Your first home mortgage

Your First Home Mortgage
by Rhonda Porter
Washington State Licensed Loan Officer MLO-1213241
Mortgage Master Service Corporation CLA 40445

• Senior Loan Officer at Mortgage Master Service
Corporation , where she’s been employed since
April 2000.
• Licensed Mortgage Originator MLO121324 for
homes located in Washington State
• Author of nationally recognized blog, The
Mortgage Porter
• Interviewed by NPR, Seattle Times, MSN
Money, WSJ Market Watch.
• 2012/2011 WAMP Outstanding Loan Originator
finalist
• Lives in Seattle area with hubby, three kids (off to
school), flat coated retriever and kitten
• Enjoys cooking and painting on black velvet (in her
spare time)

The “4 C’s” of Mortgage Underwriting
Basics
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When reviewing an application for a mortgage, lenders consider the
borrower's "4 C's".
 Capacity = the ability to repay the mortgage factoring your
income, employment history and debts.
 Credit = credit history and scores.
 Capital (or Cash) = your available assets, including your down
payment.
 Collateral = the proposed home you are considering financing.
I often compare the "4 C's" to the legs of a bar stool.
If one of the legs are weaker than the other three, the stool may
still be okay. The more weak legs, the less sturdy the stool will be.
Lenders will often consider borrowers who do not have strength in all areas of the
"4 C's".
It's important to start the preapproval process early in case you need to make
improvements to your financial scenario.

BASIC QUALIFICATIONS
• 2 years steady employment history in same line of work
(formal education may count).
• Income and assets fully documented.
• Debt to income ratio less than 45%
• 3-4 established credit lines 1-2 years old currently in use
• Credit scores 620 or higher
• Savings for down payment + enough savings for 2 months
mortgage payments "in reserves"

Credit Scores
What YOU Need to Know
Credit scores favor older established debt over new accounts/debts.
New debt brings scores down.
Keeping balances below 50% of credit lines improves scores.
Scores improve again when balances are below 30% of the credit line.
Paying off and closing older accounts may lower your score.
Paying off collections may lower your scores (consult with a LO first).
3 - 4 established and active credit accounts preferred.
Credit scores change constantly to reflect current use of credit.
What Creates a Credit Score?

Lenders rely on scores from three credit bureaus which each produce a score for a borrower.
The middle credit score is what is used for underwriting purposes and for pricing the mortgage
rate.
If there are more than one borrower, like a husband and wife, the lowest middle score is what is
used.
In the example above, the borrower's middle score is 730 and co-borrower's middle score is
775. For this couple, lenders will use the lower of the two scores: 730.
Conventional programs are more credit score sensitive than FHA, VA or USDA mortgages.
Free Credit Report
You have access to a free copy of your credit report at www.annualcreditreport.com.
This is a great place to start reviewing your credit.
Lenders do not use the same scoring modules as what you will find online so the credit
scores you see will most likely be different than those pulled from a mortgage
company.

Qualifying
Your current debts and income are reviewed to determine how much
mortgage payment you qualify for.
The monthly mortgage payment along with the mortgage program and
current interest rates determines what loan amount you qualify for.
The amount of funds used for down payment will determine the sales
price you qualify for.
1
2
3

Debt to
Income Ratios
Debt to income ratios consist of a "front" and "back" end ratio, also referred to as "dti"
(debt to income) ratios.
The front ratio is the proposed total new mortgage payment, including any HOA
dues, divided by the borrower(s) gross monthly income(s).
The back end ratio is the proposed new mortgage payment PLUS the borrowers debts
divided by the gross monthly income.
Let's assume a mortgage program allows for a 28/45 debt-to-income. If the borrowers
gross monthly income is $5000, this means that they qualify for a $1400 total monthly
mortgage payment assuming their debts do not exceed $850 in monthly payments.
$5000 income x 28% (front ratio) = $1400
$5000 income x 45% (back ratio) = $2250
$2250 - $1400 = $850 max monthly debt
The more monthly debt a borrower has, the less mortgage payment they qualify for.
NOTE: One of the biggest mistakes I see home buyers make is buying a car before
buying a home. The monthly payment typically reduces what they would have
qualified for and it negatively impacts credit score.
aka
DTI

Income & Employment
Ideally, lenders want a two year history of steady employment in the same
line of work. Sometimes a borrower's formal education may count as
employment history. And borrowers with new jobs may be able to use an
employment letter or contract to show their future employment.
Employment and income are documented by W2's, paystubs and
sometimes tax returns.
Self-employed borrowers need a minimum of two years history with 2 years
of tax returns to support their income.
It's important to meet with a local mortgage professional early to review
your employment and income scenario.

Calculating Income
Salaried Borrowers
Annual base salary / 12 Months
Commission, Bonus income or Self Employed
Averaged over 2 years
Hourly Income
Overtime
Child Support or Alimony
Must have 3 years continuance and paid regularly
This is just a small example of different types of income and how they're
basically calculated.

Down Payment and Closing Cost
The amount of funds you have available for down payment determine the sales price
you qualify for.
For example, if you qualify for a $400,000 mortgage based on your income and debt
load, and you have saved $50,000 for down payment, you may buy a home priced at
$450,000 (assuming the seller or lender paid rebate pricing pays closing cost).
Typically, the down payment for a home needs to come from the home buyers funds.
These funds will need to be "sourced" or documented with complete statements
showing where the funds came from and proving they are the borrowers.
Closing cost can be paid for by the buyers seasoned funds or other resources, such as
rebate credit or a seller contribution. "Seasoned" funds means that the funds have been
in the buyers account for two months.
Lenders will require documentation of large deposits on your asset accounts to verify
the funds used in the transaction are yours.
Cash on hand is rarely accepted by lenders for down payment or closing cost.

Acceptable funds for closing cost
All the above
Seller/builder contributions (subject to program guidelines)
Lender rebate pricing (increasing interest rate to generate rate credit)
This is just an example of where funds for closing can come from.
Acceptable funds for down payment
Checking and savings
Stocks/bonds/mutual funds
Retirement funds (can be borrowed or withdrawn)
IRS refund
Gift from family (% of gift varies depending on program guidelines)
Inheritance
Sale of personal property (keep documentation)
Funds from down payment assistance program

Mortgage Programs
There are many mortgage programs available to the first time home buyer.
Which one you select will depend on your personal financial scenario, including down
payment, credit scores and income.
It's important to ask your mortgage professional to review mortgage programs that you
may qualify for and what the pros and cons are.
Consider how long you plan on staying in the home and what your financial goals are.
Be sure to ask plenty of questions!
Home Buyer Education Classes
I am a Washington State Housing Finance Committee
trained instructor teaching classes with real estate agents
in Western Washington.
July 13th at High Point Library in West Seattle
July 20th at Green Lake Library in Seattle
For a list of classes where I'm teaching or to rsvp, visit
www.mortgageporter.com/education

Home Advantage
with Down Payment Assistance
Home Advantage is a program that is offered through the Washington State Housing Finance Commission.
Home Advantage is typically combined with a Home Advantage second mortgage that can finance closing
cost and the down payment. Unlike the House Key program (state bond), this program has unlimited funds
available for qualified Washington home buyers.
The first mortgage can be FHA, VA or a conventional mortgage. Waiting periods DO apply. With a 680 or
higher credit score, the conventional mortgage offers reduced mortgage insurance premiums which makes
this a very attractive option for home buyers shy on down payment who have been considering FHA.
The second mortgage has a maximum loan amount of 4% of the first mortgage loan amount and the
payment is deferred for 30 years (or until the property is no longer owner occupied) at zero percent
interest. Should the home owner convert the property to an investment/rental or sell the home, the second
mortgage may be called due.
Here are some of the program guidelines:
property must be owner occupied/primary residence
only for homes in Washington state
you do not need to be a first time home buyer
maximum debt to income ratio is 45% (exceptions up to 50% with specific compensating factors)
620 is the minimum credit score
home buyers must attend a Home Buyer Education seminar that has been registered with WSHFC
As a WSHFC trained mortgage originator, I'm pleased to be able to offer their programs.

"Traditional" Conforming Mortgage
Basic Guidelines
20% down payment to avoid private mortgage insurance
Second mortgages up to 85% loan to value
Down payment as low as 3% with private mortgage insurance.
Perfect credit scores are not required however the better your credit, the
lower your rate will be.
45% debt-to-income ratios (especially w/pmi)
Loan limits vary by county. Most counties in Washington have a $417,000
loan limit. King, Pierce and Snohomish Counties have a loan limit of
$506,000 for single family dwellings.
Conforming Loan Limits
for King, Pierce & Snohomish Counties
1 Unit: $506,000
2 Unit: $647,750
3 Unit: $783,000
4 Unit: $973,100

Fannie Mae HomePath
Fannie Mae HomePath properties
are homes that Fannie Mae has
foreclosed on. These homes are
generally in better condition that
typical distressed properties.
Often times, Fannie Mae will
make minor improvements prior to
putting the homes on the market.
Property must be eligible.
Visit www.homepath.com for available homes.
Minimum 3% down payment
No private mortgage insurance with credit scores above 660
No appraisal required
Seller can contribute towards closing cost
Gifts for down payment acceptable with 5% down or more
Only available for specific homes owned by Fannie Mae (foreclosed).

FHA Insured Mortgages
Minimum down payment 3.5% - 5%
Maximum allowed Seller contribution is 6% of bona fide closing cost, prepaids
and reserves
Owner occupied only
No mandatory Seller paid closing cost
Higher loan limits than conforming in Seattle, Pierce and Snohomish Counties
Mortgage insurance regardless of loan to value.
No income limits
Appraisals are essentially the same as conventional. Possible second
appraisal if property was "flipped" - HUD does not allow 2nd appraisal fee to be
paid by buyer.

Why FHA?
Less reserve requirements if borrower owns different property.
Buyers who pay alimony may consider this program due to flexible
underwriting.
Popular with young professionals who have great employment and income
and are shy on down payment.
Home buyers can purchase 2-4 plex w/minimum down payment IF they're
occupying one of the units.
203k rehab programs allow for remodeling with an all-in-one FHA mortgage.
FHA Loan Limits
King, Snohomish & Pierce Counties
1 Unit: $567,500
2 Units: $726,500
3 Units: $878,150
4 Units: $1,091,351

VA Mortgages
Only available to those who
have served our country in the
military
Not difficult to underwrite
Appraisals are done through
VA's system
Seller pays for buyer's escrow
fee
Maximum allowed seller
contribution is 4%
VA Loan Limits
King, Snohomish & Pierce Counties
$500,000 for zero down payment
NOTE: VA does not set loan limits. VA down
payments for loan amounts over the zero
down limit are 25% of the difference.
For example, a $600,000 sales price has a
minimum down payment of $25,000 in
King County. 600,000 - 500,000 = 100,000.
100,000 x 25% = 25,000.

USDA Mortgages
Zero Down -Rural Housing
Only available for homes that are in designated rural areas. (not orange on map)
Income limits apply based on county and family size
Owner occupied only
No maximum seller contribution
Current household income limits for USDA
King and Snohomish Counties: 1-4 Person $93,450 | 5-8 Person $123,350
Pierce County: 1-4 Person $82,450 | 5-8 Person $108,850

Jumbo Mortgages aka "non-conforming"
Typically requires higher credit scores.
Less than 20% down payment possible with piggy back mortgages or
LPMI (lender paid mortgage insurance).
Additional reserves typically required of buyers.
Two appraisals may be required.
Seller contribution varies depending on the lender.

Mortgage Insurance (pmi)
When you have less than 20% down payment, odds are you have some sort
of mortgage insurance. Mortgage insurance protects the lender in the event
the borrower defaults on the mortgage loan - it does not protect the buyer.
Government loans, such as FHA, USDA and VA loans all have their own
forms of "mortgage insurance" which each have their own unique terms. FHA
and USDA have both upfront and monthly insurance premiums. VA loans
currently just have an upfront insurance premium called a "funding fee".
Conforming mortgages may have private mortgage insurance with premiums
that vary depending on program type, credit scores, loan to value and other
factors.
Mortgage insurance premiums may be paid monthly, in a lump sum, split
premium (portion paid upfront and monthly) or lender paid mortgage
insurance (typically rate is slightly higher for the lender to absorb the cost of
the pmi).
You may have several options and you should ask your mortgage professional
to explain what is available to you.

Property Types
Different types of property may impact your financing, including the interest rate.
Detached Single Family Dwelling is your basic house. If it's in a plat with a home owners
association (HOA), it may be considered a "Planned Unit Development" or "PUD".
Documentation may be required if there are dues associated with the HOA.
Condominiums have special requirements. Lenders want to make sure that the HOA is
financially sound and that not too many of the units are rentals/non-owner occupied.
Government loans (FHA, VA and USDA) have a list of condos that are approved for mortgages.
Conventional mortgages charge a 0.75% fee (priced into the rate) if the mortgage term is more
than 15 years or less than 25% down payment.
Townhomes can be considered a single family dwelling or condo. The only real way to know is
by the property's legal description. If it has HOA dues, it's probably a condo. If it is a condo, the
lender will treat it as such as far as guidelines and pricing.
Manufactured Homes. At this time, Mortgage Master Service Company does not lend on this
type of property.

Mortgage Rates
Mortgage rates have been historically low for a long period of time largely thanks to the Fed's
manipulation of the market.
Mortgage rates are based on mortgage backed securities (bonds) and the Fed has been buying mortgage
backed securities (MBS) in order to keep rates low. The intent is to help spur the housing marketing and
allow home owners to refinance and save money on their monthly mortgage payments.
When the stock market is rallying, you may see mortgage rates trend higher as investors will pull money
from bonds (like MBS) to seek a potentially higher return from stocks. The reverse is also true.
Mortgage rates may change several times a day when the markets are volatile. Unless your rate is
locked, it's subject to change.

10 Factors to Pricing a Rate
When I’m pricing a rate quote, I use our pricing engine which sorts through all the lenders we work
with and provides their current pricing based on the criteria I enter. The different lenders we work
with may have better pricing based on various price points.
Here are some of the required criteria I need to consider before I’m able to produce live rates for my
quote:
1. Loan amounts for the first mortgage and (if applicable) second mortgage or heloc balance
2. Property or sales price (or appraised value)
3. Purpose of the loan (is it a purchase, refi, cash-out refi, etc.)
4. Occupancy (primary residence, second home or investment property)
5. Estimated mid-credit score of all borrowers
6. Property type (detached, condo, 2-4 plex, et.c)
7. Loan type (conforming, jumbo, FHA, VA, USDA, etc.)
8. Loan term/amortization (30, 20, 15, etc.)
9. Amortization type: fixed or adjustable rate (arm)
10. Lock period (when is the transaction anticipated to close)
Any of the above factors can impact how a rate is priced. Add to this criteria that we’re dealing with
live, changing pricing that is impacted by mortgage backed securities (bond markets).
There also may be bank pricing overlays or special programs, like Home Advantage or Fannie Mae
HomePath.

Where do you start?
The first step is to get preapproved so that you know how much you qualify
for before you present an offer on a property.
After you're preapproved, you can begin to shop for your first
home, knowing how much you can buy and what your new mortgage
payment will be. You really cannot start the preapproval process too early!

Typical Documentation
for getting Pre-Approved
Last two years W-2's
Last two years tax returns (if self employed or paid commission)
Most recent paystubs covering 30 days of income
Most recent bank statements/asset accounts (all pages) documenting
funds for closing and reserves
Complete loan application
Social Security Award Letters
Divorce Decree/Child Support Order
Bankruptcy and Discharge
When considering buying a home,
it's time to unplug your shredder.
Keep copies of everything, including deposits
to your bank or asset accounts. Questions?
Ask your Loan Officer.

References and Resources
• APR (Annual Percentage Rate)
• Conforming Loan Limits
• Credit Scores
• Debt to Income Ratios
• Do's and Don'ts during the Mortgage Process [Flyer]
• Down Payment
• FHA Loan Limits
• FHA guidelines on "flips"
• Finance Flyers for Listings Sample [Flyer]
• HUD - FHA Condo approved list
• Loan Application
• Preapproval
• Rate Quote
• Seller Contributions
• The Mortgage Porter - Blog
• USDA income limits
• VA Loan Limits

The Fine Print
The content provided is presented or compiled for your convenience by
Rhonda Porter and is provided for informational purposes only. It does
not necessarily represent the views or opinions of Mortgage Master
Service Corporation.
Neither Rhonda Porter nor Mortgage Master Service Corporation
assumes any legal liability or responsibility for the
accuracy, completeness, or usefulness of any information disclosed, or
represents that its use would not infringe privately owned rights.
The information provided should not be construed as offering
legal, financial or other advice to be relied on by the reader to make or
refrain from making any decision or to take any action.
The investment, mortgage or financial services or strategies mentioned in
and throughout this website may not be suitable for you.
Mortgage Master Service Corporation is an Equal Housing Opportunity
Lender.All rights reserved. All content, including but not limited to
text, photos and videos are protected by US Copyright. Plagiarism will
not be tolerated.
Rhonda Porter is NMLS Licensed Mortgage Originator MLO-121324.
Mortgage Master Service Corporation NMLS# CLA-40445.

Your first home mortgage

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