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Mortgages
Buying a home is an exciting time. But, when it comes to financing, things can quickly change from exciting to overwhelming. Should you get a fixed rate or ARM? 15- or 30-year mortgage? What about a down payment? It can all seem very confusing and complex, but with just a little help, you’ll discover that finding the right mortgage can be a simple process.
Step 1: Determine how much can you afford to pay each month.
Home ownership is within many consumers’ reach. The first step toward finding the right mortgage is to determine how much you can afford to pay each month. This saves you time by allowing you to focus on homes in your price range. It can also help you plan other costs you can expect to pay, such as closing fees, escrow accounts, etc. As a general rule of thumb, you should plan for your housing expenses to make up 25-30% of your gross monthly income. Here is a mortgage calculator to help get you started.
Step 2: Choose the right type of mortgage.
There are many different types of mortgages to choose from, and the right mortgage for you depends on several factors.
1. First, examine your current financial picture. What can you afford right now?
2. Next, try to forecast how your finances might change in the future. Do you expect to get raises and promotions? Or is there a chance your income might decline?
3. Thirdly, ask yourself how long you intend to remain in the home. Three years? Five years? Ten years? Twenty or more?
4. Lastly, ask yourself how comfortable you are with fluctuating mortgage payments. While most people tend to prefer a fixed-rate mortgage, there are some advantages to an adjustable-rate mortgage, if you can afford it.
Fixed-Rate Mortgage
Fixed-rate mortgages are the most popular type of mortgage. With these loans, the interest rate is fixed for the life of the mortgage, so your monthly payments never change.
Adjustable-Rate Mortgage
Adjustable-rate mortgages (ARMs) generally start out with an interest rate lower than a fixed-rate loan. This saves you money early on, and may help you qualify for a more expensive home. However, your rate is tied to a market interest rate. As the market rate goes up or down, your payments will also change at each scheduled adjustment period. (There are “rate caps” to limit the amount your mortgage can go up or down.)
Special Mortgage Programs
Many banks offer financing options for customers with special considerations. These may include special credit needs, FHA or VA loans, low down payment options or affordable home loan programs.
Step 3: Gather information and supporting documentation.
Now that you’ve identified your price range and have learned about the mortgage options available to you, it’s time to gather information and supporting documentation so you can apply for a mortgage pre-approval or application. Getting ready ahead of time will help the process move along quickly and smoothly.
Here are some of the documents you may need to prepare for the home financing process*:
• Your social security number (or proof of permanent residency, such as a utility bill)
• Pay stubs for the last two months
• W-2 forms for the past two years
• Bank statements for the past 2-3 months
• 1 to 2 years of Federal tax returns
• A signed contract of sale (if you've already chosen your new home)
• If you're self-employed, or buying a co-op or condominium, you may need to present additional information, so be sure to discuss this with your mortgage broker
• A copy of your credit report. Your credit report will be ordered by your broker/banker as part of your application process; however, if you review your credit report and address any errors before you apply, you can avoid potential delays during processing
*Remember, when assessing your financial picture, be as honest and thorough as possible.
Step 4: Get pre-approved for your mortgage.
If you've already found the home you want to buy, you can skip ahead to step 5 and apply for your mortgage directly. If you’re still searching for your dream home, now is the time to get pre-approved for your mortgage. With a pre-approval, you get written confirmation of a maximum loan amount, so you know exactly much you will be able to finance. This confirmation can help increase your bargaining power with the seller, since it's like having "cash-in-hand." And, once you find the perfect home, your transaction should close more quickly.
Note: There may be a small fee for pre-approval.
Step 5: Applying for the mortgage.
Once your offer has been accepted by the seller, a mortgage professional will assist you with the details of applying and closing on your new home (including a satisfactory property appraisal). You should expect personalized and convenient service from your local mortgage expert from start to finish. Mortgage professionals should answer your questions about the different types of mortgages available, and offer advice on rates, your needs, your buying power, etc. You’ll need to provide them with information on your income, credit history, debts, and liquid assets. If you’ve already gathered this documentation, the process will move a lot faster.
Here is what happens to your application after it is submitted:
1. The mortgage specialist reviews your information and contacts you to confirm your intent to apply and requests the required documentation to begin processing your application.
2. Then the information is transferred to the Loan Processor to verify that all documentation needed to process the loan has been collected. The broker/banker will order a formal appraisal that estimates the current value of the property. In addition, a survey of the property may be required, to verify that the property boundaries as stated in the purchase agreement are correct. A title search and title insurance are required to ensure that there are no other liens on the property. Your broker/banker can order these services on your behalf. Once documentation is complete, everything is transferred to the Underwriter.
3. The Underwriter usually has no direct contact with you, but he or she is the one who reviews all of the documentation and makes the decision to approve or deny your loan. You are then notified of the decision and if approved, can set a closing date.
4. Once the Underwriter's decision is made, the information is transferred back to the Loan Processor. If approved, the Loan Processor will contact you, request any further documentation, and set a closing date. When complete, the information is given to the Closer to assemble the "closing package" - the finalized loan documents. The Loan Processor makes sure that all fees and other payments to be made at closing are documented accurately, and verifies information with the title agent. In most cases, he or she will also establish an escrow account for payment of necessary insurance and real estate taxes.
5. Finally, the Loan Processor authorizes the mortgage funds for disbursement.
Note: You should get a Home Inspection prior to closing. A pre-purchased home inspection, performed by a professional, is a visual examination of the readily accessible areas of a home to provide an accurate evaluation of the home's condition at the inspection. This evaluation is presented to the buyer in a comprehensive report so buyers are fully informed of the home's condition prior to purchase. While a home inspection is not required, it is highly recommended.
