What Income Proofs Does a Mortgage Lender Require

Whether you are in a job, run a business, are self-employed or have inheritance the bottom line in getting a mortgage loan is to be able to prove a source of income to your lender.

In case you’re employed you will probably be required to produce written evidence such as pay slips or a statement of income for the past two years. Verification and confirmation of your income may also be required from your employer. Uncertain and irregular income such as commission, bonuses etc are not considered by a majority of the mortgage lenders.  There may be a few exceptions if you can demonstrate a certain regularity in the irregular pattern of these monetary gains.

In case you are self-employed you will again need to provide a proof of an income which will usually be in the form of a statement of your audited business accounts.

Proving a regularity and pattern in income may be difficult for a person who has just started out in the business recently.  But letter of confirmation from your accountant, audited statement of your accounts along with bank account statements for the last three years should prove to be satisfactory enough to get approval for the mortgage loan.

The bottom line is that you should be able to prove certain financial security and regularity for the future.  Whether this comes from a business job or inheritance is immaterial as long as you can satisfy the lender as to your ability to make the monthly installments on the mortgage.

4 Factors That Decide Borrowing Limit On Your Home Loan

The amount of money that you can borrow on mortgage loans depends on three main factors.

  1. Your income 
  2. Downpayment Amount 
  3. The worth of the property 
  4. Underwriting guidelines and requirements of the lender.

Your Income

Your income has a direct connection to the amount of money that you can borrow on a mortgage. The typical rule of thumb is that it is equivalent to three times your annual income. However if a couple is takes a mortgage loan jointly the amount can be much more.

For a couple a mortgage loan amount can be up to three times both the annual incomes or three times the greater income plus one year of the secondary income.

Along with your income mortgage lender will do a check on your credit rating and credit history. People with a clean credit history are likely to get a mortgage loan more easily.

Different times in the economy dictate different terms and conditions that the lenders put forth while approving a consumer for a mortgage. However, the competition amongst various mortgage loan lenders is always fierce. Anyone with excellent credit and reliable income will be find it easy to get credit.

Amount Of Downpayment

It is commonly required and recommended that you make 25% of the value of the home as down payment while taking the rest of the 75 per cent as a mortgage loan. Many lenders also adhere to this policy. However, you can find mortgage lenders who will lend up to 90% to 100% of the total cost of the home. This has become rare now.

Lenders are much more careful about how they underwrite a mortgage and safeguard their investment. If you are looking for a low downpayment home loan, financing your home with the FHA loans might be a good option. You can still qualify for a FHA loan with as less as 5% downpayment.

In such cases however there are bound to be certain extra fees and possessing charges such as the mortgage indemnity insurance, which is not always recommended.

Worth of the Property

A mortgage lender will also try and determine the loan amount based on the actual cost of the property. If he feels that the property is overpriced, he might not want to lend a greater sum. This is because if the need arises for him to recover the money from you by foreclosing and selling the house, the proceeds will not cover his loan.

If the lender refuses to qualify you for a home loan because his evaluation tells him that you are paying too much, it could be a warning sign for you as well. The property really might be overpriced. If you intend to sell anytime in the future, you might not get as much back as you paid for it.

Underwriting guidelines and requirement of the lender

A mortgage loan lender will also examine your financial resources, income and expenditure carefully. This is to determine how much of a mortgage loan can you afford to pay back comfortably without running the risk of defaulting on your account. Typically, a mortgage installment every month should be between 30 to 35% of your income.

How To Buy Property For Investment WIth A Home Loan

When you take out a mortgage loan to purchase a home you can expect the value of your investment to rise substantially over the years. Generally speaking the value of the house increases with inflation.

Many people take out mortgage loans for the purpose of purchasing investment property.

When you have finally paid off the mortgage loan and the house is in your ownership you will find that the value of the home is more than the initial cost that you purchased it for.

However, you will have paid the lender much more than what the house was actually worth after computing the interest on the mortgage loan for all those years. Still the odds are that the value of the house is more than what you have paid in total.

For example if you took a mortgage for $250,000, over a period of 25 years at the rate of 7% you will pay the mortgage lender approximately $500,000. If after 25 years the property of your house has more than doubled, you have made a profit on your investment.

In times of inflation and during the time when the economy is in boom the value of houses is known to increase by as much as double over a period of two to five years in areas that are economically progressing.

This kind of a return on investment is typical of a home purchase. People who purchased homes 50 years back have had the value of their homes increase over 10 times their initial value.

The 2 main things to consider and keep in mind are:

1) The cost of selling the house is about 10% of the value of the home. This is the minimum that the property should have appreciated for you to make a profit.

2) Buying and selling an investment property in a short term might give you higher returns. Over a long term, real estate is believed to give about the same return as stocks and bonds. If there is a boom in the housing prices in the area you purchase, it is not uncommon to double or triple your money in 5 years.

Why A Small Change In Interest Rate Makes A Big Difference To Mortgage Payments

A small difference in the interest rate of a home loan can mean thousands of dollars over the tenure of the mortgage.

Mortgage loans are typically low interest rate loans. This is of course relatively speaking when you compare the mortgage loan to other kinds of loans such as personal loan, credit card, automobile loan etc. When you decide to apply for a mortgage loan the primary factor that you consider is perhaps the interest rate.

While the interest rates being offered on a mortgage loan by various lenders may seem to be more or less the same with small difference, you should be aware of the fact that even a small difference in the interest rate can make a difference of a large sum of money.

effect of changes in mortgage interest rates

A mortgage loan is typically a loan for a large amount of money, the repayment for which is extended over a long period of time usually ranging from 15 to 30 years. A simple calculation will tell you how even the difference of .5% on the mortgage loan will save you or cost you thousands of dollars more.

Let’s say you take a mortgage loan for $250,000. One lender charges you an interest rate of 7% while another charges you a rate of 6.0%.

For the same mortgage loan you will have to pay a total amount of $530,082 approximately over a tenure of 25 years for a 7% home loans, as compared to approximately $483,225 for interest rate of 6%. This is a difference of more than $48,000.

It is not uncommon to find the difference of one per cent or more in the interest rates offered by various lenders. A lot of the variance depends on factors like the lenders underwriting guidelines for mortgage loan. For example one lender may require a higher credit score than the other. Your personal relationship with the bank of the lender also counts towards you getting a better deal. We shall speak more about how to choose the right mortgage loan in later columns.

The bottom line for now is that before you choose a mortgage you should look around extensively in order to find the mortgage deal that is most profitable for you.

What Is a Mortgage Loan

Simple Explanation For What A Mortgage Home Loan

A mortgage loan is alone taken out for the purchase of a property. Typically a mortgage is taken out by a person for the purchase of a home. It is a virtually unheard of situation where one has enough money saved up in cash in order to purchase their home.

For most people purchasing a home would not be a possibility without the existence of mortgage loans. Even if a person has enough saved up in cash reserves to be able to make a down payment on a house it does not make financial sense to do so. Mortgage loans are typically low-interest loans that extent for a relatively long tenure ranging usually from 15 to 30 years. Depleting your cash reserve to make the payment for a house all at once not only decreases the liquidity of your assets but also prevents you from investing that large amount of cash to stop. Investing the same amount of money would typically fetch you most returns on a higher rate of interest than you would be paying on your mortgage loan.

The term mortgage is derived from the French word ‘Mort’ which means dead and ‘Gage’ from old English which means pledge. The word mortgage is a very old term. When it was first coined and used it was meant to typify the risk and the doubtfulness associated with lending the money to the borrower. If the borrower was unable to pay back the loan is land was usually taken by the lender. This land was considered to be dead to the borrower as if it had never existed. While the same trend may be true today when a lender forecloses the mortgage on our home and three possesses it in order to recover his money in the case of non-payment, we do not associate the term mortgage with as morbid meaning as it held in the ancient times.

There are a few characteristics of a mortgage loan that makes it different from other kind of loan. These are typically the interest rate, the tenure of the loan and the amount that is available. Other features of a mortgage loans such as refinancing, reverse mortgage, line of credit, debt consolidation and more shall be discussed in the next columns.

Common Closing Costs For A Home Loan – Federal Reserve Board

Additional fees that you pay while purchasing a home apart from the mortgage cannot be predicted with a great deal of accuracy. They depend a lot on the location, your state rules, the lender and the cost of the home.However, there are some costs that are common. There is also a range of amount that is charged that is common. These are provided in the table below.

The additional costs listed below are the common guidelines provided by the Federal Reserve Board.

Fees Cost
Application FeeLoan Origination Fee $75-$300 including credit report for each applicant.1 – 1.5% of the loan amount.
Points 0-3% of loan amount
Appraisal FeeLender Required Home Inspection $300-$700$175-$350
Prepaid Interest Varies based on the loan amount, interest-rate and number of days that must be paid. ($300-$750 is common)
Private Mortgage Insurance Up to 1.5% of loan amount to prepay first-year
FHA, VA or RHS Fees 1.5%, 1.5% to 2% or 1.75%
Home Owners Insurance $300-$1000 per year pending on home price
Flood Determination Fee $15-$50
Survey $150-$400
Source: Federal Reserve Board  

 

There are other costs that may be levied by your lender while extending you the mortgage loan. While these may the usual fees levied by the lender, some of them may be negotiable and even completely avoidable. Processing fee and application fee is extra profit for the lender. While almost all of them charge it, a bank that you usually do business with may be willing to reduce the charge if not completely waiver it.

Because many people shop around for mortgage, a lender charges an application fee to make the effort of processing your application worthwhile even if you decide to go with another lender for the mortgage loan. However, if you finalize the deal with one, you can ask for the application fee to be removed since it is more profitable for the lender to strike a mortgage loan deal for your rather than charge you the application fee.

Junk fees and extra large amounts can be reduced and avoided.

Additionally:

In the midst of all the people involved in the deal and telling you which paperwork to sign and how much to pay and how it is easy to loose track of the various costs involved. You started out by looking at the cost of the home and applying for a mortgage.

But now you will realize that there are other costs when buying a home that are commonly known as ‘closing costs’. Not only should you understand these costs in order to know exactly how much you are gong to be spending by the time the house is yours but also to save money on these costs.

Recurring Closing Costs

Recurring costs are the costs that you have to pay over the mortgage amount not only at the time of the deal but also on a recurring monthly or annual basis.

These include real estate tax, home insurance and if you are paying less than 20% of the cost selling price of the home as down payment, then Private Mortgage Insurance as well.

Most of these payments are payable in advance. So while the house tax may be valid after one year of living in the house, you are made to pay it in advance during the time of the purchase in order to cover your next years obligation. This is known as putting money in escrow.

Non recurring costs are fees that are paid during the time of the closing of the deal but are one time in nature. You are not required to pay them again. These kinds of cost usually add to the original cost of the home and the mortgage.

Home Loan closing costs include but are not restricted to:

  • Fees associated with the mortgage loan like Origination Fee, Appraisal Fee, Credit report Fee, Tax Service Fee, Document Preparation Fee, Wire transfer Fee, Office Administration Fee etc.
  • Application Fee by the Lender Broker’s Fee if you are dealing through a Mortgage Broker.
  • Any additional service required by the lender such as Pest inspection or home appraisal.

Closing costs may also include:

  • Federal Housing Administration Fees.
  • Veteran Administration Fees.
  • Rural Housing Service Fees associated with mortgages guaranteed by government.
  • A flood determination fee to investigate whether the property is in an area prone to flooding.
  • A land survey to verify the property’s boundaries.
  • Title charge which may include a settlement fee, titles such, title examination, closing service letter, deed preparation, notary fees, attorneys fees and title insurance.
  • A host of other miscellaneous costs may include a courier delivery fee, endorsements, recording fee, transfer tax and optional home warranty.

Avoid Extra And Junk Fees On A Home Loan

It is easy to end up paying more that you have to for a home because of all the extra fees that are attached to a mortgage loan. Many of them can be reduced if not avoided all together.

For most people, taking out a mortgage to buy a home is not something that happens many times in a lifetime. Because of this people are usually unaware of the procedure involved. You mostly depend on the information given by loan agents and lenders on procedures, paperwork and fees.

The different charges and fees you have to pay differs by the location, the lender and the value of the home that you are purchasing. 

The fees levied by lenders and other individuals involved such as the mortgage broker and real estate agents are variable.  Certain charges billed to you by your lender such as processing fee and application fee can be negotiated on once you have decided which lender to use for the mortgage.

The extra charges that are levied by the government such as the Federal Housing Administration fee And the Veteran Administration Fee are usually unavoidable and non-negotiable.  You just have to absorb these costs in the total amount of your mortgage with a pinch of salt.

The extra charges and fees levied by the lender or the broker that are not a prerequisite of any government or federal law are usually termed as ‘ garbage’ or ‘junk’ fees.

If any charge seems uncommon or the amount seems to abnormally inflated you can question it and check it up. While the junk and the extra fees may or may not be wholly avoided they can be reduced and the inflation of your mortgage minimized.

Watch out for excessive processing and documentation fees in the following:

  • application fee
  • underwriting fee
  • mortgage rate lock fee
  • loan processing fee
  • broker rebate

Additional fees that are charged by the broker of the lender can usually be negotiated upon.  It may seem odd to do this but even the mere act of questioning the fees may be successful in getting your reduced or a waiver of the additional charge.