The Basics of Mortgage Lending

Written by Calum Ross
Many people have contacted me to ask questions on how lenders evaluate their ability to qualify for a mortgage. While there are a number of variables that lenders assess, what I am going to focus on here are the important ratios and numbers that they examine most closely. The two most important numbers in the lending decision are the Gross Debt Service Ratio (GDS), and the Total Debt Service Ratio (TDS). The GDS is meant to measure the amount of your income that goes towards servicing your house related debt. The TDS is meant to measure the amount of your income that goes towards servicing your total debt. In order to get your loan insured by CMHC or GE Capital (any loan above 80% of the purchased properties value is considered high ratio and requires insurance) your GDS must not be over 32%, and your TDS must not exceed 40%. In order to calculate your GDS you can use this simple formula: monthly mortgage payment + monthly property taxes + heating + 50% of your maintenance fee) subtotal (subtotal / gross monthly income) * 100 = GDS Your monthly mortgage payment is determined by the monthly principal and interest payment. This is determined by how much you are borrowing, what rate you borrow at, and how long you choose to amortize the mortgage over. Dividing your annual property taxes by 12 can arrive at the monthly property taxes. Heating is generally calculated at a minimum rate of $50 per month. The maintenance fee component is generally only applicable for selected town homes and condominiums. The TDS ratio takes a look at what you have in your GDS ratio, but then goes on to add the other monthly debt obligations that you have. This ratio does not include things like phone bills, water and car insurance. Lenders are only able to use the information available to them on your credit report. This information includes (but is not limited to) car loans, credit cards, lines of credit, departments store cards, and other loans. Believe it or not - past and current mortgage obligations are currently not captured on your credit report in Canada. While these two ratios make up the cornerstone of lending in Canada, by no means do they represent the whole picture. Job and income stability, credit rating, and type of job all play a major role. Some lenders will not lend to people with negative net worth, others include credit available in the debt servicing etc. I work with over 30 different financial institutions - from the big banks to the trust companies, they all have their individual quirks. So what happens if your ratios are not within these guidelines? Don't give up on that account. If you are applying for a conventional loan (less than 75% loan to value) thenthe lenders have a lot more flexibility. You can often go a lot higher on the ratios if your relationship is valuable to the lender, or if there are other circumstances that warrant consideration. The mortgage market is getting increasingly competitive. I know lenders that don't require income verification for clients with clean credit and 20% down, others will give great rate discounts for applicants with no income verification and 35% down. Even freshly landed immigrants can get a mortgage easily with a 20%, or higher, down payment. Getting a mortgage today has never been easier. Making sure you get the one that best meets your needs is a whole different story. Do your homework, get good representation, and always demand the best!

Types of Mortgage Lenders

It used to be fairly easy to put a term to a lender that accurately described them and the types of mortgages they originated. Time, the S&L problems of the late eighties, and a maturing marketplace have served to "blend" those differences. Some old adjectives barely apply now and are rarely used.

Mortgage Bankers

A true Mortgage Banker is a lender that is large enough to originate loans and create pools of loans which they sell directly to Fannie Mae, Freddie Mac, Ginnie Mae, jumbo loan investors, and others. Any company that does this is considered to be a mortgage banker. They can very greatly in size. Some may service the loans they originate, but not all of them will. Most true mortgage bankers have wholesale lending divisions.
Examples of two of the largest mortgage bankers are Countrywide Home Loans and Wells Fargo Mortgage. One is associated with a bank and the other is not, but both are most correctly classified as mortgage bankers.
A lot of companies call themselves mortgage bankers and some deserve the title. For others, it is mostly marketing.

Mortgage Brokers

Mortgage Brokers are companies that originate loans with the intention of brokering them to wholesale lending institutions. A broker has established relationships with these companies. Underwriting and funding takes place at the wholesale lender. Many mortgage brokers are also correspondents, which is why many of them also claim to be mortgage bankers.
Mortgage brokers deal with lending institutions that have a wholesale loan department.

Wholesale Lenders

Most mortgage bankers and portfolio lenders also act as wholesale lenders, catering to mortgage brokers for loan origination. Some wholesale lenders do not even have their own retail branches, relying solely on mortgage brokers for their loans.
These wholesale divisions offer loans to mortgage brokers at a lower cost than their retail branches offer them to the general public. The mortgage broker then adds on his fee. The result for the borrower is that the loan costs about the same as if he obtained a loan directly from a retail branch of the wholesale lender.

5 Ways to Pay off Your Mortgage Faster

Pay your 30-year mortgage off early and live a debt free life before you’re too old to enjoy it!

 

Facing down a 30-year mortgage can be psychologically and financially daunting. It’s depressing to think that most people will be in their 50’s and 60’s before they finally pay off their mortgages.

 

Know what else is depressing? The fact that the interest on a 30-year loan is astronomically more than the interest on a 15-year loan. On a $200,000 mortgage, you’ll pay more than $100,000 extra for a 30-year mortgage vs. a 15-year mortgage. That’s more than half of your total loan amount in extra interest payments!

 

One solution to solving these psychological and financial issues is to pay down your mortgage early thereby reducing the amount of time that you’ll be stuck with the monthly payments. It will end up costing you more each month, which may create even more psychological stress, but at least the end will be in sight.

 

Tax deductions are another benefit of paying your mortgage off early. The majority of your early payments go towards the interest on the loan, which is tax deductible. Pay more towards the mortgage in those early years and you might break even on taxes.

 

Here are a few popular strategies that homeowners use for paying down their mortgage early:

 

1) Refinancing: Refinance your mortgage for a shorter term at a lower rate. You will likely be paying more per month—how else would it be possible to pay off the same loan amount in half the time?—but the term will be much shorter. The one downside to this approach is that you will have to pay the closing costs, which means that it may take a few months to break even.

 

2) Large annual lump sum payments: Use your tax return, bonus, inheritance, or other big check to make one annual lump sum payment per year. If any of these amounts are unexpected yearly windfalls to you anyway, then you’re not going to miss them by paying off your mortgage with them. You’re also not going to waste that money on an impulse buy.

 

3) Paying a little bit extra every month: Try to pay a set amount of extra cash every month on your mortgage. It can be something like 15% or perhaps just $100. One trick is to pay with a separate check and notify your lender that the payment is only to be used for the reduction of principal in order to build equity more quickly. The extra check is for tax purposes as principal payments are not deductible. 

 

4) Bi-monthly mortgage payments: Work it out with your lender to pay your mortgage bi-weekly instead of monthly. The way that the weeks work out, you’ll end up getting in an extra mortgage payment per year.

 

5) Paying whatever whenever: If your finances aren’t settled enough to pay down extra money regularly, just pay what you can when you have it. No matter how small, it all helps to lessen the length of your mortgage.

 

Some financial experts caution that there are times when it doesn’t make sense to pay off your loan early. This is mainly when you have debts that charge more interest than your mortgage rate.

 

Whatever your choice, there is a strategy that will likely work for you. Anything that you can pay ahead of time will result in a shorter mortgage loan period—which will help you to achieve the dream of a debt free life just a little bit earlier.

5 Ways to Safeguard Your Mortgage

The responsibility of owning a home can be scary, especially in this troubled economic environment. Use these 5 strategies to safeguard your mortgage in the face of economic disaster.

 

With the state of our economy, it’s not too much of a stretch to imagine losing your job or otherwise suffering an economic hardship that could affect your ability to make your mortgage payments. A sudden illness or accident that leaves you unable to work is another scary possibility.

 

Many people don’t want to consider these situations for obvious reasons. However, it’s in your best interest to prepare for the worst. After all, if you end up defaulting on your mortgage, you can lose your home, which will just make any bad situation so much worse.

 

There are of course, always options like running up credit card debt, taking money out of a 401K, and pursuing a HELOC loan if you have enough equity in your home. These should be last options, though, and should not constitute your main plan of action should tragedy strike.

 

Here are a few strategies that can be used both to prevent tragedy and to deal with it:

 

1) Start an emergency fund: This is simply the best thing that you can do to help bridge the gap if you have a financial difficulty. Not all experts agree on how much you need to save, but the general rule of thumb is that you should have at least 3-6 months worth of living expenses in an easy to liquidate fund.

 

Perhaps it shouldn’t be too easy to access. You don’t want to be tempted to use it for things like a new car or a last minute trip.

Even homeowners who are already deep in debt and trying to get out of it should have some kind of emergency fund on hand to take care of things like sudden car repairs or roof leaks.

 

2) Get a mortgage that is less than you can afford: While the mortgage industry generally pushes homebuyers to get the most house that they can afford, sometimes it makes sense to get less. Purchase a house that is slightly below your means and you’ll be able to easily keep up with payments even if you have a few tight months. Then, if you have a good month and can pay more, you’ll be able to do it.

 

3) Refinance your mortgage: If you haven’t already thought about it, look into refinancing your mortgage now to bring down your monthly payments. With closing costs and other fees, it takes a while to break even—so it probably doesn’t makes sense to refinance right when you get laid off. Start the process now and use the extra monthly savings to start your own emergency fund if you don’t already have one.

 

4) Get job-loss mortgage insurance: Job-loss mortgage insurance is now more readily available than ever. Sources ranging from traditional insurers to homebuilders to banks offer it.

 

Keep in mind that there is often a time gap between getting the policy and when it actually starts to pay out. This is to prevent people who know that they are going to lose their job shortly from taking advantage. Also, the insurance generally only covers the minimum payments needed to keep the mortgage from foreclosure. So, while it is a solution, a good emergency fund will also come in handy.

 

5) Find out how open your lender is to late payments: If you do get into a situation where you can’t pay your mortgage, you can sometimes work out an altered payment schedule with your lender. The lender may even waive late fees and refrain from reporting your issues to the credit bureaus. If you don’t warn your lender in advance, however, you will subject to these issues. Do some online research now to find out what your lender’s policies are to find out if you can buy yourself some time.

 

The best defense against sudden economic problems is to develop responsible financial habits before you get into trouble. At the very least, try to keep track of your spending and make sure that you are spending less than you earn.

No matter what course of action you take, some planning ahead of time can help to solve or at least slow down even the worst finance issues.

Interest Rates On Reverse Mortgages

If you own a home and your age is above 62 years, then a reverse mortgage will give you an offer that you can convert your home's equity into cash. This mortgage lets you have a loan which is equal to the equity.

There is no need of repaying the amount until you live in that home and also you do not sell the home.If you want money to reach your requirements and you do not have an idea how to repay a loan, then this type of mortgage is perfect for you.

In this mortgage, a lender will pay you depending upon the value of your home. If you no longer live in that property, then the lender will sell that property to get the money what he had invested on you.

There are so many types of mortgage and these reverse mortgages will share the features that are given below.

The loan amount depends on age of the house owner. The older the homeowner, the larger loan he will get. The loan should be the primary debt on the house. So, if there are other debts or loans against the house, then those lenders will either be repaid or be subordinate to the lender who is issuing the reverse mortgage to the senior.

Interest rates on the HECM reverse mortgage are based on the rate of the one year US Treasury security. So, a senior can opt for different types of interest rates like the one that changes every year or an interest rate that adjusts every month. Usually when the senior opts for an interest rate that changes each year, there will be a change limit of around 2 percent, or around 5 percent for the entire term of the mortgage.

However, when it comes to interest rate on reverse mortgage, it is best to check with the lender before making a decision to take the mortgage.

How To Calculate Reverse Mortgages

You do not have to spend too much time wondering how to calculate reverse mortgage. Today, there are many websites that have calculators especially designed for reverse mortgages where by in putting some data, you can get all the information related to the mortgage.

By using these calculators, you can figure out how much balance is outstanding and how much money you can get. The calculators also give you information like how much money you can expect as a lump sum and how much you will get each month. Of course, you have to remember that these figures will always be an approximate. The real figures will be given to you by the lender based on the interest rate that is charged annually for the mortgage, the value of the house, and the amount of equity you have in the house.

For many seniors, it is important to know how to calculate reverse mortgage because they use this type of mortgage along with their Social Security checks to pay for many things like medical needs or making repairs to their homes. The fact that the mortgage does not have to be repaid until the senior passes away, sells the house, or move out permanently makes this mortgage very attractive proposition.

Although online reverse mortgage calculators give an approximate figure, the actual amount that a senior will get will be based on the prevailing rate of interest, the age of the senior, and the value of the home after an appraisal or what the limits for the mortgage are as per FHA rules in the area where the senior is living.

Dangers Of Reverse Mortgages

A reverse mortgage will provide offers to the persons who have retired to continue living in their own homes comfortably.

Without leaving your money to the relatives after you pass away, you can spend it for yourself. There are many ways to get the money from this mortgage. When you need lump sum payout or monthly payments you can avail this type of mortgage.If you have a small amount of loan pending on your own home and you choose reverse mortgage, then this amount can be paid off. Both the property taxes and insurance are figured out. The main thing you have to do is to keep your home clean and repaired if needed. Your money can be spent as many ways you want.

Are you unsure how these reverse mortgages will affect your heirs? The answer for that is they will not affect the heirs at all. Your heirs will get the money remaining after the house is sold, and the principle and interest, which is due to the lender, is paid off. A mortgage of this type will help the retired people to keep their own home, and after the retirement they will not be worried about not having enough money.

Also, to obtain a reverse mortgage there are some requirements. The main thing is that you should continue your living in that home for your entire life. You can leave the home after you sell it only.

While coming to the dangers of reverse mortgage, they are given below.

The home equity which is related to the housing loan can be used and consumed by the reverse mortgage. This is the main drawback of this type of loan. This will leave few assets to the homeowner, and also the market values of the homes can get reduced so the homeowner will not get any benefit from selling the home.

Another danger of the reverse mortgage is that this mortgage is costlier than that of regular mortgages.

So, better you get familiar about the dangers regarding reverse mortgage before considering and opting for this type of loan.

Are All Reverse Mortgages The Same ?

Reverse mortgages are made for senior citizens as a way of providing them with steady source of income. Usually this type of mortgage is available only if the senior has equity in his or her home, which cashed until the senior decides to sell the home or move away.

The senior has to be 62 years and older to be eligible for reverse mortgage.Reverse mortgage is a unique concept, and is quite different from the traditional mortgage. In reverse mortgage, the lender gives the senior a fixed amount each month. The amount will be paid as long as the person lives in the house. If the borrower dies, or the home is disposed off, the lender will then take steps to recover the mortgage. If the house is sold for more than what it is worth, then the balance amount is given to the heirs. Therefore, just value of the house is taken into consideration when giving a reverse mortgage.

There are different types of reverse mortgages, and many seniors who are contemplating on this type of mortgage actually wonder whether all reverse mortgages are the same. The answer is no. There are primarily three types of reverse mortgage, and they are single purpose reverse mortgage, home equity conversion mortgage and propriety mortgage.

In the single purpose reverse mortgage, the mortgage is given to seniors who have moderate income levels. This type of mortgage is viewed as a way of helping the senior meet certain obligations associated with the home like repairs, renovations and payment of taxes. This mortgage is backed by local and state governments.

The home equity conversion mortgage, also referred to as the HECM, is guaranteed by the Housing and Urban Development. This mortgage is insured by the federal government is dearer than the single purpose reverse mortgage. You would have to meet a counsellor to discuss this type of mortgage and get all the information regarding the risks and costs involved.

The proprietary mortgage is given by private companies, and it is not mandatory to have a meeting with a mortgage counselor. This type of reverse mortgage is similar in nature to the home equity conversion mortgage, and is equally expensive when compared to the single purpose reverse mortgage.

What Is The Definition Of A Reverse Mortgage

A reverse mortgage is only for senior citizens whose are 62 years and older. In traditional mortgages, you make payments to the lender, where as in reverse mortgage the lenders will pay you.

Usually the amount is given based on the market value of the house and the equity owned by the senior.An online reverse mortgage calculator can determine the total sum of reverse mortgage, depending upon the value of your home in the market. The value of your home in the market will be working as a constraint. Both amounts you owe on a previous mortgage and amount you get from a reverse mortgage cannot change the value of your home in the market. And this is the major advantage in reverse mortgage.

Now we will see some of the advantages and disadvantages related to reverse mortgage.

There are some fees and also qualification that should be met first to get the reverse mortgage. As we discussed above, the borrower should be of 62 years or older. In addition to this, the house be owned by the borrower, and the borrower can have a small amount of pending previous mortgage on the house. There should be insurance for the home, and also the home should be in a good condition. The lenders individually may have some conditions that should be met to get the reverse mortgage.

The loan is the combination of lender carrier fee and also interest that you should pay. There is an option for you about how and in what form you can get the payments and you can also have option how and by what time the mortgage should be paid off. If you have the amount, then the mortgage can be paid off earlier also. If you pass away before the payment of mortgage, then your successors will continue the payment of the mortgage or they can sell the house and clear off the mortgage.