There's no need to point out that the mortgage landscape has dramatically changed in the last couple of years. Gone are the breezy days of getting 100 percent financing with little documentation. Today, the financing rules are stiffer and there are fewer investors buying loans on the secondary market. There was a time when Wall Street investors bought home loans, repackaged them, and sold them for a profit. But, as we know, that era is history. Today, lenders still originate the loans but they sell them to a much reduced secondary market. According to Bank of America mortgage loan officer Bob Armstrong, who works with Vantage Pointe buyers, lenders pretty much have three secondary buyers: Fannie Mae, Freddie Mac and FHA. Of course, if you're a military veteran, there's the VA program.
So, let's talk about these and which may be appropriate for you, as well as how you'll need to prepare to qualify for a loan.
1. Conventional financing with Fannie Mae or Freddie Mac. This now requires a minimum 15 percent down payment. They also have pretty tight credit standards, but this can work to your advantage since your interest rate will be lower. As of Dec.12, 2009, there will be a new hard cap of 50 percent debt-to-income ratio. The soft cap--or usual cap--is actually lower at 45 percent, but if you have compensating factors--stable employment, an excellent credit score, money in a reserve account, or secondary employment income that's not used--that cap can be moved up to 50 percent.
2. FHA financing. These loans allow for a 3 1/2 percent down payment. The credit standards are a little more liberal but you'll be paying a slightly higher interest rate and mortgage insurance.
3. VA loans. These government-insured loans for eligible veterans and service personnel are often made with no down payment and lower interest rates than usual. Applicants must still meet set debt-to-income ratios. The VA Loan website has a mortgage checklist for applicants.
We mentioned the debt-to-income ratio, also known as DTI. This is the percentage of a buyer's monthly gross income that goes to paying debt (and taxes and insurance, etc.). There are two main types of DTI. The first is computed by adding your various payments on a monthly basis: the loan (both principal and interest), property taxes, home owners association dues, and content insurance (the insurance you'll need for the interior of your home). This part is known at PITI. The second part, or "back ratio, is the amount of your gross income that goes toward recurring or fixed debt payments, like credit cards, auto loans, alimony, child support, and the like. Take all of this, divide it by your monthly gross income, and you'll get your DTI ratio.You can do a web search of "debt-to-income ratio calculator" and find one that will help you learn your DTI ratio.
Now, let's say you've done your homework and feel ready financially to buy a condo. And, let's say you've found just the right home at Vantage Pointe. The sales person you're working with will give you the names of preferred lenders for you to talk to. Call and make an appointment. Before you go to your appointment, gather the last two years of W2 forms or, if you're self-employed, the last two years of tax returns. You'll also need your most current pay stub and current bank statement showing where the money is for your down payment. If your parents are helping with the down payment in the form of a gift, you'll need a gift letter from them with documentation showing where those funds are. If they're helping you make the purchase, you'll need their income statements, pay stub, and bank statement. Your credit report will be pulled by the lender and have all of your financial liabilities listed, so you don't need to bring that information with you.
While the new DTI regulations are strict, a good lender should be able to help you look at the variables for your situation to help you legitimately meet the criteria. Yes, they'll be looking at your true income. No, 51 percent DTI ratio just won't work. But perhaps there's debt you can pay off immediately. Or a payment like a car loan will be paid off shortly and could possibly be excluded from the debt ratio. These are things a savvy loan officer can help identify.
Finally, don't buy anything until you close escrow. Even if the furniture salesman insists that your purchase won't go on your credit report until after escrow closes. Even if you have a hankering to buy a big screen TV just the day before escrow closes. Don't do it. It will go on your credit report. The report will be checked up until escrow closes. And, you may lose your opportunity to buy your home. As Armstrong says, "Stay focused on the goal of buying a home. Keep your liabilities as low as possible and don't run up your credit cards."
So, let's talk about these and which may be appropriate for you, as well as how you'll need to prepare to qualify for a loan.1. Conventional financing with Fannie Mae or Freddie Mac. This now requires a minimum 15 percent down payment. They also have pretty tight credit standards, but this can work to your advantage since your interest rate will be lower. As of Dec.12, 2009, there will be a new hard cap of 50 percent debt-to-income ratio. The soft cap--or usual cap--is actually lower at 45 percent, but if you have compensating factors--stable employment, an excellent credit score, money in a reserve account, or secondary employment income that's not used--that cap can be moved up to 50 percent.
2. FHA financing. These loans allow for a 3 1/2 percent down payment. The credit standards are a little more liberal but you'll be paying a slightly higher interest rate and mortgage insurance.
3. VA loans. These government-insured loans for eligible veterans and service personnel are often made with no down payment and lower interest rates than usual. Applicants must still meet set debt-to-income ratios. The VA Loan website has a mortgage checklist for applicants.
We mentioned the debt-to-income ratio, also known as DTI. This is the percentage of a buyer's monthly gross income that goes to paying debt (and taxes and insurance, etc.). There are two main types of DTI. The first is computed by adding your various payments on a monthly basis: the loan (both principal and interest), property taxes, home owners association dues, and content insurance (the insurance you'll need for the interior of your home). This part is known at PITI. The second part, or "back ratio, is the amount of your gross income that goes toward recurring or fixed debt payments, like credit cards, auto loans, alimony, child support, and the like. Take all of this, divide it by your monthly gross income, and you'll get your DTI ratio.You can do a web search of "debt-to-income ratio calculator" and find one that will help you learn your DTI ratio.
Now, let's say you've done your homework and feel ready financially to buy a condo. And, let's say you've found just the right home at Vantage Pointe. The sales person you're working with will give you the names of preferred lenders for you to talk to. Call and make an appointment. Before you go to your appointment, gather the last two years of W2 forms or, if you're self-employed, the last two years of tax returns. You'll also need your most current pay stub and current bank statement showing where the money is for your down payment. If your parents are helping with the down payment in the form of a gift, you'll need a gift letter from them with documentation showing where those funds are. If they're helping you make the purchase, you'll need their income statements, pay stub, and bank statement. Your credit report will be pulled by the lender and have all of your financial liabilities listed, so you don't need to bring that information with you.
While the new DTI regulations are strict, a good lender should be able to help you look at the variables for your situation to help you legitimately meet the criteria. Yes, they'll be looking at your true income. No, 51 percent DTI ratio just won't work. But perhaps there's debt you can pay off immediately. Or a payment like a car loan will be paid off shortly and could possibly be excluded from the debt ratio. These are things a savvy loan officer can help identify.
Finally, don't buy anything until you close escrow. Even if the furniture salesman insists that your purchase won't go on your credit report until after escrow closes. Even if you have a hankering to buy a big screen TV just the day before escrow closes. Don't do it. It will go on your credit report. The report will be checked up until escrow closes. And, you may lose your opportunity to buy your home. As Armstrong says, "Stay focused on the goal of buying a home. Keep your liabilities as low as possible and don't run up your credit cards."
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