All About Conventional Mortgages

Unless you have a huge pile of cash, a big part of buying home is getting a mortgage.

There are many, many different types of mortgage loans. The most common type is a Fixed Rate Conventional Mortgage. I really like working with first time home buyers because I really like to explain this stuff. ๐Ÿ™‚ So here we go:

Conventional Mortgage: A loan that is not insured or guaranteed by a government body. It conforms with Fannie Mae and Freddie Mac guidelines so these loans are generally sold off by banks to Fannie and Freddie. This doesn’t really affect the mortgage holder. Conventional mortgages require a minimum down payment of 5%. Conventional mortgages are generally Fixed-Rate, meaning that the interest rate does not change throughout the life of the loan. If it starts at 4% with a term of 30 years, it will still be 4% 30 years later, no matter what happens in the market.

Conventional mortgages are generally 15 or 30 year but different terms are available. Generally, the shorter the term, the better the interest rate.

You can you use a conventional loan to buy a primary residence, second home or investment property up to 4 units.

Down Payment: the amount of cash you bring to closing not including the closing costs (minimum of 5% for conventional mortgage loans).

Loan-to-Value (LTV): The mortgage amount divided by the appraised value of the house. For conventional loans, your LTV must be 95% or less.
For example, if you buy a house for $100,000, you would be required to put 5% down payment.
5% of $100,000 = $5,000 down payment

So the mortgage amount would be $95,000 and the sale price is $100,000 95,000/100,000 = .95 or 95% loan-to-value

Note: when you buy a home, the lender will do an appraisal to make sure that the home is worth at least as much as the mortgage amount. Even if your home appraises higher than the sale price, you still need to put down at least 5% of the sale price. The bank requires this so that you have some vested interest in the home and you won’t just walk away from the mortgage.

Mortgage Payment Parts (PITI):
: The portion of your payment that goes toward paying down your loan.
Interest: Payment to the bank for lending you money. Does not reduce loan amount.
Taxes: Money that will go into escrow (see below) to pay real estate taxes.
Escrow is a holding account into which you will pay, as part of your mortgage payment, that the lender will use for tax payments. Most mortgages escrow for taxes and insurance so you don’t have to make those payments yourself. You will pay into the escrow account with every mortgage payment. Tax and insurance payments will be paid from this by the lender.
Insurance: Money that you will pay with each mortgage payment that will be used to pay your home owner’s insurance policy premium. (goes into escrow account each month)

You might also pay PMI (explained below) as part of your mortgage payment.

Private Mortgage Insurance (PMI): If you put less than 20% as a down payment, you are required to pay PMI. This is protection for the lender in case the loan holder defaults. The amount of PMI depends upon how much you put down. You’ll pay the highest PMI premium if you put the least down (5%). Once you pay down your loan to 80% loan-to-value (LTV), you can request that the bank eliminate your PMI. PMI is including in your mortgage payment.

Another note about PMI: If you buy a house and put less than 20% down, but then you do some renovations or upgrades and feel that your house is worth more, you can ask the bank to do another appraisal with the goal of getting rid of PMI. You will have to pay for the appraisal out of pocket and it’s usually about $400-500. If the appraisal value gives you an LTV less than 80%, it will eliminate the PMI.

An alternative to conventional mortgages are FHA Mortgages. I’ll talk about that in the next post. ๐Ÿ™‚

Pittsburgh: Regent Square

I’ve started two blog posts about different types of mortgages but there is just so much information to include, it’s been hard for me to complete. Still working on it!

In the meantime, I thought I’d talk a little bit about the area of Pittsburgh known as Regent Square. This little area East of Frick Park is a very hot real estate market. It has a business district, its walkable, it has Frick Park. I love it (and would love to move there ๐Ÿ™‚ ) But Regent square is also a unique area of Pittsburgh because it is not its own municipality.

The area outlined in orange on the map below is Regent Square according to Google.

Regent Square is made up of parts of Swissvale, Wilkinsburg and the City of Pittsburgh. This means that depending on where you live in Regent Square, your real estate taxes (and income tax) could vary wildly. The school district also varies depending on the part of Regent Square.

In terms of real estate taxes, the total millage for the 3 municipalities that make up Regent Square are:

  • City of Pittsburgh: 22.63
  • Wilkinsburg: 48.23
  • Swissvale: 38.08

As an example, if you were buying a house for $250,000, here is what your total annual real estate taxes would be in each of these areas:

  • City of Pittsburgh: $5,657
  • Wilkinsburg: $12,057
  • Swissvale: $9,520

These are big differences! This difference in real estate tax greatly affects the value of real estate here. In my experience, a house in the city of Pittsburgh portion of Regent Square will be worth more than a similar house in the Wilkinsburg or Swissvale portion. The real estate taxes make a big difference in what people can afford. Your mortgage payment would be significantly different depending on the area.

In the city of Pittsburgh, you would be paying $471 per month toward the real estate tax portion of your mortgage payment. If you were in Wilkinsburg, the real estate tax portion of your mortgage payment would be $1,004.

Just to be a little more clear, if you took out a mortgage for $250,000, here is an estimate of what your mortgage payment would be. (Principal+Interest+Taxes) (Using an estimated interest rate of 4.25% and not including home owner’s insurance)

  • City of Pittsburgh: $1,701/month
  • Wilkinsburg: $2,234/month
  • Swissvale: $2,023/month

And just a quick note about schools: Wilkinsburg is Wilkinsburg School Disctrict, Swissvale is Woodland Hills School District and the City of Pittsburgh portion is Pittsburgh Public Schools.

You can check the municipality of a particular house on the Allegheny County Assessment Site. (I bring up that website on pretty much every post…but it’s really full of useful information). Search for the address and then on the General Information tab, it will list the municipality. The one below is 14th Ward – Pittsburgh.

Hope that is helpful to you! I think it’s pretty interesting information. I also recently found out about an area of Pittsburgh near Regent Square that is called Park Place?! Who knew??

10 Steps to Making an Offer on a Home

You found the house you love! You want to make an offer! What’s the process now? This post has a lot of words and not really any images to liven it up. It’s a good outline though for first time home buyers on the whole process from finding a house and making an offer to closing and getting keys. I hope you find it helpful!

Once you decide to make an offer or bid on a house, your agent will go through the paperwork with you and ask questions about the details of the offer. The major questions are:

  • The amount you want to offer.
  • Whether or not you’ll ask for seller assist and how much.
  • How much hand money you’d like to give.
  • Information about contingencies. Whether or not your offer will be contingent (dependent upon) the results of a home inspection, pest inspection, mortgage financing, the sale of your current house, etc.

Things you’ll need to submit the offer:

  • A pre-approval (or pre-qualification) letter from a lender.
  • Hand Money (or earnest money) check
  • Initialed and Signed disclosures for the property (from your agent)
  • Signed Consumer Notice (from your agent)
  • Signed Estimated Costs sheet (from your agent)
  • Completed Sales Agreement (completed with your agent)

Once the paperwork is signed, your agent will send the offer information to the seller’s agent, likely in an email. The sales agreement will have a deadline date for the sellers to respond, usually a couple of days.

After you send over the initial offer, negotiations usually happen pretty quickly. The two agents will email, text or call back and forth with counter offers until an agreement can be made or an agreement can’t be reached and the deal falls through.

As an example of the timeline, we submitted an offer for clients a couple of days ago at about 5:30 PM. By 9:50 PM, a verbal agreement was made! And that was after a few counter offers back and forth.

The next step in the process is for the buying agent to update the sales agreement with the agreed upon terms and have the buyers and sellers sign. Once the paperwork is fully signed, the due diligence period begins! Your agent will send the sales agreement to your lender and title company so they can begin their process and you can schedule inspections.

The amount of time for due diligence is outlined in your sales agreement but is usually up to 14 days if you’ve elected to do inspections. This is the time when you have your home inspection, sewer inspection, etc. After you get the results of your inspections, you can go back to the sellers with more requests.

For example, if your home inspector says that the roof is on the last 2 years of its useful life, you can get quotes from roofers and then request some amount of the repair as seller concessions. You can ask for seller concessions in a dollar amount and do the repairs on your own after closing or you can ask the sellers to have the work done prior to closing.

If the buyers and sellers cannot come to an agreement during the due diligence period, (e.g. if you want $10k in repair money and they’ll only give $5k), you can back out of the deal and get your hand money back.

If the buyers and sellers are able to come to an agreement, a Change of Terms document is completed and signed by both parties outlining the concessions and changes to the sales agreement.

When the due diligence period ends, the lender will schedule the appraisal of the house. The appraisal needs to come back at the sale price or higher or else you won’t be able to finance the loan. This can result in the deal falling through, having to bring more money to close in order to lessen the loan amount or having to renegotiate the sale price lower to meet the lower appraisal amount.

During this period before closing, your lender might request some additional documentation but generally you’re just waiting for the title search to be completed, the loan to be underwritten, etc.

Finally, closing time! Closings are generally scheduled 30 to 60 days after the sales agreement is signed. You specify the closing date when you complete the sales agreement. 30 day closings are usually when you are paying cash (as opposed to financing) or if you are not doing any inspections. It’s pretty difficult to close a loan in 30 days if you have a 14 day due diligence period.

The day before the closing or the morning of the closing, you’ll usually walk through the house to make sure everything is as it should be. You’ll also receive the final dollar amount that you need to bring to close and initiate the wire transfer with your bank.

Your closing will be scheduled at an agreed upon location by both parties and the realtors. We’ve had a closing at a real estate office and closings at the title company office but it can be anywhere. There will be paperwork to sign, you might meet the sellers for the first time, and you’ll get the keys!!

And that’s it!

To recap here’s a quick outline of the steps from making an offer to closing on a house:

  1. Get a pre-approval from a lender. (You don’t have to actually use this lender. You can shop around for quotes still)
  2. Tell your agent you want to make an offer
  3. Complete all the paperwork with your agent
  4. Negotiate the terms of the sale
  5. Due diligence period (inspections, etc.)
  6. Communication with your lender while the deal is underwritten. They may request additional documentation, letters of explanation or different wording in the sales agreement.
  7. You’ll need to set up a new homeowner’s insurance policy and have the utilities transferred to your name.
  8. Wiring the funds to the title company usually the day before or more of closing.
  9. Closing time
  10. Get the keys and drink celebratory champagne at your new house!

I started to write a post about different types of mortgages but it was getting way too long. I’m going to try to simplify it and hopefully post next Monday. I’ll have to break it up into a couple different posts. My plan is to put up a new post every Monday ๐Ÿ™‚