Frequently Asked
Real Estate Questions
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sources deemed to be reliable.
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thereof.
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The the most efficient method of shopping for a house is to consult a real estate sales professional. How do you select a real estate sales professional, and what services can you expect?
If you know of somebody who has recently bought a house, ask for a referral from him or she. Try to find an experienced agent or broker who works primarily in the area where you are interested in purchasing a home and who has access to a computerized multiple listing service (MLS), and automated system for generating a list of houses that match your requirements.
The relationship between a home buyer and a real estate sales professional is that you usually pay nothing for the agent's services. Instead, agents are paid by the sellers (usually a commission based on the sales price of the home) and often represent the seller's interest in the transaction.
In many areas of the country, it may be possible to locate a real estate sales professional who will act as a buyer's agent - that is, who will represent your interests. However, you should determine how the buyer's will be paid. Will you be charged a commission? Or will the buyer's agent split the seller-paid commission with the seller's agent?
A real estate sales professional can provide you with a broad range of services, including the following:
What if, having gone through the pre-qualification process, you are dissatisfied with the mortgage amount you will qualify for? Perhaps you can see that your house-buying options will be fairly limited. You may indeed need to lower your sights and simply recognize that you'll have to buy a less expensive "starter home". But before you reach that conclusion, consider these three ways to increase your borrowing power:
You should know that if your existing debt is too high in relation to your income, you can qualify for a larger mortgage by paying off some of this debt before you apply for a larger mortgage. It should also be apparent that when you are anticipating buying a home, it is not the time to purchase a "big-ticket" item such as a car! If you find that it is not the amount of debt you owe but the amount of income you earn that is limiting your borrowing capacity, what can you do? In some cases, you may want to wait to apply for a mortgage until your income increases. For example, is it possible for you or your spouse to expect a raise in the near future? If so, you may want to wait a bit to buy a house, so that you can qualify for a higher mortgage amount.
If increasing your income is not a realistic alternative for the near future, you will have to shop around for a financing option that makes it easier for you to obtain affordable housing at your present income. Now is the time to become familiar with financing alternatives that may be available in your area. When you make an offer to buy a house, you will be expected to state not only the proposed purchase price, but how you plan to finance the purchase.
In general, your income is all money reported to the IRS for the latest period of two or three years. There are some qualifications. It must be expected that your income will continue at or above current levels. And, it is possible that your income for mortgage qualification purposes is even higher than the income reported for tax reasons. For example, lenders will add back real estate depreciation and thus increase your qualifying income.
Different loan programs use different calculations, or ratios, to qualify would-be borrowers. The "front" ratio is generally equal to your monthly costs for principal, interest, property taxes, and property insurance (what lenders call "PITI"). The "back" ratio includes the front ratio plus all regular monthly costs such as credit card payments and auto payments. For example, Hall has a household income of $6,000 a month. With a conventional loan, a lender might allow ratios of "28/36." The front ratio is "28." This means 28% of Hall's pre-tax income can be used for principal, interest, taxes, and insurance. In this case, 28% of $6,000 is $1,680 per month. The back ratio is "36." This means lender guidelines will allow Hall to devote 36% of $6,000, or $2,160 a month, to PITI plus regular monthly costs for items such as credit card debt, auto payments, etc. Different programs use different front and back ratios: FHA loans are at 29/41 while VA ratios are more liberal at 41/41. Some ARM programs use 33/38 ratios. Program ratios can be elastic. For instance, the use of energy efficient appliances and finishing can help liberalize ratios, sometimes by 2%. This can important for those trying to meet qualification standards.
What type of job change? From one job to another in the same field should not be an issue. From a job in one field to a job in another may be problematic because lenders like to see a two-year earnings history. And what about economics? Changing jobs for a better salary and more benefits is understandable. Changing jobs and getting less income is not attractive to lenders.
The lender is entitled to full and timely payment. If you miss a payment, the lender will file a report with credit bureaus showing the payment as late or missing, depending on when payment is ultimately received (or not received). This report can set in motion a series of problems you don't want - the lender for your new home will likely re-check your credit report just before closing, see the late or missed payment, and possibly decline the loan. You would then be required to find financing for the replacement property, something that may not be possible in short order - especially when lenders look at the credit report. Worse, if your sale closing is delayed or the deal falls through, you now have an unhappy lender to placate and the money from the missing payment is still due - plus penalties. As well, you will have a negative item on your credit report for the next seven years, something that will be problematic when you next apply for a credit card, auto loan, etc. This is an "eat beans" situation - live cheap for a few weeks, pay the mortgage, and make lenders happy.
Most probably the first lender would have been elated to finance your home - that's how it makes money. But, there are hundreds of loan programs out there and not every lender has access to every program. Because program qualification standards vary, it is possible that you qualified for a loan program not available to the first lender. Your experience illustrates an important point. Before looking for a home, buyers should speak with as many loan sources as possible to identify the financing programs that best meet their needs.
In the usual case, buyers who purchase with 20% down or more do not need PMI. For those who have PMI, there are often monthly costs for as long as the loan remains in place. New federal rules concerning PMI provide that when a loan balance is paid down 22% from the original amount, lenders must agree to cancel PMI. However, there are several caveats. First, the rule does not apply to "high risk" mortgages. With such loans PMI can be required for 15 years - more time than most loans are outstanding. Second, many lenders will allow you to cancel PMI when you have 20% equity in a home. Such policies can save years of PMI payments.
It can't hurt. With credit scoring systems where the top figure is "800,"numbers above 620 are generally acceptable, over 660 will elate most lenders. Given a higher score, it may be possible to borrow more, borrow with lessdown, borrow faster, or borrow with fewer paperwork requirements. Credit scoring is relatively new and assumes that an individual's credit information is correct. To get the best possible score, review credit reportsseveral months before mortgage hunting to assure that all information iscorrect and timely. Once credit reports are checked (and corrected if necessary), avoid opening new credit accounts or taking on new debt until settlement is completed.
It sometimes happens that married couples move because of a jobchange for the husband or wife. The catch is that while one spouse may have a new job, the other does not.The spouse without a job is known to lenders as a "trailing spouse." How should lenders qualify the couple for financing? It's not as easy as sayingthe trailing spouse does not have income - that, while true at the moment, maynot be true in the near future. Lenders will need to examine such issues as training, experience, and jobprospects when looking at an application that includes a trailing spouse. For details, speak with lenders. If possible, have a job lined up for the spouse and document potential earning capacity before making a loanApplication.
Yes, If it is steady and expect to continue.
Generally no, because credit reports largely deal with payments that are at least 30 days late. However, be aware that being late may cause you to violate loan and credit agreements, such as mortgage contracts. While many creditors have a grace period during that late fees are not assessed, a late payment is still - well - Late.
Mortgage rates go up and down daily - they "float" with the market. Many borrowers are concerned that during the period between when they apply for a mortgage and when they close on a house that mortgage rates will rise and that the house will less affordable (or maybe not affordable). So, to assure that get the rate available at the time of application, many borrowers "lock-in" rate. Some lenders provide lock-ins without cost, others have a charge. The longer the lock-in, the greater the risk to the lender, and so the more likely a fee. The best lock-ins place a ceiling on both rates and points. A lock-in that only caps rates and says nothing about points exposes a borrower to very high fees should rates go up. Some lenders have lock-in programs that allow borrowers to "float down" their rate lock. This means that if rates fall prior to closing, the borrower can re-lock at the lower rate. Speak with lenders for specific programs and options.
No. Lenders do not expect individuals to be debt free - though that is certainly helpful. What lenders do expect is that prospective borrowers will have debt that is within their means - not too much in total, and not too much in monthly Payments.
Probably. There are two issues to consider. First, lenders like to see two years of good credit after a bankruptcy is resolved. However, there are instances where lenders will finance with a year of good credit. Second, lenders want to know why you have gone bankrupt. There is a substantial difference between a bankruptcy that is caused by reckless financial habits and simple financial disasters - a car wreck, medical costs, the plant closed after 30 years, the town was underwater for three weeks, etc. In other words, not every bankruptcy is a by-product of financial negligence.
Child care is regarded by most loan programs as something other than "debt"for mortgage qualification purposes. The logic is that child care is not an obligation in the sense of a car loan or credit card bill.
Generally, yes. However, under some loan programs, if you have 6 to 10 remaining car payments, and if you have generally good credit, your auto debt will not be counted against you. The logic is that the loan will be paid off not long after you move into the house. Yes. You MUST tell lenders about all outstanding debt and payments. In the case of an auto loan or other installment debt, some loan programs will not count the debt against qualifying ratios if there are only six to ten payments remaining. Please speak with lenders for details.
In this situation a lender will want to understand your financial liability. One issue will concern whether or not the loan is secured. A second issue will concern your payments. If you are making payments, those payments will be seen as a monthly cost and will reduce your ability to borrow. If you are not making payments, that's better. Many lenders will accept 12 original canceled checks showing full payment for the note by others as evidence that you are not making monthly Payments.
Lenders can only count reported, taxable income when calculating qualifying ratios. If they have any hint that a portion of an applicant's income is unreported, they will walk away - the logic being that a federal tax lien takes precedence over a mortgage claim. You will need to amend your returns and pay all taxes and penalties. See a tax pro for details.
Many sale agreements require buyers to apply for a mortgage within a specific time period, say 7 days after the contract is signed. This is a negotiable item, however, and can be any period agreeable to both parties. This is an important matter because if an application is not made, then a buyer may be in violation the sale agreement. A violation of the sale agreement, in turn, could be grounds to forfeit the deposit. Thus, buyers should go through the sale agreement with great care before signing to assure that all obligations are known and understood. Work with an appropriate professional such as a buyer broker or attorney when reviewing a sale agreement. When you meet with a lender, be certain to obtain a letter stating that you met and showing when. Immediately provide this letter to the seller's broker in the manner required by the sale agreement.
The answer most likely is "yes," assuming good credit. While $125,000 would seem to be a ridiculous amount of debt given your current income, it is actually an investment in your professional development. Because of your training, you will be able to command a substantial income that will allow you to re-pay your school debt - and a mortgage. Because of your potential income-earning ability, many lenders will make exceptions to qualify you for financing, providing you have good credit.
The term "prequalify" does not have a standard definition. In general terms, it means a lender feels you can borrow a given amount under the rules for a particular loan program. You want to prequalify before you enter the marketplace so you know how much house you can afford. If you prequalify with a lender you do not have to use that lender, but you may want to. Some lenders charge to prequalify, most do not. With a prequalification lenders will look at your income, debts, available cash, and credit. Many lenders will run a credit check as part of the prequalification process. A lender will then provide a prequalification letter showing how much it is believed that you can borrow. Most prequalification letters are NOT absolute loan commitments, but instead show that you have spoken with a lender and have a reasonable estimate of your borrowing ability. The prequalification process helps buyers better understand what they can afford, and it also helps in the negotiating process. Show the seller a prequalification letter and it is clear that you have a reasonable ability to finance a given level of debt.
If you receive child support, alimony, or separate maintenance you do not have to report such income. That said, you should, because the more income you show the more readily you can qualify for financing or a larger mortgage. If you pay alimony, child support, or separate maintenance then you must report such obligations to lenders because they are a debt.
Lenders will "add back" real estate depreciation to increase your income. The logic is that depreciation is not an out-of-pocket cost. Does bonus income count toward a loan application. If it is steady and expect to continue, yes.
Yes. If such income is regular and expected to continue it can help you qualify under many loan programs.
Privacy is an interesting issue. It is not addressed directly in the Constitution, but the "right to privacy" was proposed in an 1890 Harvard Law Review article by Louis Brandeis and Samuel Warren. If you are concerned about personal mortgage data falling into unauthorized hands, then you may want to look into rules regarding the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and applicable state regulations.
Form 4506 can be used to order past tax returns from the IRS. In effect, the lender may elect to check and see if the application information provided by the borrower match the forms sent to the IRS. In the usual case, loans are bought and sold in large quantities. Some loans will be picked out for audit to assure that the loans meet given standards. The purchaser will obtain back tax returns
The debt will likely show up on credit reports. You need to see if the pay-off also shows up. Please check with a credit reporting agency or authorize a lender to review your report. If the debt and pay-off show up, a lender will ask for an explanation. You can then write that there was a debt, there was bad judgment, you realize you were wrong, you have paid off the debt, and you now have a better understanding of credit. In other words, "Dear Lender: I goofed and it won't happen again." Because the matter happened several years ago, it should not be an issue to lenders if your credit during the past two years is good.
Having title to a car means you have an asset, an addition to your net worth once all financing is paid. Having a lease means having a debt that must be considered when a lender looks at your financial ability. Lenders must also consider what is likely to happen when the lease is up. The borrower will buy the car (that means a lump sum payment or a new loan), buy another car, or enter into another lease. Alternatively, if you expect to give up the car when the lease ends, be certain to tell the lender and explain why. For instance, at your new location, only one car will be needed in the household, you will be able to commute by public transportation, etc. Lastly, many loan programs allow lenders to ignore monthly auto payments if only 6 to ten payments remain. The thinking is that the payments will be made, and the vehicle will be retained for some time.
The first issue will concern whether or not the loan is secured. A second issue will concern your payments. If you are making payments, those payments will be seen as a monthly cost and will reduce your ability to borrow. If you are not making payments, that's better. Many lenders will accept 12 original canceled checks showing full payment for the note by others as evidence that you are not making monthly Payments.
Lenders can only count reported, taxable income when calculating qualifying ratios. If they have any hint that a portion of an applicant's income is unreported, they will walk away - the logic being that a federal tax lien takes precedence over a mortgage claim. You will need to amend your returns and pay all taxes and penalties. See a tax pro for details.