Financing and Mortgage
Your guide to financing a home
As a newcomer to the San Antonio region, you may not be new to the home-buying process. Even so, it’s helpful to review all the steps involved, as well as San Antonio-area resources and conditions. Since San Antonio has a relatively healthy real estate market, finding the right type of mortgage for your home should not be difficult. With the proper research and the help of a reliable real estate professional, purchasing your San Antonio home should be a rewarding experience.

As you prepare to purchase a home and seek financing, it is best to first have a realist view of the all the steps involved. The financing process can take anywhere from 15 to 45 days, but typically runs 30 days. Your agent should be involved throughout the process to help it run smoothly. The basic timeline for what will happen along the way is as follows and is covered more thoroughly within this chapter. For additional expert articles about financing and obtaining a mortgage in San Antonio, visit www.RelocatingToSanAntonio.org.
  • You submit the completed 1003 application and any required supporting documentation to the lender.
  • The lender orders an appraisal of the property, a credit report and begins verifying your employment and assets.
  • The lender provides a good faith estimate of closing and related costs, plus initial Truth in Lending disclosures, which, by federal law, must be provided by your lender within three days of first pulling your credit report.
  • The lender evaluates the application and your supporting documents, approves the loan and issues a letter of commitment.
  • You sign the closing loan documents and the loan is funded.
  • The lender sends its funds to escrow.
  • All appropriate documents are recorded at the County Recorder’s Office, the seller is paid, and the title to the home is yours.

Before you even begin applying for a mortgage loan, you’ll need to evaluate your credit-worthiness. There are three major credit reporting agencies Equifax, Experian and TransUnion in the United States that maintain records of your use of credit.

These records are called credit reports, and lenders will want to check your credit report when you apply for credit. Generally, lenders will also want to know your credit score. A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. A credit score helps lenders evaluate your credit report and estimate your credit risk. By reviewing this report a head of time, you can identify any issues that are due to fraudulent activity and work towards correcting them.

Equifax: 800-685-1111, www.equifax.com; Experian: 888-397-3742, www.experian.com; TransUnion: 800-916-8800, www.transunion.com.

Go to www.annualcreditreport.com to request a free copy of your credit report, once a year, or call 877-322-8228. See, also, www.FTC.gov.

The most widely used credit scores are FICO® scores, the credit scores created by Fair Isaac Corporation. Lenders can buy FICO® scores from all three major credit reporting agencies. Lenders use FICO® scores to help them make billions of credit decisions every year. Fair Isaac develops FICO® scores based solely on information in consumer credit reports maintained at the credit reporting agencies.

Your credit score influences the credit that’s available to you and the terms (interest rate, etc.) that lenders offer you. It’s a vital part of your credit health. Understanding your FICO® score can help you manage your credit health. By knowing how your credit risk is evaluated, you can take actions that may lower your credit risk – and thus raise your credit score – over time.

— Why You Want a High FICO Score
According to Fair Isaac Corporation, the difference between a FICO® score of 620 and 760 can often be tens of thousands of dollars over the life of your loan. A low score can cost you money each month or even stop you from refinancing at a rate you know other people are getting.

— How Are FICO Scores Calculated?
Different credit data is collected to determine your credit score. This data can be grouped into five categories representing different percentages, reflecting how important each of the categories is in determining your FICO score. The FICO score is based on your credit history and is a compilation of several factors including: your payment history, outstanding credit, length of credit history, types of credit used and new credit you’ve acquired or applied for.

Payment History: The first thing any lender would want to know is whether you have paid past credit accounts on time. This is also one of the most important factors in a FICO score. Your payment history accounts for approximately 35 percent of your FICO score.

Amounts Owed: Number of accounts with balances represents approximately 30 percent of your FICO score. The amount owed on all accounts. Note that even if you pay off your credit cards in full every month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.

Length of Credit Used: In general, a longer credit history will increase your FICO score. However, even people who have not been using credit long may get high FICO scores, depending on how the rest of the credit report looks. Credit history accounts for approximately 15 percent of your FICO score.

New Credit: Factors here include how many new accounts you have by type of account. It also may look at how many of your accounts are new. How long it has been since you opened a new account? What is the length of time since credit report inquiries were made by lenders. Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a FICO score over time. Your new credit accounts account for 10 percent of your FICO score.

Types of Credit Used: Is it a “healthy” mix? Approximately 10 percent of your FICO score is based on this category. The score considers your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Your FICO score also takes into account the kinds of credit accounts you have. Do you have experience with both revolving and installment type accounts, or has your credit experience been limited to only one type? How many of each? Your FICO score also looks at the total number of accounts you have. For different credit profiles, how many is too many will vary depending on your overall credit picture.

According to Fair Isaac Corporation, a FICO score takes into consideration all these categories of information. Also, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.

Other tools and resources: Visit www.myfico.com and select credit calculators to compare loans, determine mortgage payments, whether a fixed or an adjustable loan makes sense, determine closing costs and whether renting or buying is the better option.

It is recommended to pay about 20 percent or more of the cost of the home for the down payment. This is known as 80 percent Loan To Value ratio (LTV). If you put down less than this you will be required to pay Private Mortgage Insurance (PMI), which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan. It’s determined by the size of the down payment, the type of mortgage and amount of insurance. Monthly PMI is paid with the mortgage. Remember that, under the federal law, the lender is required to cancel the PMI once the LTV ratio reaches 78 percent or, in other words, when your mortgage amortized to 78% of the original value of the house. The borrower must be current on all mortgage payments and the lender must tell the borrower at closing when the mortgage will hit that 78 percent mark.

Being preapproved by a lender can put you in a much stronger negotiating position because it shows the seller that you are a qualified, ready-to-buy buyer, financially capable of buying the property and more likely to close on the property. Getting preapproved also allows you to understand your financial condition and how much you can afford before you begin your home search.

Preapproval is different from prequalification, which is merely an estimate of what you may be able to afford. Preapproval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount based on collected preliminary information. However, neither preapproval nor prequalification represents or implies a commitment on the part of a lender to actually fund a loan. Here are some of the current documents you’ll need to get started:

  • Current pay stubs.
  • W-2s or 1099s
  • Bank statements
  • • Investments/brokerage firm statements
  • • Net worth of businesses owned (if applicable)
  • Loan statements
  • Alimony/child support payments (if applicable)

Review the information provided below to anticipate your costs involved in buying a home. This is only a partial list. For more detailed costs, ask your Realtor® to help you create a worksheet that can be updated as necessary.

— Estimating Buyer’s Fees
Whether it’s called loan origination or loan service fee, it can be up to 3 percent of the loan amount and can include the following:
  • Loan application fee.
  • Lender’s credit report.
  • Lender’s processing fees.
  • Lender’s documentation preparation fees.
  • Lender’s appraisal fees.
  • Prepaid interest on loan – prepaid per day until the end of the month in which the closing occurs.
  • Lender’s insurance escrow – can be up to 20 percent of the cost of a one year homeowner’s insurance policy.
  • Lender’s tax escrow – depending on the time of year you close this can be up to 50 percent of the yearly property taxes.
  • Lender’s tax escrow service fee- fees to set up the tax escrow.
  • Premium mortgage insurance (PMI).
  • Title insurance cost for lenders policy – depending on what part of the country you live, a portion or the full amount may be paid by the seller.
  • Special endorsements to the title – depending on the property you pick the lender may require that the buyer pay special endorsements such as an environmental lien endorsements or location endorsements.
  • House inspection fees – any that remain unpaid.
  • Title/escrow company closing fee.
  • Recording fees, for the deed or the mortgage.
  • Local city, town or village property transfer tax, county transfer tax and state transfer tax, which may vary from city-to-city and state-to-state.
  • Flood cert fee – Fee to determine if the home you pick is in a flood plain.
  • Buyer attorney’s fee.
  • Association transfer fee.
  • Condo move-in fees.
  • Co-op apartment fees – fees that may be required to transfer the shares of stock in the property to the buyer.
  • Any credit checks by the condo or co-op board.

Many people shopping for home loans forget to inquire at credit unions. There are two major differences between a traditional bank and a credit union. One difference is that credit unions are member-owned meaning that if you have an account at a credit union, you’re part owner in the enterprise. Being a member can translate into better service since you are more than a customer. The other difference is that credit unions are not-for-profit which explains why mortgages and interest rates tend to be notably better. Becoming a member is easier than typically believed; you can use the credit union search tool at www.JoinACU.org to find a local branch.

— Fixed-Rate

A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15 and 20-year term loans are also available.

Shorter term loans come with cheaper interest rates. A 15-year mortgage’s interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you’ll also pay less over the life of the loan than you would if you borrowed the same amount of money with a long term loan.

Monthly payments of a shorter term loan, however, are generally higher than the same loan for a long term because the larger payments of the short term loan are necessary to repay the debt sooner.

A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage. Whatever term you choose, fixed rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate, should rates fall.

— Adjustable-Rate Mortgages
Adjustable-rate mortgages or ARMs come with interest rates that adjust up or down, depending upon current economic trends. An ARM’s rate is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages. ARMs might also be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.

To come up with the ARM rate, the lender will add a “margin,” usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about a quarter point to two points or more, depending upon the economy. The date when the first adjustment occurs (from six months to many years) and how often the rate adjusts, depends upon the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year, or during larger periods. The adjustment period is disclosed in the loan.

ARMs generally have limits or “caps” on how high it can adjust during each adjustment period as well as over the life of the loan. The caps protect you from drastic market changes, but ARMs don’t offer the stability of a fixed rate loan. ARMs’ lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you’d have to pay for the same mortgage with a higher fixed rate. And if index rates fall with an ARM, of course, so does your monthly mortgage.

ARMs could also be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate’s periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.

Most lenders are now requiring that you use an escrow account. The lender automatically will place a portion of the homeowner’s monthly note into an account specifically designated to pay for insurance and taxes, and the mortgage company is responsible for paying the annual bills from that account.

Types of loans can include:
— Conventional
This is the traditional 15 or 30-year home loan. Variations include jumbo loans (loans for more than $417,000), conforming loans (loans under $417,000) and adjustable rate mortgages (ARMs).

— FHA Loans
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit. Among the reasons cited by FHA for this option, include:
  • Easier to qualify - Because FHA insures your mortgage, lenders are more willing to give loans with lower qualifying requirements so it’s easier for you to qualify.
  • Less than perfect credit - Even if you have had credit problems, such as bankruptcy, it’s easier for you to qualify for an FHA loan than a conventional loan.
  • Low down payment – FHA has a low 3 percent down payment, and that money can come from a family member, employer or charitable organization. Other loans don’t allow this.
  • Costs less - Many times, FHA loans have competitive interest rates because the loans are insured by the Federal Government. Always compare an FHA loan with other loan types.

Learn more at www.hud.gov/buying/index.cfm.

— Veterans Administration (VA)
VA loans are partially guaranteed through the Veterans Administration. The VA recently expanded its qualifying criteria to include more veterans, so all vets should contact the VA for the most current information.

Title insurance is a contract in which the title insurance company, in exchange for a one-time premium at close of escrow, protects against future losses resulting from defects in the title to real property that exist at the time of purchase but are unknown or undisclosed. Title insurance is significantly different from homeowners insurance and other casualty insurance. Casualty insurance provides protection from losses due to unknown future events such as fire or theft for a specified period of time (e.g. a yearly premium for a year of coverage).

Title insurance provides protection for a onetime premium for an indefinite period of time from future losses because of events that have already occurred (e.g. claims of ownership). Because of this, title insurers eliminate risks and prevent losses in advance through extensive searches of public records and thorough examination of the title.

There are two types of title insurance policies – the owner’s policy and the lender’s policy. The owner will typically purchase the Standard Coverage Form in the amount of the purchase price of the property. It does not cover increases in value unless you purchase an endorsement. It covers the buyer’s interest in the property for as long as the buyer or his or her heirs have an interest in the property subject to certain limitations.

The lender will typically purchase the Extended Coverage Form in an amount equal to the mortgage loan. It covers the lender’s interest in the property for the life of the loan. It provides additional coverage not found in a typical owner’s policy such as unrecorded easements and boundary discrepancies.

Owners may elect to purchase a Homeowner’s Policy of Title Insurance instead of the Standard Coverage Form. Introduced in the 1990s, this policy includes the standard coverage of a typical owner’s policy and additional coverage, such as forgery occurring after the policy effective date and increases in the value of the property.

A title insurance policy protects you from financial loss due to covered claims against your title, pays your legal costs if the title insurance company is required to defend your title against covered claims and pays successful claims against your title.

Claims typically covered under an owner’s title insurance policy include:
  • Someone other than the insured who owns an interest in the property.
  • Forgery, fraud, undue influence, duress, incompetency, incapacity or impersonation.
  • Defective recording of a document.
  • Restrictive covenants.
  • Undisclosed liens due to a deed of trust, unpaid taxes, special assessments or homeowners association charges.
  • Unmarketability of title.
  • Lack of access to and from the land.

Ask your title insurance agent to explain what is and is not covered under your title insurance policy.

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