Diane Beaumont of Benchmark Mortgage answers your top lending questions.
Diane Beaumont
Branch Manager, Benchmark Mortgage
719.337.6483
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Q. How should a buyer best determine their budget for a mortgage? Aside from principal loan, what other fees/payments are factored into a mortgage?
A buyer should set up a consultation with a lender. The lender will go thru income sources, liabilities you currently have, assets available to utilize as a down payment, and credit worthiness. The lender should also discuss what your immediate goals are, as well as long-term goals. Once that information is gathered, the loan officer will give you a general range that you qualify for which will enable you to begin shopping for your home confidently, knowing that you will qualify in the price range you are looking at. Other than your principal and interest payment, which pays off the amount you borrowed, taxes, hazard insurance and homeowners association dues are included to determine your maximum purchase price.
Q. How do you determine the best type of loan for a buyer? What are the main differences between loan types?
There are a few key types of loans, with variations within each one.
- FHA – this is a loan insured by HUD. It’s commonly used for first-time home buyers, buyers with less than perfect credit, and/or borrowers with a lower down payment. There are limits on the loan amount depending on the county you are buying in.
- USDA – this loan is also a government insured loan. It has very strict guidelines including property location, income, credit, debt-to-income ratio, etc. If you qualify for USDA, it does allow you to purchase with 0 down.
- VA – this loan is available for Veterans. If you are a Veteran and will be occupying the property as your principal place of residence, it will typically be the best option. There is no limit on the loan amount if you have full eligibility and the rate is usually a bit lower. You can finance 100% of the loan amount. There will be a funding fee that is paid to the Veterans Administration. This amount will vary from 1.25% to 3.3% depending on your circumstance. If you have any VA disability the fee is waived.
- Conventional – This is the loan used if you are purchasing either an owner-occupied, second home, or investment property. The rate is directly tied to credit score and down payment.
- ALT doc – These loans have a higher rate but will allow for alternate forms of documentation that may not fit in any of the boxes above. Examples would be bank statements showing deposits to determine income as opposed to tax returns.
- Reverse mortgage for purchase. This allows buyers over 62 to utilize a reverse mortgage. This is good if you are selling a home with equity and wanting to purchase utilizing that equity but need a loan for the difference. This will allow you not to have a monthly mortgage payment. This is a strategic way to maximize your retirement income.
Q. What options do you suggest for first-time homebuyers?
Typically FHA, VA, or USDA; however, if credit is high and well established there a some great conventional, low down payment products that have a lower mortgage insurance and/or assistance with some of the costs. There are restrictions to these including whether you have owned a home and/or income limits etc.
Q. What credit and income qualifications are required?
This will vary greatly, so it’s important to work with a loan officer that knows and understands the guidelines. There are circumstances where a low credit score will not prohibit you from getting a loan if there were circumstances beyond your control that caused the low score. Length of time past a derogatory event, such as foreclosure or bankruptcy, will vary depending on the loan product. Debt to income ratio allowed will vary also with each loan type but will directly affect the amount of the loan you qualify for.
Q. What are included in closing costs? How are these calculated and are they negotiable?
There are 4 main categories of fees associated with a home purchase. Some are negotiable and some are not.
- Lender fees and points. Some of these are hard fixed costs that a lender will be required to pay in order to close your loan, such as appraisal, cost of a credit report, employment verifications, processing, and underwriting to name a few. Points and fixed origination charges can be negotiated. They are directly tied to the rate. Every circumstance is different which is why it’s important to work with a lender that you trust to have your best interest in mind. There may be circumstances where a buyer will only have this loan for a short period of time which may be 2 years or less. In this case it will be advantageous to have a little higher rate and less upfront costs. There are also circumstances where a permanent or temporary buydown may be used. This will make the costs high but the rate and monthly payment lower.
- Title and recording fees. These are fixed costs that are charged to both the buyer and seller. The title company is used to protect both the buyer and the seller as a non-biased intermediary to assure the buyer takes title to a property free of any liens or encumbrances, and the funds are paid to the seller upon transfer of title. Recording fees are paid to the county to record the new owner of record and release any liens from title. These costs can vary slightly depending on title companies but overall they are consistent across the industry.
- Escrows and prepaids. These items cannot be negotiated. They consist of taxes, insurance and prepaid interest.
- Property taxes are prorated and settled and closing with the seller being charged for the taxes while they owned the home. If your mortgage has escrows the lender will establish the escrow account and will vary depending on the time of the year that you close.
- Insurance – You will choose the homeowners insurance and agent you want to use to insure your property. The first year will be collected and paid at closing. If your loan has escrows the lender will establish a cushion in the escrow account. A portion of your monthly payment will also go into the escrow account so when the bill comes due next year the lender has the funds to be able to pay.
- Prepaid interest – A daily interest per diem is calculated based on the loan amount an interest rate. This will vary depending on your closing date. Interest will be collected from the day of closing through month end to get you on the standard billing cycle.
- Mortgage insurance. This charge only occurs if you have less than 20% down.
- Real estate costs. There are a number of different costs directly associated with the property you are purchasing. Some examples are HOA transfer costs, propane prorations, a survey if required, etc. These are costs that would be paid whether you have a mortgage or are paying cash.
.Q. What are current interest rates Benchmark is offering? What are current APR’s? How are these calculated? Do they change over the course of the loan?
Interest rates are constantly changing based on market factors. These include the state of the economy, inflation, Federal Reserve policy, and investor sentiment. The rate needs to be high enough to convince investors to use mortgage-backed securities/bonds in their portfolio. In addition, many personal factors contribute to your rate. Credit score, down payment amount, how much debt you have compared to income, loan amount, and property type can all play a large role in the rate for each particular loan. Whether the property is an investment, second home, or primary residence will also make a difference. The loan type also has an impact. For example, VA and FHA may offer lower rates but higher upfront or monthly costs. Recently the fixed rate mortgage has been the best mortgage option. The rate does not change over the course of the loan unless you have choses and adjustable rate mortgage. Currently the rates for adjustable have not been attractive but that could change in future markets. The APR takes into account any origination fees, discount points, mortgage insurance, and some closing costs to show the total cost of a mortgage over the term of the loan.
Q. What are your predictions on interest rates over the next year?
We expect interest rates to have a slight decline in the next 12 months. If we do see a significant decrease, the market is expected to react with increased interest in purchasing and higher sales prices. The interest rate is one factor, but the purchase price could be more attractive in a higher interest rate environment. A future refinance could lower your interest rate but getting the best purchase price will never change.
Q. What are your top suggestions to best prepare for purchasing a home for someone hoping to buy?
Prequalify with a relationship lender. It is important to talk to a lender early to help you to identify challenges and to assist in making a long term plan to allow you to meet your financial homeownership goals.
Q. Are there any assistance programs available for Gunnison County residents?
Colorado Housing and Finance Authority (CHFA) offers a down payment assistance grant. It has very strict guidelines, including property location, income, credit and debt to income ratio. If you qualify, the grant is only repaid if you sell the property. We also have an inhouse program that is a combination first and second that helps with down payment. USDA which is 100% financing and VA are also available in Gunnison County.
Q. Does BM offer an interest rate lock? What is the fee?
Generally interest rates are locked once you are under contract to purchase. Rate locks between 30 and 60 days do not have an upfront fee. If you want to do an extended rate lock for months out there is an upfront fee to do that, but it is available.