Financing the
American Dream
A Home Buyer’s Guide
You’ve decided to
purchase a home. This will most likely be the biggest investment you will make
in your lifetime. Homeownership is the bedrock of the American Dream. It is
more than just a roof over one’s head. Owning a home brings security and a
sense of “putting down roots”.
This can be an
exciting time. It can also be a stressful time as financing a home can be a
large undertaking. Having a mortgage consultant to guide you through can make
this process easier.
Below you will
find a foundation of knowledge to better understand the workings of financing
your dream home. With this knowledge and the help of your mortgage consultant
you’ll be able to navigate the financial waters successfully. You will want to
understand what types of mortgage products are available to you, what you need
to supply the lender to get your loan approved and the amount of money needed
to close the sale.
Scroll down or
click on a topic to learn the basics of “Financing the American Dream”.
Documentation Needed for the Loan
The Truth About Interest Rates and Locks
Get Prequalified – You wouldn’t go to the grocery store without any money and you can’t effectively shop for a home without knowing how much of a loan you qualify for. Your mortgage consultant can go over the process with you, get a copy of your credit report and determine what price range you should be shopping in. In addition you will be able to determine which mortgage product works best for your situation.
Pick Out a House – Once you know how much house you can buy and the type of loan you qualify for it’s time to choose a Realtor and find your home. Since you’ve already done your financial homework you won’t waste your time looking at houses above or below your price range.
Initial Paperwork – You’ve found the perfect house. Now you need to go back to your mortgage consultant and sign the initial paperwork to get your loan started. This consists of a complete Application, Good Faith Estimate, a Truth in Lending Statement and various disclosures as required by law.
Supply Documentation – Depending on your situation you will be given a list of items to bring in to document your loan. This consists at a minimum of one month’s pay stubs, W-2’s for the last two years, a copy of your driver’s license or other identification and copies of statements from your bank accounts and retirement plans. Further documentation will be required if you are self employed or have some other unusual situation that needs to be explained to the underwriter.
Get Approved – Once you’ve gotten to this part it’s time to sit back and wait as your mortgage consultant processes your loan with the lender. This period can easily last two to three weeks depending on the market. Relax; this is normal.
Conditions, Conditions – After the underwriting period a conditional approval will likely come from the lender. This simply is a list of items the underwriter needs to complete the file for final approval. These items could consist of further documentation of income or assets, a letter of explanation for something that showed up on your credit report or further disclosures to be signed.
Final Approval and Paperwork – Once the underwriter has everything they need to complete your file the lender will issue a final approval and will draw the final documents for you to sign. This paperwork will be sent to the escrow company handling the sale to be paired up with the final paperwork needed to transfer the property to you.
Sign and Close – This is the day you’ve been waiting for! You will meet with the escrow officer and your mortgage consultant to sign the final paperwork. This process takes approximately one hour. After you’ve signed your paperwork, it will be paired up with the paperwork from the seller and the Deeds will be recorded.
Move In! – Once
everything is recorded, escrow closes and you get the keys to your new home.
Congratulations!
You may have heard the names “Fannie Mae” (FNMA) and “Freddie Mac” (FHLMC) in the news. These institutions along with private investors fund Conventional Mortgages. These mortgages are typically 30 year loans with a fixed or variable interest rate and a maximum loan amount of $417,000. Loans are available above this amount (up to $729,750) but will usually have a higher interest rate. The rates you might see advertised or talked about in the news are for loans of this type under $417,000. Down payments for this type of loan generally are at least 10% and preferably 20%.
There are mortgages available if a loan is needed above the $729,750 amount dictated by FNMA/FHLMC. These loans are called “Jumbo” loans and are held by banks and private investors. Jumbo loans are specialized products and are considered non-conforming conventional type loans.
Many first time home buyers do not have the 10% to 20% needed for a down payment on a conventional mortgage. The Government has various programs requiring little or no down payment. There are also down payment assistance programs provided by various Government agencies to help people with limited income and/or assets attain home ownership. Your mortgage consultant will help you determine if any of these programs would help you. Since these down payment assistance programs vary by agency and are sometimes not available because of budget constraints we will focus on three Government type loans available at all times.
The Federal Housing Administration (FHA)
funds most loans where a down payment of less than 10% is required. The minimum
down payment for an FHA loan is 3.5% of the purchase price. This amount can be
from the borrower’s own funds or a gift from someone with a close relationship
with the borrower. The seller can contribute funds to help the borrower with
closing costs.
The conforming loan amount for FHA is up
to $417,000, however in “high cost counties” such as Monterey County this
amount is raised to $625,500. Since the down payment is low there is a charge
for mortgage insurance to cover the lender in the event of a default on the
part of the borrower. The fee for this insurance is a onetime charge of 1.75%,
paid up front, but can be added to the loan amount. In addition there is a .5%
annual insurance cost prorated monthly and included in the payment.
This is a special
type of Government loan provided by the United States Department of
Agriculture. There is no down payment required and the seller can contribute to
the closing costs. However, income limits and property location rules apply.
Generally this type of loan can be obtained for properties located in
agricultural areas. There is a funding fee of approx. 2% but no insurance
costs.
The following
documentation will be required at a minimum:
· Complete application and signed disclosures
· Copy of Driver’s License or other ID as applicable: Residence Alien Card (Green Card) Front and Back or Passport
· Last 30 days pay stubs for all borrowers
· Most recent bank statement(s)
· Statements from investment accounts
· Retirement/401K statements
· W-2 for last two years for all borrowers
· Name and phone number of insurance agent
In addition the following may be required depending on your unique situation:
· Disability or Retirement Award Letter
· Social Security Award Letter
· Copy of Federal Tax Returns for the last 2 years
· Divorce or Separation Agreement
· Child Support Agreement
· Copy of Rental Agreements
· Proof of Liabilities for pay off
This list is not all inclusive. Lenders may require further documentation based upon the underwriting scenario.
There will be many people providing
services to you in order to fund your loan. The fees for these services can
easily amount to 3% of the purchase price. If you are fortunate enough to be
shopping for your home in a “buyers market” you may be able to ask the seller
to pay some of these fees for you.
When you apply for your loan you will be
given a document called a Good Faith Estimate (GFE). This document estimates
the costs to be charged for the loan. There are basically three sections on the
GFE. Theses sections itemize the lender fees, prepaid charges and escrow/ title
fees.
In this section you will find an
origination or broker fee (normally 1%) which covers the broker’s cost to put
together the loan along with compensation for the service. Other fees in this
section usually include a processing fee and an administration fee from the
lender. Some lenders charge a flat fee for administration and others itemize
the service provided and the specific fee attached to that service.
These include setting up your impound
account, interest from the funding date to the end of the month and the
Government funding fee/insurance cost if any.
Escrow and title provide a variety of
services including researching the title and providing insurance and recording
the Deed of Trust for the loan and the Grant Deed. These charges along with
other services are itemized in this section.
Every day you see and hear advertising in the paper, on the radio and television about some company offering super low rates or no cost loans. Both are most likely misrepresentations of the truth.
The truth about interest rates is they fluctuate daily at least and a couple times a day at worst. The other thing is that you can’t lock a rate at the beginning of the process since one doesn’t know how long it will take to get a final approval. Therefore the interest rate you will receive is probably not going to be the rate quoted when you first inquire. If anyone tells you they can guarantee what rate you will get a month from now when your loan closes they are lying. Rates are dictated by the bond markets and just like the stock market they go up and down depending on the flow of money in that particular market. No one can tell you what the price of a stock will be a month from now and the same holds true for interest rates.
Another misnomer is the “no cost” loan. When was the last time you told your boss you would love to work for free? People who work in the mortgage business aren’t volunteers either. The way one gets a “no cost” loan is to receive a higher interest rate (as much as ½%) and pay the costs over time. Banks will pay a premium for higher interest rate loans thereby covering the real cost of your loan. You end up paying for the cost every month for the next thirty years instead of paying the cost once.
You will be able to lock your rate once you get an approval. At that time rates are quoted on a 15 day lock period which is the best rate at the time. Locking for any longer is more expensive and not practical. Your mortgage consultant will watch the market consistently towards the final days of the process to lock in the best rate for you.
In addition to the principal and interest that you will pay to the lender, you will also have to pay for hazard insurance and property taxes. One year’s worth of hazard insurance will be collected at close of escrow along with a pro-rated amount of property taxes depending on when you close your purchase.
With all Government Loans and Conventional Loans where the loan to value exceeds 80%, the lender will require an impound account to pay for future property taxes and insurance. At close of escrow you will have to set up this account and place into it two months of insurance premiums and a pro-rated amount of property taxes as shown in the following table.
|
Closing
Month |
First
Payment Due |
Impound
Account |
|
|
|
|
|
January |
March |
6 months |
|
February |
April |
7 months |
|
March |
May |
2 months |
|
April |
June |
3 months |
|
May |
July |
4 months |
|
June |
August |
5 months |
|
July |
September |
6 months |
|
August |
October |
7 months |
|
September |
November |
8 months |
|
October |
December |
9 months |
|
November |
January |
4 months |
|
December |
February |
5 months |
·
First
tax payment due December 1; Late December 10
·
Second
tax payment due February 1; Late April 10
At Close of Escrow you will be asked to pick how you want to hold
title. If you are single or buying the
home by yourself this is simple. But what if you are married or are buying the
home with siblings, friends or other investors? Your unique situation will
determine your choice on how to hold title. Basically the types are Joint
Tenancy, Tenancy in Common, Community Property and Community Property with
Right of Survivorship. At some point before the closing you should contact your
legal or accounting professional and discuss which method would benefit your
situation.
The actual “closing” happens when the deeds are recorded at the
County Recorder’s Office. Two days prior
to this (up to a week prior for a refinance) you will be requested to come in
to sign the loan and other documents related to the transaction. This process
is also called the settlement. It’s called that because you will have to bring
a certified check for an amount to “settle” the transaction. Be sure and ask
either your loan officer or your escrow officer what the amount is for funds to
close.
The other important item to bring to the settlement is a form of
identification. Usually a driver’s license or passport will satisfy this
requirement. Some of the documents you will be signing need to be notarized and
the notary who will be present at the settlement will need your ID.
After the settlement it usually takes a day or two to process the
final paperwork, fund the loan and record the deeds. After the recording you
will receive the keys to your new home.
MAJOR PURCHASES: It is
strongly recommend that you do not make any major credit card purchase (i.e.
cars, furniture, etc.) or use your credit cards for any large advances - until
your loan is completely closed and funded, as this can negatively affect your
qualifying ratios.
AVAILABILITY: If you
plan to be away at any time prior to your loan closing (i.e. business trip, on
vacation), please provide your Loan Consultant with your traveling contact
information. As loan commitments have deadlines, it is very important for you
to be available to approve / sign documents so that your interest rate lock
does not expire.
MORTGAGE/RENTAL
PAYMENTS: It is vital that you make your monthly rent or mortgage
obligations on time. Late mortgage or rental payments can cause a loan to be
denied.
INSURANCE: If you are purchasing a property, we
recommend that you immediately begin shopping for your hazard / fire insurance
policy. It can take a while for an insurance company to approve and process
your application. In many cases, the lender can use the appraiser’s estimate of
cost to rebuild as your minimum insurance amount required. This amount is
usually the amount needed for replacement cost Insurance Coverage.
APPRAISAL:
An
appraiser will call you or your real estate agent directly and set up an
appointment for your appraisal. The appraisal cost is paid at the time of
service. For conventional loans credit card information will be required in
order to initiate the appraisal process. In other cases a check can be written
to the appraiser. Your real estate agent will generally let the appraiser into
the home, and make arrangements to collect a check from you for that service.
Amortization
– Gradual debt reduction.
Normally, the reduction is made according to a predetermined schedule
for installment payments.
Annual
Percentage Rate – A term used in the Truth in Lending Act to represent the full cost
of a loan including interest and loan fees.
Appraisal
– A formal, written estimation of a home’s current market value.
Appraiser
– The appraiser decides the market value of a home based on its
condition and the selling prices of comparable homes recently sold.
Certificate
of Occupancy – Authorization given by a local municipality that allows a newly or
substantially completed structure to be inhabited.
Chain
of Title -- The history of all transactions transferring title to a parcel of
real property, from the earliest document to the most recent.
Closing
– The conclusion of a transaction.
In real estate, closing includes the delivery of a deed, financial
adjustments, the signing of notes and the disbursement of funds necessary to
the sale or loan transaction.
Closing
Costs – All of the costs to the buyer and seller individually that is
associated with the purchase, sale or financing of real property.
Closing Statement – A
financial disclosure giving an account of all funds received and expected at
the closing, including the escrow deposits for taxes, hazard insurance and
mortgage insurance.
Collateral
– Property pledged as security for a debt, such as the real estate
as security for a mortgage.
Commitment
– An agreement between a lender and a borrower to loan money at a
future date subject to compliance with stated conditions.
Condominium
Declaration – The basic condominium document that must be registered by the
developer before the first unit is sold.
This declaration thoroughly describes the entire condominium entity.
Credit
Rating/Score – A rating given to a person to establish willingness to pay
obligations based upon one’s past history of timely payment.
Debt-To-Income
Ratio – Long-term debt expenses as a percentage of monthly income. Lenders use this ratio to qualify borrowers
for mortgage loans, typically setting a maximum debt-to-income ratio of 36%.
Earnest
Money – A sum of money given to bind a sale of real estate.
Escrow
Account – An account set up by the lender into which the borrower makes
periodic payments, usually monthly, for taxes, hazard insurance, assessments
and mortgage insurance premiums. The
funds are held in trust by the lender who pays the sums as they become due.
Fair
Market Value – The price at which property is transferred between a willing buyer
and a willing seller, each of whom has reasonable knowledge of all pertinent
facts and neither being under any compulsion to buy or sell.
Gross
Monthly Income – The amount of consistent and stable income that an individual
receives each month, averaged over a period of time. This amount may include consistent overtime
pay, bonuses, commissions and income from dividends or interest.
Homeowner’s
Policy/Hazard Insurance – A multiple peril insurance policy
commonly called “package policy.” It is
available to owners of private dwellings and covers the dwelling and contents
in the case of fire or wind damage, theft, liability for property damage and
personal liability.
Housing
Expense Ratio – A homeowner’s monthly housing expense as a percentage of his or
her gross (before taxes) monthly income.
Interest
– Money paid for the use of money – money paid for a loan.
Loan-To-Value
Ratio – The relationship between the amount of a home loan and the total
value of the property. For example, if
you receive a loan of $95,000 on a home that costs $100,000, the loan-to-value
ratio is 95%. Commonly known as LTV.
Lock-In-Rate
– A commitment from a lender to make a loan at a preset interest
rate at some future date. A fee may be
charged to “lock-in” a rate.
Mortgage
Insurance – A policy that allows mortgage lenders to recover part of their
financial losses if a borrower fails to fully repay a loan. This makes it possible to buy a home with as
little as 3.5% down.
Mortgagee
– A lender to whom property is conveyed as security for a loan.
Mortgagor
– One who borrows money, giving as security a mortgage or deed of
trust on real property.
PITI
– Principal, Interest, Taxes and Insurance are
the components of a mortgage payment.
Point
– A dollar amount paid to a lender for making a loan. A point is equal to one percent of the loan
amount.
Principal
– The original balance of money loaned, or existing balance
excluding interest.
RESPA
– Real Estate Settlement Procedures Act.
RESPA is a federal law that requires lenders to provide home mortgage
borrowers with information about known or estimated settlement costs.
Servicer
– After a mortgage loan closes, the loan servicer collects the
payments, manages escrow accounts, pays escrowed taxes and insurance and
manages delinquent payments. Lenders
often “release” servicing to another business, which means that a home buyer
will not necessarily send house payments to the original lender.
Settlement
– The closing of a mortgage loan.
Title
– The documented evidence (Deed) of the right to or ownership in
property.
Title
Insurance – Insurance which provides for the payment of a specific amount of
funds for loss caused by defects in the title to real estate.
Getting your loan started
To get your loan started call me at
Pacific Home Lending. I will find the right mortgage product to match your
unique situation.
|
Glen Stransky Mortgage Consultant DRE Lic#
01754329 Cell:
831.277.3118 Glen@PacificHomeLending.com |
Pacific
Home Lending is located in Monterey on the Central Coast of California.
|
Pacific Home Lending 536 Pearl Street Monterey, CA 93940 Phone: 831-648-8080 Toll Free: 866-648-8080 Fax: 831-648-8091 |
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