A critical step in the mortgage loan application process is to verify the sources for your down payment, closing costs and assets, as well as documenting income and debts. The lender uses this step to determine your qualifications as a borrower.
Down Payment & Closing Costs
Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any monies to be used for the down payment or closing costs.
Acceptable Down Payment & Closing Costs Sources
Cash in a bank account
Mutual funds / stocks / IRA / 401(K)
Proceeds from the sale of another property
Gift from an immediate relative
Collect information about your personal assets that add to your net worth and help to prove your credit worthiness.
Common Assets Considered in a Mortgage Loan Application
Stocks, bonds, mutual funds, 401(K) and retirement accounts
Personal property estimate - cars, boats, antiques, jewelry, etc.
Other real estate or property
Income and Employment
The lender will want to confirm your current gross income and have evidence of stable employment. Documentation requirements vary depending upon a number of factors - including the source of income (hourly, salary, salary + bonuses, salary + commission, commission, self-employed, etc.).
Your lender will want to review a list of all your current debts. This along with your credit report will provide the lender with a snapshot of your obligations. The lender will want to confirm that you will not be overextended when the mortgage payment is added to your current debt load.
Approximately 85% of ADRMortgage customers get a 30 year fixed rate. We have done a few ghastly bank options arms (with plenty of disclosures). And the remaining 14% of loans are short term interest only ARM loans. Consult with a professional ADR Loan Officer to find out what's best for you.
With a fixed-rate loan, your monthly payment of principal and interest never change for the life of your loan. Your property taxes may go up (we almost said down, too!), and so might your homeowner's insurance premium part of your monthly payment, but generally with a fixed-rate loan your payment will be very stable.
Fixed-rate loans are available in all sorts of shapes and sizes: 30-year, 20-year, 15-year, even 10-year. Some fixed-rate mortgages are called "biweekly" mortgages and shorten the life of your loan. You pay every two weeks, a total of 26 payments a year -- which adds up to an "extra" monthly payment every year.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan if you want to lock in a low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can give you more monthly payment stability.
Adjustable Rate Mortgages -- ARMs, as we called them above -- come in even more varieties. Generally, ARMs determine what you must pay based on an outside index, perhaps the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others. They may adjust every six months or once a year.
Most programs have a "cap" that protects you from your monthly payment going up too much at once. There may be a cap on how much your interest rate can go up in one period -- say, no more than two percent per year, even if the underlying index goes up by more than two percent. You may have a "payment cap," that instead of capping the interest rate directly caps the amount your monthly payment can go up in one period. In addition, almost all ARM programs have a "lifetime cap" -- your interest rate can never exceed that cap amount, no matter what.
ARMs often have their lowest, most attractive rates at the beginning of the loan, and can guarantee that rate for anywhere from a month to ten years. You may hear people talking about or you may read about loans that are called "3/1 ARMs" or "5/1 ARMs" or the like. That means that the introductory rate is set for three or five years, and then adjusts according to an index every year thereafter for the life of the loan. Loans like this are often best for people who anticipate moving -- and therefore selling the house to be mortgaged -- within three or five years, depending on how long the lower rate will be in effect.
You might choose an ARM to take advantage of a lower introductory rate and count on either moving, refinancing again or simply absorbing the higher rate after the introductory rate goes up. With ARMs, you do risk your rate going up, but you also take advantage when rates go down by pocketing more money each month that would otherwise have gone toward your mortgage payment.
The amount you have available for a down payment will affect what types of loans for which you can qualify. Down payments typically range from 3 to 20 percent of the sales price for the property.
Tips for Accumulating a Down Payment
Look for ways to reduce your monthly expenditures to save toward a down-payment. You could enroll for an automatic savings plan at your bank to have a portion of your payroll automatically transferred into savings. Most people save a couple of years for their down payment.
Borrow the down payment from your retirement plan
Check the provisions of your retirement plan. You can borrow funds from a 401(k) plan for a down payment or make a withdrawal from an Individual Retirement Account. Be sure you understand the tax consequences, repayment terms and/or possible early withdrawal penalties.
You may be able to save additional funds if you can move into less expensive housing.
Reduce other higher interest rate debt
Paying off credit cards will initially reduce your savings, but the money you will save from higher interest rates will pay-off in the long run.
Make a deal with the seller
In some circumstances, it is appropriate to ask the seller to carry a second-mortgage to cover your down payment. Typically, you will pay a slightly higher rate for this second mortgage.
Sell some investments
Get a second job and save your earnings
Skip a year's vacation
Gift from Family
Parents and other family members are often anxious to help children buy their first home and may have the means to give you a gift of money for a portion or all of your down payment.
No-down and low-down Mortgages
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), plays a significant role in helping low- to moderate-income families qualify for mortgages. FHA assists first-time buyers and others who would not qualify for a conventional loan, by providing mortgage insurance to private lenders. Interest rates for an FHA loan are usually the going market rate, while the down payment requirements for an FHA loan are lower than conventional loans. The required down payment can be as low as 3 percent and the closing costs can be included in the mortgage amount.
VA Loans are guaranteed by the U.S. Department of Veterans Affairs. Service persons and veterans can qualify for a VA Loan, which usually offers a competitive fixed interest rate, no down payment and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.
A second mortgage that closes with the first. Often the first mortgage is for 80% of the purchase price and the "piggyback" is for 10%. The home buyer covers the remaining 10% with their down payment. (Some lenders will write a second mortgage of 15% or even 20% of the purchase price.)
"Carry Back" Mortgage
In the case of the seller "carrying back a second mortgage", the seller loans you part of his or her equity. In this scenario, you would finance the majority of the loan with a traditional mortgage lender and finance the remaining amount with the seller. Typically you will pay a slightly higher interest rate on the loan financed by the seller.
Housing Finance Agencies
These agencies offer special loan programs to low- and moderate-income buyers, buyers interested in rehabilitating a home in a targeted area, and other groups as defined by the agency. Working through a housing finance agency, you can receive a below market interest rate, down payment assistance and other incentives.
The primary mission of Housing Finance Agencies is to boost home ownership in targeted areas, among first-time buyers and those with little money for down payments. Most of these non-profit agencies were funded with state government seed money and now operate independently.
Click here for a list of Housing Finance Agencies.
Documenting Your Down Payment
Mutual funds / stocks / IRA / 401K
In many cases, lenders need a professional, independent appraisal of the property you want to buy or refinance to ensure that it is worth at least as much as they are being asked to lend on it. If you are making a smaller down payment and have a lower credit score, the lender is going to be even more interested in making sure the property that will be collateral for the loan is worth lending the amount requested.
A professional, independent appraiser will usually visit your home and inspect its interior and exterior. The appraiser doesn't want to buy your home, and isn't a visiting head of state. So whatever you do, do not postpone the appraisal until you get a chance to "clean up a little." Cleaning does not make your appraised value higher! And delaying adds time to an already lengthy process.
The appraiser will form an opinion on the probable market value of the property considering sales of similar homes in the area among other factors. He or she will prepare an appraisal report explaining the conclusion. The appraisal belongs to the lender considering lending money with the home as collateral. Often, you can receive a copy of the appraisal either as a courtesy or in keeping with state law. Let us know you're interested and we'll help.
The lender wants to know first of all whether the property is worth at least as much as the loan amount. In the unlikely event the lender would have to foreclose, it wants to know it should be able to recoup at least the loan amount. But if your loan program depends on you borrowing, for example, 95 percent of the property's value and no more, the appraisal can impact your eligibility for the loan that's right for you. In a "close" case like that, the best solution is almost always to increase your down payment, or we can help find another solution such as another loan program that works.
An appraisal can cost from $400 to $900 or more for very complex properties. You as the borrower pay the appraiser for the appraisal fee upon ordering the appraisal.
The federal government, as of April 2009, became heavily involved in the mortgage appraisal business. Thousands of appraisers have folded their companies as the U.S. Government implements "Management Appraisal Companies" that actually force the independent appraiser to close their company and work for this new layer of "management". This has increased your cost to do a loan and extends the time to appraise a loan. HR 3044 invalidates what Andrew Cuomo and the Federal Govt. have done to the appraisal industry. This bill is working its way through the House of Representatives and will hopefully pass. Stay tuned for new updates. David E. Price, Raleigh House of Representatives, at the time of this writing is not supporting this bill. We will update you if he changes his mind, and encourage you to contact Mr. Price to support HR 3044 (rolls back the damage Andrew Cuomo and the Feds have done to the appraisal industry).
To finalize the sale of the home a neutral, third party (the escrow holder, a.k.a. escrow agent) is engaged to assure the transaction will close properly and on time. The escrow holder insures that all terms and conditions of the seller's and buyer's agreement are met prior to the sale being finalized, including receiving funds and documents, completing required forms, and obtaining the release documents for any loans or liens that have been paid off with the transaction, assuring you clear title to your property before the purchase price is fully paid.
The documentation the escrow holder may be collecting includes:
Fire and other insurance policies
Title insurance policies
Terms of sale and any seller-assisted financing
Requests for payment for various services to be paid out of escrow funds
Upon completion of all instructions of the escrow, closing can take place. All outstanding payments and fees are collected and paid at this time (covering expenses such as title insurance, inspections, real estate commissions). Title to the property is then transferred to the seller and appropriate title insurance is issued as outlined in the escrow instructions.
At the close of escrow, payment of funds shall be made in an acceptable form to the escrow. As your real estate agent, I'll inform you of the acceptable form.
The Escrow Holder Will:
Prepare escrow instructions
Request title search
Comply with lender's requirements as specified in the escrow agreement
Receive funds from the buyer
Prorate insurance, tax, interest and other payments according to instructions
Record deeds and other documents as instructed
Request title insurance policy
Close escrow when all instructions of seller and buyer have been met
Disburse funds and finalize instructions
The Escrow Holder Won't:
Give advice - the escrow holder must maintain neutral, third-party status
Offer opinions about tax implications
Mortgage Escrow Account
A Mortgage Escrow Account is established to pay on-going expenses while there is a loan on the house. These expenses include property taxes, home insurance, mortgage insurance, and other escrow items. Generally, the Escrow Account is partially funded at closing and the home buyer makes on-going contributions through their monthly mortgage payment.
If you do not wish to escrow taxes and insurance on your mortgage, you will be required to pay them on your own. Servicers (the company the posts and tracks your mortgage payments) charge approximately .2% of the loan balance if you elect to omit escrows at the time of the closing.
Many of us incorrectly call our home loan a mortgage, but in fact, a mortgage is not what your lender gives you to buy a home. A mortgage is actually the formal document proving the legal claim or lien on a piece of property that you give to the lender who holds it as security for the money you borrowed. The lien is recorded in public records. On a mortgage, you pledge the property as security for the repayment of your loan, but you do not transfer title to the lender.
If you (the mortgagee) repay your loan in accordance with the terms of the mortgage, it is canceled or satisfied by the lender (the mortgagor). However, if you do not repay your debt, the lender has the right to sell the secured property to recover funds through a court proceeding called foreclosure.
In some states, a deed of trust is used in place of a mortgage. While a mortgage involves two people (the borrower and the lender) a deed of trust involves three people - the borrower (or trustor), the lender (the beneficiary) and a trustee, a neutral third party, such as an attorney or a title agent. The deed of trust is also recorded in public records.
We spoke of one customer earlier that stopped paying their mortgage in another state when they were relocating. A big no-no. His credit score dropped 150 points. At ADR we are able to move quickly when one lender tries to take advantage of you. We moved this loan to another lender and were able to keep the borrower at the same rate, and we only lost 1 week on the closing date. Another satisfied customer.When you absolutely need to get it there......go paperless....go ADR.Five ways to make the loan process go faster We should say that "working with us" is the first way! When you let us help you find the loan that's right for you, you truly are taking advantage of some of the area's best technology and expertise to get you a loan decision and funding on your loan quickly.But here are five "other" ways you can speed up the process of getting a mortgage loan:1. Have everything ready and in one place. Elsewhere on our website, you'll find a list of things you might need in support of your mortgage application. If you get them all together and keep them in a safe, portable place like a special pouch or folder, you can cut down on time spent rooting around for things we may need. Also, you'll help cut down on your own anxiety and confusion.2. Be honest and complete when you fill out your application. "Fudging" your employment or residence history or omitting open credit accounts you'd rather not have considered doesn't increase your chances of getting a favorable loan. In 100 percent of cases, it makes it harder, and take longer. 3. Respond promptly to requests for additional information. During processing, we or the lender considering your loan may need additional information. Provide it as soon as you get the request, or return the call as soon as you get the message.4. Be prepared to explain derogatory items in your credit report. This is really part of number 2 above. If you had an illness or a divorce where you missed or made late payments, or you have other instances of late payments or delinquencies on your credit report, be prepared to explain them. Be honest, and don't be nervous! The loan processor isn't judging you, they're trying to fill in all the blanks in their paperwork.5. Let the appraiser in! The appraisal is one of the lengthiest parts of the mortgage loan process. Studies have shown that the single biggest factor in appraisal "lag time" is the appraiser's inability to reach the homeowner to make an appointment. If you're refinancing and the appraiser calls to make an appointment, make it as soon as convenient for both of youAnd remember that the appraiser doesn't want to buy your house. He or she will say what the house is worth clean and tidy and in reasonable repair, even if you have some dirty laundry on the laundry room floor or dirty dishes in the sink. Cleaning doesn't get you a higher appraisal! Letting the appraiser in as soon as possible gets you a loan faster, though.
We spoke of one customer earlier that stopped paying their mortgage in another state when they were relocating. A big no-no. His credit score dropped 150 points. At ADR we are able to move quickly when one lender tries to take advantage of you. We moved this loan to another lender and were able to keep the borrower at the same rate, and we only lost 1 week on the closing date. Another satisfied customer.
When you absolutely need to get it there......go paperless....go ADR.
Five ways to make the loan process go faster We should say that "working with us" is the first way! When you let us help you find the loan that's right for you, you truly are taking advantage of some of the area's best technology and expertise to get you a loan decision and funding on your loan quickly.
But here are five "other" ways you can speed up the process of getting a mortgage loan:
1. Have everything ready and in one place. Elsewhere on our website, you'll find a list of things you might need in support of your mortgage application. If you get them all together and keep them in a safe, portable place like a special pouch or folder, you can cut down on time spent rooting around for things we may need. Also, you'll help cut down on your own anxiety and confusion.
2. Be honest and complete when you fill out your application. "Fudging" your employment or residence history or omitting open credit accounts you'd rather not have considered doesn't increase your chances of getting a favorable loan. In 100 percent of cases, it makes it harder, and take longer.
3. Respond promptly to requests for additional information. During processing, we or the lender considering your loan may need additional information. Provide it as soon as you get the request, or return the call as soon as you get the message.
4. Be prepared to explain derogatory items in your credit report. This is really part of number 2 above. If you had an illness or a divorce where you missed or made late payments, or you have other instances of late payments or delinquencies on your credit report, be prepared to explain them. Be honest, and don't be nervous! The loan processor isn't judging you, they're trying to fill in all the blanks in their paperwork.
5. Let the appraiser in! The appraisal is one of the lengthiest parts of the mortgage loan process. Studies have shown that the single biggest factor in appraisal "lag time" is the appraiser's inability to reach the homeowner to make an appointment. If you're refinancing and the appraiser calls to make an appointment, make it as soon as convenient for both of you