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Dan Pick Real Estate

What do I need to do to get a loan?

What are the Steps in the Loan Process?
When you apply for a mortgage, you will need to furnish information regarding your income, expenses and obligations. It will be very helpful and a time-saver, if you have the following items available:
Most recent two pay stubs
W-2's for the last two years
Last two months' bank statements
Long-term debt information (credit cards, child support, auto loans, installment debt, etc.)

How Does a Lender Determine the Maximum Mortgage I Can Afford?
The three primary areas lenders examine in determining the size of mortgage you can handle include your monthly income, non-housing expenses, and cash available for down payment, moving expenses and closing costs. The most common way lenders interpret these variables to estimate your mortgage capacity is the Percentage Method. Most lenders feel a family should spend no more than 28% of its income on housing costs, including the mortgage, insurance, and real estate taxes. Also, these housing costs plus your long-term debts (car loans, child support, minimum credit card payments, student loans, etc.) shouldn't exceed 36% of your income.

Although this is not a true method, you can use the Multiplier Method formula as a general rule of thumb to determine how much home you can afford. Most lender's guidelines allow a family to carry a mortgage that is two to three times its gross annual income (income before taxes and expenses are taken out). The amount of down payment and the type of mortgage (fixed or variable rate) will determine the precise ratio used by the lender.

How Much of a Down Payment Will I Need to Buy a Home?
The amount of money that a buyer must put down at closing depends on the loan-to-value ratio - the percentage of the property's appraised value or sales price (whichever is less) that a lender is willing to loan.
For example, if a property is appraised at $100,000 and the loan-to-value ratio is 90%, the lender would be willing to loan $90,000. The buyer's down payment is the remaining $10,000. Because the loan-to-value is a percentage, the higher the sales price of a house, the higher the down payment. A down payment of 20% has been the benchmark for conventional financing, but today, many options are available, some requiring as little as 5% down. A representative from your bank can help you determine which down payment option is right for you and your budget.

Can I get an FHA or VA Mortgage?
Just about anyone can apply for an FHA-insured mortgage through banks and other lending institutions. They are particularly well-suited for buyers of moderate income; the low down payments requirements (as low as 5% of the purchase price) are matched by a relatively low maximum mortgage amount.

Similarly, VA-guaranteed loans often require no down payment for up to four times the amount guaranteed by the VA. These loans are reserved for either active military personnel or veterans, or spouses of veterans who died of service-related injuries.

If there is a downside to these loans, it's the qualifying process. Though you apply for government-insured financing through a lending institution, the Federal Housing Administration or the Department of Veterans Affairs must insure or guarantee the loan and may require specific documentation or procedures not necessarily required for conventional financing. That may take more time than is generally required for conventional mortgage approval. Additionally, FHA-required insurance must be added to your payment.

What Is A Mortgage, & What Are the Benefits of Different Kinds of Mortgages?
Simply put, a mortgage is a loan that a home buyer obtains directly from a lender to purchase real estate. The mortgage is a lien on the property that secures a promissory note (promise to repay the debt) that states the terms of the loan, including the interest rate, and the number of payments.

The most popular mortgages available to home buyers today can be divided into two general categories: those which offer fixed interest rates and monthly payments, and those where one or both of those factors are adjustable. Fixed rate/fixed payment loans are more traditional, and remain the most popular home financing method, currently accounting for about two-thirds of all residential mortgages. Their advantages are well-known: You always know what your monthly principal and interest payment will be, so your basic housing cost will remain unaffected by interest rate changes until the mortgage is paid off.

Mortgages that entail flexible rates and/or payments have grown in popularity in recent years, primarily during periods of high interest rates and/or rapidly rising home prices. Many, including the popular ARMs (Adjustable Rate Mortgages), offer lower-than-market initial interest rates that allow buyers a measure of affordability unavailable in fixed-rate loans. The tradeoff may be higher interest rates and higher monthly payments later on.

What Is the Difference Between Pre-qualifying and Pre-approval?
A pre-qualification consists of a discussion between you and a loan officer. The loan officer will collect information regarding your income, monthly debts, credit history and assets, and based on this information calculates an estimated mortgage amount for which you qualify. The pre-qualification is not a mortgage approval, but more an estimate on what you can afford. A pre-approval, on the other hand, is a more comprehensive approach giving an actual decision on a home loan. This is an actual credit approval, and it carries with it some considerable benefits. From this information, a loan approval is given agreeing to finance a home and the total mortgage amount available to you. You will have a greatly improved negotiating position when you are pre-approved for a mortgage. Sellers are more apt to negotiate with someone who already has a mortgage approval in hand. The pre-approval letter lets the seller know they are working with a serious cash buyer. A pre-approved buyer can also close on a property more quickly-another major consideration for a motivated seller. I strongly recommend it if you're serious about buying.

What Are Typical Closing Costs?
You can expect to pay the following closing costs at the time of settlement:
Appraisal fee - covers the cost of a professional written estimate of the property's value.
Attorney's or escrow fees - your own, and the lender's if they have one.
Credit report fee.
Documentation preparation - covers the cost of preparing the deed and other paperwork.
First-year's premium on fire and hazard insurance.
Impounds - sufficient to cover real estate taxes on the purchased property for the current tax period to date. The lender then pays these bills when they come due.
Interest - paid from the date of closing until 30 days before your first monthly payment.
Title insurance.
Mortgage insurance if required.
origination fee - covers the lender's administrative costs.
Recording fees.
FHA mortgage insurance (FHA loans only).
VA guarantee fees (VA loans only).

What Are Points, & What's the Point in Paying Them?
In real estate, the term "point" refers to 1% of the total mortgage loan amount. Buyers often pay lenders a supplemental fee, calculated in points, to get a better interest rate on a particular mortgage.
For instance, a lender may offer you a choice of two 30-year mortgages: the first at 8% with no points, and the second at 7-1/2% with an additional three points. If the loan is for $100,000, those three points will cost you an extra $3,000 up front - but you'll get a payback of significantly lower monthly payments for the lifetime of the loan.

Many lenders will advise you to pay the points for the better rate if you can afford it, especially if you plan on keeping the home for more than a few years. Like interest, the money you pay for points may be tax-deductible, and the investment may pay for itself through savings generated by lower monthly payments. I suggest you call your tax preparer to learn more about this.

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