4.Navigate the Mortgage Loan Process

Loan Decisions

The process of obtaining financing to purchase a home requires that you submit a formal application for a loan.  As with any other consumer good, it’s a good idea to shop around for the best terms.  With the power of the internet, it is relatively easy to obtain and review terms from several lenders to find the terms that best meet your needs.

Submitting a mortgage application requires that you provide detailed information to the lender about your income, assets and employment.  Once you have done so and provided authorization for the lender to obtain your credit background, they will pull your credit report and, by analyzing that and the information you have provided, determine how much you can borrow and for what type of loan you qualify.  When you add the amount of money you plan to use as a down payment to the qualifying loan amount the lender provides, the result will be the highest-priced home you can afford to purchase.  Knowing this number will help you frame your home search and enable you to determine what adjustments you might need to make to your ideal home’s wish list in order to find the right home in your price range for your family.

How to Make the Best Loan Decisions

When it comes to choosing the best mortgage for your new home, don’t be shy. Ask any and all questions that come to mind, remembering there’s truly no such thing as a dumb question, they’re all just learning opportunities.

How Many Years Should You Choose For Your Mortgage? Obviously that will depend on your financials but according to consumerfinance.gov, a 30-year fixed-rate loan is the most popular mortgage option, which provides a steady monthly payment you can be comfortable with. A 15-year fixed-rate loan is gaining in popularity as it cuts the mortgage term in half, while also providing significant interest savings during the mortgage lifespan.  A 30 year fixed rate mortgage allows you to make additional voluntary principal payments to reduce the term of the loan and the interest paid over the life of the loan. Another option is an adjustable-rate mortgage where rates fluctuate with the current market conditions. The most important thing to note is that the decision about whether to fix your rate or allow it to adjust to market conditions over time or what loan term you select is entirely up to you.  Your lenders should be able to give you valuable insight into the best solution for you.

Should I Consult a Mortgage Broker?  It’s important to understand the roles played in the mortgage marketplace by mortgage brokers and mortgage bankers.  Mortgage brokers act as middlemen between borrowers and lenders, bringing together the needs of the borrower and the resources of the lender.  Mortgage bankers (affiliated with depository institutions such as banks and credit unions and also unaffiliated with depository institutions) have a direct lending relationship with the borrowers they serve.  Mortgage brokers do not underwrite loans and they do not provide the funds used to close them.  They are dependent upon the mortgage banker to perform those functions.  When using a mortgage broker, any questions or resource or documentation requests that the lender has will be communicated to you by your broker — you will not deal directly with the company that is making the approval decision and providing the funds for your loan.  When you work with a mortgage banker, you will be directly engaged with the company that will provide the funds and will close your loan.  Questions or issues that the lender may have during the lending process will be discussed directly with you.  An oft-stated advantage of working with a mortgage broker is that brokers maintain dozens of lender relationships and can shop your loan around to secure the best rate and terms for you.  In practice, the mortgage industry is so competitive that you are likely to be able to secure terms at least as attractive when dealing directly with a mortgage banker.  Lending terms, rates and prices are driven by the large investors who purchase or securitize mortgages — companies with names like Freddie Mac, Fannie Mae and Ginnie Mae.  A mortgage banker will have direct relationships with them and will be well-positioned to streamline your process and secure competitive terms for you.  In the end, whether you decide to work with a mortgage banker or a mortgage broker, the most important thing you can do is to check them out.  Look at online review websites like Yelp.  Check with the Better Business Bureau.  Ask around – ask friends, neighbors and family members who they would use or have used to obtain a home loan.  A little time spent upfront doing research can pay off down the line.

Analyze Your Loan Options

Generally, your loan options are going to be based on your credit rating so it’s imperative to make sure it’s the best it can be before you begin your mortgage-shopping journey. As an example, if you’re looking at a mortgage insured by the Federal Housing Administration (FHA), you’ll need a 580+ credit score to qualify for a mortgage with a 3.5% down payment. If you’re between 500 and 579, you’ll need a 10% down payment. And if your credit score is under 500, you won’t qualify with the FHA at all.   To obtain a conventional loan you will need to have a minimum credit score of 620.  Credit scores not only determine if your loan application is approved but also the interest rate you will have to pay.  To receive a reasonable interest rate on a conventional loan you will need to have a credit score above 680 for an FHA loan your credit score should be above 640.

Are There Any Ways to Reduce Expenses as a Buyer? Ask your real estate agent about potentially eliminating costs during the buying process. Are you able to pass any costs back to the seller such as title insurance? This can reduce the overall cost you need to borrow. Sometimes the underwriter and processing fees lenders charge are negotiable, ask if they can be reduced or eliminated entirely.

Do You Need Private Mortgage Insurance? Chances are that if you apply for a conventional loan and have less than 20% of the purchase price of the home to provide as a down payment, you’ll be required to pay private mortgage insurance (PMI) to protect the lender in case you’re not able to make payments. This monthly cost will be included in your payment and will be factored into determining the amount you can borrow.

What Can I Afford for a Down Payment? A basic down payment worksheet can be broken down into three sections:

Available Funds:

  • Savings on hand
  • Cash value of insurance policies
  • Equity in your present home, if you own it
  • Investments, including stocks, bonds, mutual funds, etc.
  • Other funds like a cash gift
  • Subtract the amount you want to keep in savings to give you your Total Available Funds

Expenses:

  • Moving costs
  • Other Expenses including homeowner’s insurance
  • Closing/settlement costs (approximately 5-6% of the loan amount, but this amount may be higher in certain geographies. Check with your lender for a good estimate of closing cost requirements where you are planning to buy.)
  • Add the above to obtain your Total Expected Expenses

Down Payment:

  • Total Available Funds minus your Total Expected Expenses minus 2-3 months of mortgage payments for a contingency fund will indicate how much you have available for a down payment.

What’s Next?

Sometimes patience is a real virtue, especially when it comes to waiting on the loan status for your new home. While it can be frustrating, your new home will be worth the wait.

Lender Approval:  When your lender pre-approves you, they will provide you with a letter that you can submit along with your offer to purchase a home.  This letter will let the seller know that you are a serious buyer and that they can treat your offer with serious consideration.  It is important to understand that a pre-approval from your lender is NOT a formal approval.  The pre-approval means that as long as your lender can validate the information you have provided as well as other information they may request and if the home you seek to purchase appraises for an amount that supports the loan request, you will be able to obtain a mortgage to buy it. Once you’ve got your financing in place, you’ll be able to go out visiting open houses with confidence in knowing you’ll be able to place an offer for the new home of your dreams. Or at least as close as you can get to it without doing any major compromising.

Choosing Your Mortgage Details: Once you identify the home you wish to purchase and its seller accepts your offer, the clock will start ticking.  Although both shorter and longer closing timelines are absolutely possible and routinely occur, a fairly standard timeline for purchasing a home requires that the transaction close within 60 days of the seller’s acceptance of your offer, during that time, you’ll need to get your financing in place, get the home inspected, and ensure that you have the funds needed to close your transaction.   You’ll then need to determine details like the type of mortgage you want and your preferred length of term when securing your loan. See Applying for Your Loan

Secure A Great Real Estate Agent: One who’s knowledgeable and willing to work with you to find a home within your budget that will also meet or surpass your housing needs. Experts say that the number one reason first-time home buyers missed out on the home of their dreams was due to their initial offer not being high enough. They also noted that 40% of buyers “were very comfortable in negotiating the purchase price of the property with their real estate agent,” which means 60% were not.

Don’t make any changes that will affect your credit. Once you have obtained your pre-approval, don’t make any changes that will affect your credit and score. It is important to pay all of your bills on time and do not let any checks bounce, as this affects your credit score the same as making a late payment would. It is also vital that you do not take on any additional financial responsibilities during your home buying process. Consult your lender first if you must make a change due to an unforeseen occurrence.

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