Other Questions

Mortgage Questions and Answers

Q. What is the 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.

What is the 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 (front ratio or housing ratio) 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 (back ratio or debt ratio) is the maximum percentage of your gross monthly income that can be applied to housing expenses and recurring debt. Recurring debt includes things like 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 traditional mortgage qualifying guidelines. With today's AUS (Automated Underwriting System) the qualifying ratios can be greatly expanded. We'd be happy to approve you to determine how large a mortgage loan you can afford. We look forward to helping you buy your dream home.

Q. What is the difference between a Mortgage Broker and a Mortgage Lender?

Often times we are asked by clients and realtors "What separates First Heritage Mortgage from other mortgage companies in the marketplace today, and why should I use you?"

Simple, most individuals are familiar with the concept of Direct Lenders versus Mortgage Brokers, but there is a third option many are not aware of, a Correspondent Lender. The following defines each:

Direct Lender:

Is usually a major bank that will originate and hold mortgage loans in their portfolio. Each bank specializes in different types of loans and guidelines. Some banks like Fixed Programs or ARMS, while others like Government programs like FHA or VA, or Interest Only loans or High CLTV programs. Usually, by going directly to these banks you or your client will get good interest rates from their internal Retail Loan Officers, who are also trained on their own lending guidelines. However, there are a few pitfalls that you should be aware of. First, it is very hard to tell which of these lenders will have the best rate on any given day (rates change daily) for your specific situation. You may apply at one of these lenders only to find out later that you don't meet their program guidelines. You will then be at square one starting all over again shopping for another lender that appears to have the program you then need. Additionally, you may have been referred by a friend who may have done a great job searching for a competitive interest rate when they acquired financing 2 weeks ago, and may recommend their lender to you. Just because that lender had competitive rates last week, doesn't mean they will be the same today. Lenders will raise and lower rates to change the tide of production flowing in from brokers around the country wishing to use their programs, and backlogging the lenders underwriting process.

Pros: Good rates, knowledgeable about program guidelines

Cons: Limited programs, may have delayed processing times

Mortgage Broker:

Almost anyone can become a broker which is very scary. Brokers usually have no cash assets of their own, and no Portfolio loan programs to offer. Brokers receive rate sheets on a daily basis from the Direct Lenders. This provides brokers the benefit of seeing which Direct Lender has the best rates on any given day, and allows them to offer the widest variety of programs. If you apply with a Broker and your loan is denied with one lender, they can quickly re-lock your loan with another lender. Since brokers aren't allowed to underwrite loans for lenders, they must send the loan file to the lender, most likely out of state for review. Additionally, these brokers have no relationship with the underwriter other than over the phone at best, and many times through an account executive which makes it very hard to relay correct details and information. This can be time consuming. In many instances brokers are less informed about the actual guidelines for each of the various lenders. Brokers receive rates that are slightly better than those offered directly by the Lenders themselves, but once the broker adds on their Origination Fee (amount will vary) their rates are often higher than the same Lender can offer directly. However, going to a broker who can use the best rate in the market may still provide better rates than going to the wrong lender whose rates had moved higher. And finally, all closing documents are created at the Direct Lenders office so the broker has very little control at the end of the process.

Pros: Wide variety of programs, one stop source

Cons: Less informed about specifics, time consuming, can be more costly, No relationship to Underwriter.

Correspondent Lender:

The best of both worlds!! A correspondent lender is one who has its own source of money and sometimes portfolio programs, such as First Heritage Mortgage. Correspondent Lenders are approved by direct lenders to underwrite their own loans per the Direct Lender's guidelines. Therefore, Correspondent Lenders have a vast array of loan programs to offer, similar to Brokers, but have the ability to Process, Underwrite, and Close the loans from their own offices for speedy closings. Additionally, Correspondent Lenders have the ability to meet directly with their in-house underwriter to quickly resolve any issues. Since Correspondent Lenders are selling loans in bulk to direct lenders after the loans have closed (not one by one like Brokers), they receive the best rates available from the Direct Lenders. In fact Correspondent Lenders rates may equal and sometimes surpass the rates offered directly by the lender itself. Because of First Heritage Mortgage's size and volume of loans we deliver to lenders we receive better pricing and product enhancements that are not offered to other Correspondent Lenders. These enhancements often come in the form of more relaxed underwriting guidelines, higher CLTV's, or larger maximum loan amounts. By being a Correspondent Lender, in certain circumstances First Heritage Mortgage can close a loan in as little as 8 Days!!

Pros: Great Rates, large variety of programs, speedy closings, and knowledgeable about programs

Cons: NONE!!

Q. Why should I get an 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's 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.

Q. What's the difference between a Mortgage and a Deed of Trust?

Many of us incorrectly call our home loan a mortgage, but in fact, a mortgage is not what your lender gives you to buy a home. A mortgage is actually the formal document proving the legal claim or lien on a piece of property that you give to the lender who holds it as security for the money you borrowed. The lien is recorded in public records. On a mortgage, you pledge the property as security for the repayment of your loan, but you do not transfer title to the lender.

If you (the mortgagee) repay your loan in accordance with the terms of the mortgage, it is canceled or satisfied by the lender (the mortgagor). However, if you do not repay your debt, the lender has the right to sell the secured property to recover funds through a court proceeding called foreclosure.

In some states, a deed of trust is used in place of a mortgage. While a mortgage involves two people (the borrower and the lender) a deed of trust involves three people - the borrower (or trustor), the lender (the beneficiary) and a trustee, a neutral third party, such as an attorney or a title agent. The deed of trust is also recorded in public records.

In a deed of trust transaction, the borrower transfers the legal title for the property to the trustee who holds the property in trust as security for the payment of the loan to the lender. The deed of trust is cancelled when the debt is paid. However, if you default on your payment of the loan, the trustee may sell the property at the request of the lender without a court proceeding.

Q. What are some mistakes Buyers make?

Many new home buyers 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 its 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 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.

Q. What are Living Trusts?

Created while you are alive, a revocable living trust lets you control the distribution of your estate. Ownership of your property and assets is transferred into the trust. You can serve as trustee or you can appoint another to serve as trustee. If you serve as trustee, you must appoint a successor to serve as trustee upon your death.

Properly drafted and executed, a revocable living trust can avoid probate and delays as the trust owns the assets not the deceased. Consult with your attorney and/or CPA before deciding if a revocable living trust is the right choice for you.

Advantages to a Living Trust Holding Title
  • A husband and wife can establish a joint revocable living trust.
  • While the trustor serves as a trustee or a co-trustee, a separate tax return is not required for the trust.
  • The revocable living trust allows the trustee to buy, sell and finance assets just as before.
  • In the event of incapacitation, management of the living trust passes to the successor trustee without the necessity of a court-appointed conservator.
  • The living trust can be cancelled or changed at any time before death or incapacitation.
  • Probate - including multi-state probate - is avoided when assets are held in a living trust. (Often probate takes 9 to 12 months.)
  • Privacy. When a decedent dies with a living trust, the provisions of that trust usually do not become public.
  • Litigation is discouraged by a living trust.
  • A married couple with a living trust can reduce or eliminate federal estate taxes by setting up an Exemption Trust. While both are alive the assets remain in the revocable living trust. Upon the death of a spouse, the trust is split into two trusts: the survivors trust and an exemption trust. (For tax purposes, the surviving spouse and the exemption trust are two separate taxpayers.)
Disadvantages of a Living Trust
  • A living trust will cost more to set-up than an estate plan with only a will.
  • A trust agreement with a new will must be set-up.
  • Transferring assets into the living trust will require paperwork and incur costs not encountered with a less elaborate estate plan.
  • Handling an Exemption Trust may require extra effort from the surviving spouse.
  • Some lenders may require property held in a living trust be removed from the living trust to refinance the property.
Common Terms

Trustor: Creates the revocable living trust and transfers major assets into it. (A husband and wife can have a joint living trust or each can have their own living trust.)

Trustee: Manages the living trust's assets.

Beneficiary: Receives the assets of the living trust.

Initially the trustor, trustee and beneficiary are the same person(s).