It is essential for a new homebuyer to be fully satisfied with the mortgage they choose. This is because their loan payment will be a significant part of their lives and their finances for the next 15 or 30 years, or at least as long as they choose to remain in the home. Unfortunately, many first-time homebuyers are so excited to be buying their first homes that they get caught up in the process and lose sight of what is important – making sure that the mortgage they have agreed to is right for them.
In this section, we provide everything you need to know when it comes to choosing the right mortgage, including:
- How to Be Sure You are Comfortable With the Mortgage You Choose
- What Is Rate Lock and How Does It Impact Your Mortgage?
- How to Avoid Common Mortgage Pitfalls and Handle Potential Problems
- Making Known Your Intent to Proceed With the Loan
How to Be Sure You Are Comfortable With the Mortgage You Choose
When it comes to choosing a mortgage, there are a number of different questions a buyer needs to ask themselves before they sign on the dotted line. These questions include:
Can I Afford to Repay the Loan?
If you are planning on living in your new home for the extent of the mortgage, you need to seriously consider your current and future finances. Is your job stable enough that you don’t have to worry about losing it at any time during your mortgage’s repayment period? Can you afford to pay the mortgage with one income in the event your partner becomes unemployed? If you are confident in your ability to repay the loan, then you are starting off in a good position.
Am I Comfortable With the Monthly Mortgage Payment?
You need to be able to comfortably manage your monthly mortgage payment. You don’t want to be in a position where the payment puts a lot of pressure on your finances because all it would take is for one thing to happen for your budget to get thrown off course. Just because the bank tells you that you can afford a certain amount doesn’t mean you actually can. Take into consideration all of your expenses and subtract them from your total household income. If the mortgage payment is less than 28% of your income, then you should be able to make that payment comfortably each month.
Am I Confident With the Lender’s Decision?
You have to be confident in the lender you choose. You have to trust that they are working to get you the best rate and terms on your loan. This is why researching lenders before you apply for your loan is so important. If you are hesitant about the lender’s financing decision, then you may want to take a step back and find another lender.
Are There Any Risky Features in My Loan?
Some lenders include language in the mortgage agreement that might not be beneficial to the borrower. Before agreeing to a mortgage offer, make sure it doesn’t include any risky features like prepayment penalties or balloon payments.
Will the Loan’s Principal and Interest Change in the Future?
Most home buyers want the security and peace of mind that comes with having the same payment amount every single month. This is what is known as a fixed-rate loan and this type of mortgage allows the buyer to factor their payment into their budgets because it doesn’t change. But some mortgages, like adjustable rate loans, feature payments that can fluctuate. With these mortgages, the principle remains the same but the interest rate changes. The interest rate can increase or decrease, depending on where the national interest rate is.
When the answers to the above questions are favorable to you, your partner, and the lender, then you can confidently say that the mortgage you have chosen is the right one for you.
What Is Rate Lock and How Does It Impact Your Mortgage?
When you apply for a mortgage, the lender will discuss your loan application’s “rate lock.” A rate lock is essentially a guarantee from the lender that your loan will have a set interest rate for a certain price for a certain period of time. That length of time is typically 30, 60, or 90 days, but the terms could be set lower or higher.
Once a lender locks the rate on your loan, you are guaranteed to have that interest rate as long as you close on the home within the determined length of time. In the event that you are unable to close within the set time period, the rate on your loan will revert to whatever the rate is at the time of your closing.
Pros and Cons of Locking in Your Rate
The benefit of having a locked rate is that you are guaranteed to pay the rate even if interest rates go up. The disadvantage is that should the interest rate drop after you have your rate locked, you won’t be able to get the lower rate on your loan. But, there are some exceptions that may allow you to still get the lower rate.
One such exemption is if your rate lock agreement includes a “float down” provision. This provision permits the loan’s interest rate to be reduced if the rates drop during the locked-in period. The downside to having this provision included, however, is that it can be costly. Another exemption is to have your rate lock agreement re-written so the new, lower rate is included. But, it is also expensive to have this done as well and should the rate stay the same, you could be spending a lot of extra money for no reward.
How to Avoid Common Mortgage Pitfalls and Handle Potential Problems
Buying a home is an exciting time in one’s life, but it is not without its share of risks. To ensure that everything goes as planned, you need to be aware of certain potential problems and pitfalls that could wind up hurting you in the end.
Here is a list of common issues you are going to want to avoid when buying a new home.
Avoid Signing Partially Filled Out or Blank Documents
Never sign any blank document or any document that isn’t properly filled out with the agreed upon terms. Once your signature is on the page, the lender can fill in any blanks with whatever information they want. Make sure this doesn’t happen – only sign completed documents.
Avoid Buying More Home Than You Can Afford
If the lender tells you that you can qualify for a $300,000 loan, it does not mean that you can afford a $300,000 loan. You need to review your income and expenses to find out what you can comfortably afford before you think about applying for the highest loan possible, or else you may find yourself in financial trouble in the near future.
Don’t Think About Refinancing; Focus on Getting the Best Loan Now
One way home buyers convince themselves to buy a home at a higher rate is that they think they can simply refinance it at a lower rate in the future. This is a mistake. Instead of thinking about refinancing when you’re buying a home, focus on getting the best loan you can, right now. Refinancing isn’t cheap and there is no guarantee the interest rates will go down.
Don’t Try to Enhance Your Application With False Information
Some applicants think they can improve their loan approval odds by enhancing their applications with information that proves to be false. An example of this is claiming to make more money than you actually do. Another example is attempting to hide information that might be considered negative. Completing your application with false information is risky because it could make you guilty of mortgage fraud. Therefore, complete the application truthfully and you’ll avoid a potential legal situation.
Additional Potential Problems You May Run Into
Not all mortgage problems are the fault of the borrower. In fact, there are several reasons why a lender might prove problematic for the home buyer. Such examples include:
- Predatory Practices
- Illegitimate programs offered by the lender
Should you come across a lender who exhibits any of the above, then you should file a complaint against that mortgage company. You can file complaints with each of the following:
- The Better Business Bureau
- Your State Regulatory Board
- Your State’s Attorney General Office
- The U.S. Department of Housing and Urban Development (HUD)
- The Federal Reserve (if the lender is a bank)
- The Federal Bureau of Investigations (FBI) (if the lender is committing fraud)
Making Known Your Intent to Proceed With the Loan
Before your mortgage lender will more forward with the loan approval process, you first have to inform the lender of your “intent to proceed with the loan.” This is done by signing and submitting a Notice of Intent to Proceed with Loan Application (NIPLA) document. By signing this document, you are accepting the terms and fees listed in the Good Faith Estimate (GFE) and permitting the lender to proceed with the approval process and charge you the fees related to your loan processing.
Almost at the finish line!
Closing is one of the most anticipated parts of the home buying process because this is when the purchase is finalized and the keys are handed over. But, this process isn’t without its share of potential stress. There are far too many stories of home buyers who left the closing without the home they worked so hard to purchase.
In this final section, we will review the mortgage closing process so you, the buyer, will know what to expect. Topics will include:
- The Closing Process
- The Revised Loan Estimate – What Happened?
- Closing Disclosure – Verifying Everything Is Correct
The Closing Process
The closing is what the entire home buying process leads up to. This is a sit-down meeting during which all parties sign the papers, officially completing the deal, with the ownership of the property being transferred to you.
But, before the closing can begin, an inspection of the home should be made to determine whether the home is suitable for occupying and if there are any major home improvements that need to be made. A home appraisal is also performed to ensure that the home you are buying is priced accordingly against the actual value of the property.
The Home Inspection and Appraisal
It is important that you have completed the home inspection, conducted by a professional home inspector, prior to the closing. The reason for this is because there may be issues that the seller isn’t informing you about, such as a leaky roof, an HVAC system that needs replacing, plumbing problems, or a cracked foundation.
Although it is not always required to have the home inspected, should you not have it done, you will be personally responsible for any major repairs needed after you take ownership. By having the home inspected, you can use the inspector’s report to negotiate with the seller. For instance, if the report recommends a costly repair, you can negotiate for the seller to pay to have the repairs made prior to closing. Or, you can request a lower price for the home, or that the seller should pay your closing costs.
The appraisal is another important piece of information you will need to have before closing. Usually, it is the lender who has the appraisal performed by a professional home appraiser. The appraisal is an unbiased estimate of the true value, or fair market value, of the home you’re purchasing. The lender uses the appraisal to ensure you, the borrower, are requesting a loan amount that is appropriate.
Who Is Present at the Closing?
Every state has its own requirements for who needs to be present at a home closing, but in general, the people who are usually there include:
- You (the mortgagor)
- Your real estate agent
- The home seller
- The seller’s real estate agent
- The lender (the mortgagee)
- The Title Company’s representative
- An attorney (if you want one to represent you)
- The closing agent
How the Closing Process Works
For the buyer, the home closing process actually starts the day before the closing. On this day, you should collect and organize all of the paperwork you have received over the course of the home buying process. Some of the important documents you’re going to want to gather together include:
- The Loan Estimate
- The Contract
- Proof of Title Search
- Proof of Homeowners Insurance
- Flood Certification (if required)
- Proof of Mortgage Insurance (if required on the loan)
- The Home Appraisal Report
- The Home Inspection Report
- The Closing Disclosure
You also have the right to walk through the home 24-hours before the closing. This is so you can verify that the previous owner has left the premises, removed all of their belongings, and left the home in the condition that was specified in the contract.
If new problems are discovered during the walkthrough, you can request the closing to be delayed or you can request the seller to put a certain amount of money into an escrow account for covering the costs of the necessary repairs.
The last phase of the closing process occurs when the seller hands you the keys to your new home. Closing day is over and you’re free to move into the home.
The Revised Loan Estimate – What Happened?
Generally, once you receive your loan estimate from your lender, the lender is bound by the fees and charges included. A lender is not allowed to make revisions in the event they make mistakes, miscalculations, or underestimate the charges. But, there are some instances in which a loan estimate may be revised.
According to the TILA-RESPA Integrated Disclosure (TRID) rule, there are six events that justify a revision of the loan estimate. These events include:
- Interest rate locks – If the interest rate is not locked when the Loan Estimate is issued, then the lender can revise the estimate once the rate is locked.
- Changes in the buyer’s eligibility for the loan or changes that affect the value of the property being purchased – A buyer can experience certain changes that can affect their eligibility, such as a credit rating drop, becoming unemployed, a divorce, etc. A revision is also usually required if the lender is unable to verify the buyer’s income. If the appraisal for the property comes in higher or lower than expected, that too could result in a revised Loan Agreement being required.
- Buyer-requested changes – If the buyer requests certain changes that impact the credit terms or the settlement costs, the lender may want to revise the original Loan Estimate.
- Changes that cause an increase in settlement charges – If a change causes the settlement charges to increase beyond the tolerance variations set out in the TRID rule, the lender is granted the right to revise the loan estimate.
- The original loan estimate expires – If the buyer does not provide the lender with a Notice of Intent to Proceed with Loan Application (NIPLA) within ten business days of receiving the Loan Estimate, then the Estimate can be revised by the lender if necessary.
- Construction loan settlement is delayed – In new construction, settlement typically occurs within 60 days of receipt of the Loan Estimate. If settlement doesn’t take place within the 60 days, the lender can revise the estimate.
If you receive a revised Loan Agreement and it has nothing to do with a request made by you, then you should ask your lender to explain the reason for the revision. Find out how the revised estimate is going to affect your loan transaction, including your loan amount, the interest rate, your monthly payment, and closing costs. The more you know before you go to closing, the better off you will be.
Closing Disclosure – Verifying Everything is Correct
There are a lot of documents included in buying a home. This means there are ample opportunities for mistakes to be made. You can’t proceed through the closing expecting everything to be 100% right on all of the documents. Before you sign, you or your attorney must verify that everything is correct on your Closing Disclosure.
Some of the most important things you are going to want to verify for accuracy on your Closing Disclosure include:
- The Loan Terms – The Loan Terms include details such as the length of time the loan will last if you make just the minimum monthly payment. This is usually 15 or 30 years depending on what type of loan you choose. This part of the Disclosure also details the loan’s interest rate, your monthly payment amount, and any prepayment penalties or balloon payments.
- Closing Costs – The Closing Costs are all of the fees related to the purchase of your home. These fees include everything from the application fee to the underwriting fee and the amount can be anywhere from 2% to 5% of the selling price of the home.
- Total Loan Cost – The Total Loan Cost is what you will actually pay for your home over the life of your mortgage loan. This total is significantly higher than the purchase price because it includes the interest that you will pay on your loan.
- Prepaids – Prepaids are costs associated with your home that need to be paid in advance when you are getting a loan. Prepaids include costs such as your property taxes, homeowners insurance, and mortgage interest that will accrue between the closing date and the end of the month. So, the earlier in the month you buy your home, the more you will have to pay in Prepaids.
- Escrow – Escrow is a complex financial arrangement in which a third party account holds and regulates the payment of the funds required for the buyer and seller during the closing process. The funds are overseen by an Escrow Company; they protect the funds from chargebacks, fraud, and illegal usage in a secure non-interest bearing trust account.
- Summaries of Transactions – The Summary of Transactions is a table included on page 3 of the Closing Disclosure that shows a line-by-line comparison of the buyer’s and seller’s transaction details.
- Loan Disclosure – The Loan Disclosure is a document in which the lender provides completely transparent information about all of the terms included in the loan they are offering the buyer.
- Finance Charge – The Finance Charge is the total amount of interest and loan charges the buyer will pay over the life of their mortgage loan, assuming that the buyer will keep the loan through the full term until the last payment is paid. Finance Charge also includes any and all pre-paid loan charges.
- APR – The APR is the loan’s annual percentage rate. This is essentially the amount of interest the buyer will pay annually on their mortgage, averaged over the full term of the loan. The difference between interest rate and APR is that the interest rate pertains to the current cost of borrowing while the APR uses the interest rate as a starting point and takes into account the lender fees required to finance the loan.
How to Calculate Cash to Close
To calculate the Cash to Close amount that you will need to have on Closing Day, you can do the following equation:
- Step 1: Take the total closing costs and subtract any closing costs that are being rolled into the loan amount.
- Step 2: Take that number and add the down payment amount.
- Step 3: Take that number and subtract the deposit amount that you made when the offer was accepted.
- Step 4: Take that number and subtract any seller credits.
- Step 5: Take that number and add or subtract and adjustments, overpayment refunds, and any other credits and the number you are left with will be your Cash to Close amount.
You should now be ready for your Closing Day. Remember, carefully review all of your documents so the mortgage you get is the one you wanted.
Congratulations on financing and buying your home!