Mortgage Guide

CHOOSING THE RIGHT MORTGAGE

Purchase or Refinance

Generally there are 4 types of home buying decisions that a person faces in the course of their lives: 1) A starter home, 2) the family home, 3) an income generating investment home, 4) home to retire in.

Accordingly, the right mortgage will be different at each of these stages.

When financing a starter home, which one plans to live for 2-5 years before moving up to larger family homes, borrowers are more concerned about putting down a smaller payment and how affordable monthly payments are. They expect an increase in their monthly income over this period of 2-5 years and intend to use the accumulated equity in their first home as down payment for their future family home. A conventional or FHA loan may be the best mortgage solution for financing this home. An Adjustable Rate (ARM) mortgage reduces the initial monthly payments, but may have restrictions in refinancing.

Family homes are usually purchased by households who intend to live in them indefinitely or at least don't have a plan to move out in the foreseeable future. They usually have a fair amount of money to put down, often in the form of equity from their present home. They prefer fixed rate mortgages, where they can budget a predictable monthly payment. These borrowers know that their income will increase over the time they live in this house and may want to assume a larger monthly payment compared to their present income. The loan, which fits these criteria would be a 30-year fixed interest program. For borrowers who need more than $300,700.00 financing, a Jumbo loan will be required. A self-employed borrower or one who wishes not to document their income or assets that are used for down payment, can obtain reduced documents Low Doc or No Doc loans.

Often after children have grown up and left home, the family may select to move to a smaller house for retirement age. At this stage the family may face decreasing income and would like to spend a smaller portion of their income on housing expenses. They often have a large equity in their existing home, which can reduce their financing needs substantially. They want to minimize the interest payment and they still prefer the predictability of fixed monthly payments. A suitable loan for this borrower would be a 15-year fixed rate plan. At any time during the life of a loan, borrowers may refinance their loan to receive lower interest rates or better terms, or simply to take out some cash from the equity they own in their property for any other use. When refinancing is done to get better rates, one must bear in mind the cost of obtaining a loan and balance it against savings from lower rates.

As a rule of thumb you should be getting rates which are at least 2% below your current mortgage rates to offset the cost of refinancing. However, If you have gained a large equity in your home due to rises in house prices and you want to unlock all or some of it, refinancing with cash-out can put some money in your pocket, which you may use for any other purpose.

Home Equity loans

Home Equity Loans or Line of Credit, are additional borrowing against the value of your property to fund a one-time expense, to consolidate your debts, or fulfill ongoing credit needs such as working capital requirement for a business you just started. This financing is subordinate to your original mortgage and usually carries higher interest rates. In some instances a person with good credit may obtain a 2nd mortgage or home equity loan in excess of the value of the property. This loan, as your first mortgage, is secured by the value of your property and may also offer certain tax relief.

ARM vs. Fixed rate

ARM Adjustable Rate Mortgage is a loan with interest rates that are adjusted periodically based on changes in a pre-selected index. As a result, the interest rate on your loan and the monthly payment will rise and fall with increases and decreases in overall interest rates. These mortgage loans must specify how their interest rate changes, usually in terms of a relation to a national index such as (but not always) Treasury bill rates. If interest rates rise, your monthly payments will rise. An interest rate cap limits the amount by which the interest rate can change; look for this feature when you consider an ARM loan.

Fixed Rate mortgages guarantee that interest rate and monthly payments will remain the same throughout the life of your loan. When interest rates are expected to rise over time, a Fixed Rate loan will protect borrower against risk of higher rates. However, the borrower is paying a premium to receive this guarantee. At such times an ARM loan may offer lower interest rate compared to a Fixed Rate loan during its initial pre-adjustment period, which can help a borrower benefit from lower monthly payment at first and therefore qualify for a loan that he or she could not obtain at fixed rates.

Points vs. Rates

Points refer to certain fixed fees that are paid to lenders as percentage of the loan amount at the time of obtaining the loan. These fees are part cost of credit and part to compensate lenders for their investment or for any additional conditions (such as waiving pre-payment penalty) that they are assuming. Normally, lenders provide several options that are different combinations of rates and points. The more a borrower pays up front in form of points the lower their rate will be. A borrower will have some saving over time from lower rates. But, they may be offset by the higher initial cost of points. The choice between higher points or higher rates depends on a borrower's condition. If you are short of cash you may want a no-point loan. However, a borrower that is limited by income may have to accept the lowest rates in order to qualify. To compare two loan programs with different rates and points you also must consider how long you plan to live at this home or how soon you intend to refinance your loan.

PRE-QUALIFYING

How Much Can I Borrow?

Lenders determine the amount of loan they are willing to give you on the basis of your ability to pay monthly mortgage installments and what percentage of the value of property your loan will constitute. You may also apply for a No Ratio loan where your monthly income will not be a factor in determining your loan amount.

LTV and Debt-to-Income Ratios

LTV or Loan-To-Value ratio is the maximum amount of exposure that a lender is willing to accept in financing your purchase. Generally, lenders are prepared to lend a higher percentage of the value, even up to 100%, to creditworthy borrowers. One other consideration in approving the maximum amount of loan for a particular borrower is the ratio of monthly debt payments (such as auto and personal loans) to income. As a rule of thumb your monthly mortgage payments should not exceed 1/3 of your gross monthly income. Therefore, borrowers with high debt-to-income ratio need to pay a higher down payment in order to qualify for a lower LTV ratio. Through our lending partner Premiere Mortgage we offer a number of loan programs with high LTV or no income ratio for borrowers with higher Credit Scores.

FICO Credit Score

FICO Credit Scores are widely used by almost all types of lenders in their credit decision. It is a quantified measure of creditworthiness of an individual, which is derived from mathematical models developed by Fair Isaac and Company in San Rafael, California. FICO scores reflect credit risk of the individual in comparison with that of general population. It is based on a number of factors including past payment history, total amount of borrowing, length of credit history, search for new credit, and type of credit established. When you begin shopping around for a new credit card or a loan, every time a lender runs your credit report it adversely effects your credit score. It is, therefore, advisable that you authorize the lender/broker to run your credit report only after you have chosen to apply for a loan through them.

Self Employed Borrowers & No Income Verification Loans

Self-employed individuals often find that there are greater hurdles to borrowing for them than an employed person. For many conventional lenders the problem with lending to the self-employed is documenting an applicant's income. Applicants with jobs can provide lenders with pay stubs, and lenders can verify the information through their employer. In the absence of such verifiable employment records, lenders rely on income tax returns, which they typically require for 2 years. An alternative for a self-employed borrower who cannot demonstrate two years of sufficient income from their tax returns would be a limited documentation or reduced documentation loan. NoDocumentLoans.com specializes in Reduced Documentation and No Document loans that do not require verification of employment or income.

Source of Down Payment

Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan. It is generally expected that these funds be borrower's own saving, although a borrower may receive non-returnable gifts towards down payment and other loan fees.

CLOSING

Locking the loan

Once you determined the type of loan that is suitable for you and decided on the combination of points and rates, you submit the loan application to a lender. The lender will then underwrite your application to provide you with a firm commitment to lend the amount of loan at certain rate with certain fees and points. This commitment is called locking the loan and is valid for certain time period, usually 10-14 days, during which you can accept the offer and authorize the lender to draw the necessary documents and process your loan application for funding the loan.

Time it takes to fund

Depending on the type of loan you are seeking and what documents need to be verified in your application, it can take between several days and few weeks to process a loan application. The lender may require a preliminary title policy, value appraisal, and verification of employment and assets held with financial institutions. You are also required to sign the loan documents and notes. Once the application package is complete the lender will transfer the funds to the escrow together with instruction how to disburse such funds. You must also deposit with the escrow prior to lender's funding, those funds which are required from you.

Escrow

Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyer pays money for tax or insurance payments.

Cost at settlement

Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the total mortgage amount.

The Loan Closing

Once your application for a mortgage loan has been approved and you have received an approval from the lender, the final step before you can call the house your own is the closing, or settlement, of the purchase transaction and mortgage loan. Even though you have signed purchase agreement and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and loan is closed. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time.

At closing, you will sign the mortgage loan documents, the seller will execute the deed to the property, funds will be collected and disbursed and the closing agent will record the necessary instruments to give you legal ownership of the property. Settlement of a mortgage loan is a legal process, so specific procedures and requirements will vary according to state and local laws, but a general description of closing practices can help you through the process.

The actual loan closing procedure, including who conducts the closing and who is present, depends upon local law and custom and lender practices. Some states require that you be represented by an attorney, others do not. Even if it is not required by law, you may want to have an attorney, review the closing documents. At the point when an offer to purchase has been accepted, all funds, documents and instructions should be delivered to a neutral third party. That party could be the escrow officer or an attorney. If the escrow officer ever gets conflicting information between you or your agent and the seller and their agent, the transaction stops right there until the differences are resolved. The common kinds of disputes that sometimes occur are whether or not some item is included in the purchase price of the property. Some lenders will close the loan in their offices, some will use title or escrow companies and some will send their instructions and documents to their attorney or yours to conduct the closing. As soon as you receive your commitment letter from the lender, you should determine who is responsible for closing arrangements.

The actual closing is conducted by a closing agent who may be an employee of the lender or the title company, or it may be an attorney representing you or the lender. The lender and seller, or their representatives, and the real estate agents may or may not be at the actual closing. It is not unusual for the parties to the transaction to complete their roles without ever meeting face to face. The closing agent will have received instructions from the lender on how the loan is to be documented and the funds disbursed, and will have collected all of the necessary exhibits from you, the seller and the lender. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly disbursed and accounted for when the closing is completed.

You typically need to come to the closing with a certified check for the closing costs, including the balance of the down payment. You can get the exact figure a day or two prior to the closing from lender or the closing agent. You should also bring the homeowners insurance policy and proof of payment if it has not been delivered earlier. One of the final documents you will receive just prior to closing escrow is a copy of the closing statement. A final copy is also mailed to you after close. Go over it carefully for any errors. Keep a copy filed away where you will know where to find it. You will need it again when you prepare your tax return.

ENSURING A SMOOTH CLOSE OF ESCROW

Keep in touch with your lender.

Lenders say the number one reason for missed deadlines is that the borrower never got back to them on documentation still needed. If they have requested additional items from you, please provide them. It wouldn't hurt to give them additional phone calls periodically just to be sure there isn't anything else that they need.

Fill out your loan application completely.

If a section on the loan application does not apply to you, draw a line through it. That way the lender doesn't think you just forgot it. Complete all other information. It is there for a reason. The lender isn't needlessly prying; they really need to know this stuff. Keep copies of everything you send in to the lender. That way you always know you have everything in case something gets lost.

Keep in touch with the escrow officer too.

If you don't call, ask your agent to periodically check to see if everything is going smoothly. This way your file doesn't get stuck in the bottom of some endless pile.

Let people know if you're going out of town.

If lenders, Realtors, and escrow officers try repeatedly to get in touch with you and aren't able to they can get very frustrated. They are trying to keep all deadlines but it may seem to them that you don't care much. If you will be out of town for more than a day or so you should leave a number where you can be reached with your Realtor. That way someone can get in touch with you if necessary.

Try and be a little flexible.

You need to allow some time between when you would like to close escrow and "you absolutely must or everything goes down the drain". You will need maneuvering room to solve any last minute problems that inevitably show up. Don't schedule your closing on the last day of the year. This allows no time if there is a problem and you must close by year-end. For the most part, your role at closing is to review and sign the numerous documents associated with a mortgage loan. The closing agent should explain the nature and purpose of each one and give you and/or your attorney an opportunity to check them before signing. A brief description of the major documents may help you understand their purpose and significance. In addition to your monthly payments on the loan, most lenders will require you to maintain an "escrow", or "impound," account for real estate taxes and insurance. Current law permits a lender to collect 1/6th (2 months) of the estimated annual real estate taxes and insurance payments at closing. Additionally, real estate taxes for the current year will be pro-rated between you and the seller and paid at closing. After closing, you will remit 1/12 of the annual amount with each monthly payment. Tax and insurance bills should be sent to the lender who will pay them out of the escrow funds collected.

Truth-in-Lending Statement

This form is also required by Federal law. You were given an initial TIL shortly after you completed the loan application. If no changes have taken place since that time, the lender need not provide one at closing. If, however there are significant charges, you must receive a corrected TIL no later than settlement.

The Mortgage Note

The mortgage note is legal evidence of your indebtedness and your formal promise to repay the debt. It sets out the amount and terms of the loan and also recites the penalties and steps the lender can take if you fail your payments on time.

The Mortgage or Deed of Trust

This is the "security instrument" which gives the lender a claim against your house if you fail to live up to the terms of the mortgage note. It recites the legal rights and obligations of both you and the lender and gives the lender the right to take the property by foreclosure if you default on the loan. The mortgage or deed of trust will be recorded, providing public notice of the lender's claim (lien) on the property.

Miscellaneous Documents

There will be a number of documents or affidavits that you will be asked to sign at closing. Some are lender requirements (e.g. a statement that you intend to occupy the properties your primary residence), or are required by state or Federal law. These instruments should not be taken lightly. Some provide for criminal penalties for false information, and some may give the lender the right to call your loan, which means the entire loan amount becomes immediately due and payable. When everything has been signed and the closing agent is satisfied that all of the instructions for closing have been complied with in full, you become the owner and are given the keys to the property.

WHEN IS MY DREAM HOME FINALLY MINE?

Sometime during the day in which you close escrow you will become the legal owner of the home. The escrow officer usually will call you after the money has been issued to the seller and the deed has been recorded. At that point the home is yours.