CHOOSING A LOAN OFFICER & FINANCING


CHOOSING A LOAN OFFICER

Similar to selecting your Realtor, choosing a loan officer should be based on a recommendation or by reading reviews online (just like we all do before making a large purchase such as a car, household appliance, etc).  If you already have a trusting relationship established with a Realtor, ask them to provide you a couple recommendations for a loan officer.

You should interview at least two loan officers before selecting one to originate the mortgage for your home purchase.   The list below covers several items that you should consider when interviewing loan officers:

Have you solicited referrals from friends, family or coworkers?

  • Is the loan officer local to your market and aware of the local financing programs?
  • Can he/she provide references?
  • Do you feel comfortable with the loan officer’s character?
  • Do you feel he/she is genuine and not a “salesperson”?
  • Does he/she speak objectively with supportive data?  Or does he/she make generalizations?
  • Are they willing to prepare a Loan Estimate to objectively forecast your future monthly payment and the closing costs that will be associated with your mortgage?

In the meantime, read below for Financing Tips that covers most of the general FAQ’s that can really help you set off on the right foot in your pursuit for a home mortgage.  This article also defines many of the important mortgage acronyms to help you better understand the components of mortgage origination.

MN FINANCING TIPS

1)  What is a Mortgage?
In general, a mortgage is a loan obtained to purchase real estate.  A mortgage is typically unique to one property, and is actually a lien on the home that secures the promise that the buyer will repay the debt.  When the loan is paid off, the lien is removed from the Title.

2)  What is Loan-to-Value Ratio (LTV)?
How does it influence the size of my home loan?  The LTV Ratio is the size of your home loan compared to your home’s market value.  The LTV Ratio suggests how much equity you have in your home.  When LTVs increase beyond 80% (i.e. buying with <20% down), private mortgage insurance will be required (small monthly payment premium).

3)  What are the main types of loans available?
Fixed-Rate Mortgage: Your monthly mortgage payment remains fixed for the life of the loan.  Adjustable Rate Mortgages (ARMs): Payments fluctuate based on the current prime interest rate.  ARMs initially offer interest rate lower than Fixed-Rate Mortgages for some initial period (1-5 years), then the interest rate adjusts according to the market prime rate.

4)  When do ARMs make sense?
ARMs make the most sense if you know with absolute certain that you will being living in a home for a predetermined period of time, or if your income will increase steadily as your ARM nears its adjustable period in time.

5)  Can I pay off my loan ahead of schedule?
Absolutely!  In fact, if you contribute even a small amount extra per month to your mortgage payment, you are effectively reducing the life of your loan considerably.  Or another way of looking at it is you’ll be making an “investment return” on your extra payment approximately equivalent to your mortgage interest rate.  Caution: In the rare circumstance where you are able to rapidly pay off your mortgage (i.e. less than 3 years), some Lenders will charge a “prepayment penalty” in the $500 – $2000 range.

6)  I’m a first-time home buyer…are there special mortgages for me?
Yes.  Lenders are continuing to cater to first-time home buyers by offering excellent loan options for first-time buyers, and especially those that have very little money to put down or a weaker credit profile.

7)  How large does my down payment need to be?
FHA insured loans continue to provide financing options for buyers with as little as 3.5% down.  Keep in mind however, the less you put down, the larger your Private Mortgage Insurance (PMI) monthly payment will be.

8)  How do Property Taxes and Homeowners’ Insurance factor into my monthly payment?
Most Lenders require that your property tax and homeowners’ insurance payments be included in your monthly mortgage note.  This is convenient for all parties, and ensures that these bills get paid automatically by contributing a smaller amount monthly.

9)  What factors affect my mortgage interest rate?
As your down payment, annual income and credit score increase, your mortgage interest rate will decrease until it reaches the going market interest rate.

10)  What are Discount Points?
You can “buy down” your mortgage interest rate prior to Closing.  You can buy down your mortgage interest 0.125% or 0.250% (for example) for an upfront fee.  As long as you own the home longer than it takes to recoup that upfront fee in monthly interest savings, then it is a good investment.

11)  What is an escrow account? Do I need one?
Your Lender can establish an escrow account that will set aside a portion of your monthly mortgage payment to cover your annual property taxes, homeowners’ insurance, and private mortgage insurance (if you bought with <20% down).  This is a reliable, and extremely low cost option to ensure that these bills get paid on time.

12)  How do I get a mortgage?
Ask your real estate agent, coworkers or friends for a Lender referral.  Then you will need to fill out an loan application, and you will be asked to provide the following documents:

  • Pay stubs for the past 2-3 months
  • W-2 forms for the past 2 years
  • Information on long-term debts
  • Recent bank statements
  • Tax returns for the past 2 years
  • Proof of any other income
  • Address and description of the property you wish to buy
  • Purchase Agreement (once it’s available)
  • The Lender will order your credit report and an appraisal for your future home (both of which you will pay for at Closing).

13)  Is there a difference between getting Pre-Qualified and Pre-Approved?
Yes.  Pre-Qualification is simply an informal estimation on how much you will be able to borrow.  Pre-Approval is an extensive process where your Lender accounts for all of your financial documents listed in question 12 above, and commits to lend to you the loan amount for which you qualify.

14)  How do I compare the costs of different Lenders?
Simply ask various Lenders for a Loan Estimate.  Give them the following information:

  • Anticipated loan amount
  • Annual property tax amount
  • Annual homeowners’ premium
  • And assume A+ credit (or whatever you believe your credit score to be)
  • RESPA (Real Estate Settlement Procedure Act) requires Lenders to disclose all closing costs, and lender servicing and escrow account practices. So you will get a pretty good “apples-to-apples” comparison between Lenders.