Six Basic Mortgage Rules To Follow

Whether this is your first home or fourth, really understanding your mortgage and how it works is crucial. After all, it’ll probably be the biggest loan of your life!

What IS A Mortgage?

In the most basic sense a mortgage is a loan to buy a property. The process of securing a mortgage means lender approval based on your income, credit rating and other debt.

Understand Your Fixed Costs

Before you decide what you can—or should—spend on a mortgage it’s important to take stock of your habits and your true fixed costs. Be honest with yourself when putting together your household budget, if you’re going to be miserable without your daily premium cup of coffee, then along with your student debt and car payments, consider that a fixed cost.

Be PITH Safe

According to the CHMC (Canadian Housing & Mortgage Corporation), your monthly housing costs should be less than 32% of your gross monthly income. These are considered your PITH or Principle and Interest (of your mortgage payments), Property Tax, and Heating bills.

Get A Mortgage You Can Afford

If you pass the PITH test, the second test of what you can afford mortgage-wise is that your entire monthly debt load (car payments, credit card debt, student loans, etc) should be less than 40% of your gross monthly income. The CMHC even has a handy Mortgage Affordability Calculator on their site: cmhc.ca.

Paying Off Your Mortgage

Once you’re approved for a mortgage and buy your home (congratulations!), now you have to actually start paying off the loan. There are several factors involved in this like your interest rate, payment schedule (monthly, twice a month, every two weeks, or weekly) and your amortization period, which is the amount of time you’ve selected to pay back the mortgage (usually ranging from 15-25 years).

Picking The Right Interest RateThe interest rate at which you select to pay off your mortgage varies from “fixed”—whereby the rate will NOT change for the term of the mortgage, and is generally a bit higher but considered more stable, or “variable” whereby the interest rate can fluctuate with the current state of the market.

Finally, owning a home can truly be an amazing thing. Thankfully there are many resources out there to help make the process a smooth one like mortgage brokers and financial advisors, so remember, you’re never alone through this daunting process!

Shared from:  http://www.hgtv.ca/realestate/article/mortgage-rules/

New FHA Loan Rules

Federal Housing Administration loans look like a godsend right now. The FHA requires a down payment of only 3.5%, and it just lowered its mortgage insurance premiums by 0.5%. (You have to get mortgage insurance when your down payment is less than 20%.) It’s doing all this to attract more home buyers—especially first-timers—to the market.

Before you hop on the government loan bandwagon, know this: FHA loans aren’t for everyone. There are several things you should consider before applying for one. 

Limited loan amounts and types

FHA loans can be quite modest. In most areas, the limit is $417,000. In certain high-cost areas, the limit is $625,000. Depending on where you live, that might not get you the spacious house you’ve been dreaming about.

Credit requirements

To take advantage of the FHA’s low 3.5% down payment, you’ll need a credit score of at least 580. The official minimum for an FHA loan is 500, although borrowers with a score below 580 will need to fork over a 10% down payment.

While you’ll have an easier time getting an FHA loan with a low credit score, it usually means higher interest rates. But since the FHA backs these loans, you’ll get better rates with a poor score than you would with a conventional mortgage. However, it’s often just better to wait and boost your score instead of paying thousands more over the life of the loan.

Some lenders won’t lend to those with scores below a certain threshold, like 620. Others might change their requirements to adhere to a changing market, which is what Wells Fargo recently did when it lowered its FHA credit requirements from 640 to 600.

A life sentence of mortgage insurance

FHA borrowers are required to pay an upfront mortgage insurance premium (MIP). Currently, the fee is 1.75%. This fee is usually rolled into the total cost of the mortgage.

Additionally, FHA borrowers have to pay annual mortgage insurance. For most loans, this mortgage insurance remains throughout the life of the loan—you will need to refinance out of an FHA loan to get rid of it. In contrast, you can stop paying mortgage insurance on conventional loans after acquiring 20% equity. In January 2015, the FHA reduced its annual MIP rates to 0.85%.

Remember: The MIP rate you get at the time of your loan is the one you’re stuck with unless you refinance. If you had closed on a mortgage in December 2014 with MIP rates at 1.35%, your premiums would stay the same in January 2015 despite the reduction.

Fewer lenders

While many lenders are FHA-approved, not all are. This means you may have a smaller selection when it comes to finding an FHA-approved lender in your area. However, you should not have too difficult a time finding at least two to compare.

Stricter appraisal requirements

FHA appraisal guidelines are more rigid than those for conventional loans, and not all houses will get the green light for FHA approval. Usually this means the home needs some kind of repairs. If the seller isn’t willing to make them, then there’s no FHA loan for that property in your future.

Don’t limit your choice

If your credit is good and your payment history is solid, you should first look into a nongovernment-backed loan, if only for comparison. Many loans not backed by the FHA have more flexible terms, and lenders have a wider variety of options when they don’t have to adhere to certain government rules.

Reposted from:  http://www.realtor.com/advice/new-rules-make-fha-loans-look-tempting-theyre-not-everyone/