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STEPS OF THE MORTGAGE PROCESS

by Jim Parker,

Exclusive Buyer Agent

Before contacting any lenders, perform some calculations to estimate monthly payments and see if any fit within your budget.

Try to limit your monthly payments to about 30% of your monthly gross income.

Ball Park Example: 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. This is just a guess at the principal & interest. Your final monthly mortgage payment you'll actually make will also include property taxes, mortgage insurance and hazard/homeowner's insurance (and don't forget any monthly allocation for HOA dues).

Use my Payments & Loans Worksheet for a more thorough calculation.

Note: 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 an FHA loan.

MORTGAGE CALCULATOR & RESOURCE WEBSITES

Mortgage - Refinance Calculator from Realtor.com

Mortgage - Home Purchases calculator from Bank Rate- Note: Add another 20% of the monthly mortgage Principal & Interest payment for homeowner's insurance, property taxes, and mortgage insurance

Mortgage Calculator from Zillow

• Great information about mortgages - Mortgage Reports.
• The HomeFinder section of the Sunday Atlanta Journal-Constitution for different types of loans and lenders.
• You may even wish to ask 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,.

The loan type you choose is determined by..."What's important to you?"

• Low monthly payment? - Then maybe you can put alot of money down and the lower loan balance on a conventional loan.
• Low down payment? - Then maybe an FHA loan is good and allows you to hold money back for any emergency repairs
• Low interest rate? - Great credit scores along with 20% down should give you the best rates.

Become familiar with the different types of mortgages available:

Conventional (usually requires 5-20%+ down & less stringent appraisal guidelines and you may avoid mortgage insurance);

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 but still carries a funding fee which can be financed).

*****CHOOSING A LENDER*****

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 because the contract will normally limit the amount of time to perform certain tasks to days not weeks. 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.)

You'll need to prove two things to get a mortgage to buy a home:

(1) You're legally earning enough money to make your monthly mortgage payments (i.e., what you can afford), 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 but not preapproved.

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.

• "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 guarantee that you will be approved for the loan. This just says you "might" be qualified, not that you are approved and is a weaker position for contract negotiations.

• "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. And you may need to provide the long list of bank statements, tax returns, W-2 pay stubs, explanations of large deposits, investment statements, etc,., that are needed for full loan approval. The lender then can provide you with a letter stating that you've been pre-approved for a certain loan type and amount. This will give you more leverage to negotiate in a competitive bid situation.

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 stronger financial 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.

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

The term "closing" simply means that you sign the final loan paperwork at an attorney's office and at the same time the title (i.e., ownership) of that property is transferred to you (i.e., sign on the dotted line on lots of forms). This "loan closing" (i.e., home purchase) process is where Buyer, Seller, and Lender finally meet to transfer money, property ownership, and keys.

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.). 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. 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