Mortgage 101 - Education for Buyers
Once a simple task that meant comparing the fixed interest rate
mortgages of a dozen or so lenders, the mortgage search today is
more like finding your way through a maze. There are dozens of loan
types, hundreds of loan programs and thousands of mortgage brokers,
bankers, lenders, finance companies, credit unions, even stock
brokerage firms originating loans.
Because there is so much to learn, finding a mortgage that fits
doesn't begin with an application, but education. If there's but one
aspect of the home buying transaction you take the time to learn in
detail, make it mortgages. Discover too late that you can't afford
your mortgage, and you could not only lose your home, but also be
unable to purchase another one for years.
Obtaining information is easy. Mortgage information sources are as
numerous as mortgage types. Web sites, topical newspaper articles,
mortgage books, consumer seminars and workshops can help.
Professionals, including financial planners, real estate agents,
mortgage brokers and lenders, can also assist you.
Examine your finances
First, compare fixed-rate mortgages with adjustable rate mortgages
to determine which type best fits your current financial lifestyle
and, to some extent, your future obligations 15 to 30 years down the
road. Learn how much of a mortgage you can afford. Lenders are apt
to qualify you for as much as they are willing to lend, which can be
more than you can really afford. It's up to you to take stock of
your income and expenses, both current and projected, to determine
what you can comfortably manage each month.
Along with your mortgage payment of interest and principle, remember
to add related insurance costs, taxes, homeowner association dues
and any other costs. Also, obtain copies of your credit reports from
all credit reporting agencies. Obtaining your credit report in
advance gives you time to challenge missing information, errors, or
other discrepancies. If necessary, you can put a statement on your
credit report to explain any blemishes you can't cure. Lenders
likely will ask you to explain problem areas on your credit record
anyway. Your attention will let the lender know you are
conscientious about your finances.
Shopping for lenders and loans
When you are ready to shop for a loan you have two basic choices --
direct lenders and mortgage brokers. Direct lenders have money to
lend. They make the final decision on your application. Lenders have
a limited number of in-house loans available. Brokers are
intermediaries who, like you, have many lenders from which to
choose. If you have special financing needs and can't find a loan to
suit them, an experienced broker may be able to ferret out the
financing you need. Mortgage brokers, however, are paid with a slice
of the amount you borrow, some more than others.
Along with shopping the source, you'll also have to shop loan costs,
including the interest rate, broker fees, points (each point is one
percent of the amount you borrow), prepayment penalties, the loan
term, application fees, credit report fee, appraisal costs and a
host of others.
Your application
Before you actually apply for a mortgage on or off line, gather
documents necessary to prove claims you'll make on the application.
The application will ask 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).
The lender will run a credit check on you, but you'll have to supply
supplemental documentation including paycheck stubs, bank account
statements, tax returns, investment earnings reports, rental
agreements, divorce decrees, proof of insurance, and other
documentation. If the lender deems you creditworthy, it will likely
hire a professional appraiser to make sure the value of the home you
are about to buy is commensurate with your loan amount.
Lock it down
During your loan application, get a rate lock - an essential
document in a rising mortgage rate market. On or offline, a rate
lock -- in writing - guarantees you a certain interest rate and
terms for a given period.
Lock in all the costs you can, the interest rate, and points.
Set the lock ''on application'' rather than ''on approval.'' On
approval means you won't have a stab at rates until the loan
application is approved. In a rising market, a lock on approval
would cost you more in higher interest rate.
Along with shopping around for the best mortgage, shop around
for both the terms of the lock contract and its cost. Both can
vary.
Your lock-in period should be long enough to allow for
settlement, contingencies imposed by the lender or the purchase
contract and other factors that could delay the process.
Consider all factors that could delay your settlement, including
the time it will take you to provide requested materials about
your financial condition, unanticipated construction delays on a
new house and the like.
Most lock periods range from 15 to 60 days. Anything longer
could be cost prohibitive. Ask your lender to estimate (in
writing, if possible) the average time for processing loans.
Once you lock-in a rate, you must make sure that your loan is
approved and closed before the commitment expires. Follow up on
your loan application to make sure you don't delay sending
additional documents the lender requires.
Get pre-approved
Finally, once the lender approves your loan, you've been
pre-qualified for a certain amount, but that doesn't guarantee you
the loan. Prequalification indicates you are creditworthy enough to
obtain a loan and it lets you know how much the lender is willing to
lend you based on your income and debts. Often, the lender has yet
to pull your credit report. It's wise to take the next step and get
pre-approved for a specific amount the lender will actually lend
you.
A pre-approval - in writing - is the amount the lender guarantees it
will lend you, based on a thorough analysis of your application. The
pre-approval not only gives you the security of shopping for a home
you can afford; it tells the seller you are a serious buyer ready
with solid financing. That's a negotiating edge you want in any
market. |
