CHOOSING THE BEST LOAN

How do I choose the best loan?

What type of loan is best for me?

Finding a mortgage loan begins with education. There are many sources of information, including web sites, newspaper/magazine articles, mortgage books, consumer seminars and workshops, financial planners, real estate agents, mortgage brokers and lenders that can assist you in your search.

Finding the right mortgage loan for you depends on many factors:

  1. Your current financial situation.
  2. How you expect your finances to change.
  3. Cost of your new house.
  4. How long you intend to keep your house.
  5. How comfortable you are with your mortgage payment changing.

Guidelines that Lenders Use

Lenders use certain guidelines to determine the mortgage amount they will lend a prospective home buyer, two such guidelines are housing expenses and long term debt. Lenders look for housing expenses (including mortgage payments, insurance, taxes and special assessments) that do not exceed 25% - 28% of the homeowner's gross monthly income.

For FHA (Federal Housing Administration) loans, this figure should not exceed 29% of the home buyer's gross monthly income. With loan guaranteed by the VA (Department of Veteran's Affairs), lenders measure prospective home buyers with "Residual Income," or the monthly income minus expenses. The remainder is then measured against geographical and family size data to qualify the borrower.

The usual definition of long-term debt is, monthly expenses extending more than 10 months into the future and these expenses should not exceed 33% - 36% of the homeowner's gross monthly income.

What types of loans are available?

Knowing which type and term is right for you could prevent needless headaches and could save you thousands of dollars. Most lenders offer unique mortgage programs with loans specifically tailored to meet the needs of:

  1. First-time homebuyers
  2. People with little or bad credit histories
  3. People with no down payment
  4. Teachers
  5. Veterans
  6. Doctors

Loan Types

Combination loan
A combination loan combines a first and second mortgage for up to 90% of the property's value in a single loan application. This way you can avoid the additional costs of private mortgage insurance (PMI), the higher rates of a jumbo loan or both.

Commercial
If the primary function of your property is to host a business then the loan would be considered a commercial loan.

Construction
This loan type choice is if you are building a home. Lenders specializing in construction loans can lend you the money, whether or not you own the land. If you own land, they will lend you a percentage of the properties future value. If you don't yet own land, they will lend you a percentage of its existing value.

Debt Consolidation
If you have many creditors at high interest rates, such as,credit cards, personal loans, car and boat loans, you can combine everything into one loan with a lower interest rate and payment.

FHA - VA
Select the FHA or VA purchase or refinance options if the loan you are looking for would be a government insured loan through the Veterans Administration or Federal Housing Administration.

Home Equity Line of Credit (HELOC)
 A HELOC is a second mortgage that works like a revolving credit line.

Home Improvement Loans
Consider this option if you are planning a major improvement to your existing home and you don't want to refinance your first mortgage. Home improvement loans are typically second mortgages because you are not replacing your fist mortgage.

Jumbo loans
These are loans for homebuyers who require larger loan amounts. Jumbo loans are available in both fixed-rate and adjustable-rate mortgages and generally have higher interest rates due to the amount of money borrowed.

Refinance
If your home loan has higher interest rates than current rates, you can get a new loan for your home with a lower interest rate and use the money to pay off the old loan.

Reverse Mortgage
A loan which gives the borrower a steady monthly income. When the borrower dies the home is sold and the loan is repaid. This is particularly well suited for senior citizens who have paid off their homes.

Fixed or adjustable rate?

Fixed Rate Mortgages
The most common type of mortgage loan, with a fixed rate your monthly payments for interest and principal never change, (other costs like property taxes and homeowners insurance may increase, but your monthly payments will be the same for the life of the loan). Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years - the 15 year and 30 year are the most common. "Biweekly" mortgages are also available, they shorten the loan by making half the monthly payment every two weeks, you make a total of 26 payments (since there are 52 weeks in a year) or 13 "months", every year.

Fixed rate fully amortizing loans have two distinct features.

1. The interest rate remains fixed for the life of the loan.
2. The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

Early in the amortization period, a large portion of the payment is applied towards the interest, as the loan is paid down, more of the monthly payment is applied to the principal. A typical 30 year fixed rate mortgage takes 22.5 years of payments to pay half of the original loan amount.

Adjustable-rate mortgage (ARM)
The interest rate on an ARM will changes over its lifetime. ARMs start out like fixed-rate mortgages initially, the interest rate and your monthly payment remain the same, this time period can vary from several months to several years. After that, the rate and your monthly payment can go up or down for the remainder of the term. In general, ARMs come in terms terms of 15 to 30 years.

An ARM rate is calculated by the lender by adding a "margin," usually two to four percentage points, to the index.

The interest rate then goes up or down, depending upon the current economic trends. The rate you pay on an ARM is based on that fluctuating index plus a fixed extra amount (margin). Different indexes go up and down faster than others -- both the index used and the margin can vary among lenders.
The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill (used to set rates on 30-year fixed mortgages).

Some other important questions to ask:

  1. Does the ARM include a rate cap? Rate caps limit the size of interest rate changes both for periodic adjustments and for the life of the loan.
  2. How often does the rate change? Some ARMs may adjust annually, but some may adjust more frequently.
  3. Can you convert your ARM to a fixed-rate mortgage?
  4. Is your ARM assumable?
  5. Are there any penalties for paying off your loan early, (a prepayment fee)? Being able to prepay your ARM will allow you to refinance if rates go down.

Locking in an interest rate

Depending on how far along you are in your home search, you may think about locking in a rate.

  1. Lock in - Secure the interest rate you want, lock-in periods vary, usually from 30 to 90 days. Generally, you'll be allowed to lock in your rate after you have been prequalified and approved. Ask about any fees.
  2. Float down - A float-down feature may be available, which lets you lock in a rate then lower that rate one time if rates go down during the lock period. Ask about any fees associated with this feature.
  3. Buy down - You pay a percentage of the loan amount, also known as points, to get a lower interest rate on your loan. Buying down your interest rate may make sense if you want lower monthly payments and can afford the cost of points.

Comparing loan costs

Closing costs are the fees you pay to get a loan; they include fees that your lender charges, including points and various third-party fees.

How do I choose a Mortgage company?

What to Consider in Making Your Decision

Determine the mortgage company that you;
a.) feel the most comfortable with,
b.) can trust and feel confident in.

There's more to it than the lowest advertised interest rate, shopping for service takes time and work, your definition of good service could contain:

  1. Providing a free pre-approval.
  2. The loan officer should be timely with all communications and commitments and they are delivered in writing.
  3. The mortgage company notifies you of all fees.
  4. The mortgage company provide guarantees that promote good service (closing date guarantee, rate match guarantee, etc.)

Along with selecting the mortgage source, you'll also have to compare loan costs, including the interest rate, broker fees, points (each point = 1% of the loan amount), prepayment penalties, the loan term, application fees, credit report fee, appraisal and third party costs.

Selecting the right mortgage company can save you money upfront and over the life of your loan. The questions provided below are a step by step guide to help you find the best deal.

1. How long has your company been in business?
It's a good idea to check out any business that you are unfamiliar with, a few places to start are the Better Business Bureau, the Mortgage Brokers Association and Mortgage Bankers Association.

2. Are you a lender or a broker?
A mortgage broker's job is finding you the best loan - they don't lend money. A good broker will shop for you, explain all of your options and assist you with the paperwork.
Mortgage brokers are in the business of selling mortgages. The interest rate you receive and the points you pay should be the same as if you went directly to the lender for the loan. The commission that the broker receives from the lender is negotiable, don't hesitate to ask the broker what his commission will be.

3. How are you paid?
When a loan officer is paid based off a percentage of your loan amount, it is very likely they are adding to your rate to improve their compensation. Example:
You are purchasing a home with the loan amount of $100,000. The loan officer has a rate that they could offer you at 7% with zero points, instead the loan officer quotes you 7% with 1 point (1 point = 1% of the loan amount, which equals $1000).

4. Do you maintain the servicing on your loans?
Some companies maintain their servicing, meaning that after closing the loan, you payback the mortgage provider who initially provided you with the mortgage. If you do not like change than this could have an impact on the selection of your mortgage provider.

5. Do you have prepayment penalties? (Is there a monetary penalty if you pay the loan off early)
If you pay your mortgage off before the specified time, do you have to pay the mortgage provider an additional fee over and above what is owed in principle and interest. Sometimes prepayment penalties are only on certain loan types, make sure to ask the provider about the program you are seeking.

6. When can I lock my loan and what type of lock options do you offer?
To lock a rate, fill out a mortgage application first and a credit report is run with a mortgage provider. This step will eliminate having too many options open for the mortgage provider to adjust your rate in the loan process. You will also want to check if they have lock options with the ability to lower your rate, if interest rates drop while you are shopping for a home.

7. Do you charge to lock my rate?
Most mortgage providers charge you something to secure a rate. You want to find out how much and what happens to the fee if the property you are purchasing falls through.

8. How long can I lock my rate?
If you are not closing for 90 days, and the mortgage provider indicates that you can only lock in for a maximum of 60 days, then consider the next mortgage provider on your list.

9. Do you have in-house underwriting and processing or do you outsource it?
If a mortgage provider outsourcers any part of their process, this means that you will be working with more than just one company in obtaining your mortgage. How is the service with the other companies?

10. Do you provide a free Good Faith Estimate (GFE) on rate and costs prior to my deciding to go with you?
This is crucial in making your final decision, consider a Good Faith Estimate as a price tag prior to buying.

10 Steps to get a Mortgage

Prepare yourself and consider all the factors when making that big investment - purchasing a home. It's important to research, ask questions, and study the process carefully - after all you could spend 25 to 40 percent of your gross income paying for your home. We've compiled resources to help you stay on the right track to getting a mortgage loan and buying your home.

1. Homework
Study and compare your choices in types of loans, where you get your loan from (banker vs. broker), consult an expert on any legal or financial matters you don't understand. Look into mortgage brokers, seller financing, a family loan or insurance company financing, there are more options than a bank. The cost of the mortgage shouldn't be your only qualifier, select the company that you have confidence is reputable and will deliver the loan with the terms and costs they promised. Ask family, friends and business professionals for referrals.Don't choose a lender just because they have the lowest rate, remember to consider the total cost of your loan including the APR, loan fees, discount and origination points.

2. Check your credit
Pull your credit reports before you apply for a mortgage, a preemptive examination of your credit report gives you time to correct errors, avoid any surprises, and otherwise clean up your credit act.

3. Get pre-approved, not just pre-qualified
You will have a better chance of getting a seller to accept your offer by being as prepared as possible. Put yourself in the sellers' shoes, you (as the seller) receive multiple offers to purchase your property, the buyer (you...a complete stranger) is asking to take your property off the market for at least two to three weeks while they apply for a loan.

  1. "Pre-qualified" - the mortgage professional is making a quick credit check about how much you can borrow based on information you've provided.
  2. "Pre-approved" - the mortgage professional has verified income, expenses, assets, liabilities and credit, as a result, much of the paperwork for the loan has been completed.

When meeting with lenders, always ask how they define each term and what additional steps will be required to obtain a loan.

4. Choose the right loan for you
A loan is a product and one size doesn't fit all. Choose the loan that is right for you; if you plan on moving within a few years maybe an adjustable rate mortgage (ARM) with a low introductory rate or a zero-point loan. If you plan on staying in a home longer (or for life), perhaps look for a fixed rate and consider higher up front costs to obtain a lower rate. Be sure to look at initial interest rates, future interest rates and payments (if different), and the possibility of prepayment penalties. Investigate all your options, do the math and compare your choices side-by-side:

  1. What can you afford? - Your credit report is the best indication of your credit worthiness. Excessive credit is almost as bad as poor credit or even no credit. Even if you pay your bills on time, lenders tend to focus just as much on how much credit you have available as they do on timeliness. So being up to your ears in car loans and credit cards is a sure way to be turned down for a mortgage. Postpone any big ticket purchases until after you buy your house. 
  2. Loan Length - The term (length) of a mortgage is 30 years by industry standards, but 15- and 20-year-term loans are also available. With a shorter-term loan, you can reduce your interest rate, (a 15-year rate is typically one-quarter to one-half percent lower than one for 30 years). You may need a conventional 30-year mortgage if you don't have sufficient long term income to handle the higher monthly payments of a 15 or 20 year loan. You can always make extra payments and save a bundle. Consider your monthly budget because the shorter the loan term (length), the higher the monthly payments.
  3. Fixed Rate or ARM? - Fixed-rate mortgages protect you from the risk of rising interest rates, but you'll end up with a higher rate should interest rates fall. ARMs are a good choice for someone who knows their income will rise or at least keep pace with the loan rates periodic payment cap. If you plan to move in a few years and aren't concerned about the possibility of a higher rate, an ARM could be a good choice.

5. Shop for home insurance early
Start shopping for insurance as soon as you have an accepted offer. Don't wait until the last minute to get insurance, you'll get better coverage and better rates if you have time to shop around.

6. Get a home inspection
Independent home inspectors examine for roof and basement leaks, the mechanical systems and how long the appliances should last. It's highly recommended that you get property, roof and termite inspections unless you're buying a new home with warranties. Inspectors can't report on things they can't see, but their trained eyes are better than yours. Inspection reports are great negotiating tools when asking the seller to make needed repairs and this way you'll know what you are buying.

7. Get everything in writing
A written contract will override a verbal contract. Your state may require that contracts for the sale of real property be in writing.

8. Don't sign anything without reading it
Review in advance, any documents you'll be signing. Many of the documents you'll sign are standard forms and are usually available for review (even though specifics of your loan may be unknown early in the transaction). You won't have time to read all the documents at the closing.

9. Know your rights
Every consumer has the right to equal access under the law, to credit and the right to full disclosure of all costs associated with obtaining a mortgage. It's up to you to review and know your rights.

  1. The Equal Credit Opportunity Act (ECOA) provides for equal access to credit regardless of:
      - Race
      - Religion
      - Age
      - Color
      - National origin
      - Sex
      - Marital status
      - Income from public assistance programs
    There are additional protections if you have a physical or mental disability. The ECOA also requires that you are notified within 30 days of the completed loan application that your application has been approved as requested, modified, or rejected. Specific reasons for rejection must be given, in writing, to you at the time of rejection or upon your written request for the reasons.
  2. Real Estate Settlement Procedures Act (RESPA) requires lenders to give you advance notice of estimated closing costs in purchase and refinance transactions.
  3. Truth-in-Lending Act requires all lenders to fully disclose - within three business days after receiving your loan application - a written statement of fees, terms and conditions associated with a loan, including the Annual Percentage Rate (APR.), which reflects the cost of obtaining credit.

10. Allow for delays
Everyone wants real estate transactions to close on time, but usually transactions are delayed - sometimes a week or more. Let's say you ask your landlord to terminate your lease the day of your closing, then two days before your scheduled closing date the transaction is delayed. What happens now? Avoid this type of stress by terminating your lease one week after your scheduled closing, if there are any delays, your housing requirements are covered.