June 20, 2011

What should I know about a mortgage?

To find the right home mortgage is definitely a pivotal factor in the home buying and selling process. Lack of financing, the wrong financing or a delay in financing is a scenario that can cause much frustration and heartache. There is probably nothing more disappointing for a buyer than to spend weeks, possibly months, looking at homes in a particular price range only to discovering that they can not qualify for a loan at that price point.

Find the money first

Over-shopping is just one reason the importance of mortgage pre-qualification is not taken for granted.

Critical first step

Even before you start looking for a home, have a mortgage loan officer pre-qualify you. It is a critical first step. Here are the key benefits of pre-qualification:

  • you know in advance what you can afford
  • you save time not looking at the wrong price range
  • you get the lender’s perspective of the marketplace
  • your future agent will see your pre-approval as a positive sign you are serious
  • A source of financing can influence a seller’s reaction to an offer
  • it can lead to a more efficient and faster closing
  • you learn about the financial alternatives available to you and have time to consider them

Because there are many aspects involved in determining buying power, professional help here will go a long way toward a positive experience.

The lender needs to know

After you have been pre-qualified and found a home you would like to purchase, you will have to fill out an application and gather important information for your loan officer. Although some lenders may need additional documentation, by having the information below ready for the initial interview, you should be able to save time and avoid possible delays later on. If you tie this information to your loan pre-qualification, there should be no surprises.

Mortgage loan application checklist

___ Employment History (for the past two years and include the name, address, dates of employ and income)

___ Social Security Numbers for both borrower and co-borrower

___ Checking and Savings Accounts (names, addresses, balances, last two months bank statements)

___ Stock, Bonds, Investment Acct. (Statements, #s, issue dates, certificates, etc.

___ Life Insurance Policies (policy #s, amount, company, approximate cash value)

___ Retirement Plan (approx. value, statement copy)

___ Other Assets (autos, furniture, boats, real estate, etc.)

___ Liabilities (creditor name, address, payment amount, current balances)

___ Rent, Utilities and Other Expenses (landlord’s name and address for the past year)

___ Self-Employed or Commissioned Borrower (2 years tax returns)

___W-2’s for two years (employee)

___Paycheck stubs for one month

Remember, your loan officer is there to assist you during this process.

Your financing source

There are many aspects to consider before you pick a lending source. Do an internet search for reviews on the lenders. Changes in government oversight of lending rules and procedures have stiffen and in many cases created an atmosphere where obtaining a home mortgage is more difficult. For example, lower credit scores may result in higher interest rates. When choosing a source you should consider how competitive their rates are; the types of mortgages they offer, specifics on each loan, the cost to borrow and how they service their loans. Seemingly tiny differences can have a big effect on the  cost or convenience of a loan product. Here is a list of questions for you to ask them.

  1. What different types of mortgages do you offer?
  2. Do you have multiple mortgage sources with different rates and costs that compete for your business?
  3. Do you sell the mortgage after you have originated it? If so, who services the loan going forward?
  4. Do you provide a written estimate of the monthly payments and a breakdown of the closing costs?
  5. Do you escrow for real estate taxes and insurance?
  6. Do you offer private mortgage insurance (PMI) for loans with minimum down payments? What do they cost?
  7. How do we eliminate PMI down the road?
  8. Do you offer FHA mortgages? If not, why not?
  9. Do you have a sense of your ratio between applications and approvals?
  10. Based on the information we have provided you, do you have a recommendation as to what type of loan is the best for our circumstances?
  11. Who are your main competitors?

Be cautious of organizations (or a particular loan officer) that suggests you come back after you have found a home. It is a good indication the person is unaware of the value of pre-qualification and a sign they may not practice good customer service. Insist on pre-qualification in person. You want to develop a good working relationship with your lender in order to be comfortable with the entire financing process. In some cases, if you have already established credit with a bank or a credit union they are already somewhat familiar with you.

What to expect

The lending process can be confusing because loan officers will spend time and energy trying to convince you they are the best mortgage source. But when their underwriters spend even more time asking follow-up questions and challenging your application, it can be confusing. Conflicting signals are due to the complementary roles the loan origination (sales), and underwriting (risk control) functions play within the organization. Just being aware of the conflicting position may help in cutting down on the frustration it can cause.

Some quick tips

The type of financing, the amount of your mortgage and whom you finance with should be based on what is comfortable for you both financially and service-wise. Mortgage lending is an extremely competitive field, and it will pay dividends to shop for a loan. You want to be in a position where they are competing for your business. In addition to banks and credit unions, check out mortgage brokers as well. This type of lender has many loan products and specializes in mortgage loans only. They typically originate the loan and one of their preferred lenders funds the loan. Unlike a traditional banker, they are strictly commission based and work more like real estate agents.

There are other sources of loans to check out. Online mortgages are available and underwritten by some of the largest financial institutions in the country. VA mortgages are available for veterans with no-down-payment required for qualifying veterans. There are also specialized mortgages. An example of a specialized mortgage is the Department of Housing and Urban Development(HUD) 203(k) Program. The 203(k) is an FHA insured loan specifically designed for homeowners planning on repairing and occupying a “fixer-upper”. The cost of the repairs and improvements are included in the loan amount. There are many sources of loans that reveal themselves when you come into the market and utilize the tools available to seek them out.

One of the more common errors is a buyer pre-qualifies, finds a home and secures a contract subject to loan approval, made an application and approved. Then, they buy a car before the closing! The lender rejects the closing because their circumstances have just changed. This circumstance and others have killed many closings. Don’t let it happen to you.

In conclusion

Your financial circumstances, needs and preferences, should be discussed and evaluated thoroughly before making a commitment. Mortgage pre-qualification will assist with the overall efficiency of the home purchase and sale. Be prepared for the mortgage application by “gathering the proper information and forms” prior to your meeting with lenders. Save time and makeup several application packages at the same time, then put them to good use. Also, remember that there are various financial institutions from which to choose. Asking questions and getting accurate, straightforward answers will assist you in obtaining your housing goal.  Learn more about home mortgage questions from readers.