Most real estate contracts require the buyer include a pre-approval letter with your offer to
On-Line Internet Lending:
I am not a fan of On-Line Lending... From what I have seen, it's nothing but Bad News. They could hit you with excessive junk fees, your loan officer is located across the continent, when there is a problem... Good luck. They might promise you a good rate, but in the end, you will pay dearly and you'll here several excuses why you were not qualified to get that good rate in the end when it's too late. Because they know you have signed a legal binding contract to buy a house and you can't back out & lose it.
Chances are, you will never make your closing date... You will look like a jerk, the jerk who used a lender off the internet... and you will feel like a jerk. (sorry for the bluntness, but it's true)
You are going to shop for a home, get the best price, feel good about yourself, then you think the battle is over. That you just apply for a loan, kick back, wait till closing, right? Wrong! The lender that you choose will make or break the transaction. When you have a local lender, your Loan Officer is available in person, your loan is processed here, in the St. Louis area. If you have a problem, you can get in someone's face... But if you will consider my advice, your loan will go smooth.
Some Loan Officers, are either new-to-the-business or savvy-out-to-get-you experts, even the local ones... There are several ways for them to make extra money from doing your loan that are either called junk fees or hidden elsewhere in the loan.
Good Faith Estimate
This is an actual written quote from a Lender that documents
what the costs of the loan will be... Several lenders tend to
dance around this issue. Rarely will they offer it to you.
The good part is you know up front what the costs are, prevent any hidden / last minute junk fees, and the lender must keep their written word... BY ASKING FOR A "GOOD FAITH ESTIMATE"
THE LENDER KNOWS UP FRONT YOU KNOW WHAT YOUR DOING...
This type of mortgage is your most common, and typical for banks, savings & loans, brokers and mortgage companies. There are many variances and costs from lender to lender. You should ask for a good faith estimate whenever shopping for any type of mortgage. This document which has to be legally issued within 3 business days of making loan application (along with a few others), and details the cost of doing business with that particular lending institution. This is where you can compare costs, rates & service. Sometimes just getting a good faith estimate is a feat in itself.
The conventional mortgage is probably the type of mortgage your parents had. You can put as little or as much as you want, down. The down payment percentage will determine if you will be required to pay private mortgage insurance (PMI). Private Mortgage Insurance is basically default insurance which protects the lender, which you pay. If you put 20% of the sales price down, you will not be required to pay PMI. You can also avoid PMI by having an adequate credit score to qualify for a second mortgage for the difference of the 20% that you don’t have available. These are commonly known as 80-10-10’s or an 80-15-5. By meeting the 80% requirement on the first mortgage it negates the need for PMI. In addition, doing a side by side comparison, paying PMI vs. let’s say an 80-15-5, the combined payments are less than paying PMI, and you get the tax advantage of the interest write off. PMI is not tax deductible.
There are also 100% financing Conventional loans available. Some of these programs are aimed at low to moderate income borrowers. They may also have credit score qualifications and/or first time buyer restrictions. There are several variations to this type of loan, which will vary slightly from lender to lender.
Pros & Cons of Conventional Financing:
Usually the quickest loan to close. Appraisals don’t normally predicate for repairs. Must be credit worthy (no late pays typically in the last 12 months) If you have 20% to put down, this is the loan you want to choose...
These are federally insured mortgages. Normally, a bank or S&L don't handle them, but mortgage companies do. They are more lenient with credit issues, but are a little tougher on the house. The appraiser will note if there is any peeling paint inside or outside on the property if the house was built before 1978. This is due to the health issue of lead base paint. If there are any areas noted, these will have to be scraped and painted, and then re-inspected prior to closing. Additionally, the roof will need at least 3 years of life, knob & tube wiring isn’t allowed and crawl spaces have to have vents and be at least 18 inches from the lowest joist. Those are the most commonly noted repairs. Termite inspections are also required.
Credit can be sketchy on an FHA loan but will have to be explained and make sense. You can also have down payment assistance on an FHA loan. These DAP’s as they are called, can be seller backed or a not for profit agency such as Chapa, Genesis and Nehemiah, which are national programs and most widely used in this market. There are also local DAP’s, such as Madison County Community Development (MCCD). This program has income limitations, requires a whole house inspection (by an approved inspector), and must qualify for FHA financing. It’s a 5 year forgivable loan, once you have lived there for 5 years the loan is no longer repayable.
There are also loans available for credit that is less than perfect. With a conventional loan being an “A” loan, the less than perfect credit would be a “B” loan. These loans are riskier so the rate is usually higher. Recent bankruptcies and foreclosures would fit into this category and stated income borrowers as well as no documentation loans.
Are you a Veteran?
Do you have limited funds for down payment and closing costs?
The VA Mortgage offers:
No down payment
Easy qualification with regard to credit and income
Out of pocket expenses can come from a gift
No monthly insurance requirement
Best for people who are:
Qualified veterans, reservists, active servicemen and women and their spouses.
(check with your regional VA office to see if you are eligible)
Eligible borrowers who have limited funds for down payment and closing costs.
VA mortgages offer the opportunity to buy a home up to a specified amount with no down payment. These loans are administered by the Department of Veterans Affairs. VA loans are assumable and have more flexible requirements than either FHA or conventional (not government insured) home loans. Available in fixed-rate mortgage options.
Grant Money Programs /
Bad Credit Programs
Mortgage brokers are companies that sell mortgages for many different banks and lenders. They usually get a commission based on a flat fee or a percentage of the loan, paid by the lender. Brokers can be useful in quickly getting you a loan, because they represent many different types of mortgages, and one of them is bound to be ideal for your financial situation. Sometimes, the APR through brokers can be less expensive than going directly to the same bank yourself for financing, because in many cases the broker charges less for closing a loan than the bank's own internal salespeople.
You can get cheaper APR mortgages.
Sliding lock. If you lock in your APR through the broker, and the market interest rates drop, some brokers can get out of the lock and restart another lock for little or no extra fees. Many banks will not allow that type of practice when dealing directly with them. Some banks will allow you to re-lock, some will not, and some will charge a fee.
Can quickly find a loan that you would qualify for, whereas a bank might only have one or two loan types that you would not qualify for.
They must courier papers back and forth to lenders, so postage charges can add up. It can be $200 in postage fees from one broker before your loan closes.
Many unscrupulous brokers can steer you into the wrong mortgage. Just because you qualify quickly for a particular mortgage, does not mean it's the best mortgage for you to have. Some try to charge you fees, or put you into mortgages that don't allow early termination, or they have excessively high origination fees. These are issues you need to watch out for.
There are many, many different types of mortgages. We will cover some of the most common types on this page.
Fixed Rate Mortgage
With a fixed rate mortgage your interest rate is set prior to closing on your home and does not change for the entire term of the loan. If you are approved far in advance of closing many banks will give you the opportunity to lock in the interest rate 2 - 3 months prior to closing. Sometimes you may be able to lock further in advance for a fee, which is usually some percentage of a point. A point is equal to 1% of the loan amount. Locking early for a fee may be advantageous if rates are low and expected to rise.
Pros Of Fixed Rate Mortgages:
You know what your monthly payment amount will be and it will not change.
No worries about interest rate hikes that will raise your payments.
Cons Of Fixed Rate Mortgages:
Initial interest rate is higher than an adjustable rate mortgage.
If interest rates decline, it will not lower your payments.
If the interest rates decline significantly, you can refinance your mortgage to take advantage of the lower interest rate. Refinance charges will be incurred, so the interest rate drop must be able to justify these costs.
Adjustable Rate Mortgage or ARM
With an Adjustable Rate Mortgage the interest rate will vary throughout the term of the loan. How often the rate changes depends upon the adjustment period of the loan.
Pros Of Adjustable Rate Mortgages
Adjustable Rate Mortgages are initially priced at a lower mortgage rate than fixed interest rate mortgages. This will result in a lower initial payment.
The bank is willing to give a lower mortgage interest rate because it is "protected" from higher interest rates in the future.
Adjustable rate mortgages generally have a rate increase cap (a cap is a maximum) per year and a lifetime cap on the interest rate. These are important details in an adjustable rate mortgage. It may be better to use an ARM when rates are up high, and they are less advantageous when rates are low.
If you plan to be in a house for only 3-5 years, an ARM allows you to pay lower monthly payments for those 3-5 years than a fixed interest rate mortgage.
If interest rates drop, an ARM provides a way to participate in these lower rates without having to refinance your house. This can save you closing costs.
The adjustment period is key to the loan. How often they adjust the payment is important because you want the longest adjustable period. Most decent ARMs have an adjustment period of one year, so your monthly payments remain the same for a year, then increase or decrease the next year.
Cons Of Adjustable Rate Mortgages
Interest rate hikes will increase the amount of your payments.
Since it is difficult to predict interest rates changes, it may be difficult to plan a adjustable rate mortgage payment into your budget.
If you have a cap over 2%, your monthly payments can go up significantly. Try to get the lowest cap you can.
Catch up clauses can come out of nowhere. If the cap was 3% and the rates rose 5%, they can invoke a "catch up" clause the following year, which can significantly increase your monthly payments.
Any time interest rates are adjustable, there is risk of volatility and increased monthly payments from the mortgage lenders.
Avoid adjustable rate mortgages with negative amortization!
Be very weary of the word "discount" when looking at ARMs as this means that the loan will most likely have a shorter adjustment period which will lead to a higher cost in the long run. This is similar to introductory rates on a credit card.
BE ASSURED THE RATES WILL RISE SHARPLY SOONER RATHER THAN LATER!!!
Other mortgage payment items:
Personal Mortgage Insurance (PMI)
20% down/equity and you don't have to pay this worthless expense! PMI is insurance that you are forced to take out by the bank if you are putting down less than a certain percentage (usually 20%) of the total purchase price. This insurance protects the bank from losses in case you stop making your payments. The bank must drop the PMI once you have built up more than 22% in equity. Stay on top of this and make sure they drop it when they are supposed to. If your property appreciates you effectively have more equity in your home. If this happens you should ask your lender if they will drop the PMI requirement based on the new value. In order for them to drop the PMI they will most likely require an appraisal which will cost you around $250.
You can possibly avoid paying PMI with a 80 / 20 Loan
20% down/equity and you can pay your own taxes. This means that if you put down at least 20% or have built up 20% in equity the bank will usually let you hold the tax money in an interest bearing account until the taxes are due!
Insurance (Homeowners and Flood)
Most banks require you to keep homeowners insurance and flood insurance in escrow to protect their investment. This way they always know that you have the insurance to protect the property that they are lending you money on.
Some other definitions
The "term" or length of the mortgage is an important factor that must be considered when looking for a mortgage. Mortgages are generally 15, 20 and 30 years. Generally the shorter the term of the mortgage, the lower the interest rate will be. This is because the bank has less exposure to interest rate increases in the future. The shorter the term, the less chance of interest increases. The shorter term mortgages will save you a large amount of money in interest payments. If you can not afford a shorter term mortgage, a large amount of interest and monthly payments can be saved by making extra payments towards the loan principle.
Points on a Mortgage
The more points (a point is equal to 1% of the mortgage amount) you are willing to pay, the lower the interest rate on the mortgage will be. So a basic decision needs to be made here, pay the points ($$$$) up front and save on the interest on the mortgage later, or save the money now and pay the higher interest rate as you go.
Below is an example of two mortgages. The first mortgage is a no points mortgage and the second mortgage has points paid up front. Note: in some cases the points can be "put back into" the mortgage, thus increasing the amount of the mortgage by the amount of the points paid on the mortgage.
Mortgage Amount Points Interest Rate Term Monthly Payment* Total Interest
$150,000.00 0 7.00% 30 Years $997.95 $209,266.34
$150,000.00 2 6.75% 30 Years $972.90 $200,240.76
$153,000.00 2 6.75% 30 Years $992.36 $204,243.90
* Monthly Payment includes Principle and Interest.
In the example above, the payment of 2 points, equivalent to $3,000.00 on the $150,000.00 mortgage lowered the monthly payment by $25.05 and saved a total of $9,025.58 in interest over the life of the mortgage.
On the third row in the table the $3,000.00 in points were put back into the mortgage, increasing the mortgage amount $150,000.00 to $153,000.00 The monthly payments decrease from $997.95 to $992.36 a savings of $5.59, while the interest over the life of the loan went down from $209,266.34
to $204,243.90 a savings of $5,022.34 in this case.
Bottom Line: Look Beyond The APR
Don't just look at the APR of a mortgage loan. The example above clearly shows how important it is to take into account the points on a home mortgage loan. Depending on your situation, it can be better for you to pay points in order to get a lower APR.
How do you make the decision?
How long do you plan on staying in the house?
If you plan on staying in the house only a short period of time, the lower initial cost of less points or even no points would be the way to go. However, if you are planning to stay in the house for a longer period of time, a large amount of money can be saved by paying the points up front and saving on lower interest later.
Do you have the money to pay for the higher amount of points?
If you plan on staying in the house a long period of time, and you have the money to pay the points
up front, it may be a good idea to pay the point(s) and save the interest. This can be a considerable amount of money over the life of the loan.
Does the point fee lower the APR enough?
If you plan on staying in the house a long period time and have the money to pay the points up front, the next question to ask is, Does paying the points to get a lower interest rate, lower the interest rate enough? This depends on how long you will stay in the house and how much a point will lower the interest rate. Generally a point will lower your interest rate by about 1/8 - 1/4 of a percent on a 30 year fixed rate mortgage and 1/4 - 1/2 a percent on a 15 year fix rate mortgage.
Points can be put back into the mortgage.
You may be able to "put the points into the mortgage". This means that the dollar amount of the points are added into the mortgage amount. One point on a $100,000.00 is equal to $1,000.00 So if you were getting a $100,000.00 mortgage with a 1 point fee put back into the mortgage, the new mortgage amount would be $101,000.00. Or you can ask the seller to pay the points for you.
Summary Of The Process:
2. Purchase a Home.
3. Apply For Your Loan
4. The Processing Of Your Loan Application
5. Appraising Your Home