The Home-Buying Closing Process in a Nutshell

The Home-Buying Closing Process in a NutshellThe closing process for a home purchase is an exciting time. The home is finished, the purchase is ready to be finalized and it’s almost time to move in. The final steps of the closing process ensures both parties are able to meet their requirements and all the paperwork is in place and verified.

The Key Players

There are actually four parties involved in a typical closing: the buyer, the seller, the bank or lender financing the purchase, and the escrow agent. Each has an important role in making sure the closing happens effectively and efficiently.

As is common with most purchases, the buyer is already familiar with the need to have a down payment ready and to be committed to a purchase. Additionally, the buyer will have already worked out the loan approval preliminary reviews and steps with the bank financing the purchase if it is not an all cash purchase.

The Escrow Process

During escrow the purchase is then validated through a number of steps. These include:

  • Ensuring the property title is clear of any problems or previous liens (a legal method by which other parties get paid for the seller’s outstanding prior debts).
  • Ensuring the property has been appraised and represents the actual worth represented to the bank.
  • Ensuring the bank is ready to pay the seller with a payment check and that the buyer has paid any down payment as well. Both payments are put into an escrow account managed by an escrow agent and not to be released until all the purchase requirements are met.
  • Ensuring the buyer has been notified, read and has committed by signature to all the purchase documentation necessary to complete the sale. This includes understanding the nature of the home loan, payment responsibilities, and what happens if there is a default.
  • Ensuring any property taxes, homeowner’s association fees, and other fees have all been addressed before the seller transfers the property to the escrow agent, which is then transfered to the seller.
  • Finally, passing along the keys and title of the property to the buyer, the title lien to the bank financing the deal, and the payments for the property to the buyer.

When all the above happens, a home purchase is closed and the home officially belongs to the buyer. The seller also gets paid and can deposit his income accordingly. The escrow agent files all the paperwork with the bank, the county recorder’s office, and copies are sent to the buyer and the seller for their own records.

Contact your trusted mortgage professional if you have any additional questions about the closing process as well as other aspects of financing your new home. 

 

Equity Loan and HELOC vs. Reverse Mortgage – What’s the Difference?

Equity Loan and HELOC vs. Reverse Mortgage - What's the Difference?There are times in our lives when the idea of freeing up cash becomes desirable or necessary. Near retirement, this is a common consideration. The typical financial tool that many retirees want to know about is a reverse mortgage, but it’s not the only equity tool available.

Equity Loan

The equity loan, or second mortgage, is essentially an additional fixed interest loan attached to the home. However, unlike the first mortgage which was used to buy the home, the second mortgage can be used for other purposes such as putting in a pool, redesigning the home to make it more accessible, or to pay for a dream vacation. This kind of loan can be set up for a long pay period which reduces its monthly financial impact. The fact that it is attached to the home can result in a very low interest rate for the borrower. However, to qualify, one does have to have the income or assets to pay it back, which may be challenging for those on a fixed income.

HELOC

The Home Equity Line of Credit, or HELOC, is similar to the equity loan, but it is not a fixed loan amount. Instead, the HELOC works more like a credit card. The homeowner makes charges against the line of credit, develops a balance and then pays it off. The homeowner retains the ability to borrow against it again, as needed. Much like the equity loan, the HELOC is attached to the home for collateral, which can result in a lower interest rate, but the borrower is not under obligation to the entire loan value at once. The HELOC can result in a lower monthly payment and can be used multiple times. Most HELOCs have a variable interest rate. 

Reverse Mortgage

A reverse mortgage is an option for borrowers age 62 or older who have a sizable amount of equity in their home. This loan takes equity out of an owned home and converts it into cash for the borrower. A key benefit, compared to other tools, is that there is no monthly payment. Many times, the reverse mortgage loan is used to pay off an existing mortgage to eliminate that monthly payment as well. The homeowner is able to stay in their home and is not obligated for repayment until the home is no longer the primary residence or he or she passes away. The loan principal and accruing interest are paid back at the end of the loan life with a balloon payment or by transferring over the home itself to satisfy the debt. The loan is never more than the value of the home at the time of origination, so in most cases the home value will have risen and is more than enough to repay the loan. Many seniors have found the reverse mortgage to be a powerful way to boost monthly cash flow in their lives and make their later years more comfortable.

The home equity loan, HELOC and the reverse mortgage are three equity borrowing tools that can effectively give a homeowner greater cash flexibility. Each have varied requirements and benefits as well as certain risks to be aware of. Contact your trusted mortgage professional who can answer your questions and help you determine the very best option for you.

Pros and Cons of Adjustable Rate Mortgages

Pros and Cons of Adjustable Rate MortgagesWhen you are in the market for a new home, you may be faced with numerous options for financing your home. One of the choices you will have to make is whether to apply for a fixed or adjustable rate mortgage. In some cases, an adjustable rate mortgage (ARM) may be your best option, but keep in mind, they are not the answer for everyone.

Adjustable rate mortgages can be risky for some borrowers and it’s important to understand both the pros and cons.

When To Consider Adjustable Rate Mortgages

Perhaps one of the best things about ARMs is they typically have a lower starting interest rate than fixed rate mortgages. For some borrowers, this means it is easier for them to qualify for a loan. ARMs are beneficial for borrowers who:

  • Anticipate an income increase – for borrowers who are anticipating their income to increase over the next year or two, an ARM may be the right option.
  • Will be reducing their debt – those borrowers who have automobile loans or student loans that will be paid off in the next few years may benefit from an ARM which would allow them to qualify for a larger mortgage today anticipating their ability to covert to a fixed-rate mortgage.
  • Are purchasing a starter home – when you anticipate living in a home for five years or less, an adjustable rate mortgage may help you save money for a bigger home.

Adjustable Rate Mortgage Concerns

There are a number of different types of adjustable rate mortgages and they are each tied to specific interest rate indexes. While an ARM may offer borrowers some flexibility in terms of income and debt ratios, the downsides cannot be ignored. Some of the cons of using an ARM to finance your mortgage include:

  • Rate adjustments – borrowers should carefully review their loan documents to see how frequently their interest rates may increase. Some loans adjust annually while other may not increase for three to five years after the mortgage is signed. For borrowers, this means they may anticipate an increase in their monthly payments.
  • Prepayment clauses – oftentimes, lenders include a prepayment penalty with ARM loans which can be surprising for borrowers. Before agreeing to an ARM, make sure you read the documents very carefully to determine how long you need to hold the loan and if there is a prepayment clause.
  • Home values – one of the biggest challenges borrowers face with an ARM is what happens if the property value decreases: Refinancing a home into a fixed-rate mortgage may be more difficult if this occurs.

Borrowers who are searching for the right mortgage should discuss all options with their loan officer. There are specific instances when an ARM may be the best option and there are other times, such as if you plan to stay in your home for more than five years, where a fixed-rate mortgage may be your best option.

Should You Pay Discount Points When You Get Your Mortgage?

Should You Pay Discount Points When You Get Your MortgageOne of the challenges you will face when deciding how much money to put down on your new home is whether to put down a larger down payment or to take a bit of money from your down payment and use it to buy “discount points” to lower your interest rate.

There are pros and cons to doing both and each borrowers situation will be different so it’s important to understand which option is best for your individual situation. Some factors you should consider include:

  • Cost of borrowing – generally speaking, to lower your interest rate will mean you pay a premium. Most lenders will charge as much as one percent (one point) on the face amount of your loan to decrease your rate. Before you agree to pay points, you need to calculate the amount of money you are going to save monthly and then determine how many months it will take to recover your investment. Remember, closing points are tax deductible so it may be important to talk to your tax planner for guidance
  • Larger down payment means more equity – keep in mind, the larger your down payment, the less money you have to borrow and the more equity you have in your new home. This is important for borrowers in a number of ways including lower monthly payments, better loan terms and potentially not having to purchase mortgage insurance depending on how much equity you will have at the time of closing
  • Qualifying for a loan – borrowers who are facing challenges qualifying for a loan should weigh which option (points or larger down payment) is likely to help them qualify. In some instances, using a combination of down payment and lower rates will make the difference. Your mortgage professional can help you determine which is most beneficial to you

There is no answer that is right for every borrower. All of the factors that impact your mortgage loan and your overall financial situation must be considered when you are preparing for your mortgage loan.

Talking with your mortgage professional and where appropriate your tax professional will help you make the decision that is right for your specific situation.

Look Beyond The Interest Rate: What Else Matters When Choosing A Mortgage Lender?

Look Beyond The Interest Rate What Else MattersMost consumers securing a mortgage plan to remain in that loan for 30 years. During that time, the borrower maintains a relationship with the loan servicer or lender. Most often, home buyers do not think twice about who the mortgage lender is, but rather focus on the interest rates offered.

Look beyond this information. Borrowers need to take into consideration much more before they sign on the dotted line. Here’s what to look for specifically:

Choosing a Specialized Lender Can Help

Home buyers interested in special loan programs must select a lender approved to provide those loans. FHA, USDA and VA loans, in particular, must come from an approved lender. A specialized lender like this not only has approval for the loan but often will provide more support and guidance throughout the lending process.

Recognize That Competition Is Heavy

The mortgage lending market is very competitive and with that comes the ability to negotiate deals and discounts. It also means lenders will be aggressive in trying to close the deal. A good mortgage lender will never cause the borrower to feel rushed or as if they must agree to terms immediately. Rather, they should feel comfortable enough with the lender to discuss terms at length and even to think about it before buying.

In-House Lenders Versus Independent Lenders

Many real estate agents have an in-house lender that works alongside the agency helping to secure loans for would-be buyers. Sometimes, they can help with lower interest rates or promises of better access to credit, but not always. Again, buyers should never feel pressured into working with a specific lender or in settling for a loan they are not confident they can afford. Buyers should not feel as though they must work with the real estate agent’s recommended lender.

Take A Close Look At The Advertising

To be clear, the real estate lending industry has many fantastic offers to provide to home buyers or those refinancing now – including low interest rates and low down payment requirements. However, advertisements from some lenders may try to sway a buyer by looking more promising than the competition. However, most of today’s mortgage lenders offer many of the same benefits even if they do not explicitly advertise them.

For example, most offer a lock-in period to hold a specific interest rate for a length of time. Most offer discount points and incentives to help buyers to save money. Virtually all lending agents and loan offers will work “aggressively” as some marketing may state, to secure a low-cost loan for the buyer. In other words, buyers need to look beyond these flashing promises and at the actual terms.

How to Find a Comfortable Fit with a Lender

Considering all of these points, many home buyers still will make a decision about who to borrow from based on interest rates and available borrowing credit. It makes sense to consider lenders with lower rates or better terms.

Yet, there are other factors that contribute to which lender is the best. Perhaps most importantly is finding a lender that feels right. What does that mean?

They should work closely with the buyer as a team, together working to find the best loan opportunity possible. That often means that the mortgage lender needs to be ready to say no. For example, if a home buyer hopes to buy a home that he or she really cannot afford, the lender needs to be willing to caution against such investments.

Worthy lenders do more. They will help a buyer to qualify for a loan, but also provide advice on how to get the best deal possible in their situation. For example, they may be able to tell the home buyer what to do about their current credit score to boost it a bit before locking in a loan. They may offer advice about monthly payments and how much a buyer can expect to pay in mortgage payments, insurance, utilities, and so on. They work with the buyer, not sell to the buyer.

Does Personal Experience Matter?

Many times, consumers receive advice that they should ask for referrals from family and friends. This can be helpful, but that does not mean the recommendation is the best fit. For those that choose to use referrals, be sure there’s a comparison that’s recent and that the recent buyer can offer specific reasons why one lender was better than another.

The same is true for a local bank. Many times, consumers instantly turn to their local bank, perhaps one they have experience with spanning 10 or more years. This can be one option, but it should never be the instant, only option considered. Take the time to compare numerous opportunities.

History Matters, Too

Mortgage lenders come and go. Often, lenders sell a loan to another serving agency, which can make any mortgage holder a bit on edge about what to expect. Buyers should ask whether or not the lender will remain the long-term loan servicer or if they could see their new mortgage sold to another company. There are protections in place to ensure that the borrower isn’t penalized during the transfer of servicing, but it’s a good question to ask up front.

Here’s the Bottom Line

Home buyers need a mortgage lender they can trust and count on to provide their mortgage loan. They also need:

  • To feel as though the lender is knowledgeable and willing to share that knowledge with them
  • A lender that makes time for them to ask those questions and never rushes a decision
  • An organization that offers competitive rates and is willing to work hard to qualify the buyer
  • To feel valued as an investor, not just sold to
  • To offer competitive services including the type of tools borrowers need for online payments

The good news is some lenders work hard to stand out from the others. They provide incredible offers, reliable service, and a feel-good atmosphere for buying a home. Any home buyer who is making this type of financial decision needs a lender by their side they feel good about and trust to have their best long-term intentions in mind. Those loan offers who stand out tend to ensure the entire buying process is successful.  

How The 2018 Tax Changes Can Affect Your Mortgage

How The 2018 Tax Changes Can Affect Your MortgageWhen the chatter was at its peak on the 2018 tax law changes being proposed, one of the big areas of concern for homeowners was the elimination of the mortgage interest deduction. Right behind that issue was a similar treatment with regards to property tax deductions.

As the rumors swirled and Congress moved, many feared both deductions had finally met their day and were going to be entirely eliminated, resulting in a major financial hit that many homeowners and particularly those in high real estate cost states would have felt painfully. As it turned out, there’s no reason to panic or suddenly dump titled real estate just because it has been bought with a mortgage. 

Yes, both issues were impacted by the 2018 tax law changes, but neither the mortgage interest deduction nor the property tax deduction were eliminated entirely. Instead, they were modified.

The changes include:

  • Mortgage interest deduction – the new laws cap the eligible debt to $750,000. While old loans originated prior to the law change date are still eligible up to $1 million, new mortgages created after the enactment date are caught in the lower universe. However, being realistic, most homebuyers are not in the bracket that afford a $750,000 plus priced home except maybe in a few communities such as New York City or the San Francisco/Bay Area in California. So the change basically means business as usual for 9 out of 10 homeowners in the U.S.
  • Real estate property taxes – total state and local taxes eligible for deduction are now capped at $10,000. This is where some homeowners could feel a pinch as a typical home in higher cost states easily generates property tax levels of $5,000 to $7,000 for a $300,000 home. So those units assessed a higher value by tax auditors will likely feel this new limitation take effect.
  • The standard deduction increase – remember, the above items are only useful to the extent that a tax filer itemizes his deductions. With a standard deduction now at $12,000 for an individual and $24,000 for a married couple, filing jointly, the option to itemize could go away entirely if the standard deduction provides a higher level of tax savings overall. And then that makes the above two deductions entirely moot and useless. Of course, it’s not entirely a plus since the personal exemption is also eliminated, thus reducing the benefit of the higher standard deduction by as much as $4,150 per person. In essence, the change is a wash, but could be enough to bar use of itemization, which would hurt greatly.

So the changes did not wipe out any benefit entirely (except the personal exemption). Instead, the real impact depends on which change applies to a specific taxfiler’s situation.

This is why two homeowners in the same town with the same house and market value could end up having very different tax results with the 2018 changes. Because there is so much variance.

As always, work with a trusted tax professional in order to understand how these changes will affect your personal tax situation.

Manage These 3 Items Before Applying For A Mortgage

Manage These 3 Items Before Applying For A MortgageMortgage lenders weigh the risk of getting their principal and interest paid back by looking at the qualities of the prospective borrrower. And due to the amount of money being requested and lent to purchase homes, those requirements can become daunting.  Working with a trusted and qualified mortgage professional makes this sometimes confusing process a little clearer.

To this end, there are three things that a potential homebuyer can do to prepare for the mortgage approval process.

Manage Debt And Credit Levels

For many homebuyers, managing their credit score is the biggest challenge. Mortgage lenders like buyers with strong credit. While getting strong credit usually isn’t something that can be done overnight, paying bills on time, all of the time can help to build a positive profile.

Using as little credit as possible is also helpful, since high utilization of existing credit lines can harm a borrower’s score. Having less debt can also reduce monthly payments, making it easier to qualify for a larger mortgage.

Manage Income And Qualifying Ratios

Lenders look for two things when it comes to a borrower’s income:

  1. Stable incomes are preferred, so being able to prove the income with a W-2 form or other documentation is usually required. Self-employed people will typically need to prove their income with their tax returns, so taking high write-offs can make it harder to qualify.
  2. A borrower’s income should be significantly higher than his total monthly debt payments. Lenders divide a borrower’s monthly payments — including their proposed mortgage — into the gross monthly income. If the payments exceed a set percentage, the lender will shrink the mortgage until it considers the payment affordable.

Collect Required Paperwork Early

To qualify for a mortgage, borrowers typically need to submit a comprehensive file of supporting documentation. This can include tax returns, pay stubs and bank and investment account statements.

Since lenders frequently want some historical data, it can be a good idea for people considering applying for a mortgage to start collecting documentation before they actually begin the mortgage application process. Once again, working with a qualified mortgage professional will make this process a lot more comfortable.

Should You Consider an Adjustable Rate Mortgage For Your Home Purchase?

Should You Consider an Adjustable Rate Mortgage For Your Home Purchase?With mortgage rates finally looking like they may move upward a bit as the overall market improves the adjustable rate mortgage starts to come into play again. Better known as the ARM home loan, the adjustable rate mortgage can be a flexible, powerful tool, depending on how it is used.

ARMs Can Help Save On Total Interest Expense

When rates were higher years ago, the ARM was an alternative way to obtain financing for a home without paying as much in interest with every payment. This was ideal for folks who felt that a few years forward the regular market rates would drop or they didn’t plan to stay in the same home for a number of years.

By trading away the mundane predictability of a 30-year fixed loan, the borrower was rewarded with a lower cost loan via an ARM. However, after a short period, anywhere from six month to ten years, the ARM would reset and the rate charged would change to a specific market index.

ARMs became all the rage in the early and mid-2000s as people bought homes to then sell them quickly with rising property values. It was low cost interest paid for large sums of financing, which was then paid back and profits were made just holding a home two years or so and well within the typical ARM period. However, when the real estate market went south a number of years back, many had to hold onto homes longer and rates reset to a higher, floating rate index.

The Advantages of Adjustable Rate Mortgages

Today, the advantage of the ARM again presents itself as rates begin to rise, offering again lower interest rates for home financing for a typical one to ten years. But these tools still include the rate reset after the intro period to consider, and with mortgage rates on an upward trajectory for the next few years it’s worth noting that the loan may cost more when the switch happens.

Thus a borrower should remember to look at the ARM as a shorter-term borrowing tool. A few options that can off-set the potential added interest rate costs in the future are:

 

  • sell the home prior to the reset date while verifying that there is no pre-payment penalty period
  • sell the home for a substantial amount more than it was bought for based on price appreciation or property improvement
  • refinance to a fixed-rate loan at a later date to avoid potentially higher index-based floating rates

 

The same caveat from a decade ago applies to today’s ARMs: they can be extremely valuable for up-front borrowing savings, but borrowers need to always remain aware of the included reset date and what it means for further financial obligations down the line.

As always, talk with your trusted mortgage loan professional to examine the best course of action for your personal situation.

Questions and Answers Regarding The Veterans Loan Program

Questions and Answers Regarding The Veterans Home Loan ProgramOwning a home is important to military veterans just like the majority of other consumers.  The Veteran’s Administration has provided an exceptional benefit for those who have served (or are currently serving) in any of the armed forces. And this VA Loan Program is helping thousands of service members achieve the goal of home ownership.

There are a number of questions that come up regarding the fees and qualifications of the VA Loan Program.  

What Are The Specific VA Fees?

Many veterans and active military personnel like the fact that VA loans don’t require private mortgage insurance (PMI). PMI has served as a thorn in the side countless home buyers who couldn’t manage a 20 percent down payment. The good news is that VA loans don’t requre mortgage insurance, even with no down payment at all.

To compensate for the absence of mortgage insurance, the government charges most borrowers a VA Funding Fee. Depending on individual circumstances and the type of funding you need (first-time home purchase versus refinance, for example), this fee can range from.5 percent to 3.3 percent of your mortgage amount.

Fortunately, applicants on disability and surviving spouses may be exempt from this requirement. 

Are There Any Administrative Concerns Regarding VA Home Loans?

VA loans are generally as easy to attain as any other government or conventional mortgage loan products, but they do have some unique qualifications to consider. These issues just need to be known and addressed appropriately throughout the transaction to ensure it goes smoothly.

For instance, if you and your spouse both serve in the military and you want to buy a home together, each of your VA entitlements must go through separate processing and approval procedures.

A VA loan also calls for a specific type of home appraisal called a Minimum Property Requirements (MPR) inspection. This should not be confused with the traditional home inspection. The MPR is the required appraisal by an independent VA appraiser. These appraisers typically dig into the home’s tiniest details, which can also be helpful by uncovering potential issues with the home.

Any home improvement or construction work currently under way may delay the approval process. You can minimize these issues by making sure that both your lender and your REALTOR have extensive experience in working with VA loans.

How Can A VA Loan Save Me Money?

Properly finessed, a VA loan for the right amount, and at the right interest rate, can edge out conventional loans. For instance, that VA Funding Fee, unwelcome as it might seem, could cost substantially less than the down payment you might otherwise put down on a conventional loan — without the need to pay mortgage insurance premiums for the first several years of your home ownership.

While the monthly mortgage payments might not look dramatically different on paper, even a savings of $100 a month can make an enormous difference to your financial health over the life of your mortgage loan.

VA loans can indeed provide some important benefits and buying power for our nation’s past and present military service professionals. Take the time to examine all your options so you can obtain the mortgage loan package that best serves your specific needs and goals.

Ultimately, however, you should probably sit down with a skilled mortgage professional who can run these numbers for you in detail and advise you on your wisest course of action.

The Younger Mortgage Market: Move Over Millennials, Gen Z Is Moving Into Home Ownership

The Younger Mortgage Market Generation ZAlthough the majority of the Generation Z population make $25,000 or less per year, they really have embraced the American Dream of home ownership. According to a recent survey by Zillow, 97 percent of Gen Z renters asked were confident they will be homeowners in the future, whereas only 55 percent of Millennials were

82 percent of Gen Zers who were renting identified home ownership as the most important component of the American Dream — more than Millennials, even though that group is presently the largest segment of homebuyers, according to data from the National Association of Realtors.

So Who Exactly Are Generation Z?

While precise definitions vary, Generation Z are generally known as people born from the late 1990s to early 2000, and they are just beginning to come of age in the housing market. Many currently are renters, but they do not appear content to stay renting for long.  

That could be due to seeing rental prices skyrocketing across the country, or less than ideal rental situations may be a factor — nearly half are living in spaces less than 1,000 square feet, and 82 percent of those Gen Zers share rent with another person, according to MarketWatch.

This Generation Is Bigger Than The Millennials

The Generation Z crowd outnumbers their older Millennial peers by about one million, positioning them to be a force driving the home buying and building market soon. While they are experiencing one of the most competitive housing markets in recent history, that doesn’t seem to phase Gen Zers.

More than 77 percent say they would forgo business ownership in favor of home ownership, and more than 50 percent would be willing to give up social media networking for a year to obtain their dream home, according to a recent Time Magazine survey.

Three in five teens have already begun saving toward their dream home, so while most Gen Zers hope to be homeowners by the age of 28, (three years lower than the national average) they are getting a good start toward meeting that goal. Due to their savvy tech skills and inherent digital nature, Gen Zers are poised to buy homes more efficiently and faster than previous generations of renters.

When navigating the rental market, 33 percent of Gen Z renters are able to find new accommodations in a month or less, probably because they submit more applications per search, at approximately 3.1 applications per property search versus 2.4 for Gen Xers and 2.2 for Baby Boomers, according to a recent Zillow report.