Debt to Income Ratio Explained. It is simple, really...

Before a first time buyer, or any home buyer sets out to start viewing properties, getting pre-approved is one of the crucial first steps, but examining your debt-to-income ratio is best done before applying for a home loan. Why is the debt-to-income ratio of 43% such an important percentage and factor? This ratio speaks to a home buyer’s financial capacity not so much in terms of buying a home but capacity to faithfully pay on the mortgage and not go into default – as much a concern for the lender as it should be for the home buyer. For purposes of getting pre-approved for a mortgage, your debt-to-income ratio is calculated simply by adding up all your monthly debt payments and then divide the total by your gross monthly income. This is how mortgage lenders measure a home buyer’s ability to successfully manage monthly mortgage payments and responsible servicing of the debt. An Example of Debt-to-Income Ratio Calculation Let’s say your annual income is $60,000 or $5,000 monthly and the home you’re interested in is $200,000 and for the sake of simplicity, you’re putting down 3.5% as with an FHA loan at 4% interest rate. This ratio speaks to a home buyer’s financial capacity not so much in terms of buying a home but capacity to faithfully pay on the mortgage and not go into default – as much a concern for the lender as it should be for the home buyer. For purposes of getting pre-approved for a mortgage, your debt-to-income ratio is calculated simply by adding up all your monthly debt payments and then divide the total by your gross monthly income. This is how mortgage lenders measure a home buyer’s ability to successfully manage monthly mortgage payments and responsible servicing of the debt. An Example of Debt-to-Income Ratio Calculation Let’s say your annual income is $60,000 or $5,000 monthly and the home you’re interested in is $200,000 and for the sake of simplicity, you’re putting down 3.5% as with an FHA loan at 4% interest rate. The amount you’re financing would be $193,000, add to that, again for simplicity, PMI (private mortgage insurance for loans with less than 20% down) property tax of $14 per $1,000 borrowed (check your target community’s property tax rate) and interest. Your total monthly mortgage payment would total $1,229.89. Now, let’s add $200 for an auto loan, $400 for revolving debt such as credit cards and accounts plus the mortgage of $1229.89. Obviously, there can be a lot more to an individual’s monthly debt than this, but we’re keeping it simple, but this totals $1,829.80. Divide the monthly debt of $1,829.89 by the gross monthly income of $5,000 and you get a debt-to-income ratio of 36%. Congratulations, your debt-to-income ratio is well below the general maximum of 43%. Need more information? Visit txpremiermortgage.com for more explanations!

What Does Title Insurance Protect Me From?

By including title insurance when purchasing property, your title insurer takes on accountability for legal expenses to defend your property title, should it ever be challenged. Many different occurrences can come into play to warrant the need for title insurance. The title company responsible will then take on the legal expenses to defend the property for as long as you are in possession of an interest in the property under the title. If the defense is not successful, you will be reimbursed for any loss of value of the property. Common Things Title Insurance Covers: 1. UNDISCLOSED HEIRS, FORGED DEEDS, MORTGAGE, WILLS, RELEASES AND OTHER DOCUMENTS 2. FALSE IMPRISONMENT OF THE TRUE LAND OWNER 3. DEEDS BY MINORS 4. DOCUMENTS EXECUTED BY A REVOKED OR EXPIRED POWER OF ATTORNEY 5. PROBATE MATTERS 6. FRAUD 7. DEEDS AND WILLS BY PERSON OF UNSOUND MIND 8. CONVEYANCES BY UNDISCLOSED DIVORCED SPOUSES 9. RIGHTS OF DIVORCED PARTIES 10. ADVERSE POSSESSION 11. DEFECTIVE ACKNOWLEDGEMENTS DUE TO IMPROPER OR EXPIRED NOTARIZATION 12. FORFEITURES OF REAL PROPERTY DUE TO CRIMINAL ACTS 13. MISTAKES AND OMISSIONS RESULTING IN IMPROPER ABSTRACTING 14. ERRORS IN TAX RECORDS

Talk the Talk – Know the Mortgage Lingo at Closing

What in the world are they talking about? Many borrowers go through the closing process in a haze, nodding, smiling, and signing through a bunch of noise that sounds like Greek. Even though you may have put your trust in your real estate and mortgage team, it helps to understand some of the terminology so that you can pay attention to specific details that may impact the decisions you need to make. Common Closing Terms / Processes: 1. Docs Sent – Buyers sit on pins and needles through the approval process, waiting to find out if they meet the lender’s qualification requirements (which include items such as total expense to income, maximum loan amounts, loan-to-value ratios, credit, etc). The term “docs sent” generally means you made it!! The lender’s closing department has sent the approved loan paperwork to the closing agent, which is usually an attorney or title company. Keep in mind that there may be some prior to funding conditions the underwriter will need to verify before the deal can be considered fully approved. 2. Docs Signed – Just what it implies. All documentation is signed, including the paperwork between the borrower and the lender which details the terms of the loan, and the contracts between the seller and buyer of the property. This usually occurs at closing in the presence of the closing agent, bank representative, buyer and seller. 3. Funded – Show me some money! The actual funds are transferred from the lender to the closing agent, along with all applicable disclosures. For a home purchase, if the closing occurs in the morning, the funds are generally sent the same day. If the closing occurs in the afternoon, the funds are usually transferred the next day. The timing is different for refinancing transactions due to the right of rescission. This is the right (given automatically by law to the borrower) to back out of the transaction within three days of signing the loan documents. As a result, funds are not transferred until after the rescission period in a refinancing transaction, and are generally received on the fourth day after the paperwork is signed. (Note – Saturdays are counted in the three day period, while Sundays are not). The right of rescission only applies to a property the borrower will live in, not investment properties. 4. Recorded –

Let’s make it official. The recording of the deed transfers title (legal ownership) of the property to the buyer. The title company or the attorney records the transaction in the county register where the property is located, usually immediately after closing. There you have it – an official translation of closing lingo. As with any other important financial transaction, there are many steps, some of which are dictated by law, which must be followed.

Assembling Your Home Buying Team – Knowing The Players

Buying a new home is literally a team sport since there are so many tasks, important timelines, documents and responsibilities that all need special care and attention. Besides working with a professional team that you trust, it’s important that the individual players have the ability to effectively communicate and execute on important decisions together as well. Real Estate Agent – A Realtor® is a licensed agent that belongs to the National Association of Realtors®, which means they are pledged to a strict Code of Ethics and Standards of Practice. A few of the important roles your agent performs: Determine your home buying needs Define your property search criteria – neighborhoods, school districts, local amenities… Provide insight on market trends and property values Negotiate purchase contracts Pay attention to due-diligence periods and other important timelines Articulate inspection and appraisal reports Professionally estimate fair market value on listings A common misconception of many First-Time Home Buyers is that hiring a real estate agent will end up costing more money. However, the typical arrangement in a purchase transaction is for the seller to cover the buyer’s agent commission. In some cases where a new home developer or For Sale By Owner is listing a property and offering a lower price to deal direct, it is still a good idea to have an agent in your corner to protect your financial and investment interests. Considering that some buyers may see 5-7 real estate transactions in a lifetime, compared to an agent that closes the same amount in a month, it is obvious to see that there is a big advantage to having the ability to rely on that experience when your home and security is on the line. Mortgage Professional - A mortgage professional (loan officer, mortgage planner, loan consultant, etc.) is the glue that holds the entire transaction together (biased comment). In addition to establishing the purchase price and monthly payment a borrower can qualify for, the mortgage team will also need to communicate with all of the other players on the home buying team throughout the entire process. To highlight a few details your mortgage team is paying attention to: Initial pre-qualification to determine purchase price / loan amount Explain all loan program options that may fit your investment goals Collecting / organizing loan approval documents Watching economic indicators that influence daily rate changes Locking rates Communicating with title / escrow officers Submitting loan package to underwriting departments Updating disclosure / GFE paperwork within proper time frames Following funding through the final recording Tracking inspections, insurance and other lending requirements Post closing rate / program monitoring (although that might just be us) Insurance Agent - The lender in any mortgage transaction will require a homeowner’s insurance policy (hazard insurance). This policy protects the property in the case of fire, theft or other damage (except flood or earthquake, those are separate policies and may be optional). If it is determined that the property that you want to purchase is in a flood zone, flood insurance is not optional, it is mandatory. The flood zone determination will be done with a “flood certification” from a third-party provider. Title and Escrow - It is possible to have a title company and an escrow officer work for different companies. Also, some states use closing attorneys and there are still a few states where they use abstract of title instead of title insurance. In most purchase transactions, the seller has the option of choosing the title company. The title and escrow officers are often thought of as the same role, but in reality are quite different positions. The title officer takes care of all issues that have to do with the title (also referred to as the deed) of the property. The lender may require a title insurance policy guaranteeing that the title is clear of all liens except those being filed by the lender. Escrow takes care of receiving, signing, and notarizing the final loan documentation, as well as collecting the other paperwork associated with the home sale. The escrow officer is a neutral third party that makes sure no money is transferred until all conditions for each side are met. The money management of an escrow company include: Real estate commissions Funds to mortgage company Homeowner’s Insurance Premiums Property Taxes HOA Dues and other third-party fees Finally, the escrow officer will see that you are properly recorded as the new owner with the county. Home Inspector - When you have found the home that you like, it is a wise idea to have a professional take a look at the home to see if there are any issues with the property that could be a problem in the future. Even though some buyers have an “Uncle Joe” who has owed several homes and knows what to look for, a certified Home Inspector can be money well spent. They will look at the functionality of the home to make sure the electrical, plumbing and physical aspects of the home are strong, which will help the buyer make an educated decision about following through with the purchase, or renegotiating certain aspects of the contract. Keep in mind, the home inspector and appraiser have different jobs. An appraiser determines value, while the inspector looks for structural problems, defects or maintenance issues. The inspector is doing this strictly for the buyer’s sake. The lender is not concerned if a faucet has a minor leak as long as the property is worth the sales price. Therefore, the lender generally does not require an inspection unless the purchase contract requires one. So, an inspection is not required, but it is recommended. As a matter of fact, one of the forms in an FHA application package is one that says “For Your Protection: Get a Home Inspection.” Appraiser - While the appraiser is typically never seen by the home buyer, an appraisal is obviously an important component of a home purchase transaction. The appraiser will conduct an analysis of the property to determine the current market value. The bank will always require an appraisal, and in some cases need a second opinion of value if the program guidelines or loan amount require it. Appraisers compare the sales prices of similar properties sold in the neighborhood and surrounding areas with the subject property. This can be a very tricky process, especially if there are few properties to choose from, or if there is an overwhelming amount of foreclosures and short sale listings. Now, since two homes are rarely identical, the appraiser has the difficult job of trying to compare apples to apples; sometimes red delicious to yellow delicious, or sometimes Fuji to Winesap. When done, the estimate of value is given. If that value is below the purchase price, then negotiation may take place. If it is at or above the purchase price, we are ready to go forward.

What You Need To Know About Gift Funds

The "Donor" of the gift must be a family member, fiancé or domestic partner. They must prove they have the ability to provide you with the gift by providing a copy of their bank statement, a copy of the canceled gift check and/or a signed letter from their bank saying the funds are available. The "Gift Letter" is a form we will provide. The donor will need to complete it with basic information and a signed statement that the funds are a gift with no expectation of repayment. The "Transfer" must be documented carefully. Make a copy of the gift check and deposit slip or of confirmation of the wire transfer. Deposit the gift in the account you're already using for verification of funds to close. DO NOT combine this deposit with any other incidental deposits. Provide either an online update or the next account statement to show that the deposit cleared into the account. Some programs allow for the entire down payment to be in the form of a gift. Others may require that you have at least 5% of the purchase price from your own funds. As these rules can vary or change at any time, never hesitate to consult with us for the specifics as they relate to your transaction. While the documentation requirements may seem excessive at times, please remember that the underwriters are simply following the rules to assure that your down payment is not borrowed and that any allowable gift funds are coming from acceptable sources. And remember, if you have any questions about the mortgage process, just ask! Call 281-907-6401 or visit www.txpremiermortgage.com TODAY!

Calculating The Net Benefit Of A Refinance Transaction

Calculating the net benefit of refinancing can be a challenging task if you do not understand what to calculate. We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate. Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over the term of the loan is the most popular. Calculating the actual savings can be a tricky chore unless you know the difference between cash flow savings and interest savings. If your refinance objective is to only save on the interest by lowering your rate, then the interest savings should be done with the calculations below. Calculating Interest Savings: (Loan Amount x Interest Rate) / Months in year = Interest paid per month ($200,000 x 6% or .06) / 12 = $1,000.00 *Remember to do the calculation in the parentheses first* We now know that you are paying $1,000.00 per month in interest. You should take the new interest rate you are getting with your refinance and calculate what your new interest payment will be. ($200,000 x 5% or .05) / 12 = $833.34 Now we need to find out the difference between the two interest rates. Current Interest Payment – Proposed Interest Payment = Interest Savings $1,000.00 – $833.34 = $166.66 Now you have figured out that by dropping your interest rate 1% on $200,000 you will be saving $166.66 per month or about $2,000 per year. Awesome! Anyone would want to save $2,000 per year, where do I sign… right? Not so fast, you’ll want to calculate the break-even point to find out how you will benefit after your closing costs. Net Benefit Formula (Break-Even): (Closing Costs – Escrows) / Interest Savings = Month of Break-Even ($6,000 – $1,000) / $166.66 = 30 Months In other words, it will take 30 months for you to recoup the cost of your refinance. If you plan to keep your mortgage for at least 30 months then you might want to consider this deal. Okay, now we can calculate your net benefit for refinancing with one more calculation. (Monthly Savings * Months you plan to keep mortgage) – (Closing Costs –Escrows) = Net Savings ($166.66 * 120 months) – ($6,000 – $1,000) = $14,999.20 If you kept the mortgage for 120 months (10 years) you would save $15,000. Okay, now you can find out where to sign. Calculating the net benefits of a refinance is crucial in determining if it is strategic for you to refinance. Keep in mind that each mortgage is slightly different and you may need to adjust calculations accordingly. …… Frequently Asked Questions: Q: I heard that I should only refinance if I drop 1% on my mortgage is that true? Some people say ½% , 1% to never. Every mortgage is different. For Example: A no cost loan can have a 1 month break-even point with only a .25% drop in interest rate. Now that you know how to calculate your net benefit, you are able to figure out what may be beneficial for your situation. Q: Why can’t I just compare my current payment to the proposed payment and figure out my net benefit? You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations. Let’s assume you currently have a 15 year mortgage and you’re comparing it to a 30 year mortgage. If both loans have the same interest rate and loan amount but the amortization is different, your interest savings per month would be $0. However, you are going to show a cash flow savings with the 30 year mortgage because of the longer amortization.

Where Does My Earnest Money Go?

Where Does My Earnest Money Go? If I give my real estate agent a $5000 Earnest Money Deposit check… Where does that money go? A basic and very obvious question that most First-Time home Buyers ask once their purchase contract gets accepted. According to Wikipedia: Earnest Money – an earnest payment (sometimes called earnest money or simply earnest, or alternatively a good-faith deposit) is a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious (earnest) about wanting to complete the purchase. When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations. An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract. For example, there may be a contingency period for appraisal, loan approval, property inspection or approval of HOA documents. In most cases, the Earnest Money held by the escrow company is credited towards the home buyer’s down payment and/or closing costs. *It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources. The Process: Earnest Money is submitted to an escrow company with the accepted purchase contract At the close of escrow, the EMD is credited towards the down payment and / or closing costs If there are no closing costs or down payment, the EMD is refunded back to the buyer Who Doesn’t Get Your Earnest Money: Selling Real Estate Agent – A conflict of interest Sellers – Too risky Buying Agent – They shouldn’t have your money in their account