The New England Real Estate Team

Step 3: Obtain Financing.

Until you have been pre-approved for a loan by a mortgage lender, it is unwise to begin serious house hunting. Indeed we would recommend you to see a lender before we show you any homes. No seller will want to waste their time with a buyer that might not be able to secure a loan. You need to know, within a certain range, how much home you can afford and, most of all, how you plan to pay for it. You can not negotiate on a price for a home without knowing what you can afford. The following items are general and your home mortgage lender will have the specific knowledge and experience in helping you obtain a home mortgage that is best suited for you.

• Minimum mortgage terms you need to know.
• Calculating your down payments.
• Calculating mortgage payments.
• Add in taxes and insurance.
• Home ownership expenses.
• Which loan is the right one?
• Getting pre-approved.
• Finding a Great Lender.
• Closing Costs.

Please Note:

Ignore The Media Headlines.

They do not tell the whole Story!

Obtaining Financing and Financing Terms may be far more critical than the selling price of the home you wish to purchase.

Let's say you are ready to be a homeowner. You have good credit, plan to stay put for five or more years and have been waiting for home prices to drop, and drop, as in today's market. It's time to get serious--before an inevitable rise in interest rates wipes out your advantage in waiting for home prices to drop. Rarely are the mortgage interest rates and the home selling prices been in sync. The conditions that make home prices to stop falling is the very same thing that will push mortgage rates higher. So anything you gain by further drops in home prices might be offset by rising mortgage interest rates.

Consider you have been keeping an eye on a home for weeks waiting for the price to drop. Currently the home is selling for $320,000. You wish to put 20% down and take a mortgage for $256,000. Currently the mortgage interest rate is 5.5%. The monthly payment for a 30 year fixed mortgage will be $1453 per month. Let's say the price dropped on the property after 3 months, of patiently waiting, to $310,000 however, in the mean time the interest rate for a 30 year fixed mortgage has risen to 6.0% and with a down payment of 20% your new mortgage will be $248,000. The new monthly payment will be $1487. That is an increase of $34 per month! Mortgage costs will rise as the economy recovers, so trying to time real estate might not pay off. If you waited to buy, you would have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate.  And you have spent an extra 3 months living someplace you would rather not be.

Media Headlines of pending housing doom and gloom do not tell the whole story. So ignore the headlines, and stop sitting on your thumbs!

 Minimum mortgage terms you need to know.

• Amortized: A loan for which the same payment amount is made over time, with payments including interest plus the money to pay back the principal (the amount borrowed). At the end of the term (like a 15 year loan), a fully amortized loan will have a loan balance of $0.00.
• Annual percentage rate (APR): This figure represents the true cost of borrowing money per year, as it includes up-front costs in addition to the interest rates
• Closing costs: Costs associated with settlement/closing or getting a loan. Examples would be the appraisal, attorney's fees, escrow company fees, and so on.
• Conforming loan: A standardized loan that can be sold by the lender in the secondary market.
• Escrow money/earnest money / good faith deposit: Money given to a third party upon acceptance of an offer; escrow is designed to show a willingness and a financial ability to purchase.
• Fifteen-year loan: A loan for which payments are spread over fifteen years.
• Home-owner's insurance: Insurance that covers damage to the home. Coverage varies widely; always read the policy carefully.
• Impound/escrow account: An account the lender sets up (sometimes through a third party) for taxes and/or insurance; your monthly payment then includes this amount, which is used by the lender/third party to pay your tax or insurance bills when they become due.
• Land sales contract (contract for deed): A contract in which the seller is the primary lender, but she/he does not convey complete ownership to the buyer until the final payment has been made.
• Mortgage/deed of trust: A document that pledges the property as collateral in case you default on your mortgage payments.
• Mortgage insurance: Insurance that the lender requires the borrower to purchase to cover the lender's losses if the borrower defaults on the mortgage payments. Mortgage insurance is typically required when the down payment is less than 20 percent.
• Nonconforming loan: A loan that doesn't conform to guidelines set by the secondary market.
• Point: One percent of the loan amount. In most cases, points can be considered up-front interest payments. If you pay the lender more today, your interest rate will be lower.
• Property taxes: Taxes levied by the city/state based on the value of the home.
• Secondary market: Investors or companies that buy and sell loans. The two largest participants Freddie Mac and Fannie Mae; created with the help of the federal government, they now operate as private companies, though still under congressional oversight.
• Thirty-year loan: A loan which payments are spread over thirty years. This is the most common loan because the resulting monthly payments seem affordable to most buyers.
• Title insurance: Insurance that protects the policyholder against a claim/loss in the event there is a dispute involving property ownership (i.e. a former owner claims his signature was forged on a previous deed).
• Underwriting: The process of analyzing risk, verifying financial information, and filing paperwork, concluding with a final loan approval.

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Calculating your down payments.

The first step to financing the purchase of your dream home is figuring out how much down payment you can come up with. A 20% down payment is ideal, but not nrcessary. Options include borrowing from a relative or friend or from your retirement account. All three of these can have unpleasant consequences. The best options are savings, cash gifts (without strings attached), certificates of deposits (CDs), stocks, bonds, mutual funds, sale of other property, tax refunds, sale of boats, and other toys. Whatever you choose to do, above all, consult a local tax professional and/or an accountant to fully understand the pros and cons, the rules, potential risks and pitfalls. Just because you can do something doesn't mean that it's a good idea.

If a down payment is not in your near future you still have some options:

There are no free lunches in the lending business, so you could expect to pay higher interest rates when ever the lender needs to take on more risk.

It is very easy to get in over your head. Ask questions. Be informed!

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Calculating mortgage payments.

If you make the decision to buy a home based on whether you can afford the monthly payment, you will need to examine the effects the loan length has on the monthly mortgage amount. With an estimated sale price and a mortgage calculator, you can calculate approximate payments for 15-year, 20-year, 30-year, and 40-year fixed-rate loan. Keep in mind that the further out in time you extend the mortgage the more total interest you pay. You will probably need to try out several different sale prices and length of mortgages to determine what will ultimately be most comfortable for you. Following are steps to guide you through the process:

• 1. Estimate a sale price.
• 2. Subtract the amount you can make as a down payment.
• 3. Enter the resulting number you need to borrow from the lender into a mortgage calculator.
• 4. Enter the number of total monthly payments (i.e. 180 for a 15-year, 240 for a 20-year, 360 for a 30-year and 480 for a 40 year mortgage)
• The calculator will display the combined monthly principal and interest payments. (If you don't have a mortgage calculator by all means use the calculator available on our web site: http://www.josephshimer.com/calculator.asp or http://www.johnbielefeld.com/calculator.asp)

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Add in taxes and insurance.

You will need to add into the monthly payments, calculated in a previous step, the monthly property taxes and monthly home owner's insurance. Following are steps to guide you through the process:

• You can call us or the town tax assessor to get the tax rate for any town in MA and NH.
• With the tax rate (in number of dollars charged/$1000 of the assessed value of a property) you can then call us or ask the tax assessor for the assessed value of a property and divide it by 1000.
• The resulting number is then multiplied by the tax rate and the result is your yearly property tax.
• Divide the yearly tax by 12 months and add this to the monthly mortgage payments from the mortgage calculator (from Step 2:).
• Next you will need to call your insurance broker and ask for a typical insurance rate/month it will cost you for a home owners insurance policy for the home you selected for the original estimated sale price (from Step 2:).
• Add the monthly insurance payments to the monthly mortgage payments and then add the tax per month. Now you have your total monthly payments for a property.

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Home ownership expenses.

You also must be made aware of all the additional expenses of home ownership you do not have as a renter. Now might be a good time to update your projected budget to obtain a better picture of what owning a home will cost and what you can afford.

Consider the following expenses (add any additional expenses you can think of):

• Painting
• Gas
• Electric
• Water/sewer
• Oil
• Trash removal
• Condo Fees
• Transportation
• Snow plowing
• Septic pumping
• Yard care
• Furniture
• Plumbing
• Roof repair
• Pool maintenance
• Yard equipment
• Tools
• Fencing
• Groceries
• Cleaning service
• Cleaning equipment
• Laundry
• Appliances
• General repairs

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Which loan is the right one?

There are literally hundreds of different home loan programs out there. By meeting with a loan officer, you can determine the best type based on your individual situation. Be very thorough in your research. Make sure you clearly understand all the issues, implications, and risks of any options you may consider. Bellow are some examples of the most common mortgage types:

• Fixed-rate mortgage: The interest rate (and thus principal and interest payments) remains fixed for the entire length of the loan. Two common lengths are fifteen and thirty years, although loans can be for virtually any time period up to forty years (the current maximum for most lenders). The longer the term, the more total interest you pay, but the lower the monthly mortgage payment.
• Adjustable-rate mortgage (ARM): A loan for which the interest rate (and thus payments) fluctuates over time. This is a dangerous loan if interest rates are rising or are projected to rise.
• Hybrid loan: An ARM in which the first adjustment period doesn't occur for an extended period of time (three, five, seven, and ten years are the most common). Each subsequent interest-rate adjustment usually occurs annually. This is sometimes referred to as an intermediate ARM.
• Interest-only loan: For a period of time, payments are only large enough to cover the interest due, with no money applied to reducing the principal. You still owe what you borrowed even after months/years of making payments. We strongly recommend that you do not consider this type loan. The negative impact can be quite devastating.
• Jumbo loan: A loan that exceeds pre-established loan limits set by Fannie Mae and Freddie Mac. Interest rates for a jumbo loan are slightly higher than for conforming loans, since larger loan amounts increase the risk to lenders. Each year, the limits increase because of inflation; for 2005, any loan on a single-family unit that exceeded $359,650 was considered a jumbo loan.
• FHA (Federal Housing Administration) loan: A government-backed loan that allows for credit problems and higher debt ratios. Watch out for the higher-than-normal closing costs.
• VA/DVA (Veterans Administration) loan: A government-backed loan that allows veterans to purchase property with virtually no money down. It also allows for credit problems and higher debt ratios. Watch out for the higher-than-normal closing costs.
• Balloon loan: Also called a bullet loan, this typically has a fixed interest rate for a certain period of time; at a predetermined future point (five years is the most common time frame), the entire loan balance is due in full. At that time, complete repayment or refinancing is necessary, which makes this a risky loan since interest rates fluctuate and your job security/financial situation may have changed.

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Getting pre-approved.

Pre approval is the best way to go. Pre approval indicates the loan officer has reviewed all your financial status and has issued a letter of pre approval for a loan through his/her lending institution. You will be in a better negotiating position, because the sellers know that - barring any unforeseen circumstances - you are financially capable of buying his property. Closing time will be much quicker, since most of the loan paperwork is already completed. Best of all you will not discover, after finding your dream home, that you are unable to obtain the necessary mortgage to close.

A letter of pre approval is only good for two months. After two months a new letter must be issued by your loan officer. This will cover any financial changes that may occur during the two month period.

Before you can get pre approved you will need to provide information and documentation to your loan officer. The information and documentation is then verified. If you meet the requirements set by the lending institution then a pre approval letter will be issued. The following list will give you a basic idea of what may be needed to help you prepare:

• Addresses of residences for past two years
• Bank names, addresses, and account numbers for all checking/savings accounts (statements for the previous three months may be required)
• Copy of gift letter, if receiving down-payment money as a gift
• Copy of tax returns for two years (typically for self-employed only)
• Current balance sheet and year-to-date profit and loss statement (for self-employed only)
• Divorce decree (if applicable)
• Documentation of other income (alimony, child support, etc.)
• IRS Form 4506 or Form 8821 (these allow the IRS to release confidential tax information to the lender; these forms are not required in every instance)
• Job history (employers/addresses/phone numbers) for previous two years
• Letter of explanation (with documentation) for credit delinquency
• List of all assets, including make, model, year, and current value of automobiles owned
• Most recent statement(s) for 401(k), mutual funds, and money market accounts
• Names, addresses, account numbers, and balances of debts
• Original Certificate of Eligibility and DD 214 (for VA loan only)
• Pay stubs for the last thirty days
• Previous bankruptcy discharge papers (if applicable)
• Proof of bonuses for two years (if applicable)
• Proof of identity (driver's license/social security card)
• Proof of residency, such as green card/work or visa permit (for non-U.S. citizens only)
• Transcript (if you were a student within the past two years)
• W-2s for the past two years

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Finding a Great Lender.

We can be a valuable source of information on lenders, since we work with lenders every week. Referral form others can also lead you in the right direction, such as friends, family, coworkers and etc.

Banks have many types of financial products to serve you and help. Mortgage brokers specialize in mortgage loans. Mortgage brokers are like match makers, matching buyers with the best lender based on what each needs. Mortgage brokers usually collect a commission from the lender for finding and, in some cases, processing the paperwork on a new loan. Mortgage brokers may collect fees (for loan application, document preparation, and so on) from you the borrower, usually as part of the closing/settlement at closing. These fees must be clearly disclosed on a Good Faith Estimate, which broker/lenders are required to provide to the borrower within three days of a loan application and again at closing

Any government loans (VA, FHA, MassHousing etc.) have more hurdles than conventional loans. If you want to obtain this type of loan, make sure your mortgage lender/broker is proficient in processing these loans. This can save you time and help you avoid the hassles of government paperwork.

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Closing Costs.

Closing costs vary from lender to lender, the amount of time attorneys are involved in the transaction, state transfer taxes and even the type of loan. Some of the costs at closing are not costs associated with getting the loan but rather are prepayment for services.

If you are short of cash to pay for these expenses, ask during contract negotiations (i.e. when making an offer) whether the seller will absorb some or all of your closing costs.

Here are the closing fees and costs:

• Appraisal fee
• Attorney's fee
• Credit report fee
• Document preparation fee
• Escrow fees
• Flood certification fee (if applicable)
• Homeowner's insurance
• Homestead Act fee (if applicable)
• Inspection fees
• Loan application fee
• Loan origination fee
• Mortgage insurance
• Overnight mail/delivery fees
• Pest/termite inspection fee
• Points
• Property taxes
• Recording fees
• Reserves
• Survey fee
• Tax service fee
• Title insurance
• Title search fee
• Transfer taxes
• Underwriting fee

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