Once a potential home buyer has passed the first hurdle of choosing their buyer agent, making contact with a good mortgage counselor is an important next step.
Although there are many excellent resources available to borrowers via the World Wide Web, we at HomeBuyerPower are strong advocates of making contact with a mortgage loan counselor in the geographic vicinity of where your home purchase will occur. Your chosen and trusted exclusive buyer broker is an excellent source for this recommendation and referral.
A good mortgage counselor will provide a buyer with a solid road map of what they need to do to get ready to finance their home.
Choosing the right loan program is an often difficult decision, and considerations such as how long a buyer anticipates staying in their new home, what their future income expectations are, and whether they are willing to accept the risks of a changing interest rate all have a bearing on this important decision. As in shoes, one size does not fit all and the importance of making contact and discussing the many programs and options with a knowledgeable and experience loan counselor cannot be overstated.
There are three main characters that you may encounter when proceeding through the mortgage application process.
Briefly, the cast of characters that you may hear of or have contact with during the mortgage application process include:
- The “Mortgage Counselors”, sometimes called “Loan Officers” or “Loan Originators”. These are the people responsible for making initial contact with you, the borrower, and “taking your application”. This individual is usually your primary contact and if a difficulty arises, they are often your advocate and troubleshooter within the lender’s organization.
- After the application is taken, the individual usually responsible for completing the processing of your loan application is the “Loan Processor”. This individual typically orders the appraisal, credit report, verifications and other similar items.
- The “Underwriter”, sometimes figuratively referred to as the “loan committee”, is the decision maker responsible for taking all of the information gathered by the Mortgage Counselor and Loan Processor and deciding whether to approve the loan. Oftentimes their approval may be conditional, and will require additional information before an approval is granted. Rarely will you have any contact with this person.
It is wise to be either pre-approved or pre-qualified prior to looking at home, preferably pre-approved.
First, let’s distinguish between “pre-approval” and “pre-qualification”:
- Pre-qualification” generally occurs after a lender has done a very preliminary job of reviewing a borrowers credit and income history. Simply put, the lender certifies that the borrower is qualified to borrow a certain amount of money based upon this very cursory review.
- Pre-approval” generally goes much farther, and occurs after a borrower credit and income history are carefully reviewed and verified.
Often buyers have unrealistic expectations of what they can buy. Pre-approval avoids this problem and also potentially gives the buyer an edge during negotiation: if the buyer wishes to disclose it he or she may have the negotiating strength of a cash buyer. There is an important caveat here though: do not disclose to the seller the amount you are pre-approved for, only the fact that you are pre-approved. If you disclose the amount, you may have tipped your financial hand and by implication disclosed your upper negotiation range. This important information can be used by the seller to their advantage during the negotiation.
If you have not gone to the effort in advance to be pre-approved, make certain that your contract or purchase offer contains a statement that it is contingent, or subject to, your obtaining a mortgage loan to your satisfaction. In other words, you should not be held to the letter of your offer unless a loan can be obtained on terms favorable and satisfactory to you.
There are many different types of loan programs, each having different features and each suited to different circumstances.
Some typical loan programs for consideration include:
- 30 year fixed rate loans: the most common type of loan and offer the advantage and certainty of a set payment amount for the life of the loan. If you plan to stay in the home for a long time, if this is truly your “dream home”, a fixed rate loan, whether it be a 30 or 15 year term, becomes even more advantageous. Also, if your income is likely to decrease or remain steady, as is the case with those anticipating retirement, a fixed rate program gives you the peace of mind of more accurately planning your future expenses. While most of the gains from an adjustable are noticed in the first few years of the loan, and later these are offset by the higher payments, this is not the case with a fixed rate loan.
- 15 year fixed rate loans: the popularity of this shorter-term fixed rate program has increased significantly in recent years, as more borrowers have opted for quicker equity build-up at the expense of higher monthly payments. Some liken it to a forced savings account, as it requires you to pay off the debt faster. These are especially advantageous when rates are low and you are refinancing an adjustable loan and you wish to “lock” your rate for the life of the loan.
- Adjustable-rate loans: also known as “ARM” loans, this program is more suited to risk takers and it shifts the risk of rising interest rates to the borrower, who also stands to benefit if rates drop during the term of the loan. When rates are high, this program also has a lot of appeal as you can typically qualify for more home at the lower adjustable initial “teaser” rate. This program is also well suited to a borrower who does not plan to be in a home too long, as when a move to another job, city or house is anticipated. ARM loans typically start at a below-market “teaser” interest rate, but usually include “caps” or limit on the amount of periodic increases and total life-of-the-loan increases. Adjust on a schedule of every 6 months, every year, every 3 years, every 5 years or every 7 years.
- Balloon loans: payments are calculated, or “amortized” over a longer term (typically 15 or 30 years), but the loan is due and payable in full at an earlier date. The balloon should be at a date far enough into the future so that the borrower has more than ample time to undertake the refinance process prior to the balloon date.
- Convertible loans: much like an adjustable loan, but includes the right to convert to a fixed rate during a pre-agreed timetable. This can be a very advantageous loan for those wishing to qualify for more home using an adjustable’s initial lower “tickler” rate, but with the added security of being able to convert to a fixed rate at a later date.
- Seller takeback loans: while this is not really an industry offered loan “program” as such, it is a worthwhile approach to consider when mapping out your home financing strategy. When the seller has a large equity stake in the property, they may be willing to provide the financing. Instead of making payments to a conventional lender, the seller finances the purchase and the buyer makes their payments to the seller instead. Simply put, the seller takes the place of the bank. This approach is especially attractive to borrowers who may not qualify for a conventional loan, as in the case of self-employed borrowers or those without sufficiently established credit histories.
There are a number of things you can do to make the loan application process go smoother and improve the chances of a positive outcome.
They include:
- Do not make any large purchases immediately prior to or during the loan origination process. If you are considering a motor home, new car, or a new credit card, it is best to wait until after the process is completed and the loan closed. To do otherwise may risk your chances of qualifying for the home loan.
- Keep up with your mortgage counselor, and do not let large pauses in time go unnoticed. Mortgage counselors are typically handling many applications at once, and slips between the cracks are not uncommon. Do not let a very long period of time pass before asking “Need anything else?”
- Provide requested information as quickly as possible. Often during loan processing, many of the tasks, and some of the individual decisions, occur in sequential fashion. A slip-up in time of a few days in responding to a request for information could also hold up other parts of the process.
- Try to get all details from the mortgage counselor in writing, and ask for signed copies of any documents executed by you. This may help avoid problems that could develop if promised rates do not materialize or hidden costs appear later in the process.
- Try to clean up any problems shown on your credit report before making the loan application. If you are aware of any credit issues, consider raising these with the mortgage counselor at the time of application to avoid delays later on. This will also speed up the success of any workaround solutions initiated by your mortgage counselor. Errors on credit reports have recently been an issue of national attention. There are several surveys suggesting that nearly 50% of all credit reports contain some sort of derogatory error. You may be wise to order a copy of your credit in advance of formal loan application to review it for possible errors.
For their protection, your lender will order an appraisal to arrive at an independent determination of the value of the home, the cost of which will be at your expense.
- A low appraisal will lead to a lowering of the loan amount, and in most cases, will initiate a re-opening of price negotiations by the buyer in an attempt to have the sale price similarly reduced.
- A high appraisal may lead to a higher than anticipated loan amount, depending on your lender’s underwriting criteria. At the least, a high appraisal serves as reassurance that you did not overpay for the home, and that you may have even bought more than reflected in the sale price.
Shopping for points, rates and fees is a very wise investment of your time.
A “point” is equal to 1 percent of the loan amount. Theoretically, points are paid to reduce or “discount” the loan interest rate below the then current market rate, and the more points a borrower pays, the lower the interest rate. Reality does not always square with theory. Sometimes, though not often, there are significant variances in the interest rates between lenders with identical points.
“Junk fees”, sometimes called “Garbage fees”, are extra lender charges added to your financing costs in order to increase the profitability of your loan to the lender.
Some “junk fees” might include “underwriting fees”, “loan processing” fees, “courier fees”, “photocopy fees”, or “inspection” fees. These can be negotiated away, although your objections will be more effective if raised early-on in the loan application process.
