The mortgage process is not a secret or mysterious procedure. You can be an informed consumer and possibly even save thousands of dollars over the length of your mortgage if you follow these steps
Step 1: Asking the tough questions.
Before you start the refinance or purchase process you need to answer a few important questions. If you do not answer them honestly, the final decision you make will be based upon inaccurate information. This might lead you to a mortgage that is not the best financial solution for you, which is not the right mortgage, and could cost you thousands of dollars over the term of the mortgage.
- Ask yourself these questions:
- What is my current mortgage rate?
- Do I just want a lower mortgage rate?
- Do I escrow for real estate taxes and insurance.
- Do I want cash out at the closing?
- Do I want to pay off my credit cards or other debts?
- Do I have Personal Mortgage Insurance on my loan now?
- How long do I intend to live in my home?
- What is our total household income per year?
- Will our incomes remain steady and our jobs remain constant?
- How much money am I willing to put towards a down payment?
- How much house can I afford to buy?
- Do I qualify for a VA loan?
- Am I a first time home buyer?
- What are my credit scores?
- Do I have anything on my credit report that might cause a lender alarm?
- What are the real estate taxes on the property, and what will the home owner’s insurance cost?
- What is my home worth?
By honestly answering the questions above, you are on your way to determining the type of Mortgage that best fits your financial circumstances. You are taking control of the mortgage process, not allowing it to take control of you.
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Step 2: Answering the questions honestly and formulating a plan.
We all want a lower mortgage rate; but why waste our time trying to obtain one if our credit scores do not warrant it, or if we only have a few years left on our mortgage? By answering the above questions, you are narrowing down the field of what mortgage is best for you!
What is my current mortgage rate?
Look at you last mortgage statement or pull out your old mortgage loan paperwork to see what your interest rate is (5.5%, 9%). Also look for the date you took out the mortgage and the maturity date (how many years you must pay on the mortgage loan).
Do I just want a lower mortgage rate?
First you need to determine your current rate and then check the newspapers or go online and see what rates are today. Are today’s rates that much lower than what you are currently paying? Banks, Credit Unions, and Mortgage Companies do not do mortgage loans for free. If the difference in rate is only a ¼% - 1/2% lower, the costs associated with refinancing your mortgage loan may not make economic sense. For example, if will cost you $4,000 to refinance a $200,000 home mortgage loan to a rate that’s only ¼% lower than you have now, it will be almost a decade before the money you paid to refinance will be outstripped by the money you saved in interest. Will you even be in your current house in 10 years?
Do I escrow for real estate taxes and insurance?
Pull out your latest real estate tax bill as well as your latest insurance bill; determine exactly what the yearly costs are. These numbers are important since they help determine your debt ratios, which are significant to the mortgage lender. Your mortgage statement will show if there are separate monthly charges for real estate taxes, home owner’s insurance, and mortgage insurance.
Do I want Cash out at the mortgage closing?
Do I need cash for home improvements, college tuition, debts, bills, medical expenses, investment purposes, or any of a number of other reasons? Determine the amount of cash you would like to take out of your refinance. Remember: the amount of cash you take out can increase the mortgage interest rate and your monthly payment.
Do I want to pay off my credit cards or other debts?
Determine what credit cards and other debts you would like to pay off, and then add them up. Put the highest-interest credit card bills first on your list and work down from there. If you have any judgments or liens (state or federal tax liens), place them on the list The mortgage lender will require you to pay them off at the time of the mortgage closing. If there are any medical debts, the mortgage lender might require that you pay those off as well.
Do I have mortgage insurance on my loan now?
Look at your mortgage statement to see if you are paying monthly mortgage insurance. Mortgage insurance is required by many lenders for loans that are more than 80% of the mortgage loan compared to the value of the home. If your home is valued at $100,000 and you have a $90,000 loan, many mortgage lenders will require mortgage insurance for the amount above $80,000 ($10,000 worth of mortgage insurance coverage). This protects the mortgage lender in case of a mortgage loan default.
How long do I intend to live in my home?
This question is tough to answer, and it can have great ramifications. The government says that most people move every seven years. So why do most people have a 30 year fixed rate loan? They probably have one because their parents and grandparents had this type of loan. Within the last 10 years or so the mortgage industry has created new mortgage loan products for the consumer. These mortgage loans are tailored for specific consumer situations. That is why you are going through this mortgage process: you are determining what mortgage product is best for you. Perhaps you are buying a starter home for you and your wife, or you are refinancing after several years and thinking about the extra space you’ll need when the children start to arrive. Changing jobs, moving to be closer to your parent after you have become established; there are many reasons to move, so why have a long term mortgage? You may be moving in 3-5 years or intend to stay for 15-30 years. The honest answer will help determine right mortgage loan for you.
What is our total household income per year?
You and your mortgage lender will want to know what your monthly and yearly income is. The easiest way to figure this out is to look at your pay stubs and last year’s W-2s. The W-2 will show exactly what you made last year. The pay stub should show the year to date as well as what you make weekly, bi-weekly or monthly. The pay stub will also show any debits such as loan repayments or child support payments that are being deducted from your paycheck. You need to know these amounts since they will help the mortgage lender to determine the amount of the mortgage loan for which you qualify.
Will our incomes remain steady and our jobs remain constant?
Will your income remain steady over the next few years or will it increase substantially? If you think it will increase, you might be able to forego principal payments of your mortgage loan in the early years and catch up in the later years. Also take into consideration whether you expect your spouse’s employment status to change.
How much money am I willing to put towards a down payment?
Gather your checking account statements, savings statements, money market statements, and stocks and bond statements and determine how much money you actually have to make a down payment on a home. Don’t forget to factor in the closing costs on the loan. Will your parents or friends give you any money for your down payment?
How much house can I afford to buy?
A special calculator will help you answer this question. It will ask for the information you have determined by answering the last few questions. Click here to go to this calculator.
Do I qualify for a VA loan?
If you qualify for a VA loan, you may be able to purchase a home with very little down payment. There are many other benefits associated with this program as well. Make sure you tell the lender you qualify for a VA loan. Answers to questions regarding VA loans and eligibility requirements can be found at homeloans.va.gov .
Am I a first-time home buyer?
If you answer yes to this question, there are some benefits available to you for a first-time mortgage loan. Here are a few web sites that can give you further help in making a good decision about your first home mortgage loan:
What are my credit scores?
By knowing your credit scores, you may be able to determine roughly what the mortgage loan interest rate you qualify for is. To find out your scores and obtain a copy of your credit report, go to:
Your credit scores are an indication of how likely you are to default on your mortgage loan. The higher the score, the less likely you are to default, and the lower your interest rate is likely to be.
Do I have anything on my credit report that might cause a lender alarm?
By reviewing your credit report in advance you can see for yourself any blemishes that might cause a lender concern. These blemishes may be such things as late payments on credit card debt or a late auto payment. Make sure you take a close look at these reports and determine if they are accurate. If not, you should notify the credit bureau right away. Make sure you directly contact all of the 3 credit report agencies. The more late payments or other blemishes you have, the higher the chance that the mortgage interest rate will be higher, the loan to value will be lower, or BOTH. The key to low home mortgage loan rates is great credit.
What are the real estate taxes on the property, and what will the home owner’s insurance cost?
Look for your real estate tax bill from your county assessor and your latest home owner’s insurance bill. Write down the yearly costs of the taxes and insurance.
What is my home worth?
Determining the value of your home in advance may save you a lot of time and disappointment. The mortgage lender will require an appraisal to be done to determine the value of your home. You need to know in advance what your home is worth, since this will tell you the loan limit, as well as how much equity (the value of the home minus your current loan balance) you have in your home. The simplest way to determine the value of your home is to look at what similar homes are selling for in your neighborhood. If you live in the same model home as the one down the street, and it sold for $100,000 one month ago; your home is probably going to be valued at $100,000. If your home was the same value as the one down the street, but you added a 500 square foot addition; your home will likely appraise for more.
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Step 3: Organizing your information.
Here are the documents that you may need to give to your loan officer to make sure that the process goes as quickly and smoothly as possible.
Income documents:
- Copies of last two paychecks.
- Copies of last two years’ W-2’s.
- Copies of last two years’ Federal Income Tax returns.
Mortgage Documents:
- Copy of previous closing statement (if refinancing).
- Copy of last month’s mortgage statement (if refinancing).
- If on Land Contract, Copy of Land Contract.
- If paying on Land Contract, copies of last 12 months’ checks to Land Contract holder.
Miscellaneous Documents:
- Copy of last month’s bank statement.
- Copy of last month’s 401-K statement.
- Copy of last month’s Investment statements.
- Copy of Homeowner’s Insurance front page.
- Copy of real estate tax bill.
- Copy of Divorce Decree (if applicable).
- Copy of Child Support Agreement (if applicable).
- Copy of Driver’s License.
- Copy of Bankruptcy papers (if you filed in the last 5 years or information is still being shown on your credit report).
- Copy of the last appraisal on your home (if available).
- Letter detailing the reason for any blemishes or challenges on your credit report. (For example, you were out of work for 3 months because of illness, or there were two late payments on a credit card but they are being disputed because the charges were not yours in the first place.)
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Step 4: Deciding what type of loan is right for you.
As you can see from the below table, you can qualify for almost any loan regardless of the type of credit you have. That does not mean that you should accept any loan you qualify for from the mortgage lender. What the table shows you is that you have choices. This table may give you some ideas of what to ask your loan officer about, and may help you decide what type of loan you are looking for.
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Type of Loan
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Good Credit
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Bad Credit
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Time in Home Less than 5 yrs
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Time in Home Less than 10 yrs
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Time in Home Less than 20 yrs
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Interest Only
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x
|
|
x
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|
|
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1 Year Arm
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x
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x
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x
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|
|
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3 Year Arm
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x
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x
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x
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|
|
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5 Year Arm
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x
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x
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|
|
|
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15 Year Fixed
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x
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x
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|
x
|
|
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20 Year Fixed
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x
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x
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|
|
x
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30 Year Fixed
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x
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x
|
|
|
x
|
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Home Equity
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x
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x
|
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x
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x
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Debt Consolidation
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x
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x
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x
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x
|
x
|
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FHA
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x
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x
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|
|
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Interest Only:
This mortgage loan features interest-only monthly payments for a number of years. Your monthly payment during this initial period will include no interest. The borrower is allowed to make additional principal payments (to pay down the loan balance) at any time. This type of loan is ideal for self-employed borrowers who can make principal payments when business is good, borrowers that have had a reduction in income, and borrowers who are just starting out and want lower monthly payments in the beginning of their loan.
1 Year Arm:
The mortgage interest rate remains fixed for 1 year and becomes adjustable after that 1 year period. The adjustments depend on many factors (Index, margin, caps). This loan is for the borrower that wants a very low rate, either because they will not be in the home for a very long time, or because they plan on refinancing later and want a lower rate now. Be Careful: this loan is not for everybody.
3 Year Arm:
The mortgage interest rate remains fixed for 3 years and becomes adjustable after that 3 year period. If you are only going to stay in your home for three years, a 3-year Arm would be ideal for you. This is because the mortgage interest rate will remain fixed for 3 years and will generally be lower than that of a comparable 15- or 30-year fixed rate mortgage loan. The loan is not due if you happen to stay another year, but the interest rate generally adjusts upward.
5 Year Arm:
The mortgage interest rate remains fixed for 5 years and becomes adjustable after that 5 year period.
15 Year Fixed:
The mortgage interest rate remains fixed for all 15 years of the loan. The borrower makes equal mortgage payments over that 15 year period, at the end of which the loan is paid for in full.
20 Year Fixed:
The mortgage interest rate remains fixed for all 20 years of the loan. The borrower makes equal mortgage payments over that 20 year period, at the end of which the loan is paid for in full.
30 Year Fixed:
The mortgage interest rate remains fixed for all 30 years of the loan. The borrower makes equal mortgage payments over that 30 year period, at the end of which the loan is paid for in full.
Home Equity Loan (HELOC):
Also known as a second mortgage, this type of loan is generally taken out when you already have a first mortgage on your home and have a great first mortgage rate. Generally it is less expensive take out a Home Equity Loan since the loan amount is smaller. When you only need a small amount of cash out, or you have a few debts you want to consolidate, a Home Equity Loan may save you some money over a new first mortgage. Caution: many lenders will try to have you refinance your first mortgage before they offer you a new second Mortgage. This is because they make more money on first mortgages.
Debt Consolidation Loan:
This means that you are consolidating several small debts into one by taking out either a new first mortgage or a second mortgage.
FHA Mortgage Loans:
FHA’s mortgage insurance programs offer lenders an incentive to loan money to otherwise creditworthy people who don’t meet the lender’s typical requirements with regard to debt-to-income ratios, credit histories, and other such areas. There are many benefits to this loan program, so be sure to see if you qualify. For more information on FHA’s loan program and qualification requirements, go to www.fha.gov.
There are many variations on each of the above loans. Ask your loan officer plenty of questions until you understand exactly what you are being offered.
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Step 5: Apply for and compare mortgage loans.
There are many different types of mortgage lenders. From your local Bank, Savings & Loan, Credit Unions, National Mortgage Lenders (Countrywide, Washington Mutual), Internet Companies (Lendingtree, E-Loan), to Mortgage Bankers and Mortgage Brokers. As a consumer you have a wide range of choices, and it’s possible that each of the above can give you a great mortgage loan - IF you’ve done your homework and determined in advance what your situation is!
The loan officer will start by asking you many questions or by beginning an application. You have at your fingertips all of the answers - this will be a surprise. This will put the loan officer on the defensive, since he is now dealing with an informed consumer. Tell him what type of loan you are looking for: “I want a 15 year fixed rate and I want $10,000 cash out after all expenses are included in the loan”. You have taken charge; you have directed him to one product and made his life easy. The loan officer should come back with a rate quote or possible monthly payment based upon the information you gave him. You should not have been charged one penny at this point. Once he quotes a rate, you need find out what he charges and what all of the fees associated with the loan are. You do not want this verbally, but in the form of a GOOD FAITH ESTIMATE (GFE) and a TRUTH IN LENDING STATEMENT (TIL). He is required by law to send you these documents within 3 business days of taking an application from you. If he is reluctant, or does not send you the GFE and TIL, move on to another lender. The only way you can see if you are receiving a great mortgage loan is by having the GFE and TIL to compare to other loan offers. These documents level the playing field. They give you the ability to analyze what all of the costs associated with the loan are and which lender’s deal is best for you.
Once you have obtained the GFE and TIL and made your choice, it’s time to commit to the loan and obtain loan approval. Ask the lender to approve the loan subject to the appraisal of the property. In other words, you want all contingencies except the appraisal removed before you pay for the appraisal. You should only order and pay for the appraisal once the approval is obtained and a loan commitment letter is given to you.
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Step 6: Closing the Loan
Once the appraisal is ordered and reviewed by the Lender, the loan should close within a few days. The whole process (if you have done your job by answering all of the questions in Step 1 & 2 and providing all of the documents outlined in Step 3) should take 2-3 business weeks. The process could take as little time as a week (the time to order and receive the appraisal), or over a month if you have an inept lender.
You’re in charge. The lender/loan officer should be more than willing to communicate with you every step of the way, including being available either at the closing table or on the phone during the closing. If the loan officer is not taking your calls, ask for his supervisor or the owner of the company. If they do not respond take your business elsewhere. There are people out there that want your business and will provide you great service. Never stay with someone that acts like they are doing you a favor. After all, you have done most of the work! The mortgage process is not some secret, mysterious process. In fact, you should already know if you qualify for a loan based on your answers to the above questions. Best of luck on your home mortgage loan search!
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