# Step 1 Getting Pre-Qualified

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3 Debt Ratio Calculations EXAMPLE: TD = Total Debt NM = New Mortgage Payment (Principal, Interest, Taxes, & Insurance) TGI = Total Gross Monthly Income Formula - ((TD + NM) TGI) x 100 = Debt Ratio Let s assume your total monthly debt payments are \$400 and your new mortgage payment, including principal, interest, taxes, and insurance, is \$1,000. Let s also assume that your total gross monthly income is \$3,800. Using the Debt Ratio Formula above we can determine the following; TD = \$400 NM = \$1,000 TGI = \$3,800 ((\$400 + \$1,000) \$3,800) x 100 = % As you can see the debt ratio in this example is approximately 37%. Most mortgage programs have a maximum debt to income ratio that they are willing to lend to. In the next section we will cover those programs along with their allowable debt ratios. Mortgage Programs & Debt Ratios For the purpose of this guide, we will break the available mortgage programs into 4 categories; Conventional Loans, FHA Loans, USDA Rural Development (RD) Loans, & VA Loans. Conventional Loans The maximum debt ratio for a Conventional Loan is 45% - no exceptions FHA Loans The maximum debt ratio for an FHA Loan is 45% but it can go much higher if there are compensating factors such as a high credit score or a large amount of assets. If you need to go above a 45% debt ratio we can help you just call Michigan Mortgage solutions at USDA RD Loans The maximum debt ratio for RD Loans is 41% - no exceptions VA Loans The maximum debt ration on VA Loans is 45%

5 Property Value & Sales Price Once you re pre-qualified and you sign a purchase agreement on a home you would like to purchase, we are going to require that you pay for a property appraisal. This appraisal will represent the value at which we are willing to lend on. Your appraisal will need to show a value greater than or equal to your purchase price in order for us to lend you money to purchase that home. No lender will ever lend you more money than the home is worth. If for some reason, your appraisal comes in less than the purchase price, you will be able to negotiate with the seller to lower the sales price. If the seller is unwilling to lower the price, you can walk away from the deal or make up the difference with your own money. I would never suggest a buyer pays more than the appraised value for a home but sometimes people really want a particular home and are willing to make a poor financial decision to get what they want. Appraisals are done by a third party that has no relationship to the transaction. In fact, since 2009, we have to order Appraisals from an Appraisal Management Company (AMC) which is essentially an appraisal broker. The AMC will then hire an appraiser to complete your appraisal. We are not even allowed to contact the appraiser directly and the AMC acts as a middle man to ensure the accuracy of the appraisal and also make sure we have no influence on the appraisal what so ever. This new process has added about a week to the mortgage process and also increased the average cost of the appraisal from \$300 to \$475.

7 FHA Loans The minimum down payment for an FHA Loan is 3.5%. Unlike conventional loans, this 3.5% down payment can be a gift and you don t have to have any of your own money in the transaction. FHA loans also require Mortgage Insurance, however, the FHA Mortgage Insurance is charged both up front and on a monthly basis. The upfront Mortgage Insurance is 1.75% of the loan amount and it gets financed into the mortgage. The monthly Mortgage Insurance is 1.25% of the loan amount divided by twelve. Example You re buying a \$150,000 home with a 3.5%, or \$5,250, down payment. This leaves us with a loan amount of \$144,750. First we have to determine the upfront FHA Mortgage Insurance which is 1.75% of \$144,750, or \$2,533. This \$2,533 will be financed into your loan making the total loan amount \$147,283 (\$144,750 + \$2,533). Next we have to determine your Monthly Mortgage Insurance at 1.25% of the loan amount using the calculation below; PMI = \$144,750 x 1.25% = \$1, = \$ per month FHA Monthly Mortgage Insurance also cancels at 78% of the original loan amount but it must be paid for a minimum of 5years before cancellation. USDA RD Loans There is no minimum down payment for an RD Loan since this product offers 100% financing. However, the USDA RD Loan is only available in certain geographic locations that are considered Rural. With that being said, the maps used to determine rural areas have not been redrawn in over 20 years so you may be surprised when you find out what is considered Rural. RD Loans require Mortgage Insurance as well. Similar to FHA, the RD Mortgage Insurance is charged both up front and on a monthly basis. The upfront Mortgage Insurance is 2.0% of the loan amount and it gets financed into the mortgage. The monthly Mortgage Insurance is 0.4% of the loan amount divided by twelve. Example You re buying a \$150,000 home with no down payment. This leaves us with a loan amount of \$150,000. First we have to determine the upfront Mortgage Insurance which is 2.0% of \$150,000 or \$3,000. This \$3,000 will be financed into your loan making the total loan amount \$153,000 (\$150,000 + \$3,000). Next we have to determine your Monthly Mortgage Insurance at 0.4% of the loan amount using the calculation below; PMI = \$150,000 x 0.4% = \$ = \$50 per month

10 Putting it All Together Every cost or fee discussed in this section will be presented to you within your mortgage application that you complete once your offer to purchase is accepted by the seller. There are two documents used to explain these fees, one being the Good Faith Estimate and the other being the Fees Worksheet. The Good Faith Estimate (GFE) has been revamped in recent years in order to make it easier to understand. Unfortunately, with the recent changes, the Good faith Estimate no longer itemizes the costs and fees which makes it difficult to know what costs what. This is why it s important that you request a Fees Worksheet along with your GFE as it will itemize all costs so you can see a breakdown of everything. In the next section we are going to show you how to structure your Purchase Agreement in a way that has the seller paying for most of your closing costs outside your down payment and appraisal fees.

12 seller to net \$144,760 which is \$3,760 more dollars in their pocket and you still get \$9,000+ in concessions. Our average client only needs 3% to make things work but as I stated before the more the better. Mind you, we will be there to walk you through exactly how much concessions you will need so if you don t totally understand, we got you covered! Mortgage Programs & Sellers Concessions For the purpose of this guide, we will break the available mortgage programs into 4 categories; Conventional Loans, FHA Loans, USDA Rural Development (RD) Loans, & VA Loans. Conventional Loans The maximum sales concession for a Conventional Loan is 3% FHA Loans The maximum sales concession for an FHA Loan is 6% USDA RD Loans The maximum sales concession for RD Loans is 6% VA Loans The maximum sales concession on VA Loans is 6% As you can see, there is a lot of math and understanding to accomplish when buying a home. I created this guide to give you a foundation to start from. Beyond this guide, we are here to help you with all of this math along with structuring your purchase agreement in order to make everything work for you. Don t hesitate to call Michigan Mortgage Solutions to answer any of your questions at (248) , or Toll Free at (888) We are here to help and while you may find someone that knows as much as we do about mortgage financing but you ll never find someone that knows more. I hope you ve enjoyed this guide and we look forward to helping you purchase your next or first home!

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