5 Steps to Take Today to Prepare for Home Ownership
February 27, 2019
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Educating yourself in the homebuying process is a smart way to prepare for home ownership. It includes becoming familiar with certain ratios and terms used by mortgage lenders to determine buyers’ ability to repay debt. It may also help you protect against predatory lending practices that take advantage of unsuspecting consumers. Here are five tips to help you prepare yourself today.
1. Consolidate and reduce debt.
The Debt to Income Ratio (DTI) is the most important ratio used by lenders to determine a borrower’s ability to repay their monthly debt obligations. This ratio is calculated by dividing a borrower’s monthly debt by monthly gross income.
Monthly debt includes housing expenses, credit reportable debt and all expenses for other real estate owned, including principal & interest, insurances, taxes, and dues. Income used to qualify borrowers must be stable and expected to continue. The maximum DTI is 43% for most RSI Bank mortgage programs, however, some programs allow higher ratios for qualifying.
Calculate your Debt to Income Ratio using this free worksheet
2. Build or repair credit.
Maintaining good credit is important to your financial future. The interest rate at which you can borrow, insurance premiums, mortgage insurance, and your overall ability to borrow money may be dependent on your credit performance. You can maintain good credit by making payments on time, keeping credit balances low, and only using credit when it is necessary. Opening or closing multiple accounts in a short period of time can lower your credit scores. Accounts may appear on your credit report for several years, even after they are closed.
Credit scores are used by banks and mortgage companies to determine a borrower’s likelihood of repaying a debt. Credit scores are determined by the age of any debt held, total credit line versus available balance, type of debt, and timeliness of payments.
Most RSI Bank products do not use risk-based pricing, nor does the Bank base rates or points on credit scores. However, credit reports and scores are reviewed for each borrower for trends in payment history and credit usage. Credit scores of 620 or better are generally accepted, depending on the type of loan and the occupancy type.
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3. Familiarize yourself with common mortgage terms.
What is the difference between prequalification and preapproval? What is APR? What are points? It’s important to educate yourself on these important terms and others, so you can estimate and understand your closing costs, avoid predatory lending and overpaying on fees, as well as other mortgage pitfalls.
A prequalification is a preliminary step in the mortgage process; it is a letter from the bank stating the terms at which you would be approved for a loan, based on information you have stated to the bank. Income, credit, assets, and collateral are not reviewed by our lending representatives. A pre-qualification letter is issued subject to underwriting a complete loan file.
A pre-approval is a complete loan application, which includes a review of an applicant's financial background and credit score. It excludes any information on the subject property. A commitment letter is issued subject to the receipt of any outstanding items and the approval of the property.
Most people shop by interest rate and do not understand APR. APR is the annual percentage rate of interest plus other costs associated with a loan, such as mortgage insurance, origination fees, and points. It can be used to compare rates and fees between lenders.
Download our Definitions of Common Mortgage Terms
4. Learn about your mortgage program options.
There are many different kinds of mortgages. Selecting the right mortgage is personal and based on numerous factors. Each borrower’s current and future financial situation is considered when lending representatives discuss loan programs. For example, current income, expected future income, retirement age, and future expenses, such as college for children, should all be considered when selecting a loan program.
Adjustable-rate mortgages (ARM), offer a fixed payment for a period of time before the rate adjusts. ARM programs typically offer a lower starting interest rate than fixed mortgages. However, the rate may increase in the future. Fixed rate mortgages offer fixed monthly payments for the life of the loan. Some programs offer lower down payments and higher Debt to Income Ratios than other loan programs, which may be more appealing to first time homebuyers. RSI Bank offers special programs for qualifying first-time homebuyers.
Contact a Lending Representative
5. Understand Loan-To-Value Ratio and how it can impact your ability to purchase a home.
The Loan to Value ratio (LTV) is a measure of a loan’s size to the value of the property that secures the loan. It is calculated by dividing the loan amount by the value of the home. A residential real estate appraisal is used to determine the value of the property. The higher the LTV, the more risk the lender takes on when loaning money.
In general, LTV greater than 80% requires mortgage insurance (MI). Mortgage insurance protects the bank, not the borrower. Mortgage insurance is an additional cost paid by the borrower, which is why first-time homebuyers are encouraged to put as much money down as possible. The greater the down payment, and the higher your credit scores, the less the mortgage insurance will cost.
RSI Bank's free mortgage calculators can be helpful tools during the mortgage process.
The information and resources provided in this article are meant for educational purposes only; this is not advice. Please speak with a Lending Representative for specific information on RSI Bank’s mortgage programs, loan review process, and for further details and full disclosures.
*Freecreditreport.com is an Experian company and has no relation to RSI Bank.
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