Welcome to AMS'Financing 101

What if you could understand your mortgage without a PhD?
	Getting a home loan shouldn't be complicated, and with a basic foundation of knowledge, it doesn't have to be. That's why we're offering you Financing 101. This brief summary of mortgage loans is designed to help you become more aware of how the industry works. Our objective is to help you to be more informed while you're searching for a home loan.
Table of Contents INTRODUCTION CHAPTER 1: What Other Mortgage Companies Don't Want You To Know CHAPTER 2: Your Credit Rating CHAPTER 3: Your Mortgage or Rental History CHAPTER 4: Your Income and Assets CHAPTER 5: Your Loan Size CHAPTER 6: What Type of Borrower Are You? CONCLUSION
INTRODUCTION When you start searching for a home of your own, it is always practical to deal with the lending aspect of becoming a homeowner first, because unless you have a lot of cash on hand, you will need a mortgage loan. At Alternative Mortgage Solutions our objective is to help you to be more informed while you're searching for a home loan. This brief course is designed to give you the knowledge you need to understand what lenders will be telling you. It will also help you to understand what interest rate and term you will be offered and why. The mortgage industry has many guidelines, and is by no means an exact science. You are bound to have quite a few questions, but don't worry, we will be here to help you learn and understand. The best way to determine what size and type of home loan you can qualify for is to consult a lender. At AMS, we will pre-qualify you for your mortgage loan for free. We will analyze your income, credit, and asset information and let you know which program is best for your situation. Table of Contents Next Chapter
CHAPTER 1 What Other Mortgage Companies Don't Want You To Know Lenders cannot give you an accurate interest rate quote without knowing your credit and income information, and the size of the loan you are getting. Unless you are locking your rate at the time of the quote, it is useless. Mortgage companies are required by law to send you estimated loan documents, including fees, within three days of your application. Bad credit or bankruptcy does not equal "no loan for you!" Points are NOT mandatory, and most times not even necessary on a loan. It does NOT cost to lock an interest rate, unless you are dealing with extended rate locks. Down payments are NOT always required to purchase a home. Your rate, terms, and fees should be finalized at least 24 hours before closing. Do not accept unwanted changes at the closing table. Finally, it does NOT cost to apply for a home loan. Previous Chapter Table of Contents Next Chapter
CHAPTER 2 Your Credit Rating There are 3 major credit-reporting agencies. Trans Union, Equifax, and Experian. Most major banks or lending institutions report to at least one of these agencies, or bureaus. Each of these companies has a file for you and your rating with them. When you make a payment on time, your lender reports to one or more of these agencies. The same is true if you pay your payment late. These bureaus review all of the data that creditors give them and report it to the lenders that request it. They give the information a rating or score. This score is what other lenders look at when they are trying to determine whether or not to give you a loan. The agencies base your credit score on several criteria. A few examples are the number of accounts you have open, how long they have been open, how close to the high credit limit each account is, and your payment history. (FYI, in most cases, a payment is not recorded as late by credit reporting agencies until it is 30 or more days past the due date.) Bankruptcies, judgments, collection accounts, and foreclosures also affect your credit rating. Having too many people look at your credit can affect it negatively as well. Optimally, in order to get the best interest rate and lowest cost, you should have at least 3 accounts that have been open over 12 months, no late payments, and you should be well below the high credit limits. If you do not have credit that resembles this description, you can still get a good home loan, but it will not necessarily offer the rates advertised by most lenders. Previous Chapter Table of Contents Next Chapter
CHAPTER 3 Your Mortgage or Rental History A lender wants to see that you have taken responsibility and paid for a roof over your head in the past. They require at least a 12-month history of rent or mortgage payments. In some cases, a full 2-year history may be needed. The more times you have paid your rent or mortgage over 30 days late, the more complicated it will be to get a loan. Lenders want to verify that you have paid your monthly housing expense on time for at least a year. To verify your payment history, only a leasing or lending company's word, or copies of canceled checks or money orders will suffice. If you rent, and your landlord is an individual, as opposed to a management company, the lender will not take their word that you have paid on time. This is where the canceled checks come into play. To get a home loan you will have to provide copies of at least 12 months of canceled checks so the lender can see for themselves that you pay your housing expense on time every month. If you are unable to prove a timely payment history, it does not mean you won't qualify for a loan. It will just be more difficult to obtain financing, and the rate may not be as low. Some advice to those who are living with a friend or family member, start paying them rent. Pay a significant amount, at least $100, by check or money order to them on the same day every month. They, then, need to cash the check or deposit it into their own account. After that, what they do with the money does not matter. They can return the money to you, or do whatever they want with it. It is incredibly important to establish the best rent history possible. Previous Chapter Table of Contents Next Chapter
CHAPTER 4 Your Income and Assets When qualifying you for a loan, lenders look not only at your credit and housing payment history, but also your income and assets. In order to establish your income they look at your job history and potential. A full 2-year job history is required in most situations. This means lenders need the name of every company you have worked for in the past 2 years. They also need documentation. Two years W-2's, one month of recent pay stubs, and a written statement from your employer is usually what they ask for. They then average your pay over the past 2 years. This figure is what they consider to be your income in most cases. There are quite a few cases when borrowers do not have a "regular job." These are addressed in different ways. If you are self-employed, the lender will need 2 years of full tax returns and a current year profit and loss statement. Again, they will average the past 2 years and use this figure for your income. If you receive child support, alimony, or maintenance, a divorce decree will be needed to prove this income. Any other supplemental income, such as social security, retirement, etc. will also have to be proven. A letter from the provider and tax forms will suffice. If any of the preceding factors cannot be proven, it doesn't mean that you can't get a loan. Once again, it just becomes more difficult. We offer stated income programs in order to overcome these issues. Once your income has been determined, a lender will take the figure and compare it against your debt. This creates what is called your debt to income ratio. Your monthly bills (not including utilities, etc.) when added to your new proposed mortgage payment should not exceed over 45% of your pre-tax monthly income. You can figure this ratio yourself by adding all of your monthly debts and dividing by your gross monthly income. The debts you should include in this computation are: car payments credit card bills student loans rent or mortgage payments any other debt on your credit report Exceeding the limit of 45% does not mean that you can't get a loan. It will just be more complicated and the rate will be higher. Lenders also look at your assets. These reflect your ability to save. Lenders look at you bank accounts for proof of your down payment, or reserves. Reserves are money you need to have in the bank so the lender can see that you have extra should you lose your job. Enough money to cover 1 or 2 months of mortgage payments is required by most lenders. The money in your accounts usually needs to be seasoned. `Seasoned` means the money has been in an account for 60 days, or you have a paper trail to prove where it came from. Their reasoning behind this is so they can be assured that you did not get another loan for your down payment. The more you have down on paper, the higher your net worth appears. This in turn makes you look like less of a "risk" to the lender, so they will lend you more money at a lower interest rate. Previous Chapter Table of Contents Next Chapter
CHAPTER 5 Your Loan Size Interest rates and the cost associated with a mortgage are affected by loan amounts and loan to values. If your loan amount is less than $125,000, expect about .125% higher than the going rate of the day. (If the rate is 7%, expect 7.125%.) The farther under $125,000 you loan size falls, the greater the rate or the cost of your loan will be. This is because lenders do not collect as much interest on a $50,000 loan as they do on a $100,000 loan, so they charge a slightly higher rate, and greater upfront fees. If your loan amount is greater than $275,000, you can also expect a variance from the best rate available. This is because lenders presume that larger loan amounts are a greater risk. Lenders also assess a risk value to the amount of your loan compared to what the home you are financing is worth. This is called the loan to value. The higher your loan to value is, the more risk there is associated with your loan. Hence the more you borrow, the more the lender will try to compensate for the risk. Lenders have found that their risk is greatest if you borrow more than 80% of the value of your home. They derived this amount because if they ever have to foreclose on (or take back) a home, in most cases they only recover 80% of the value of that home. So they charge a monthly fee if you borrow more than 80%. This fee is called PMI (Private Mortgage Insurance). This charge can be anywhere from $30 to upwards of $100 per month depending on your loan amount. The larger your loan amount, the larger the monthly PMI fee will be. There are a few lenders that do not charge PMI, but their rates and fees tend to be higher. As long as you get a non-government loan, PMI has to be released by the lender as soon as you pay your loan down enough to be below 80% of the value of your home when you financed it. However, government loans do not have such strict PMI regulations, so the lenders can and do collect PMI for longer periods of time. Annoying as it is, PMI is a fact of mortgage life, and can rarely be avoided without putting a 20% down payment on your home. Consult a representative from AMS to find about more about PMI, and how to get relief from it. Not only do lenders collect PMI for high loan to values, they also charge slightly higher interest rates and fees. You can expect rates to be a little higher than the rate of the day if you are borrowing more than 80% of the value. The greater your loan to value the greater the variance will be. The loan to value a lender will offer you has a lot to do with your credit as well. If you have excellent credit, the lender will feel safer giving you a low interest rate, with low fees, and a low PMI rate. The more problematic your credit history is, the lower the loan to value you are offered will be. At AMS we have a lot of great programs with low rates and fees. You can be confident that AMS will search for the best program for your situation. We will find a loan program with the best combination of the lowest PMI rates, interest rates, and fees available to you. Previous Chapter Table of Contents Next Chapter
CHAPTER 6 What Type of Borrower Are You? There are 5 basic types of borrowers. They are generally called A, A-, B, C, and D. An A borrower will qualify for the best conventional interest rate available and high loan to values (LTV's.) A- will receive a rate 1-2% higher and can also qualify for high LTV's. B and C borrowers will get a rate about 2-4% greater than prime and still have a chance for high LTV's. However, the chances are more remote. D borrowers can expect rates 3-6% higher than prime and may have problems getting a loan for more than 75% LTV. In this chapter we will use the knowledge you've gained about yourself from the previous chapters to decide how a mortgage lender might classify you. *A borrowers* have excellent credit. They have at least 3 accounts open on their credit, and are not exceeding their high credit limits. They have no late payments, collections, bankruptcies, etc. They also have a full 2 year rent or mortgage history with no late payments. An A borrower has only had one or two jobs in the past 2 years, and they have stayed in the same line of work. They have a debt to income (DTI) ratio less than 38%, and a bank account with a steady average balance. Their bank accounts generally have enough reserve money to cover at least one month of their mortgage payment. A borrowers are prime candidates for higher loan to values. *A- borrowers* have good credit. They may have had a couple of isolated credit problems in the past, maybe a late payment or two, but no major problems like bankruptcies, foreclosures, or judgments. They also tend to have a good rent or mortgage history, with maybe one late payment, not more than 30 days late. They have a 2-year job history with no gaps in employment. Their debt to income ratio is generally less than 45%, and they usually have a bank account that may or may not carry a steady balance from month to month. *B and C borrowers* are very similar, so it is hard to distinguish between the two. They generally have less than perfect credit and some problems with paying their monthly bills on time. They may have had a bankruptcy over 2 years ago and some paid judgments. They may not have a rent or mortgage history. They could also have some accounts that have been placed under collection. Their job history may not be solid, and they may even have had some periods with no employment. Their DTI ratio could be as high as 50%, and it is possible that they do not have any bank accounts. Depending on the extent of each of these qualifications, the borrower could qualify for 75-90% LTV. In some cases, they may possibly be able to receive 100% financing; usually through first time homebuyer programs. *D borrowers* have more extensive credit problems. They may have bankruptcies, foreclosures, judgments, and or collections. They usually have a poor rent or mortgage history, or may not have one at all. Their job history may have gaps and may not be in the same line of work. Their DTI ratio could be 55% or higher, and only sometimes do they have a bank account. Depending on how severe each of these circumstances are, this borrower may qualify for 60-80% LTV. In rare cases, the LTV could go as high as 90%. Previous Chapter Table of Contents Next Chapter
CONCLUSION Congratulations! You made it through Financing 101. By now you should have a good idea of what type of mortgage loan and interest rate you can expect. Keep in mind that approving loans is not an exact science, and every situation is different. This course was constructed to make you more aware of the industry as a whole and should give you some ideas of what you need to do to qualify for the rate you want. It should also give you a little leverage to discuss your rate and terms with potential lenders. This course is a tool to help you understand what mortgage companies will tell you. If you have any questions, or would like to get pre-qualified for a mortgage loan, call us at 1-888-568-1444 or e-mail us at webinfo@mortgage-ams.com. Previous Chapter Table of Contents

What if you could understand your mortgage without a PhD?

Getting a home loan shouldn't be complicated, and with a basic foundation of knowledge, it doesn't have to be. That's why we're offering you Financing 101. This brief summary of mortgage loans is designed to help you become more aware of how the industry works. Our objective is to help you to be more informed while you're searching for a home loan.

INTRODUCTION
CHAPTER 1: What Other Mortgage Companies Don't Want You To Know
CHAPTER 2: Your Credit Rating
CHAPTER 3: Your Mortgage or Rental History
CHAPTER 4: Your Income and Assets
CHAPTER 5: Your Loan Size
CHAPTER 6: What Type of Borrower Are You?
CONCLUSION

INTRODUCTION

When you start searching for a home of your own, it is always practical to deal with the lending aspect of becoming a homeowner first, because unless you have a lot of cash on hand, you will need a mortgage loan. At Alternative Mortgage Solutions our objective is to help you to be more informed while you're searching for a home loan. This brief course is designed to give you the knowledge you need to understand what lenders will be telling you. It will also help you to understand what interest rate and term you will be offered and why.

The mortgage industry has many guidelines, and is by no means an exact science. You are bound to have quite a few questions, but don't worry, we will be here to help you learn and understand. The best way to determine what size and type of home loan you can qualify for is to consult a lender. At AMS, we will pre-qualify you for your mortgage loan for free. We will analyze your income, credit, and asset information and let you know which program is best for your situation.

Table of Contents Next Chapter

CHAPTER 1

What Other Mortgage Companies Don't Want You To Know

Lenders cannot give you an accurate interest rate quote without knowing your credit and income information, and the size of the loan you are getting.
Unless you are locking your rate at the time of the quote, it is useless.
Mortgage companies are required by law to send you estimated loan documents, including fees, within three days of your application.
Bad credit or bankruptcy does not equal "no loan for you!"
Points are NOT mandatory, and most times not even necessary on a loan.
It does NOT cost to lock an interest rate, unless you are dealing with extended rate locks.
Down payments are NOT always required to purchase a home.
Your rate, terms, and fees should be finalized at least 24 hours before closing. Do not accept unwanted changes at the closing table.
Finally, it does NOT cost to apply for a home loan.

Previous Chapter Table of Contents Next Chapter

CHAPTER 2

Your Credit Rating

There are 3 major credit-reporting agencies. Trans Union, Equifax, and Experian. Most major banks or lending institutions report to at least one of these agencies, or bureaus. Each of these companies has a file for you and your rating with them. When you make a payment on time, your lender reports to one or more of these agencies. The same is true if you pay your payment late. These bureaus review all of the data that creditors give them and report it to the lenders that request it. They give the information a rating or score. This score is what other lenders look at when they are trying to determine whether or not to give you a loan.

The agencies base your credit score on several criteria. A few examples are the number of accounts you have open, how long they have been open, how close to the high credit limit each account is, and your payment history. (FYI, in most cases, a payment is not recorded as late by credit reporting agencies until it is 30 or more days past the due date.) Bankruptcies, judgments, collection accounts, and foreclosures also affect your credit rating. Having too many people look at your credit can affect it negatively as well.

Optimally, in order to get the best interest rate and lowest cost, you should have at least 3 accounts that have been open over 12 months, no late payments, and you should be well below the high credit limits. If you do not have credit that resembles this description, you can still get a good home loan, but it will not necessarily offer the rates advertised by most lenders.

Previous Chapter Table of Contents Next Chapter

CHAPTER 3

Your Mortgage or Rental History

A lender wants to see that you have taken responsibility and paid for a roof over your head in the past. They require at least a 12-month history of rent or mortgage payments. In some cases, a full 2-year history may be needed. The more times you have paid your rent or mortgage over 30 days late, the more complicated it will be to get a loan.

Lenders want to verify that you have paid your monthly housing expense on time for at least a year. To verify your payment history, only a leasing or lending company's word, or copies of canceled checks or money orders will suffice. If you rent, and your landlord is an individual, as opposed to a management company, the lender will not take their word that you have paid on time. This is where the canceled checks come into play. To get a home loan you will have to provide copies of at least 12 months of canceled checks so the lender can see for themselves that you pay your housing expense on time every month. If you are unable to prove a timely payment history, it does not mean you won't qualify for a loan. It will just be more difficult to obtain financing, and the rate may not be as low.

Some advice to those who are living with a friend or family member, start paying them rent. Pay a significant amount, at least $100, by check or money order to them on the same day every month. They, then, need to cash the check or deposit it into their own account. After that, what they do with the money does not matter. They can return the money to you, or do whatever they want with it. It is incredibly important to establish the best rent history possible.

Previous Chapter Table of Contents Next Chapter

CHAPTER 4

Your Income and Assets

When qualifying you for a loan, lenders look not only at your credit and housing payment history, but also your income and assets. In order to establish your income they look at your job history and potential.

A full 2-year job history is required in most situations. This means lenders need the name of every company you have worked for in the past 2 years. They also need documentation. Two years W-2's, one month of recent pay stubs, and a written statement from your employer is usually what they ask for. They then average your pay over the past 2 years. This figure is what they consider to be your income in most cases.

There are quite a few cases when borrowers do not have a "regular job." These are addressed in different ways. If you are self-employed, the lender will need 2 years of full tax returns and a current year profit and loss statement. Again, they will average the past 2 years and use this figure for your income. If you receive child support, alimony, or maintenance, a divorce decree will be needed to prove this income. Any other supplemental income, such as social security, retirement, etc. will also have to be proven. A letter from the provider and tax forms will suffice.

If any of the preceding factors cannot be proven, it doesn't mean that you can't get a loan. Once again, it just becomes more difficult. We offer stated income programs in order to overcome these issues.

Once your income has been determined, a lender will take the figure and compare it against your debt. This creates what is called your debt to income ratio.

Your monthly bills (not including utilities, etc.) when added to your new proposed mortgage payment should not exceed over 45% of your pre-tax monthly income.

You can figure this ratio yourself by adding all of your monthly debts and dividing by your gross monthly income. The debts you should include in this computation are:

car payments
credit card bills
student loans
rent or mortgage payments
any other debt on your credit report

Exceeding the limit of 45% does not mean that you can't get a loan. It will just be more complicated and the rate will be higher.

Lenders also look at your assets. These reflect your ability to save. Lenders look at you bank accounts for proof of your down payment, or reserves. Reserves are money you need to have in the bank so the lender can see that you have extra should you lose your job. Enough money to cover 1 or 2 months of mortgage payments is required by most lenders. The money in your accounts usually needs to be seasoned. Seasoned means the money has been in an account for 60 days, or you have a paper trail to prove where it came from. Their reasoning behind this is so they can be assured that you did not get another loan for your down payment.

The more you have down on paper, the higher your net worth appears. This in turn makes you look like less of a "risk" to the lender, so they will lend you more money at a lower interest rate.

Previous Chapter Table of Contents Next Chapter

CHAPTER 5

Your Loan Size

Interest rates and the cost associated with a mortgage are affected by loan amounts and loan to values. If your loan amount is less than $125,000, expect about .125% higher than the going rate of the day. (If the rate is 7%, expect 7.125%.) The farther under $125,000 you loan size falls, the greater the rate or the cost of your loan will be. This is because lenders do not collect as much interest on a $50,000 loan as they do on a $100,000 loan, so they charge a slightly higher rate, and greater upfront fees.

If your loan amount is greater than $275,000, you can also expect a variance from the best rate available. This is because lenders presume that larger loan amounts are a greater risk.

Lenders also assess a risk value to the amount of your loan compared to what the home you are financing is worth. This is called the loan to value. The higher your loan to value is, the more risk there is associated with your loan. Hence the more you borrow, the more the lender will try to compensate for the risk.

Lenders have found that their risk is greatest if you borrow more than 80% of the value of your home. They derived this amount because if they ever have to foreclose on (or take back) a home, in most cases they only recover 80% of the value of that home. So they charge a monthly fee if you borrow more than 80%. This fee is called PMI (Private Mortgage Insurance). This charge can be anywhere from $30 to upwards of $100 per month depending on your loan amount.

The larger your loan amount, the larger the monthly PMI fee will be. There are a few lenders that do not charge PMI, but their rates and fees tend to be higher. As long as you get a non-government loan, PMI has to be released by the lender as soon as you pay your loan down enough to be below 80% of the value of your home when you financed it. However, government loans do not have such strict PMI regulations, so the lenders can and do collect PMI for longer periods of time. Annoying as it is, PMI is a fact of mortgage life, and can rarely be avoided without putting a 20% down payment on your home. Consult a representative from AMS to find about more about PMI, and how to get relief from it.

Not only do lenders collect PMI for high loan to values, they also charge slightly higher interest rates and fees. You can expect rates to be a little higher than the rate of the day if you are borrowing more than 80% of the value. The greater your loan to value the greater the variance will be.

The loan to value a lender will offer you has a lot to do with your credit as well. If you have excellent credit, the lender will feel safer giving you a low interest rate, with low fees, and a low PMI rate. The more problematic your credit history is, the lower the loan to value you are offered will be.

At AMS we have a lot of great programs with low rates and fees. You can be confident that AMS will search for the best program for your situation. We will find a loan program with the best combination of the lowest PMI rates, interest rates, and fees available to you.

Previous Chapter Table of Contents Next Chapter

CHAPTER 6

What Type of Borrower Are You?

There are 5 basic types of borrowers. They are generally called A, A-, B, C, and D. An A borrower will qualify for the best conventional interest rate available and high loan to values (LTV's.) A- will receive a rate 1-2% higher and can also qualify for high LTV's. B and C borrowers will get a rate about 2-4% greater than prime and still have a chance for high LTV's. However, the chances are more remote. D borrowers can expect rates 3-6% higher than prime and may have problems getting a loan for more than 75% LTV. In this chapter we will use the knowledge you've gained about yourself from the previous chapters to decide how a mortgage lender might classify you.

A borrowers have excellent credit. They have at least 3 accounts open on their credit, and are not exceeding their high credit limits. They have no late payments, collections, bankruptcies, etc. They also have a full 2 year rent or mortgage history with no late payments. An A borrower has only had one or two jobs in the past 2 years, and they have stayed in the same line of work. They have a debt to income (DTI) ratio less than 38%, and a bank account with a steady average balance. Their bank accounts generally have enough reserve money to cover at least one month of their mortgage payment. A borrowers are prime candidates for higher loan to values.

A- borrowers have good credit. They may have had a couple of isolated credit problems in the past, maybe a late payment or two, but no major problems like bankruptcies, foreclosures, or judgments. They also tend to have a good rent or mortgage history, with maybe one late payment, not more than 30 days late. They have a 2-year job history with no gaps in employment. Their debt to income ratio is generally less than 45%, and they usually have a bank account that may or may not carry a steady balance from month to month.

B and C borrowers are very similar, so it is hard to distinguish between the two. They generally have less than perfect credit and some problems with paying their monthly bills on time. They may have had a bankruptcy over 2 years ago and some paid judgments. They may not have a rent or mortgage history. They could also have some accounts that have been placed under collection. Their job history may not be solid, and they may even have had some periods with no employment. Their DTI ratio could be as high as 50%, and it is possible that they do not have any bank accounts. Depending on the extent of each of these qualifications, the borrower could qualify for 75-90% LTV. In some cases, they may possibly be able to receive 100% financing; usually through first time homebuyer programs.

D borrowers have more extensive credit problems. They may have bankruptcies, foreclosures, judgments, and or collections. They usually have a poor rent or mortgage history, or may not have one at all. Their job history may have gaps and may not be in the same line of work. Their DTI ratio could be 55% or higher, and only sometimes do they have a bank account. Depending on how severe each of these circumstances are, this borrower may qualify for 60-80% LTV. In rare cases, the LTV could go as high as 90%.

Previous Chapter Table of Contents Next Chapter

CONCLUSION

Congratulations! You made it through Financing 101.

By now you should have a good idea of what type of mortgage loan and interest rate you can expect. Keep in mind that approving loans is not an exact science, and every situation is different. This course was constructed to make you more aware of the industry as a whole and should give you some ideas of what you need to do to qualify for the rate you want. It should also give you a little leverage to discuss your rate and terms with potential lenders. This course is a tool to help you understand what mortgage companies will tell you. If you have any questions, or would like to get pre-qualified for a mortgage loan, call us at 1-888-568-1444 or e-mail us at webinfo@mortgage-ams.com.

Previous Chapter Table of Contents