Author: erick.merced

For many people, especially first-time homebuyers, it can be quite challenging to come up with a 20 percent down payment to purchase a home. Luckily, when it comes to Conventional loans, there is a solution: private mortgage insurance, or PMI.

When putting down less than 20 percent of the appraised home value or sale price, a homebuyer is typically required to carry PMI. Should a homebuyer default on their loan, the lender will still receive payments for the home.

And, although PMI does protect the lender, it also benefits the homebuyer by allowing them to purchase a home without having to save up a significant amount of money to put towards the down payment. For many buyers who want to get into a new home quickly, being required to have PMI is worth it.

How much does PMI cost?

The cost of PMI varies depending on the lender, but is usually established by the insurance company, and based on the following criteria:

• Loan amount
• Terms of loan
• Loan-to-value ratio
• Type of loan
• Credit score

Credit scores affect PMI premiums significantly, which when paid in monthly installments can range from 0.2% to over 1% of the loan amount. For example, if the PMI factor is found to be .5% for a particular loan based on the criteria above, you would simply multiply that factor times the loan amount and divide by 12 to get the monthly PMI payment. For a $165,000 loan, it would be 165,000 x .005 / 12 = $68.75 per month.

How is PMI paid?

There are several ways to pay for PMI including in a single premium plan, monthly, or annually, so it is important to ask your lender which options they offer to select one that works best for you.

How long are you required to have PMI?

After you have paid off 22 percent of your home, your PMI will fall off, but you can opt-out once you have paid off at least 20 percent, if you can demonstrate through an updated appraisal that the value is sufficient to warrant the PMI removal. By law, a lender must cancel your PMI once you have paid down 78 percent of the home’s original amount.

Do other loan types have PMI?

While PMI is a term that is related to Conventional loans, other types of lending have their own version of protections for the lender, which benefits the customer with a lower down payment requirement.  For FHA loans, it is called the Mortgage Insurance Premium (or MIP) and allows you to get a loan with as little as 3.5% down.  VA loans have a Funding Fee and USDA loans have a Guaranty Fee.  These fees allow each program to provide a 0% down payment option to borrowers.

Want to know if you qualify?

If you are looking to purchase a new home, let our team of experts help get you the financing you need. For over 20 years, we have assisted thousands of customers with their home buying process. We are committed to finding the right mortgage product to suit your needs and to help make your experience as pleasant as possible. For more information or to request a free consultation, please call Butler Mortgage at 407-931-3800.

As you’re going through the process of purchasing a home, you will undoubtedly come across the terms “mortgage pre-qualification” or “mortgage pre-approval” or maybe even both. What does it mean to be pre-qualified or pre-approved, and what’s the difference between them?

Similarities Between Pre-Qualification and Pre-Approval

According to the Consumer Finance Protection Bureau, pre-qualification and pre-approval are more similar than many think. Some lenders even use the terms interchangeably, while others have different definitions for each.

• Both are useful tools for estimating the loan amount for which you can qualify. Though it isn’t an exact figure, it can save on the frustration of finding a house you love, only to realize it is out of your budget down the road.
• If you have a pre-qualification or pre-approval letter, it shows sellers that you are serious when submitting your offer. A seller wants to be confident that you are able to secure financing when they accept your offer, and a pre-approval or pre-qualification letter helps you stand out and demonstrates that you are likely to be approved for a mortgage in the amount that you’ve offered.
• Neither one guarantees you will receive a loan from a lender. A decision maker, called an Underwriter, will ultimately review all of your documentation and decide whether you are qualified.  However, a Loan Officer who has experience, and works for a reputable lender, will usually have a very good “batting average” in issuing these items.

The Differences Between Pre-Qualification and Pre-Approval

Pre-qualification is often the first step in the mortgage process, and is fairly easy to attain by verbally communicating your income and asset information to a lender.  The lender will then run some calculations, along with pulling your credit report, to determine whether you would qualify for a loan and for how much.

A pre-approval is very similar, but instead of verbally telling the lender about your financial situation, you provide actual documentation evidencing your income (paystubs, W2’s, tax returns) and assets (bank statements, 401K statements, etc.).  By providing such documentation, you increase the chances that a Loan Officer’s assessment will match that of the Underwriter.

Which One Do You Need?

Since the terms vary in definition by lender, and are used interchangeably in some situations, it can be hard to know which one is right for you. It ultimately depends on how your lender defines each term and whether you want to go so far as to provide pertinent documentation to your lender early in the process. Talk to your lender and real estate agent to figure out which best suits your situation.

We understand that financing a home can be a daunting task, but the experts here at Butler Mortgage are here to help. Our Loan Officers will do everything possible to make your mortgage experience as painless as possible, so you can spend less time worrying, and more time enjoying your home. Call us today at 407-931-3800 with any questions.

Having multiple jobs is common these days, but lenders have some rules when it comes to income that qualifies to be used for a mortgage. Lenders accept most income sources that people typically have, but how they calculate it, and what documentation they will need varies based on the source, length, and amount of income.

Income Needs to Be Stable

Mortgage lenders look at three major factors when considering a person’s income:

• The consistency of the income
• How long the income has been received by the borrower
• The likelihood that the income will continue in the future

These considerations are easier to assess with certain incomes than others. Here is how mortgage lenders look at various sources of income:

Employment Income

This is income received through salary or wages when employed by somebody else. Lenders typically prove this income through a combination of recent pay stubs, W-2s, and written or verbal verification of employment from your employer. Additionally, your lender will also be looking to verify your job title, length of employment, and how likely it is for your employment to continue.

Lenders will typically look for a two-year employment history, though less may be acceptable if you are new to the workforce.

Self-Employment Income

For self-employment, lenders typically require that you’ve been doing so for at least two years. Verification comes via copies of income tax returns and often requires a copy of a business license or verification of the length of your self-employment with your CPA.

Income will generally be averaged over the most recent two years, and adjustments will be made such as adding back depreciation expense, since it is not an actual cash expense.

Your lender will be looking for a pattern of stable or increasing earnings over time. If your income in year two is marginally lower than that of year one, your lender may still qualify you based on the lower amount. If your loan is considered high risk because of substantially declining income, you may not be qualified at all.

Rental Income

As with other incomes, your lender will typically need two-years of history to use rental income. This will be your net income, which is the gross rent, minus the expenses of owning the property. As with self-employment, non-cash expenses like depreciation will be added back.

If there is a loss on your rental properties, that shortfall will be calculated on a monthly basis and added to your long-term debt in order to calculate your debt-to-income ratios.

Investment Income

The rules for using investment income are sometimes more confusing than with other income types. Lenders typically require the following to consider investment income:

• A two-year track record of receiving investment income
• An investment asset portfolio sufficient to support the claimed income
• Income tax returns from the past two years, and financial statements proving the value of your investments.

Secondary Income Sources

This covers a range of different income sources, with the two most common being part-time jobs and side businesses.

In the case of a part-time job, your lender will typically look at a two-year history in which you held both your full-time position and your second job. They will average your income over the past two years, supported by pay stubs and W-2s.

Side businesses are considered much like full-time self-employment. The lender is looking to verify that you have maintained a side business that has been profitable for at least the last two years. You will be required to produce tax returns complete with Schedule C, verifying your income.

If you’re applying for a mortgage, it is smart to volunteer any income sources that you have. Your lender will let you know if it is acceptable for qualification, and will walk you through the steps of verifying the income.

We understand that financing a home can be a daunting task, but the experts here at Butler Mortgage are here to help. Our Loan Officers will do everything possible to make your mortgage experience as painless as possible, so you can spend less time worrying, and more time enjoying your home. Call us today at 407-931-3800 with any questions.