First-time and experienced purchasers alike may not understand the ins and outs of mortgages, but a primer can clarify what you need to do

Mark Paxton with Wells Fargo Home Mortgage Company recommends using pre-approval loans to reduce some of the stress that comes with home-buying.

Financing a home is usually the largest personal and emotional business transaction anyone will make. Navigating the home-finance waters can be tricky for veteran buyers and neophytes alike. But with a little information and guidancer, the process becomes more rewarding, both personally and financially.

While there is no substitute for the personalized services of a seasoned mortgage professional, here are some general principles that can get you started and hopefully allow you to ask better questions of your lender.

Pre-qualification vs. pre-approval
Before applying for a loan, buyers may wish to submit general income and debt information to a potential lender information that enables the lender to estimate the loan amount a borrower is reasonably eligible for. Typically, the lender will issue a pre-qualification letter stating the determined amount.
Pre-qualifying for a loan helps buyers to narrow the scope of houses within a set range of affordability. Remember, however, that a pre-qualifying amount is not a guaranteed loan. It remains subject to a lender's final commitment after formal application and underwriting processes are complete.

More savvy buyers, might consider obtaining a pre-approval. Unlike a pre-qualification, a pre-approval results in a commitment from a potential lender to make a loan. During the pre-approval process, a lender conducts personal credit investigations, evaluates the income and net worth of the borrower and then guarantees an amount that the buyer is eligible to borrow, all before the buyer has even entered a contract to purchase a home.

"Pre-approvals help buyers and real estate professionals by removing some of the credit approval anxiety," says Mark Paxton, Branch Manager at Wells Fargo Home Mortgage's Turtle Creek office. "Pre-approvals demonstrate a higher level of seriousness to Realtors and sellers and also confirm that borrowers have already completed some of the necessary steps for obtaining a loan. Pre-approved buyers are often able to close transactions more quickly, which can sometimes even lead to negotiating leverage for a buyer."

Choosing a mortgage structure
While a number of mortgage structures exist, all have two common features: interest charges and principal payments. The most typical mortgages are fixed-rate structures under which the monthly interest and principal payments remain static for the term of the loan.

Ron Watterson with CTX Mortgage says interest rates shouldn’t be the only consideration when getting financing.

Other mortgages allow for changes in the loan's interest rate at specified intervals, and the rates may increase or decrease along with the index rate tied to the loan. Even other mortgages are convertible a term that simply means a loan begins with an adjustable-rate loan but, at some point during the term, converts to a fixed rate (or vice versa).

Interest rates aren't the only consideration, though.

"A common question that home buyers will ask me is "'What is your interest rate?'" says Ron Watterson, a loan officer with CTX Mortgage Company. "While I understand that they are attempting to compare quotes from several lenders, the comparison isn't always that simple. Interest rates are often only one component of a mortgage, and it should be reviewed in conjunction with all other potential fees and charges in order to make an accurate comparison. Most buyers find that lenders rates are usually very similar, and that service and responsiveness are also important factors to consider."

Along with interest rates, mortgages may include origination and discount fees (which are essentially prepayments of interest) expressed as a percentage of the loan amount. Each one percentage point is commonly called a "point." For example, two points on a $100,000 loan equals $2,000.

Other fees associated with mortgages may include, but are not limited to, charges for appraisals, credit reports, property inspections, title insurance and escrow fees. Prudent buyers should always inquire about the charges for such fees, especially when the quoted rates seem low.

"If something from a rate standpoint sounds too good to be true, it probably is," Paxton cautions. "When lenders quote low interest rates, make sure that they aren't making up for it in the processing fees or somewhere else. And be aware that, although there are many reputable and respected lenders out there, some will quote low rates and then later claim that the rates were rejected during underwriting. When selecting a lender, it is always a good idea to get a recommendation from someone that you trust, perhaps a co-worker or a Realtor."

Several factors, including the length of time a buyer expects to own a home, a buyer's tolerance for fluctuating payment rates and a buyer's long term income expectations, can influence the type of mortgage that best fits each borrower's circumstances.

Buyers who know in advance that they will own a home for only a few years may wish to consider a mortgage that offers an initial fixed rate and later converts to a flexible indexed rate, a feature that can initially offer more favorable interest rates than a traditional 30-year fixed-rate structure.

"Fixed initial rate mortgages are common in the Oak Lawn community, where home buyers will often buy a place, fix it up, live in it for a few years and then resell," Paxton explains. "In the event that the buyer unexpectedly keeps the home beyond the initial fixed-rate period, it does not require a lump-sum balloon payment or immediate refinancing. Instead, it becomes a variable rate, indexed mortgage."

The application
After finding a property, a buyer must complete and submit a written mortgage application that, among other things, identifies the property to be financed, identifies the borrower and discloses pertinent information like employment histories, net worth and other data that would demonstrate the ability of the borrower to maintain the required mortgage payments.

"In order to receive quick funding, it is important to provide the lender with complete and accurate mortgage application information early in the home-buying process," Watterson says. "Otherwise the time spent verifying incomplete or incorrect information can make the experience seem unreasonably long and stressful to everyone involved. Complete information is the key to a smooth loan process."

Lenders will typically want to see copies of the following items: IRS Form W-2 for the last two years, current payroll stubs, the names and addresses of current employers, bank statements for the last two months, investment statements, divorce decrees, child support agreements and similar documents.

Underwriting
After receiving a written application, lenders will begin underwriting a loan to determine whether it complies with institutional lending standards. Lenders will investigate the property to be used as collateral by seeking a commitment for title insurance and by obtaining property appraisals. And, unless a borrower has obtained pre-approval for a loan, lenders will investigate a borrower's creditworthiness and ability to repay the mortgage by obtaining credit reports and employment and income history verifications.

"Poor credit reports can sometimes be stumbling blocks, but they are rarely insurmountable," Watterson says. "Credit reports may contain incorrect negative information, and a lender can assist you in updating the records. Other buyers may have derogatory information that can be legitimately explained in writing, such as late payments made during periods of unemployment or serious illness. A good underwriter will consider the entire situation, and take extenuating circumstances into consideration. Automated underwriting systems have helped to streamline much of this process. And borrowers who may have experienced credit trouble in the past but who have maintained good credit histories over the most recent 12 months may still qualify for loans."

Once underwriting is complete, the lender will either reject the application or commit to make the loan. Lenders may issue commitments either with or without closing conditions, such as proof of flood and/or hazard insurance.

Closing the loan
Finally, the moment everyone has worked so diligently for: the closing. A mortgage closing is the formal meeting at which buyers sign documents to take ownership of their new homes. To be sure that everything is in order, however, it is always a good idea to review the loan documents prior to closing.

During closing, borrowers will receive title insurance policies that confirm the rightful ownership of the real estate. They will also receive settlement statements that itemize transaction expenses and fully account for the distribution of loan proceeds. If the loan is an escrow loan, the borrower(s) will also need to make payments into an escrow account from which property taxes and hazard insurance premiums will be deducted as they come due.
Mark Paxton, Wells Fargo Home Mortgage Company, 3131 Turtle Creek Blvd., 214-443-5310.

Ron Watterson, CTX Mortgage Company, 5944 Luther Lane, 214-987-0500, ext. 207.




SHOULD I REFINANCE?
As interest rates dropped precipitously over the last few years, many homeowners took advantage of the opportunity to refinance their mortgages. In many cases, refinancing was a wise move. Sometimes, however, the marginal savings associated with refinancing simply may not justify the costs.
So how do you know if refinancing is right for you?

When weighing options, savvy borrowers will carefully compare the long-term savings derived from refinancing at lower rates to the additional costs they will incur in closing a new loan. As a benchmark test, financial advisers suggest that borrowers should consider refinancing only if the new rates are at least two percentage points lower than those they are currently paying.  
In general, borrowers who intend to stay in their homes longer will have a solid opportunity to make back the additional closing costs, while those who are considering selling in the near future may not want to refinance, even if the rates drop significantly.

When calculating the paybacks associated with refinancing, the structure of the new loan is an important concern. For example, a borrower with an adjustable rate mortgage who anticipates increasing interest rates may wish to switch to a fixed-rate loan, allowing him to lock into currently lower rates. On the other hand, borrowers with fixed-rate mortgages who anticipate lower interest rates in the future may consider switching to an adjustable-rate mortgage so their rate will then float downward along with the index to which it is tied.

Homeowners who have built sizeable equity in their homes have additional considerations. Restructuring with a term shorter than the standard 30 years, while often resulting in higher monthly payments, may mean considerably lower interest payments over the life of the loan. And those who desire to extract some of their equity in cash when refinancing will likely incur greater interest charges over the life of the loan after refinancing with a higher principal balance.

At best, refinancing can be confusing.  But with the guidance of experienced mortgage professionals (and perhaps a tax consultant), homeowners may find that interest charges saved are interest charges earned.

Scott Huffman



A GLOSSARY OF MORTGAGE TERMS
Not sure what all those acronyms and initiailss mean, or what you're really signing? Here's a quick reference to loan and mortgage terms.

Adjustable Rate Mortgage (ARM). Mortgages that allow the interest rate to change at periodic intervals based on an index plus a margin. This type of loan typically offers an initial interest rate and payment lower than fixed-rate loans available at the same time, allowing borrowers to pay less in the early years and potentially more later if interest rates rise.

Annual Percentage Rate (APR). The all-in cost of borrowing money, expressed in the form of an annualized rate, used as a tool to make apples-to-apples comparisons of loans offered by several lenders.

Federal Home Loan Mortgage Corporation (aka "Freddie Mac"). A corporation established by the federal government that purchases first mortgages (both conventional and federally insured) from members of the Federal Reserve System and the Federal Home Loan Bank System.

Federal Housing Administration (FHA) loan. A mortgage insured with the FHA that is designed to help low- and moderate-income and first-time home buyers who may not otherwise qualify for a mortgage.

Federal National Mortgage Association (aka "Fannie Mae"). A company authorized by federal statute organized to provide a secondary mortgage market for purchase and sale of mortgages guaranteed by the VA and those insured by the FHA. By purchasing mortgages from lenders, Fannie Mae frees up more capital in the private sector to finance new loans.

Fixed Rate Mortgage. Mortgages having a fixed rate of interest and, generally, a fixed monthly payment for the term of the loan.

Graduated Payment Mortgage (GPM). A type of mortgage financing, offered primarily to aid first-time home buyers, wherein the monthly payments gradually increase over a number of years as the income of the borrower increases.

Mortgage. The pledging of property, most often real estate, to a creditor as security for the payment of a debt.

Mortgage banker. A person or firm engaged in the business of dealing in mortgages, including their placement and refinancing.

Mortgage broker. A person or firm functioning as intermediary between borrower and lender in securing a loan.

Private Mortgage Insurance (PMI). Insurance that reimburses a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed to the lender (the mortgage plus the costs of the sale). A home buyer who makes less than a 20 percent down payment may have to purchase PMI. Generally, a homeowner can request cancellation of the PMI once the equity equals or exceeds 20 percent of the market value of the property.

Veterans Administration (VA) loan. A loan program available to qualifying veterans of U.S. military service under which mortgage payments are guaranteed by the VA and designed to encourage lenders to offer such veterans loans with more favorable terms.

Scott Huffman



This article appeared in the Dallas Voice print edition, March 3, 2006.