Mortgage Guide

Buying a house is, at once, one of the most exciting life events we ever experience and the most achingly fretful. Without warning, everything enjoyable about finding the home of our dreams can suddenly be overshadowed by a mortgage nightmare if you’re not prepared. It doesn’t have to be that way.

Armed with the knowledge of how the mortgage process works along with proven strategies for securing the right home loan, you can be assured of the best possible home purchase experience.

The biggest mistake new homeowners make is to embark upon their home purchase quest without a plan. This guide will provide you with your mortgage roadmap with the essential stops you’ll take along the way:

1. Determine how much house to buy
2. Get your credit checked
3. Decide which type of mortgage is right for you
4. Gather your paperwork
5. Select your lender
6. Get pre-approved
7. Search for your dream home
8. Get ready to close
9. Go for the close
10. Mortgage servicing
 

In this market environment you should be shooting to put down at least 20%. Not only will that broaden your mortgage options when working with a lender, it will reduce your immediate expenses by eliminating the need for mortgage insurance (PMI). When calculating your total out-of-pocket costs you should add in another two to three percent on to the price of the house to cover closing costs. And don’t forget other costs associated with buying a home, such as moving costs.

From there you can calculate how much of your income you have available to apply towards a mortgage. As a rule, most lenders want to see your total debt payments, including your mortgage, credit cards, student loans, and child support not to exceed 36% of your pre-tax income. When figuring your total housing budget, don’t forget to add in home insurance, homeowners’ fees, property taxes, and maintenance costs. The last thing you want after you’re in your dream home is to be house poor.

Ideally, you want to take a minimum score of 700 into see a lender. With each 25 points below 700, your interest costs go up. Below 650, you are doomed to subprime territory which can be prohibitively expensive. It is always worthwhile to take the time, even if it adds months or a year on to your home quest, to work on increasing your score.

Fixed mortgages: The most common terms for fixed mortgages are 15-year and 30-year with the interest rate fixed for the term of the loan. In either case, your principal and interest payments are amortized over the loan period so that, in the early years of the loan, interest expense comprises the biggest portion of your payment, and, as the loan matures, more of your payment is comprised of principal. The primary difference between the two loan periods is that your monthly payments will be higher in the 15-year term because you will be paying down your principal more quickly. Generally, it is advisable to stick with the 30-year term in order to make your monthly payment more affordable. With most mortgages, you are allowed to make extra principal payments if you want to pay your principle down more quickly (be sure to check with your lender for this option).

Adjustable rate mortgage (ARM): With an ARM your initial interest rate is set below the prevailing fixed interest rate for a period of three to seven years. At the end of the initial fixed-rate period, the interest rate is reset based on the prevailing rates at the time. If interest rates increase over the initial period, your rate will be adjusted upward. Most ARMs include an annual cap of around 2% and a lifetime cap, typically around 6%. After the fixed-rate period, rates are adjusted annually (some may adjust every three years) with adjustments tied to a monthly interest rate index such as the LIBOR or the Treasury rate.

In deciding which route to take, your first consideration should be the length of time you plan to stay in the home. If you have found your life-long dream home, you may be better off with a fixed rate. Also, if you think interest rates are going to increase in the future, you’ll save on interest costs over time. If however, your new home is going to be a stop along the way and your planned stay is going to be less than five to seven years, you could save money currently with an ARM.

• W-2 forms from the most recent two year period
• Federal tax returns from most recent two year period
• Six months of paycheck stubs
• Six month profit-loss statement if you are self-employed
• Documentation of other income sources
• A detailed listing of creditors and outstanding debt
• Statements of all assets including investments, real estate, autos
• Cancelled checks or transaction record of rent or mortgage payments.

It’s also important try to compare the interest rate lock provisions. Most lenders will only lock your interest rate for 30 days. Some may offer a 60 day lock for a fee or a slightly higher interest rate. If you are buying during a period of rising interest rates, it may be to your advantage to try for a 60-day lock.

Lenders want your business, so, if you have good credit, you might be able to negotiate for a lower rate, lower points or waived fees. See what they will be willing to do the get your business. Then go onto the next lender. You should meet with no less than three in order to find one you will that suits your needs.

A word on points: Points are like pre-paid mortgage interest which you pay up front instead of through the loan. Each point is equivalent to 1% of your loan. Offering points is a way for lenders to reduce the loan interest rate. For instance, the lender may reduce your loan rate by .25% in exchange for a point. Just keep in mind, lenders are in it for the profit, and if they are going to give up some with a lower interest rate, they will make it up with higher points or fees. You shouldn’t consider points unless you know you will stay in your home long enough to make up the cost with lower interest payments.

Going into the closing period you should be fully aware of all of the costs you will incur, some of which will need to be paid at the closing appointment, and others which may be included in your loan. Your lender should have provided you with “good faith estimate” of these costs at the time of escrow. Among the more common closing costs and fees are:

• Loan origination fee
• Points
• Appraisal fee
• Credit report fee
• Inspection fee
• Application Fee
• Mortgage broker fee (if you used a broker)