When should you start the mortgage process?

After contacting us, the first step is to get pre-approved for a loan. This is important because it is often difficult for somebody not in the industry to estimate how much the bank will loan them. A huge mistake would be to begin the process by looking for a home, and then find out that you can only afford a home that costs less than the ones you have been looking for. If this happens, it can be difficult to find a home that you like since you are used to seeing homes that are more expensive.

Do you need to sell your existing home before you apply for a loan?

The answer to this question is "No." You can apply for a new mortgage loan before you sell your current home. However, depending on your income and debt levels, you may be required to sell your current home before you can close on your new loan.

How do you choose a lender?

Trying to choose a lender can be a difficult task. Instead of going all over town from bank to bank for the best pricing, have a mortgage broker do it! Choose a mortgage broker that can shop for the best loan at the best possible price. Mortgage brokers also have access to banks that you don't, which will allow you the freedom to do something else. Be sure to also pica a broker that educates you on loans, so you can pick one with your short and long term goals in perspective. Here at Lincoln Pacific Realty & Mortgage, we make it easy on the home buyer. We have access to hundreds of loan products, and if you choose, we can both finance and represent you as your REALTOR.

What are ARM Loans?

ARM stands for Adjustable Rate Mortgage. Almost all loans are amortized over 30 years, meaning the installment debt is calculated over 30 years for repayment. Depending on how long the payments are fixed, the rate (directly linked to payment) goes up. For instance, if your payment is the same for 30 years, your rate would be higher than if your payment was only fixed for 5 years. Your payment is fixed for 5 years before it adjusts (for the remaining 25 years) usually upward, but it is at a lower rate (directly linked to payment). "Adjustable Rate," means your rate is fixed for "X" amount of time before it adjusts.

Most ARM's have rate caps to regulate how much a rate can rise. For instance, if you have a 5 year ARM, the payments are the same for 5 years. After that time, let's say the payment can go up X% every 6 months. If the rate cap is 9.5%, it can go up every 6 months until it reaches 9.5%. But it can never go higher than the rate cap. Arm's can also decrease if the economic market dictates it to do so, but we may not see that for some time. If you're only going to be living in your property for a short period of time, you may want to choose an ARM as opposed to a 30 yr. fixed loan. Common Arm's include a 3/1, 5/1, 7/1, & 10/1.

What are fixed rate loans?

With a conventional fixed rate loan, the monthly payments do not change. The interest rate remains fixed throughout the life of the loan. While a fixed rate loan offers the borrower security that their payment will not increase, it is generally a higher rate than an ARM (rate is directly linked to payment). A 30 yr. fixed loan also does not allow the borrower to take advantage of interest rate decreases. In that case a borrower would need to refinance with a new loan to reduce the interest rate.

Because of the changing economy, employment changes, and extreme market changes, most homeowners do not stay in their home for 30 years. If there is a significant difference between the rate of a 30 year fixed loan and the 5/1 ARM payment, a homeowner buying a 1 bedroom condo that plans to have children in the near future may not want to pay extra for the stability of stable payment for 30 years. If they are going to sell the home in a few years, it may be wise to take the ARM over the 30 year fixed loan.

A borrower may want a 30 year fixed loan if the rate is the same or very close to the ARM. The determining factors for short term (ARM) and long term loans are different, & sometimes they are very close in rate. If a homeowner is looking to stay in their home for life, maybe it's their dream home; then the fixed loan would be a good choice. Fixed rate mortgages are usually 15, 20, or 30 years, but loans of up to 40 years can be found with some lenders. The longer the term of the mortgage is, the lower the monthly payment.

How often do mortgage interest rates change?

Due to market fluctuations, interest rates change daily. Many lenders will allow you to lock and/or float the interest rate once you have been approved for a loan. Once you find a home to purchase, you will "lock" your loan. This means that for a certain number of days (15, 30, 45) your loan is guaranteed to remain the same. For example, if you enter into a 30 day escrow, and lock your loan with a 30 day lock, you have to close your loan in 30 days. If you do not close the loan by the 30th day or before, you will have to pay extra to keep that same rate that you locked. This makes it very important to get everything to the lender so your loan is not held up. If you do not submit the correct paperwork that the lender is asking for, it will delay the funding of your loan. If you have promised the sellers you would buy the home in 30 days, and the bank cannot close the loan because you are not giving them the right information, the seller can pull out of the deal, you could possibly lose your earnest money, and you will lose the rate you locked in.

What documents do you need to complete a loan application?

Depending on the loan program you are applying for you may be asked to provide a variety of documents. Documents may include but are not limited to: a fully executed agreement for the property being purchased, two months bank statements for all accounts, copy of your most recent pay stub, previous W2's, divorce decree, copy of a rental lease, homeowner's insurance policy, flood insurance policy, retirement accounts and any other documents that may be required to approve your loan. If you are stating your income, instead of documenting it, then the procedures are different. Most self-employed people state their income.

How much of a down payment will you need to purchase a home?

The minimum down payment required depends on the loan program you select. Most lenders offer loans with various down payment options, including no down payment and low down payment programs.

How much money will I have to come up with to buy a home?

The amount of money required to purchase a home depends on a number of factors, including the cost of the house and the type of mortgage you choose. In general, you need to come up with enough money to cover four costs: earnest money, down payment, home inspections/appraisals, and closing costs. When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. This is usually 1-3% of the cost of the home, although it is always negotiable. If your offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. The amount of the down payment is up to you. Besides closing costs, you will have to pay for the home inspection ($250 and up) and the appraisal ($350 and up).

What are closing costs?

Closing costs are the costs associated with finding a bank, processing the paperwork and organizing the loan to buy a house. Closing costs which you will pay at settlement average 3-4% of the price of your home. These costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise. These costs can be financed into the cost of the home or paid for by the seller, so don't let this scare you out of buying a home. Wrapping these costs into the loan will make a very small increase in your monthly payments, and if the seller pays, that's even better!

What are points?

One point is one percent of the loan amount (for example, on a $100,000 loan, 1 point equals $1,000).

What does a mortgage lender consider when reviewing a loan application?

There are three categories of information most lenders look at when reviewing a loan application. The applicant's personal information, the subject property information and the mortgage program information. Personal Information includes your income, assets, debts and credit history. This information is used to help determine your ability to repay the loan. Property information includes using an appraiser to prepare an appraisal report on the property. The appraiser compares your home to other similar homes in your area to determine that the loan amount being requested is acceptable to the lenders investors. The mortgage program information includes such factors as down payment required, repayment terms and length, points, and interest rates.

How does my credit score play into my loan?

One of the things a bank takes into consideration when lending you money is how likely you are to NOT make the house payment. Your credit score is one of these factors. If you have an outstanding credit score, in the bank's point of view, the probability is very low that you won't make your house payment. If your credit score is very low, the bank thinks the probability increases that you WILL NOT make your house payments. There are loans for both scenarios, but if you have a lower credit score your rate (directly linked to payment) may be higher. The bank want's to be paid more for taking what they consider a higher risk investment. Think about it this way, if you had 200k in the bank, and Microsoft wanted to borrow it, you would probably loan it to them because the probability of Microsoft being able to pay it back is very high. You would make X percent on your money. Now if you were loaning your 200k to Enron, you would really be taking a risk that you may never see that money again! If you decided to loan your money to them, you would certainly charge them more for your increased risk. You would now make X+Y on your money.

So what will my mortgage cover?

Most loans have 4 parts: (PITI = Principle, Interest, Tax & Insurance.) Principal - the repayment of the amount you actually borrowed; Interest - payment to the lender for the money you've borrowed; Homeowners insurance - a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and Property Taxes - the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year.

How much will the bank or lender allow me to borrow?

The amount of home you can afford is directly linked to how much the bank will lend you. A buyer may think they can afford more than the bank will lend them, but the bank may be uncomfortable lending that amount. The bank has the final say on how much they lend. They base the loan amount on what they call the "Back End Ratio" and the "Front End Ratio." Please contact us to figure out this amount.

Why is the Annual Percentage Rate (APR) different from the interest rate?

The APR is a rate that reflects the total cost of your mortgage loan expressed in terms of an annual interest rate. The APR reflects factors including the interest rate on your mortgage loan, the term of the loan, and the other applicable costs of financing such as points, fees and certain closing costs. Your monthly payment is calculated based on the mortgage note rate, not the APR. The APR will be higher than your interest rate, especially if you are paying any points. Look at it in terms of formulas.

In this scenario, let's say you are buying a home for $742,000, and you are financing in 8k for closing costs.

________Rate___________ Loan ______Amortized _______ _Monthly Payment
At ______6.5%, ________ $750,000 ____ Over 30yrs ____= _______$4,740.00.

To find the APR, you look at the equation backward, and take out the finance charges.

____Mortgage Payment ______Amortized _______Loan ___________APR Rate
________$4,740.00 ___________Over 30yrs _____+$742,000 ___=_______ 6.6%

This should give you a basic idea of how APR is calculated.