Financing A Home

FINANCING A HOME

MORTGAGES

A mortgage is a loan that requires you to pledge your house to the lender as a guarantee that you will repay the loaned amount.

There are two basic types of mortgage loans: conventional loans and government loans. Conventional loans are loans made by private lending institutions, such as banks. Government loans are those which are regulated and funded through a governmental agency at the state or federal level.

Conventional Loans

Each lending institution offers a variety of different loan programs. It is important to investigate the loan programs that each institution has available to determine which fits best with your current situation. However, it will be helpful to understand the most common loan options. Most of the loans that you will encounter are variations of one of the following two options.

The 30-year fixed-rate loan

This loan has an interest rate that does not vary over the life of the loan. It is fully amortized which means that it has equal monthly payments, including both the principal and interest, that will result in the loan being completely paid at the end of the 30th year, if you make each monthly payment in full and on time.

The 30-year fixed-rate loan is the most stable, predictable loan available, making it desirable to many first-time home buyers. You will know what to expect for the duration of the loan, with no surprises. However, this loan may have higher interest rates, and higher monthly payments.

Variations of this loan include changing the term to make it shorter, usually 5, 10 or 15 years. Shortening the term raises the monthly payment, because it is amortized over a shorter period of time. However, this will save you money as it results in less interest being paid over the course of the loan.

The adjustable-rate mortgage (ARM)

This loan has an interest rate that changes according to a specified index. The rate is adjusted, and corresponding changes are made in the monthly payments, at prearranged intervals (ranging from six months to 10 years) over the life of the loan. ARMs are riskier than fixed-rate loans. Interest rates can go up or down. If they go down, you will benefit from a lower rate which means lower monthly payments. However, if they go up, so will your monthly payments. The advantage of an ARM is that it allows you to qualify for a larger loan, because it often has a lower starting interest rate and monthly payment.

Variations in ARMs usually occur in setting the frequency of the interest rate adjustments. Some are adjusted every six months. Some are fixed for five to ten years, and then adjusted annually every year after that. Some are adjusted only once during the life of the loan, usually after five to seven years.

Government Loans

Government loans are guaranteed, insured, or funded by a state or federal government agency. Government loans often require little or no money for down payments, have lower loan fees, and have lower interest rates making it easier to qualify.

Federal Housing Administration (FHA) loans

The Federal Housing Administration is not a lender, but it provides mortgage insurance to institutional lenders making it possible for them to provide fixed-rate and adjustable-rate loans with lower fees and interest rates to more risky borrowers. Financing through an FHA loan may slow the home buying process because there is more red tape involved. Sometimes, additional fees or points may be charged by the lending institution to make up for the low FHA loan interest rates. Be sure to ask the lender if this is the case at their institution.

Veterans Administration (VA) loans

VA loans are available to those who have served in the armed forces after 1940, and their spouses. Individuals who have served in other specified organizations, programs, or schools may also qualify. You can find out if you are eligible for this loan and get a certificate of eligibility (which is required) from the local Veterans Administration office. One certificate is given to a veteran once in his or her lifetime. This is a one shot opportunity.

VA loans are guaranteed by the Department of Veterans Affairs. They require no down payment and no payment of points on the part of the buyer. If points are charged by the lender, they must be paid by the seller. The seller will most likely build this factor into the acceptance of a buyer's offer.

Special Loan Programs

There are many special conventional and government loan programs available to first-time home buyers and home buyers with low-incomes. These programs vary, but can include low or no down payments, smaller monthly payments, assistance with closing costs, and other features that make financing a home more feasible. You can find out what programs are available by asking lenders and local and state housing offices.

MORTGAGE INSURANCE

Personal Mortgage Insurance (PMI) protects the lender from not being repaid for their loan. This enables them to make loans to individuals who are considered to be a higher risk. Most lenders require PMI when the down payment is less than 20% of the sales price. The payment of PMI is usually incorporated into your monthly mortgage payment, although sometimes it is required annually, or up front at the time of closing.

HOW TO GET A LOAN

Once you have located a lender who meets your loan needs, you will need to formally apply for the loan. A lender is going to evaluate the level of risk that will be taken in making you a loan based on specific criteria.

Criteria Used to Evaluate a Loan Application

Criteria will vary depending upon the lending institution and the type of loan you select. Be sure to ask your lender for their specific criteria. In general, lenders look at the following:

	The monthly payment of the loans cannot be more than 28% of your Gross Monthly Income.
	Your mortgage and other debts combined cannot be more than 36% of your Gross Monthly Income.
	You must have sufficient funds to make the down payment and closing costs.
	You should have a satisfactory credit report which entails: no current past due accounts, no bankruptcy (although, if it occurred more than two years ago you may still qualify in some cases), and no infrequent or late payments. Credit reports are evaluated on a point system. Points are deducted for each negative mark on your record. Most lenders look for a report that has 500 or more points out of 600.
	Your verified income and employment record will be reviewed.
	Verified checking and savings account statements will be considered.
	An appraisal of the property should state that the loan amount is not more than 20% greater than the market value of the home.
	A title search verifying that the seller has a free and clear title to sell the house is required. Lenders want to be sure that the seller is indeed the owner of the property, so they require a title search going back approximately 120 years. The title must be free and clear from any other claims to ownership in order for the seller to be able to sell the house. The title search also researches any liens filed by creditors on the nonpayment of bills or taxes. All outstanding liens must be paid or cleared before closing.

The Loan Interview

Documents to Take with You:

It will speed the process significantly if you bring all the necessary documents with you at the time of your loan interview.

	sales agreement for the house
	copy of canceled hand money check
	bank account numbers, addresses of the banks, and bank statements for the past three months
	pay stubs for the past 30 days (or other proof of your employment and salary) [If you have not been employed for the past 30 days, bring all the current information that you have available.]
	W-2 forms for the past 2-3 years
	information about debts, including loan and credit card account numbers, payment amounts, balances, and names and addresses of your creditors
	current landlord's name and address (if renting)
	copy of canceled rent checks or receipts for the past 12 months
	divorce papers, if applicable
	Social Security card, and driver's license (or other form of photo identification)
	Social Security or SSI award letter
	information regarding child support or alimony

**ALSO, ASK THE LENDER BEFORE YOU GO WHAT ADDITIONAL DOCUMENTS THEY REQUIRE. IF ANYTHING IS MISSING GET IT TO THEM AS SOON AS POSSIBLE.**

Documents You Should Receive:

At the time of your interview you should receive two things from the lender.

A GOOD FAITH ESTIMATE OF CLOSING COSTS: This document provides you with an itemized estimate of your total closing costs.
MORTGAGE DISCLOSURE STATEMENT: Lenders are required by law to disclose the percentage of loans that they transferred to another lender over the past three years. It also requires that a lending institution notify you within a 15 day period if your loan has been transferred. This notification includes the name of the new institution, its address, and the procedures for making payments to them.

MONTHLY MORTGAGE PAYMENTS

Your monthly mortgage payment includes principal, interest, and escrow payments toward insurance, and taxes. At the beginning of your payment, a very small percentage of the payment goes toward paying the actual loan amount. The largest portion goes toward paying the loan's interest. The costs of insurance and various property taxes are also included in the monthly payment. The lender keeps those funds in an account, called an escrow account, and pays those costs when they are due.

Lenders provide borrowers with annual escrow statements which indicate the amount you have in escrow, as well as a record of payments made from that account. Often these annual statements will also include an amortization schedule showing how much interest and how much principal has been paid on the loan up to that date.

FORECLOSURE

Foreclosure is the term used to refer to the legal means by which a lender will take possession of your home if you do not make your monthly mortgage payments. If this occurs, the lender can force you to move out and sell your home to pay off the loan.

IF YOU BEGIN TO HAVE TROUBLE MAKING YOUR MONTHLY PAYMENTS, CONTACT YOUR LENDER IMMEDIATELY. It is important to let the lender know the reason that you are unable to pay. If there is a legitimate reason, such as the loss of a job or illness preventing the ability to work, the lender may be able to offer some form of temporary or permanent assistance.

If you are unable to work out a solution with the lender, contact a housing counseling agency, which may offer other possible solutions, and assistance. DO NOT WAIT UNTIL IT IS TOO LATE OR YOU COULD LOSE YOUR HOME.

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