The concept of a mortgage is quite simple. It's basically a loan for a home wherein the property itself is used as collateral.
Securing a mortgage, however, can be complex. The process may take more than a
month, as several parties – from the escrow officer to the loan underwriter –
work behind the scenes to put it all together.
A trusted real estate agent can recommend a reputable mortgage professional and help you navigate through the process.
Finding the right Mortgage
A RE/MAX agent can help you find a solid lender or broker. You might also ask friends, family members and colleagues for references.
When interviewing lenders and mortgage brokers, consider asking the following questions:
• What fees are
• What types of mortgages might I qualify for?
• What interest rates are available for different types of mortgages?
• Can I lock in an interest rate? Will it cost me anything to do that?
• What are the closing costs? Can I wrap these costs into the mortgage?
• How much cash will I have to bring to closing?
• How long will it take to process my loan?
• Are there special programs I might be eligible for?
• Can I get references of customers you've worked with in the last two years?
• How many lenders do you work with? (For mortgage brokers only.)
• How are you paid? How do you make money on my loan? (For mortgage brokers only.)
RE/MAX Buyer Tip: Your RE/MAX agent can assist with your mortgage research, help you locate reputable loan professionals, and answer questions you may have about the process.
RE/MAX Buyer Tip: Don't open new credit card accounts or take on any new debt for at least six months (and even up to a year) before shopping for a mortgage
Getting approved for a loan prior to your home search is a smart move that offers several advantages. It gives you a benchmark for how much you can afford, helping you narrow down your home search from the start. It also allows you to be taken more seriously in the bidding stage, which can help tremendously in your negotiations, especially when dealing with distressed properties.
Getting pre-approved is simply a matter of your lender checking your financial situation and writing a letter stating that it would be willing to lend you a certain amount of money.
You'll need to assemble several documents to start the preapproval process:
• Federal tax
returns for the last two years.
• W2s (or 1099 statements) for the last two years.
• Bank statements for the last two months.
• Recent pay stubs and proof of any other income.
• Proof of assets (stocks, mutual funds).
• Information about your current debts.
• Information about the source of your down payment, including gifts.
How Much Can You Afford?
Figuring out how much you can afford is a crucial first step in the home-buying process. Knowing the answer to this question early will make your home search more focused and less stressful.
The 28/36 rule is an established benchmark used by many lenders to determine how much credit to offer you. Here's how it works:
The "28" refers to the notion that no more than 28 percent of your gross monthly household income should go toward housing costs, which include mortgage principal, interest, taxes and insurance.
To calculate, simply multiply your gross monthly income (amount before taxes) by .28. Use this amount as a guide for how much house you can afford.
Example: You earn an annual salary of $70,000. Divide 70,000 by 12, giving you a monthly gross income of $5,833. Multiply that by .28, and you'll find that you should spend no more than $1,633 each month on total housing costs.
The "36" part of the 28/36 rule refers to your overall debt, which should not exceed 36 percent of your income. This is important to consider because other high monthly debt – such as car and credit card payments – impact the amount you can afford to spend on housing.
For first-time buyers, the tricky part is knowing how much to budget for taxes and insurance. An experienced real estate professional can assist you with this.
Down Payments: How Much Do You Need?
Down payments for homes can range from 5 to 20 percent of the purchase price, depending on the type of product you are eligible for.
RE/MAX Buyer Tip: If a low credit score is making it hard for you to get a loan, take action to improve your situation. Your RE/MAX agent is a great resource for advice, and you can also check out the tips on improving your credit score on MyFico.com.
Several websites can help you check your credit score. Visit www.annualcreditreport.com for a free annual credit report from each of the major reporting agencies. For just your FICO score, which is most often used by lenders to gauge your risk level, you can visit MyFico.com.
Mortgage 101: Basic Loan Types
With a fixed-rate mortgage, your interest rate – and your monthly payment of principal and interest – will stay the same for the entire term of the loan. This type of mortgage tends to be the most popular because it protects homeowners from the possibility of future monthly payment increases (a situation faced by borrowers who select an adjustable-rate mortgage) and is very straightforward.
Fixed-period Adjustable-Rate Mortgage (ARM) or hybrid ARM
Most lenders today offer a fixed-period or "hybrid” ARM, which is an adjustable-rate mortgage featuring an initial fixed interest rate period, typically of 3, 5, 7, or 10 years. After the fixed-rate period expires, the interest rate becomes adjustable for the remainder of the loan term. Fixed-period ARMs are often named by the length of time the interest rate remains fixed.
Example: In a 5/1 ARM, the “5” stands for the five-year introductory period during which the interest rate remains fixed. The “1” indicates that the interest rate is subject to adjustment once per year after the introductory period, and for the remainder of the loan term.
Government loans (FHA and VA)
If you're qualified, you may consider an FHA (Federal Housing Administration) or a VA (Department of Veterans Affairs) loan. These programs allow a lower down payment and credit score when compared to conventional loans.
FHA loans are helpful for applicants who don't have a 20% down payment saved or who need more flexible income or credit requirements.
There are some differences between FHA loans and conventional loans. For example, there's a maximum loan amount, which varies depending on where the home is located.
Also, FHA loan programs typically require you to pay mortgage insurance, similar to private mortgage insurance, or PMI. Under FHA, this is called a “mortgage insurance premium,” or MIP. Typically, you will pay an upfront mortgage insurance premium (UFMIP). Keep in mind that the UFMIP must be entirely financed into the mortgage or paid in cash; it cannot be partially financed. You will also pay an annual insurance premium, which you will pay monthly with your mortgage payment. You’ll need to factor that amount in when you set your budget.
VA loans are offered by VA-approved lenders and are insured by the Department of Veterans Affairs. To qualify, you must be a current or former member of the U.S. armed forces or the current or surviving spouse of one. These loans can help reduce your down payment requirement, sometimes to zero. They may also help you get a lower interest rate on your loan. However, there are limits on the available loan amount. If you believe you may qualify for a VA loan, be sure to tell your lender, so you can explore your options together.
When you start to explore your mortgage options, you may hear the term "jumbo loan" come up. If you do, this may be because you live in a high-priced real estate market or are looking at properties that are more expensive than average. If you are considering homes requiring a mortgage that exceeds $417,000, it's a good idea to find out more about jumbo loans and discuss them with your lender.
Renovating Home? Consider a 203(k)
The 203(k) program, available through HUD, provides benefits for buyers of homes in need of major renovation and repair. If you're looking for a fixer-upper, the 203(k) program enables you to obtain just one mortgage to finance both the purchase and rehabilitation of the property.
RE/MAX Buyer Tip: Don't fudge the truth. A white lie on your mortgage application is considered mortgage fraud. It may not be a big deal now, but it could come up later and haunt you.
If you notice other fees popping up in your loan process, ask for an explanation. You have a right to know what each fee is and why it's being charged.
Not all home loans come with the option of paying points. If this option is available, it's worth investigating, as it could save you money in the long run.
When does it make sense to pay points on a mortgage? Although it greatly depends on your situation, paying points can make sense when you have cash on hand, plan to stay in your home for a while, and don't intend to refinance in the near-term.
To figure out whether points will equal savings for you, simply divide the total you paid for your points by your monthly savings. This gives you the number of months it will take for you to recoup the money you paid for the points.
Example: Let's say that paying $5,000 in points up front saves you $85 per month. That means it would take 59 months for your points to really start saving you money. That's almost five years.