Tips for Completing a Mortgage Application

Taking out a mortgage can be exciting but stress-filled process. As if budgeting for a home and searching for an ideal property weren’t enough of a headache, the paperwork involved in the official mortgage application can prove to be time consuming and confusing as well. Before embarking on the application process, therefore, it can be helpful to know what information will be required of you, so you can compile all of the necessary documents and details ahead of time.

Personal Information

Of course, any loan application is going to ask you for your basic personal info (name, address, etc.), but mortgage loan applications ask you to detail your owning and renting history as well. Be prepared to enter information pertaining to your previous residences dating at least two years back, regardless of whether you rented or owned property. If you rented, the lender will contact your landlord to obtain information about your rent payments and any eviction histories. If you owned, the lender will require all information pertaining to previous mortgages and mortgage payment histories. If you are taking out the loan with a spouse or family member, keep in mind that both parties are required to provide this information.

Property and Loan Description

In addition to providing a detailed history of your previous residences, you will also need to describe the property you hope to purchase if granted the mortgage for which you are applying. The application will ask you not only to itemize the kind of loan you are requesting (i.e. whether it is a conventional loan or a government subsidized mortgage like an FHA loan), but will also ask you to describe the size and history of the property. You will need to list the year the property was built, the number of different rooms, the square footage, and any other necessary information. If you are taking out a construction loan, be prepared to list all of the anticipated construction and repair work planned.

Employment and Income Verification

Before filling out a mortgage application, you’ll also want to carefully compile information pertaining to your household income, including any assets or investments. Lenders will need to know how much you’re worth—and what kind of mortgage payment you can afford—before processing or approving a home loan. You will also be asked to provide the address and phone number of your current job, as well as a contact name so that the lender can verify your employment. If you have held your current job for two years or less, you will also be required to provide the same information with regard to your previous job.

When filling out a mortgage application, you will also be asked to itemize any liabilities—such as debt—that may impact your ability to make mortgage payments. It is important to  be as accurate and honest as possible when providing this information, as accuracy will help you secure the most appropriate (and, in many cases, the lowest) mortgage rate possible.

Lending Criteria Adjustments: What They Mean for Buyers and Lenders

In recent months, the housing market has seen steady improvement. Home prices and interest rates are up, but so are housing applications and purchases. While prospective homebuyers are demonstrating increased confidence in the market, this positive activity has also been somewhat tempered by the more stringent requirements set in place for lenders by the Consumer Financial Protection Bureau (CFPB) earlier this year.

New Stipulations

In early 2013, the CFPB approved a number of rules that restrict the activity of mortgage lending institutions. These rules prohibit lenders from granting loan terms that exceed 30 years, and they also forbid certain unique, special case conditions, such as periods in which homebuyers only pay interest on the principal loan. Additionally, mortgage fees are not to exceed 3% of the entire mortgage that’s granted, and the debt-to-income level of applicants must not exceed 43%.

Reasoning and Rationale

Some lenders are skeptical of these new regulations, seeing them as an infringement on their rights as independent institutions. However, as the CFPB stresses, the goal behind these new rules is to avoid another national economic crisis like the one triggered in 2008, when a glaring lack of regulation and oversight resulted in ultimately disastrous lending decisions. Relatedly, the new rules aim to decrease the risk involved for both buyers and lenders, as more stringent requirements increase the chances that a buyer will be able to successfully pay off the loan.

Immediate Effects

The individuals that will be most negatively impacted by these new regulations are those in the lowest socio-economic strata, who will likely be forced to rent rather than buy for a longer period of time. The age and income levels of first-time homebuyers will also likely increase, as lenders will require individuals to be more financially stable before granting them a mortgage loan. While this may be frustrating to some prospective buyers, it can also be beneficial, as it requires these individuals to be more financially savvy and conscientious about budgeting and saving to purchase a home.

Long Term Effects

In the long term, the members of the CFPB hope that the new regulations will help ensure that the economy continues to improve, as there will be fewer foreclosures and bankruptcy cases. These changes may also change the way we think about home ownership in America. As many economists have pointed out, America is one of the only countries in the world where owning a home is considered such a priority, and where even the poorest individuals in society are granted home loans. Over time, the number of families who choose to rent rather than buy may significantly increase.

If you are a prospective homebuyer who is about to undergo a mortgage application process, be prepared to face a slightly stricter evaluation and more extensive background check from your lender. While this may slow down the application process a bit, it is important to keep in mind that the lending criteria changes that are causing this delay have been put in place to protect you from future financial problems.

 

The Pros and Cons of the 30-Year Mortgage

Recently, the 30-year fixed home mortgage (by far the most popular home loan available) has come under some scrutiny. Some argue that the loan should no longer be subsidized by private lenders, while others argue that it is the only way that most individuals would ever be able to eventually own a home. For now, though, the 30-year mortgage is here to stay, so here are some pros and cons of the loan that might help you decide if this is the right loan for you.

Pros: Affordability and Stability

One of the biggest draws of the 30-year mortgage is that in terms of monthly mortgage payments, it is often the most affordable. While many lenders recommend a 15-year mortgage, as the shorter loan term will reduce interest rates and help you pay off the loan more quickly, the increased monthly payments are simply not an option for many families. Moreover, the 30-year mortgage is offered at a fixed rate, meaning that your interest rates and payment amounts will not change over the life of the loan, unless you opt to refinance. This can be incredibly useful to those who need to do some long-term budgeting.

Pros: Initial Payments and Refinancing Options

The 30-year fixed rate mortgage also draws most homebuyers due to its low down payment requirements: often, buyers only need to put down 5% of the overall cost. These decreased down payment amounts generally apply even for those who qualify for hefty mortgages (loans can reach $3 million). Another benefit of the 30-year mortgage is that due to the long repayment period, it is fairly simple to arrange for refinancing when necessary. Thus, if interest rates improve over the life of the loan, you can refinance partway through to reduce your overall interest payments. The refinancing option can also be helpful if your house needs repairs, or if you need to consolidate debt under a lower interest rate.

Cons: Issues of Retirement and Major Expenses

For some, the 30-year mortgage option might be ideal. Yet this particular home loan might present some drawbacks to other homeowners, depending on their life stages, job situations, and family plans. For example, a 30-year mortgage would not be the best option for someone who is 15 years away from retirement. It might also present some difficulties to families who will be sending their children off to college at some point, since paying a mortgage on top of college tuition can be incredibly taxing on a family budget.

In an age when people move frequently for work and family-related matters, a 30-year mortgage can also be somewhat of a hassle. Of course, the biggest drawback of the 30-year mortgage is the amount of interest paid over a long term. In short, this mortgage is not the best way to save money on a home loan. To decide if this is the right home loan for you, take the time to plan out a long-term budget, and consider career, family, and retirement plans as well.

How to Prepare for a Home Loan

Since taking out a mortgage to purchase a home will likely be one of the most significant—if not the most significant—financial investment of your life, it’s important to plan for a mortgage application accordingly. This means making sure that all of your finances are in order and that your credit score is strong before going through the pre-approval process or signing on to any mortgage deal with a lender. What follows are some basic tips to help you with these preparations.

Pay Down Debt

One of the best ways to ensure that you get the best mortgage rate available is by improving your credit score, and one of the best ways to improve your credit score is by paying down credit card debt. By reducing your debt to income ratio, you can increase your credit score by as much as a hundred points, while simultaneously demonstrating to lenders that you are a responsible borrower and a sound investment for the bank. Paying off credit cards may sound like an intimidating task, and for those with a large amount of debt, it can take a while—all the more reason to start planning for a hone loan as far in advance as possible.

Avoid Additional Debt 

Once you’ve paid down credit cards and credit lines, it’s also important to avoid accruing any new debt. This may seem like a no-brainer, but it can be very easy to slip back into new debt once old debt is paid off. Individuals feel a newfound sense of wealth and stability once credit cards are paid off, and occasionally use that as an excuse to take out an auto loan or open a store credit card account. This, however, can simply send your debt to income ratio skyward again, which in turn may threaten to lower your credit score and reduce your chances of getting the best loan rate out there.

Save, Save, Save

Of course, anyone who is looking to take out a mortgage should be sure they have enough money saved for a down payment. Yet it’s always a good idea to set aside more than you think you’ll need, as there will inevitably be some unexpected expenses incurred along the way to purchasing your home. For example, you may find your “dream home,” only to discover that the sellers are requesting a few thousand dollars more in a down payment, and will not budge in negotiations. Or you might find a house that seems right for you, but which will require a number of home repairs right away.

Finally, it’s important to keep apprised of the information on your official credit reports. Occasionally, these reports include erroneous information that may be driving down your credit score—and you don’t want to discover this problem when you’re sitting in the mortgage lender’s office. Make sure to request your official FICO scores prior to filling out a mortgage application, and be sure to comb through the documents to ensure that all of the information is correct.

The Ins and Outs of the FHA 203k

Are you a DIY enthusiast looking to purchase a home primarily in order to fix it up? Are you a prospective homebuyer whose budget will only allow you to purchase a “fixer-upper?” Or are you a current homeowner whose house is in dire need of repair? If you answered yes to any of these questions, then you may want to consider the possibility of taking out an FHA 203k home loan, an alternative to a traditional bank mortgage or refinancing option.

What is the FHA 203k?

An FHA 203k is a government-backed home loan designed to foster the rehabilitation of run-down homes, particularly in socioeconomically underprivileged or underdeveloped communities. Since the purchase of these homes can be a risky investment for prospective buyers, the FHA has drastically decreased the required down payment for this loan as an enticement (though, as described below, there are some added costs associated with the 203k). Moreover, the eligibility requirements for the 203k are much less strict than for other mortgages.

Does Your Home Qualify?

While eligibility requirements for buyers are more relaxed, the FHA has set forth some strict stipulations for the home itself. To qualify for the 203k loan, for instance, a home’s original foundation must remain in tact amidst the repairs; in other words, the loan cannot be used to tear down a property and build an entirely new one. The 203k will also only cover certain designated repairs, including HVAC improvements, roof repairs, outfitting for energy efficiency, increased handicapped access, and kitchen or bathroom remodeling, among others. Additionally, buyers themselves must show proof that they will live in the home.

Financial Considerations

One of the financial benefits of the FHA 203k loan is the fact that it bundles the base mortgage together with the cost of repairs, thus allowing homebuyers to kill two birds with one stone. However, because the starting value of the home will be low due to its need for repair, and because the impending repairs will not necessarily guarantee an increase in value, the loans are riskier than others—a fact that will inevitably drive up interest rates. Moreover, because the paperwork associated with the loan can be dense and difficult, it may be necessary to hire an FHA loan specialist to help prepare the application, which will tack on extra fees as well.

Time and Paperwork

Taking out an FHA 203k loan can be beneficial to a homeowner looking to repair a rundown house, but it is also important to note that these loans can be difficult to get, simply because it is more difficult to find a lender who will process the loan. Government loans by nature require more paperwork and involve more red tape than traditional mortgages, and it can take up to 3 months to finalize the loan documents. Thus, if you’re planning to take out one of these home loans, be sure to budget for time as well as for the increased interest rates.

If you do decide to opt for an FHA 203k loan, be prepared to provide all of the standard personal information required for any mortgage application, including income levels, credit ratings, and a list of assets. You will also need to provide an itemized list of the repairs you will be undertaking, as well as the home’s estimated value both before and after the rehabilitation.

 

The Future of Reverse Mortgages

Many homeowners opt to take out a reverse mortgage on their homes in order to finance large home repairs and other major family expenses, such as their children’s college tuition. Others view reverse mortgages as an additional retirement funding opportunity. The recent announcement of possible changes to reverse mortgage qualification criteria, however, may require people to do some extra planning before opting for this kind of home loan.

Previous and Current Trends

Prior to the housing market crisis in 2008, reverse mortgages were fairly easy to get—and when compared to the process of taking out a first mortgage, they might even have been called a breeze. While banks and credit unions are a bit more cautious about doling out these loans, they are still relatively simple to apply for; in fact, in some cases, homeowners do not even need to undergo a credit check. This makes reverse mortgages one of the most popular loan options for people of all ages and economic standings.

Recent Minor Changes

In recent months, the Federal Housing Administration has rolled out some changes that could change the face of the reverse mortgage process. The most significant alteration has been the elimination of the lump sum option. This particular kind of reverse home loan is fairly self-explanatory: it allowed individuals to cash out their entire loan at once, which gave them the chance to immediately pay off debts or put the money into a savings account for retirement funds.

Expected Future Changes

The elimination of one of the most popular reverse loan mortgage options is, according to many economists, just the first of many attempts by the FHA to cut costs and more closely manage the federal housing loan budget. It is predicted that the FHA will continue to raise fees associated with reverse home loans, reduce the amount of money homeowners can take out at once, and begin requiring background credit checks prior to loan approval. Moreover, borrowers will have to produce documented proof that they can pay both their homeowner’s insurance and taxes before being considered for a reverse home loan.

What This Means For You

If you have been counting on the funds from a reverse mortgage to fund repairs, cover debt, or pay for basic expenses during retirement, don’t panic: the changes to reverse mortgages do not mean that it will be impossible for you to receive such a loan. These alterations do, however, mean that you may have to recalibrate your budget in the event that you are asked to pay more in loan fees and interest, or in the event that you must receive the loan in specific installments over time rather than in a lump sum.

If you are close to retirement and are planning on taking out a reverse mortgage to cover expenses, it’s also important to get a good sense of the value of your home, as this will be a deciding factor in the loan amount you are offered. It’s also essential to make sure you have all of your financial affairs in order, with no interest, tax, or loan payments in default, so you can ensure you will receive the loan even if the FHA’s proposed changes go into effect.

Mistakes to Avoid During the Mortgage Application Process

Buying a home can be an exciting experience, especially once you think you’ve finally found the house of your dreams. At times, the relief felt in finally locating such a home can be so overwhelming that it’s tempting to rush into the purchase process—a tendency that can lead to a number of missteps. When applying for a mortgage, it’s important to be cautious, so you can avoid some of the following most common mortgage mistakes made by novice homebuyers.

Spending Too Much

The desire to complete a purchase as quickly as possible can often lead prospective buyers to borrow too much money from a lender. Typically, buyers will not even realize this is happening. This is because lenders calculate mortgages based on an applicant’s income and level of debt, so when they explain these calculations to buyers, the numbers make sense. However, lenders often fail to consider the numerous other expenses in an applicant’s life, which may ultimately make it quite difficult to make the mortgage payments.

Neglecting Credit Scores and Prequalification

Another one of the major mortgage mistakes that homebuyers make is applying for a loan before they’ve been able to repair a bad credit score.  Ideally, individuals should have scores of 720 or higher, in order to receive the best interest rates.  In fact, a score below 680 can end up costing homeowners thousands of dollars in added interest costs. Thus, before diving into the mortgage application process with a lower credit score, consider whether it would be worth the added cost to buy so soon.  To get the best sense of what your interest rates will be with your current score, be sure to go through an official prequalification.

Choosing the Wrong Loan Term

Those who rush into the mortgage application process also tend to take the first loan term suggested, which is typically a 30 year mortgage. Though these are the most popular options available, they are not necessarily the best for everyone. If there is a chance that you might relocate before 30 years are up, consider a 5-1 ARM loan, which is an adjustable interest rate loan in which you pay the lowest interest rates for the first 5 years, at which point rates typically go up. This way, you can end up saving some money if you need to sell. On the other hand, those who are closer to retirement should consider a shorter loan term (either 10-15 years), so they can get the most out of their investment.

The best ways to avoid making these mortgage mistakes is to plan your budget carefully prior to house hunting or meeting with a lender. Set limits for how much you’ll be able to spend on a mortgage so you don’t get roped into borrowing too much, make sure your credit is in order before applying, and take the time to go through the prequalification process. All of these steps will help ensure that you make a sound decision about a serious investment.
 

Navigating the Loan Modification Process

At some point or another, many people face unexpected financial trouble that makes it difficult, if not impossible, for them to make their mortgage payments. In the face of these financial difficulties, whether they arise from job layoffs or other added expenses, some fear that foreclosure is their only option. This, however, is not the case—these days, loan modification is available as an alternative.

What is Loan Modification?

Loan modification is similar to mortgage refinancing in that the terms and conditions of the loan and/or loan payments are altered partway through the repayment. Whereas a refinance replaces an existing mortgage with a brand new one, however, loan modification simply adjusts the monthly principal and interest payments to accommodate drastic changes to a homeowner’s financial situation. Typically, loan modification periods are only temporary, intended to help homeowners just until they can recover from their financial issues. Some programs may last several months, while others can last a couple of years.

Government Loan Programs

In order to assist those families who are falling behind on their mortgage payments, and who thus may require a loan modification, the government has designed a program called The Home Affordable Modification Program (HAMP). This program was set up in response to the mortgage crisis of 2008, when thousands of individuals faced possible foreclosures. To help such struggling families keep their homes, HAMP sets forth guidelines to help mortgage lenders and borrowers as they navigate the ins and outs of loan modification.

HAMP Requirements for Borrowers

In order to qualify for HAMP assistance, homeowners must first be able to demonstrate clear evidence of financial struggle. To be eligible, the original mortgage must also have been approved no earlier than January 1, 2009.   Homeowners must owe less than $730,000 on their mortgage (interest not included), and must also be able to prove that their current mortgage payment is at least 31% of their monthly gross income. Homeowners will also need to provide a significant amount of financial info, from income report documents to receipts from social security and disability payments, depending on the scenario.

HAMP Requirements for Lenders

As mentioned above, HAMP also sets forth guidelines for mortgage lenders, to ensure the smooth and efficient processing of any loan modification plans. For example, lenders are required to collect specific information from borrowers, including at least two of the most recent pay stubs from each person listed on the original mortgage, a detailed outline of the homeowner’s budget, the previous year’s tax returns, and a signed affidavit provided by HAMP. The servicer or lender in charge of the modification then submits all of the required documentation to HAMP coordinators.

If an applicant is approved for a loan modification, it is typically on a trial basis. For instance, most borrowers get the green light for a 3-month conditional modification; if they are able to successfully make the required payments during this time, then they can begin the official modification term. If they fail to make these payments, then foreclosure may unfortunately be the only alternative.

 

 

 

The Pros and Cons of Seller Financing

While many potential homebuyers choose to obtain their mortgage through a bank or other lending institution, it is also possible to receive a home loan from an independent seller. This option, referred to as seller financing, keeps all financial transactions between the buyer and the seller, removing the participation of a third party lender. While this can be a risky enterprise with a few drawbacks, there are a number of benefits to selecting this route for your mortgage.

Expedited Sale

One of the benefits of obtaining seller financing as opposed to a bank loan is that it can speed up the sale process. The process of applying for a loan through a bank can be quite time consuming, particularly if a loan applicant goes through a pre-approval and pre-qualification process before finally signing into the loan. When a seller manages the mortgage financing, the application is simplified, with fewer steps required to obtain their approval.

Simpler Qualifications

Another reason that seller financing can expedite the process of closing on a home is because the qualifications for the loan are much more relaxed. Part of the reason that applying for a bank mortgage can take so long is because of the stringent standards and restrictions for approval. An independent seller will most likely run a credit check to ensure that the buyer’s history isn’t a disaster, but that is typically the extent of financial background checks. Moreover, an seller will also grant loans to those with lower credit scores, which can be a saving grace to those with a spotty credit history.

Reduced Costs

Opting to go with seller financing can also reduce or entirely eliminate the fees associated with closing on a home. When a homebuyer receives a loan from a bank, he or she will have to pay closing costs to the lender and broker who have helped finance the loan and drawn up the mortgage papers. These costs are eliminated in a seller-financed mortgage. An independent seller who is anxious to sell will also be more likely to cut applicants a deal in other areas as well, and thus may accept lower down payments.

Drawbacks

There are specific reasons why seller financing is not more popular, however. First of all, though a legal and binding contract is still drawn up and signed by both parties, entering into business with a seller as opposed to a bank can be risky, since the transaction does not have the backing of a large and reputable institution. Moreover, while some sellers will grant home loans to those with a less than stellar credit history, in return they may significantly increase the asking price or the interest rates.

Homebuyers who need to purchase a home quickly without the hassle of working with a bank or those who fear their applications may be rejected due to a poor credit history may find seller financing to be a viable option. To reduce the risks involved with this kind of mortgage, applicants should be sure to have all papers reviewed by a lawyer or real estate professional, to ensure that the rates and loan terms are fair and reasonable.

Cautions and Caveats: Protecting Your Mortgage

Obtaining a mortgage is a major accomplishment, and should be something to celebrate. Unfortunately, however, signing the papers on your home loan doesn’t mean that it will always be smooth sailing down the line. Once the mortgage is set up, there are still a number of different factors that may come into play, which may change the status of your loan. What follows is a list of some of the details of which every borrower should be aware.

What To Know About Escrow

Many first-time homebuyers express some confusion over the role of escrow in their mortgage.  After taking out a home loan, a lender will set up an escrow account for the buyer. A portion of the monthly loan payment will be deposited into this account, and will be used to pay taxes and insurance on the home. This is not mandatory, but can save homeowners the stress of being hit with a large annual tax or insurance payment all at once. Make sure to speak with your lender or loan servicer about escrow, to set up the option that’s best for you.

Effects of Divorce and Ownership Transfer

Many homebuyers are couples, and thus there are often two signatures on all of the loan documents. In fact, in some states, the law requires that both parties living in the home be listed as co-signers on the loan. In the event of a divorce, this can be somewhat of a legal headache; one spouse will need to transfer ownership of the mortgage to another, and this will involve a trip to court. While no one wants to plan for ownership transfer under these circumstances, it is a good idea to at least be aware of the state laws and legal repercussions of a divorce on the status of a mortgage.

Be Aware of Your Rights

Many borrowers are not aware that they have certain rights that will help protect their mortgage and their home in the event of any financial difficulties. For example, there are strict rules that dictate how a lender can and should contact a borrower in the event of a delinquent loan: they are not allowed to call someone at their place of employment, they can only call during certain hours, and they must state the delinquent status in a letter mailed to the borrower. There are a number of other dictates set forth in the loan agreement, so make sure you know how you are protected, just in case.

Avoiding Fraud

There are certain lenders and brokers who may attempt to take advantage of borrowers by inflating the value of a home or pocketing some of the equity. For example, occasionally a seller will work with a broker to flip a house, selling it first to a “set-up” buyer for an inflated price, who will then help sell it for an even higher price to an unsuspecting buyer. When this happens, a borrower may take out a much higher mortgage than necessary. In order to avoid fraudulent deals like this, make sure to work through reputable, licensed brokers and lenders, and avoid buying directly from an independent seller.

It can also be helpful to hire a lawyer to help navigate some of these issues. While this will add to the expense of the mortgage process, it can save hundreds or even thousands of dollars that might have been lost in a misguided, fraudulent, or poorly constructed deal.