Things to Know About Getting a Home Loan (Mortgage)
The Pre-Approval Letter
One of the first steps in buying a home is getting pre-approved for a mortgage. This process starts with either a meeting or a phone call with a licensed loan officer, who will require some information from you. He or she will check your credit scores, verify your employment and income, check your tax records and bank statements and require you to fill out a loan application. Once they have all the documentation they need, they will begin the approval process which usually will take a couple of weeks to a month, depending on the complexity of your financial history.
Most lenders are willing to issue a pre-qualification letter after checking your income and credit. A pre-qualification letter allows you to write an offer on a home, however to a seller it won’t be as strong an offer as if you had shown them a pre-approval letter. The best way to describe the difference between a pre-qualification and a pre-approval is this: A pre-qualification is a letter from the lender stating they are fairly confident you will qualify for a loan up to a certain amount based on the information they have. A pre-approval is a letter from the lender stating they know you do qualify for a loan up to a certain amount and they have verified all the pertinent information to be sure of that.
Buyers make offers on a fairly regular basis with a pre-qualification letter, especially when the market is moving fast or they find the perfect home sooner than they had expected. But if you have the ability, it’s a terrific asset to have the full loan pre-approval knowing that you can present a very strong offer to a seller, who will have more confidence accepting your offer knowing you qualify for your loan. The other advantages of obtaining your pre-approval are that you will know how much buying power you have and how much your down payment and monthly payment will be once you determine the best type of loan for your needs.
Types of Loan Officers
There are two main and most common types of loan officers from which to choose.
Mortgage Bankers: Mortgage Bankers typically use their own money to fund loans. An example would be your local bank or credit union. They often have access to loans only from their institution and therefore offer the fewest amounts of loan choices. However, they will sometimes have the best rates and fees. Every bank will be different and rates change on a daily (and sometimes hourly) basis.
Mortgage Brokers: Mortgage Brokers do not typically use their own money to fund loans. They act as a middle man to arrange financing from their pool of companies they work with. They often have the greatest amount of loan choices. However, their service fees can vary greatly and they don’t necessarily always have the best rates.
You will receive a Good Faith Estimate (GFE) of loan costs from a lender you choose to contact and this will be a breakdown of the estimated costs of obtaining the loan. It will include estimates for the lender fees, all closing costs, and all anticipated costs of buying the home. It is a good idea to call more than one lender to compare these fees, as they can vary greatly from lender to lender. It’s also a good idea to ask friends, family and your real estate agent for recommendations. There are lots of great lenders available to work with, but it is wise to do your homework so you don’t pay too much or work with someone unreliable who won’t be able to close your loan on time or at all. I would be happy to recommend some excellent lenders who have earned my trust through their ability to deliver quality service at a fair price.
Types of Loans
The best type of loan to get is different for every buyer. Factors that will affect which loan is best for you include: Your down payment amount and where those funds are coming from, your credit score and credit history, your other financial obligations (other debt-such as credit cards and car loans), and the area where you are looking. Other factors that come into play are both your long and short term goals for the home and your financial plan. The list below is not a comprehensive list of every available type of loan, but a quick overview of the most popular and available loans in Arizona. Your lender will discuss your goals and situation in great detail to help you determine the best fit for you.
USDA Loan: The USDA is a rural loan program available in certain areas where the population is considered less dense. This type of loan is very popular due to the fact that it is a zero money down loan, meaning that your initial out of pocket expenses to buy the home will be significantly less than some of the other types of loans.
VA Loan: VA loans are available for certain active or retired military personnel who meet the requirements and have their Certificate of Eligibility. This loan is also popular due to the fact that it is a zero money down loan as well.
Home-Path Financing: This type of financing is only available on certain bank-owned foreclosure homes. The minimum down payment is 3% of the purchase price. This loan type requires no appraisal to be done.
FHA Financing: FHA loans only require a minimum down payment of 3.5% of the purchase price. This loan type is popular because it is available for all homes on the market as long as the home is in fairly good condition. This loan type also typically allows borrowers to have higher than average debt ratios and allows the down payment amount to be in the form of a gift to the borrower.
Conventional Financing: Conventional Financing is the loan type most people think of first. However, what most people don’t know is that contrary to popular belief you can obtain conventional financing with as little as a 3% down payment. An important distinction is that any loan where the borrower puts 20% or more of the appraised value down will not require Private Mortgage Insurance (PMI).
PMI: Private Mortgage Insurance is a monthly fee that will be added to your monthly loan payment for any loan exceeding 80% of the appraised value (meaning when you put less than 20% down). The cost of PMI varies with each type of loan program and there is no blanket percentage to gauge how much it will be. Your loan officer will explain that in greater detail when discussing your loan options.
Typical Costs of Buying a Home
There are some customary fees that you will encounter when buying a home and while this is not a complete list for every scenario, it should give you an overview of what you might typically expect to pay. The combination of these fees is typically referred to as Closing Costs.
• Lender Fees (often called Origination Fees, Credit Check Fees, Loan Application Fees, Underwriting and Document Fees)
• Appraisal Fee ( the home will be subject to a licensed appraiser’s estimate of value)
• Inspection Fees ( Your real estate agent will probably recommend that you obtain pest, home and/ or pool inspections to verify the home’s condition)
• Title and Escrow Fees (The title/escrow company is a neutral third party that handles a lot of the paperwork, collects and disburses funds, and issues title insurance to protect all parties in the transaction)
• Pro-rated Property Taxes and Fire Insurance
• Recording and Notary Fees
• Upfront Cost of Fire Insurance (aka Home Owner’s Insurance)
• Pre-paid Interest on your new loan
• PMI up-front fees
• Home Warranty Cost (should you choose to purchase one)
• Home Owners Association (HOA) transfer and disclosure fees
• Earnest Money (This is not really a fee, but it is an upfront expense to be aware of when making an offer to purchase a home)
Note: One important thing to know is that when you are looking at foreclosure homes, there may sometimes be additional & non-customary fees that buyers will be responsible for paying. You should confer with your real estate agent before writing an offer to be sure there are no surprises and to make sure you know exactly what your total costs will be ahead of time.
Can I ask the seller to help me pay the closing costs?
There is no blanket answer to this question, as every scenario is different. Most types of loans place a cap on the amount a seller is allowed to contribute towards a buyer’s closing costs, although some loans allow for more than others. Depending on the competition you face with your offer, sometimes you can write an offer and ask for the seller to pay your closing costs, and sometimes you will need to build the closing costs into the offer you write so that the amount gets built into your loan. The advantage of doing this is that your up-front out of pocket expenses are less.
When Are These Fees Due?
Questions I get asked the most frequently center around when fees are due and is it possible to ask the seller to contribute towards some of the fees.
Typically, when you write an offer you will write a check for an amount that will be your earnest money deposit. This check will go to the title company and be cashed upon acceptance of your offer and will be returned to you if your offer is rejected. This is the amount of money you have at risk should you choose to back out of escrow for a non-contractually allowed reason and shows the seller your intention of “good faith” to buy the home. This amount will be held in escrow throughout the transaction and will be applied towards your down payment and/or closings costs at the end of the transaction. There will be a final accounting statement (called the closing statement or HUD-1) that will show all deposits, charges and the balance of all those figures that we will see towards the end of your transaction.
The next out of pocket expense most buyers encounter is for inspections. Typically you will have both a home and pest inspection (and pool inspection if the home has one) within the first two weeks of acceptance of your offer. Inspectors usually expect to be paid at the time of the inspection.
The next fee will be for the appraisal, which will also be ordered typically within the first two weeks. Your loan officer will order this for you and arrange for the payment.
Unless you schedule additional inspections or services, you typically will not need any more money until a few days before your closing date. This will be when your closing costs and down payment will be due. These funds will be deposited with the title/escrow company and will either need to be wired to them or delivered in the form of a cashier’s check.
What is the Difference Between Signing and Closing?
Many buyers get confused about the difference between these two terms and incorrectly think they will sign their loan documents and get their keys on the same day. In reality, you can expect to sign your loan documents typically about 3 days prior to your closing date. Your signing will usually happen at the title company you are working with and will take about an hour. Between the time you sign the documents and close escrow, the documents will be sent back to your lender for a final review and they will send over the funds for your new loan amount to the title company. You will also need to drop off or wire the remainder of your down payment and closing cost funds to the title company as well. Once all the funds from all parties have been received and all documents cleared, then your file will be released for recording at the county and you will be ready to close escrow.
When Do I Get the Keys to My New Home?
The home will be yours and you will get your keys when the home officially records into your name. What this means is that once all of your funds and the funds from your lender for your new mortgage are at the title company, once all documents have been signed by all parties and approved by everyone necessary, then a courier from the escrow/title company will physically take a slip of paper to the county recorder’s office and have the deed recorded. Most recordings happen around 4 P.M., so you can most likely expect this to happen in the late afternoon of your closing day. Then your real estate agent will get a phone call letting them know that the deed has recorded and at that time the house officially becomes yours and you can arrange to pick up your keys. All of your hard work and diligence has paid off and you are a proud new home owner.