Mortgage Information

It’s a good idea to get pre-approved by a lender before you start looking for a home to purchase. Most lenders will give you a free consultation. If you need Lenders to contact call me at 904-608-5681 or e-mail me at: tomsells@bellsouth.net  I will give you a few names you can talk to.  Once you’re pre-approved: you'll know exactly what you can afford, you can act immediately when you find the home you want and sellers will be more comfortable accepting your offer knowing you can get financing and most probably complete the transaction. Today, all offers to purchase property must be submitted with a letter of pre-approval or proof of funds if offering all cash. If you are serious about buying get the pre-approval letter first before you start looking at property. If you just want to see homes and get decorating ideas go to a local builder and visit their models but remember: First, the site agent represents the builder or seller, Second, you can get more for your money with a pre-existing home, extras in model homes are all add on's. Third, if you want a new home you should still have your own realtor such as myself representing you, to help with inspections as another set of eyes, negotiations and closing..     

What to expect on your first visit/contact with a lender?

A mortgage lender will evaluate four areas of your financial history to determine your ability to secure a loan. These are:

  • Credit history/credit scores

Today you need an average minimum credit score of 620 just to be considered for a loan, anything below that you will probably pay a higher then normal  interest rate, possibly points, larger down payment or not be able to get a loan at all.   

  • The amount of monthly credit you currently have, (debit to income ratio)
  • Income/employment history
  • Your financial assets (money in the bank, investments, retirement accounts and potential gift funds).

Typically the lender will only look at the last two years of your history in all the above areas.
In order to prepare for your first visit to a lender, you should have documents on your most recent 2 year residence and employment history ready. (Recent grads who are newly employed are usually fine as school can be a part of the 2 year history without any problem.)

 

 

Routine documentation you should have available:
  • 30 days of pay stubs
  • 2 yrs of W-2’s or 2 years tax returns (if self employed)
  • 2 months worth of bank/asset/investment/retirement account statements (all pages, front and back, original documents, copies may not be accepted)
  • Diploma or school transcript if a full time student during the past 2 years
  • Information on any real estate you may currently own
  • A copy of recent mortgage statements or your current lease
  • Explanations for any derogatory credit or gaps in employment you know you may have
  • Any correspondence with creditors if you have disputed any debts

Other items that would be helpful include:

  • Social Security card
  • Drivers license
  • Pass Port
  • Military ID

 

The Loan Market

It is important to know that almost all loans are sold by the financial institutions making the loan. The lender you work with is the “originator.” Your loan is then sold in the “secondary market.” The largest buyers of loans are agencies called Federal National Mortgage Assoication or FNMA (Fannie Mae), Federal Home Loan Mortgage Corporation or FHLMC (Freddie Mac) and Government National Mortgage Association or GNMA (Ginnie Mae). These huge organizations constitute the “secondary market” and write the rules for loans that they will buy. A lender must then follow the rules these agencies have written in order for the loan (borrower and property) to qualify as conventional, FHA or VA. During the loan process your loan will be evaluated by an Underwriter. Their job is to make sure that the loan fits the guidelines for a particular program (FHA, VA or conventional), so the loan can be sold.

Today, more and more buyers are experiencing longer lead times and more detailed documentation necessary to get loans approved "perfected." Loans for primary residence are difficult enough, second homes or investment property loan documents are being put under a microscope. Having a good credit score, stable employment is no longer enough to get financing especially on second or investment homes. On investment homes,  be prepared to pay higher rates, provide personal financial statements, possibly the last two years of income tax records, higher closing costs and down payments. If you have no history of managing property, be prepared to provide documentation showing enough income to cover payments on the new property without a renter (vacancy).    

Be prepared for 60 to 180 days after making application to get approval on investment property loans. It is highly recommended to get all the required documentation in to the lender and the financing approved before getting a contract on a property accepted, which could put the binder or down payent money and property at risk of being lost. Savvy listing brokers are all inviting back up offers on property under contract to protect their sellers. Failure to perform on getting a loan in the time period negotiated can put you at risk of losing the home and possibly your binder.  When your lender asks for documents get them ASAP to avoid having to ask for an extension on the contract closing.  Asking for an extension on getting the loan approved gives the seller the opportunity to accept another higher or cash back up offer.   

I cannot emphasize enough the importance of getting the financing approved as soon as possible BEFORE PUTTING A HOME UNDER CONTRACT. Getting a loan approved today is completely different then it was years ago in fact, more difficult today then six monthss ago because of all the new Federal Regulation put on lenders.  Waiting to get the financing approved after you have a home under contract, you risk losing the binder or earnest money, money on inspections, appraisals and other costs associated with your due diligence if  the loan does not get approved in the time negotiated. In addition, if the seller is not willing to extend the time to get your loan approved, you will probably lose the home under contract to another offer the seller has waiting in a back up position.     

What is an FHA Loan?

An FHA loan is a government insured loan that was instituted to assist buyers with minimal cash to purchase a home and first time buyers. This program requires that the buyer invest a minimum of 3.5% of the purchase price. Part of that can be a minimal down payment of 2.25% plus some closing costs. Sometimes the buyer can negotiate for the seller to pay the remaining costs.
FHA loans have more lenient guidelines for borrower credit history, allow for all or part of the funds needed by the borrower to be a gift, and has stricter requirements on the property’s condition for the protection of the borrower. Not all mortgage brokers or financial institutions do FHA loans.

What is a VA Loan?

A VA or Veterans Administration loan is a government insured loan designed as a benefit for Veterans or Retired military from the U.S. Army, U.S. Air Force, U.S. Navy, Marine Corps and U.S. Coast Guard.  Those who served in the Reserves must have been on active duty for more than six months at any one time to be eligible for a VA loan. It is designed primarly for first time buyers however, can be used additional times for owner occupied property only, no investment property.   Further, it can also be used for second or vacation homes providing an individual qualifies, has a VA certificate of eligiblity available and the home will not be rented.

VA loans are probably one of the most mis-understood type loans available but a great benefit to former military.  In addition, one of the most popular loans because it is often negotiated having very little or no money down and requires the seller to pay a portion or all of the buyers closing costs.  Paying a portion or all of a buyers closing costs is a small concession to make in a strong buyers market that helps provide a motivitated seller the opportunity to sell their property. 

VA loans historically have the best track record in terms of fewer foreclosures than most other type loans available,  primarily because of the strick guidelines and documentation required to do a VA loan. Va loans can be fixed rate interest (the most common) or adjustable.  

For more information on doing a VA loan call me at 904-608-5681 or e-mail tomsells@bellsouth.net.  Having taken many VA loan applications with my  broker for the last eight years and being a military veteran myself,  I am more familiar with VA loans then most Realtors. I can recommend a number of qualified lenders that will provide you the best service on these often mis-understood Federally insured loans. 

What is a USDA loan? 

A comparatively new type loan issued by the United States Department of Agriculture. USDA loans requiring little or nothing down with the seller very often providing assistance on the buyers closing costs towards a borrower's primary residence.   This type loan is available only in rural areas however, it is very popular but not available in most cities or some heavily populated counties.  In North East Florida USDA loans cannot be done anywhere in Duval County, they can be done in most of St. Johns including the World Golf Village but not North of route 210 or  in the city of St. Augustine. USDA loans can be done in most of Clay county except for Orange Park, most of Putnam and Flagler counties and all of Nassau and Baker counties. Some of the benefits for a borrower using USDA financing: 

  • There is no downpayment 
  • 102% of the appraised value can be borrowed if desired to include the 2% guarantee fee required for USDA loans 
  • There is no mortgage insurance 
  • There is streamlined processing for borrowers with a FICO credit score of 620 or more 
  • There is no maximum purchase price limit 
  • It is not limited to first time buyers 
  • Closing cost assistance from government sponsored entities is allowed 
  • There is no limitation on the source of funds for closing costs, such as gift funds 
  • Generally rates are very good 

There are household income limits, but if the total household income exceeds the limit, certain adjustments can be made for things such as child care expenses for children 12 years or younger.  In Clay, Nassau and  St. Johns Counties, a 1-4 person household has an income limit of $74,900 and a 5-8 person household has an income limit of $98,850. For Putnam County, a 1-4 person household has an income limit of $73,600 and 5-8 person household has an income limit of $97,150.  Borrowers must be a U.S. Citizen or a permanent resident or qualified alien and the property must be the borrower's primary residence.   

 If you want to do this type loan be sure to check with your mortgage broker or lender before starting to look at property to confirm you qualify and the loan can be done in a particular geographic area.  Go to their web site to determine if a particular geographic area is eligible for a USDA loan and or call your Bank, Credit Union or local mortgage broker.  If you call, tell them Real estate Broker Tom Stanko suggested you call them and you will be working with him to find a home.

What is a Conventional Loan?

A conventional loan is a loan that meets the standards of the “conventional” secondary marketplace. There are two types of conventional loans, Conforming & Non-Conforming. Conforming loans usually fit neatly into the box of rules and are under the prescribed maximum loan amount set each year. Both the borrower and the property fit the typical scenarios and there is nothing unusual.

Loans over the “conforming” loan amount or loans that have some facet outside the box either related to the borrower or the property are called Non-Conforming loans. A loan can be Non-Conforming if the borrower is unable to document their income or assets, or their credit scores are low, or if the property is unusual for the area or if the loan amount or program is designated Non- Conforming.

What's the Difference Between a Fixed Rate and an Adjustable Rate?

Fixed Rate
A fixed rate mortgage is one in which your monthly principal and interest payment will always be the same for the life of the loan. The benefit is that you always know what your principal and interest costs are. Fixed Rate loans are usually amortized (paid in full) over a period of 30, 20 or 15 years. Your monthly payments are predictable over the life of the loan. (Keep in mind that your monthly mortgage payment may include principal and interest AND 1/12 of your annual property taxes and home owners’ insurance. So although the principal and interest will remain steady, the taxes and insurance amounts can vary.)

Adjustable Rate Mortgage
With an adjustable rate mortgage (ARM), the interest rate may fluctuate which makes the payment change during the life of the loan. ARMs start off with a fixed interest rate for a determined period of time (1, 3, 5, 7, 10yrs.) and then adjust annually after that. Typically, the shorter the fixed term is, the lower the initial rate. The lower rate means lower payments for that period of time. Once the rate adjusts, the payments can go up if the interest rate is higher. Most loans adjust annually after the fixed rate period.

ARM’s adjust based on the combination of the index and the margin. The index is the predetermined indicator that establishes the basis for the rate adjustment. The index can be the 12 Month Treasury Average (MTA), the 1 year LIBOR rate, the 1 year Treasury Note, or Prime Rate, or several other accepted indicators. The index is the rate for the particular indicator on a particular date (usually the anniversary of the loan). The index is a number that changes daily, the margin is a static single number, usually 2.25-3.00% that is added to the index. When you add the index and the margin together, you get the new rate.

Both types of loans have their benefits and pitfalls. For example, a fixed rate mortgage is appealing because you always know what your payment will be. On the other hand, when interest rates are high and falling, choosing the adjustable rate mortgage may be favored because the initial interest rate will be lower than fixed and the interest rate may drop in the future, resulting in smaller monthly payments. However, with an adjustable rate mortgage you run the risk of ending up with a higher payment should the interest rate increase during the life of the loan.

An ARM may be advisable if you intend to be in the home for a short time (the fixed rate term or less). Many people know they will be moving in 3-5 years or less and chose to take advantage of the lower rate to have a lower payment or afford more house.
If you intend to stay in the house for a long time, the fixed rate loan and its predictability may be preferable in a rising rate environment.

Which Mortgage is Best?

There are literally dozens of loan products and hundreds of combinations of these products. A good Loan Consultant will listen to your needs, evaluate your situation and should recommend loan scenarios that fit your need. A home loan should fit into your overall financial plan, help meet your long and short term financial goals with the desired monthly payment and equity position.
Just calling around for the best rates on a 30 year mortgage could cost you thousands of dollars over the life of your loan if you don’t get the loan that best fits your needs. There is so much more to the home loan process than just rates. A professional loan consultation is a vital first step in the process and is usually at no cost to you.

As your real estate professional I can assist you in finding a lender or a consultant. Call me at: 904-608-5681 or e-mail: tomsells@bellsouth.net  and let me use my experience and contacts to help you with your financing.

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