Before you make any big purchases, move any money around, or make any big-time life changes, consult your loan officer.
1. Don’t change jobs or the way you are paid at your job! Your loan officer must be able to track the source and amount of your annual income. If possible, you’ll want to avoid changing from salary to commission or becoming self-employed during this time as well.
2. Don’t deposit cash into your bank accounts. Lenders need to source your money and cash is not really traceable. Before you deposit any amount of cash into your accounts, discuss the proper way to document your transactions with your loan officer.
3. Don’t make any large purchases like a new car or new furniture for your new home. New debt comes with it, including new monthly obligations. New obligations create new qualifications. People with new debt have higher debt to income ratios… higher ratios make for riskier loans… and sometimes qualified borrowers no longer qualify.
4. Don’t co-sign other loans for anyone. When you co-sign, you are obligated. As we mentioned, with that obligation comes higher ratios as well. Even if you swear you will not be the one making the payments, your lender will have to count the payment against you.
5. Don’t change bank accounts. Remember, lenders need to source and track assets. That task is significantly easier when there is consistency among your accounts. Before you even transfer money between accounts, talk to your loan officer.
6. Don’t apply for new credit. It doesn’t matter whether it’s a new credit card or a new car. When you have your credit report run by organizations in multiple financial channels (mortgage, credit card, auto, etc.), your FICO score will be affected. Lower credit scores can determine your interest rate and maybe even your eligibility for approval.
7. Don’t close any credit accounts. Many clients have erroneously believed that having less available credit makes them less risky and more likely to be approved. Wrong. A major component of your score is your length and depth of credit history (as opposed to just your payment history) and your total usage of credit as a percentage of available credit. Closing accounts have a negative impact on both those determinants of your score.
Any blip in income, assets, or credit should be reviewed and executed in a way that ensures your home loan can still be approved. The best advice is to fully disclose and discuss your plans with your loan officer before you do anything financial in nature. They are there to guide you through the process.
Adjustable Rate Mortgage (ARM)
When you get a mortgage, you'll pay interest on it. If you decide to get an adjustable rate mortgage, or ARM, the interest will change throughout the life of the loan based on the market rate. The rate might adjust after five years or after 10, depending on the type. Depending on several factors, an ARM can save you money. But if you plan on living in the home for decades, an ARM is often not the best choice, as you have no way of predicting whether rates will rise or fall.
Annual Percentage Rate
Annual percentage rate, or APR, is one of the most important mortgage vocabulary terms to understand. The APR is about more than just the interest rate: It's the total cost of taking out the mortgage, including the interest rate on the loan and any fees you need to pay. You can use the APR to compare the total costs of different mortgage offers from different lenders.
Quite simply, closing costs are the fees you pay to get the mortgage and to obtain the property. Both the seller and the buyer have to deal with closing costs. The costs typically include the origination fee for the loan, title insurance, taxes, and attorney fees. Usually, you don't know the exact amount of the closing costs until you finalize the loan. But your lender has to give you a good-faith estimate of the amount.
When you take out a mortgage, your house acts as collateral. If I'm your lender and you stop making payments to me, I can claim your house. Collateral goes both ways. It gives me, the lender, a sense of security: If you fail to pay, I haven't lost everything, since I have the house. It also encourages you to pay your mortgage, since you risk losing your home if you don't.
The debt-to-income ratio is how much debt you have compared to how much you earn. For example, if your income is $5,000 per month and your housing costs are $2,500, your debt-to-income ratio is 50 percent, which is very high. An ideal debt-to-income ratio for housing is about 30 percent. It's recommended that your total debt-to-income ratio not exceed 50 percent for all debts.
The down payment is the amount of money you pay up front when buying a house. If you are buying a $200,000 house and pay $40,000 up front, your down payment is 20 percent of the house's cost. The higher your down payment, the better, as most lenders will give better rates for higher up-front payments. It is possible to get a mortgage with a smaller down payment, but you usually have to pay for mortgage insurance and have a higher interest rate.
The Federal Housing Administration, or FHA, is a government agency that insures mortgages. The FHA allows people to buy homes and obtain mortgages with less-than-stellar credit histories and lower-than-average down payments. If you take out an FHA loan, you have to pay mortgage insurance on it as well as a fee of 1.75 percent.
A fixed-rate mortgage is the opposite of an ARM. The interest rate stays the same for the life of the loan. If you take out a 30-year fixed-rate mortgage with a 5 percent interest rate, the rate will be 5 percent in year one and in year 30.
A prepayment penalty is an extra charge for paying down the loan early. If your mortgage has one, it is usually outlined in the documents. For example, you might have to pay 2 percent of the principal if you pay off the loan within the first five years. Fortunately, prepayment penalties aren't common in today's mortgage market.
Private Mortgage Insurance
Private mortgage insurance (PMI) is an amount you pay above the cost of the principal, interest, and other fees each month. PMI is meant to protect the lender in case you stop paying. It's commonly needed when your down payment is less than 20 percent of the house's value. Once you've made enough payments on the mortgage that the amount of your loan drops to less than 80 percent of the cost of the house, you typically no longer need to pay PMI.