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10 Steps to Getting a Mortgage and Buying Your Own Home
Posted By Ron On February 27, 2012 @ 8:11 AM In Mortgages,Real Estate | Comments Disabled
With the changing of the seasons, many people begin to look for a new home – and a new mortgage. If you’ve read my four part series entitled Are You Ready for a Mortgage ? you may remember that I only covered four aspects of this life changing event:
As important as those four steps are, there is actually a lot more that goes into the mortgage  application process so I decided to outline the entire process for getting a conventional mortgage. Since I wasn’t in the military, if you’re looking for information on a VA mortgage , I recommend checking with my good friend Ryan over at The Military Wallet .
The process of applying for and getting a conventional mortgage  loan usually takes just a few weeks. Government loans, and conventional loans issued to borrowers with serious credit problems, can take up to a few months to process. Once you’ve decided that home-ownership is for you, the process of buying a home with a conventional mortgage  will include the following steps:
A mortgage lender is typically a bank or other financial institution that issues mortgages, though it could also be an individual who “totes the note.” Traditionally, home buyers looked for a mortgage lender after they had found a house to buy, but today’s savvy home buyers begin working with a lender before looking at properties. It’s a good way to avoid my 10 First Time Home Buyer Mistakes !
Lenders will tell you exactly how much home you can afford under their guidelines and how much they’re willing to lend you based on your credit score  (Get your free triple credit score  at GoFreeCredit.com ). Once you know how much home you can afford, you can shop for a house that won’t blow your budget .
Nothing makes a seller more nervous than a contingency clause enclosed inside an offer to buy. Sellers almost always feel more comfortable when a buyer has been preapproved for a mortgage  loan. Another advantage to the buyer … buyers who have been preapproved may have more leverage in negotiations with the seller. You’ll also stand out if several other buyers are bidding on the home you want because you can set an earlier closing date without having to wait on an approval process to run its course.
As you look for a lender, try to find one that offers the best combination of the following factors:
Work only with lenders with a great reputation and who demonstrate a sincere commitment  to helping you through the process. If it feels like a lender just wants your money, move on. Another important point, how is the lender’s “follow-up?” Do they return your phone calls? Do they dodge your questions?
Virtually all lenders charge an origination fee (generally 0.5–1% of the principal) to cover the expenses they incur to assess your credit score  and process your loan. Lenders who charge no origination fees usually have higher interest rates.
Since YOUR interest rate will depend on your own personal situation (credit score , income, history, etc), don’t choose a lender based on its advertised rates. Why? The rate you receive will likely differ from those advertised rates. Those are called “teaser rates” because they tease and lure you in. A better choice is to choose a lender with realistic rates that are also competitive with other lenders.
Lenders you consider should specialize in the specific type of loan you want and be willing to look at your personal financial situation under a variety of different loan options.
Make your choice wisely!
Once you’ve determined how big a mortgage you can afford, your next steps (unless you’ve qualified for a government loan or another special situation) should be to choose your:
The most important factor in your decision between an ARM or a fixed-rate mortgage is how long you plan to live in the property.
Home buyers often look to ARMs as a way to make a dream home “affordable.” They choose an ARM because they’re confident they can make the ARM’s lower monthly payments and ignore the prospect of being unable to afford the higher payments that might ensue when the ARM’s fixed-rate period ends. To avoid this trap, choose an ARM only if you’re certain you can afford the payments if they increase to the fullest possible amount after your rate adjusts.
The length of a mortgage’s term affects both the total cost of the mortgage and the size of the monthly payments.
The table below shows monthly payments and total costs for two mortgages with the same principal ($100,000) and interest rate (6%), but with 15- and 30-year terms.
|Term||Monthly Payment||Total Cost|
Whether you should choose a longer- or shorter-term mortgage depends on your particular financial situation. If you can definitely handle the higher monthly payments of a shorter-term mortgage, that’s probably the better way to go. If you can’t (and many people can’t), a longer-term mortgage is the better choice.
Honestly, that depends on your personal situation. Adjustable Rate Mortgages(ARMs) do have their place but they’re not the panacea many mortgage  brokers make them out to be. An ARM loan is primarily for people with a specified need for a mortgage  and who plan to sell their home before the rate term expires or adjusts.
An adjustable-rate mortgage  (ARM) has an interest rate that can change at certain specified and agreed upon points during the term of the loan. Most ARMs offer a fixed rate for a certain period of time (3, 5, 7, or even 10 years), after which the rate adjusts to match current interest rates. Some ARMs have an interest rate adjustment cap (like one percent) over which the rate cannot adjust. For example, if your ARM has a rate of 3.75 percent with a 1 percent adjustment cap, it cannot adjust to more than 4.75 percent on its first adjustment go-around.
Whenever the interest rate adjusts, the amount of your monthly payment will increase (if interest rates rise) or decrease (if interest rates fall – there isn’t much downside risk for rates to fall right now). Like fixed-rate mortgages, ARMs usually come with 15- or 30-year terms. At the end of the term, you will have paid off the original principal plus interest. The total amount of interest that you pay on the loan will vary based on:
|Lower initial costs:During an ARM’s fixed term, interest rates and monthly payments are usually lower than those of fixed-rate mortgages.||Financial risk: If rates have risen by the time your fixed term ends, your monthly payments on an ARM can increase substantially or even double.|
|Assumability: Unlike fixed-rate mortgages, many ARMs can be transferred to third parties, which can make your property attractive to buyers looking to assume a seller’s loan.||Stress: Some borrowers forgo ARMs in exchange for the peace of mind that comes with fixed-rate mortgages’ permanent interest rates and set payment amounts.|
The rate index and margin determine how the interest rate of an ARM adjusts after the fixed-rate term expires.
If you’re shopping for an ARM, always be sure you’re evaluating the fully indexed rate of a loan, not just the index rate. Also, be wary of loans with teaser rates—introductory interest rates that are usually much lower than the loan’s fully indexed rate but often last as little as one month. Ignore teaser rates entirely and focus on the rate that takes effect once the fixed-rate period of your ARM ends.
There are a few other key terms you should know as you begin to consider getting an ARM:
It’s impossible to answer one way or the other since I don’t know your personal financial situation, but if you plan to be in your home only 5-7 years and you’re confident you’ll be able to sell it when the time comes, an ARM loan may be your best choice.
But if you’re unwilling or unable to sell your home and the rate is about to adjust to a level that makes your payment difficult to make, an ARM loan may be your worst nightmare.
Once you’ve chosen a lender and a size and type of loan, the next step is to get prequalified or preapproved.
Prequalification and preapproval indicate that you’re likely to qualify for a mortgage of a particular type and size, but neither guarantees that you’ll be approved when you actually apply for a loan. Even so, it’s always helpful to get preapproved, not just prequalified, for a mortgage.
Once you’ve been preapproved, you’re ready to shop for a home. As you shop, remember that you’ve been preapproved for a loan of a certain size. That doesn’t mean you absolutely must stick within that price range, but choosing a significantly more expensive home will require you to start all over with your lender. After you find a home, you’ll:
Once you have a purchase agreement signed, the real estate agents and lenders will confer to set a closing date. On the closing date, the sale of the property will close, or become final, and your lender will transfer funds to your seller.
After you’ve signed a purchase agreement, set up an appointment to meet with your lender to discuss specific loans to apply for. Ask your lender to present you with at least 3–5 loan options that have the type, term, and amount that you want. At the meeting, ask your lender to help you compare the various loans. In particular, pay close attention to the following three factors as you compare:
Disregard any interest rates your lender quotes except the annual percentage rate (APR)  of each loan, which includes all of the loan’s costs in a single rate. If you’re comparing two 30-year fixed loans with APRs of 6.9% and 7.1%, the loan with the lower APR will have the lower total cost.
Not to be confused with a loan’s term, a loan’s terms are its various features and rules, such as prepayment penalties (see below) and, for ARMs, the adjustment frequency.
Some loans include a prepayment penalty that specifies a period of time during which the borrower cannot pay down the principal faster than through the normal amortization of the loan. The restrictive period usually lasts only for the first few years of the loan, but some loans have prepayment penalties for the entire term. Never get a loan with prepayment penalties of any sort. The only way to be 100% sure that your loan doesn’t include one is by reading all of your loan documents carefully before you sign—unscrupulous lenders may try to introduce a prepayment penalty clause at the last minute.
Closing costs refer to all of the costs associated with approving and processing a loan, including origination fees, appraisal fees, and any points you pay on the loan (explained in step 5). Closing costs typically amount to 2–5% of the principal and are usually tax deductible. In addition to the fees that the lender charges for processing your loan application, expect to pay these closing costs as well:
At this point in the approval process, most lenders will offer you only a very rough estimate of closing costs. You’ll get a more accurate estimate in step 5.
Once you’ve selected a specific loan to apply for, you’ll need to complete a loan application and submit documentation that the lender requires.
Your lender is required by law to provide you with a good-faith estimate (GFE) within three days after you apply for a loan. The GFE provides an estimate of your loan’s closing costs and specifies the interest rate that the lender is willing to offer you. Since the GFE is only an estimate, expect your final closing costs to vary somewhat from the numbers quoted in the GFE. The interest rate will also likely change, unless you pay to lock it.
An interest rate lock protects you from changes in interest rates that occur between when you receive your GFE and when you actually get your loan. Most lenders will lock the rate quoted in your GFE for free for 30 days, including adjusting the rate downward if rates fall. For a fee of 1/8–1/4 of a point (1 point = 1% of your principal), the lender will guarantee your rate for up to 60 days and adjust the rate downward if rates fall. It usually makes sense to pay to lock your rate if:
Locking programs vary, so inquire with your lender if you’re interested in locking your rate.
Lenders often will agree to lower the interest rate quoted in your GFE in exchange for an up-front cash payment. Each point you pay is equal to 1% of your principal and reduces your rate by a certain fixed amount, usually a fraction of 1%. For example, paying two points on a $100,000, 30-year fixed mortgage with a 6% APR would cost $2,000 and might lower your rate to 5.5%. A simple calculation can help you decide whether to pay points:
Even at this point, you are still not definitively approved for your loan. The final preapproval step involves turning over your loan to a loan processor (usually an employee of your lender) who reviews all of your documentation to confirm the information in your loan application. Expect the loan processor to call you during the process if they run into any difficulties verifying your information—if they do call, it’s essential to respond immediately in order to keep the process on track.
While the loan processor is working on finalizing your loan, the lender will arrange for an independent appraisal of the property you intend to buy. The goal of the appraisal is to confirm that the property is worth at least as much as the loan principal amount—if the appraiser’s report concludes that the property is not, the lender will most likely not approve the loan. Most lenders include the appraisal fee in the loan’s closing costs, though some lenders cover this cost themselves. If you pay for the appraisal, you’re entitled to receive a copy of the appraiser’s report.
Assuming all goes well with the appraisal and the loan officer’s investigative research, the lender will send you a:
Review these documents carefully. If you uncover any problematic discrepancies with earlier cost estimates or loan terms that you’ve received, discuss them with your lender as soon as possible.
If your loan application is rejected, you’re entitled to know the specific reasons why. The most common reasons you might be rejected are if you fail to provide sufficient information, the appraised value of the property is insufficient, or problems arise with your application that had so far gone undetected, such as undisclosed credit- or income-related issues. Once you know exactly why your loan was rejected, ask your lender to recommend alternative options. Depending on the specific reasons why you were rejected, you might still qualify for a different type of loan or a loan with a lower principal.
If you’re rejected by lenders more than once and don’t know what to do, consider looking for properties that offer seller financing. Seller financing is an alternative home loan arrangement in which the seller offers the buyer a loan directly to finance the purchase of the property. The buyer then pays the seller interest on the loan, circumventing the ordinary loan approval and payment process entirely. Seller financing has certain advantages over regular financing—the approval process is less stringent, and sellers are sometimes willing to overlook credit problems and other issues that lenders could not ignore.
After you’ve been approved, the last step before you receive your loan and close on your property is to provide your lender with proof that you’ve obtained homeowner’s insurance . Homeowner’s insurance covers property- related losses that result from catastrophic events, such as fires and hurricanes. Mortgage lenders typically require you to obtain an amount of homeowner’s insurance equal to the total replacement value of the property—the amount it would cost to replace the home if it were completely destroyed. Homeowner’s insurance costs vary based on the value and location of the property—most policies cost at least a few hundred dollars per year.
Once you’ve obtained a policy, ask your insurer to fax your lender a proof of insurance form to certify that you have a homeowner’s insurance policy in place.
If you’re required to buy PMI, you’ll need to provide proof that you’ve obtained a PMI policy before your lender will agree to issue your loan. Ask your lender or your homeowner’s insurance provider to put you in contact with PMI providers. PMI costs vary depending on a variety of factors, but they usually amount to 0.5–1% of the principal (spread out over the term of the loan, since you pay PMI on top of your monthly mortgage and homeowner’s insurance payments).
Lenders are required by law to allow you to cancel your private mortgage insurance once the amount of principal you’ve paid off exceeds 20% of the property’s original purchase price (or the property’s original appraised value at the time you obtained the loan, whichever is less).
The closing  is a meeting that finalizes your real estate transaction. Money changes hands from you (and your lender) to the seller, and the seller delivers the keys to the property to you, the new owner. A representative from your lender attends the meeting to provide the loan check to the seller to cover the balance of your down payment and the property’s purchase price. The loan “check” is often delivered electronically at the time of the closing.
At the closing, you also sign off on a variety of documents to make the transfer of property (and the loan) final. These documents include the mortgage contract, which secures the loan with the new property, and several other documents, such as the HUD-1 form, which specifies the loan’s final closing costs. Take the time to read through all of these documents carefully to make sure none of the loan’s main terms or fees have changed substantially.
Welcome to home-ownership! Now it’s time to move your belongings into your new home!
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 Mortgage: http://www.thewisdomjournal.com/Blog/mortgage-basics/
 Analyze your personal financial situation: http://www.thewisdomjournal.com/Blog/are-you-ready-for-a-mortgage-part-one-analyze-your-finances/
 Determine your maximum mortgage amount: http://www.thewisdomjournal.com/Blog/what-size-mortgage-can-i-afford/
 Review your credit score: http://www.thewisdomjournal.com/Blog/review-your-credit-report-and-credit-score/
 Gather and organize the information lenders will require: http://www.thewisdomjournal.com/Blog/are-you-ready-for-a-mortgage-part-four-organize-the-information-your-lender-requires/
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 information on a VA mortgage: http://themilitarywallet.com/what-are-va-loans/
 The Military Wallet: http://themilitarywallet.com/
 10 First Time Home Buyer Mistakes: http://www.thewisdomjournal.com/Blog/10-first-time-homebuyer-mistakes/
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