In a Nutshell
ONE: The first step in getting a loan is deciding what kind of program is best for you:
The total cost of a mortgage loan consists of the interest rate on the loan, origination fees, discount points and
miscellaneous other charges. There are a range of interest rate/point combinations to meet your needs. Your
lender should explain all of your options to you. Here are some terms and concepts you should know:
"Loan Program" is a term that describes whether the rate can change or not and how long the
loan will last. So when you hear the term "30 Year Fixed" it means the loan is payable over 30
years and the interest rate will never change. A "One Year ARM" is not a loan that is paid off in
one year. It is a 30 year loan with a rate that starts changing after one year.
"Conforming" loans” conform to the criteria and limits set forth by the largest buyers of loans,
FNMA (Fannie Mae) and FHLMC (Freddie Mac).
"Jumbo" loans” are bought by different lenders. The loan amounts for Jumbo loans exceed the
conforming guidelines.
"Fixed rate loans" have interest rates that can never change (i.e. the interest rate remains the
same throughout the life of the loan).
"Adjustable Rate Mortgages" have features that allow for future interest rate changes if
interest rates in general change.
"Loan-to-Value" one of the most often used jargon terms. If you have a house valued at
$100,000 with a $90,000 loan you have a 90% loan-to-value. The difference (in this case 10%)
is the amount of cash down payment provided that reduced the amount financed. (essentially it
is the loan amount divided by the sales price or market value)
TWO Picking a rate:
The first reaction most people have is to pick the lowest rate, but that may not always be the best choice. There
are more variables that go into determining the overall cost of a mortgage than just the rate. Here are some
important terms and concepts you should consider:
"Points" are fees paid up front that are used to lower the interest rate. It's like prepaying the
interest on your loan in one lump sum to save money every month you keep the loan. The
trouble is it takes about 5-7 years to recoup the money you pay to lower the rate. So if you don't
plan on keeping the property very long it doesn't pay to pay points. Each point is 1% of the loan
balance.
"Annual Percentage Rate (APR)" is a way to compare different loan programs. The
calculation is complicated to explain but to put it simply, the APR takes into account the fees
paid to get the loan and is stated as an interest rate which some would call the "true rate." Have
your lender should explain this concept to you and/or research the web on “APR”.
THREE Finding a mortgage lender and submitting your application for a mortgage:
Lenders do vary in both the mortgage products they offer and the services they provide. It is best to "shop
before you buy." Lenders regularly advertise their loans and rates in local newspapers and on websites. Here
are some terms and concepts you should know:
"Preapproval" is a process that lets you get approved for your loan before you find a house to
buy. It's a very good thing to do since it makes you appear very strong to the seller, and
you can act quickly since the qualifying part of the process is out of the way.
"Rate Lock" is when you want your lender to guarantee the rate you want will be in effect
when your loan closes. Rates change every day-sometimes more than once-so if your rate isn't
locked, it can be pretty nerve wracking. The choice to lock or not is entirely up to you.
"Floating" means your rate is not locked- it's floating with the market.
FOUR Getting Pre-Approved:
This process may vary from lender to lender, but generally once you have submitted your loan application, it
will be assigned to a loan officer who will maintain primary responsibility for your loan through to closing. The
loan officer will generally submit the loan to the underwriting department for a preliminary loan decision. If you
are seeking preapproval, underwriting can occur before an appraisal is performed. In this case your approval is
subject only to an acceptable property appraisal once you have chosen the home. Here are some terms you
should know:
"Preliminary Approval" means that your income and credit meet the guidelines for the loan
you've chosen. This approval is in writing and contains any necessary conditions to provide the
final approval.
"Conditions or Stipulations" are tasks that must be completed before your loan can be funded.
Read your preliminary approval letter carefully, and be sure to discuss all the conditions
with your mortgage loan officer.
FIVE Processing Your Application:
To process your loan is to make sure all the proper documentation needed has been obtained and checked
ensuring the conditions stated in the preliminary approval are met. Here are some terms you should know:
"Disclosures" are documents your lender must mail to you within 3 business days after
receiving your application. You must sign and return them to the lender.
"Good Faith Estimate of Settlement Costs" is a legal form that discloses all the fees and
charges associated with getting your loan. In the case of third party fees like title insurance
and homeowners insurance, these are purely estimates.
"Truth in Lending Disclosure" is a legal form that describes your loan in detail including the
rate, Annual Percentage Rate and any Adjustable Rate features that may apply.
“A Property Appraisal" is a report written by an appraiser who visits the property to measure
it, draw a simple floor plan and take photos. The appraiser also compares the property to other
properties in the area that sold in the previous 6 months. This is to determine what the "fair
market value" is and what others have paid for similar properties.
"Title Search" confirms who owns the property and what liens there are against it which must
be paid prior to funding your loan.
"Verifications" are sent to your bank, your employer and to your landlord if you are renting to
verify what you put on the application.
Your lender will order an appraisal of the property. Within days, you will be sent a complete set of mortgage
disclosure documents by your lender. These documents will include a Good Faith Estimate of settlement
charges, a Federal Truth-In-Lending Disclosure, a Mortgage Program Disclosure, and other information
and documents pertinent to your transaction. You should carefully review these documents for accuracy and
contact your lender with any questions.
Within the first week after you apply for a mortgage, two other events should occur. First, an appraiser hired by
your lender should have made an appointment to perform a physical inspection of the property. Second, you
should engage the services of a title or closing attorney to perform the settlement and escrow process. NOTE:
generally I will select a title company or closing attorney on your behalf from a pool of those I’ve worked
with in the past.
SIX Final Approval:
Once the appraisal, credit report, and executed disclosure and documentation package is received, your lender
will prepare your loan for submission for final approval. The underwriter will review and analyze the processed
loan package and either approve, deny or suspend your application for a loan. In reaching a decision on your
application, the underwriter will take into consideration your income, credit, cash reserves and the property
itself. Here are some terms you should know:
"Housing Ratio" is a percentage of your gross monthly income it takes to make your house
payment including taxes and insurance. If you earn $6,000 and your house expense is $1,500,
you have a 25% housing ratio.
"Total Debt Ratio" is the percentage of your gross monthly income it takes to pay your house
payment plus other monthly payments you make, like car payments, credit cards, etc.
"Cash Reserves" is money left in the bank after the loan funds. Cash in the bank is a very
important factor. It is a good idea to have cash reserves when your loan closes just in case you
run into unforeseen circumstances. It is usually wise to have at least 2 months worth of house
payments.
"Credit History" is the timeliness with which you have paid your bills in the past. Most
important is the last two years.
SEVEN Funding Your Loan:
The end of the lending process is usually called "Settlement or Closing" because that's when everybody "settles
up." Loan funds are either wired to an escrow account or the lender sends a cashier's check to the closing agent.
In a purchase you would also add your down payment and money for any fees you have to pay. The current
owner's lender is paid in full, any fees charged by other parties are paid and whatever is left goes to the seller.
In refinances, your current lender is paid off and all the fees are paid out of the loan proceeds. If the refinance is
"no cash out," you probably won't get much money from the closing. In a "cash out" refinance, there is
significant money that is disbursed to you.
While at the closing you will read and sign numerous documents relative to the purchase or refinance of your
property. Your closing agent will be able to answer any questions you may have regarding these documents.
Included with my buyer’s consultation packet is a “Know what you are signing” document that explains
each document you will/may sign from our initial meeting up through closing”.