THE MORTGAGE PROCESS
Most buyers need a mortgage to finance their purchase. Depending upon the price of the house and your credit score it may be easy or hard to get 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 the Buyer 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.
- Pre-approval takes pre-qualification one step further. The lender will verify the Buyer’s income, assets, debts and credit history, and then issue a letter stating that the mortgage is approved for a certain amount within a certain time frame, subject to an appraisal of the property.
- Pre-Qualified for a Mortgage is the first step in which the lender collects income, debts and repayment capability information from the borrower to determine credit worthiness and financial ability to qualify for a loan. The lender does not verify any of the information. Pre-qualification” is non-binding to the lender and only serves as an indication the buyer might be qualified to get a mortgage.
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.
■ 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. www.credit.com is a reliable source.
- To get a complete credit picture, sign up for FICO Deluxe. www.myfico.com 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 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. Some of the obvious choices are adjustable rate (ARM) or a fixed mortgage.
- 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: 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. This is type mortgage is often called a Smart Mortgage.
- Other Considerations
- 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.
- A Dry Closing is one that is complete in all of the contract requirements except for the final fund disbursement and delivery of documents. Sometimes a closing is dry because the Seller or Buyer refuses to close and the other party wants to call their hand. More often a Dry Closing occurs because an
out-of-state mortgage company gets their funds later than scheduled. If the funds are delayed, usually the documents are held in escrow pending their receipt.
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 from the Anderson Associates Library of downloadable forms. www.GreenwichLiving.com/Forms.htm
- 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 give 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.
G 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.
- Finally you are ready to enjoy your new home.