Annual income refers to the total income earned during a fiscal year. This includes things like: salary, bonuses, commissions, overtime, and/or tips earned. Gross income is the money you brought in before tax and the net annual income is the amount you’re left with once deductions are complete.
A cash-out refinance replaces your current mortgage with a new home loan that is for more than you owe on your house. Why do this? By doing this, you will receive the difference in cash and be able to spend it on home improvements, debt consolidation, or other financial needs you deem necessary. To cash-out refinance, you have to have equity built up in your house. According to NerdWallet, here’s how cash-out refinance works:
- Pays you the difference between the mortgage balance and the home’s value
- Has slightly higher interest rates due to a higher loan amount.
- Limits cash-out amounts to 80% to 90% of your home’s equity.
The current balance on your loan statement is what is owed as of the date of the statement. The current balance does not reflect how much you owe to fully satisfy the loan.
Your debt-to-income ratio is the total of all monthly debt payments divided by your gross monthly income. This total is one-way lenders gauge your ability to manage the monthly payments to repay the money you want to borrow. Borrowers with low debt-to-income ratios are more attractive to lenders. Any ratio higher than 43 percent communicates that a buyer may be a risky borrower. To a lender, someone with a high debt-to-income ratio shouldn’t take on any additional debt. If the borrower defaults on his mortgage loan, the lender could lose money.
Currently, the maximum debt-to-income ratio that a homebuyer can have is 43 percent they want to take out a qualified mortgage. According to the Consumer Financial Protection Bureau, “Borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments. The 43 percent debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still get a Qualified Mortgage.”
In addition, the lower your debt to income ratio, the better the mortgage rate you will lock in on your loan, which translates into more money in your pocket now, and in the future.
A down payment on a home mortgage is a percentage of the total sales price of your home which is paid by you to the seller of the home you are purchasing. (The remaining payment of the home to the home seller is provided to them from your mortgage.) Down payments are discussed as percentages. For example, 20 percent down means the borrower is paying the seller 20 percent of the purchase price. (A down payment of at least 20 percent lets you avoid private mortgage insurance, or PMI.)
According to Nerd Wallet, while 62 percent of Americans think they need (at least ) a 20 percent down payment to buy a home, really much less is required.
The minimum down payment for a home mortgage depends on the type of loan and your lender’s requirements. Different loan types come with their own minimum down payment requirements such as: 3 percent for conventional loans; 3.5 percent for FHA loans; and zero percent down for VA loans and USDA loans.
An FHA loan requires a 3.5 percent down payment on the purchase price of the loan.
FHA loans are appealing to first-time buyers because of the low down payment requirements. For new purchase loans, an FHA loan requires a minimum of a 3.5 percent down payment. If you purchase a home for $175,000, for example, your down payment will be at least $6,125. Typically, closing costs can be wrapped into the loan and do not need to be paid out of pocket.
Keep in mind that 3.5 percent is the minimum down payment required on the purchase of a home with an FHA loan. Your lender will determine your creditworthiness which can affect the size of your down payment. Borrowers with poor credit might need to put more money down in order to qualify for the loan. If your credit is not where you want it to be, you can improve it by paying your bills on time, keeping your balances low on credit cards and checking your credit reports for errors.
The FHA loan limit is the maximum loan amount you can get for an FHA loan, which varies depending on the area you live in.
An FHA loan is a loan that is insured by the Federal Housing Administration (FHA). The loans are geared toward borrowers that do not have a large down payment on the home they wish to purchase. FHA loans require a minimum of a 3.5 percent down payment on the purchase price of the home.
In 2020, FHA loan limits in high-cost metropolitan areas increased to $726,525. In areas where housing costs are low, FHA limits are $314,827. To see specific FHA lending limits in your state, click here.
Private mortgage insurance (PMI) is the lender’s protection if your home goes into foreclosure because you default on your primary mortgage.
When borrowers apply for a home loan, lenders will require a down payment equal to a certain percentage of a property’s purchase price (usually 20%). If unable to afford that percentage, a lender will require the borrower take out a PMI. PMI’s are usually included in your monthly payment to the lender for your mortgage. The PMI can cost anywhere from 0.5% and 1% of the entire loan amount annually.
An interest rate is the amount charged above the principal by a lender for the use of assets. This is the rate that a lender charges to borrow their money. Typically, the interest is expressed as an annual percentage of the outstanding loan.
A loan term is the length of your loan. The loan term will tell you how long the loan will last as long you make the required payments each month. The length of your loan will affect the total monthly payment required along with total interest.
For example, a longer term will mean you pay less each month but will accumulate more interest.
Different loan periods could be: 30 year, 15 year, adjustable rate, and more.
Your loan-to-value (LTV) ratio is an indicator for whether or not you can afford the home you’re wanting. Lenders will look at your LTV ratio to see how risky your loan will be. LTV ratio is the amount of your loan divided by the value of the asset, which would be the home that is securing the loan. The LTV is typically shown as a percentage. The higher the percentage, the more risky the loan will appear to lenders.
To calculate your LTV ratio, you divide the amount of your loan by the appraised value of the home securing the loan. Credit Karma provides this example:
You want to purchase a home for $200,000, which is also its appraised value. If you have $40,000 for a down payment, you would need a $160,000 loan. The LTV would be the loan amount of $160,000 divided by the appraised value of $200,000, which is 0.80, or 80%. Your LTV is 80% of the property’s value.
Lenders will look at monthly debt to further look into the risk of the loan. Lenders use monthly debt amounts compared to income to evaluate whether or not a borrower can afford a mortgage payment in addition to those debts.
Monthly debts include: minimum credit card payments, medical bills, personal loans, student loans, and/or car loan payments.
Total Interest Paid is how much interest you will pay over your loan’s lifespan. This amount is not the same as your interest rate or the annual percentage rate. Total Interest Paid will typically be larger than both the interest rate and annual percentage rate because it is based on the full amount you’d pay over your full mortgage term.
Consumer Financial Protection Bureau provides this example to give you a better idea: A $100,000 loan with a 4 percent fixed interest rate, for example, could have an APR of 4.25 percent and a TIP of 72 percent.
Total Loan Amount is the principal amount that will be borrowed. The total loan amount is calculated as the difference between your down payment and the home value.
The “total of all payments” number represents the total amount of money the borrower will have paid over the life of the home mortgage.
The Consumer Financial Protection Bureau explains that, “the ‘total of payments’ is found on page 5 of the Closing Disclosure form in the “Loan Calculations” section. This total includes principal, interest, mortgage insurance (if applicable), and loan costs. It assumes that you make each monthly payment as agreed – no more and no less – until the end of the loan.”
Up-front mortgage insurance (often referred to as Upfront MIP) is an insurance premium, required for Federal Housing Administration (FHA) loans, when the loan term begins. It differs from private mortgage insurance (PMI), which is collected by a conventional, private mortgage lender monthly if a borrower’s down payment on a home is less than 20 percent of the home purchase price. Up-front mortgage premiums are collected and used for a variety of groups, like the FHA, to insure loans for borrowers.
Like PMI, Upfront MIP is an insurance premium collected by the lender to protect them if the borrower defaults on his mortgage payments. The FHA collects 1.75 percent and is typically paid at loan closing or rolled into the monthly mortgage payment.
Upfront mortgage insurance premium (MIP) is mandatory for most of the FHA’s Single-Family mortgage insurance programs, according to the U.S. Department of Housing. “Lenders must remit upfront MIP within 10 calendar days of the mortgage closing or disbursement date, whichever is later.”
While no mortgage insurance is required for a VA loan, borrowers are required to pay a one-time VA loan funding fee. The VA Funding Fee is a governmental fee applied to every VA purchase and refinance loan. The fee is given to the Department of Veterans Affairs to cover losses and safeguard the loan guaranty program for future generations of military homebuyers.
Typically, the VA funding fee is 2.3% of the amount borrowed on a VA home loan unless you are a borrower who has already used the VA loan program in the past. Then your fee is 3.6%. Borrowers that are looking to reduce the amount of the funding fee can if they put at least 5% down at closing.
Note: In the past, regular military members paid slightly reduced funding fees than Reservists and National Guard members, but in 2020 fees for all military branches are equivalent due to the passing of the Blue Water Navy Vietnam Veterans Act.
The VA loan limit is the maximum amount in which a qualified Veteran can borrow without making a down payment.
VA loans are home loans designed for American veterans or their surviving spouses that are guaranteed by the U.S. Department of Veterans Affairs. Benefits include no down payment requirements, a negotiable interest rate, no mortgage insurance premiums and low closing costs.
In 2020, the VA loan limits are the same as the Federal Housing Finance Agency’s limits. The county you live in will affect how much you can borrow. In most counties, for example, the VA loan limit is $484,350. In counties with a higher cost of living, the loan limit is as high as $726,525.