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Nine out of 10 buyers need a mortgage to finance their purchase. The real
issue with real estate financing is not getting a loan (virtually anyone
willing to pay high enough interest rates can find a mortgage). The real
issue is to get the loan that's right for you -- the mortgage with the
lowest cost and best terms.
1. Start Early
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Ideally you should
start the mortgage process before looking for a home and certainly well
before bidding on a home. By meeting with loan officers in advance and
identifying mortgage programs, it won't be necessary to quickly find a
lender, check credit, and rush into a financing decision that may not be
the best option.
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Purchases usually
require buyers to apply for financing and clear their mortgage
continency within 30 days.
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Buyers who are
already pre-approved are in a stronger bargaining position.
2. How Much
Can you Borrow
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First and foremost,
you must determine how your mortgage payment will fit your current
budget and, to some extent, your future obligations 15 to 30 years down
the road.
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Start by using one
of the
on-line calculators
and numerous
mortgage rate sites.
3. Check Your Credit
Rating
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Every time you apply
for a credit card or other type of loan, the lender checks your credit
history. These checks show up as inquiries on your credit report.
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The three main credit
reporting agencies are:
Equifax,
Experian and
Trans Union.
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You are entitled to a
free credit report,
but be careful where you go to get it. You are giving out personal
information.
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Your
FICO Score is
relied on by most lenders to determine your credit worthiness. FICO
scores, are numbers tabulated using software by Fair, Isaac & Company.
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FICO scores run from
about 600 to 850. The higher the score the less you will have to pay for
a loan.
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The Median Score is
723. For the best rate your score should be over 760.
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Normally, credit
inquiries hurt your FICO Score. Presently, Fair Isaac ignores all
mortgage related inquiries that occur within a 30-day prior to the date
the credit score is tabulated.
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Late payments,
especially recent ones and high debt carry the most weight in lowering
scores.
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If you find errors
in your credit report or if your score is lower than you would like,
first read one of the
articles, sign up for
FICO Deluxe than discuss it with your Mortgage Company.
4. Decide which type
of Loan would be Best For You
The once simple task of
comparing fixed rate mortgages has been replaced by a maze of options and
varying definitions. There are literally dozens of loan types available, too
many to discuss here. Some of the obvious choices are:
If you are going to be
staying in your home for only a short period, an ARM might be the best idea.
The initial interest rate will be lower than the fixed rate, however the
rate will usually change every year based an index such as
LIBOR or
One-Year Treasury Notes plus a pre-determined margin.
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If You decide on
an ARM, check out the index it is tied to. Some indices rise more
rapidly than others.
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ARMs usually have
two caps (limits):
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There are a great
many variations for ARMs. The rate can be fixed for 3, 5, 7 or 10
years and then change.
Fixed rate mortgages
give stability, for which you pay a somewhat higher interest rate. If you
are going to be staying in your home for seven years or more, a fixed
interest rate might be the best. If rates go down, you can always
re-finance.
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How long do you want
the mortgage term?
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Usually mortgages
are between 10-years and 30-years.
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In general, if you
have the discipline and can pre-pay without penalty, a longer mortgage
gives you the option to pay less when you need to but allows you the
flexibility of paying more when your are able.
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Of course a
Smart Mortgage, no
matter how long the term, is always a good choice.
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Other Considerations
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Lenders will often ask
to have you pay real estate taxes, principal, interest and insurance
(PITI) as one payment each month. This is usually not necessary.
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PMI (Private Mortgage Insurance)
may be able to reduce your monthly payments or it may just add cost. Check
it out.
5. Find a
Mortgage Company You like and Trust
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Real estate
financing is available from numerous sources, including local banks,
local mortgage brokers and on-line companies.
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Unless you have an
established relationship with a mortgage lender, it is best to work with
someone locally your Buyer-Agent knows. Based on his or her experience,
your Buyer-Agent can provide you a list of lenders with a history of
offering competitive programs and delivering promised rates and terms.
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Be careful about
on-line lenders. They may sound good, but what are you going to do if
they let you down. Our experience with on-line lenders has not been
good. They are the most frequent cause of
Dry Closings.
6. Apply for a
loan
Applying for a loan is
the easy part. Getting the required documents together is the difficult
part.
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Start by downloading
and completing the
Uniform Residential Loan Application Form
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The application asks
for information about your job tenure, employment stability, income,
your assets (property, cars, bank accounts and investments) and your
liabilities (auto loans, installment loans, mortgages, credit-card debt,
household expenses and others).
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You'll have to
supply additional documentation including paycheck stubs, bank account
statements, tax returns, investment earnings reports, rental agreements,
divorce decrees, proof of insurance, and other documentation.
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The lender will run
a credit check on you to take a look at your credit status.
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If the lender deems
you creditworthy, the lender will give you a pre-approval or, if you
have selected a property, the lender will likely hire a professional
appraisal to make sure the value of the home you are about to buy is
truly worth your loan amount (usually no more than 90% of the purchase
price).
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RESPA requires your lender or mortgage broker to you a Good
Faith Estimate of settlement charges and other disclosures within three
days of applying for a loan.
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You should also
receive a
Truth in
Lending Disclosure Statement which will show you the Annual
Percentage Rate (APR). The APR takes into account not only the interest
rate, but also points and
other fees, such as mortgage broker fees. Ask for the APR up front.
Because there are a number of ways to calculate an APR, you may want to
calculate your own APR to truly compare loans.
7. Get a
pre-approval
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A pre-approval means
you have met with a loan officer, your credit files have been reviewed,
you have completed and signed the loan application, submitted the
necessary documents and the loan officer believes you can qualify for a
given loan amount. No specific property address to purchase is required.
Based on this information, the lender will provide a pre-approval letter,
which shows your borrowing power. There is usually a fee for a
pre-approval and pre-approvals are often limited to about four months.
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Although not a final
loan commitment, the pre-approval letter demonstrates your financial
strength and shows that you have the ability to go through with a
purchase. This information is important to owners since they do not want
to accept an offer that is likely to fall apart because financing cannot
be obtained.
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Pre-approval is
sometimes confused with pre-qualification. Pre-qualification is often the
first step in which the lender collects (but does not verify) income,
debts and repayment capability information from the borrower to determine
credit worthiness and financial ability to qualify for a loan. Usually
there is no fee charged and no credit report is run. Pre-qualification is
non-binding to the lender and only serves as an indication the buyer might
be qualified to get a mortgage.
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You can visit as many
lenders as you like and get several pre-approvals (or pre-qualifications),
but keep in mind that each one carries with it a new credit check, which
will show up on future credit reports. A lot of credit inquiries may hurt
your FICA credit score.
Additionally, the more people you ask for pre-approval or
pre-qualification, the less likely any of them will be interested in
working hard for you. In almost every instance, it is better to select one
mortgage company you like and stick with them.
8. Mortgage
Commitment
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Once your loan
application is processed, the property has been appraised and the Lender’s
underwriter has approved the loan, the Lender will issue a Commitment
Letter.
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The Commitment Letter
will spell out the loan amount, expiration date, locked in rate (if
desired), and the property address. Any outstanding conditions required by
the underwriter will be listed.
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Commitment Letters are
usually good for about three months, but can be updated by supplying
current asset and income information.
9. Closing
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Once the Lender is
ready to close, the attorneys for the Seller, Buyer and Lender will
coordinate a closing date convenient to them and to the Buyer and Seller.
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The Closing will
normally be in the office of the Seller’s or Buyer’s attorney. In many
instances, the Lender’s attorney may not even attend and will give the
Buyer’s attorney a check in escrow.
10.
Post-Closing
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Immediately after the
closing, Buyer’s attorney will record the sale (deed
and mortgage) in the Town of Greenwich’s land records.
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After the closing,
Lender will review all of the documents and often provide you with a
post-closing package. This should include your appraisal (if you have not
already received a copy).
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Your attorney will
also give you a package of all of the documents you signed.
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Be sure to give your
accountant a copy of the closing statement.
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Enjoy your new home
and remember to pay your mortgage on time.
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