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Berkeley Realtor Home > Berkeley Real Estate Loans and Financing > Tools for Berkeley Real Estate Buyers > Mortgage Basics FAQ

Am I Ready to Buy a Home? Mortgage Basics FAQ

Mortgage Basics

You can find out by asking yourself some questions:

  • Do I have a steady source of income? Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
  • Do I have a good record of paying my bills?
  • Do I have few outstanding long-term debts, like car payments?
  • Do I have money saved for a down payment?
  • Do I have the ability to pay a mortgage every month, plus additional costs?

What is a Mortgage?

Generally speaking, a mortgagee is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

How Do I Choose the Right Mortgage For Me?

Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.

  • Do you expect your finances to change over the next few years?
  • Are you planning to live in this home for a long period of time?
  • Are you comfortable with the idea of a changing mortgage payment amount?
  • Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?

Your Union Trust Loan Consultant can help you use your answers to questions such as these to decide which loan best fits your needs.

What Steps Need To be Taken To Secure a Loan?

During the application process, your Union Trust Loan Consultant will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-3 weeks. The first step in securing a loan is to complete a loan application. To do so, you'll need some or all of the following
information:

  • Pay stubs for the past 2 -3 months
  • W-2 forms for the past 2 years
  • Information on long-term debts
  • Recent bank statements
  • Tax returns for the past 2 years
  • Proof of any other income

How are Pre-Qualifying and Pre-Approval Different?

Pre-qualification is an informal way to see how much you may be able to borrow. You can be "pre-qualified" over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.

A pre-approval from Union Trust Mortgage Services is our actual commitment to lend to you with a specific investor. It involves assembling your financial records (without the property description and sales contract) and going through a preliminary approval process
with a specific investor. A pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

How Does the Lender/Investor Decide the Maximum Loan Amount That I Can Afford?

The lender/investor considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support.

According to most investors, monthly mortgage payments should be no more than 33% of gross income, while the mortgage payment combined with non-housing expenses, should total no more than 40-45% of income. The lender/investor also considers cash available for down payment and closing costs, credit history, etc. when determining your
maximum loan amount.

What Is Ernest Money? How Much Should I Set Aside?

Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions.) If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. Typically, if you back out of a purchase transaction after removing conditions agreed to in your contract prior to closing, you may forfeit a percentage of your funds held in escrow.

What Is a Loan-to-Value (LTV) Ratio? How Does It Determine the Size of the Loan?

The loan-to-value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $500,000, you could borrow up to $475,000 (95% of $500,000), and would have to pay $25,000 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV ratio, the less cash home buyers are required to pay out of their own funds. Check with your Union Trust Mortgage In-house Loan Consultant about 90%, 95%, and 100% financing. It can be done!

What Types of Loans Are Available and What Are the Advantages of Each?

Fixed Rate Mortgages: Payments remain the same for the life of the loan.

Types:

  • 15-year
  • 20-year
  • 30-year

Advantages

  • Predictable
  • Housing cost remains unaffected by interest rate changes and inflation

Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits. The interest rate fluctuates as the prevailing market rate moves up or down.

Types

  • Balloon Mortgage: Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when the initial time has elapsed, the balance is due or refinanced (though not automatically.) (Example: 30 due in 5 = a 30 year loan whose entire principal balance is due at the end of the first 5 years.)
  • Hybrids: a loan whose interest rate is fixed for a given period and then becomes variable (Example: 5/1 ARM = a loan whose payments are amortized over 30 years, whose interest rate is fixed for the first 5 years, then converts to an ARM)
  • Interest Only: a loan where only the interest is paid monthly.

Advantages

  • Generally offer lower initial interest rates
  • Monthly payments can be lower
  • May allow borrower to qualify for a larger loan amount

When Do ARMS Make Sense?

An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.

What Are the Advantages of 15- and 30- Year Loan Terms?

30-Year:

  • In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
  • As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

15-Year:

  • Loan is usually made at a lower interest rate.
  • Equity is built faster because early payments pay more principal.

Can I Pay Off My Loan Ahead of Schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment; ask your Union Trust Mortgage In-House Loan Consultant for details.

Are There Special Mortgages for First-Time Home Buyers?

Yes. Many investors offer affordable mortgage options, which can help first-time home buyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities. Typically, these loans have a
maximum loan size of $359,650.

How Large of a Down Payment Do I Need?

There are mortgage options now available that only require a down payment of 5% or less of the purchase price. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.

What Is Included in a Monthly Mortgage Payment?

The monthly mortgage payment mainly pays off principal and interest. Some investors also include local real estate taxes and homeowner's insurance (requested by you.)

What Factors Affect Mortgage Payments?

The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

How Does the Interest Rate Factor in Securing a Mortgage Loan?

A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan. A lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher
than the interest rate because it also includes the cost of points, mortgage and other fees included in the loan.

What Happens if Interest Rates Decrease and I have a Fixed Rate Loan?

If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

 
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