What should I know before buying a
home?
How much house can I
afford?
Why should I
refinance?
What are the costs of
refinancing?
What kinds of mortgages are
available?
What is a Fixed Rate
Mortgage?
What is an Adjustable Rate
Mortgage?
What is a VA
Loan?
What is a FHA
Loan?
How can I save on a Fixed Rate
Mortgage?
What determines the cost of a
mortgage?
What is a Private Mortgage
Insurance?
What should I ask my
lender?
What documents will I need for my
loan application?
What is involved in the closing
meeting?
What costs will I pay at
closing?
How do lenders decide home loan
approval?
What decisions do credit lenders
make?
What should I know before buying a
home?
Here are some tips that could save
you a lot of time, money and trouble.
Plan ahead. Establish
good credit and save as much as you can for the
down payment and closing costs.
Get
pre-approved online before you start
looking. Not only do real estate agents
prefer working with pre-qualified buyers; you
will have more negotiating power and an edge
over homebuyers who are not
pre-approved.
Set a budget and stick
to it. NCA Home's Mortgage Calculators can
help you determine a comfortable price
range.
Know what you really want in a
home. How long will you live there? Is your
family growing? What are the schools like? How
long is your commute? Consider every angle
before diving in.
Make a reasonable
offer. To determine a fair value on the
home, ask your real estate agent for a
comparative market analysis listing all the
sales prices of other houses in the
neighborhood.
Choose your home loan
(and your lender) carefully. For some tips,
see the question in this section about comparing
loans.
Consult with your lender before
paying off debts. You may qualify even with
your existing debt, especially if it frees up
more cash for a down payment.
Keep
your day job. If there is a career move in
your future, make the move after your home loan
is approved. Lenders tend to favor a stable
employment history.
Do not shift money
around. A lender needs to verify all sources
of funds. By leaving everything where it is, the
process is a lot easier on everyone
involved.
Do not add to your debt.
If you increase your debt by financing a new
car, boat, furniture or other large purchase, it
could prevent you from
qualifying.
Timing is everything.
If you already own a home loan, you may need to
sell your current home to qualify for a new one.
If you are renting, simply time the move to the
end of the lease.
How Much
House Can I Afford?
How much house
you can afford depends on how much cash you can
put down and how much a creditor will lend you.
There are two rules of thumb:
You can afford a home that's up to 2 1/2
times your annual gross income.
Your monthly payments (principal and
interest) should be 1/4 of your gross pay, or
1/3 of your take-home pay.
The downpayment and closing costs - how
much cash will you need? Generally speaking,
the more money you put down, the lower your
mortgage. You can put as little as 3% down,
depending on the loan, but you'll have a
higher interest rate. Furthermore, anything less
than 20% down will require you to pay Private
Mortgage Insurance (PMI) which protects the
lender if you can't make the payments. Also,
expect to pay 3% to 6% of the loan amount in
closing costs. These are fees required to close
the home loan including points, insurance,
inspections and title fees. To save on
closing costs you may ask the seller to pay some
of them, in which case the lender simply adds
that amount to the price of the house and you
finance them with the mortgage. A lender may
also ask you to have two months' mortgage
payments in savings when applying for a home
loan. The mortgage - how much can you borrow? A
lender will look at your income and your
existing debt when evaluating your home loan
application. They use two ratios as guidelines:
Housing expense ratio. Your monthly
PITI payment (Principal, Interest, Taxes and
Insurance) should not exceed 28% of your monthly
gross income.
Debt-to-income ratio. Your long-term
debt (any debt that will take over 10 months to
pay off - mortgages, car loans, student loans,
alimony, child support, credit cards) shouldn't
exceed 36% of your monthly gross income.
Lenders aren't inflexible, however. These are
just guidelines. If you can make a large
downpayment or if you've been paying rent that's
close to the
same amount as your proposed
mortgage, the lender may bend a little. Use our
calculator to see how you fit into these
guidelines and to find out how much home you can
afford.
Why Should I Refinance?
If
you have a low, 30-year fixed interest rate
you're in good shape. But
if any of these
Five Reasons applies to your situation, you may
want to look into refinancing.
1. Decrease monthly payments.
If
you can get a fixed rate that's lower than the
one you currently have, you can lower your
monthly payments.
2. Get cash out of your equity.
If
you have enough equity you can get cash out by
refinancing. Just decide how much you want to
take out and increase the
new home loan by
that amount. It's one way to release money for
major expenditures like home improvements and
college tuition.
3. Switch from an adjustable to a fixed
rate.
If interest rates are increasing
and you want the security of a fixed rate, or,
if interest rates have fallen below
your
current rate you can refinance your adjustable
home loan to get the fixed rate you're looking
for.
4. Consolidate debt.
You can
refinance your mortgage to pay off debt, too.
Simply increase the new home loan amount by the
amount you need
and the lender will give you
that cash to pay off creditors. You'll still owe
the lender but at a much lower interest rate -
and that interest may be tax-deductible. (seek
the
advice of your tax advisor or the
equivalent.)
5. Pay off your mortgage sooner.
If you switch to a shorter term or a
bi-weekly payment plan, you can pay off your
home earlier and save in interest. And if your
current
interest rate is higher than the new
rate, the difference in monthly payments may not
be as big as you'd expect.
Is refinancing worth
it?
Refinancing costs money. Like buying
a new home, there are points and fees to
consider. Usually it takes at least three years
to recoup the costs of refinancing your home
loan, so if you don't plan to stay that long it
isn't worth the money. But if your interest rate
is high it may be smart to refinance to a
lower interest rate, even if it is for the
short term. If your mortgage has a prepayment
penalty, this is another cost you will incur if
you refinance.
Use the reasons above as a
guideline and determine whether or not
refinancing is the right thing to do. You can
also use our refinance analysis calculator to
help you decide.
What Are the Costs of
Refinancing?
Here's what you can expect
to pay when you refinance:
The 3-6 Percent Rule
Plan to pay between 3% and 6% of the
amount of the new home loan amount (if want
cash-out, the home loan amount will be
larger). Yet some lenders offer no-cost
refinancing in exchange for a higher rate.
Getting to the Points
Points play a big part in how much it'll
cost to refinance - if you pay more points, you
can lower your interest rate.
Points are a
good idea if you're planning to stay in your
home for a while, but if you'll be moving soon
you should try to avoid paying points
altogether.
Negotiate the Fees
Be
aggressive and investigate the fees your lender
is asking you to pay.
You may not need an
appraisal, or your loan-to-value may be such
that you no longer need Private Mortgage
Insurance. Sometimes if you refinance
with
your current lender they won't need a credit
report. With a little research it's amazing how
much you can save.
Here, we've explained the
different home loan refinancing fees.
Application Fee: This
covers the initial costs of processing your home
loan application and checking your credit.
Appraisal Fee: An appraisal
provides an estimate or opinion of your
property's value.
Title Search and Title
Insurance: A Title Search examines the
public record to discover if any other party
claims ownership of the property. Title
Insurance covers you if any discrepancies
arise in ownership. (A reissue of the title can
save 70% over the cost of a new policy.)
Lender's Attorney's Review
Fees: In any financial transaction of this
scope, a lawyer's participation ensures that the
lender isn't legally
vulnerable. This fee is
passed on to you. Although such fees are not
applicable in many Western States.
Home Loan Origination Fees:
This is the cost of evaluating and preparing a
mortgage home loan.
Points: These are basically
finance charges you pay the lender. One point
equals 1% of the home loan amount (for example,
one point on a $75,000 home loan is $750). The
total number of points a lender charges
depends on market conditions and the loan's
interest rate.
Prepayment Penalty: Some
mortgages require the borrower to pay a penalty
if the mortgage is paid off before a certain
time. FHA and VA loans, issued by
the
government, are forbidden to charge prepayment
penalties.
Miscellaneous:Other fees
may include costs for a VA home loan guarantee,
FHA mortgage insurance, private mortgage
insurance, credit checks, inspections and
other fees and taxes. How to Save
Money Refinancing:
Research all costs and fees.
Don't be afraid to negotiate with your
lender.
Shop around for the lowest rates.
Check with your current lender for lower
rates
with costs that are reduced or
waived.
What Kinds of Mortgages Are
Available?
Fixed-Rate Mortgage - interest rates
and monthly payments remain unchanged for the
life of the home loan
Adjustable-Rate Mortgage - interest
rates and monthly payments can go up or down,
depending on the market
Hybrid Loans - a combination of fixed
and adjustable mortgages
How do you decide which home loan is best?
These questions may help.
How much cash do you have for a
downpayment?
What can you afford in monthly payments?
How might your financial situation change in
the near future and beyond?
How long do you intend to keep this house?
How comfortable would you be with the
possibility of your monthly payments
increasing?
Discuss these with your lender so
they can help you decide which home loan would
best suit you.
What is a Fixed Rate
Mortgage?
This is the most common home
loan arrangement in the U.S. With a fixed-rate
mortgage the loan's principal and
interest
are amortized, or spread
out evenly, over the life of the home loan,
giving you a predictable monthly payment.
The upside is, if rates are low,
you can lock in for as long as 30 years and
protect yourself against rising
rates.
However, if rates fall you can't change your
rate without refinancing the home loan, and that
could cost money.
The 30-year Fixed-Rate Mortgage,
the most popular and easiest to qualify for,
will give you the lowest payment. But you can
also get a 20-, 15- and
even a 10-year
fixed-rate mortgage if you wish to save interest
and pay your home off sooner.
What is
an Adjustable Rate Mortgage?
With
Adjustable-Rate Mortgages (ARMs) interest rates
are tied directly to the
economy so your
monthly payment could rise or fall. Because
you're essentially sharing the market risks with
the lender, you are compensated with an
introductory rate that is lower than the
going fixed rate.
How often does the interest
rate change?
That depends on the home
loan. Changes can occur every six
months,
annually, once every three years or whenever the
mortgage dictates.
How much can my rate
change?
Your ARM will stipulate a
percentage cap for each adjustment period, which
means your interest may not increase beyond that
percentage point. If
the market holds
steady, there may be no increase at all. You may
even see your payment decrease if interest rates
fall.
How are the changes
determined?
Every ARM home loan is tied
to a financial market index, such
as
CDs, T-Bills or LIBOR
rates. Your rate is determined by adding an
additional percentage (known
as a margin) to
that index's rate. When the index rises or
falls, your rate rises or falls with it.
Is there a limit to how much
interest I'll be charged?
Yes. It's
called a ceiling, or lifetime cap. This
is a guarantee that your interest rate will
never exceed a designated
percentage. For
instance, if your introductory rate was 5% and
you have a lifetime interest rate increase cap
of 6% (meaning
that your interest rate can
never increase more than 6% during the life of
the home loan) then your ceiling would be 11%.
What are the benefits of an
ARM?
With a lower initial interest rate (usually
2% to 3% lower than fixed-rate mortgages),
qualifying is easier and the payments are more
manageable at first.
You may qualify for a larger home loan than
you would with a fixed-rate mortgage.
If you're only planning to stay a short time
the interest rate is likely to stay lower than
that of a fixed-rate mortgage.
If you expect regular pay increases that
would cover the increase in your interest, or if
you believe interest rates will fall, an ARM
might be the wiser choice.
A few words of caution:
Negative Amortization -This
happens when a lender allows you to make a
payment that doesn't cover the
cost of
principal and interest. Watch for this. It may
be used as a lure to get you into a home with
the promise of low initial payments. Or, a
lender may give you a payment
cap instead of
a rate cap. In this mortgage arrangement, if
interest rates increase, your monthly payments
could stay the same - but the higher interest
will still be charged to
your home loan,
adding to it instead of reducing it. Either way,
if you find yourself with a negative
amortization ARM, you'll be adding to your
debt.
Discounted interest rates -
Sometimes a lender will advertise an unusually
low initial rate. This is a discounted rate, and
it's essentially a marketing
tool. If your
ARM offers a discounted interest rate you are
certain to see an increase at your next
adjustment period, even if interest rates don't
change.
What is a VA Home Loan?
Administered by the Department of Veterans
Affairs, these special loans make housing
affordable for U.S. veterans. To qualify you
must be a veteran, reservist, on active duty, or
a surviving spouse of a veteran with 100%
entitlement.
A VA home loan is simply a
fixed-rate mortgage with a very competitive
interest rate. Qualified buyers can also use a
VA home loan to purchase a home with no money
down,
no cash reserves, no application fee
and reduced closing costs. Some states allow a
VA home loan for refinancing as well.
Many lenders are approved to
handle VA loans. Your VA regional office can
tell you if you're qualified.
What is a FHA
Loan?
FHA loans are designed to make
housing more affordable for first-time
homebuyers and those with low to moderate
income.
Both fixed- and adjustable-rate
FHA loans are available, and in most states, an
FHA home loan can be used for refinancing. The
difference is, they're insured by the
U.S. Department of Housing and Urban
Development (HUD). With FHA
Insurance, eligible buyers can put down as
little as 3% of the FHA appraisal value or
the purchase price, whichever is lower.
Qualifying standards are not as strict
and
the rates are slightly better than with
conventional loans.
Convertible ARMs
Some
adjustable-rate mortgages allow you to convert
to a fixed rate at certain specified times. This
mitigates some of the risk of fluctuating
interest rates, but there will be a
substantial fee to do it. And your new fixed
rate may be higher than the going fixed rate.
Two-Step Mortgages
This
is an ARM that only adjusts once at five or
seven years, then remains fixed for the duration
of the home loan. Not
only will you benefit
from a lower rate for the first few years, but
interest rate cannot increase beyond the stated
fixed rate. It may even be lower, depending on
market conditions.
Then again, you also run
the risk of adjusting to a much higher rate.
Convertible
Loans
Another ARM choice, the convertible
home loan offers a fixed rate for the first
three, five or seven years, then switches
to
a traditional ARM that fluctuates with the
market. If you strongly believe that interest
rates will fall a convertible home loan might be
a smart move.
Balloon Mortgages
These
short-term loans begin with low, fixed payments.
Then, in five, seven or ten years a single large
payment (balloon)
for all remaining
principal is due. While this saves money up
front, coming up with a large payment at the end
of the home loan may be difficult. Some lenders
will allow you to
refinance that payment,
but some won't, so be sure you know what you're
getting into.
Graduated Payment Mortgage
(GPM)
With a GPM you pay smaller payments
that gradually increase and level off after
about five years. Lower payments can make
it
possible for you to afford a bigger home, but
they'll be interest-only payments, which deduct
nothing from the principal. To the extent that
full interest payments are made, this will
not result in a negative amortization. In
other words, there will be no increase of
principal and no amortization of the
home
loan principal.
How Can I save on a Fixed Rate
Mortgage?
Short Term Mortgages
You don't have to finance your home for
30 years.
Granted, the payments will be
lower, but you'll be paying them longer. You
could, instead, opt for a period of 20, 15 or
even 10 years, pay your home
off sooner and
save in interest.
Furthermore, lenders offer much
more attractive interest rates with short-term
loans, so your payments may not be as much as
you'd think.
The table below shows you in the example the
interest savings on a $100,000 home loan at 8.5%
interest:
| Term |
Monthly Payment |
Total Interest
Accrued |
| 30 yr |
$768.91 |
$176,808.95 |
| 20 yr |
$867.83 |
$108,277.58 |
| 15 yr |
$984.74 |
$
77,253.12 |
By paying $215.83 more a month on
a 15-year mortgage, you'd save $99,555.83 in
interest over a 30-year home loan - and own the
house in half the time.
What Determines the Cost of a
Mortgage?
There are five factors that
determine the ultimate cost of a mortgage.
The principal, or
amount of the home loan, is the total
amount you borrow (the purchase price minus your
downpayment).
The interest rate adds
significantly to the cost of your mortgage.
Fixed or adjustable, the interest paid at the
end of the home loan can exceed the original
cost
of the home itself. For instance, a
$100,000 loan balance at 8.5% for 30 years will
cost you $277,000 by the time the home loan is
retired.
The term of the home loan
is the length of time until the loan is paid
off. A longer term means more interest and
higher cost.
Points are interest paid on
the home loan and they're purely optional. You
pay points at closing if you want to reduce the
interest rate and make your monthly
payments
smaller. One point equals one percent of the
loan amount.
Fees are paid to the lender
at closing to cover the costs of preparing the
mortgage. They can vary according to where you
live and what type of home loan you're securing.
While points and fees are not
financed, they still contribute to the cost of
the mortgage.
What is Private Mortgage
Insurance?
Private Mortgage
Insurance, or PMI, is insurance purchased by
the buyer to protect the lender in case the
buyer defaults
on the home loan. PMI is
generally applied when you put down less than
20% of the home's purchase price. The reason is
this:
With 20% down, you are considered
a low risk. Even if you default the lender will
probably come out ahead because they've only
loaned 80% of the home's
value and they can
probably recoup at least that amount when they
sell the foreclosed property.
But with 5% or 10% down, the
lender has a lot more invested in the home loan
and if you default, they will almost surely lose
money. This is why lenders require buyers
to
purchase PMI if they put down less than 20%.
It's insurance that, no matter what happens, the
lender will recoup its investment.
How does PMI increase your
buying power?
In simplest terms, PMI
allows you to put less money down, and the
benefits are as follows:
If you have good credit but are short on cash
for a downpayment you can put as little as 5%
down.
It doesn't take as long to accumulate a 5% or
10% downpayment so you could buy a home much
sooner than you anticipated.
A smaller downpayment allows you to purchase
a larger or nicer home.
For repeat buyers, a smaller downpayment on
the new home can free up cash from the sale of
their previous home to use for other debts or
expenses.
Your interest will be higher if you put down
less than 20%, but that interest is
tax-deductible.
What does PMI cost?
A
Good Faith Estimate will be provided to you
within a few days after we received your home
loan application. This disclosure
will
provide you with an estimate of your monthly PMI
premium as well as the initial premium you'll
need to pay at closing. Additionally, we will be
providing you a disclosure on your
rights
(if applicable) to cancel the PMI.
What Should I Ask
My Lender?
What type of home loan
is best for me?
If you've done some
groundwork you should have a pretty good
idea of what type of home loan you need. But
your lender may offer options you hadn't
considered or even something you haven't yet
heard about.
What will my closing costs
be?
At closing, you'll be required to
pay a number of fees such as transfer of title,
origination and appraisal, attorney
services, credit report, title insurance and
inspections. Your lender is required to provide
an estimate of these costs within a few days
after
your application is received, but you
can always ask for an estimate sooner.
Will I be charged points?
Sometimes you'll have to pay points (one
point = 1% of the
home loan amount) in order
to get the interest rate the lender has quoted
you. Before proceeding with your home loan
application
find out if there are any points
attached to your loan.
What items must be prepaid?
Some expenses, such as first year's property
taxes and insurance, must be paid at closing.
Your lender will let you know what's
required.
How long will I be guaranteed
the quoted interest rate?
This is
called "locking in" a rate and most lenders
provide this service. When you apply for your
home loan, the
lender will lock in the
agreed interest rate for an agreed period of
time. But there may be a fee for this, so ask.
Also,
obtain such lock-ins in writing, which
is a requirement in most states.
How long will it take to get
approval?
It varies, so make sure you get
an estimate of how long approval will take,
especially if you have a deadline for closing on
a new home.
Does the home loan have a
pre-payment penalty?
If you even think
there's a possibility you may pay off your loan
early (this includes refinancing) find out if
there's a penalty for doing so.
Is there a call option
attached?
A call option allows the
lender to require you to pay off
your home
loan balance before it's due. You don't want
this, so make sure it's not in the contract.
Also, in many states, these are not permissible
on residential loans.
What Documents Will I
Need for My Home Loan Application?
When
preparing a home loan, the lender will ask for
substantial documentation. Here's a list of what
is usually required.
Personal Information
Address and telephone numbers of each
borrower
Previous address(es) over the last seven
years
Social Security number(s) of applicants
Age of applicant(s) and dependent(s)
Name and address of landlord(s) or lender(s)
for the past two years and proof of payment
Current housing expense details (rent,
mortgage payments, taxes, insurance)
Employment/Income
Name and address of employer(s) for the past
two years
Pay stubs for the past 30 days W-2 forms for
the past two years
A written explanation of any employment
gaps
If you're self-employed you'll need:
Complete, signed Federal Income Tax Returns
for the past two years (personal and
corporate)
Year-to-date Profit and Loss Statement and
Balance Sheet
Other Income
If you receive Social Security, a pension,
disability or VA benefits you'll need:
A copy of your awards letter (or tax returns
for the past two years)
A copy of your most recent check
Child Support
If you pay child support you'll need:
A copy of the divorce or separation
agreement
Evidence of payment for the last 6-12 months
(cancelled checks of pay history from the
courts)
Rental Income
If
you receive rental income you'll need:
A copy of the lease
Debt Disclosure - Credit Cards,
Loans and/or Current Mortgages
Name and address of each creditor
Account number, monthly payment and
outstanding balance for each
Proof of recent payment or current statement
for each
Documentation of alimony or child support
you are required to pay
Written explanation of any past credit
problems
Home Loan Application
for Home Purchase
A complete, signed copy of sales contract.
Mailing address and property description (if
it's not in the contract)
A copy of your cancelled earnest money check
Home Loan Application for Refinance
A copy of the deed
A copy of your hazard insurance policy
A copy of the property survey
Proof that your home has passed a termite
inspection
Evidence of Funds
for Downpayment
If the downpayment is a gift you'll need a
signed gift letter, the giver's bank statement
showing sufficient funds, a copy of the check
and a deposit slip
If you have any recent large deposits or new
accounts you'll need to show documentation
Other
If your home loan is for new construction
the lender will need to see plans and
specifications
If there's a bankruptcy in your financial
history you'll need complete documentation
Fees
Appraisal fee (approximately $350)
Credit report fee (approximately $50)
In some areas, a flood determination fee
(approximately $20)
What's
Involved in the Closing Meeting?
Preparing for Closing
Many
things must be taken care of before you come to
the closing meeting. Ask your lender for a list
of your responsibilities so you can arrive fully
prepared.
Set a Closing Date
When
choosing a closing date give yourself time to
gather all your information and free up any
necessary funds. The
lender will need time
to prepare and deliver home loan documents
(usually 3-5 days), home inspections must be
scheduled and
if any repairs are needed
allow enough time for them to be completed.
Also, if your rate is locked in, make sure you
close before the deadline so you'll be
guaranteed the quoted interest rate.
Other Required Items
Your lender
will provide you with a commitment letter that
lists all the other documentation that's
required at closing. The following are common
examples.
Survey - This shows the property's
boundaries and any improvements made to it. It
also details any encroachments on the property
like fences or buildings.
Major
encroachments must be corrected before closing.
Termite Inspection - Many areas
legally require homes to pass a termite
inspection, and all FHA and VA loans require
one. If a termite inspection is required you
must bring the certification to closing.
Homeowner's Insurance - Lenders
require you to carry insurance for the
replacement cost of the property. Bring the
policy with you to closing.
Title Insurance Policy - All lenders
require title insurance to protect them against
claims of property ownership by anyone other
than the borrower. The
title insurance
issues the policy company after conducting a
title search.
Flood Insurance - A flood insurance
policy is necessary for any property located in
a flood plain.
Water and Sewer Certification - If
the property isn't served by public water and
sewer facilities you'll need certification from
the local government
that you have a private
water source and sanitary sewer facility.
Certificate of Occupancy - For a new
home you'll need one of these before you move
in. The builder should get it for you from the
city or county.
Building Code Compliance - An
inspection is often required to make sure the
property conforms to current building codes.
There will be an inspection fee,
and the
contract should specify who pays for any repairs
needed to bring the home up to
code.
Final Walk-Through
A
day or two before closing it's a good idea to
take one last look at the home to make sure
repairs have been made, there's no new damage,
and
anything meant to be sold with the
property is still there. You can do this on your
own or with your real estate agent.
Closing Costs
One
business day before closing your lender must
allow you to review your
Settlement Statement
This is the final exact amount you'll
owe at closing and it must be brought
in the
form of a certified or cashier's check. (Our
Closing Costs Checklist can help you keep track
of these expenses.)
The Closing Meeting
The
legal sale and purchase of your home happens at
the closing meeting which is attended by the
buyer (you), the home loan
officer, the
seller and any real estate agents or attorneys
involved. (In some areas, closing is done by an
agent without a meeting.)
Examination and Signing of
Documents
At the closing meeting, the
closing agent will review the
settlement
sheet with you and the seller and ask you both
to sign it. This is also when you'll present
evidence of insurance
and inspections and
sign all other home loan documents.
Payment of Closing Costs
Once all papers are signed and in order
you'll hand over the check for
closing costs
(the downpayment is included in check) and the
lender provides the remaining funds to purchase
the house.
Transfer of Property
Congratulations! You now own your new
home. After the meeting, the closing
agent
will record the mortgage and deed in your name
with local government records and all funds will
be disbursed.
Documents
During closing
you'll sign stacks of important paperwork,
including the following:
HUD-1 Settlement Sheet - This is the
itemized list of closing costs your lender gave
you the day before closing. After the
closing agent completes it you and the seller
both sign it.
Truth-in-Lending Statementt - Given
to you soon after you applied for your loan, it
outlines the cost of
the home loan, gives
you the APR (annual percentage rate) and defines
the loan terms and number of payments.
The Mortgage Note - The mortgage (or
promissory) note is legal evidence of your
promise to repay the home
loan according to
the agreed terms which this document
outlines.
The Mortgage - This is the legal
document that gives the lender a claim against
your house if you fail
to uphold the terms
of the mortgage note. Although you have
possession of the house the lender shares
ownership until
you pay off the home loan,
and can demand full payment or foreclosure if
you default. Some states use a deed of trust
instead that conveys title to a trustee
until the home loan is repaid.
Affidavits - These are documents
required either by the lender or the law. Your
lender can explain any affidavits you're asked
to sign.
The Deed - This document transfers
ownership to your name and is signed by the
seller at closing. You'll get a copy at closing
and the original will be sent to
you after
it's recorded.
What Costs Will I Pay at
Closing?
Closing costs vary according to
lender, location and even from sale to sale.
Some
costs can be negotiated, reduced or
even waived and some may be paid by the
seller.
When you're doing your research,
use this checklist to get a rough idea of what
you'll pay at closing. The lender or closing
agent will provide you
with an exact total a
day or two before closing.
Closing Costs
Checklist
$______Down payment
$______Lender's points
$______Prepaid
interest
$______Home Loan origination fee
$______Mortgage insurance
$______Credit
reports
$______Appraisal(s)
$______Survey
of property
$______Inspections
$______Homeowner's
insurance
$______Attorneys' fees
$______Title search
$______Title
insurance
$______Prorated property taxes
$______Recording fees
$______Closing
taxes
$______Escrow account for and
insurance
$______Other costs specified in
purchase agreement
$______Other
costs
|
How Do Lenders Decide Home
Loan Approval?
The Four "Cs" of Home Loan
Approval
1. Capacity
2. Credit
3.
Collateral
4. Character
Capacity
A lender will
weigh your housing expenses and total debt
against your monthly income to determine your
ability to repay a home loan.
Monthly Income - Your net monthly
income. If you're self-employed or receive
commissions or bonuses, the lender averages your
monthly income over the last two years.
Housing Expenses - This is the monthly
payment you'll have with the new home loan,
along with the monthly cost
of insurance,
property taxes and any homeowner's fees or other
costs.
Total debt - Add up any current
mortgages, credit card balances, child support
or alimony payments, tuition, car loans or other
installment loans that will take longer
than
10 months to pay off and this is your total
debt. If your monthly mortgage payment is less
than 28% of your net monthly income, a lender
will typically consider you qualified
to
repay the home loan. That figure can even go as
high as 36% depending on the buyer. For
instance, many lenders will allow a first-time
buyer's housing expenses to take
up more of
their income.
Credit
To find out what
kind of credit risk you represent, your lender
will investigate your:
Previous mortgage payment history
Rent payment history
Credit card use
Installment debt payment history
A few late payments on a credit
card may not hurt you all that much. But
collections, repossessions, foreclosures and
bankruptcies can be serious problems.
If you
have a good explanation you may still be able to
repair your credit rating and get approval.
Collateral
When you ask
for a home loan, you're putting the home itself
up as collateral. Naturally, the lender will
want to know that the home is worth
at least
as much as the loan amount, which is why an
inspection is required.
But they'll also want proof that
you have the cash necessary for the downpayment
and closing costs. They'll seek verification of
funds from sources including
bank accounts,
stocks, bonds, mutual funds, the sale of an
existing property or any gifts from family
members that will not have to be repaid.
Character
The way you
conduct your financial transactions tells a
lender a great deal about your fiscal character.
If you take responsibility for your
debts by
paying your bills regularly and on-time, you
will appear to have the integrity they're
looking for in a borrower.
Other Compensating Factors
Many factors can sway a lender in your
favor. The bottom line is that the lender
wants to feel secure in loaning you money.
Even if there are a few dings in your credit, if
you appear to be a safe credit risk overall
you should be confident your loan will be
approved.
What Decisions Do Credit Lenders
Make?
There are three major decisions
that a credit lender is empowered to make.
1. Home Loan Approval
Approval is
often given with conditions, such as the sale of
current property, that require documentation for
final approval.
2. Home Loan Suspension
A loan is
suspended when information is incomplete or
questions remain unanswered in the loan
application. The buyer must supply the
needed information before a final decision
can be made.
3. Home Loan Denial
There are a
number of reasons why your home loan may be
denied, and you're entitled to know those
reasons. If denial is based
on your credit
you're entitled to a free copy of that
report. | 
