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Factors Determining Mortgage Rates and Applications

Knowing what the lenders are looking for to determine your home loan application helps you to prepare for it well in advance. The information the lenders require may increase time to time. Nevertheless, it will not be less than what is listed below. You could say that these are the minimum information required. These factors are valid for mortgage refinance applications and even for car loans or credit card applications for that matter.

Your Income Level: This is usually called household income and includes your partners income as well if you are buying (or owning) your home jointly. Mortgage lenders have a metric called income multiplier. For example if the metric is 3 times of the income, it means that you can only borrow 3 times of your earnings. These metric changes as the lenders get optimistic/aggressive or pessimistic/cautious. Of course a lender would want to verify your employment. They will at least ask wage slips for the last three months. They may want to confirm with your boss usually by a letter. The longer you were in your current job is the better, otherwise you will need to provide information about your previous jobs as well. Self employed people need to provide accounts and probably confirmation from their accountant. Your income is the very starting point of the process. Then lenders should be able to tell you how much maximum home loan they can offer you.

Down Payment: You will need to put down certain amount of the property value. The higher the down payment, the easier the process becomes. Your application gets accepted easier, you are offered better rates and your payments become more affordable. Unless you have a steady, verifiable jobs and best of credit score you are looking at minimum of 15–20% down payment (in refinance cases, that would be the equity left in your home after the loan). They used to do a 25% down payment and no questions asked mortgages, but the lenders wised up the hard way not to ask anything. There is the issue of Private Mortgage Insurance (PMI) that the lenders would make sure you pay if they are lending more than 80% of the value of the property. So you save on that if you can put at least 20% (or refinance up to 80%).

Your Credit Score: It is wise to say that you should not start the process of home mortgage loan application without checking your credit score. There are many free credit score providers available, but I would suggest that you get a copy of your credit report and go through it. This would at least give you an insight to how it works. There may be something that should not have been there and it may be corrected by just calling your credit card company or bank. Your credit score identifies you to the lender as a number. It really is that simple. John Smith becomes 708 to the mortgage underwriter. Looking after your credit score is a long, continuous process. However, if you failed on that do not despair, you can repair your credit in time. No not with the credit repair agents, just yourself. Starting from today, if you put your house in order, start making payments in time and sorting out your financial affairs you can prepare yourself for a mortgage with good credit score 6–12 months down the line. If you have time, this would be much better option for you than trying to get a home loan with bad credit.  

Your Income and Expenditure Statement: Most home mortgage loan application forms will have a section to put your household income and expenditure or there will be an additional form. You will need to put all sources of income in here with all the expenditures including credit card payments, car loan payments, children’ school fees as well as the usual monthly utility bills, grocery and clothing spending.  This will allow the lender to assess your ability to afford the mortgage payments. They will ask you about six months bank statements to verify these spending, so there is no hiding unless you are making some cash and making payment in cash. Clearly high spending household will reduce the limit of home loan amount they can get.

Your Residence Verification: Mortgage and refinance loan lenders would want to verify your residence for at least 3 years. If you are in the voters’ registrar or some government data readily available to mortgage providers, you just need to put your addresses for 3 years. Otherwise, prepare utility bills for these addresses, you will be asked.

All being well you should get an offer in the post.

External Factors: These are the factors that you can not affect. I am just going to list some of them, so that you know. General condition of the economy has direct effect on mortgages and loans. When the economy is good, everyone including lenders are optimistic and this effects their decision. They look at the applications negatively or positively. Rising or falling house prices have a positive or negative effect on your application, too. Obviously, if the house prices are rising, the security underlying the refinance loan is increasing and vice versa. I know you can not do much about it; however, it is the case. Should you not have time pressures, you may choose the best time to refinance or buy a house according to lenders sentiment. It helps.

Article by JS Lee

Should You Choose Fixed Rate or Flexible Rate Mortgage Loan?

This article may seem to conflict with my other blogs where I talk about keeping your options open and not getting into high redemption penalty situation, but you will see that it does not. Let us look at the terminology.

Fixed rate home mortgage loan or refinance loan means that you fix your loan interest for a long period of time. Once you get a fixed rate mortgage, you will have a peace of mind of knowing how much you are going to pay each month in that duration. In return to giving you a fixed rate, lenders would want you to be committed to that loan. They will make sure with the redemption penalties that you will not refinance it anytime soon. I think it is only fair for them to do this, because to cover your fixed rate they will have to go out and find fixed source of capital. So your flexibility will be much lower but you will have a peace of mind just in case the mortgage rates shoot again.

Flexible home mortgages keep your mortgage rate flexible, meaning your loan interest will go up or down with the determined criteria (usually the base rate). Here you will have a very small (or no) redemption penalty, giving you flexibility to refinance again or pay your loan back say when you sell your home. However, you do not know where the rates are going to be in two years time. It may shoot up as well as hit the rock bottom.

One thing to note here is that some fixed mortgage lenders may allow you to move your mortgage if you decide to move, although usually selling your home and buying a new one must be done in the same time. In general the real fixed rate mortgages would be slightly higher interest; however there are so many different mortgages to generalize. Some mortgages may only be fixed to start with and then it may become flexible and higher interest after the short initial fixed period. These are little tricks banks play on customers to show them how low their monthly payments. Somehow consumers are focused on the near term and starting monthly payments plays an important part in their decision. What we are discussing here is a real deal fixed mortgage of considerable duration, not an introductory fixed period.  

Now the decision of which of the rates to get depends entirely in your beliefs and circumstances. For example, a) you believe that the home mortgage loan rates hit the rock bottom and can not go much lower anymore, b) you have found your ideal home and you will not move for a job or other reasons for a long time, c) your credit score is very good just now to qualify you for the best rates, d) you are worried the rates will go up quite much and you want a peace of mind. Then, you should look to fix your mortgage interest as long as you can. In the completely opposite scenario, you should remain flexible. I hope it is all clear. 

Article by JS Lee

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