Thursday, July 06, 2006

Your Typical Purchase Home Loan Process

Buying a home is probably one of the most important and stressful times for many couples. Finding the right place to fit your needs, obtaining financing, and educating yourself on everything to do with the process can be very intimidating.

  1. Pre-Qualification / Pre-Approval- I always advise buyers to get pre-approved for a mortgage loan before looking for a home. Pre-approval is similar to pre-qualification, except it goes one step further. Your debts, income, credit history and score are all fully verified and you are actually approved for the loan in advance. You'll be approved for a loan of up to a specific amount and under certain conditions and terms, and will receive a written letter of approval. Being pre-approved means you can go out and search for your dream home with out worrying if you can afford it or not. It also gives you possible preference over other some other buyers because you are ready to move forward immediately, where others still may need to obtain financing. Pre-qualification is not as good as pre-approval, you still provide information on your credit, income, detbs and the such, you are given an amount of a loan you can afford and qualify for; but you are not actually 'approved' for a loan.
  2. House Hunting - Once you know how much house you can afford, you can start visiting open houses, or working with an agent to shop for the home that meets your needs. You have multiple options here, and could work with a Real Estate Agent, search MLS listings, or find For Sale By Owner properties from a variety of places.
  3. The Offer and Purchase & Sales Agreement - Once you've found the property that fits your needs and desires, the terms of the sale are negotiated. Negotiations will cover, the sales price, reapir requests, move-in dates, and other common conditions and stipulations. You may have a Buyers Agent (which I generally advise people to do), who will then present your offer to the seller, or if you are not using a buyer's agent, you may make this offer personally. You can and should also include a copy of your pre-approval letter, as it could give a positive influence to tilt the sale in your favor if the seller has received similar offers from other buyers who are not pre-approved.
  4. Loan Application - If the seller accepts your offer, it will now be time to obtain your mortgage if you have not already been pre-approved.
  5. Documentation - If you were pre-approved, this step has already taken place; otherwise, paperwork and supporting documentation for your application must be submitted. This information usually includes things such as pay stubs, two years of tax return statements, personal or business (if self employed) banking statements, and verification of the source of your down payment, funds to close, and cash reserves.
  6. Appraisal - Lenders always require an appraisal on home sales. This step could hurt a sale if a large discrepancy were to exist between the sales price and the value of the property, this rarely occurs though.
  7. Title Search - At this point the lender will want to know if there are any leins against the property, and a search for such information is conducted. A lein may have been incurred by the owner for a variety of reasons, including but not limited to tax leins, mechanic's leins for home improvements, etc... The lender will require that all leins must be resolved before the transfer of the title can take place, and often many leins can be resolved through closing, and will come out of the sellers side. The Title Company that performs the search will then insure it's findings to protect the buyer and lender from any subsequent leins that they may have missed.
  8. Property Inspection - Many lenders, and it's generally a good thing to do otherwise, will require a property inspection. A property inspection is different from a property appraisal, as an appraisal determines value of property, where an inspection determines a properties possible safety hazards, termite or insect infestations, water damage, or other discrepancies with the condition of the physical structures. Some of these findings may need to be resolved prior to finalizing the sale.
  9. Processor's Review - At this point a loan processor will review your total application for completeness and quality control, and all pertinent information and verifications; package them up and forward it on to the underwriter.
  10. Underwriters' Review - The underwriter will look at the information submitted by the loan officers and loan processor and make a final decision on whether the loan will be approved. Lenders are looking for and concerned with whether a borrower will make their payments on time, and for properties that will cover the cost of the investment if the borrower defaults on their loan.
  11. Mortgage Insurance - When a borrower applies for a loan that is 80% or more of the properties value, a lender will normally require Private Mortgage Insurance (PMI). This insurance ONLY covers the lender in cases where the borrower defaults on their loan. Consult your mortgage planner on possible ways to avoid paying this insurance. Also, a mortgage insurance company may deny coverage even if the loan meets the criteria of the lender depending on a variety of factors (not a common occurence).
  12. Stipulations for a Clear-to-Close - Otherwise known as Final Lown Approval, In the majority of instances, when your debt-to-income and credit are meet the specific program requirements, your loan application will be approved with very little or no problems at all. However, in some cases, you may have last minute stipulations, like an increased down payment because the property appaisal came in lower than expected, or to improve your debt-to-income ratio. In some cases, you may also be required to have certain reapirs to the property resolved before closing. Those are a couple examples of the many possible conditions that may need to fulfilled before final loan approval. Your mortgage planner will be able to help you negotiate anything that pops up last minute.
  13. Homeowners' Insurance - Lenders will require fire and hazard insurance equalling the repalcement costs of the buildings. If the property is located in a flood zone, you will also be required to obtain Flood Insurance. In some areas, earthquake insurance is mandatory as well.
  14. Signing the Papers - A.K.A. "Closing" is where you will meet with the seller and sign the final loan and escrow documents.
  15. Funding of the Loan - A wire or check for the amount of the loan will be sent to the title company by the lender.
  16. Closing Process - The documents transferring title are recorded with the County Recorder and the title company then authorizes the escrow company, or closing agent, to draft a check to the seller.
  17. Move In!! - Now you get to move into your new home, it's always good practice to change all the locks for safety.

Friday, June 30, 2006

Refinancing for the Right Reasons

In todays mortgage industry, it's required that you show benefit for the borrower when they want to refinance their current mortgage. This requirement of showing benefit is in place to help borrowers avoid predatory lending practices from some of the more unscrupulous individuals out there.

There are many ways to show benefit. Some common ways are very simple indeed, such as Refinancing for a Lower Interest Rate, or a Shorter Term. Other ways could be to consolidate debt, or get cash out for home improvements. I consider these to be valid reasons for refinancing.

Before I came to be a mortgage planner, I had worked for eight years, extensively in the wedding industry, helping wedding professionals with their internet marketing and business development. While I was doing such work for an online wedding directory & magazine, we had received many inquiries from mortgage brokers requesting to advertise to brides and grooms about refinancing their mortgages to get cash out to have that wedding of their dreams. After proof-reading hundreds of articles, many about being budget conscious and having a frugal wedding within ones means, I had feelings that this was not a smart idea, in general, for most couples. They would be putting themselves in further debt at the onset of their lives together, and the interest paid on such debt would be far more than had they just had a more frugal wedding within their means to begin with.

Now, as a mortgage planner, I posed the question to several online bridal communities and forums. And without a doubt, many of the bride / groom 's that responded said they thought this would be an awful idea and they wouldn't ever think about doing such a thing. Many gave reasons regarding regarding interest paid on debt over the years, preference of having a more frugal wedding, etc...

So I ask the question to you. Are the reasons your thinking about refinancings valid and worthy? You should be educated on the purpose of why you need or want to refinance, and know why the program your getting into is the best for your situation.

Wednesday, June 21, 2006

What are Points? And Why Pay Them?

To be honest, you don't pay points - but you do have the option to. The benefits to 'paying points' are significant for many borrowers, if they learn and know how to exercise them to their utmost value. Let's take a look at how to do that.

A 'Point' is a fee that a borrower pays the lender at the loan closing. Points are expressed as a percentage of the loan amount. So, if you are paying 1 point, and your loan amount is 100,000; you would be paying $1000.

Many people 'think' they must pay points, when in fact they do not; however, if you decide to go to a 'no-points' loan, your interest rate is often higher.

Here's a simple example:

Say your lender offers a no-points interest rate of 7%.

They may also offer the following:

6.75% and 1 point
6.25% and 2 points
6% and 3 points
5.75% and 4 points

There are hundreds if not thousands of mortgage lenders in the U.S.; all competing for a finite amount of business, lenders pay 'finders fees' to independent brokers for beinging them borrowers.

When utilizing the option of paying points, it is called 'Paying Points to Buy-down Your Interest Rate', essentially what your doing is paying directly to the mortgage broker at closing, the finders fee that the lender would have otherwise paid. This can be a positive benefit for many borrowers, but should be weighed properly with what your overall goals are.

Some borrowers have little wiggle room because they are cash-sensitive, and may need to avoid points so that they have enough money on hand to complete the deal.

Other borrowers are income-sensitive, so they need to pay as many points as possible up front, to lower their interest rate (and thus their monthly payment) so that their mortgage payment will not be excessive.

There are two other factors that should guide you, if you are not constrianed by cash or income shortfalls.

Your first question should be, how long do I realistically plan on staying in this property. If you plan on staying for the long haul, you will want to think about paying points upfront. as you will be able to benefit from a lower interest rate over the whole life of the mortgage.

If you plan on only staying for short time (less than 7-10 years), or you already envision refinancing your mortgage sometime in the near future to perform home improvements or for other cash needs (schooling for children comes to mind); you may want to avoid points and pay the higher interest rate; because you won't be there long enough to see any major differences.

You may also envision a length of stay in your mortgage because of falling interest rate expections; I do NOT recommend borrowers making decisions based upon their speculation of interest rates which you can not forecast; unless of course you own a crystal ball that works. If you do, let me know, I have some questions I need answered!

Secondly, even when you plan on staying in your home for the long haul, there may be things that you could use your money on that take priority over 'paying points to buy down your interest rate'. A useful way to compare and determine what is right for your needs, is to look at paying points to lower your rate as an investment in that shows a greater return the longer you stay in your mortgage loan.