What should I know about buying a home?
[Reprinted from Empire Capital Mortgage] •
How much house can I afford?•
Why should I refinance? •
What are the costs of refinancing?•
What kinds of mortgages are available? •
What is a Fixed Rate Mortgage?•
What is an Adjustable Rate Mortgage? •
What is a VA Loan?•
What is a FHA Loan? •
How can I save on a Fixed Rate Mortgage?•
What determines the cost of a mortgage? •
What is a Private Mortgage Insurance?•
What should I ask my lender? •
What documents will I need for my loan application?•
What is involved in the closing meeting? •
What costs will I pay at closing?•
How do lenders decide home loan approval? •
What decisions do credit lenders make? What should I know before buying a home?Here are some tips that could save you a lot of time, money and trouble.
Plan ahead. Establish good credit and save as much as you can for the down payment and closing costs.
Get pre-approved online before you start looking. Not only do real estate agents prefer working with pre-qualified buyers; you will have more negotiating power and an edge over homebuyers who are not pre-approved.
Set a budget and stick to it. The Mortgage Calculator can help you determine a comfortable price range.
Know what you really want in a home. How long will you live there? Is your family growing? What are the schools like? How long is your commute? Consider every angle before diving in.
Make a reasonable offer. To determine a fair value on the home, ask your real estate agent for a comparative market analysis listing all the sales prices of other houses in the neighborhood.
Choose your home loan (and your lender) carefully. For some tips, see the question in this section about comparing loans.
Consult with your lender before paying off debts. You may qualify even with your existing debt, especially if it frees up more cash for a down payment.
Keep your day job. If there is a career move in your future, make the move after your home loan is approved. Lenders tend to favor a stable employment history.
Do not shift money around. A lender needs to verify all sources of funds. By leaving everything where it is, the process is a lot easier on everyone involved.
Do not add to your debt. If you increase your debt by financing a new car, boat, furniture or other large purchase, it could prevent you from qualifying.
Timing is everything. If you already own a home loan, you may need to sell your current home to qualify for a new one. If you are renting, simply time the move to the end of the lease.
How Much House Can I Afford? How much house you can afford depends on how much cash you can put down and how much a creditor will lend you. There are two rules of thumb:
You can afford a home that's up to 2 1/2 times your annual gross income.
Your monthly payments (principal and interest) should be 1/4 of your gross pay, or 1/3 of your take-home pay.
The downpayment and closing costs - how much cash will you need? Generally speaking, the more money you put down, the lower your mortgage. You can put as little as 3% down,
depending on the loan, but you'll have a higher interest rate. Furthermore, anything less than 20% down will require you to pay Private Mortgage Insurance (PMI) which protects the
lender if you can't make the payments. Also, expect to pay 3% to 6% of the loan amount in closing costs. These are fees required to close the home loan including points, insurance,
inspections and title fees. To save on closing costs you may ask the seller to pay some of them, in which case the lender simply adds that amount to the price of the house and you
finance them with the mortgage. A lender may also ask you to have two months' mortgage payments in savings when applying for a home loan. The mortgage - how much can you borrow? A
lender will look at your income and your existing debt when evaluating your home loan application. They use two ratios as guidelines:
Housing expense ratio. Your monthly PITI payment (Principal, Interest, Taxes and Insurance) should not exceed 28% of your monthly gross income.
Debt-to-income ratio. Your long-term debt (any debt that will take over 10 months to pay off - mortgages, car loans, student loans, alimony, child support, credit cards) shouldn't exceed 36% of your monthly gross income.
Lenders aren't inflexible, however. These are just guidelines. If you can make a large downpayment or if you've been paying rent that's close to the
same amount as your proposed mortgage, the lender may bend a little. Use our calculator to see how you fit into these guidelines and to find out how much home you can afford.
Why Should I Refinance?If you have a low, 30-year fixed interest rate you're in good shape. But
if any of these Five Reasons applies to your situation, you may want to look into refinancing.
1. Decrease monthly payments.
If you can get a fixed rate that's lower than the one you currently have, you can lower your monthly payments.
2. Get cash out of your equity.
If you have enough equity you can get cash out by refinancing. Just decide how much you want to take out and increase the
new home loan by that amount. It's one way to release money for major expenditures like home improvements and college tuition.
3. Switch from an adjustable to a fixed rate.
If interest rates are increasing and you want the security of a fixed rate, or, if interest rates have fallen below
your current rate you can refinance your adjustable home loan to get the fixed rate you're looking for.
4. Consolidate debt.
You can refinance your mortgage to pay off debt, too. Simply increase the new home loan amount by the amount you need
and the lender will give you that cash to pay off creditors. You'll still owe the lender but at a much lower interest rate - and that interest may be tax-deductible. (seek the
advice of your tax advisor or the equivalent.)
5. Pay off your mortgage sooner.
If you switch to a shorter term or a bi-weekly payment plan, you can pay off your home earlier and save in interest. And if your current
interest rate is higher than the new rate, the difference in monthly payments may not be as big as you'd expect.
Is refinancing worth it?Refinancing costs money. Like buying a new home, there are points and fees to consider. Usually it takes at least three years
to recoup the costs of refinancing your home loan, so if you don't plan to stay that long it isn't worth the money. But if your interest rate is high it may be smart to refinance to a
lower interest rate, even if it is for the short term. If your mortgage has a prepayment penalty, this is another cost you will incur if you refinance.
Use the reasons above as a guideline and determine whether or not refinancing is the right thing to do. You can also use our refinance analysis calculator to help you decide.
What Are the Costs of Refinancing?Here's what you can expect to pay when you refinance:
The 3-6 Percent Rule
Plan to pay between 3% and 6% of the amount of the new home loan amount (if want cash-out, the home loan amount will be
larger). Yet some lenders offer no-cost refinancing in exchange for a higher rate.
Getting to the Points
Points play a big part in how much it'll cost to refinance - if you pay more points, you can lower your interest rate.
Points are a good idea if you're planning to stay in your home for a while, but if you'll be moving soon you should try to avoid paying points altogether.
Negotiate the Fees
Be aggressive and investigate the fees your lender is asking you to pay.
You may not need an appraisal, or your loan-to-value may be such that you no longer need Private Mortgage Insurance. Sometimes if you refinance
with your current lender they won't need a credit report. With a little research it's amazing how much you can save.
Here, we've explained the different home loan refinancing fees.
Application Fee: This covers the initial costs of processing your home loan application and checking your credit.
Appraisal Fee: An appraisal provides an estimate or opinion of your property's value.
Title Search and Title Insurance: A Title Search examines the public record to discover if any other party claims ownership of the property. Title
Insurance covers you if any discrepancies arise in ownership. (A reissue of the title can save 70% over the cost of a new policy.)
Lender's Attorney's Review Fees: In any financial transaction of this scope, a lawyer's participation ensures that the lender isn't legally
vulnerable. This fee is passed on to you. Although such fees are not applicable in many Western States.
Home Loan Origination Fees: This is the cost of evaluating and preparing a mortgage home loan.
Points: These are basically finance charges you pay the lender. One point equals 1% of the home loan amount (for example, one point on a $75,000 home loan is $750). The
total number of points a lender charges depends on market conditions and the loan's interest rate.
Prepayment Penalty: Some mortgages require the borrower to pay a penalty if the mortgage is paid off before a certain time. FHA and VA loans, issued by
the government, are forbidden to charge prepayment penalties.
Miscellaneous:Other fees may include costs for a VA home loan guarantee, FHA mortgage insurance, private mortgage insurance, credit checks, inspections and
other fees and taxes.
How to Save Money Refinancing: - Research all costs and fees.
- Don't be afraid to negotiate with your lender.
- Shop around for the lowest rates.
- Check with your current lender for lower rates
with costs that are reduced or waived.
What Kinds of Mortgages Are Available? - Fixed-Rate Mortgage - interest rates and monthly payments remain unchanged for the life of the home loan
- Adjustable-Rate Mortgage - interest rates and monthly payments can go up or down, depending on the market
- Hybrid Loans - a combination of fixed and adjustable mortgages
How do you decide which home loan is best? These questions may help.
- How much cash do you have for a downpayment?
- What can you afford in monthly payments?
- How might your financial situation change in the near future and beyond?
- How long do you intend to keep this house?
- How comfortable would you be with the possibility of your monthly payments increasing?
Discuss these with your lender so they can help you decide which home loan would best suit you.
What is a Fixed Rate Mortgage?This is the most common home loan arrangement in the U.S. With a fixed-rate mortgage the loan's
principal and
interest are
amortized, or spread out evenly, over the life of the home loan, giving you a predictable monthly payment.
The upside is, if rates are low, you can lock in for as long as 30 years and protect yourself against rising
rates. However, if rates fall you can't change your rate without refinancing the home loan, and that could cost money.
The 30-year Fixed-Rate Mortgage, the most popular and easiest to qualify for, will give you the lowest payment. But you can also get a 20-, 15- and
even a 10-year fixed-rate mortgage if you wish to save interest and pay your home off sooner.
What is an Adjustable Rate Mortgage?With Adjustable-Rate Mortgages (ARMs) interest rates are tied directly to the
economy so your monthly payment could rise or fall. Because you're essentially sharing the market risks with the lender, you are compensated with an
introductory rate that is lower than the going fixed rate.
How often does the interest rate change?
That depends on the home loan. Changes can occur every six
months, annually, once every three years or whenever the mortgage dictates.
How much can my rate change?
Your ARM will stipulate a percentage cap for each adjustment period, which means your interest may not increase beyond that percentage point. If
the market holds steady, there may be no increase at all. You may even see your payment decrease if interest rates fall.
How are the changes determined?
Every ARM home loan is tied to a financial market index, such
as CDs, T-Bills or LIBOR rates. Your rate is determined by adding an additional percentage (known
as a margin) to that index's rate. When the index rises or falls, your rate rises or falls with it.
Is there a limit to how much interest I'll be charged?
Yes. It's called a ceiling, or lifetime cap. This is a guarantee that your interest rate will never exceed a designated
percentage. For instance, if your introductory rate was 5% and you have a lifetime interest rate increase cap of 6% (meaning
that your interest rate can never increase more than 6% during the life of the home loan) then your ceiling would be 11%.
What are the benefits of an ARM?
With a lower initial interest rate (usually 2% to 3% lower than fixed-rate mortgages), qualifying is easier and the payments are more manageable at first.
You may qualify for a larger home loan than you would with a fixed-rate mortgage.
If you're only planning to stay a short time the interest rate is likely to stay lower than that of a fixed-rate mortgage.
If you expect regular pay increases that would cover the increase in your interest, or if you believe interest rates will fall, an ARM might be the wiser choice.
A few words of caution:
Negative Amortization -This happens when a lender allows you to make a payment that doesn't cover the
cost of principal and interest. Watch for this. It may be used as a lure to get you into a home with the promise of low initial payments. Or, a lender may give you a payment
cap instead of a rate cap. In this mortgage arrangement, if interest rates increase, your monthly payments could stay the same - but the higher interest will still be charged to
your home loan, adding to it instead of reducing it. Either way, if you find yourself with a negative amortization ARM, you'll be adding to your debt.
Discounted interest rates - Sometimes a lender will advertise an unusually low initial rate. This is a discounted rate, and it's essentially a marketing
tool. If your ARM offers a discounted interest rate you are certain to see an increase at your next adjustment period, even if interest rates don't
change.
What is a VA Home Loan? Administered by the Department of Veterans Affairs, these special loans make housing
affordable for U.S. veterans. To qualify you must be a veteran, reservist, on active duty, or a surviving spouse of a veteran with 100% entitlement.
A VA home loan is simply a fixed-rate mortgage with a very competitive interest rate. Qualified buyers can also use a VA home loan to purchase a home with no money down,
no cash reserves, no application fee and reduced closing costs. Some states allow a VA home loan for refinancing as well.
Many lenders are approved to handle VA loans. Your VA regional office can tell you if you're qualified.
What is a FHA Loan?FHA loans are designed to make housing more affordable for first-time homebuyers and those with low to moderate income.
Both fixed- and adjustable-rate FHA loans are available, and in most states, an FHA home loan can be used for refinancing. The difference is, they're insured by the
U.S. Department of Housing and Urban Development (HUD). With FHA Insurance, eligible buyers can put down as
little as 3% of the FHA appraisal value or the purchase price, whichever is lower. Qualifying standards are not as strict
and the rates are slightly better than with conventional loans.
Convertible ARMs
Some adjustable-rate mortgages allow you to convert to a fixed rate at certain specified times. This mitigates some of the risk of fluctuating
interest rates, but there will be a substantial fee to do it. And your new fixed rate may be higher than the going fixed rate.
Two-Step Mortgages
This is an ARM that only adjusts once at five or seven years, then remains fixed for the duration of the home loan. Not
only will you benefit from a lower rate for the first few years, but interest rate cannot increase beyond the stated fixed rate. It may even be lower, depending on market conditions.
Then again, you also run the risk of adjusting to a much higher rate.
Convertible Loans
Another ARM choice, the convertible home loan offers a fixed rate for the first three, five or seven years, then switches
to a traditional ARM that fluctuates with the market. If you strongly believe that interest rates will fall a convertible home loan might be a smart move.
Balloon Mortgages
These short-term loans begin with low, fixed payments. Then, in five, seven or ten years a single large payment (balloon)
for all remaining principal is due. While this saves money up front, coming up with a large payment at the end of the home loan may be difficult. Some lenders will allow you to
refinance that payment, but some won't, so be sure you know what you're getting into.
Graduated Payment Mortgage (GPM)
With a GPM you pay smaller payments that gradually increase and level off after about five years. Lower payments can make
it possible for you to afford a bigger home, but they'll be interest-only payments, which deduct nothing from the principal. To the extent that full interest payments are made, this will
not result in a negative amortization. In other words, there will be no increase of principal and no amortization of the
home loan principal.
How Can I save on a Fixed Rate Mortgage?Short Term Mortgages
You don't have to finance your home for 30 years.
Granted, the payments will be lower, but you'll be paying them longer. You could, instead, opt for a period of 20, 15 or even 10 years, pay your home
off sooner and save in interest.
Furthermore, lenders offer much more attractive interest rates with short-term loans, so your payments may not be as much as you'd think.
The table below shows you the interest savings on a $100,000 home loan at 8.5% interest:
| Term | Monthly Payment | Total Interest Accrued |
| 30 yr | $768.91 | $176,808.95 |
| 20 yr | $867.83 | $108,277.58 |
| 15 yr | $984.74 | $ 77,253.12 |
By paying $215.83 more a month on a 15-year mortgage, you'd save $99,555.83 in interest over a 30-year home loan - and own the house in half the time.
What Determines the Cost of a Mortgage? There are five factors that determine the ultimate cost of a mortgage.
The principal, or amount of the home loan, is the total amount you borrow (the purchase price minus your downpayment).
The interest rate adds significantly to the cost of your mortgage. Fixed or adjustable, the interest paid at the end of the home loan can exceed the original cost
of the home itself. For instance, a $100,000 loan balance at 8.5% for 30 years will cost you $277,000 by the time the home loan is retired.
The term of the home loan is the length of time until the loan is paid off. A longer term means more interest and higher cost.
Points are interest paid on the home loan and they're purely optional. You pay points at closing if you want to reduce the interest rate and make your monthly
payments smaller. One point equals one percent of the loan amount.
Fees are paid to the lender at closing to cover the costs of preparing the mortgage. They can vary according to where you live and what type of home loan you're securing.
While points and fees are not financed, they still contribute to the cost of the mortgage.
What is Private Mortgage Insurance? Private Mortgage Insurance, or PMI, is insurance purchased by the buyer to protect the lender in case the buyer defaults
on the home loan. PMI is generally applied when you put down less than 20% of the home's purchase price. The reason is this:
With 20% down, you are considered a low risk. Even if you default the lender will probably come out ahead because they've only loaned 80% of the home's
value and they can probably recoup at least that amount when they sell the foreclosed property.
But with 5% or 10% down, the lender has a lot more invested in the home loan and if you default, they will almost surely lose money. This is why lenders require buyers
to purchase PMI if they put down less than 20%. It's insurance that, no matter what happens, the lender will recoup its investment.
How does PMI increase your buying power?
In simplest terms, PMI allows you to put less money down, and the benefits are as follows:
If you have good credit but are short on cash for a downpayment you can put as little as 5% down.
It doesn't take as long to accumulate a 5% or 10% downpayment so you could buy a home much sooner than you anticipated.
A smaller downpayment allows you to purchase a larger or nicer home.
For repeat buyers, a smaller downpayment on the new home can free up cash from the sale of their previous home to use for other debts or expenses.
Your interest will be higher if you put down less than 20%, but that interest is tax-deductible.
What does PMI cost?
A Good Faith Estimate will be provided to you within a few days after we received your home loan application. This disclosure
will provide you with an estimate of your monthly PMI premium as well as the initial premium you'll need to pay at closing. Additionally, we will be providing you a disclosure on your
rights (if applicable) to cancel the PMI.
What Should I Ask My Lender? What type of home loan is best for me?If you've done some groundwork you should have a pretty good
idea of what type of home loan you need. But your lender may offer options you hadn't considered or even something you haven't yet heard about.
What will my closing costs be?
At closing, you'll be required to pay a number of fees such as transfer of title, origination and appraisal, attorney
services, credit report, title insurance and inspections. Your lender is required to provide an estimate of these costs within a few days after
your application is received, but you can always ask for an estimate sooner.
Will I be charged points?
Sometimes you'll have to pay points (one point = 1% of the
home loan amount) in order to get the interest rate the lender has quoted you. Before proceeding with your home loan application
find out if there are any points attached to your loan.
What items must be prepaid?
Some expenses, such as first year's property taxes and insurance, must be paid at closing. Your lender will let you know what's required.
How long will I be guaranteed the quoted interest rate?
This is called "locking in" a rate and most lenders provide this service. When you apply for your home loan, the
lender will lock in the agreed interest rate for an agreed period of time. But there may be a fee for this, so ask. Also,
obtain such lock-ins in writing, which is a requirement in most states.
How long will it take to get approval?
It varies, so make sure you get an estimate of how long approval will take, especially if you have a deadline for closing on a new home.
Does the home loan have a pre-payment penalty?
If you even think there's a possibility you may pay off your loan early (this includes refinancing) find out if there's a penalty for doing so.
Is there a call option attached?
A call option allows the lender to require you to pay off
your home loan balance before it's due. You don't want this, so make sure it's not in the contract. Also, in many states, these are not permissible on residential loans.
What Documents Will I Need for My Home Loan Application?
When preparing a home loan, the lender will ask for substantial documentation. Here's a list of what is usually required.
Personal Information
- Address and telephone numbers of each borrower
- Previous address(es) over the last seven years
- Social Security number(s) of applicants
- Age of applicant(s) and dependent(s)
- Name and address of landlord(s) or lender(s) for the past two years and proof of payment
- Current housing expense details (rent, mortgage payments, taxes, insurance)
Employment/Income - Name and address of employer(s) for the past two years
- Pay stubs for the past 30 days · W-2 forms for the past two years
- A written explanation of any employment gaps
- If you're self-employed you'll need:
- Complete, signed Federal Income Tax Returns for the past two years (personal and corporate)
- Year-to-date Profit and Loss Statement and Balance Sheet
Other Income - If you receive Social Security, a pension, disability or VA benefits you'll need:
- A copy of your awards letter (or tax returns for the past two years)
- A copy of your most recent check
Child Support - If you pay child support you'll need:
- A copy of the divorce or separation agreement
- Evidence of payment for the last 6-12 months (cancelled checks of pay history from the courts)
Rental Income
If you receive rental income you'll need:
Debt Disclosure - Credit Cards, Loans and/or Current Mortgages
- Name and address of each creditor
- Account number, monthly payment and outstanding balance for each
- Proof of recent payment or current statement for each
- Documentation of alimony or child support you are required to pay
- Written explanation of any past credit problems
Home Loan Application for Home Purchase - A complete, signed copy of sales contract. Mailing address and property description (if it's not in the contract)
- A copy of your cancelled earnest money check Home Loan Application for Refinance
- A copy of the deed
- A copy of your hazard insurance policy
- A copy of the property survey
- Proof that your home has passed a termite inspection
Evidence of Funds for Downpayment - If the downpayment is a gift you'll need a signed gift letter, the giver's bank statement showing sufficient funds, a copy of the check and a deposit slip
- If you have any recent large deposits or new accounts you'll need to show documentation
Other - If your home loan is for new construction the lender will need to see plans and specifications
- If there's a bankruptcy in your financial history you'll need complete documentation
Fees - Appraisal fee (approximately $350)
- Credit report fee (approximately $50)
- In some areas, a flood determination fee (approximately $20)
What's Involved in the Closing Meeting? Preparing for Closing Many things must be taken care of before you come to the closing meeting. Ask your lender for a list of your responsibilities so you can arrive fully prepared.
Set a Closing Date
When choosing a closing date give yourself time to gather all your information and free up any necessary funds. The
lender will need time to prepare and deliver home loan documents (usually 3-5 days), home inspections must be scheduled and
if any repairs are needed allow enough time for them to be completed. Also, if your rate is locked in, make sure you
close before the deadline so you'll be guaranteed the quoted interest rate.
Other Required Items
Your lender will provide you with a commitment letter that lists all the other documentation that's required at closing. The following are common examples.
- Survey - This shows the property's boundaries and any improvements made to it. It also details any encroachments on the property like fences or buildings.
Major encroachments must be corrected before closing.
- Termite Inspection - Many areas legally require homes to pass a termite inspection, and all FHA and VA loans require one. If a termite inspection is required you must bring the certification to closing.
- Homeowner's Insurance - Lenders require you to carry insurance for the replacement cost of the property. Bring the policy with you to closing.
- Title Insurance Policy - All lenders require title insurance to protect them against claims of property ownership by anyone other than the borrower. The
title insurance issues the policy company after conducting a title search.
- Flood Insurance - A flood insurance policy is necessary for any property located in a flood plain.
- Water and Sewer Certification - If the property isn't served by public water and sewer facilities you'll need certification from the local government
that you have a private water source and sanitary sewer facility.
- Certificate of Occupancy - For a new home you'll need one of these before you move in. The builder should get it for you from the city or county.
- Building Code Compliance - An inspection is often required to make sure the property conforms to current building codes. There will be an inspection fee,
and the contract should specify who pays for any repairs needed to bring the home up to code.
Final Walk-Through
A day or two before closing it's a good idea to take one last look at the home to make sure repairs have been made, there's no new damage, and
anything meant to be sold with the property is still there. You can do this on your own or with your real estate agent.
Closing Costs
One business day before closing your lender must allow you to review your
Settlement Statement
This is the final exact amount you'll owe at closing and it must be brought
in the form of a certified or cashier's check. (Our Closing Costs Checklist can help you keep track of these expenses.)
The Closing Meeting
The legal sale and purchase of your home happens at the closing meeting which is attended by the buyer (you), the home loan
officer, the seller and any real estate agents or attorneys involved. (In some areas, closing is done by an agent without a meeting.)
Examination and Signing of Documents
At the closing meeting, the closing agent will review the
settlement sheet with you and the seller and ask you both to sign it. This is also when you'll present evidence of insurance
and inspections and sign all other home loan documents.
Payment of Closing Costs
Once all papers are signed and in order you'll hand over the check for
closing costs (the downpayment is included in check) and the lender provides the remaining funds to purchase the house.
Transfer of Property
Congratulations! You now own your new home. After the meeting, the closing
agent will record the mortgage and deed in your name with local government records and all funds will be disbursed.
Documents
During closing you'll sign stacks of important paperwork, including the following:
- HUD-1 Settlement Sheet - This is the itemized list of closing costs your lender gave
you the day before closing. After the closing agent completes it you and the seller both sign it.
- Truth-in-Lending Statementt - Given to you soon after you applied for your loan, it outlines the cost of
the home loan, gives you the APR (annual percentage rate) and defines the loan terms and number of payments.
- The Mortgage Note - The mortgage (or promissory) note is legal evidence of your promise to repay the home
loan according to the agreed terms which this document outlines.
- The Mortgage - This is the legal document that gives the lender a claim against your house if you fail
to uphold the terms of the mortgage note. Although you have possession of the house the lender shares ownership until
you pay off the home loan, and can demand full payment or foreclosure if you default. Some states use a deed of trust
instead that conveys title to a trustee until the home loan is repaid.
- Affidavits - These are documents required either by the lender or the law. Your lender can explain any affidavits you're asked to sign.
- The Deed - This document transfers ownership to your name and is signed by the seller at closing. You'll get a copy at closing and the original will be sent to
you after it's recorded.
What Costs Will I Pay at Closing? Closing costs vary according to lender, location and even from sale to sale. Some
costs can be negotiated, reduced or even waived and some may be paid by the seller.
When you're doing your research, use this checklist to get a rough idea of what you'll pay at closing. The lender or closing agent will provide you
with an exact total a day or two before closing.
Closing Costs Checklist
$______Down payment
$______Lender's points
$______Prepaid interest
$______Home Loan origination fee
$______Mortgage insurance
$______Credit reports
$______Appraisal(s)
$______Survey of property
$______Inspections
$______Homeowner's insurance
$______Attorneys' fees
$______Title search
$______Title insurance
$______Prorated property taxes
$______Recording fees
$______Closing taxes
$______Escrow account for and insurance
$______Other costs specified in purchase agreement
$______Other costs
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How Do Lenders Decide Home Loan Approval?
The Four "Cs" of Home Loan Approval
1. Capacity
2. Credit
3. Collateral
4. Character
Capacity
A lender will weigh your housing expenses and total debt against your monthly income to determine your ability to repay a home loan.
Monthly Income - Your net monthly income. If you're self-employed or receive commissions or bonuses, the lender averages your monthly income over the last two years.
Housing Expenses - This is the monthly payment you'll have with the new home loan, along with the monthly cost
of insurance, property taxes and any homeowner's fees or other costs.
Total debt - Add up any current mortgages, credit card balances, child support or alimony payments, tuition, car loans or other installment loans that will take longer
than 10 months to pay off and this is your total debt. If your monthly mortgage payment is less than 28% of your net monthly income, a lender will typically consider you qualified
to repay the home loan. That figure can even go as high as 36% depending on the buyer. For instance, many lenders will allow a first-time buyer's housing expenses to take
up more of their income.
Credit
To find out what kind of credit risk you represent, your lender will investigate your:
A few late payments on a credit card may not hurt you all that much. But collections, repossessions, foreclosures and bankruptcies can be serious problems.
If you have a good explanation you may still be able to repair your credit rating and get approval.
Collateral
When you ask for a home loan, you're putting the home itself up as collateral. Naturally, the lender will want to know that the home is worth
at least as much as the loan amount, which is why an inspection is required.
But they'll also want proof that you have the cash necessary for the downpayment and closing costs. They'll seek verification of funds from sources including
bank accounts, stocks, bonds, mutual funds, the sale of an existing property or any gifts from family members that will not have to be repaid.
Character
The way you conduct your financial transactions tells a lender a great deal about your fiscal character. If you take responsibility for your
debts by paying your bills regularly and on-time, you will appear to have the integrity they're looking for in a borrower.
Other Compensating Factors
Many factors can sway a lender in your favor. The bottom line is that the lender
wants to feel secure in loaning you money. Even if there are a few dings in your credit, if you appear to be a safe credit risk overall
you should be confident your loan will be approved.
What Decisions Do Credit Lenders Make? There are three major decisions that a credit lender is empowered to make.
1. Home Loan Approval
Approval is often given with conditions, such as the sale of current property, that require documentation for final approval.
2. Home Loan Suspension
A loan is suspended when information is incomplete or questions remain unanswered in the loan application. The buyer must supply the
needed information before a final decision can be made.
3. Home Loan Denial
There are a number of reasons why your home loan may be denied, and you're entitled to know those reasons. If denial is based
on your credit you're entitled to a free copy of that report.
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