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Dec 2

Mortgage Pre-Approval: How To Provide Proof Of Income

Mortgage Pre Approval How To Provide Proof Of Income

When you first speak with a mortgage lender about buying a home, you may hear about providing proof of income and other financial information. Providing these items will allow the mortgage lender to give you an informed expectation for your buying range. Or, if you are looking for a pre-approval, providing these items will allow the lender to get your approval processed.

Because it can be confusing to collect and maintain the information that you’ll need to bring to a mortgage lender, it’s important to understand what your financial assets are. In this article, we’ll help you to figure out what you need to share for proof of income and what other financial assets could factor into your home purchase.

When is the right time to contact a mortgage lender?

Providing proof of income

What income can be used to qualify for a mortgage? Lenders will typically count income that you currently have or can expect, but the weight given to individual types of income may vary based on qualifying factors such as consistency (how regularly the income is received), longevity (how long the particular income has been earned), and continuity (the likelihood that the income will continue into the foreseeable future).

Employment income: salary or wages from an employer

When you first speak with a mortgage lender about buying a home, you may hear about providing proof of income and other financial information. Providing these items will allow the mortgage lender to give you an informed expectation for your buying range. Or, if you are looking for a pre-approval, providing these items will allow the lender to get your approval processed.

• Preferably demonstrable for at least two years.

• Indicated by W2s, pay stubs, and/or verification by the employer.

• Salary is taken at face value, whereas hourly wages may be averaged over the previous two years. 

• Overtime and bonuses are averaged over the previous two years.

Self-employment income: working for yourself or a company you own

• Most lenders will require that you show consistent income from self-employment for at least two years before it can be counted.

• Income will be averaged over the previous two years (meaning they won’t just accept your current earnings or salary).

• Income must show stable or increased earnings; diminished earnings are likely to be considered high risk.

• Self-employed applicants must also provide a history of filed tax returns. 

Rental income: earnings from a rented property

• Earnings will be averaged over the previous two years and must be demonstrable for that length of time.

• Lenders will assess the cost of maintaining the property, including potential depreciation, and deduct that from your net earnings when applying them to income.

• Investment income: earnings from investment portfolios, i.e. stocks

• Certain stocks pay dividends to shareholders, which can count as income. These payments are usually made quarterly, and reflect the health of the company and the value of the stock.

• A two or three-year track record of earnings is required.

• Applicants must demonstrate an asset base sufficient to support claimed investments.

• Applicants must provide a history of tax returns for two or three years.

Retirement income: social security, pensions, etc.

• Award documentation is sufficient for social security and pensions.

• 401k and IRAs require tax documentation to show an asset base large enough for at least a 3-year continuance. 

Military income

The same documentation rules apply for active military and their families. One benefit for our service members is that housing, base, and food allowances can be included as income for mortgage calculations. Those deployed to war zones must provide documented confirmation since income earned in these zones is not taxed. 

Learn about how you could apply for a VA Loan. 

Secondary income: side hustles

For part-time jobs, income must be demonstrable for two years and will be averaged over that period. Substantiated by W2s and pay stubs.

For side businesses, similar qualifications to self-employment income are used. If an applicant cannot demonstrate income from a side business for the past two years, this income may be used by a lender to “shore up” the application. This is called a compensating factor, and may be used to counterbalance low credit scores, high debt ratios, or a low down payment. However, it will not be counted as income.

What about savings accounts?

A savings account may be used for a down payment, which will be an important factor in your pre-approval and loan estimate. However, savings may not count as income because they are accumulated over time and cannot be guaranteed to grow at a specific rate.

Mortgage lenders look at savings accounts as a type of safety net for borrowers. If you should lose your job or temporarily suffer a dip in your monthly income, you can use savings to cover your mortgage payments. Because of this, lenders look at borrowers with sizable savings accounts as less risky.

Other savings, like an inheritance or trust fund, may have a time sensitive disbursement plan, either monthly, yearly, or at other specific times. Even if you receive this money on a regular basis, it is most similar to a savings account, and your mortgage lender will need to understand your access to this asset.

Stock and investment earnings

Certain stocks may contribute to your income in the form of dividends. However, many companies do not pay dividends for stocks, and their value is based on their sale. You may be inclined to sell a stock in order to purchase a home, but you cannot use stocks as a financial asset.

Many people do plan to sell stocks in order to purchase equity, and if you are speaking to your mortgage lender about your home buying potential, it is helpful to know the total value of your holdings.

Equity and investment properties

Any equity that you own has value. However, whether you want to liquidate that value in order to purchase your new home will make a difference with your mortgage.

If you own a home and are selling it to purchase a new home, an appraisal will be an important part of your process. Getting an appraisal will allow a mortgage lender to understand what your home’s value is, and that can help to create a pre-approval amount for you to purchase a new home. When this is done, it is assumed that you will be selling your old home at a similar value to the appraisal cost in order to pay for your new mortgage. This could factor into the cost of the home, your down payment, or be applied to monthly premiums. But once you have a selling contract on your current home, there is no need for an appraisal.

If you are buying a second home or investment property, you may use the equity of your first home as collateral if you have paid off around 75% of your previous mortgage.

Sharing your income information

If you are applying for a mortgage loan, be open and honest about all of your income sources with your mortgage lender. Your lender will let you know about the qualifications of your income and help you through the process of providing proof of income.

Even if your income is not applicable, it may be helpful in determining what type of borrower you will be. A secondary source of income that could contribute to your savings is a positive indicator. And, if it is not able to qualify as income, it may be available to you if you refinance.

What to expect from a lender

A lender will look at your income to determine how large of a PITI—a monthly payment of principal, interest, taxes, and insurance on the home—that you can pay without creating a financial hardship. Most lenders look for a PITI no larger than 28% of your gross income, though this is variable. In addition, a lender may look at other claims to your income, such as credit card payments, and consider them when determining the amount you will be able to handle.

Are you looking to speak with a mortgage lender about your finances? Contact RatePro Mortgage to get more information about your options with a mortgage loan.

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Sep 25

What Homebuyers Need To Know About Homeowners Insurance

What Homebuyers Need To Know About Homeowners Insurance

New homeowners may anticipate closing costs associated with buying a home, but may not anticipate the ongoing costs of homeownership. As you complete your home purchase it is important to understand the cost of homeowners insurance, which will be required by your mortgage lender and is intended to protect your investment.

What is homeowners insurance?
Homeowners insurance is a specific type of policy that protects homeowners against potential losses from disasters such as fire, storm damage or burglary. It will also protect against certain types of personal harm that could happen to others on your property. You may also add coverage for earthquakes or flooding depending on where your property is located. If you live somewhere flooding is likely, your insurance company may require additional flood coverage.

A home insurance policy covers four major areas:

  • Dwelling, which covers damage to the home and attached structures.
  • Additional living expenses, which covers living expenses if your home becomes unlivable.
  • Personal liability protects you against lawsuits from damages or personal injuries that occur on your property.
  • Personal possessions, which covers destroyed or stolen personal property.

How is private mortgage insurance different from homeowners insurance?
Private mortgage insurance (PMI) is paid to protect the mortgage lender and bank from the homeowner defaulting on the loan. PMI is paid until the homeowner owns at least 20% of the home. Although there are variables in policies for PMI, these variables will be decided by the mortgage lender and included in the closing disclosure. PMI may also be included in your monthly mortgage payment.

Homeowners insurance is paid to protect the homeowner throughout the time that they own the home. It may also protect the mortgage lender and bank during the time of the mortgage loan. Homeowners insurance should be paid regardless of your mortgage loan. Homeowners insurance will include many variables that can change to match your preferences and needs.

Learn more about Private Mortgage Insurance.

What does homeowners insurance have to do with my mortgage?
All mortgage lenders will require you to purchase homeowners insurance at the time of your home purchase. Similar to a car dealership requiring proof of insurance, this is to ensure that something will not affect the value of your house after purchase. It is even more important when the homeowner is repaying their mortgage to a bank for the cost of the home. Even if the home is yours, the bank still owns equity in the home, and they will want that equity to be protected.

Your mortgage lender will establish that you have homeowners insurance prior to closing on a home. You will want to speak with your mortgage lender to establish what coverage you will need. Most likely, your policy will need to ensure that 100% of the home’s cost is insured.

Can homeowners insurance be included in mortgage payments?
Yes, it can be. When you pay your homeowners insurance as a part of your mortgage, it’s called having an escrow. Depending on your lender, you may be asked to have an escrow as opposed to seeking homeowners insurance privately if you own less than 20% equity in your home. This is to ensure that your home is protected for both you and your mortgage lender.

If you own more than 20% equity in your home, you may still choose to have an escrow. Some homeowners will do this to minimize the number of payments that they are responsible for or to also include property taxes into their escrow, which is also an option.

Is homeowners insurance required?
Before you close on your home your mortgage lender will likely require you to have a homeowners insurance policy. This is to protect your equity in the home as well as the equity owned by the mortgage lender or bank.

It is possible to sign a home insurance binder, which acts as a temporary policy while purchasing a home. This may be helpful if you are planning to close on a home quickly.

How much should homeowners insurance cost?
The cost of homeowners insurance is highly variable depending on location, risks like flooding or earthquakes, and the value of your home. However, in the US it typically costs between $600-1,200 per year. You can expect to pay about $35 per month for every $100,000 of home value.

When is a certain coverage required?
If your home is going to require additional insurance coverage, such as earthquake or flooding coverage, your realtor and mortgage lender should be aware of this before the home is placed under contract. That’s why it’s important to understand what to expect to pay in closing costs and to have an estimate about the cost of homeowners insurance.

Visit the RatePro Mortgage blog to learn more about closing costs and contact us to answer your questions about mortgage loans.

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Sep 9

What to Expect With Closing Costs

What to Expect With Closing Costs web

When preparing to buy a home, there are a few things that most people are prepared for. And when you close on a home, it means that the end of your negotiations are over, your mortgage is approved, and you and the seller are prepared for sign and have the property turned over. However, you will also need to prepare for closing costs as an expense before you finalize the purchase of your home. Here’s what you need to know about closing costs:

What are closing costs?
Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. These costs are typically between 2-5% of the purchase price of their home. What makes up closing costs is unique to the type of mortgage lender that you work with, as well as your location and the type of mortgage that you choose. There are multiple factors that make up closing costs, but they will usually be itemized and explained to you by your mortgage lender. Some of these fees may also be negotiable, but remember, this must be done prior to closing.

Where can I find my closing cost?
You will receive a closing disclosure by your mortgage lender 3 days before your loan closes. This document has a lot of useful information, including the amount of your loan, interest rate, monthly payment, and the closing costs.

Before you get here, you should have been given a loan estimate from your mortgage lender which would have included a summary of these costs. There are restrictions that prevent a mortgage lender from increasing these costs substantially, so this should be used as a first indicator of how much money you will need to have set aside.

How much should closing costs be?
Closing costs are typically between 2-5% of the purchase price of your home. If you purchase a home that is $150,000, your closing costs will be between $3,000 and $7,500. Because there are other costs that come with owning a home, such as mortgage insurance, it is important to be prepared to pay these costs at closing.

What factors determine the cost of closing costs?
The items that make up your closing costs can vary, but they will most likely include appraisal and attorney fees, title insurance and services, as well as local and state taxes and recording fees. These fees are all a normal part of purchasing a home, and should be easily explained by your mortgage lender.

Other costs include the set up of your escrow account for the payment of future real estate taxes and homeowner’s insurance.

Is there a way to not pay closing costs?
You can avoid pay closing costs by getting a no-closing cost mortgage. This type of mortgage does not require you to pay costs at closing. However, the buyer will usually have to pay an increased monthly interest rate to make up for these costs.

In some instances, closing costs may be paid by the seller of the home if you agree upon this in the purchase and sale agreement. Also, if you are required to move for your career, your company may be able to pay or subsidize your closing costs. It’s always worth asking.

When can I ask my mortgage lender or realtor about closing costs?
You can, and should, speak with your mortgage lender about closing costs immediately. When you apply for pre-approval, a mortgage lender or bank will typically evaluate your finances with fees like closing costs in mind. Because they are paid at closing, it is another important item to save for when planning to purchase a home.

When you are looking to purchase a home, there are a lot of things that you may have questions about. Finding a local mortgage lender that you can rely on will help you to understand everything that you need to know about this important process. Visit RatePro Mortgage to answer all of your questions.

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Jul 18

Tips for Buying a Home When Mortgage Rates are Rising

Tips for Buying a Home When Mortgage Rates are Rising

Mortgage rates have risen about .5% since the end of 2017 to 4.625% for a 30-year conventional loan. If you are planning to buy a home this year, it’s important to learn what this could mean for you.

The mortgage rate increase will have an affect on your monthly payment. It may not be a large amount each month, but the cost increase will add up over time. However, this has happened steadily over the past decade, and it doesn’t mean that this is a bad time to buy a home.

Here are a few things that you can do when mortgage rates rise:

Lock your mortgage rate
Speak with your lender about locking your mortgage rate. This means that your interest rate will be frozen until your closing, ensuring that you will not pay more in interest than the rate you were quoted at the time you sought pre-approval. This can be helpful if month-to-month interest rates seem variable.

Consider increasing your down payment
Even if interest rates are rising, the lowest rate available is always going to go to an ideal homebuyer. If you can increase your down payment, you will have a better chance of getting a lower interest rate.

Consider your price range closely
When interest rates increase, the housing market can slow. This often means that houses on the market may be open to selling at a lower price range. If this is not the case, consider reevaluating your price range now that interest rates have changed.

Pay down your ARM mortgage
If you have an ARM (adjustable rate mortgage) and the rate is going to change soon, you will likely pay more per month due to the increase. If you can pay more at this time, you can decrease your total amount owed prior to the increase in interest.

Buy discount points
Most lenders will allow you to pay more money in loan costs with the specific goal of reaching a lower interest rate, called buying discount points. The amount paid is determined by the loan amount, and will lower your rate by .125% increments. The larger the rate decrease, the larger the amount of discount points.

Don’t panic. Mortgage rates have fluctuated up and down for many years. Monitoring interest rates has always been a part of buying a home, but it should not dissuade you from making a purchase when you are ready for it.

Contact RatePro Mortgage for the current rate trends and to learn the best time to lock in your interest rate on a mortgage.

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Apr 19

Everything You Need to Know About FHA Loans in 2018

Everything about FHA Loans 2018

FHA (Federal Housing Authority) Loans are designed for first-time homebuyers and can help buyers with low or building credit to make homeownership a reality. FHA Loan limits are set by the U. S. Department of Housing and Urban Development, or HUD.

It is important to stay up-to-date on what these changes are if you are interested in signing an FHA Loan in 2018. And remember, these limits can vary by state and housing market, so be sure to check with your local mortgage lender to discuss the current rate.

The national FHA loan limit for high cost markets will increase to 679650.The national limit for FHA insured Home Equity C 1

What is a high-cost or low-cost market?

Locations within Virginia range from low-cost to high-cost. The central Virginia market, including Richmond, is currently set at $535,900.

FHA loan limits increase when the average price of homes rises. This means that the limit is considering the average home price over the past two years in Virginia. It is also expected that home prices will continue to rise and FHA loan limits may change again to correspond. This could mean that FHA Loans can work with your home buying budget and correspond with the market that you wish to buy in.

Copy of FHA3

FHA3 2

Lender requirements

Although an FHA Loan is insured through the Federal Housing Agency, the mortgage lender may have specific requirements that they set to qualify for an FHA Loan. It is important to discuss these requirements before deciding what type of loan that you would like, and it may be helpful to learn about other loan options as well. Remember, when looking for a mortgage, a priority should be the face-to-face contact only available from a local mortgage lender.

Want to learn more about other loan types? Check out What Mortgage Loan is Right For You?

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