Financing

• 1.0. Getting Started
  • 1.1 Build your ‘Green File’
  • 1.2 Consider your Credit Rating.
  • 1.3 Prioritize your Costs and Savings.

• 2.0 About the loan process
  • 2.1 Choose a Mortgage Company.
  • 2.2 Choose a Loan.

• 3.0 Getting your questions answered.
  • 3.1 Don’t be intimidated by the jargon used in financing.

• 4.0 Getting Qualified
  • 4.1 Pre-Qualification.
  • 4.2 Pre-Approval.
  • 4.3 Why Choose Pre-Approval?

• 5.0 Geting the loan
  • 5.1 Brokers vs Lenders
  • 5.2 Loan application forms
  • 5.3 Documentation
  • 5.4 Underwriting

• 6.0 Final Loan Approval
  • 6.1 Signing.
  • 6.2 Wiring Funds.

1.1 Build your ‘Green File‘
Organizing and compiling all your pertinent financial documents into
a ‘green file’ (think ‘green’ for money) is an absolute
must for any potential borrower. Your green file is a
resume or profile that will give lenders an idea of what
kind of debtor you might be. The typical green file should
contain:

• Financial statements
• Bank accounts
• Investment records
• Credit card information
• Auto loans
• Other indebtedness
• Recent pay stubs
• Tax returns for two years

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1.2 Consider your Credit Rating. Another
means by which lenders gauge your trustworthiness as a
borrower is through your credit rating. Credit ratings
tracks your credit history , which includes such crucial
information as the number of your open loans and the punctuality
of your payments.

Treat your credit like gold. Credit ratings are important because
they determine whether or not you will be approved for
a loan and what your interest rate wll be. Thus, you cannot
take your credit rating seriously enough! We suggest checking
your credit reports at least once a year or before making
any major purchase to ensure the accuracy of the information.

What the scores mean. Ratings usually vary between 400 and
800. Anything above 620 is good. If you exceed 680, you
are considered premium and may even get a lower interest
rate.

Determine your credit rating. You can do this by contacting a credit
reporting agency such as Equifax, Experian or Trans Union.
Above all, don’t hesitate to consult with your lender
if you need to improve your rating.

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1.3 Prioritize your Costs and Savings. Buying
real estate wisely is all about credit and interest terms.

Prioritize your costs. Down payments, closing costs and additional
expenses (such as surveys and inspections) should be at
the top of your list. On the other hand, be sure to pay
down on your current revolving and high-interest rate
debts, such as credit cards, because this will influence
your credit rating and interest rate.

Remember: lenders like stability. Instill confidence in your potential
lender by avoiding any big, sudden moves both in your
career and your finances. If that job change or big budget
purchase absolutely cannot be postponed, check with your
lender first and consider the consequences.

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2.1 Choose a Mortgage Company.
Securing finances requires a decision that you may have
to live with for many years-so spend time comparing the
terms and conditions of different lenders, before making
your choice. There are a number of ways to find a willing
lender, whether through traditional print ads, Realtor
referrals or Internet sources. There are also several
considerations to keep in mind when shopping for the right
lender and program:

• Price: Consider the competitiveness of a lender’s terms with
  that of others, especially for mortgage rates, interest
  rates, and additional closing costs and points.
• Diversity of products: Price is important but by no means should
  it be your only determining factor. How extensive is
  the lender’s range of offered loan programs? Check the
  availability of the loan program most appropriate to
  your credit profile and property.
• Rapport: Do your lenders and brokers communicate effectively
  and thoroughly? Are they attentive and prompt? You aren’t
  looking for just a guide but a partner -someone you
  can work with and trust every step of the way.
• Connections: Check whether the lender has access to
  local loan approval committees that understand your
  goals as a borrower.

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2.2 Choose a Loan. Though there are many different kinds of loans available today, these three are the most commonly used:

• Fixed loan: This long-term option requires monthly payments
  that will remain the same (fixed) throughout the duration
  of the loan. The loan term may vary from fifteen to
  thirty years.
• Adjustable rate mortgage (ARM): The loan rate here will be determined
  by factors such as the Federal Funds rate index, readjustment
  intervals, and capitalization rate. The initial interest
  rate can be as much as 2 to 3 percent lower than a comparable
  fixed rate mortgage. This can make homeownership more
  affordable. However you should first examine all factors
  and consider the downside risks before selecting this
  option.
• Hybrid loan: Also known as an intermediate or convertable ARM,
  it offers a fixed interest rate for a specified initial
  period before it ’switches’ to an ARM and adjusts with
  the market every six months or every year thereafter.Consult with your lender to determine which loan type
  and program would best correspond with your resources
  and needs.

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3.1 Don’t be intimidated by the jargon used in financing.
Here are a number of key terms you’ll see frequently in your loan application process.

• Creditreport: Request your lender to order one from a third
  party credit agency such as Equifax, Experian or Trans
  Union. A credit report should contain information on
  all your outstanding loans and repayment history, and
  will typically cost under fifty dollars.
• Application/processing fee: This is the lender’s fee for determining your capacity as a borrower and will usually be charged upon closing
  of the loan. Expect a price tag of a couple of hundred
  dollars.Annual percentage rate (APR): The APR expresses the
  sum total of all your borrowing costs as a interest
  rate percentage charged on the loan balance.
• Indexes: Changes in indexes such as the Federal Funds Rate and
  the Treasury Bill are used to periodically readjust
  the interest rates in adjustable rate mortgages (ARMs).
• Points: When mortgage companies are competing by offering lower
  interest rates, they may charge you a “point”,
  a one-time pre-paid interest fee, calculated as a percentage
  of the loan. Points are considered part of the cost
  of credit to the borrower, and part of the investment
  return to the lender. They may range from 0.25% to 2%
  of the loan balance, and are usually paid up front.
  One point equals 1%.
• Appraisal cost: This is the fee charged by an independent appraiser
  who may be hired by your lender to evaluate the property’s
  purchase price, condition and size in relation to similar
  recent neighborhood sales. This information is necessary
  to the lender because it ensures repayment in case the
  borrower defaults, forcing the lender to sell the property.
• Miscellaneous fees: Various costs will be incurred during the processing
  of your loan request, such as notary, courier, county
  recording fees and title company escrow fee.
• Pre-payment penalties: A prepayment penalty is a provision of your
  contract with the lender that states that in the event
  you pay off the loan early, you will pay a penalty.
  Penalties are usually expressed as a percent of the
  outstanding balance at time of prepayment, or a specified
  number of months of interest. They often decline or
  disappear altogether with the passage of time.

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How is pre-approval different from pre-qualification? What
are the advantages of each and which option would be the
best for you?

4.1 Pre-Qualification. This is an assessment by the lender, based on certain basic information given by the borrower (e.g. employment, income, asset
information, current monthly debt, and credit worthiness).
Based on this quick evaluation the lender makes a tentative
decision to pre-qualify the borrower for a certain loan
amount. This does not commit the lender to a loan, rather
it is only an opinion of the lender.

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4.2 Pre-Approval. Like a pre-qualification,
a pre-approval involves a lender making an assessment
of a borrower’s buying capacity based on her or his income.
But unlike a pre-qualification, a pre-approval letter
also checks the applicant’s credit and is a surer verification
of a borrower’s income. It takes longer to process and
will require more comprehensive documentation, but gives
a clearer and more definitive guarantee of the loan amount
a borrower is entitled to.

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4.3 Why Choose Pre-Approval? It’s
advisable to go straight to a pre-approval for several
reasons. A pre-approval can strengthen your purchasing
power as a far more accurate evaluation of how much house
or real estate you are capable of buying. The pre-approval
will be more appealing and thus perform better than a
pre-qualification in a competitive sellers market. It’s
also more time-effective since it reduces the time your
lender will need to process and fund your loan.

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5.1 Brokers and Lenders: Telling the Difference.
The lender or creditor is the
party who 1) disburses or provides funds to the borrower
at the end of a successful loan application process, and
2) receives the note attesting the borrower’s obligation
to repay. The broker, meanwhile, acts as an intermediary
between the borrower and the lender and serves as the
applicant’s main contact throughout the process. The mortgage
broker usually receives a service fee from the lender
for customer services rendered.

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5.2 Loan application forms: Where
to Find Them. Most forms can be downloaded from a lender’s
website. Fill out all forms accurately and completely,
and contact your lender for any questions or clarifications.

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5.3 Documentation : Keeping your
Papers in Order. It is highly recommended to keep an organized
file containing both originals and copies of all documents
accumulated throughout the entire application process.
These will include:

• 2 years of W-2 forms from your employer, or 2 years of
  tax returns for those who are self-employed
• Recent pay stubs
• 3 months of 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
• Copies of visa or green card (for non-US citizens)
• Copies of existing mortgage debts (for those applying for a
  home equity line of credit or another mortgage)

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5.4 Underwriting: keeping in touch.
Underwriters, hired by lenders, are analysts who examine
all the data from a borrower’s property and transaction,
and ultimately determine whether or not mortgages should
be issued to the applicant. Loan approval committees will
use underwriters’ reports during their deliberations to
evaluate the property and the applicants’ creditworthiness.
Your broker may contact you frequently in the course of
the loan application process, so prompt communication
is necessary to keep the process running smoothly.

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6.1 Signing. Here comes the best
part. Once your lender has agreed to close or fund your
loan, the signing can begin. Before this happens, however,
be sure to verify and finalize all the documents, and
to supply any additional requirements (such as photo IDs
or cashiers’ checks). The final loan documents are usually
signed in the presence of a notary at a title company.

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6.2 Wiring Funds. Your down payment is either automatically
deducted or wired-in the latter case, the money is electronically
transferred between financial companies. Make sure that
the wiring instructions as well as all important numbers
must be clarified and checked for accuracy by both parties.

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Give yourself a pat on the back. Your loan is now funded! Tie
up any loose ends by confirming the money transfer with
your broker and filing all pertinent documents of the
transaction.