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HOME WBT’S GUIDE TO MORTGAGES & HOMEBUYING
Dear Future Homebuyer, If you’re considering a mortgage loan for a new home purchase, you’ve come to the right place. Great interest rates are just the beginning at Wilson Bank & Trust, where our experienced, knowledgeable lenders will help you through the entire process and find a loan that’s the right fit for your circumstances and budget. We offer a variety of loan options to choose from, allowing you to find the best option that fits your needs. In this booklet you will find tips on budgeting, details on the loan programs we offer, and information about what you need to get started. For more information, visit our resources page at wilsonbank.com/mortgage. Your Wilson Bank & Trust Mortgage Team. We’re always just a phone call away: 615-994-5320
Determine Your Budget
HomeReady Mortgage
Take into account the monthly mortgage payment plus the amount needed for the down payment and closing costs. Make sure to account for upkeep, maintenance, and emergency repairs that can arise. Set aside 1% of your total mortgage for these expenses. The U.S. Department of Housing and Urban Development recommends not spending more than 30% of your income on housing costs.
• This program is for creditworthy low-income borrowers. • Credit score ≥ 620 is necessary, but borrowers with credit scores ≥ 680 may get even better pricing. • Offers up to 97% of the purchase price. You would be responsible for the 3% down plus your closing costs. • You do not have to be a first-time homebuyer to qualify. • Requires you to take an online homebuying education course. • Has an income limit – income levels above a certain amount aren’t eligible for this type of loan, depending on your area. • This program offers better rates and mortgage insurance than some others. • Has flexible funding – cash for down payment or closing costs can come from multiple sources. • There is a reduced MI (mortgage insurance) coverage requirement above 90% LTV (loan to value). The MI is cancellable once the borrower’s equity reaches 20% (restrictions apply).
The Homebuying Process STEP 1 Get preapproved. STEP 2 Find a qualified real estate agent. STEP 3 Find the right home. STEP 4 Make an offer. STEP 5 Negotiate your offer and agree on a price. STEP 6 Inspect the home and finalize the price. STEP 7 Finalize your mortgage. STEP 8 Obtain insurance on the new home. STEP 9 Close on your new home. STEP 10 Move in and enjoy your new home!
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United States Department of Agriculture (USDA) Rural Development • Allows you to borrow up to 100% of the purchase price. You would be responsible for your closing costs. • This is a government guaranteed loan. • A finance/funding fee of about 1.1% of the loan amount is added on top of your loan. • Comes with income limits and property restrictions – usually reserved for low and very low incomes. • Limited to rural areas. Eligible addresses can be searched here: eligibility.sc.egov.usda.gov/eligibility/. Applicants Must: • Be without decent, safe, and sanitary housing • Be unable to obtain a loan from other resources with terms and conditions that can be reasonably be met • Agree to occupy the property as your primary residence • Have the legal capacity to incur a loan obligation • Meet citizenship or eligible non-citizen requirements • Not be suspended or barred from participation in federal programs Properties Must: • Be modest in size • Not have market value in excess of the applicable loan limit • Not have in-ground swimming pools • Not be designed for income-producing activities
Federal Housing Administration (FHA) • Allows you to borrow up to 96.5% of the purchase price. You would be responsible for the 3.5% down plus your closing costs. • This is a government loan. • Comes with a finance/funding fee of about 1.75% of the loan amount on top of your loan. • Good option if you have a lower credit score. • A monthly mortgage insurance premium (MIP) is required for the life of the loan.
Tennessee Housing Development Agency (THDA) • Down payment assistance for first-time homebuyer that is normally paired with an FHA loan. • Up to $7,500 is available depending on the sales price. • Has an income limit. • Requires a minimum credit score of 640. • Amortized over 15 years with the same interest rate as the first mortgage.
Veterans Administration (VA) • Only for veterans of the U.S. armed forces, and eligible spouses. • No down payment assistance needed. • May require borrower to pay some closing costs and a VA funding fee.
Fair Lending
What Is a Credit Score? • A number that helps a lender predict how likely an individual is to repay a loan, or make credit payments on time. • A number that changes as the elements in a credit report change. • It has broad use and impact. Your credit past is your credit future. • FICO® is one of the most common credit scoring systems, the scores can vary between 350–850. • VantageScore®, a new credit scoring system that was developed by the three credit bureaus, uses scores that range from 501–990. • You can obtain a FREE credit report at freecreditreport.com. Credit Score Is Based On:
• The Equal Credit Opportunity Act prohibits lenders from discriminating against applicants based on race, color, religion, national origin, sex, marital status, or age. • The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. • Under these laws, a consumer cannot be refused a loan based on these characteristics, and cannot be charged more or offered a less favorable term.
Credit The Five C’s of Credit C = Capacity C = Capital C = Conditions C = Character
Payment History – 35% Current Total Debt – 30% Length of Credit History – 15% Types of Credit in Use – 10% Requests for New Credit – 10% Maintaining Good Credit • Debt-to-income ratios for good credit are illustrated below. • Involves good money management. • Save a portion of your income and make longterm investments. Debt to Income Ratios
C = Collateral 51% or more Danger
39% to 50% High
24% to 38% Fair
16% to 23% Good
15% or less Great
What Goes into a Monthly Mortgage Payment? • Escrow: This is an account that your lender/servicer uses to pay your taxes and insurance when they are due each year. When you close on a loan, a cushion or deposit is collected to go into your escrow account, because there will not be a full year to collect the needed funds from your monthly payments. Your lender/servicer divides these annual costs into a monthly amount (1/12 of what’s due for the whole year). This is added to your monthly mortgage payment and goes into an escrow account until it’s due. • Property Taxes: When you own a property, these taxes are due every year to the city and/or county. • Homeowners Insurance: This is required in case something were to happen to damage or destroy your house (fire, storm, etc.). A yearly premium is due for this insurance. • Private Mortgage Insurance (PMI) or Mortgage Insurance (MI): Protection for your lender/servicer. Required when you pay less than 20% of your purchase price upfront, in case something were to happen and you were to stop making your mortgage payments. PMI is normally added to the monthly payment. • Closing Costs: 2–3% of the purchase price. Includes fees for the appraisal of the property, the title company’s fees, transfer taxes and the escrow deposit.
Saving and Investing • Mutual Fund: A collection of stocks or bonds of various corporations. • Opportunity Cost: The next best alternative that’s given up in making a financial choice. • Principal: The amount of money originally invested. • Risk: The possibility of financial loss or physical harm. • Savings Account: An interest-bearing account where people put money for future use. • Stock: A share of a corporation that is sold to the public. • Short-Term Saving Options: - Saving accounts - Certificates of deposit (CDs) - Money market accounts • Long-Term Saving Options: - Bonds - Stocks - Mutual funds - 401(k) retirement accounts
Glossary of Common Lending Terms • Debt Consolidation Loan: A loan used to pay off and combine other credit balances. This type of loan is offered by most financial institutions as well as debt counseling agencies that try to help overwhelmed borrowers get back on track. Often a debt consolidation loan is backed by some collateral, such as a second mortgage if the borrower is a homeowner. The loan can also be a personal loan or even a title loan, however. Generally the loans being consolidated are high-interest credit card balances or delinquencies (defaulted loans) that a person is trying to repair. By paying off or making right these types of items, a person can often get the loan at a better interest rate than they are paying due to recalculations based on a new lower payment and a resulting improved credit score. • Education/Training Loans: Loans used for tuition and other related expenses. Often the borrower is able to put off repayment until the completion of the education. Interest rates for education loans are generally less than installment loans because the borrower will generally be equipped to manage the debt, having gained the knowledge to begin a career. • Equity Loan: A loan that uses the equity in a person’s home as collateral, often used for purposes like home improvements or debt consolidation. An equity loan can also be referred to as a second mortgage, and because the loan is secured by the borrower’s home, the interest rate is often lower than with other forms of credit. • Foreclosure: In the event that a mortgage loan becomes defaulted the lender has the right to foreclose, or essentially take the home from the borrower. Any loan using a home as collateral – whether a debt consolidation second mortgage, a home equity line of credit, or a regular mortgage – could result in foreclosure if the borrower
becomes behind on payments. Recent foreclosure rates are at record highs due to borrowers with high credit risks obtaining loans that they could not afford; falling housing prices that make a home not worth the amount borrowed against it; and adjustable rate mortgages whose interest rates have risen beyond the borrower’s means to make the payment. A home that has been foreclosed by a bank is typically sold below market value to quickly recoup the amount owed plus the associated legal fees. Banks would rather get the loan off of their books than wait to find a buyer to pay market value for the home. • Installment Loan: A loan that involves the lender (financial institution, etc.) exchanging a sum of money for a borrower’s set of equal payments, at a set interest rate according to the terms of the loan. Installment loans are used to make large purchases such as cars or appliances. A mortgage is another type of installment loan. • Line of Credit: Otherwise known as revolving credit, this differs from installment credit in that there is not an initial exchange of money with set repayment terms. Instead, the borrower is given a credit limit that they can borrow up to, and they must make payments afterward based on the amount borrowed. The loan can be borrowed and repaid repeatedly as long as the minimum payments are made and the limit is never exceeded. Credit cards are a common use of revolving credit because the card is used and the balance paid on a monthly basis. Another form of revolving credit is a home equity line of credit, or HELOC, which uses the borrower’s home as collateral for the loan. HELOCs have a lower interest rate than credit cards because credit cards have no collateral to back the loan. • Mortgage: A loan specifically intended for purchasing a home. A mortgage is usually repaid over a 15- or 30-year period and conventionally includes a monthly payment with a fixed interest rate. The interest rate is based on the interest rate environment and the creditworthiness of the borrower at the start of the loan.
Because the home itself serves as collateral for the loan, the interest rate is typically lower than that of credit cards and other installment loans. • Personal Loan: An unsecured loan made by a financial institution based solely on the credit of the borrower, without a form of collateral. The better the borrower’s credit score or history with the lender, the better terms they will receive. In most cases even the best customer will pay a slightly higher rate than a similar loan using some collateral for the loan. However, personal loans are often smaller in dollar amount and collateralizing may not be feasible. • Repossession: When a loan secured by a car title or personal property goes into default, the item is said to be repossessed. Because a lender keeps the title of a vehicle being used as collateral, they may obtain a key for the vehicle if needed, or otherwise have the vehicle towed. Personal property such as televisions, electronics, and jewelry may also be repossessed if they’re used to secure a personal loan and the borrower defaults. • Secured Loan: A loan backed by security, also known as collateral. The borrower’s willingness to repay will be based on what they have promised the lender in exchange for giving them the loan. The better the security, generally the lower the risk to the lender and therefore the lower interest rate paid by the borrower. Mortgage loans are safer than credit cards to lenders because credit cards may fund expenditures like travel, restaurants, and clothing, which have no value to resell for recovering the money that was loaned. • Unsecured Loan: A loan without security, or collateral, to back the loan in the event the borrower defaults on the loan. Unsecured loans are made based solely on the borrower’s promise to repay and their creditworthiness. Credit cards and personal loans are types of unsecured loans. Because the lender is not holding anything of value to use to recover their loss in the event of default, an unsecured loan will always have a considerably higher interest rate to be paid by the borrower.
Resources • For more information on HomeReady® mortgages, visit singlefamily.fanniemae.com/ originating-underwriting/mortgage-products. • Information on USDA loans can be found at rd.usda.gov. • For more information on THDA loans or to take a homebuyer class, visit thda.org/homebuyers or call THDA’s homeownership hotline at 615-815-2100. • For more information on VA loans or to see if you qualify, visit benefits.va.gov/homeloans. • For more information on HUD (Department of Housing and Urban Development), visit hud.gov. • For help managing your money and learning to save, visit the University of Tennessee Extension website at fcs.tennessee.edu/money. • To obtain a FREE credit report, please visit freecreditreport.com.
TERMS OF USE This booklet has been compiled for the sole purpose of conveying information about mortgage products for prospective homebuyers. The bank will make every reasonable effort to ensure all contents are accurate and up to date, but the information is subject to change at any time. Wilson Bank & Trust makes no warranties of any kind regarding the products in this booklet, and no information contained in it should be inferred as a substitute for the agreements and disclosures that govern the bank’s products and services.
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