Frequently Asked Questions

 Answer: When applying for a mortgage, you’ll typically need to provide documents that verify your financial stability and ability to repay the loan. Common documents include:

• Proof of Income: Recent pay stubs, W-2 forms, and tax returns from the past 2 years if you're employed, or if self-employed, recent tax returns and business financial statements.
• Bank Statements: Usually from the last 2-3 months to show your savings and cash reserves.
• Proof of Assets: Documentation for any other assets you hold, such as investment accounts, real estate holdings, or retirement accounts.
• Identification: A government-issued ID (like a driver’s license or passport).
• Debt Information: Details about any debts, such as credit card balances, car loans, student loans, and any other financial obligations. Lenders may also require additional documentation specific to your situation.

Homeownership builds wealth in three key ways:

1. Cash Flow Advantage: Owning a home often costs less than renting over time in terms of monthly expenses. For instance, over a nine-year period, monthly rent tends to exceed the combined cost of a mortgage payment, taxes, and insurance. While this isn’t always the case, with current rates, owning often provides a cash flow benefit over renting.
2. Equity through Amortization: Each mortgage payment adds to your equity in the home, similar to a forced savings plan. Over nine years, for example, you might pay $43,698 towards your principal. This amount is your equity, which you can reclaim when you sell the property.
3. Compounding Appreciation: Just like any investment, the value of a home compounds over time. If a $100,000 home appreciates by 3% in the first year, it’s worth $103,000 the next year. Another 3% appreciation in the following year would bring its value to $106,090. This compounding effect means that buying a home earlier in life can greatly increase long-term wealth.

In this example, the compounding appreciation results in a gain of $63,691 over nine years. Altogether, owning the home for nine years would increase your net worth by $95,367 compared to renting.

Here’s the breakdown of how the example numbers were calculated in this scenario:

• Cash Flow Difference:
  
  • Monthly Housing Expenses: For the buying scenario, the monthly expenses include:
    
    • Principal and Interest (P&I): $840
    • Property Tax and Insurance: $383
    • Maintenance and Repairs: $93
    • Total Monthly Expenses: $1,316
  • Monthly Rent: Starting rent is $1,221 and increases annually by 3.5%. By year 9, monthly rent reaches $1,608.
  • Nine-Year Cash Flow: Over nine years, buying results in a cash flow savings (difference between buying and renting) of $7,799.
• Amortization Gain:
  
  • Loan and Equity: The original loan amount is $202,500. After nine years of payments, the remaining principal balance is $158,802. This means that $43,698 has been paid down in principal, which is the equity gained through amortization over this period.
• Appreciation Gain:
  
  • Home Value Appreciation: The home’s starting value is $225,000. Assuming an average annual appreciation rate of 2.81%, the home’s value after nine years is projected to be $288,691.
  • Appreciation Gain: This growth in home value results in an appreciation gain of $63,691.
• Net Gain by Buying:
  
  • Total Wealth from Ownership:
    
    • Appreciation Gain: $63,691
    • Cash Flow Difference: $7,799
    • Amortization Gain: $43,698
    • Total Gains: $115,188
  • Cost to Sell: Selling the home after nine years incurs a real estate commission of 6% (estimated at $17,321).
  • Net Gain by Buying: After accounting for the cost to sell, the total net gain from buying over nine years is $95,367.

 Answer: The amount you can borrow is typically determined by your debt-to-income (DTI) ratio, credit score, and down payment. Most lenders recommend that your monthly mortgage payment (including principal, interest, taxes, and insurance) not exceed 28-31% of your gross monthly income. Your DTI ratio—how much you owe compared to your monthly income—should ideally be below 43%, though some programs allow higher DTIs. Speaking with a lender or using a mortgage affordability calculator can provide a more personalized estimate. 

 Answer: Pre-qualification is a quick, informal process where a lender evaluates your financial information (like income and debt) to provide an estimate of how much you might be able to borrow. It doesn’t require a credit check and doesn’t carry much weight in the buying process.

• Pre-approval is a more in-depth process. It involves a hard credit inquiry, income verification, and a thorough review of your financial situation. With pre-approval, you receive a conditional commitment for a specific loan amount, giving you a stronger position when making offers on homes since it shows sellers you’re a serious buyer.

 Answer: The traditional down payment is 20% of the purchase price, which helps avoid private mortgage insurance (PMI). However, many loan programs have options for lower down payments and there are different down payment assistance options that are available to make purchasing a home more affordable:

• FHA Loans: Often allow down payments as low as 3.5%, which can be a good option for buyers with limited savings.
• VA Loans: Available to eligible veterans and active-duty military members, VA loans often require no down payment and do not have PMI.
• USDA Loans: Available in certain rural and suburban areas, USDA loans also typically require no down payment.
• Conventional Loans: Some conventional loan programs may allow down payments as low as 3%, though PMI is usually required if your down payment is below 20%.

 Answer: PMI is a type of insurance that protects the lender in case you default on the loan. PMI is usually required if your down payment is less than 20%. The cost of PMI varies depending on factors like your credit score, loan type, and loan amount. PMI can often be canceled once you reach 20% equity in the home, or it may automatically terminate once you reach 22% equity. FHA loans, however, typically require mortgage insurance for the life of the loan unless you refinance. 

 Answer: Your interest rate depends on several factors, including:

• Credit Score: Higher credit scores generally qualify for better rates.
• Loan Type: Rates can vary between fixed-rate, adjustable-rate, and government-backed loans (like FHA, VA, or USDA loans).
• Down Payment: Larger down payments can lead to better rates since they reduce the lender’s risk.
• Market Conditions: Mortgage rates fluctuate based on economic conditions, the Federal Reserve’s policies, and market demand.
• It’s wise to shop around and compare rates from different lenders or consider locking in a rate if you’re concerned about rates increasing before you close on your home.

 Answer: Closing costs include various fees associated with finalizing your mortgage. Common costs include:

• Loan Origination Fee: Covers the lender’s administrative costs.
• Appraisal Fee: Pays for an appraisal to assess the home’s value.
• Title Insurance: Protects against disputes over property ownership.
• Home Inspection Fees: Optional, but recommended to ensure the home is in good condition.
• Credit Report Fee: Covers the cost of pulling your credit report.
• Property Taxes and Homeowner’s Insurance: Often prepaid for the first year.
• Closing costs generally range from 2-5% of the loan amount, though some sellers may cover a portion of these costs through negotiation or credit arrangements.

 Answer: From application to closing, the mortgage process typically takes 30-45 days. Key factors that affect the timeline include:

• Speed of Documentation: How quickly you provide the required documents can impact the process.
• Appraisal Timing: Scheduling and completing an appraisal can vary based on local availability.
• Underwriting Review: The underwriter assesses your financial information and the property’s value to ensure they meet the lender’s requirements.
• Market conditions and lender-specific timelines may also influence the duration. It’s a good idea to stay responsive and proactive in communication to avoid delays.

 Answer: Many mortgages today, especially those through mainstream lenders, do not have prepayment penalties. However, some loans—particularly some adjustable-rate mortgages (ARMs) or specialty loans—may include a prepayment penalty clause. Check with your lender about any restrictions before making extra payments. Paying off your mortgage early can reduce interest paid over the life of the loan, but consider whether there are any penalties for doing so. 

 Answer: When the appraisal is lower than the agreed-upon purchase price, it can affect your financing because lenders base the loan amount on the appraised value, not the purchase price. If this happens, you have a few options:

• Negotiate with the Seller: You can ask the seller to lower the purchase price to match the appraisal.
• Increase Your Down Payment: If you still want to proceed, you may need to make up the difference between the appraised value and the purchase price with additional funds.
• Challenge the Appraisal: In rare cases, you may request a review or appeal of the appraisal if you believe there was an error or missed information.
• Cancel the Contract: If your purchase contract includes an appraisal contingency, you may have the option to back out without penalty if the appraisal is too low.

Yes, credit can impact your loan terms even if you can qualify for a home loan. This is one of the most critical factors in what loan terms you will get and/or if you can qualify.  Credit scoring is used for almost all major purchases, but there is little education on this subject.  Your FICO credit score is made up by the following factors.

1. Payment History – 35% of your credit:  The biggest part of your credit is the simplest one... pay your bills on time.

2. Money Owed – 30% of your credit:  Starting out most people make the mistake of taking out new credit and running up the balances.  This is the opposite of what you want to do.  When you get new credit keep the balances low (10% to 30% max).  

3. Length of Credit History – 15% of your credit: It's important to start with good credit utilization at the earliest age you are financially responsible to do so.  This will help earn you a better score when you ready to purchase a home.  When I'm asked what age someone should purchase a home, I always answer with, "at the youngest age they are financially responsible to do so.”  For some people, this is 18. For others, this may be 80, but the younger you become a homeowner the better opportunity for increased net worth by the appreciation compounding on the real estate and the principal reduction of your loan.  Because purchasing a home relies so heavily on credit (terms and/or qualifications), it's important to responsibly start building your credit history at an early age.  

4. New Credit – 10% of your credit: It's important when starting out to not fall into the trap of taking out a large amount of credit (high dollar amount) all at the same time.  Especially, if you have a small amount of credit history (for example, you haven’t opened many credit cards or had an auto loan previously) this can be seen as a higher risk and can lower your score. 

5. Types of Credit in Use – 10% of your credit: You should not open new credit you do not intend to use, however, it's also not a good idea to have a bunch of one type of debt (i.e., credit cards).  Instead, try to limit this amount of debt to maximize your credit score. 

The short answer is yes, but this may vary depending on the loan type.  This can be frustrating as you might not have a student loan payment required for some time, but agency guidelines (FHA, Fannie Mae, Freddie Mac, etc) tell lenders how to calculate the debt-to-income ratio based on the student loan debt.  For example, conventional may require a calculation of 1% of the outstanding balance in order to figure out your "payment" to use in the debt-to-income calculation while FHA may only require .5% of the outstanding balance.   

If you have student loan debt it is important to look at different loan options to see what is going to be best for you and your situation.

Call me or text me at 785-917-0112 to learn more about different loans options that might be available to you. 

Mortgage points, also known as discount points, are fees you can pay to lower the interest rate on your mortgage. Each point typically costs 1% of the loan amount and generally reduces the interest rate by about 0.25%, though this can vary by lender. Paying points is often referred to as "buying down the rate" because it effectively lowers the cost of your monthly payments over the life of the loan.

Here’s a closer look:

• Cost of Mortgage Points:
  
  • Each point costs 1% of your loan amount. For example, if you’re taking out a $300,000 mortgage, one point would cost $3,000.
  • You can often purchase fractions of points, such as 0.5 points, which would cost half the amount (e.g., $1,500 for a $300,000 loan).
• How Mortgage Points Affect Interest Rates:
  
  • Each point typically reduces your interest rate by about 0.25%, but this can vary depending on the lender and market conditions.
  • For example, if your original interest rate is 4%, buying one point might reduce it to 3.75%.
• Break-Even Point:
  
  • When considering whether to buy points, it’s important to calculate the break-even point—how long it will take for the interest savings to cover the upfront cost of the points.
  • To find your break-even point, divide the cost of the points by the monthly savings on your mortgage payment. If you plan to stay in the home beyond this break-even period, buying points could be a good option.
• Types of Mortgage Points:
  
  • Discount Points: These are the points you purchase to lower the interest rate on your loan. They impact your monthly payment and the overall interest cost.
  • Origination Points: These are fees that lenders may charge for processing the loan. They don’t reduce the interest rate and are essentially an additional cost to originate the loan.
• When Mortgage Points Make Sense:
  
  • If you plan to stay in your home for a long time, buying points can make sense because you’ll have more time to benefit from the reduced interest rate.
  • For shorter-term stays, it might not be worthwhile, as you may not break even on the upfront cost.

Mortgage points can help make your mortgage more affordable over time, but they come with an upfront cost, so it’s a good idea to evaluate your finances, how long you plan to stay in the home, and your future goals before deciding.

 At this time there are no tax breaks for first-time homebuyers, however, this could change in the future.  Also, homeowners are allowed to deduct the interest they pay and some of the closing cost on their tax returns.  Please always consult your tax professional regarding these tax deductions. 

Yes, you can buy a home without your spouse. Here’s what to keep in mind:

1. Ownership: You can hold the title and mortgage solely in your name. This means you're solely responsible for payments and have full ownership.
2. Income & Credit: Only your income and credit will be considered, which may be beneficial if your spouse’s credit is lower. However, combining incomes could help qualify for a larger loan.
3. Property Laws: Some states have community property laws, meaning your spouse may still have a claim. In other states, ownership is individual unless specified.
4. Estate Planning: If you want your spouse to inherit the home, consider adding them to the title as a joint tenant or creating an estate plan.
5. Tax Deductions: Only you can claim property-related deductions if you file separately.

Buying solo can simplify finances but requires careful planning based on state laws and shared goals.

Getting prequalified gives you a preliminary idea of how much you can afford, helping you narrow your home search to properties within your budget. It can also make you a more attractive buyer to sellers since it shows you’re serious and financially prepared. Though not a guarantee, prequalification can help you identify any financial adjustments needed before moving forward in the mortgage process. 

Prequalification generally requires basic information about your finances:

• Income: Estimated annual or monthly income from all sources, which helps determine your borrowing power.
• Debts: Information about existing debts, such as credit card balances, car loans, or student loans, which affect your debt-to-income (DTI) ratio.
• Assets: Savings, retirement accounts, or other assets that can help with your down payment or closing costs.
• Credit Score: Some lenders may perform a soft credit check to gauge your creditworthiness.

Prequalification doesn’t require formal documentation, making it a quick process that provides an estimated loan amount.

 After submitting your mortgage application, you’ll follow these steps:

• Provide Documentation: Expect to submit detailed financial documents like tax returns, pay stubs, bank statements, and proof of assets.
• Appraisal: The lender will arrange a home appraisal to confirm the property’s value aligns with the purchase price, which is crucial for final loan approval.
• Underwriting: An underwriter reviews your financial details and the appraisal to assess risk. They may ask for additional information or clarification during this process.
• Closing Preparation: Once approved, you’ll review the loan’s terms, complete a final walk-through of the home, and prepare funds for closing costs.
• Avoid Financial Changes: During this time, avoid large purchases, new debt, or job changes, as these can affect your loan approval.

 Your monthly mortgage payment includes several key components:

• Principal: The portion of the payment that goes toward reducing the balance of the loan.
• Interest: The cost of borrowing from the lender, which is calculated based on your loan’s interest rate.
• Property Taxes: An estimated amount for local property taxes, which are typically escrowed and paid by the lender annually.
• Homeowner’s Insurance: Provides coverage for damage or loss to your home; most lenders require you to escrow for this as well.
• Private Mortgage Insurance (PMI): Required if your down payment is less than 20%, PMI protects the lender in case of default. PMI is typically added to your monthly payment until you reach 20-22% equity in the home.

Lenders generally prefer borrowers with at least two years of stable employment, ideally in the same field, as this shows reliable income. You’ll need to provide pay stubs and, if applicable, employment verification from your employer. If you were a student (not highschool), we can use that as a part of your employment history too.

• Self-Employed Applicants: May need to provide additional documentation, like two years of personal and business tax returns, profit-and-loss statements, and business bank statements to verify income stability. There are some special programs for self-employed borrowers that can use bank statements to qualify or 1 year of tax returns. 
• Job Changes: If you recently changed jobs but remain in the same field, lenders may still consider it stable, especially if the change was for a promotion or higher salary.