Chapter 4
Getting a Mortgage Loan
B
Overview
ecause houses cost so much, most of us must borrow money to buy a home.
When you borrow money, you sign papers agreeing that if you don’t pay back the
loan the lender can take your house and sell it to someone else to pay back the
money you borrowed. Buying a home is a big responsibility, and the more you know, the
more you will be able to help yourself.
In this chapter we will discuss what a mortgage loan is, who makes mortgage loans,
and how you can find the right lender and the right loan. We’ll try to make some of the
terms easier to understand, so you will know what to ask for and be able to understand
the terms of the loans you’re looking at.
To help you be a smart mortgage loan shopper, this chapter will teach you:
Ø What a lender looks at when deciding how much to loan you for a house
Ø How to practice prequalifying yourself for a loan to know how much you can
borrow
Ø The different types of loans available and how to know which are right for you
Ø Where to look for your home loan
Ø How to understand the terms of your loan
Ø What the process is to apply for and get approval for your loan
Ø How to help yourself if you are turned down for a loan
What is a Mortgage?
Mortgage: A loan secured
by a lien on your home.
Foreclosure: Legal action
that terminates all
ownership rights when the
homebuyer fails to make
the payments.
Principal: The original
amount of money
borrowed, or the unpaid
amount of the loan.
Interest: The fee charged
for borrowing money.
Taxes (property):
Required financial
contribution for the support
of a government, based on
the value of the property.
Insurance (homeowners):
A contract that promises to
reimburse the homeowner
in case of loss or damage
to the home.
Mortgage term: The length
of time it takes to pay off a
mortgage.
When you borrow money, whether for a car, a house, or anything
else, you sign a paper that says you promise to pay the money
back. This paper includes information about the amount of money
you are borrowing, when you will pay it back, how much the interest
is, and how much your monthly payments will be.
When you borrow money for a house, the loan
is called a mortgage loan. The paper you sign
for a mortgage not only promises to pay the
loan back, but you also agree that if you don’t
pay, you will give the house to the lender. The
lender would then sell the house to get back
the money you owe. This process is called
foreclosure. Foreclosure can ruin your credit
rating and make it very hard for you to buy
anything else on credit. When you get a loan
for your house, you and your lender want to make sure you get the
best loan you qualify for, with the best interest rate you can find, so
that you can afford to pay back the loan.
As you begin to look around for the best loan terms with different
lenders, you will probably be surprised at the many different types
of loans available, the wide range of interest rates, and the many
different fees charged by lenders for processing your loan
application. The whole process can be very confusing, even for
those of us who have bought homes before. We’re going to learn
more about the process so that you can make educated, informed
decisions.
The House Payment
As we discussed briefly in Chapter 3, your house payment is
usually not just paying back the amount of money you borrowed for
the house and the interest charged. There are usually four parts to
your house payment: principal, interest, taxes and insurance
(PITI). If you are buying a home directly from the seller, you may
only be paying the principal and interest to the seller, but you will be
paying the property taxes to the county you live in, as well as
making your property insurance payments. A PITI payment is a
more convenient way to make sure these important payments are
made.
The length of time it takes you to repay the mortgage is called the
mortgage term. Mortgage contracts can be written for any terms,
but the most common is for 30 years. Mortgages can also be for 10,
15, or 20-year terms. The amount you borrow, the term of the
mortgage and the interest rate all determine the amount of your
monthly mortgage (house) payment. Even when the interest rate is
the same, you will pay more for interest over a 30-year loan than
you would on a 20-year loan. The amount of money you borrow will
be amortized. For the first several years of your loan, you will be
paying back more on the interest you owe than on the actual
amount of money you borrowed. Take a look at the sample
Amortization Schedule at the end of this chapter to see how this is
done.
When you pay a PITI house payment, you send the payment to
your lender. The lender deposits the tax and insurance portions of
your payment into an escrow account. An escrow account is
different from the process of escrow at the time that your loan and
home purchase are being finalized. An escrow account is a special
account held by the lender and used only for payment of taxes and
insurance for a specific property. When you make your house
payments, your lender sets aside 1/12 of the amount needed each
year for taxes and insurance. When the yearly tax and insurance
bills come due, the bills are sent to the lender, who pays the bill
from your escrow account and subtracts that amount from your
account.
Your house payment may change from year to year because the
amount you need to pay for insurance and property taxes may
change. If you have an adjustable interest rate, your payment will
change. However, the portion of your house payment that pays
back the loan itself, or the principal, will stay the same.
The 4 Cs of Credit
In Chapter 2, we talked about how important your credit history is
when trying to buy a home. In this section, we’ll talk about it again,
and explain how a lender decides whether you qualify for a loan.
Remember, lenders are in business to loan money. They want to
lend money to people, but they also want to make sure that the
loan will be paid back. It’s important that you know how the process
works so you’ll be able to help convince them you’re a “good risk.”
There are four main areas a lender looks at when deciding if they
can lend you money: capital, capacity, credit and collateral.
Capital
Capital is the amount of money you have on hand to buy a house.
This would include amounts you have in savings accounts,
certificates of deposit, bonds, or other places. Having money saved
Amortized: To pay off a
debt gradually, within a
certain amount of time, by
making regular payments.
Escrow account: An
account held by the lender
or the loan servicer into
which the homeowner pays
money for taxes and
insurance.
Capital: Assets or money
that is available for use.
Notes:
proves to the lender that you know how to
budget your money enough to save, and will
help them feel better about lending you money.
Capacity: Your ability to
make your mortgage
payments on time.
The lender will ask you what amounts of capital
you have and where you got it. They will be
looking to see if you have enough money to
pay the costs of buying a home such as these:
Notes:
•
•
•
•
•
•
Down payment
Loan fees
Closing costs
Escrow impounds
Reserves
Moving expenses
It is best if you have saved the money for these costs yourself.
Some loan programs for low-income and first-time homebuyers
recognize that it may be difficult to save up that much money, and
will allow you to receive money as a grant or a gift from family
members to add to what you were able to save.
Capacity
When a lender looks at your capacity, they are looking at your
ability to earn enough income to pay off your home loan. They want
to know that you make enough money to pay the loan and still have
money for regular living expenses. It’s never a good thing when you
have to choose between making your house payment and eating!
When your lender looks at your capacity, they pay attention to three
areas: your current income, your income and employment history,
and the amount of money you owe to other debts.
Current Income
The lender will ask for pay stubs and other information that will
prove how much money you make each month. Lenders look at
your gross income, the money you get before taxes are taken out.
Gross income also includes money you receive from overtime
worked, commissions, dividends, and other pay you receive on a
regular basis. The important thing will be that you are able to prove
that you have a steady income.
If you are paid more often than once a month, you can calculate
your gross monthly income yourself – here’s how.
• Hourly: If you are paid by the hour, take your hourly pay rate
and multiply it by the number of hours you work in one week.
Multiply that number by 52, the number of weeks in a year.
Then take that amount and divide by 12, the number of
months in a year. This new amount will be your gross
monthly income, or GMI.
Example: $10/hour, 40 hours/week
$10 X 40 = $400/week
$400 X 52 = $20,800/year
$20,800 ÷12 = $1,733 (GMI)
•
Bi-weekly: If you are paid every other week, take the amount
you receive before taxes, multiply by 26, the number of twoweek periods in a year, and divide by 12, the number of
months in a year. This will also give you your GMI.
Example: $1000/every 2 weeks
$1,000 X 26 = $26,000
$26,000 ÷12 = $2,166.67 (GMI)
Income and Education History
Your lender will ask for verification of employment, which simply
means that he needs proof of your jobs and your income. To do
this, you will need to gather pay stubs, tax returns, and other items
that can show your employment and income history. Lenders want
to know that you have held steady jobs in the same field of work,
and have earned a stable income for at least the last two years.
They will also want to know if it is likely that you will continue to be
employed and if your income will stay the same or even increase in
the next two years. They will probably contact your past and
present employers to verify information. Remember, all of this is to
help them understand that you can repay the loan for your new
home.
If you have just finished your education and
are beginning to work in your new career, your
lender will consider that a positive move.
Finishing school and working in your area of
study will not hurt your chances to get a home
loan.
Other debt
As we mentioned before, your lender will want to know how much
debt you have. In Chapter 2 we discussed ways to avoid too much
debt and pay off extra debt before you apply for your home loan.
This is where that information is very important.
“I have enough money to
last me the rest of my life,
unless I buy something.”
--Jackie Mason
Notes:
Credit: An arrangement to
buy something and pay for
it later or over a period of
time.
Credit history: A record
of credit use that lists
individual consumer debts
and whether they were
paid as agreed.
Credit report: A report of
an individual’s credit
history and record of
repaying debt.
Notes:
Your lender will want information on any car or furniture payments
you might be making, student loan amounts, revolving charge
accounts at stores or charge card accounts, and any other monthly
bills you pay. This will also include amounts you might pay for child
support, child-care expenses, alimony, or wage garnishments. The
lender doesn’t include your monthly utility bills, insurance bills, or
retirement and savings contributions as debts. If you have too much
money going out every month to pay your debts, this can disqualify
you from getting a home loan.
The amount of money you bring in every month from your job, your
employment history and stability, and the amount of debt you have,
will all help the lender decide if you have the capacity to pay back a
home loan. If you carefully consider your situation, get rid of extra
debt, and provide the information the lender needs to verify these
things, you will give yourself a better chance of getting the loan you
need to buy your own home.
Credit
We discussed credit before, and talked about how important it is to
have a good credit history. Your credit history is very important in
helping the lender decide if they want to loan you money. If you
aren’t able to pay your smaller bills when they’re due, the lender will
not believe that you could handle your money any better with a
larger debt. If you have several loans and credit cards and struggle
to pay even the minimum amount due each month, you will need to
make some improvements before a lender will be willing to lend you
money for a home loan.
The lender will order a copy of your credit report to look at.
Remember when we encouraged you to get a copy of your credit
report and see what was on it before you applied for a loan? It is
important that you know what that report says about you before the
lender looks at it. You don’t want any unpleasant surprises! Your
credit report will give detailed information about every company that
you borrowed money from in the last seven years, including the
amount you borrowed and if it’s paid off, and will show how many
times you were late with your payments and how late they were. It
will also include any information about bankruptcies, court
judgments against you, or other problems.
If you have several late payments, accounts in collection, or court
judgments against you, you will want to explain them to the lender.
You will need to be able to convince the lender that there were
good reasons for the late payments, that you have solved the
problems and that your credit situation is getting better.
If you have a history of credit problems, you can get help. Don’t
give up! There are consumer credit counseling agencies in your
community that are non-profit and will help you for free or for a
small fee. Go back to Chapter 2 and read the section about getting
help when you have bad credit. Then, make a few phone calls.
Collateral: Property that is
pledged as security for a debt.
Collateral
Appraisal: A professional
estimate of the market value of
a property.
The value and condition of your new home will affect your mortgage
loan. The home you want to buy is the collateral for the loan.
Collateral is security for your loan. As we discussed before, if you
don’t make your house payments, the lender has the right to take
the house from you and sell it to pay back the loan. It is important to
the lender that the home is worth enough money to pay back the
loan, if needed. This is why they hire an appraiser to do an
appraisal of the home.
Your lender will check the appraisal and look for the value of the
home as well as to make sure the home is in good condition. If the
appraisal shows a major problem with the house, they will probably
require that it be repaired before agreeing to the loan. This is
another contingency to your loan, which protects both you and the
lender.
How Much Can You Borrow?
Assuming that the lender is convinced that you know how to handle
money, you have proven that you have the income sufficient to
meet your needs and pay back a home loan, and the home you
want to buy is in very good condition, how does the lender
determine how much money you can borrow?
To make sure that you can afford to pay your house payment,
lenders set limits on how much of your income can go to pay debt
payments. These limits are called the housing ratio and the debtto-income ratio. We mentioned these in Chapter 2, but we’re
going to look at them again.
Housing Ratio
The maximum percentage of your income that can go towards a
house payment is predetermined by the type of loan you choose.
This is the housing ratio. Depending on the type of loan you want,
your lender could require that your house payment, including
principal, interest, taxes, and insurance, not exceed 29 percent (or
another predetermined amount) of the income you make.
Housing ratio: The
percentage of gross income
that goes toward paying for
housing expenses.
Debt-to-income ratio: The
percentage of gross monthly
income that goes toward
paying debts.
Notes:
“I’m living so far beyond
my income that we may
almost be said to be
living apart.”
--e e cummings
Notes:
For example, if your gross monthly income is $2,000, and the loan
you want has a housing ratio of 29 percent, the maximum amount
you could spend each month for your house payment would be
$580. ($2000 X 29% = $580)
In addition, the lender will take a look at how much your housing
costs will increase by buying a home. The smaller the increase, the
easier it will be for you to get your loan. This means you don’t want
to look for houses that are so expensive that your house payment
will be much more than you were already paying for rent.
Debt-to-Income Ratio
The maximum percentage of your income that can be paid towards
a house payment plus all other creditor debts is called the debt-toincome ratio. This amount is also pre-set, depending on which type
of loan you have. The debt-to-income ratio could be from 35 to 45
percent.
For example, if your loan program has a 41 percent debt-to-income
ratio, the total of your house payment (PITI) plus car, furniture,
credit card and other debt payments cannot be more than 41
percent of your income. If your gross monthly income is $2000, the
maximum amount you could be spending on all debt is $820.
($2000 X 41% = $820)
From these calculations you can see
that if you have a lot of debt you will
qualify for a smaller home loan, one
which might not be enough for the
house you want. You may need to
get rid of some of your debt before
you will qualify for a loan.
A lender might use a higher housing
ratio and/or debt-to-income ratio
(meaning you can have a larger amount of debt) if you have made
a larger down payment, have a large amount of money in your
savings account, one of your large debts will be paid off soon, or
your income will increase very soon. If you have a successful
history of being able to handle a higher debt load, they will take that
into consideration also.
Pre-qualification/Pre-approval
If you know how much money you can borrow before you start
looking at homes, you can narrow your search and look at only
those houses in your price range. Most lenders will be happy to
pre-qualify you and help you determine approximately how much
money you are qualified to borrow. Usually, there is no charge for
this service, and you are not required to get your loan through that
particular lender if you find a better interest rate and terms
elsewhere.
It is important to know that being pre-qualified for a loan does not
mean you are pre-approved. When a lender pre-qualifies you for a
loan, they do not check into what you tell them. They only fill out a
worksheet based on the information you give them, and will give
you an approximate amount that you might be qualified to borrow.
You can practice pre-qualifying yourself for a
loan by using the worksheets at the end of this
chapter. First, fill out the Total Monthly Debt
Worksheet. Notice that this worksheet is
different than the debt worksheet you filled out in
Chapter 2. Lenders do not include all of your
expenses to figure out your debt-to-income ratio.
You will need to remember those other
expenses when thinking about how much money you can borrow
and pay back.
Next, fill out the Pre-qualifying Worksheet, using your total from the
debt worksheet. You can either use the housing and debt-toincome ratios provided, or replace them with those that apply for
the type of loan you’re considering. If you find that the monthly
mortgage amount you qualify for is too small for the house you
want, you need to make some changes. What would happen if your
Total Monthly Debt amount were smaller? Do you need to make
some changes in your income? Can you afford to purchase the
home you are looking at?
In today’s home buying market, most homebuyers are finding that
they must be pre-approved by a lender before they even begin to
look at houses. Sellers are much more likely to accept an offer on
their house if the buyers are pre-approved.
Pre-approval takes longer than being pre-qualified. The lender will
ask for all the important information to determine what size loan you
qualify for. After checking all the information you provide, they will
actually provide you with a pre-approval letter, which lets sellers
know that you are already approved for a certain amount, and will
make it easier for them to accept your offer.
Pre-qualified: The lender
has agreed to lend you
money for the purchase of
a home, but is not
committed to a certain loan
amount.
Pre-approved: The lender
has agreed to lend you a
certain dollar amount for
the purchase of a home.
Notes:
Tip: Copy the
worksheets, write on the
copy, and keep the
original to make more
copies for the future!
Finding the Right Lender
“Underlying the whole
scheme of civilization is
the confidence men have
in each other, confidence
in their integrity,
confidence in their
honesty, confidence in
their future.”
--Bourke Cockran
Conventional home loans:
Any mortgage not insured or
guaranteed by FHA, VA, or
another government entity.
There are many types of lenders who can make mortgage loans.
You may have already thought of going to your local bank, but
there are many other possibilities too. Comparing the different
types of loans offered by different lenders can save you money.
Here is a list of some of the lenders to consider:
•
Notes:
•
•
•
•
Banks: If you can find a good home loan through your local
bank you have the advantage of keeping all your financial
matters in one place. Banks provide loans for homes, cars,
home improvement, business, and many other loans.
Mortgage banking companies: Since mortgage companies
specialize in only making loans secured by homes or
property, they can offer very good interest rates.
Credit unions: Credit unions usually offer good rates and
terms for their members. Since a credit union is a private
bank, you must be a member of a certain group to be a
member of a credit union. You may qualify through your
employer or school or some other group.
Mortgage brokers: A mortgage broker’s job is to find loans
for buyers. They help you fill out a loan application, check
your credit and collect the information needed for the
application, and then research which loans and which
lenders would work for your situation. Mortgage brokers
receive a fee from the lenders, so some brokers may place
loans with the lender who pays them the highest fee, rather
than with the one that will give you the best terms. You will
want to check the reputation of the broker before you work
with them.
Non-profit community housing: In most cities you can find
organizations that are working to improve or repair certain
neighborhoods in your city, or who might focus on helping
low- and moderate-income families to buy their own home.
These organizations may have funding from government or
private grants to provide money for home loans, so they are
often able to provide loans with lower interest or better
terms. These loans are available to people who meet certain
income or other guidelines, and the loans must be repaid or
you may lose your house, just as with conventional home
loans. The best way to find out about these organizations is
•
to check with the housing agency in the city where you live,
and ask them for a list of nonprofit housing groups.
Sellers: While looking at houses, you may see signs or
advertisements stating that the “owner will carry” or
somehow stating that the owner will lend you the money to
buy their home. When the owner “carries” the loan, you
make payments directly to the owner, at a specified interest
amount and for a pre-determined amount of time.
Nonprofit housing
organization: An
organization that exists to
educate and assist others
but whose partners do not
benefit financially from their
membership.
Notes:
Be sure that you have legal ownership of the home
transferred to you through a note and mortgage. A title
company can draw up the papers for you to make sure both
you and the seller are protected. Consult with your attorney
before signing this type of contract. You will want to be sure
that there is nothing wrong with the house and that you can
sell the home if you need to. This type of transaction can be
very dangerous for you if you are not very careful.
A seller might also agree to a “carryback”, which means the buyer takes
over the seller’s loan but doesn’t have
enough money to pay the difference
between the loan amount and the
purchase price. This kind of a loan
would mean you would be making
two loan payments: one for taking
over the seller’s original loan, and
another to the seller for the difference between the loan and
the purchase price. Make sure you can afford both
payments! If you don’t have legal documents drawn up
which transfer ownership to you it is much easier for the
seller to take back the property, even if you are only late on
one payment, because they still own it. Protect yourself and
your investment by insisting on having legal documents
drawn up that transfer legal ownership over to you, while at
the same time recognizing that if you don’t make your
payments, the seller has the right to take back the house.
Don’t forget to arrange for title insurance!
Start with the bank or credit union you bank with, and ask them if
they do home loans. Find out what kind of programs they have
available and what kind of terms they offer, contact other lenders to
find out more and compare programs, terms and interest rates.
Plan on contacting at least three lenders of different kinds in your
area so you know what’s offered. You should plan on talking with
the lenders all on the same day, as interest rates can change daily.
Government-insured
loans: Loan programs that
provide insurance or
guarantees to the lender.
Notes:
Mortgage Loan Classifications
There are three main categories of home loans: conventional loans,
government-insured loans, and special loan programs for lowincome homebuyers. It’s a challenge to know which programs and
terms are best for your situation, but because there are so many to
choose from, it is possible to find one that works just right for you.
Government-Insured Loans
Government-insured loans are not money loaned
by the government. Instead, the government has
programs that provide insurance or guarantees to
the lender. In other words, the government insures
the loan so the lender doesn’t have to worry about
not getting repaid. The interest rates on
government loans are generally set by the current
market and are sometimes lower. The government,
not the lender, controls some of the fees and sets the requirements
to qualify for the loans.
Government agencies such as the Federal Housing Administration
(FHA), the U.S. Department of Veterans Affairs (VA), and USDA
Rural Development (USDA-RD) provide these government-insured
loans. You must meet certain guidelines to qualify for these
programs. For instance, to qualify for a VA loan you must be a
veteran of the U.S. armed forces. VA loans don’t require a down
payment from the veteran. FHA programs often have a smaller
down payment required to purchase a home. Your lender can guide
you in deciding if you qualify for one of these loans.
Federal Housing Administration (FHA)
FHA was created by the Federal Government to provide affordable
home financing for qualified borrowers. FHA is a very popular loan
for the first-time homebuyer, but it is a program that can be used for
third or fourth home loans too. Today, FHA plays a critical role in
financing for minority borrowers, first-time homebuyers, and
borrowers who have little money to put down on a home.
FHA insures 100% of the loan, eliminating the lender’s risk. FHA
mortgage insurance provides lenders with protection against losses
because FHA will pay a claim to the lender in the event of a
homeowner’s default. Loans must meet certain requirements
established by FHA to qualify for the insurance. The cost of the
mortgage insurance is passed along to the homeowner and
typically is included in the monthly payment. In most cases, the cost
will remain for the entire loan term.
Unlike conventional loans that adhere to strict underwriting
guidelines, FHA-insured loans require a smaller cash investment to
close a loan. FHA guidelines are more relaxed and will allow some
borrowers to have a bankruptcy that was discharged at least 2
years ago, they allow the use of alternative credit sources (utilities,
child care, and insurance premiums) in lieu of traditional credit, and
they allow higher debt ratios. FHA interest rates are extremely
competitive with conventional loans.
(Source: www.hud.gov/offices/hsg/fhahistory.cfm)
USDA Rural Development Single Family Housing Direct Loan
Programs
If you want to buy an affordable house in a rural area, USDA Rural
Development (“USDA RD”) wants to help. They can tell you about
the various programs available through RD and assist you in
applying for them. Further information on all of USDA’s housing
programs is available at the USDA Rural Development office
servicing your area. These are usually listed in telephone books
under “United States Government, Department of Agriculture.”
Information is also available on the USDA RD website at
http://www.rurdev.usda.gov/rhs/index.html, or contact the Rural
Housing Service at the following address:
Rural Housing Service
USDA Rural Development
STOP 0701
1400 Independent Avenue, SW
Washington, DC 20515-0701
(To be connected to your Rural Development state office, dial (202)
720-4323 and press 1.
The Direct Homeownership Loan program is available to lower
income individuals and families who wish to live in rural areas or
rural cities or towns. Under the program, individuals or families
receive a loan directly from RD. Payments are based on income,
with no down payment required. You must be unable to obtain a
homeownership loan from a bank or other conventional sources.
Loans under the Direct Homeownership Loan program are made to
families with incomes below 80% of the median income level of the
communities in which they intend to live. Even if you have minor
credit problems, RD may still be able to work with you. Loans under
this program may be made for the purchase of an existing home or
to build a new home.
“Lack of money is no
obstacle. Lack of an
idea is an obstacle.”
--Ken Hakuta
Notes:
Sweat Equity: Manual
labor, either in renovation
or construction, which is
performed in return for
home ownership.
Notes:
Mutual Self-Help Housing Program
Under this program, families provide a substantial portion of the
labor involved in building their own homes. This “sweat equity”
contribution reduces the total cost of purchasing a home—allowing
many people to purchase houses that otherwise would have been
out of reach.
Guaranteed Loans
If your income is too high to qualify for a direct housing loan, you
may qualify for a guaranteed loan. These are loans made by other
lenders, such as banks or credit unions and are guaranteed by RD.
This allows other lenders to make loans to people they would not
otherwise be able to serve. Guaranteed housing loans are available
to applicants whose incomes are below 115 percent of the median
area income.
(Source: “A Place to Live” USDA Rural Development pamphlet, 2000)
U.S. Department of Veterans Affairs (VA)
The main purpose of the VA home loan
program is to help veterans finance the
purchase of homes with favorable loan
terms and at a rate of interest that is
competitive with the rate charged on
other type of mortgage loans. For VA
housing loan purposes, the term
“veteran” includes certain members of the Selected Reserve, active
duty service personnel and certain categories of spouses.
To get a VA loan, the law requires that the homebuyer must be an
eligible veteran and that they must occupy the property as their
home within a reasonable time after closing the loan. The veteran
must have enough income to meet the new mortgage payments
and take care of other obligations and expenses and must have a
good credit record.
VA loans offer some important advantages over most conventional
loans:
• Ensures that all veterans are given an equal opportunity to
buy homes with VA assistance
• No down-payment
• A negotiable fixed interest rate competitive with conventional
mortgage interest rates
• Limitations on closing costs
• An assumable mortgage, with approval by the lender
• Long repayment terms
• No prepayment penalty
•
Leniency extended to VA homeowners experiencing
temporary financial difficulty
(Source: “Guaranteed Home Loans for Veterans”, VA pamphlet, 1996)
Conventional Loans
Lenders who make conventional loans are companies who lend
money to make a profit. They set their own interest rates and fees
and have their own limits on how much they will lend for each of
their programs. They often have more flexibility to adjust the
requirements of the loan to meet borrowers’ needs. The rates and
terms for conventional loans are usually comparable with other
home loan products in the market.
Fannie Mae or Freddie Mac: These organizations have special
programs that allow lenders to accept smaller down payments on
loans and use higher qualifying ratios (remember the housing and
debt-to-income ratios?) and then sell the loan to Fannie Mae or
Freddie Mac.
If you have saved less than 20 percent of the purchase price for a
down payment, a conventional loan will usually require that you
also purchase private mortgage insurance (PMI) to protect the
lender. The cost of the PMI is added to your monthly mortgage
payment and your closing costs. We will discuss PMI more later.
Special Loan Programs
Most states, and some local government jurisdictions, have special
programs in place to help the first-time and low-to-moderateincome homebuyer purchase a home. The terms for these
programs usually include lower down payments and lower interest
rates. Other special programs such as down payment assistance
may be available to those who qualify for the programs. The focus
of these programs is to make it possible for more people to own
their own home. Some programs are national, and some are local,
based on the needs of the community you live in. Check with the
Housing and Finance Association in your area for information about
these programs.
Some of the different types of loan programs are:
• Local bank programs: Under the Federal Community
Reinvestment Act, all banks are required to invest part of
their earnings in programs that help increase home
ownership. Ask about them at your bank.
• City and county housing agencies
Fannie Mae or Freddie
Mac: Organizations
chartered by Congress to
increase supply of funds
for home loans. Both buy
mortgages from lenders
and then sell them to
investors.
Private mortgage
insurance (PMI): An
insurance policy that
reimburses the lender for
losses if a borrower fails to
make payments.
Notes:
•
Adjustable-rate mortgages
(ARM): A mortgage whose
interest rate changes over
time. The rate is based on an
index that reflects current
market conditions.
Index: The index is usually
an average of the interest
rates on a particular type of
security such as the LIBOR.
Margin: With adjustable rate
mortgages, the set
percentage the lender adds
to the index rate to determine
the current interest rate.
Community development corporations: These might
include Habitat for Humanity, Neighborhood Housing
Services, and many others.
Types of Mortgages
Before you can decide which lender to use and
what kind of home loan you need, you need to
understand the different types of mortgage loans
that are available. Your mortgage loan will be
one of the largest loans you ever get, and it’s
important to choose your loan carefully.
Fixed-Rate Mortgages
With a fixed-rate mortgage, the interest rate stays the same
throughout the whole life of your loan. This kind of loan can protect
you from inflation, because if interest rates go up it won’t affect your
principal house payment at all. As we mentioned before, if your PITI
payment goes up with a fixed-rate mortgage, it will be because
property taxes or homeowner’s insurance went up, but your interest
remains the same. If interest rates go down, your payment won’t
decrease unless you refinance your home loan. Fixed-rate
mortgages are the most common loan for first-time homebuyers.
Who should consider a fixed-rate mortgage?
• Those who can easily qualify for the loan they want
• Those who expect to stay in their new home for at least five
years
• Those who want the security of always having the same
house payment so they can budget their money
Adjustable-Rate Mortgages
These loans, also known as ARMs, can help a homebuyer qualify
for a larger mortgage than they could with a fixed-rate mortgage.
ARM mortgages usually start with a lower interest rate, so monthly
payments are lower, and then the interest rate on an ARM is
adjusted periodically, which will change your house payment
amount. The period of time before the first adjustment can be short,
such as 1 to 3 years, or long - even 7 or 10 years. After that first
initial period of time, the interest rate on most ARM loans is
adjusted every year, although some might change every 3 or 5
years.
The interest rates on ARM loans rise and fall along with market
interest rates, so your house payment may rise higher than your
ability to afford it. The interest rate is linked to an index, or an
average of interest rates, plus a certain percentage, called a
margin. How often the interest rate is adjusted, which index is used
to determine how much it’s adjusted, and the rate caps, or the
maximum amount the interest rate can be adjusted, are all decided
on ahead of time. If you get an adjustable rate mortgage, make
sure you understand its terms so you know what to expect. Before
you get this type of loan, find out what the maximum amount could
be, and determine if you can afford it if it goes that high.
Who should consider an adjustable-rate mortgage?
• Borrowers who expect to move within five years
• Those who want a slightly lower rate to qualify for a loan
• Borrowers who know their income will increase faster than
their payment amount will
• Those who are buying when interest rates are high but are
expected to go down again soon
• Homeowners who are willing to have their house payment
amount change periodically
Balloon Mortgages
For homeowners who know they won’t be staying long in the house
they purchase, a balloon mortgage can be a good option. For the
first initial term of the loan, monthly payments for a balloon
mortgage are the same as if you had a regular fixed-rate mortgage.
At the end of this predetermined period, the entire balance of your
mortgage will be due. The initial term of the loan could be as low as
5 or 7 years, or as much as 15 years, but the payment is generally
based on a 30-year amortization. Whatever the term, be very
careful with this type of loan.
To pay off the balance of your loan, you would need to sell the
home and move, or refinance the loan at the current interest rate.
When the loan becomes due, you may have the option of
“resetting” the interest rate of your loan at whatever the current
interest rate is at the time, or you may be able to refinance your
mortgage. This option must be stated in your original loan
agreement, and you must meet certain qualifications, such as not
being late with your payments, having no liens against the property,
and others.
This kind of mortgage is good for people who know they will be
transferred to a different town in a few years. If you get a balloon
mortgage, be sure you know and understand all the terms and
Refinance: Using a new
mortgage to pay off an
existing mortgage.
Graduated payment
mortgage: A mortgage that
starts with a low monthly
payment that increases at a
predetermined rate over a
specific period of time.
Negative amortization: The
borrower is paying less
interest than what is actually
being charged for a mortgage
loan. The unpaid interest is
added to the loan's principal,
so the borrower may end up
owing more than the original
amount of the mortgage.
requirements. If you have to reset or refinance your loan at a higher
interest rate than you had in the beginning, your house payment will
be higher.
Manufactured housing:
Homes that are built in
factories and then moved to
the property site.
Notes:
Who should consider a balloon mortgage?
• Those who expect to move or be transferred soon
• Buyers who are sure they will be able to refinance if they still
live in the home when the full mortgage becomes due
• Those who may need a lower monthly payment for a while to
meet the debt-to-income ratio guidelines
Graduated Payment Mortgages
A homebuyer who has just begun their work career and is sure that
their income will continue to increase over time may benefit from a
graduated payment mortgage (GPM). House payments for a
GPM start out at a smaller amount and gradually increase over
time. When the payments reach a certain amount they stay at that
amount for the rest of the loan, except for increases in insurance
and taxes. Think things through very carefully before agreeing to
one of these loans. You must be very sure that your income will
increase along with your house payments.
A GPM is adjusted at a predetermined rate and payment level. It is
not adjusted according to interest rates, like the ARM is. This type
of loan can result in negative amortization because some of the
interest owed from the beginning of the loan is added back into the
loan balance. The initial smaller payments of the loan do not
include all the interest due. If something happens that you need to
sell your home sooner than expected, the amount you still owe –
because of the interest added back into the loan balance – may be
higher than you can sell the house for.
Tip: Copy the
worksheets, write on the
copy, and keep the
original to make more
copies for the future!
Who should consider a graduated payment mortgage?
• Homebuyers who know their income will soon increase
• Those who know how to budget their money to plan for
higher payments
• Shoppers who plan to live in their new home for a long time
Other Mortgages
There are other types of mortgages that we haven’t discussed here.
There are step-rate mortgages, interest only mortgages, mortgages
for buying manufactured housing, possibilities to lease a home
with an option to buy it in the future, sellers who finance the loan
themselves, and other private mortgage possibilities. There are
special homebuyer assistance programs that may pay some of the
interest on a home loan or may reduce the purchase price of a
home. You might be taking this homebuyer education course to
qualify yourself for a housing assistance program. Talking to
lenders, asking questions, and checking internet and library
sources will help you learn more about what is available to help you
become a homeowner.
Working with a Lender
We’ve given you a lot of information to talk over with a lender. You
need to find a lender that will work with you, one you feel
comfortable working with, and who will be interested in finding the
best loan for you.
Comparing Loans
When you talk to a lender, you don’t need to accept the first rate or
loan program offered. Ask them about other loan programs you
might qualify for. If you’ve already met with another lender who
gave a better rate, ask the lender to match the rate and terms. Ask
lots of questions and talk with several lenders so you know what is
available to you. Use the Mortgage Shopping Worksheet at the end
of this chapter and fill in the information as you interview lenders.
Compare the information you gather to decide which lender and
loan product would work best for you.
Gathering Your Records
Your lender will need a lot of information
from you to determine what loan you are
eligible for, how much you can borrow, and
whether they can lend money to you. This
loan documentation checklist will help you
get started gathering your information. The
lender may ask for additional documents,
depending on the conditions of your loan.
Having this information ready will help speed up the process. If you
are applying for a loan with a spouse or other co-borrower, you will
need to gather the same information for both of you.
General Documents
q Social Security number
q Birth dates
q Driver’s License or other picture ID
q Signed copy of your ratified sales contract, with receipts for
the earnest money deposit towards the property
“Learn the art of patience.
Apply discipline to your
thoughts when they
become anxious over the
outcome of a goal.
Impatience breeds
anxiety, fear,
discouragement and
failure. Patience creates
confidence, decisiveness,
and a rational outlook,
which eventually leads to
success.”
--Brian Adams
Notes:
q
Property Information Listing Sheet or Multiple Listing Service
Sheet for house you want to buy
Income and Employment
q Name, address, phone number, and fax number for every
employer you have had in the last two years
q Dates of employment and income, including explanation of
any gaps in employment, if needed
q Most recent two months pay stubs showing year-to-date
earnings
q Income tax returns for the last two years
q Profit and loss statement and balance sheet for the past two
years if you are self-employed
q Proof of child support payments received
q Proof of all other income, such as pension payments,
seasonal employment, government assistance/SSI benefits,
and statements of stock dividends
“A positive attitude may
not solve all your
problems, but it will
annoy enough people to
make it worth the effort.”
--Herm Albright
Non-Traditional Credit
History: A payment history
with landlords, utility
companies, and other
regular bills that show a
history of making regular
and on-time payments.
Notes:
Bank Accounts
q Most recent savings account statements
q Most recent checking account statements
q Most recent brokerage statements showing stocks and
bonds balances and recent transactions
Assets
q Make, year, and current market value of each automobile
owned free and clear
q Estimate of the market value of other assets, such as
furniture, recreational vehicles, personal property or
collections
q Approximate value of vested interest and most recent
statement for retirement plan
q Name of life insurance policy, policy number, face amount
and approximate cash value of each policy
Debts and Expenses
q Creditor’s name, address, account number, payment
amount, current balance, date paid in full and copy of
statement with zero balance (if applicable) for each open
credit account, including credit cards with a zero balance
q Information on any installment loans, including creditor’s
name and address, account number, payment amount,
current balance, etc.
q
q
q
Year, make and model of car you are making payments on,
as well as lender name, account number, monthly payment
and amount still owing
Letter of explanation for any negative credit items on your
credit report
Bankruptcy documentation and list of creditors, if bankruptcy
within last 10 years
Non-Traditional Credit History (if no credit history)
q Name and address of landlords for last two years
q Receipts or cancelled checks for rent payments
q Receipts or cancelled checks for utility payments
q Receipts or cancelled checks for private credit relationships
Housing
q Landlord’s name and address and previous 12-month rental
payment history - rent receipts or copies of cancelled rent
checks are helpful
q Address, current market value, mortgage lender, account
number, current monthly payment and outstanding balance
due for present house if you own your own home now
q Previous address information if you have lived at your
current address less than two years
Other Information That May Be Needed
q Veteran’s certificate of eligibility (if applicable)
q Certified copies of divorce decree and separation agreement
q Proof of child support payments you receive
q Name, address, and phone number of person to whom you
pay child care
q Signed letter from the donor stating that you are not required
to repay gifted money for down payments or closing costs
Applying for the Loan
After you have researched the different types of loans available,
decided who you would like to use as your lender, and gathered up
all your documents, you will make an appointment to meet with the
lender in their office. Both you and your spouse, or co-borrower,
should be at this meeting. Be prepared to meet with the lender for
an hour. It is normal to feel a little nervous about the meeting with
the lender, but remember that the lender wants your business.
They will ask specific information about your employment, income,
debts, and credit history, as well as information about the house
you want to buy.
Good Faith Estimate: A
document that estimates
the closing costs and fees
you will have to pay.
Truth in Lending
Statement: A summary of
the total cost of credit such
as the APR and other
details of the loan.
Notes:
It is important that you are honest with the lender about your
financial affairs. Instead of trying to cover up past problems, it
would be helpful if you discuss them and try to show the lender that
your problems have been solved. Ask questions and make sure
you fully understand the loan terms. The purpose of this meeting is
to:
• Give the lender copies of the documents you gathered
• Discuss all the terms of the loan you are applying for
• Fill out and sign the application form
• Sign letters giving permission for the lender to verify
employment and financial information
• Give the lender authorization to get your credit report (you
may have to pay the fee for this at that time)
• Discuss any possible problems with your credit, income, etc.
• Pay the application and appraisal fee
The lender is required by law to send you a Good Faith Estimate
and an early Truth-in-Lending Statement within three business
days after you have applied for your loan. This document will give
you an estimate of the closing costs and fees you should be
prepared to pay. There is a sample good faith estimate in the
appendix of this book. If you don’t understand any of the charges,
do some research and find out what they are. Ask the lender, look it
up on the internet or other sources, or ask the instructor of your
homebuyer education course. Make sure you understand the terms
of your loan.
Good Things to Know About Your Loan
Annual percentage rate
(APR): The total cost of a
mortgage stated as a yearly
rate.
Interest rate lock-in: A
written agreement
guaranteeing the homebuyer
a specific interest rate,
provided the loan is closed
within a certain period of
time.
To make sure you have the best loan possible for you and your
situation, here are a few more things you should know:
Annual Percentage Rate (APR)
The APR is a combination of the interest rate, points, broker fees,
and other pre-paid credit charges that you, the borrower, are
required to pay. Not all the fees you are required to pay are
included, but the APR is a good number to use to compare different
loan programs.
Lock-Ins
Interest rates can change daily. The interest rate that the lender
quotes to you on one day may be different on another day. The
amount of loan you qualify for and the size of your monthly
payment will depend on the interest rate you pay. You might want
to make sure that you will get the interest rate the lender quoted to
you. The lender can “lock in” your interest rate for a specific amount
of time. Make sure you get a lock-in agreement in writing, and
make sure the rate will be locked in long enough to finalize your
loan.
Prepayment
Refer back to the Amortization Schedule at the end of this chapter.
Remember what a small amount of your monthly payment is
applied to the principal of your loan in the first years of your loan? If
you pay more each month on your loan payment, the extra
payment reduces the amount you owe. You can pay off your loan
sooner and save a lot of money on the interest. This is called
prepayment. The chart on the next page gives examples of how
much money you can save if you pay a little extra on your house
payment:
Loan Amount: $125,000
Interest Rate: 4%
Regular Monthly Payment: $596
Loan Term: 30 years (360 months)
Extra Amount
Monthly
Months to
Total
Total
Added to
Payment
Pay Off
Amount
Saved
Payment
Mortgage
Paid
$0
$596
360 (30 yrs)
$214,560
$25
$621
335 (27.9 yrs)
$208,034
$6,525
$75
$671
292 (24.3 yrs)
$195,932
$18,628
$100
$696
275 (22.9 yrs)
$191,400
$23,160
$150
$746
246 (20.5 yrs)
$183,516
$31,044
Notice that just by rounding off the house payment amount to $621
each month, the homeowner can save themselves $6,525 and
they’ve cut two years off their mortgage. Think of the difference
they could make if they add a little more to their payment each
year! Some lenders charge a penalty for prepayment of a loan.
Before you choose a lender, ask if they will allow you to prepay
your loan without paying a penalty.
How Your Loan is Processed
After your meeting, the lender will hand over your application and
documents to the loan processor, who will verify all your
information. This may take some time. When you meet with your
lender, ask them for an estimate of how long this process takes.
They have a lot of information to verify, but you have helped speed
up the process by gathering and organizing your information ahead
of time. If they ask for more documents, try to get it for them as
soon as possible. During this time the lender and loan processor
will:
• Send you a Truth-in-Lending Statement and a Good Faith
Estimate of Closing Costs within three days of your meeting
Commitment Letter: A
letter from the lender stating
that they agree to lend you
money to purchase a house.
Notes:
“In this world, nothing is
certain but death and
taxes.”
--Benjamin Franklin
Closing: The date on which
all documents are either
recorded or accepted by an
escrow agent and the sale
proceeds are available to
Seller.
Notes:
•
•
•
•
•
•
Request an appraisal and flood certification of the property
you want to buy
Order your credit report
Verify two full years of employment for you, checking dates
of employment and earnings
Verify bank account balances
Check with your landlord to establish rental history
Prepare documents and loan package to submit to the
underwriter
The underwriter will evaluate the loan package and compare the
information you provided with the information they verified. Then
they will analyze your file with their loan guidelines to see if you
qualify for the loan. If you have a few credit problems in the past but
a clear record for the last several months, they will take that into
consideration. The underwriter will read any letters of explanation
you were asked to provide, and will make a decision based on all
the information in your file.
Approval
The lender will let you know whether you are
approved for the loan or not. If you are
approved, you will receive a Commitment
Letter. Congratulations! Be sure you read the
letter carefully, and make sure all the conditions
of the loan are correct. If there is anything in
that letter that is new or that you don’t
understand, contact the lender and ask about it.
There may be certain conditions in the letter,
such as final inspection of the property, a title
search, or other things the lender will require before the loan is
final.
The commitment letter will have an expiration date. That means
that if all the conditions stated in the letter are not completed by that
date, the loan will be withdrawn. You will need to sign a paper
saying that you accept the terms and conditions of the loan, so
make sure you understand them before you sign.
Be patient – you still don’t have your mortgage loan yet. The next
step is called closing, which is the meeting where you pay your
money, final papers are signed, the property is deeded over to you
and your mortgage is legally recorded. Closing day is an exciting
day, and the next chapter will help you prepare for it.
“Fall seven times, stand
up eight.”
--Japanese Proverb
Rejection
There can be a lot of reasons why a mortgage loan is turned down.
As we discussed before, a lender cannot deny you a mortgage loan
because of your race, religion, age, color, national origin, gender,
marital status, or because you receive public assistance.
If you are turned down for the loan, lenders are required by law to
explain their decision. It is discouraging to be turned down, but you
can always apply with another lender. Before you do, try to meet
with the loan officer and ask them exactly why you were turned
down. There are things you can do to fix the problems, with some
extra time and effort.
Take a closer look at your financial and credit situation, and see
what you can do to fix some of your problems. Maybe you need a
little more time to establish a better credit history or increase your
income. Don’t get discouraged!
The chart below outlines some of the legal reasons for a mortgage
loan being turned down. Don’t give up if you are turned down for a
loan. There are a lot of things you can do to help yourself, and you
can always apply again and to another lender after you have
corrected problems. The chart also gives you ideas for fixing some
of the common problems:
Reason for
rejection
Too much debt
What you can do
•
•
Not enough assets
or money on hand
•
•
Value of house too
low
•
•
Credit history
problems
•
•
•
Go back to Chapter 2, review budgeting and
ideas for reducing debt
Talk with a housing counselor or credit
counselor
Rework your budget and spending so you
can save more money
Contact a non-profit housing agency for
programs requiring less closing costs or
down payment
Use the appraised value of the house to
renegotiate the price of the house with the
seller
Negotiate with seller to correct problems to
increase house value
Review your credit report
Require the credit reporting agency to
correct negative incorrect information
Review Chapter 2 for ways to rebuild good
credit, then apply again later
Notes:
Chapter Summary
“In the business world,
the rearview mirror is
always clearer than the
windshield.”
--Warren Buffett
Notes:
Now you know a little more about mortgages than you did before.
We’ve given you practice in pre-qualifying yourself for a loan, so
you have a better idea of how a lender will look at you and your
loan application. You’ve learned about different types or mortgages
and how to determine which kind is best for you. You’ve also
learned where to look for a mortgage, and what questions to ask
the lender about the different loan packages.
Remember, you can save yourself a lot of money if you learn
everything you can about mortgages and shop around. Don’t take
the first loan you can get. Talk to several lenders, compare rates
and terms and different loan packages, and make sure you
understand the loan you decide on. Your home is one of the
biggest purchases you are ever going to make, and it is important
that you know everything you can. Ask questions, do research, be a
smart home shopper! Try the Self Test at the end of this chapter,
and see how much you’ve learned already.
Used by special permission
Self-Test: Getting a Mortgage
1. What are the 4 Cs of credit?
___________________
___________________
___________________
___________________
2. What does PITI stand for?
_________________________________
3. Draw lines to match the type of mortgage on the left with its description on the right.
a. Adjustable-rate mortgage
1. Interest rate does not change through
entire life of loan.
b. Balloon mortgage
2. Lower initial interest rate that changes
based on interest rate index. Payment
may go up or down depending on
current market interest rates.
c. Fixed-rate mortgage
3. House payments start out at a smaller
amount and gradually increase over
time.
d. Graduated payment mortgage
4. Monthly payments based on 30 year
amortization but lump sum due at end of
specific period.
4. Define the following terms:
Debt-to-Income Ratio ______________________________________________
Good Faith Estimate _______________________________________________
Pre-qualification __________________________________________________
Pre-approval _____________________________________________________
5. Complete the following sentences:
a. The best way to compare loans is to look at the ____________________________.
b. Verification of your employment, income, rental status and financial records is done
by the loan ________________________.
c. A _________________________ helps the lender see that you pay your debts on
time.
Amortization Schedule
Principal= $129000 (amount borrowed)
Amortization Period= 30 years
Interest Rate= 4.00%
Starting month= Sep
Your monthly payment will be $ 615.86
For Starting Year = 2013
• Sep:
Principal: $ 185.86
•
•
•
FOR 2013:
Oct:
Nov:
Dec:
Principal: $ 186.48
Principal: $ 187.10
Principal: $ 187.73
Interest: $ 430.00
Interest: $ 429.38
Interest: $ 428.75
Interest: $ 428.13
Principal= $ 747.17 Interest= $1716.26
Balance: $ 128,814.13
Balance: $ 128,627.64
Balance: $ 128,440.54
Balance: $ 128,252.81
Balance= $ 128252.81
For Calendar Year 2014 (Year 2, 28 left)
•
•
•
•
•
•
•
•
•
•
•
•
FOR 2014:
Jan:
Feb:
Mar:
Apr:
May:
Jun:
Jul:
Aug:
Sep:
Oct:
Nov:
Dec:
Principal: $ 188.35
Principal: $ 188.98
Principal: $ 189.61
Principal: $ 190.24
Principal: $ 190.88
Principal: $ 191.51
Principal: $ 192.15
Principal: $ 192.79
Principal: $ 193.43
Principal: $ 194.08
Principal: $ 194.72
Principal: $ 195.37
Interest: $ 427.50
Interest: $ 426.88
Interest: $ 426.25
Interest: $ 425.61
Interest: $ 424.98
Interest: $ 424.34
Interest: $ 423.71
Interest: $ 423.07
Interest: $ 422.42
Interest: $ 421.78
Interest: $ 421.13
Interest: $ 420.48
Balance: $ 128064.45
Balance: $ 127875.47
Balance: $ 127685.85
Balance: $ 127495.61
Balance: $ 127304.73
Balance: $ 127113.21
Balance: $ 126921.05
Balance: $ 126728.26
Balance: $ 126534.82
Balance: $ 126340.74
Balance: $ 126146.01
Balance: $ 125950.63
Principal= $ 2302.11 Interest= $5088.15 Balance= $ 125950.63
For Calendar Year 2042 (Year 29, 1 left)
•
•
•
•
•
•
•
•
•
•
•
•
FOR 2042:
Jan:
Feb:
Mar:
Apr:
May:
Jun:
Jul:
Aug:
Sep:
Oct:
Nov:
Dec:
Principal: $ 589.79
Principal: $ 591.75
Principal: $ 593.72
Principal: $ 595.70
Principal: $ 597.69
Principal: $ 599.68
Principal: $ 601.68
Principal: $ 603.69
Principal: $ 605.70
Principal: $ 607.72
Principal: $ 609.74
Principal: $ 611.78
Interest: $ 26.07
Interest: $ 24.10
Interest: $ 22.13
Interest: $ 20.15
Interest: $ 18.17
Interest: $ 16.17
Interest: $ 14.18
Interest: $ 12.17
Interest: $ 10.16
Interest: $ 8.14
Interest: $ 6.11
Interest: $ 4.08
Balance: $ 7232.72
Balance: $ 6640.96
Balance: $ 6047.23
Balance: $ 5451.52
Balance: $ 4853.83
Balance: $ 4254.14
Balance: $ 3652.46
Balance: $ 3048.77
Balance: $ 2443.07
Balance: $ 1835.34
Balance: $ 1225.60
Balance: $ 613.81
Principal= $ 7208.64 Interest= $ 181.63 Balance= $ 613.81
Total Monthly Debt Worksheet
Debts
Monthly Payment
Car Payment
$____________
$____________
Total car payments:
$____________
Credit Cards
__________
$____________
__________
$____________
__________
$____________
__________
$____________
Total monthly payment from credit cards:
$____________
Loan Payments
_______________
$____________
_______________
$____________
_______________
$____________
_______________
$____________
Total monthly debt from loans:
$_____________
Child Care (required for some loan programs)
$________________ X 52 ÷ 12
Weekly cost for all children
TOTAL MONTHLY DEBT (ADD FAR RIGHT COLUMN)
$_____________
$_____________
Prequalifying Worksheet
Step 1:
Your total Gross Monthly Income (before taxes)
Times 28% Housing Ratio (varies with type of loan)
________________
X
Equals
________________
Step 2:
Your total Gross Monthly Income (before taxes)
Times 36% Debt-to-Income Ratio (varies with loan)
Equals
Minus Total Monthly Debt (from worksheet)
Equals
.28
________________
X
.36
=________________
- ________________
=________________
Step 3:
The lesser of the two amounts from Step 1 and Step 2 is the maximum monthly
mortgage amount you would qualify for, including principal, interest, taxes and
insurance.
Use this form to re-figure the amounts using different ratios for different loan
types. You can also figure out the difference if you were to have a lower total monthly
debt amount
Mortgage Shopping Worksheet (p 1 of 2)
Lender 1
Lender 2
Name of Lender
Name of Contact
Date of Contact
Mortgage Amount
Mortgage
1
Basic Information on the Loans
Type of Mortgage: fixed rate, adjustable rate,
other? If adjustable, see next page
Minimum down payment required
Loan Term (length of loan)
Contract interest rate
Annual percentage rate (APR)
Points (may be called loan discount points)
Monthly Private Mortgage Insurance (PMI)
How long must you keep PMI?
Estimated monthly escrow for taxes & hazard
insurance
Estimated monthly payment (Principal, Interest,
Taxes, Insurance)
Fees: Different institutions may have
different names for some fees and may
charge different fees. We have listed some
typical fees you may see on loan documents
Application, Loan processing or underwriting fee
Origination fee
Lender fee or Funding fee
Appraisal fee
Attorney fees
Document preparation and recording fees
Broker fees (may be quoted as points,
origination fees, or interest rate add-on)
Credit report fee
Other fee
Other costs at Closing/Settlement
Title search/Title insurance
For lender
For you
Estimated prepaid amounts for interest, taxes,
hazard insurance, payments to escrow
State and local taxes, stamp taxes, transfer
taxes
Flood determination
Prepaid Private Mortgage Insurance (PMI)
Surveys and home inspections
Total Fees and Other Closing/ Settlement
Cost Estimates
Mortgage
2
Mortgage
1
Mortgage
2
Mortgage Shopping Worksheet (p 2 of 2)
Lender 1
Lender 2
Name of Lender
Mortgage
1
Mortgage
2
Mortgage
1
Mortgage
2
Other Questions and Considerations about
the Loan
Can any of the fees or costs be waived?
Prepayment penalties
Is there a prepayment penalty?
If so, how much is it?
How long does the penalty period last?
Are extra principal payments allowed?
Lock-ins
Is the lock-in agreement in writing?
Is there a fee to lock-in?
When does the lock-in occur – at application,
approval, or another time?
How long will the lock-in last?
If the rate drops before closing, can you lock-in
at a lower rate?
If the loan is an adjustable rate mortgage:
What is the initial rate?
What is the maximum the rate could be next
year?
What are the rate and payment caps each year
and over the life of the loan?
What is the frequency of rate change and of
any changes to the monthly payment?
What is the index that the lender will use?
What margin will the lender add to the index?
Credit Life Insurance
Does the monthly amount quoted to you
include a charge for credit life insurance?
If so, does the lender require credit life
insurance as a condition of the loan?
How much does the credit life insurance cost?
How much lower would your monthly payment
be without the credit life insurance?
If the lender does not require credit life
insurance and you still want to buy it, what
rates can you get from other insurance
providers?
Source: Federal Interagency Task Force on Fair Lending (FRB1-750000,0199C)