its entirety. This added certainty is part of what makes FHA loans popular with first-time homeowners because the terms tend to be looser, which also makes it a bit easier to qualify for an FHA loan versus a conventional loan, for example.

FHA loans require many of the same qualifications that conventional loans do - such as proof of employment, bank statements, two years' worth of tax returns and details of your credit history. However, the extent or degree of those requirements aren't as strict.

Take your credit score as a classic example. Generally speaking, the higher your credit score is, the greater your chances are of being approved, provided the other aspects of your finances all check out. But if your credit score isn't quite as high as you'd like it to be, you may still be approved for an FHA loan.

How does an FHA mortgage compare to a conventional mortgage?

There are a lot of similarities that FHA loans have to conventional loans. Understanding this fact can provide further instruction on how to get an FHA mortgage and determining which  mortgage product is the right one for you.

In addition to both being highly popular mortgage products, their interest rates come as either fixed or variable, down payments are highly affordable - as low as 3.5% for FHA loans - and the length of the loan periods can run between 10 and 30 years.

Overall, though, FHA loans and conventional loans actually have more differences than likenesses. The biggest distinction lies in the fact that conventional loans aren't guaranteed by the federal government. This means that if you were to default, your lender would be on the hook for what has yet to be paid off. As a result of this, it's generally more difficult to gain approval for a conventional loan than it is for an FHA loan.

How does debt-to-income factor into obtaining an FHA mortgage?

There's no magic number, action or sheet of paper when it comes to how to get an FHA mortgage as seamlessly as possible. Every person, situation and FHA loan differs. One of the factors used in approval assessment is your debt-to-income ratio, or DTI. This is a calculation that assesses how much of your earnings goes toward paying down debt on a percentage basis. The higher the figure, the more that you spend on payments. For purposes of mortgages, "debts" are considered credit card bills, credit lines, auto loans, unpaid tuition and other installment loans. Utility bills are not factored into this equation.

Again, there's really no magic number in terms of what DTI ratio you need to be approved for an FHA loan. However, it may not be as low as you think it needs to be. According to the previously referenced FHA report, in 2018, roughly 1 in 4 FHA loans -  went to applicants with a DTI ratio of 50% or more. This represents the largest percentage of FHA loans with DTI ratios above this threshold since the turn of the century. This doesn't necessarily mean anyone with a DTI at or higher than 50% will be approved, of course, but it does further the point that FHA loans are designed to be more lenient when it comes to approval, especially as they compare to conventional loans.

You can calculate your DTI on your own by adding up all your monthly payments (not including utilities, as previously mentioned) and dividing that total by how much you earn each month before taxes are taken out.

What does loan-to-value ratio mean and how does it apply to buying a house?

Another ratio FHA lenders use when evaluating mortgage borrowers' potential purchase of a home is the loan-to-value ratio or LTV.  Like DTI, the LTV ratio is another financial calculation that lenders use, only this one occurs closer to the actual purchase of a house you're interested in. Although it may sound complicated, it's actually pretty simple: It's the size of the loan you seek to obtain versus how much of the house you're interested in buying out of pocket. You divide the amount of the loan by the house's value to get your answer.

Here's an example that can provide added clarity. Say the house you're interested in has a purchase price of $250,000 and you want to put 5% toward it as a down payment, or what amounts to $12,500. The LTV ratio in this scenario would be 95% because you're coming up with 5% of the property's cost.

The higher the percentage, the more risk the lender assumes. For FHA loans, the maximum loan-to-value ratio allowed is 96.5%. This means that you can make a down payment of as little as 3.5% with a loan backed by the Federal Housing Administration.

Is there a maximum loan amount with an FHA mortgage?

If one overarching rule applies to real estate in general, it's the fact that there's a lot of flexibility as it pertains to obtaining a mortgage. A classic example of this is FHA loan limits, which have been known to fluctuate over the years.

For example, the FHA loan limit ceiling rose in high-cost areas last year to $726,525, the government agency announced last December. That's up from a previous ceiling of $679,650. For low-cost areas, the limit among single-family units also rose, to $314,827.  However, in places like Alaska and Hawaii - where the cost of living tends to be a bit more expensive - the maximum loan amount is $1.08 million.

The reason for the wide variation in FHA loan limits is due to the disparity in asking prices from one portion of the country to the next. For instance, in the Northeast, the median price for a single-family residence this past August was $303,500, according to the latest data available from the NAR. But in the Midwest, a median-priced residence went for $220,000. That's substantially below the Northeast, despite jumping over 6.5% from a year earlier.

In short, if you're wondering how much mortgage you can get for your money, your best course of action is to ask your FHA lender. They'll give you a more precise figure, which will largely depend on where you plan on buying. The same goes for closing costs you may accrue. What those are and their amounts will largely hinge on the state you live in or plan on moving to if you're purchasing a place the next state over or one on the opposite side of the country. Generally speaking, as the loan amount increases, so too do average closing costs.

Armed with these facts and figures, you should have all the information you need for how to get an FHA mortgage and whether your current circumstances make you an ideal candidate. If you're still unsure, your loan officer  will be more than happy to point you in the right direction toward the right loan that will lead to success.

Understanding Mortgages

Coffee cup on a desktop, with the words 'bank statements'

"You don't judge a book by it's cover" is a particularly relevant phrase when you're in the market to buy a home. Upon reviewing online listings to see what houses are up for sale, the pictures of the interior can make a property look like the quintessential location, with plenty of space, gorgeous cabinetry, hardwood floors and custom ceilings. Yet upon closer inspection - which usually involves actually visiting the house with a real estate agent - there's much more to the story that the pictures didn't fully capture. Flooring that wasn't depicted may be in severe disrepair, the roof may leak and the wooden cabinetry could be shoddily constructed.

Cardboard house with dollar bills next to itIn short, there's just about always more to the story when it comes to a house up for sale that catches your eye. This same reasoning can be applied to bank statements and why mortgage lenders request them when you apply for a mortgage. You may have the necessary assets, gainful employment or income that makes you eligible to buy a home on paper, but your lender needs to get the back story about various factors. What are those factors? That's what we're about to address, along with tips for what you can do to make this chapter of the mortgage application process seamless.

What do mortgage lenders look for on bank statements?

The overarching reason why your mortgage provider requests a copy of a recent banking statement is to ensure that you have sufficient funds for the house that you're looking to purchase. For most people, real estate is the largest purchase they make in their lives. According to the most recent statistics available from the National Association of Realtors, the typical house in the U.S. costs approximately $265,600. And in certain areas of the country, the median is even higher, such as the Northeast and West ($303,500 and $415,900, respectively).

Examining up-to-date financial records enables your lender to determine if you have the means to pay the asking price of a house and the interest from the loan, whether fixed or adjustable, as well as the closing costs associated with the transaction, whether it’s a purchase or refinance.

Although, it goes a bit deeper than that. In addition to finding out what funds are available, they also need to establish from where they derive. Of course, for most people, the money they earn comes from their employer, and are frequently deposited automatically on a weekly or biweekly basis. That's why in addition to the dollar amount that's deposited, bank statements also detail the date of when the deposits occurred. This helps your lender document consistency and a pattern - or lack thereof - as to how much money is coming in on an ongoing basis and how frequently. For instance, some people - such as those in sales - may receive a commission, so the amounts vary from one pay period to the next. Those who are salaried receive a base pay.

Your mortgage lender doesn't have a preference; they just want to ensure everything makes sense as to how you're paid. The bank statement you provide gives them the context they need to make an informed decision regarding loan approval.

Woman holding her hands up in confusionWhat if my lender can't determine where funds derive?

Although you don't hear about it too often in the mainstream media, Americans usually prefer saving to spending. In fact, according to a recent Gallup poll, most people in the U.S. are saving at least a portion of what they earn and 56% consider themselves to be in "excellent" shape in terms of finances.

But say you have $20,000 in the bank and your lender can't adequately determine where that money came from. If this is the case, you might as well not have it at all. In other words, it isn't enough to have a large sum of money stowed away. Your lender needs to authenticate where, when and over how long a time the funds accrued. In some cases, there may be a simple explanation, such as a gift, end-of-year bonus or lottery winnings. In any of these cases, your lender may need to probe further to obtain greater clarity. This is part of the reason why it's a good idea to work in consultation with your loan officer so you can quickly field questions that arise.

What does the term "seasoned" mean in real estate?

In addition to sourcing, your lender will also check to see if the funds you have are seasoned. As the description suggests, seasoned refers to how long assets or funds have been in your bank accounts. Lenders have different definitions as to the precise time frame that makes assets seasoned, but generally speaking, those that are have been in your account for at least a month. Should deposits exist that occurred in fewer than 30 days, they'll likely ask about what the circumstances were. This may be readily identifiable and not require you to elaborate, but it's important to be familiar with your account activity so you have an explanation for newly available funds. 

All that said, what can you do to make this process go smoothly? Here are a few suggestions:

Woman smiling at a cafe tableBe honest

Any relationship is built upon trust, so if you make assertions about what you earn or where money comes from that is untrue, it will likely disqualify you from obtaining a loan. Transparency and honesty are essential.

Know your numbers backwards and forwards

No one knows your financial situation better than you. Familiarize yourself with your bank statement by checking it regularly. Having answers to your lender's questions will help speed things up considerably.

Avoid overdrawing

Your bank statement is ultimately a "statement" as to how you manage your finances. If you make charges that cause a check to bounce, it may raise a red flag for your lender that suggests you're not a good loan candidate.

Bottom-line: Although your bank statement may be just one page of the mortgage application story, it can serve as a summary that will help your lender come to the right conclusion about loan approval - and the beginning of homeownership


Honoring our Veterans

Nov 8
Category | General

Honoring our veterans

Honoring our Veterans

Veterans’ Day is a time to honor and pay respect to those who have served our country. To all veterans, we thank you for your sacrifice and service. Click here for a list of businesses that are offering discounts and complimentary services to veterans in observance of Veterans’ Day.

American flagA history of Veterans' Day:

Germany and the Allied Nations ceased fighting in World War I on the eleventh hour of the eleventh day of the eleventh month. Because of this, November 11, 1918 was known as “the end of the war to end wars.”

The following year, after the Treaty of Versailles was signed, President Wilson named November 11, “National Armistice Day” to honor those who died in service for their country. By 1938, Armistice Day became an official legal holiday in appreciation for those who fought in World War I.

In 1954, after World War II and the Korean War, Congress amended the holiday to be Veterans’ Day, a day to celebrate all veterans.

Remember to take time today to appreciate and thank those who have served our country, it is because of their sacrifice that we are able to experience freedom.

Understanding Mortgages

What makes VA loans special?

The nation's active duty service members and veterans are a lot of things. Loyal. Patriotic. Courageous. Resilient. Strong-willed. Family-oriented. Important. And that's just a handful of the words that come to mind. 

Here's another term that's highly characteristic of America's best and brightest: homeowners. On the surface, you may not think this word applies, given that those currently serving may be forced to relocate themselves at any given time. But as data from the National Association of Realtors shows, former or current members of the military represent roughly 1 in 5 recent homebuyers. And of those buyers who are on active duty, their median age is 34 - quite young compared to the typical civilian buyer (42 years old).

When current and formerly active members of the United States military are looking to buy, they have many options to do so. And when it comes to their preferred mortgage type, one stands supreme: VA loans. Whether you've long been a member of the armed forces or served for only a brief amount of time, VA loans are a great way to enter the housing market affordably and in a manner that's in keeping with your current situation and circumstances. As their title connotes, VA loans are backed by the United States Department of Veterans Affairs. This basically means that should a borrower default, the VA guarantees the mortgage issuer that the loan will be paid off in full.

But there's much more to VA loans than their being supported by the federal government, a fact which on its own make this product a desirable financing tool. Here are a few other elements of VA loans that can help you decide if this mortgage is the one for you and determine whether you're eligible to apply.

No down payment is required
Perhaps the biggest perk of VA loans is borrowers don't have to put any money down up front. A common misconception when it comes to mortgage is the notion that a down payment of 20% or more is required. Not only is this not true, but the actual percentage homebuyers put down is considerably smaller than that, averaging between 3% and 3.5%, according to the NAR. This makes homeownership much more realistic for families who are on a budget, as a 20% down payment on a median-priced home in the U.S. would cost upwards of $53,120 (the current median for an existing home is $265,600). However, even a down payment of 3.5% - the equivalent of $9,285 - is no drop in the bucket, either.

The ability to forego the down payment is part of what makes VA loans so popular. At 56%, most active duty do not put any money down when they buy a house, based on the latest figures from the NAR. Roughly 41% of veterans take advantage of no money down financing as well.

Length of service required varies to be considered eligible
There are roughly 1.3 million men and women who are now on active duty, according to estimates from the Pew Research Center. That's down from 1.4 million in 2010 and 2 million in 1990. Virtually all of them will receive veteran status should they decide to retire from the military. It raises an interesting question: How long do you have to be in the service to be qualified for a VA loan? The answer to this question isn't always clear cut and largely depends on whether the U.S. is in war or peacetime. For example, if it's wartime - a designation that the VA ultimately determines - service time required for VA loan eligibility is usually 90 days. But if it's during peacetime, it's roughly double that at 181 days.

VA loan eligibility may also be contingent on the branch of the military you are or were in. For example, if you're in the National Guard or Reserves, six full years of service is required.

Surviving spouses of service members may also be eligible to apply for a VA loan. But here as well, there are various circumstances that determine when you become qualified. The best course of action if you're unsure is to talk to your lender directly and tell them your situation.

Funding fee replaces private mortgage insurance
Another advantage of VA loans is borrowers usually don't have to purchase private mortgage insurance. Normally, when a buyer takes out a loan and puts down less than 20% of the home's purchase price, they have to buy mortgage insurance to ensure the loan is paid off in the event of default. Such a policy is not mandatory for VA loan borrowers. In lieu of private insurance is a basic funding fee, which is typically around 2% of the home's value. This amount is paid to the VA. However, this amount may be lowered to 1.5% with a down payment of 5% or 1.25% by putting 10% down. The VA Funding Fee can also be financed into the loan amount or paid in cash.

The funding fee may be waived entirely, though, in certain circumstances, such as if your spouse died while in the line of duty or from a disability which stemmed from his or her time in the armed forces. Veterans who have a 10% disability and receive disability checks are also exempt.

If you're in the military or are a veteran, you've achieved quite a bit. A VA loan can put you in position to add "homeowner" to your list of accomplishments. Please contact us to learn more.

Helpful Tips

Cyber Security: Strong Passwords

Best practices for strong passwords:

Cybersecurity is critical, both in your personal and professional life, and passwords are the first line of defense against imposters gaining access to your accounts. The Verizon Data Breach Investigations Report found over 70% of employees reuse passwords at work. The report also states 81% of hacking-related breaches leveraged either stolen and/or weak passwords.

Follow the tips below to make sure that you are setting strong passwords to protect your accounts and information online.

Password Do’s:

  • Use a password manager: Password managers are online services that safely store and manage your passwords. Your passwords will be encrypted, so it is a secure way to keep them all in one easy to find place.
  • Change your password regularly: This will make it less likely that your accounts will be compromised.
  • Make your passwords long: Advanced hackers can use computer programs that run through every combination of numbers and letters. The longer and more complex your password is, the harder it is to crack!
  • Mix up symbols and numbers with letters: An example of this technique is using the number 1 in place of a lowercase letter l.
  • Use nonsense sequences of letters and numbers: This will make it more difficult for someone to guess your logins and harder for advanced technology to crack your passwords.

Password Don’ts:

  • Don’t use the same password for everything: If you do, and an imposter gets your password for one account they can use it for all the other services and platforms you have.
  • Don’t keep passwords in areas people can access: Storing logins in your desk or easy to access places in your computer puts you at risk. Instead use a password manager that encrypts your passwords for you.
  • Don’t use common words or phrases: If the letter sequences you use are found in the dictionary, an intruder will be able to crack your passwords easier.
  • Don’t use personal information: Logins that include birthdays, names of loved ones, or streets you grew up on will make it easy for someone to hack your accounts.

Don’t give your password to anyone: Not even coworkers or good friends.

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