You can learn a lot, but most of the information is fairly "generic" and sometimes out of date. Consider everything you learn from books and on the web as background information. After you get some "practice" by going out and actually looking at homes, more of what you read will begin to make sense. The books and articles provide good advice for the most part and can be part of your learning experience, but for specifics, you are going to have to talk to a lender or Realtor. Many of the "experts" who write the books and articles may have never actually earned their living by making loans or selling real estate. Some of those who did were in the business long ago. Some are in management and not actively selling houses or originating loans anymore.
Absolutely. One thing you should realize is that the term "lender" can refer to either the lending institution or to the actual loan officer representing that institution. If you simply get a phone number from the yellow pages or a newspaper ad, you don't know if you are going to be talking to an experienced lender or someone who has only been on the job for a few weeks. The reason loan officers are pretty free about answering your questions is because they hope that, by providing you this service, you will consider them as your lender when you actually decide to apply for a home loan.
The best way is through a referral from someone you know or a Realtor. Realtors will usually recommend someone who will be helpful and reliable, based on past experience. Realtors do not want you to have an unpleasant experience and perhaps be angry about it with them, so you can be reasonably certain that any loan officer they recommend has performed well for others in the past.
Kickbacks in any form are illegal. If you discover there are kickbacks involved, you should inform your local Department of Real Estate.
Lenders look at several things, as you will find when you gather information from books or on the web. Assuming you have saved the down payment and have a good credit history, the main thing that determines your ability to qualify for your home loan is income. Lenders have guidelines they use to figure out what monthly payment you can afford and call these "debt to income" ratios. It is basically a percentage of your monthly income.
You can get in the ballpark. There are a variety of "calculators" all over the web that can help you figure out what payment you qualify for, and knowing the payment, you can calculate backward to calculate the purchase price. However, there are a lot of variables that you may not be aware of. Depending on where you may buy, there may be homeowner's association fees or higher property tax rates that have to be included in the calculation. Different loan programs have different guidelines. If you are making a larger down payment, guidelines may be more elastic. With a smaller down payment, the guidelines may be stricter. In determining what loan amount you would qualify for, you should make certain assumptions about what your taxes, insurance and HOA fees (if any) might be. Once you think you are close, you should also talk to a lender.
If you are an experienced buyer and are putting at least twenty percent down on your new home, talking to a lender before you make an offer is probably unnecessary. At the same time, you could have your loan totally approved before making the offer, which might make your offer more attractive than others. If you are a first time buyer or putting less than twenty percent down, then your lender can help you zero in on your maximum purchase price and can pre-qualify you for a loan. Knowing that you qualify for a loan eases the stress of buying a home.
No. A pre-qualification is strictly an opinion of the loan officer that you will be qualified to purchase a home of a certain price. He bases this opinion on information you provide regarding income, debts, and savings. The information you provide might be verbal, presented in a telephone conversation, or you might provide him with pay stubs, bank statements, and he may review your credit. You can see that the more documentation you provide, the more valid the pre-qualification. If you are willing to provide documentation, you may as well apply for a loan and get pre-approved.
Pre-approval means you or your loan officer has completed a loan application, and you have provided required documentation so that an actual underwriter can approve your loan before you have purchased a property. Such an approval makes certain assumptions about the interest rate and other items associated with your monthly payment. If the property taxes are higher than anticipated, or you buy in an area where there are homeowner's association fees, the underwriter will have to review your loan again. A pre-approval applies only to you, the borrower. Once you choose a home, the property will have to qualify as well.
If all borrowers were alike, it would simply be a matter of service. If you mail in a loan application to a faceless institution, you may have only a phone number to contact and may only be able to contact them during business hours. You may be put on hold or have to leave a message and wait for a phone call back. A loan officer that has been referred to you will often meet you face to face in your home, his office, or your Realtor's office. He will have a pager that you can usually use to contact him at any time, and he will usually respond promptly to pages. However, all borrowers are not alike. Each borrower and each transaction has something unique about it, which may or may not present a challenge. A qualified loan officer will anticipate those challenges and prepare for them in advance, where a faceless person in an office may just process your loan as "paperwork".
In most cases, no. With most loans, there is somebody earning a commission on your loan, anyway. If you deal directly with your loan officer, it is just that you know exactly who is earning the commission.
Shop around, too. Then tell your loan officer what you found out. Interest rates are pretty much the same everywhere, usually varying by only about one-eighth of a percent. Your loan officer will probably match whatever you find because he has an incentive to do what it takes to keep your loan. First, he earns a commission. Second, he has a duty to whoever referred you to him. If a Realtor or builder refers clients to the loan officer only to have them obtain their home loan elsewhere, they may come to question why.
First of all, you should beware. When you receive a rate quote that sounds too good to be true, it usually is. You should adhere to some rules for "shopping around." Always compare rates on the same day, because rates change from day to day, sometimes during the day. Always make sure you are talking about the same commitment or lock-in period. If your lender is quoting you thirty-day pricing and the competitor is quoting twelve-day pricing, there will be a difference. Then, compare fees by getting Good Faith Estimates from each lender on the same day. The Good Faith Estimate has numbers in front of all the fees and charges. All lender fees have a number in front of them that is in the 800's. Be sure not to include the other fees in your comparison because the lenders are only estimating those anyway. If you choose the competitor, be sure to get a commitment letter guaranteeing your rate and fees for a specific period of time.
It depends on whether you like to be "safe" or prefer to "roll the dice." If you think rates are trending upward, then of course you should lock your rate. If you think they are trending downward, then it is your choice. It is often difficult to predict when rates will quit going down and begin to increase. When rates start to go up, they usually go up fast. Even in a downward trending market interest rates are sometimes volatile. There may be "spikes" where rates jump up a bit before continuing their downward trend. If you have put off locking in your rate until the last minute trying to get the very lowest rate, you might get caught in one of those volatile jumps in the market. You will have to lock in anyway so you can close your purchase on time.
Unlike stocks, whose prices are published each day, interest rates on mortgages are not. Most major papers publish a weekly survey of interest rates, but it is difficult to insure that what is in the paper is accurate. Plus, some advertisements are designed to look like rate surveys and you have to be careful. Advertisements are designed to generate phone calls and are not always accurate. You can keep track of the trend, however, by turning on CNBC each morning and listening to the news of the "bond market." The bond market, in this reference, refers to the buying and selling of 30-year treasury bonds. The same factors that influence the bond market influence interest rates. When the bond market is "up," yield (rates) go down. The day-to-day changes may be minute or none at all, but you can track the trend. As you are tracking the trend, you can continue calling your loan officer and checking on the interest rate for your loan. If you feel your loan officer is not giving you the benefit of a drop in rates, then start shopping around again and tell him what you have found out from other lenders. Be sure to get honest rate quotes as advised in a previous question.
Refer to the advice in the above question, "What if my lender can't give me the best rates?" At the same time, of course you should shop rates. My advice is to do it in the way suggested in the previous question. The problem is that when you call lenders on the phone to ask for a rate quote, the loan officer knows you are calling everybody else. It is tempting to tell you whatever you want to hear. Later, you may get a "surprise".
If we are talking strictly about the interest rate quote you receive from your lender, instead of the overall function of the market, then this is the way it works most of the time. Each morning, most lending institutions issue a rate sheet that goes out to its branch offices, loan officers and to brokers. The rate sheet will quote several different rates and have a cost associated with each rate, expressed in "points." One point equals one percent of the loan amount. The loan officer then decides how much to add to that "base price" to charge his clients. In most cases, it is the loan officer who determines your rate in this manner. Some institutions set a flat rate that all loan officers must charge, but they are in the minority.
As his commission, the loan officer earns a percentage of whatever is added to the base price from the rate sheet.
In addition to points, lenders charge other fees as a source of additional income. Certain fees, such as appraisal fees, credit report fees, tax service fees, and flood certification fees are actually costs incurred by the lender in processing your loan. Other fees are not associated with direct costs, but designed to offset the costs of processing loans or to generate income. These have been called "junk fees" by some people in the business. Some examples of these fees are processing fees, document fees, underwriting fees, wire transfer fees, and so on. Over recent years, the amount collected in these types of fees has increased as rate competition between lenders has become fiercer. Fees differ from lender to lender, but if you are comparing fees, you must also take into account the interest rates and points charged as well. Companies that claim to be offering the lowest rates often have higher fees. Companies that claim to have the lowest fees, often have slightly higher rates.
It depends on whether your loan is impounded or not. In some cases, having impounds is voluntary. In others, it is a requirement of the loan. If your loan is impounded, the monthly payment will cover not only principal and interest, but a certain amount each month that will accumulate in your "escrow" or "impound" account and will be used for the payment of mortgage insurance, property taxes, and homeowner's insurance.
There are many types of services required when you buy a home and each of them incur
costs, only a part of which come from the lender. Lender costs include any points you may pay, plus fees for appraisal, credit report, processing, documents, floor certification, and others. In addition, there will be escrow or settlement fees, and title insurance, plus some miscellaneous fees from both the title company and the escrow or settlement agent. Depending on your choices, you may also have fees for property inspections, homeowner's warranty, pest inspection,and homeowner's association related fees. Then there are "prepaid" expenses which will depend on whether your loan is impounded or not, the loan-to-value of your loan, and what type of property you buy. Prepaid expenses include items such as mortgage insurance, homeowner's insurance, property taxes, and pre-paid interest.
Many buyers obtain additional funds as a gift from a family member. Another source is that you may be able to borrow against your 401K plan or retirement plan. You can use the sale of personal property as a source of funds, but you must document it carefully. You will need an appraisal or valuation of the item (such as the blue book for automobiles), a copy of the bill of sale, a copy of the check used to make the purchase, and a copy of the deposit receipt showing the funds going into your account.
Your credit score, or FICO score as it is also known, is recorded by three separate credit bureaus: Experian, Equifax, and TransUnion. To find out your score we recommend you contact them, starting with
Experian.
Amortization can seem like a complicated subject, but in fact it is merely a breakdown of how much of your monthly mortgage payment goes toward paying off the principal and how much is instead paying the interest on the loan. You should have received an amortization schedule when the mortgage was originated. If you did not, your mortgage lender should be able to provide one.
The final rate on a mortgage loan is influenced by a number of different factors, including the overall level of long term interest rates, the rules of the lender and the creditworthiness of the borrower.
There are few numbers as important to the mortgage process as the three digit credit score. To the lender, the credit score is a prediction of how likely the borrower is to pay his or her mortgage on time, and the credit score will greatly influence the interest rate on the mortgage, or even whether the mortgage is granted at all.
Private Mortgage Insurance, or PMI, is designed to protect the mortgage lender in the event the home buyer defaults on the purchase. In most cases, PMI will be required for mortgage loans with less than a 20% down payment. PMI tends to be quite costly, so it is important to drop it as soon as the equity in the home hits the 20% mark.
One of the most significant developments in the mortgage market in the past few years has been the advent of the interest only mortgage. With an interest only mortgage, the home buyer is required to pay only the interest portion of the loan for a set period of time, often between 3 and 5 years. After that interest only period has expired, payments of principal and interest are required, and this will cause a significant increase in required monthly mortgage payments.
The reverse mortgage is generally most suitable, and most available, to older citizens, and it provides people with a way to stay in their homes while tapping the equity built up in their homes to pay living expenses. With a reverse mortgage, the lender agrees to pay the homeowner a set amount of money every month, with the understanding that the home becomes the property of the lender upon the death of the homeowner.
Property taxes can be a significant part of the expense of home ownership, and it is important for all home shoppers to take property taxes into account. Each municipality will have its own property tax calculation formula, and property taxes can differ significantly between townships.
If you have enough cash on hand to replace your home and everything in it in the event of a fire, flood or other disaster, you may not need homeowners’ insurance. Most of us, however, are not in such a fortunate position, and we need insurance to protect our biggest asset.
Closing costs are the costs the home buyer must pay at the time of closing. These costs are in addition to the down payment, and it is important for the buyer to get an estimate of those closing costs ahead of time. Closing costs are also sometimes referred to as settlement costs.
Points are an up front cash payment that may be charged by the lender as part of the fee for the loan. Points are expressed as a percentage of the amount of the loan. For instance, a loan with 3 points would have an additional charge equal to 3% of the loan amount.
An adjustable rate mortgage, also called an ARM, is a mortgage in which the interest rate can change. For most ARMs there will be an initial period in which the interest rate will not change, but after that period has expired the interest rate will rise or fall according to the terms set forth in the mortgage.
An appraiser is a professional who has knowledge of the real estate markets and is skilled at determining the fair market value of homes. The appraiser will typically be chosen by the lender, but in most cases the borrower will be responsible for paying the appraisal fee.
A balloon mortgage is one which will be payable in full before the full term expires. In most cases the balance on a balloon mortgage will be refinanced when it comes due. For example, with a 7 year balloon mortgage, the monthly payment may be calculated based on a 30 year period, and the full balance at the end of year 7 would be refinanced or paid in full at that time.
When discussed in terms of home buying and mortgage lending, equity is the difference between the value of the home and the balance remaining on the home mortgage loan or loans.
Escrow is an agreement to place money or other valuable items into an account with a third party for safekeeping, pending the completion of a promised act by one party or another. Some mortgage transactions will include an escrow agreement requiring the borrower to add a specific amount for taxes and insurance to the monthly mortgage payment. That money then goes into an escrow account which the lender will use to pay the taxes and insurance payments as they are due.
Fannie Mae is a Federal agency which purchases and repackages loans as investments. The securities of Fannie Mae guaranteed by the agency and often used in fixed income investment portfolios.
The housing expense ratio is the ratio of housing expenses, including monthly mortgage payment, real estate taxes and homeowners insurance, to the borrower’s equity. This ratio is used, along with a host of other factors, to determine the borrower’s qualification for a mortgage.
A lien is the lender’s right to make a claim against the property of the borrower in the event of a default.
A mortgage broker is an independent contractor who specializes in finding and comparing loan products from a variety of different lenders.
Pre-approval is a commitment by the lender to write a mortgage for the specified borrower, prior to the identification of the property being purchased. The pre-approval process is designed to make shopping for a home easier, as it allows potential buyers to know ahead of time how much they can borrow.
There are several mortgage calculators available online for you to use, that can make it easy to determine your monthly payment. If you want to figure it out on your own you can use the following equation:
| Monthly Payment = Principal * |
Monthly Interest (in decimal form) |
| 1-(1+Monthly Interest) - (# of months) |
If you are not a math whiz, I would suggest doing the math on a mortgage
calculator online. It can make the whole process a lot easier, and can allow you to change variables such as loan term and interest rate rather easily, and see what the difference may be.