Loan Process

Where do you begin to secure finances for purchasing a new home, refinancing an existing home, or obtaining a real estate equity line of credit? Loan acquisition can get confusing, but 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 pertinent financial documents into a green file is an absolute must for any potential borrower. Think of the green file as 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 (retirement, IRA, stock, etc.) Bank accoutns (savings, Cd, checking, etc.) Recent paystubs (2) W2's for two previous years Government issued ID (license, passport, etc.)

Consider your credit rating

Another means by which lenders gauge your trustworthiness as a borrower is through your credit rating. These indicate your credit history, which includes such crucial information as the number of open loans and the punctuality of your payments.

Credit ratings are important because they often determine whether or not you will be approved for a loan and what your interest rate will be. Thus, you cannot take your credit 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 contained there.

Ratings usually vary between 400 and 800. Anything above 640 is good. If you exceed 680, you are considered premium and may even get a lower interest rate.

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.

Prioritize your costs and savings

Buying real estate wisely is all about choosing what to spend for first.

Down payments, closing costs and additional expenses (such as 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.
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 Loan

Though there are many different types of loans available today, these three are the most commonly used:

This long-term option requires monthly payments that will remain the same throughout the duration of the loan, which can vary from fifteen to thirty years. Though it’s the most affordable short-term solution, it may cost more than shorter term mortgages over the life of the loan.

The loan rate here will be determined by factors such as 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, which can make homeownership more affordable. However you should first examine variant factors and downside risks before seriously considering this option.

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.

Consult with your lender to sssess which loan type and program would best correspond with your resources and needs.

Key Financing Terms

Don’'t be intimidated by the jargon used in financing. Here are a number of key terms you’ll see frequently in your process.

This is the lender’s fee for the assessment of your capacity for repayment as a borrower and will usually be charged upon closing of the loan. Expect a price tag of a several hundred dollars.

Annual Percentage Rate (APR)

The APR expresses the sum total of all your borrowing costs as a percentage interest rate charged on the loan balance.

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).

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.

This is the fee given to an independent appraiser who may be hired by your lender to evaluate the property’s purchase price, condition and size in relation to similar recent neighborhood sales. This is useful to the lender because it ensures repayment in case the borrower defaults, forcing them to sell the property.

Various costs will be incurred during the processing of your loan request, such as notary, courier, and county recording fees.

A prepayment penalty is a provision of your contract with the lender that states that in the event you pay off the loan entirely, 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.

Lender Assessment

how is pore-qualification different from pre-approval? 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.q. 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 at all to the applicant, being 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 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, it 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.

Brokers and lenders: telling the difference

The lender or creditor is the party who 1) disburses or provides funds to the borrower at the end of a successful loan application process, and 2) 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.

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 this 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.

Wiring funds

Your 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.