I. Preparation. Where do you begin to secure finances for purchasing a new home, refinancing an existing home, purchasing your dream ranch, or obtaining a real estate equity line of credit? Providence Properties can help. Obtaining a real estate loan can be confusing. You can simplify the process and avoid a lot of potential headaches by getting off to a good start. Here are a couple of ways to do so:
- Build your “Green File”. Organizing and compiling all your pertinent financial documents into a ‘green file’ (think ‘green’ for money) is an absolute must for any potential borrower. Your green file is a resume or profile that will give lenders an idea of what kind of debtor you might be. The typical green file should contain:
- Financial statements
- Bank accounts
- Investment records
- Credit card information
- Auto loans
- Other indebtedness
- Recent pay stubs
- Tax returns for two years
Another means by which lenders gauge your trustworthiness as a borrower is through your credit rating. Credit ratings tracks your credit history, which includes such crucial information as the number of your open loans and the punctuality of your payments.
- Treat your credit like gold. Credit ratings are important because they determine whether or not you will be approved for a loan and what your interest rate wll be. Thus, you cannot take your credit rating seriously enough! We suggest checking your credit reports at least once a year or before making any major purchase to ensure the accuracy of the information.
- What the scores means. Ratings usually vary between 400 and 800. Anything above 620 is good. If you exceed 680, you are considered premium and may even get a lower interest rate.
- Determine your credit rating. You can do this by contacting a credit reporting agency such as Equifax, Experian or Trans Union. Above all, don’t hesitate to consult with your lender if you need to improve your rating.
Buying real estate wisely is all about credit and interest terms.
- Prioritize your Costs. Down payments, closing costs and additional expenses (such as surveys and inspections) should be at the top of your list. On the other hand, be sure to pay down on your current revolving and high-interest rate debts, such as credit cards, because this will influence your credit rating and interest rate.
- Remember: lenders like stability. Instill confidence in your potential lender by avoiding any big, sudden moves both in your career and your finances. If that job change or big budget purchase absolutely cannot be postponed, check with your lender first and consider the consequences.
- Choose a Lender (Mortgage Company). Securing finances requires a decision that you may have to live with for many years-so spend time comparing the terms and conditions of different lenders, before making your choice. There are a number of ways to find a willing lender, whether through traditional print ads, Realtor referrals or Internet sources. There are also several considerations to keep in mind when shopping for the right lender and program:
- Price. Consider the competitiveness of a lender’s terms with that of others, especially for mortgage rates, interest rates, and additional closing costs and points.
- Diversity of products. Price is important but by no means should it be your only determining factor. How extensive is the lender’s range of offered loan programs? Check the availability of the loan program most appropriate to your credit profile and property.
- Rapport. Do your lenders and brokers communicate effectively and thoroughly? Are they attentive and prompt? You aren’t looking for just a guide but a partner -someone you can work with and trust every step of the way.
- Connections. Check whether the lender has access to local loan approval committees that understand your goals as a borrower.
- Choose a Loan. Though there are many different kinds of loans available today, these three are the most commonly used:
- Fixed loan. This long-term option requires monthly payments that will remain the same (fixed) throughout the duration of the loan. The loan term may vary from fifteen to thirty years.
- Adjustable rate mortgage (ARM). The loan rate here will be determined by factors such as the Federal Funds rate index, readjustment intervals, and capitalization rate. The initial interest rate can be as much as 2 to 3 percent lower than a comparable fixed rate mortgage. This can make homeownership more affordable. However you should first examine all factors and consider the downside risks before selecting this option.
- Hybrid loan. Also known as an intermediate or convertable ARM, it offers a fixed interest rate for a specified initial period before it ‘switches’ to an ARM and adjusts with the market every six months or every year thereafter.
Consult with your lender and Providence Properties to determine which loan type and program would best correspond with your resources and needs.
III. Understanding Financing. Don’t be intimidated by the jargon used in financing. Here are a number of key terms you’ll see frequently in your loan application process.
- Credit report. Request your lender to order one from a third party credit agency such as Equifax, Experian or Trans Union. A credit report should contain information on all your outstanding loans and repayment history, and will typically cost under fifty dollars.
- Application/processing fee. This is the lender’s fee for determining your capacity as a borrower and will usually be charged upon closing of the loan. Expect a price tag of a couple of hundred dollars.
- Annual percentage rate (APR). The APR expresses the sum total of all your borrowing costs as a interest rate percentage charged on the loan balance.
- Indexes. Changes in indexes such as the Federal Funds Rate and the Treasury Bill are used to periodically readjust the interest rates in adjustable rate mortgages (ARMs).
- Points. When mortgage companies are competing by offering lower interest rates, they may charge you a “point,” a one-time pre-paid interest fee, calculated as a percentage of the loan. Points are considered part of the cost of credit to the borrower, and part of the investment return to the lender. They may range from 0.25% to 2% of the loan balance, and are usually paid up front. One point equals 1%.
- Appraisal cost. This is the fee charged by an independent appraiser who may be hired by your lender to evaluate the property’s purchase price, condition and in relation to similar recent neighborhood sales. This information is necessary to the lender because it ensures repayment in case the borrower defaults, forcing the lender to sell the property.
- Miscellaneous fees. Various costs will be incurred during the processing of your loan request, such as notary, courier, county recording fees and title company escrow fee.
- Pre-payment penalties. A prepayment penalty is a provision of your contract with the lender that states that in the event you pay off the loan early, you will pay a penalty. Penalties are usually expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest. They often decline or disappear altogether with the passage of time.
- Pre-Approval. How is pre-approval different from pre-qualification? What are the advantages of each and which option would be the best for you?
- Pre-Qualification. This is an assessment by the lender, based on certain basic information given by the borrower (e.g. employment, income, asset information, current monthly debt, and credit worthiness). Based on this quick evaluation the lender makes a tentative decision to pre-qualify the borrower for a certain loan amount. This does not commit the lender to a loan, rather it is only an opinion of the lender.
- Pre-Approval. Like a pre-qualification, a pre-approval involves a lender making an assessment of a borrower’s buying capacity based on her or his income. But unlike a pre-qualification, a pre-approval letter also checks the applicant’s credit and is a surer verification of a borrower’s income. It takes longer to process and will require more comprehensive documentation, but gives a clearer and more definitive guarantee of the loan amount a borrower is entitled to.
- Why Choose Pre-Approval? It’s advisable to go straight to a pre-approval for several reasons. A pre-approval can strengthen your purchasing power as a far more accurate evaluation of how much house or real estate you are capable of buying. The pre-approval will be more appealing and thus perform better than a pre-qualification in a competitive sellers’ market. It’s also more time-effective since it reduces the time your lender will need to process and fund your loan.
IV. Application and Processing.
- Brokers and Lenders: Telling the Difference. The lender or creditor is the party who:
- disburses or provides funds to the borrower at the end of a successful loan application process,
- receives the note attesting the borrower’s obligation to repay.
The broker, meanwhile, acts as an intermediary between the borrower and the lender and serves as the applicant’s main contact throughout the process. The mortgage broker usually receives a service fee from the lender for customer services rendered.
- Loan application forms: Where to Find Them. Most forms can be downloaded from a lender’s website. Fill out all forms accurately and completely, and contact your lender for any questions or clarifications.
- Documentation: Keeping your Papers in Order. It is highly recommended to keep an organized file containing both originals and copies of all documents accumulated throughout the entire application process. These will include:
- 2 years of W-2 forms from your employer, or 2 years of tax returns for those who are self-employed
- Recent pay stubs
- 3 months of bank and money market statements
- Brokerage, mutual fund and retirement account statements
- Proof of other income sources (alimony, trusts, rental income, etc.)
- Credit card statements
- Auto /boat / student / miscellaneous loans
- Drivers’ license or form of ID
- Copies of visa or green card (for non-US citizens)
- Copies of existing mortgage debts (for those applying for a home equity line of credit or another mortgage)
- Underwriting: keeping in touch. Underwriters, hired by lenders, are analysts who examine all the data from a borrower’s property and transaction, and ultimately determine whether or not mortgages should be issued to the applicant. Loan approval committees will use underwriters’ reports during their deliberations to evaluate the property and the applicants’ creditworthiness. Your broker may contact you frequently in the course of the loan application process, so prompt communication is necessary to keep the process running smoothly.
- Signing. Here comes the best part. Once your lender has agreed to close or fund your loan, the signing can begin. Before this happens, however, be sure to verify and finalize all the documents, and to supply any additional requirements (such as photo IDs or cashiers’ checks). The final loan documents are usually signed in the presence of an escrow officer or a notary at a title company.
- Wiring Funds. Your down payment is either automatically deducted or wired-in the latter case, the money is electronically transferred between financial companies. Make sure that the wiring instructions as well as all important numbers must be clarified and checked for accuracy by both parties.
Give yourself a pat on the back. Your loan is now funded! Tie up any loose ends by confirming the money transfer with your broker and filing all pertinent documents of the transaction.