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Understanding How Debt Affects Your Mortgage

When determining a target price range for purchasing a home, it’s important to consider your existing debt, as this will affect what kind of mortgage you will qualify for. Your debt to income ratio, or DTI, is one of the most important metrics after your credit score. In this post, we cover everything that a homebuyer needs to know about their DTI and the effect that this will have on the mortgage process. 

What is DTI?

The primary tool mortgage lenders use when considering your application is your DTI, or debt to income ratio. In simple terms, this is the percentage of your income that you must set aside each month toward paying off your debts. This number can be as important as your base income and your credit score when determining your eligibility for a loan. 

Calculating your DTI

To calculate your DTI, lenders will divide your monthly debt obligations by your gross income. This seems simple enough, but this equation fails to take into account taxes, food, utilities, health insurance, transportation costs, or childcare. You will want the lowest DTI possible, not just to ensure a good mortgage rate, but also to be able to still live comfortably while paying off your debts. 

Front-end vs. Back-end DTI

There are two kinds of DTI: front-end DTI and back-end DTI. Front-end DTIs only include housing costs like future mortgage payments, insurance, property tax, and homeowner costs compared with your gross income. Back-end DTIs include all your other debts like credit card debt, student loan debt, and car loans compared with your gross income. Most mortgage lenders will take both DTIs into account when considering your application. 

What is the best debt-to-income ratio?

In order to get approved for a conventional mortgage, your back-end DTI should be less than 43%, however, with excellent credit, you may be eligible for up to 50%. If your ratio is higher than this, you could pay more interest or be denied for a loan. 

Even if your back-end DTI is lower than 43%, only you can determine the debt to income ratio that makes sense for your situation. Just because you can be approved for a loan at a good rate doesn’t mean it’s a great idea. Some mortgage lenders do not have your best interest in mind. They just want to make the largest loan possible. Don’t be fooled! Make sure you do the math before you overcommit yourself to monthly mortgage payments. You know your household budget better than anyone. 

At the end of the day, we recommend paying extra on your debts and avoiding large purchases on credit to lower your DTI before you apply for a mortgage. This helps the mortgage process go smoothly so that you can have both your dream home and financial peace of mind.  

If you have questions about your financial situation or the mortgage process, feel free to reach out to any of our mortgage professionals at (205) 776-8401. 

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Loans Mortgages Refinance

Making the Most of Refinancing Your Home

It seems like a pain to go through the mortgage process AGAIN just a few years after purchasing your home. Loan applications, appraisals, closings…why bother if your current mortgage payments already fit comfortably into your budget? Are the savings and benefits worth it? Even if you’re not considering a move, the time could be right to refinance your home. 

Do you have a child in college? Are you interested in starting a business? Refinancing your home can be a strategic way to dip into your own personal piggy bank to help in many different life situations.

What is refinancing?

“Refinancing” is getting a new mortgage to replace your original one. Instead of throwing out the original mortgage, the first loan is paid off when the new loan is created. Refinancing can improve the interest rate and term of the loan. 

When is refinancing a good idea?

Like many things, it’s a numbers’ game. There are two metrics to weigh as you consider when to refinance: your home’s value relative to the amount owed on your current mortgage and current interest rates. Over time, the value of your home should increase, and there could be more incentives to refinance. You can’t control the fluctuations in interest rates, but you can monitor them to find strategic opportunities. When your home’s value is up and the interest rates are down, you will get the maximum benefit from refinancing your home. 

We’ve had historically low-interest rates for a long time, and it’s difficult to tell when they might start to creep back up. With the current state of the economy, we recommend making refinancing decisions based on your personal financial situation rather than holding out for a possible future rate improvement. 

Why is refinancing beneficial?

Apart from just lowering your monthly mortgage payments, refinancing gives you options to utilize the equity you’ve built on your home. You can utilize the cash equity built up in your home to pay off credit card debt, a car loan, a student loan, or even start a business, buy a second home or an investment property. 

Decreasing your interest rate today by even one percentage point might make a bigger difference than you think. A 1% improvement could save you more than $20,000 per $100,000 financed over the term of a 30-year mortgage. 

Should I refinance?

MortgageRight can help explore all the different possibilities that open up to you when you refinance your home. Our trained mortgage specialists can help you explore the benefits of refinancing based on your situation to determine if now is the best time for you to take action. 

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Homebuying Homebuying Tips Loans Mortgages Purchase

MYTH: Now is Not a Good Time to Buy

Real Estate has appreciated a lot lately and we have heard many potential homebuyers say they’re thinking about waiting until prices come down to buy a home. If rising home values are keeping you on the sidelines, you may be waiting longer than you ever intended.

For instance, should you try and wait it out, the market may have gone up 20% before there is a 10% correction. And while you’re waiting for months or years, you may still pay 10% more for your new home after paying rent when you could have started paying off a new mortgage.

The right time to buy your first home is when you are ready; both financially and emotionally. And significant life events (getting married, relocating, landing a great new job, having children) generally drive the decision to consider purchasing instead of continuing to rent.

At MortgageRight, our experience tells us you cannot time the real estate market when data becomes available many months after market events take place. This, along with so many other variables, makes pinpointing a perfect time to buy nearly impossible.

If you are ready to buy your first home, this may be the right time to buy a home. Competitive interest rates and a variety of home loan programs are currently available that will can meet your needs today.

Don’t let this myth is deter you. Instead of continuing to make rent payments to a landlord, start making payments on your own home.

Contact MortgageRight. Our helpful loan associates area always ready to explain the process and your options.

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First-time Homebuyer Homebuying Homebuying Tips Loans Mortgages Purchase

Defining the First-Time Homebuyer

The U.S. Department of Housing and Urban Development (HUD) describes a first-time homebuyer as someone who meets any of the following conditions:

  • An individual who has not owned a principal residence for three years. A spouse is also considered a first-time homebuyer if he or she meets the above criteria. If you’ve owned a home but your spouse has not, then you can purchase a place together as first-time homebuyers.
  • A single parent who has only owned a home with a former spouse while married
  • A displaced homemaker who has only owned with a spouse.
  • An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
  • An individual who has only owned a property that was not in compliance with state, local or model building codes – and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

Please contact MortgageRight at 205.776.8401 or Contact@MortgageRight.com for more information.

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Budgeting Down Payment Homebuying Homebuying Tips Mortgages Purchase

Mortgage Loans Offering Down Payment Assistance

Assistance for First-Time Homebuyers

Many first-time buyers think they need to have 20% saved up for a down payment, plus funds to cover closing costs. But if not having these funds is the only thing standing between you and buying your first home, don’t worry. Gift funds, down payment assistance, and specialty programs tailored specifically for first time buyers can help you move forward to get the home today.

First-time homebuyer programs are designed to help new buyers achieve their goals of homeownership. These programs generally help remove one of the largest obstacles first-time buyers must overcome when purchasing a home – The Down Payment.

There are even opportunities to qualify for a first-time program even if you have purchased a home before.

A larger down payment is generally recommended for buyers who want to avoid paying mortgage insurance, but saving those funds can take time. For many buyers, the money needed for a down payment can be one of the biggest hurdles to buying their first home.

Fortunately, there are loan programs that contain down payment assistance programs specifically designed to help first-time buyers who have little, or even no cash saved for a down payment.

So, if you have been worrying about where to find the funds needed to purchase your very first home, take a look at a few of the first-time homebuyer down payment assistance programs currently available today:

Loan Products

FHA Loans – FHA loans are insured by the Federal Housing Administration, and these government backed loans have been designed specifically to help buyers achieve their goal of homeownership. FHA loans have lower down payment requirements compared to conventional (private lender) mortgages. With an FHA loan, your down payment can be as low as 3.5% and can be gifted to you from a family member or friend. FHA loan guidelines are also more lenient, and allow for lower credit scores and lower debt ratios. They will also allow the seller to contribute towards closing costs.

USDA Loans – The only government backed loan program that offers 100% financing for all qualifying borrowers, a USDA loan is a great option for first-time buyers looking for a zero down payment option. USDA loans do have some very specific eligibility requirements, including the location of the property. USDA 100% financing loans are intended for buyers who want to purchase rural property outside of major metro areas.

VA Loans – The U.S. Department of Veterans Affairs insures VA loans and helps veterans, active military persons, and surviving spouses purchase their dream homes. VA loans are available with up to 100% financing, have no mortgage insurance requirements, and offer more flexible eligibility guidelines.

From help with closing costs to 100% financing, MortgageRight can help you understand the many programs available to help first-time homebuyers achieve their goal of homeownership.

Buying your first home is exciting and you have many loan programs and options available to you. Partnering with an experienced mortgage loan officer is an important part of buying your first home. From help with closing costs to 100% financing, MortgageRight can help you understand the many programs available to help first-time homebuyers achieve their goal of homeownership.

Contact MortgageRight at 205.776.8401 or Contact@MortgageRight.com for more information.

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Budgeting Homebuying Homebuying Tips Loans Mortgages Purchase

Myth: 20% Down Payment Requirement To Purchase Your First Home

You Do Not Need a Large Down Payment to Qualify

According to a recent survey, nearly half of renters overestimate the up front costs of buying their first home. Too many believe they need to put 20% or more toward a down payment when buying a home.

That was most likely the case when your grandparents purchased their first home, but that is no longer the case.

While a 20% down payment is still considered standard, it is not the only option. Fortunately, there are loan programs that contain down payment assistance options that are designed to help first-time buyers who have little, or even no cash saved for a down payment.

In fact, there are many programs that allow buyers to put down as little as 3%. Statistics show that 7 out of 10 first tie homebuyers make a down payment of 5% or less and some first-time homebuyer programs offer NO MONEY DOWN. And as many as 15% of those who have purchased homes within the last 2 years have financed with 0% down.

Perhaps the reason for this supposed myth is due to Private Mortgage Insurance. When you finance a home with less than 20% down, you also have to pay PMI every month until you reach the required equity of 20%. This is true of regular conventional loans, but not for FHA loans which can go as low as 3.5% equity.

At first glance this may seem risky, but the Government wanted more Americans to be able to achieve the American dream. To achieve this and boost homeownership, they created the Federal Housing Administration (FHA) and began offering government backed loans that were insured against default (insurance to the mortgage company or bank in case the borrower ever defaulted on the loan). This made lending to borrowers with a lower down payment and credit scores a reality.

For instance, the FHA will back a loan for a borrower with a 500-579 credit score and a 10% down payment. If the borrower has at least a 580 credit score, they only need a 3.5% down payment to qualify for an FHA mortgage (borrower may pay more over time). Conventional loans programs offer down payments between 3% and 5%. Veterans, military service members and eligible surviving spouses can get mortgages with a down payment as little as zero.

In an analysis of historical loan data by Laurie Goodman, Jun Zhu, and Taz George with the Urban Institute shows why government-backed investors like Fannie Mae see relatively little risk in qualifying mortgage loans with down payments as low as 3-5%. The data shows that credit is a stronger indicator of default risk than down payment size. The percentage of defaults of 5-10% down loans versus 3-5% down is very similar.

“Of loans that originated in 2011 with a down payment between 3-5 percent, only 0.4 percent of borrowers have defaulted. For loans with slightly larger down payments – between 5-10 percent – the default rate was exactly the same. The story is similar for loans made in 2012, with 0.2 percent in the 3-5 percent down payment group defaulting, versus 0.1 percent of loans in the 5-10 percent down payment group.” – Urban Institute

If you’re in the process of buying a home for the first time, you probably have some questions about the best way to find and finance your dream home. At MortgageRight, our goal is to make sure you have the education and support you need. That starts with dispelling many common myths about mortgages and home buying.

Please contact MortgageRight at 205.776.8401 or Contact@MortgageRight.com for more information.

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Homebuying Loans Mortgages Purchase

Conventional Loans

Conventional (conforming) mortgage loans are financed and insured by private lenders and investors, rather than being insured by the Federal Government (FHA). Conventional loans are often sold to Freddie Mac (FHLMC) or Fannie Mae (FNMA), the largest source of loan funds in the United States, who purchase closed mortgages, freeing up funds so lenders can make more home loans. A conventional loan may also offer the choice to pay homeowners insurance and taxes directly, rather than be included in the monthly payment each month.

A conventional refinance can be a excellent way for FHA homeowners to cancel their FHA mortgage insurance premiums. Rather than refinance with the FHA, homeowners can opt to refinance with a conventional loan instead. This strategy is increasingly popular as home values continue to recover nationwide. The rules are basically the same for refinance as they are for purchase, but the results can prove to be a great way to save money on both the short and long run. Simply call MortgageRight for more info.

Disclosure: Even though a lower interest rate can have a profound effect on monthly payments and potentially save you thousands of dollars per year, the results of such refinancing may result in higher total finance charges over the life of the loan.

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Government Loans Homebuying Loans Mortgages Purchase

VA Loans

The VA (Veterans Affairs) loan helps service members, veterans and their families become homeowners by providing a home loan guaranty benefit and other housing-related programs to help veterans obtain, retain, or adapt a home for personal occupancy.

VA guaranteed loans are provided by private lenders, such as banks and mortgage companies, and not by the VA directly. The U.S. Department of Veterans Affairs is not a direct lender, therefore the loan is made through a private lender and partially guaranteed by the VA so long as guidelines are met. Through the VA Home Loan Guaranty Program, VA guarantees a portion of your loan against loss and helps lenders provide you with more favorable financing terms.

The VA loan remains one of the few mortgage options for borrowers who do not have a down payment. VA loans are available to more than 22 million veterans and active military members.

Most members of the military, veterans, reservists and National Guard members are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability may also apply.

MortgageRight is Veteran Owned and Operated and understands the needs and requirements of our veterans. We remain steadfast in honoring their dreams of homeownership.

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Government Loans Homebuying Mortgages Purchase

FHA Loans

A FHA (Federal Housing Administration) loan is a government-insured mortgage loan. An FHA loan has features that may make it easier for first-time homebuyers to achieve the dream of homeownership with low down payment options, flexible credit and income guidelines and a fixed-rate. FHA mortgage insurance protects the lender if a borrower defaults on the FHA loan.

Each FHA borrower pays a mortgage insurance premium. The premiums are collected and used by the FHA to reimburse the lender (not the borrower) should the borrower default and the lender must foreclose upon the loan and sustain a loss. This insurance enables a lender to provide loan options and benefits often not available through conventional financing. 

Fortunately, the Federal Housing Administration (FHA) requirements for credit scores and down payments are lower than for conventional loans. Borrowers may be able to qualify for an FHA loan with a credit score of at least 580 and a downpayment of just 3.5 percent. FHA loans may allow sellers to pay up to 6 percent of the loan amount to cover buyers’ closing costs.

Meet with MortgageRight.

Not all lenders can offer you a FHA loan, however MortgageRight is a Federal Housing Administration (FHA) approved lender.

  • You must prove that you have 2 years of steady employment, showing your income has remained the same or increased.
  • You cannot have declared bankruptcy in the past 2 years or had a foreclosure in the past 3 years. If you have, you may not qualify for an FHA loan.
  • You must also have the cash to pay the downpayment on your loan which is generally 3.5 percent of the total cost of the loan.

If you feel that you can or are close to meeting these requirements, call a MortgageRight loan officer today!

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Homebuying Loans Mortgages Purchase

Jumbo Loans

A jumbo rate loan is a loan that exceeds conventional or conforming loan limits (the amount Fannie Mae and Freddie Mac will buy) and is a great loan for purchasing a high-priced or luxury home. If you have a lower debt-to-income ratio, a higher credit score, and a larger down payment – a jumbo rate loan may be right for you.

In most housing markets that amount is $417,000 and any mortgage more than that is a jumbo mortgage loan. Jumbo loans are available for primary residences, second or vacation homes and investment properties and are also available in a variety of terms.

They are offered in both fixed-rate or adjustable-rate loans and may have higher interest rates than conforming and conforming high-balance home loans. Jumbo loans may also require stricter underwriting and typically require a higher down payment, higher credit score and reserves. Jumbo rate loans have no private mortgage insurance requirements.

The perks of the jumbo rate loan are numerous.

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