The loan process – financing your home purchase

(Another part in our series from California Association of REALTORS for Home Buyers.)

Unless you’re one of the rare few able to pay cash for your home, central to buying
is finding the right lender and mortgage product. There are many different kinds of lending institution, offering a wide range of loans and special programs. In fact, you should diligently research your options and shop around for a mortgage with as much care as you take when looking for a home.
Here are the main steps to securing the mortgage that best suits your needs...



Educate Yourself About Your Options
Sad to say, but we’re currently in a time when a great many people are suffering
the consequences of having made poor – and perhaps ill-advised – mortgage decisions. That’s why it’s crucial for you to learn as much as you can about your mortgage options.
There are myriad loan types and programs available through thousands of banks, finance companies, credit unions, and other assorted lenders. Not surprisingly, there are just as many sources of information about mortgages. Web sites like REALTOR.com®, books, news articles, seminars, mortgage brokers, lenders, and knowledgeable REALTORS® can all help you make your way through the labyrinth of financing possibilities, so make use of them. And be sure to get a few opinions. In short, do your homework before you put your name on the line, because what you don’t know could hurt you.

Sincerely Examine Your Financial Situation
Together with educating yourself about your loan options, you should be asking yourself how much mortgage and down payment you can really afford. Make yourself accountable. What might you be giving up – not just every month, and also perhaps 20 years down the road – by extending yourself further? Maybe taking on a larger mortgage will pay off greatly as an investment, maybe it won’t. Be sure to weigh the risks and opportunity costs.

Along these lines, REALTOR.com® provides you with a variety of loan calculators that will help you determine what your regular payments will be based on your projected down payment, the loan principal, the interest rate, the mortgage term, and so on.

One other point to note is that some lenders will qualify you for the maximum they’re willing to lend which, however, may be more than you can truly afford given all your other responsibilities. Additionally, be sure to factor all related taxes, insurance, improvements, homeowner fees and all other potential costs into the equation. The bottom line is that you should make a list of your monthly expenses, as well as project your financial commitments during the life of the mortgage.
This will provide a realistic figure of what you can afford.

In shopping for a loan you should consider two main sources: direct lenders and mortgage brokers. Direct lenders have the money and make the decisions, but have a limited number of in-house products to offer. Brokers are intermediaries who charge a fee, but who can provide you with loan options from many sources and can often save you money overall. In this case, you might consult your REALTOR® as they may have some beneficial connections.

Your Basic Mortgage Options
Generally, there are two ways you can go: a fixed-rate mortgage with an interest rate that remains the same for the life of the loan, or an adjustable-rate mortgage (ARM) with a rate that adjusts up or down, depending upon economic trends.

The advantages of a fixed-rate mortgage – particularly if you lock in at a low rate – are that they protect you against the risk of rising interest rates, and their stability can also make it easier for you to plan and budget your short and long-term expenses. Their down side is that they generally have higher rates than ARMs at any given time, and by locking in you run the risk of being trapped at a relatively high rate if interest rates fall.

In this connection, another main consideration when getting a fixed-rate mortgage is the term. Shorter term mortgages like a 15-year have lower rates than a 30-year. The shorter term and lower rate mean that you’ll pay both less principal and interest over the life of the loan, although your monthly payments will generally be higher.

On the other hand, an adjustable-rate mortgage’s (ARM) rate is commonly based on the U.S. Treasury index for a one-year Treasury bill, although it may also be geared to other indexes. Generally, lenders add 2-4% to the index rate to get their ARM rate. Initially, the rate is lower than the fixed rate by a quarter point to two points or more. This rate will periodically adjust within set limits or “caps” that are specified by the terms of the loan.

Finally, it must be reiterated that the loan you ultimately qualify for will depend on your credit status. The best rates and terms are only available to those with solid credit so, if possible, pay off your credit cards and make all other bill payments in full and on time.

Apply For A Mortgage
Once you’ve reached a pending agreement with a seller to buy a home you’ll have all the details you need to formally apply for a mortgage. When you meet with your chosen lender to complete the application you’ll need to provide information – if you didn’t during the pre-approval process – about your household income, job tenure and stability, assets and existing debt, and regular expenses. This may take the form of pay stubs, bank and investment statements, tax returns and other documentation. The lender will also check your credit status.

During the application process you’ll discuss your different loan options and programs you qualify for, as well as finalize the size of your down payment. If you place less than 20% down, the lender will require the mortgage to be guaranteed by a third party such as the Veterans Administration (VA), the Federal Housing Administration (FHA) or a private mortgage insurer (PMI).

Generally, because there are so many considerations and so much at stake, make sure you bring all your questions to the table, and this includes asking the lender to explain all terms of the mortgage. You may find that having a trusted and knowledgeable REALTOR® by your side to explain every aspect of the mortgage contract will increase your peace of mind.

Lastly, if you’re deemed worthy of the loan you’re seeking, the lender will often have the home you’re buying professionally appraised to ensure that it is worth the purchase price.

I hope you've found this helpful and educational. Please let me know if you have any questions about this process or if I can help you further!