Reverse Mortgage - Get the Facts

Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity

If you’re 62 or older – and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses – you may be considering a reverse mortgage. It’s a product that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.


The Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to understand how reverse mortgages work, the types of reverse mortgages available, and how to get the best deal.


In a “regular” mortgage, you make monthly payments to the lender. In a “reverse” mortgage, you receive money from the lender, and generally don’t have to pay it back for as long as you live in your home. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.

Types of Reverse Mortgages

There are three types of reverse mortgages:

• single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations
• federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD)
• proprietary reverse mortgages, private loans that are backed by the companies that develop them

Single-purpose reverse mortgages are the least expensive option. They are not available everywhere and can be used for only one purpose, which is specified by the government or nonprofit lender. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.

HECMs and proprietary reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount. HECM loans are widely available, have no income or medical requirements, and can be used for any purpose.

Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling. The counselor is required to explain the loan’s costs and financial implications, and possible alternatives to a HECM, like government and nonprofit programs or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. 


To find a counselor, visit www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm or call 1-800-569-4287. Most counseling agencies charge around $125 for their services. The fee can be paid from the loan proceeds, but you cannot be turned away if you can’t afford the fee.


How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, and current interest rates. In general, the older you are, the more equity you have in your home, and the less you owe on it, the more money you can get.


The HECM lets you choose among several payment options. You can select:

• a “term” option – fixed monthly cash advances for a specific time.
• a “tenure” option – fixed monthly cash advances for as long as you live in your home.
• a line of credit that lets you draw down the loan proceeds at any time in amounts you choose until you have used up the line of credit.
• a combination of monthly payments and a line of credit.

You can change your payment option any time for about $20.


HECMs generally provide bigger loan advances at a lower total cost compared with proprietary loans. But if you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. So if your home has a higher appraised value and you have a small mortgage, you may qualify for more funds.

Loan Features

Reverse mortgage loan advances are not taxable, and generally don’t affect your Social Security or Medicare benefits. You retain the title to your home, and you don’t have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence.


In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid.


If you’re considering a reverse mortgage, be aware that:

• Lenders generally charge an origination fee, a mortgage insurance premium (for federally-insured HECMs), and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender sometimes sets these fees and costs, although origination fees for HECM reverse mortgages currently are dictated by law. Your upfront costs can be lowered if you borrow a smaller amount through a reverse mortgage product called a "HECM Saver."
• The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases as the loan funds are advanced to you and interest on the loan accrues.
• Although some reverse mortgages have fixed rates, most have variable rates that are tied to a financial index: they are likely to change with market conditions.
• Reverse mortgages can use up all or some of the equity in your home, and leave fewer assets for you and your heirs. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. However, if you or your heirs want to retain ownership of the home, you usually must repay the loan in full – even if the loan balance is greater than the value of the home.
• Because you retain title to your home, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you don’t pay property taxes, carry homeowner’s insurance, or maintain the condition of your home, your loan may become due and payable.
• Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Getting a Good Deal

If you’re considering a reverse mortgage, shop around. Compare your options and the terms various lenders offer. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. That can help inform the questions you ask that could lead to a better deal.

• If you want to make a home repair or improvement – or you need help paying your property taxes – find out if you qualify for any low-cost single-purpose loans in your area. Area Agencies on Aging (AAAs) generally know about these programs. To find the nearest agency, visit www.eldercare.gov or call 1-800-677-1116. Ask about “loan or grant programs for home repairs or improvements,” or “property tax deferral” or “property tax postponement” programs, and how to apply.
• All HECM lenders must follow HUD rules. And while the mortgage insurance premium is the same from lender to lender, most loan costs, including the origination fee, interest rate, closing costs, and servicing fees vary among lenders.
• If you live in a higher-valued home, you may be able to borrow more with a proprietary reverse mortgage, but the more you borrow, the higher your costs. The best way to see key differences between a HECM and a proprietary loan is to do a side-by-side comparison of costs and benefits. Many HECM counselors and lenders can give you this important information.
• No matter what type of reverse mortgage you’re considering, understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates: they show the projected annual average cost of a reverse mortgage, including all the itemized costs.

Be Wary of Sales Pitches

Some sellers may offer you goods or services, like home improvement services, and then suggest that a reverse mortgage would be an easy way to pay for them. If you decide you need what’s being offered, shop around before deciding on any particular seller. Keep in mind that the total cost of the product or service is the price the seller quotes plus the costs – and fees – tied to getting the reverse mortgage.


Some who offer reverse mortgages may pressure you to buy other financial products, like an annuity or long term care insurance. Resist that pressure. You don’t have to buy any products or services to get a reverse mortgage (except to maintain the adequate homeowners or hazard insurance that HUD and other lenders require). In fact, in some situations, it’s illegal to require you to buy other products to get a reverse mortgage.


The bottom line: If you don’t understand the cost or features of a reverse mortgage or any other product offered to you – or if there is pressure or urgency to complete the deal – walk away and take your business elsewhere. Consider seeking the advice of a family member, friend, or someone else you trust.

Your Right to Cancel

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will allow you to document what the lender received and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid up to then for the financing.

Reporting Possible Fraud

If you suspect that someone involved in the transaction may be violating the law, let the counselor, lender, or loan servicer know. Then, file a complaint with:

• the Federal Trade Commission (FTC). You can do that online at www.ftccomplaintassistant.gov or by phone at 1-877-FTC-HELP (1-877-382-4357).
• your state Attorney General’s office or state banking regulatory agency.

Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives. The following organizations have more information:


Reverse Mortgage Education Project
AARP Foundation
601 E Street, NW
Washington, DC 20049
www.aarp.org/revmort
1-800-209-8085


U. S. Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm
1-800-CALL-FHA (1-800-225-5342)


Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
www.ftc.gov/bcp/menus/consumer/credit.shtm — Click on “Mortgages & Your Home”
1-877-FTC-HELP (­1-877-382-4357)


The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a video, How to File a Complaint, at ftc.gov/video to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

What is an Assumable Loan?

An assumable loan is a type of loan that a person can take over or assume. In such a situation, a person doesn’t apply for a brand-new loan. Instead, he takes over a loan that already exists. When a borrower takes over an assumable loan, he usually does not start fresh, with a new balance. He normally takes over only the current balance of the loan, and in many cases, the current interest rate.

Sometimes a person who opts for an assumable loan doesn’t have to qualify for it. This is not always the case, however, as there are also some loan programs that do require those who want to take over another person’s loan to qualify. Since some assumable loans allow the new borrower to assume the loan without qualifying, this situation is often seen as optimal for a person who has bad credit. For example, a person who has bad credit may have great trouble qualifying for a mortgage loan. If he can find a home with an assumable mortgage, however, he can take over the mortgage loan without having his bad credit impair him.

Besides taking on an assumable loan to circumvent credit problems, there are other factors that may make this type of lending situation attractive. In a mortgage situation, for example, a person who takes on an assumable loan can avoid the closing costs he would pay if he were taking on a first mortgage.

Interest rates can be a major benefit for someone who wants to take on an assumable loan. For example, an individual may want to acquire a loan for a property during a time when interest rates are high. If he can find and qualify for an assumable loan that was taken out during a low-interest period, he can pay much less interest than those who take out brand-new loans. Some lenders take steps to avoid having to offer lower-than-current interest rates when a person assumes a loan, however. Many include clauses in their terms that allow them to raise interest rates if a person assumes a loan; typically, this is referred to as a due-on-sale clause.

In most cases, taking on an assumable loan means providing some cash to the person who held the original loan or even taking out a second loan on the same property. For example, a person may take on an assumable mortgage of $80,000 US dollars (USD). If the property he purchases is being sold for $100,000 USD, however, he still has to ensure that the seller receives the full amount. In such a case, he may give the seller the rest of the money out of his savings or from another source. If this is not a possibility, he would usually have to take on another loan in order to meet the seller’s total sale price.

USDA Loan Requirements

What are the USDA Mortgage Loan Requirements?



To decide if you qualify for an USDA Mortgage Loan, the following will be looked at:

• Your income and your monthly expenses. Standard debt-to-income ratios are 29/41 for USDA Loans. These ratios may be exceeded with compensation factors.
• Your credit history (this is important, but USDA's credit standards are flexible). A FICO score of 620 or above is required for all loans through most lenders.
• Your overall pattern rather than to individual problems you may have had.

To be eligible for an USDA Mortgage, your monthly housing costs (mortgage principal and interest, property taxes and insurance) must meet a specified percentage of your gross monthly income (29% ratio). 
Your credit background will be fairly considered. At least a 620 FICO credit score is required to obtain an USDA approval through most lenders. You must also have enough income to pay your housing costs plus all additional monthly debt (41% ratio). These percentages may be exceeded with compensating factors. Applicants for loans may have an income of up to 115% of the median income for the area. Maximum USDA Loan income limits for your area can be found at http://www.rurdev.usda.gov/HSF-Guar_Income_Limits.html 

Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance.




Can I get an USDA Mortgage Loan after bankruptcy?

Criteria for USDA loan approvals state that if you have been discharged from a Chapter 7 bankruptcy for three years or more, you are eligible to apply for an USDA mortgage. If you are in a Chapter 13 bankruptcy and have made all court approved payments on time and as agreed for at least one year, you are also eligible to make a USDA Loan application.


What are the USDA Down Payment Requirements?

USDA Mortgages have no down payment requirement. Other loan programs don't allow this.


What types of property are eligible?

While USDA Mortgage Guidelines do require that the property be Owner Occupied (OO), they do allow you to purchase condos, planned unit developments, manufactured homes, and single family residences.


What is the maximum amount that I can borrow?

The maximum amount for an USDA Mortgage Loan are determined by:

Maximum loan amount: The is no set maximum loan amount allowed for an USDA Mortgage. Instead, your debt-to-income ratios will dictate how much home your can afford (29/41 ratios). Additionally, your total household monthly income must be within USDA allowed maximum income limits for your area. Maximum USDA Loan income limits for your area can be found at http://www.rurdev.usda.gov/HSF-Guar_Income_Limits.html


Maximum financing: The maximum USDA Mortgage amount will be 100% of the appraised value of the home.

Types of Loans - USDA

USDA stands for United States Department of Agriculture.  Over the last few years USDA or Rural Housing Loan has become the hottest loan in town for most low and moderate income families.  This is because you can get a loan for 100% financing with no Mortgage Insurance.

These programs are tailored towards people who live in Rural Areas.  To determine if the house you are thinking about purchasing is in a rural area and if you meet income qualifications click on the following link:

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

There are two types of loans that USDA offers

USDA Guaranteed Rural Housing Loans
USDA Guaranteed Loans are the most common type of USDA rural housing loan and allow for higher income limits and 100% financing for home purchases. USDA Guaranteed Loan applicants may have an income of up to 115% of the median household income for the area.   All USDA Guaranteed Loans carry 30 year terms and are set at a fixed rate.


USDA Direct Rural Housing Loans
USDA Direct Housing Loans are less common than USDA Guaranteed Loans and are only available for low and very low income households to obtain home ownership, as defined by the USDA. Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI.  You can click here http://www.rurdev.usda.gov/HSF-Direct_Income_Limits.html and see if you qualify for this loan.

Why choose a USDA Mortgage?

1. USDA loans require NO down payment
2. In some cases you can finance your closing costs, Seller can pay up to 6% of your closings costs so really you don't have to come to the table with ANY money.
3. There are NO prepayment penalties for USDA Rural Housing Loans.
4. USDA loans has no monthly Mortgage Insurance.
5. A USDA loan is available to all Rural areas of the country, provided a market exists for the property and the home meets HUD's minimum property standards.
6. You can use this loan to purchase a New or Existing one family home in Rural Areas.
7. No Manufactured Homes allowed unless it is Brand new (talk to your lender about this)
8. USDA loans are offered at 30 years terms with a fixed interest rate.

Types of Loans - VA (Purchases)

Basic Requirements for Purchases

VA loan applicants often wonder about the eligibility of houses they’re considering getting a loan for--sometimes the concerns are about the type of property, for some VA loan applicants the concern might be over the condition of the home. For VA insured mortgages there are local ordinances, federal law, and VA requirements which must be met in order for the home to be approved for a VA insured mortgage.

General requirements and more specific guidelines cover VA loan eligibility. There are rules based on known issues--termites, flood zones and high-voltage power lines. The general requirements are simple enough to understand and provide some flexibility to the lender and appraiser when deciding if a particular property qualifies for a VA loan based on VA minimum property requirements.

The Department of Veterans Affairs requires a home to conform to some basic standards. The property must be inhabitable and provide the customary space for sleeping, cooking, and sanitation. The rules for multi-unit properties or multi-purpose buildings include VA requirements that each living unit contain “dedicated” sleeping, cooking, and sanitary areas.

VA requirements also include rules governing the condition of all typical mechanical systems found in the home. A heating and air conditioning system must be safe to operate and protected from weather and other “destructive elements”. These mechanical systems must have adequate capacity.

They must be able to function properly in the space it is installed in, meaning for example that a home can’t be equipped with a central air system that is too small for the space it must heat or cool.

VA appraisers who find problems or unacceptable issues related to these basic requirements may recommend improvements or alterations. If the property cannot be “reasonably modified” to accommodate these basic requirements, the property could be ineligible for a VA insured home loan. 

 

FHA Loans

Mortgage lending has been a quickly transforming environment within the last several years. Additional regulations and guidelines have resulted in hundreds of thousands of families that were able to buy or refinance a property just a couple years ago being unable to get approved for a mortgage loan. A growing number of home buyers are using government-insured FHA home loans because of the favorable terms that they offer, compared to other loan types.  

What is the Federal Housing Administration?

The FHA (quick for Federal Housing Administration) has been in existence since 1934 when it was founded in the course of the Great Depression. Since its inception over 75 years ago, over 37 million mortgages have been insured by the FHA in the United States. The FHA is the largest government insurer of home loans in the world today. FHA Loans have become so popular in today’s lending climate because they can be much more accommodating than other mortgages, but they do contain specific credit, income and property criteria for a mortgage to get approved. A number of the more crucial requirements are listed beneath. 

FHA Loan Income Requirements

The income verification and earnings capacity evaluation of the borrowers is an essential component of the FHA mortgage approval process because it shows the individuals capacity to repay the home loan. FHA loans utilize two separate DTI Ratios (Debt-To-Income Ratios) to determine a borrowers income eligibility. The initial ratio to be applied is the housing cost ratio (Top Ratio). To meet the Top Ratio requirements, the new month to month housing expenses can not exceed 31 percent of the borrowers total income. Housing expenses include principal and interest mortgage payment, taxes and insurance. Once it is determined that the housing ratio meets criteria for approval, the total expense ratio (Bottom Ratio) is applied. To meet Bottom Ratio criteria, the individuals complete monthly expenditures, including the new housing payment, can not exceed 43% of their total monthly income. Other expenses that are factored into the total expense ratio include credit card payments, car payments, student loans, and any other monthly payments that are to be paid. A borrowers credit report may be used to verify monthly expenses. 

FHA Loan Credit Requirements

To meet FHA loan credit criteria, the borrowers almost certainly be required to have a FICO credit score of 620 or above. The credit score used for FHA loan qualification is determined by obtaining the borrower’s scores from each of the three major credit bureaus, then eliminating the highest and lowest scores. This score is referred to as the “middle score” or “mid score”. Although the FHA has set its minimum credit score requirement at a 580 for many of its programs, individual lending institutions are free to add additional requirements and raise the minimum score as they see fit. It can be acceptable for the borrower to posses a bankruptcy in their past and still qualify, but you will find that additional guidelines will apply. If an individual possesses a Chapter 13 bankruptcy in their past, they must provide proof that all court ordered payments have been made on time for at least one year before application. If an individual has a Chapter 7 bankruptcy in their past, they must wait at least two years from the discharge date before application. 

FHA Loan Property Requirements

A home must have an FHA appraisal performed by a certified appraiser to be an acceptable property for an FHA loan. To satisfy the FHA appraisal requirements, the home must be in reasonably good condition. Certain disqualifying appraisal conditions may include but are not limited to structural problems, leaking roofs or missing exterior paint or siding. The property appraised value is extremely significant in the FHA loan process and the home must appraise for at least the purchase price. The highest FHA mortgage amount changes from county to county and metropolitan areas throughout the United States. The smallest maximum FHA loan amount in any county is $271,050, but can reach as large as $729,750 in particular high-cost locations.

Conventional Mortgages

A conventional mortgage is a type of mortgage in which the terms and conditions of the loan meet the criteria set forth by Fannie Mae and Freddie Mac. A conventional mortgage can be defined as either a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM). 

A fixed rate mortgage is classified as having the same principal and interest payment for the life of the loan, while an ARM is identified by having a fixed rate for only a specified period of time before the rate becomes variable, depending on market conditions.

Many times, people confuse a conventional mortgage with a conforming mortgage. 

However, a conventional mortgage can be both conforming or non-conforming (jumbo). 

 Because conventional loans are set by Fannie Mae and Freddie Mac, the easiest way to identify if a loan is conventional or not is to know whether or not the loan is government insured. Typical government-insured loans are FHA (Federal Housing Administration), VA (Veterans Affairs) or USDA (United States Department of Agriculture) Rural Development loans. Fannie Mae and Freddie Mac are considered stockholder-owned corporations.

The most common conventional mortgage terms are fixed for 30 and 20 years, however, you can get other fixed-rate loans for 10-, 15-, 25- year terms. There are also 3/1, 5/1, 7/1 and 10/1 ARMs.

You do not need 20% down for a conventional mortgage.  You can get a conventional mortgage with as low as 5% down but you will have to pay mortgage insurance and it will depend on your credit score to determine whether you can get mortgage insurance or not.

First Time Homebuyers

You are thinking about buying a home for the first time, you have heard your real estate agent, friends or lender speak about First Time Home Buyers loans... FHA, Rural Housing, VA loans, HUD homes all of these terms really are confusing.  There are several programs available through the government to help you finance your first home.


Now, be aware that the term First time Home buyer is really just that... Agencies now a days don't actually provide money for first time home buyers; instead they facilitate programs that encourage banks and lenders to grant mortgages.

The FHA Loan

The Federal Housing Administration (FHA) provides what is probably the most popular home loan program for first time buyers. Rather than lending the money themselves, the FHA insures a loan made by a private lending institution. This insurance gives the lender a measure of peace in knowing that even if the homeowner defaults on the loan, they will not lose their investment. In such cases, the FHA steps in and pays the balance of the loan, then assumes ownership of the house and resells it.
An FHA loan is designed specifically for first time home buyers in the moderate to low income bracket. Requirements for FHA loans are less strict than those for a traditional fixed rate mortgage. FHA loans are so widely used in the housing industry that they are generally the first ones thought of when first time home buyers apply for a mortgage.

Housing and Urban Development Homes - HUD Homes

HUD Homes are properties offered to low income buyers through a program administered by the U.S. Department of Housing and Urban Development.  As is the case with the FHA loan, HUD does NOT actually loan the home buyer any money.  In fact, HUD doesn't even insure the loan.  A HUD home is acquired through an FHA backed mortgage issued by a private lending institution.  If the home buyer defaults on his mortgage, FHA pays the balance of the loan, then HUD acquires the home and resells it, usually at less than market value.  HUD homes are aimed at home buyers with limited income.

VA Loans

The Veterans Administration (VA) provides a loan program similar to that of the FHA program. Again, rather than loaning money themselves, the VA guarantees a loan made by a private lender. These loans are aimed at U.S. military veterans and their families. A VA loan can be acquired not only by a veteran, but also by a widow or widower as long as that individual does not remarry.
The main advantage of the VA loan is the fact that home buyers are not required to purchase private mortgage insurance or provide a down payment. VA loans are designed to help military personnel purchase homes in areas where financing options are limited.


The USDA Development Housing Loan - Rural Housing


The U.S. Department of Agriculture (USDA) offers yet another guaranteed loan program designed to help lower income first time home buyers purchase homes in rural areas. First time home buyers benefit from this program with no down payment, no mortgage insurance, and lower credit rating requirements to qualify. The USDA understands that first time home buyers in rural environments have additional financial challenges that need to be addressed in order to purchase a home. These USDA-guaranteed loans fit the bill perfectly.

The four types of federal first time home loan programs listed here are but a small sampling of what is available. Various state governments also offer low interest mortgages for first time home buyers, as do some larger cities and counties. Your real estate agent and mortgage broker should be familiar with the government backed loans available in your area. They'll be happy to work with you to acquire the best financing for your needs.

Downpayment Options

I have received many calls and heard may people say that they can't afford to buy a home because they don't have 20% down.  There is nothing further from the truth than that.





*  There is a fabulous loan for Rural Areas that is called USDA Rural Housing Development, this Loan has income limits please see the link below to check income limits on your State

http://www.rurdev.usda.gov/HSF-Guar_Income_Limits.html

With this Link you can check Eligibility

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

This Loan is not for everybody but it is a great loan because you don't have to put any downpayment and the best thing is that you have NO Mortgage Insurance, which could result in very good savings in the long run.  I will go into detail later on in a different post.

*  FHA - The Federal Housing Administration, promotes different types of programs to promote home ownership.  FHA is one of them, this program allows you to get into a house with as little as 3.5% down.  This loans in this market are the most popular, but are not for everybody.   They are easy to qualify as you don't have to have perfect credit, just decent credit.  You can check the link below to see what is the Max Loan amount you can get in your area:

https://entp.hud.gov/idapp/html/hicostlook.cfm


*  VA - This loan is guaranteed by the Veterans Administration.  This loan is good for Veterans.  You can get a loan for 100% Financing, meaning NO down payment and NO Mortgage Insurance.

Check the following Link for Eligibility

http://www.benefits.va.gov/homeloans/elig_center.asp

*  Conventional Loans - This loan is your standard 30 year or 15 year Mortgage, pretty much you have to have good credit, your debt-to-income ratios need to be in line.  Even for these type of loans you can come up to the table with as little as 5% down.  Your Mortgage Insurance will be then high but still you will have an option to come to the table with that little down payment.  You will need to have 20% down in order to avoid paying mortgage insurance.

In order to make a decision on how much down you need to put and which loan program is best for you, review your options with your Lender, they will be able to help you and I am sure they will help you decide which loan will better suit your needs.  These are not the only types of loans you can get either, maybe your lending institution has a portfolio loan or another one that will work for you best.

Getting to know what you can afford

The rule is that you usually can buy three times as much as you make.  So if you make $50,000.00 per year, you can buy up to $150,000.00.


This will be in the perfect world of course and if you have absolutely no other debt, no car payment, no student loans, no liens, no credit card payments, etc.  The whole thing is based on something called a Debt-to-income Ratio.


What is the Debt to Income Ratio?


A debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include certain taxes, fees, and insurance premiums as well. )


There are two main kinds of DTI, as discussed below.  The two main kinds of DTI are:

1. The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (Mortgage principal and interest, mortgage insurance premium [when required], hazard insurance premium, property taxes and homeowner's association dues [when applicable]).
2. The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.

Example:

In order to qualify for a mortgage for which the lender requires a debt-to-income ratio of 28/36:

• Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income.
  • $3,750 Monthly Income x .28 = $1,050 allowed for housing expense.
  • $3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.

In order for your lender to get you pre-qualified for a mortgage and find out what you can afford, they have to review the following:

• Last Full Month Pay stubs
• Last 2 years W2's (or 2 years tax returns if you are self employed)
• Last 2 months Bank Statements
• Any Other Income you might receive (Proof for the last 3 months if it's Social Security or Disability, Pension, Alimony, Child Support. - This has to continue for the next 3 years in order to be considered usually)
• If you pay child support or alimony, you need to provide with divorce decree and child support court order or alimony order.
• Any Assets you may have (401K, Investments, IRA, Life Insurance, etc.)
• Review Full Tri-Merge Credit Report

Be honest with your lender, things do come up, if you fail to mention a lien or something that is bothering you but you are thinking about hiding, better not, talk to your lender about it, it's better to be honest up front so things do not come up later on and, believe me those surprises are not usually good.  They can delay closing or even cause the loan to be denied.

The lender will then review your paperwork and do a pre-qualification for you, with your income and your credit and by taking a loan application.

It is true that the better your credit score you are better off getting the best rate and a very good loan, but that doesn't help you necessarily to afford more for a house.  That is all up to your debt to Income Ratio.

Different Types of Loans will determine what DTI is acceptable.

Some of the best loans to get as per my experience are the following:

• Conventional 30, 20, 15 or 10 Year Mortgage  DTI    28/36
• FHA 30, 25, 15 years Mortgage  DTI    31/43
• USDA 30 years Mortgage  DTI   29/41
• VA 30 or 15 years Mortgage  DTI 41

It is really your lender's job to know which program is the best for your situation, if it is a good lender they will make the right choice for you.