The Loan Process
Here are the basic steps of applying for a mortgage. For more information, please contact us.
Tentatively approves the homebuyer for a certain size loan pending credit checks, etc. You know how much you can spend while shopping for a home or negotiating a price on one you have already found.
2. Application or initial interview (consumer safeguards)
Truth-in-Lending: provides APR
RESPA: provides known and estimated closing costs
3. 30 - 60 days to approve or reject the application
Income/employment check: Letter to employer
Income guidelines: Check housing expenses, long-term debt
4. Credit Check
Credit History, Type of Credit, Attitude towards credit, Lapses in payment
5. Fair Credit Reporting Act and ECOA
Ensure fair credit-gathering practices. Prohibits discrimination in lending based on race, color, national origin, sex, marital status or income source.
6. Check applicant's assets (independent appraisal)
Form to applicant's savings institution, Physical security, Location, Zoning/taxes.
7. Gather necessary documentation
Can include gift letter, VA certification, Self-employment certification.
If not qualified: Notify applicant with reasons for rejection
If approved: Notify Realtor of approval, Realtor will notify the buyer.
Types of Loans
Just as there are several types of credit and financial situations, there are several different types of loan situations. Here’s a look at some of the various types of loans and the advantages and disadvantages of each. This should help you to determine the loan that is best-suited for you.
Fixed Rate vs. Adjustable Rate Mortgage (ARM)
Just as their name imply, a fixed rate mortgage is a mortgage that locks you into one rate for the entire duration of the loan. Adjustable rate mortgages, or ARMs, will adjust according to an index of the U.S. Treasury. Please keep in mind that you always have the option of refinancing your home. In doing so, you can change the status of your rate
Advantages of Fixed Rate Loans
Certainty. You will always know what your rate is. There will be no wondering if your rate will rise.
If the current interest rates are low, locking in at a fixed rate will ensure that when the rates begin to rise, you will continue to pay the low rate.
Disadvantages of Fixed Rate Loans
Be careful if the current interest rates are high. If this is the case, taking out a fixed rate loan will mean that you will pay the high rate, even if the current rates begin to fall.
Advantages of ARM’s
Typically, ARM’s have a starting interest rate that is lower than the current rate. The difference can be between 1 and 3 points.
Disadvantages of ARM’s
Your ARM could rise quickly. If this is the case, you could end up paying much more than the current interest rates in a short period of time.
Usually, ARM’s do not give you the option to switch to a fixed rate. Your only option to escape paying a rising interest rate would be to refinance.
Federal Housing Administration (FHA) Loans
The U.S. Department of Housing and Urban Development (HUD) guarantees loans for low to moderate-income buyers. These loans are backed by the Federal Housing Administration (FHA). FHA loans are very popular for first time home buyers in Minnesota. If you qualify for an FHA loan, you will need to pay for an FHA appraiser to determine the value of the property. You will also need to pay mortgage insurance.
Advantages of FHA Loans
You can make a lower down payment.
It is possible to qualify even if you have substantial long-term debt.
If you take out an ARM FHA loan, it will only move 1 point per year.
Disadvantages of FHA Loans
You must pay a mortgage insurance premium, or MIP, which is equal to 2 1/4% of the loan amount on a 30 year loan.
Veterans Administration (VA) Loans
These are available to people who have served in the military for a certain length of time. To see if you qualify, call 651-296-2562 or 1-800-827-1000. Surviving spouses are also eligible for VA loans.
Advantages of VA Loans
You can borrow the entire purchase price of the home. No down payment required.
Disadvantages of VA Loans
You must pay a funding fee, which is 2% for veterans or those on active duty and 2 3/4% for those serving in the National Guard or reservist. You pay this fee as part of your monthly loan payment.
A buyer can take over the seller’s loan and make payments that were negotiated by the seller years ago. These types of loans carry higher interest rates, but have lower closing costs.
A Caution About Predatory Lending
Predatory lenders take advantage of people in difficult financial situations. They will exploit those who have a lack of financial knowledge, which is why it is easy for first time home buyers to fall victim to them. Be cautious of the following.
High interest rates and fees. Some loans will contain hidden fees. Most are negotiable. Be knowledgeable of what your lender changes. Ask them up front for a list of their fees.
Small monthly payments with a large balloon payment at the end. Some lenders will make an offer with low monthly payments. Be sure to investigate how much the end of your loan will require you to pay monthly. It could be set up in such a way that you would be required to take out a second loan in order to pay off the original one.
Prepayment penalties. Some loans may penalize consumers wanting to pay off some or the entire loan early. Minnesota law requires lenders to disclose these types of penalties at the time of application, and the lender must offer you an alternative should you decline.
Depending on your loan type and the amount of your down payment, you may be required to purchase mortgage insurance.
If you made less than a 20% down payment on a conventional loan, you will need to purchase Private Mortgage Insurance (PMI), which is paid monthly. Once you gain 20% equity, then you may be released from this insurance.
If you have an FHA loan, you will need to pay a Mortgage Insurance Premium (MIP) of 2 1/4% of the total loan amount for a 30-year loan. You cannot cancel your MIP under state law.
To approve your loan, your lender will require a property appraisal to ensure that the loan is appropriate for the condition of the property. An appraisal is an estimate of the property.
Another requirement of the lender will be that you have the property insured. This also insures their investment in the property. Be sure to shop around to avoid overpaying. Keep in mind that an insurance company will not only look at the current condition of the home, but they will also look at any past claims on the property, along with any past claims that you have made on any other properties. Depending on the location of the property, meaning county, city, and zip, you may pay a higher premium. The insurer will also look at your age, if you have children, and if you have any pets. Another cost-saving tip is to use the same insurance company that the previous homeowner used.
This will protect the lender in the event the legal title of the property isn’t clear. Some events that could result in an unclear title would be if a spouse wasn’t living in the property at the time of sale, then later decides they want to claim it, or if the property was left to another party in a will.
Your lender may require you to escrow monthly payments for things such as insurance and taxes. The amounts of these expenses will be included in your monthly mortgage.
Original source: the Minnesota Association of REALTORS