Frequently Asked Questions
Buying a Home
How do I qualify for a mortgage?
Different mortgage types have different specific qualification requirements, but the general process of qualifying for a mortgage is the same.
- You submit an application with a lender.
- You provide the necessary documentation, which includes paycheck stubs, tax statements, bank and asset statements, and identification.
- The lender reviews your information. They look at your income, how much debt you have, and they also pull a credit report.
- Based upon your status, the lender determines how much money you can afford for a mortgage as well as what interest rate you should receive.
What is the required minimum credit score?
An important element of qualifying for a mortgage is your credit score. Your lender pulls a credit report to look at your credit score. Different loan types have different qualifying scores:
- The minimum qualification score for most conventional loans is 620.
- For FHA loans, the minimum score is 580.
- For VA loans, the minimum score is 620.
- For USDA loans, the minimum score is 640.
In addition to credit score, a lender looks at your debt-to-income ratio to make sure you are not overextended.
Which loan type is best for me?
Mortgage lenders offer a wide variety of loans designed to meet the needs of buyers. The most common types of loans obtained by first-time buyers are:
- Conventional loans. This is the most common type of mortgage loan. Conventional loans can be for as long as 30 years or as short as five years, with options in between. They can be fixed-rate or adjustable rate. Conventional loans are provided by banks as well as private mortgage lenders like Mortgage 1. When most people think about home loans, the conventional loan is the one they are thinking of.
- FHA loans. A Federal Housing Administration (FHA) loan is a mortgage that is insured by the Federal Housing Administration (FHA) and issued by an FHA-approved lender such as Mortgage 1. FHA loans are designed for low-to-moderate-income borrowers; they require a lower minimum down payment and lower credit scores than many conventional loans.
- VA loans. VA loans are offered through the Department of Veterans Affairs. They are available to active and veteran service personnel and their families. VA loans are backed by the federal government and issued through private lenders like Mortgage 1. VA loans have favorable terms, such as no down payment, no mortgage insurance, no prepayment penalties and limited closing costs.
- USDA loans. Rural Development home loans are low-interest, fixed-rate loans provided by the United State Department of Agriculture. The loans do not require a down payment. The loans are financed by the USDA and obtained through private lenders, such as Mortgage 1, and are meant to promote and support home ownership in underserved areas.
- MSHDA loans. The Michigan State Housing Development Authority (MSHDA) offers down payment assistance to people with no monthly payments. The down payment program offers assistance up to $7,500 (or 4 percent of the purchase price, whichever is less).
How much house can I afford?
To determine how much house you can afford, follow the 28/36 rule.
Many financial advisers agree that households should spend no more than 28 percent of their gross combined monthly income on housing expenses and no more than 36 percent on total debt. Total debt includes housing as well as things like student loans, car expenses, and credit card payments.
The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay each month.
To calculate how much 28 percent of your income is:
- Multiply 28 by your monthly income. If your monthly income is $7,000, then multiply that by 28. 7,000 x 28 = 196,000.
- Divide that total by 100. For example, 196,000 ÷ 100 = 1,960.
Do the same for the 36 percent rule, using 36 in place of 28 in the example above.
What will my interest rate be?
Interest rates are calculated based on roughly 23 different factors that are unique to each buyer. Your interest rate will depend on your credit score, the loan amount, term length, loan type, down payment amount and more. If you’re unhappy with your pre-approved interest rate, your Loan Officer may be able to suggest a few ways for you to increase your score.
What are closing costs?
You pay closing costs to cover the fees charged by the various entities involved in the purchase of your new home. These costs may include: application fees, escrow payments, underwriting fees, title fees, appraisal fees, homeowners insurance among others. Closing costs typically amount to 2 – 5 percent of the purchase price. In a competitive market, closing costs are usually paid for by the buyer, but buyers can request that the closing costs be covered by the seller.
What is an escrow account?
More often than not, if you put less than 20 percent down when purchasing a home, your lender will require an escrow account. Each month, a portion of your mortgage payment will be placed into this account and it acts on auto pilot. Money in this account is used to cover insurance and property taxes as they come due.
What is PMI?
Private Mortgage Insurance (PMI) is an insurance policy that protects a mortgage lender or title holder if a borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage. If you pay 20 percent or more as a down payment on a conventional loan, you do not need PMI. Once you start paying PMI, it goes away in two ways: (1) once your mortgage balance reaches 78 percent of the original purchase price; (2) at the halfway point of your amortization schedule. For example, if you have a 30-year loan, the midpoint would be 15 years. At the point, the lender must cancel the PMI then, even if your mortgage balance hasn’t yet reached 78 percent of the home’s original value. PMI is typically between 0.5 percent to 1 percent of the entire loan amount.
Refinancing Your Mortgage
When is the right time to refinance?
If done correctly, refinancing can be a great financial move for you and your family. But how will you know that it’s the right time? Here are five reasons why you should consider refinancing right now.
- Your credit score has improved since the original mortgage closing. Normally just adding a mortgage account that has been paid on time for a year or more can have a significant positive impact on an individual’s credit score. Mortgage rates are discounted for every 20-point increase in borrowers credit score up to 740. Depending on how much higher a consumer’s credit score has improved, the potential savings could be substantial, especially if combined with reason number two.
- Your originally purchased with less than 20 percent down and you are paying Private Mortgage Insurance (PMI). Refinancing can be a great way to remove those extra premiums for their monthly payments. Since 1991, home values have increased an average of 3.3 percent each year, according to the Federal Housing Finance Agency’s (FHFA) House Price Index (HPI). Just in the past year, home prices went up an average of 6 percent across the country.
- You want to reduce the terms of the loan. When combined with number one and two on this list, a borrower could actually get a similar payment with a big reduction in years left to pay their mortgage. Going from a 30-year to a 15-year mortgage can result in thousands of dollars of interest savings over the life of the loan.
- You want to combine high-interest loans to a lower, tax-deductible payment. Student loans, personal loans and auto loans traditionally are secured with higher interest rates than mortgage loans. Refinancing and paying off higher-interest loans can be a great way to simplify the number of payments made each month and reduce overall monthly payments.
- You want a low-cost source of cash for home improvements or investments. Home improvements can improve the value of the home and many investments that pay higher than the after-tax cost of can provide a source of income over the cost of a mortgage.
What will my lender need from me to refinance?
After we receive your application, we will be in touch and request a copy of your most recent mortgage statement and two paystubs. If you decide to pursue a refinance to lower your rate and term or pull cash out, an appraisal will be required to complete the process.
How much will a refinance cost?
Often times, our customers are able to refinance their current mortgage with little-to-no money out of pocket. We include the refinance costs in to the loan itself so you can complete the process without having to pay a large lump sum for closing costs and pre-paids.