Routine documentation you should have available:
- 30 days of pay stubs
- 2 yrs of W-2’s or 2 years tax returns (if self employed)
- 2 months worth of bank/asset/investment/retirement account statements (all pages)
- Diploma or school transcript if a full time student during the past 2 years
- Information on any real estate you may currently own
- A copy of recent mortgage statements or your current lease
- Explanations for any derogatory credit or gaps in employment you know you may have
- Any correspondence with creditors if you have disputed any debts
Other items that would be helpful include:
- Social Security card
- Drivers license
The Loan Market
It is
important to know that almost all loans are sold by the financial institutions making the loan. The
lender you work with is the “originator.” Your loan is then sold in the “secondary market.” The
largest buyers of loans are agencies called FNMA (Fannie Mae) FHLMC (Freddie Mac) and GNMA (Ginnie
Mae). These huge organizations constitute the “secondary market” and write the rules for loans that
they will buy. A lender must then follow the rules these agencies have written in order for the loan
(borrower and property) to qualify as conventional or FHA. During the loan process your loan will be
evaluated by an Underwriter. Their job is to make sure that the loan fits the guidelines for a
particular program (FHA or conventional), so the loan can be sold.
What is an FHA Loan?
An
FHA loan is a government insured loan that was instituted to assist buyers with minimal cash to
purchase a home and first time buyers. This program requires that the buyer invest a minimum of 3%
of the purchase price. Part of that can be a minimal down payment of 2.25% plus some closing costs.
Sometimes the buyer can negotiate for the seller to pay the remaining costs.
FHA loans have
more lenient guidelines for borrower credit history, allow for all or part of the funds needed by
the borrower to be a gift, and has stricter requirements on the property’s condition for the
protection of the borrower.
What is a Conventional Loan?
A
conventional loan is a loan that meets the standards of the “conventional” secondary marketplace.
There are two types of conventional loans, Conforming & Non-Conforming. Conforming loans usually fit
neatly into the box of rules and are under the prescribed maximum loan amount set each year. Both
the borrower and the property fit the typical scenarios and there is nothing
unusual.
Loans
over the “conforming” loan amount or loans that have some facet outside the box either related to
the borrower or the property are called Non-Conforming loans. A loan can be Non-Conforming if the
borrower is unable to document their income or assets, or their credit scores are low, or if the
property is unusual for the area or if the loan amount or program is designated Non-
Conforming.
What's the Difference Between a Fixed Rate and an Adjustable Rate?
Fixed Rate
A fixed rate mortgage is one in which your monthly
principal and interest payment will always be the same for the life of the loan. The benefit is that
you always know what your principal and interest costs are. Fixed Rate loans are usually amortized
(paid in full) over a period of 30, 20 or 15 years. Your monthly payments are predictable over the
life of the loan. (Keep in mind that your monthly mortgage payment may include principal and
interest AND 1/12 of your annual property taxes and home owners’ insurance. So although the
principal and interest will remain steady, the taxes and insurance amounts can vary.)
Adjustable Rate Mortgage
With an adjustable rate mortgage (ARM), the
interest rate may fluctuate which makes the payment change during the life of the loan. ARMs start
off with a fixed interest rate for a determined period of time (1, 3, 5, 7, 10yrs.) and then adjust
annually after that. Typically, the shorter the fixed term is, the lower the initial rate. The lower
rate means lower payments for that period of time. Once the rate adjusts, the payments can go up if
the interest rate is higher. Most loans adjust annually after the fixed rate period.
ARM’s
adjust based on the combination of the index and the margin. The index is the predetermined
indicator that establishes the basis for the rate adjustment. The index can be the 12 Month Treasury
Average (MTA), the 1 year LIBOR rate, the 1 year Treasury Note, or Prime Rate, or several other
accepted indicators. The index is the rate for the particular indicator on a particular date
(usually the anniversary of the loan). The index is a number that changes daily, the margin is a
static single number, usually 2.25-3.00% that is added to the index. When you add the index and the
margin together, you get the new rate.
Both
types of loans have their benefits and pitfalls. For example, a fixed rate mortgage is appealing
because you always know what your payment will be. On the other hand, when interest rates are high
and falling, choosing the adjustable rate mortgage may be favored because the initial interest rate
will be lower than fixed and the interest rate may drop in the future, resulting in smaller monthly
payments. However, with an adjustable rate mortgage you run the risk of ending up with a higher
payment should the interest rate increase during the life of the loan.
An
ARM may be advisable if you intend to be in the home for a short time (the fixed rate term or less).
Many people know they will be moving in 3-5 years or less and chose to take advantage of the lower
rate to have a lower payment or afford more house.
If you intend to stay in the house for a
long time, the fixed rate loan and its predictability may be preferable in a rising rate
environment.
Which Mortgage is Best?
There
are literally dozens of loan products and hundreds of combinations of these products. A good Loan
Consultant will listen to your needs, evaluate your situation and should recommend loan scenarios
that fit your need. A home loan should fit into your overall financial plan, help meet your long and
short term financial goals with the desired monthly payment and equity position.
Just calling
around for the best rates on a 30 year mortgage could cost you thousands of dollars over the life of
your loan if you don’t get the loan that best fits your needs. There is so much more to the home
loan process than just rates. A professional loan consultation is a vital first step in the process
and is usually at no cost to you.
Your
real estate professional can assist you in finding a lender for a consultation.
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