Loan Application

Do your Homework
You have worked hard to accumulate wealth and your mortgage is sure to be one of your largest financial commitments. As such, be your own advocate, understand the lending process and strive to obtain the best terms that meet your needs and you will be financially rewarded.

Types of LendersLoan Application
After the Attorney Review period you shall submit a copy of the executed contract and your loan application to the lending agency that you have been pre-qualified with. If you want to continue shopping for a loan you will usually contact a direct lender or mortgage broker.

Direct Lenders
Direct lenders have money to lend from a specific number of in-house loans. However, Direct Lenders have the ability to make the final decision on your application.

Mortgage Brokers
Brokers are intermediaries who shop many lenders for each lenders’ store of loans. If you have special financing needs and can’t find a lender to suit them, a mortgage broker may be able to find a specialized lender to suit your needs.

Interest Rates
Interest rates can change while the loan application is being reviewed and processed by the lender. Therefore, if you think  interest rates could rise significantly, you may consider “locking in” the rate in order to guarantee a favorable rate. A good place to start is  www.bankrate.com.

Points
Points are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can, in turn, lower your monthly payments. A point is equal to 1% of your home loan amount (or $1,000 for every $100,000), and it’s essentially like paying some interest up front, in exchange for a lower interest rate over the life of your loan. The general rule is that the longer you plan to be in the home, the more you might benefit from paying points up front when you close your loan. Consulting with a credit counselor or financial advisor may help you decide.

The Big Picture
The Interest rate is most important part of your loan but  there are many other factors that affect the true cost of the loan, including broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal and many others. Be sure to look at the big picture and consider all factors.

Mortgage Type
The four major types of Mortgages.

Fixed Rate Mortage
With a Fixed Rate Mortgage, otherwise known as a “Conventional Mortgage or “FRM.”, the interest rate remains the same throughout the entire loan term. Fixed rate mortgages usually come in 10, 15, or 30 year terms. A conventional loan has no backing from the government in the way an FHA, HUD or VA loan does. Conventional loans can be either insured or uninsured contingent on their loan-to-value ratio.

Uninsured Loan 
An Uninsured Loan will usually require you to put down at least  20% of the sale price or appraised value of the property. Uninsured Loans are more expensive upfront but less expensive over the life of the loan because you will be financing less money at a lower interest rate.

Insured Loan
An insured Loan will usually allow you to put down less the 20% of the sale price or appraised value of the property. Insured Loans will usually be less expensive  upfront but more expensive over the life of the loan because you will be financing more money at a higher interest rate plus the cost of Insurance. Because of the lower down payment, the Lender will require  private montage insurance” otherwise known as “PMI”, to protect them in case you default. PMI fees vary, depending on the size of the down payment and the loan, but are usually between 0.3 and 1.15% of the original loan amount per year.

Adjustable Rate Mortgage
With an Adjustable Rate Mortgage, otherwise known as an”ARM”, the initial interest rate will be fixed for a stipulated period of time then the rate will change and adjust on a specified schedule.

Veterans Affairs Mortgage
A Veterans Affairs Mortgage otherwise known as a “VA” Mortgage is secured from a home loan guaranty program that is only made available to Active Duty Service members, Veterans, National Guard and Reserve members. Qualifications and limitations can be found at www.benefits.va.gov.

Federal Housing Administration, Mortgage
A Federal Housing Administration Mortgage otherwise known as a “FHA” Mortgage, insures the loan to protect the lender in case the borrower defaults. This protection allows the Lender to offer the borrower more favorable terms. An FHA Mortgage may be helpful  to a Buyer having difficulty qualifying for a loan, a Buyer with imperfect credit, or a Buyer with a low amount of cash available for a down payment and closing costs. Qualifications and limitations can be found at www.hud.gov.

Factors to Consider

Credit Report
It’s estimated that over forty percent of all credit reports contain errors.  Obtain a copy of your credit report from each of the three major credit bureaus, and examine them carefully. Identify any error and contact the credit bureaus to correct them as quickly as possible.

Credit Standing
Lenders appreciate when you carry low credit card balances, or pay them off, along with any other outstanding bills before applying for the mortgage. Avoid closing current accounts or applying for new ones, which may make the lender suspicious. It is in your best interest to pay off as much debt as possible before shopping for a mortgage, to lower your debt-to-income ratio.

Down Payments
The more money a borrower can afford to pay up front, the more likely they are to be approved by a lender. It also makes for a lower loan, which saves you a significant amount of interest costs.

Income Stability
Lenders look for steady sources of income, so avoid changing jobs or quitting right before submitting a mortgage application.

Available Funds
Lenders require borrowers to have sufficient funds set aside to cover closing costs, and (if necessary) pay for points. Avoid major purchases that may deplete any available funds prior to purchasing a new home.

Lender Metrics
Lenders use metrics to help them sort through various applications, quantify risk, and establish loan terms. Front-End Ratio, Back-End Ratio and Down Payment Percentage are some of the primary metrics.

Front-End Ratio
The front-End Ration is the monthly percentage of your yearly gross income dedicated to mortgage payments. Mortgage payments consist of four basic components: taxes, interest, insurance, and principal otherwise known as “PITI”. Although some lenders have been known to lend to borrowers with PITI exceeding 30% , PITI generally should not exceed 28% of your gross income.

Back-End Ratio
The Back-End-Ratio, also known as the debt-to -income ratio is the percentage of a borrower’s gross income required to cover their debts. Debts include all of your loan payments including but not limited to vehicles, credit cards, and mortgages. Most lending institutions will recommend that the borrower’s debt-to-income ratio should not exceed 36%  and remain below 45% of their gross income. Based on a 36% ratio, the maximum monthly debt can be calculated by multiplying your gross income by 0.36 and then dividing by 12.

Down Payment Percentage
A down payment of at least 20% of the home’s purchase will reduce the insurance required. The mortgage payment is directly impacted by the down payment, and also by both back-end and front-end ratios. Buyers who can make a larger down payment are able to purchase more expensive houses.