Step 1 Getting Pre-Qualified Now that you ve made the decision to purchase a home, the next step is to get pre-qualified from a lending institution, like Michigan Mortgage Solutions, to determine how much you can borrow as well as the total monthly house payment you will be comfortable with. When getting pre-qualified for a mortgage, you will be asked to supply a good amount of documentation in order to support your income and your ability to repay. Below you will find a list of documentation that you should set aside while you re going through the mortgage process. Some documents, like pay stubs and bank/asset statements, will need to be updated throughout the process. For this reason, we suggest that you create a mortgage file, or folder, to hold your pay stubs and bank/asset statements as they come in. This way you will have everything in one place. Mortgage Documents to Gather Last 30 days pay stubs for each borrower Last 2 years W2 s for each borrower Last 2 consecutive bank statements all pages / all accounts Most recent retirement or asset statements all pages / all accounts Copy of drivers license for each borrower Copy of Social Security Card for each borrower If You re Self Employed, 1099 d, Commissioned, or Rental Income Last 2 years of federal tax returns all schedules Last 2 years of corporate tax returns If You re Retired or on Social Security Pension award letter stating amount, frequency, & duration of benefit Social Security award letter If You re Divorced, Receive Alimony, Spousal Support, or Child Support Copy of Divorce Decree all pages Copy of Support Order all pages The above documentation is most of what would be requested from you during the mortgage process. However, each borrower is unique and depending on your specific situation, more documentation will be required. In fact, be prepared to be paper-worked to death lol! This process can seem quite intrusive but it s less of a hassle if you re ready for it and it s a necessary evil. If you keep all of these documents in one spot from the time you start until you close your loan, your hassle will be minimal. Next, we re going to cover the math behind prequalifying you for a mortgage.
How Much Will We Lend You? To determine your maximum loan amount, we will need to calculate your monthly gross income and compare that to your monthly debt expenses which will allow us to calculate your debt ratio. Your monthly debt expenses include all debts that show up on your credit report like credit cards, student loans, and auto loans, plus the new mortgage payment including principal, interest, taxes, and insurance. Your debt ratio is the percentage of your gross income that is spent towards debt. To calculate your debt ratio, simply divide your monthly debt total by your monthly gross income and then multiply the answer by 100. Each mortgage program has a maximum debt ratio that they are willing to lend to and we ll cover that shortly. In many cases, borrowing the maximum amount that you qualify for can set you up to struggle financially and we want to make sure that you avoid that. Even though you can t pre-qualify yourself, I wanted to supply you with an understanding of how we will pre-qualify you. Below you will see formulas for calculating gross monthly income as well as debt ratio. Gross Income & Debt Ratio Gross Income is the amount you are paid prior to deductions for taxes and benefits. If there is more than one borrower you would use these calculations for each borrower individually. Calculating your gross income will vary depending on your pay frequency as demonstrated below; Gross Income Calculations Paid Weekly (Gross Pay on Last Pay Stub multiplied by 52 weeks) divided by 12 months Paid Bi-Weekly (Gross Pay on Last Pay Stub multiplied by 26 bi-weeks) divided by 12 months Paid Bi-Monthly Gross Pay on Last Pay Stub multiplied by 2 If you are self employed, paid on commission or you work a lot of overtime, your income calculations will be more in depth and will typically require the past two years of tax returns. If you need help with any of these calculations make sure you call Michigan Mortgage Solutions at 248-674-6450.
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 = 36.84 % 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 248-674-6450. 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%
Credit Reports & Credit Scores The next part of the pre-qualification process is to determine your credit scores. When applying for a mortgage, we are going to use the credit scores that are reported by TransUnion, Experian, and Equifax in the form of a mortgage credit report. A mortgage credit report is not the same as the consumer credit report that you can purchase online because the scoring formulas are slightly different. Credit scores are very important in determining your eligibility to purchase a home as well as figuring out which mortgage program is best for your specific situation. In most cases, the lower your credit score, the higher your interest rate will be. However, each mortgage program has a minimum credit score that they are willing to lend to. In the following section you will see what the minimums are for each program. Mortgage Programs & Credit Scores As stated before, 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 minimum credit score for a Conventional Loan is 660 but can sometimes go lower with compensating factors such as a lot of equity, large cash reserves, or a low debt ratio. FHA Loans The minimum credit score for an FHA Loan is 600 but it would require a manual underwrite which means a human will review the loan and determine the borrowers eligibility. However, anything under a 660 score will require a verification of 12 months rental history. If you have a low credit score we can help you, just call Michigan Mortgage solutions at 248-674- 6450. USDA RD Loans The minimum credit score for an RD Loan is 620. However, anything under a 660 score will require a verification of 12 months rental history. VA Loans The minimum credit score for a VA Loan is 620. However, anything under a 660 score will require a verification of 12 months rental history If you are below these minimum scores, I ve created a couple resources to help you improve your credit scores. Just visit the following website link or call Michigan Mortgage solutions at 248-674-6450. Improve your credit score here > http://michiganmortgagesolutions.com/bad-credit
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.
Step 2 - Down Payment & Transactional Mortgage Costs The Down Payment Depending on which mortgage program you qualify for, you may be required to pay a certain percentage on the purchase price as your down payment. Your down payment will be paid at close the day you purchase your home. The down payment CANNOT be covered by your sales concessions. Some loan programs require that your down payment comes from your own funds and others will allow you to receive a gift for your down payment. The down payment requirements for each loan program are below. If you put less than 20% down, you will be subject to Mortgage Insurance, also known as MIP or PMI. Mortgage Insurance is a fee paid by the borrower(s) that covers the mortgage lender against the borrowers default. Each mortgage program has different requirements when it comes to Mortgage Insurance and you can learn more about them below along with the corresponding down payment requirements. Down Payment & PMI Requirements by Mortgage Program As stated before, 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 minimum down payment for a Conventional Loan is 3% but it s quite restrictive from a credit and debt ratio perspective and that s why most borrowers put down 5% or more. Conventional loans require that you pay PMI on a monthly basis if your down payment is less than 20% of the purchase price. The PMI monthly payment will be a small percentage of your loan amount, usually between 0.27 1.1%, divided by twelve. Example You re buying a $150,000 home with a 5%, or $7,500 down payment. This leaves us with a loan amount of $142,500. We ll assume the PMI is 0.67% which would give us the following PMI Calculation; PMI = $142,500 x 0.67% = $954.75 12 = $79.56 per month The PMI percentage will be based on your credit score and your loan to value. The monthly PMI payments automatically stop when you pay your loan down to 78% of the original loan amount. Conventional loans also have strict policies when it comes to getting a gift for your down payment. These policies state that the borrower must contribute at least 5% of their own funds towards the down payment unless the gift will be for a 20%, or more, down payment.
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% = $1,809.38 12 = $150.78 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% = $600 12 = $50 per month
VA Loans There is no down payment requirements for a VA loan since this product offers 100% financing to any United States veteran. VA loans don t require a monthly Mortgage insurance but they do require something similar to upfront Mortgage Insurance which is called a Funding Fee. This VA Funding fee is 2.125% of the loan amount and it will be added to the loan and financed over the life of the mortgage. Example You re buying a $150,000 home with no down payment. This leaves us with a loan amount of $150,000. To determine the VA Funding Fee which is 2.125% of $150,000 or $3,188. This $3,188 will be financed into your loan making the total loan amount $153,188 ($150,000 + $3,188). Hopefully you now have a good understanding of the down payment and Mortgage Insurance requirements for each of the mortgage products we ve discussed. Your down payment will be paid at the mortgage closing when you complete the purchase of your home. Besides the down payment, there are several other fees and costs that get charged when completing a mortgage. In the next section we are going to discuss these costs and then eventually show you how to get the seller to cover most, if not all of them for you! Transactional Mortgage Costs & Fees Michigan Mortgage Solutions is a mortgage broker so our fee for service is typically paid by the lender that we choose to broker your loan. All mortgages have third party fees that will be the same across the board. Out of Pocket Costs Prior to Closing Earnest Money Deposit (EMD) Once you find a home that you want to put an offer on, you will usually provide the seller with an Earnest Money Deposit to show them you are serious about purchasing the home they are selling. This EMD check will usually be held by your realtor until your offer is accepted and then it will be cashed and applied towards the proceeds you ll need at close. Usually a minimum of $500 is required. Appraisal Fee - The appraisal fee is now between $400-525 and it will provide a complete report on the homes current value. This is paid prior to closing. Home Inspection - This is optional and costs between $250-450. A home inspection is when a licensed builder or inspector goes through the property and looks for any repairs that need to be made now or in the near future. Homeowners Insurance - You will be required to pay for a full year of homeowners insurance at closing. This is typically paid for on the day of closing and depending on how your purchase agreement is structured it could be covered by a sellers concession.
Third Party Closing Costs for Mortgage Transaction Title Company Fees - The title company prepares your mortgage closing package and also insures your title is clear of any liens prior to purchase. Their fees include the following; Closing fee of $500 which covers the document preparation and Notary to close loan. This fee is dependant upon which Title Company is used and that is typically determined by the seller or listing agent. Title Insurance which is a percentage of your loan amount Recording fees around $70 for recording the entire mortgage document set after closing. Lender Fees - The lender is who will be lending you the money to purchase your home and they charge an underwriting fee between $695-895 to determine that you are eligible to borrow the money. You will also be charged between $12-25 for a credit report Escrow Accounts, Tax Prorations, & The Homestead Tax Exemption Escrow Account - An escrow account is established to pay your future property taxes and homeowner insurance premium. The funding of this escrow account depends on the month you close, as well as the amount due for summer and winter property taxes and the yearly homeowner s insurance premium. Tax Prorations In the state of Michigan, we typically have a tax bill due in September as well as in February. The September tax bill covers from July of this tax year until July of next tax year. The February tax bill covers from December of this tax year until December of next tax year. Depending on which month you close in along with when your seller paid the tax bills, you may need to reimburse the seller for the taxes that he/she has already paid. This reimbursement of taxes is called a tax proration. Homestead Tax Exemption When it comes to purchasing a home, if it is a bank owned foreclosure, a second home, or a rental property, the taxes will be considered Non- Homestead. Non-Homestead Taxes are paid at a rate that is approximately 40% higher than when they are Homestead. If you purchase a home that currently has Non-Homestead taxes, you will need to qualify for the mortgage at the Non-Homestead tax rate. This means that your escrow account calculations, the tax prorations, and your debt to income ratio calculations will be based off of the Non-Homestead tax rate. For this reason it s very important for you to know if the taxes are Non-Homestead because it may limit how much you can borrow. The good news is that if you purchase the home as your primary residence, you can file for the Primary Residence Tax Exemption and get your taxes reduced to the Homestead rate. The bad news is that if you purchase your home after June 1 st, you will be paying the Non- Homestead tax rate until the following year.
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.
Step 3 Structuring Your Offer to Purchase After we pre-qualify you, we re going to provide you with a Pre-Approval letter which states how much we are willing to lend you along with which mortgage program and down payment you qualify for. You will give this Pre-Approval letter to the Realtor of your choice and then you can begin putting in offers on homes that you would like to purchase. Once you find a home that you want to purchase, you will be required to put your offer in writing in the form of a Purchase Agreement. In order to get the most out of your Purchase Agreement, it needs to be written with your best interest in mind and we re going to walk you through how to do that. Sellers Concessions Seller s concessions are where the seller is willing to forfeit a percentage of the purchase proceeds to go towards your closing costs. These concessions usually range from 3 6 % of the purchase price which can add up to a lot of money. In most cases 3% concessions is enough to cover a good portion of your costs leaving you to come up with very little at closing beyond your down payment if a down payment is required. 6% concessions would definitely cover all your mortgage related costs as well as buy down your interest rate resulting in more of your money saved. In this current housing market, I would personally try for the largest amount of concessions you can get. In fact, it s important for you to remember that when buying a home it s a negotiation. Your first offer may be rejected, it may be countered, or it may be accepted. Even if the offer is rejected or countered, you can simply make another offer. However, when you make your next offer you may have to give a little to get the seller to accept it. To help you better understand how to structure your offer with seller concessions, I m going to provide a few different scenarios for purchasing the same home. Negotiations & Writing Your Offer to Purchase For the examples below we are going to put an offer on a home that is listed for $150,000. If we offer to purchase this home for $150,000 with 6% concessions, we are actually asking the seller to accept $141,000 and give us $9,000 towards our costs. $9,000 is probably way more than what is needed to cover the costs so any leftover proceeds can go towards reducing your interest rate and saving you money on your monthly payment. However, getting a seller to give up that much of the purchase price usually doesn t happen unless they are very motivated. So that just means you may need to be a little creative with your offer if you think you need the full 6% concessions. For example, if you think the home will appraise for a little more than the asking price of $150,000, you can offer $154,000 and still ask for the 6% in concessions. This would allow the
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) 674-6450, or Toll Free at (888) 665-2630. 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!