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Mortgage Appraisals and How They Affect the Home Loan Process

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When a bank is offering you a mortgage, it needs to secure the property you are buying incase you are not able to meet future payments as defined in the payment schedule. For this purpose, banks or mortgage brokers appraise the property in question to determine the appropriate loan amount they can offer basedon its fair market value. Although mortgage appraisal is part of the lending process, this fee is paid by the customer either up front or incorporated in the loan interest rate.

How Do Banks Choose An Appraiser?

Federal Housing Administration requires that banks hold no affiliation with the appraising professionals. For this purpose, banks usually hire mortgage appraisalcompanies that have a panel of appraisal experts who are certified by theState and Federal regulatory bodies to provide an unbiased appraisal value of the property being lent out to the customer. Borrowers and lenders both have their interest in the appraised value of the property. However, the lender needs to ensure that the loan they are offering to the customer can be recovered by selling the property in case the customer defaults.

How Do Mortgage Appraisers Work?

Mentioned below are some steps involved in the mortgage appraisal process.

1.      Appraisal And Inspection Are Two Different Things

Many people may confuse appraisal with the inspection process. However, both are different in the sense that whilethe inspection officer will tell the buyer the condition ofthe house that they are looking forward to buying and what kind of repair it would require. later on, the appraisal report will highlight how much the home is worth based on its current condition and surrounding market.

2.      How Is The Appraisal Value Determined?

To determine the fair value of the propertyd, the appraiser will consider the following points:

  • Comparable properties in the neighborhood and their selling value
  • How old the house is and its current condition
  • Property location and surrounding areas
  • Size and features such as sq-footage and number of bedrooms and bathrooms
  • Structural improvements such as additions to living space including toilets
  • Additional features and amenities including wood flooring, swimming pool and the like

3.      Submission Of The Appraisal Report

Once the appraisal process is complete, an appraisal report is submitted to the Bank. By law, the lender needs to provide the final report to the buyer three days before the closing date. The most common type of appraisal report is called Uniform Residential Appraisal report or URAR, and it includes a complete analysis of the appraised property and how the appraiser concluded the fair value of the house that the customer is willing to buy.

How Are Mortgage And Tax Appraisals Different?

Tax appraisal is usually done by a local government body such as local municipality, city or county to assess the Property Tax levied onhomeowners. The tax amount collected is used for community schools, public safety,and other welfare services. Tax appraisers usually use data from previous years or personally visit the property to appraise its tax value. On the other hand, a mortgage appraiser considers the fair market value of a property in case it needs to be sold to recover the customer’s default amount.

How Does Property Appraisal Affect The Mortgage Process?

Appraisal value can affect a mortgage loan in many different ways including how interest rate and LTV( Loan to Value)is being calculated for the offered loan. A high appraised value may result in a low LTV which is less risky for the bank and can reduce mortgage rate for the customer.

The time it takes to disburse the loan–Since lenders such as banks hire appraisal companies that have mortgage appraisers on their payroll, it dependson how long they take to assess the market value of the property being mortgaged. If you are lucky and the appraiser is familiar with the local area where the property is located, the process will be quick and easy. This will reduce the overall time required to acquire a mortgage facility.

Asking price is higher than the appraised value of the property–If you are interested in a property being mortgagedthrougha bankand the appraisal value comes out to be too low, the lender might not offer you the loan suggesting the deal is too risky to recover the full amount in case of default.

How To Argue An Appraisal?

1.      Dig Deeper Into Comparative Sales

If you want to challenge an appraiser, you need to give them a substantial reason rather than just suggesting that they are wrong. Try to look for missing comparisons, a property that was not listed on websites such as Zillow could have been sold for a higher price but missed by the appraiser. Such deals may help in revising your appraisal to a higher value.

2.      Notice The Upgrades That Were Missed During The Appraisal

While appraising the property, the appraiser may not have a chance to ask the owner if any new features were added to the house such as tiled floors, renovated kitchen and the like. If you find these things missing in the report, then do not hesitate to point them out as they can increase the fair market value of your property.

3.      Look Carefully Into The School District

Many properties have higher values because of their school district. If your house is located in an area famous for its schools, then this could be an important point in raising the value of your property.Also, see if the properties used by the appraiser to determine the market value belonged to the same school district.

Mortgage appraisal is an essential part of the home lending process. By being thorough and vigilant during thistime, potential buyers can acquire the property at a lower interest rate while making minimal or zero out of pocket payments to the current homeowner.

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PITI – What Is It and How to Estimate It Yourself

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PITI, or “Pity”, is a sum of mortgage payments that include the principal amount, Interest on the loan, property tax, and insurance premiums. PITI helps lenders calculate a loan applicant’s ability to pay their mortgage payments based on the income level. Using PITI, lending institutions, such as banks, decide on how much loan amount they can offer to an applicant. Lenders also use PITI to create a reserve requirement as well. This is a multiple of PITI, which the lender keeps as a deposit. They use it to cover any shortages, if the borrower faces financial hardship and defaults on their monthly payment.

Breaking It Down

Breaking PITI down into its individual components helps us understand the term better and realize why each element is important in a mortgage payment calculation.

Principal

This is the base amount that you borrow from your bank to finance the new property you require. Your monthly payment doesn’t depend only on the principal amount. Principal will only make part of it while other portions will include interest, taxes, and insurance premiums.

Interest

When a lender such as a bank or any other financial institution offers you a loan, they are losing out on an opportunity to invest that amount somewhere else. To cater to this opportunity cost, the bank will charge you an interest on your loan amount. Most banks want to recover maximum interest during the beginning of the loan tenure. Hence, interest amount forms a major chunk of initial mortgage payments.

Taxes

The amount of PITI can vary based on the tax rate and assessed value of the property being financed. Some of the elements that determine your property tax include:

  • The state in which your property is located
  • Local tax assessor who comes to assess the value of property being financed
  • Market value of the property and its surrounding areas

The property tax is calculated by applying your local county tax rate on the assessed value of the property. After the principal and interest amount, property tax is the major contributor to the PITI amount.

Insurance

Just like property tax, home insurance is another variable that plays an important role in raising or lowering your PITI. The type and amount of home insurance you have to pay for depends on two factors:

  • The area you would like to live in
  • How much down payment you are willing to make

The most common types of insurances include:

  • Homeowners Insurance – This type of insurance protects you against vandalism, theft or other hazards such as a fire.
  • Flood Insurance – Depending on the area you are willing to move to, your lender may require flood insurance as well. This will be in the interest of both the parties in case of a natural disaster such as flood or hurricane, which can completely destroy the financed property.
  • PMI or Private Mortgage Insurance – According to 20% down payment rule, if a borrower makes a down payment of less than 20%, they are liable to purchase PMI as well.

Various elements can increase or decrease the amount of insurance premium on a property. Hence, borrowers need to be mindful while choosing a locality and making down payment to minimize their monthly mortgage payments.

Estimating Your PITI

It is always good to do a little homework and get a rough estimate about your monthly mortgage expense before you finance a property. This will help you maintain your monthly budget once you start making your loan payments. Your interest rates and principal amount are determined by your bank, but having a good grip on variable expenses such as taxes and insurance premiums can help reduce your mortgage payments. Some useful steps to determine your PITI value include:

1.         Looking For a PITI Calculator Online

An online PITI calculator will help you identify your monthly payments by amortizing your interest rate over the loan period. It will also take into consideration your property tax and home insurance by dividing the yearly payment in to 12 equal installments. It then adds all these elements together to form your monthly payment schedule.

2.         How Much You Need

PITI is calculated based on the amount you are financing from the lending institution rather than the property value itself. Before entering the loan amount in PITI calculator, you need to subtract your down payment from it as well. It is important to note that there are some closing costs associated with the mortgage loan. It would be wise if you allocate some of your savings to these charges to avoid any surprises after you have paid your mortgage in full.

3.         Tax and Insurance Variables

Almost any PITI calculator you choose will ask you for the tax and insurance amount. Banks usually include these variables in their monthly payment to protect themselves from property damage or tax liens.

  • Estimating Insurance Premium – A general rule of thumb is to set aside $35 for every $100,000 of your loan amount. If your bank requires you to acquire flood insurance, then your insurance premium may rise accordingly.
  • Tax Estimate – Check your local state regulations to figure out the tax rate and multiply it by market value of your property to get a rough tax estimate on your property.

Putting all these variables along with the loan tenure in the calculator will give you a rough idea of how much your PITI would come around to. You can then use this figure to manage your monthly budget accordingly.

Having an understanding of PITI is an essential part of taking out a mortgage. Lenders use the ratio of PITI to your gross income to determine your repayment capacity on a mortgage loan. For most lenders to offer you a mortgage loan, this ratio should be above 25%. Hence, doing your own PITI calculation beforehand will help you choose property that will provide you with best value for money.

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How Does a Reverse Mortgage Work?

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With rising healthcare costs and increase in property taxes, many retirees face difficulty in meeting their monthly expenses. Reverse Mortgage is an effective way for old age homeowners to convert their home equity into cash. Homeowners can use this cash in multiple ways such as renovating their property or paying off their monthly dues.

You can use a Reverse Mortgage to pay off a regular mortgage. This way, you can avoid monthly payments to your lender. If you can manage your property dues, such as taxes and other maintenance costs, you can apply for a Reverse Mortgage. You can pay the loan off any time before the last surviving property owner passes away or moves out.

Step By Step Guide To Securing a Reverse Mortgage

1.         Counseling

The first step towards securing a Reverse Mortgage facility is obtaining objective information about the Reverse Mortgage loan from counselors approved by Housing and Urban Development organization. Once the counseling session is complete, you will receive a certificate of completion at your home address. This certificate is part of the Reverse Mortgage loan application.

2.         Submit Loan Application

To initiate the Reverse Mortgage loan, borrowers need to submit an application packet to their lender, which usually includes:

  • A Valid Identification document
  • Proof that the property put up as collateral is your primary residence
  • Proof of income showing that you have enough money to pay for homeowner insurance and property taxes on your property
  • Reverse Mortgage counseling certificate

3.         Appraisal

Once you submit the loan application, the lender will appraise your property value. This is a major step in the Reverse Mortgage process as it determines the amount you are eligible to receive as a loan.

  • Request for Appraisal – According to latest housing regulations, lenders cannot order appraisers of their own choice and need to contact an independent Appraisal Management Company to appraise the property’s value.
  • Property Visit By An Appraiser – Once the lender makes a request for appraisal, FHA-approved property appraisers will visit your home for inspection and take necessary pictures to determine the property’s worth.
  • Submission of Appraisal Report – The appraisal report is shared with the lender within 3-5 business days after the property visit. Latest regulations require that lenders share a copy of the latest appraisal report with the applicant as well.

4.         Underwriting the Loan

During this stage of the loan process, underwriters review the application along with submitted documents and stipulate the terms and conditions associated with the loan. Once the application meets all the conditions, the lender will set a closing date for loan disbursal.

Cash Payment Options

  • One-time Disbursal – You can receive a lump sum payment from your lender through Reverse Mortgage. However, this is only available for fixed-rate
  • Term Option –Using this option borrower can receive a fixed amount of cash on a monthly basis for a pre-determined period.
  • Line of Credit –This is useful for applicants who need to utilize their Reverse Mortgage facility as and when required. The interest accrues depending on how cash the borrower draws over a period of time.

Eligibility Criteria

  • Since these loans were designed for senior citizens, Reverse Mortgage facility is available for people above 62 years of age.
  • You should either own the home or have low enough mortgage to pay it off using a Reverse Mortgage loan.
  • You must be living at the property and must not stay at any other place for more than 12 months.
  • For multi-family homes, you should be using one of the units as your primary residence. In the case of manufactured homes, they are approved for Reverse Mortgage as long as they follow FHA requirements. An HUD-approved condominium can also be used for availing Reverse Mortgage facility.
  • You must be able to pay your monthly dues during the life of the loan. These may include home insurance, property taxes, and maintenance fee such as homeowners
  • Many lenders require that you must not be delinquent on any federal loan.

Fees Associated With Reverse Mortgage

1.         Origination Premium

The federal government insures Reverse Mortgage loans, but the loan applicant has to bear the insurance costs. Insurance premium can range between 0.5% and 2.5% depending on the appraisal value and the amount you borrow from your initial limit in the first 12 months.

2.         Processing and Closing Fee

The lender can charge you up to $6,000 for processing the loan depending on your property value. Closing costs include fees for background and credit check, property appraisal, taxes and any other fees.

Risks Associated With Reverse Mortgage

  • Reducing Family Inheritance – Reverse Mortgage is a high-interest loan, which is compounded over a period of time. The upfront costs and accrued interest can considerably reduce your home equity. This means you may not be leaving behind much for your family or surviving spouse as an inheritance.
  • Risk of Foreclosure Proceedings – This could be a major problem for a surviving spouse who did not co-sign the Reverse Mortgage facility with the primary applicant. In case the applicant passes away, their spouse will be forced to sell the property to pay-off the loan. Hence, it is important that borrowers talk to other house occupants about a backup plan in case they do not survive.
  • Stringent Terms – Reverse Mortgage borrowers’ risk of losing equity in their home very quickly as the high-interest rates compound over a period of time. The terms for Reverse Mortgage are quite stringent as well, with lenders refusing to amend loan terms such as lowering interest rates or adding a co-borrower after loan disbursal.

Bottom Line

Reverse Mortgage allows borrowers to use their home equity to manage their monthly expenses. However, before availing this type of loan, borrowers should spend some time in understanding the loan terms and devising a strategy to maximize the loan proceeds. Otherwise, they may end up leaving little or no inheritance to their spouse or other family members.

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Understanding Subprime Mortgages

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When seeking for financial assistance in the form of a Mortgage loan, it is imperative that the intended borrower has a good credit score to secure the ideal loan. In addition to a good credit score, a debt to income ratio of less than 35 percent is also required. Unfortunately, not all borrowers can meet such requirements because of their credit history and low income.

In such cases, borrowers can apply for a subprime mortgage which is specifically designed to offer assistance to people with low credit scores and other financial issues. In this article, we will explain what a subprime mortgage is, when you might need it and how to apply for it.

What is a Subprime Mortgage?

Many times borrowers with low income face difficulties while applying for a loan. A conventional mortgage requires the borrowers to have a good credit score and a steady income. However, a subprime mortgage is offered to people who have a credit score of 600 or below.

One would expect such a loan to be at a greater risk of default since the borrowers already have a bad history when it comes to the repayment of loans. This risk is compensated for at the beginning of the process by offering higher interest rates as compared to the conventional loans. In some cases, banks may also charge the borrowers in some other way, such as a greater down payment or a higher closing cost.

Types of Subprime Mortgage

Within the category of Subprime Mortgage, there are other subtypes to choose from. These are:

1.      Fixed-Interest

The main advantage of choosing this type of subprime mortgage is the longer term of repayment. Instead of the traditional 30 year period for the repayment, a fixed-interest mortgage allows the borrower to have a longer repayment period of 40 to 50 years.

This longer-term translates into reduced monthly payments for the buyer, however, since the lender has to compensate for the risk associated with the greater inability of the borrower to pay off the total amount, a higher interest rate is added. While choosing such a mortgage, it is important to find out the amount of interest rate that is being offered by different lenders and choose the one that offers the lowest.

2.      Interest-Only Mortgage

An interest-only mortgage allows the borrower to have a period of 5, 7 or 10 years in which they are required to pay only the interest payments that are charged. Under such type of payment, the principal payment can be delayed and the borrower, if wishes, can regularly make payments towards the principal.

At the end of the term, the borrower is expected to pay off the mortgage or can refinance the mortgage. Such a mortgage is considered ideal for borrowers that are expecting to witness an increase in their income or an improvement in their financial condition over the years.

3.      Dignity Mortgage

This kind of mortgage is considered to be relatively new and gives the borrower ease in paying off the principal amount. In the beginning, the borrower is required to pay about 10% of the principal amount. After this, if the borrower is found to be diligent in paying the regular interest payments for five years, the amount that has been paid in the form of a higher interest rate is compensated to pay off the principal amount by reducing the interest rate to the prime rate. This gives the borrower an opportunity to prove their ability to pay off the loan which is why the term “dignity’ is used.

4.      Adjustable-Rate Mortgage

An Adjustable-Rate mortgage (ARM) uses a fixed interest rate at the beginning of the loan’s term after which the payment keeps changing and resetting according to an index. At the beginning of the repayment schedule, the borrower might be paying off a reduced amount. However, the unpredictable nature of such a mortgage does not give the borrower any guarantee about how the change might affect the payment schedule. There is a lot of unpredictability associated with such a mortgage due to its high dependence on the economic conditions and the index.

How to Get a Subprime Mortgage

When applying for a subprime mortgage, you will find the process to be extremely similar to the process that is followed when applying for a conventional mortgage. However, we have summarized the complete process of getting a subprime mortgage in the following steps:

  • At the beginning of the process, it is important to consider your options by making a list of all the lenders that offer subprime mortgages. By looking at the interest rates offered by each lender, choose one that best meets your needs.
  • Even though the documentation required in the case of subprime mortgage is not as complex as in the traditional mortgage, the lender will ask you for a steady proof of income, bank statements, and documents that reflect your monthly expenses.
  • Read the contracts thoroughly and sign them.
  • You might need to offer additional documents if the lender requires. Hence, you should not expect all the documents mentioned above to be sufficient and should be ready to gather and present any additional documents.

Pros and Cons of Subprime Mortgage

The biggest advantage of a subprime mortgage is the ability of borrowers with poor credit scores to get a loan and the less complex nature of the overall process as compared to that of a conventional one. Whereas, the disadvantages of subprime mortgage include, the higher interest rates and the requirement to show a steady income for borrowers who are presently unemployed.

Conclusion

Even though getting a subprime mortgage might be risky, as a borrower it allows you to have a more versatile mortgage option that you can use to buy a home for yourself without having to worry about your credit history or debt responsibilities. In case you expect your financial condition to improve shortly and are in need of temporary financial assistance getting a subprime mortgage is your best option.

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