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Helpful Mortgage Tips
When taking steps toward purchasing a home, it is likely that feelings of
excitement, happiness, stress and unfamiliarity will happen in a matter of
moments. Whether you are new to home buying or if you have been through the
process before, it's likely when the time comes to apply for a mortgage loan,
it can quickly become daunting. The paperwork alone can be enough to sabotage
the home buying experience, but when the mortgage process is understood, the
home buying experience can be rewarding. Follow these steps to ensure your home
buying experience is stress-free and relaxing.
Qualifying For The Loan
The Loan Application Form
Purchase Details
Personal Information
Employment History and Sources of Income
Personal Assets
Personal Indebtedness
Additional Information
After The Loan Application - What Next?
Reducing The Anxiety of Waiting
Be Prepared For Home Ownership
Planning For The Unexpected
If Your Mortgage Becomes Delinquent
What To Do When You Default On Your Mortgage
Mortgage Loan Workout Plans
Qualifying For The Loan
To ensure the mortgage process begins smoothly, you should select a lender that
you trust. A loan officer will follow up and schedule a meeting. This person
acts as the information gatherer who will collect pertinent information
necessary to approve a loan. The loan officer should discuss the various kinds
of loans available to you, interest rates, fees for each type and the
qualification requirements. During the meeting, the loan officer will fill out
or assist you in filling out the application.
After the application is complete, you should have a general idea about
interest rates and fees that will be charged. The total cost of a mortgage
includes the interest rate on the loan, origination fees, discount points and
other charges. One point is equal to one percent of the amount of the loan and
is usually collected at the loan closing, or settlement. The interest rate is
attached onto the monthly payment. Points refer to the percentage amount of
cash you must bring to the closing.
Many lenders will provide a range of interest rate and point combinations that
are unique to every borrower. Typically, the higher the interest rate, the
lower the points will be. For instance, if the current interest rate is 8.5
percent with two points, a nine percent rate may be offered at no points. For
first time buyers or for lower mortgage amounts, it might be more appropriate
to settle for no points during the closing. If your company offers transfer
assistance, it's possible that you will not be responsible for origination fees
or points. The loan officer should explain all of these options.
Be certain that you are aware of how and when the rate and fees are set. Many
lenders will quote a rate and fee at the time the application is taken. Then
they will guarantee, or "lock" the rate quote for a specified length of time.
This lock protects you from rising interest rates while the loan is processed,
but it also commits you to close the loan at the rate and the fee, even if
rates decline before closing. Lock periods may run from 10 to 60 days, but
longer periods can be made available for an additional fee. The lock must be
long enough to last through the closing date.
If locking in a rate is not the way to go or if you believe that rates could
further decrease, you may opt to "float." This means the final rate and fees
will be established closer the settlement date. Before accepting a floating
rate, make sure that the rise in interest rates will not create a problem or
place you in a cash crunch. Regardless of the option you choose, please ensure
that you understand the terms of a lock.
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The Loan Application Form
On the loan application, you will be asked to provide data on the property you
wish to purchase. Additional information on your personal income and that of
your spouse will be asked. If you prepare early by organizing your check stubs,
bank account information and your social security numbers, the application
process will take less time and hopefully an approval will come faster. You
should be prepared to answer all questions truthfully and to the best of your
knowledge.
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Purchase Details
The property acts as security for the mortgage and therefore, the lender will
order an appraisal of the property. To solidify this process, you need to have
the following information available:
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A complete copy of the sales
contract, including addendums, signed by all parties, showing the full names of
the sellers and buyers as they will appear on the new deed, the amount of
earnest money deposit and who is responsible for closing costs.
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If the house is to be built, or
is still under construction, a set of plans and specifications.
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The complete mailing address of
the property, its age and its full legal description.
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Name, address and telephone
number of the real estate agent and/or the seller of the property who will
assist the appraiser in obtaining access to the property. All of this
information should be in the purchase contract. If not, consult the Realtor or
the seller.
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Personal
Information
The loan officer will ask for social security numbers of you and your spouse
(or other CO-borrowers), your age, number of years of schooling, your marital
status, the number and ages of dependents and your current address and
telephone number. If you have not lived at your current address more than two
years, you must furnish former addresses for up to seven years. You will also
be asked to detail your current housing expenses such as rent or mortgage
payments, real estate taxes and insurance. You will need the name and address
of your landlord(s) or mortgage lender(s) for the past two years.
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Employment
History and Sources of Income
A steady job impacts your ability to make the regular payments on the mortgage
In order to qualify for a mortgage you will need to provide the following:
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At least two years employment
history with employer's name and address, your job title or position, length of
time on the job, salary, bonuses, commissions and average overtime pay.
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Recent paycheck stubs and
Federal W-2 forms for two years (some lenders may require full Federal tax
returns).
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Records of dividends and
interest received from investments.
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If you are self-employed, full
tax returns and financial statements for two years, plus a profit and loss
statement for the current year to date.
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A written explanation if there
are gaps in your employment record, because of circumstances such as illness,
layoffs, or for any other reason.
The loan officer might make you
sign a Verification of Employment (VOE) form. This will be sent to your
employer to verify your employment and earnings. One will be sent to previous
employers if you haven't been employed more than two years. Many lenders now
use a general authorization that allows them to verify employment and other
financial information on the application.
If you are relying on other sources of income such as rental property, social
security, disability payments or child support, you must provide adequate proof
of the source. Appropriate documents could include canceled checks, copies of
leases, certification of benefits, divorce decrees or similar evidence.
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Personal Assets
A detailed listing of your personal assets is required on the loan application
form. You will need to have the following information available to complete the
form:
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All bank accounts including
checking and savings, and money market accounts, with the name and address of
the institution, name(s) on the accounts, account numbers and current account
balances.
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Recent bank statements for at
least two months.
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Current market value of stocks,
bonds, CDs and other investments.
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Vested interest in all
retirement funds.
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Face amount and cash value of
life insurance policies in force.
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Make, model, year and value of
automobiles owned.
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Address and market value of all
real estate owned along with the amount of rents collected, the mortgage on the
property and the monthly mortgage payments (a profit and loss statement will be
required for investment properties).
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Value of other personal property
such as furniture.
As with the Verification of
Employment, Verifications of Deposit (VOD) for each of the institutions (or a
general authorization) where you have savings or checking accounts must be
signed. Differences between account balances reported by the institution and
balances you provided on the loan application have to be reconciled. Be sure
you have correct current balances.
The lender will look for the source of funds that you will use to make the down
payment and closing costs. Gifts from a relative, church, municipality or
non-profit organization may sometimes be used, but must be verified in writing.
If you are providing less than five percent of the sales price, the donor must
be a relative and must provide a letter stating the donor's relationship to
you, the amount of the gift and the fact that no repayment is expected.
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Personal Indebtedness
Itemizing all of your current bills including outstanding loans, current
balances and monthly payments on items such as your car, credit cards, and
other retail store accounts will be important as they will determine your
eligibility for owning a home. You should be prepared to offer account or loan
numbers, monthly payment amounts and the terms of any notes.
Information provided by you will serve as your credit report which will also
become important in determining your eligibility. Any differences in the
numbers you offer and those on the credit report could raise a red flag and
delay the time it takes to get an approval. Please have your data correct at
the time the loan application is completed.
The lender should be aware of any credit problems. Credit problems do not
necessarily mean an approval is not possible. Only that a higher rate might
have to be assessed. Lenders realize that unemployment, illnesses, divorce or
other financial hardships can hurt your credit rating. In these cases, you
should provide a written explanation of the problem that can be sent with the
loan application. The lender will consider a written explanation as part of the
underwriting process. If the problem has been corrected and you have made your
payments on time for a year or more, your credit will likely be judged
satisfactory. Late payments, judgments against you or defaulted loans will hurt
your credit rating and could keep you from obtaining the financing you need to
purchase your home.
If a bankruptcy is part of your past, you should give full details and copies
of all documentation. You will also need to explain the terms of any alimony,
child support or other outstanding payments. These obligations are viewed the
same as a debt payments by many lenders and they too will be part of the
underwriting process.
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Additional Information
In addition to filling out the application and disclosing your financial
history, you will be asked to sign a statement of truthfulness. This section
certifies that the information you provided is correct and that you will inform
the lender of any material changes in the information. You also consent to (1)
verification of the application data, (2) submission of account history to
credit reporting agencies, and (3) transfer of the loan or loan servicing to
successors to the original lender.
The last portion of the loan application asks for information on race and
gender. Similar to a career application, the Federal Government will use this
information to monitor lenders' compliance governing agencies. This information
bears no relevance in obtaining financing. However by law, it is required for
the lender to ask for the information. Under Federal law, lenders are required
to note race and sex on the basis of physical observation or surname.
Some circumstances require the lender to request additional information or
documentation regarding you or the property after the application has been
submitted. Most loan officers will make every attempt to collect data at the
start, but they sometimes cannot foresee every circumstance. Additional
information requests should not be viewed negatively, but you should respond
promptly with answers.
In some instances and based upon the provided answers, some loan officers can
pre-qualify applicants. This does not necessarily mean that a loan will be
approved. It is still up to the lender to verify all information presented.
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After The Loan Application - What Next?
Once the loan application has been completed and submitted, it is sent to the
lender's loan processing department and reviewed by an underwriter. Here, the
decision to approve or reject the loan is made. Loan processors will send
Verifications of Employment and Deposit and order the credit report, property
appraisal and other documents that will be necessary for home ownership. The
timing to receive these documents affects the amount of it takes for approval
of the loan. If you are transferring one city or state to another, it could
take longer to receive information. Processing times also vary from different
lenders, but the loan officer should be able to offer a rough idea of the
timing.
After three business days from the time the application was completed, the
lender must provide you with a Good Faith Estimate. This
estimate provides an explanation of all closing costs. It will show costs such
as origination fees, mortgage insurance, title insurance, escrow reserves and
hazard insurance. In addition to a Good Faith Estimate, you will also receive a
Truth-in-Lending Disclosure statement. This statement shows the
estimated monthly payment, the total cost of all finance charges on your loan
and the Annual Percentage Rate (APR). The APR represents the
dollar amount of finance charges you pay either up front or during the life of
the loan. The APR is converted to an annual interest rate. After the lender has
approved the loan, you should receive an approval letter. If the loan does not
close within the specified commitment period, the terms are subject to change.
The approval might contain conditions you need to meet, so always read the fine
print. If a an approval is scheduled before a specified closing, the lender may
offer a verbal approval. This is not unusual, but make sure you understand the
terms and don't be coy about asking for a letter.
After the approval letter is sent, you are now ready to move forward with the
purchase of your home. The next step will be a closing where the terms of the
settlement will be discussed. Depending upon the terms of the deal, you might
be required to bring money and other documentation to the closing.
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Reducing The Anxiety of Waiting
During the time between the loan application and approval, it is not uncommon
to have feeling of uncertainty. Unexpected delays, requests for more
information and other disconnects can be very unsettling, but when you keep the
lines of communication open with your lender and if you provide as much
detailed documentation as possible, you can alleviate most if not all of the
stress.
If the lender needs additional information, make yourself available to them. If
you are not local, lean on your real estate agent or provide the lender with
additional ways to contact you such as a cell phone or e-mail address.
Responding quickly to lender allows the process to stay on track. In an effort
to protect all parties involved, mortgage loans require involve much more
paperwork and legal documentation than a car or other traditional type of loan.
Lenders will not request more than what is absolutely necessary.
Remember too that the lender wants to fund the loan and underwriters seek to
approve loans, not deny them.
The mortgage is an important step toward obtaining your dream of homeownership.
Understanding the process involved can make that much more rewarding.
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Be Prepared For Home Ownership
Once you have obtained possession of your home, you will quickly learn that
homeownership requires more than just your monthly mortgage payment. Utility
payments as well as other problems within the home and can create financial
strains, especially for first-time buyers who may not have liquid cash
reserves. Often when these problems are detected, it happens at the most
inopportune time. However, drawing a budget and setting aside money for these
sudden emergencies can be your saving grace.
With newer property, expenses may include landscaping, interior design and
furnishings. Most mechanical items and appliances will be under warranty for at
least six months to a year and may only need minor repairs. In an older homes,
replacement of major items can get expensive. Determine the age of the furnace,
hot water heater, air conditioning system, kitchen appliances and the roof. The
inspection report should identify the ages of these major items. If they are
older then half of their functional life, you will have to plan for the costs
of a replacement.
Establish budgets and account for regular maintenance as well as major repairs.
Maintain an emergency fund for repairs and appliance replacement. Also be aware
of additional sources of financing for when a major item such as the roof or
heating system has to be replaced. These are not cheap fixes and may actually
require a home equity loan. When this happens, determine the best type of loan
you can qualify for, the pros and cons and how you will pay off the loan. Your
budget should also include a reserve for making mortgage payments in the event
of illness or a job loss.
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Planning For The Unexpected
Unexpected expenses can impair your ability to maintain your house payments.
This is the number one cause of foreclosure and bankruptcy. Although most are
unanticipated, many homeowners lose their homes because of illness, loss of
employment or marital problems. Although nobody factors these things into their
futures, planning ahead will help to recent these personal crises. If your
credit is good, short-term loans can be a quick fix. There are a number of
local sources that can help you in this area. Churches and civic groups might
have programs available or they can often direct you to a viable source.
Nonprofit housing organizations may also offer special assistance programs.
State and local housing agencies are also places to turn.
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If Your Mortgage Becomes Delinquent
The first day of the month is typically when your mortgage payment is due, but
you have a 15-day grace period to ensure it arrives at the lender's office.
Late payments are assessed after the 15th day. The timing and amount of late
charges will vary, based upon lender policies. Payments before the next payment
due date will be accepted by the lender, but if you owe two or more mortgage
payments, your home is in jeopardy of being repossessed. If you stumble upon
hard times, you should make specific arrangements with your lender. Many
lenders will have programs that you may participate in to prevent a
foreclosure.
When three or more mortgage loan payments have not been paid, the loan may be
given to the lender's attorney and foreclosure proceedings are the next step.
You should avoid this because in the case of a foreclosure, the entire balance
of the loan may be due and payable immediately. In addition to the loan
payments, you will be responsible for legal fees incurred by the lender.
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What To Do When You Default On Your Mortgage
Nobody, including the lender wants you to lose your home. Foreclosure costs
more money than the foreclosure sale. Therefore, lenders do not foreclose homes
to make money. Rather foreclosures are done as a way of limiting losses on a
defaulted loan. This is why you should always work with your lender immediately
to develop a plan to avoid losing your home. To do this, you should stay in
constant communication with your lender and be honest in evaluating your
financial situation. Your lender will be more willing to work with you if you
have shown a commitment to paying on time. If you are behind with your mortgage
payments, or in the event that that you will likely fall behind, there are
steps you should take before discussing anything with your lender.
First prepare a monthly list of your income and expenses by using realistic
figures based upon your financial situation. You should also put together a
complete financial disclosure package, showing your assets and liabilities,
including all debts and monthly payments and when they are due. Pay stubs,
unemployment check stubs or other proof of current income should be included in
this package, in addition to two years' tax returns. Get an estimate of the
value of your property. You can usually get a local real estate broker to offer
a complementary estimate of the current market value. Finally, prepare a
written explanation of the situation for the lender and offer any plan or
suggestion you may have on how you can bring yourself and the loan up to speed.
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Mortgage Loan Workout Plans
When a lender is willing to work with you, they may recommend workout plan.
This is an agreement between you and your lender that outlines the steps to
overcome delinquency and prevent the loss of your home. It may be written or
oral and will have specific deadlines that must be met to avoid a foreclosure.
It based upon realistic expectations that should enable you to meet the terms.
The workout plan will heavily weigh upon the seriousness of the default. If the
default is caused by temporary condition and is likely to be made good within
one to two months, the lender may consider granting a temporary indulgence.
Some examples of cases where this approach would be considered are where the
house has been sold but the sale has not been settled or where an insurance
settlement is pending. In cases like these, the lender will want documented
evidence, such as the sale contract, before granting indulgence.
If you have suffered a temporary loss of income but can show that income has
returned to previous levels, you may structure a repayment plan
to bring the loan current. This arrangement requires your normal mortgage
payments be made as scheduled, plus an additional amount that will cover the
delinquency in no more than 12 to 24 months. The additional amount could be a
lump sum due at a specific date in the future. Repayment plans are probably the
most frequently used type of workout agreement.
For some homeowners, it may be impossible for you to make any payments at all
for a specified period of time. If you have had a good record with the lender,
a "forbearance plan" can enable you to suspend payments or make reduced
payments for a certain length of time. The forbearance plan will be in writing,
have a definite term and spell out the terms. In most cases, the length of the
plan will not exceed 18 months and will result in a foreclosure if you fail to
meet the terms of the agreement.
A workout agreement should only be used as a last resort between you and your
lender. It is not a replacement for budgeting and financial planning.
Additionally, a workout plan may not be available if your payment record has
not been consistent. Lenders will work closely with good borrowers who are
experiencing hardship, but they are not inclined to cooperate with those who
demonstrate poor financial evidence.
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