FINANCING

Getting Started
Check your credit rating
Credit scores range between 400 and 800. A score higher than 620 is considered good; a score higher than 680 may possibly get you a lower interest rate.

Securing Financing
In addition to checking your credit rating, you will need to create a file with all your important financial documents:

• Financial statements
• Bank accounts
• Investments
• Credit cards
• Auto loans
• Recent pay stubs
• Tax returns for two years
• Copies of leases for investment properties
• 401K statements, life insurance, stocks, bonds, and mutual account information

Things to avoid
Do not make major purchases: Lenders look at your debt-to-income ratio when deciding if you qualify for a mortgage. Your debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt - including credit cards, student loans, installment debt and car payments. Making a major purchase, like buying a car, can weaken your position. For example, suppose you earn $5,000 a month and have a car payment of $400. At an interest rate of approximately 8% on a thirty-year fixed rate loan, you would qualify for approximately $55,000 less than if you did not have the car payment.

Don’t Move Money Around: Your lender will ask you to provide statements for the last two or three months on any of your liquid assets, including checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts, there may be large deposits and withdrawals in some of them. The mortgage underwriter will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious. Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for the lender to properly document.

Shop For a Loan
How to find a lender
In addition to calling on local banks, you can also find and apply to lenders over the Internet and through referrals from your REALTOR®. We can suggest lenders who have proven themselves competitive and capable even with problem properties or poor credit.

Choosing the Right Lender
Interview several lenders to evaluate their:

• Ability to explain things clearly
• Interest rates, costs and fees
• Loan programs that suit your credit profile

Choosing the right kind of loan
Your lender can help you select a loan program to suit your needs. The three most popular loan types are:

• Fixed loan: Assures your monthly payments will stay the same over the life of the loan. Fixed rate loans may be best if you intend to hold the property for a long period of time.
• ARMs (adjustable rate mortgages): ARM’s may be suitable if you plan to sell or refinance your home within the next few years. The starting interest rate is typically lower than a fixed rate loan, but it is important to understand the index, the readjustment interval and the capitalization rate.
• Intermediate ARMs: Also called Hybrid Loans, these can offer fixed interest rates for a set number of years, after which the interest rate adjusts with the market every 6 months or year thereafter.

Know the Numbers
Credit report
Your lender will order a review of your outstanding loans and repayment history from a third party credit agency. It typically costs under $50 to check your credit.

Application / processing fee
This fee, typically a few hundred dollars, is charged to cover the lender’s work to evaluate your ability to repay the loan. Some lenders will credit this back to you upon closing.

What is APR?
The annual percentage rate is the sum total of all your borrowing costs expressed as a percentage interest rate charged on the loan balance. An original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed.

Indexes
The interest rates on variable loans readjust periodically based on changes in an index, typically the Federal Funds Rate.

Points
In order to offer lower interest rates, mortgage companies may charge a one-time pre-paid interest payment calculated as a percentage of the loan. Called “points,” this can range from 0.25% to 2% of the loan balance. Points are usually paid up front and are tax-deductible.

Appraisal cost
Lenders hire appraisers to evaluate the property’s purchase price, condition and size. This helps ensure the purchase price is not too high. Appraisal costs vary depending on the property and type of appraisal.

Miscellaneous fees
You may incur various charges, like notary, courier, and county recording fees, in the processing of your loan.

Prepayment penalties
Your lender may charge a penalty if you refinance or sell during a set period. These penalties vary widely, so be sure you understand in advance if these apply to you.

Get "Pre-Approved"
You can spend a few minutes on the phone with a lender who asks you a few questions, then issues a certificate pronouncing you "pre-qualified." Sellers know such certificates are worthless because none of the information has been verified.
To make the strongest offer, work with your lender to verify all your information and get "pre-approved." This process can take anywhere from a few days to a few weeks, but it's a very powerful tool to have when negotiating.

Applications and Processing
Mortgage brokers and lenders - who does what?
The mortgage broker is the individual or company who serves as your main contact. They may work with a number of lenders, who actually provide the funds for the loan.

Filling out the application
There are standard loan application forms. The information will be verified and used to qualify you for your loan, so take the time to answer questions accurately.

Documentation
The mortgage broker will need copies of the documents you began gathering in the first phase of the loan process, including:

• Either 2 years of W-2 forms from your employer or 2 years of tax returns if you are self-employed
• Recent pay stubs
• 3 months bank and money market statements
• Brokerage, mutual fund and retirement account statements
• Proof of other income sources (alimony, trusts, rental income, etc.)
• Credit card statements
• Auto /boat / student / miscellaneous loans
• Drivers’ license or form of ID
• If you’re not a US citizen, then copy of your green card or visa
• Copy of any existing mortgage debts if you are applying for a home equity line of credit or another mortgage

Stay in communication
The lender will have an analyst crunch your numbers and verify your documentation to confirm your ability to repay the loan. Once you are in contract on a property, there may also be a loan approval committee that will meet to review your creditworthiness and evaluate the property. This is called the underwriting process, and questions are bound to arise. Be sure to return your mortgage broker’s calls promptly to keep the process moving forward smoothly. Check in with your broker periodically.

The signing
When the lender is ready to close your loan, you will sign the final loan documents. This typically takes place in front of a notary or escrow officer. Ask your mortgage broker if there is anything you need to bring for this. Allow enough time to review the documents for accuracy.

Congratulations!
Your mortgage broker will confirm that the money has been transferred and the loan has closed. Always follow up to confirm that your loan funds went where they were supposed to. It is a good idea to keep records of this phase of the transaction.