Financing

 

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Unless you intend to pay cash for the entire sales price of your new home, you will need a mortgage.  Financing your new home is a critical part of the home buying process.  If you haven't already been pre-approved (or even if you have), here are your next steps.  Just remember the quicker you apply for a loan, the quicker you will be approved.  Your closing agent will be able to help with this, but generally you don't want to spend too much time figuring out financing.

Starting with your bank.  Some purchasers believe that you have a better chance of getting favorable loan terms from your own Bank or Credit Union, since you already have a banking relationship with them.  This is an easy way to start, but not all Banks and Credit Unions offer the very best interest rates and loan terms.  By only checking with your financial institution you may be missing some fantastic options that other places may have available for you, so also pay attention to the next point…‚Äč

Shop around.  Talk to a Mortgage Broker and a few Lenders, if time permits.  You don’t want to go overboard because each place will pull your credit and too many hard credit inquiries will impact your credit score.  But, it’s always good to know all of your options, not just what one bank or one credit union has to offer you.  Mortgage Brokers have the unique ability to shop multiple lending institutions that might be willing to make an exception on something that others would not consider doing at all.

Avoid PMI if you can.  Private Mortgage Insurance (PMI) is an extra cost to you, but it insures your loan for the lender in case of your default.  Most conventional financing with less than 20% down will require it, but it also largely depends on which financing program you choose.  It’s an added expense that can be avoided if you can either find a program that does not require it or if you can save up enough money to put 20% down on the home.  Ask your mortgage broker or lender about the possibility of excluding this.    

Be prepared for a financial body scan.  When you apply for a mortgage you are proving your ability to pay back the loan, so they will likely dig into every financial detail of your life from the past few months.  Any large deposits will require a statement describing and verifying where they came from.  2 Years of employment will need to be verified.  All of your debts and obligations will need to be disclosed. They do this largely to ensure that you have the willingness and ability to sustain homeownership.

Check out our lender partners. The lending partners on our site are paid advertising spots, but these institutions have been interviewed and chosen by us, so they are already familiar with the way that GoldenKey is revolutionizing home buying and with our buyer Cash Back program. Working with one of these might help ensure a smoother loan transaction for you.  

Mortgage Basics:

Your monthly mortgage payment is typically made up of the following parts:

  1. Principal: Reduces the outstanding balance of your mortgage.
  2. Interest: Monthly cost on the money borrowed to buy your home.
  3. Taxes: Covers the property taxes charged by your local government.
  4. Insurance: Covers homeowners insurance which is required by most mortgage lenders (details below).
  5. Depending on your property location, property type, and specific loan terms, you may have other monthly or annual expenses such as mortgage insurance, flood insurance, or homeowner association dues. Make sure you understand all of the expenses before finalizing your mortgage.

Mortgage Process:

Your mortgage process is typically made up of the following steps:

  1. Pre-Qualification:  This is the initial step of contacting a mortgage professional to begin the loan process.  This step typically involves your credit report inquiry, income and asset review along with an automated underwriting approval.
  2. Locking In: Once you have your accepted sales contract, and once you have determine the loan program that you intend to do, you are ready to lock in your interest rate.  The lock is done for an amount of time equal to the expected amount of time needed to complete your purchase process.   
  3. Disclosure Documents:  Once your Mortgage Professional has received all of the pieces of information necessary to establish your official application, it is time to provide you with your disclosure documents.  There are many documents that you will need to review and sign, but most important of these initial documents is your LE (Loan Estimate) this is the document that has replaced the Good Faith Estimated and Truth in Lending and is the new way for you to compare loan offers between lenders and is sort of your contract with the lender about the terms that you are agreeing to about your loan. 
  4. Returning of all Documents: Once the Mortgage Professional has all of your disclosure documents and any trailing income, asset or credit documents, they begin getting the file ready for submission.
  5. Processing and Submission: Once all of your information is compiled, organized, double checked and deemed ready, your loan file is submitted to underwriting.  Once your file is submitted, the loan processor assigned to your file is busy ordering tax transcripts from the IRS, Insurance Verification, Title Insurance from the closing attorney and the appraisal of the property.
  6. Underwriting: Once the lender receives the loan file, they will review it and ensure that it is ready for underwriting.  Once accepted, the file is forwarded to an actual underwriter for review to ensure that everything is acceptable and that it all meets the lender’s requirements for loan approval.
  7. Conditional Approval:  Once the underwriter approves the loan file, they will issue your conditional approval which basically gives the final list of items needed for the underwriter to be able to issue your final loan approval.
  8. Re-Submission: Once all of the items are collected to satisfy the list needed from the conditional approval, the loan processor on your file will re-submit these items for final approval.
  9.  Final Approval: Once all conditions have been met, the underwriter will issue a final approval and the lender will do a final scrub of the loan file and conduct a verification of employment to ensure everyone is still working.
  10. CTC (Clear to Close):  Once the lender is completely satisfied with everything, they will issue the Clear to Close which means that the file is ready to be delivered to closing.
  11. CD (Closing Disclosure): This is your final loan disclosure which should mirror the initial or latest LE (Loan Estimate) and this is the final disclosure.  It replaces the HUD Settlement Statement that we had been used to for years.  You will receive this CD a minimum of 3 days in advance of closing.  The one that you receive at closing should be identical to this.
  12. Closing: This is the final step where you sign all of the final loan documents which include your Note (which is your promise to pay back the loan), the Deed (which gives you ownership and the lender an ownership interest in your home if you are financing) and all of the other final disclosures that require signatures. Most importantly, this is when you get the keys to your new home!!!

 

Useful terms:

LE (Loan Estimate): This is the form that has recently replaced the Good Faith Estimate and Truth in Lending.  This is meant to be a shopping document for you and it has improved the way that customers review competing offers.  It ultimately breaks down the differences between offers to what truly matters and shows you these bottom lines in an easy to read format.

CD (Closing Disclosure): This is the final disclosure and it replaced the HUD Settlement statement.  This document is meant to be compared to the original LE document and is laid out in a very similar format.  This document gives you the final numbers that you should see at closing. 

Escrow Account: In most cases, homeowners insurance and property taxes are paid once per year. Most homeowners choose to add the monthly portion of these payments to their monthly mortgage. This is what an escrow is.  It helps you budget for the cost of insurance and taxes, and makes it easy to guarantee your coverage and on-time payments. Lenders also prefer this option because it guarantees that your insurance premiums and taxes are being paid. 

For example, if your annual homeowner’s insurance premium (or payment due) is $2,400, you may add $200 per month to your mortgage payment. This extra payment each month adds up to $2,400 over the course of the year, and it is held in escrow (a neutral account). The extra payments are then automatically paid out in one lump sum to the insurer when the annual payment is due. You typically have the right to waive (or opt out an escrow account) if you are investing at least a 20% down payment.

Interest rate: The percentage of interest that your lender charges you for borrowing money. This rate will vary based on current market conditions, your personal financial situation (including income, credit score, debt, investments, etc.), the size of your down payment, and the type of mortgage that you choose.

Discount points:  These are fees paid that help reduced the amount of interest rate charged, where one point is equal to 1% of the total loan amount.  For example, 1 point on a $100,000 total loan amount is equal to a $1000 fee. It is not exactly a 1% to 1% ratio, but the more discount points that you pay, the lower your interest rate can be. This payment is tax-deductible and could significantly impact the total amount of interest you pay over the life of your loan, but make sure you understand its full impact by consulting with your mortgage professional and tax advisor.

Origination fee: Fee paid to the loan officer or mortgage broker who initiates and completes the loan transaction. The origination fee may be presented as one lump sum, made up of an origination charge, a processing fee, and an underwriting fee, or it may be in addition to these figures depending on the institution you are working with.  If you have questions about any fees, be sure to ask your mortgage professional to explain them.

Loan term: The amount of time that you have to pay off your mortgage balance. A shorter loan term typically means a higher monthly mortgage payment but lower total payments over the life of the loan (due to the loan being paid off in a shorter amount of time).

Pre-Payment Penalty: This is something to watch out for.  These are fees that lenders may charge if you pay off your loan early. Lenders want to keep your loan on the books so if you pay it off early they don’t make as much money.  It is important to understand and carefully consider all of your options and ask questions before deciding on a particular loan.  You are going to want to ensure that your loan does not have a penalty for additional principle payments or for paying it in full. These penalties are more popular for investment loan than for primary residences.  But make sure you consult your mortgage professional about this. 

Balloon Loan:  This is a loan type that offers you a longer loan term like 30 years and where your monthly payment is set up like your term is 30 years, but the loan balloons within a shorter period of time.  This means that you will be responsible to pay the entire loan balance off earlier than what your regular monthly payment is set up to do.  Lots of 2nd mortgages still carry these options, although these are not nearly as popular for 1st mortgage any longer.

Credit Scores: Equifax, Transunion and Experian are the 3 major credit bureaus. These 3 agencies have each come up with their own scoring models which are supposed to be used to help lenders evaluate your ability to repay your loan.  The idea is that the higher your credit score, the less likely you are to typically default on your loan. Although each agency does not receive the exact same data, every lender isn’t required to even report, lenders who do report may not report to all 3 agencies and all data in your credit may not be completely accurate.  These are mainly the reasons for the variations in credit scores between the 3 agencies.  The difference between scores that you might pull on your own from free online services and the scores you receive from your mortgage lender may vary greatly.  This is due to the score model online verses the model typically used by mortgage lenders.  So not only are there 3 agencies, but each agency has numerous scoring models available as well.    

All participating banks, lenders, originators, loan brokers and their employees (collectively, "Lenders") are paid advertisers ofGoldenKey, Inc. GoldenKey, Inc. does not recommend or endorse any Lender. For more information on our advertising practices, see our Terms of Use & Privacy.

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