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    Mortgage Basics

    Appraisals

    An Appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an “Appraiser” typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.

    Closing Costs

    “Closing” is the last step of buying and financing a home, and when the property is officially transferred from the seller to the buyer. At Closing, all the parties in the mortgage loan transaction sign the necessary documents.

    Closing can take anywhere from 1-hour to several, depending upon contingency clauses in the purchase offer, or any escrow instructions needing to be executed.

    Prior to closing you should have a final inspection, or “walk-through” to insure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc.

    In most states the settlement is completed by a title or escrow firm in which you forward all materials and information plus the appropriate cashier’s checks or bank wire so the firm can make the necessary disbursement. Your representative will deliver the check to the seller, and then give the keys to you.

    Refinance

    Refinance is simply originating a new loan on your property.  It’s generally a good time to refinance when mortgage rates are 2% lower than the current rate on your loan. It may be a viable option even if the interest rate difference is only 1% or less. Any reduction can trim your monthly mortgage payments.

    Example: Your payment, excluding taxes and insurance, would be about $770 on a $100,000 loan at 8.5%; if the rate were lowered to 7.5%, your payment would then be $700, saving you $70 per month.  Your savings depends on your income, budget, loan amount, and interest rate changes. Your lender can help you calculate your options.

    Reverse Mortgage

    A reverse mortgage allows borrowers age 55 or older to access part of the equity in their primary home without making payments.  Accrued interest is simply applied toward the loan balance. If there is a current traditional loan balance on the home, the entire balance may be included in the reverse mortgage.

    FHA Loans

    In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. This enables buyers that may have otherwise been excluded from the housing market to buy a home.

    The FHA does not make home loans, it insures loans.  Should a homebuyer default, the lender is paid from the FHA mortgage insurance fund.

    FHA Provisions

     Buy a house with as little as 3.5% down.

    • Ideal for the first-time homebuyers unable to make larger down payments.
    • The right mortgage solution for those who may not qualify for a conventional loan.
    • Down payment assistance programs can be added to a FHA Loan for additional down payment and/or closing cost savings.
    Private Mortgage Insurance (PMI)

    On a conventional mortgage, when your down payment is less than 20% of the purchase price of the home mortgage lenders usually require you get Private Mortgage Insurance (PMI) to protect them in case you default on your mortgage.  Sometimes you may need to pay up to 1-year’s worth of PMI premiums at closing which can cost several hundred dollars. The best way to avoid this extra expense is to make a 20% down payment, or ask about other loan program options.

    Since reverse mortgages are non-recourse loans (homeowner is not obligated to pay any shortfall), most borrowers are required to get mortgage insurance to protect the lender from any such shortfalls. 

    VA Loans

    The Veteran Administration’s Loan (VA Loan) originated in 1944 through the Servicemen’s Readjustment Act; also know as the GI Bill.  It was signed into law by President Franklin D. Roosevelt and was designed to provide Veterans with a federally-guaranteed home loan with no down payment.  VA loans are made by private lenders like banks, savings & loans, and mortgage companies to eligible Veterans for homes to live in.  The lender is protected against loss if the loan defaults.  Depending on the program option, the loan may or may not default.

    Foreclosure

    For a traditional loan, it is when a homeowner is unable to make principal and/or interest payments on their mortgage. The lender, a bank or building society, can seize and sell the property as stipulated in the terms of the mortgage contract.

    For a reverse mortgage, a foreclosure is possible if the borrower does not make their required property tax payments, maintain property insurance, pay applicable association dues, or maintain their home according to standard FHA guidelines.

    Application Checklist

    Below is a list of documents that are typically required when you apply for a mortgage.

    Your Property

    • Copy of signed sales contract including all riders
    • Verification of the deposit you placed on the home
    • Names, addresses and telephone numbers of all realtors, builders, insurance agents and attorneys involved
    • Copy of Listing Sheet and legal description if available (if the property is a condominium please provide condominium declaration, by-laws and most recent budget)

    Your Income

    • Copies of your pay-stubs for the most recent 30-day period and year-to-date
    • Copies of your W-2 forms for the past two years
    • Names and addresses of all employers for the last two years
    • Letter explaining any gaps in employment in the past 2 years
    • Work visa or green card (copy front & back)

    If self-employed or receive commission or bonus, interest/dividends, or rental income:

    • Provide full tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
    • K-1’s for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1’s are not attached to the 1040.)
    • Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120) including all schedules, statements and addenda for the last two years. (Required only if your ownership position is 25% or greater.)

    If you will use Alimony or Child Support to qualify:

    • Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year

    If you receive Social Security income, Disability or VA benefits:

    • Provide award letter from agency or organization

    Source of Funds and Down Payment

    • Sale of your existing home – provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
    • Savings, checking or money market funds – provide copies of bank statements for the last 3 months
    • Stocks and bonds – provide copies of your statement from your broker or copies of certificates
    • Gifts – If part of your cash to close, provide Gift Affidavit and proof of receipt of funds
    • Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation

    Debt or Obligations

    • Prepare a list of all names, addresses, account numbers, balances, and monthly payments for all current debts with copies of the last three monthly statements
    • Include all names, addresses, account numbers, balances, and monthly payments for mortgage holders and/or landlords for the last two years
    • If you are paying alimony or child support, include marital settlement/court order stating the terms of the obligation
    • Check to cover Application Fee(s)