Applying for a Loan

An introduction to mortgage. Here’s some basics about mortgages: what they are, how they work.

Definition. A mortgage is simply a loan you take out to buy a home. Obtaining a mortgage will let you purchase a $200,000 home though you have far less money to put toward such a large purchase. After saving and paying a down payment (e.g. 20% of the total cost of the home), you borrow from a lender the remaining amount. Loans for homes are usually repaid in monthly payments over a 30-year period.

Fixed-rate mortgages. There are many mortgage options, but two typical types include 15-year and 30-year fixed-rate mortgages — with the 30-year being more common. Fixed-rate means that the interest rate does not change during the course of the loan. If the rate is 7.75% at the beginning of the loan period, it will still be the same at the end.

Repayment rate. On a 30-year fixed-rate loan, it takes almost 22 years to pay off half of the loan balance. During the early years of repaying your mortgage, most of your payment goes toward the interest on the money you borrowed. A typical example. Consider a fairly typical example: A home is on the market for $200,000. A down payment of 20% reduces the amount of the loan by $40,000 to $160,000. A 30-year fixed-rate mortgage is obtained. The interest rate is 7.75% — resulting in 360 monthly payments of $1146 each.

Lender’s Limits

Here’s a simple formula for estimating the maximum amount a lender will allow you to borrow.

Your monthly housing expense. A lender defines your housing expense as the total of your:

  • Mortgage payment (principal and interest, PI)
  • Property taxes (T)
  • Insurance (I)

The common acronym for this total housing expense is PITI. The “formula.” A typical lender may require that this total housing expense (PITI) must not exceed 33% of your monthly gross income (before taxes). For the self-employed, the lenders use the net income (after-expenses) from the bottom line of Schedule C. For example. You have a monthly gross income of $7200. Your monthly housing expense (PITI) will need to be $2400 or less.

Other debts. Of course there is one more consideration, the extent of your indebtedness. A lender will also allow another 5% of your monthly income to go towards other debt payments.

Should You Stretch it?

It pays to be honest.

  • Don’t get in over your head. A lenders limit is only a maximum of what they are willing to loan. This may still be more than you can afford.
  • Your income tax return may be needed. Lender’s often require you to submit a copy of your income tax returns to validate your income.

Calculate Your Monthly Housing Expenses

Property tax estimate.

Here’s a quick estimate of what you might pay each month. Assume that you will pay about 1.5% of the purchase price of your home each year. For example. On a $200,000 home, 1.5% is $3,000 — or, $250 each month that must be added to your monthly mortgage payment.

Remember… Your monthly payment is not the same as the lender’s calculation of your housing expense (PITI) for the purpose of determining your maximum eligibility. You will also need to add your monthly mortgage payment and insurance to this amount.

Homeowners insurance.

Here’s a quick estimate of what you might pay each month for Private mortgage insurance (PMI). Almost all lenders require this insurance on purchases of homes when you put down less than 20% of the purchase price. They are merely protecting their interest in the other 80% or so of the purchase price.

…of course it also protects you. You will want to protect your investment. Consider buying the most comprehensive coverage you can and take the highest deductible you can afford to help minimize the cost.

Estimating your cost. You will want to shop around for the best quality and cost of insurance. But here’s a suggested starting point.

Purchase
Price
Monthly
Cost
$100,000$40
$200,000$65
$300,000$110
$400,000$135
$500,000$160

 

Maintenance and other costs.

Expect to spend about 1% of the purchase price of your home. For example. On a $200,000 home, expect to pay $2000 per year — or, $166 each month. Of course this cost will vary widely from month to month.

Other expenses. Add to this the monthly expense of other non-essential improvements you might make on your home — new furniture, landscaping, etc.

Minus your tax savings.

Owning a home allows you to deduct part of the expenses on your tax form. What you might be able to deduct. Both the IRS and most states allow you to deduct limited amounts of your mortgage interest and property taxes as itemized deductions on Schedule A.

The limitations. You can deduct the interest on the first $1,000,000 of debt as well as all of your property taxes. On a second mortgage (home equity loan) you can deduct to a maximum of $100,000 borrowed.

A simple estimate. Multiply your monthly mortgage payment and monthly property taxes by your federal income tax rate — which will vary, depending on your tax bracket, anywhere from 15% to 40%. For example. If your monthly mortgage payment on your $200,000 home is $1146 for a $160,000 loan, and your monthly property taxes are $250, and your income is roughly between $40,000 and $100,000 per year, you would have a federal tax rate of about 30% if you are married, filing jointly. 30% of $1146 + $250 would give you a tax savings of about $400.

Reverse Mortgages

There are many myths about reverse mortgages that keep senior citizens from using them.

Defined. With a reverse mortgage, a homeowner receives monthly payments from the home’s equity via the mortgage company.

Ownership. The participant in a reverse mortgage does not need to give up home ownership. Senior citizens who are cash poor but property rich can take out a reverse mortgage and continue to own and live in their homes. They also continue to pay homeowner’s insurance, property taxes, and other costs of maintenance.

Equity. Some think falsely that because a reverse mortgage lets them borrow against the equity in their property that at some point the equity will run out — and they will lose their homes. Not true. According to Linda Hubbard, vice president of marketing at Transamerica HomeFirst, “A participant can never ‘run out of equity’ in the sense that there is no longer equity to fund monthly cash advances. Since a reverse mortgage loan is a ‘non-recourse’ loan, the lender can only look to the value of the home for repayment when the loan is due, which is when the borrower permanently leaves the home.”

More information about how reverse mortgages work is available in a free video from Transamerica HomeFirst, 1 (800) 538-5569, Department W209. Source: The Oregonian.

Veterans

There are differences between Oregon’s home loan program for veterans and conventional loan programs.

The biggest difference between the Oregon Department of Veterans’ Affairs (ODVA) home loan program and conventional loan programs, besides the eligibility requirement, is the interest rate. While the interest rate is subject to change, loans are offered to veterans at a very attractive rate. Fees and closing costs are comparable with those of conventional loans.

The minimum down payment required for an ODVA loan is 5 percent (at the time of this article). However, if a borrower makes a down payment of less than 20 percent, mortgage insurance is required. The mortgage insurance premium used on ODVA loans is an up-front single premium paid at closing. It may be financed in the loan, as long as the total loan does not exceed 95 percent loan-to-valve ratio and the veteran’s entitlement.

The federal Department of Veterans Affairs also offers a loan program in which it guarantees a portion of the loan made by a lender. The eligibility requirements for this program are different from those of the Oregon program, as are the uses for which a person may borrow money. This information may become dated and is subject to change. For more Information on the United States Department of Veterans Affairs home loan program, call 1-800-827-1000.

Source: Tom Cowan, Jr., Veterans Home Loan Division.