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Metro Denver, Colorado Mortgage Loans FAQ

• How much house can you afford?

• How much can you borrow?

• How much cash will you need for the down payment and closing costs?

• Your Monthly Payment

• Types of Mortgages

• VA & FHA Loans

• What factors affect the cost of your mortgage?

• Which loan is best for you?

• Documents you’ll need for the loan application.

• The Closing

How much house can you afford?

There are two general rules:

• You can afford a home that's up to 2 1/2 times your annual gross income.

• Your monthly payments (principal and interest) should be 1/4 of your gross pay, or 1/3 of your take-home pay.

Use our calculators to get a general idea of much house you can afford.

How much can you borrow?

The lender will consider your ability to repay the loan, your credit risk, and your collateral.

Ability to Repay the Loan

The lender will compare your housing expenses and total debt to your monthly income to determine your ability to repay the loan. They’ll also verify that you have money available to cover the down payment and closing costs.

Credit Risk

The lender will look at your credit history, including credit cards, installment debts, and previous rent or mortgage payments.

Collateral

The home you’re buying is the collateral for your loan, so the lender will want to verify how much the home is worth. This is the reason for the appraisal.

Lenders use two ratios as guidelines:

• Housing expense ratio. Your monthly PITI payment (Principal, Interest, Taxes and Insurance) should not exceed 28% of your monthly gross income.

• Debt-to-income ratio. Your long-term debt (any debt that will take over 10 months to pay off - mortgages, car loans, student loans, alimony, child support, credit cards) should be no more than 36% of your monthly gross income.
  Exceptions are sometimes made. For example, if the rent you’re currently paying is close to the amount of your prospective mortgage payment, the lender may take that into consideration.

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How much cash will you need for the down payment and closing costs?

Down Payment
Generally speaking, the higher your down payment, the lower your monthly payment will be. If you can pay at least 20% down you’ll avoid Private Mortgage Insurance (PMI), which protects the lender if you can't make the mortgage payments.

Closing Costs
These are fees you pay at closing, such as inspections, title fees, and credit report. Your lender must give you an estimate of these costs within a few days after your loan application is received. You’ll receive an exact total a day or two before the closing.
It may be possible to negotiate some closing costs, or even get them waived. You may ask the seller to pay some of your closing costs. If the seller agrees, that amount will be added to the price of the house and will be financed along with the mortgage.
A lender may also ask you to have two months' mortgage payments in savings when applying for a loan.

Your Monthly Payment

Your monthly payment is determined by 4 factors – Principal, Interest, Taxes, and Insurance, or PITI.
Principal - the amount applied to your loan balance.
Interest.
Taxes - property taxes. (In some cases, property taxes are paid separately.)
Insurance – insurance on your home. (This may also be paid separately.)
Plus PMI (private mortgage insurance – see above) if you’re required to have it.

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Types of Mortgages

With a fixed-rate mortgage, the principal and interest are spread out evenly over the life of the loan, so you have a predictable monthly payment. If interest rates are low, you can lock in the rate and protect yourself against rising rates. If rates fall, you’ll need to refinance if you want to take advantage of the lower rate.

With an adjustable rate mortgage, or ARM, interest rates and monthly payments can go up or down, depending on the market. How often the rate can change, and how much it can change, depends on the terms of the mortgage.
Because the initial interest rate on an ARM is lower than a fixed-rate mortgage, it’s easier to qualify and payments are lower at first. You may also qualify for a larger loan. But if the rate goes up, your payment will also go up.

A balloon mortgage has low fixed payments for a short period, such as 5 or 10 years. At the end of that time, the entire remaining principal is due in one payment. Balloon mortgages save you money up front, but you may have a hard time making that final payment. Your lender may or may not let you refinance the balloon amount.

VA & FHA Loans

VA Loans are fixed-rate mortgages at good rates. To qualify, you must be a veteran, on active duty, a reservist, or a surviving spouse.

FHA Loans are insured by the U.S. Department of Housing and Urban Development (HUD) and are intended for low to moderate income buyers and first time buyers. Qualifying is easier, and rates are slightly better than conventional mortgages.

What factors affect the cost of your mortgage?

There are five factors:

• The principal or amount of the loan.

• The interest rate.

• The term or length of the loan. (A longer term means more interest is paid.)

• Any points you pay on the loan. A point is 1% of the loan amount. Paying points reduces your interest rate and the amount of your monthly payment.

• Any fees you pay to the lender to cover the costs of preparing the mortgage.
  Fees and points aren’t financed, but they still contribute to the cost of your mortgage.

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Which loan is best for you?

That depends on the answers to several questions.

• How large a downpayment can you afford?

• How large a monthly payment can you afford?

• Is your financial situation likely to change?

• How long do you plan to stay in this house?

• Are you comfortable with the idea of your monthly payments increasing?

A good lender will help you choose the best mortgage for your situation.

Documents you’ll need for the loan application.

Lenders will ask you to document personal information (such as names, addresses, and social security numbers of all applicants) and current income and expenses. Depending on your individual circumstances, your lender will tell you exactly what documentation you’ll need to provide.

The Closing

In Colorado, the closing is a meeting involving all related parties.
Soon after your loan is approved, your lender will send a list of documents you’ll need to bring to the closing. You’ll also be sent an Estimated Settlement Statement that tells you the funds you’ll need to bring to closing in the form of a cashier’s check. At the closing, the legal purchase of your home is completed. You’ll provide the cashier’s check and sign the final documents.

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