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Mortgage ABC

Buying your first home can seem intimidating, especially when faced with many different loan types.  When researching general information about the most popular home loan types, remember it is not as simple as finding the cheapest interest rate.  At first taking out a mortgage may appear daunting, but once you break it down, it becomes straightforward. As with any financial decision, the first step in the process is to educate yourself about the process.

What IS a Mortgage?

What is a mortgage really?  A mortgage is a lien on the real property that gives the lender the right to take the property by foreclosure if you default on the loan.  Because most people cannot afford to buy real estate with cash, nearly every real estate transaction involves a mortgage.  Contrary to popular belief, a mortgage is not a loan; it creates a lien on the property, which serves as a lender’s security for the debt.  The party who borrows the money is the mortgagor; the party who provides the money is the mortgagee.  A mortgage gives the lender the right to sell the secured property to recover funds if you do not pay the debt.

While the choice of mortgage product affects the amount of the monthly mortgage payments, there are plenty of other aspects of homeownership, such as homeowner’s insurance, property taxes, maintenance,and  homeowner’s dues,  that need to be factored into your overall cost.  The mortgage note, in which the borrower promises to repay the debt, sets out the terms of the transaction:

  •     The amount of the debt
  •     The mortgage due date
  •     The rate of interest
  •     The amount of monthly payments
  •     Whether the lender requires monthly payments to build a tax and insurance reserve
  •     Whether the loan may be repaid with larger or more frequent payments without a prepayment penalty
  •     Whether failing to make a payment or selling the property will entitle the lender to call the entire debt due

When comparing monthly payments from various lenders, be sure to ask if the lender included monthly taxes and insurance costs in the total payment.  Often times if your downpayment is large enough, inclusion of taxes and insurance won’t be required, but you will instead pay your insurance company and real estate taxes directly.

It can not be emphasized enough that preparation is the key to ensure a smooth process.  If you are working with a real estate attorney, he or she should walk you through the entire process in advance.

Pre-Qualified vs Pre-Approved

First, its important to understand the differences between a home mortgage prequalification and preapproval.   Pre-Qualifying helps you determine what you can realistically afford in order to start your shopping.  It provides an indication of  what you expect to be qualified for.  However, it is not a sure thing and doesn’t carry the same weight as being pre-approved. Home loan pre-approval is a more involved process, which includes submitting a formal application and documentation and provides a conditional commitment from the lender for the exact loan amount.  Essentially you are getting your home loan approved prior to selecting a property.  A pre-approval will require income and asset documentation.  Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.  A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having the cash  to pay for the house.

Formal Application

Once you locate your property you wish to purchase and have a successful offer, it’s time to begin the formal application process. If you were not pre-approved, at this stage you will need to provide more detailed documentation to your lender, including assembling your financial records.  Mortgage loan qualification guidelines typically differ depending on the loan program and the lender.  The costs of your transaction may vary depending on the loan program you select with your lender, and any changes you decide upon during the loan process.

The type of loan you choose is a very important aspect of the loan process, and one you should completely understand before making any kind of commitment.  Once the lender receives all this information, they will verify them and start the decision making process.  

The appraisal is ordered and is done during the same time that the processor is verifying information.    Whether it’s during the pre-approval stage or during the approval process itself, the essential question the lender’s underwriters are asking is “How good of a long term risk is the borrower?”

Approval

The loan processing (approval) stage is typically the longest in the process.  During this step there isn’t really much you can do but wait.  Again, be aware that any material changes in your financial situation can impact this stage, so before you do anything that could have an affect, make sure you discuss it with your lender.  When the underwriter is satisfied, the borrower will receive an approval and be cleared to close.

As well as your home loan costs, there are other fees and charges associated with buying a property you need to consider, such as loan origination or underwriting fees, broker fees, transaction, settlement, and third party costs.  Costs associated with property surveys and searches may be required.  Make sure you look into the closing costs and other costs in detail.  It is very important that each client fully understands all of the costs associated with their mortgage loan.  Be aware that other fees and costs vary by program and by lender, so when you are shopping for a loan, make sure to get all of the associated costs so you can make a proper comparison.

Closing

The final step in the mortgage process is the closing meeting. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time. The closing is a meeting, most often at the title insurance company, where the lender, homebuyer and seller meet to complete the sale and mortgage process. Closing costs may vary among companies and also throughout the nation because of differing local laws and customs.

A couple of fees to be aware of:

  • Origination fee: This is the fee charged by a lender for processing a loan.
  • Loan origination fee:  Lenders charge these fees for processing of the mortgage agreement and other paperwork.

As with all the fees, rates, and points involved in a mortgage transaction, don’t shy away from negotiating these down or even out of the agreement.  Keep in mind that knowing the process and having knowledge of the competitive marketplace enables you to be a more successful negotiator.

Parting Thoughts

With all of the finance programs available to the consumer, from conventional, adjustable rate mortgage and interest only, having an experienced mortgage professional on your side will help you achieve your goal of buying a home and should save you money in the process.  Certainly your interest rate is important, but getting the right mortgage, receiving the true costs of the transaction, and getting sound counsel can be far more valuable than a fraction of a percentage difference in your rate.  As with any major financial decision, don’t let the emotion of the transaction put you in an untenable situation by assuming more debt than you can service.  Improving your expertise and knowledge before you start will help the whole loan process be a smooth and relatively painless one.

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