Three Key Factors in Qualifying for a Home Loan
When a mortgage company makes a decision about a home loan application, the lender primarily considers three basic factors: (1) your ability to repay the loan; (2) your willingness to repay the loan; and (3) the collateral.
Ability to repay the mortgage is determined by verifying your current employment and analyzing your total income. Lenders prefer for you to have been employed at the same place for at least two years or to at least be in the same line of work for a few years. Your estimated monthly payment will be compared to your monthly income and debt.
Willingness to repay is influenced by how you have paid previous loans and by examining how the property will be used. Willingness can be gauged by your credit report and previous commitments to pay rent and/or utility bills.
Collateral is property that is pledged by a borrower to protect the interests of the lender.
It is important to remember that there are a set of rules each lender uses to assess these factors on each loan and determine if the lender will ultimately lend you money. These rules are called a Credit Policy. Each loan application is evaluated individually on a case-by-case basis. Many loan applications may come up short in one area, but make up for it with other strong points. These compensating factors may include: a large down payment, extensive educational background, or overall financial health. Securing mortgage insurance to protect a lender in the event you are unable to make your payments may also impact your qualifying for a home loan.
Contact your Academy Mortgage Loan Officer with any questions about qualifying for a home loan.
Why Private Mortgage Insurance Is Necessary
Private mortgage insurance (PMI) is a type of insurance that helps protect mortgage companies against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.
PMI also enables mortgage companies to grant loans that would otherwise be considered too risky to be purchased by third-party investors like Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn, allows mortgage companies to continue originating new loans.
PMI Payment Options
PMI can typically be paid monthly, or with a single-premium at closing. Premiums are based on the amount and terms of the mortgage and can vary according to the loan-to-value ratio, type of loan, the amount of coverage required by the mortgage company, and the borrower’s credit characteristics and income.
If you choose to pay your PMI premium monthly, the premium will be collected with the regular monthly mortgage payment. If you choose a single-premium plan, the entire premium covering several years is paid in a lump-sum at closing. In the single-premium scenario homebuyers can choose to add the lump sum premium to the loan amount. By doing this, homebuyers can reduce their closing costs and may be able to increase their interest deduction. Note: For tax advice, please consult a tax advisor regarding your specific situation.
PMI can usually be canceled by homebuyers after they have at least 20 percent equity in their home. Borrowers should contact their mortgage servicer to find out the procedure for canceling their PMI when they think they have achieved 20 percent equity. Guidelines for canceling PMI are set by the mortgage servicer. Typically, investors will require an appraisal on the property. The servicer can recommend qualified local appraisers. On primary residences the Homeowners Protection Act requires that PMI be automatically cancelled when the loan is scheduled to reach 78 percent of the original loan-to-value (LTV) or in other words 22 percent equity, based on the original sales price or original appraised value, whichever is lower.
PMI vs. FHA Mortgage Insurance
Although the insurance protection concept is similar, there are differences between PMI and FHA mortgage insurance. FHA mortgage insurance is a government-administered mortgage insurance program that has certain restrictions. FHA mortgage insurance sets maximum regional loan limits that are lower than those with private PMI. FHA mortgage insurance may be more expensive, take longer to receive approval, and have fewer payment plan options. FHA mortgage insurance lasts five years or until the loan is scheduled to reach 78 percent of the original LTV, whichever is longer, unlike PMI, which is cancellable if you make extra payments in most circumstances. FHA mortgage insurance is a good choice for some borrowers with credit history problems or limited down payment or for those who might need special assistance.
Contact your Academy Mortgage Loan Officer about your loan options.
Choosing a Loan Program
There isn’t a single or simple answer to the question: “Which loan program should I choose?” The right type of mortgage for you depends on many different factors, including:
Your current financial picture.
How you expect your finances to change.
How long you intend to keep your house.
How comfortable you are with your mortgage payment changing.
For example, a 15-year fixed-rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher than with a 30-year fixed-rate mortgage. An adjustable-rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage, but your payments could greatly increase when the interest rate changes.
The best way to find the “right” answer is to discuss your current finances, your financial prospects, and your preferences frankly with an experienced mortgage professional, and make sure you analyze all of your options. Contact your Academy Mortgage Loan Officer today.