The Start Line
Organize, Organize, Organize!
I can’t stress enough how important it is to stay organized throughout your entire home purchase. Create a file with all of your important financial documents. Regardless of the loan type, lenders will need information about you. Make copies of financial statements such as bank accounts, investments, credit cards, auto loans, recent pay stubs and two years’ tax returns, if married, of both husband and wife. If purchasing with a co-signer(s), all buyers applying for a home loan should have separate financial documentation in seperate folders to avoid confusion and for ease during the process.
Check Your Credit Rating
Credit scores range between 400 and 800. 620 + is considered “good”. 680 + is considered “premium” and may possibly help get you a lower interest rate. Going forward, treat your credit like your most valued possession. Once you have determined to use a specific lender, he/she will run your credit in the process of pre-approving you for a home loan. Below, you will find the contact information for the 3 major credit reporting agencies to help you determine your credit rating. Ask your lender how to improve your credit score if you need to. Lenders will help guide you with your finances in the beginning stages of your home search process and will follow through until you’re loan is officially closed.
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Savings & Debt
If you are planning to buy real estate, try to save as much as you can and reduce as much debt as possible. Your savings will be used for the down payment of your new home and for your closing costs which will all be outlined for you when you meet with your lender of choice. Such closing costs include (appraisal, miscellaneous fees, escrow, title insurance, etc.). Savings will also be used for expenses such as inspections while in escrow. For debt, try to pay down existing high interest rate debt like credit cards and student loans. Closing costs are usually about 2% of the purchase price in addition to your down payment. If you need help calculating this, please feel free to contact me or your lender anytime and we’ll be happy to help you calculate the numbers.
In the time of preparing to purchase a new home, it is not a good time to change careers, move your money around, or buy big ticket items such as cars, furniture, or appliances. Lenders like stability. So if you are considering any major changes, it pays to meet with a lender and ask them how to proceed before you make any changes.
SHOPPING FOR THE RIGHT LOAN
Today, lenders can be found through a variety of sources such as searching and applying to lenders found online or through referrals from your REALTOR®. We would be happy to suggest lenders we have used successfully, who have proven themselves competitive, capable, and credible.
Choosing the Right Lender
Interview, Interview, Interview. It is important that you work with a lender that you trust with the following:
- Ability to explain things clearly and return your phone calls in a reasonable time period/ Reliability.
- Competitiveness of interest rates, costs & fees.
- Availability of loan programs that suit your credit profile and knowledge of any new lending programs that are best considering your desired property.
- Understands the kind of property you are buying and is flexible to your needs.
Today there are so many types of loans on the market that it is beyond the scope of this page to list or explain. Your lender is the best person to help you select a loan program to suits your needs best. Below is a summary of the two most popular loan types we see in practice.
- Fixed loan: The fixed rate loan assures your monthly payments will stay the same over the life of the loan, which is typically between 15 and 30 years. Fixed rate loans may be best if you intend to hold the property for a long period of time.
- ARMs (adjustable rate mortgages): ARM’s may be suitable if you plan to sell or refinance your home within the next few years. The starting interest rate is typically lower than a fixed rate loan, saving you money initially. However, it is important to understand the index, the readjustment interval, the capitalization rate and downside risks of an ARM before making a final decision to use this type of loan.
Typically, it costs under $60 to check your credit. With your permission, the lender will order a review of your outstanding loans and your repayment history from a third party credit agency and will use this to help pre-approve you for your home loan. Once a lender runs your credit and IF you decide to check out another lender after this step, that new lender may want to run your credit again. Sometimes, your credit may need to be ran again depending on the lenders needs once in escrow.
Application / Processing Fee
This cost, typically a few hundred dollars, is charged to cover the lender’s work to evaluate your ability to repay the loan. Some lenders will credit this back to you upon closing.
When mortgage companies are competing by offering lower interest rates, they may charge you a one-time pre-paid interest payment calculated as a percentage of the loan. Called “points”, this may range from 0.25% to 2% of the loan balance, and is usually paid up front. Points are tax-deductible; consult with your tax advisor.
Appraisals are completed for the buyers and lenders as the banks will only lend on what the property is actually worth. Once in escrow, lenders will place an order through an AMC (Asset Management Company). Once that order is placed, different independent appraisers, get the order and the first to respond gets the job. Appraisers are called to the home to evaluate the property’s purchase price, condition, and size compared to similar recent neighborhood sales within a 1 miles radius. This helps ensure the purchase price is not too high, and gives the lender more confidence in getting repaid in the event they are forced to sell the property if the borrower defaults. The appraisal costs vary depending on the property, type of appraisal, and region.
Expect to see various charges incurred in the processing of your loan which might include notary, courier, county recording fees, messenger fees, and broker base fees.
These vary widely, so be sure you know in advance if your lender will charge a penalty if you refinance or sell, and the certain period during which the penalties apply.
Does it Help to be Pre-Qualified by a Lender?
The pre-qualification process can be completed fairly quickly, based on less information than is required for getting pre-approved. While it is fast and it does help, a pre-qualification letter is an opinion from a lender of the maximum amount of real estate you can qualify for. In a competitive seller’s market, an offer from a buyer with a pre-qualification letter could lose out to a person who is pre-approved as a pre-approval is a more in depth qualification and can give a seller more ease in making the decision to take that specific buyer into escrow.
Get Pre-Approved by a Lender
There are several benefits to putting in more time and detail into getting a pre-approval letter. First of all, you will know exactly how much real estate you can afford. When you find a property you want to buy, your offer will be in a better positioned than someone less prepared. Second, you would have spent time with your lender and discussed your financial goals giving you much more confidence and security in your purchase amount. Finally, being pre-approved is more efficient; it reduces the amount of time it will take your lender to fund your loan while in escrow. Be prepared to provide documentation, which the lender may independently verify, including but not limited to:
- Job and Career Status
- Proof of Income
- Monthly Debt Payments/Statements
- Cash Available
- Total Assets and Debts
*make sure to keep all of your documents in one file and separate them for each person if married or purchasing with another person. This way, you can just keep updating the documents if required or asked to do so in escrow.
*we also advise you to keep all electronic signatures and paperwork signed in an online folder so you always have copies of everything.
APPLICATION AND PROCESSING
Mortgage Brokers and Lenders – What’s the Difference?
The mortgage broker is the person or company who is your main contact throughout your loan. They are often able to work with a number of lenders, who actually provide the funds for the loan. Typically, the lender pays the mortgage broker a fee for acting as the intermediary and providing all the customer service.
Filling Out the Application
There are standard forms to be completed when applying for a loan. Some mortgage brokers keep these on their website so you can fill out and submit the forms online. The information will be verified and used to qualify you for your loan, so take the time to answer questions accurately. The more organized you are, the easier this process will be.
Documentation / What Your Lender Needs To Qualify You For Your Home Loan
- Either 2 years of W-2 forms from your employer or 2 years of tax returns if you are self-employed
- Recent pay stubs
- 3 months bank and money market statements
- Brokerage, mutual fund and retirement account statements
- Proof of other income sources (alimony, trusts, rental income, etc.)
- Credit card statements
- Auto /boat / student / miscellaneous loans
- Drivers’ license or form of ID
- If you’re not a US citizen, copy of your green card or visa
- Copy of any existing mortgage debts if you are applying for a home equity line of credit or another mortgage
What Happens Next
The lender will have an analyst, usually called an “underwriter”, crunch numbers and verify your documentation to confirm your ability to repay the loan. Once you are in contract on a property, there may also be a loan approval committee which will meet to review the underwriters’ conclusions regarding your creditworthiness, and to evaluate the property on which they are lending. This is called the underwriting process, and questions are bound to arise. Be sure to return your mortgage broker’s calls promptly to keep the process moving forward smoothly. Check in with your broker periodically and keep the accuracy of information going. Lenders will look at a debt to income ratio in order to determine how much you can reasonably repay/afford.
The Final Steps
When the lender is ready to ”fund” and “close” your loan, either your real estate agent, your mortgage broker, or escrow will call to give you the good news that your loan documents have been released by the bank and are now ready to be signed. Signing and release of your loan documents will happen after a 3 day hold once your CD (Closing Disclosure) is released by the bank and acknowledged/signed by you. Signing will typically take place in front of a notary or an escrow officer. Ask your mortgage broker if there is anything you need to do to prepare for this, such as bringing a photo ID to your signing, a cashiers’ check or wire instructions, to wire the rest of your down payment. Allow yourself enough time to review the documents for accuracy.
You’ve Made It!
Once you have signed and notarized your final loan documents with escrow and wired/deposited your last