Financing Options
Start A Green File
A Green File is an essential collection of your financial documents that will be required by your lender, regardless of the loan type. It should include copies of your bank statements, investment statements, credit card statements, auto loans, recent pay stubs, and two years of tax returns. These documents provide crucial information about your financial history and stability, and lenders will need to review them thoroughly before approving your loan. Having these documents organized and readily available will make the loan application process much smoother and quicker, so it’s important to gather them together before applying for a loan.
Check Your Credit Rating
Credit scoring systems have been in place for centuries and have undergone numerous changes and updates over the years. The current range of credit scores is between 400 and 800, with a score of 620 or higher considered “good” and a score of 680 or higher considered “premium.” Having a high credit score can potentially help secure a lower interest rate on loans and other financial products. Despite the changes in technology and the economy, maintaining a good credit score remains an important part of managing one’s finances.
To determine your credit rating, you can contact any of the three major credit reporting agencies listed below. If you need to improve your credit score, ask your lender for advice on how to do so. Moving forward, it’s important to treat your credit with the utmost care and responsibility, as it can greatly impact your financial future:
Savings & Debt
Try to save up money for your down payment, closing costs (including appraisal, miscellaneous fees, escrow, title insurance, etc.), and inspection expenses when purchasing real estate. It’s also a good idea to pay off any existing revolving or high-interest rate debts such as credit cards to improve your financial standing.
Toe The Line
Making significant changes like changing careers, moving money around, or purchasing expensive items is not advisable when trying to secure a loan. Lenders prefer stability and consistency in the financial records of potential borrowers. Thus, it is wise to consult with a lender beforehand to determine the best course of action before making any significant changes that may impact your loan application.
If you are tempted to buy a big ticket item, consider the following:
A $500 a month debt payment (like a credit card or auto loan) could lower the amount of home you can afford by about $83,000!
* Based on a 30 year mortgage at 6% interest.
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Shop for a Loan
How to Find a Lender
In today’s world, there are various sources through which you can find lenders for your real estate needs. Apart from traditional sources such as newspaper ads, you can now also apply to lenders through the internet or referrals from your real estate agent. Our team has a list of reliable lenders that we have worked with in the past, who have proven their capabilities in dealing with difficult properties and poor credit scores. We would be happy to provide you with their contact information so you can choose a lender who suits your needs.
Choosing the Right Lender
Interview several lenders to evaluate the following:
Choosing the Right Kind of Loan
Due to the variety of loans available on the market, it is not feasible to list and explain them all here. It is best to seek guidance from your lender to select the loan program that suits your needs. However, we have summarized the three most commonly used loan types below:
Conventional Loans – These are not guaranteed or insured by the government. They typically require a higher credit score and a larger down payment. Conventional loans can be either fixed-rate or adjustable-rate mortgages.
FHA Loans – These are guaranteed by the Federal Housing Administration and require a lower down payment (as low as 3.5%) and have more flexible credit score requirements. However, they also require mortgage insurance premiums.
VA Loans – These are guaranteed by the Department of Veterans Affairs and are available to eligible veterans, active-duty service members, and surviving spouses. They typically offer lower interest rates and require no down payment, but may have additional fees.
For more detailed information on loan types, it is recommended to click the link provided at the end of this page.
- Fixed loan: The fixed rate loan assures your monthly payments will stay the same over the life of the loan, which is typically between 15 and 30 years. Fixed rate loans may be best if you intend to hold the property for a long period of time, say over 7 years.
- ARMs (adjustable rate mortgages): ARM’s may be suitable if you plan to sell or refinance your home within the next few years. The starting interest rate is typically lower than a fixed rate loan, saving you money initially. However, it is important to understand the index, the readjustment interval, the capitalization rate and downside risks of an ARM before making a final decision to use this type of loan.
- Intermediate ARMs: Also called Hybrid Loans, these loans can offer fixed interest rates for the first 3, 5, 7 or 10 years after which the interest rate adjusts with the market every 6 months or year thereafter.
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Know the Numbers
Credit Report
A review of your credit history from a third party credit agency can typically be ordered by the lender with your permission for a cost under $50. This review will include an evaluation of your outstanding loans and your repayment history, and will help the lender determine your creditworthiness and ability to repay a loan. It is an important step in the loan process and can have a significant impact on the terms and interest rates offered to you.
Application / Processing Fee
This cost, typically a few hundred dollars, is charged to cover the lender’s work to evaluate your ability to repay the loan. Some lenders will credit this back to you upon closing.
What is APR?
The APR, or annual percentage rate, is the sum total of all your borrowing costs expressed as a percentage interest rate charged on the loan balance.
For example: After fees, the original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed, and the principal payments are calculated based on the length of the loan term (for example 15, 20, or 30 years).
Indexes
The interest rates on variable loans readjust periodically based on changes in an index. Typical indexes include the Federal Funds Rate, Treasury Bill.
Points
When lenders are vying for business by providing lower interest rates, they may impose a one-time fee called “points” that is pre-paid and calculated as a percentage of the loan. This fee can range from 0.25% to 2% of the loan balance and is generally paid upfront. It is important to note that points are tax-deductible, so it’s a good idea to seek advice from your tax advisor on this matter.
Appraisal Cost
Lenders usually hire independent appraisers who are experienced and well-versed with property evaluations. These appraisers compare the property’s purchase price, condition, and size with recent neighborhood sales to determine the fair value of the property. The appraisal helps ensure that the purchase price is reasonable and also gives the lender confidence that they will be able to recover their money in case the borrower defaults. The cost of appraisal varies based on factors such as the type of appraisal, the property being appraised, and the region.
Miscellaneous Fees
During the loan processing, you can expect to see different charges, including notary, courier, and county recording fees. These charges may vary depending on the region and the lender. The notary fee covers the cost of a licensed notary public to witness the signing of your loan documents. The courier fee is for the delivery of documents from the lender to the title or escrow company. The county recording fee covers the cost of recording your loan and deed with the county where the property is located.
Prepayment Penalties
Penalties for refinancing or selling a property can vary greatly among lenders. It is important to be aware of whether your lender charges such penalties, as well as the length of the period during which they apply. By understanding these details in advance, you can avoid any surprises and potentially save yourself a significant amount of money in penalties.
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Get Pre-Approved
Does it Help to be Pre-Qualified by a Lender?
Obtaining a pre-qualification letter from a lender is a relatively quick process that requires less information than getting pre-approved. However, it is important to note that a pre-qualification letter only provides an opinion from the lender regarding the maximum amount of real estate that the buyer can qualify for. In a seller’s market where there is high competition, a buyer with only a pre-qualification letter may lose out to another buyer who has already been pre-approved. Therefore, it is recommended to obtain pre-approval instead of pre-qualification to have a stronger position in a competitive real estate market.
Get Pre-Approved by a Lender
Obtaining a pre-approval letter has several advantages. It enables you to determine the exact amount of real estate that you can afford, providing you with a competitive edge over other buyers in a seller’s market. Additionally, it is more efficient and reduces the time taken by the lender to fund your loan. When you identify a property you wish to purchase, your pre-approval puts you in a stronger position to make an offer compared to someone who is less prepared.
Be prepared to provide comprehensive documentation, which the lender may independently verify, including but not limited to:
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Applications & Processing
Mortgage Brokers and Lenders – Who Does What?
The mortgage broker serves as the primary contact for your loan and can work with multiple lenders who provide funds for the loan. The lender pays the mortgage broker a fee for acting as an intermediary and providing customer service.
Filling Out the Application
When applying for a loan, there are standardized forms that need to be completed. Many mortgage brokers now offer the convenience of filling out and submitting these forms online through their website. It is important to take the time to accurately answer all questions, as the information will be verified and used to qualify you for your loan. This includes providing personal and financial information, such as your employment history, income, and assets. The lender will also request documentation to support this information, such as pay stubs, tax returns, and bank statements.
Completing these forms and providing accurate information is crucial to the loan approval process. Inaccurate or incomplete information can delay the loan process or even result in denial of the loan. It is also important to note that the lender may conduct a credit check during this process to assess your creditworthiness. Therefore, it is important to maintain good credit and address any issues that may negatively impact your credit score before applying for a loan.
Documentation
The mortgage broker will need copies of the documents you began gathering in the first phase of the loan process, including:
Stay in Communication
Once you have applied for a loan, an underwriter, also known as an analyst, will review your documentation and verify your ability to repay the loan. If you are under contract for a property, there may also be a loan approval committee that evaluates your creditworthiness and the property being lent on. This process is called underwriting and may raise some questions. It is important to promptly respond to your mortgage broker and keep the process moving smoothly. Be sure to check in with your broker periodically to stay up-to-date with the underwriting process.
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Funding
The Signing
When your loan is ready to be “closed” or “funded” by the lender, you’ll be required to sign the final loan documents, which will be facilitated by your real estate agent and mortgage broker. The signing typically takes place in front of a notary or an escrow officer. Your mortgage broker will provide you with any preparation details you might need, such as bringing a photo ID or a cashier’s check if you’re purchasing real estate. It’s important to give yourself enough time to review the documents for accuracy before signing them.
If funds are being wired: “Wiring instructions” direct the electronic transfer of money between financial companies. If possible, arrange to have the wiring instructions in place ahead of time and checked for accuracy by both the sender and recipient of the wire. It is critical that these instructions be exact, and even so, delays are all too common.
Congratulations!
After your loan has closed, your mortgage broker will likely call you to confirm that the funds have been transferred successfully. However, it is always recommended to follow up with a phone call to ensure that your loan funds were sent to the correct account. Keeping accurate records of this critical phase of the transaction is a good idea to ensure that everything is in order. You should also make sure to receive copies of all the loan documents and closing paperwork for your own records. If you have any questions or concerns during this process, don’t hesitate to reach out to your mortgage broker for clarification.
