Q: What advantages does a letter of pre-approval offer to home buyers?
A: When a borrower obtains a pre-approval letter by applying for a
mortgage before finding a house then the buyer has several advantages
including:
  • House hunting made easy. Pre-approval lets the home buyer know
    exactly how much home he or she can afford. Home finding is
    focused on a precise price range.
  • Cash buyer status. The buyer has the increased negotiating
    leverage of cash buyer status because the mortgage is already in
    place.
  • Accelerate the mortgage process. Significant time is saved
    because a large part of the mortgage has already been processed.


Q: How do underwriting or qualifying ratios work?
A: Qualifying ratios are percentages of a home buyer’s gross income that
can prudently be allotted for debt. These calculations help the mortgage
lender determine whether the borrower will be able to make mortgage
payments in a timely and consistent way.

The most commonly used rule of thumb is 28% or 36%, which limits the
sum of monthly mortgage principle, interest, property taxes and
insurance payments (PITI) to 28% of the home owner’s gross monthly
income and further limits the total of all long-term debt payments to 36%.

Lenders may relax these limits to allow a financially stable borrower to
qualify for a larger loan amount.

Compensating factors that count include an excellent credit history, a
consistent savings pattern, or a future increase in income. Moreover,
borrowers who are being relocated by their employers are eligible for
qualifying levels of 33% and 38% (vs. 28% and 36%) because as a group
they show a track record of lower risk of default.


Q: What costs are incurred at a typical closing?
A: In addition to the “points” you elect to pay when applying for the
mortgage you may also be required to pay a down payment, closing costs,
property taxes, and other prepaid costs.

Points are fees paid to the lender to obtain a lower interest rate. A point
equals one percent of the loan amount. Points are usually paid at the time
of closing. Discount points are paid by the buyer to reduce the loan’s
interest rate. Paying one discount point normally reduces the rate by
1/8th%. If the home buyer plans to keep the residence for five or more
years it is worthwhile to pay as many discount points as possible to
reduce the monthly payments and achieve greater savings over the life
of the mortgage.

The down payment is the difference between the price of a house and
the mortgage amount. Part of the down payment is usually paid as
“earnest money,” or deposit, when the contract is signed by both buyer
and seller. The balance of the down payment is due at the closing.

Closing costs are the other charges the buyer must pay to obtain a loan.
These usually include taxes, which are charged in most states, and title
insurance, which protects the borrower and the lender in the event
anyone can prove that the borrower is not the proper owner of the house.


Q: How much will these closing costs actually be?
A: If the mortgage is for more than 80% of the price of the home, private
mortgage insurance protecting the lender may be required. Closing costs
also include the cost of a property appraisal and credit report. Prepaid
items are the first several months of costs paid on a monthly basis such
as homeowners insurance and real estate taxes. These prepaid items are
held in an escrow account for the borrower.

The down payment will depend on the mortgage you have obtained; it can
be as little as 3%, and occasionally, even zero, or as much as 30% or more
of the purchase price. Points will add another 1% to 3% of the purchase
price.

In some areas, closing costs add up to another 5% of the mortgage
amount, and in some areas, may be even higher. That means, for
example, if you buy a $90,000 home you will need at least $2,700 – and
more likely, $4,500 for a down payment, plus another $5,000 to $7,000 for
closing.

When applying for a mortgage, your mortgage counselor will provide a
good faith estimate of the closing costs as part of the applications
package you receive.


Q: What information is required with a mortgage application?
A: Personal, employment and financial information from you, and legal or
technical real estate information from your attorney and/or your Realtor. A
list of what you need to supply your lender follows.

Personal information:
  • The full names of all buyers as they appear on the title.
  • Social Security numbers of all buyers listed on the title.
  • Present addresses of all buyers going back at least two years.
  • Home and office phone numbers of all buyers.

Employment information:
  • Present employer’s name, address and a contact person to whom
    an employment verification form may be sent.
  • Written explanation for any gap during a two year period.
  • Previous employer name and address going back two years if not in
    present job two full years.
  • Present salary. (Year to date pay stub and last two years W-2.)
  • Variable income: commission, part-time income, bonus, overtime
    and/or interest income used to qualify. Supply two years signed,
    federal tax returns and W-2s and/or 1099s.
  • Self employed: Supply two years signed federal, personal and
    business tax returns, a profit and loss statement and a balance
    sheet.

Other Income:
  • Rental income. Supply a copy of a current lease that is in effect for
    at least 12 months.
  • Alimony and child support. If you use this for qualification, supply
    copy of divorce decree and property settlement showing terms.
    Proof of payment is also necessary.
  • Income from notes held.
  • Supply a copy of ratified note.
  • Retirement, social security and disability income. Supply a copy of
    the award letter and latest check showing amount of present
    payment. A copy of the year-end statement, if applicable, may be
    necessary.

Assets:
  • Bank account names, addresses, account numbers, balances. Show
    the average daily balance for your checking accounts.
  • Supply the two most recent bank statements for all accounts, with
    the exception of your checking accounts, for which you may need
    statements for the past 12 months.
  • If you have owned another home you will need the past 12 months
    of cancelled mortgage payment checks to prove you made timely
    payments.
  • Stocks and bonds. Supply copies of certificates or statements of
    accounts that you received from your broker within the past 30 days
    that list your holdings and any/all action on your accounts.
  • Mutual funds. Supply a copy of your most recent statement and an
    explanation of any recent account activity that is not included on
    the statement.
  • Life insurance. Include the current cash value of all life insurance
    policies owned by all buyers who will be listed on the title.
  • Vehicles. List year, model, make and value and supply copy of the
    title if vehicle is less than four years old, has no outstanding lien or
    has investment value.
  • Real Estate. Supply address and market value. If free and clear,
    date of mortgage payoff. Supply copy of deed.
  • Present residence. Supply copy of sales contract and settlement
    sheet.

Liabilities:
  • All loans including mortgages on real estate, home improvement,
    auto, education and personal loans. Include name and address of
    lender, account numbers, outstanding balance for all loans, monthly
    payments, months left on each loan, a copy of the next payment
    coupon.
  • Credit cards. Account numbers, outstanding balance, most recent
    statements for all credit cards.
  • Alimony and child support. Supply a copy of your ratified decree and
    property settlement documenting the terms of the decree.

Present home:
  • Copy of the listing.
  • Copy of the sales contract.
  • Settlement sheet (if the house was sold within the past year.)
  • Copy of the deed if you are refinancing.
  • Name and address of your present landlord if you are renting or
    leasing.


Q: What do I need to do to apply for a VA loan?
A: Basically, two documents.
  • Certificate of eligibility. To obtain the certificate, you will need a DD-
    214 (Separation of Service) or if you are still in military service, a
    statement of service signed by your commanding officer or
    personnel officer. The statement must be updated before
    application.
  • Authorization to Live Off Base, form DD-1747 from the Housing
    Office, and, Transfer Orders (if they are applicable).


Q: What payments are made at the time of loan application?
A: Usually only two payments.
  • Appraisal Fee
  • Credit Report

At some banks or financial institutions you may have to pay an
“application fee” to cover the lender’s (or loan broker’s) cost to process
the paperwork.
Buyer FAQ's