Home Buyers Guide

This section provides information on some of the issues involved with the mortgage loan process associated with the home purchase process.  There are several steps involved with funding a home purchase.

Before searching for a home, it is best that a buyer know how much of a home he/she can afford.  There are different loan programs available and different payment terms for them.  The purpose of pre-approval is get an assurance of the financing available to close on the purchase the fastest time possible.  A purchase offer is strengthened by a letter of pre-approval.

Credit history

The primary index of credit history is the FICO score.  This is provided by three credit history vendors- Equifax, Experian, and Transunion.  Typically the middle of the three scores is used of each borrower.  If there are more than one borrowers, the lowest midde score is used.  Most loans are made with a FICO of at least 620, but many may go down to 540.  For VA loans,there is no minimum FICO, but VA lenders may have an "overlay" that requires a minimum FICO score.

Monthly debt

Debt to Income (DTI) is considered an element of "capacity" that gives an indication of leftover income available to make the required payments.  Many programs have a cap on this such as 44% and 50%.  Additional financial resources and income sources may be taken into consideration as mitigating circumstances and require extra treatment for approval.

Income

Lenders are concerned about the return of their money.  They like to be sure the borrower has funds coming in to make the required payments.  Usually, they require income statements for the two most recent years, as well as proof that the income is going to continue.

Assets

Additional resources can be used to strengthen one's position when applying for a mortgage.

Purchases

After approval for a mortgage has been granted and before closing, it is important that no major purchases be made.  A major credit purchase could significantly change a FICO when verified before closing, could cause disapproval for funding the mortgage.  A cash purchase might significantly lower financial reserves to cause approval to be reconsidered.

Down payment

Many loan programs require a down payment.  This assures their lenders you have "skin in the game."  The only government loan program that does not require a down payment is the VA loan.  A down payment should not be confused with an earnest money deposit since the earnest money deposit's primary purpose is to convince a buyer of a proposed purchaser's sincerity.  The earnest money deposit is credited against the purchaser's closing costs.

Closing costs

These are expenses paid at closing to finalize the origination process.  They typically include recording fees, closing agent fees, title insurance, and other fees that were not previously paid.  These have to be made by certifiable funds.

Insurance, Real Estate taxes

Hazard insurance is almost always required for a mortgage loan to close.  The first year is usually paid at closing with monthly escrow payments for subsequent renewal periods.  The same is true for real estate taxes.  However, real estate taxes are usually paid in arrears.  At closing, these taxes are prorated such that seller's portion is a credit to the buyer's closing cost.

Home inspections

It is recommended to obtain a home inspection before committing to a purchase and to avoid any surprises.  This is done but the borrower at the borrower's expense.

Origination Fees

Depending upon the particular loan process, a lender may charge an origination fee and underwriting fee.  A mortgage loan broker will receive a commission for the brokerage's services, but this cost is offset by the lower rates it can offer.  A processing fee may also charged for coordinating the needs of the lender with the borrower.  Here at Advocate Lending, this fee is included in our highly competitive commission.  Also, the interest rate of the mortgage loan may be a cost or provide a financial benefit to the borrower.  The VA loan has an origination fee that may for certain causes be waived.

Mortgage Insurance

Mortgage insurance may be required if the lender feels the the loan to value (LTV) percent is too high.  This is typical of FHA loans above 80% and Reverse Mortgages, in general.  There is usually an upfront payment made at closing and monthly payments until the LTV drops to a certain percent.  Except for FHA loans of more than 15 years, this must be dropped when at 78% LTV or may be dropped, depending upon payment  history, at 80%.

Required funds

At closing, you may be required to pay closing costs as well as any other costs incurred by third parties on your behalf.  These need to be certified funds.  If they are to be automatically deposited, use caution and verify with the closing agent the endpoint recipient before you send them.

Extra time

If for some reason you need more time, let your loan officer know as soon as possible.  It may require another rate lock which may change the terms of mortgage loan and add an extra closing cost.

Identification

Verifiable picture identification is needed before proceeding with the application.