Choosing
a Lender
We can suggest the services
and expertise of our
affiliated mortgage
company, however one
good way to find a lender
is to ask friends, family
members or co-workers
for a referral. Asking
your real estate agent
is another good alternative.
Agents frequently work
with mortgage lenders
and will know who can
get the job done. Agents
will refer you to lenders
with a good track record
since they want the
deal to go through as
much if not more than
you do! Check out a
few lenders and pick
one that you feel confident
will get the job done
in an efficient manner
and one that you feel
comfortable working
with. Don’t base your
decision on the interest
rate quoted by each
lender. Interest rate
quotes are a not a good
way to choose a lender.
Many lenders will quote
low rates to entice
you. Once you've made
application and your
loan is in process,
the rate manages to
go up. Interest rates
change daily and sometimes
they change inter-day
as well. Your interest
rate is based on many
factors: your credit
score, the amount of
the loan, the amount
of your down payment,
and other factors. Unless
your loan officer will
agree to lock in the
low rate they quote
you don’t believe them.
Remember, that for practical
purposes your interest
rate can be locked up
to 45 days. Anything
above this will entail
higher rates and lock
fees. Locking in your
loan at the time of
pre-approval is also
not practical since
you’ll have no idea
how long it may take
to find the right home.
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Required Information and
Documentation
Applying for a mortgage
loan requires that you
document your employment,
assets, income, etc.
Click
Here
for a checklist of what
information and documentation
you’ll need to gather
up.
Click
Here
for information and
documentation required
from a foreign national.
Start now, if you don’t
have some of the items
available you’ll need
to call your bank, employer
and accountant/tax preparer
to get copies of the
required paperwork.
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Loan Pre-Qualification
Pre-qualification is
a necessary first step.
It helps both you and
your Realtor know the
price of the home you
can afford, and it also
points out any potential
qualifying problems
early, so that you may
have them resolved early
in the process rather
than delaying a closing
or even losing a home
you want. Pre-qualification
helps you in the negotiating
stage because sellers
will want assurance
that you can purchase
the home. A pre-qualification
can be done rather quickly.
Some lenders may ask
you to fill out a full
loan application others
may just verbally obtain
the basic data from
you. Your loan officer
will run and in file
credit report. Most
lenders will do this
free of charge but some
may try to charge you
the cost of a full factual
credit report which
is required later in
the process. The cost
of an in file credit
report is around $18.
The cost of a full factual
credit report is usually
about $60-$70. They
need to find your credit
score, also known as
your "FICO"
score. Your credit report
will also list all of
the consumer debt you
have--car loans, student
loans, personal loans,
credit card payments
etc. Based on your credit
report, down payment
and income your loan
officer can tell you
the maximum loan amount
you qualify for, assuming
the information you
provided is correct
and can be verified.
A pre-qualification
only means that the
lender should be able
to grant the loan, provided
all information given
was correct. At your
request your loan officer
will provide a pre-qualification
letter stating that
based on the information
you provided, verbal
and/or documented, that
you qualify for a loan
in the amount of $XXX.
You can also get a rough
estimate of the interest
rate, loan points you
will need to pay, and
your total monthly payment.
You may also request
a Good Faith Estimate
that details the total
closing costs associated
with your loan. However,
unlike a pre-approval,
your loan package has
not been underwritten
and there is no formal
approval. Once you find
a home, and get an accepted
offer, your lender still
has to submit the loan
package for actual approval
by the bank's underwriters.
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Loan
Pre-Approval
A pre-approval is similar
to pre-qualification,
however everything must
be fully documented
and you must complete
and sign a loan application
and all relevant disclosures.
You will probably be
asked to pay a fee for
the credit report and
appraisal. A full loan
package is then submitted
to an underwriter for
approval. A pre-approval
is actually an approval
of your loan, subject
only to the house qualifying,
i.e. Subject to its
appraisal and inspections.
You should determine
how long this approval
is good for, and whether
it locks in an interest
rate, or how it would
vary if the rate changes.
In most cases it is
not a good idea to lock
in your interest rate
until you actually have
a contract on a home.
Not all lenders offer
full pre-approvals.
However, many do and
if you want to take
this extra step, you
will be considered a
much more qualified
buyer and your offer
will command serious
consideration since
the seller will not
have to wonder if you
will get the loan.
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Good Faith Estimate
(GFE), Closing Costs
and Impound (Escrow)
Accounts
A lender is required
by law to provide you
with a GFE within 3
days after you make
formal application for
a mortgage loan.
Click
Here
to see a detailed list
and discussion of closing
costs and impound accounts.
The GFE is an estimate
of all the fees associated
with a mortgage loan.
Most of these fees are
paid at the closing.
The lender will also
quote you an interest
rate, whether that rate
is fixed or adjustable,
and an estimated payment.
Remember this is only
an estimate, however
be sure to question
any significant deviation
from this estimate at
the closing.
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Your Credit Report and Your
FICO Score
FICO scoring is what
lenders use to judge
your creditworthiness.
The best interest rates
and terms are provided
to those borrowers with
scores of 620 and above.
For a more detailed
discussion of FICO scoring
and what effects your
FICO score
click
here.
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Cleaning up
Your Credit Report
It is not uncommon for
your credit report to
contain derogatory items
that you took care of
long ago, or items that
just are not yours.
There may be past judgments
or liens that have been
paid off but not reflected
in your credit report.
Many times a divorce
can lead to problems
on your credit report.
There may also be derogatory
items that are correct
such as outstanding
debts still owed or
disputed debts. Most
problems can be corrected
with some work on your
part. You may be able
to reach a settlement
on past debts. Your
loan officer may be
able to help you or
point you in the right
direction. If you have
legitimate derogatory
information such as
auto or credit card
late payments, your
lender will ask you
to write a letter of
explanation as to why
you were late. Usually
all late payments on
your report will need
to be explained. Ask
your loan rep to help
you write these letters.
This is a very common
scenario and your loan
rep will know just what
you need to say on the
explanation letter.
For a more detailed
discussion of how to
go about cleaning up
your credit
click
here.
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Down Payment
Discussion
The greater your down
payment the easier it
is to get approved for
a loan. If you put down
20% and have good credit
the underwriter will
be more flexible and
usually your loan will
get approved quicker.
The underwriter won’t
be as stringent when
analyzing debt to income
ratios. Another advantage
of putting down 20%
is that you will not
have to pay for mortgage
insurance (MI). Lenders
are very strict about
where your down payment
came from. They will
want explanations and
documentation on any
unusually large deposits
in your banks accounts.
Money that is borrowed
and deposited into your
accounts are not acceptable
as a down payment. Some
loan programs allow
borrowers to receive
a portion of the down
payment from a parent
or family member as
long the money can be
traced. However this
money must be considered
a gift, not a loan,
and your family member
will have to sign a
letter stating that
it is a gift and it's
not to be repaid. Usually
a down payment of at
least 3% of the sales
price must be from your
own funds.
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Mortgage Insurance
(MI).
Mortgage insurance or
MI is a type of insurance
provided by a private
mortgage insurance company
to protect a lender
in the event of default
on a loan. It is required
when the loan to value
(LTV) exceeds 80% of
the appraised value
or sales price which
ever is less. For example,
if you put down only
10% then the LTV will
be 90% and you will
need to pay for MI.
The MI premium is based
on the LTV and increases
as the LTV increase.
The annual premium is
divided by 12 to arrive
at your monthly premium.
For a 90% (10% down)
loan take the loan amount
and multiply it by 0.60%.
The number you get is
the annual premium.
Divide that number by
12 and you get the monthly
premium. For instance
if your loan amount
is $100,000 the monthly
premium would be $50.
Note: The PMI factor
quoted above is an estimate
and subject to change.
Rates vary slightly
among MI companies,
lenders, and loan programs.
Please check with your
loan officer for the
latest information.
There are several ways
around paying MI even
when your LTV is greater
than 80%. One is to
do what is called an
80-10-10 loan. Take
out an 80% first mortgage
and then a 10% second
mortgage. The second
mortgage is usually
a Home Equity Line of
Credit that carries
a higher interest rate
however affords the
flexibility of paying
down and also borrowing
again under this line
of credit. The second
way is to find a lender
that offers self-insured
programs. This type
of loan would have a
higher interest rate
in place of the private
mortgage insurance premium.
While mortgage insurance
premium payments are
not tax deductible,
the interest associated
with a self-insured
mortgage would be fully
tax deductible. MI can
be removed but this
may be difficult to
accomplish. Lenders
are supposed to allow
you to remove the MI
requirement when the
LTV falls below 80%.
Usually the lender will
require an appraisal.
Contact your current
mortgage holder to determine
their policy on removing
MI. If your property
value increases enough
and interest rates are
favorable you can refinance
with an 80% loan and
avoid MI. The fact that
lenders sometimes make
it difficult for borrowers
to remove MI has prompted
Congress to action.
There is a law that
makes removing MI automatic
once the equity in a
property reaches 22%.
Sounds good right? Unfortunately,
the bill only addresses
the elimination of MI
through principal reduction,
not appreciation. This
means that a consumer
will have to pay MI
for 10 or 15 years before
MI is dropped (unless
the property is refinanced
with an 80% loan).
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Loan
Programs
There is an assorted
menu of available loan
programs that will fit
almost any situation.
Most of the discussion
up to this point has
been focused on what
is referred to as a
full doc loan that requires
that the borrower be
able to document and
verify all pertinent
information. The borrower
must have good credit,
verifiable income and
be able to make at least
a minimal down payment,
to name but a few of
the requirements. Additionally,
the borrower’s total
debt, including the
proposed mortgage payment,
must not exceed a specified
percentage of their
income. Not every borrower
fits this profile, some
borrowers may have poor
credit, others may have
undocumented income
or their debt to income
ratio falls outside
of the prescribed limits
or standards. There
are loan programs available
to fit any and all of
these scenarios. There
are no ratio loans,
no doc loans, no income
loans, stated income
loans, no money down
loans (100% financing).
You get the picture.
Whatever your situation
there is a loan program
available, the only
down side is that these
specialty loans usually
come with higher interest
rates and may require
a higher down payment.
A detailed discussion
of all the available
loan programs is beyond
the scope of this website.
We have a licensed mortgage
broker on staff with
the experience and the
knowledge to answer
any of your questions.
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Fixed Rate vs. Adjustable Rate
Mortgages
Most borrowers opt for
fixed rate loans without
giving it much thought
because they think it
is the safest and best
option. When interest
rates are low this may
be the best option,
but even in a low interest
rate period it may still
not be the best loan
product. Adjustable
Rate Mortgages (ARM’s)
offer many advantages
over a fixed rate loan.
Rates on ARM’s are usually
if not always lower
than a fixed rate loan.
There is a wide variety
of ARM products. Some
ARM’s are adjustable
monthly, others semi-annually,
others annually. Some
ARM loans offer a fixed
interest rate for 3,
5, 7 or 10 years before
they become adjustable.
Some ARM loans offer
incredibly low interest
rates at the outset,
called teaser rates.
Depending on the difference
between the interest
rates and how long you
plan to stay in your
new home and adjustable
rate loan may be much
more sensible. Most
people live in the same
home for an average
of 5 years, but pay
interest rates based
on a 30 year time horizon.
Another point to consider
is that when interest
rates are high why not
take the lower interest
rate offered by an ARM
and wait until interest
rates head back down
which they inevitably
will. Once rates reach
a point that it makes
sense you can refinance
your home at the then
lower fixed rate. One
last point to keep in
mind with an ARM loan
is to inquire about
the interest rate index
used to calculate the
actual interest rate.
ARM’s are priced based
on an index plus a fixed
margin. This index is
most commonly based
one of the following
indexes: the Treasury
Bill Rate, the LIBOR
Rate (London Inter Bank
Offer Rate) or the COFI
Rate (Cost of Funds
Index). Once again I
suggest discussing the
advantages and disadvantages
of Fixed Rate and Adjustable
Rate Mortgages with
your loan officer. To
view the ARM Handbook,
a government publication,
Click
Here
. To view more information
about COFI Loans
Click
Here.
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Locking In Your Interest
Rate
At some point you will
have to lock in your
interest rate. This
means regardless of
whether rates go up
or down, you're locked
in to that rate. You
can lock in at the time
of application, after
contracting on a home,
or any time prior to
the closing. You should
work closely with your
loan officer and ask
for advice. Many times
loan officers will have
insights as to where
rates are going based
on economic conditions.
They may advise you
to lock immediately
because they believe
rates may rise or to
just float because rates
may fall. Usually lenders
do not charge to lock
in a loan, however on
locks greater than 45
days they may charge
a premium to lock your
rate. They may charge
an extra quarter point
or so for this privilege.
Remember that no one
knows which way rates
are headed, they can
only base their estimate
on experience and common
sense. Sometimes lenders
miss the market and
the rate you hoped for
isn't available. The
bottom line is that
the decision of whether
to lock or float is
yours. You should coordinate
closely with your loan
officer and your real
estate agent to determine
when to lock the loan
based on your projected
closing date and market
conditions. For example,
if the rate lock is
only good for 30 days
and you have a 45 day
window to closing, locking
your rate at the time
of contract may not
be a good idea.
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Should You Pay a
Loan Origination Fee
(Points)
Generally, you should
only pay points if you
plan on keeping the
loan for at least two
to four years. Because
points are prepaid interest,
you need to be sure
you will keep the loan
long enough to recoup
these costs through
lower monthly mortgage
payments. If there is
a chance you may move
within a four year period
or if the general interest
rate market is declining
(increasing the likelihood
of refinancing), you
might consider a zero
point loan. Please consult
with your loan officer.
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Cash
Reserve Requirements
Most lenders require
you to have 3 to 6 months
of your monthly payment
in the bank as cash
reserves. The bank wants
to be sure that you
will be able to make
payments on time and
that you have a cash
cushion for unforeseen
circumstances. Be sure
to budget this into
the total cash you’ll
need to close. The total
cash required to close
is the sum of the down
payment, closing costs,
impounds/prepaids and
cash reserves.
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What is Your
Actual Total Monthly
Payment (PITI)?
Your
total monthly payment
always consists of 4
items. They are referred
to as the "PITI"
which is the mortgage
principal plus interest
(PI) payment, your taxes
(T), and your homeowners
insurance (I). In addition
to your PITI there is
also your Homeowners
Association (HOA) dues
if you are buying a
single family home in
a Planned Unit Development
(PUD), a condominium
or a townhouse and mortgage
insurance (MI) if you
are putting down less
than 20%.
Click
Here
to use our mortgage
calculator.
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Minimizing
Closing Costs
A technique to reduce the cash out of pocket to purchase your new home is to ask
the seller to pay some or all of your closing costs. Basically what you’re doing
is financing your closing costs. What happens is that once you’ve agreed upon a
price for the home you then add your closing costs on top of the sales price and
the seller agrees to pay for your closing costs. This is written into your
purchase contract. The increase in your monthly payment is minimal and you save
thousands in out of pocket expenses. Be aware that the home must appraise for
the sales price including the closing costs. Keep in mind a few simple rules. On
conventional loans you can only ask the seller to pay non-recurring costs, not
pre-paids or items to be paid in advance. If you are putting ten percent down or
more, the most the seller can contribute is six percent of the purchase price.
If you are putting less down, the most the seller can contribute is three
percent. On VA loans, you can ask the seller to pay everything. VA loans do not
require the buyer to make a down payment or to pay any closing costs. On FHA
loans, it is backwards. You can ask the seller to pay your pre-paids and
impounds, but it doesn't normally make sense to ask the seller to pay your
non-recurring costs. The exception is that there are some fees a seller has to
pay on a FHA loan, so you won't be paying those anyway. Also, if the seller
wants to pay discount points (not your loan origination fee) or pay for a buy
down, that is allowed. The reason it does not make sense for the seller to pay
your normal buyer's costs on an FHA loan has to do with how the FHA loan amount
is calculated. Instead of just using a percentage of the purchase price like
everyone else, FHA calculates your loan amount based on the purchase price plus
your closing costs (most people think the down payment on an FHA loan is 3%,
which is not true). If the seller pays your closing costs, your loan amount is
calculated from a smaller number, resulting in a smaller loan amount and a
larger down payment. So the seller pays your closing costs, but your down
payment is larger. The end result is that your out-of-pocket expenses to close
are about the same.
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Why
Finance Your New Home
?
Even if you do not need to finance your new home it may be
a good idea to do so. You should consult a financial advisor first,
however in most cases mortgage financing is the lowest cost money one can
borrow, especially if you consider the tax advantages. By taking out a
mortgage loan you can invest your free cash in other more profitable investments
or use the money to pay off higher cost debt. In most cases a home is not an
investment that has high returns. When you factor in the closing costs and
commissions paid when you sell your property it usually takes at least 3-5 years
to recoup your initial investment. On average a home only appreciates in
value between 2-3% per year, however in recent years in this area this rate has
been much higher. So, before you pay cash for your new home make
sure you consult with a financial advisor and investigate the possible
advantages of financing your new home and investing your cash elsewhere. Over
the long run investing in the U.S. equity markets may yield higher returns.
Remember to consult a financial advisor.
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