DETERMINING NEEDS & WANTS

DETERMINING FINANCIAL FEASIBILITY

Pre-Approval

Some lenders have a pre-approval process.  This process determines whether or not you are eligible for a mortgage and if so, how much you are eligible to borrow. Pre-approvals can be free, or can cost up to $350, depending on the extent of the pre-approval process and the lending institution.

It is important to ask each lender what constitutes their pre-approval process. Some lenders look at one element of the process, such as a credit report, or non-verified income.  This is termed pre-qualification. Pre-qualification is the most simplified form of pre-approval because it only covers one element of qualification, and none of the information is verified. Other institutions offer pre-approvals that are all-inclusive and more complex. The only part missing is the appraisal of the home you are interested in purchasing.  These are the most reliable, but are time limited, usually valid for up to 120 days.

Getting a pre-approval helps you to know how much you can pay for a house.  However, there are certain ways to get a picture of your eligibility before actually visiting a lender.

Credit

For a small fee you can obtain a copy of your credit report from a credit reporting company.  A credit report includes personal identification, employment history, payment history, a list of those who have inquired about your credit in the past six months, and public record of bankruptcies, foreclosures, or tax liens. This will give you the opportunity to see what a lender will be looking at when you apply for a loan. The most common reasons that buyers may be declined for a mortgage loan are because of poor credit or no credit.  By obtaining a credit report you may be able to find out if problems exist and take care of them before going to a lender. 

If there is inaccurate information on your credit report, call the credit company and discuss it. A credit company can change inaccurate information at no cost to you, only if it is not your credit problem. If a payment is inaccurate or a delinquent notice shows up incorrectly, you must contact the agency that is owed the money. The credit company can only resolve these problems when the billing company alerts them.

Not all creditors supply information to credit bureaus, so it is possible that you have credit that will not show up on your report.  By contacting the credit bureau, you can have any credit card accounts added to your report for a small fee. This will give you a credit history if your report currently does not contain any, or you can order a report from the three major credit companies.

Poor or bad credit cannot be removed from your report for seven years.  Lenders have different criteria for granting a mortgage, so do not lose hope if you have a late payment, bankruptcy, repossession, etc.  Some creditors may look at only recent years, and they may approve a loan if your report demonstrates that your bill-paying history has improved, and is currently in good standing.

Qualifying Amount

There are general rules that lenders tend to use to determine how much to loan to each individual based on his income and current debts. You can calculate how much you may qualify for by using the same methods that lenders apply. The Rules of Thumb most often used are:

1. Total monthly housing costs included in a mortgage payment,  including principal, interest, mortgage insurance, property   taxes, association dues, and homeowner's insurance, may not exceed 28% of the borrower’s gross monthly income (GMI).  To  calculate the estimated mortgage amount, multiply your gross monthly income by .28.

 GMI X  .28 = _______

For example, if your GMI is $1,700, the total monthly mortgage payment you could afford would be:

$1,700 X .28 = $476

2. Total monthly debts, including the aforementioned housing costs, and any other debts (car or student loans, credit cards, child support, etc.) may not exceed 36% of the borrower’s gross monthly income (GMI).  To calculate the estimated mortgage amount, multiply your gross monthly income      by .36.  Then, subtract all your other monthly debts (not including any housing costs) from that amount.  The remainder      is your feasible monthly mortgage payment amount.

(GMI X .36) - Total Debts = _______

For example, with a GMI of $1,700, and monthly debt payments equal to $200, your monthly payment amount would be:

($1,700 X .36) - $200 = $412

TYPES OF LENDERS AND WHAT THEY HAVE TO OFFER

Do not wait until you have found a home to start shopping for a lender.  This will only slow the process.  Investigate at least three different lenders before making a decision. This investigation can be done before or during the time you look for a house.

Mortgage Brokers:

Brokers find a mortgage lender who is willing to make you a loan.  They may operate as an independent business, not necessarily as your agent or representative.  Most often brokers are paid by the lender, but they may also try to charge you.

Savings and Loans:

Half of home mortgages made in the United States are financed by savings and loans.  These institutions will often lend up to 90% of the house's appraised value.

Credit Unions:

Credit unions are nonprofit banks for people employed in the same industry or with some other common bond.  Because they are nonprofit organizations, credit unions can offer lower down payment requirements, lower interest rates, and lower closing costs.  However, not all credit unions offer mortgages.

Large National or Regional Banks:

These types of banks offer a variety of mortgage programs, but because of their size, they have rigid lending policies. They tend to sell more of their mortgages to other institutions. These institutions may be out of the immediate area.  This means that you will need to send your payments through the mail, and count on institutions outside of your area to be aware of the taxes that need to be paid out of your mortgage escrow account.  It is a good idea to ask what percentage of loans are sold by each bank so that the likelihood that a loan will be sold out of the area is known.

Local Banks:

Local banks offer a more limited variety of mortgage programs. They typically do not sell their loans to other institutions. Because they are locally operated, they are not as rigid in their policies, so there may be more flexibility in working with them.

What To Look For In A Lender

What To Ask A Lender:

1. What is the length and maturity of the loan?
   The typical loan term is 30 years, but 10, 15 or 20 year loans are also common.  The longer the loan, the lower the monthly payment will be, but it will have a higher total  cost over its term because there is more time for interest to accumulate.
   

2. What is the interest rate?
   Different lenders will have different rates, but do not be fooled into thinking that the lowest interest rate is the best deal.  There are trade-offs with lower interest rates, such as additional payments at closing, and/or higher down payments.  When comparing interest rates, make sure you are comparing  apples to apples.  Ask all lenders for the same loan terms,  and for the Annual Percentage Rate (APR). The APR incorporates not only loan interest, but closing  costs and down payment in  the calculation.
    

3. What are the number of points you will have to pay for a given  interest rate?
   A point is equal to one percent of the loan.  Points count  as pre-paid interest. Essentially, points are paid as fees to secure a certain interest rate.  For example, a lender  may have an interest rate of 6.75%. However, if you pay one point up front (or one percent of the loan amount), you can reduce that interest rate to 6.5%.  You can usually pay  between one and three points to get a reduced interest rate.
   

4. Are application and other fees charged by the lender?
   Examples of fees charged by the lender are:  document fees ($50-$300), underwriting fees ($300), loan origination fees, and loan processing fees. These fees are not always necessary. You and your attorney should review all additional fees before agreeing to pay any of them.
   

5. Will payment and/or rates change? If so, how often, and by how much?
   Adjustable rate mortgages are loans with interest rates that   change.  The interest rate can go up or down depending on  the interest rates at the time of adjustment. 
   

6. Is there an opportunity for refinancing the loan?
   Refinancing involves obtaining a new mortgage when interest rates are lower, and using it to pay off your existing mortgage. If you refinance you will have to pay closing costs again, but if interest rates have dropped at least two percentage points lower than your existing interest rate, it is usually worth it.
   

7. Is there a prepayment penalty?
   Prepayment is when you pay off the loan before the end of the term.  Most loans do not have penalties associated with prepayment, but be sure to ask.
   

8. Do you have FHA or VA loans?
   These are government loans that may offer lower downpayment costs, closing costs, and/or monthly payments. They are described further in the financing section.
   

9. Do you offer any special programs for first-time home buyers?
   Some lenders and government offices offer loans with special  features that help those who have never purchased a home to become a home owner.  You can find out what programs are   available  by asking lenders and local and state housing offices.
   

10. Will I need to pay for private mortgage insurance (PMI)?
    Private mortgage insurance protects the lender if someone fails to pay back their loan.  Having PMI enables the lender  to loan money to someone who may be considered a higher risk. Check with the lender to determine if PMI is required.
    

11. What is the typical time it takes to process my application?
    It takes an average of three to four weeks to process a loan application.
    

12. How long after my application is approved can I go to closing?
    This usually takes about three weeks, depending on the amount of work that still needs to be done to get to closing.  The  entire process, application to closing, may take anywhere from thirty to ninety days. Frequent communication with the loan  processor will prevent delays. Be sure to ask the loan  processor if there is any information s/he needs.        
    
     

DEFINING WHAT YOU WANT

When you begin thinking of what house to buy, be sure to determine the difference between needs and wants.  Keep your list of needs as short as possible.

Defining What You Want In A Location

 Defining What You Want In A House

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