December 15, 2007

Mortgages In Today's Market

Becoming Lender-Attractive and Financially Comfortable

Buying property and refinancing in the United States has changed. Recent headlines regarding the mortgage industry have not been pretty. Potential purchasers have backed out of contracts, mortgage lenders have pulled back funds at the closing table, and banks have borrowed money to stay afloat. For loan-seekers, the days of 100% financing and stated income loans are fading away. Banks are returning to traditional loan products that require larger down payments and proof of income.
When choosing the right home to buy or the right program to refinance into, remember that there are good deals and bad deals, but no deal is worse than a home you cannot afford. Buying a home in today’s market should be viewed as a long term investment that provides financial security, a shelter to raise a family, and a possible tax deduction.
In today’s mortgage market, there is a large discrepancy in rates between conforming loans (up to $417k) and jumbo loans (over $417k) on single family homes, condos, and co-ops. For example, the rate on a 30-year fixed, $417k mortgage would be about 1% lower than on 30-year fixed, $418k loan. Your home’s price and your down payment amount will also affect your interest rate and the way your loan is structured. To minimize monthly payments, it is common to structure a loan into a first and second mortgage, with the first mortgage not exceeding the conforming limit of $417k, and the second mortgage reflecting the remaining loan amount.
Who consumers choose as their mortgage lender and banker has become increasingly more important. A year ago, as long as the customer had a pulse, he or she could get a mortgage. Today, working with the right person and institutional lender is very important.
Below are some things to look out for when looking to buy or refinance your home.
Borrowing Power. I recommend starting your mortgage process early so that you can determine your borrowing power. Your borrowing power depends on your total income and your overall liabilities. The first step in determining your borrowing power is to obtain a copy of your credit report and make sure it is accurate. Your credit score, which may be provided by your lending institution but not always by a credit reporting agency, is a critical factor in borrowing money. Second, you should make a list of your income, including your yearly salary, bonuses, rental income (if borrower owns an investment property), inheritance, and alimony (if applicable). Third, make a list of all of your monthly expenses (rent, bills, food, clothing, transportation, entertainment) and debts (credit card, student debt). Finally, and most importantly, make sure that your overall debts are below 38% of your total income (called debt-ratio). Your debt-ratio is a key figure that banks consider in determining whether, and how much, to lend. For example, if you make $3000 a month and have no debt, your mortgage payment cannot be higher that $1140, or 38% of your gross income. Note that this $1140 figure includes taxes, insurance, and maintenance/common charges (if applicable).
What Kind of Loan is Right for Me? One of the most common things I hear when a client is looking to refinance a home is, “I did not understand what kind of loan I took out.” Make sure you understand how the loan works—is your rate adjustable or fixed, are you paying principal and interest or interest only, is your loan a negative amortization loan, and is there a pre-payment penalty—are common questions that borrowers should ask. Borrowers should also ask about the lending institution’s origination fees.
What is the Cost of Borrowing Money? Many first-time buyers do not know the cost of borrowing money. A person with a 700+ FICO score and a 6.5% interest rate should expect to spend approximately $625 per month for every $100k borrowed based on a 30-year mortgage (payment will vary depending on the product and your overall situation).
Closing Costs. While most home buyers are aware of the down payment, many are not aware of the closing costs associated with buying or refinancing a property. Your home’s purchase price, property type, and the county in which it is located will determine your range of closing costs. The range will be between 1% of the purchase price on the low end (co-ops), and 5% of the purchase price on the high end (new construction condos, houses, or townhouses). If the transaction is a refinance, closing costs in NYC’s five boroughs will be anywhere between 2%–5% of the overall loan amount. So when you evaluate your assets, make sure to keep the closing costs in mind.
Necessary Documents. There are certain documents that must be compiled to effectuate the loan process. Typically, you will need to provide 2 years worth of W2s and/or income tax returns, pay stubs covering the most recent 30 days of employment, and asset statements showing your cash reserves. Cash reserves are the amount of cash left after subtracting your closing costs and down payment, which typically ranges anywhere from 5%–20% on houses and condos and 20%-30% on co-ops, from your assets. Ample cash reserves make you a stronger candidate for obtaining a mortgage and passing a coop board.
Pre-qualification vs. Commitment. A pre-qualification letter just states your name and approval amount and may be written by almost any broker or lending institution. A commitment, on the other hand, is a more formal and accurate document that has been approved by a bank’s underwriting department and states your approval and approval terms. You want a commitment.
The suggestions provided in this article will put you ahead of the average new home buyer and individual looking to refinance. Following these principles will increase your chances of obtaining a loan within your means.

Posted by brianscottcohen at 3:50 PM | Comments (4)
Categories: Mortgage

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