Obtaining
a home mortgage loan doesn’t have to be difficult.
This is a step by step guide on the basic process of getting
a home loan. Use this as a helpful reference, but make sure
to seek the expertise of a professional mortgage loan officer
for specific details of all loan programs.
How much
can I afford? What are the factors?
Debt to Income Ratio
A common term
you will hear during the initial mortgage application process.
You can figure your debt to income ratio by dividing the
total amount of your bills(only long term debt such as credit
cards, car loans, etc.) including the new house payment
and dividing by your total gross monthly income (before
taxes). Just remember that because it looks good on paper
doesn’t mean it is an affordable payment. You have
to be honest with yourself and set a realistic mortgage
payment that you can truly afford.The only thing you need
to remember is in most cases you cannot go above a 55% debt
to income ratio.
Down
Payment
A down payment
for a home is usually between 3% and 20% of the total cost
of the home. The amount of the required down payment depends
on your credit history, income, the cost of the home, and
the type of mortgage you choose. Many first-time homebuyers
put down 3% to 5% of the cost of the home.
Closing
Costs
Closing, or settlement,
costs are fees you pay when you actually get your loan from
your financial institution. These include points, taxes,
title insurance, financing costs, items that must be prepaid
or escrowed, and other settlement costs. You should negotiate
for lower fees the same way that you should negotiate for
the best rate. Some fees, such as taxes, may be fixed but
your lender may be willing to negotiate others.
Closing costs
generally range between 2 to 7% of the property value. You’ll
receive an estimate from your lender after you apply for
a mortgage. You must pay these costs before you move into
your new home.
Mortgage
Insurance
Normally required
on all mortgage loans where you don’t put at least
20% down. It basically protects the bank should you go into
foreclosure. Once you reach 20% equity in your home you
may be able to get this insurance/fee removed.
Property
Taxes
Sometimes the
local property taxes you have to pay will be included in
your payment. It is held in an escrow account and the lender
pays your taxes for you.
Homeowners
Insurance
Just like renters
insurance, it protects you from potential hazards. You have
the right to obtain homeowners insurance from the company
you choose. You can include it in your payments if you choose;
some lenders require it. It is always a good idea to have
insurance, even if it is not required.
Basic
Types Of Mortgages
Fixed-Rate
Mortgages
Fixed-Rate Mortgages
offer:
- Predictable
payments, there are fixed monthly payments for the life
of the loan.
- Protection
from rising interest rates. For the life of the loan,
no matter how high market interest rates go up, your rate
remains the same.
- Faster equity
growth in comparison to other mortgage options such as
ARMs and other Mortgages.
Best for people
who:
- Prefer regular
payments with no surprises.
- Are on limited
or fixed incomes.
- Plan to stay
in their homes a long time.
- Are purchasing
or refinancing at a time when interest rates are comparatively
low.
Fixed-rate mortgages
offer the same interest rate, monthly principal and interest
payment throughout the entire term of the loan. The longer
the term, the lower the monthly payments and the more cash
you’ll have for other expenses. With a shorter term,
you’ll have higher monthly payments and you’ll
qualify for a smaller loan amount, but you’ll save
on interest costs over the life of the loan and build your
equity faster. The fixed-rate mortgage loan is the “traditional”
choice and is still the most popular because it offers stability
and predictable monthly payments.
Adjustable
Rate Mortgages
Adjustable Rate
Mortgages:
- Assist borrowers
in obtaining a larger loan amount because qualifications
are at a lower interest rate.
- Save money
in the early years.
- Lower initial
interest rate than a traditional fixed-rate loan
- Have a variety
of adjustment periods
Best for people
who:
- Need extra
borrowing power.
- Want to save
money in the first few years.
- Plan to move
or refinance in a few years.
- Are purchasing
or refinancing at a time when interest rates are comparatively
high.
Adjustable-Rate
Mortgages feature an interest rate that periodically adjusts
with changing market rates. ARMs are available in government,
conforming and jumbo loan amounts. The ARM allows you to
take advantage of lower interest rates in a falling rate
environment, and you’ll benefit from lower monthly
payments. The initial interest rate on an ARM is usually
lower than the lifetime interest rate on a fixed-rate mortgage
(FRM). ARM interest rates and the degree to which they fluctuate
at the end of every adjustment period, are determined by:
- Index: Published
economic indices such as U.S. Treasury Securities or London
Inter-Bank Offered Rate (LIBOR) that are used to direct
the adjustment.
- Margin: A
fixed percentage (usually two to three percent) that is
added to the index at each adjustment period
- Rate Cap:
Typically the maximum amount your rate can increase or
decrease per adjustment period (2%) and over the life
of the loan (6%). This protects you in case of volatile
market swings.
Jumbo
Mortgages
Jumbo Mortgages
offer:
- Larger loan
amounts to purchase more expensive homes.
- Loan amounts
as high as $1 million.
- Jumbo Mortages
facilitate high-end purchases of:
• Primary residences
• Second or vacation homes
• Investment properties
Best for people
who:
- Want to finance
larger and/or more expensive properties and can handle
larger monthly payments.
- Investment-minded
buyers who want to leverage their assets more effectively.
Currently a jumbo
mortgage is a purchase or refinance loan that exceeds $417,000
for a single-family home.* It is also called a non-conforming
loan because it does not conform to the loan limits set
by Fannie Mae (The Federal National Mortgage Association
or FNMA) or Freddie Mac (The Federal Home Loan Mortgage
Corp. or FHMLC). Jumbo financing options include fixed-rate
and adjustable-rate mortgages, with a range of terms to
accommodate immediate and long-range financial plans.
Getting
Your Paperwork Together
There are several
things you will need to start the process:
- Copy of Drivers
License or ID
- Last 2-3
years W-2’s
- Bank, savings
and investment account statements
- Most Recent
Paycheck Stubs
- If renting,
12 months cancelled rent checks or written verification
of good standing from your landlord
Getting Pre-Approved
Getting Pre-Approved
tells you exactly how much you can afford, what the closing
costs will be, makes your offer on homes look better than
others, and gives you a chance to lock in a rate without
being obligated to anything.
Apply
for your Mortgage
Once you have
a ratified contract in place on your new home you will apply
for your mortgage. The mortgage application process will
be simpler since you are already Pre-Approved. During this
process your mortgage lender has you complete the entire
application and provide more detailed financial information.
Then your application is sent to underwriting for approval.
Order
a Home Inspection
To insure there
are no major problems with your home it is important to
have a detailed home inspection performed. An experienced
home inspector can find both major and minor problems with
the house which you need to know about before your closing.
If there are no real issues, great! If there are problems
you may have the opportunity to negotiate further concessions
from the sellers and if they are major (structural, serious
mold or termite damage etc.) even void the contract.
Order
an Appraisal
An appraisal
will be required by your mortgage lender and will give you
one last financial check that your new home is worth and
appraises for the purchase price.
Final
Approval of your Mortgage
Waiting for the
bank to finish underwriting your loan is usually one of
the longest steps in the process, so be prepared. Usually
the bank will need more information such as past financial
records, bank statements, etc. Get the bank whatever it
needs as quickly as possible to keep the process moving!
Title
Search
This step of
the process will be started by your Closing Attorney and
also takes some time. The title company checks through decades
of public records to make sure that the people selling you
the home actually own it. It may sound odd, but the banks
and regulators require it to protect you and the lending
institution from fraud.
Schedule
your Closing and final Walk-Through
Once your mortgage
is approved and the title search is completed, your Attorney
can schedule the Closing (settlement). A few days prior
to closing, you and your RichmondHomeShopper.com Buyer’s
Agent will walk through the house one last time to make
sure everything is in order.
Closing
You, your Skye
Bruce Properties Buyer’s Agent and your Attorney,
all sit down at the table and sign off on lots paperwork,
documents and fine print. Your Attorney and Skye Bruce Properties
Buyer’s Agent will explain any item, term or document.
It’s all worth it though because at the end of it
all you finally get the keys to your new home!
