Finding a Loan

Everything about buying a home hinges on being able to buy the home you want and loving the home you can afford! A large part of our job is making sure that your finances are ready, that you choose from homes you can afford and love, and that you have a reliable local loan officer who will shepherd your mortgage through and ensure that everything is done correctly, just as your Buyer’s Best agent will be making sure that everything involved with your purchase is done correctly.

The mortgage industry has changed enormously in reaction to the meltdown of ’07 – ’08. The choice of loans is now more limited, with greater oversight in place, and much tighter guidelines. The good news is that there are loans available! We’ll work with you on the preliminary financial analysis to determine which loan is best. Before you even start looking at homes, the initial process we use goes something like this:

Evaluate your finances and identify the right loan for you.
Choose a mortgage company and loan officer who will do a good job.
Have your credit checked and clear up any mistakes that may appear.
Establish a price range within which to look.

Once this is done, start looking, knowing you can buy and how much you can spend.

Do not pay off credit cards and other consumer loans and close the accounts.
Mortgage companies like to see some current active good use of credit.

The loan types available now are:

Conventional – now requires a minimum of 5% down, 20% to avoid mortgage insurance. Stricter debt ratios are also in place now, and interest rates for the loan are tied to credit scores. Down payments as low as 5% are possible but carry a high PMI (Private Mortgage Insurance) and need very good credit.
FHA – requires only 3.5% down, do have mortgage insurance, but will allow higher debt ratios and lower credit guidelines than Conventional.
VA – still often the loan of choice for qualifying Veterans, VA loans have no down payment (although they do carry an upfront funding fee of 2-3%), and have looser requirements for credit and debt ratios.
USDA – 0% down but upfront mortgage insurance of 3.5%. This loan has property location restrictions but can be an excellent choice.
HomePath – a Fannie Mae program with 3% down and no Mortgage Insurance. It requires a higher credit score and can only be used with Fannie Mae eligible properties. You cannot have grants and community second loans with HomePath.

All these mortgages allow the seller to pay most or all of your closing costs, and all allow you to pay points up-front to get a lower interest rate. Most can be used in conjunction with grants and local programs.

Once you have a contract on your new home (or before), your loan officer will send a list of documentation needed. Get that information to your loan officer as quickly as possible. It will be needed for the complete package of appraisal, contract, your loan application, and the verifications of employment and accounts that will then go to your mortgage company’s Underwriting for review and final approval.

This must be done to meet the loan commitment deadline
and to make sure your loan is ready for settlement.

Due to Federal regulations tracking money because of drugs and Homeland Security, there are some actions that you should clear with your loan officer first:

Don’t move money around from one account to another without verification
Don’t accept money from someone to help with your purchase without the proper tracking and okay from your loan officer.
Don’t make large purchases, open new credit accounts or do anything else to change your credit situation without checking first.

Some terms you’ll hear:

Down Payment – Money that you will use to purchase the house, along with the loan. Depending on the kind of loan you have, the down payment can be quite small although a smaller down payment will usually mean paying mortgage insurance and possibly a higher interest rate. At 20% down, you will not have to pay mortgage insurance, and with some lenders, as little as 10% will result in a slightly higher interest rate but no mortgage insurance.

Mortgage insurance – usually a fee paid up-front and monthly on loans with lower down payment. Mortgage insurance protects the bank, not the homebuyer.

ARM (Adjustable Rate Mortgage) – have a lower starting rate which can adjust depending on the indicator they are tied to. ARMs have had a bad rap but can be very good under the right circumstances, and homebuyers in recent years have seen their mortgage payments go down, not up.

Closing costs – in mid-Maryland will typically be approximately 4% of the purchase price, depending on a number of factors including taxes, your homebuying status, and points you may be paying to get a lower interest rate. Your loan officer will give you a more exact estimate once you have an actual house in mind.

Points – are a percentage of the loan total that you can chose to pay upfront as part of your closing costs to lower your interest rate. We can help you determine whether points will be cost-effective depending on your cash and the time you expect to be in the house.

Ratios – each loan type will carry guidelines for the percentage of your gross monthly income you will be allowed to carry in both total debt and mortgage payment. Ratios will be somewhat flexible depending on your credit history and down payment. Generally the allowable ratios will be:

Conventional – 28% for PITI (Principal, Interest, Taxes, Homeowners and Mortgage Insurance), and 41% for total debt; higher with excellent credit, a larger down payment and PMI.
FHA – 29% for PITI and 41% total debt, quite a bit higher with good credit.
VA – 45% total debt, which can all be PITI if you have no other debt.

Throughout the loan process, your agent, loan officer and loan processor will be working with you to make sure everything goes smoothly. Especially if you think there may be credit issues, discuss them early in the process. Any of us involved in your home purchase will be happy to answer your questions or to find the answers for you.

This is intended as an introduction only. If you want more specific information and a mortgage calculator, the following link to Prime Lending provides a wealth of information on the loan process: https://lo.primelending.com/ljohnson.