Financing Your Home

Prior to 2007, at least for the first several years of this decade, qualifying for a mortgage wasn’t nearly as difficult as it is today. Mortgage qualification standards were lowered for a time, meaning tens of thousands of homeowners purchased homes who should have never been qualified in the first place.As a result of the lowered standards, many of these same homeowners have defaulted on their loans, unable to keep up with payments. Creditors have finally raised the bar, making it tougher for consumers to qualify for a home loan.

If shopping for a home mortgage, there are four criteria you must keep in mind when applying. Where you stand in each area can determine if you are approved or not and what your loan terms will be.

Home appraisal – You purchased a 4 bedroom, 3 bath colonial, paying $385,000 for the home, be putting $85,000 down. With $300,000 to finance, your mortgage broker will make sure that the home is worth the amount you are paying for it. In this current market of declining home values, that isn’t a sure thing.

Your credit rating — Your credit reports will be accessed and your credit score will be obtained. Depending on how high your score is, the mortgage terms (interest rate) will be set accordingly. Expect a lower rate if your credit is excellent.

Your capacity to repay the loan — Can you afford to repay the loan? Do you have sufficient assets and income to meet monthly payments? These questions must be answered before a loan offer is given.

Your employment — How long have you been employed? Where do you work? Are you paid a salary, salary plus commission, or are you paid hourly? These questions are the final determining factor on whether you will be offered a loan or not.

The tougher standards may seem unfair to some consumers, but they are in place for your protection and to protect the lender’s assets. If your credit is good or excellent and all of the other criteria have been met, then receiving approval for a home loan will likely happen.

Tags: escrow, home insurance, mortgage interest, mortgage payments, PITI, Property Taxes

Understanding Escrow

Congratulations, you found the home of your dreams and are ready to put some money down and finance the rest. Getting approved for a mortgage (assuming you still need to take this step) involves understanding several matters, items we’ll take a look at right now.

Your Monthly Payments — What a PITI!

PITI is a term you may hear about when you buy your home, an acronym that stands for the following:

Principle: The amount you will be borrowing, to be paid back over the life of the mortgage loan.

Interest: This represents the cost of the money lenders will charge for your using their money to buy your home.

Taxes: The government will tax you to pay for schools, road improvements, and other local services. Property taxes is the chief way that these funds are raised.

Insurance: If you have a loan on your home, then homeowners insurance is required and strongly recommended even if you don’t. Offers protection against fire, theft, earthquake (sometimes) with flood insurance something you can purchase separately through a federal program.

Principal + Interest + Taxes + Insurance (PITI)
= Total Cost of Your Mortgage Loan

Prospective homeowners can forget that beyond principle and interest payments, property taxes and homeowners insurance can impact affordability. PITI is part of the formula that lenders use when calculating your affordability ratios.

Your Escrow

Oftentimes, your property taxes and homeowners insurance will be paid out of an escrow fund and sent directly to the local taxing authority and to your insurance provider. This insures that everyone gets paid (including the mortgage company).

Likely, at the time you make your down payment you’ll have to come up with additional funds which will be deposited into your escrow account and tapped as needed — something to consider when determining if you can afford a home or not.

Ultimately, your mortgage lender will decide whether you can afford to make payments when PITI is taken into consideration.

Further Reading

7-Step Home Buying Plan

You’re Only 11 Steps Away From Buying a Home

Home Mortgage Guide 

Tags: escrow, home insurance, mortgage interest, mortgage payments, PITI, Property Taxes