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This section will attempt to answer some of the questions you
may have about mortgages, the loan process, and financial considerations.
Please contact me if you have additional questions or for clarification.
Buying a home may be the most exciting,
confusing and stressful financial transaction you ever undertake.
Even if you have done it several times you can still find the
process complicated and intimidating, particularly when it comes
to getting a mortgage loan. Countless loan documents, unfamiliar
terminology and uncertainty serve to temper the joy of buying
a new home. As soon as the sales contract is signed, obtaining
the financing for the purchase becomes paramount. If you understand
the steps required to qualify for a mortgage loan, however,
much of the stress can be avoided. The following explanation
of the loan application process is intended to help you through
the complexities of obtaining a mortgage loan.
First, you will fill out a loan application. The loan application
form asks for information on the property you are buying, terms
of the purchase contract and the employment and financial history
of all loan applicants, including your spouse and/or other co-borrowers.
The lender will verify this information in order to approve
the loan, so it is very important to make sure that it is complete
and accurate. See the mortgage loan application checklist below.
Next, it takes a few weeks to complete the evaluation of your
application. More information may be required once the application
has been submitted. The sooner you can provide the information,
the faster your application will be processed. Once all the
information on your application has been verified, I will call
you to let you know the outcome of your application. If the
loan is approved, a closing date is set up and the I will review
the closing process with you.
Finally, on closing day, you'll present your paid homeowner's
insurance policy or a binder and receipt showing that the premium
has been paid. The closing agent will then list the money you
owe the seller (remainder of down payment, prepaid taxes, etc.)
and then the money the seller owes you (unpaid taxes and prepaid
rent, if applicable). The seller will provide proofs of any
inspection, warranties, etc. Once you're sure you understand
all the documentation, you'll sign the mortgage, agreeing that
if you don't make payments the lender is entitled to sell your
property and apply the sale price against the amount you owe
plus expenses. You'll also sign a mortgage note, promising to
repay the loan. The seller will give you the title to the house
in the form of a signed deed. You'll pay the lender's agent
all closing costs and, in turn, they will provide you with a
settlement statement of all the items for which you have paid.
The deed and mortgage will then be recorded in the state Registry
of Deeds, and you will be a homeowner. Obtaining a mortgage
loan need not be an ordeal that dampens the thrill of acquiring
a new home. If you understand the lending process and are prepared
to do your part, it simply becomes a key step in owning a home.
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Employment History / Income Sources
Name, address and phone numbers of all employers for past two
years Past two years W-2's Most recent pay stub from employer
Self Employed Borrowers & Commissioned Income
Past two years tax returns with all schedules (Individual, Partnership
and Corporate) Current Balance Sheet and Y.T.D. Income Statements
for the business owned
Sources of funds for Closing
Name, address and account numbers for all checking, savings
and investment accounts Most recent bank statements on all accounts
Closing statement on sale of a prior home If using gift funds,
we can help prepare gift letter and verify funds
Debts / Obligations Provide account number, monthly payments,
and approximate balance for all debts: Auto Loans Credit Cards
Signature Loans Landlord (need address) Mortgage Loans (need
address)
Miscellaneous Information & Documents
Initial deposit for credit report and appraisal Copy of earnest
Money Agreement/Contract Childcare letter /explanation (VA only)
Bankruptcy papers and discharge, if applicable Photo I.D. and
Social Security cards (FHA only) (Back to top)
What is pre-qualification and pre-approval?
A pre-qualification is normally issued by a loan officer, who,
after interviewing you, determines the dollar value of a loan
you can be approved for. However, loan officers do not make
the final approval, so a pre-qualification is not a commitment
to lend. After the loan officer determines that you pre-qualify,
he/she then issues you a pre-qualification letter. This pre-qualification
letter is used when you are making an offer on a property. The
pre-qualification letter indicates to the seller that you are
qualified to purchase the house you are making an offer on.
Pre-approval is a step above pre-qualification. Pre-approval
involves verifying your credit, down payment, employment history,
etc. Your loan application is submitted to an underwriter and
a decision is made regarding your loan application. If your
loan is pre-approved, you are then issued a pre-approval certificate.
Getting your loan pre-approved allows you to close very quickly
when you do find a house. A pre-approval can help you negotiate
a better price with the seller, since being pre-approved is
very close to having cash in the bank to pay for the house!
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The most commonly used credit score today
is known as a "FICO" score. A company named Fair, Isaac & Co.
developed a mathematical way to look at factors in your credit
record that may affect your ability and willingness to repay
a debt. These factors can include your record of repaying loans,
i.e., student loans, car loans and credit card bills; any public
records you might have, like tax liens and bankruptcies; how
often you apply for installment loans and new credit cards;
and how much you actually owe. For example, if you charge up
to the limit on your credit cards – even if combined they don't
seem to add up to a lot of money – this might hurt your credit
score. Or, if you have recently applied for several credit cards,
including department store payment plans or credit cards – even
if you haven't begun to use them yet – your credit score might
be affected negatively. Credit scores are widely used today
because they speed up the mortgage approval process for most
consumers, allowing mortgage lenders to work with consumers
whose credit scores raise questions about their credit records.
What's more, by using credit scores, mortgage lenders treat
each person objectively because the same standards apply to
everyone. Credit scores assess each factor equally for every
consumer, every time. They do not include race, religion, national
origin, gender or marital status as factors. Credit scores are
blind to demographic or cultural differences among people. Mortgage
lenders look at other information besides your credit score
before deciding whether to make you a mortgage loan. They look
at your employment history, your income and outstanding debt,
savings patterns and amount of savings, and the type of mortgage
you want. Mortgage lenders also look at the value of the property
you want to buy or refinance and the amount of the down payment
you plan to make or the equity that you have. All of these factors
combined together make up your "borrower profile." Mortgage
lenders view this full picture to make a final decision about
your ability and willingness to repay a mortgage loan.
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RESPA stands for Real Estate Settlement
Procedures Act. It requires lenders to disclose information
to potential customers throughout the mortgage process. By doing
so, it protects borrowers from abuses by lending institutions.
RESPA mandates that lenders fully inform borrowers about all
closing costs, lender servicing and escrow account practices,
and business relationships between closing service providers
and other parties to the transaction. For more information on
RESPA, visit the web page at http://www.hud.gov/fha/sfh/res/respa_hm.html
or call 1-800-217-6970 for a local counseling referral.
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It's an estimate that lists all fees paid
before closing, all closing costs, and any escrow costs you
will encounter when purchasing a home. The lender must supply
it within three days of your application so that you can make
accurate judgments when shopping for a loan.
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Private mortgage insurance is a policy
that protects lenders against some of the losses that result
from defaults on home mortgages. You, the borrower, are required
to pay the premium for this insurance. Private mortgage insurance
reduces the lender's risk associated with lending money to home
buyers because the the mortgage insurance company will pay the
lender a percentage of the outstanding loan balance in the event
of default. PMI is typically required whenever the down payment
amount is less than 20% of the home sales price. If you have
a good credit history, you can avoid PMI by structuring a loan
as two separate mortgages. By limiting the first lien mortgage
amount to 80% or less of the purchase price, PMI is not required.
Your down payment combined with your second lien will make up
the remaining 20%.
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An escrow account is an account opened
and maintained by the mortgage company from which future payments
for real estate taxes and homeowner's insurance premiums are
made. Your escrow account is usually established at the time
of your closing. The lender will collect reserves for your escrow
account at this time to establish the account. Lenders will
not require you to have an escrow account provided you have
an excellent credit history and your first lien loan to value
is 80% or less. If you choose to not have an escrow account,
you will be required to pay your hazard/homeowner's insurance
and property taxes each year as they become due.
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Discount Points, or "Points", are mortgage
interest fees paid up front at the time of closing to reduce
the mortgage interest rate. One point equals one percent (1%)
of the loan amount. Paying points is a tradeoff between paying
money now or paying money throughout the life of the mortgage.
Points are prepaid interest. You should only pay points if you
plan to keep your present mortgage long enough to recover the
cost of the points through lower monthly mortgage payments,
which result from paying the points up front at closing.
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You'll love the feeling of having something
that's all yours - a home where your own personal style will
tell the world who you are. But there's more to owning a home
than personal satisfaction. When you make a mortgage payment,
you are building equity. And that's an investment. You can deduct
the cost of your mortgage loan interest from your federal income
taxes. Interest will compose nearly all of your monthly payment,
for over half the number of years you'll be paying your mortgage.
This adds up to hefty savings at the end of each year. And you're
also allowed to deduct the property taxes you pay as a homeowner.
If you rent, you write your monthly check and it's gone forever.
Another financial plus in owning a home is the possibility its
value will go up through the years.
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That depends on a number of factors, including
the cost of the house and the type of mortgage you get. In general,
you need to come up with enough money to cover three costs:
earnest money - the deposit you make on the home when you submit
your offer, to prove to the seller that you are serious about
wanting to buy the house; the down payment, a percentage of
the cost of the home that you must pay when you go to settlement;
and closing costs, the costs associated with processing the
paperwork to buy a house. When you make an offer on a home,
your real estate broker will put your earnest money into an
escrow account. If the offer is accepted, your earnest money
will be applied to the down payment or closing costs. If your
offer is not accepted, your money will be returned to you. The
amount of your earnest money varies. If you buy a HUD home,
for example, your deposit generally will range from $500 - $2,000.
The more money you can put into your down payment, the lower
your mortgage payments will be. Some types of loans require
10-20% of the purchase price. That's why many first-time homebuyers
turn to HUD's FHA for help. FHA loans require only 3% down -
and sometimes less. Closing costs - which you will pay at settlement
- average 3-4% of the price of your home. These costs cover
various fees your lender charges and other processing expenses.
When you apply for your loan, your lender will give you an estimate
of the closing costs, so you won't be caught by surprise. If
you buy a HUD home, HUD may pay many of your closing costs.
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Yes. A paid homeowner's insurance policy
(or a paid receipt for one) is required at closing, so arrangements
will have to be made prior to that day. Plus, involving the
insurance agent early in the home buying process can save you
money. Insurance agents are a great resource for information
on home safety and they can give tips on how to keep insurance
premiums low. Also, be sure to shop around among several insurance
companies. Consider the cost of insurance when you look at homes.
Newer homes and homes constructed with materials like brick
tend to have lower premiums. Think about avoiding areas prone
to natural disasters, like flooding. Choose a home with a fire
hydrant or a fire department nearby.
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