Arrange Your Financing
THE LOAN APPROVAL LETTER
A written approval letter provides you with the leverage you need to obtain the very best price and terms. In a competitive situation, you gain an advantage with a strong approval letter.
The Benefits of an Approval Letter:
- You gain significant advantages in negotiating by being prepared where other buyers may not be
- You prove to the seller that you are a very serious buyer who is ready to act
- You eliminate wasted time, frustration and stress
- You are approved for your loan in advance — all “verifications” and contingencies are removed except for the appraisal, termite inspection and contract
- All you need to do is find the home you want and write an offer
- You know what your monthly payment will be
- You know how much cash you need to purchase your future home
Important to keep in mind: What you are qualified to pay versus what you are comfortable paying for a monthly mortgage payment may be two different numbers. You can often be approved for a much larger monthly payment than what you will actually be comfortable paying each month- this is something to discuss with your lender or your Realtor. A good Realtor will respect those boundaries regardless of what the numbers say you can afford. Do not let anyone convince you to look “just a little bit higher”.
ARRANGE YOUR FINANCING
Seller Expectations
The seller expects your financing to be approved prior to submitting an offer. Anything less will put you at a competitive disadvantage at contract time.
Pre-Approval is Different from Pre-Qualification
Pre-Approval means that you have made written loan application with documentation and it has been approved by the lender.
Pre-Qualification means only that a conversation with the lender has taken place but nothing has been verified and no commitment has been made by the lender.
Requirements for Pre-Approval
There are several documents that may be required by the lender in order to issue a commitment or pre-approval letter.
- Employment – Name, address and phone numbers for employer(s).
- Pay Stub – Most recent.
- Previous Employment – If you have been with your present employer for less than two years, need name, address, phone numbers.
- Other Income – Such as alimony, child support, disability, VA benefits, Social Security benefits, rental income. Evidence of receipt must be supplied.
- Authorization to Obtain Credit Report
- Current Mortgages – Name, address, account numbers, monthly payments and balances, including any recently paid-out accounts. If the property is to be rented or sold, provide lease or sales agreement.
- Charge Accounts – Name, account numbers, and balances.
- Other Loan Accounts – Personal, student loans, any installment type loan. Provide the name, address, account numbers, payments and balances.
- Auto Loans – Name, address, account numbers, monthly payments, balances.
- Other Liabilities – Alimony, child support, student loans, monthly payments.
- Self-Employment or Part Owner of a Company – Year-to-date profit and loss statement, complete personal and business tax returns and 1099’s for the past two years. Ownership is defined as 25% or more shares of stock in the company.
- Tax Returns – Needed for the past two years if overtime, commission, bonus or tip income is to be used for qualification purposes.
This list may look daunting at first glance, but many of these items are easily available with a quick trip to your lending institution and a look over your old tax forms. Your lender will help walk you through the document collection process.
Lender’s Commitment Letter
When your full loan application and documentation has been reviewed by the lender’s underwriter and approved, you will receive a commitment letter. Conditions for funding the loan after this lender commitment is made typically include:
- Appraisal
- Termite Inspection
- Survey
- Title Search
The Benefits of an Approval Letter:
- You gain significant advantages in negotiating by being prepared where other buyers may not be
- You prove to the seller that you are a very serious buyer who is ready to act
- You eliminate wasted time, frustration and stress
- You are approved for your loan in advance — all “verifications” and contingencies are removed except for the appraisal, termite inspection and contract
- All you need to do is find the home you want and write an offer
- You know what your monthly payment will be
- You know how much cash you need to purchase your future home
INFORMATION FOR LOAN APPLICATION
Formal Loan Application:
- Contract for Sale – Ratified and with all addenda, a copy of the deposit check, a copy of the listing property data sheet.
- W-2 Forms – For the past two years.
- Checking and Savings Account – Name, address, account numbers and balances (provide at least 3 months of statements).
- Other Assets – Stocks, bonds, cash value of life insurance, vested interest in retirement plan, household and personal effects (approximate value).
- Landlord Information – If presently renting, name and address.
- Photo ID – Copy of your driver’s license is sufficient.
- VA Applicants – Certificate of Eligibility, DD-214 or Statement of Service, name, address, phone number of closest living relative.
TOP TEN LIST: FINANCING YOUR HOME
- In addition to your down payment, you are going to pay closing costs, approximately 3% of the sales price, plus any points.
- If you ask the seller to pay your closing costs, you will most likely reduce or eliminate any chance of the seller lowering their price.
- Your interest rate will be determined by your credit scores. Lower scores will increase your rate.
- You can lower your rate by paying one or more points to the lender at settlement. A point is normally 1% of the loan amount. But, unless your credit is near perfect you won’t likely have both a low rate and zero points.
- If you do pay points to the lender, the current tax laws allow them to be taken as a deduction in the year of settlement, treating them as prepaid interest.
- Your actual monthly payment will be the total of the principal and interest payment plus one twelfth of you annual property tax bill and your hazard insurance policy. If you are buying a condominium or home with an Association, your monthly condo fee or association fee will be due as well.
- You will receive tax benefits as a result of homeownership. Just how much will depend on your entire financial picture and must be calculated by a tax advisor. Deductible items are: Interest paid; Property Taxes paid; Points in the year paid.
- You need to be approved for financing before contracting for your home. Sellers prefer to see buyers who are not at risk for failing to obtain financing, evidenced by an approval letter submitted with the offer to purchase. Pre-approval requires the following: Credit report; Verification of assets (bank statements); Verification of income (pay stubs and/or tax returns)
- Your lender should always be selected on the basis of their track record of delivering the loans on a timely basis and for the price quoted. Never select a lender on the basis of rate alone. 10. Lenders who tout low rates often base them on additional points, financing fees or a hope that the market will decline prior to settlement.
- Service is almost as important as a good loan rate.
CALCULATE YOUR PAYMENT
SAMPLE LOAN APPLICATION FORM
PURCHASERS ESTIMATED CLOSING COSTS
In addition to the amount of the loan, these are some costs that you should expect to provide at closing.
Purchase Price _________________________
Application Fee: $500 (processing; $350, underwriting; $150) _________________________
Credit Report: $14-$28 _________________________
Appraisal: $300-$500 _________________________
Survey: $300 and up (often optional) _________________________
Homeowners Insurance: Approx. $200-$500 _________________________
Mortgage Title Insurance: $2.00-$2.90/$1,000 of loan amt. _________________________
Owner Title Insurance: $3.00-$3.90/$1,000 of loan amt. _________________________ (Discount if both Mortgage & Title Ins. Is purchased)
Attorney’s Fee ($300-$600) OR Settlement Company ($250-$325) _________________________
Discount Points – 0% to 4% of loan; if applicable _________________________
Tax Escrow: 2-3 months _________________________
Insurance Escrow: 2-3 months _________________________
PMI Escrow: 1 month, if necessary _________________________
Pre-paid Interest: per diem to the end of the month _________________________
Recording Deed
A) State & Local – $3.33/$1,000 of sales price _________________________
B) Recording Fee – $33.00 _________________________
Recording Deed of Trust
A) State & Local – $3.33/$1,000 of loan amount _________________________
B) Recording Fee – $46 for over 10 pages _________________________
Other _________________________
Other _________________________
Estimated Total _________________________
If you are concerned about not being able to cover the funds needed at closing, there are several things that we can do to negotiate these so that the seller can pay them or they can be tied into your loan.
OBTAINING HOME OWNERS INSURANCE
Obtaining hazard/homeowner’s insurance used to take a matter of minutes- now it can take days or even weeks. Because of a string of weather-related losses and many other factors, hazard insurance is now more expensive and it takes longer to get.
Insurance underwriters not only look at the claims history of the current homeowner and specific property; it is highly likely that they will also be evaluating your own claims history as well. Therefore, it is critically important to initiate the process of getting hazard insurance before we have even identified the home you wish to purchase. Getting started on this process is as important as getting your mortgage.
I strongly recommend that you call your current insurance company or insurance broker right away. If you do not have a preferred company, I will be happy to recommend several names. Bear in mind that the length of time you have been a customer of a particular insurer or the amount of business you do with them does not mean as much as it used to, and the underwriting guidelines that insurers use change on an almost daily basis.
Please do not leave this important task to the last minute. Unless you are purchasing a condominium, closing will most likely not be able to occur until you have proof of homeowner’s insurance.
In today’s market, it is critical to begin the process of obtaining hazard insurance as soon as you have a ratified contract.Under no circumstances should you leave this to the last minute.
Your lender requires that you keep the property insured against damage or destruction and name them as the co-insured. This is referred to as hazard insurance.
Homeowner’s Insurance is hazard insurance plus liability and contents coverage for the owner. Almost without exception, purchasers obtain Homeowner’s Insurance. Your policy must be paid for and a binder issued prior to settlement. Evidence of such must be delivered to the lender prior to funding the loan.
For Condominium Purchasers: The master policy covers the structure of the building on behalf of you and your lender and is paid for in your condo fees. However, this provides no liability and contents coverage for you, and no coverage if another unit is damaged by something that occurs within your unit. Please speak with your insurance agent to discuss adequate separate coverage for your personal belongings.
Please Note: Insurers in Virginia do not issue hazard insurance policies when a hurricane watch is in effect for any part of the state. Please do not leave this for the last minute or settlement may be delayed.
