Equity And Income Requirements
Home mortgage loan pricing is determined by the lender in two ways, and both methods are based on the creditworthiness of the borrower. In addition to checking your FICO score from the three major credit bureaus, lenders will calculate the loan-to-value ratio and the debt-service coverage ratio to determine the amount that theyre willing to loan to you, plus the interest rate.
LTV is the amount of actual or implied equity that is available in the collateral being borrowed against. For home purchases, LTV is determined by dividing the loan amount by the purchase price of the home. Lenders assume that the more money you are putting up , the less likely you are to default on the loan. The higher the LTV, the greater the risk of default, so lenders will charge more.
For this reason, you should include any type of qualifying income that you can when negotiating with a mortgage lender. Sometimes an extra part-time job or other income-generating business can make the difference between qualifying or not qualifying for a loan, or in receiving the best possible rate. A mortgage calculator can show you the impact of different rates on your monthly payment.
What Else Can You Do To Improve Your Mortgage Offer
Youve got two remaining cards up your sleeve.
1 Apply for a longer mortgage term
You may not get a larger loan offer, but you could substantially reduce your monthly payments.
Affordability is usually calculated over a standard 25-year mortgage term. If you apply for a 30 or 35-year term, your monthly repayments will be lower. But the overall cost of interest that youll be paying over the mortgage term will be significantly higher.
2 Use a mortgage broker
Individual lenders can only provide information about their mortgage products. Finding out about alternative offers that might be available from any of the 300+ mortgage lenders in the UK is difficult and time-consuming – and many of them cant be contacted directly by potential borrowers.
A well-connected mortgage broker will know about the full range of mortgages available right across the market and will be able to advise on high-income multiple mortgages, e.g. on a 5x or even 5.5x basis.
Theyll be able to propose the lenders who will look most favourably on your particular circumstances and will package your application, so it demonstrates your suitability for their lending criteria.
The result can be a more generous mortgage offer, a cheaper borrowing rate, or a variation in the terms , which will better suit your circumstances.
Can I Get A Mortgage For More Than The Value Of The Property
Im buying a house at a discount from a family member but need funds to renovate it
Q My partner and I are first-time buyers. We are looking to buy a house from a family member. The family member has had the house valued at £120,000 but has offered it to us for £70,000 to help us on to the property ladder.
The house is in need of a rewire, central heating and new windows, bathroom and kitchen.
As the house is valued at £120,000, would it be possible to take out a mortgage of £100,000 even though we are buying the house at £70,000? ML
A No lender will give you a £100,000 mortgage to buy a property costing £70,000. Any mortgage offer will be based on the purchase price of the property even if this is lower than the actual value. And the most youll be able to borrow with a conventional mortgage would be 90% of the price which, in your case, would be £63,000. To be able to get a mortgage of £100,000 you would need the purchase price to be just over £111,111 and to be able to put down a cash deposit of £11,111.
Thats not to say you wont be able to borrow to pay for renovation costs as most mainstream lenders are prepared to lend money for building costs but they dont pay the money up front which wouldnt suit you. Instead any money lent is paid after the building work is complete and the property has been revalued.
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Does The Size Of My Deposit Make Any Difference
Yes the larger the deposit, the cheaper your mortgage will be.
This is because not only will the loan required be smaller but you will get access to the best interest rates, as lenders may view you as less risky if you are putting a significant sum of money into the property yourself.
The best mortgage deals are available to people with a deposit of at least 40%. The cheapest interest rate for applicants making a 40% downpayment is 1.69%, according to our mortgage calculator. This rate is offered by Nationwide, for a two-year fixed-rate deal.
Meanwhile the cheapest rate for a first-time buyer with a 5% deposit is 2.45% for a two-year fix with Newcastle Building Society.
Avoid Svr If Your Current Mortgage Term Is Coming To An End
Once your mortgages initial period ends, you will be automatically rolled onto your lenders standard variable rate . This is your lenders default rate and you might find its significantly higher than the rate in your initial period. If this happens your mortgage payments could shoot up, however, you can avoid this happening by remortgaging onto a new deal.
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Whats The Maximum Amount You Can Borrow
Bigger loans are generally more lucrative to creditors. However, larger sums also come with a higher risk of default.
Most lenders do not dish out home equity loans worth more than the applicants homeownership stake because that would leave a chunk of the loan potentially unsecured. A line needs to be drawn somewhere and, in many cases, the magic number is 80. Though each lender is free to choose how high to go, many wont lend more than 80% of what the homeowners interest in their property is worth.
How An Equity Release Agreement Works
One option is for one or more investors to buy portions of your home’s equity through a property investment fund. You pay fees which are periodically deducted from the remaining equity in your home. The investor’s share of your home’s equity goes up over time, and yours goes down.
For example, suppose your home is currently worth $500,000. You sell 20% of your home’s equity in return for a lump sum of $100,000. The fee charged by the fund may vary, depending on your circumstances and the agreement. If the fund charges an initial fee of $30,000, it may take $130,000 of your equity to cover both the lump sum and periodic fee.
Additional amounts of equity are deducted each time the periodic fee falls due . The fee is a set percentage of the fund’s equity in your home. So, as the fund’s share of equity increases, the fee goes up.
When the equity release agreement ends, and your home is sold, the fund gets their share of the proceeds. That is, the proportion of your home’s equity they have accrued. You or your deceased estate get the remainder of the proceeds, if any.
The proportion of home equity you keep will reduce over time, and could even go down to zero.
Check your agreement to see what happens if your equity goes down to zero. Make sure you can continue living in your home, until sold by you or your deceased estate.
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How Do Lenders Work Out How Much I Can Afford
Taking on a mortgage is a big financial commitment, and lenders will want to make sure you could afford the monthly repayments.
They will conduct an affordability check when calculating how much they will lend you. This involves examining your income and outgoings the more money you spend each month, the less you might be able to borrow.
As part of their affordability assessment, lenders will consider criteria such as your:
- Employment status
- Total gross income
- Regular outgoings
- Student loan repayments
- Childcare costs
If you are wondering, what kind of mortgage could I get?, check out our guide to the different types of mortgage.
Refinancing Options For Underwater Mortgages
If your house is worth less than the balance due on your mortgage, your home has negative equity. You may hear people say that your house is “underwater.” In that case, if you want to get a refinance for a better interest rate or a lower payment, you’re trying to borrow more than your house is worth.
Freddie Mac has a product called the Enhanced Relief Refinance Mortgage. If you applied for the refinance loan after November 1, 2018, you may be able to borrow more than your house is worth. If you have an adjustable rate mortgage, you can borrow up to 105 percent of the home value if the loan is a fixed rate loan, there are no LTV limits.
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How Home Sale Proceeds Sharing Works
The provider pays you a reduced amount for the share you sell. How much you get for the share depends on your age.
Terms and conditions vary. The provider may offer a ‘rebate’ feature. This means you get some money back if you sell your home earlier than expected. The amount you get back depends on when you sell your home and how much you got for your sold share. You may also have the option to buy back the sold share later, if you wish.
For example, suppose your home is currently worth $500,000 and you sell a 20% share of the future value. Depending on your age, the provider may offer you $37,000 to $78,000 to buy that share today. When you sell your home, the provider receives their share of the proceeds. Say in 20 years time you sell your home for $800,000. The provider gets 20% of the sale price , minus any rebate .
Can I Borrow More With A Joint Mortgage
When lenders previously based their calculations solely on income, they tended to apply a higher multiple to joint applications from two or more prospective borrowers. Now, however, the benefit of applying with a partner or friend is the fact you will be provided with a loan based on both of your salaries, rather than being offered a significantly higher multiple. For example, if you were offered 5 times your £25,000 annual income as a single applicant, you would be able to borrow up to £125,000. However, if you applied with someone also earning £25,000, you would collectively be able to borrow up to £250,000.
If you buy a property with someone earning substantially more or less than you do, it is worth asking your solicitor to draw up a contract stating what the expectation is on how the monthly repayments will be met and whether you will contribute equally or proportionately to the amount you own. This extends to how you would divide the equity in the property if it was sold in the future.
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Are There Alternatives To Keeping Unused Funds
Ultimately, that would depend on your investment plans.
If you plan to invest for the long-term, rather than the short-term, you may want to just borrow the amount you need, pay down your home loan as much as you can, and grow your equity.
Then you can merely top-up your home loan to use as a or cross-securitise your home.
Speak to one of our specialist mortgage brokers on 1300 889 743 and we can help you qualify for a home loan increase without any charges.
Home Equity Loans Vs Helocs
Home equity loans provide a single lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan. The loan must be repaid in full if the home on which it is based is sold.
A HELOC is a revolving line of credit, much like a credit card, that you can draw on as needed, pay back, and then draw on again, for a term determined by the lender. The draw period is followed by a repayment period when draws are no longer allowed . HELOCs typically have a variable interest rate, but some lenders offer HELOC fixed-rate options.
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A Historic Opportunity To Potentially Save Thousands On Your Mortgage
Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.
The Ascent’s in-house mortgages expert recommends this company to find a low rate – and in fact he used them himself to refi . and see your rate. While it doesn’t influence our opinions of products, we do receive compensation from partners whose offers appear here. We’re on your side, always. See The Ascent’s full advertiser disclosure here.
The Annual Salary Rule
The ideal mortgage size should be no more than three times your annual salary, says Reyes.
So if you make $60,000 per year, you should think twice before taking out a mortgage that’s more than $180,000. However, if you have a partner, and your combined income is $120,000, you can comfortably increase your loan amount to $360,000.
That’s not to say you should always opt for the most expensive mortgage you can qualify for. If you settle on something below your max, you’ll have more wiggle room to put money into a savings account or pay for other costs like home renovations.
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Raise Your Credit Score
A higher credit score helps you obtain not only a lower interest rate but also a slightly larger loan, in many cases.
Having a higher credit score may allow you to qualify for a higher mortgage , but only to a certain extent, says Matt Hackett, operations manager at Equity Now, a New York-based mortgage lender.
To boost your score, be sure to make all your payments on time, and dont max out the credit you have or apply for more credit while youre trying to get the mortgage.
Federal Housing Administration Loans
The Federal Housing Administration , part of the U.S. Department of Housing and Urban Development , provides various mortgage loan programs for Americans. An FHA loan has lower down payment requirements and is easier to qualify for than a conventional loan. FHA loans are excellent for first-time homebuyers because, in addition to lower up-front loan costs and less stringent credit requirements, you can make a down payment as low as 3.5%. FHA loans cannot exceed the statutory limits described above.
However, all FHA borrowers must pay a mortgage insurance premium, rolled into their mortgage payments. Mortgage insurance is an insurance policy that protects a mortgage lender or titleholder if the borrower defaults on payments, passes away, or is otherwise unable to meet the contractual obligations of the mortgage.
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Get More Than One Quote
Its always a good idea to get multiple rate quotes and loan offers in fact, studies show comparison-shopping pays off over the course of a loan.
Theres another benefit, too, however: If you get multiple preapprovals, youll get multiple offers with potentially different amounts. If you really need a big mortgage, you can go with the lender that offers the largest preapproved loan.
With more than one offer, you also have the leverage to go back to a lender that preapproved you for a smaller amount and see if theyll increase the amount theyre willing to lend. This can help you get the biggest mortgage for the lowest cost.
With additional reporting by TJ Porter
Increasing My Mortgage What Is A Further Advance
A further advance is when you take on more borrowing from your current mortgage lender.
This is typically at a different rate to your main mortgage.
This route can make sense if:
- your lenders further advance is competitive
- you dont want to remortgage or switch lenders.
You can spread your payment over a long term and your interest rate should be lower than a personal loan.
But always check the market to see if you can get a better deal before committing.
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What Is A Mortgage
A mortgage is a security interest in a piece of real estate. When you borrow money to buy a house or refinance a house, you give the lender a mortgage, which means that if you don’t pay the loan back, the lender can foreclose on the mortgage and sell the property to satisfy the debt. Lenders do this because home loans are such large loans, and they need to protect themselves in the event that you don’t pay.
What Are The Risks Of Remortgaging To Release Equity
Remember that you remortgage to release equity, you are increasing your loan. If your home has risen in value then it may not feel that way , but you will still end up paying back more than you otherwise would have, and it will probably be longer before you finish paying off the loan.
If you borrow more than the amount by which your equity has increased, then your loan-to-value ratio will rise. This may result in higher repayments, so youll need to make sure you can afford these .
Bear in mind too that if house prices were to fall, you could find yourself in negative equity. Negative equity means that your outstanding loan is larger than the total value of your home. This is a bad predicament to be in, as it can make it impossible to remortgage, and very hard to sell your home.
Also beware of remortgaging without first taking advice. Rushing into it may mean you are turned down by multiple lenders, which will affect your credit score. Wait until a mortgage broker is confident that your application will succeed.
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