When obtaining a loan for a home purchase, you will be dealing with lots of terms that relate to important numbers, and figures that will affect your loan approval. Before you get approved, it is vital that you understand these terms, and how they will impact your loan. We’ve already gone over what DTI is (see last entry), and now we will go over what Loan To Value, or LTV, means.
LTV: Loan to Value Ratio
Whether you are purchasing or refinancing a loan, the LTV will be used by the lender to determine loan approval. The LTV is the percentage that reflects the loan amount compared to the current market value of the property. The key element when determining the LTV is the amount the home appraises for. In some cases, a property can appraise for less than the sales price. In this case, the lender will require the loan amount, and the appraised amount to line up with one another. To calculate the LTV, you divide the appraisal amount by the loan amount after down payment.
Loan Amount / Appraised Amount = LTV
If you are purchasing, nowadays, almost every loan program requires a down payment. If you are going conventional, the down payment requirement can be anywhere from 5% to 30% of the purchase price. If you are using an FHA loan, you will need a minimum of 3.5% down payment. Let’s take a look at a few examples.
Scenario #1: FHA buyer putting 3.5% down
Appraised Amount: $350,000
Down Payment: $12,250
Loan Amount: $337,750
$337,750 / $350,000 = 96.5% LTV
Scenario #2: Conventional Buyer putting 20% down
Appraised Amount: $550,000
Down Payment: $110,000
Loan Amount: $440,000
$440,000 / $550,000 = 80% LTV
Again, the LTV is one of the most crucial terms to understand when obtaining a loan to purchase, or refinance a home. If you have more questions, do not hesitate to contact your mortgage professional! We loan officers love it when clients take an interest in their loan, and ask lots of questions!
If you have questions regarding a home loan, or how much you can be pre-approved for, visit my website at www.AlissaAlvarez.com
If you are a first time home buyer, or even if you already own a home, understanding the terminology of a loan can be mind numbing! So many letters being thrown at you…PMI, MI, FHA, DTI, GFE, URLA, LTV! Of course, your loan officer will explain these terms as they come up, but it can be difficult to keep track of them all.
While every acronym is important, there are four that are especially important to understand; DTI, LTV, PMI, and MI before committing to a loan. Over the course of the month, I’ll be going over these terms. First, let’s start with the all important DTI.
DTI: Debt to Income Ratio
When you are getting pre-approved for a loan, or refinancing your current loan, your Debt to Income ratio (DTI) will be a determining factor. This ratio is the percentage of how much of your monthly income is committed to your monthly debts.
Bills such as your cell phone, internet, and gym memberships aren’t considered towards your “debt.” In the eyes of the bank who is approving your loan, the only debts they are concerned with are those that show up on your credit report. Common debts are car loans, student loans, mortgages, credit cards, child support, etc.
When calculating your income, the bank is looking for your gross monthly income, or the amount you earn BEFORE taxes. Other income will also include qualified child support, spousal support, rental, retirement, and disability.
Generally, banks will require that you have a DTI ratio no greater than 31% on the front end (not including the proposed mortgage payment) for an FHA loan. In considering a conventional loan, generally a DTI ratio no greater than 28% on the front end is accepted.
In order to calculate your DTI, you will need to divide your total monthly debts by your total gross monthly income.
Monthly Debt / Gross Monthly Income = Debt to Income Ratio
Scenario #1: FHA buyer looking to purchase their first home
Total Monthly Debt = $500 a month
– Car loan = $220
– Student loan = $130
– Credit Card payment = $150
Gross Monthly Income = $5000 a month
$500 / $5000 = 10% DTI
Scenario #2: Conventional buyer looking to purchase a 2nd home
Total Monthly Debt = $1700
– Mortgage = $1200
– Car loan = $450
– Credit Card payment = $50
Gross Monthly Income: $3800
$1700 / $3800 = 45% DTI
In scenario #1, the DTI is well under the maximum 31% allowed for an FHA loan. As a result, this particular borrower would generally meet the DTI requirement. In scenario #2, the borrower’s 45% DTI is too high, and therefore, will probably not meet the DTI requirement.
There are sometimes exceptions to these guidelines, and each lender will have their own requirements. Therefore, it is important that you discuss with your lender about their specific guidelines. Do not be afraid to ask your loan professional questions, that is what we are here for! Asking questions, and fully understanding the terms of your loan is crucial to making the right decision for you.
If you have questions regarding an FHA loan, or would like to know how much you are pre-approved for, visit my website at www.AlissaAlvarez.com
If you have any questions regarding FHA loans, or how much you are pre-approved for, visit my website at www.AlissaAlvarez.com
In the current market, many homeowners have an adjustable rate mortgage (ARM) which are going to begin adjusting this year. Presently, one of the most common reasons for a refinance is to switch the ARM to a more stable fixed rate. A refinance is one option in which you can take control of your mortgage rate, and monthly mortgage payment. If you have an ARM, and are considering a refinance, here are a few things you will want to consider.
1. How much will the new adjusted rate raise my monthly payment? You will need to do a little bit of research to figure this out, either by calling your lender, or reviewing your loan papers. If your rate is going to go up a few percentage points, this can raise your monthly payment substantially. For example, consider to following scenario:
$300,000 loan amount @ 3.75% = $1390 monthly payment
After 5 years, the ARM will adjust by 1.5%
$300,000 loan amount @ 5.25% = $1655 monthly payment
Difference of $265 more a month
In this scenario, if $265 raise in the monthly payment is too much for the homeowner, a refinance might be in order. The amount an ARM will adjust is unknown, which can be an unsettling when trying to budget for the monthly payment. Many homeowners look to a refinance to secure the fixed rate, and fixed monthly mortgage payment.
2. What if I can’t cover the cost of a refinance? If you are worried about closing costs, negotiate with your loan officer, and often times we can work something out to get those lowered. Often times lenders will offer a rebate on a rate, which is a percentage of the loan amount, and can be credited towards your closing costs. For example:
$300,000 loan amount, 30 year fixed rate of 5% with a rebate of (.875%)
Closing costs estimated at $3,000
.875% rebate = $2,625
New closing costs after rebate credit = $375
As you can see, by negotiating with the lender, it might be possible to save yourself hundreds of dollars on closing costs. But remember, rates/rebates change everyday, so please be sure to verify if this is an option for you.
As always, when considering an important decision like a refinance, be sure to consult your mortgage professional and review your options. If you are interested in more information, check back in all this week as I will be posting various topics relating to a refinance.
With interest rates as low as they are, you might be thinking about refinancing your home to take advantage of the lower rates. In many cases, a homeowner can refinance into a much lower rate, which in turn can save them a significant amount on their monthly mortgage payment. But a refinance won’t make sense for everyone, and it’s important to discuss with your loan officer the details of your specific situation.
When considering a refinance, the following are a few things you want to consider:
1. How much lower will my interest rate be if I refinance? Generally speaking, it only makes sense to refinance your loan if your new interest rate is at least 1% below your current rate. With a 1% lower interest rate, you should see your monthly payment drop by at least $100. For example, if your current loan amount is $300,000, with a 30 year fixed interest rate at 6.25%, your monthly P & I payment is around $1850. If you refinanced with a lower interest rate of 5.25%, your monthly P & I payment is now only about $1650, saving you $200 a month!
2. How long will I be in my home? Remember, since a refinance is starting up a new loan, there will be closing costs involved. It’s a good rule of thumb to say that closing cost will equate to 1-3% of the loan amount. For example, if you consider the same loan amount of $300,000, you can expect closing costs of at least $3,000. When you take into account the cost of a refinance, it is important to determine whether or not you will be in the home long enough to benefit from the monthly savings. Again, let’s take a look at the example above in which we lowered the interest from 6.25% to 5.25%. In order to determine how long it will take for the monthly savings to equal the cost of refinancing, we will use the following equation:
closing costs / monthly savings = number of months till you break even
$3000 / $200 = 15 months
In this example, you will need to be in your home at least 15 months to have accumulated enough monthly savings to break even with the refinancing costs. If you do not plan on staying in your home long enough realize these savings, it wouldn’t make financial sense to refinance.
Your home is your most important investment, and a key component to the health of your financial future. Before you refinance, ask yourself the above two questions, and discuss your options with your mortgage professional. Throughout this week, I’ll be going over more details of the refinancing process. Feel free to contact me at anytime at (562) 972-0351 with any of your questions. For more information on refinancing your mortgage, including mortgage calculators and a checklist, visit my website at www.AlissaAlvarez.com
One of the first steps to purchasing a home is getting preapproved for a loan. Often, most borrowers get prequalified for a loan, which is a good start. However, in order to establish yourself to Realtors as a serious and able buyer, you will need a preapproval letter from a lender.
With a preapproval letter in hand, a buyer is now in position to do the following:
1. Save time by looking at the right properties. A preapproval letter will set your price range, thereby saving you from wasting time looking at homes out of your price range. Nothing is more disappointing than finding a home you fall in love with, going to a lender to apply for a loan only to find that you qualify for less than what you hoped for. Now, not only is the house out of reach, but homes in the lower price range can seem disappointing in comparison.
2. Increase your negotiating power. A seller’s highest priority is selling their home fast. Homes are like bread, the longer they stay on the shelf, the less desirable they become. Nobody likes stale bread! A buyer that is preapproved is more of a sure bet to close the transaction. Preapproved buyers will always have priority over prequalified buyers!
3. Faster closing period. If you are preapproved, the transaction will not be tied up while the application is being processed. Appraisals can be ordered, and the ball can get moving right away, which can decrease a closing period from 30 days to a couple of weeks! Again, this might be even more advantageous if a seller is in a bind, and needs to close quickly.
Completing a loan application is usually the most time consuming part of the transaction. If you have already taken care of this step, you are only positioning yourself ahead of the pack! If you would like to see how much you are pre-approved for, feel free to call me at (562) 972-0351, or visit my website at www.AlissaAlvarez.com