Robert Bowker is a Mortgage Originator with Interlinc Mortgage, a lending company in Round Rock. Bowker recently answered several questions for Community Impact Journal focused on the home buying process. Specifically, Bowker provided information and advice for people looking to buy a home, as well as common practices and benefits to watch out for. The following answers have been edited for length and clarity.
What kind of qualifications do potential buyers need to know to be approved for a mortgage?
There are many things that need to be taken into account. A key component is something called a debt-to-income ratio. There is a forward gear and a reverse gear. The front ratio for the homebuyer is the percentage of their gross monthly income, and the back ratio is the housing payment and all debts on a person’s credit report as a percentage of gross monthly income. Also, homebuyers should be aware of the effect student loans will have on this ratio. Even though student loans do not currently require payment, mortgage lenders will still consider 0.5% of a person’s total loan against their debt-to-equity ratio.
A second key requirement involves a person’s credit score. The score requirement varies depending on factors such as the type of loan. For example, the Federal Housing Administration can accept a credit score as low as 580 as long as the debt-to-income and loan-to-value ratios meet the investor program guidelines. Conventional loans can go down to a credit score of 620, but this will also require a larger down payment.
What are some tips for first-time home buyers trying to take advantage of relief programs?
First-time home buyers need to find a lender who knows the elements of various loan programs, such as how much needs to be repaid or how much can be forgiven. All assistance programs are different. There are also different assistance percentages available ranging from 2% to 5% of the loan. Homebuyers should also be aware of something called a Mortgage Credit Certificate, or MCC, which is designed to help first-time homebuyers get help with tax credits. They should also be aware that assistance programs have income limits and some have purchase price limits. This is why it is important to work with a professional.
What is the difference between an adjustable mortgage and a fixed rate mortgage?
The variable rate mortgage, or ARM, is locked in for a period of time and then will adjust. For example, a home buyer could opt for what is called a 5/1 adjustable mortgage. This is where the interest rate on a loan is locked in for five years and can be adjusted once a year. Or, a homebuyer might have a 5/6, which is a loan whose interest rate is locked in for five years and can be adjusted every six months. People need to ask these questions and be aware of the life cap, which is the maximum number of times a loan can adjust over the life of the loan.
A fixed rate loan contains an interest rate that is locked in for the entire term of the loan, whether it is 15 years, 30 years or another term.
How long does the home buying process take after applying for a mortgage?
This is a tricky question because [the process] is not based on when the application is fulfilled. It is based on when the contract is written. Homebuyers should be able to secure a mortgage within 30 days of writing the contract.
When is the best time for a homeowner to refinance their mortgage?
This is a very delicate question because everyone’s situation is different. Homeowners really need someone they trust who will calculate the actual ROI for them for refinancing, rather than someone who is just looking for a paycheck.
Homeowners should consider the following when deciding whether or not to refinance:
• how long they plan to stay in the house;
• what the refinancing will save them per month; and
• what it will cost to refinance, whether it is integrated into the loan or paid up front.
How can homeowners use their home equity to their advantage?
Home equity is a good thing. In Texas, homeowners are limited to taking only 80% of their home’s total value in cash to help protect equity. However, it is important to understand how to use a withdrawal wisely. For example, I wouldn’t use a home equity withdrawal to pay off my car, because I’d spread payments from short-term debt to long-term debt, and end up paying more for the vehicle.
Can paying off a mortgage early result in penalties?
On a regular convention [loan]there are no prepayment penalties, but if you follow a unique program like a bank statement loan [that allows homebuyers to qualify for a mortgage without income documents that most loan types require] or not[qualified mortgage loan, which has features that reduce risk for borrowers and make the loan more affordable]buyers should ask if there are any penalties for prepaying a home loan.
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