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 accounts (savings, CD, checking, etc.) Recent paystubs (1 month) W2's for two most recent years, Government issued ID (driver lic, 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.

 

Treat your credit like gold

 

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.

 

What the scores mean

 

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.

 

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.

 

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:

 

   Fixed loan

 

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.

 

   Adjustable rate mortgage (ARM)

 

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.

 

   Hybrid loan

 

Also known as an intermediate or convertible 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 assess 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.

 

   Application/processing fee

 

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 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.

 

For Example: After fees, the original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed, and the principal payments are calculated based on the length of the loan term (for example 15, 20, or 30 years).

   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.

 

   Appraisal cost

 

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.

 

   Miscellaneous fees

 

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

 

   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 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 pre-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.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 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 hers 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.