“What happens when you go to a lender,†asked Deborah Johnson, vice president and relationship manager for J.P. Morgan Chase. I didn’t know the answer and from the silence in the room, I was in good company. But Johnson, who was this week’s presenter at the Bedford Central Development Corp. homebuyer seminar series, schooled us on the mortgage process.
First of all, what is a mortgage? A mortgage is a type of loan used to purchase property. The preapproval process will tell you the maximum loan amount you could qualify for. Please don’t mistake this with prequalification, which is an affordability estimate. The preapproval process is a much more accurate process which involves verifying gross monthly income, the balances and payments on current debts like credit cards, and how much cash is available for a down payment. Assets, such as IRAs, stocks, and bonds are also itemized.
“You want to do a preapproval closer to the day you’re going to buy,†explains Johnson. This is because most preapprovals have a 90 day life span. After that everything needs to be re-verified.
There a five types of mortgage payment options. Depending on your situation you may choose a fixed-rate mortgage, adjustable-rate mortgage (ARM), interest only mortgage, balloon mortgage, or a jumbo mortgage. The two most common types are traditional and ARM.
A Traditional Fixed-Rate Mortgage is attractive to many buyers because it provides stability despite netting a higher interest rate. You can count on your payments being the same amount every month for the life of the loan.
ARMs offer a lower initial interest rate for a certain period of time but the mortgage lender can raise the rates according to market indexes. Lower mortgage payments may sound more appealing, but there are some risks involved. This option is best for individuals who don’t plan to be in the home for more than five years.
ass="amp-ad-wrapper amp_ad_1 ampforwp-incontent-custom-banner ampforwp-incontent-ad2">After your home purchase, you’ll pay your mortgage every month. Understanding how your payment works will help you to determine what you can afford to pay monthly. Remember the acronym “PITI†says Johnson. This refers to the Principal, Interest, Property Taxes, and Insurance. Let’s dissect it.
Principal: This is the amount of money you borrowed from the lender. Each month you’re paying a portion of that loan back.
Interest: This is a percentage that a borrower must pay for the privilege of borrowing money from the lender. Johnson warns not to compare mortgage offers solely on the interest rate alone. “Make sure you look at the annual percentage rate (APR),†she says. The APR is a better indicator of the true cost of the mortgage because it combines the loan’s interest cost and other fees charged by the lender over the life of the loan.
Property Taxes: Many people pay their real estate taxes as part of their mortgage payment. These taxes are paid to local and state governments and will vary depending on where you live, so it is wise to check how much property taxes are in the area you’re looking to purchase.
Insurance: Typical home owners insurance protects the owner from any financial loses on your property that might result because of fire, wind, or other hazards. Some individuals also get flood insurance if they live in an area at high flood risk. Individuals who purchase a home with less than a 20% down payment will be required to take out private mortgage insurance (PMI) to protect the lender from default.
When you apply for a mortgage, the lender will ask you to fill out a standard application known as a 1003 form (pronounced ten 03). It will ask you numerous questions about your financial situation and employment history. Here’s a list of what you can expect to include.
Assets: Last two months statements from you checking and savings accounts, stocks, bonds, W2 forms, money marketing accounts, retirement accounts, IRA, life insurance policies, child support etc.
Liabilities: You will also have to list all outstanding debt which may include credit card payments, other mortgages, car payments (leased or financed), student loans, collection accounts, etc.
“Disclose all your information,†says Johnson. Withholding information may result in civil liability, including monetary damages, criminal penalties including a fine, imprisonment, or both.
Join me next week to learn about some key players involved in the home buyer’s process. In the meantime follow me at www.twitter.com/LaToyaReports with daily tips for homebuyers.
Other posts in The Homebuyers Toolkit series:
LaToya M. Smith is an editorial assistant at Black Enterprise