Loan Program Anatomy
Fixed Rate Mortgage Products:
30 Year Fixed Rate - the interest rate is fixed for 30 years and the mortgage is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
20 Year Fixed Rate - the interest rate is fixed for 20 years and the mortgage is fully amortized (or paid off) in 20 years if the normal payment schedule is followed.
15 Year Fixed Rate - the interest rate is fixed for 15 years and the loan is fully amortized (or paid off) in 15 years if the normal payment schedule is followed.
10 Year Fixed Rate - the interest rate is fixed for 10 years and the loan is fully amortized (or paid off) in 10 years if the normal payment schedule is followed.
Fixed Rate Balloon Mortgage Products:
7/23 Conforming Mortgage - the rate is fixed for a period of 7 years and then converts to a new fixed rate for the remaining 23 years. The new rate is typically based on the Fannie Mae net yield index and is added to a pre-determined margin. Note that converting to this new rate is permitted only if the prescribed conditions are met and if not, then the loan is due and payable to the lender as a balloon loan (review your loan documents carefully). The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
5/25 Conforming Mortgage - the rate is fixed for a period of 5 years and then converts to a new fixed rate for the remaining 25 years. The new rate is typically based on the Fannie Mae net yield index and is added to a pre-determined margin. Note that converting to this new rate is permitted only if the prescribed conditions are met and if not, then the loan is due and payable to the lender as a balloon loan (review your loan documents carefully). The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
30/15 (30 due in 15) - the rate is fixed for a 15 years and the payment is amortized over 30 years to provide for a lower monthly payment. This loan is due and payable as a balloon loan at the end of 15 years.
Adjustable Rate ARM's:
10/1 ARM - the rate is fixed for a period of 10 years after which in the 11th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 11th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
7/1 ARM - the rate is fixed for a period of 7 years after which in the 8th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 8th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
5/1 ARM - the rate is fixed for a period of 5 years after which in the 6th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 6th year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
3/1 ARM - the rate is fixed for a period of 3 years after which in the 4th year the loan becomes an adjustable rate. The adjustable is tied to the 1-year treasury index and is added to a pre-determined margin (usually between 2.25-3.0%) to arrive at your new monthly rate. Ask what the margin, life cap and periodic caps of your ARM will be in the 4h year. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
Traditional ARM's:
1 Year Treasury ARM (1 YR T-Bill) - the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1-year treasury index which is added to a pre-determined margin (typically ranging from 2.25-3.00%) to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
1 Year Treasury Average ARM - the rate is fixed for 1 year (this initial rate is sometimes referred to as the teaser or start rate) after which in the 2nd year the rate will adjust based on the 1-year treasury average index which is added to a pre-determined margin (typically ranging between 2.25-3.00%) to arrive at the new annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
Monthly Treasury Average ARM (MTA) - the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the monthly treasury average index which is added to a pre-determined margin (typically ranging between 2.25-3.00%) to arrive at the new monthly rate. This loan may also have periodic payment caps as well as interest rate caps, and therefore could have the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be.
COFI ARM (Cost of Funds) - the rate is fixed for a 3 month period (this initial rate is sometimes referred to as the teaser or start rate) after which your rate is based on the 11th district cost of funds index (COFI) which is added to a pre-determined margin (typically ranging between 2.25-3.00%) to arrive at the new monthly rate. This loan may also have periodic payment caps and therefore the potential for negative amortization. Ask what the margin, life cap and periodic caps of your ARM will be.
6 Month CD ARM - the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6-month CD index which is added to a pre-determined margin (typically ranging from 2.25-3.00%) to arrive at the new semi-annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
LIBOR ARM (London Interbank Offer Rate) - the rate is fixed for 6 months (this initial rate is sometimes referred to as the teaser or start rate) after which in the 7th month the rate will adjust based on the 6-month LIBOR index which is added to a pre-determined margin (typically ranging from 2.25-3.00%) to arrive at the new semi-annual rate. Ask what the margin, life cap and periodic payment caps of your ARM will be. The loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
Second Mortgages:
30 Year Fixed Rate - the interest rate is fixed for 30 years and the loan is fully amortized (or paid off) in 30 years if the normal payment schedule is followed.
15 Year Fixed Rate - the interest rate is fixed for 15 years and the loan is fully amortized (or paid off) in 15 years if the normal payment schedule is followed.
30/15 (30 due in 15) - the rate is fixed for a 15 years and the payment is amortized over 30 years to provide for a lower monthly payment. This loan is due and payable as a balloon loan at the end of 15 years.
Equity Lines:
Prime Rate - an equity line of credit with a loan term ranging from 15 to 25 years. The rate is based on the prevailing prime rate, which is added to a fixed margin (typically ranging from 0 to 4%) depending upon a borrower's individual credit and equity. The line of credit offers check-writing privileges and interest is paid only on the funds drawn from the account. A draw period exists from which a borrower may access the funds after which the repayment period begins so that the equity line is fully paid at the end of the term.
Private Mortgage Insurance
What is private mortgage insurance?
Private mortgage insurance (PMI) is insurance that protects a lender or investor against loss if a borrower stops making mortgage payments. It makes it possible for you to buy a house with as little as a 3-to-5 percent down payment, helping you buy a home sooner than you otherwise could. Studies show that homeowners with less than 20 percent invested in a home are more likely to default, making low down payment mortgages more risky for lenders and investors. That's why lenders and investors generally require mortgage insurance for loans with down payments of less than 20 percent.
What's the benefit?
PMI makes it possible for you to buy a house with a low down payment and get into a home years sooner than you would otherwise. If you're a first-time buyer, PMI helps you get over the biggest hurdle to home ownership: coming up with the traditional 20 percent down payment. If you're a trade-up buyer, mortgage insurance allows you to consider a wider range of homes. Both first-time and move-up buyers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt, or paying for home improvements or emergencies.
How much does it cost?
Premium prices vary. They are based on the size of the down payment, type of mortgage and amount of insurance coverage. Premiums typically are folded into your monthly mortgage payment. The range for a median priced home is $50 to $80 per month (in 2001, the national median price for a single family home was $147,500). You can pay the premium up front and finance it as part of your mortgage. Lender-paid policies also are available, but they result in a higher interest rate on the mortgage.
How do I qualify?
The qualifying process for loans covered by mortgage insurance is similar to that for regular mortgage loans. Generally, you need to have enough income to cover the monthly mortgage payment and closing costs, and a good credit background. Many mortgage insurance programs offer flexible underwriting features, such as alternative methods of credit verification.
Can I get a loan with PMI if I have a low income?
Yes. If you're a lower-income, first-time buyer, you may be eligible for special programs that make it possible for you to buy a home with 3 percent or less down (apply thru Allie Mae for assistance). Their flexibility makes it possible for many lower-income buyers to achieve home ownership: Programs are tailored to community needs and involve partnerships with local groups. They feature education programs that help you learn about the home buying process and counseling to help you keep your home if you run into financial trouble. They offer a variety of options in such areas as down payment, PMI premium and credit verification. Evidence of on-time rent and utility payments, for example, can substitute for a more traditional credit history. Check with your lender to see if you're qualified for an affordable housing program.
Can I get PMI if I'm refinancing my loan?
Yes. Refinancing with PMI can increase your financial flexibility. You can get cash to pay off consumer debt, make other investments, or cover college tuition or medical bills. If you have a piggyback or 80-10-10 loan, you can refinance with PMI and get rid of that second mortgage.
Can I buy PMI directly from an insurance company?
No. The lender arranges for private mortgage insurance coverage on your loan. A range of PMI products with a variety of payment options is available to meet your needs. When you shop for a loan, ask lenders about your PMI options. Why did I get a letter saying my PMI application was denied after my lender said my insured loan was approved? Lenders make the arrangements for PMI coverage on loans. They often send a mortgage application to more than one insurance company. One company may approve an application, while another may not. If a company denies coverage on a loan, it sends a letter to the borrower explaining why. The lender, meanwhile, may have obtained coverage on the loan from another company.
Can I cancel PMI?
Yes. PMI usually can be cancelled when the homeowner builds up enough equity in the home. Under federal law, PMI on most loans made on or after July 29, 1999, will end automatically once the mortgage is paid down to 78 percent of the original value of the house. Do I get a refund when my insurance is cancelled? It depends on the type of premium plan you have. Most borrowers opt for the pay-as-you-go plan. With this plan, you pay for PMI a month at a time. When insurance is cancelled you stop paying premiums, but you don't get a refund. With plans in which you pay your premium up front, at closing, or annually, you may get a refund. Consult your lender.
What is a piggyback loan?
Some lenders offer low down payment loan products that don't carry mortgage insurance. The most typical is the piggyback loan, also known as the 80/10/10 or 90/20. The piggyback stacks a high-rate small second mortgage on top of a lower-rate first mortgage. The piggyback can have several drawbacks, but can also be a good option for many borrowers.
What's the difference between PMI and FHA insurance?
Private mortgage insurance is the private sector alternative to the Federal Housing Administration mortgage insurance, which is a government program backed by taxpayers. There are some important differences:
Ø PMI generally costs less. It covers the top 20 to 30 percent of the loan, while FHA insures 100 percent of the loan.
Ø PMI is available on a wider variety of loan products, and there's no maximum loan amount. FHA loans are subject to maximum loan amounts, depending on the cost of housing in your area.
How is PMI different from other types of insurance associated with home ownership?
PMI is not mortgage life insurance, which pays off a mortgage if you die or become disabled. It is not homeowners' insurance, which protects you from loss from theft, fire or other disaster. Mortgage insurance protects the lender and investor from loss, not the borrower. PMI protects the lender, in the case that you should default on your payments.
Understanding COFI ARMs
How would you like a mortgage loan where you did not have to make the whole payment if you did not want to? Or would you like a loan with an interest rate about one percent below a thirty-year fixed rate mortgage and pay zero points? Or a loan where you did not have to document your income, savings history, or source of down payment? How would you like a mortgage payment of only 1.95 (January, 2004) percent? You can have all that with the 11th District Cost of Funds (COFI) Adjustable Rate Mortgage.
Sound too good to be true? Sound like a bunch of hype?
Each statement above is true. However, it is also only part of the story and loan officers do not always tell you the whole story when promoting this loan. Then other loan officer try to scare you away from the adjustable rate mortgages. However, once you become aware of all the details of the loan, it is an excellent way to buy the house of your dreams, especially when fixed rates begin to go up.
ARMs in General
Adjustable rate mortgages all have certain similar features. They have an adjustment period, an index, a margin, and a rate cap. The adjustment period is simply how often the rate changes. Some change monthly, some change every six months, and some only adjust once a year. Indexes are simply an easily monitored interest rate that moves up and down over time. Adjustable rate mortgages have different indexes. The margin is the difference between your interest rate and the index. The margin does not change during the term of the loan.
So if you have an adjustable rate mortgage and you wanted to calculate your interest rate on your own, all you have to do is look up the index in the paper or on the internet, add the margin, and you have your rate.
Indexes and the 11th District
The "Prime Rate" you hear about in the news is one interest rate index, although it is very rare that mortgages are tied to this index. It is more common to find adjustable rate mortgages tied to different treasury bill indexes, the average interest rate paid on certificates of deposit, the London Inter-Bank Offered Rate (LIBOR), and the 11th District Cost of Funds(COFI).
COFI ARM Index
The 11th District Cost of Funds (COFI) is the weighted average of interest rates paid out on savings deposits by banking institutions in the 11th district of the Federal Home Loan Bank (FHLB), which is located in San Francisco. The 11th District includes the states of California, Nevada, and Arizona.
The COFI index moves slower than the other indexes, making it more stable. It also lags behind actual changes in the interest rate market. For example, when rates begin to go up, the COFI index may continue to decline for a couple of months before it also begins to rise. However, when interest rates start to decline, the COFI index may continue to go up for another couple of months, too. It lags behind the market.
Monthly Adjustments Sound Scary?
Although you can get a COFI ARM with an adjustable period of six months, you can get a lower margin if you go for the monthly adjustment period. Since the margin plus the index equals your interest rate, the lower margin is an advantage and most people choose the monthly adjustment.
Monthly adjustments sound scary to the uninitiated, but keep in mind that this is a slow moving index. Most other ARMS have an annual cap of two percent a year. Since 1981, when the FHLB began tracking the index, the most it has moved during any calendar year is 1.6%. So why get a higher margin just to get a rate cap that you probably will not use anyway?
The "life-of-loan" cap for the COFI ARM is usually 11.95%. The most recent year that this cap could have been reached was 1985. Plus, most experts do not expect a return to the interest rates of the early 1980's when interest rates were pushed up artificially to combat the inflation of the 1970's.
Make Only Part of Your Payment?
This is the really interesting feature of the loan. You do not have to make the whole payment. Each month you get a bill that has at least three payment options. One choice is the full payment at the current interest rate. A second choice allows you to pay only the interest that is due on the loan that particular month, but does not pay anything towards the principal. Finally, the third option gives you the choice to pay even less than that and is called the "minimum payment."
The minimum payment when you start your loan can be calculated as low as 1.95 percent. Keep in mind that this is not the note rate on your loan, but just a way to calculate your minimum payment.
Deferred Interest and Amortization
Of course, if you only make the minimum payment each month, you are not paying all of the interest that is currently due that month. You are deferring some of the interest that is currently due on the loan and you will pay it later. The lender keeps track of this deferred interest by adding it to the loan and the loan balance gets larger. Neither you nor the lender wants this to continue forever, so your minimum payment increases a bit each year.
The payment cap on the loan is 7.5%, which also has nothing to do with the interest rate. All it means is the most your minimum payment can increase from one year to the next is seven and a half percent. For example, if your minimum payment is $1000 this year, next year the most it could be is $1075. This continues each year until your payment is approximately equal to the payment at the full note rate.
Just in case, there are fail-safes built into the loan. If you continue making the only the minimum payment and your current balance ever reaches 110 percent of the beginning balance, the loan is re amortized to make sure you pay it off in thirty years (or forty years, whichever option you chose). Every five years the loan is re-amortized to make sure it pays off within the term of the loan.
Stated Income and Other Features
Many COFI ARM lenders allow home buyers with good credit to apply without documenting their income, assets, or source of down payment. Of course, you have to make a twenty or twenty-five percent down payment on your home purchase. This is helpful for self-employed borrowers or those who have jobs where it is difficult to document their income. Plus, some people just do not like the bother of supplying W2 forms, tax returns and pay-stubs. Anyway, it makes for a quick and easy loan approval.
Sub-Prime COFI ARMs
Some people have less than perfect credit and they are used to being charged outrageous rates for past problems. Some COFI lenders offer this same loan but have a slightly higher starting payment and a higher margin. The end result is that your interest rate would be about one percent higher.
Who Should Get This Loan?
Most people who get the COFI ARM are purchasing a home between $300,000 and $650,000, but it is not limited to that. It is a real favorite of those working in the financial industry and those with higher incomes. One reason they like it is because they consider any deferred interest to be an extended loan at a very attractive rate. By making the minimum payment, they do other things with the money.
Home buyers whose income has peaks and valleys, such as self employed or commissioned salespeople also like the loan, because it provides flexibility in the monthly payment. During a slow month they can make the minimum payment if they choose.
Another reason borrowers like the loan is because it allows for tax planning. The borrower can defer interest payments and at the end of the year, analyze their tax situation. If it serves their tax interests, they can make a lump sum payment toward any interest that has been deferred and deduct it for tax purposes.
Starter Homes
If you're buying a home with the intention of living in it for only a few years before you move up to a bigger home, the COFI ARM makes sense, too. With this loan and its low start payment you can often qualify for a larger home than you can when applying for a fixed rate loan. This allows you to skip the intermediate purchase and move up immediately to the home you really want, which makes more sense and saves you money.
If you buy a home, then sell it to move up to a bigger home, you are going to have to pay Realtor's commissions and closing costs. On a $300,000 house, this would be around $25,000. If you skip buying that home and buy the home you really want, you save that money. Plus, you save money in another way. Say you live in your intermediate purchase for five years, then move up and buy another home with another thirty year mortgage. That is thirty-five years of home loans. If you buy your ideal home now, you save five years of mortgage payments. Depending on your loan amount, that can be a lot of cash.
Conclusion
The COFI ARM is all about options.
Mortgage Bankers & Mortgage Brokers
The types of mortgage lenders include mortgage bankers, commercial banks, savings & loans and credit unions gather funds from their customers through checking and savings accounts and certificates of deposits. These funds are then used to make loans. When these institutions make a mortgage loan, they may decide to hold it in portfolio or sell it to secondary market investors.
Mortgage bankers get their funds typically by selling their loans in the secondary mortgage market. Although the loan is sold shortly after funding, mortgage bankers may not sell the servicing on the loan. Since, mortgage bankers primarily have one focus of business--to make mortgage loans-- they usually offer very attractive loan programs and rates.
Mortgage brokers generate about 50% of all loans. They have access to a variety of lenders and often offer the most choice in loan programs. Brokers assist the consumer in completing the application and loan selection process and direct them to suitable lenders to fund the mortgage. Besides, brokers can quickly place your loan with another lender if your loan is turned down. Mortgage brokers are paid a fee by the borrower or the lender when a loan closes.
It is important to understand the difference between mortgage lenders and mortgage brokers. As a rule, mortgage brokers don't make a decision whether to extend you a loan, and they don't actually makes the loan. They work as intermediaries between borrowers and lending sources. However this fact does not mean that you are paying a higher rate. Since mortgage brokers obtain their funds from a variety of sources, they can even save you money by shopping your loan.
Mortgage lenders usually have wholesale and retail departments. Mortgage brokers obtain rates at wholesale, markup these rates by adding points and then quote you a retail rate which is what you get when you go directly to a lender. Mortgage brokers are free to set their own pricing and may markup wholesale rates differently.
When deciding on a mortgage broker it is important to choose one that shops rates with a large number of lenders, has a fair markup and good service.
Regardless of what type of institution you do business with, it's important to make certain it has no complaints registered with state or federal regulators or the Better Business Bureau. Some BBB reports are now available on-line. You may also want to verify how long your bank or mortgage company has been in business.
Closing Your Loan
Introduction
Once your application for a mortgage loan has been approved and you have received a commitment letter from the lender, the final step before you can call the house your own is the closing, or settlement, of the purchase transaction and mortgage loan. Even though you have signed purchase agreement and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and loan is closed. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time.
At closing, you will sign the mortgage loan documents, the seller will execute the deed to the property, funds will be collected and disbursed and the closing agent will record the necessary instruments to give you legal ownership of the property. Settlement of a mortgage loan is a legal process, so specific procedures and requirements will vary according to state and local laws, but a general description of closing practices can help you through the process.
Between Commitment and Closing
As soon as you receive firm approval from the lender who is making your mortgage loan, you should confirm the actual date of loan closing. An estimated closing date was probably specified in the sale contract, but a firm date needs to be set by you, the seller of the property and your lender. You want to make sure that settlement will take place before your loan commitment expires and before any rate lock agreement (guaranteed terms of the loan) expires. The settlement date also has to allow adequate time to assemble all of the required documentation. If repairs or maintenance on the property are a part of the lender's commitment, there must be time to complete them. The real estate agents involved in the sale transaction and the lender are often the best people to coordinate the closing arrangements. Most lenders require at last 3 to 5 days advance notice of the closing date in order to prepare the loan documents and get them to the closing agent.
There are standard documents and exhibits that are commonly required for a loan closing, regardless of jurisdiction. Some of these will be your responsibility and others will be the responsibility of the seller. The following documents are typically required for closing:
Title Insurance Policy: Every lender will require title insurance. The company issuing the title insurance policy will have researched legal records to make sure that you are receiving clear title, or ownership, to the property. Their title search has established that the seller of the property is the legal owner, and that there are no claims, or liens, against the property. The title company offers both a lender's policy and an owner's policy. You will have to pay for a lender's policy and it is advisable for you to have an owner's policy as well. For a small additional premium, it will protect you up to the full value of the property if fraud, a lien or faulty title is discovered after closing.
Homeowner's Insurance: The lender will require you to have homeowners insurance on the property at least in the amount of the replacement cost of the property. You should make sure the policy covers the value of the property and contents in the event they are destroyed by fire or storm. You must pay for the policy and have it at closing. You are free to select the insurance carrier, but the lender will require the company to meet rating standards and be rated by a recognized insurance rating agency
Termite Inspection and Certification: In many areas of the country, the property must be inspected for termites and the inspection is required in the purchase contract. In some parts of the country, this may be called a "wood infestation" report. The report is required on all FHA and VA loans as well as many conventional loans.
Survey or Plot Plan: Your lender may require a survey of the property, showing the property boundaries, the location of the improvements, any easements for utilities or street right-of-way and any encroachments on the boundaries by fences or buildings. Encroachments can be minor, such as a fence, or may be serious and have to be corrected before closing. In some areas, an addendum to the title policy eliminates the need for a survey.
Water and Sewer Certification: If the property is not served by public water and sewer facilities, you will need local government certification of the private water source and sanitary sewer facility. Properties with well and septic water sources are usually governed by county codes and standards.
Flood Insurance: If the lender or the appraiser determines that the property is located within a defined flood plain, you will want, and the lender will require, a flood insurance policy. The policy must remain in force for the life of the loan.
Certificate of Occupancy or Building Code Compliance Letter: If your home is new construction, you will have to have a Certificate of Occupancy, usually from the city or county, before you can close the loan and move in. The builder will obtain the certificate from the appropriate authority. Many local governments require an inspection when a home is sold to see if the property conforms to local building codes. Code violations may require repairs or replacement of structural or mechanical elements. The responsibility for ordering the inspection and paying for any required repairs should be spelled out in the purchase contract.
Other Documentation: Additional documentation required for closing will be set out in the commitment letter from the lender and will depend upon terms of the sale, peculiarities of the property and local ordinances and custom. Examples would include private road maintenance agreements if the street in front of your property is not maintained by a municipality or proof of sale of your previous home if that was a condition of approval of your loan.
Within 24 hours prior to the actual closing, your and your real estate agent should make a final inspection of the property to make sure any required repairs have been completed, all property described in the sale contract, such as kitchen appliances, carpeting and draperies are present and that no recent fire or storm damage has occurred. In most cases, the lender will make a similar inspection before closing.
The Loan Closing
The actual loan closing procedure, including who conducts the closing and who is present, depends upon local law and custom and lender practices. Some states require that you be represented by an attorney, others do not. Even if it is not required by law, you may want to have an attorney, review the closing documents.
Some lenders will close the loan in their offices, some will use title or escrow companies and some will send their instructions and documents to their attorney or yours to conduct the closing. As soon as you receive your commitment letter from the lender, you should determine who is responsible for closing arrangements.
The actual closing is conducted by a closing agent who may be an employee of the lender or the title company, or it may be an attorney representing you or the lender. The lender and seller, or their representatives, and the real estate agents may or may not be at the actual closing. It is not unusual for the parties to the transaction to complete their roles without ever meeting face to face.
The closing agent will have received instructions from the lender on how the loan is to be documented and the funds disbursed, and will have collected all of the necessary exhibits from you, the seller and the lender. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly disbursed and accounted for when the closing is completed.
You typically need to come to the closing with a certified check for the closing costs, including the balance of the down payment. You can get the exact figure a day or two prior to the closing from lender or the closing agent. You should also bring the homeowners insurance policy and proof of payment if it has not been delivered earlier.
For the most part, your role at closing is to review and sign the numerous documents associated with a mortgage loan. The closing agent should explain the nature and purpose of each one and give you and/or your attorney an opportunity to check them before signing. A brief description of the major documents may help you understand their purpose and significance.
Settlement Statement - HUD-1 Form: This form is required by Federal law and is prepared by the closing agent. It provides the details of the sale transaction including the sale price, amount of financing, loan fees and charges, proration of real estate taxes, amounts due to and from buyer and seller and funds due to third parties such as the selling real estate agent. It must be signed by both buyer and seller and becomes a part of the lender's permanent loan file.
Some of your charges on the HUD-1 may have already been paid, such as credit report and appraisal fees. They will be noted as P.O.C. (paid outside the closing). You will usually be charged interest on the loan from the date of settlement until the first day of the next month and your first payment will be due on the first day of the month and your first will be due on the first of the following month. Make sure you know exactly when your first and subsequent payments are due and what the penalties are for being late.
If your loan is greater than 80 percent of the value of the property, you will probably have to pay for mortgage insurance that protects the lender in case you default. One year's premium will usually run between 0.5 percent to 0.75 percent of the loan amount.
In addition to your monthly payments on the loan, most lenders will require you to maintain an "escrow", or "impound," account for real estate taxes and insurance. Current law permits a lender to collect 1/6th (2 months) of the estimated annual real estate taxes and insurance payments at closing. Additionally, real estate taxes for the current year will be pro-rated between you and the seller and paid at closing. After closing, you will remit 1/12 of the annual amount with each monthly payment. Tax and insurance bills should be sent to the lender who will pay them out of the escrow funds collected.
Truth-in-Lending Statement (TIL): This form is also required by Federal law. You were given an initial TIL shortly after you completed the loan application. If no changes have taken place since that time, the lender need not provide one at closing. If, however there are significant charges, you must receive a corrected TIL no later than settlement.
The Mortgage Note: The mortgage note is legal evidence of your indebtedness and your formal promise to repay the debt. It sets out the amount and terms of the loan and also recites the penalties and steps the lender can take if you fail your payments on time.
The Mortgage or Deed of Trust: This is the "security instrument" which gives the lender a claim against your house if you fail to live up to the terms of the mortgage note. It recites the legal rights and obligations of both you and the lender and gives the lender the right to take the property by foreclosure if you default on the loan. The mortgage or deed of trust will be recorded, providing public notice of the lender's claim (lien) on the property.
Miscellaneous Documents: There will be a number of documents or affidavits that you will be asked to sign at closing. Some are lender requirements (e.g. a statement that you intend to occupy the properties your primary residence), or are required by state or Federal law. These instruments should not be taken lightly. Some provide for criminal penalties for false information, and some may give the lender the right to call your loan, which means the entire loan amount becomes immediately due and payable. When everything has been signed and the closing agent is satisfied that all of the instructions for closing have been complied with in full, you become the owner and are given the keys to the property.
Borrowing Online
Borrowing online popularity
It is not surprising to find out that home buyers are browsing and shopping for homes online, but is it surprising that they're borrowing the money to buy those homes on web sites without ever meeting with a loan officer face to face?
The web offers numerous reputable sites that offer 24-hour access, seven days a week to those who prefer to go about getting their mortgage online.
So what do these sites have to offer? Besides the convenience of 24-7 access, these sites also offer borrowers a place to go where lenders will compete for their business. People with excellent credit may get immediate preliminary responses; others may have to wait a day or two for the offers and quotes to come in. Many of these sites offer sub-prime lenders who cater to those with damaged credit. Online brokers offer easy, automated access without the hassle of having to go into a physical office.
Online mortgage brokers
If an online mortgage broker is for you, and you don't care if you meet face to face with a live person, there are precautions that you should take to ensure you are doing business with a reputable broker or firm. The first thing you will want to do is make sure that they are licensed by your state's regulatory agency, if such licensing exists. Also, check with the Better Business Bureau www.bbb.org.
You will also want to make sure that any personal information you submit through the site is sent over a secure connection. If it's not, your information is at risk of being stolen by unscrupulous individuals who hack into systems. Identity theft is a growing concern, and you should make sure your information is safeguarded during this process.
Also, try to limit yourself to a few credible online brokers/lenders. If you go to too many different sites, they will each pull your credit report and it will have a negative impact on your credit rating. Each time your credit report is pulled, an inquiry shows up on the report. Too many inquiries may have a negative impact on your total credit score.
Appraiser's Role
Appraiser's role
When you take a mortgage to buy a house, the lender requires an appraisal -- a neutral expert's estimation of the home's fair market value. The appraiser considers many factors including, condition, size, location, and amenities of the property being appraised. He will then compare your property to the prices of comparable homes that have been sold in the area.
Lenders require this appraisal because it would be bad business to lend more than the house is worth. In the vast majority of cases, everything is fine: The house is appraised at or above the sale price and the loan goes through. However, on occasion, the appraisal comes in less than the home's selling price. What happens next depends upon the loan amount you are seeking and the lender's guidelines.
One factor that goes into your mortgage rate is your "loan to value". This number is expressed as a ratio of loan amount over property value. If you initially believed your home to be worth $200,000, and it only appraises for $180,000, your "loan to value" will increase. If the LTV (loan to value) increase too much, you may lose your loan
What to do if your appraisal comes in low?
In the case that your appraisal comes in low, you will first want to go back to the appraiser to reevaluate. Appraiser's are human, and can make errors. You will want to make sure they haven't missed any recent add-ons, the new swimming pool, etc. If everything looks correct you will need to go directly to the lender.
Many lender's have appraisal review boards that will audit an appraiser's work. They will review the comparable properties that were used, adjustments that were made, area sales history, current market conditions, etc. Be warned, that a review board is just as likely to cut the value as they are to increase it. Make sure you really have a case before you go this route.
As a last resort, you may want to have a 2nd appraisal done. Or you will want to take to your loan officer about changing your loan program.
Step By Step Guide
If you're like most Americans, owning your own home is a major part of the American dream. Allie Mae wants to help you understand the steps necessary to reach that dream. Home ownership is a big responsibility, one that you will need to accept for many years to come. It's worth the effort, and the Allie Mae can help.
You may not be familiar with us. Allie Mae is an objective, independent source of information for the mortgage consumer. We know that the whole process of getting a mortgage can be confusing, so an important service we provide is information such as this guide. Whether you are buying a home, refinancing, taking a home equity loan, building a home or in need of a mortgage for any purpose, Allie Mae is here to help.
Are you ready to get started?
When you decide you want to buy a home, you will be faced with many decisions. The first is whether you are actually ready to buy. Finding the right home is not always easy, and getting a mortgage loan can be time-consuming and complicated. To help you decide if you're ready to buy, we'll take you through the steps a mortgage lending institution uses to decide if you qualify for a mortgage loan.
When you take out a loan, you sign documents that say you promise to pay back the loan. When a mortgage lending institution makes your loan, it has determined that there is a good likelihood that you can keep that promise. The mortgage lender knows that it does not help you or the lending institution if you are given a loan, and are unable to make the payments each month. To decide if you will be able to repay the loan, the lender will look at many different pieces of information about you. This process is called "underwriting" (the process of verifying data and evaluating a loan for approval). The underwriter gives the final loan approval. These pieces of information show how well you have repaid your debts in the past, whether you are likely to repay your debts in the future, and your ability to repay the mortgage and your current debts.
There are some general guidelines that help a lender in looking at these pieces of information about you. But you should also remember that there is some flexibility in these guidelines, because everyone's financial situation is different. If you are very strong in one area, it may help balance out another area in which you aren't quite as strong.
Let's go thru some questions. If you aren't ready to buy a new home now, you'll find we've included information that may help you qualify in the future. When you get to the end, you will have a better idea of whether this is the right time for you to buy a home, or whether you need to work on improving your credit history, paying off existing debts, or saving more money. Either way, Allie Mae will be able to give you some helpful information.
How is your job history?
This is extremely important. Having a steady job helps you to keep your promise to pay back a mortgage loan. If you have been working continuously for two years or more, you are considered to have steady employment. If you have recently changed jobs but are in the same line of work, you are also considered to have steady employment. A lender will need to know your job history, and it will be a major factor in whether you qualify for a loan. If you have been working continuously for less than two years, the mortgage lender will look for an explanation. There may be a good reason:
Ø You may have been discharged recently from the military or just finished school.
Ø Your work may be seasonal, and you might have work gaps between seasons.
There may be other acceptable reasons why you have not been employed continuously for two years. For example, you may have been laid off because of a business closing or an illness. Or you may be in a line of work in which frequent job turnover can be customary, but you have been consistently employed and have maintained a regular, consistent level of income. If you have been fired for cause such as excessive absences, have long gaps in your employment record, or have dips in your income level that are difficult to explain, you should probably delay buying a home until you can demonstrate that you have a stable work history.
Based on the information above, give yourself a "+" if you think you have a stable work history or a "-" if you do not.
Do you pay your bills on time each month?
How you paid your bills in the past gives a lender some indication of how you can be expected to pay them in the future. When you apply for a mortgage, a lender will order a credit report. They will look at all all your debts, the amount of your monthly payments, and the number of months or years left to pay on the debts. The lender will also check on how well you have kept your promises to repay your debts. Credit reports are provided by credit reporting companies that make inquiries through a wide range of available sources of information: banks that may have given you a car loan, credit card companies, even gasoline companies and department stores that offer credit cards.
It's important to disclose all debts and any difficulty you may have had in the past in repaying these loans. It's also important not to leave out any information about money you owe. Credit reporting companies have access to a great deal of financial information about you, and they make it available to lenders who will be reviewing your loan application. If you have previously owned a home, and your mortgage has been foreclosed upon within the last seven years, the foreclosure will be revealed on your credit report. Having a foreclosure on your records doesn't mean you can never buy another home. Your lender will want to know the reason for the foreclosure, and most prefer that two years go by before you apply for a new mortgage. If you have declared bankruptcy within the past ten years, that also will be revealed on your credit report, and it will be helpful for you to explain the circumstances surrounding it. Lenders usually prefer that you wait two years after discharge of the bankruptcy before assuming a new large debt like a mortgage loan (this is not always the case). This gives you time to reestablish credit and show that you are again able to manage your financial affairs. Sometimes credit reports are inaccurate, or they give a misleading picture of past credit problems that have since been resolved. To check the accuracy of yours, make sure to get a copy of your credit report before you start the application process. If you find any errors, you can take steps to have the report corrected.
If your credit report shows that you do not have a good credit history, and the information reflected is correct, you should probably delay trying to buy a home and take steps to improve your credit profile.
For example, you may have too many debts, or you may pay some debts late each month. If so, you should work to bring your payments up to date and pay off some of your debts. Even if your debts are current, you may not be considered a good candidate for a loan if you have made your monthly payment after the due date each month. After you have decreased the amount you owe and are able to show a history of making payments on time, you may be ready to begin looking for a home to buy.
Based on the information above, give yourself a "+" if you have a good credit history or a "-" if your credit history shows some recent, unresolved problems.
Do you have a credit history?
If you have never had any credit cards or taken out a loan through a financial institution, the various credit reporting firms may not be able to issue a credit report on you. In that case, you may be able to use a "nontraditional" credit history. For example, you may be able to document that you pay your rent, telephone bills, or utility payments on time each month. You can put these records together yourself by making copies of canceled checks (usually 6+ months) or showing copies of monthly bills that do not have any late charges. A mortgage lender may be able to help you put this information together. If you have a good record of paying your rent and other bills you may still qualify for a loan.
Based on the information above, give yourself a "+." If you do not always pay your bills on time or have no record of your payments, give yourself a "-."
Do you have money saved for a down payment?
When you buy a home, you will need money that you have saved for a down payment and "closing costs." The amount of the down payment may vary, but generally you must make a down payment that equals a percentage of the purchase price. You will also need money for closing costs. These costs can be expensive, depending upon where you live. Sometimes the property seller is willing to pay part of your closing costs.
The mortgage lender will want proof that you have saved the funds that you will use for a down payment and part or all of the closing costs. If the funds are in a savings account, the lender will ask the financial institution to verify the amount and the length of time that the funds have been in your account. The lender wants to make sure that you are not borrowing all the money you will use for the down payment and closing costs. Some communities have programs to help first time buyers. With some of these programs, you may be able to accept a gift from a relative or to borrow a portion of the money you will need for the down payment and closing costs from a local nonprofit organization or government agency. With others, you may be able to get a grant or other funds that you will not have to repay and can use to cover some of these costs. If you do not have at least a portion of the money saved, this probably is not the right time for you to try to buy a home (this is not always the case). Instead, it would be a good idea to open a savings account and begin putting away some funds from every paycheck. The longer you have accounts and the longer and more consistently you have been able to save money, the better you will look to lenders when you are ready to apply for a mortgage in the future.
Based on the information above, give yourself a "+" if you have money saved for your down payment and closing costs. Give yourself a "-" if you do not have money saved right now.
Can you afford to pay a mortgage each month?
If you pay rent each month, you may be prepared to make monthly mortgage payments. The amount of your monthly payment depends upon the amount you borrow, the interest rate, and the repayment period or "term." The shorter the term, the higher your monthly payment. For that reason, most home buyers repay their mortgage over the longest term possible, usually 30 years.
How to calculate your payment.
The amount of your mortgage payment will depend on how much you borrow, the term (repayment period) of the loan, and the interest rate. If you know how much you need to borrow (the purchase price minus your down payment and closing costs), and what the interest rate will be, you can use our calculators to find out what your monthly payment will be on a mortgage. Note - don't forget to add property taxes and insurance to your payment.
Let's look at an example: Let's suppose that you want to purchase a house that costs $100,000. If you make a $5,000 down payment, you would need a $95,000 mortgage with 0 closing costs. The monthly payment on a $95,000 mortgage at 6 percent interest is $570 for 30 years. The $570 monthly payment only covers the principal, or a portion of the amount you borrowed, and interest on the mortgage loan. There are other expenses that will be added to your monthly payment. These include taxes and homeowner's insurance. If your down payment is less than 20 percent, you may need to pay private mortgage insurance (PMI). These costs vary depending upon where you live and the cost of your home, but they can add a hundred dollars or more to your monthly payment. In addition, if you are thinking about buying a unit in a condo or cooperative building, or a house in a planned unit development, you may also need to pay monthly homeowner's fees to cover maintenance expenses or special assessments related to the common areas.
How does a lender determine the mortgage amount you may receive?
When you first approach lenders about financing a mortgage for you, they will use two commonly accepted guidelines to help determine your ability to make mortgage payments. These guidelines are a starting point for evaluating your ability to make the payments on the proposed loan. So your lender will look closely at your individual financial situation to determine if more flexible guidelines are appropriate for you.
1. Your monthly housing costs (including mortgage payments, property taxes, homeowner and mortgage insurance, and home-owner's fees) should total no more than 28 percent of your monthly gross (before taxes) income. In addition to your regular pay, your income can include funds you receive from overtime work, a part-time job or second job; retirement, VA, and Social Security benefits; disability; welfare and unemployment benefits; alimony; and child support.
2. Your monthly housing costs plus other long-term debts such as payments on car loans, student loans, or other installment debt (debts with more than ten months left to repay) should total no more than 36 percent of your monthly gross income.
Depending upon your household income, you may be eligible for special assistance programs. These programs may make it easier for you to get a larger mortgage loan than you normally would be able to using the above qualifying rules. Now, to get an idea of the mortgage amount that you might be able to qualify for based on your annual income, let's look at a calculation. You will need to know the approximate interest rate that lenders currently are charging for a 30-year, fixed-rate mortgage. Check the real estate section of your local newspaper or call a mortgage lender to get the current rates for your area.
This is the amount you could potentially borrow. Only you can decide whether you feel comfortable carrying the maximum amount of financing that you qualify for. And this calculation can only help you with the first qualifying rule - the amount of your home payment. It does not take into account the amount of your other debts. If they are high, that could reduce the amount of the loan for which you can qualify.
Give yourself a "+" if you think your family's monthly income is enough to pay both your current monthly expenses and the housing payment you would owe if you bought a home. Give yourself a "-" if you do not think you would qualify at this time.
Have you been turned down for a mortgage?
If you have tried to buy a home, but were unable to get approved for a mortgage, you should try to find out why the lender did not want to make the loan. Based on the information above, you may already have figured out why you did not get a loan. Maybe you did not have a steady work history, or you tried to buy a house that was too expensive for your income, or your debt level is too high. If you are unable to figure out why you were turned down, you should ask the lending institution for an explanation. You should also ask what steps you can take so that you can qualify in the future.
You're ready to buy a home. What do you do first?
If you have read all the information above, and have received a copy of your credit report, you may be ready to begin the process of buying a home. You may want to call a local real estate agent to show you homes in your area. You may also want to make an appointment with a mortgage lender. It will take some time working with a real estate agent to find the right home in the price range that you can afford. It will also take time to apply for the mortgage, have the lending institution evaluate your application, and have your loan approved. Still more time is required to do all the necessary paperwork and close on your loan. But in the end, you will have a home for you and your family, and you will have achieved an important part of the American dream.
You do not think you are ready to buy a home or you are not sure. What should you do?
If you took this test and received a couple of minuses, or you weren't sure about some the questions, don't be discouraged.
You took the first step!
Owning you own home may seem out of reach, but you can change that over time. Even if you know you cannot qualify now - or even six month from now - there may be a way you can work toward this important goal in the future. Nobody ever said becoming a homeowner was easy. It's difficult, but it's also rewarding. It can be worth sacrificing and planning over a long period of time to achieve it.
