DTI is the percentage of your monthly income to your monthly debt.

“Buying down the rate” with discount points can essentially save you $ thousands.

Know the four factors that determine whether or not you qualify for a loan.

The pros and cons of using collateral when you apply for a home loan.

Your credit score affects a lender's decision to issue you a loan.

The types of closing costs you need to look for in your closing disclosure.

Understanding Closing Costs

The ultimate question: how much of my own money do I need to buy a home? The answer is – it depends! But let’s take a step back and start with why. Borrowers need a down payment to show the lender that you are serious about the investment of buying your own home, by being willing to put in your own money (called a down payment), not just the lender’s money. The amount could vary, depending on which loan program you use.

Conventional – Requiring 3% down

Jumbo – Requiring 5-20% down

FHA – Requiring 3.5% down

VA – Requiring 0% down

USDA – Requiring 0% down

Various down payment sources may be used. The first, most obvious one, would be cash from savings. The next would be gift funds (see the Ask Ark section below for eligibility requirements for gift funds) and the last would be down payment assistance programs. These programs help prospective home buyers get into a home faster by offering assistance through a grant for down payment costs or closing costs. Find more information in the Resources section below.

Assets

At the same time, the more money you have after closing, the less likely you are to default. All in all, a lender is looking to understand: Does the applicant have a financial cushion to fall back on if their income is unexpectedly interrupted?

Have they shown a pattern and habit of saving money over time? In most cases the lender will want to verify that an applicant has an amount equal to 2 months’ worth of their total housing payment (including real estate taxes and homeowner’s insurance) saved up in a capital account, after they subtract any cash required for down-payment & closing costs.

It’s also important to know what the source of your assets are. Is it savings? Was it a gift? Was it a one-time settlement or bonus? Discuss your entire financial status/picture with your Mortgage Advisor.

Closing Costs

Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing is the point in time when the title of the property is transferred from the seller to the buyer. Typically, home buyers will pay between about 2 – 5% of the purchase price of their home in closing fees. So, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs.

What Costs Should You Expect at Closing?

Closing costs vary widely based on where you live, the property you buy, and the type of loan you choose. Here is a list of fees that may be included in closing. It’s not likely that your loan will include all the fees listed here. Closing fees can be rolled into the loan or paid at closing. They're usually broken down into three categories: lender fees, third-party fees, and taxes.

Lender Fees

• Credit Report Fee: A credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.
• Origination Fee:This covers the lender’s administrative costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.
• Application Fee:This fee covers the cost for the lender to process your application. Before submitting an application, ask your Mortgage Advisor what this fee covers. It can often include things like a credit check for your credit score.
• Underwriting Fee: Covers the cost of analyzing whether or not to approve you for the loan.
• Private Mortgage Insurance (PMI): PMI protects the lender if you default on your mortgage. If you're making a down payment less than 20%, you'll be required to pay PMI.
• Prepaid Interest: Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
• Discount Points:“Points” are prepaid interest. One point is one percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.

Third-Party Fees

• Escrow Deposit/Account: An escrow deposit or account is held by a third-party (e.g., title company) or lender, who holds the money and property to ensure the transaction process.
• Lender's Title Insurance: A lender's title insurance is required. It protects against a future legal challenge to the title of the property and protects the lender's financial stake in the home.
• Owner's Title Insurance: An owner's title insurance is optional. It is just like a lender's title insurance, but protects the owner's financial stake.
• Recording Fee: A fee charged by your local recording office, usually city or county, for the recording of public land records.
• Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property. This is not required in all states.
• Homeowners Insurance: Covers possible damages to your home and is required by virtually all lenders. You first year's insurance is often paid at closing.
• Attorney Fees: Buying a home involves Real Property law. Attorney fees vary by state, value, and property type. They either charge by the hour or have a flat fee.
• Appraisal Fees: An appraisal fee covers the cost of a professional evaluation of a home's market value. The appraiser determines if the contract price is appropriate given the condition, location, and features of the home.

Taxes

• Property Tax: Typically, any taxes due within 60 days of purchase will be paid at closing.
• Transfer Tax: This is the tax paid when the title passes from seller to buyer.
• Mortgage Tax: A few states, including NYS, charge a mortgage recording tax. NYC imposes a mortgage recording tax of 1.8% on amount $500k and 1.925% for those over $500k. NYS imposes mortgage tax of 0.5%

Often you are asked to put down two months of property tax and mortgage insurance payments at closing.

The minimum credit score requirement for the different types of loans available.

If you want to buy a home and you aren’t paying 100% cash, any competent residential mortgage banker will confirm that your credit score is going to matter. First, it will help determine if you’re likely to qualify for any mortgage and second, it will help establish what interest rate you may be charged.

So, what is a credit score? How is it determined? And how can you fix a bad one? Read on.

What is a Credit Score?

A credit score is a grade based on your credit history—how many entities have extended credit to you, how much credit they have extended and how diligently you’ve paid your debts. There are bureaus that compile and report on credit history: Experian, TransUnion and Equifax. These credit bureaus gather and analyze data to arrive at a FICO score—a measure of consumer credit risk. Because creditors generally don’t report information to all bureaus, you are likely end up with three different FICO scores. Mortgage lenders typically use the middle one. One of the most reliable sources to review your FICO score is myFICO.com.

How is a Credit Score Compiled?

Credit scores can range from 300 to 850 points, but the rating is not just based on how quickly you pay off your debts. While payment history does account for 35% of the score, the total amount owed is important (30%), because the larger your debt, the higher the risk. The length of time you’ve used credit is taken into account (15%)—the longer, the better—and also how much “new” credit you’ve recently accessed (10%). Finally, your overall mix of credit is worth 10%. A diverse mix may be comprised of student loans, car loans and unsecured revolving debt (credit cards).

What Credit Score is Needed to Qualify for a Mortgage?

Since the Dodd-Frank Wall Street reform was signed into law in 2010, it has become more difficult for people with poor credit to qualify for mortgage loans. However, different types of loans have different requirements. While it’s possible (but difficult) to get an FHA loan with a credit score as low as 500, the down payment needed is higher (10%). With a score of 580 or more, you can qualify for an FHA loan with as little as a 3.5% down payment and the approval is more likely. Veteran’s (VA) loans and conventional loans from mortgage services companies like Ark Mortgage typically require a score of 620 or higher.

The higher the credit score, the more likely a borrower will qualify for a lower interest rate with mortgage lending firms. A score of 760 (or higher) traditionally receives the lowest rates. Additionally, lenders may also require that there be no late or delinquent payments for the past 12 months, a low debt-to-income ratio (amount you owe compared to the amount you earn) and a solid employment history (2 years minimum).  Factors that reduce the lender’s risk and might compensate for lower credit scores include a larger down payment, high income, substantial savings and a long employment history with your current employer.

What Can You do to Improve Your Credit Rating?

If your credit isn’t as high as it could be, the best thing to do is start the reparation process before starting to shop for a home. Here are some steps you can follow:

1. Obtain your credit report and scan for mistakes. You are entitled to a free annual report from each of the three credit bureaus. Just visit AnnualCreditReport.com. Recent studies show that 20% of consumers find errors on at least one of their three reports and that four out of five people who filed a dispute were successful in modifying their reports. Some even saw a change in their credit score by simply correcting a reporting error.
2. Get into the habit of paying off credit card balances quickly.
3. Keep your revolving credit utilization ratio low. This is the ratio between your total credit and the amount you owe. Lenders like to see your debt remain at 30% or less of your available credit.
4. Refrain from opening any new credit accounts. It’s counter-intuitive but each credit request lowers your credit utilization ratio. Applying for several credit accounts in a short period of time is a red flag for credit reporting bureaus and can reduce your FICO score by 10%. One exception is when you are shopping for a car, mortgage or student loan, in which all applications opened within 45 days count as one application.
5. If any of your creditors have turned your debts over to a collection agency, contact the collection agency directly and ask them to do a “Pay for Delete” meaning that you agree to pay the balance and they agree to remove the account from your credit report. This won’t improve your credit but might be expected by your lender.
6. If you have a family member or close friend with good credit, ask them to add you as an authorized user to their credit card account. The credit history of that account will be added to your credit report and you can add points to your FICO score. This can be especially important if you currently have no credit history.
7. Don’t close accounts to temporarily raise your credit score. This will impact your credit utilization ratio and can have the opposite effect of what you intended.

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