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Understanding
the Financing Process
When Buying Martha's Vineyard Real Estate
We already know that the home buying
process on Martha's Vineyard is a complicated process; and
shopping for the right home is the fun part. It is the financing
and closing the sale that is the most mysterious and stressful
for the buyer. Therefore, I want to address the process
and unravel some of the mystery. But first, this is important....
The
Nationwide Mortgage Licensing System and Registry launches
NMLS Consumer Access Website
The Office of Consumer Affairs and Business
Regulation announced that the Nationwide Mortgage Licensing
System and Registry (NMLS), operated by state financial
regulators including the Massachusetts Division of Banks,
launched the "NMLS Consumer Access" resource. There hope
is that it will help protect mortgage shoppers from unscrupulous
loan originators.
NMLS Consumer Access is a fully searchable
single-source consumer access website that allows the public
to verify state-licensed mortgage lenders, brokers and individuals
currently licensed through NMLS. Future updates to NMLS
Consumer Access will provide a record of applicable disciplinary
actions taken against a licensee by any jurisdiction in
the country.
The NMLS Consumer Access website was
launched in January 2010 and the NMLS
Resource Center, claims the website will bring greater
transparency to the mortgage industry and compliance with
provisions of the SAFE
Act.
The database of companies and individuals
will be updated nightly and will tell consumers whether
the person they're working with has had their license suspended
or revoked in any state, and will list any aliases the individual
has used since the age of 18. It will also seek to discover
whether that person is engaged in other sidelines and what
that person's license status is in other jurisdictions.
You can download a .PDF pamphlet of
Information
about NMLS Consumer Access prepared by the NMLS Resource
Center.
Okay, now let's get back to the Financing Process.
PRE-QUALIFICATION:
A mistake that most inexperienced buyers make is they fail
to find out exactly how much home they can afford. This
affects almost every aspect of buying a new home - including
how the Offer To Purchase is constructed. Martha's Vineyard
real estate agents are equally guilty because they start
showing a buyer property without knowing if the buyer can
afford the home they are looking at. It is generally recommended
that the first thing a buyer needs to do is pre-qualify
themselves so they know exactly how much they can afford
to spend for their dream home and how much cash they will
need for a down payment. Pre-qualification acts as a dry
run for the loan application process. The mortgage lender
will use details you provide about your credit, income,
assets and debts to arrive at an estimate of how much of
a mortgage you can afford. The whole process may take only
minutes and there is usually no charge to the buyer. The
pre-qualification is non-binding to the lender because
the information you provide has not been verified. However,
it serves as a good indication to the lender of your general
creditworthiness.
This also simplifies the pre-approval process which is the
next step. In many cases, the buyer will be surprised because
they have under-estimated their buying power. Pre-qualification
is an easy process and can be done either on-line or with
the assistance of a lending agent. Items considered when
pre-qualifying for a mortgage loan are employment history,
credit history and FICO
(credit rating) score, and monthly income and expenses.
PRE-APPROVAL vs. PRE-QUALIFICATION:
You may be wondering what the difference is between pre-approval
and pre-qualification. Pre-approval takes pre-qualification
one-step further. The lender will actually contact your
employer, your bank and others to verify your income, assets,
debts and credit history, and then issue you a letter stating
that your mortgage is approved for a certain amount within
a certain timeframe. You may be charged a small fee to cover
the cost of your credit reports and your application. This
fee is often refunded at the time of closing. I always ask
my clients to get pre-approved when they’re getting
serious about making a purchase, because in today’s
market a pre-qual letter carries very little weight with
savy sellers.
I realize being in the position of a
borrower and having to present all of your personal financial
information to a stranger might be a sensitive subject.
Jack Guttentag, The
Mortgage Professor, has developed a free pre-qualification
tool. “It is designed to let you see where you stand,”
he says. “And it will offer [links] that give information
on remedying your weaknesses.” SplitRock Real Estate
can assist you in getting pre-qualified or pre-approved.
LOAN APPLICATION:
The first step in applying for a loan is to understand the
mortgage programs that you may qualify for, its advantages
and disadvantages, so make a list of any questions you may
have (i.e. Why choose a Fixed Rate Mortgage over an Adjustable
Rate Mortgage?) Depending upon the economic climate at the
time you are applying for a loan, you may want to lock-in
the interest rate or float the loan's interest rate. Locking-in
the rate means that the lender usually commits to the mortgage
interest rate and terms (points and fees) at the time the
loan application is submitted. Buyers who opt to "float
the loan" believe interest rates and terms may become more
favorable between the time (weeks or months) of the application
and the closing. This means that the buyer can lock-in the
interest rate anytime between the loan application date
and closing. As you can imagine, this is a gamble because
you take the risk that interest rates may rise instead of
drop. In addition, the terms may not be the same, thereby
increasing the mortgage payment. The next thing you want
to think about is if you want to pay additional points to
lower your interest rate. Each point is one (1%) percent
of the mortgage loan payable in cash at closing.
Read
my article "Locking in the Rate" here.
The following list itemizes most of the documentation you
will need for your loan application:
- Check to pay for the application fee.
- Property Information:
- Completed Offer To Purchase or Purchase and Sales
Agreement contract signed by the buyer(s) and seller(s).
- Copy of the legal description and the LINK data
sheet for the property.
- If you are selling your current home, a copy of
the listing contract.
- If you have sold your current home, a copy of the
settlement statement (HUD-1)
- Income & Assets:
- Pay stubs for the last 30 days.
- Names and addresses of each employer for the past
2 years.
- W-2s for the past 24 months
- Statements for each bank, mutual fund, and/or investment
account for the last three months.
- The estimated value of all personal property.
- If you have made any large deposits to your accounts:
- Explanation and source for the deposit(s).
- If the large deposit was a gift:
- Signed gift letter (lender can supply).
- Copy of the gift check.
- Copy of the deposit receipt.
- If you own more than 25% of a business:
- Corporate or Partnership tax returns.
- If self-employed: Tax returns for the last 3 years
(with schedules),
Year-to-Date Profit and Loss Statement prepared by an
accountant.
- If you own rental property: Tax returns for the last
2 years and any current lease agreements.
- If you are retired: The Pension Award Letter.
- If you receive Social Security: The Social Security
Award Letter.
- If you are counting child support as income: Copy of
the divorce settlement,
Copy of 12 months of cancelled child support checks.
- Debts:
- Names, addresses, account numbers, balances and
monthly payments on all current loans.
- Explanation of credit report anomalies, including:
Late payments, credit inquiries in the last 90 days,
charge-offs, collections, judgments and/or liens.
- Bankruptcy filed within the last 7 years (bring
a copy of your bankruptcy papers).
- VA Loans: Copy of DD Form 214, Report of Separation
from Service.
- Miscellaneous:
- Photo ID and proof of Social Security Number.
- Residence addresses for the past 2 years.
- If applicable, a copy of your divorce decree.
- If you are not a citizen, a copy of the front and
back of your green card.
WHAT DO I HAVE TO DO TO MAINTAIN MY LOAN APPROVAL?
Just because you have been approved for a loan doesn't mean
that your financing is secure. The mortgage lender will most
likely make a second credit check just prior to closing because
the mortgage loan is only conditionally approved. The lender
reserves the right to re-verify credit, income, assets and
employment at any time prior to closing and may cancel the
loan if there are any adverse changes to your qualification
status. Red flags can disqualify you for the approved mortgage
program. A red flag is any inquiry made regarding your credit
worthiness. If you decide to purchase a big ticket item -
like that Porsche roadster or sailboat you have wanted - prior
to closing, you are at risking a red flag showing up on your
credit report. Another thing you do not want to do is move
your money around --- leave your bank and investment accounts
alone until after the closing. Do not close accounts or change
banks. A large withdrawal or deposit to any accounts will
trigger a red flag. If a red flag is triggered, you may be
asked to produce a paper trail tracking large withdrawals
and/or deposits. Although your employment status also affects
your credit worthiness, a change of jobs for salaried employees
to one of equal or higher pay will not trigger a red flag.
However, commissioned sales people should not change jobs
prior to closing on their mortgage loan. Mortgage lenders
typically average your commissions over the last two years
to determine income. Changing employers eliminates the two-year
commission history and places uncertainty on your income status.
The bottom line is not to make any changes without first talking
with your mortgage lender.
PRE-PAYMENT PENALTY:
Okay, you have your loan and you closed on your Martha's Vineyard
property on time with no problems so you are one happy camper.
You have been enjoying your home on Martha's Vineyard for
a few years but lower interest rates have you thinking about
refinancing your loan. However, you failed to read the part
in your loan agreement that addressed a pre-payment penalty.
What can you do --- nothing! If it was in the agreement when
you accepted the loan, you have to pay. But, what is a pre-payment
penalty and why is it part of some lending agreements? I explained
earlier the how and why of paying points as part of the loan
package. However, consumers today are demanding cheap loans,
meaning that they do not want to pay any points. Lenders are
acquiescing to the market demand for cheap loans by offering
to pay a mortgage broker a "yield spread premium". This presents
a good argument for not using a mortgage broker and dealing
directly with a bank. Do you really want to know what a "yield
spread premium" is?
Read
my article on "Yield Spread Premium" here.
Anyway, the reason for including a pre-payment penalty clause
is because the lender is trying to protect themselves from
making a cheap loan, usually an Adjustable Rate Mortgage (ARM)
that the borrower intends to pay off or refinanced in a few
months. Massachusetts allows a lender to charge a pre-payment
penalty but it must be clearly spelled out in the loan document.
Most pre-payment penalties do not exceed three years, so a
loan with a three-year-pre-payment clause may be constructed
with the following terms:
" Penalty of three percent of the outstanding loan balance
if paid off in the first year; " Penalty of two percent of
the loan balance if paid off in the second year; " Penalty
of one percent of the loan amount if paid off in the third
year.
As you can see, the penalty lessens the longer the loan is
held. Most lenders will allow up to 20-percent in additional
pay downs of the balance of the loan principal per year without
a penalty. Furthermore, many pre-payment penalties apply only
to a pay off because of a refinance and will not affect the
homeowner if he or she decides to sell the property within
the pre-payment penalty period. As I think you can see, pre-payment
penalties exist as a deterrent to what the financial market
calls "refinance churning".
In summary, it is important first to decide upon the mortgage
product that best suits your needs. Ask the lender if the
loan includes a pre-payment penalty for early payoff. After
the details of the pre-payment penalty are explained, you
can decide if the terms are agreeable to you.
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