When applying for a mortgage, you will need just a few pieces of information:
- Name and Social Security number of each applicant
- Current address
- Phone number where you can be reached
- Monthly salary and sources of income (include child support or
alimony received)
- Information on length of employment, and employer address and
phone number
MORTGAGES
- What is a mortgage, and what are the benefits of different
kinds of mortgages?
Simply put, a mortgage
is a loan that a homebuyer obtains directly from a lender to
purchase real
estate. The mortgage is a lien on the property that
secures a promissory note (promise to repay the debt) that states
the terms of the loan, including the interest rate and the number of payments.
The most popular mortgages available to home buyers today can
be divided into two general categories: those that offer fixed
interest rates and monthly payments, and those in which one or
both of those factors are adjustable.
Fixed-rate/fixed-payment loans are more traditional and remain
the most popular home financing method, currently accounting for
about two-thirds of all residential mortgages. Their advantages
are well-known: you always know what your monthly
principal
and interest payment will be, so your basic housing cost will
remain unaffected by interest-rate changes until the mortgage is
paid off.
Mortgages that entail flexible rates and/or payments have grown
in popularity in recent years, primarily during periods of high
interest rates and/or rapidly rising home prices. Many, including
the popular ARMs (Adjustable
Rate Mortgages), offer lower-than-market initial interest rates that allow buyers a measure of
affordability unavailable in fixed-rate loans. The tradeoff may be
higher interest rates and higher monthly payments later on.
- What are the different types of lenders, and how do I choose
the right one for me?
Before someone lends you the money to purchase your home,
they'll want to know a lot about you. And you're entitled to know
as much as you can about them too.
It's important because getting a mortgage
is not just a one-time signing of documents, a handshake and a
check. You will be depending on your lender to fund the loan as
promised, on time, and over the life of the loan; to keep good
payment records, pay your taxes and insurance (if included in your
monthly payment); and to perform many other continuing services.
Contact me about the lenders
you have in mind. Most experienced sales professionals are quite
familiar with mortgage lenders and can give you sound advice about
a lender's reputation, its qualifying procedures, and the unique
programs and benefits it offers home buyers.
- Are there any mortgages especially designed for first-time
buyers?
Today, first-time buyers enjoy a number of
mortgage
options that make purchasing a home more affordable by minimizing down
payments and keeping monthly payments as low as
possible during the early years of the loan.
Most ARMs feature an interest
rate that is below market for the first year and may only rise
gradually after that.
VA- and FHA-insured
loans call for extremely low down payments (zero to five percent
of the purchase price) and often offer a below-market interest
rate. Similarly favorable terms can be arranged with the help of
private mortgage insurance or PMI.
Finally, first-timers who can find a cooperative seller or
third-party investor can look into such non-traditional financing
methods as a lease/buy arrangement. Check with a mortgage
representative for the unique benefits and
requirements of several major mortgage alternatives.
FINANCING
TIP
Anyone can apply for an FHA mortgage provided the loan
amount doesn't exceed the maximum allowed by law. |
- Can I get an FHA or VA mortgage?
Just about anyone can apply for an FHA-insured
mortgage through banks and other lending
institutions. They are particularly well-suited for buyers of
moderate income; the low down
payment requirements (as low as five percent of the
purchase price) are matched by a relatively low maximum mortgage
amount.
Similarly, VA-guaranteed loans often require no down payment
for up to four times the amount guaranteed by the VA. These loans
are reserved for either active military personnel or veterans, or
spouses of veterans who died of service-related injuries.
If there is a downside to these loans, it's the qualifying
process. Though you apply for government-insured financing through
a lending institution, the Federal Housing Administration or the
Department of Veterans Affairs must insure or guarantee the loan
and may require specific documentation or procedures not
necessarily required for conventional financing. That may take
more time than is generally required for conventional
mortgage approval. Additionally, FHA-required
insurance must be added to your payment.
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DOWN
PAYMENTS & AFFORDABILITY
- How much of a
down
payment will I need to buy a home?
The amount of money that a buyer must put down at closing
depends on the loan-to-value ratio — the percentage of the
property's appraised value or sales price (whichever is less) that
a lender is willing to loan.
For example, if a property is appraised at $100,000 and the
loan-to-value ratio is 90 percent, the lender would be willing to
loan $90,000. The buyer's down payment is the remaining $10,000.
Because the loan-to-value is a percentage, the higher the sales
price of a house, the higher the down payment.
A down payment of 20 percent has been the benchmark for
conventional financing, but today, many options are available,
some requiring as little as five percent down. A mortgage representative
can help you determine which down payment option
is right for you and your budget. Contact me for more
information about where to start.
- How does a lender determine the maximum mortgage I can
afford?
The three primary areas lenders examine in determining the size
of mortgage you can handle include your monthly income;
non-housing expenses; and cash available for
down
payment, moving expenses and closing
costs.
The most common way lenders interpret these variables to
estimate your mortgage capacity is the Percentage Method. Most
lenders feel a family should spend no more than 28 percent of its
income on housing costs, including the mortgage, insurance, and
real estate taxes. In addition, these housing costs plus your
long-term debts (car loans, child support, minimum credit card
payments, student loans, etc.) shouldn't exceed 36 percent of your
income. Some mortgage companies, have
relaxed ratios to help you purchase the home of your dreams.
Although it is not a standardized method, you can also use the
Multiplier Method formula as a general rule of thumb to determine
how much home you can afford. Most lenders' guidelines allow a
family to carry a mortgage that is two to three times its gross
annual income (income before taxes and expenses are taken out).
The amount of down payment and the type of mortgage (fixed or
variable rate) will determine the precise ratio used by the
lender.
To get an idea of how much home you can afford, contact me to see how you can
receive a free pre-qualification
from a local mortgage company.
THE
LOAN PROCESS
- What are the steps involved in the loan process?
When you apply for a mortgage, you will need to furnish
information regarding your income, expenses and obligations. It
will be very helpful, and save time, if you have the following
items available:
- Two most recent pay stubs from your employer
- W-2s for the last two years
- Last two months' bank statements
- Long-term debt information (credit cards, child support,
auto loans, installment debt, etc.)
| CAN'T
AFFORD A 20 PERCENT DOWN PAYMENT? ASK YOUR REAL ESTATE
PROFESSIONAL ABOUT PRIVATE MORTGAGE INSURANCE (PMI). |
For buyers who qualify
for conventional financing, but can't handle the high down payment
requirements, most mortgage companies may still offer this financing with
PMI,
or private mortgage insurance.
Designed to protect the lender against default by the borrower,
PMI allows you to obtain traditional financing with a down payment
significantly lower than the standard 20 percent. By using PMI,
you may be able to get a fixed-rate or adjustable-rate mortgage by
putting as little as five percent down.
As with an FHA-insured
loan, you must pay premiums for PMI coverage, the amount being
determined by the type and amount of your loan. But unlike FHA
financing, the maximum loan amount is determined by the lender.
Moreover, PMI premiums are often lower than FHA insurance, and may
be paid as part of your monthly mortgage payment, in annual
installments, or in a lump sum at the time you obtain the loan.
If you'd like to find out more about the unique advantages of
PMI, ask me to put you in touch
with a local mortgage representative.
CLOSING
COSTS
- What are typical closing
costs?
You can expect to pay the following closing costs at the time
of settlement:
- Appraisal fee — covers the cost of a professional written
estimate of the property's value.
- Attorney's or escrow
fees — your own and the lender's if they have one.
- Credit report fee.
- Points
(see Question 76).
- Documentation preparation — covers the cost of preparing
the deed
and other paperwork.
- First year's premium on fire and hazard insurance.
- Impounds (also known as "escrow
account") — sufficient to cover real
estate taxes on the purchased property for the current tax
period to date. The lender then pays these bills when they
come due.
- Interest
— paid from the date of closing until 30 days before your
first monthly payment.
- Title
insurance.
- Mortgage
insurance if required.
- Origination
fee — covers the lender's administrative
costs.
- Recording fees.
- FHA
mortgage insurance (FHA loans only).
- VA guarantee fees (VA
loans only).
REFINANCING
TIP
Consider refinancing when rates fall two percent below
your current rate and you plan on staying in your home at
least 18 months more. |
POINTS
- What are points, and what's the point in paying them?
In real estate, the term "point" refers to one
percent of the total mortgage
loan amount. Buyers often pay lenders a
supplemental fee, calculated in points,
to get a better interest rate on a particular mortgage.
For instance, a lender may offer you a choice of two 30-year
mortgages: the first at eight percent with no points, and the
second at 7.5 percent with an additional three points. If the loan
is for $100,000, those three points will cost you an extra $3,000
up front — but you'll get a payback of significantly lower
monthly payments for the lifetime of the loan.
Many lenders will advise you to pay the points for the better
rate if you can afford it, especially if you plan on keeping the
home for more than a few years. Like interest,
the money you pay for points may be tax-deductible, and the
investment may pay for itself through savings generated by lower
monthly payments. We suggest you call your tax preparer.
GOVERNMENT
REGULATIONS
- Is the lending process regulated by the government?
Most definitely. There are many laws and government regulations
that all lenders must follow to ensure that all applicants are
given fair and equal treatment. For example, in 1968, Congress
passed the Truth in Lending Law, which requires that lenders
provide borrowers with information about a loan's true
interest
rate. By law, lenders must reveal a loan's annual
percentage rate (APR).
The law also stipulates that for refinancing and second
mortgage loans, the borrower has up to three days after closing
to change his or her mind and call the deal off. The lender may
not disburse money until after this three-day "recession
period" has passed.
MORTGAGE
PAYMENTS
What is APR and how is
it calculated?
The annual
percentage rate (APR) is a calculated rate of
interest for a loan over its projected life. This rate includes
the interest, all points
(which are considered prepaid interest), Mortgage
insurance, and other charges associated with making
the loan that the lender collects from the borrower.
The APR is calculated by a standard formula that all lenders
use. This enables the borrower to comparison-shop between lenders
and/or loan products.
What is a good-faith estimate?
Your lender or loan agent must provide you with a good-faith
estimate within three days of your application. This is the
information you need to make a fair and accurate judgment when
shopping for a loan.
Your estimate is a written document that shows all the costs
that can be estimated in advance by the lender. You need this
information so there are no surprises on the day you close your
sale on the property to be purchased. You will be expected to pay
closing
costs.
- What does my monthly mortgage payment include?
The bulk of your monthly mortgage payment goes toward paying
off the principal and interest of your loan. In addition, most
lenders require that you pay a sufficient amount to cover your
local real estate tax, plus your homeowner's or hazard insurance.
This amount is placed in an escrow account, from which your lender
then pays your tax and insurance bills as they come due.
- Can I pay off my loan early?
If you can afford it, and are interested in the considerable
advantages of having more equity
and/or owning your home free-and-clear at the earliest possible
date, the answer in most cases is yes.
The FHA,
VA, and even some states do not allow lenders to charge penalties
for paying mortgages early or refinancing. In fact, many lenders
now include space on monthly statements for borrowers to itemize
an additional principal
payment they wish to include with their regular payment.
If you're unsure about the rules governing pre-payment, review
your loan agreement.
- What are the respective advantages of 15-year and 30-year
loans?
The 30-year
fixed-rate mortgage remains the standard mortgage, with an
array of valuable benefits designed especially for buyers who
expect to stay in their homes for a long time. Because the
borrower pays more interest
than principal for the first 23 years, the tax deduction is
substantial. And as inflation causes both living expenses and
income to increase, your unchanging monthly mortgage payments
account for a relatively smaller portion of income as the years go
by.
As you'd expect, a 15-year monthly mortgage means higher
monthly payments than an equivalent 30-year loan...but not as much
higher as you may think. At the same rate of interest, payments on
the 15-year mortgage are roughly 20-25 percent higher than a loan
that takes twice as long to pay off. And one of the benefits of
choosing a 15-year mortgage is that you can generally get a lower
interest rate for an otherwise similar loan. Another advantage is
faster equity
build-up because a larger portion of your early payments is going
to pay off principal. This makes the 15-year mortgage an ideal
alternative for couples approaching retirement or anyone else
interested in owning their home free-and-clear as quickly as
possible.
MORTGAGE
POINTS
Consider paying the points for the better rate if you can
afford it, especially if you plan on keeping the home for
more than a few years. Like interest, the money you pay
for points may be tax-deductible, and the investment may
pay for itself through savings generated by lower monthly
payments. |
- Do adjustable-rate mortgages offer any protection against
rising rates?
Yes. ARMs and other variable-rate-of-payment plans offer
lower-than-market interest
rates initially, but because they are tied to the interest rates
of U.S. Treasury Bills or other indexes, interest rates later in
the loan term may rise. However, many such loans offer built-in
safeguards designed to minimize the effect of any rapid escalation
in interest rates.
One such safeguard is the rate
cap. Many ARMs include provisions for the maximum
amount your rate can rise, both annually and over the life of the
loan. For example, if your initial rate is 6.5 percent, the loan
may include one-percent annual and five-percent lifetime
caps...which means even if rates rise dramatically, you'll pay no
more than 7.5 percent next year, 8.5 percent the following year
and so on, until a maximum rate of 11.5 percent is reached.
An ARM may also allow your rate to decrease when the index it
is tied to goes down. As you might expect, decreases are usually
capped as well.
A second protective device included in some ARMs is the
payment
cap. Under this provision, your monthly payments
may rise by only a set dollar amount. The potential disadvantage
of this type of cap
is that it can slow or even reverse your equity
build-up. If rates rise dramatically, you could actually wind up
owing more principal
at the end of the year than you did at the beginning.
Of course, ARM holders can also consider refinancing to a
fixed-rate loan after a few years. Some ARMs even include a
provision for converting to a fixed-rate loan after a set period
of time.
- What can I do if I have a fixed-rate loan and interest rates
go down?
When interest
rates drop significantly as they have in recent times, the
homeowner should investigate the financial advantages of
refinancing. Essentially, this means taking out a new loan to pay
off your existing loan.
Refinancing may require paying many of the same fees paid at
the original closing,
plus origination
fees. Most mortgage experts agree that if you can
get a rate two percent less than your existing loan, and you plan
on staying in your home for at least 18 months more, refinancing
is a good investment.
- What is the difference between pre-qualifying and pre-approval?
A pre-qualification
consists of a discussion between you and a loan officer. The loan
officer will collect information regarding your income, monthly
debts, credit history and assets, and based on this information
calculate an estimated mortgage amount for which you qualify.
The pre-qualification is not a mortgage approval, but more an
estimate on what you can afford.
A pre-approval, on the other hand, is a more comprehensive
approach giving an actual decision on a home loan. With most
mortgage companies, a credit report is ordered electronically and is
received within 30-60 seconds. This is an actual credit approval
and it carries with it some considerable benefits. From this
information, a loan approval is given agreeing to finance a home
and specifying the total mortgage amount available to you.
What could be more comforting than the peace of mind that goes
with knowing that your mortgage is fully approved?
You will have a greatly improved negotiating position when you
are pre-approved for a mortgage. Sellers are more apt to negotiate
with someone who already has a mortgage approval in hand. The
pre-approval letter lets the seller know they are working with a
serious cash buyer. A pre-approved buyer can also close on a
property more quickly — another major consideration for a
motivated seller. We strongly recommend it.
WANT TO PAY OFF YOUR LOAN EARLY? THERE ARE SEVERAL WAYS.
- Save some extra money every month. With the
interest
you earn on savings you may be able to make an extra payment
at the end of the year.
- Pay an extra twelfth of your principal
and interest payment every month.
- Send whatever extra you can every month.
- Whichever method you choose, be sure to clearly indicate
that the excess payment is to be applied to principal.
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