Mortgage 101
It's a good idea to get pre-approved by a lender before you start looking for a home. Most will give you a free consultation. Once you're pre-approved, you'll know exactly what you can afford. Then you can act immediately when you find the home you want and sellers are more comfortable accepting your offer.
What To Expect In Your First Conversation With A Lender?
A mortgage lender will evaluate four areas of your financial history to determine your ability to secure a loan:
- Credit history/credit scores
- The amount of monthly credit you currently have
- Income/employment history
- Your financial assets (money in the bank, investments, retirement accounts, and potential gift funds)
Routine documentation you should have available:
- Thirty days of pay stubs
- Two years of W-2s or two years of tax returns (if self-employed)
- Two months worth of bank/asset/investment/retirement account statements (all pages)
- Diploma or school transcript if a full-time student during the past two years
- Information on any real estate you may currently own
- A copy of recent mortgage statements or your current lease
- Explanations for any derogatory credit or gaps in employment you know you may have
- Any correspondence with creditors if you have disputed any debts
Other items that would be helpful include:
- A social security card
- A driver's license
The Loan Market
It is important to know that most of the financial institutions making the loans sell almost all their loans on what is known as "The secondary market". The lender you work with is referred to as the 'originator'. Your loan is then sold in the 'secondary market'. The largest buyers of loans are agencies called FNMA (Fannie Mae), FHLMC (Freddie Mac), and GNMA (Ginnie Mae). These huge organizations constitute the 'secondary market' and write the rules for loans that they will buy. A lender must then follow the rules these agencies have written in order for the loan (borrower and property) to qualify as conventional, VA, or FHA. During the loan process an Underwriter will evaluate your loan. Their job is to make sure that the loan fits the guidelines for a particular program (FHA, VA, or conventional), so the loan can be sold.
FHA Loans are government-insured loans that were instituted to assist buyers with minimal cash and first-time buyers to purchase a home. An FHA loan has more lenient guidelines for borrower credit history, allows for all or part of the funds needed by the borrower to be a gift, and has stricter requirements on the property's condition for the protection of the borrower. FHA loans do require inspections to ensure that the property meets the FHA guidelines.
VA Loans are entitlement loans that are earned based on the number of years served in the armed forces. If you were an active service member at one time in the past. It is recommended to talk to the United States Department of Veterans Affairs to get more information about your VA entitlement. Just like FHA loans, VA loans also require inspections to ensure that the property meets the VA guidelines on the property's condition for the protection of the borrower.
Conventional Loans meet the standards of the 'conventional' secondary marketplace. There are two types of conventional loans, conforming and non-conforming.
- Conforming Loans usually fit neatly into the box of rules and are under the prescribed maximum loan amount set each year. Both the borrower and the property fit the typical scenarios, and there is nothing unusual.
- Loans over the 'conforming' loan amount or loans that have some facet outside the box either related to the borrower or the property are called non-conforming loans. A loan can be non-conforming if the borrower is unable to document their income or assets, if their credit scores are low, if the property is unusual for the area, or if the loan amount or program is designated non-conforming.
What's The Difference Between A Fixed Rate And An Adjustable Rate?
Fixed rate mortgages are when your monthly principal and interest payment are always the same for the life of the loan. The benefit is that you always know what your principal and interest costs are. Fixed rate loans are usually amortized (paid in full) over a period of 30, 20, or 15 years. Your monthly payments are predictable over the life of the loan. (Keep in mind that your monthly mortgage payment may include principal and interest AND 1/12 of your annual property taxes and home owners' insurance. So although the principal and interest will remain steady, the taxes and insurance amounts can vary.)
Adjustable rate mortgages (ARM) allow for the the interest rate to fluctuate, which makes the payment change during the life of the loan. ARMs start off with a fixed interest rate for a determined period of time (1, 3, 5, 7, 10 years), and then adjust annually after that. Typically, the shorter the fixed term is, the lower the initial rate. The lower rate means lower payments for that period of time. Once the rate adjusts, the payments can go up, if the interest rate is higher. Most loans adjust annually after the fixed rate period.
Which Mortgage Is Best?
There are literally dozens of loan products and hundreds of combinations of these products. A good loan consultant will listen to your needs, evaluate your situation, and recommend loan scenarios that fit your need. A home loan should fit into your overall financial plan, and help meet your long- and short-term financial goals with the desired monthly payment and equity position.
Just calling around for the best rates on a 30-year mortgage could cost you thousands of dollars over the life of your loan if you don't get the loan that best fits your needs. There is so much more to the home loan process than just rates. A professional loan consultation is a vital first step in the process and is usually at no cost to you.
Ten Questions To Ask
Your real estate professional can assist you in finding a lender for a consultation. Make an informed decision when selecting your mortgage lender. Consider asking:
- Are you a licensed mortgage broker, a mortgage banker, or both?
- Will I receive a loan estimate, and will it disclose fees that I must pay out of pocket?
- Do you have automated underwriting, or does my file need to go through a full underwriting process?
- Do you have a local underwriter?
- What are the approval conditions?
- How far in advance before closing does the mortgage package go out?
- How long does the full process take?
- Are you using a local appraiser? What is their time frame?
- Do you guarantee your closing date and closing costs?
- When can I lock my rate?
Remember: if you need a referral to a reputable mortgage loan officer or mortgage broker, speak to your REALTOR®.
