Your lender is key to the deal
Getting a loan today can be one of the most challenging steps in the home buying process. Make it as easy on yourself as possible.
If at all possible, stick with a local Charleston area lender.
Why? As times get busy for lenders, having a local contact just works far better. Many of the national mega-lenders that deal over the Internet and phone only (no local offices - this includes both Internet lenders and larger insurance/financial services conglomerates with no local offices) are less likely to have one identifiable, responsible representative that has a personal stake in your loan approval and in its processing. This can lead to delays and frustration. Get a local individual who "owns" your loan and has allegiance to you. This is important.
During your wait for approval and then your wait for closing, you (and your agent as well as the agent for the seller) will want updates from your lender. There is nothing worst that trying to get an update on you loan via a central 800 number only to be directed to "the next available representative" rather than someone who knows your situation.
Even more irritating is to work with a company that consistently sends you to voice mail - call after call. Or, one of my favorite mind numbing situations - each time you call, having to re-explain your situation and reason for the call so the other person on the phone can hunt for your file or pass you off to another unsuspecting, uninformed representative where you have to re-explain who you are and why you are calling so that representative can hunt for your file and decide if they can help or pass you down the line to the next representative, etc. Stay local with your own representative that you can meet face to face if necessary. I can't emphasize this enough.
Getting pre-approved before you start your search is important and will save you time and frustration. Start the pre-approval process as early as you can.
Banks want to lend you money and they need to lend money but they all have strict paperwork requirements that can slow the process. Find out what your lender needs from you and get the lender what is needed early and then follow up. Make it easy for them to move your loan ahead. All lenders are busy. Make it easy for them so you move to the front of the line.
Some companies, known as “mortgage brokers” offer to find you a mortgage lender willing to make you a loan. A mortgage broker may operate as an independent business and may not be operating as your “agent” or representative. Your mortgage broker may be paid by the lender, by you as the borrower, or both. You may wish to ask about the fees that the mortgage broker will receive for its services.
Some lending institutions are more likely to approve marginal loan situations than others. Depending on your credit situation, you may receive an approval from one lender and have another lender turn you down. If you know that your credit is very good, I suggest that you stick with larger direct lenders such as larger banks. If your credit is questionable, you may need to use a mortgagebroker as mortgage brokers have a wide array of potential lenders available to them.
The main thing to remember about a mortgage broker is that they are not a lender but are an intermediary that connects lenders with people seeking loans and that they receive a commission for doing so. The commission that they receive may be higher from one lender than from another and that may have some influence on their choice of lenders to suggest you. The advantage of the mortgage broker is they are not limited to the in-house lending constraints that larger direct lenders are usually limited to. If you do have credit concerns you are more likely to receive an approval through a mortgage broker that has the additional flexibility to search beyond one group of loan options.
You may be eligible for a loan that is ensured by a government entity such as the
Veterans Administration (VA), Farmers Home Administration (FMHA) or the Federal Housing Administration (FHA). An advantage of using one of these is that they usually require a lower down payment or no down payment at all because the government stands behind you in the event you default on the loan.
Buyers are sometimes confused about the function of these government-backed loans. The government does not issue these loans. The loan is issued by a regular lender as always but the VA, FHA etc. approves
the loan after a rigorous review and inspection/appraisal of the property.
In a nutshell, the FHA is designed to help low to moderate income people obtain mortgages, the VA offers loans to veterans or active-duty personnel, and the FmHA is designed for people who meet certain income requirements that want to buy in very rural areas.
Note: most offers to purchase will disclose the sort of lending to be sought by the buyer. The seller may factor in the more lengthy process and higher demands on the seller when considering accepting an offer from a buyer using a government-backed loan. Usually it doesn't have a great impact on whether or not the offer will be accepted; but, in markets that are very fast-moving (strong sellers markets) it has been known to create a disincentive for the seller to accept an offer from someone using a government-backed loan.
Private mortgage insurance (PMI) is required if you are not using a government-backed loan or if you are not putting down a certain percentage on the purchase of your home, typically 20%. Private mortgage insurance and government mortgage insurance protect the lender against default and enable the lender to make a loan which the lender considers a higher risk. Private mortgage insurance ads to the cost of your monthly payments. Once you have achieved 20% equity in your home either through appreciation or through pay down in the principal, if you were previously required to carry private mortgage insurance, that requirement will be dropped at that point.
The reason private mortgage insurance is required is that the bank needs a way to protect itself in the event you default on the loan. It costs them money to liquidate a property. During the time the bank holds a property they will incur expenses such as the expense of carrying the mortgage amount, insurance, taxes, utilities and more. In addition,they will have to pay a marketing fee via commissions in order to sell the home to recover their investment. The bank figures that if you have 20% in the house, or if you have a government entity offering to purchase alone in the event of your default, they are likely to fully recover their losses should a default occur.
Banks are in the business of providing loans but they are not in the business of owning property. They want to give you a loan but they do not want to own your house - ever.
Mortgage insurance should not be confused with mortgage life, credit life or disability insurance, which are designed to pay off a mortgage in the event of the borrower’s death or disability.
There are many different types of loans available to you today. Most people choose to go with a conventional 30 year mortgage; but, there are other options including a 15 year mortgage which is also quite popular. You may choose a fixed interest rate or a variable interest rate. If you choose a variable rate loan that loan will be associated with an index, such as LIBOR or the US Treasury index, so that as that index changes, your loan will either increase or decrease in monthly payments. This type alone is also called an adjustable rate mortgage (ARM).
The majority of loans are fixed. Fixed loans provide a sense of security
to the lender because the monthly payment is always very predictable. Some of the problems experienced during the most recent financial meltdown were directly attributed to a large number of borrowers experiencing increases in their monthly payments on their ARMs that they were not able to handle. ARMs are excellent instruments and work well as long as they are used properly and as long as the buyer understands how they work.
Another difference in loans is that most loans have a predictable series of equal payments but some loans do not. In addition to the arm which can change, another way a loan can change is through a balloon payment requirement. Balloon payment loans are typically relatively short-term loans (5 years is common) that have a low monthly payment but a large final payment called the "balloon" where the entire sum of the unpaid principal becomes due at once. Again, this is an excellent instrument if used properly. Your lender should be able to counsel you as to whether or not you should stick with a basic 30 year fixed loan or use something that is different.
Often the price of a home mortgage loan is stated in terms of an interest rate, points, and other fees. A “point” is a fee that equals 1 percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow. Often, you can pay fewer points in exchange for a higher interest rate or more points for a lower rate. Ask your lender or mortgage broker about points and other fees.
The Truth in Lending Disclosure Statement is put together to show you the annual percentage rate or APR of the loan. The APR is not to be confused with the interest rate you will be paying. Often buyers are surprised to see an APR that is higher than the interest rate that was quoted to them. There is a reason for this. The APR is effectively the return on investment that the bank is receiving for issuing the loan. it is the interest rate you will be paying added to other fees such as points that the lender will receive for the privilege of providing the loan and is reflected in an annual percentage basis.
Expect your APR to be higher than the interest rate you have been quoted. The purpose of the APR via the Truth in Lending Statement is to make it easier for you, as a consumer, to compare the costs of different loans that are being offered to you from different lenders.
During the process of shopping for your loan, you have a right to request a good-faith estimate of closing costs. The lender may require that you present a signed contract before they go to the effort of competing this document as it does require their resources to do so.
When you do request a good-faith estimate and you have a contract in hand, your lender should give you that estimate promptly. This estimate will show you a balance sheet of the expenses associated with the loan they are offering and what the expect that you will need to bring to closing. This is not exact - there will be variation between this statement and the final closing statement. It is a best guess of what to expect.
When shopping for a loan, you may discover that it is not as simple as you have hoped it to be when attempting to compare loans to one another. A good lender, working with you personally as your representative, is important in determining the actual cost of your loan and which loan from that lender is best for you. Your lender may also be willing to help you compare their costs with the costs of their competitors should you be shopping around.
Consider how long you will be living in the home when you consider the type of loan you should get. If you expect to be in the home for a short period of time, you may want to consider a low cost ARM or even possibly an interest-only loan. If you know that you plan to keep the house for a long time, you may be better off using a more conventional type of loan. Be very careful in your selection because it can make a big difference in the long run if your plans change. Each type of loan has valuable uses but not all loans are good for all borrowers. Know what you were comfort zone is for variations in monthly payments. Be aware of the likelihood of life changes.
Prepayment penalties are not that common anymore but they do exist. A
prepayment penalty is a charge assessed to you if you pay off your loan early. It is a good idea to negotiate the terms of the prepayment penalty if a prepayment penalty exists on the loan that is being offered. The purpose of the prepayment penalty is to ensure that the lender receives a certain number of payments from you before the loan is canceled so they can break even on the cost of providing the loan.
Your lender may require you to obtain certain settlement services, such as a new survey, mortgage
insurance or title insurance. It may also order and charge you for other settlement‑related services, such as the appraisal or credit report. A lender may also charge other fees, such as fees for loan processing, document preparation, underwriting, flood certification or an application fee. You may wish to ask for an estimate of fees and settlement costs before choosing a lender. Some lenders offer “no cost” or “no point” loans but normally cover these fees or costs by charging a higher interest rate
“Locking in” your rate or points at the time of application or during the
processing of your loan will keep the rate and/or points from changing until settlement or closing of the escrow process. Ask your lender if there is a fee to lock-in the rate and whether the fee reduces the amount you have to pay for points. Find out how long the lock-in is good, what happens if it expires, and whether the lock-in fee is refundable if your application is rejected
. Also, ask about float down options.
Your monthly mortgage payment will be used to repay the money you borrowed plus interest. Part of your monthly payment may be deposited into an “escrow account” (also known as a “reserve” or “impound” account) so your lender or servicer can pay your real estate taxes, property insurance, mortgage insurance and/or flood insurance. Ask your lender or mortgage broker if you will be required to set up an escrow or impound account for taxes and insurance payments.
If your home is in a
flood zone, your lender may require you to buy flood insurance.
Whether or not a home is in a flood zone is determined by the Army Corps of Engineers. On their surveys they have different types of flood zones. Some areas within flood zones are more prone to flooding and others; therefore, different ratings are applied depending on which type of flood zone your home is in.
You may not be required to carry flood insurance even if your house is in a flood zone if it is in the type of flood sound that is rarely subject to flooding. This is a confusing point because many homes in the Charleston area are within flood zones that required no flood insurance because the likelihood of flooding is so rare yet it still exists.
Your lender may charge you a fee to check for flood hazards. You should be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or servicer may require you to buy flood insurance at that time. Even if your lender does not require flood insurance, it may be a good idea to get it. If it is not required, the cost of flood insurance is nominal.