The typical application is basically an outline of who you are, the property you want to buy or refinance, and your financial assets and liabilities.
The lender initiates a credit check and arranges for an appraisal of the property you plan to buy (or the current property you want to refinance). The appraisal assures you and the lender that the property has fair market value. The lender is investing in you and, in the unlikely event of default on your loan, the property must be worth enough to settle the debt.
Once your credit check, appraisals and verifications are complete, this “credit package” is reviewed by an underwriter who makes the loan decision. If your loan is approved, your lender will issue you a loan commitment (a binding agreement) to lend you the money. The commitment spells out all the details of the loan including all charges and fees, closing requirements, and any important conditions including:
A list of documents you will need for closing;
Information on when the commitment expires; and
Important information you should know when closing on your home.
The loan commitment may also may have certain conditions that you must meet before the loan is granted—bills you must pay off, or special requirements of the homeowners association, fox example.
In the case of new construction, the lender will want the appraiser to inspect the home just prior to closing. This is to ensure that it is in accordance with the plans and specifications furnished by the builder or contractor.
You and an attorney (if you choose to have an attorney represent you) should review the loan commitment carefully. Make sure the terms are acceptable to you. Assuming you and the lender come to terms, your agreement with the lender is now complete.
The lender will check the title to the property to make sure there are no outstanding liens or title problems. The lender requires, and sometimes will arrange for, title insurance to protect the property against unforeseen problems. This is called a “lender’s” title insurance policy. You may want to obtain title insurance to protect your own interest in the property. This is called an “owner’s” title insurance policy. These policies ensure that your property is free and clear of any title defects, claims or encumbrances.
Generally, your down payment can be anywhere from 5% to 20% of the home’s value. Veterans, or those serving active military duty, may obtain loans with no down payment at all.
If the down payment on your home is less than 20%, your lender will probably require that you get private mortgage insurance. This insurance insures the lender against possible default on the loan. It is not to be confused with mortgage life insurance or homeowners insurance.
The cost of PMI is divided into two parts. The first part is a payment made at the loan closing. The second part is an ongoing payment made each month along with the principal and interest payment.
Normally, PMI may be removed if you have reduced the principal amount of your loan to 80% or lower than the original purchase price. It also may be removed if you have obtained an independent appraisal stating that the outstanding principal amount of the loan is 80% or lower than the appraised value.
Some lenders do not require PMI. Instead, they may increase their origination fee and/or the interest rate on the loan. This can represent a significant advantage to the borrower since PMI premiums are not deductible for tax purposes and mortgage interest is usually deductible.
Closing costs and procedures vary from state to state and from county to county. In some jurisdictions, an attorney represents the lender. In others, the title company represents the lender. There may be state or county transfer taxes to be paid. There may also be fees for recording certain documents. There are also standard charges that are paid at all closings. Taxes, title insurance premiums, and interest on the loan pro-rated from the closing date to the end of the month.
Prior to closing, be sure to inquire if the lender requires an escrow account set up for the payment of the real estate taxes and homeowners insurance. Some lenders will waive the escrow requirements if the down payment is above a certain limit. Depending on when you close and when real estate taxes are paid in your jurisdiction, the cash required to set up the real estate tax escrow could represent one-half to three-quarters of the annual real estate tax bill.
It is important that you review what the closing costs will be with your lender and attorney. This should take place far enough in advance of the closing to allow yourself time to obtain the necessary funds to pay the closing costs.
This is the day you’ve been waiting for, the final step before you own your new home or complete the refinancing of your current home. At the closing you, the seller, the lender and the attorneys for all involved validate, review and sign all documents relating to the purchase or refinance. The lender provides the check for the loan amount. You receive the title to your property and the keys to your new home.
The dollar difference between the market value of your home and your current mortgage balance determines your home equity. In other words, if you sold your home this would be the cash you would receive after the sale. A home equity loan allows you to access this cash without selling your home by using your home as collateral. As you pay down your mortgage, and/or your home’s value increases, your available equity increases accordingly.
Because home equity loans and lines of credit are secured by your home, there are three distinct advantages over other types of loans: lower interest rates, tax deductible interest (consult your tax advisor) and large loan amounts. Based on your personal financial situation, you may be able to borrow up to 100% of your available home equity.
You can use a home equity loan or line of credit for almost any expense — to buy a car, consolidate debt, build an addition, remodel your home, or pay college tuition. Many people use home equity loans to pay off higher interest debt such as credit cards, auto loans, and personal loans.
A home equity loan is advanced in one lump sum. You make fixed monthly payments over a fixed term and are charged interest only on the unpaid balance. A loan makes it easier to budget since your monthly payments are fixed over the life of the loan.
A home equity line of credit is a set amount of money you are approved to use whenever you like. You access your funds by writing checks. As you repay the balance, you can reuse it up to your approved credit limit. You are charged interest based on the unpaid balance. A line of credit gives you the flexibility to borrow funds when you need them. When the line of credit expires, you need to renew or pay your outstanding balance.