Loan Process

• A pre-approval letter is more reliable that a pre-qualification letter. This tells the seller that you have already been through the loan process and are just awaiting a home. Having this can save you thousands because sellers are more anxious to work with someone already approved for financing.
  
• You will know how much money you can qualify to borrow and how much the payments will be based on the purchase price you choose to focus on.
• You will have more leverage in negotiations with the seller, and you will feel less stressed when you know that financially the house you would like to purchase is available.
• A realtor will work harder for you because it means that you are serious about buying a home.
• Make sure not to make any major purchase prior to discussing this with the lender that has pre-approved you.

Here's the information most lenders will need to know:

• The amount of money you wish to borrow and the length of time you will need the money.
• Your current address and, if you've been at your present address less than two years, your previous address.
• Your social security number.
• Your present employer's address and, if you've been at your present job less than two years, your former employer's address.
• Your gross monthly income.
• Your bank account numbers and your approximate balances.
• Your assets (real estate, personal property, paid-up life insurance, etc.).
• A complete list of your debts, with account numbers.
• A copy of the purchase agreement for your new home.
• An account, in writing, of any problems concerning your loan application.

1. Contract for Purchase
2. Contract for sale of current home (if applicable)
3. Last 2 years W-2's and tax returns
4. Loan payment information (credit cards, car loans, etc.)
5. Earnest money deposit receipt or cancelled check
6. Attorney and realtor phone #'s.
7. Driver's license and social security card or number
8. Application fee
9. Cancelled checks for last 12 mos rent or mortgage
10. Business tax returns

With this information in hand, the lender will take these steps to process your application:
1. Verify the facts.
2. Get a credit report.
3. Make a property appraisal.
4. Review your application.
5. Decide whether or not to make the loan.

1. Are both fixed-rate and adjustable mortgage loans available?
2. What is the interest rate?
3. What are the "points"?
4. How long can I "lock-in" the financing at the current interest rate?
5. What are the other fees a lender may charge me in conjunction with my loan?
6. Are funds for a second mortgage available?
7. On adjustable loans:
  - How often will the interest rate be adjusted?
  - Is there a maximum limit on each rate change?
  - How often will the monthly payment be adjusted?
  - Is there a ceiling on payment adjustments?
  - Can the term of the loan be extended?
  - Is it convertible to fixed?
8. Is there a prepayment penalty clause? (This involves extra charges for paying off the loan before maturity. About 80% of all loans in the United States are paid off early.)
9. Is it an open-end mortgage? (An open-end clause in a mortgage allows you to borrow in the future for home improvements or other purposes, up to the amount of principal you've paid off.)
10. What is the "grace" period? How late can a monthly payment be made before a late charge is assessed? What will happen if a payment is missed?
11. If you sell your house, will the new buyer be able to assume your mortgage at the same interest rate?
12. Are "points" required for obtaining the new mortgage? (Usually lenders charge points for the cost of giving you a mortgage loan. A "point" is 1% of the loan.)
13. Will the lender require mortgage insurance.

House hunting begins at home... with planning. Before you grab the road maps and hit the streets, you need to know how much house you can afford to buy. Knowing your affordable price range will bring your house hunting into focus.

How much house you can afford depends on two things: how much you can afford for the monthly house payment, and how much you can invest in the down payment. Monthly payments include the principal and interest on the mortgage loan, and property taxes and insurance against fire and other hazards. These four costs are often abbreviated "P.I.T.I." (For some buyers and lenders monthly housing costs may also include homeowner association dues, condominium fees and mortgage insurance.)

The key items are the size of the down payment and the amount of the mortgage. The down payment might be zero in the case of VA-backed mortgages. Or a buyer may invest 20 to 25 percent of the purchase with a conventional loan and not be required to buy mortgage insurance. A local lender can be very helpful to you in determining just how much house you can afford.

A house hunter's first step is to set a housing budget, then go shopping for the house (price) and payments (P.I.T.I) that fit the budget. Few things are more frustrating than looking at homes, falling in love with one, and then discovering that you can't afford that particular house. You can avoid this by getting pre-qualified, then pre-approved.

Even though there are many ways to qualify to buy a home, make sure the monthly payment makes sense for you. A current rule of thumb is that the monthly is that the monthly payment should not be more than 25-33% of gross monthly income.

You'll want to note the differences between being pre-qualified and pre-approved.

Pre-Qualification:
  • Based on preliminary information regarding your income, debts and assets.
  • Information is usually provided verbally by the buyer(s)
  • In-file credit report may or may not be reviewed
  • Once a purchase agreement is executed, the buyer must complete a loan application
  • No fee

• Buyer provides documentation of income, debts and assets.
• Loan application is completed.>
• Information is verified and loan is approved by underwriter
• No need to complete application once purchase agreement is executed (it's already done)
• Buyer makes a deposit on closing costs
• Buyer's loan is approved, subject only to home's appraisal

Savvy home buyers know the importance of credit. When you're in the process of looking for your new home, font-family: Arial"> can save a great deal of time and frustration.Credit scores help lenders determine the type and size mortgage loan for which you qualify. The score is basically a summary of your credit report, in the form of a numerical measurement that reflects your management of credit. Based on information compiled by credit bureaus, the score takes into consideration:

• The applicant's payment history
• The amount of credit the applicant has
• Information reported monthly by creditors
• Any serious past problems with debts (i.e., liens, bankruptcies, collections, judgements)

The credit scoring process converts these and other factors into a single number that aids lenders in determining the likelihood an applicant will repay a loan on a timely basis.

Credit scores used in mortgage lending typically fall in the 300 to 900 range. Generally, the higher the score, the less risk of default the borrower presents to the lender. However, credit scoring is only one factor considered by a lender when evaluating and only after careful analysis of all the information collected from the applicant.

Even home buyers who are already pre-qualified benefit from knowing their scores. While the pre-qualification measures debt and income ratios to "predict" the loan amount for which a person may qualify, the credit score provides a clear indication of the buyer's credit standing - a major factor during the final loan approval process. A low score may necessitate a decreased loan amount, a change in mortgage type or possibly even denial of the loan altogether. We recommend that every home buying prospect learn his/her credit score as the first step in the lending process. The credit score will likely ultimately determine the rate of interest you will pay.

When it comes to paying for a home, buyers today have an almost unlimited number of financing options from which to choose. They have before them a real "mortgage smorgasbord" - a table full of exotic names like "ARMS," "balloons, " and "buy downs."

Some involve financing assistance from the home seller. Others are from regular financial institutions like mortgage companies, banks and savings and loans. Here's a run-down on the main types of financing every home buyer should know today. Interest rates are intended for illustration only. Ask a local lender for current market rates and more detailed information on loan products to suit your needs.

Conventional Mortgage

A conventional loan is an indebtedness or mortgage made between a lending institution and a borrower without a third party participant (such as VA or FHA). Most types of conventional loans are paid off in equal monthly payments spread over 15, 25, or 30 years. The interest rate stays the same for the life of the loan; therefore the monthly principal and interest payment also remains constant.

Terms of a conventional loan vary among lenders, but basically a loan can be obtained with as little as 5% down payment. When the down payment is less than 20% it is, in some cases, necessary for the loan to have private mortgage insurance (PMI) to protect the lender.

VA Loan

Qualified veterans (Reserves and National Guard also qualify) can take out loans exceeding $200,000 with no down payment and flexible underwriting guidelines; closing costs may be a gift. VA-guaranteed loans can be combined with second mortgages and are assumable (upon qualifying) by any future buyer. Payments are fixed for the full term.

FHA Loan

Strictly speaking, FHA (the Federal Housing Administration) does not make a loan; rather it insures loans, which makes lenders willing to finance home purchases on favorable terms. With an FHA loan the down payment can be as low as 2.25% for properties above $50,000 and 1.25% for properties below $50,000.

Discount Points may be paid by either the seller or the buyer. FHA charges an up-front Mortgage Insurance Premium, similar to Private Mortgage Insurance, that can be financed in the mortgage amount or paid in cash at settlement. The borrower must also pay an annual Mortgage Insurance Premium of .50% which is collected monthly.

ARMs (Adjustable Rate Mortgages)

ARMs are loans in which the interest rate is subject to change on a periodic basis. Advantage: a low initial interest rate, with payments that may decrease over time. Disadvantage: payments may also increase over time. ARMs may be risky if interest rates rise significantly and your income doesn't. They're popular with first-time buyers, and buyers who plan to move or refinance within 3 to 5 years.

Balloon Mortgage

These are short-term (5-7 year) loans, amortized over 30 years; they're repaid in equal monthly payments plus a "balloon" payment for the remaining balance. They enjoy lower interest rates and monthly payments than fixed-rate loans, but the borrower may risk needing to refinance the remaining balance when the term is up. The balloon mortgage is designed for borrowers who plan to move or refinance within the loan term. Some allow conversion to a fixed rate at the terms end.

Owner-Assisted Financining

Owners may finance first, second, third or fourth loans. They may loan their equity back as a first mortgage (often called a "take back").

Second Mortgage

The seller of the house lends the buyer enough money to make up the difference between the purchase price and the down payment/first-mortgage balance (a commercial lender may also make this kind of loan). The terms, including the interest rate, are based on buyer/seller agreement. It is often a short-term (5-15 year) loan; sometimes "interest only" payments are made until the term date, when the balance is due. A buyer can then pay off the loan or refinance.

Buy-Down Mortgage Plan

The seller (who in this case might be the home owner, the builder, or a third party) puts additional cash "up front" with the lender when the loan is closed, in exchange for a lower interest rate.

Non-Conforming Loans

Lenders National Mortgage Corporation has developed a new "Alternative Lending" division, providing home buyers with products that do not conform to the normal FHA/VA and conventional lending guidelines.

These unique loan products are tailored to fit specific financial situations, including:

• Bankruptcies less than 2 years from discharge
• No income/no asset verification loans
• Late payments on previous or current mortgage
• Bank statement programs for the self-employed
• Excessive credit problems, but sufficient liquid assets to work with
• Stated income with less than-perfect-credit and borrower has down payment

How much will you need for your initial monetary investment in your new home? It's a combination of downpayment and closing costs, plus pre-paid items and reserves. Here's a rough estimate (depending on which type of mortgage you select) of funds required at closing:
Conventional = 10% of purchase price
FHA = 6% of purchase price
VA = 4.5% of purchase price

The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are some other not-so-obvious sources. In recent years, for example, "parent power" has taken some new twists for first-time buyers; and older home owners are looking with great interest at "reverse equity mortgages."

Home Equity Loan

Parents often have considerable equity built up in their own homes -and many are tapping that asset through home equity loans to make a gift to the next generation. The 1981 federal tax law permits tax-free gifts from parents. Ask your tax advisor for current information on how large a gift may be without incurring income tax. Often lenders will require a "gift letter" to verify that parents don't expect repayment.

Shared Equity/Profit Sharing

In return for providing a part of the down payment, the parents (or another investor) share in the "profit" or net equity of the house when the home owners sell it.

Life Insurance

If you've built up a cash value on your life insurance policy over the years, you may be able to borrow from your insurance company up to the amount of this accumulated cash value. Often they will even ask a more favorable interest rate than would be asked for other types of loans.

Stocks and Bonds

If you feel the market doesn't favor selling your stocks or bonds now, you may be able to secure a bank loan using your portfolio as security.

Company Profit Sharing or Savings Plan (also, 401-K)

Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs.

The larger the down payment, the less money you need to borrow, which means lower monthly payment. However, remember that in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies and other miscellaneous items. So don't plan to put your last penny down at the closing table.

Generally, lenders calculate that the home buyer shouldn't pay more than 28% of gross income for P.I.T.I. payments, or 36% for both P.I.T.I. and monthly debts combined. This might be a little less depending on other outstanding long-term debts (more than 8 months), alimony/child support payment, number of children and their ages, and other household budget items.

The easiest way to make a quick estimate of the mortgage amount for which you may qualify requires applying the two basic formulas used by lenders for loan application. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payment remains the same.

Most lenders will require that applicants meet both guidelines before approving a mortgage loan. The first formula compares income to housing costs without including long-term debts; the second includes all debts.

A variety of other formulas exist. VA and some lenders use a single ratio based on mortgage payment and all debts, which allows easier qualifying for a more expensive home for a borrower with a little debt.

To figure your housing budget, simply multiply your gross monthly income (before taxes) by 28% and 36%. For example, a family with a monthly income of $3,500 might qualify for a mortgage on a house that produces payments between $980 and $1,260

Mortgage Bankers

Mortgage bankers issue mortgages to borrowers. They then process and sell the mortgages to large investors or into the secondary mortgage market.

Mortgage Loan Brokers

Some individuals or groups charge a fee (usually to the borrower) to match borrowers with lenders. Sometimes they make direct loans. An advantage of working with mortgage brokers is that they often represent many investors and lending institutions and can provide you with many more financing alternatives, usually at the same pride as the mortgage banker.

Financial Institutions

Mutual savings banks, savings and loan associations, insurance companies and some commercial banks are the traditional sources of mortgage loans. Savings and loans often grant favorable terms to their own account holders.

Private Lenders

Individuals (often home sellers) and groups (sometimes sellers employers, if the seller is being transferred) lend money. This source is especially helpful in arranging second mortgages, but can also assist with first trust, wrap-around and other mortgage plans.

Credit Unions

Federal Credit Unions can write 30-year conventional and government-insured mortgages. Some will make loans; others will not. A good possible source for credit union members.