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Mortgage 101 |
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There are almost as many types of loans as there are types of houses. There are creative ways to get financed if you don't have a down payment, if you don't have closing costs or if you don't wish to pay the mandatory private mortgage insurance (PMI). The scope of this topic is so extensive that it requires its own article. Let's focus on the basics of securing a home loan.
There are dozens, if not hundreds, of types of mortgages that are being offered out there in the financial market place. But the 4 most common terms you'll encounter are:
3) Adjustable Rate Mortgage (ARM) 4) Home Equity
The 30 year fixed loan was at one time pretty much the industry standard and is more than likely the type of mortgage your parents and grandparents used to buy their homes. Simply stated, the loan has a 30 year payoff schedule and the interest rate does not change for the life of the loan. The 15 year fixed mortgage? You got it. It's a 15 year loan pay off at a fixed rate. The interest rates are lower than that of the 30 year and by cutting your payoff time in half you save an enormous amount in interest payments.
The ARM's have become the most popular mortgages. As the name suggests, the interest rate adjusts. There is a hybrid version of the ARM that offers a fixed rate for a set number of years before the rate can fluctuate. You will see these listed as 3/1, 5/1 or 7/1 ARM's. The first number indicates the number of years that the rate is fixed. These are great loans for people who don't expect to stay in the home for more than the 3, 5 or 7 years that the rate is fixed. These loans offer lower interest rates than the traditional 30 year. So, if you're not going to be in the house longer than 7 years, why would you pay a higher rate for a 30 year loan?
The Home Equity loans come in many different forms, but they are often bundled with a traditional fixed or adjustable loan to avoid paying private mortgage insurance (PMI). These loans are called “second mortgages” and usually have slightly higher interest rates. Usually, the higher interest rate is less than what a borrower would have to pay in PMI, hence they are a popular alternative. These bundled loans are often referred to as an 80/15/5, or 80% for the first loan, 15% for the second mortgage and a 5% down payment.
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Many of the costs that come with a line of credit or term home equity loan (HELOC) are similar to the ones you pay when you buy a home. They can include:
· Closing costs, which may include attorney fees, a title search to verify your ownership of the home, mortgage preparation and filing, and insurance fees. Estimate 2 percent to 4 percent of the loan for closing costs. · A fee for a property appraisal (@$350), which estimates the fair market value of your home. This is sometimes part of your closing cost but most of the time it cash on delivery when the appraiser comes to your house to appraise your home. · An application fee that covers the cost of processing the loan. This is not always refundable if you are denied credit. · Points, which are service fees figured on the total amount of the loan or credit line and usually paid at closing. One point equals 1 percent of the loan. For a $30,000 loan or line of credit, one point would equal $300. · Annual maintenance fees @ $100 on HELOC’s. Transaction fees each time you make a withdrawal from your credit line. Cancellation fee. If you pay off the loan early, you may be required to pay this fee. · Inactivity fee. Borrowers who don't use their line of credit during a given period of time might be charged.
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The information below should help clarify your purchase or refinance. There is a lot of information, but the more you know, the better. Once you read this, if you want even more to digest, check out the Useful Info link. Enjoy! |
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There are a few different ways of proving your income to a bank/broker or credit union. One is called full documentation and the other is stated. The latter is more geared for people who are self employed, earning tips and are on part time status. The former is for people who can provide the documentation to actually prove what they earn. For investors full documentation is more attractive as you can prove your income and hence you receive lower interest rates on your mortgage.
Full documentation is the way to go as you can prove your income and therefore have the advantage of the lower rates. The paperwork that you need to have ready to hand over to the mortgage broker is as follows:
· End of month pay statements showing one full months income · The last two years W-2’s · Bank statements for the last two months · Proof of where your down payment is coming from (if applicable). It may be the above “bank statements for the last two months” covering your down payment amount · Open loans – names, account #, balances and monthly payments
In addition if you know of any derogatory credit on your credit reports prepare a letter of explanation explaining why and when it happened.
If you have these in order you can be guaranteed to have a quicker turn around on your loan and hence have a smoother purchase/refinance. Normally it’s a thirty day turn around once approved to time of closing however if you have everything in order you could cut this time in half.
With stated loans, you may borrow up to 100% of the property’s appraised value. This type of loan features reduced paperwork...intended for borrowers who find it difficult to provide the documentation required for traditional mortgages. This program requires borrowers to state their income (stated income). This is great loan program for a self-employed borrower, commissioned borrowers, or those with sources of income that are difficult or impossible to document. Borrowers with sufficient credit and down payment can obtain these loans.
Stated Income Loan programs allow the borrower to write an income on their loan application. The borrower is still required to go through the normal loan procedures, but is not required to show tax returns, pay stubs or other means of income verification and is not required to sign a 4506. Stated Income Loans usually require better credit, assets such as money in the bank, stocks, and bonds and be able to show at least two years of employment stability. In most cases, we will require the borrower to have at least four to six months of Reserves (Mortgage Payments) in the bank. These reserves are funds in your savings account that can cover monthly payments in the event your income has been interrupted.
The benefit to Stated Income Loans is that you're not required to show proof of income. If the source or stability of your income does not meet conventional guidelines, you may find your best bet is a loan program that doesn’t use your income to qualify. In order to reduce the lenders risk by not verifying your income, lenders require more of a down payment to offset not asking for your income. You will probably need 15% down payment (although a few programs will accept a 10-20%). The interest rate will be slightly higher then a conventional mortgage.
The lower the down payment or equity, the more cash you’re expected to have in reserve after closing. Generally, you should count on having at least three to six months worth of mortgage payments in the bank. Your savings and assets should reflect the earnings you claim on your application. Reasons you might apply for a “No Income Verification” loan: |
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· Your tax returns don't reflect your true income · You have monthly debts that exceed “Debt to Income” percentages, and you personally feel you can handle the debt. · You are self- employed and your income has been inconsistent (especially if the most recent year was less profitable than previous). You will need to prove that you have been in business for at least two years. · You don't want to go through the hassle of fully documenting your loan application.
So to recap, stated income loans require you to tell us what your income is at the time of your application but we do not verify that information. No income verification - doesn’t ask you to put an income figure on your application. “Stated Income” always has a better interest rate than “No Income Verification”. Residential mortgage products include "Stated Income" and "No Income Verification" programs for both owner and non-owner occupied properties. |
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Once your offer is accepted, the bank will send an appraiser out to the property to evaluate its value. They're lending you a lot of money and want to be sure that they will be able to recoup it if you were to default. The appraisal is not free. It will be a part of your closing costs and generally run about $300 to $500 for the service. You will be provided with a copy of this appraisal. In it, your future home will be compared to other homes in the area and evaluated according to the current market prices. As long as the appraiser evaluates the value of the home at or above what you are asking the lender for, there should be no snags with the appraisal portion of getting financed. The lender makes all the arrangements for the appraisal. All you have to do is pay for it! It’s approximately $300 to $400 for this service.
You will also be required to purchase a homeowners insurance policy for the home. This is entirely your responsibility and you can use any insurance company you like. Once you purchase coverage, your insurance agent will fax or email the proof over to your lender.
Your lender, agent, and escrow agency are tying up all the loose ends. A search on the title of the house will be done to make sure there are no legal liens against the home. Your lender and escrow company will work closely to determine how much money is to be exchanged between all parties on the day of closing. There are certain costs listed in categories such as "Items in connection with the loan", "Prepaids / reserves" and "Title Charges".
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