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What are the advantages of a Home Purchase?

A home purchase gives you personal benefits such as a sense of investing in your community.  You’ll also feel pride for achieving the great American dream of homeownership.  However, there are some strong financial benefits as well.

One of the largest benefits of a home purchase is the tax savings you’ll receive.  Interest payments on a home mortgage are typically tax deductible (consult your tax advisor for more information).  As you continue to make home mortgage payments, you’ll build home equity, as opposed to paying rent into somebody else’s pocket.

As your home equity increases, you can borrow against this amount to:

  • Make home improvements
  • Pay for college
  • Pay off debts
  • Take a vacation

With today’s low or no down payment options, a home purchase may be easier than you may think.

Will I have to pay PMI?

You’ll need to pay Private Mortgage Insurance (PMI) if your loan exceeds an 80 percent loan-to-value (LTV).  If you put less than 20 percent down payment on your purchase loan, you’ll likely be required to pay mortgage insurance until your LTV reaches 80 percent or less.

What are discount points?

Discount points let you lower the interest rate on your home loan.  One discount point equals 1% of the total loan amount.

How do I know if it’s best to lock in my interest rate or to let it float?

Mortgage interest rate movements are as hard to predict as the stock market and no one can really know for certain whether they will go up or down.  If you have a hunch that rates are on an upward trend then you may want to consider locking the rate as soon as you are able.  Before you decide to lock, make sure that your loan can close within the lock in period.  It will not do any good to lock your rate if you can not close during the rate lock period.

What will an underwriter look for?

Underwriters work for the lender and must decide to approve your loan – or not.  They will evaluate your loan application and documentation to see if your criteria meet the minimum guidelines for the specific loan program you are requesting.

In general they will look at three general areas:

Your Income and Employment

Underwriters will naturally ask, “How will this borrower repay this loan?  What is the source of income?”  For those employed by someone else, the old way of doing this was to mail a “Verification of Employment” to your employer.  When your employer had verified all the pertinent information, such as how long you have worked there, what you currently earn as a base income, how much you make typically in bonuses or commissions, and how likely it is that you will continue to be employed there.  Today we may still do that but we have alternatives too.  We can provide your last two years W-2 statements and tax returns, and your most recent paystubs covering a minimum of 30 days showing you are still employed.  This is called “alternative documentation” and is much faster than waiting for the US Postal Service and your employer who may or may not be cooperative.

Your Assets

In the case of a purchase, you obviously must have sufficient cash to actually close the deal.  Cash means money in bank accounts, of course, but also any other liquid assets such as stocks, bonds, mutual funds, etc.  In addition to enough for the proposed down payment and closing costs, you must also have some reserves.  This will vary by the lender, but as a conservative rule-of-thumb- you should have at least three months gross income in reserves when the deal is closed.  They will also want to document less liquid assets, such as life insurance policies, retirement plans, real estate, businesses owned, automobiles, and personal assets.  You are not obligated to disclose or document everything, only those assets you want considered to induce the lender to make the loan.

What they are looking for:  Sufficient assets to cover contingencies.  If you lost your job tomorrow, would you default on all your debt the next day, or can you carry yourself for a while?

Your Credit History

The lender wants to know about your current obligations and the payments you must make each month.  They also run your credit report to see how well you have handled your debt in the past.  Lenders are coming to realize that how well you have paid your obligations in the past is a better indicator of their safety than any other criterion they may consider.

What they are looking for:  Is the amount of proposed total debt reasonable for your income and lifestyle?  Have you somehow found a way to pay all your obligations in the past no matter what?

What documents will I need to provide with my application?

When you apply for a loan you’re often asked to provide income documents (paystubs, W-2’s, tax returns), bank account statements and a purchase agreement if you are buying a home.

 What is a credit score and how does it affect my application?

A credit score is one of the pieces of information that Hamilton Bank uses to evaluate your application.  Credit scores are based on information collected by credit bureaus and information reported each month by your creditors about the balances you owe and the timing of your payments.

A credit score is a compilation of all this information converted into a number that helps a lender determine the likelihood that you will repay the loan on schedule.  The credit score is calculated by the credit bureau, not by the lender.  Credit scores are calculated by comparing your credit history with millions of other consumers.  They have proven to be a very effective way of determining credit worthiness.

Some of the things that affect your credit score include your payment history, your outstanding obligations, the length of time you have had outstanding credit, they types of credit you use and the number of inquiries that have been made about your credit history in the recent past.

Credit scores used for mortgage loan decisions range from approximately 300 to 900.  Generally, the higher your credit score, the lower the risk that your payments will not be paid as agreed.  Using credit scores to evaluate your credit history allow Hamilton Bank to quickly and objectively evaluate your credit history when reviewing your loan application.  However, there are many other factors when making a loan decision and we never evaluate an application without looking at the total financial picture of the customer.

 Does the inquiry about my credit affect my credit score?

An abundance of credit inquiries can sometimes affect your credit scores since it may indicate that your use of credit is increasing.  But don’t overreact.  The data used to calculate your credit score does not include any mortgage or auto loan credit inquiries that are made within the 30 days prior to the score being calculated.  In addition, all mortgage inquiries made in any 14-day period are always considered one inquiry.  So, don’t limit your mortgage shopping for fear of the effect on your credit score.

Do I need a home inspection AND an appraisal if I am purchasing a home?

Both a home inspection and an appraisal are designed to protect you against potential issues with your new home.  Although they have totally different purposes, it makes the most sense to rely on each to help confirm that you have found the perfect home.

The appraiser will make note of obvious construction problems such as termite damage, dry rot or leaking roofs or basements.  Other obvious interior or exterior damage that could affect the salability of the property will also be reported.

However, appraisers are not construction experts and won’t find or report items that are not obvious.  They won’t turn on every light switch, run every faucet or inspect the attic or mechanicals.  That’s where the home inspector comes in.  They generally perform a detailed inspection and can educate you about possible concerns or defects with the home.

Accompany the inspector during the home inspection.  This is your opportunity to gain knowledge of major systems, appliances and fixtures, learn maintenance schedules and tips and to ask questions about the condition of the home.

What is an escrow account?

An escrow account is an account set up by a lender to hold funds that are set aside for the payment of property taxes and insurance.  In addition to the principal and interest payment on your mortgage loan, you may elect -or be required-  to put aside additional finds each month in an escrow account to pay for property taxes and mortgage and hazard insurance.  The lender holds the money in an escrow account and makes the payments from the account when they are due.

Will I need hazard/homeowners insurance?

As a condition of your loan, you will need hazard insurance.  If your property is located in a special flood hazard area, you may need additional flood insurance as well.  Please contact your insurance professional for further information.

Can I make my monthly payments with an automated debit from my checking account?

Automated monthly payments are available.  At the loan closing an automated payment application will be provided.  Simply return it at your earliest convenience to enroll in the automated payment program.  You can also schedule automatic payments on line through Hamilton Bank.

Can’t find the answer to your question here? Call us at 410-823-4510 for personal service from a mortgage professional.

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