4
Steps to Obtain a Mortgage
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A quick guide brought to you by Intero Real Estate Services
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1 2
Get your Finances in Order
Brush up on Mortgage Basics
3 4
Talk to a Lender or Mortgage Broker
Review the Lending Process
1
Get your Finances in Order
What to Do Develop a household budget Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months. This approach will factor in unexpected expenses, such as car repairs, as well as predictable costs such as rent, utility bills, and groceries. Reduce your debt Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt — car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income. Look for ways to save You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month. You’ll probably spot some great ways to save, whether it’s cutting out that morning trip to Starbucks or eating dinner at home more often.
Increase your income Now’s the time to ask for a raise! If that’s not an option, you may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want. Save for a down payment Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment. Keep your job While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate. Establish a good credit history Get a credit card and make payments by the due date. Do the same for all your other bills, too. Pay off the entire balance promptly. Learn what factors affect your score in the next page.
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Budget Worksheet INCOME
EXPENSES
Take Home Pay (all family members) Child Support/Alimony Pension/Social Security Disability/Other Insurance Interest/Dividends Other Total Income
Rent/Mortgage (include taxes, principal, and insurance) Life Insurance Health/Disability Insurance Vehicle Insurance Homeowner’s or Other Insurance Car Payments Other Loan Payments Savings/Pension Contribution Utilities (gas, water, electric, phone) Credit Card Payments Car Upkeep (gas, maintenance, etc.) Clothing Personal Care Products (shampoo, cologne, etc.) Groceries Food Outside the Home (restaurant meals and carryout) Medical/Dental/Prescriptions Household Goods (hardware, lawn, and garden) Recreation/Entertainment Child Care Education (continuing education, classes, etc.) Charitable Donations Miscellaneous Total Expenses
Remaining Income After Expenses (Subtract Total Income from Total Expenses)
The first step in getting yourself in financial shape to buy a home is to know exactly how much money comes in and how much goes out. Use this worksheet to list your income and expenses here:
Your Credit Score Credit scores range between 200 and 800, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score: Your payment history Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filing, liens, and collection activity also impact your history. How much you owe If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits. How much new credit you have New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.
The length of your credit history In general, the longer you have had accounts opened, the better. The average consumer's oldest obligation is 14 years old, indicating that he or she has been managing credit for some time, according to Fair Isaac Corp., and only one in 20 consumers have credit histories shorter than 2 years. The types of credit you use Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example. For more on evaluating and understanding your credit score, visit www.myfico.com
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2
Brush up on Mortgage Basics
Commonly Used Mortgage Terms Amortization – A repayment plan that includes regular, consistent payments of principal and interest over the course of the loan.
Down Payment – The amount of money a borrower contribute upfront on a real estate purchase.
Closing Costs – All the fees associated with a real estate transaction, excluding the purchase price.
Jumbo Mortgage – A loan amount that exceeds the limits set by governmentbacked companies Fannie Mae and Freddie Mac.
Conventional Loan – A mortgage loan that is not insured by government agencies like the FHA or VA.
Points – A fee paid to buy down the interest rate. One point is equal to one percent of the loan amount.
Debt-to-Income Ratio – The percentage of a borrower's monthly income that is used to repay debts. This ratio helps lenders determine how large of a mortgage a borrower can afford.
Private Mortgage Insurance – Insurance paid by the borrower to protect the lender on loans with a down payment of less than 20 percent.
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Common Mortgages Mortgage terms: Mortgages are generally available at 15-, 20-, or 30year terms. In general, the longer the term, the lower the monthly payment. However, you pay more interest overall if you borrow for a longer term. Fixed interest rate loans: A fixed rate allows you to lock in a low rate as long as you hold the mortgage and, in general, is usually a good choice if interest rates are low.
Adjustable interest rate loans: An adjustable-rate mortgage is designed so that your loan’s interest rate will rise as market interest rates increase. ARMs usually offer a lower rate in the first years of the mortgage. ARMs also usually have a limit as to how much the interest rate can be increased and how frequently they can be raised. These types of mortgages are a good choice when fixed interest rates are high or when you expect your income to grow significantly in the coming years.
Balloon mortgages: These mortgages offer very low interest rates and payments usually cover only the interest so the principal owed is not reduced. This type of loan may be a good choice if you think you will sell your home in a few years. Government-backed loans: These loans are sponsored by agencies such as the Federal Housing Administration (www.fha.gov) and offer special terms, including lower down payments or reduced interest rates to qualified buyers.
Specialty Mortgages Interest-Only Mortgages: Your monthly mortgage payment only covers the interest you owe on the loan for the first 5 to 10 years of the loan, and you pay nothing to reduce the total amount you borrowed (this is called the “principal”). After the interest-only period, you start paying higher monthly payments that cover both the interest and principal that must be repaid over the remaining term of the loan.
Option Payment ARM Mortgages: You have the option to make different types of monthly payments with this mortgage. For example, you may make a minimum payment that is less than the amount needed to cover the interest and increases the total amount of your loan; an interest-only payment, or payments calculated to pay off the loan over either 30 years or 15 years.
Negative Amortization Mortgages: Your monthly payment is less than the amount of interest you owe on the loan. The unpaid interest gets added to the loan’s principal amount, causing the total amount you owe to increase each month instead of getting smaller.
40-Year Mortgages: You pay off your loan over 40 years, instead of the usual 30 years. While this reduces your monthly payment and helps you qualify to buy a home, you pay off the balance of your loan much more slowly and end up paying much more interest.
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A word about Risk and Rewards: In high-priced housing markets, it can be difficult to afford a home. That’s why a growing number of home buyers are forgoing traditional fixed-rate mortgages and standard adjustablerate mortgages and instead opting for a specialty mortgage that lets them “stretch” their income so they can qualify for a larger loan. But before you choose one of these mortgages, make sure you understand the risks and how they work.
Some lenders will loan you 100 percent or more of the home’s value, but these mortgages can present a big financial risk if the value of the house drops. Specialty mortgages can:
Specialty mortgages often begin with a low introductory interest rate or payment plan — a “teaser”— but the monthly mortgage payments are likely to increase a lot in the future. Some are “low documentation” mortgages that come with easier standards for qualifying, but also higher interest rates or higher fees.
Have monthly payments that increase by as much as 50 percent or more when the introductory period ends.
Pose a greater risk that you won’t be able to afford the mortgage payment in the future, compared to fixed rate mortgages and traditional adjustable rate mortgages.
Cause your loan balance (the amount you still owe) to get larger each month instead of smaller.
Specialty Mortgages Questions to Consider Before Choosing a Specialty Mortgage: How much can my monthly payments increase and how soon can these increases happen?
Am I paying down my loan balance each month, or is it staying the same or even increasing?
Do I expect my income to increase or do I expect to move before my payments go up?
Will I have to pay a penalty if I refinance my mortgage or sell my house?
Will I be able to afford the mortgage when the payments increase?
What is my goal in buying this property? Am I considering a riskier mortgage to buy a more expensive house than I can realistically afford?
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3
Talk to a Lender or Mortgage Broker
Bank or Mortgage Broker? BANKS
Risks of a mortgage bank:
A direct lender. Bank employees alone review your application and make the decision to lend you money. Typically, the bank will sell your loan on the secondary market.
Limited choice: Mortgage bankers only offer their own programs. To comparison shop, you will need to speak with several lenders.
MORTGAGE BROKERS Benefits of a mortgage bank: Reliability: You probably know and trust your local mortgage bank. It is regulated by state and federal agencies and likely has strong ties with your community. One-stop shopping: You deal directly with the source of your loan. Savings: A bank may save you money in the loan process and/or offer you better terms based on your total assets on deposit with the bank. Speed: A bank also may process your loan faster than other providers.
A mortgage broker is a middleman who may represent the mortgage loan products of hundreds of different lenders. The broker's goal is to match you with the loan product that best meets your needs at the best price. Once your loan is approved, you will usually deal directly with the loan originator or their mortgage service provider. Benefits of a mortgage broker:
Qualifying: A mortgage broker can best steer you to the national or regional lenders that are most likely to accept your application based on your financial and personal information. Savings: You may get a more favorable loan rate. Speed: A broker saves you time shopping for a loan. Risks of a mortgage broker: Hidden costs: Some mortgage brokers attempt to increase their profit by writing hidden costs into your loan. Best hedge: know the loan process and ask questions. Professional oversight: Unlike mortgage bankers, mortgage brokers are not subject to licensing and regulation in all states.
Variety: By shopping across a range of different programs and lenders, a mortgage broker may find you a better fit than a mortgage bank. West Ave Office a 2800 Kirby Drive Houston TX 77098
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Go shopping
Your lender is required by the Federal Real Estate Settlement Procedures Act to provide you with a good-faith estimate of the fees due at closing. This document, called the good-faith estimate, or GFE, is supposed to be provided to you within three days of applying for a loan. The requirement is satisfied if the good-faith estimate is mailed within three days. Closing fees, also called settlement costs, cover almost every expense associated with your home loan. Because closing costs typically amount to between 3 percent and 5 percent of the sale price, it is best to wait until you receive the good-faith estimate before committing to a loan. Smart shoppers obtain good-faith estimates from two or more lenders, compare their costs and ask questions about any large discrepancies. More on the components of the GFE in the next section.
Watch Out for Hidden Fees
Truth in Lending Act statement, or TILA The federal Truth in Lending Act requires lenders to disclose in writing the terms and conditions of a mortgage, including the annual percentage rate, or APR, and other fees and charges. Unfortunately, lenders may lawfully exclude certain fees, including property appraisal fees, title search and insurance fees, notary and some recording fees and credit report and flood certification fees, leaving homebuyers without an apples-to-apples comparison of loan costs. Ask your lender to break down your TILA statement for you. If the information changes, the lender is obligated to provide you with an updated form at or before closing.
Servicing disclosure statement Federal law requires your lender to disclose to you whether it believes someone else will eventually be your mortgage servicer --Â that is, collect payments, handle disputes, send out escrow statements and perform other functions after a loan closes. Affiliated business arrangement disclosure In addition to these federally required forms, if you apply for a loan from a mortgage company operated by a builder or real estate agent, you should receive an affiliated business arrangement disclosure at the time the builder or agent refers you to that company. This form simply states that you are not required to use the services of the affiliated company and are free to shop for a mortgage elsewhere.
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Don’t Shop Based on Rates Alone
Have you ever wondered how do lenders set your mortgage rate? Well, actually they don't. While mortgage lenders control who gets approved for a loan and on what terms, actual mortgage interest rates are largely determined on the secondary market, where mortgages are bought and sold. Meet Fannie and Freddie Fannie Mae and Freddie Mac, two large and influential mortgage investors, were founded by the government decades ago to help bring efficiency to the lending process. They and other mortgage investors buy loans that lenders make and either hold them in portfolio or bundle them with other loans into mortgage-backed securities. These are sold to Wall Street, mutual funds and other financial investors, which trade them much the same as Treasury securities and bonds.
It is these financial investors in the secondary market, not mortgage lenders and brokers, that collectively determine the interest rate of your mortgage loan. As with the stock market, interest rates in the secondary market tend to move up and down. When the economy is on an upswing, investors demand higher yields, forcing lenders to raise mortgage rates. In a market downturn, rates tend to drop for consumers because of increased investor demand. Conventional wisdom is that interest rates move in cycles; after a prolonged increase, a slow drop usually occurs. Some use 10-year Treasury bonds as a barometer; when bonds go up, interest rates go down, and vice versa.
Questions To Ask Lenders 1.
What are the most popular mortgages you offer? Why are they so popular?
5.
Who will service the loan — your bank or another company?
2.
Which type of mortgage plan do you think would be best for me? Why?
6.
What escrow requirements do you have?
7.
How long will this loan be in a lock-in period (in other words, the time that the quoted interest rate will be honored)? Will I be able to obtain a lower rate if it drops during this period?
8.
How long will the loan approval process take?
9.
How long will it take to close the loan?
3.
Are your rates, terms, fees, and closing costs negotiable?
4.
Will I have to buy private mortgage insurance? If so, how much will it cost, and how long will it be required? (NOTE: Private mortgage insurance is usually required if your down payment is less than 20 percent. However, most lenders will let you discontinue PMI when you’ve acquired a certain amount of equity by paying down the loan.)
10. Are there any charges or penalties for prepaying the
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Questions Lenders Will Ask Employment and income Where do you work? How much do you make? How long have you been at your job? Is your income steady salary or irregular income? If it's the latter, you may need to provide more details to obtain a favorable interest rate. Outstanding debts What recurring debts do you have? How much do you pay a month for auto loans? Credit cards? How much of your monthly pretax income do these debts consume? Cash reserves and assets How much money do you have in the bank? How much will be left after you pay your down payment and closing costs?
Down payment How much money are you putting down? Is this your own money? If not, is it a gift from your parents? A nonprofit agency grant? Loan purpose Is this mortgage for a home buy or refinance? If it's a refinance, do you want to take cash out at closing to pay off other debts? If so, how much? Property use Do you plan to live in the house? Is it investment property? Is it a condominium? duplex
Answers You Should Give The following responses tend to work in your favor: Steady employment (two or more years) with the same employer or in same line of work. Low debt: no recent major buys (such as automobiles) and a debt-to-income ratio of 36 percent or less. Loan is for straight home purchase (or rate-andterm refinance). Property is detached single-family home to be used as primary residence.
These responses tend to work against you: Self-employed or contract worker. High debt: credit cards maxed out, total debt-toincome ratio more than 36 percent. Property is a duplex or condominium, to be used as a vacation home or rental. No cash left after home buy and closing costs. Down payment is 3 percent or less of buy price and money is borrowed.
Down payment of at least 5 percent of sales price with your own money. You'll have at least two months' worth of mortgage payments in the bank after closing.
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4
Review the Lending Process
Prequalification or Preapproval The advantages of prequalification and preapproval are twofold: You're more attractive to sellers, who needn't worry that they'll accept your offer only to have your loan turned down, and you'll save time closing when you find a home because the lender will have already completed the necessary qualifying and underwriting steps. Prequalification Prequalification acts as a dry run of the loan application process. The mortgage lender will use details you provide about your credit, income, assets and debts to arrive at an estimate of how much mortgage you can afford. The whole process may take only minutes, or a few hours at most, and is usually free. While a prequalification is nonbinding to the lender (because the information you provide has not been verified), it does serve as a good indication to potential sellers of your general creditworthiness.
Preapproval Preapproval takes prequalification one step further. The lender will contact your employer, your bank and others to verify your income, assets, debts and credit history, and then issue you a letter stating that your mortgage is approved for a certain amount within a certain time. You may be charged a small fee to cover the cost of your credit reports and your application, often refunded at closing.
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Documents You Will Need The following are the most likely documents your lender or mortgage broker will require: W-2 forms — or business tax return forms if you're self-employed — for the last two or three years for every person signing the loan.
Addresses where you’ve lived for the last five to seven years, with names of landlords if appropriate.
Copies of at least one pay stub for each person signing the loan.
Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value, such as a boat, RV, or stocks or bonds not held in a brokerage account.
Account numbers of all your credit cards and the amounts for any outstanding balances. Copies of your most recent 401(k) or other retirement account statement. Copies of two to four months of bank or credit union statements for both checking and savings accounts. Lender, loan number, and amount owed on other installment loans, such as student loans and car loans.
Documentation to verify additional income, such as child support or a pension. Copies of personal tax forms for the last two to three years.
The Good Faith Estimate The good-faith estimate is just that -- an estimate. The lender directly controls some of the fees, and those are the ones to pay the most attention to when you are comparing offers. Some fees are generated by third parties and usually don't vary much from lender to lender. Other expenses are under your control, and there are taxes and government fees that should be the same, regardless of the lender.
Origination
Settlement, closing or escrow fee
Discount
Abstract or title search
Property appraisal
Title examination
Credit report
Document preparation
Lender's inspection
Notary
Mortgage insurance application Attorney Assumption
Title insurance
Mortgage broker fee
Recording
Tax-related service fee
City/county tax stamps
Application
Transfer tax
Commitment
Survey
Rate lock
Pest inspection
Processing
Condominium application
Underwriting
Prepaids for interest, hazard
Wire transfer
insurance, property taxes, mortgage insurance and flood insurance
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Underwriting
Once your loan has been approved, the clock starts ticking to closing day. Much remains to be done during those few weeks, and most of it occurs behind the scenes. You can help speed the process by:
Providing complete documentation with your application. Responding promptly to your lender's request for more information. Calling your lender and real estate agent to check on your loan application status. Helping contact employers and others who may need to provide documentation. Keeping records of your conversations with your lender.
Inspection and Insurance While the lender and third parties are preparing your loan for closing, there are a couple of things for you to tackle. You probably will want to have the home inspected, and you will be required to buy homeowners Home inspection Home inspection is commonly required to determine the structural and mechanical condition of the home you're buying, including the roof, heating, plumbing, air conditioning and electrical wiring. The inspection may reveal the need for repairs that the seller may have to complete before the sale of the house can go through. It's a good idea to have the home inspected after you agree on a price but before signing the contract and putting down a deposit. If you're in a hurry to lock in the deal, make sure your contract states that the terms are conditioned on a satisfactory professional inspection. The cost of a home inspection typically ranges between $250 and $500. Homeowners insurance After the home has been appraised, you'll be in a better position to obtain adequate insurance. Coverage comes in two types:
Replacement cost policy:Â A 20-year-old camera destroyed in a storm would be replaced with an equivalent new model. Cash value policy: You would receive nothing for the camera because the item has lost its value over time. Owners of older dwellings and contents tend to prefer the replacement cost policy, which may cost 10 percent more; owners of newer houses and furnishings should consider the cash value policy. Whichever policy you choose, be sure to ask your insurance agent about safety features such as deadbolts, storm shutters and security systems you can install to reduce your premium.
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What Happens Behind the Scenes Here's what's happening while you wait for your home to close: Underwriting verification Your lender's team of underwriters springs into action, verifying the information on your application and supporting documents. They will call your employer, for instance, to verify that you work in the job and at the salary stated on your application. The amount of verification involved depends on how risky your lender perceives you to be. Appraisal Your lender will require an independent appraisal of the property prior to closing, the outcome of which could affect the rate and terms of your mortgage. The work will be done by a licensed appraiser, who will arrive at an expert's estimated value of the property based on physical inspection and a sampling of comparables, or "comps" -- prices paid for comparable properties that have recently sold in the neighborhood. The cost of an appraisal typically runs between $300 and $500. Title search and title insurance Your lender doesn't want to lend money against a house that may have claims or other encumbrances
on it. That's why a title company performs a title search. The title company will go to the county courthouse and research the history of the property, looking for encumbrances such as mortgages, claims, liens, easement rights, zoning ordinances, pending legal action, unpaid taxes and restrictive covenants. The title insurer then issues a policy that guarantees the accuracy of the work. Your lender will require a title policy that protects the lender. In some cases two policies are issued, one to protect the lender and one to protect the property owner. Flood certification Lenders also want to know whether the property you're buying is in a flood-prone area. They will hire a vendor to analyze your property and neighboring sites to determine if the home is in a flood zone; the report is called a flood certification. If the answer is yes, you'll be required to buy flood insurance because most standard homeowners policies don't cover damage from rising water.
Renting? Try this Not only does owning a home give you a haven for yourself and your family, it also makes great financial sense because of the tax benefits — which you can’t take advantage of when paying rent.
Rent: ______________ Multiplier: x 1.32 Mortgage payment: _______________
The following calculation assumes a 28 percent income tax bracket. If your bracket is higher, your savings will be, too. Based on your current rent, use this calculation to figure out how much mortgage you can afford.
Because of tax deductions, you can make a mortgage payment — including taxes and insurance — that is approximately one-third larger than your current rent payment and end up with the same amount of income
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