Home loan process

Help for First Time Home Buyers

Closing costs are fees paid at the time you sign papers for you home loan or "closing" in addition to your down payment. The following list contains items which normally make up your closing costs. There may be other fees and all fees listed below may not be required on all loans. In general, closing costs can be estimated at approximately 1-3% of the sale price.

Closing Costs

  • Appraisal Fee - to determine the value of the property

  • Credit Report Fee - a history of your payments and debt

  • Underwriting Fee - to determine if your loan meets certain qualifications

  • Title Insurance Fee - a search done through the register of deeds office to determine if there are liens on the property

  • Recording Fee - to record the mortgage, deed or other documents at the register of deeds

  • Tax Service Fee - to track the payments of your real estate taxes

  • Flood Certification Fee -  to determine if you are in a flood hazard area or not

  • Prepaid Items & Reserves - see below for details

Some closing costs, prepaid items & reserves must be paid prior to or at the time of closing. The list below are examples of prepaid items & reserves. Not all loan programs require these prepaid items and reserves.

Prepaid Items & Reserves

  • Homeowners' Insurance - One full year premium paid prior to closing.
  • Prepaid Interest - The interest that will accrue from the date of closing to the 1st of the next month (up to a 30 day maximum charge.)

  • Tax Escrow Deposit - Previous year's tax bill � by 12 = monthly escrow. Usually a two month deposit is required at closing.
  • Private Mortgage Insurance Deposit - A one month deposit is required at closing. This is required when you do not have the full required down payment. May not be applicable to all loan programs.

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How Much of a House Can You Afford?

Buying you house ultimately depends on two things:

  1. How much you have available for a down payment (starts at 3% down for some programs), and 

  2. If you fit within the qualifying guideline used by banks. 

Lenders' Qualifying Guidelines:

There are two qualifying guidelines that determine the amount of mortgage for which you are eligible: housing ratio and debt ratio. The lender will use the lesser of housing ratio or debt ratio as your qualifying mortgage amount. 

1. Housing Ratio, 28%:
Your monthly house payment, including taxes and insurance, should total no more than 28% of your gross monthly income. Gross monthly income is defined as annual pre-tax salary divided by twelve.

Example: If your gross monthly income is $2,000 then 28% equals $560. (2,000 x .28 = 560)

Your housing expense, $560 in the above example, consists of four components known as PITI (Principal, Interest, Tax & Insurance). Only the principal and interest components are used to determine the qualifying mortgage amount.

Example to determine Principal & Interest Payment: If your housing expense equals $560, then you must subtract an estimate for taxes and homeowners insurance. The remaining balance is the part that would be used to re-pay your loan.

  $560    Housing Expense
- $100    1/12 of annual tax bill
- $ 20     1/12 of annual insurance
= $440    Principal & Interest

The principal & interest payment ($440 in the above example) can be used by the lender to determine the mortgage amount you qualify for.

Click here for an easy-to-use
Mortgage Calculator

 

2.   Debt Ratio, 36%:
Your monthly housing costs plus other long-term debts should total no more than 36% of your gross monthly income.

Example:  Using the same income as in the example above ($2,000 per month gross pay) your debt ratio dollar amount is $720.   (2,000 x .36 = 720)

With this dollar amount you must first subtract out your other monthly debt payments such as:

  • vehicle payments
  • student loan payments
  • required minimum payments on credit cards
  • any other loan payments

(DO NOT include utility, phone, insurance or cable payments. These are considered living expenses and need not be counted as debt.)

Example:  Assuming $260 in other monthly debt ($200 vehicle payment + $10 credit card payment + $50 student loan payment = $260),  and using the $720 calculated above, your PITI is $460. (720 - 260 = 460)

Now deduct an estimate for taxes and insurance to arrive at your Principal & Interest amount. For example, $460 - $120 ($100 for taxes & $20 for insurance) = $340. You will use this number to calculate your mortgage amount.

To determine the approximate sale price you can afford, add your down payment to your mortgage amount.

Example:
Qualifying mortgage amount + down payment = sale price of house.

$44,210 + $3,000 = $47,210

As you can see, the larger the down payment or the lower your other debts the "more house" you can afford to buy.

3.  Your Credit Record:

In addition to calculating housing costs and other long-term debts, lenders also order a credit report and review your repayment history.

What does a bank look for in a credit report?

  • At least 3 different lines of credit (called trade lines.) with a 12 month history.
  • No late payments in the last 12 months.
  • No open collection accounts.
  • No unsatisfied judgments.
  • Bankruptcy that has been closed or discharged at least three years ago.

If is important to keep your credit good by making sure you pay your bills by the date the payment is due and to keep credit card balances to a minimum. If your credit card balances are greater than 20% of your gross monthly income, it could make qualifying for a home loan more difficult.

To order a credit report, click on the link below

Credit Report

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