The mortgage payment is usually the top concern for home buyers. Buyers want to know what their monthly payment will be. In order to get to that magical monthly “house payment” amount, you must go through the mortgage-qualifying process. It’s important to rely on a mortgage expert to ensure you understand your mortgage options.
Here are a few of the most frequently asked questions regarding a home mortgage. Click on each tab for more information.
Determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home.
There are many programs available, but sometimes your loan choices may be limited. For example: If you have a less than 20% down payment, or if someone is giving you a gift for all or part of the down payment, or if you borrow all or a portion of the down payment from your 401K or retirement plan. Different loan programs have different rules on how you qualify.
Loan programs may include conventional fixed rate loans, adjustable rate mortgages, VA, FHA, USDA, and Jumbo Loans for those in the price point of $500K or higher.
Documenting Your Assets When Applying For A Mortgage
When buying a home, lenders will want to verify “where” the money comes from (AKA Sourcing of funds). If you can document that the funds have come from your personal account, typically the lender is more confident of your strength as a borrower.
In addition, if you can verify you have additional assets that are not needed for the down payment, it is important to have documentation. Additional assets are “reserves” you can draw upon during times of trouble, such as unemployment, medical emergencies, and similar occurrences. Additionally, assets can also help document that you have a history of saving money, which makes you a more dependable borrower.
It is extremely important to document the paper trail of any funds you use for your down payment and closing costs. The sections below provide guidance on both verifying assets and documenting them as a source of your down payment.
Checking, Savings, & Money Market Accounts
The quickest and easiest way to document funds in your bank account is to provide your lender with copies of your most recent bank statements. Most lenders request two months bank statements, but some still ask for three. Some lenders still send a “Verification of Deposit” to your bank in order to determine your current bank balances and average balance for the last two months. However, some lenders prefer and will request bank statements.
If the money you are using for the down payment and closing costs has been in the bank for the entire period covered by the bank statements, you’re fine. These are known as “seasoned funds.” However, if your statements show any large or unusual deposits, the lender will ask you to explain them and document their source.
Stocks, Bonds, Mutual Funds, etc.
Most buyers who own stocks recieve a monthly or quarterly statement from their brokerage. You will need to supply statements for the most recent sixty or ninety days in order to document these assets.
Although it is rare nowadays, some people actually hold stock certificates in lieu of having a brokerage account. When this is the situation, make copies of the certificates and provide those copies to your lender. You might also want to supply tax records to indicate you have owned these stocks for some time.
If part of your down payment will come from the sale of stocks and investments, you will need to keep all documentation that applies to the sale. Provide these copies to your lender as well.
Especially when buying a first home, some borrowers need help coming up with the down payment. This help can come in the form of a gift from a close family member. Lenders will require the donors to a “gift letter.” The gift letter states the relationship between the parties, the address of the purchased property, the amount of the gift, and sometimes the source of the funds used to make the gift. The gift letter also clearly states that the funds are a gift and not required to be repaid.
With most lenders, the donor will have to also provide evidence that they have the ability to make the gift. This can be in the form of a bank or stock statement to show they have the funds available. You should also make a copy of the check used to make the gift and keep a copy of the deposit receipt when you deposit the gift funds into your bank account or escrow.
401K or Retirement Accounts
It is important to provide documentation about your retirement accounts or 401K programs because this is another asset you could draw upon as reserves in case of an emergency. It is also another way to show you have a savings history. Just provide a copy of your most recent statement to your lender.
Many people use these accounts as a source of funds for their down payment, too. Some employers allow you to “cash out” a portion of the 401K and some allow you to borrow against it. Be sure to keep copies of all paperwork involving the transaction. If they cut you a check, be sure to make a photocopy of that, too, including any receipt for deposit into your personal bank account.
If you are borrowing against your 401K, some lenders will count this as an additional debt to go along with car payments, credit cards and other obligations. This may seem kind of silly because you are borrowing your own money, but from the lender’s viewpoint it is still a monthly obligation that you must come up with and should be taken into account. If you are “tight” on your debt-to-income ratios in qualifying for a home loan, this could be an important consideration. It may affect whether you choose to cash out the account and pay any tax penalty, or simply borrow against it.
Always consult a licensed accountant to verify any tax penalties.
Below Are Items That The Lender May Require For Your Loan
- W2 forms for the last two years
- Pay stubs covering a 30 day period
- Federal tax returns (1040’s) for the last two years,
- Year-to-Date Profit and Loss Statement (for self employed)
- Corporate or partnership tax returns (if applicable)
- Pension Award letter (for retired individuals)
- Social Security Award letters (for those on Social Security)
- Bank statements for previous two months (sometimes three) on all accounts. All pages.
- Statements for two months on all stocks, mutual funds, bonds, etc.
- Copy of latest 401K statement (or other retirement assets)
- Explanations for any large deposits and source of those funds
- Copy of HUD1 Settlement Statement on recent sales of homes
- Copy of Estimated HUD1 Settlement Statement if a previous home is for sale, but not yet closed
- Gift letter (if some of the funds come as a gift from a family member)
- Gifts can also require:
- Verification of donor’s ability to make the gift (bank statement)
- Copy of the check used to make the gift
- Copy of the deposit receipt showing the funds deposited into bank account or escrow
- Landlord’s name, address, and phone number (for verification of rental)
- Explanations for any of the following items which may appear on your credit report:
- Late payments
- Credit inquiries in the last 90 days
- Copy of bankruptcy papers if you have filed bankruptcy within the last seven years
- Copy of purchase agreement (if you have already made an offer)
- Documentation of child support (if you desire to show it as income)
- Copy of Divorce Settlement (to show the amount)
- Copies of twelve months canceled checks to document actual receipt of funds.
- Copy of Social Security Card (or other documentation of social security number)
- Copy of Driver’s license
- Copy of DD214
Please note, the lender may require additional letters of explanation, or documentation not listed above. It is best to get your lender whatever they may need to complete the loan process.
Closing Costs When Buying a Home
Below is a summary of costs you may have to pay when you buy or refinance your home. Keep in mind, this may not include all the fees associated with your loan, but it will hopefully provide you with an idea of some of the closing costs you may come across. There are two broad categories of closing costs. Non-recurring closing costs are items that are paid once and you never pay again. Recurring closing costs are items you pay time and again over the course of home ownership, such as property taxes and homeowner’s insurance. The items below should appear on the lender’s Good Faith Estimate, as required by law.
Non-Recurring Closing Costs Associated with the Lender
Loan Origination Fee
The loan origination fee is often referred to as “points.” This fee is charged by the lender to process the loan. One point is equal to one percent of the mortgage loan. As a rule, if you are willing to pay more in points, you will get a lower interest rate.
Any points in addition to the loan origination fee are called “discount points.” Borrowers can pay a lender points to reduce the interest rate on the loan. For each point purchased, the loan rate is typically reduced by 1/8% (0.125%). Points can also be used to lock-in the interest rate for a specified period of time.
Since your property serves as collateral for the mortgage, lenders want to be reasonably certain of the value and they require an appraisal. The appraisal looks to determine if the price you are paying for the home is justified by recent sales of comparable properties. The appraisal fee varies, depending on the value of the home and the difficulty involved in justifying value. Unique and more expensive homes usually have a higher appraisal fee.
As part of the underwriting review, your mortgage lender will want to review your credit history. The cost can depend upon the type of credit report required by your lender.
Mortgage Broker Fee
About seventy percent of loans originate through mortgage brokers and they will sometimes list your points in this area instead of under Loan Origination Fee. They may also add in any broker processing fees in this area. The purpose is so that you clearly understand how much is being charged by the wholesale lender and how much is charged by the broker.
Flood Certification Fee
Your lender must determine whether or not your property is located in a federally designated flood zone. This fee is usually charged by an independent service to make that determination.
Before computers made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, lenders draw their own documents. This fee is charged on almost all loans.
Once again, it is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member.
If an Administration Fee is charged, once again, it is difficult to determine the exact cost. It will vary based on the lender.
Appraisal Review Fee
Even though you will probably not see this fee on your Good Faith Estimate, it is charged occasionally. Some lenders routinely review appraisals as a quality control procedure.
Items Required to be Paid in Advance
Mortgage loans are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first.
This is the insurance you pay to cover possible damages to your home and other items. If you buy a home, you will normally pay the first year’s insurance when you close the transaction.
VA Funding Fee
On VA loans, the Veterans Administration charges a fee for guaranteeing your loan. If you have not used your VA eligibility in the past, this is two percent of the loan balance. If you have used your VA eligibility before, it is three percent of the loan. If you are refinancing from a VA loan to a VA loan, it is three-quarters of a percent of the loan amount. Instead of actually paying this as an out-of-pocket expense, most veterans choose to finance it, so it gets added to the loan balance. This is why the loan balance on VA loans can be higher than the actual purchase amount.
Up Front Mortgage Insurance Premium (UFMIP)
This is charged on FHA purchases of single family residences (SFR’s) or Planned Unit Developments (PUDs). Like the VA Funding Fee it is normally added to the balance of the loan. Unlike a VA loan, the homebuyer must also pay a monthly mortgage insurance fee, too. This is why many lenders do not recommend FHA loans if the homebuyer can qualify for a conventional loan.
Most mortgage insurance (when required) is simply paid monthly along with your mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on their loans.
Reserves Deposited with Lender
Many lenders require you to deposit funds into a reserve account. Funds in this account are your funds, and the lender uses them to make the payments on your Homeowner’s insurance, property taxes, and mortgage insurance (whichever is applicable). Each month, in addition to your mortgage payment, you provide additional funds which are deposited into your reserve account. The lender’s goal is to always have sufficient funds to pay your bills as they come due.
Homeowners Insurance Reserves
Your lender will divide your annual premium by twelve to come up with an estimated monthly amount for you to pay into your reserve account each month with your mortgage payment.
Property Tax Reserves
How much you will have to deposit towards taxes to start up your account varies according to when you close your real estate transaction.
Mortgage Insurance Reserves – When required, most lenders allow this to simply be paid monthly. However, you may be required to put two months worth of mortgage insurance as an initial deposit into your reserve account.
Non-Recurring Closing Costs NOT associated with the Lender
Methods of closing a real estate transaction vary from state to state, as do the fees.
Title Insurance assures the homeowner that they have clear title to the property. The lender also requires it to insure that their new mortgage loan will be in first position. The costs vary depending on whether you are purchasing a home or refinancing a home.
Most sets of loan documents have two or three forms that must be notarized. Usually your settlement or escrow agent will arrange for you to sign these forms at their office and charge a notary fee.
Certain documents get recorded with your local county recorder. Fees vary regionally.
Also referred to as a Termite Inspection. This inspection tests not only for pest infestations, but also other items such as wood rot and water damage.
Since it is the Homebuyer’s choice to obtain a home inspection or not, this cost is not usually reflected on a Good Faith Estimate. However, it is recommended.
This is also an optional item and not normally included on the Good Faith Estimate. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time.
When you close the transaction on your refinance, there will most likely be some outstanding interest due on the old loan. For example, if you close on August twentieth (and you made your last payment), you will have twenty days interest due on the old loan and ten days prepaid interest on the new loan. Your first payment on the new loan would not be until October 1st since you have already paid all of August’s interest when you closed the refinance transaction (since interest is paid in arrears, a September payment would have paid August’s interest, which has already been paid in closing).
Homeowner’s Association Transfer Fee (AKA Capital Contribution)
If you are buying a condominium or a home with a Homeowner’s Association, the association often charges a fee to transfer all of their ownership documents to you.
If you didn’t get bored as you read through this, now you know everything…a lot, anyway…about closing costs.
FICO SCORE Explained
When you apply for a mortgage loan, you expect your lender to pull a credit report and look at whether you’ve made your payments on time. What you may not expect is that they seem to be more interested in your “FICO” score.
Each time your credit report is pulled, it is run through a computer program with a built-in scorecard. Points are awarded or deducted based on certain items such as how long you have had credit cards, whether you make your payments on time, if your credit balances are near maximum, and assorted other variables. When the credit report prints in your lender’s office, the total score is displayed. Your score can be anywhere between the high 300’s and the low 800’s.
Some of the things that affect your FICO score are:
- Too many accounts opened within the last twelve months
- Short credit history
- Balances on revolving credit are near the maximum limits
- Public records, such as tax liens, judgments, or bankruptcies
- No recent credit card balances
- Too many recent credit inquiries
- Too few revolving accounts
- Too many revolving accounts
What is a FICO Score?
FICO stands for Fair Isaac & Company and is the name for the most well known credit scoring system, used by Experian. The credit bureau’s computer evaluates a complete credit profile and assigns a score, which is used to estimate credit worthiness. Each of the three bureaus (Experian, Trans Union, Equifax) employs its own scoring system, so a given person will usually have 3 separate scores.
What Does This Mean to Me?
You should have your credit reviewed BEFORE you look for a home, and work with a PROFESSIONAL Loan Officer to make sure your loan is based on the most accurate information. It is best to make any corrections before you try to purchase a home, because you can never be sure the exact impact a change will have on your score.
FICO Scores and Interest Rates
Credit scores can affect more than whether your loan gets approved. Additionally, they can also affect how much you pay for your loan.
They Don't Always Make Sense
Even so, sometimes credit scores do not seem to make any sense at all. One borrower with a completely flawless credit history had a FICO score below 600. One borrower with a foreclosure on her credit report had a FICO above 780.
Don't Buy A Car (or ANYTHING FOR THAT MATTER) Just Before Looking for a home, or during your home purchase!
In conclusion, a word of advice not directly related to FICO scores. When people begin to think about the possibility of buying a home, they often think about buying other big ticket items, such as cars. Quite often when someone asks a lender to pre-qualify them for a home loan there is a brand new car payment on the credit report. Often, they would have qualified in their anticipated price range except that the new car payment has raised their debt-to-income ratio, lowering their maximum purchase price. Sometimes they have bought the car so recently that the new loan doesn’t even show up on the credit report yet, but with six to eight credit inquiries from car dealers and automobile finance companies it is kind of obvious. Almost every time you sit down in a car dealership, it generates two inquiries into your credit.
Credit History is Important
Nowadays, credit scores are important if you want to get the best interest rate available. Protect your FICO score. Do not open new revolving accounts needlessly. Do not fill out credit applications needlessly. Do not keep your credit cards nearly maxed out. Make sure you do use your credit occasionally. Always pay on time!
Understanding Title Insurance
What is title insurance? If you’ve purchased a home you may be familiar with the benefits of title insurance. However, if this is your first home, you may wonder, “Why do I need yet another insurance policy?” While a number of issues can be raised by that question, we will start with a general answer.
The purchase of a home is one of the most expensive and important purchases you will ever make. You and your mortgage lender will want to make sure the property is indeed yours and that no one else has any lien, claim or encumbrance on your property.
Who needs title insurance?
Buyers and lenders in real estate transactions need title insurance. Both want to know that the property they are involved with is insured against certain title defects. Title companies provide this needed insurance coverage subject to the terms of the policy. The seller, buyer and lender all benefit from the insurance provided by title companies.
What does title insurance insure?
Title insurance offers protection against claims resulting from various defects (as set out in the policy) which may exist in the title to a specific parcel of real property, effective on the issue date of the policy. For example, a person might claim to have a deed or lease giving them ownership or the right to possess your property. Another person could claim to hold an easement giving them a right of access across your land. Yet another person may claim that they have a lien on your property securing the repayment of a debt. That property may be an empty lot or it may hold a 50-story office tower. Title companies work with all types of real property.
What protection am I obtaining with my title policy?
A title insurance policy contains provisions for the payment of the legal fees in defense of a claim against your property which is covered under your policy. It also contains provisions for indemnification against losses which result from a covered claim. A premium is paid at the close of a transaction. There are no continuing premiums due, as there are with other types of insurance.
What are my chances of ever using my title policy?
By acquiring your policy, you derive the important knowledge that recorded matters have been searched and examined so that title insurance covering your property can be issued. Because we are risk eliminators, the probability of exercising your right to make a claim is very low. However, claims against your property may not be valid, making the continuous protection of the policy all the more important.
In conclusion, just as you wouldn’t make an investment based on a phone call, you shouldn’t buy real property without assurances as to your title. Title insurance provides these assurances.
The process of risk identification and elimination performed by the title companies, prior to the issuance of a title policy, benefits all parties in the property transaction. It minimizes the chances that adverse claims might be raised, and by doing so reduces the number of claims that need to be defended or satisfied. This process keeps costs and expenses down for the title company and maintains the traditional low cost of title insurance.
Have more questions about the mortgage process? Contact us today to let us help you find your best option!