FINANCING PROCESS / MORTGAGE

Now that you've learned some basics, let's go through the steps of getting finance to get a mortgage.

Pre-qualification vs. pre-approval?

Sometimes these terms are used interchangeably, but they're actually very different:

Pre-qualification

This involves providing your lender with some basic information what income you make, what you owe, what assets you have, etc. They'll look at your overall financial situation and be able to provide you with a preliminary estimate of what loan terms for which you may qualify. When you get pre-qualified, the lender doesn't review your credit report or make any determination if you can qualify for a mortgage, they'll just provide the mortgage amount for which you may qualify. Pre-qualifying can help you have an idea of your financing amount (and the process is usually quick and free), but you won't know if you actually qualify for a mortgage until you get pre-approved.

Pre-approval

This involves completing a mortgage application and providing the lender with your income documentation and personal records. You’ll usually have to pay an application fee, and the lender pulls and reviews your credit. A pre-approval takes longer than a pre-qualification as it’s a more extensive review of your finances and credit worthiness. Pre-approval is a bigger step but a better commitment from the lender. If you qualify for a mortgage, the lender will be able to provide: the amount of financing; potential interest rate (you might even be able to lock-in the rate); and you'll be able to see an estimate of your monthly payment (before taxes and insurance because you haven't found a property yet).

Why get pre-approved? 

It saves you time by letting you search for homes within your pre-approved, affordable price range. Also, you're letting sellers know you're a serious and qualified buyer. Often, if there's competition for a home, buyers who have their financing in place are preferred because it shows the seller you can afford the home and are ready to purchase. 

So, we suggest asking your lender to prepare a pre-approval letter that your agent (if you are working with one) can submit with your offer. Having a pre-approval makes your offer 100 times stronger. An offer without a pre-approval letter is unlikely to be taken seriously by a seller.

What's an APR?

Most homebuyers only think about the interest rate, but your lender will typically use APR(Annual Percentage Rate) when reviewing and quoting your financing. The interest rate is what the lender charges you to borrow money. The APR includes the interest rate as well as other fees that will be included over the life of the loan (closing costs, feesetc.) and shows your total annual cost of borrowing. As a result, the APR is higher than the simple interest of the mortgage. That’s why it’s always important when comparing lenders to look at the APRsquoted and not just the interest rate. In addition, all lenders, by federal law, have to follow the same rules when calculating the APR to ensure accuracy and consistency.

What are Points?

One point is equal to one percent of the total principal amount of your mortgage. For example, if your mortgage amount is going to be $125,000, then one point would equal $1,250(or 1% of the amount financed). It's important to ask about the interest rate, APR, closing costs and points as these can all vary by lender. Lenders frequently charge points to cover loan closing costs and the points are usually collected at the loan closing and may be paid by the borrower (homebuyer) or home seller or may be split between the buyer and seller. This may depend on your local and state regulations as well as requirements by your lenderBe sure to ask if there are points on your loan, how much they are and who will pay the points.

What's a Pre-Payment Penalty?

Be sure to ask if your mortgage contains a pre-payment penalty. A pre-payment penalty means you can be charged a fee if you pay off your mortgage early (i.e., pay off the loan before the loan term expires).

Mortgages application

When you apply for a mortgage, your lender will likely use a standard form called a Uniform Residential Mortgage ApplicationForm Number 1003. Sometimes it's just referred to as a "1003." The lender uses this form to record relevant financial information about an applicant who applies for a conventional one to four-family mortgage. It's important to provide accurate information on this form. The form includes your personal information, the purpose of the loan, your income and assets and other information needed during the qualification process.

Loan estimate

After you give the lender six pieces of information; your name, your income, your social security number to obtain a credit report, the property address, an estimate of the value of the property, and the size of the loan you want your lender must give or send you a Loan Estimate within three days. The Loan Estimate will outline the projected closing costs and loan terms (i.e., loan type, interest rate, estimated monthly mortgage payments) you discussed with your lender. Carefully review the estimate to be sure the terms meet your expectations. If anything appears different, ask your lender to explain why and to make any necessary corrections.

Closing disclosure

Lenders are required to provide you with a written disclosure of all closing conditions three business days before your scheduled closing date. Use that time to thoroughly review details of the Closing Disclosure and to question anything that doesn’t match your Loan Estimate (i. e, closing costs, loan amount, interest rate, monthly mortgage payment, estimated taxes and insurance outside of escrow). If there are significant changes, another three-day disclosure period may be needed.

Step 1: Determine your budget

Don't look for homes until you know what you can reasonably afford. Remember to not only factor in your monthly mortgage payments, but also taxes, insurance, maintenance and any other monthly costs (car, student loan, credit cards). You can use our Mortgage Calculator to help estimate your monthly mortgage payment.

Step 2: Find a Lender

Now that you have an idea of what you can spend, it’s time to find a lender. Unless you are paying cash for the home, you’ll need to work with a lender to secure financing. And similar to the process of finding a real estate professional, you should talk with a few lenders to find the best fit for your situation. Remember, while the interest rate you’ll pay is a big factor, it shouldn’t be the only factor. Also consider the different types of loan options available, their customer service, closing costs and other fees, etc. This is the largest financial investment you’ll make, so shop around.

Types of Lenders:

Online Mortgage Broker/Lead Service – There are multiple online services (i.e., LendingTree.com, Bankrate.com) that don't actually lend money, but will work with multiple financial institutions to help you find the best deal.

Mortgage Broker – Similar to above, a broker doesn't work for a particular financing institution. Instead, they work with multiple lenders to find you the best rate or loan product to meet your needs.

Financial Institution (Bank, Credit Union, etc.) – Most major and local banks offer mortgage products, and it's always a good idea to check with your current bank or credit union when looking for a lender. Many times, they may offer their current customers preferred rates or discounts.

Non-bank mortgage lender – If your bank or credit union doesn’t offer you the mortgage product you’re looking for, be sure to search for a non-bank mortgage lender. There are many companies that specialize just in financing for homes.

Still need help finding a lender? Ask family and friends for referrals or talk to us if you do, we will always provide you with 3 of them Also, search the Internet for a mortgage lender and ask if they are an approved Fannie Mae lender.

Step 3: Get Pre-Approved

Once you find a lender, you’ll want to get pre-approved. Even if you have an idea of what you can spend, you’ll want to work with your lender to determine the exact amount of financing. Sometimes this is less than you anticipated, sometimes it's more. Keep in mind, you shouldn’t necessarily increase your buying power even if the lender approves you for a higher amount. If you know what your limit is, don’t increase that amount just because you can. Also, ask your lender about special financing and resources like the Neighborhood Stabilization Program that can provide down payment assistance or reduce your upfront costs.

Step 4: Shop for a Home

After you're pre-approved, it's time to CONTACT US today if you need some advice in connecting you with several financial institutions.