4: Financing a Home4: Financing a HomeIntroductionSince houses are so expensive, most individuals need a mortgage loan in order to purchase one.Getting a mortgage loan – a loan used to purchase a home – can be a very extensive andcomplicated process. This section will help simplify this process so that you can easilyunderstand the steps involved in obtaining a mortgage loan to finance your home. Section Objectives: Understand how mortgage loans work Learn how to calculate how much you can afford to borrow Compare different types of loans and mortgage loan program requirements Learn how to shop for the best loan Learn the steps needed for financing a homeHow Mortgage Loans WorkA Mortgage Loan is a secured loan agreement between the lender and the buyer in which theproperty (house) is collateral for the loan. This means that the mortgage gives the lender theright to collect payment on the loan and to foreclose the property if the loan obligations are notmet.You usually work with either a mortgage broker or loan officer to apply for a home loan. A mortgage broker is an intermediary between the lender and the customer. They shop for loans from different financial institutions and for different loan products. A loan officer represents one lender or financial institution. For instance, a loan officer may work for a specific bank.
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4: Financing a HomeWHO ORIGINATES MORTGAGE LOANS?Many different types of lenders make home loans, not just banks. It is important to understandwho originates mortgage loans when you are selecting the appropriate lender and loan productfor you. Some different types of lenders include:INSTITUTION DESCRIPTION Banks are the traditional sources of mortgage loans and often have many loan products and programs.Banks One advantage of borrowing from the bank if being able to keep all of your financial activity in the same place Mortgage bankers only make loans that are secured by mortgagesMortgage on homescompanies and One advantage of borrowing from a mortgage company is thatfinance since they specialize in mortgage loans, they often have loancompanies programs at good interest rates. A credit union is a private bank run by and for its members. One advantage of borrowing from a credit union is that theseCredit Unions institutions usually offer their members good mortgage loan terms, fees and interest rates. Some non-profit community development and housing organizations receive money from government or grants to lend for home purchases. One advantage of borrowing from a non-profit is that the interestNon-profit rates are often less than the cost of bank loans and the repaymentorganizations terms are easier for new homebuyers. Looks for NeighborWorks® organizations like Community HousingWorks at www.nw.org or visit www.hud.gov for HUD- Approved Homeownership Counseling Agencies. State or local housing finance agencies (HFA) also provide financing for special uses and especially for first-time homebuyers. The US Department of Agriculture (USDA) Rural Development (RD) offers government-guaranteed rural housing loans in rural areasGovernment throughout the US. Find a list of offices at www.rurdev.usda.gov.Agencies One advantage of borrowing from government agencies is that they may have financing available at lower interest rates or require lower down payments and closing costs for low- and moderate- income or first-time homebuyers.
4: Financing a HomeTHE SECONDARY MARKETTo make sure that they always have money to lend to homebuyers, banks and mortgagecompanies often sell their loans to investors. Because the investor is the second owner of theloan, these investors are known as secondary market.Why is the Secondary Market important? Extra cash is available to lenders. This can drive down mortgage rates and make Homeownership more affordable Mortgage originators can have access to pool of capital and provide financing to more homeowners. Home buyers can have greater access to reasonable mortgage financing.Mortgage Loan BuyersFannie MaeThe Federal National Mortgage Association, commonly known as Fannie Mae, was founded in1938 during the Great Depression as part of the New Deal. It is a government-sponsoredenterprise (GSE), though it has been a publicly traded company since 1968. The corporationspurpose is to expand the secondary mortgage market by securitizing mortgages in the form ofmortgage-backed securities, allowing lenders to reinvest their assets into more lending and ineffect increasing the number of lenders in the mortgage market.Freddie MacFreddie Mac was created in 1970 to expand the secondary market for mortgages in the US.Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, andsells them as a mortgage-backed security to investors on the open market. This secondarymortgage market increases the supply of money available for mortgage lending and increasesthe money available for new home purchases.Private BuyersA party that makes in investment into debt securities with the objective of making a profit.Mortgage Loan InvestorsOnce the loans are sold in the secondary market, the buyers package these loans intomortgage-backed securities. The securities are then sold to investors on Wall Street. WhenFreddie Mac and Fannie Mae do this, they guarantee timely payments of principal and interestto the investors who invest in these pools. When other investors do this, package loans areoften called collateralized mortgage obligations (CDO’s). Mortgage backed securities areattractive to many investors, especially large-scale institutional investors such as pension fundsor mutual funds.
4: Financing a Home The Secondary Market Process Bank lends $$ to borrowerBank either keeps mortgage note or sellsmortgage note to “secondary market” and uses Proceeds of Portfoliothe proceeds of the sale to make new loans to sale Bank ownsother homebuyers Mortgage Note mortgage note 30-year fix Mortgage Loan Buyers Fannie Mae Freddie Mac Private Buyers package these loans into mortgage-backed securities Wall Street Investors Investor A Investor B Investor C Mutual funds, pension funds, large-scale institutional investments
4: Financing a HomeMORTGAGE PAYMENTSTo repay the mortgage debt, your monthly mortgagepayment will include the amount that goes toward theprincipal of the loan (the money you’ve borrowed) and theamount that goes toward interest (the cost of borrowingmoney).1For many homeowners, the lender maintains an escrowaccount for you to pay things like homeowner’s insurance,property taxes, mortgage insurance (if applicable) andother fees. Be sure to check with your loan officer to see if this is the case. Together, theseelements are called PITI: The part of the mortgage payment that is applied to the original amount Principal borrowed. Interest The amount that the lender charges for lending money. Taxes The part of the mortgage payment used to pay property taxes. The part of the mortgage payment used to pay Homeowners and sometimes Insurance mortgage insurancePITI Example2 Cost: $250,000 home Down payment: 10% - $25,000 Term: 30-year term Property taxes: Assumed a 1.5% property tax on the purchase price Homeowner’s Insurance: California average of about $8001 Source: http://www.homeloanlearningcenter.com/MortgageBasics/WhatsinaMortgagePayment.htm2 Source: http://cgi.money.cnn.com/tools/mortgagecalc/
4: Financing a HomeFactors Affecting Mortgage PaymentWhen applying for a mortgage loan, there are many factors that will affect your mortgagepayment amount. Some of these factors include:Down PaymentThe Down Payment is the amount of cash a borrower pays towardpurchasing a home. The more you invest in a house upfront, the lessmoney you borrow from a lender, and the smaller your mortgagepayment will be.Repayment Terms of the loanYour mortgage is affected by the number of months (years) you take to repay the loan. A 15year loan means you pay a higher monthly mortgage payment (but pay less money in interestover the full term of the loan.) A 30 year loan means you pay a lower monthly mortgagepayment (but will pay more in interest over the full term of the loan.)Loan Interest RateThe lower the interest rate on the loan, the lower your monthly payment will be.Buy Down PointsPoints are fees the borrower pays the lender at the time the loan isclosed, expressed as a percent of the loan. When you pay “points” youpay interest in a lump sum upfront in order to get a lower rate on yourfixed rate mortgage. Each point costs 1% of the mortgage amount.The more points you pay up front, the lower your mortgage rate for afixed period of time.Homeowners Association FeeA Homeowners Association is a group that governs a subdivision, condominium or plannedcommunity. The association collects monthly fees from all owners to pay for common areamaintenance, handle legal and safety issues and enforce the covenants, conditions, andrestrictions set by the developer.Mello-RoosMello-Roos is a bond for district facilities like parks, libraries and schools that is an annual fee inaddition to state, city and local property taxes for homes in certain areas. In most cases, Mello-Roos taxies are levied as part of the annual property tax bill. IMPORTANT NOTE: SUPPLEMENTAL TAX A supplemental tax bill is a separate bill that reflects the increase or decrease in the assessed value of a property. This tax is mailed only to the property owner of record and will not be sent to your lender as part of your mortgage payment.
4: Financing a Home a Loan Qualifying for a Loan THE 5 C’S OF CREDIT Discussion: If a friend wanted to borrow $10,000 from you, what would youwant to know about that person? Write some things you may want to know about the personasking you for money:________________________________________________________________________________________________________________________________________________________________________________________________Just as you would want to be sure that your friend is trustworthy and will pay you back,lenders want to make sure you can afford the home you want to buy and that you will be ableto repay the loan. Mortgage lenders look at five things, called the 5 C’s of credit, to determineif you are a good credit risk: The amount of cash you have available Lenders are interested in how much of your own money you plan to Capital invest in a purchase The more cash you have, the more comfortable a lender is with lending you money Your ability to earn enough income to make payments and still pay all your living expenses Capacity Lenders look at your current income, your income history, your earning potential, and your Debt-to-Income Ratio Credit History is one of the most important factors in establishing a person’s ability to repay a loan.Credit History Lenders look at the person’s credit report, checking and savings accounts to assess how well the person handles financial obligations. Collateral is property that a creditor has the right to take if you do not pay a particular debt, such as a home or car. Other types of collateral include household goods, business property, bank accounts, and wages. Collateral The lender will look at the value of the collateral to make sure it is worth at least as much money as you are borrowing. If a borrower is unable to repay a loan, the lender accepts ownership of the collateral (security) as repayment.
4: Financing a Home Lenders are interested in any conditions that may affect the applicant’ ability to repay the loan. Conditions If you have been at a job for less than two years, you may be asked to provide additional information about your work history.LOAN-TO-VALUE (LTV) RATIOThe loan-to-value ratio is the ratio of the loan balance you owe to theappraised value of the house. The LTV usually is described as apercentage.The LTV ratio is used during the loan approval period to gauge risk: The higher the LTV ratio, the higher the risk and typically the higher the interest rates. The lower the LTV ratio (below 80%), the lower the risk and the lower the rates!To calculate the LTV, divide the appraised value of the property by themortgage amount.For example: $400,000 appraised value $260,000 mortgage $260,000 / $400,000 = .65 or 65% LTVAffordabilityA home loan is the single largest financial investment you are likely to make inyour lifetime. You will want to find the most affordable home for which you qualify that alsoaligns with your Savings and Spending Plan and financial goals.Income and Expense Pie ChartThe Income and Expense Pie Chart to the rightrepresents how your monthly income is allocated as Incomea percentage. When looking at affordability, you willoften be pre-approved so that your housing anddebt expenses are equal to 45% of your income andall other expenses are equal to 55% of your income.This way you will receive an affordable loan that willallow you with enough income to pay all of yourexpenses.
4: Financing a Home Housing: Mortgage, property taxes, property insurance, homeowners association dues (if applicable) Debt: Loans, car loans, credit cards, child support, revolving Other: Savings, investment, donations Household: All living expenses (food, clothing, etc.), utilities, telecommunication, education, entertainment Income and Expense Pie Chart Example Less Debt = More Purchasing Power More Debt = Less Purchasing PowerWith 7% of income used for paying off debt and 38% With 15% of income allocated toward debt and 30%available for housing payments, this individual is able toward housing, this individual does not have as to qualify for a higher mortgage loan. much income available for a home, and has a lower purchasing potential. Income Income Housing Household Housing 30% Household + Other 38% + Other Expenses Expenses 55% 55% Debt Debt 15% 7%
4: Financing a HomeHOUSING (FRONT-END) RATIOThe housing ratio (or front-end ratio) is the maximum percentage of a borrower’s income thatcan be used to make a monthly mortgage payment. In other words, the housing ratiodetermines how much of your monthly gross income is tied to your complete housing payment.To calculate the housing ratio, your lender will compare your housing expense now with theexpense you will have if you purchase a home. The smaller the increase, the stronger yourapplication looks. A lower housing ratio percentage means that you are using a smaller portionof your monthly income for housing expenses, while a larger percentage means you are using alarger piece of your income for housing. Generally, a lender will want to see a front-end ratiobelow 38%. It will be harder to get the loan approved if it is higher than this amount becausethere is more of a possibility you may have trouble repaying the loan.Calculating Your Housing (Front-End) RatioTo compute your front-end ratio, first calculate your monthly housing cost, including currentmortgage or rent payments and any condo/co-op/homeowners association fees. Next,calculate your gross monthly income using the Gross Monthly Income Worksheet on thefollowing page. Finally, divide the monthly housing cost by your gross monthly income todetermine your front-end ratio. $ _____________ $ _____________ _____ % ÷ = Monthly Housing Cost Gross Monthly Income Housing/Front-end Ratio
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4: Financing a HomeGross Monthly Income WorksheetIF YOU ARE PAID:Hourly $ ___________ X $ __________ $ ___________ (pay before # of hours you X 52 ÷ 12 months = gross monthly deductions) work in 1 week incomeWeekly $ ___________ $ ___________ (pay before X 52 ÷ 12 months = gross monthly deductions) incomeBi-weekly $ ___________ gross monthly (pay before X 26 ÷ 12 months = income deductions)Twice a $ ___________ $ ___________month (pay before X 24 ÷ 12 months = gross monthly deductions) incomeOnce a month $ ___________ gross monthly (pay before income deductions)Not regularly $ ___________ (income from last $ ___________ year’s tax return ÷ 12 months = gross monthly before income deductions)Other grossmonthlyincome(Include grossmonthly $ ___________ $ ___________income fromotherborrowers: i.e.spouse)TOTAL GROSS MONTHLY INCOME: $ ___________
4: Financing a HomeDEBT-TO-INCOME (BACK-END) RATIOThe debt-to-income ratio (or back-end ratio) is the maximum monthly amount the borrowercan spend on a house payment (housing ratio) plus all debts owed to creditors. In otherwords, this ratio shows how much of your monthly gross income is tied to your completehousing payment and all monthly debt obligations.Generally, the lower your back-end ratio, the better your financial condition because you havefewer debts. The less monthly debt you have, the more you can allocate towards your housingpayment – increasing your purchasing power with an affordable housing payment.Calculating Your Debt-to-Income (Back-End) RatioFirst, figure your total monthly debt payments. Be sure to include (if applicable) housingexpenses (rent or mortgage), car payments, loan payments, credit card payments, etc.Monthly Housing + Debt PaymentsMortgage/rent payments $ ___________Condo/co-op/community association fees $ ___________Car payment(s) $ ___________Bank/credit union loan $ ___________Student loan payment $ ___________Other loans/credit accounts $ ___________Credit card payments $ ___________Payment for past medical care $ ___________Other: $ ___________ $ _____________ ÷ $ ___________ = _____ % Monthly Housing + Gross Monthly Income Debt-to-Income/Back-End Debt Payments RatioAlthough each situation varies, a front-end ratio higher than 38% or a back-end ratio higherthan 45% signals a need to lower your debt and control use of credit before attempting topurchase a home. If your ratios are higher than the standard 38/45, a lender may lower theamount of mortgage you qualify for, or deny your mortgage loan application.Lenders may potentially offer you higher percentage rate as an alternative to your higher ratios.This could be a higher potential of defaulting on your mortgage loan due to the higher cost ofobtaining your mortgage loan & paying your mortgage loan.
4: Financing a HomeCALCULATING AFFORDABLE MONTHLY PAYMENTS3You can estimate your approximate affordable monthly mortgage payment by reversing thesteps used to calculate your back-end ratio. Simply multiply your monthly gross income by .36(standard back-end ratio) and then subtract your monthly debt payments (not includinghousing expenses) from the total. The result is the amount you could afford to pay each monthon a mortgage.$ ___________ x $ __ _.36_____ – _____ % = $ ___________ Gross Monthly Standard Monthly Debt Payments Affordable Monthly Income (excluding housing Payment Back-End Ratio expenses)Sample: Estimating an Affordable Monthly Mortgage PaymentIn this example, the back-end ratio is at 2,025 and the front-end ratio is 32% (1427/4500)The Lee Family has a gross monthly income of $4500 $4,500 Income X .45 Debt-to-income/back-end ratio $2,025 Total debt paymentsThey spend $598 each month on debt payment other than housing expenses $2,025 Total debt payments - $598 Non Housing debt payments $1,427 Estimated mortgage payment (inclusive of taxes and insurance)3 Source: http://www.incharge.org/docs/housing-guides/4_inchargehomeownership.pdf
4: Financing a HomeComparing Mortgage LoansNow that you understand the basics of mortgage loans, let’s discuss categories and types ofloans, loan origination, and special programs available to you.LOAN CATEGORIES & TYPESHome loans generally fall into the following three main categories. Within each category therecan be many types of loans.Loan Categories Government- Conventional Non-conventional Insured/GuaranteedGovernment-insured loans Any loan that is not insured Non-conventional loans areinclude loans from private by FHA (Federal Housing loans which carry more risklenders that the government Administration), VA to the lender/investor ofinsures or guarantees to the (Veterans Affairs) or USDA such loan. They usually arelender such as FHA (Federal (United States Department offered when aHousing Administration), VA of Agriculture) Rural “conventional loan” is not(Veterans Affairs), and USDA Development – a non-GSE attainable.(United States Department of loan – a Non-GovernmentAgriculture) Rural Development, sponsored entity.Rural Housing Service Loans.ConformingConforming loans have terms and conditions that follow the guidelines set forth by Fannie Maeand Freddie Mac. Most common guideline in a conforming loan is the loan limit of $ 417,000for a single family residence. Since early 2008, a series of legislative acts have temporarilyincreased the one-unit limit to up to $729,750.Non-conformingA non-conforming loan does not follow guidelines set forth by Fannie Mae and Freddie Mac.Most common non-conforming loan is a “jumbo loan” – a loan amount higher than theconforming loan limit.Typical Down PaymentsDown payment requirements vary by loan categories or special program requirements.Typically, down payments are in the following ranges: Government-Insured/Guaranteed: 0-3.5% Conventional: 5-20%
4: Financing a Home Non-conventional: 5-20%
4: Financing a HomeTypes of Loans Fixed-Rate Adjustable-Rate Balloon- Graduated Payment (ARM) PaymentRate Fixed for life of Initial fixed-rate period; Fixed monthly Monthly payment starts the loan then rate adjusts payments, but low then payments go upward or downward entire loan up over a period of depending on mortgage comes due at years. When payments terms the end of a set reach the fully period, usually amortized payment 5,7,10 or 15 amount, they stay fixed years for the rest of the loan.Loan Typically 15, 20 Initial fixed rate period 30-year 15, 30 year mortgages;Term & 30 year of 2, 3, 5, 7 or 10 years schedule of payments increase mortgages, payment; typically after 5-15 years where at the 5,7,10 or 15 end of the term year loan due the loan is paid off.Pros Payment does Initial payments may be Provides a Beneficial if you know not change over more affordable lower monthly that your income will time payment increase over timeCons Payment Payment may increase Borrower must If income does not remains the after fixed-rate period. be prepared for increase over time, same, which Learn more about ARMs the large single mortgage may become could be higher on the following page. payment at the unaffordable than it would be end of the loan with a different loan
4: Financing a HomeUnderstanding Adjustable-Rate Mortgages (ARM)4Unlike a Fixed-Rate Mortgage where the interest rate stays the same, Even though the initial ARMan ARM will have variable interest rates, largely determined by two interest rate may seem lowfactors: when compared to a fixed-1. Index: A rate set by market forces and published by a neutral third rate mortgage, be awareparty. If the index rate moves up, in most circumstances so does your that an increase in interestinterest rate and you will probably have to make higher monthly rates could lead to higherpayments. If the index rate goes down, your monthly payment could monthly payments in thego down (however, not all ARMs adjust downward). future.2. Margin: An agreed-upon number of percentage points that is addedto the index to determine your rate. The amount of the margin may differ from one lender toanother, but it is usually constant over the life of the loan.Before deciding on an ARM, you may want to ask yourself: Is my income enough – or likely to rise enough – to cover higher mortgage payments if interest rates go up? Will I be taking on other sizable debts, such as a loan for a car or school tuition, in the near future? How long do I plan to own this home? If you are planning to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time. Do I plan to make any additional payments or pay the loan off early?When comparing ARMs, be sure to ask the following questions: What is the initial rate? How long does the initial rate last? How frequently does the rate change after the initial period? What are the rate caps for the first adjustment, each adjustment after that and over the life of the loan? What index will be used? What is the margin? What could be the highest monthly payment? Can the loan be converted to a fixed- rate? What is the cost of conversion? (When you convert from an ARM to a fixed mortgage)4 Source: http://files.consumerfinance.gov/f/201204_CFPB_ARMs-brochure.pdf
4: Financing a Home SPECIAL PROGRAMS Federal, state and local governments and private, public and nonprofit companies across the U.S. work hard to make homeownership affordable for low- and moderate-income homebuyers, especially those who have never owned a home. These programs can be used with other special mortgage loan programs for first time home buyers making a home purchase Make a Pre-purchase Coaching affordable. appointment with CHW staff to see which programs you may Eligibility and other requirements vary across programs. Most qualify for! For a current list of programs are targeted toward low- to moderate-income families special loan programs and and first-time home buyers. To qualify, all loans must be funding available with CHW originated through a certified lender. Check your local city or Lending, go to: speak to a certified lender who can guide you through the www.chworks.org/chw-lending- application process. home/downpayment-assistance Online Resources: City of San Diego www.sdhc.org San Diego Housing Commission programs for those planning to buy a home within the City of San Diego. Community www.chworks.org Free pre-purchase coaching and information on all HousingWorks programs currently available. County of San www.sdcounty.ca.gov Click on Homeowner Programs for down payment Diego /sdhcd and closing cost assistance programs in the County of San Diego. CalVet www.calvet.ca.gov or Click on Home Loans for information about special www.va.gov loan programs for California veterans. Federal Housing www.fha.gov FHA loans offer low down payments (as low as Administration 3.5% of the purchase price), low closing costs and (FHA) the option to buy a home, fix it up, and include all the costs in one loan Habitat for www.habitat.org Habitat for Humanity helps home buyers purchase Humanity House and build a home by investing “sweat-equity” hours. Department of www.benefits.va.gov/ A special loan with no down payment required for Veteran’s Affairs homeloans veterans. See website for qualifications. USDA Rural http://eligibility.sc.eg The USDA home loan program is for eligible home Housing ov.usda.gov buyers in designated rural areas.
4: Financing a HomeDown Payment assistanceDown payment assistance programs provide funds that can boost up your purchasing power orsave you interest over the life of the loan. So how does it work?Area Median Income (AMI)On an annual basis, the U.S. Department of Housing and Urban Development calculates whatthe median income is for each area. Each down payment assistance program will have theirguideline on how much a household can make and household size in order to qualify for theprogram.The down payment assistance can be city, county, or state programs. In order to get access tothese programs, you must be a first time home buyer and obtain your First Time Home BuyerHUD Certificate. 2012 San Diego County Area Median Income(AMI) 80% of 100% of 50% of 60% of 120% of AMI House AMI AMI AMI Low AMI Low Moderate Hold Size Moderate Moderate Income Income Income Income Income 1 $28,150 $33,780 $45,000 $53,150 $63,750 2 $32,150 $38,580 $51,400 $60,700 $72,900 3 $36,150 $43,380 $57,850 $68,300 $82,000 4 $40,150 $48,180 $64,250 $75,900 $91,100 5 $43,400 $52,080 $69,400 $81,950 $98,400 6 $46,600 $55,920 $74,550 $88,050 $105,700 7 $49,800 $59,760 $79,700 $94,100 $112,950
4: Financing a Home 8 $53,000 $63,600 $84,850 $100,200 $120,250PREDATORY LENDINGSubprime lending is different from predatory lending.Predatory or abusive lending combines certain products,practices and prices that create unfair terms for the borrower.Predatory lending practices can include:“Packing” and padding costs and feesThese include excessive closing costs, inflated appraisal costs and extra recording fees. Somelenders include expensive and often unnecessary single-premium credit insurance as acondition to a loan.Balloon payments and Negative AmortizationNegative amortization is when your monthly payment is not enough to cover the accruedinterest. The unpaid interest is then added to the principal balance. This results in a higherprincipal amount due at the end of the loan period than at the beginning of the loan. A balloonpayment is a lump sum payment due at the end of the loan period. The lump sum payment isoften beyond your ability to pay so that you will be forced to refinance your loan for additionalcosts.Deceptive Practices & FraudDisclosures may be skipped or fees may be financed without your knowledge. Some lendersactually forge loan documents and signatures so you get stuck with loan terms you knownothing about.High-Pressure Sales TacticsAds offer extra money or lower monthly payments or promise that bad credit is not a problem,but the loans have high interest rates and fees. It if sounds too good to be true, it probably is.Many predatory lenders work hand-in-hand with mortgage brokers who deliberately steer youto loans with unwarranted high interest rates and away from the more affordable options forwhich you would qualify.
4: Financing a HomePREDATORY LENDING RED FLAGS5Predatory lenders may try the following tactics to deceive borrowers. Watch out for thesewarning signs!Encouragement to If a lender has changed any of your income or expense information or leavesinclude false your income blank, do not sign the loan application.information Never sign a blank loan document or work with a lender who asks you to.Blank loandocuments When a lender makes promises in order to make the sale, but then backs out“Bait and switch” on the promises after the sale. To avoid this, it’s critical to carefully read andsales tactics understand the agreement before you sign. It is not recommended to sign the agreement if anything in it is unclear or not as promised. If a lender encourages you to inflate your income on your application form toEquity stripping help get the loan approved, watch out! A predatory lender doesnt care if you cant keep up with the monthly payments, because as soon as you cant, the lender will foreclose. This is when a lender persuades a borrower to repeatedly refinance a loan,Loan flipping often within a short time frame, charging high points and fees each time. This is not in your best interest because it costs you money and postpones the loan principal from being reduced. Some lenders will offer you the option to pay your loan bi-weekly. AlthoughA high fee for bi- this type of payment plan can reduce the finance charge and length of a loan,weekly payments predatory lenders may charge you $1,000 for the "privilege" of paying biweekly. In reality, such accounts can often be set up for free or a few hundred dollars at most. If you are behind on your mortgage payments, a predatory lender may offerRequired deed to help find new financing. But first you are asked to deed your property oversigning to the lender as a temporary measure to prevent foreclosure. But then the promised loan never comes, and you no longer own your home. These are often warning signs of scams. Consumers responding to such adsAdvertisements are guided through a phony application process and may even receive fakepromising “No loan approval documents. To receive the approved loan, they are told to payCredit? No money up-front for fees or services – and instead end up losing their money.Problem!”5 Source: http://www.handsonbanking.org/htdocs/en/y/cr/loa/ycrloawrn.html
4: Financing a Home Shopping for the Right Lender and Loan6 SHOP WITH SEVERAL LENDERS It is important to shop around with several lenders before making your final decision so that you can get the best financing deal. Keep in mind that the mortgage price and terms may be negotiable. Taking the time to shop, compare and negotiate could say you thousands of dollars! Tips for Finding a Lender Ask for a referral from your REALTOR® or real estate agent. Check local and state financing programs for referrals. Read mortgage lender reviews available at www.zillow.com/directory/mortgage- lenders/ Speak to friends & family who can share with you their experience when they purchased their home. However you decide to shop for your lender, make sure you establish trust with the person who will originate your mortgage –one of the largest investments you will ever make! COMPARE IMPORTANT COST INFORMATION Before “going shopping” for the right loan, know how much of a down payment you can afford and all of the costs involved in the loan. It’s important to compare information about the same loan amount, loan term and type of loan. Cost Comparison Factors Rates Request a list of current mortgage interest rates. Find out if the rate is fixed or adjustable. If the rate quoted is for an adjustable-rate mortgage, ask how your rate and loan payment will vary. Will your loan payment be reduced when rates go down? Ask about the loan’s annual percentage rate (APR), which takes into account the interest rate, points, fees and other credit charges you may be required to pay. Points Points are fees paid to the lender or broker for the loan and often affect the interest rate. Typically, the more points you pay, the lower the rate. Ask for points to be quoted to you as a dollar amount rather than just the number of points. 6 Source: http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea09.pdf
4: Financing a HomeDown Payments and Private Mortgage Insurance (PMI) Ask about the lender’s requirements for the down payment, including what you need to do to verify that funds are available. Ask your lender about special programs offered. Many lenders now offer loans requiring less money down, even for conventional loans. If PMI is required, ask what the total cost will be and how much your monthly payment will be when the PMI premium is included.Fees Home loan fees may include loan origination or underwriting fees, broker fees, and closing costs. Some of these fees may be negotiable. Ask what each fee includes, as several items may be lumped into one fee. Ask for an explanation of any fee you do not understand. Common fees are included in the Mortgage Loan Comparison Worksheet.Monthly Payments Ask what your monthly payments will include. Ask if your property has Mello Roos or homeowners association fees Ask for an explanation of any fee you do not understand. Common fees are included in the Mortgage Loan Comparison Worksheet.NEGOTIATE FOR THE BEST DEALDid you know that many lenders and brokers offer different prices for the same loan terms todifferent consumers, even if those consumers have the same loan qualifications? Don’t paymore than you have to for the same loan!Tips for Negotiating: Ask the lender or broker to write down all of the costs associated with the loan. Then ask if h e or she will waive or reduce one or more of its fees or agree to a lower rate or fewer points. Make sure that the lender or broker is not lowering one fee while raising another. Once you are satisfied, you may want to ask for a written lock-in, including the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. Keep in mind that a fee may be charged for locking in the loan rate and rates may fall. If you have issues with credit, don’t limit your search to only high-cost lenders. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price.
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4: Financing a HomeMortgage Loan Comparison Worksheet7 LENDER 1 LENDER 2 LENDER 3 Name of Lender Name of Loan Officer Phone Number DateBASIC LOAN INFOLoan programLoan amount requestedType of mortgage (fixed-rate, adjustable-rate orother)Minimum downpayment requiredLoan termInterest rateAnnual % ratePointsPMI or MIPHow long MI must bekeptEstimated monthlyescrow for taxes &hazard insuranceEstimated monthlypayment (PITI, MI)FEESApplication feeOrigination feeProcessing feeUnderwriting feeAppraisal feeCredit report feeDocument preparationfeeBroker feesOther feesIs there a prepaymentpenalty? How long?77 Source: Federal Interagency Task Force on Fair Lending
4: Financing a Home LENDER 1 LENDER 2 LENDER 3 Name of Lender Name of Loan Officer Phone Number DateADJUSTABLE-RATELOANCONSIDERATIONSInitial rateHow long does theinitial rate last?How frequently doesthe rate change afterthe initial period?What are the rate capsfor the first adjustment,each adjustment afterthat and over the life ofthe loan?What index will beused?What is the margin?What could be thehighest monthlypayment?Can the loan beconverted to a fixed-rate?Cost of conversionoption
4: Financing a Home
4: Financing a Home
4: Financing a Home
4: Financing a Home
4: Financing a Home
4: Financing a Home
4: Financing a Home The Loan Process 1 2 3 4There are five key stages in themortgage process, as shown in 5the diagram.By understanding the process,knowing what to expect andplanning ahead, you canincrease your confidence aboutobtaining a mortgage loan andbuying a home.STEP 1: RESEARCH & EDUCATIONAs you are reading this you are well on your way for this step! Consider continuing youreducation by sitting down with a housing counselor to review your affordability and determineif you are mortgage ready. You can also: Talk to friends, family and co-workers who are homeowners about their experience when they purchased their home. Talk to mortgage professionals (without any commitment) about their process and products Go online and do some calculations to see how much you can afford.Where can I go for pre-purchase coaching?CHW offers one-on-one coaching sessions to review your personal situation and get anestimate of how much you can afford (pre-qualification).
4: Financing a HomeSTEP 2: PRE-APPROVAL8What is pre-approval? Pre-Approval is the process during which the lender checks your credit history, verifies income and reviews supporting documents in order to identify how much loan for which you qualify. The pre-approval letter is a letter from the bank or lender estimating how much they will lend a borrower. Pre-Approval vs. Pre-Qualification A written commitment from a lender Estimate of how much house you can for mortgage funding as long as certain afford and how much money a lender is conditions are met willing to loan you Your information is verified Your information is not verified Pre-approval can take more time Pre-qualification is fast and easy – you can because of the verification process even pre-qualify for a mortgage online in a Carries more weight than a pre- few minutes qualification letterThe Advantages of Loan Pre-Approval Save time looking at homes by knowing what you can afford to buy Advantageous when bidding on a property because the seller knows you qualify Signals to real estate agents that you are a well-qualified, serious buyer Can speed up the process when you find a home you want to buy Note: Even a pre-approval is not a guarantee that you will be approved for a mortgage loan. The funding will only be given when the property appraisal, title search, and other verifications check out on the home you have chosen to buy. Neither is the pre-approval binding; you can still obtain a mortgage from a different lender.9How do I get pre-approved?Typically, the documents needed to qualify you for a loan include: Income Records Tax Returns (typically past three years) Pay stubs (typically one full month, Proof of Undocumented Income most recent) Credit report (current, within past 90 days) W-2’s (typically past three years)8 Source:http://www.trulia.com/guide/home_buying/getting_a_loan/what_is_a_pre_approval_and_why_do_you_need_it/9 Source: http://www.mortgage101.com/article/mortgage-pre-qualification-vs-pre-approval
4: Financing a HomeSTEP 3: LOAN APPLICATION10After you have an accepted a purchase contract on a home (you will learn more about purchasecontracts in the Shopping for a Home section) you will complete the mortgage applicationprocess. It is at this time when you sign all disclosures and depending on your lender, you mayhave an application fee to pay upfront. The mortgage loan application is a lengthy documentthat consists of 10 sections: Section Description1. Type of Mortgage and Tip: This information should match the type of mortgage and Terms of Loan mortgage loan terms that you discussed with your loan officer.2. Property Information Includes: Information about the property, including the address, and Purpose of Loan year it was built, purchase or refinance, and other details. Includes: Personal information of you and any coborrower involved, including Social Security number, date of birth, marital status, and3. Borrower Information contact information. Tip: Be prepared to provide former addresses for up to seven years. Includes: History of employment – where you have worked and for4. Employment how long. Your loan officer will have you sign a Verification of Information Employment (VOE) form, which is sent to your employer as verification. Includes: Gross monthly income and monthly expenses.5. Monthly Income and Tip: Be sure to be as accurate as possible when filling out this Combined Housing section, as differences between your figures and those on your Expense Information credit report could delay the decision on your mortgage loan. Includes: Net worth – the difference between how much you own6. Assets and Liabilities (assets) and how much you owe (liabilities). Includes: Details of the mortgage loan – presented as estimates –7. Details of the including the purchase price of the home, closing costs, and the Transaction total cost of your mortgage loan, among other information. Tip: Make sure to look closely at the estimated closing costs. Includes: Questions about any pending legal problems or other8. Declarations factors that may influence your financial situation.9. Acknowledgment and Includes: Your signature saying that the information you are Agreement providing is accurate and true to the best of your knowledge.10. Information for Includes: Information such as your ethnic origin and race for Government statistical purposes. Monitoring PurposesTip: Use the Loan Documentation Checklist on the following page to help you remember whatyou will need when you fill out the mortgage application!10 Source: http://www.freddiemac.com/singlefamily/docs/Step_by_Step_Mortgage_Guide_English.pdf
4: Financing a HomeLoan Documentation ChecklistGeneral Documents Documents to Support Current Debts Social security card and driver’s For each creditor (bank, credit card or license or other picture ID person) with whom you have an outstanding debt: name, address, account number, balance, monthly paymentDocuments to Support Income Documents to Support Savings and Recent Bank Activity The name, address, phone number and fax number of every employer Most recent savings account you have had in the last two years statement(s) Most recent two months’ pay stubs Most recent checking account Income tax returns for the last two statement(s) years Most recent brokerage statements showing stock and bond balances and recent transactionsEvidence of All Other Income, including: Documents to Explain Irregularities Child support payments Letter of Explanation for any negative Pension payments credit items Seasonal employment income Letter of Explanation for any gap in employment Government assistance Chapter 7 or Chapter 13 bankruptcy Social Security benefits discharge papers and list of creditors Statements of stock dividendsDocuments to Support History of OtherConsistently Paying Housing Expenses Veteran’s certificate of eligibility Letters from landlords stating where Certified copies of divorce decree and you lived for the past two years, separation agreement dates you lived there, rent per Name, address and phone number of month, and how many times you the person to whom you pay childcare were late with your rent payment. If you cannot get a letter, provide the name, address and telephone number of each landlord for the past two years, the amount of your monthly rent payments and 12 months of rent receipts or canceled checks for each landlord for the past two years.
4: Financing a HomeStep 4: Loan Processing & UnderwritingOnce the loan application is completed, it is assigned to a loan processor. The loan processorcompletes your loan package by (depending on your lender) ordering your credit report,ordering an appraisal of the value of the property you want to buy and verifying youremployment, rent and bank account balances.A loan underwriter reviews your complete loan application package and decides whether toapprove your loan in accordance to your lender’s loan program guidelines.STEP 5: LOAN APPROVAL & CLOSINGIf you are approved, the lender will send you a commitment letter. The commitment letter is aformal loan offer that states the amount and terms of the loan. You will have a set amount oftime to close the loan. You will also have loan conditions to satisfy.The closing is the day your loan is completed (not the purchase transaction). You will signdocuments on which you agree to pay the lender for the money borrowed (mortgage note) andgive the lender rights to your property if you fail to repay the loan (Deed of Trust). You willlearn more about the closing in the Shopping for a Home section.If your loan is not approved, make sure you review the underwriter’s decision with yourmortgage professional. Reasons for denial can include: Changes in income New debt Insufficient assets Value of the property less than the original agreed purchase offerClosing costs and documents will be discussed more in the Shopping for a Home section.
4: Financing a Home Self-Assessment True or False 1. All loans require a 20% down payment on the home. True False 2. Adjustable-rate loans usually offer borrowers starting interest rates lower True False than fixed-rate loans. 3. When comparing loan products, you only need to consider interest rates to True False find the best option for you. 4. A pre-approval is a guarantee that you will be approved for a mortgage True False loan. 5. Generally, less debt means you will have greater purchasing power. True False Matching Terms11 Put the letter of the definition that best describes the definition of the terms below. Terms Definitions 1. Loan-to-value ______ A. One percent of the loan amount 2. Down payment B. The amount of cash you pay toward the ______ purchase price 3. Annual percentage rate ______ C. A bond for district facilities, usually levied as 4. Point ______ part of the annual property tax bill 5. Mello-Roos D. The total cost of credit, which includes the ______ interest, points and certain other fees charged by a lender E. The loan balance owed, compared to the appraised value of the house 11 Source: Adapted from NeighborWorks America’s Realizing the American Dream, page 249