Frequently Asked Questions About the Home Buyer Tax Credit
The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.
What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.
How do I claim the tax credit? Do I need to complete a form or application?Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase.
What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.It is important to note that you cannot purchase a home from your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse. Please consult with your tax advisor for more information. Also see IRS Form 5405.
I read that the tax credit is "refundable." What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 14 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs.
The Secretary of Housing and Urban Development has announced that HUD will allow "monetization" of the tax credit. What does that mean?It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.Under the guidelines announced by HUD, non-profits and FHA-approved lenders will be allowed to give home buyers short-term loans of up to $8,000.The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.In addition, approved FHA lenders will also be able to purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
Friday, July 24, 2009
Reverse Mortgages
Reverse mortgages (also called home equity conversion loans) enable elderly homeowners to tap into their equity without selling their home. The lender pays you money based on the equity you have accrued in your home; you receive a lump sum, a monthly payment or a line of credit. Repayment is not necessary until the borrower sells the property, moves into a retirement community or passes away. When you sell your home or no longer use it as your primary residence, you or your estate must repay the cash you received from the reverse mortgage plus interest and other finance charges to the lender.
Most reverse mortgages require you be at least 62 years of age, have a low or zero balance owed against your home and maintain the property as your principal residence.
Reverse mortgages are ideal for homeowners who are retired or no longer working and need to supplement their income. Interest rates can be fixed or adjustable and the money is nontaxable and does not interfere with Social Security or Medicare benefits. Your lender cannot take property away if you outlive your loan nor can you be forced to sell your home to pay off your loan even if the loan balance grows to exceed property value.
Why You Should Have a Home Inspection
Whether you are buying or selling a home, you should have a professional home inspection performed.
A home inspection will look at the systems that make up the building such as:
Structural elements, foundation, framing etc.
Plumbing systems
Roofing
Electrical systems
Cosmetic condition, paint, siding etc.
If you are buying a home, you need to know exactly what you are getting. A home inspection, performed by a professional home inspector, will reveal any hidden problems with the home so that they may be addressed BEFORE the deal is closed. You should require an inspection at the time you make a formal offer. Make sure the contract has an inspection contingency. Then, hire your own inspector and pay close attention to the inspection report. If you aren't comfortable with what he finds, you should kill the deal.
Likewise, if you are selling a home, you want to know about such potential hidden problems before your house goes on the market. Almost all contracts include the condition that the contract is contingent upon completion of a satisfactory inspection. And most buyer's are going to insist that the inspection be a professional home inspection, usually by an inspector they hire. If the buyer's inspector finds a problem, it can cause the buyer to get cold feet and the deal can often fall through. At best, surprise problems uncovered by the buyer's inspector will cause delays in closing, and usually you will have to pay for repairs at the last minute, or take a lower price on your home.
It is better to pay for your own inspection before putting your home on the market. Find out about any hidden problems and correct them in advance. Otherwise, you can count on the buyer's inspector finding them, at the worst possible time.
A home inspection will look at the systems that make up the building such as:
Structural elements, foundation, framing etc.
Plumbing systems
Roofing
Electrical systems
Cosmetic condition, paint, siding etc.
If you are buying a home, you need to know exactly what you are getting. A home inspection, performed by a professional home inspector, will reveal any hidden problems with the home so that they may be addressed BEFORE the deal is closed. You should require an inspection at the time you make a formal offer. Make sure the contract has an inspection contingency. Then, hire your own inspector and pay close attention to the inspection report. If you aren't comfortable with what he finds, you should kill the deal.
Likewise, if you are selling a home, you want to know about such potential hidden problems before your house goes on the market. Almost all contracts include the condition that the contract is contingent upon completion of a satisfactory inspection. And most buyer's are going to insist that the inspection be a professional home inspection, usually by an inspector they hire. If the buyer's inspector finds a problem, it can cause the buyer to get cold feet and the deal can often fall through. At best, surprise problems uncovered by the buyer's inspector will cause delays in closing, and usually you will have to pay for repairs at the last minute, or take a lower price on your home.
It is better to pay for your own inspection before putting your home on the market. Find out about any hidden problems and correct them in advance. Otherwise, you can count on the buyer's inspector finding them, at the worst possible time.
Five Ways to Make the Loan Process Go Faster
I should say that "working with me" is the first way! When you let me help you find the loan that is right for you, you truly are taking advantage of some of the nation's best technology and expertise to get you a loan decision and funding on your loan quickly.
But here are five "other" ways you can speed up the process of getting a mortgage loan:
1. Have everything ready and in one place. Elsewhere on my blog, you will find a list of things you might need in support of your mortgage application. If you get them all together and keep them in a safe, portable place like a special pouch or folder, you can cut down on time spent rooting around for things I may need. Also, you will help cut down on your own anxiety and confusion.
2. Be honest and complete when you fill out your application. "Fudging" your employment or residence history or omitting open credit accounts you would rather not have considered does not increase your chances of getting a favorable loan. In 100 percent of cases, it makes it harder, and take longer.
3. Respond promptly to requests for additional information. During processing, myself or the lender considering your loan may need additional information. Provide it as soon as you get the request, or return the call as soon as you get the message.
4. Be prepared to explain derogatory items in your credit report. This is really part of number 2 above. If you had an illness or a divorce where you missed or made late payments, or you have other instances of late payments or delinquencies on your credit report, be prepared to explain them. Be honest, and do not be nervous! The loan processor is not judging you, they are trying to fill in all the blanks in their paperwork.
5. Let the appraiser in! The appraisal is one of the lengthiest parts of the mortgage loan process. Studies have shown that the single biggest factor in appraisal "lag time" is the appraiser's inability to reach the homeowner to make an appointment. If you're refinancing and the appraiser calls to make an appointment, make it as soon as convenient for both of you. Remember that the appraiser does not want to buy your house. He or she will say what the house is worth clean and tidy and in reasonable repair, even if you have some dirty laundry on the laundry room floor or dirty dishes in the sink. Cleaning does not get you a higher appraisal! Letting the appraiser in as soon as possible gets you a loan faster, though.
But here are five "other" ways you can speed up the process of getting a mortgage loan:
1. Have everything ready and in one place. Elsewhere on my blog, you will find a list of things you might need in support of your mortgage application. If you get them all together and keep them in a safe, portable place like a special pouch or folder, you can cut down on time spent rooting around for things I may need. Also, you will help cut down on your own anxiety and confusion.
2. Be honest and complete when you fill out your application. "Fudging" your employment or residence history or omitting open credit accounts you would rather not have considered does not increase your chances of getting a favorable loan. In 100 percent of cases, it makes it harder, and take longer.
3. Respond promptly to requests for additional information. During processing, myself or the lender considering your loan may need additional information. Provide it as soon as you get the request, or return the call as soon as you get the message.
4. Be prepared to explain derogatory items in your credit report. This is really part of number 2 above. If you had an illness or a divorce where you missed or made late payments, or you have other instances of late payments or delinquencies on your credit report, be prepared to explain them. Be honest, and do not be nervous! The loan processor is not judging you, they are trying to fill in all the blanks in their paperwork.
5. Let the appraiser in! The appraisal is one of the lengthiest parts of the mortgage loan process. Studies have shown that the single biggest factor in appraisal "lag time" is the appraiser's inability to reach the homeowner to make an appointment. If you're refinancing and the appraiser calls to make an appointment, make it as soon as convenient for both of you. Remember that the appraiser does not want to buy your house. He or she will say what the house is worth clean and tidy and in reasonable repair, even if you have some dirty laundry on the laundry room floor or dirty dishes in the sink. Cleaning does not get you a higher appraisal! Letting the appraiser in as soon as possible gets you a loan faster, though.
Fixed Rate or Adjustable Rate?
What are the advantages of fixed rate versus adjustable rate loans?With a fixed-rate loan, your monthly payment of principal and interest never changes for the life of your loan. Your property taxes may go up and so might the homeowner's insurance premium part of your monthly payment, but generally with a fixed-rate loan your payment will be very stable.
Fixed-rate loans are available in all sorts of shapes and sizes: 30-year, 20-year, 15-year, even 10-year. Some fixed-rate mortgages are called "biweekly" mortgages and shorten the life of your loan. You pay every two weeks, a total of 26 payments a year -- which adds up to an "extra" monthly payment every year. Just by making your payments biweekly, instead of monthly, means you are making one full mortgage payment extra each year, and that can significantly reduce the number of years on your fixed-rate mortgage. For example, with a 30-year-fixed mortgage, making biweekly payments can knock up to six years off the life of your loan!
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan if you want to lock in a low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can give you more monthly payment stability.
Adjustable Rate Mortgages -- ARMs -- come in even more varieties. Generally, ARMs determine what you must pay based on an outside index, perhaps the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others. They may adjust every six months or once a year.
Most programs have a "cap" that protects you from your monthly payment going up too much at once. There may be a cap on how much your interest rate can go up in one period -- say, no more than two percent per year, even if the underlying index goes up by more than two percent. You may have a "payment cap," that instead of capping the interest rate directly caps the amount your monthly payment can go up in one period. In addition, almost all ARM programs have a "lifetime cap" -- your interest rate can never exceed that cap amount, no matter what.
ARMs often have their lowest, most attractive rates at the beginning of the loan, and can guarantee that rate for anywhere from a month to ten years. You may hear people talking about or you may read about loans that are called "3/1 ARMs" or "5/1 ARMs" or the like. That means that the introductory rate is set for three or five years, and then adjusts according to an index every year thereafter for the life of the loan. Loans like this are often best for people who anticipate moving -- and therefore selling the house to be mortgaged -- within three or five years, depending on how long the lower rate will be in effect.
You might choose an ARM to take advantage of a lower introductory rate and count on either moving, refinancing again or simply absorbing the higher rate after the introductory rate goes up. With ARMs, you do risk your rate going up, but you also take advantage when rates go down by pocketing more money each month that would otherwise have gone toward your mortgage payment.
I would not recommend even thinking about getting an ARM loan if you are planning on staying in your home for more than five years. If you are planning on staying in the home less than five years, you can and should explore the possibilities of an ARM versus a fixed-rate loan with your mortgage professional.
Verifying your Down Payment, Closing Costs, Assets, Income, and Debts
Documentation required for most all mortgage loans includes (but is not limited to) the following:
One full month of paystubs
Two full months' bank statements, all pages, even if blank
Two full months' other asset statements, such as mutual funds, retirement accounts, etc.
Last two years W2s or full tax returns including all schedules
Driver's license
Social security card
Signed disclosures -- these are part of RESPA (Real Estate Settlement and Procedures Act).
A critical step in the mortgage loan application process is to verify the sources for your down payment, closing costs and assets, as well as documenting income and debts. The lender uses this step to determine your qualifications as a borrower.
Down Payment & Closing Costs
Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any monies to be used for the down payment or closing costs.
Acceptable Down Payment & Closing Costs Sources
Cash in a bank account
Mutual funds / stocks / IRA / 401(K)
Proceeds from the sale of another property
Gift from an immediate relative (must be mother, father, brother, or sister)
Assets
Collect information about your personal assets that add to your net worth and help to prove your credit worthiness.
Common Assets Considered in a Mortgage Loan Application
Stocks, bonds, mutual funds, 401(K) and retirement accounts
Life insurance
Other real estate or property
Income and Employment
The lender will want to confirm your current gross income and have evidence of stable employment. Documentation requirements vary depending upon a number of factors - including the source of income (hourly, salary, salary + bonuses, salary + commission, commission, self-employed, etc.).
Debts
Your lender will want to review a list of all your current debts. This, along with your credit report, will provide the lender with a snapshot of your obligations. The lender will want to confirm that you will not be over-extended when the mortgage payment is added to your current debt load.
One full month of paystubs
Two full months' bank statements, all pages, even if blank
Two full months' other asset statements, such as mutual funds, retirement accounts, etc.
Last two years W2s or full tax returns including all schedules
Driver's license
Social security card
Signed disclosures -- these are part of RESPA (Real Estate Settlement and Procedures Act).
A critical step in the mortgage loan application process is to verify the sources for your down payment, closing costs and assets, as well as documenting income and debts. The lender uses this step to determine your qualifications as a borrower.
Down Payment & Closing Costs
Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any monies to be used for the down payment or closing costs.
Acceptable Down Payment & Closing Costs Sources
Cash in a bank account
Mutual funds / stocks / IRA / 401(K)
Proceeds from the sale of another property
Gift from an immediate relative (must be mother, father, brother, or sister)
Assets
Collect information about your personal assets that add to your net worth and help to prove your credit worthiness.
Common Assets Considered in a Mortgage Loan Application
Stocks, bonds, mutual funds, 401(K) and retirement accounts
Life insurance
Other real estate or property
Income and Employment
The lender will want to confirm your current gross income and have evidence of stable employment. Documentation requirements vary depending upon a number of factors - including the source of income (hourly, salary, salary + bonuses, salary + commission, commission, self-employed, etc.).
Debts
Your lender will want to review a list of all your current debts. This, along with your credit report, will provide the lender with a snapshot of your obligations. The lender will want to confirm that you will not be over-extended when the mortgage payment is added to your current debt load.
Debt-to-Income Ratio
Your debt-to-income ratio is simply a way of determining how much money is available for your monthly mortgage payment after all your other recurring debt obligations are met.Debt limit
There is generally a debt limit associated with each type of loan, such as a 28/36 qualifying ratio for a conventional loan. These qualifying ratios are guidelines. An excellent credit history can help you qualify for a mortgage loan even if your debt load is over and above the limit.
Understanding the Qualifying Ratio
Typically conventional loans have a qualifying ratio of 28/36. Usually an FHA loan will allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be applied to housing (including loan principal and interest, private mortgage insurance, hazard insurance, property taxes and homeowner's association dues).
The second number is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes car loans, child support, and monthly credit card payments.
For example:
With a 28/36 qualifying ratio:
Gross monthly income of $3,500 x .28 = $980 can be applied to housing
Gross monthly income of $3,500 x .36 = $1,260 can be applied to recurring debt plus housing expenses
With a 29/41 qualifying ratio:
Gross monthly income of $3,500 x .29 = $1,015 can be applied to housing
Gross monthly income of $3,500 x .41 = $1,435 can be applied to recurring debt plus housing expenses
Simply Guidelines
Remember these are just guidelines. I would be happy to pre-approve you to determine how large a mortgage loan you can afford. I look forward to helping you buy your dream home.
Closing Costs
There are certain standard costs associated with closing the sale of a house (and even with a refinance of a house). These fees are split between the buyer and the seller (or paid for by the buyer totally in a refinance) as spelled out in the sales contract.
As a realtor negotiates the sales contract for you, s/he will not only work to get the sales price you want, but s/he will also work to limit the number of closing costs for which you will be responsible.
I will walk you through the closing costs, answering any questions you may have explaining which costs are decreed by law to be yours and which are negotiable.
Good Faith Estimate
Buyers will receive a "Good Faith Estimate" of closing costs at the time the loan application is submitted to the lender.
Loan-Related Closing Costs
Loan Origination Fee
This covers the administrative expenses in setting-up and processing the loan. The loan origination fee may be a percentage of the mortgage amount.
Points (optional)
An option for the home buyer is to pay points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount. For example: on a $150,000 loan, 1 point would equal $1,500.
Appraisal Fee
The fee for having the house appraised may be incorporated into the closing costs or payment may be required by the lender at the time the loan application is submitted.
Credit Report
The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.
Interest Payment
Typically the buyer is required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins. For example: If closing is on May 15. Your first monthly payment begins to accrue interest on June 1 with your first mortgage payment due July 1. At closing, an interest payment covering the accrual period between May 15 and May 31 may be required.
Escrow Account
At closing a payment may be required to fund the escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account. If you are financing more than 80% of the sale price of the home, you will be required to escrow home insurance, property taxes, and any other types of insurance required by the lender (such as flood insurance if the property is located in a flood zone).
Tax Closing Costs
Property Taxes
This is the one closing cost that is often prorated between the buyer and seller. If the seller has already paid the annual property taxes, the buyer typically reimburses the seller for the period in which the buyer will be occupying the property. Likewise, if the taxes have not yet been paid, the seller typically reimburses the buyer for the period in which the seller occupied the property.
Transfer Taxes and Recording Fees
This is the cost for transferring ownership of the property and recording the purchase documents. The fee is often calculated as a percentage of the sales price.
Insurance Closing Costs
Homeowner's Insurance
This insurance covers replacement costs for damages caused by fire, wind, or other disaster that might affect the value of the property. Typically, the insurance also includes personal liability and theft coverage.
Flood or Quake Insurance
Additional hazard insurance coverage that is required for homes located in a designated hazard zone as established by the Federal Emergency Management Agency (FEMA). An appraiser, inspector, or your realtor can let you know if a property resides in a hazard zone.
Private Mortgage Insurance (PMI)
Insurance required for conventional mortgage loans when the borrower's down payment on the house is less than 20 percent of the loan value. Mortgage insurance is required on all FHA loans, regardless of the amount of down payment made.
Title Insurance
This policy protects both the buyer and lender by insuring a clear chain of title. (In other words, it insures that that the person who sells the house has the legal right to do so.)
As a realtor negotiates the sales contract for you, s/he will not only work to get the sales price you want, but s/he will also work to limit the number of closing costs for which you will be responsible.
I will walk you through the closing costs, answering any questions you may have explaining which costs are decreed by law to be yours and which are negotiable.
Good Faith Estimate
Buyers will receive a "Good Faith Estimate" of closing costs at the time the loan application is submitted to the lender.
Loan-Related Closing Costs
Loan Origination Fee
This covers the administrative expenses in setting-up and processing the loan. The loan origination fee may be a percentage of the mortgage amount.
Points (optional)
An option for the home buyer is to pay points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount. For example: on a $150,000 loan, 1 point would equal $1,500.
Appraisal Fee
The fee for having the house appraised may be incorporated into the closing costs or payment may be required by the lender at the time the loan application is submitted.
Credit Report
The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.
Interest Payment
Typically the buyer is required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins. For example: If closing is on May 15. Your first monthly payment begins to accrue interest on June 1 with your first mortgage payment due July 1. At closing, an interest payment covering the accrual period between May 15 and May 31 may be required.
Escrow Account
At closing a payment may be required to fund the escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account. If you are financing more than 80% of the sale price of the home, you will be required to escrow home insurance, property taxes, and any other types of insurance required by the lender (such as flood insurance if the property is located in a flood zone).
Tax Closing Costs
Property Taxes
This is the one closing cost that is often prorated between the buyer and seller. If the seller has already paid the annual property taxes, the buyer typically reimburses the seller for the period in which the buyer will be occupying the property. Likewise, if the taxes have not yet been paid, the seller typically reimburses the buyer for the period in which the seller occupied the property.
Transfer Taxes and Recording Fees
This is the cost for transferring ownership of the property and recording the purchase documents. The fee is often calculated as a percentage of the sales price.
Insurance Closing Costs
Homeowner's Insurance
This insurance covers replacement costs for damages caused by fire, wind, or other disaster that might affect the value of the property. Typically, the insurance also includes personal liability and theft coverage.
Flood or Quake Insurance
Additional hazard insurance coverage that is required for homes located in a designated hazard zone as established by the Federal Emergency Management Agency (FEMA). An appraiser, inspector, or your realtor can let you know if a property resides in a hazard zone.
Private Mortgage Insurance (PMI)
Insurance required for conventional mortgage loans when the borrower's down payment on the house is less than 20 percent of the loan value. Mortgage insurance is required on all FHA loans, regardless of the amount of down payment made.
Title Insurance
This policy protects both the buyer and lender by insuring a clear chain of title. (In other words, it insures that that the person who sells the house has the legal right to do so.)
Buyer Don'ts
Things to Avoid before Buying a HomeMany new homebuyers make the mistake of rushing out to buy things to fill their home with as soon as the seller accepts their purchase offer and the lender pre-approves their loan. But there are still a few major hurdles to overcome before the keys are handed out. Here are some things to avoid during the home buying process to assure your transaction goes as smoothly as possible:
Don't make an expensive purchase. It may be tempting to order that new sofa for your soon-to-be living room, but it is best to avoid making major purchases like furniture, cars, appliances, electronic equipment, jewelry, or vacations until after the closing. Financing that furniture with a store credit card or even one of your own credit cards could jeopardize your credit worthiness during the time it means the most. Using cash to purchase big items can also create a problem because many banks take into consideration your cash reserve when approving your mortgage.
Don't get a new job. Lenders like to see a consistent job history. Generally, changing jobs will not affect your ability to qualify for a mortgage loan - especially if you are going to be making more money. But for some people, getting a new job during the loan approval process could raise some concern and affect your application.
Don't switch banks or move money around. As your lender reviews your loan package, you will likely be asked to provide bank statements for the last two or three months on your checking accounts, savings accounts, money market funds and other liquid assets. To eliminate potential fraud, most loans require a thorough paper trail to document the source of all funds. Changing banks or transferring money to another account - even if its just to consolidate funds - could make it difficult for the lender to document your funds.
Don't give a good faith deposit directly to the seller in a FSBO (for sale by owner) purchase. As a rule, your good faith deposit belongs to you, not to the seller, until the deal closes. Your FSBO seller may not know that your good faith funds should be applied to your expenses at closing. Get an attorney or other neutral party who can hold the deposit or put it in a trust account until you close on the home. Your purchase contract should dictate to whom the funds go should the transaction fall through.
Don't disregard your lenders requirements. You may have been pre-approved for the loan but your work with the lender is far from over. In order to process your loan, you need to meet certain requirements. Your lender will need copies of your bank statements, W2s and other paperwork. It is up to you to get it to him or her as soon as possible. Failure to submit certain qualifying documents could cause you to lose your loan and the financing you need to buy your home.
Loan Officer vs Mortgage Broker
When you are looking to get a mortgage loan, you may work with a loan officer or you may choose to work with a mortgage broker. People often confuse the two job types even though both will glean the same results: a new home. However, it is important to understand the difference between the two types of jobs so you know what to expect from them during the mortgage application process.
A mortgage broker is an individual or firm that acts as an independent agent for both the borrower and the lender of a mortgage loan.
Mortgage brokers are the middle man between you and the lending institution, which can be a bank, trust company, credit union, mortgage corporation, finance company or even an individual private investor. A mortgage broker will analyze your financial situation to determine which lender is the best fit for your loan needs. He or she will submit your mortgage application to one or more lenders in order to sell it, and works with the chosen lender until the loan closes. He or she receives a commission from the borrower if the loan closes.
A loan officer is a representative of a lending institution, such as a bank, who works to sell and process mortgages and other loans originated by their employer. They often have a wide variety of loans types to draw from, but all originate from that specific lender.
Also known as a loan representative or account executive, loan officers represent the borrower to the lending institution and will guide him or her through the selection, processing and closing of mortgage loan. Loan officers can be paid a commission or salary for their services.
I am referred to as a Home Mortgage Consultant. I work for Wells Fargo Home Mortgage. All of my customers receive their loans from Wells Fargo, and Wells Fargo does not sell their loans to other companies. With a mortgage broker (and even with loan officers of other companies other than Wells Fargo), your loan will most likely be sold on the secondary market and you may not find out who the new owner of your mortgage is until several months after your home loan has closed.
Ask these questions of your next loan officer, mortgage broker, or home mortgage consultant: What lender will own my loan once I close on my house? Will my loan be sold to another company (be careful! Some brokers or loan officers will tell you "no," but you will see another company's name in your mortgage paperwork when you sign at closing).
A mortgage broker is an individual or firm that acts as an independent agent for both the borrower and the lender of a mortgage loan.
Mortgage brokers are the middle man between you and the lending institution, which can be a bank, trust company, credit union, mortgage corporation, finance company or even an individual private investor. A mortgage broker will analyze your financial situation to determine which lender is the best fit for your loan needs. He or she will submit your mortgage application to one or more lenders in order to sell it, and works with the chosen lender until the loan closes. He or she receives a commission from the borrower if the loan closes.
A loan officer is a representative of a lending institution, such as a bank, who works to sell and process mortgages and other loans originated by their employer. They often have a wide variety of loans types to draw from, but all originate from that specific lender.
Also known as a loan representative or account executive, loan officers represent the borrower to the lending institution and will guide him or her through the selection, processing and closing of mortgage loan. Loan officers can be paid a commission or salary for their services.
I am referred to as a Home Mortgage Consultant. I work for Wells Fargo Home Mortgage. All of my customers receive their loans from Wells Fargo, and Wells Fargo does not sell their loans to other companies. With a mortgage broker (and even with loan officers of other companies other than Wells Fargo), your loan will most likely be sold on the secondary market and you may not find out who the new owner of your mortgage is until several months after your home loan has closed.
Ask these questions of your next loan officer, mortgage broker, or home mortgage consultant: What lender will own my loan once I close on my house? Will my loan be sold to another company (be careful! Some brokers or loan officers will tell you "no," but you will see another company's name in your mortgage paperwork when you sign at closing).
What is a Credit Score?
Before deciding on what terms lenders will offer you on a loan (which they base on the "risk" to them), they want to know two things about you: your ability to pay back the loan, and your willingness to pay back the loan. For the first, they look at your income-to-debt obligation ratio. For your willingness to pay back the loan, they consult your credit score.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they are named after their inventor!). Your FICO score is between 350 (high risk) and 850 (low risk).
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. In fact, the fact they do not consider demographic factors is why they were invented in the first place. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Different portions of your credit history are given different weights. Thirty-five percent of your FICO score is based on your specific payment history. Thirty percent is your current level of indebtedness. Fifteen percent each is the time your open credit has been in use (ten year old accounts are good, six month old ones are not as good) and types of credit available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). Finally, five percent is pursuit of new credit -- credit scores requested.
Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
The most widely used credit scores are FICO scores, which were developed by Fair Isaac & Company, Inc. (and they are named after their inventor!). Your FICO score is between 350 (high risk) and 850 (low risk).
Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality or marital status. In fact, the fact they do not consider demographic factors is why they were invented in the first place. "Profiling" was as dirty a word when FICO scores were invented as it is now. Credit scoring was developed as a way to consider only what was relevant to somebody's willingness to repay a loan.
Past delinquencies, derogatory payment behavior, current debt level, length of credit history, types of credit and number of inquiries are all considered in credit scores. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or reestablishing a good track record of making payments on time will raise your score.
Different portions of your credit history are given different weights. Thirty-five percent of your FICO score is based on your specific payment history. Thirty percent is your current level of indebtedness. Fifteen percent each is the time your open credit has been in use (ten year old accounts are good, six month old ones are not as good) and types of credit available to you (installment loans such as student loans, car loans, etc. versus revolving and debit accounts like credit cards). Finally, five percent is pursuit of new credit -- credit scores requested.
Your credit report must contain at least one account which has been open for six months or more, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score. If you do not meet the minimum criteria for getting a score, you may need to establish a credit history prior to applying for a mortgage.
An Overview of the Loan Process
Make no mistake, there is a lot involved in getting a mortgage loan. You would not be here on my blog site or at my website if you could fill out a one-page application and get the best loan for you funded the same day. What I do is most of the heavy lifting for you, so you can concentrate on what's important -- preparing to move into your new home, saving money, or making plans for your home equity line of credit.
There are four main steps involved in getting a loan. You will see that I have made your part in them as easy as possible, and I do all the work! That's what I am here for.
Step One: Determine How Much You Can Borrow
This is determined by a few things: How much of a monthly payment can you afford? Given your unique credit and employment history, income and debt, and goals, how much will a lender loan you? The first part you can get a rough idea of by using the calculators on my blog site. I will also help you through different scenarios by asking a few simple questions. Based on standard lender guidelines, I will get you a good idea of what kind of terms and loan program you can expect to benefit most from.
Step Two: Pre-Approval for Your Loan
This is where the rubber meets the road and you save the most money. You supply information about your employment, your assets, your residence history, and so on. I get your permission to look at your credit report. When I review all this information, I will actually get our pre-underwriting decision engine to "pre-approve" your loan, and I give you a Priority Buyer Letter (pre-approval letter). Handle it with care -- to a home seller, it is like a suitcase full of cash! Your realty agent will use your PBL to make the best offer on the home you choose, and the seller knows you are pre-approved. It gives you buying clout! While you are picking out the home that is right for you, I are busy finding the loan that is right for you.
Step Three: Apply Now! It's Easy!
Complete your loan application now. Even if you do not find your dream home for a few months, I can update everything in your file very easily, and you only have to do the application once. You may have to provide updated income or bank statements if too much time passes between the time you receive your PBL (priority buyer letter) and obtain a sales contract. The application process could not be easier, you can apply right at my Wells Fargo site at wwwl.patstangmortgages.com. When the time is right, I will order an appraisal of your new home.
Step Four: You are a New Homeowner!
Your realty agent and the seller's will work together to designate an escrow/title company to handle the funding of your loan once it is has completed the underwriting process and is approved. I will coordinate with the escrow company to make sure all the papers your lender will need are in order, and you will sign everything at the escrow/title company's office.
You have answered a few questions, given me some detailed information, applied online, and next thing you know, you are moving in!
I am in the business of mortgage loans -- so I do most of the work. Doesn't that make sense?
There are four main steps involved in getting a loan. You will see that I have made your part in them as easy as possible, and I do all the work! That's what I am here for.
Step One: Determine How Much You Can Borrow
This is determined by a few things: How much of a monthly payment can you afford? Given your unique credit and employment history, income and debt, and goals, how much will a lender loan you? The first part you can get a rough idea of by using the calculators on my blog site. I will also help you through different scenarios by asking a few simple questions. Based on standard lender guidelines, I will get you a good idea of what kind of terms and loan program you can expect to benefit most from.
Step Two: Pre-Approval for Your Loan
This is where the rubber meets the road and you save the most money. You supply information about your employment, your assets, your residence history, and so on. I get your permission to look at your credit report. When I review all this information, I will actually get our pre-underwriting decision engine to "pre-approve" your loan, and I give you a Priority Buyer Letter (pre-approval letter). Handle it with care -- to a home seller, it is like a suitcase full of cash! Your realty agent will use your PBL to make the best offer on the home you choose, and the seller knows you are pre-approved. It gives you buying clout! While you are picking out the home that is right for you, I are busy finding the loan that is right for you.
Step Three: Apply Now! It's Easy!
Complete your loan application now. Even if you do not find your dream home for a few months, I can update everything in your file very easily, and you only have to do the application once. You may have to provide updated income or bank statements if too much time passes between the time you receive your PBL (priority buyer letter) and obtain a sales contract. The application process could not be easier, you can apply right at my Wells Fargo site at wwwl.patstangmortgages.com. When the time is right, I will order an appraisal of your new home.
Step Four: You are a New Homeowner!
Your realty agent and the seller's will work together to designate an escrow/title company to handle the funding of your loan once it is has completed the underwriting process and is approved. I will coordinate with the escrow company to make sure all the papers your lender will need are in order, and you will sign everything at the escrow/title company's office.
You have answered a few questions, given me some detailed information, applied online, and next thing you know, you are moving in!
I am in the business of mortgage loans -- so I do most of the work. Doesn't that make sense?
Are You Pre-Qualified or Pre-Approved for Your Mortgage
Before you begin to shop for a new home, you should set up a time to meet with me so we can figure out how much you can afford. This will put you in a better position as a buyer. That is when it is important to understand the distinction between being pre-qualified for a loan and pre-approved for a loan. The difference between the two terms will be crucial when you decide to make an offer on a house.
To get pre-qualified for a loan, I will collect information about your debt, income, and assets. We will look at your credit profile and assess goals for a down payment and get an idea of different loan programs that would work for you.
It is important to understand that this is just an estimate of what you are eligible to borrow, not a commitment to lend. Getting pre-approved for a loan gives you competitive advantage when the time comes to bid on a home because you have been approved for a loan for a specified amount.
To get pre-approved, you will complete a mortgage application and provide me with various information verifying your employment, assets, and financial status such as W-2 forms, bank records, and credit card statements. We will review your mortgage options and submit your application to decision it for approval. Once the application process is complete you will receive a Priority Buyer Letter indicating the amount the lender is willing to lend you for your home.
A Priority Buyer Letter is not binding on the lender; it is subject to an appraisal of the home you wish to purchase and certain other conditions. If your financial situation changes (e.g. you lose your job), interest rates rise, or a specified expiration date passes, your lender must review your situation and recalculate your mortgage amount accordingly.
To get pre-qualified for a loan, I will collect information about your debt, income, and assets. We will look at your credit profile and assess goals for a down payment and get an idea of different loan programs that would work for you.
It is important to understand that this is just an estimate of what you are eligible to borrow, not a commitment to lend. Getting pre-approved for a loan gives you competitive advantage when the time comes to bid on a home because you have been approved for a loan for a specified amount.
To get pre-approved, you will complete a mortgage application and provide me with various information verifying your employment, assets, and financial status such as W-2 forms, bank records, and credit card statements. We will review your mortgage options and submit your application to decision it for approval. Once the application process is complete you will receive a Priority Buyer Letter indicating the amount the lender is willing to lend you for your home.
A Priority Buyer Letter is not binding on the lender; it is subject to an appraisal of the home you wish to purchase and certain other conditions. If your financial situation changes (e.g. you lose your job), interest rates rise, or a specified expiration date passes, your lender must review your situation and recalculate your mortgage amount accordingly.
Foreclosures 101: The Basics of Buying Foreclosures and Short Sales
Buying a foreclosure or short sale can be complex. Because each situation is unique, understanding the buying process is critical. Short sales, foreclosures and lender-owned properties can be classified as non-traditional home sales. While they may provide the opportunity to buy real estate at reduced prices, these types of sales are complicated and take longer than traditional real estate.
Short Sales -- The seller is asking their lender(s) to agree to take less than the amount owed on the home as payment in full. It is considered a short sale when the sale price is insufficient to pay off the total mortgage(s) and costs of the sale. Contrary to its name, a short sale can be one of the most time consuming types of real estate transactions because the seller and lender(s) must agree to the terms of modifications of the seller’s mortgage obligations.
In Foreclosure -- Properties in foreclosure represent an owner who has missed one or more mortgage payments and has received an official notice of foreclosure from their lender.
Lender Owned -- Once the foreclosure process is complete, the property becomes lender owned. The seller is now the bank and the home is vacant.
Things to Consider
Non-traditional home sales are more complex and potentially more time consuming because the lender is heavily involved in the transaction – either acting with approval powers or as the owner/seller.
Foreclosed properties may be previously owned by people experiencing financial difficulties and may require costly updates and repairs.
Liens or back taxes often create challenges with the property's title.
When entering into this type of real estate transaction, it’s critical to work with an expert who understands the market and can help you navigate the process. Consult your realtor.
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