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QUICK SUMMARY OF MORTGAGES

by Jim Parker, Exclusive Buyer Agent

Once you get tired of living in an apartment, or you plan on buying a home of your own, you'll need to prove two things to get a loan to buy a home:

1. You're earning enough money to make your monthly mortgage payments (which include loan principal, interest, PMI, property taxes, and homeowner's insurance):
   • click here to see what you can "really" afford, or
   • click here for another opinion - Please note: Add 20% to payment for homeowner's insurance, property taxes, and mortgage insurance, and

2. You're an "acceptable" credit risk (i.e., your FICO score is sufficient) for making future payments. Once you provide proof to a legitimate, licensed mortgage lender, you should then be prequalified.

HOW DO YOU PICK THE RIGHT LENDER?

Before asking the lender your first question, perform a quick calculations on your own to determine the monthly amount you plan to pay for a home and see if it fits within your budget. Multiply your Gross Monthly Income by 30% as a guideline for average monthly payment. What amount did you get?

Try to limit your monthly payments to about 30% of your monthly gross income. You'll hear about front end & back end ratios. Front end ratio = ratio of monthly mortgage payment to gross income (Conventional loans require 28% or less). Back end ratio = monthly mortgage payment plus monthly auto loan, credit card, or other loan payments. (Conventional loans require 36% or less.) If neither ratio can be achieved, you may want to try FHA or VA type loans.

NOTE: Divide the 30% of your monthly gross income by $6 to get a ball park loan amount in $1,000's. For example, $900 monthly payment (30% of $3,000 monthly gross income)/$6 => $150,000 loan (e.g., 900/6 x 1,000). Look for homes below your upper price range. If you find something less expensive that you like, you will be able to save money. It has been my experience that every $10,000 in home price means a noticeable difference in features of a home.

Use my Payments & Loans Worksheet for a more thorough calculation. However, a simple estimate of monthly mortgage; utilities; and miscellaneous household expenses such as lawn care, furniture, draperies, and monthly home maintenance costs can be thrown together. Don't forget to add the costs to move including any early move out penalties from apartments, moving & truck rental expenses, home inspection, homeowner's insurance, and some other prepaid costs before closing into your total budget.

Better FICO scores may mean a no documentation loan;

If you are a first time homebuyer, there may be special loans;

Think about what is important to you:

Low monthly payment?

Low or "NO" down payment?

Low interest rate?

Become familiar with the different types of mortgage loans available:

• Conventional (usually requires 10-20% down & less stringent appraisal guidelines);
• FHA (usually requires only a minimum of 3.5% down but mandatory PMI; or
• VA (if you qualify, can be a 0% down program up to a certain loan amount).

Check some of these sources:

• The HomeFinder section of the Sunday Atlanta Journal-Constitution for different types of loans and lenders
• You may even wish to ask family members/friends/co-workers who recently closed on a home loan who they might recommend.
• Talk with your Buyer Agent for suggestions or seek reviews of lenders on kudzu, angieslist, etc,.

NOW TALK WITH A LENDER AND GET QUALIFIED/APPROVED FOR A LOAN

You know your personal financial situation better than anyone else. To get a competitive comparison, talk with at least three mortgage companies within a 30 day period without a major reduction in credit scoring and learn about the rates and terms of their loans. Ask about the types of loans that fit your situation. Select one lender that offers solutions to your financing needs before you make an offer. You really don't want to be trying to select a lender at the same time you are making offers on a property. Ask each lender for their "par" rate of interest. (This is the interest rate you would pay without paying discount points. Each discount point will cost $$$ to reduce your rate by about 0.125%. Divide monthly savings into cost of discount point(s) to determine payback period.)

The lender should give you a document (i.e., loan qualification letter) to prove to your agent and the Seller that you are "qualified" to purchase the property.

Two types of loan qualification exist:

• "Pre-qualification" is just an estimate that a lender makes based on information you furnish to them, perhaps over a phone call, like income, expenses, and other factors. There are no written papers/documents furnished at this stage of the loan process. Nothing is verified at this time either. Being pre-qualified means that a lender has used a brief conversation to judge that you're a good loan candidate with no lender commitment that you will be approved for any loan, but you provided enough information to get a lender to say you can afford a loan.

• "Pre-approval" is more thorough. During the pre-approval stage, you complete an application ===Click here to see sample loan application=== that informs the lender about how much you make, how much you currently owe (loans and debt) and how much you've saved. Your credit report and credit score is reviewed. The lender then can provide you with a letter stating that you've been pre-approved for a certain loan type and amount.

The difference between "prequalifying" and "preapproval" could make a major difference in your negotiations process. Generally, Agents and Sellers put more credibility into a pre-approval, since it suggests that the potential buyer has a strong credit position.

After contracting for a property, the lender you make loan application with needs to furnish you a Loan Estimate (LE) which provides total closing costs, monthly payments, and an estimated amount to bring to closing. See the last question in the list below to understand what information the LE provides.

WORKSHEET OF QUESTIONS TO COMPARE LENDERS

===Click here for a "PRINTABLE PDF" version of the Lender Comparison Worksheet - Use it during discussions with lenders!===

Use this worksheet as a guideline. Add or change questions. It's not a complete list of questions that would fit your situation.

Lender Comparison Worksheet
QUESTION	LENDER #1	LENDER #2	LENDER #3	COMMENTS
Lender Name	___________	___________	___________	___________
Phone #	#	#	#	-
Loan Program Names What type of loan(s) best fit my specific buying situation? What are your specific guidelines to qualify for these loans? (FICO scores, income level, employment, assets, liabilities, etc.) Please explain how each is better than the others.	-	-	-	-
Loan term & Conditions 30 years 15 years 3, 5, or 7 year fixed and then adjustable thereafter. Are there any limits on seller contributions: Closing costs (e.g., limited to 3% of sales price)? Dollar limits for allowances for repairs? Other restrictions?	-	-	-	-
Amount of down payment required for the specific program (Note: some programs offer NO money down programs) Do you offer 100% finance loans (i.e., NO-DOWN PAYMENT)? Do you have programs that DO NOT require closing costs? What are their pros and cons for me?	-	-	-	-
Interest Rate: Note: Record rates for 15 year & 30 year loans; 80%1st Mortgage & 10-15% 2nd Mortgage; Adjustable Rate; Interest Only: 100%; FHA/VA; First-Time-Homebuyer loans; or Special Circumstance Loans. When will the rate be locked (i.e., guaranteed) and when will I get written notice (i.e., interest rate lock letter) that the rate is locked? How long can I lock my interest rate without penalty or payment - 30/60/90 days? What are the ADVANTAGES & DISADVANTAGES of locking now? How can I get a better interest rate?	-	-	-	-
Cost of Discount Points: (Percentage of Loan to drop interest rate) How much do loan discount points cost? What is the payback period? (36 or fewer months is acceptable.)	-	-	-	-
How can I eliminate Private Mortgage Insurance?(PMI or MIP on FHA Loan)Note: PMI on loans generated on or after 1-1-2007 is tax deductible, but only under certain circumstances. Does the loan have a monthly PMI charge? How much per month?	-	-	-	-
Loan Prepayment Penalty on Any Program I like? Does the loan have a prepayment(i.e., paying your loan off early) penalty? If so, what are the costs and terms?	-	-	-	-
Documentation: What documentation will you need from me to qualify for the loan?W-2's, Bank and Investment Statements, etc,.	-	-	-	-
Length of time How long will you take to process my loan (from date of loan application to loan approval)?	-	-	-	-
Using IRA Funds: What are the pros & cons to use IRA retirement funds for a down payment? Consult a CPA too. Note: IRS Publication #590 states the will permit up to $10,000 for down payment without penalty, but appropriate taxes are charged and you have a period of time to pay it back without penalty.	-	-	-	-
Escrows/Prepaids: Will your lender allow the seller to pay prepaid escrows (i.e., property taxes and homeowner's insurance)in the agreed upon closing costs? Will the lender allow me to pay annual property taxes and homeowner's insurance directly?	-	-	-	-
Property Survey: Does the lender require one? (If not & you want it, ask the closing attorney to order it. 2-3 weeks.)	-	-	-	-
May I make additional payments toward principle without penalties?	-	-	-	-
Lender costs: What are your fees: application, origination, appraisal, credit report, processing fees, and other charges? (Note: The lender you select will provide you a Loan Estimate of charges to back this information up.)	-	-	-	-
Loan Estimate: When will you furnish a Loan Estimate(LE)? The LE should reflect details in five separate major financial factors: INTEREST RATE: The rate of your loan(This is normally after you lock your rate so they can prepare a loan estimate using the appropriate interest rate); MONTHLY MORTGAGE PAYMENT: including principal, interest, taxes, PMI and hazard/homeowner's insurance; CLOSING COSTS ESTIMATE: of "required" and "optional" closing costs;Please click here for my discussion of "Closing Costs and What Affects interest rates" ESCROWS or PREPAID ESTIMATE: Prepaid hazard/homeowner's insurance and property taxes to establish escrows; and AMOUT REQUIRED AT CLOSING ESTIMATE: amount required at closing.	-	-	-	-
Flood Certification: When can I get certification that property is not in a Flood Zone? (Note: Usually a fast turnaround on this.)	-	-	-	-

WHAT DOES "CLOSING" MEAN AND WHAT HAPPENS AT CLOSING?

The term "closing" simply means signing the final loan paperwork with an attorney and transfer of title to you. (i.e., Signing on the dotted line - on lots of forms). This "loan (home purchase) closing" process is where Buyer and Seller finally meet to transfer money, property ownership, and keys.

If all works well to this point, at least three (3) days prior to your closing, your lender must furnish you with a Closing Disclosure document that is supposed to reflect almost exactly th numbers you were furnished on the Loan Estimate form.

The closing attorney places all lender, attorney, Buyer and Seller related closing costs onto one of two different forms they can use:

(1) HUD-1(A two-page form): The first page summarizes what the Buyer and Seller will pay or receive. The second page details closing costs, prepaids(homeowner's insurance & property taxes), etc., and the balances are transferred to the appropriate Buyer/Seller columns on the first page. ===Click here to review the HUD-1 Real Estate Settlement Statement that you will see with final numbers in the columns perhaps 24 hours prior to closing or at the loan closing in the attorney's office.

(2)ALTA Real Estate Settlement Statement (A three-page form): The closing attorney places all lender, attorney, Buyer and Seller related closing costs onto one three-page form (===Click here to review the ALTA Real Estate Settlement Statement that you will see with final numbers in the columns perhaps within 24 hours prior to closing or at the loan closing in the attorney's office.)

IMPORTANT: Compare the numbers that the lender gives you with the Settlement Statement form with your Exclusive Buyer Agent to understand if "all" closing costs are accounted for and within reason for Georgia.===