Borrower's Choice - Resources

First, prospective buyers should not begin looking at homes until they have been pre-qualified with the mortgage lender in order to avoid disappointment and save time. The loan amount for which you can qualify is based on two separate calculations. Using what is known as qualification ratios, lenders evaluate your income and long-term debt to determine a "safe" amount for your mortgage payment. A fairly standard ratio is 28/33, and certain mortgage programs use a more liberal 29/41 ratio, like the Fair Housing Authority.

Here's how it works. With a 29/41 ratio, you are allowed to spend up to 29% of your gross monthly income for mortgage payments. The lender then runs a different calculation. This one is your loan payment plus debt payments combined, which may not exceed 41% of your gross monthly income.

An interest rate is also needed to calculate exactly how much you can borrow. For example, suppose you had $1,000 a month allocated for your mortgage payment. At 7% you could borrow about $150,000 on a 30-year mortgage. At 6% you could borrow nearly $168,000, and at 8% you could borrow a bit less at $137,000.

Most lenders require at least a 5% down payment. The more money you put down the more it reduces your monthly payment. Some lenders offer no-down-payment loans, while others only require 3% down.

Some lenders want to know how much you plan to put down and the source of those funds. Sources you may draw upon include checking and savings accounts, stocks and bonds, pension plans, real estate holdings, life insurance policies, mutual funds and employee savings plans. Other lenders only require a certified check at closing.

You are also now allowed to withdraw up to $10,000 from an Individual Retirement Account (IRAs) with no early withdrawal penalty, if used towards buying your first home.

When buying your new home or refinancing your existing home, in addition to your down payment, the prepaid property tax and homeowners insurance premium, you'll need cash for various fees associated with the purchase. These expenses are known as closing costs and are paid by both buyers and seller. Listed below are typical closing costs associated with mortgage loans. Some of the fees may or may not be required.

• Loan origination fee
• Appraisal fee
• Broker and lender fees
• Document preparation fee
• Survey charge
• Title insurance fee
• Attorney or escrow fee

Any reputable real estate broker will "pre-qualify" you for a mortgage before you start house hunting. This process includes analyzing your income, assets and present debt to estimate what you may be able to afford on a house purchase. Mortgage brokers and lenders can calculate the same sort of informal estimate for you.

Obtaining mortgage "pre-approval" is another thing entirely. It means that you have in hand a lender's written commitment to put together a loan for you (subject to verification of income and employment).

Pre-approval make you a stronger buyer, welcomed by sellers. With most other purchases, sellers must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing.

Certain documents might be needed during the underwriting process, and will depend upon your selected loan program. Below is a list of various forms of documentation that might be needed in order to issue final approval.

• Last two years of tax returns and W-2
• Last two pay stubs
• Last two bank statements
• Proof of homeowners insurance
• Purchase agreement
• Statements for mutual funds, 401K, IRAs, etc.

Every lender is required to provide certain disclosures under federal law to allow you to understand (and ultimately shop) the economics of the mortgage proposal. Included in these are the Good Faith Estimate and Initial Truth-in-Lending Statements. You should carefully review these documents to fully understand all fees associated with the settlement charges.

The annual percentage rate (APR) is what is most commonly used to compare lenders as the "note rate" can vary widely depending on what fees are being charged. The APR factors interest plus certain closing cost, any points and other finance charges over the term of a loan.

The main difference is in method of delivery of the product. Independent mortgage companies (e.g., a correspondent lender) sell their loans to other financial institutions that operate on a wholesale basis. Some banks originate on their own behalf and operate with their own employees, facilities, etc. Others banks prefer to pay the independent companies to originate loans and not risk hiring employees and other costs required of this approach. It really is as simple as WHOLESALE vs. RETAIL. Both methods are valid and operate quite well in a market that is highly competitive and efficient. It is up to the customer to evaluate which direction to go based on pricing and service as in any other industry.

The term "conforming" as opposed to "nonconforming" is sometimes used to explain loans that offer terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These are two private, congressionally chartered companies that buy mortgage loans from lenders, thereby ensuring that mortgage funds are available at all times in all locations around the country. The most important difference between a loan that conforms to Fannie Mae/Freddie Mac guidelines and one that doesn't is its loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit.

The loans which do not conform to Fannie Mae/Freddie Mac guidelines are called nonconforming loans, which are sometimes called "jumbo loans" when the loan size limit is exceeded. Other nonconforming loan products are for customers with some credit problems.

If you put less than 20% down on most loans, then you'll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This charge adds approximately and extra half a percent onto the loan.