THE MORTGAGE PROCESS
Most home purchases involve financing obtained from an institutional lending service. You as a borrower will be required to supply this lender with pertinent documents and information regarding your employment, credit history and finance information. The purpose of all this information is to document and support your request that the lender invest its money for your purchase of a new home.
You should interview lenders as soon as you begin to look for a home. Your agent can provide you with names of reputable people. The lender will gather the necessary information and provide you with an approval letter for a certain amount of money, contingent only upon the appraisal of the property you eventually decide to buy. This gives you the strength to operate successfully in a competitive real estate marketplace.
Complete loan approval will commence when you have a property under contract. Within about 15 days of notification to your chosen lender, an appraisal of the property will be done. If the property appraises at or above the contract purchase price, there is no issue with the loan. If the appraisal of the property is below the contract price, the loan will be based on the appraisal figure, not on the purchase price. If you have an appraisal contingency in your contract, it may be possible to renegotiate the price of the property.
WHAT CAN YOU AFFORD?
To be eligible for a loan, you must have a credit record acceptable to the lender, and you must be able to handle the monthly payments of principal, interest, taxes and insurance. In addition you must have sufficient cash for a down payment and closing costs. Down payment amounts can generally run from 10% to 25%, and cash required for closing costs is approximately 3-5% of the purchase price. In the case of an FHA loan, less cash is needed for closing.
The types of loans most popular and available include a 30-year fixed mortgage (which has constant monthly payments for the 30-year life of the loan) and various adjustable ARM mortgages. Adjustable loans typically have constant payments for 5 years, 7 years, etc., then change every year thereafter based on financial indices and other features of the ARM, which the loan officer can explain in detail. Another product in the market is the interest-only loan, which translates into much lower monthly payments, but does not reduce the principle of the loan. This loan comes in many sizes and shapes, and your lender can give you a good description of the pros and cons.
For the past several years interest rates have been historically low, and this increases the buyer’s borrowing power. It is important that you understand the loan you choose and are comfortable with all of the loan features and monthly payments. Your real estate agent and your loan officer can give you all the information and options necessary for you to arrive at the best choice for you.