Tips on Getting Your Mortgage Loan Approved

What is important to lenders?      Not every applicant is approved for a home loan the first time he or she applies. For a variety of reasons, even after a lot of hard work, sometimes a loan just can’t be approved. It may have to do with the applicant’s credit or savings history, employment stability, debt structure, or the value of the home. The good news is that a denial is merely a detour, not a roadblock. Purchasing a home takes planning, discipline and hard work! Follow these tips and with our assistance, homeownership is not out of reach.

Establish a consistent record of paying bills on time.       Before making a loan the size of a home loan, most lenders will want to review how you have handled your credit in the past. This includes all credit accounts, including utilities, revolving debt (credit cards, etc.), and installment debt (car loans, student loans, etc.).      It is critical for you to bring all overdue bills up to date immediately and begin paying them on time in a consistent manner.

Establish a consistent record of steady employment.       Lenders are more likely to look favorably on an applicant who has been in the same (or similar) line of work for generally two or more years. If you have been working steadily for less than two or more years, expect the lender to ask why. There are many acceptable reasons, including: You recently finished school, vocational training, or left the military; Your work is typically seasonal and gaps in employment are customary to the industry You may have been laid off from your job; or Frequent employment changes are normal in your line of work (sales, contract work, etc.), but you have been consistently employed and maintained a consistent level of income over the past 2 years.  You may want to pay off some debt to lower your debt-to-income ratio.       This step will make it easier to qualify for a mortgage loan if your debt ratio is high. Chances are good that if you’re already paying rent, making a mortgage payment will be a smooth transition. Along with the mortgage payment, you’re also responsible for real estate taxes and insurance, and if required, mortgage insurance and homeowners dues. Work with us to determine the monthly payment you can afford based on your income and the standard debt-to-income ratio guidelines.  Establish a consistent savings pattern.       Saving money for a down payment, and still having enough reserves left over to cover two months of expenses in the event of an emergency, is typically the most challenging part of buying a home. While sometimes it is difficult, this is a necessary step to ensure you are financially ready to take the plunge into homeownership.

How Is Mortgage APR Calculated?

 

1. What is APR?

   • The APR on a mortgage loan is the Annual Percentage Rate. The APR does not affect the monthly payment, which is calculated using the principal, interest rate and length of loan.
     The APR always includes discount points, origination points, pre-paid interest, private mortgage insurance, underwriting fees, loan-processing fees and document preparation fees.
     The APR may include the loan application fee and credit life insurance.
     Mortgage APR is designed to prevent lenders from offering low interest rates and hidden fees.
     

   How is APR Calculated

   • As mortgage APR may include the loan application fee and/or credit life insurance fees, there is no clear way to calculate APR. In fact, different lenders use different formulas.
     In general, the APR can be calculated by adding the interest rate plus any additional costs. If two loans have the same interest rate, but one has a lower APR, the one with the lower APR is the better deal.
     APR calculators are available online at many sites, including http://www.mortgagefit.com/calculators/apr.html and http://www.money-zine.com/Calculators/Mortgage-Calculators/Mortgage-APR-Calculator/.
     

   Additional Information

   • APR is used not only in calculating mortgage payments but also in calculating payments for credit cards, auto loans, personal loans and many other loans.
     In any situation, the APR is a good starting point for loan comparison, but it should not be the only comparison. Review the monthly payments and fees included before selecting a home loan.
     Finally, be sure to get a good-faith estimate before committing to a home loan. This document is government-mandated and allows a borrower to see what the monthly mortgage payment will be and all fees associated with a loan.
     

How to Calculate a Mortgage Payment With Insurance & Taxes

Buying a house is a complicated process, and no aspect of a purchase is more complex than the financial side. Numerous variables go into the calculation of your final monthly mortgage payment, and that sum often comes as a surprise to buyers, even after looking at numbers for weeks. Your lender and real estate agent will provide estimates, but you should be crunching the numbers yourself. Don't be passive during this important process. There are formulas you can use to compute your mortgage payment. You can use online mortgage calculators that will pop out a number for you, but you'll still need to have the correct information at hand. When buying a house, knowledge is power, especially when it comes to financing. 

Things You'll Need

• Computer
• Spreadsheet software (optional)
• Mortgage loan amount
• Insurance and tax estimates

Instructions

Calculate the loan amount

1.  Determine the loan amount by subtracting the down payment from the purchase price. Then add closing costs or other fees that you are rolling into the loan. For this example, we'll use a price of $150,000.

2. Determine your down payment. For this example, we'll use a down payment of $10,000.
 

3. Estimate closing costs, if you plan to roll these into the loan. For this example, we'll use closing costs of $5,000.

 

4. Calculate the loan amount. In this example, the purchase price is $150,000, and you're paying $10,000 down and rolling into the loan $5,000 in closing costs, resulting in a loan amount of $145,000. 

 

Gather the variable data

5. Track down the following numbers to calculate your monthly payment: annual property taxes, annual homeowners insurance premium and, if necessary, private mortgage insurance.

6. Ask your real estate agent for the amount of annual property taxes on the property. If you're already working with a lender, this information should be included on the good faith estimate prepared by the lender. You can also contact your county tax office.

 

7. Estimate the annual insurance premium for the property. Contact an insurance agent to get a quote.

 

8. Calculate the estimated private mortgage insurance (PMI) payment. You'll pay this if your down payment is less than 20 percent of the purchase price. Average PMI runs from $50 to $80 per month on a home priced at $159,000, according to the Mortgage Insurance Companies of America. The actual PMI is based on the loan-to-value ratio (LTV). PMI for a 100 percent LTV is usually around 1 percent and goes down from there with lower LTV ratios.

Do the math

9. Calculate the monthly payment. The most convenient method is to go online and use one of the many mortgage payment calculators available, such as www.mortgagecalculator.org. Just plug in the numbers and it will quickly spit out your monthly payment.

 

10. Use a spreadsheet if you prefer not to go online. This example is based on the scenario above that resulted in a loan amount of $145,000. The loan is for 30 years at a fixed rate of 6 percent. Type the following formula into your spreadsheet: =PMT(6%/12,360,145000). That's 6 percent interest (divided by 12 to give you a monthly rate) for 360 months (30 years) and loan amount of $145,000. The result is your monthly principle and interest payment of $869.35.

 

11. Add in your estimates for taxes, insurance and PMI, if necessary. Insurance costs vary, of course. The average annual premium was $804 in 2006, according to the Insurance Information Institute. That equals 12 monthly payments of $67. For this example, we'll figure annual property taxes of $2,000, or about $167 a month. So, $869 for principle and interest, plus $67 for insurance, plus $167 for taxes comes out to a total monthly payment of $1,103. If you need to pay PMI, add an additional $50 (estimated) for a total of $1,153.

 

 

 

 

The Loan (aka, "The Mortgage")

Basics

The loan you get from the bank is called a mortgage, also called a note.  (We'll talk more about how to get a loan in a minute.) The bank loaning the money is the lender.  The amount you pay to the bank each month is your mortgage payment.  The rate of interest on the loan is the mortgage rate (or the interest rate).
If you don't make your mortgage payments then the bank will repossess the house.  (This is called foreclosure.)  Then they'll sell it to make sure that they can recoup the money they loaned to you, and that you didn't pay back.
The number of years it takes to pay back the loan is called the term, which in the U.S. is either 15 or 30 years.  There are pros and cons of each:

15-year mortgage	30-year mortgage
• Saves a bundle on interest • Pay off the loan in half the time	• Easier to qualify for • Lower monthly payments • Allows you to buy a higher-priced home • Keeps your cash liquid

How do you choose between the two?  If you want the most flexibility then take the 30-year loan.  You can still save on interest and pay your loan off early by paying the bank a little extra each month (or whenever you can afford it).  The difference is that with a 30-year loan you get to dictate how much extra you want to pay, and therefore how much you want to save.  With a 15-year loan you have to make bigger payments every month whether you like it or not.
On the other hand, if you can definitely afford the payments on a 15-year loan, and you don't trust yourself to make extra principal payments on a 30-year loan, then take the 15-year loan and enjoy the fact that you'll save a bundle of interest and pay off the loan in half the time, without having to do anything special.
If you're satisfied with that advice then keep reading.  Otherwise you can check out more about 15- vs 30-year mortgages in the appendix.
Right now you should figure out how much money you have saved up that you can use for a down payment, unless you know you can get a loan with no down payment.

Paying back a mortgage

You pay back your loan by making a payment every month.  At closing you'll usually have the opportunity to sign a form which lets the bank draft the payment automatically from your bank account each month, which is very convenient.  If you decline to do the auto-draft, then it's your responsibility to make your payment each month on your own initiative.  The bank won't send you a monthly bill. Part of your payment goes towards the principal (the amount the bank loaned you), and part of it is interest (the bank's profit from lending you money).  So when the bank loans you $100,000 you pay them back that $100,000 and then some.  If you only had to pay back the same $100,000 they gave you then there wouldn't be anything in it for them.  That's why they charge interest.
Even though part of your monthly payment is for principal and part is for interest, you make only one payment to the bank each month, and that payment amount stays the same for the life of the loan.  You don't have to know how much of your payment is for principal and how much is for interest, and you generally don't need to know, but if you're curious, you can see my page on how to figure mortgage interest.  At the end of the year the bank will send you a statement for your taxes (since you'll get to deduct the interest you paid if you itemize), and the statement will tell you how much interest you paid over the year.

Mortgage interest

Interest is the fee you pay for the privilege of borrowing money.  It's how the bank makes a profit by giving you a loan.  Naturally, the lower the interest rate, the better for you, because you'll pay less total interest.  And since the interest is part of your monthly payment, a lower interest rate means a lower monthly payment, too.  Finally, a lower interest rate means you can afford a more expensive house.  (Let's say you've got $1500/mo. to pay towards a home.  When less of that $1500 goes to interest, more of it can go towards paying off the cost of the home, which means you can afford a pricier house.)  So when you get to the point where you're shopping for a loan, you'll try to get the lowest rate possible.

Incidentally, in July 2010, U.S. mortgage rates dropped to 4.58%, the lowest rate in over 50 years.  (Star Tribune)  And HSH has a list of historical mortgage rates since 1986.

Maybe you remember percentages from high school, so you figure that if you have a $100,000 loan at 6% you'll be paying the bank back $106,000?  Nice try, but that would work only if you paid back the loan after one year. The 6% rate is an annual rate, so you're going to pay that 6% every year.  (You won't pay quite as much as $6000 x 30 though, because you pay interest only on the outstanding balance, not the original loan amount and as time goes by your balance gets lower.)
The actual amount of interest you pay each month is the current outstanding balance, times the interest rate, divided by 12. (e.g., $150,000 left on a loan at 6%, means you'd pay $150,000 x 6% ÷ 12 = $750 in interest for that month.)  If your eyes just glazed over then don't worry about it, it's not important, I just provide the details for those who want to understand everything completely. Here's all you need to know:

1. Over the life of the loan, you'll be paying the bank a lot more than just the interest rate times the loan amount.
2. When comparing loan offers from two different banks, just a single percentage point of difference means a big difference in how much interest is paid.
3. For the first several years most of your payment goes to interest, not principal. On a 30-year, 7% mortgage, in year #15 over 75% of your monthly payment goes to interest and not equity. After 15 years you won't own half your house, you'll own only 27% of it.

Here are some pretty pictures to demonstrate the first two points. We'll assume a $125,000 loan for 30 years at various interest rates.
Total Interest Paid Over the Life of the Loan
So even at a very low interest rate of 6%, you're paying $145,000 in interest on a $125,000 loan. So you borrow $125,000 and pay back $270,000 -- more than double what you borrowed!
It's even worse if you have a higher interest rate. Note how going from a 6% to 10% interest rate means you pay an extra $125,000 over the life of the loan. So the total you'd pay on a $125,000 loan at 10% would be $125,000 principal + $269,907 interest = $394,907! Quite a lot to pay back for a $125,000 loan, huh?

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Average Yearly Interest ($125,000 loan, 30 years)

Here again, going from 6% to 10% interest means you pay an extra $5000 on average in interest each year!

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How the interest rate affects the monthly payment

Types of loans

For the most part, you don't have to concern yourself with the difference between the three main kinds of loans (Conventional, FHA, and VA loan). It's your lender's job to try to pick the best loan for your needs and qualifications, not yours. But since you'll hear these terms bandied about frequently, you might want to know what they mean, so here ya go. Conventional. This is a fancy word for "normal". A conventional loan is just a regular, normal loan.

FHA. The U.S. government offers the FHA loan program to make home-buying easier. The government guarantees part of the loan if you default, which means that they pay the bank if you fail to make your payments. Since the loan is partially guaranteed, it's easier to get. Don't get excited about the government making your payments for you, though -- if you fail to make your mortgage payments the bank will still take the house back from you. The government pays the bank after the bank has already repossessed your house. Note that not all sellers will agree to an FHA loan, because there's a little more red tape involved, and because the house can't be a fixer-upper -- the house has to be in excellent shape to pass an FHA inspection.

VA. VA loans are an option for veterans, and it's possible to put 0% down on one. Just like with FHA loans, the VA itself doesn't lend money, it just guarantees part of the loan so lenders feel comfortable lending the money. VA-guaranteed loans can be combined with second mortgages (which is when the bank makes the main loan covering most of the price of the house, and the seller makes a separate loan to the buyer for the rest of the price.) VA loans can be assumed by any future qualified buyer, so your hands aren't tied if you need to sell -- you can sell to anybody, not just another veteran. (visit the VA's home loan site for more)

 

Most homeowners look forward to the day when they make their last mortgage payment, and many make extra payments or seek lower interest rates so they can pay off their mortgage early. While paying a mortgage off early gives you extra money each month, it may also increase your annual income tax payment.

1. Living Expenses

   • Once you no longer have a monthly mortgage bill to pay, your living expenses decline. This gives you more money each month you can invest, use to pay off other debt, or use for other expenses.
     

   Taxes And Insurance

   • Your mortgage bill likely included an amount that was set aside in escrow each month and that paid your homeowners insurance and property taxes. Once your mortgage is paid off, you must pay these bills directly.
     

   Income Tax Deduction

   • When you pay off your mortgage, you can no longer deduct your mortgage interest from your annual income tax. If you itemize, losing this deduction may bump you into a higher tax bracket.
     

   Save Money

   • When you pay your mortgage off early, you save on the interest you would have otherwise paid on that loan. For example, if you have a 30-year, $250,000 mortgage at 6 percent interest that you pay off nine years early, you save nearly $100,000 in future interest payments.