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Mortgage Financing

Most home buyers will need to finance much of their home purchase.  Getting a loan in place is an important part of the home buying process.  The mortgage itself is simply a piece of paper, like an IOU, that you sign and hand over to the lender in exchange for a mortgage loan.  If you default on your repayment of the loan, the mortgage gives the lender the right to foreclose and take possession of your property. 

The lender is the mortgagee and you as the borrower are the mortgagor.  The lender gives you the loan and you give the lender a mortgage on your home.

Because lending and mortgage language can be confusing we invite you to use our Mortgage Glossary.   Buyer’s Choice Realty has no financial connection to any lender and receives no compensation of any sort from any companies mentioned or referred.

There is also a splendid on-line Mortgage Basics Course on Bankrate.com.  It consists of 7 Chapters with multiple choice questions at the end of each chapter. 

If you are a visual learner you will enjoy these 16 brief video lessons on How to Obtain a Mortgage found on eHow.com. 

The following is our own attempt to educate you in the mortgage process.

Interest Rates - Mortgage Lenders charge fees for the use of their money.  The biggest fee is the interest rate they charge you.  Additional fees are more confusing to get a handle on.  Different lenders charge different fees.  This may include fees for loan application, credit report, appraisal, points, and other fess sometimes wrapped together and called an origination fee.  APR or Annual Percentage Rate is a more helpful way of comparing loans because it includes the interest plus points and fees.   

We have a separate section on Loan Shopping because it is a technique few borrowers understand.  Our web based comparison work sheet will help you compare lenders in a more precise and accurate manner.   It’s worth your while to take a close look at closing costs. 

Mortgage Broker or Mortgage Lender– It is important to know if the company you select for your financing is a Mortgage Broker or a Mortgage Lender. 

Mortgage Brokers do not lend money directly, but rather they arrange transactions.  They have access to several lenders and will find a lender for you. They operate as an independent business with no direct affiliation to any specific lender.  You could have a wider selection of loan products with a Mortgage Broker. 

A Mortgage Broker can take an application and collect the required documents from you for your loan file, but the decision to approve and fund your mortgage loan is always made by the lender. Also, if you change the loan parameters the Mortgage Broker may need to have you fill out new paperwork required by the new lender you are switching to. 

Mortgage Brokers are compensated in points paid at closing or as an add-on to your interest rate or possibly both. Their fees may be separate from and in addition to the lenders origination fee or other fees.   It is wise to ask the Mortgage Broker how he or she will be compensated. 

Mortgage Lenders have the authority to approve your loan in-house.  They can portfolio your loan or sell it directly to the secondary market.  There is no middle-man when you are using a Mortgage lender. 

Because a lender has the ability for in-house approval, it may be easier for you to monitor the status of your loan and to get direct answers to questions during the loan process.  Sometimes it may not be clear whether you are dealing with a lender or a broker. 

Some financial institutions operate as both. Mortgage Brokers don’t always use the word “broker” in their ads.   Ask if a Mortgage Broker is involved in your transaction.  Choose your lender carefully.  Look for financial stability and a reputation for customer satisfaction.  Choose a company that gives helpful advice and makes you feel comfortable. 

Don’t be afraid to make Mortgage Lenders and Mortgage Brokers compete with each other for your business by letting them know you are shopping to compare costs and terms for the best deal.  Since interest rates and points can change daily, to compare apples to apples be sure to get all your information on the same day.

PITI – An acronym for Principal, Interest, Taxes and Insurance, these are the four components of a mortgage payment.  These are important factors that affect your monthly payments.   The principal and interest payments are paid to the lender.  The monthly tax and home insurance payments are escrowed by the lender and included in your monthly payments

Principal -is the actual amount of your loan. A portion of the principal is usually paid off with each mortgage payment. The principal component of each payment (except on interest only loans) is typically very small in the first few months, but increases as the mortgage balance drops.  

Interest - Initially, the largest part of your mortgage payment goes toward paying off the interest. Over time as you begin to pay off your mortgage, more of your monthly payment goes toward paying down the principal and less toward paying off the interest.

Taxes - are usually escrowed so most homeowners also pay their real estate taxes as part of their mortgage payment. Taxes can be a significant part of your total mortgage payment, and tax rates can vary significantly from town to town. So make sure you know the monthly taxes that will be part of your mortgage payment.   If taxes are $3,600 a year you must add $300 a month to your mortgage payment.  As taxes or insurance payments go up, so does your monthly payment. 

Insurance - Homeowner’s insurance may be collected and escrowed by your lender and paid to your insurance company.  Homeowner’s insurance protects your home and property against fire or other damage. You may need supplemental coverage for other risks like flooding.  

PMI – Private Mortgage Insurance is required when a borrower is putting less than 20% down on a property.  Its purpose is to protect the lender against losses should the borrower default.  FHA mortgages, which are insured by the Federal Government, require a different type of insurance with different coverage.

Unlike the mortgage insurance on FHA loans which remains through the life of the loan, PMI can be cancelled under certain circumstances.

The best way to avoid PMI is to have a 20% down payment.   But there are plans which allow you to avoid PMI by getting an immediate 2nd mortgage when you purchase the home.   For example, you could get a first mortgage for 80% of the purchase price with no PMI, a 2nd mortgage for 10% of the purchase price and put 10% down in cash.  This is known as a piggy back or an 80-10-10 mortgage.  

You can e-mail us for a copy of our free electronic brochure on Cancelation of PMI.

Getting Pre-Approved early in the home buying process is the smart way to go.  Sellers will be expecting to see a buyer’s pre-approval letter before committing to the buyer.  Because of confidentiality issues we prefer not to hand over the pre-approval until after the seller has signed our offer, but we do need to have one in hand.

A Pre-Qualification is not a Pre-Approval.  You can easily be pre-qualified by a lender or yourself with on-line calculators.  It simply means someone has taken a look at your income and expenses and plugged them into a debt-to-income ratio formula.  On the other hand, pre-approval requires an analysis of your credit report and income and expenses.  The lender will tell you the maximum amount of loan they will offer, and which loan programs you qualify for. 

 

Now you can go shopping for a home with confidence about your buying power--but it still doesn't mean the bank will approve the loan. Your income and credit report will be checked again before closing, and the home itself must be approved.

 

The fact that a particular lender has pre-approved you does not mean that you must use that lender to close the loan.  You may find a better rate or loan program.  Logically, the first thing you want to do is let them know what you have been promised elsewhere and give them the opportunity to match it.  If they cannot, then move the loan to a lender who will give you the better value.  Remember, however, you must meet the Commitment Letter Date agreed upon in the purchase agreement.  Since the closing is usually 30 to 60 days out, that should not be a problem.  Also, you must be capable of closing under the parameters set forth in the written agreement with the seller.

 

Credit Reports – Your credit report is your electronic fingerprint.  It represents your personal reputation in the financial community.  It can be one of your best assets or it can be one of your biggest liabilities.  Think of it as a tool to build financial security.  You will not see the entire picture of your credit unless you read a report from each of the three major credit reporting agencies www.experian.com, www.transunion.com, or www.equifax.com but you can order a triple-merged credit report which reports each credit account you have and  indicates which credit bureau reports which accounts you can see who knows what about you. Some people are surprised to find errors in their reports so it’s a good idea to plan ahead and find out what is there before you strart searching for a home.

 

If you would like to know how to improve your credit score e-mail us for a free copy of our electronic brochure “5 Tips on Improving Your Credit Score”.

 

Documentation Needed– Mortgage applications require a great deal of information and documentation.  Some of the more commonly required documents include:

 

Social Security and Date of Birth -  will be required of you and any co-borrowers.

Income Verification -  You need to show your two most recent pay stubs with year-to-date earnings.

Tax Information – W-2 forms and tax returns are often required for the last two years.

Employer’s Verification – The names, addresses, and phone numbers of ;your employers for the past two years are needed. 

Bank Account Information – The account numbers and current balances of your checking, savings ord any other accounts may be needed.

Assets Information – This includes statements of current assets such as IRA Accounts, CDs, stocks, and copies of bonds with bond number, issue date and amount.  If you have individual statements provide a current brokerage statement with the name of the stocks, the amount per share, and the number of shares owned.

Personal Property Information – You must disclose the value of your personal property, including employee retirement accounts, automobiles, any valuable property or collections, and life insurance.

Credit Information – You will need to provide the names and addresses of all creditors as well as the monthly payment and the total amount due for all current loans.

Current Housing Information – If you own your own home you will need to provide your address, current market value, mortgage lender, account number, current monthly payment and outstanding balance due on the mortgage.  If you rent, you will need to provide your address, the name and address of your landlord, your current monthly rent.  If you have lived at your current address for less than two years you will need to provide your previous address information.

Student Information – If you are in school or recently graduated and do not have two years of employment history, you will need your school transcripts or diploma.

Contract and Deposit Information – you will need a signed copy of your executed purchase and sale agreement showing that you and the owner have accepted the terms of your transaction. You will also need receipts for the first and second deposits on the property.

Gift Letter - You will need a copy of a gift letter if part of your down payment or closing costs will be a from a gift.  You will need a signed letter from the donor stating that you do not have to repay the gift amount.

Self Employment Documents – If you are self-employed you will need your prdofit and loss state3ments and balance sheet for the past two years.

Divorce or Separation – You will need a copy of the divorce decree or maintenance agreement along with any amendments.  You will need a twelve month payment history of alimony or child support payments.  You will need all of these if the payments are needed to qualify you for the mortgage.

Rental Property Information – You will need federal tax returns and a schedule of all real estate you own.  You will also need the account number and address of the mortgage company if any property you own is not owned free and clear.  If the property is rented, you will need a copy of the current lease agreement.

 

Documentation requirements vary from one loan program to another.  Lenders using an automated underwriting system may require fewer documents.   Most lenders will utilize alternative documentation which allows them to accept copies of w-2 forms, pay check stubs, and other docs that are easier for you to supply. 

 

If you plan to provide Internet generated documents, be sure that they contain your name and account number, a complete thirty day history of information and the URL of the entity.  If your account number does not appear in its entirety on these documents, you will need to supply a non-Internet generated statement for identification purposes.  The source of all large deposits that appear on your asset statements will need to be explained and documented.  If you like, you may complete an on-line application with one of our preferred mortgage lenders who uses an automated underwriting system.

 

 A Good Faith Estimate (GFE) must be mailed or provided by a mortgage lender or broker within three business days of applying for a loan as required by the Real Estate Settlement Procedures Act (RESPA).  The estimate must include an itemized list of fees and costs associated with your loan.  A standard form is used and is intended to help consumers compare different quotes from different lenders or brokers.

 

The lender directly controls some of the fess, and those are the ones to pay most attention to when you are comparing lender quotes.  Some fees are third party fees that usually do not  vary a whole lot from lender to lender.  Taxes and government fees should be the same regardless of the lender.  You may want to look at a sample Good Faith Estimate before you begin your loan shopping.

 

 

Appraisal – To confirm that the house you are buying is worth the purchase price you have agreed to pay the lender orders an appraisal. The lender does not want to get stuck with a house worth less than what was loaned.   This is usually ordered after the Home Inspection. 

 

At this point you need to know what lender you are using. 

 

By this time you should have done your loan shopping to determine who you want to use. That’s the lender you want to order the appraisal.  An appraisal is a written analysis of the estimated value of a property prepared by a qualified appraiser.  

 

When a lender is involved in a purchase they require an appraisal on the property as an integral part of loan underwriting. Generally speaking, the appraised value of the property suggests a fair purchase at that amount.  On the other hand, a tax assessment on a property is usually not a good indicator of the fair market value of the property. People tend to confuse the appraisal with the tax assessment. 

The tax assessment may help you to compare the relative value of properties next to each other or on the same street but the only certain conclusion you can draw is what your taxes will be on the property; not how much you should pay to purchase that property. 

Because an appraiser usually visits the property and inspects it both inside and out, some buyers confuse the lender’s appraisal visit and inspection with the buyer’s home inspection.  These have nothing to do with each other.  The bank hires the appraiser and you hire your home inspector.  As fate would have it, you pay for both.

Whether you’re looking at an appraisal or a tax assessment, usually the more recent the report, the more accurate it is. Remember, assessment has only to do with the taxes and appraisal has to do with the comparative market value of the property.

A property is demonstrated to be worth what a ready, willing, and able buyer will pay without being under duress.  But if it does not appraise out, you may not want to buy it.  If you are putting 20% or more down, make sure your Buyer’s Agent has inserted a clause in the contract to purchase that can get you out if it does not show an appraisal value equal to or above your purchase price.

Processing - At this point the loan then goes into what is known as processing. The Processor will collect any information or documentation asked for if not already in your file. The information is matched to the application and any discrepancies noted and addressed. At this time title and the property appraisal are ordered. When these items are received the file is sent to the underwriter.

Underwriting - The Underwriter assesses the risk factors and will issue a list of conditions or stipulations for the Processer to complete. When all the conditions are met, the Underwriter notifies Processing that there is a Clear to Fund. 

Time for processing and underwriting may vary due to the type of loan and the length of time it takes to receive and clear all the conditions. Normally this takes three to seven days. If there is a major problem(s) with the appraisal, title, credit or proving source of funds it will take longer.

Rate Lock – A rate lock is the lender’s promise to hold a certain interest rate for you while you wait for closing.  During the time period until your closing date the cost of mortgages may change.  But if your interest rate and points are locked, you will be protected against any increase.  Depending upon the lender you may be able to lock the interest rate when you make application for the loan. 

 

Usually lenders offer three different options. 

 

(1)  Locked Interest Rate and Locked Points which guarantees you mortgage terms will not increase above the rate and points that you have agreed to even if the market changes.

 

(2)  Locked Interest Rate and Floating Points which allows you to determine the number of points you want to pay to reduce your interest rate at a later time.

 

(3)  Floating Interest Rate and Floating Points which allows you to lock your rate and points at a later time, but prior to closing.  If rates go up, you should expect to be charged the higher rate.

 

What happens if the interest rate lock expires?  If you don’t close by your interest rate lock expiration date, you might lose the interest rate and number of points you had locked.  This could happen if there are delays in your closing, whether caused by you or others involved in the settlement process.  For example, if the lender has to wait for any documents from you or others like appraisers, termite inspectors, builders, or the sellers. 

 

Most lenders will allow you to extend your lock for a period of time to accommodate your circumstances.  However, when you extend your interest rate lock you will usually be charged a lock extension fee based on market conditions.

Some lenders have preprinted forms that set out the exact terms of the interest rate lock.  Others may only make a verbal rate lock promise.  Oral agreements can be difficult to prove in the event of a dispute.  It is wise to obtain written rather than verbal interest rate lock agreements to have a tangible record of your arrangements with the lender. 

Lender Commitment – While your pre-approval letter is what you will use to convince a seller that you are qualified for the purchase it’s the commitment letter that provides the guarantee that the lender will close on this specific house on the prescribed date.  It usually takes 21 to 30 days for the lender to get all the information needed to provide their commitment.  The actual letter should come sometime after your home inspection.

 

The commitment letter is for your benefit as the buyer.  If the lender does not provide it on time, you will need to ask for an extension or withdraw from the transaction and get your deposit money back from the seller or listing broker.  Usually the seller will grant the extension; but not always. The commitment letter is not for the seller to determine if they want to continue moving forward with you as their buyer.  It’s to protect you as the buyer from losing your deposit money.  Failure for the lender to meet the commitment and the home inspection clause are the only two legitimate clauses for a buyer to withdraw from the transaction.

 

Title InsuranceTitle insurance is quite different than most other types of insurance. Most insurance, such as homeowners insurance, protects the policy holder from risks in the future, such as fire or storm damage. Title insurance, however, provides coverage for past problems or errors in the chain of title to the property, such as missing or forged signatures, missing discharges, probate issues and a host of other problems.

There are actually two separate forms of title insurance – one form that protects the mortgage lender and the other that protects the new owner. In transactions, where there is a mortgage lender, the bank will require a Lender’s Title Insurance policy to protect their loan. The buyer pays the premium as part of the closing costs for the transaction. A buyer has the option of purchasing a similar policy of protection for their own interests. The Owner’s Title Insurance policy requires an additional premium to be paid, but offers coverage in a greater amount and for the buyer’s direct benefit.

When a new title examination is performed in connection with a sale and a defect or dispute arises, an owner who purchased title insurance is protected.  First, the insurance company will hire a real estate lawyer at their sole expense to determine whether the dispute is really a title defect. An uninsured owner, however, would have to pay their own attorney. Second, if the issue truly represents a defect in title, the title insurance policy will assure that the transaction goes forward. 

Title insurance premiums are based on the value of the real estate at the time of the purchase. The amount of coverage automatically increases during the first five years of coverage up to150% of the original coverage amount. For example, if the original coverage amount was $500,000.00, the coverage would increase by the end of the fifth year to $750,000.00 .The premium for title insurance is paid once, at the closing, and is then effective for the entire time the buyer owns the property without the need to renew.

Title Insurance policies are provided through closing attorneys in Massachusetts.  Be sure to talk to about the option of Owner’s Title Insurance with him or her.  An owner’s title insurance policy generally protects you from financial losses caused by a number of issues the attorney can explain to you. 

 

You will have to buy title insurance from a company acceptable to your Lender. However, you can still shop around for the best premium rates, which can vary depending on how much competition there is in a market area. 

 

The federal Real Estate Settlement Procedures Act (RESPA) gives you the right to select the title company to issue your title insurance policy. As with all other aspects of your mortgage loan, you should shop for the best deal, compare the offers you receive from various companies, and negotiate for the best price.

 

Funding for Closing – Massachusetts is a “wet” state and does not allow dry funding.  The difference is that at a dry funding the loan will actually close without the money being there.  The funds are sent after the loan documents are reviewed by the lender. 

 

Mass law says that a lender may not cause a borrower to execute loan documents until the lender transfers the loan proceeds to the borrower, the borrower's attorney, or the lender's attorney. Transfer of loan proceeds is one of the following: 1. Wire transfer; 2.Certified check; 3. Bank treasurer's check; 4. Cashier's check; or 5. Or other type of good funds.  MA ST 183 § 63B

 

All lenders do however require a copy of the HUD1 or Settlement sheet be reviewed before either the wire transfer is sent or the check is made acceptable for deposit. In other words they want to make sure everything is correct before disbursement occurs.