With subprime mortgages making headlines over the past few weeks, buyers can be ambivalent about their lending options. New online guides and free brochures can help to clear up any confusion and help consumers find a loan that suits them. The NATIONAL ASSOCIATION OF REALTORS®, the Center for Responsible Lending, and the Federal Housing Administration offer online resources for consumers. Here are links to the test guides:
Bankrate.com: Understanding Mortgages
Information on the different types of mortgages available, choosing the right mortgage according to lifestyle, the importance of credit scores, mistakes to avoid, a real-life mortgage makeover and self-help tools and calculators. The guide is the third installment in the company's yearlong Financial Literacy Project.
Specialty Mortgages: What Are the Risks and Advantages?
Produced jointly by NAR and the Center for Responsible Lending, this brochure can help prospective buyers assess the risks and advantages of interest-only, negative amortization, payment option ARM, and 40-year mortgages. Available in English and Spanish.
Traditional Mortgages: Understanding Your Options>
While specialty mortgages may help make homeownership more affordable, they generate more risk and consumers should understand these risks before they choose a mortgage. This brochure, also produced jointly by NAR and the Center for Responsible Lending, explains that for most consumers, traditional fixed-rate mortgages and adjustable-rate mortgages continue to be excellent options.
How to Avoid Predatory Lending
Home buyers need to be aware that some lenders offer predatory loans that take advantage of consumers. This brochure, produced jointly by NAR and the Center for Responsible Lending, identifies the warning signs of predatory loans. It also gives consumers tips on how to avoid them, including questions they should ask when shopping for a loan.
Learn About FHA Mortgages
The Federal Housing Administration has made significant improvements to its mortgage insurance programs. Many aspects of the FHA application process have been streamlined to make it more user-friendly and efficient. This brochure outlines the changes and how to qualify for an FHA mortgage, plus other resources available from FHA, HUD, and NAR.
Nine out of 10 buyers need a mortgage to finance their purchase. The real issue with real estate financing is not getting a loan (virtually anyone willing to pay high enough interest rates can find a mortgage). The real issue is to get the loan that's right for you -- the mortgage with the lowest cost and best terms.
- Ideally you should start the mortgage process before looking for a home and certainly well before bidding on a home. By meeting with loan officers in advance and identifying mortgage programs, it won't be necessary to quickly find a lender, check credit, and rush into a financing decision that may not be the best option.
- Purchases usually require buyers to apply for financing and clear their mortgage continency within 30 days.
- Buyers who are already pre-approved are in a stronger bargaining position.
How Much Can you Borrow
- First and foremost, you must determine how your mortgage payment will fit your current budget and, to some extent, your future obligations 15 to 30 years down the road.
- Start by using one of the on-line calculators and numerous mortgage rate sites.
Check Your Credit Rating
- Every time you apply for a credit card or other type of loan, the lender checks your credit history. These checks show up as inquiries on your credit report.
- The three main credit reporting agencies are: Equifax, Experian and Trans Union.
- You are entitled to a free credit report, but be careful where you go to get it. You are giving out personal information. To get a complete credit picture, sign up for FICO Deluxe
- Your FICO Score is relied on by most lenders to determine your credit worthiness. FICO scores, are numbers tabulated using software by Fair, Isaac & Company.
- FICO scores run from about 600 to 850. The higher the score the less you will have to pay for a loan.
- The Median Score is 723. For the best rate your score should be over 760.
- Normally, credit inquiries hurt your FICO Score. Presently, Fair Isaac ignores all mortgage related inquiries that occur within a 30-day prior to the date the credit score is tabulated.
- Late payments, especially recent ones and high debt carry the most weight in lowering scores.
- If you find errors in your credit report or if your score is lower than you would like, first read one of the articles, sign up for FICO Deluxe than discuss it with your Mortgage Company.
- If you are planning in advance, it would be wise to sign up with a credit reporting company such as credit.com, Equifax Triple Protection or Fair Isaac Score Watch
Decide which type of Loan would be Best For You
The once simple task of comparing fixed rate mortgages has been replaced by a maze of options and varying definitions. There are literally dozens of loan types available, too many to discuss here. Do you want an adjustable rate (ARM) or a fixed rate mortgage? Some of the obvious choices are:
Adjustable Rate Mortgages
- If you are going to be staying in your home for only a short period, an ARM might be the best idea. The initial interest rate will be lower than the fixed rate, however the rate will usually change every year based an index such as LIBOR or One-Year Treasury Notes plus a pre-determined margin.
- If You decide on an ARM, check out the index it is tied to. Some indices rise more rapidly than others.
- ARMs usually have two caps (limits):
- The annual cap limits how much the interest can change (high or low) from the previous year.
- The lifetime cap limits the maximum interest rate that can be charged for the life of the loan.
- There are a great many variations for ARMs. The rate can be fixed for 3, 5, 7 or 10 years and then change.
- Fixed rate mortgages give stability, for which you pay a somewhat higher interest rate. If you are going to be staying in your home for seven years or more, a fixed interest rate might be the best. If rates go down, you can always re-finance.
- How long do you want the mortgage term?
- Usually mortgages are between 10-years and 30-years.
- In general, if you have the discipline and can pre-pay without penalty, a longer mortgage gives you the option to pay less when you need to but allows you the flexibility of paying more when your are able.
- Of course a Smart Mortgage, no matter how long the term, is always a good choice.
Fixed Rate Mortgages
- Lenders will often ask to have you pay real estate taxes, principal, interest and insurance (PITI) as one payment each month. This is usually not necessary.
- PMI (Private Mortgage Insurance) may be able to reduce your monthly payments or it may just add cost. Check it out.
Find a Mortgage Company You like and Trust
- Real estate financing is available from numerous sources, including local banks, local mortgage brokers and on-line companies.
- Unless you have an established relationship with a mortgage lender, it is best to work with someone locally your Buyer-Agent knows. Based on his or her experience, your Buyer-Agent can provide you a list of lenders with a history of offering competitive programs and delivering promised rates and terms.
- Be careful about on-line lenders. They may sound good, but what are you going to do if they let you down. Our experience with on-line lenders has not been good. They are the most frequent cause of Dry Closings.
Apply for a loan
- Applying for a loan is the easy part. Getting the required documents together is the difficult part. Start by downloading and completing the Uniform Residential Loan Application Form
- The application asks for information about your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses and others).
- You'll have to supply additional documentation including paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation.
- The lender will run a credit check on you to take a look at your credit status.
- If the lender deems you creditworthy, the lender will give you a pre-approval or, if you have selected a property, the lender will likely hire a professional appraisal to make sure the value of the home you are about to buy is truly worth your loan amount (usually no more than 90% of the purchase price).
- RESPA requires your lender or mortgage broker to you a Good Faith Estimate of settlement charges and other disclosures within three days of applying for a loan.
- You should also receive a Truth in Lending Disclosure Statement which will show you the Annual Percentage Rate (APR). The APR takes into account not only the interest rate, but also points and other fees, such as mortgage broker fees. Ask for the APR up front. Because there are a number of ways to calculate an APR, you may want to calculate your own APR to truly compare loans.
Get a pre-approval
- A pre-approval means you have met with a loan officer, your credit files have been reviewed, you have completed and signed the loan application, submitted the necessary documents and the loan officer believes you can qualify for a given loan amount. No specific property address to purchase is required. Based on this information, the lender will provide a pre-approval letter, which shows your borrowing power. There is usually a fee for a pre-approval and pre-approvals are often limited to about four months.
- Although not a final loan commitment, the pre-approval letter demonstrates your financial strength and shows that you have the ability to go through with a purchase. This information is important to owners since they do not want to accept an offer that is likely to fall apart because financing cannot be obtained.
- Pre-approval is sometimes confused with pre-qualification. Pre-qualification is often the first step in which the lender collects (but does not verify) income, debts and repayment capability information from the borrower to determine credit worthiness and financial ability to qualify for a loan. Usually there is no fee charged and no credit report is run. Pre-qualification is non-binding to the lender and only serves as an indication the buyer might be qualified to get a mortgage.
- You can visit as many lenders as you like and get several pre-approvals (or pre-qualifications), but keep in mind that each one carries with it a new credit check, which will show up on future credit reports. A lot of credit inquiries may hurt your FICA credit score. Additionally, the more people you ask for pre-approval or pre-qualification, the less likely any of them will be interested in working hard for you. In almost every instance, it is better to select one mortgage company you like and stick with them.
- Once your loan application is processed, the property has been appraised and the Lender’s underwriter has approved the loan, the Lender will issue a Commitment Letter.
- Make sure you get a copy of the appraisal. You paid for it.
- The Commitment Letter will spell out the loan amount, expiration date, locked in rate (if desired), and the property address. Any outstanding conditions required by the underwriter will be listed.
- Typical conditions are homeowner’s insurance, title reports and title insurance.
- Commitment Letters are usually good for about three months, but can be updated by supplying current asset and income information.
- Once the Lender is ready to close, the attorneys for the Seller, Buyer and Lender will coordinate a closing date convenient to them and to the Buyer and Seller.
- The Closing will normally be in the office of the Seller’s or Buyer’s attorney. In many instances, the Lender’s attorney may not even attend and will give the Buyer’s attorney a check in escrow.
- Immediately after the closing, Buyer’s attorney will record the sale (deed and mortgage) in the Town of Greenwich’s land records.
- After the closing, Lender will review all of the documents and often provide you with a post-closing package. This should include your appraisal (if you have not already received a copy).
- Your attorney will also give you a package of all of the documents you signed.
- Be sure to give your accountant a copy of the closing statement.
- Enjoy your new home and remember to pay your mortgage on time.