Mortgage & Refinance: Debt To Income Ratios
Debt to Earnings Ratios, often referred to as “DTI’s”, are a crucial calculation employed in the refinance, debt consolidation, and buy mortgage application practice. A debt to income ratio is achieved by dividing your monthly debt payments by your pre-tax income. Debt to income ratios are ultimately used to decide how much money you can borrow, and a detailed knowledge of DTIs can help you get the most value from your refinance, debt consolidation or purchase mortgage transaction
There are two distinct types of debt to income ratios which are used in refinance, debt consolidation or purchase mortgage underwriting, a Front End Ratio (or “Front Ratio”) and a Back End Ratio (or “Back Ratio”).
The Front Ratio is calculated by dividing the sum of your total monthly housing costs, composed of your mortgage payment including principal interest taxes and insurance as well as homeowner’s association fees, mandatory maintenance fees, common charges in a development and mortgage insurance if applicable.
The Back Ratio is similar to the front ratio, but on top of basic housing expenses the back end ratio also includes your other monthly debt payments, particularly consumer debt payments, into the calculation. Examples of monthly consumer debts are your credit card bills, automobile payments, personal or student loans, etc. Examples of items not typically included in a back end ratio would be life, health & car insurance premiums.
When your lender is evaluating your application, they are in fact trying to match your application with the lending criteria for the program which you want to see if you qualify for the loan. While there are many factors in determining how much money you can borrow and at what rate, debt to income ratio is amongst the most important. A good credit, conventional mortgage program will very often have a debt to income ratio requirement of 33/38 – front/back, meaning that your monthly housing costs should be less than one third of your gross income per month.
If you make $3,000.00 per month, that means the maximum mortgage payment you could qualify for under a 33/38 program would be $1,000.00 per month inclusive of principal interest taxes and insurance as well as other housing costs, and your will only be allowed a total monthly expenditure including mortgage, credit cards and other consumer debts totaling $1,140.00. That may seem very conservative, and it is. If you’ve ever been turned down by a brick and mortar bank for a mortgage refinance, debt consolidation loan or for financing a new home purchase, chances are it had something to do with your program’s low debt to income ratio.
Many modern lenders are not as concerned about the back end ratio at all and decide solely on the basis of the front ratio, and in the case of a veteran’s VA loan, their guidelines only concern the back ratio and ignore the front. FHA loans allow you to carry more consumer debt but with a higher income requirement, with a standard debt to income ratio guidance of 29/41 – front/back.
Progressive lenders now have programs with excellent rates which allow individuals to borrow up to 100% financing and in certain cases up to millions of dollars at even better rates than many of 33/38 programs, but which allow for a debt to income ratio of up to 55% or even 60% in some cases, whether you prove your income through tax returns and W2 forms or simply state how much you earn. These relaxed debt to income ratio criteria allow you to borrow more easily without the fear of rejection, and the better your credit and the larger your down payment in the case of a purchase or equity in the case of a refinance or debt consolidation the more relaxed these criteria can be. Debt consolidation programs can often make it much easier to qualify if you mandate that certain consumer debt accounts be directly paid off, thereby reducing your monthly consumer debt payments. Contact a nationally capable mortgage broker so that you have access to a wide variety of programs, and be honest with your loan officer about your earnings and debts and things will go smoothly. Remember, they want to get you the money you need, and will work with you to make sure that happens.
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Home Refinancing Rates – When Is It Worth It To Refinance?
When interest rates were two points below your existing mortgage rate, it was considered a sound rule of thumb to refinance. But with today’s low closing costs, a difference of one percent can save you money on your interest costs. Even with low fees, it only worth it to refinance when you can be sure you can recoup the mortgage costs.
Figuring Up Costs
Refinancing is simply paying off one loan and taking a new one. The same fees that you paid with the first mortgage, you will probably have to pay for the second mortgage. Usually, loan cost range between $2000 to $6000 for a $200,000 loan. You will also have to add in points for lower interest rates, adding additional thousands. The only way to recoup these costs is to keep your mortgage for several years.
Interest Rates
To make refinancing worth it financially, you need to be sure that interest rates are low enough to pay for the cost of refinancing. One simple way to figure this out is to use a mortgage interest calculator from one of the lending sites. These calculators will give you an estimated monthly payment and the total cost of the interest. By punching in different interest rates, you can see your potential savings.
Short Term
Besides interest rates, you also need to compare terms. The shorter the loan the less you will pay in interest. Ideally when you refinance, you should choose a loan with a shorter term. You can also choose a biweekly mortgage, where you pay half a mortgage payment every other week, which can reduce your loan by years.
Finding Low Cost Lenders
Not all lenders charge the same fees or interest rates, so you can save thousands by searching for lenders. You can easily go to the big name mortgage lenders and request quotes, but some smaller financing companies offer better deals. The easiest way to find them is through an online mortgage broker site. Basically, you enter some basic information about yourself and income, and then you receive several different quotes. From this list of offers, you can decide who is offering the best refi package.
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Mortgage And Real Estate Information Requested By Debtors
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Mortgage and Real Property Data for Debtors
If you owe money and have a low credit rating you could discover that it difficult to get a mortgage loan. In view of these info, you may be interested in asking a professional real estate agent help you to locate a home. These brokers have a database full of houses that stream from land contracts, bad credit approval, and so on. The real estate agent could help you find a residence that you will be able to buy regardless of how bad your credit score maybe.
If you have remaining debt, the lender will inquire about your credit historical past and debts incurred. The lender will ask if in case you have any remaining unpaid loans, and if so, what amount do you pay monthly. In other terms, you probably have automobile loans, you will have to show the amount of balance owed and the amount paid month-to-month toward the loan.
Lenders will ask about bank card debts. If you happen to reply yes, then the lender will ask how much do you pay monthly. Overall, the lender will ask about the amount you spend monthly on incurred debts that come from your pretax salary on credit card repayments etc.
You will have to answer questions pertaining to your property and assets, which incorporates cash on hand. The underwriters will examine info relating to the questions. For example, they may study and ask about the amount of estimated balance in your banking account. The amount of funds will likely be accessible in your account after you might have paid closing fees, down payment prices, and different fees relevant to mortgage loans and if you have a saving account.
The lender will ask how much cash do you plan to apply to the loan. The lender might ask additionally if the down cost is cash coming out of your pockets. If the answer is not any then the lender will ask the place the money is coming from…
Loan Function
The loan function is of curiosity to the lender. Accordingly, you’ll reply to questions referring to the aim of the loan, which incorporates, are you refinancing a present home, or are you an modern buyer?
Refinancing Mortgage
If you happen to reply to the question pertaining to the mortgage, letting the lender know that you simply intend to refinance a present house with the money lent; the lender will ask, if you will require cash at closing to repay debts. In fact, the question that follows will likely be is the amount of money needed to pay the debts in full.
The Purpose of the Property
The lender would require information pertaining of the home’s purpose. Do you propose to make use of the house for work or dwelling? Is the loan supposed to put be an investment into the property?
Kind of Property
The mortgage lender will have know if the home is single-family housing, a duplex, or condominium.
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US Treasury Program To Avoid Foreclosure
The U.S Treasury Department is going to intoduce a plan that could save all homeowners who are struggling from the foreclosure syndrome. The Department will apply this plan using the collaboration of home loan business leaders. However the analysts have one thing else to say. They believe that this program can’t support the banks to survive through the discomfort of residence loan.
Sources said that the strategy is nearly ready and just needs some final brush up. If everything goes correct then the details will be announced on Wednesday.
The Philadelphia KBW Bank Index, BKX hiked 3.1 percent on Friday. This rise proves that the Government is aware of the issues from the home loan and housing marketplace. Chairman of Soifer Consulting, Mr. Ray Soifer also confirmed the previous statement. In this industry the foreclosures are increasing as well as the household costs are falling.
As far as the sub prime loans are concerned they’re also facing a issue. In this loan, the teaser rates initially stay low. But it goes up after two or three years. The new program will freeze the interest rate with the borrower prior to the rate becomes higher.
You will discover some analysts who believe that if the terms of loan are renegotiated then it will just postpone the writing off procedure for such loans. However the loans require to be written down mainly because the borrower will not be capable to repay the expected amount.
The Chief strategist of Sandler O’Neil & Partners in New York Mr. Robert Albertson said that, if a bank wanted a higher rate in a longer term, then it would not get it a teaser rate.
The analysts said that the treasury hoped that bank could prevent the writing down of excessive home loan related assets in the time of acceleration on the economic growth of other sectors. This will allow the banks to produce profits in a higher level.
Financial Services Analyst of PNC Wealth Management in Philadelphia Mr. Mark Batty said that if the income from the borrower increases, then the borrowers can be in a position where they can fight using the up growing interest rates.
The shares of Wells Fargo & Co rose nearly 7% to $32.43. Countrywide Financial Corp shares rose 16.3% to $10.82. These two banks are in a talking term using the treasury.
Some investors consider the above scenario too much optimistic.
Portfolio Manager of Hedge Fund Trident Investment Management Mr. Nandu Narayanan said that postponing the inevitable situation can only drag the foreclosure on for a longer time.
Some other people like Mike Holland, and Albertson believe that this new plan of treasury department though promising, can have some bad effects as well. They believe that there will be a whole lot of inappropriate proposals prior to finally settling down using the correct one.
But most on the analysts believe that this proposal can be a big aid towards handling of the crisis at hand. Mr. Batty thinks that giving the proposal a chance is better than doing nothing.
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Ten Mistakes And How They Can Affect Your Mortgage
Wouldn’t it be great if everything in life came with a checklist? Unfortunately, for most of us we have to learn life’s lessons the hard way – by experiencing them! Fortunately, for home buyers there are some rules of the game that are well known and can help you avoid major pitfalls when buying a home or refinancing your mortgage. Let’s take a look at ten mistakes that can have detrimental affect on your mortgage so you can prepare yourself now to get the best terms possible on your next mortgage.
#1 – Not shopping around. Too many people go to their local bank or other financial institution for their mortgage and never shop around. As a result, they end up paying more over the life of the loan because they don’t realize what they could have had. Go to at least three mortgage providers when looking for a loan – make them compete and earn your business!
#2 – Using the mortgage broker the realtor recommends. Sure the realtor is the sweetest person you ever met and tells you not to worry because her friend over at ABC Mortgage will take care of you – what she isn’t telling you is that she is getting a kickback for recommending them. Realtors have one goal in mind – to earn commission on the sale. You can often get much better deals by shopping around yourself and saying “no thanks” to the recommendation.
#3 – Buying too much house. How many square feet do you need and how much can you afford? Don’t get yourself into a situation where you have too much house that you can’t afford over your lifetime. Remember, it’s not just the monthly payments you have to worry about. You also need to think about property taxes, insurance and heating and cooling costs.
#4 – Getting into the wrong mortgage. A quick scan of the newspapers will show you that a lot of people have gotten into the wrong mortgage. Make sure you know the differences between fixed and adjustable rate mortgages and seek the help of a trusted, third party to help you make the right decision. Be sure to review the prepayment penalties as well – why should you be penalized for paying off your loan ahead of time?
#5 – Credit. This one you probably already know about, but it is worth repeating again and again. Clean up your credit and don’t make any big purchases right before you go to take out a mortgage. Save the new car purchase or flat-screen TV purchase until after you have signed the loan paperwork!
#6 – Borrowing too much. This goes hand in hand with #3. Don’t anticipate future earnings and buy a house you simply cannot afford. Purchase a house you can afford now, even if it may not be your dream house. In a few years, if you are earning more, you can look into buying a bigger house. Start small and work your way up so that you know you can afford your mortgage and not get yourself into financial trouble down the road.
#7 – Missing out on programs for first time home owners. Many first time homeowners don’t take advantage of the various programs and discounts available for them. Check into local, state and federal programs that can help reduce your interest rate and potentially negotiate better terms.
#8 – Inaccurate information, or garbage in/garbage out! Don’t try and fool the lender – it isn’t worth it. Make sure you have supporting documentation for everything you put down on the mortgage application. Furthermore, never sign a mortgage document in which the lender hasn’t completely filled out all the fields. Insist on honesty on both sides of the desk!
#9 – Not locking in the rate. Rates can change in the blink of an eye. Get your rate locked in and don’t wait around until the last moment. Get your rate in writing with the complete terms spelled out from your mortgage lender when you lock it in.
# 10 – Not considering the other “charges” in your mortgage. Sure, you got a great rate on your mortgage, but did you carefully read about the other charges the lender has stuck in? Rates are important, but make sure you understand the full cost of your loan. Read (and question) all the charges listed. Sure, you might have to pay a quarter of a percent more by going somewhere else, but after you add up all the fees you may find that by going to a lender with a slightly higher rate can actually save you money.
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The 7 Sins of Mortgage Brokers
Honesty is the most important aspect of dealing with mortgage brokers. Unfortunately not all brokers are forth coming with certain information that would allow you to trust them and make an informed decision about the deal they recommend. Don’t get me wrong not all mortgage brokers are bad. Just don’t underestimate the influence that commission has on their recommendations. And, as always there are bad eggs in every industry.
Being aware of the following broker sins will help you pick a trustworthy broker and make sure they get the best deal for you. Most importantly, don’t be afraid to ask questions.
Sin 1: Favouring their loan product.
You need to be aware if the mortgage broker is also a lender, i.e. do they have their own loan products? If they do, and they offer there own product, there needs to be a clear, understandable reason why their product is the best choice for your situation.
Sin 2: Being influenced by commission.
Brokers get commission from the lender you end up borrowing from. You need to ask if the broker has special incentives for referring you to a specific lender i.e., do some lenders pay more commission? If so, this may lead them to be biased about which lender they recommend to you. They may be inclined to recommend you to the lender that pays the most; regardless of whether this is the best choice for you.
So again you need to be given a clear and understandable reason why the product and lender is the best choice for your situation. You also need to find out how big a range of lenders the broker deals with. They can’t claim to find you the best loan product on the market for your needs if they only deal with 20% of lenders on the market.
Sin 3: Hiding the real cost of the mortgage.
Make sure the broker provides you with the comparison interest rate, when looking at or comparing any home loan products. The comparison rate shows you the real cost of a home loan by taking into consideration all the foreseeable fees and charges associated with the loan. This is so you can easily compare home loan products.
Sin 4: Withholding information.
Know the whole deal. You need to know the whole service provided by the broker. Do they provide ongoing service and assistance after you secure your loan? If so, find out for how long. Also, what are the fees involved? Theirs and the lenders. All this needs to be made clear before any papers are signed.
Sin 5: Allowing client ignorance.
Make sure you understand what the benefits and the drawbacks are for you. You need to have it explained to you in a clear way so you can understand it. This is so you can weigh it up and decided for yourself if refinancing is actually in your best interest. There is a bad practise in the mortgage broker industry called churning. Churning is the act of refinancing for the sake of commission even though there are no benefits for the mortgage owner. Making sure you understand the benefits and drawbacks of the refinancing deal yourself will make it impossible for you to fall victim to this practice.
Sin 6: Being Uninsured
Do the brokers have their own professional indemnity insurance? This protects professionals against liability claims resulting from negligent work. All lenders will have it. However the brokers should not assume they are covered by the insurance of an umbrella organization. The broker needs to know for sure if they are or are not protected.
Sin 7: Being Unqualified.
Is the broker qualified to give you lending advice? In every country there are reputable authority organizations that provide mortgage brokers with credentials, provided they undertake certain courses. Find out who these organizations are and make sure the broker you’re dealing with is a member or has been given credentials.
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