Covington GA Living

At the risk of loosing about 51% of my readers, I have to say right up front that... No, girls!  This is not about the 1983 movie, "Risky Business," that propelled Tom Cruise to fame.  Sorry!

This is the third in a series of articles on mortgage lending in the Covington Georgia real estate market.  And that, too, in today's market, can be a "risky business."

In mortgage transactions, the lender takes the risk that you and I, as borrowers, may default on the loan and not repay the debt.  Therefore, they assess their risk on every type of mortgage loan to determine whether the loan should be approved or declined.  There are four major risk factors lenders consider today when underwriting a mortgage loan in the Covington real estate market and several lesser ones.  In this part of the series, we'll look at the first two major factors, LTV and DTI.  In Part 4, we'll look at the other two major risk factors and the lesser ones.

Loan To Value (LTV)

One of the first risk indicators lenders look at is called the Loan To Value (LTV) ratio.  Loan To Value is a mathematical calculation in which the amount of the loan you're applying for is divided by the lower of either the purchase price or the appraised value of the home you are buying.

Example:

• Purchase Price of $200,000
• Appraised Value of $203,000
• Down Payment of $20,000
• Loan Amount of $180,000

$180,000 divided by $200,000 = 90% LTV

The normal maximum LTV expected by the lender for a "conforming" mortgage loan for a primary residence or second home is 95%.  That is to say that the borrower pays 5% down, leaving a mortgage loan of 95% of the sales price of the home being purchased.

Normal maximum LTV for a conforming mortgage loan on investment property is 90% (10% down payment).

Loan options are also available for LTVs between 95% and 100% even though they represent a higher risk to the lender.  They are available on some special conforming programs and on government guaranteed programs through the FHA and VA.

There is a 95% maximum LTV on home refinancing to obtain a better interest rate, and 90% maximum LTV on refinancing for home equity loans, called "cash out refinances."

When a borrower is obtaining two mortgage loans to finance a home (such as an 80/20 loan - 80% first mortgage, 20% second mortgage), the mortgage lender considers a calculation called the CLTV or Combined LTV.

Example:

• Purchase Price of $200,000
• Appraised Value of $203,000
• Down Payment of $20,000
• 1^st Lien Loan Amount of $160,000
• 2^nd Lien Loan Amount of $20,000

$160,000 divided by $200,000 = 80% LTV

$160,000 + $20,000 = $180,000 divided by $200,000 = 90% CLTV

Debt To Income Ratio (DTI)

The second major risk factor lenders consider is your Debt To Income Ratio (DTI).  Making up your DTI are two ratios:  1. Housing Ratio, and 2. Total Debt Ratio.

The Housing Ratio is the monthly estimated house payment (including PITI: principal, interest, property tax and homeowner's insurance) divided by the borrower's and co-borrower's monthly gross income (before tax).

Example:

• PITI of $1,420.50
• Gross Monthly Income of $6,000

$1,420.50 divided by $6,000.00 = 23.7% Housing Ratio

[TIP] A good rule of thumb to use when you're crunching numbers before deciding about applying for a mortgage loan is to make sure your Housing Ratio is no higher than 30%.  In reverse, that means that you should be able to comfortably afford a house payment (PITI) amounting to about 30% of your gross income.

The Total Debt Ratio is the estimated monthly house payment (PITI) plus other monthly payments such as car loans, credit cards, personal loans, etc., divided by the borrower's and co-borrower's monthly gross income.

Example:

• PITI of $1,420.50
• Other Debt

•  
  • Auto Loan Payment $460.00
  • Credit Card Payments Totaling $300.00

• Gross Monthly Income of $6,000

$1,420.50 + $460.00 + $300.00 = $2,180.50

$2,180.50 divided by $6,000 = 36.3% Total Debt Ratio

[TIP] A good rule of thumb to use for a maximum Total Debt Ratio is no higher than 40%.

[TIP] Your car loan payment is not normally considered when figuring your Total Debt Ratio if you have less than 10 months left to pay on the loan!

Most loans today are underwritten through automated (computerized) underwriting.  When lenders use automated underwriting, actual maximum ratios allowed may be different since the computer can easily consider all risk factors of the loan at once.  The ratios can go higher than 30% Housing Ratio and 40% Total Debt Ration.  However, when you're crunching numbers yourself, as I mentioned above, it's best to use 30% Housing Ration and 40% Total Debt Ratio as guidelines.

Contact any of "Your Traditional Neighborhood Specialists," Licensed Realtors in Georgia at 770.787.7777 (Ext. 456) to list your property for sale or to purchase a property in Covington, Conyers, Oxford or anywhere in Newton, Rockdale, Walton, Henry, Gwinnett or east DeKalb Counties in Georgia.  We are accepting referrals!

You deserve more from your Realtor than just another refrigerator magnet!  Visit our profile to learn more about the services you deserve.  Call us today at 770.787.7777, Ext. 456, or contact us by email by clicking on "email me" on the right side of this page under our profile.

To see all Covington, Conyers and Oxford homes for sale, click here and then click on "Search MLS Listings."  We know Newton, Rockdale, Walton, Henry, Gwinnett and DeKalb Counties and can get your home sold or help you buy your Covington or Conyers home. 

"Your Traditional Neighborhood Specialists" fees are the same as for a single Realtor.  But you get...

• Five times the Market Knowledge
• Five times the Marketing Expertise
• Five times the Negotiating / Sales Ability
• Five times the Accessibility
• All for a single-Realtor fee!

We think you deserve it!

Copyright 2008 by Your Traditional Neighborhood Specialists.  All Rights Reserved.  All information provided in Covington Living Blog is subject to change without notice, and represents the ideas and opinions of the author(s).  The author(s) are not responsible in any way for the accuracy of the information provided, and offer no warranties of any kind, either express or implied.

In real estate, we talk about Smart Homes, meaning everything from ecologically sound building practices, materials and systems to being digitally wired so that one can dial in on their cell phone and turn on the oven.

We talk about Smart Growth, environmentally and politically sensitive land use zoning and planning... maintaining greenspaces in cities, conservation neighborhood development, TND/PUDs, attractive commercial spaces without acres of asphalt.

And now, there's the "Smart Car."  They don't have a lot to do with real estate in Covington except that I'm a Realtor and now I drive one!

While we were in Europe last year, my wife and I noticed them everywhere, and kinda fell in love with them.  She said they were so ugly, they were cute!  When we got home, I did a little research and found that Mercedes would start building them for the US market and importing them in 2008.  That's all it took.  The next day, my reservation was in for the first one I could get. 

After almost exactly a year of waiting, I picked up my Smart Car this morning.  It's one of about 200 delivered in metro-Atlanta to date, and the first one - so far as I can tell - in Covington.  What a great little car!

It's actually roomy, peppy and has all the bells and whistles my big SUV had... except one.  The Smart Car has only an eight-gallon gas tank to supply the 3-cylinder engine.  But with its 40 to 50 MPG, the eight gallons should send me 350 to 400 miles!

Mine is the "Passion" model with remote keyless entry, heated leather seats, sun roof, air, auto-down electric windows, remote adjustable mirrors, automatic halogen headlights, rain-sensing wipers, AM/FM/CD, iPod plug, drink holders, "luggage" space behind the seats, and more stuff I haven't even figured out yet.

The rear-engine, rear wheel drive Smart Car is amazingly affordable, even though it's built by Mercedes to those exacting, quality German engineering standards.

Any other Realtors driving a Smart Car, or have one ordered?  I'd like to hear from you!

Maybe more Realtors should drive them!  They make you feel Smart... and kinda "Green."

In this second part of my series on mortgage lending, we'll discuss "underwriting" and the difference between being "pre-qualified" or "pre-approved"  for you mortgage loan.

In the Covington real estate market, for every mortgage loan transaction, the lender must determine how risky it is for them to give you a mortgage loan.  Lenders have much more vigilant in today's market due to the high default rate on mortgages in the U.S., and rightly so.  After all, lenders are the ones who take the risk that you and I, as borrowers, may default on the loan and not repay our debt.  To assess their risk, lenders use a process called "underwriting."  That's a term I'm sure you've heard, but may not fully understand.

In mortgage lending, underwriting is simply a detailed credit analysis the lender does before they will grant you a mortgage loan.  The term derives from the Lloyds of London insurance markets several centuries ago.  Financial bankers of that time who agreed to accept some of the risk of a given venture (typically a sea voyage - with the associated risk of sailing off the edge of the world), in exchange for a premium payment, would literally write their names under the risk information written on a Lloyds document (insurance policy) created for that purpose.  Thus, the term "underwriting."

So, why are we talking about underwriting before even beginning to look for the perfect home for you?  I've already said that underwriting is the detailed credit analysis the lender does before they will give you a loan.  So doesn't that come later in the home buying process after you've found your dream home and written the seller an offer?  No... it should come right up front.  That's the difference between being "pre-qualified" and "pre-approved" for a loan.

It is common for the terms pre-qualified and pre-approved to be confused and viewed as being the same.  However, they are very different.

The pre-qualification process involves a quick consultation between you and a lender to discuss three things...

1. The amount of money you have to put towards a down payment, closing costs and prepaid items, escrows and cash reserves. [NOTE: We will discuss all these items and what each means in future articles.]
2. Can your income and assets be verified.
3. Price range of homes you should look in and how much you can afford and be comfortable with on a monthly house payment.

Your lender will also pull your credit score, and if everything looks all right, give you a pre-qualification letter.  This letter tells you and your Realtor® that you've talked with a lender; you are "qualified" to buy a home, and what price range you should be looking in.  However, a pre-qualification letter does NOT guarantee that you will ultimately be approved for a loan because your loan has not yet been underwritten.

Most mortgage loans in the Covington real estate market today are underwritten through automated (computerized) methods.  This is a more formal evaluation and consultation process performed by your lender resulting in a "pre-approval letter."

In the pre-approval process a loan application is completed, automated underwriting is completed and your credit scores from all credit bureaus are evaluated.  Many borrowers, and some Realtors®, assume that obtaining a credit score from a single credit report is sufficient to indicate that a borrower will be approved for a mortgage.  But, because there are multiple risk factors to be considered in mortgage loan approval, estimating an approval from a single credit score or report can be very inaccurate and misleading.

The pre-approval process, resulting in a pre-approval letter, is the only way to ensure that you can get a mortgage for the amount you need as long as...

• 1. The property appraisal and title are satisfactory
• 2. You can verify all information on your mortgage application, and
• 3. Nothing changes in your financial status (assets, liabilities & employment) prior to closing.

Having a pre-approval letter gives you the insight of knowing what price range you should be looking in, the comfort of knowing exactly what price home you can afford, and the negotiating strength of being able to make an offer and follow through on it when you find the perfect home for you and your family. 

You will eventually have to go through the process of loan application, providing your W-2s, pay stubs, bank account information, etc. anyway.  So why not do it right up front for a pre-approval letter rather than a pre-qualification?  Pre-approval is the only way to go!

Note that if you would like to check the reliability of the mortgage lenders you might be considering, or those referred by your Realtor®, go to the Georgia Department of Banking website to find information on mortgage brokers, lenders and processors doing business in the State of Georgia.

In the next part of this series, Part 3, I'll tell you about three of the major risk factors lenders evaluate when considering your mortgage loan.

I invite your questions and comments throughout this series on mortgage lending in the Covington real estate market, and hope it will make you more confident and comfortable about wanting to buy a new home or selling the one you have.

Contact any of "Your Traditional Neighborhood Specialists," Licensed Realtors in Georgia at 770.787.7777 (Ext. 456) to list your property for sale or to purchase a property in Covington, Conyers, Oxford or anywhere in Newton, Rockdale, Walton, Henry, Gwinnett or east DeKalb Counties in Georgia.  We are accepting referrals!

You deserve more from your Realtor than just another refrigerator magnet!  Visit our profile to learn more about the services you deserve.  Call us today at 770.787.7777, Ext. 456, or contact us by email by clicking on "email me" on the right side of this page under our profile.

To see all Covington, Conyers and Oxford homes for sale, click here and then click on "Search MLS Listings."  We know Newton, Rockdale, Walton, Henry, Gwinnett and DeKalb Counties and can get your home sold or help you buy your Covington or Conyers home. 

"Your Traditional Neighborhood Specialists" fees are the same as for a single Realtor.  But you get...

• Five times the Market Knowledge
• Five times the Marketing Expertise
• Five times the Negotiating / Sales Ability
• Five times the Accessibility
• All for a single-Realtor fee!

We think you deserve it!

Copyright 2008 by Your Traditional Neighborhood Specialists.  All Rights Reserved.  All information provided in Covington Living Blog is subject to change without notice, and represents the ideas and opinions of the author(s).  The author(s) are not responsible in any way for the accuracy of the information provided, and offer no warranties of any kind, either express or implied.