- HOME LOANS MADE SIMPLE

HOME LOANS MADE SIMPLE

HOME LOANS MADE ANS MADE SIMPLE

Table Of Contents

Introduction

How The Loan Process Works From A To Z 17

Honest Pre-Approvals

Good Lenders Follow A Proven Process To Close On Time

Good Lenders Update You Throughout The Process

Good Lenders Can Close Difficult Loans

A Summary Of How I Can Simplify Your Purchase

A Mortgage Terms Glossary

Foreword Buying or refinancing a home is a very exciting time, but it can also be overwhelming. We are here to make sure the mortgage process is as simple and seamless as possible—that’s the advantage of choosing an experienced team like ours. We each have 30 years of experience in this industry, and have done every type of loan imaginable. Our team looks for potential snags in the loan process and prevents them before they ever turn into a problem for you. We work hard to meet or beat our deadlines. We believe in communicating with you in an honest, open way and leveraging technology to the fullest. You will always know the what and why of each state of the loan process. We hope you give us the opportunity to exceed your expectations! Tom & Debbie

About Us

A. Thomas Micheletti

For over thirty amazing years, I have been part of the California residential and investment real estate community. Always growing, always learning, I find that each loan and each person has unique qualities and requirements that keep my career both rewarding and challenging. My mortgage career began in 2001. After learning the business at the largest mortgage brokerage in Northern California, I founded America’s Mortgage Source, Inc. in the Napa Valley in late 2003. Being the owner and broker with multiple loan officers and processing staff under me, I excelled at most aspects of the mortgage business including loan origination, underwriting, doc drawing, funding, closing, delivery, and secondary market functions. To understand my priorities, let me share a few things with you. To provide excellent service an agent must be well educated and dedicated to meeting his customer’s needs: I have Bachelor of Arts degree in applied math and industrial engineering from the University of California, Berkeley and I love the use of technology in my business. This includes social media; secure online document delivery and management, electronic signings and real-time loan status updates, so you always know what is going on with your loan. Never a believer in “Banker’s Hours”, I always try to make myself available for my clients when it is convenient for them, so evening and weekend access by appointment is one of the many things that set me apart from my competition.

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I am passionate and enthusiastic about the work I do and take a holistic long-term approach to my client’s needs as opposed to only the transaction at hand. I am very grateful for the many friends I’ve made through my work. In addition to my experience serving my client’s residential and real estate investment needs, I have invested in and have developed residential and commercial real estate. Developing, stewarding, managing, buying and selling investment real estate gives me extra insight when advising my clients.

Debbie Kalfas

As a Chicago native, I decided to advance my real estate career in 1987 and relocated to the stunning San Francisco Bay Area after completing my MBA from DePaul University with a major in Real Estate Finance. Over the course of nearly 20 years, I had the privilege of working with some of the largest commercial brokerages and retail development firms in the country, including CB Commercial, Marcus & Millichap, Barnes & Noble, Gordon Biersch Brewing Company, and Panda Express. I transitioned into residential real estate sales in Northern California in 2007, where my greatest personal satisfaction came from finding families their dream homes. My success was built on a foundation of customer service, drive, experience, and education. To this day, focusing on the customer's needs, backed by the ability to deliver, is my service guarantee!

[Talk about loans]

Beyond real estate, I am passionate about the healing power of horses and other service animals. I have witnessed the transformational impact they can have on physically and emotionally challenged children, such as speaking their first word, taking their first steps, or sitting up for the first time. My mission is to support organizations that provide healing

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interaction opportunities to people with physical and emotional challenges, children who are victims of abuse, battered women, terminally ill children, at-risk youth, and wounded heroes.

CHAPTER 1 Introduction

Finding the right home is obviously a major component of homeownership, but that in no way means the process of getting that home is as simple as finding it. The reality is that searching for and buying a home involves an entire process that includes many steps and pieces that need to come together before you can declare the home “yours,” make the move, and settle in. If you’re wondering who I am and why you’re receiving this book, I’ll give you a little background. I’m a mortgage lender, and it’s my job to make sure you get the money you need to buy your house. Why am I giving you this book? As a home buyer, you have numerous options when it comes to getting approved for financing for your home purchase. You can apply for loans from any number of national or local lenders. So why should you choose to work with me? I have a direct working relationship with your real estate agent and a proven track record of getting buyers to the finish line of their home purchases. This chapter provides you with an overview of the entire home- buying process, including the home search, breaking it down into 10 basic steps that you should follow, along with your agent, to get things moving. Beyond that, in further chapters, I will go over everything you need to know about what I do for you and how I close loans on time — hence, the title of the book. Below is the 12-step checklist that will help make the whole process more rewarding and less anxiety-provoking. Searching 1

for and purchasing a home is not for the faint of heart, but it is so very worth it!

THE 10 STEPS OF HOME BUYING:

• Find Out What You Can Afford • Get Pre-Approved for a Loan • Create a List of Needs vs. Wants • Look at Homes • Choose a Location • Choose Home Design

• Hire an Agent • Make an Offer • Put Money in Escrow • Negotiate with the Seller • Begin the Closing Process • Close the Closing Process

STEP 1: FIND OUT WHAT YOU CAN AFFO U CAN AFFORD

This first step is essential before you do anything else in the home-search and home-buying process. If you find out you can’t yet afford a home, or you aren’t ready to sell your home to get to your dream home, then wait until you can. There’s no point in getting your hopes up, stumbling upon the house of your dreams, and finding out you can’t afford it. You have to work within your price range, and not only use that as a general guide, but also as your starting point in going forward. So, know your budget! Don’t just think about the overall home sale price; consider the down payment, the monthly mortgage payments, property taxes, homeowners’ association fees, maintenance, and closing costs. Too many buyers — both first- time home buyers as well as second- and third-timers — make

the mistake of not factoring in and accounting for all associated expenses in buying a home. For example, a home might seem affordable to you at first glance, but there are always “hidden” expenses involved, which, if you aren’t prepared for them, could lead you into financial problems. If you’re not sure where to start, try an online mortgage calculator, which will take various factors into consideration, including your monthly income. I would also be happy to give you a preliminary estimate on what you can afford. One tip is to make a detailed examination of the housing market to figure out your price range, as well as determine any issues you might have in meeting your basic needs. Do research on items like school districts, crime stats, impending construction, or anything that could increase or decrease the value of a home.

STEP 2: GET PRE-APPROVED FOR A LOAN

This is where I come in. Yes, you can get a loan from most financial institutions, but the majority of home buyers contact lenders for mortgage loans because the full cost of a home is generally not within the purview of the typical buyer’s assets. Be careful here. Some banks are willing to lend larger loans than they know are reasonable, creating financial issues for buyers down the road. Even if you know your budget, and you know what’s affordable for you, you could get “tricked” by a bank or lender into thinking you can afford more than you can. Know your limits. Stay disciplined so you stay on track. Let’s say you’re counting on selling your home for X amount of dollars to serve as your down payment for your dream home that’s a bit out of your financial reach, and you don’t have extra in your savings account. What are you going to do if your home

doesn’t sell for the amount you expected — or worse, if your home doesn’t sell at all, languishing on the market while you’re forced to pay two mortgages and can’t make ends meet? You have to be smart about this. While the process of buying a home, whether or not it’s your first, is a major emotional financial investment, you must maintain emotional control and make practical decisions based on your budget and situation. The best approach? Pre-approval by a proven, experienced, qualified, and reputable mortgage lender — like me — with whom you work closely and carefully to determine the appropriate budget for a mortgage loan.

STEP 3: CREATE A LIS TE A LIST OF NEEDS V F NEEDS VS. WANTS

Essentially, you need to determine what is most important to you in a home — the non-negotiables — vs. what you’d like to have in a home — things you might need to let go of. In other words, figure out what you need in your home (think number of bedrooms or bathrooms, yard, garage, basement, etc.) vs. what you want in your home (such as a fenced-in yard, gourmet kitchen, deck, walk-in closet). Then, write these items down when you’re shopping for a home. This will eliminate a lot of wasted time and energy looking at homes that don’t meet your criteria, and your budget, and will bring you that much closer to finding the right home for you. Keep in mind that no home is perfect. Be prepared to make some concessions, and remember that your ultimate dream home might be out of reach — for now. Nobody said that your first home has to be your last home!

STEP 4: LOOK AT HOMES

Now comes both the fun part as well as the tricky part — looking

at homes. The fun part is searching and viewing online homes that meet both your budget and criteria, as well as visiting open houses, allowing you to figure out and see for yourself what is and isn’t the right home for you, and then finding it. You should make sure a thorough search is completed on all the available for-sale homes that fall within your price range and meet all the needs — and at least several of the wants — on the lists you wrote out in the third step. The tricky part? You need to examine each property’s condition so that you know exactly what it is you’re getting. Who knows what a seller or a listing agent is disclosing to you? Hire a qualified home inspector to inspect all aspects of the home, such as structural and foundational issues, the yard, driveway, and walkway, the quality of water and plumbing systems as well as electrical work, water damage or mold, infestations requiring extermination, as well as doors and windows.

STEP 5: CHOOSE A LOCATION

Location, location, location! You probably hear that term in real estate a lot. This term can mean several different things, but here, I’m referring to the fact that one of the most important choices someone can make when determining which home to purchase is location. You’ll need to factor in the area of the city, the neighborhood, the school district, proximity to important amenities, the commute to work, crime statistics, noise, neighbors, parking, traffic, etc. There is plenty to consider when thinking about location. Don’t forget that every property has its own specifics related to water supply, sanitation, and market access, which can either increase or decrease the value of the property.

Finally, really picture yourself and your family both inside the home and outside it, in the area. Can you see yourselves living there? Do you get a positive vibe, or a negative vibe? These are all things to consider when choosing a location.

STEP 6: CHOOSE A HOME DESIGN

When you’ve determined such items as price range, needs vs. wants, and location, don’t forget to add home design to the list. I’m not talking about interior design or décor, which are all things that can be modified, upgraded, or even completely renovated in time. Rather, I’m talking about the type of home — such as a condo, a townhouse, a bungalow, a two-story home, etc., as well as big-ticket items like a garage, yard, basement (finished or unfinished), dining room, staircases, where the bathrooms are located in relation to the bedrooms, etc. In other words, how was the home architecturally designed? Perhaps you’re a first-time home buyer who’s single, and you’re looking for a condo in a multi-story building where you’ll meet plenty of people. Or perhaps you and your partner have outgrown your smaller starter home, and you need to upgrade to a larger home with three bedrooms in close proximity to a bathroom, and perhaps on a second story, with the kitchen and living room on the main floor. Design matters! You need to determine the right type of home design that meets your needs and those of your family, if applicable.

STEP 7: MAKE AN OFFER

Once you’ve found the home that you and your agent are sure is the one — it falls within your price range, it’s in the right area and neighborhood, it meets all your needs criteria and maybe most of your wants, it’s been thoroughly inspected and examined — it’s

time to make an offer. This is the first step to actually purchasing a specific property. “Making an offer” essentially means proposing a price to buy the property, and depending on the seller, the listing agent, your own agent, and the current housing market, that proposal could be equal to, less than, or more than the asking price. Further, a “spoken deal” means nothing; many legal requirements and written documents, such as the Residential Purchase Agreement, are involved in officially making an offer on a home, and this is another area where you truly need the expertise of a good real estate agent. If you choose to work without an agent, especially if you’re a first- time home buyer, you put yourself at risk of making expensive mistakes, or even screwing up the entire deal. Further, keep in mind that real estate laws and requirements can vary from state to state and can change over time. Keep yourself abreast of all new home-buying and housing market information applicable to your area. For second- or third-time home buyers: Don’t assume that because you bought a home in Oregon two years ago that you know the rules or conditions in North Carolina. The process of actually drawing up an offer on a home in which you’re interested is a bit complicated. Here are a few basic things that are important to know about making an offer. The offer: • must conform to local regulations and standards; • must mention the amount being offered as well as the actual asking price; • must include any terms and conditions on the purchase; • must be drafted and signed; • must be forwarded to the seller through an agent (your buyer’s agent or the seller’s agent); • is not a binding sales contract; 7

• is the buyer’s offer on the house based on its current condition and according to the terms and conditions; • is subject to change if the seller doesn’t agree with your terms; • can be refused if the seller doesn’t accept the amount being offered; • becomes void if the seller makes any changes, and becomes a counteroffer, which you can accept, refuse, or change. In this last instance, which is actually quite common during this process, an offer turns into a counteroffer, which can turn into another counteroffer, and on it goes back and forth until both parties are satisfied, or until the buyer moves on and/or the seller refuses to accept the buyer’s deal. The offer doesn’t actually become a contract until all parties agree to all terms, conditions, and changes in writing. So, now, what should be included in the drawn-up purchase offer? Here is a list of the most common items: • Physical address of the property; • Legal description of the property; • Price and terms and conditions of the purchase; • Seller’s promise to give clear title to buyer; • Target closing date; • Earnest deposit associated with the offer, as well as method of deposit; • Disposition of earnest deposit if deal falls through or fails; • Plans for adjusting taxes, fuel, and water bills between buyer/seller; • Who will pay for title insurance, land survey, home 8

inspections, etc.; • The deed to be granted; • State-mandated legal requirements; • Attorney review of contract; • Any disclosures; • The time after which the offer will expire.

Something else to consider is contingencies. Many offers are made contingent upon a factor or event that must be resolved before the offer moves forward. The two most common contingencies are financing and home inspections. For financing, the offer is made contingent on the first-time buyer receiving a sufficient mortgage loan from their bank, or for current homeowners, contingent upon the sale of their home. For home inspections, the offer is made contingent upon a satisfactory home inspection report.

STEP 8: PUT MONEY IN ESCR Y IN ESCROW

Part of the home-buying process involves putting money into escrow; the buyer is expected to put money into escrow in order to make the contract binding, which then helps the contract move through and toward closure. A lot of people, both buyers and sellers, are confused about what “escrow” is. Essentially, it refers to a time period, not a place. Escrow is the period between 1) the time an offer of purchase is made on a property; and 2) the time when that property’s title is officially transferred from seller to buyer — to the new owner. The escrow process is essential in cases in which the ownership title will be changed. The money put into escrow, or the initial deposit amount collected as part of escrow, is considered as “good faith” money or “earnest” money. This money is the payment amount that will

follow the home purchase process.

How much money are you, the buyer, supposed to put into escrow? This totally depends on the terms as stipulated in the offer of purchase. Still confused? The good news is that an escrow agent who specializes in this period and process should be involved. The agent serves as a third party who enjoys a neutral state between seller and buyer, and helps provide assurance to both parties. The agent is also heavily involved in the actual transaction to ensure the clauses of the offer will be met completely, accurately, and satisfactorily. Further, the escrow agent serves as the manager of the trust account that holds the funds that will cover the value of the transaction. You might be wondering how long the money that you will deposit remains “in escrow.” The money collected from the buyer is held in escrow until the seller completes his or her obligations, and transfers the title over to the buyer. After this transfer is authorized, verified, and completed, the payment is then remitted to the seller. The “good faith” or “earnest” money is used to cover some of the down payment, the purchase price, and the closing costs.

STEP 9: NEGOTIATE WITH THE S TE WITH THE SELLER

The negotiation process in real estate transactions is one of the key steps for both the buyer and the seller. While the seller and listing agent want to sell the home for the reasonably highest amount they can, the buyer and the buyer’s agent want to get the best deal that they can. It can feel like a competition, and this is where negotiations come into play. For many buyers, this is the toughest and most challenging aspect of purchasing a home, to the point of becoming exhausting. It’s

especially difficult to navigate if you don’t have a good buyer’s agent who’s skilled in negotiation tactics. In fact, this is one of the biggest reasons that we recommend hiring a real estate agent — negotiation! But you should also learn negotiation skills yourself. There are strategies and tactics you can learn and do when you are involved in the home-buying process, and we will discuss these in greater length later in this book. However, we can offer a summary of this aspect in this step in this process for the purposes of this chapter. You need to plan ahead with your agent on how to make a winning negotiation strategy. For example, once you find the home that meets your needs and falls within your price range, and you intend to make an offer, you should review comparable sales in the area and compare these comps with the prospective house, which will aid in validating the asking price. Be sure to research and look at at least a handful of properties that are similar to the one on which you have your eyes set. This way, you can take the average price of all the applicable comparable homes, and mention it in your offer. I also recommend that you visit the homes you’re using as comps before deciding on a price for your offer. The conditions of these properties must be taken into consideration. For example, if your prospective home — the target home — has additional features that the comps don’t have, then you need to factor that in for the price quote. It doesn’t need to be a “secret” that you did some research on comparable homes. In fact, you should actually mention the comps during the negotiation. Why? It will give the seller and the listing agent the impression that you know your stuff. You did your due diligence by doing your homework ahead of time — research — and this will only strengthen your bargaining position. Hiding the fact that you studied comparable sales, or,

worse, failing to do this all together, is a mistake that can weaken your bargaining position, mark you as vulnerable or a “target” to be taken advantage of, and cost you in the end. As discussed in Step 7, a purchase offer can evoke different responses from the seller. First, the seller might accept your offer as is. Second, the seller might counter the offer by demanding changes (making a counteroffer for your review). Third, the seller could reject your offer altogether, coming back with a totally different counter proposal. How does negotiation play into this? Essentially, knowing how to negotiate, and having a skilled buyer’s agent on your side, will get you the best deal possible. It will also help you to deal with the seller’s response (acceptance, counteroffer, or rejection) strategically and effectively. First, know the maximum amount that you are prepared to spend on this home. If you’ve persuaded the seller to come down from the original listing price (based on the comps date you’ve acquired and shared), but now the seller comes back with a counteroffer, you, with the guidance of your agent, will need to determine how much you want the home and how badly you want to go through with the deal. For example, if you persist with your offer price when there’s a high market demand, you risk losing the property to another buyer who’s willing to pay more. This is why it’s important to know your limits and to stick to them, as well as to know how badly you want a particular home. Another tip for negotiating is to set your emotions aside, no matter how tricky that could be. The process of buying a home, which includes negotiating, is a professional business transaction, so there is no room for personal sentiments. If the price that the seller demands is too high relative to the comparable value of the property, then you need to know when to walk out of the deal, regardless of how painful it might be.

STEP 10: THE CLOSING PROCESS

After the negotiating is over, and after an offer has been made and accepted, comes the closing process. First, what is the closing process? Essentially, it involves everything that’s needed to make the home sale and home purchase complete, legal, and finalized. It’s also referred to as settlement or escrow, and is highly automated and computerized. Although nearly pro forma (“done as a matter of form” or “standard”), the closing process is meant to bring all the parties involved to the same platform. Before the process of closing can begin, the buyer must inspect the property personally. Why? You have to check to make sure that absolutely nothing has changed regarding the property’s condition following the signing of the contract (purchase agreement). If something has changed, then you must notify your agent and go back to the drawing board. What’s all involved in the closing process? The closing process can seem confusing and complicated, particularly for first-time buyers, but when compared to other aspects of searching for a home and the home-buying process, it’s actually a brief component, essentially involving the completion of the transaction to which all parties have agreed, based on the contract. The main “goal” of the closing process is to transfer the title of the property from former homeowner (seller) to new homeowner (buyer). It includes the need for title insurance, since there could be errors, unreported claims, or other flaws in the review of the property’s ownership. All usual property transfer taxes must be paid during closing. Further, you need to settle all other claims, including closing costs, legal fees, and adjustments. The closing agent is the party who is responsible for drawing up and

finalizing the documentation regarding the home loan.

In the majority of cases, both the buyer and seller, along with their agents, are present in a professional office setting. They’re committed to the completion of all relevant and required paperwork so the property can officially be transferred from seller to buyer — the buyer gets the keys to the home; the seller gets the payment. Then, it’s the closing agent’s responsibility to subtract the funds required to pay existing mortgages and other costs related to the transaction. The closing agent must also ensure the deeds, loan documents, and other papers are prepared, signed, and submitted to the offices that maintain property records. This seems like a lot, but there really is little work to be done by you, the buyer — provided you have hired your own agent (this is another reason it’s important to have an agent working on your side) — because closing agents take care of all the necessary documentation required by title companies, lawyers, and lenders. The final result of the closing process is that the buyer obtains the title to the property, the seller receives the payment, the agents receive their commissions, the lenders’ loans are fully documented in the public records, and the state government collects the taxes generated by the transaction. Everyone wins! But what if not everyone wins? Remember, it’s not over until it’s over — meaning the home isn’t yours until you close, and until the closing process is fully complete. When you finally get to the end of the closing process, and you start picturing yourself moving into and settling into your new home, nothing feels worse than the deal suddenly falling apart at the last moment. While this isn’t common, it still happens. How and why? Some of the reasons include a last-minute home

inspection gone awry, a low home appraisal, or failure on the buyer’s end to obtain financing. However, it’s easy for buyers to avoid these potential pitfalls and ensure the deal goes through if they are aware and prepared, and if they’ve secured the services of a good agent to make sure all the bases are covered so you’re not left in such a disappointing and heartbreaking situation. First, the home inspection. If major physical damage is revealed during the home inspection, the deal could be called off. This shouldn’t be all that surprising, however. If a home is considered structurally unsound or unsafe to live in, then there’s a good chance the deal won’t move forward, and the purchase will fall through. Low home appraisals also occur, and can be deal breakers, just like a poor home inspection report or damage noticed. If your target home’s appraisal is low, the lender will not give you a home loan to purchase it. To avoid financing becoming an issue as a last-minute deal breaker, please ensure you have been pre-approved for a mortgage, and for the appropriate amount (if you work with me, I’ll make sure you are). You might be surprised at how many applications are rejected during the mortgage approval process. Wait to get your finances in order before you apply for a loan, and then wait again to be pre-approved before you go off searching for homes, finding the perfect one, making an offer, etc. — only to have the deal go through because you didn’t end up qualifying for the loan after you’ve gotten yourself emotionally invested in a home you can’t have. Going through the entire process and finalizing everything with the seller and listing agent, but then faltering in the financing department, will stall or probably sink the deal, almost every time.

Title insurance and even more home inspections should also be expected as part of the closing process. The lender will have to ensure the seller fully owns the house. Defaulters will not own the house fully. It’s important that you keep these potential pitfalls in mind before you get to the closing process. If something goes wrong, but appropriate contingencies are in place, the deal could still be saved. But better to be safe than sorry — so protect yourself and take the right steps to get you where you want to go.

CHAPTER 2 How the Loan Process Works from A t om A to Z

Understanding the loan process from start-to-finish is the best way to ensure smooth sailing and issue-free closing. Knowing what must be done, when it must be done — and subsequently if it was done — is the best defense against lender obstacles and unexpected delays. The loan process comprises four phases: origination, processing, underwriting, and closing. Most lenders’ loan procedures go through this process or some version of it. The origination of a loan is pretty straightforward: you decides to enter into a loan agreement with a particular lender. This is the origin of the loan, hence the term origination. Processing is also just what it sounds like: the loan is processed by the lender. Processing usually includes filling out lots of forms (and I mean lots of forms), answering questions, and providing various documents to the lender. Underwriting is the step of lending that some people don’t know much about. When a loan goes through underwriting, a specialist compares the processing stage results against the lender’s requirements and standards to decide whether to approve or deny the loan. In other words, underwriting is kind of like the spell-check of the loan process, where someone goes through the materials with a fine-toothed comb to make sure everything is on the level. We’ll go more in-depth with underwriting later on in this book. 17

Finally, we come to closing, where the loan is completed and funds are transferred to the agreed recipient. Almost all commercial loans go through this process, whether its mortgages, auto loans, or small business loans. After all, you don’t just walk into a bank, mortgage company, or mortgage broker and say, “I want a loan,” and immediately turn to closing. To the uninitiated, lending seems to be complex. But if you think of the whole process as these four simple steps, it doesn’t seem complicated at all. A loan originates from somewhere, it is processed, it’s underwritten, and then it’s closed. Simple. However, just because the main four steps are simple doesn’t mean that there isn’t plenty of room for things to go awry. This whole book is based on the idea that a lot can go wrong with a lender, so you have to be on your toes. With that in mind, let’s focus on the three main categories that make up a typical mortgage: rate, insurance, and size.

TYPES OF MORTGAGE RATES

Almost all mortgages are either “fixed-rate” mortgages or “adjustable-rate” mortgages. In a Fixed-Rate Mortgage (FRM), the interest rate is set for the entire term of the mortgage. An FRM is advantageous to borrowers because they’ll know exactly how much money they will pay back on the loan and also know exactly how much each payment will be from the first day to the last day. However, an FRM is not as beneficial to lenders because a slight turn of the economy could make a loan less lucrative in the long run for the organization. With that in mind, most FRMs have

higher interest rates than other types of mortgages.

For some folks, committing to paying a bit more in interest is worth it for the peace of mind that they have a fixed amount to pay for the duration of the loan. In that case, FRMs can be the ideal choice. However, if a borrower wants a lower interest rate at the beginning, a different type of mortgage is available. The interest rate on an adjustable-rate mortgage (ARM) is initially lower than the FRM rate, but it may change periodically. Usually, the interest rate is determined by a related economic index, such as the rate for Treasury securities. Depending on the loan, the rate could change unrelated to any index; in other words, the lender could simply decide to raise the borrower’s interest rate based on its own judgment. Borrowers who want lower monthly payments at first can benefit from an ARM. For example, a medical student who is making less money now than they know they’ll make in the future could benefit from an ARM. They will pay a smaller monthly payment at the beginning, but then pay more later. If a borrower chooses an ARM, they usually will have a choice between an amortizing ARM and an interest-only ARM. An amortizing ARM is the most common type. With this type of mortgage, the lender calculates a monthly payment that will pay off the entire mortgage balance within the term of the loan (usually 30 years). However, since ARM loans don’t have a fixed interest rate, the payments most likely will fluctuate over that time period, likely getting higher and higher with each passing year (there usually is a top limit negotiated at the time of the loan). For example, a $100,000 amortizing ARM loan would involve payments of about $278 per month for 360 months (30 years).

The borrower would be obligated to pay that $278 plus interest each month. For the first few years, interest will be low, but then eventually get higher and higher. Conversely, an interest-only ARM is less common. This type of loan puts interest payments in a preset first term of the mortgage, with the actual loaned money (the principal) paid off after that term. Using the example above, during the first five years of an interest- only ARM loan for $100,000, the borrower is only paying interest payments on that $100,000, not the $278 towards the principal. Once that term is up, the next 25 years of payments go towards the principal $100,000. In other words, the borrower spends the first five years making comparatively small monthly payments on interest only, and then the next 25 years paying much larger monthly payments towards the principal. Generally, interest-only loans are only recommended to borrowers who are incredibly responsible with their money and expect to be able to pay the loan off in full faster than the 30-year term. Otherwise, borrowers usually find themselves trapped in a mortgage they can’t afford a few years down the line.

TYPES OF MORTGAGE INSURANCE

Once a borrower decides between a Fixed-Rate Mortgage, an amortizing adjustable-rate mortgage, or an interest-only adjustable-rate mortgage, they must decide on the insurance for the mortgage. There are two types of mortgage loans when it comes to insurance: conventional loans and government-insured loans. The difference between the two types is incredibly simple: government-insured loans come with insurance backed in some way by the federal government, and conventional loans are not

insured or guaranteed in any way by the government.

Some typical government-insured loan types are the Federal Housing Administration (FHA) program, the Veterans Affairs (VA) program, and the United States Department of Agriculture (USDA) program. There are others and borrowers should be encouraged to search for programs that could benefit them, depending on their situation.

TYPES OF MORTGAGE SIZE

The size of a mortgage is split into two categories: conforming and jumbo. A conforming loan is one that conforms to the underwriting guidelines of Fannie Mae or Freddie Mac, the two government- controlled real estate investment corporations. Their guidelines can get complicated, but generally all you need to know is that mortgages need to be less than a certain amount of money in order to conform to the guidelines. The amount of money that determines conformity changes from time-to-time, most recently in 2019. A jumbo loan, as you might have guessed, is one that is larger than the conforming price set by Fannie Mae or Freddie Mac. These loans are for enough money that they present a considerable risk to the lender, and therefore are harder for borrowers to obtain. In case this isn’t clear, let’s assume that this year the Fannie Mae and Freddie Mac conforming limits are both the same at $500,000. A conforming loan will be anything below $500,000 and a jumbo loan will be anything above $500,000. However, due to the cost-of-living being different across the country, certain areas have higher conforming loan limits than

others. Therefore conforming and jumbo loans will be different depending on your area. Most real estate agents will only deal with home prices that fall below the conforming price, so this will rarely come up with you. However, the difference between obtaining a conforming loan and obtaining a jumbo loan is significant, so it’s important to understand the terms when dealing with lenders. Now you know about the mortgage options on the table. Let’s talk a bit about the people involved in making the mortgage a reality.

THE PLAYERS INVOLVED IN THE LENDING PROCESS

The first person engaged in the lending process is referred to as the loan officer. The loan officer is the project coordinator, overseeing the transfer of information between you (the prospective buyer) and their organization’s processing and underwriting departments. It is likely that the loan officer will be in direct contact with the borrower from the beginning of the mortgage process all the way through until closing. The loan officer should be licensed with the National Mortgage Licensing System (NMLS). The loan officer’s licensing status can be verified with the NMLS at www.nmlsconsumeraccess.org. The site is incredibly simple: you enter in a loan officer’s name, address, and other important information, and the system tells you if they are on the level. It will let you know if they are an active registrant in the federal database, if they are authorized to conduct business, and, if so, what organizations they are authorized to represent. It goes without saying that if you start working with a loan officer who is not up-to-date on their NMLS certifications, you and you should not work with them. This could not only cause serious

delays in the mortgage process, but could put you and you into considerable financial danger. Once the borrower has found an NMLS-certified loan officer, the preliminary discussions of the loan can begin. This is the first step in the loan process we discussed earlier: Origination. Once all loan disclosures are executed and all income and assets data are provided, the transaction moves into the second phase, which is Processing. The loan processor works with the loan officer to handle the loan’s documentation and tasks. For example, they are in charge of ordering the appraisal, doing title work, verifying income and deposits, checking the debt-to-income (DTI) ratio, and a multitude of other loan-related items. Once the loan processor assembles the loan package, they submit it to the underwriting department, beginning the third stage of the loan process: Underwriting. As stated earlier, underwriting is the process of poring through the buyer’s submitted information and making sure it jibes with the requirements of the loan organization. The underwriter will focus on matching the applicant’s income, assets, credit information, property title, and home appraisal to the lender’s lending guidelines. If everything meets the organization’s requirements, a loan is offered and a closing date set. If something doesn’t look right or there is some sort of issue, the loan is denied. Granted, the terms of a mortgage loan may have as many as 100 conditions to be met. After all, most mortgages are for fairly large sums of money, and lenders don’t want to be haphazard with their finances. With that in mind, the underwriter and loan processor may not be individual people, but rather teams of people. Sometimes the entire processing and underwriting departments of a lending organization are working on one particular loan.

With that many players in the game, you can see the importance of working with a solid, well-versed loan officer.

ORIGINATION: PRE-QUALIFICATION OR PRE-APPROVAL

The first step in the lending origination process is a pre- qualification letter sent to the buyer from a lending organization. The next step is a pre-approval letter. You might be confused. There is an important difference between a pre-qualification letter and a pre-approval letter. A pre- qualification letter is when the lender simply checks your credit and asks some basic questions such as:

• “How much do you earn?” • “Where do you work?” • “Have you filed your tax returns?”

Assuming that the buyer answers the questions with satisfactory information, a pre-qualification letter is written. At this stage of the process, there is no verification of your information. You can say you make millions of dollars per year and, assuming you have good credit, be “pre-qualified” for a multi-million dollar house. With the drafting of a pre-approval letter, the lender actually goes through and verifies the prospective buyer’s income, down payment, down payment source, and ensures tax returns have been filed if the prospective buyer is a self-employed borrower. With a pre-approval letter, the lender is asserting that it has verified more information besides just your credit. They verify you have a good income, a solid job, or, if self-employed, have been self-employed for a long enough period to qualify for some

of the lending programs that are on the market.

That’s why you want to have a pre-approval declaration or letter before really beginning the loan process with a lender, not just a pre-qualification letter. As far as I’m concerned, a pre- qualification letter is simply the first step in the loan process and not enough to start building a loan package. Some lenders will prey on the fact that you don’t know the difference between these two types of letters. A professional lender will not assume that a pre-qualification letter is good enough to begin the loan process. I work with my customers to achieve pre-approval status before discussing anything further. As you might know, after the housing crash we had some years ago starting around 2008, banks are now more stringent about loans. As such, a pre-qualification letter is simply not good enough to get a mortgage from a professional organization in today’s marketplace. Any lender who tells you otherwise is not a lender you want to work with.

You need a rock-solid preapproval letter.

PROCESSING: A SOLID LOAN ESTIMATE

Once you have your sights set on a property and have your pre- approval letter in hand, your next step should be to obtain a solid loan estimate for the property. The loan estimate lists loan terms and settlement charges to be paid if a borrower decides to go forward with working with any particular lender. It is not a pre-approval, nor is it a pre- qualification. It is more of a “This is what we will likely offer you when you start the loan process and are approved for the loan.”

The loan estimate used to be called a “good faith estimate.” It’s

called a loan estimate today, and it is basically an upfront quote of all the different costs, fees, interest rates, etc., that buyers can expect to pay if they proceed with a loan from that lender. It explains which charges can change before settlement and which charges must remain the same. It usually also contains a chart that compares multiple mortgage loans and settlement costs, making it easier for the borrower to shop for the best loan. In the loan estimate phase, the various fees that are associated with getting a loan to buy a property are compiled. It is going to have estimated appraisal fees, inspection fees, and estimated closing fees. For example, if you pay the title insurance, (which they do in some areas), then an estimate for the title insurance cost is prepared and factored that into the loan estimate. The loan estimate is designed to give borrowers important information while they shop for a loan. Borrowers are encouraged to shop around to multiple lenders to determine which company offers the best deal for their needs. There’s usually a length of time stated in the estimate that you can use to shop and decide. After that time period is up, the loan estimate will be invalid and a new estimate will have to be obtained. The loan estimate may be provided by a mortgage broker or the lender. When a borrower obtains a loan estimate, it shows the lender that the borrower has at least some interest in working with them. However, when the borrower is given a loan estimate, loan originators are only permitted to charge for the cost of a credit report and are not permitted to charge for appraisal, inspection, or other similar settlement services.

PROCESSING: INTENT T G: INTENT TO PROCEED

When the borrower is done shopping around and has decided which lender they would like to work with, they bring the loan estimate to the lending establishment and start the next step. Working with the real estate agent and lender’s loan officer, you sign all loan disclosures, the loan estimate, and signs off on an important document called the “intent to proceed.” The intent to proceed evidences that you are interested in moving forward with obtaining a loan from that particular lender. It does not commit the prospective buyer to get a loan from that lender. It simply states that you have signaled intent to proceed with the lender’s loan process under the terms described in the loan estimate. Think of the intent to proceed as someone raising their hand at an auction. It doesn’t mean they are going to buy, it just means they are interested in buying. It’s just that in this case, they have to sign something instead of simply raising their hand.

PROCESSING: RATE LOCK

Once that paperwork is done, in most cases the next step is for the lender’s licensed loan officer to lock in the rate. By that I mean that the loan officer commits that the lender will give the borrower a certain interest rate on the loan. The world of loans and mortgages is fast-paced, and interest rates can change at any time. A rate lock is important because it guarantees that a mortgage lender will give you a certain interest rate, at a certain price, for a specific time. Exactly when the lender locks in the rate is going to vary. Some lenders lock it in at this point, some wait until a later time in the process.

A rate lock protects the borrower from rising interest rates in the period between sales agreement execution and closing (often a month). If you lock in a rate of 3.25%, you will only have to pay 3.25% interest even if rates rise while you go through the loan application process. A rate lock is commonly good for 30, 45, or 60 days, though that time period can be shorter or longer. After that period expires, you are no longer guaranteed the locked-in rate unless the lender agrees to extend it. Therefore, arranging a prompt closing is crucial. I once heard a story from a fellow lender about a woman who wanted to buy a home. She went through the pre-approval process and got a loan estimate. She then discussed rates with the lender and seemed satisfied with the terms. However, she did not get a rate lock because she was in a hurry and didn’t want to go through the process at that time. She came back to the lender three months later to finish going through the loan origination process. However, she was shocked to find that the interest rate the lender offered had increased significantly since her last meeting. The lender had to politely but firmly explain to her that without a rate lock, there was nothing she could do. The woman ended up signing for the loan under the new, higher interest rate — all because she couldn’t spend the time to lock in that rate when she had the chance. And really, it’s not that woman’s fault she missed out on a better interest rate. These loan processing steps are complex, with many variations on the moving parts. That’s why having an excellent lender’s loan officer is paramount to your understanding and

satisfaction with the process.

The loan officer must make time to explain the documents in detail and be of great service to you. The loan officer has the obligation of knowing in detail and explaining the lender’s loan programs and requirements. That’s why you don’t want to work with just any old loan officer. Find the one who will treat you well and walk you carefully through the steps. Choosing the right lender could mean the difference between saving thousands of dollars...or losing thousands of dollars.

PROCESSING: THE AP G: THE APPRAISAL

One of the most crucial steps in the lending process is the lender’s appraisal of the property. This is where the lender will determine whether or not the house is worth the amount of money they are going to lend to the borrower.

Let me warn you upfront: the appraisal process can be a wild ride.

The lender orders the appraisal. It could take a week, two weeks, or even three to get the appraisal back. This is usually not because of the lender, but because appraisal companies utilize a more complicated system than in the past. It used to be that an appraiser would stop by your house and walk through it for an hour or so. Now, things are much more complicated. The reason for the complication is because the lender has to protect its investment. It is investing in both the home as a financial asset and in the borrower as a client. A smart lender will not loan hundreds-of-thousands of dollars to someone without properly vetting every single aspect of the borrower and the property.

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