|
 |
 
Home Loans
If you've been thinking of purchasing a home, you may have some concerns about your ability to buy. You're not alone—many people postpone buying a home for various reasons. The most common reasons relate to the loan: lack of a downpayment, insufficient income, and credit problems.
First time homebuyers (and even some experienced homebuyers for that matter) are often intimidated by the loan process, but if you arm yourself with a basic understanding of what will be expected of you and what you can expect from the lender and then work with a qualified professional, you can avoid the horror stories we all hear about!
After 25 years in the business, experience has proven time and again that the vast majority of purchases which fail or are delayed do so because of a hang-up in the buyer's loan. So, the very best advice I can give you is to prequalify for a loan before you decide what house you want to buy.
One of the biggest problems facing homebuyers today is coming up with enough money for the
down payment and closing costs. The amount of money you have available can greatly limit or increase your purchasing power. The two most common ways to get the
down payment are to save the money or to use the proceeds from the sale of your existing home to purchase your new home. But there are other strategies for you to consider. Loan programs such as FHA, VA and Community Homebuyers can help. And here are some additional ways to accumulate the necessary funds that are acceptable to most lenders.
- Have your parents give you the money as a gift.
Any taxpayer is permitted to give up to $10,000 per year to another person without having to pay a gift tax. Technically, your mother could give you $10,000 and give $10,000 to your spouse. Your father could do the same. This would give you $40,000 for a
down payment and closing costs.
You'll have to provide documentation (such as a "gift letter") to prove that the money really is a gift and not a loan. Also, please note that if your
down payment is less than 20% or if you are obtaining a government-insured loan, at least 5% of the sales price must be paid from your own money.
- Shared Equity
An alternative way for parents to help their children purchase a home (or for anyone to help someone else, for that matter) is with "shared equity financing." This allows a person who does not live in the home, and another person who does, to be co-owners.
The occupant owner pays the non-occupant owner a monthly fair-market rent proportionate to the non-occupant owner's percentage of ownership. The non-occupant owner gets the tax deductions (again, in proportion to the share of ownership) allowed to landlords. The property must be the principal home of the occupant owner and the rent payments must be fair and in proportion to the non-occupant owner's interest in the property.
- Borrow against your 401K or Insurance Policy
You can also cash out your 401K but you will be subject to withdrawal penalties and payment of taxes. If you borrow against it, the loan payment will be counted as a debt.
- Sell or borrow against an asset.
Selling an asset such as a car can help increase the amount of money you have available. Borrowing against an asset is also acceptable as long as you qualify with the additional debt.
- Obtain a low point or zero point loan.
This will reduce your closing costs substantially, but there will be a tradeoff in the interest rate. This strategy works best if you don't have a lot of money up-front but have enough of a monthly income that you can afford a slightly higher monthly loan payment.
- Ask the seller to pay for all or a part of your non-recurring closing costs.
You real estate agent can assist you with this when you make an offer on a home. And with some government back loans, the seller is required to pay some of the buyer's closing costs.
- Ask the seller to carry back financing
If the seller does not need all of the equity in their property, they may be willing to carry some of the financing which will reduce the amount of your
down payment.
- Check into city and/or county down payment assistance programs.
- Close escrow late in the month to reduce the amount of prepaid interest on the loan.
- Use equity in another property.
You may be able to obtain 100% financing if you or someone you know has equity in a property that can be used as collateral.
Not just income from a job counts. Income from alimony, child support, bonuses or even future raises might be considered in qualifying for a loan. The key is to have the documentation to prove that it is income you can count on in the future. Another option is to find a co-mortgator who is willing to go on the loan with you to help you qualify. And talk to a loan officer to find out about financing options that will allow you to stretch your purchasing power, such as an FHA loan, an adjustable rate mortgage, balloon financing or a graduated payment mortgage.
If you can, get a copy of your credit report before applying for a home loan. This will enable you to correct any errors before they become an issue with the lender, start repairing your credit if you've had previous problems or establish credit if necessary. You can request a copy of your credit report, for a small fee, by writing to any one of the following credit bureaus:
TRW Complimentary Credit Report,
P.O. Box 2350,
Chatsworth, California, 91313
Trans Union Corporation,
Customer Relations Department,
P.O. Box 7000, Department P,
North Olmstead, Ohio, 44070
Equifax
P.O. Box 740241, Department P,
Atlanta, Georgia 30374
In consideration of possible security risks, I do not recommend that anyone request or receive their credit report via an on-line service. A loan officer can run your report for you. Most Real Estate Brokers can run a copy as well.
When you read your credit report, look for:
Incorrect Entries -- if there are mistakes, you can have them corrected by writing to each credit bureau and requesting that the information be deleted. They will contact the creditor who must respond within 30 days. If the creditor does not respond, the item will be removed and a new report will be sent to you. If there is still a dispute, you can add a 100-word statement to your file explaining your side of the story.
Outdated Negative Entries -- You can request, in writing, that unfavorable items older than 7 years be removed from your report. Bankruptcies can only be removed after 10 years.
Current Negative Credit -- Talk over current negative entries with your loan officer or Real Estate Broker. They often have strategies for re-establishing good credit. One strategy is to contact the creditor directly. The creditor may be willing to remove the derogatory information from your credit file if you make a full or partial payment toward the debt. They may also "re-age" the account by making the current month the first repayment month and will show no late payments.
When you break it down to just 8 steps the loan process doesn't seem so intimidating:
Step 1: The Application
This step will be the most time consuming one for you, but it is the key to a smooth loan process! Your lender will be looking for a lot of information and paperwork , so you might as well gather it now and have it on hand.
Step 2: Ordering Documentation
Very shortly after completing the loan application (usually within 24 hours), your loan officer will run a copy of your credit report and send out "verification" forms to your employer, landlord, current lender, etc. to verify the information on your loan application. If you have already entered into a contract to purchase a home, the loan officer will also order the appraisal.
Step 3: Receiving the Documentation
As the documentation comes in, the loan officer will review it for red flags or problems which need to be addressed. This is where it is critical that you have an experienced loan officer working for you and with you. A loan officer that can anticipate what the underwriter will want to see and package the information in a concise and easily understood manner can make all the difference between getting a thumb up or a thumb down.
Step 4: Submitting the Loan
The "loan package" which contains all of the information gathered so far is sent off for review.
Step 5: Approving the Loan
It usually takes a loan underwriter from 24 to 72 hours to review the loan package and make the decision on whether you get the loan. This is where you really find out how important it is that your loan officer put together the most complete (and easy to read) package available. If the underwriter feels something is missing or misinterprets something, he or she may just set the package aside while waiting for you and the loan officer to provide whatever else he or she thinks is needed.
Step 6: Printing the loan papers and sending them to escrow
The lingo for this is "drawing the docs." The lender prints all the loan papers and then sends them to the escrow company. The escrow company adds some more paperwork (such as your estimated net sheet which shows you how much more money you need to bring in to close the escrow) and then calls you in to sign everything. Its a good idea to ask either your real estate agent or your loan officer to come to this meeting. They can review the papers and, if there are problems, take care of them on the spot.
Step 7: Funding the loan
Your signed papers are returned to the lender who reviews them all to make sure everything was signed correctly and that all the paperwork is complete. Lenders call this the "funding review." Depending on how busy they are, the review process can take 24 to 72 hours. Once the lender is sure that all the t's are crossed and all the i's have been dotted, the lender releases the money to the escrow company for disbursement. This is also the point where you, as the buyer needs to have the balance of your funds into escrow. Your funds have to be "good faith," meaning as a cashier's check or wire transferred from an savings or checking account. A personal check can't be accepted unless its given in advance with enough time for the check to be deposited and cleared through the bank.
Step 8: Closing
As soon as the escrow company has the go ahead from everyone and all the funds, they record the deed which transfers title from the seller to the buyer. They disburse the moneys as instructed and the escrow is officially "closed."
All lenders use the same loan application and all lenders will ask you for the same information. By having this information on hand when you begin, you can make things a lot easier for everyone!
1) Your Residence History:
a. Previous addresses for the last 2 years.
b. How long you've lived at each residence for the last 2 years.
c. If you are renting now, your landlord's name and address.
2) Your Employment History:
a. Name and address for each employer for the last 2 years.
b. The dates you worked at each place of employment.
c. If there any gaps in your employment, why?
3) Your Outstanding Loans and Credit Cards. For each account:
a. Creditor's name and address.
b. The account number.
c. The balance owed.
d. Your monthly payment.
e. How many months left to pay of the loan or account.
4) Savings, Checking or Investment Accounts. For each account:
a. Name and address for each financial institution.
b. The account number.
c. Current balance or value.
5) Real Estate You Currently Own. For each property:
a. The address.
b. The estimated market value.
c. The outstanding loan balance.
d. Your monthly payment(s).
e. If its an investment property, the amount of your monthly rental income.
6) Personal Property You Own:
a. Net cash value of your life insurance.
b. The make, year and value of each car you own.
c. Total value of your furniture or other personal property.
And plan to give your loan officer copies of:
-
Most recent pay stub.
-
Most recent 2 years W-2's
-
Most recent 2 years tax returns
-
If self-employed, year-to-date profit and loss statement
-
Most recent 2 months bank statements for each checking / savings account
-
Copy of driver's license and social security card
-
Verification of your down payment (such as copy of your savings account statement showing the funds deposited)
Calling around and asking for interest rate quotes is not the best way to find a lender! And here's why:
- Interest rates change daily, so today's quote may not be available tomorrow.
- Often the rates quoted over the phone are not "locked" prices; the lender just wants to get you in the door. This means that the rates will be subject to change until the day your loan closes instead of being set for a specified period of time.
- The lender knows nothing about your situation or needs so the interest rate they quote may or may not be a program that will fit you — or that you qualify for.
- You won't know what the lender really has to offer you.
Competitive rates are important, but when you consider the fact that most lenders get their money from the same source anyway, its not surprising that they all have essentially the same rates to offer.
Consider asking these questions as well:
- Are they a mortgage banker or direct lender?
A mortgage banker or a direct lender is a lender who not only originates their own loans but also underwrites, approves, funds and services them. A mortgage banker has their own money to lend and so they have the most control over the loan process.
- Are they a mortgage broker?
A mortgage broker originates loans, but does not actually lend the money. They submit the package to an outside source that underwrites and funds the loan. A mortgage broker may have less control over the loan process but they can typically offer the best opportunity to get your loan approved since they can send the loan to many difference lenders. They can also typically have access to a wider variety of loan programs.
- How long has the company been in business?
Lenders comes and go. Make sure that the company you are dealing with has been around for a while.
- What is their reputation in the community?
Real estate brokers can be a good resource for this information!
- Do they lock-in their interest rates and for how long?
Interest rates can be locked for 15, 30, 45 or up to 60 days.
Meeting with a loan officer and getting qualified for a loan before looking for a home will save you time, energy and frustration. Prequalifying for a loan:
- Tells you how much home you can afford.
- Helps you avoid buying less home than you can afford or being disappointed if you find the home of your dreams only to discover that you can't get the loan you need to purchase it.
- Shows you about how much money you'll need for the down payment and closing costs.
- Lets you know what you can expect your monthly payment to be for principal, interest, taxes and insurance (called the
"PITI").
- Identifies the loan programs you qualify for.
With the wide variety of loan programs available, it's important to know which types you qualify for and which will best suit your needs. You might be eligible for a special first-time homebuyer program. If you feel you can afford a higher mortgage payment but can't meet standard qualifying ratios, a co-mortgagor may work for you.
| |
|
|
|
|
|
