Preparing for Home Ownership

An in-depth guide to purchasing

your first home

Office: 302.422.4414 Fax 302.422.4494 www.TheMortgageMarketofDelaware.com

Preparing for Home Ownership

Buying a home is probably the single most important decision a person will ever make during their lifetime. It can be a time of intense emotion. Educating yourself about home buying in general, understanding the process and the terminology, and familiarizing yourself with the local real estate market can mean the difference between an informed customer and an overwhelmed home buyer.

The purpose of this seminar is to provide you with the information and knowledge to demystify the home buying process in order to allow you to make the best decision for you and your family.

How Much Can I Afford?

Few things are more frustrating than falling in love with a house only to discover that it is not in your price range. But, how do you know what you can afford? By knowing how much money can qualify to borrow.– Check your credit report– Calculate how much of a monthly payment you’re

comfortable paying. You may qualify for a loan amount that would require a higher monthly payment than you’d like to pay.

– Get pre-qualified by visiting one of our Home Loan Advisors here at The Mortgage Market of Delaware or call us at 302.422.4414

Checking Your Credit Report

There are three main credit reporting agencies. On a yearly basis, you are entitled to one free credit report from each of the reporting agencies. In addition, if you have been denied credit, you can request your credit report within 30 days of denial.– Equifax- P.O. Box 105069, Atlanta, GA 30348

(800) 685-1111 or www.econsumer.equifax.com– Experian- P.O. Box 2104, Allen, TX 75013

(888) 397-3742 or www.experian.com/product/consumer/online.com

– TransUnion- P.O. Box 1000, Chester, PA 19022(800) 888-4213 or www.transunion.com/CreditReport

Figuring Your Housing Budget

Generally, lenders figure that the home buyer shouldn’t pay more than 32% of gross income for P.I.T.I. (principal, interest, taxes, and insurance) or 40% for both P.I.T.I. and monthly debts combined. This might be a little more or a little less depending on other outstanding long-term debts (more than 10 months), alimony/child support payments, and other household budget items.

The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying two basic formulas for loan application that lenders use to estimate your debt to income. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payments remain the same.

Formulas to Calculate Debt-to-Income

32% Formula

Total Mortgage PaymentGross Monthly Income = 32% DTI

40% Formula

PITI + All Monthly DebtsGross Monthly Income = 40% (or less) DTI

To figure your housing budget, simply multiple your gross monthly income (before taxes) by 32% and 40%. For example, a family with a monthly income of $3,500 might qualify for a mortgage with monthly payments up to $1,120.

I’m Ready to be a Home Owner

You know that buying a house is the right step for you. Congratulations! The first step toward buying a house is to sit down and plan. We call it “Pre-Qualifying”. Simply, its determining how much house you can afford to purchase. Knowing your affordable price range will bring your house hunting into focus. The Mortgage Market of Delaware can pre-qualify you for a home loan, allowing you the opportunity to effectively shop for a home.

How Much Can I Afford?

How much house you can afford to buy depends on two things: how much you can afford for the monthly housing payment, and how much you can invest in the down payment. Monthly payments include principal and interest on the home loan, property taxes, and insurance against fire and other hazards. These four costs are often abbreviated P.I.T.I. Your monthly housing costs may also include homeowner association dues, condominium fees, and mortgage insurance.

Qualifying

In today’s market, an “affordable” home is not so much determined by sales prices as it is by the financing which translates into a monthly payment. This is where your housing budget comes in- even though you may qualify to buy a more expensive home, make sure the monthly payment makes sense to you and allows you to save for those rainy day repairs. The rule of thumb is that your monthly payment should not be more than 32% of your gross monthly income.

The Mortgage Market Offers:- Conventional Home Loans- No Income/No Asset- Stated Income/Stated Asset- 100% Financing- VA Loans- Construction Loans- Bridge Loans- Interest Only- Jumbo Loans- 15 Year, 30 Year, & 40 Year Fixed Loans- Second Mortgages- Subprime Loans- Lines of Credit

Documents You Might Need to Provide

• Bank statements from the last 2 months. It is important to the lender to see how you’ve been moving money around. If you made any big deposits in that period from sale of stocks or personal possessions, be prepared to provide documentation.

• Documentation of funds- this could include any statements from your 401k account or money market funds.

• Recent paycheck stubs (2)- This will show that you haven’t taken any advances on your pay and are getting paid what you said you were.

• Offer letter- If you are relocating to a new location and/or job, have a copy of the offer letter, plus a letter stating you’ve begun work at that location. Your salary needs to be included in the letter.

• Tax Returns & W-2s- Have your tax returns and W-2s from the past 2 years handy.• Employer’s Address & Phone Number- We need this for employment verification.• Landlord’s Name & Phone Number- If you have been renting, we need this information

for rental history verification.• A copy of the fully executed sales agreement signed by all parties for the house you

are purchasing.

Private Mortgage Insurance Explained

Private Mortgage Insurance (PMI) is a type of financial guarantee that helps protect the lender against losses that can occur upon foreclosure. Mortgage insurance is typically required for loans with less than 20% down payment. With this protection, your lender is able to offer mortgage loans with a smaller down payment. You will simply pay an additional amount for PMI in your monthly payment.

The amount you pay for PMI is largely affected by your credit score. A minimum credit score of 620 will ensure an optimum PMI payment.

Understanding Your Credit Score- What is a credit score?

A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.

- How are credit scores calculated?Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don’t necessarily use the same scoring software, so don’t be surprised if you discover that the credit scores they generate for you are different.

Which parts of a credit history are important?

The percentages below show a breakdown of approximate value that each aspect of your credit report adds to a credit score calculation.

35% Your Payment History30% The Amounts You Owe15% Length of Your Credit History10% Types of Credit Used10% New Credit

Your Payment History Includes:

• The number of accounts paid as agreed• Negative public records or collections• Delinquent accounts:– Total number of past due items– How long you’ve been past due– How long its been since you had a past due

payment

What You Owe:

• How much you owe on accounts and the types of accounts with balances

• How much of your revolving credit lines you’ve used- looking for indications you are over-extended

• Amounts you owe on installation loan accounts vs. their original balances- to make sure you are paying them down consistently

• Number of zero balance accounts

Length of Credit History

• Total length of time tracked by your credit report

• Length of time since accounts were opened• Time that has passed since the last activity• The longer your (good) history, the better your

scores

Types of Credit

• Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)

• A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards).

Your New Credit:

• Number of accounts you’ve recently opened and the proportion of new accounts to total accounts

• Number of recent credit inquiries• The time that has passed since recent inquiries or

newly-opened accounts• If you’ve re-established a positive credit history

after encountering payment problems• In general, checking to make sure you aren’t

attempting to open numerous new accounts

What’s a Good Credit Score

Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.

Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don’t be discouraged if your scores are lower, because there’s a mortgage product for nearly everyone.

Nine Ways to Improve Your Credit• Review your credit report carefully. Correct any significant errors.• Pay your bills on time.• Don’t open a lot of new accounts over a short time period, especially if you have a

short credit history.• Shop for credit over a short period of time. FICO scores distinguish between

searching for credit for a specific loan and searching for lots of different credit lines.• If you have questionable credit history, open a few new credit accounts, use them

responsibly, and pay them off on time.• Don’t open credit accounts you don’t intend to use.• A credit card or installment loan can raise your score as long as you don’t have too

high a balance and you pay it off in a timely manner.• Keep your balance low in relation to your available credit. If your credit limit is

$10,000, keeping your balance below $5,000 (50%) will improve your score.• If you pay off your credit card debt, do not close the account because it can change

the ratio of your total credit card balances to your total available credit lines.

Setting Aside “Reserves”

One of the most important things you can do to prepare to buy a home is to set aside money for “reserves”. Lenders prefer to see two months of reserves for those “just-in-case” times.

Two months of reserves is equal to 2 mortgage payments.

Rental History

Lenders require a rental history with no 30-day late payments in the last 12 months.

Establish a Realtor Relationship

Finding a Realtor you can trust is also a key element in preparing for home ownership. You should find a buyer’s agent who will work solely for you and your best interests.

What’s the difference between a seller’s agent, a buyer’s agent, and a dual agent?

Questions & Answers

Contacting The Mortgage Market of Delaware

Main Office- 302.422.4414

Chris Moore- 302.422.4746

JoAnn Moore- 302.422.4124

Chad Moore- 302.422.4303

Andrea Moore- 302.422.4669