Qualifying for a Home Loan and Types of Mortgages
Pre-Approval vs. Pre-Qualification
What could be more comforting than the peace of mind that goes with knowing your mortgage is fully approved? You will have a greatly improved negotiating position when you are preapproved for a mortgage.
Sellers are more apt to negotiate with someone who already has a mortgage approval in hand. Having a preapproval letter from a lender let's the seller know they are working with a serious buyer. A preapproved buyer can also close on a property more quickly - another major consideration for a motivated seller. Obtaining a preapproved mortgage is essential in a "sellers' market" or where supply is limited.
Preapproval uses basic information as well as electronic credit reporting. It is a true mortgage commitment, which means a commitment to financing your home and an indication of the total mortgage amount available to you. Team Sachi Hawaii has connections with several mortgage lenders that can help you through the preapproval process. In most cases, there is no charge for this service. Ask us for more information!
If you are unable to receive preapproval on a home loan, getting prequalified is another option. Prequalification is not a full mortgage approval, but an estimate of what you can afford. When you prequalify for a mortgage, the lender collects basic information regarding your income, monthly debts, credit history and assets, and then uses this information to calculate an estimated mortgage amount that you can afford. This will give you an idea of the price range of properties that you can shop for in the market.
Fixed Rate Mortgages
A fixed-rate mortgage loan is one on which the monthly payment does not change, regardless of what happens to market interest rates. Your monthly payments will be stable and predictable, but initial interest rates tend to be higher on a fixed rate mortgage than on an adjustable rate loans. The term or length of fixed-rate mortgages is generally set to be 15 or 30 years. No matter how much interest rates fluctuate, your payment remains the same throughout the length of the loan. Because of this, you know what your mortgage payment will be and can plan accordingly.
Some sellers have mortgages on the property that they are trying to sell that can be assumed by a new buyer. These mortgages, called assumable mortgages, are the loans that can be transferred to a new owner. In other words, the new buyer assumes or takes over the mortgage obligations. There are certain advantages to this type of fixed-rate mortgage, most notably regarding interest rates. It is possible for the person assuming the loan to take it over with a lower interest rate than he/she could get taking out a new home loan. Many fixed-rate mortgages, however, cannot be assumed by a subsequent buyer.
Adjustable Rate Mortgage
With an adjustable-rate mortgage (ARM), the interest rate fluctuates up and down according to current market interest rates within limits at specific intervals. From a lender's point of view, ARM's are preferable because they allow for a match between the rate that the lender pays on savings accounts to fund the loan and the income from the loan.
What makes ARM's appealing to borrowers is that lenders generally charge a lower rate of interest on ARM's. An ARM loan fluctuates, or is adjusted, at set intervals and only within set limits. The adjustment interval tells how frequently the rate on the ARM will be reset. The ranges of these intervals are as low as three months to as long as seven years.
If an adjustment rate on the ARM is reset at an interval of five years, the rate on the arm is reset to the index rate plus the margin. Volatility on mortgage payments tend to increase when the adjustment period is shorter. You may want to consider a longer adjustment period when considering an ARM loan.
Team Sachi Hawaii can find out if an assumable fixed-rate mortgage or an adjustable-rate mortgage is available or even possible on a property that interests you. Call today!
Applying for a Home Loan
The process of applying for a home loan can be a time consuming task. Often many documents are requested by the lender concerning your financial situation.
Mortgage Application Documents
When you apply for a mortgage, you will usually need to furnish information regarding your income, expenses and obligations. It will save time and make the process go smoother if you have the following items prepared in advance:
Pay stubs from the last two months
W-2s for the last two years
Federal Tax Returns for the last two years
Bank statements from the last two months
A list of long-term debt information (credit cards, child support, auto loans, installment debt, etc.)
Repairing Past Credit Problems
Following a loan application, the lender will request for a copy of your credit report from the credit reporting bureaus. At this time, some blemishes may appear on your credit history. There are many reasons why credit problems occur. Some of the reasons could be that:
You were a co-signer on a loan that wasn't paid on time
You allowed someone else to use your credit cards
You may have thought your paid the bill
You thought your insurance company was going to handle the payment
You are divorced but your former had credit problems.
Whatever the reason, be assured that some lenders will work with you to find a credit solution! They have special programs and financing options that allow you to get a mortgage even with minor credit blemishes. It may also be the case where your credit report is in error. If this is the case you will need to contact the credit reporting agency and request a correction of the information.
It is always in your best interest to keep your credit report in good standing. Here are some helpful hints to maintain a clean credit history:
Never go over 90 days past due on any accounts
Keep your credit card debt below 50% of your monthly obligations
If paying bills after the due date, always pay within the grace period
The Financing Process
To a new homebuyer the actual financing process can seem like an endless maze of forms and paperwork. To help understand the process a little better, we have outlined below the steps generally followed in the financing process. Following that you'll find some of the basic questions asked by most potential homebuyers regarding the financing of their dream home.
Steps In The Financing Process
Complete the loan application. An application fee may be required by the lender.
The Lender begins processing the application.
The Lending institution requests an appraisal of the home, a credit report and verification of employment and assets, such as bank accounts.
The Lender will provide a booklet containing specific information and a good faith estimate of closing and related costs.
An estimate of your loan costs, in the form of an initial Truth in Lending Disclosure Statement is issued.
The Lender evaluates the application, along with supporting documentation, and approves the loan.
The borrower signs the closing documents and the loan is funded.
The Lender disburses the funds to the settlement or closing agent (usually the escrow officer). The Seller is paid his/her monies and title to the home is yours.
Within a day or two appropriate documents are recorded at the county recorder's office and the transaction is final.
Financing Questions and Answers
We've put together a list of some of the most commonly asked questions about home financing. This section answers questions such as the amount of time it takes to process a mortgage application, what's included in your payments, and closing costs to name a few.
Team Sachi Hawaii would be glad to answer any questions you may have regarding financing. Please do not hesitate to give us a call!
How long does it take to process a mortgage application?
It usually takes about 45 to 60 days to process an application, although it can take as few as seven days and as long as 90 days for some transactions. The actual time depends on how quickly the lender can get an appraisal of the property, a credit report, and verification of employment and bank accounts.
What documents will I have to provide?
Be prepared to provide verification of income (including a pay stub and recent tax returns), bank account numbers, and details on your long-term debt (credit cards, auto loans, child support, etc.). If you're self-employed you may also be required to provide financial statements for your business.
Could anything delay approval of my loan?
If you provide the lender with complete and accurate information, everything should go smoothly. You may face a delay if the lender discovers credit problems - a history of late payments, nonpayment of debts, or a tax lien. You may then be required to submit additional explanations or clarifications. You should also be sure to notify your lender if there are any changes in your personal or financial status between the time you submit an application and the time your loan is funded.
What is included in my house payment?
Your monthly house payment will include payments toward the principal balance of the loan and interest on your loan. Depending on the terms of your loan, the payment also may include hazard (homeowners) insurance, hurricane insurance, mortgage insurance and property taxes.
Can I pay those other items separately?
No, they cannot be paid separately if the loan is an FHA or VA-insured loan. With most other loans you can pay your own taxes and insurance if you borrowed no more than 80 percent of the purchase price or appraised value of your home. Check with your lender to be sure.
What do the closing costs include?
Closing costs for the loan cover fees related to the processing and administration of your loan. In addition to a loan fee, you'll usually be asked to prepay interest charges to cover the partial month in which you close, and prepay impounds for property taxes, hazard insurance and mortgage insurance, if any.
When do my mortgage payments start?
Mortgage payments usually begin about 30 days after closing. The actual date of your first payment will be included in your closing documents