by all the different loan programs and financial
is some general mortgage information along with a summary of several loan
types and definitions of some common terms.
|When should I call the
|This should be your first step for many reasons:
If you have financing pre-arranged, you are less of a risk to the seller and can
often negotiate a better deal. Many sellers wont accept an offer
unless you are pre-qualified. Even if they do, you will usually be required to
provide a Conditional Loan Approval within 5 days of contract signing. Ideally, you
should get pre-approved, but at a minimum, you should be pre-qualified with a lender you
trust before you begin shopping for a home. (See 'Pre-Qualified vs. Pre-Approved'
2. You need to know what type of loan you can qualify for prior to
finding a property. This is because some sellers will not accept a contract
if the buyer is going to use a VA or FHA loan. Other sellers will accept the
contract but wont negotiate as much on price. This is because VA and FHA loans
can require the seller to pay for certain items that could otherwise be paid by the buyer.
In other words, a VA or FHA buyer will generally cost the seller more at closing.
3. Some lenders will not finance certain types of properties at all.
Condominiums, for example, can present several obstacles. First, to use a VA
or FHA loan, the complex must be a VA or FHA approved project. Some condominiums are
even difficult to purchase with a conventional loan. Lenders determine
approval based on many factors such as the percentage of renters vs. owners in
the complex. Also, if one individual owns over a certain percentage of the units in the
complex, some lenders will not fund a loan for properties in that complex at all.
4. You dont want to look at houses you cant afford.
Not only is this a waste of your time, but its extremely difficult to find a
'Chevrolet' that you like after youve been test driving 'Cadillacs'. In other
words, if you can only qualify for $110,000 loan and youve already been looking at
$150,000 houses, those $110,000 houses suddenly dont look so great in comparison.
|How do I choose a mortgage
|Like Real Estate Agents, mortgage companies and Loan Officers are
a dime a dozen. Shop around. Talk to many and go with the one you trust.
Ask friends and relatives if they can recommend somebody. Dont be afraid to
ask questions. Do NOT let anybody high-pressure you into signing anything you feel
|What questions should I
|Ask the Loan Officer to explain anything and
everything that you do not COMPLETELY understand. When you first start shopping for
a loan, you will hear many terms...VA, FHA, conventional, points, fixed rate, adjustable,
balloon, etc. All of this can be very confusing and people are often hesitant to ask
questions because they dont want to appear stupid. Buying a house is a huge,
long-term investment. And as the cliche goes, the only stupid question is the one
not asked. As a matter of fact, you should ask questions even if you DO know the
answer. This is a good way to find out if your Loan Officer knows what they are
talking about and if theyre being straight with you. After all, it is your
hard-earned money. Three very important questions to ask are:
1. Is the loan a fixed-rate or adjustable?
2. Is there a pre-payment penalty?
3. What is the Annual Percentage Rate (APR)? This is not
necessarily the same as the "interest rate" you were quoted.
Ideally, you want to find the lowest interest rate with the lowest
possible closing fees. The APR is the best way to compare loan programs because it
reflects both the interest rate and other fees as one combined figure. In other
words, it reflects the actual cost of your loan. BE CAREFUL! Many lenders will
quote a low interest rate and then nail you with other fees (the small print!) This
can easily make your loan more expensive than a program with a higher interest rate.
The lower the APR, the lower the total cost is to you. Your
lender should tell you the APR in addition to the interest rate. The
amount you will have
to pay for a loan is closely related to your credit-worthiness.
Also be aware that lenders are required to provide you with a document
called a "Good Faith Estimate of Closing Costs." Although this is only an
estimate, it tells you, in writing, the costs and fees you can expect to pay at closing.
It may not include many
title company fees, but your Real Estate Agent should be able to help you estimate
|One of the first questions your
Real Estate Agent will
ask is if youre pre-qualified. Don't confuse this with loan approval...it is
very different. A pre-qualification is usually given in just a few hours or
days. It is usually based upon only a credit report and what you tell the lender,
such as how much you make, how much you owe and what kind of assets you own. A
pre-qualification letter should state all of the conditions that must be met before your
loan is actually approved. You will usually be asked to pay approximately $35 for a
tri-merged credit report in order to get pre-qualified.
on the other hand, means the lender has already verified your credit history, income,
employment, debts, assets and anything else required for you to get the loan. While
pre-approval may take as long as 2-4 weeks, once you have it, you are as good as a CASH
buyer. All that's left to do before closing is to approve the
property: appraisal, termite inspection and title work. Once pre-approved, you
could close on a property in as little as 7-10 days. This makes you very
appealing to sellers. Some sellers will even accept a lower price from a
pre-approved buyer because 1.) they have some assurance that your loan will not fall through,
and 2.) you can close the deal quickly.
|I'm buying a new home and
my builder offers their own financing. Should I use it?
|It depends. You should still investigate other
lenders and go with whoever will give you the best overall deal. Many builders will
offer incentives, such as $5000 off, if you use their financing. Depending on the
builder and your Real Estate Agent, you may be able to negotiate this discount AND use your own
lender, especially if you are pre-approved. Don't just go with the builder's
financing because they offer you a discount. As always, you need to look at the
overall cost of the loan.
|How much will taxes and
insurance add to my payment?
|The amount of the property taxes depends on many
factors, including the property itself, the city where it's located and whether it will be
owner-occupied or an investment property. Your Real Estate Agent should be able to tell you
the annual tax amount on any of the properties you're interested in. If
not, give us a call and we can help you find out. Insurance
is also based on many of the same factors. Your insurance agent should be able to
give you a quote on what your premium will be for any given property. If you use the
same insurance agent you use for your other insurance needs (i.e. your car insurance), you
will usually receive a lower rate than if you go with a different company.
|Types of loans:
|VA Guaranteed Loan - If you are a
veteran of the U.S. Armed Forces and meet basic requirements, you can qualify for a loan
that is guaranteed by the Veterans Administration. One of the advantages of a VA
guaranteed loan is that you dont need a down payment. You only need enough
money to pay for closing costs. And unlike other zero down programs, VA loans do not
require mortgage insurance. This helps veterans who otherwise may not qualify. One of the disadvantages of a VA loan is that you will be
required to pay a funding fee of approximately 2-3% of the loan amount to the VA.
However, it can be financed into your loan. If you are a veteran with a
service-connected disability, you do NOT have to pay this fee. FHA Insured Loan - An FHA loan is a government insured loan. It is
similar to a VA guaranteed loan in many ways, but you do not have to be a veteran to
qualify. FHA offers different
programs to help buyers get into homes without large down-payments. This is often a
good way for first-time buyers to go. Be sure to ask about mortgage insurance.
Conventional Loan - Conventional Loan -
non-government loans, usually requiring a substantial down-payment. (10% - 20%).
However, if you can come up with the cash, it may be the way to go. Ask many
questions since you do not have the government stipulations that protect your interest
like with VA and FHA loans.
80-20 Loans - This is a special zero down loan
program offered by some institutions. You borrow 80% of the purchase price as a
normal first mortgage. The other 20% (your down-payment) is borrowed as a second
mortgage and therefore, has a much higher interest rate. However, since you are
considered to be putting 20% down, you will usually not be required to pay mortgage
insurance with this type of loan. This can often be worth paying the higher interest
rate, especially since mortgage interest is generally tax-deductible whereas
mortgage insurance premiums
are not. It is worth checking out if you don't have much money for a
Fixed Rate - This means the interest rate will not change for the
life of the loan (i.e. 7.5% for 30 years). Fixed rate loans are great for people who
are on a fixed income or anyone who wants to know that their payment will not change over
time. A fixed rate loan is a good choice when interest rates are low.
Adjustable Rate Mortgage (ARM) - These are loans with interest
rates that fluctuate. The interest rate is usually fixed for a certain number of
years and then adjusts (usually annually) based on certain market conditions. For
example, a 3/1 ARM will have a fixed rate for three years, after which the rate will
adjust each year for the remainder of the loan. There is usually a 'cap' or limit on
how much the interest rate can increase per year and over the life of the
loan. ARMs are often attractive since they offer much lower rates than
fixed rate mortgages. However, it is important to realize that this is
only the starting rate! This type of loan is good for
people who know they will only own their house for a few years.
Balloon Loan - This type of loan has a fixed rate for a set
period of time with one large or "balloon" payment at the end. Most of
these loans can be refinanced so long as certain conditions are met. A balloon loan
may be right for people who have the money to pay cash but want to keep their cash and be
able to use it for a period of time.
|Some other terms you
|Mortgage Insurance - This is insurance that can be required on high-risk loans (usually
those with less than a 20% down-payment). The premium may be a one time fee due at closing,
or it may be added to your
monthly payment, or both.
Points - A point is 1% of the loan
amount and is paid to lower the interest rate of the loan. (Two points on a $100,000
loan is $2000). This is cash you will have to pay as part of your closing
costs. With interest rates as low as they are today, most borrowers do not need to
pay any points to get a decent rate. The longer you plan to stay in your home, the
more advantageous it is to lower your interest rate. If you plan to move in a couple
of years, it would most likely NOT be in your interest to pay points for a lower rate.
Qualifying Ratio - Depending on the type of loan, lenders will require
that your mortgage payment not exceed a certain percentage of your income. This
keeps the lender from making loans that will over-extend the borrower and result in a
Pre-Payment Penalty - This is a penalty imposed on the
borrower for paying a loan off early.
Origination fee - This is the fee charged for
'originating' your loan. Most lenders charge 1% of the loan amount, but in many
cases, it is negotiable. Some lenders charge no origination fee. But rest
assured, they probably make up for it elsewhere!
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