LESSON 4: Finances and Costs

GET PREAPPROVED FOR YOUR LOAN

* You have gone through the prequalification steps in Lesson 2

* Your financial picture is looking pretty good!

Your next step: SELECT A LENDER FOR LOAN PREAPPROVAL

YOUR OBJECTIVE:

Obtain a letter of commitment

• Spells out how you can borrow (or pay each month)
• At that point, you are guaranteed a loan.

WHAT YOU NEED TO BE PREAPPROVED

The lender will ask for the following documents to perform an analysis:

• Bank statements and savings history
• Tax records - proof of employment/income
• Interest and dividends
• Child support/alimony payments you receive
• Credit report

TIPS FOR PICKING THE RIGHT LENDER

• No one loan or mortgage fits all - shop and compare
• A lender's rates and fees are NOT locked in stone
• Rates and fees CAN VARY WIDELY among lenders
• There are no stupid questions. Ask away!
• Don't feel pressured to sign if it doesn't feel right
• Look for cash incentives on new construction
• Some SELLERS offer incentives and may pay fees and costs

KNOW THE TYPES OF MORTGAGES YOU CAN GET

FIXED (30-year, 15-year)
Interest rate stays the same for the entire loan period
Good for buyers who plan to keep the loan the full term
Shorter period (15-year) will cost less overall, but your monthly payments will be higher

ADJUSTABLE RATE (ARM)
Initial interest rate can be up to 3 points below fixed mortgage rates
Rate is tied to economic indicators
Adjusted rate is capped at a set percentage
Good for buyers who intend to move/sell in several years
Good for buyers who need lower payments in the beginning

BALLOON RATE
Smaller payments are made for a set period of years
Entire principal may be due in a final payment
Good for buyers who want lower payments
Good if you don't plan to keep the loan a long time
The downside: buyer needs to make a big future payment

FEDERAL HOUSING ADMINISTRATION(FHA) loans
Different types available including fixed and ARM
Available to any buyer who can qualify

VETERANS ADMINISTRATION (VA) loans
Different types available including fixed and ARM
Available to Veterans

DISCOUNT POINTS
These are prepaid interest added to a loan
Each point is one percent of the loan amount
Points lower the interest rate; you pay points at closing
Experts generally discourage buyers from taking points

NOTE: Loan origination fees are ALSO called points, but they are different from discount points.

A loan origination fee is a percentage of your loan (usually 1% or 1 point) that you pay to the lender at closing.

FINDING DOWNPAYMENT DOLLARS

1. You can withdraw $10,000 from an IRA without penalty
   (For couples it would be $20,000O)
   NOTE: This applies to buyers who have NOT owned a home or condo in the last two years. BE SURE to check an accountant for any other taxes that may apply
2. Borrow from a 401 (k) IF you can pay it back
   NOTE: You lose $$ because you pay it back in after-tax dollars
3. Ask a relative or friend for a GIFT
   NOTE: Individuals can receive $11,000 tax-free as a GIFT.
4. Check for old forgotten savings bonds, savings accounts
5. You may qualify for government help
   NOTE: Fannie Mae, Freddie Mac, state agencies offer aid.

MAYBE YOU DON'T NEED A DOWNPAYMENT

New financing strategies are making the traditional 20%downpayment rule obsolete. Check these options:

• Lenders offer 100% loans (downpayment is in loan)
• Lenders offer 100%+ loans(downpayment and closing costs)
• Your investment portfolio can be used as collateral for a 100% loan
• There are rent or lease-to-own options
• HUD-approved lenders offer down payments as low as 3%

SOME FEES AND COSTS TO ASK ABOUT

ESCROW ACCOUNT
As soon as you begin the loan process, an Escrow (TRUST) account is set up to hold money you will pay out at closing.

After closing, the Escrow account is the holding account for money your lender uses to pay your taxes and insurance.

FEES PAID AT LOAN APPLICATION
These VARY by lender. Get itemized estimates when you are shopping for lenders, and compare the following:

• Credit Report fee
• Mortgage broker fee (if you use a broker)
• Document preparation, administrative fees
• Appraisal
• Inspection fee - for new construction
• Flood certification
• Title search/title insurance

EARNEST MONEY FOR THE SELLER
The deposit you pay when you make an offer is the Earnest money. This goes in Escrow until closing. At closing, you receive any interest the money earned.

FEES PAID TO LENDER AT CLOSING
Loan origination fee (also called points) - 1% of loan
NOTE: It may be possible to eliminate this payment and fold it into your loan amount. (See below)
Private Mortgage Insurance (for Escrow)
Private Mortgage Insurance is typically charged
to first-time buyers and those who put less than 20% down
Homeowners insurance money for your Escrow account so the lender can pay your premiums
Property tax money for the Escrow account (up to six months) so the lender can pay your twice-yearly County property tax
Downpayment, if there is one
Balance of Earnest money if more is owed (to seller)

NON-LENDER CLOSING COSTS
Closing/Settlement Fee for closing agent/title company
Title Insurance
Notary Fees for signature on loan documents
Deed Recording fees
Pest Inspection (seller may pay this and any repairs)
Home Inspection (paid by buyer)
Home Warranty on major appliances (seller may pay)

SOME WAYS TO CUT CLOSING COSTS

1. Take a no-point mortgage to eliminate the 1% loan origination fee. NOTE: This means taking a slightly higher interest rate.
2. Obtain credit from the seller. NOTE: This actually lowers your offer, and may not be possible if the house is in demand.
3. Finance your closing costs as part of your mortgage. Ask upfront if you qualify for a 100% or more loan.
4. Use a monetary gift from a relative or friend. (This tax-free gift is currently $11,000.) NOTE: Find out if your lender accepts this form of payment.

COMING NEXT: Put Together the Right Buying Team