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We understand how stressful and complicated the homebuying process can be. So, we’ve put together this list of frequently asked questions and answers to help walk you through the entire process. Before you know it, you’ll be ready to make that deal and become a proud homeowner.

• How much can I afford?
• How will long-term debt affect how much I can afford?
• How am I qualified for a home loan?
• What is Private Mortgage Insurance (PMI)?
• How much of a down payment do I need?
• What is an Adjustable Rate Mortgage (ARM)?
• What are Discount Points?
• What is a Lock-in?
• How much are closing costs and what do they include?
• Why do I need an appraisal?
• Why do I need homeowner’s insurance?

How much can I afford?
Mortgage lenders use qualifying ratios to determine how much of a mortgage you can reasonably afford. It is important to remember that these ratios may vary from lender to lender and each application is handled on an individual basis.

Housing Expenses:

Your monthly housing costs include the mortgage principle, interest, taxes and insurance (PITI).

In general, to qualify for conventional loans, housing expenses should not exceed 28% of your gross monthly income.

Example:

Annual Income:             $30,000/12 =

Gross Monthly Income:    $2,500             

Maximum Conventional
Loan Housing Expense:       x 28%  

Monthly Housing Payments =  $700

• Your ability to repay is verified by your current employment and total income.
• Your willingness to repay is closely related to how you’ve fulfilled previous financial commitments. This is why lenders place such an emphasis on your credit report.

It is important to remember that there are no set rules. Each applicant is handled on a case-by-case basis. So even if you come up a little short in one area, perhaps one of your stronger points will make up for it.

Low Down Payment Mortgages

Even if you do not have a lot of money to use as a down payment, you still may be able to purchase a home. More and more borrowers are taking advantage of low down payment mortgages and becoming homeowners with as little as 5% down. With these loans, however, you may be required to carry Private Mortgage Insurance (PMI).
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What is Private Mortgage Insurance (PMI)?
PMI is a type of insurance provided by a mortgage insurance company that is used to protect the lender in the event that you default on the loan. Mortgage insurance is usually required on a conventional loan when your down payment is less than 20% of the home’s appraised value.

If you secure a FHA or VA loan, you will have to pay FHA mortgage insurance premiums or VA guarantee fees.
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How much of a down payment do I need?
To avoid PMI, a down payment of 20% of the home’s appraised value is required (or sales price – whichever is less). A down payment as low as 5% is acceptable with restrictions, but PMI will be required. Down payment requirements will vary by lender.
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What is an Adjustable Rate Mortgage (ARM)?
An Adjustable Rate Mortgage (ARM), has an interest rate which changes periodically, usually in relation to an index, and payments which may go up or down accordingly With a fixed-rate mortgage, the interest rate stays the same during the life of the loan.

ARMs offer lower initial interest rates, which will help you qualify for a larger loan amount and also offers lower monthly payments.  However, the interest rate is subject to change in the future, and your payment could increase at each adjustment period. 

The Basic Features:

The Adjustment Period: With most ARMs, the adjustment period occurs every one, three or five years, resulting in a change in your interest rate and montly payment.

The Index: Most lenders tie ARM interest rates to changes in an index rate. These indexes usually go up and down with the general movement of interest rates, making your monthly payment amount rise or fall accordingly.

The Margin: To determine the interest rate on an ARM, lenders add to the index rate a few percentage points called the margin. The amount of the margin can differ from one lender to another, but it is usually constant over the life of the loan.
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What are Discount Points?
Discount points are points paid up front to obtain a lower interest rate. The more points you pay the lower the rate you may obtain. Usually, one point equals 1% of the loan amount and will lower the interest rate by .25%.

Paying points may be advantageous if you intend to hold the property for a long time.  If you intend to hold the mortgage for a short period of time, the cost you pay up front may exceed the benefit you'll receive from a lower rate.

To get an idea of whether or not it is worth it to pay points, do the following:

• Divide the amount paid in points by the amount saved by the lower monthly payment.

Your savings per month is $33 ($665-$632).

The amount you pay for 2 points would be about $2000 (1 point is 1% of 100,000 or $1000) following the formula:

$2000 (amount paid for points) / $33 (savings per month) = 60.6 months.

You would need to keep the mortgage for 5 1/2 years to make paying points worth the cost.

Depending upon the lender, you may be able to lock in your interest rate and points when:

• you file your application;
• during processing of the loan;
• when the loan is approved; or
  later

Lock-ins protect you against increases while your application is processed.  A locked-in rate may prevent you from taking advantage of rate decreases during this period.  You may request a rate-buy down before the closing for a fee. 
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How much are closing costs and what do they include?
Closing costs can be divided into three categories:

• Lender fees (points, appraisal, credit report, underwriting, settlement and tax service fee)
• Prepaid (interim interest, real estate taxes and escrow, insurance premiums and escrow)
• Settlement costs (title insurance, settlement/ attorney fees, city/county/state taxes, recordation and messenger fees)

An appraisal is a written estimate of a property’s market value completed by an appraiser. The value is based upon a market analysis of the prices of recent sales of similar properties in the area and the property’s physical condition. Usually, this requires an interior and exterior property inspection.

Appraisals and Sales Prices

• If the appraised value is higher than the sales price, there is no impact to you.
• When the property appraises for a lower value than the sales price, the lower appraised value is used to determine your loan amount. To complete the sale, you may have to increase the down payment to make up the difference between the appraised value and the purchase price.

• Buying the right type of policy.
• Having the proper levels of protection within that policy including special provisions for jewelry, computer equipment, and other particularly valuable possessions.
• Supplementing this coverage with special protection against natural disasters that are not covered in your basic policy.