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Spring is Mortgage Season
By Linda Chugkowski

According to the calendar, spring is right around the corner. Many Vermonters will begin thinking about home improvement projects, purchasing a new home or perhaps building one — they may also be considering applying for a mortgage. Before visiting your financial institution, you may find it helpful to explore how banks qualify an individual for a mortgage, how a credit score affects the process, what types of products are available, what PMI is and how points are used to lower the interest rate.

Generally speaking, when qualifying someone for a mortgage, a bank will consider available resources to repay the loan, property value and credit history. It is in the best interest of the bank and the applicant for there to be sufficient income to cover the mortgage payment and other existing monthly debt obligations. Banks may finance up to 100% of the appraised property value/purchase price.

Credit history is a major factor in the cost of financing your home. Financial institutions use credit scores as part of the qualification process; the better your credit score, the better your chances of getting credit with an attractive interest rate. Excessive obligations, late payments, debt collection accounts, bankruptcy, or a monetary court judgment will negatively affect your credit score. The use of credit scores extends beyond a transaction with a financial institution. Utility companies use credit scores in determining whether or not a new customer will be required to place a deposit, and employers may use a credit score in the employment application process. Consumers are entitled to a free copy of their credit report every year. Visit www.annualcreditreport.com or call 877-322-8228 to obtain your copy.

Most banks offer fixed or variable rate mortgages, and construction loans. The interest rate on a fixed rate mortgage remains the same for the entire life of the loan. Variable rate products usually begin with an interest rate lower than a fixed rate mortgage and over time the interest rate fluctuates (up or down) based on market conditions. There are limits around how high or low the interest rate can go over the life of a variable rate loan. Many of today’s variable rate mortgages begin with a fixed rate for the first 3, 5, or 7 years, then adjust annually.

Construction loans have a fixed interest rate while the home is being built; interest only payments are made during the construction period, based on the balance outstanding. Naturally, the interest only payment increases as the house nears completion. Following the construction period, the loan may be converted to a conventional mortgage.

The majority of Vermonters opt for a standard conventional mortgage. Financing is available on up to 100% of the appraised value/purchase price of your home; however, if you finance more than 80% of the value, Private Mortgage Insurance (PMI) is required. Though there is an added cost for PMI, it benefits the lender and the borrower. The lender is protected in the event the borrower defaults on the loan and a borrower with a smaller down payment is still able to purchase a home.

The Vermont Housing Finance Agency (www.vhfa.org) works with many local banks to provide special programs that make financing a home more affordable for many Vermonters. VHFA programs may provide up to 100% financing and help with closing costs. VHFA also offers numerous other programs.

Simply stated, points are a way of “buying down” your interest rate and one point is equal to 1% of the amount borrowed. For example, if the borrowed amount is $200,000, one point equals $2,000. The more points you pay, the lower your interest rate. For individuals who plan on owning their home for a long period of time, the savings over the life of their loan offsets the upfront expense of the points. Individuals who plan on moving in a few years may want to opt for a zero point mortgage.