Introduction

Purchasing a home usually entails obtaining a mortgage, but what exactly is a mortgage? Essentially, a mortgage is a large loan used to buy a house. You get the money you need up front, and in return, the lender receives repayment of the loan in addition to interest charged to borrow the money.

Although the main elements of a mortgage are similar to other loans (such as down payments, interest rates, terms, etc.), the amount is usually much larger and generally the largest sum anyone borrows throughout their life. Because of this, the process is much more precise and carries with it additional charges in the form of closing costs.

Before you begin to look for a new house start by thinking "mortgage" so you'll know how much you can afford and what you need to do to obtain one.

What Is a Pre-Approval and How Does It Benefit You?

When you've decided you're ready to enter the real estate market and buy a home, start by getting pre-approved for your mortgage. You're going to have to do this at some point anyhow, and doing it right away has advantages.

First, you'll know exactly how much you're able to borrow, and may be able to lock in to current interest rates. Secondly, being pre-approved puts you in the driver's seat by showing the buyer you're ready to make a serious offer. In fact, some sellers and realtors require pre-approval before they will show a home.

Don't confuse "pre-qualified" with "pre-approved," there's a big difference. Getting pre-qualified gives you a general idea of your borrowing power but does not provide actual approval. Once you've been pre-approved, all you need to complete the transaction is agreement with the seller and an appraisal. Basically, when you've been pre-approved all you need is the house!

You should note that a pre-approval is based on your personal circumstances at the time of application. Should any of those circumstances change, your approval may be affected negatively. Also be aware that your approval will expire after a specified period if you haven't purchased a home.

How to Find a Lender

If you already have a relationship with a financial institution through a checking or savings account, talk to them first about a mortgage and then get a quote from 1st Source. 1st Source will give you the straight talk and sound advice you need during the home buying process.

Also check with friends or relatives who have recently purchased a home and see where they got their mortgages. In addition, realtors know the lay of the land regarding local lenders and will be happy to steer you toward the companies they deal with most often.

Searching for a mortgage on the Internet can be an uncertain process. It's difficult to know whether you're dealing with a reputable company or some guy working out of his basement. Do you want to send off your intimate financial information without knowing it's going to be safe? If you don't recognize the lender's name as that of a reputable firm, call the Better Business Bureau in that company's state to inquire.

When you're comparing lenders and their mortgages, make sure you're comparing apples to apples. A mortgage with a lower interest rate may result in higher closing costs. Use this convenient checklist to compare annual percentage rates and other fees when shopping for a mortgage.

What Is a Lender Looking For?

Understandably, a potential lender wants to determine your ability and willingness to repay the loan. In order to accomplish this they will review your finances, employment history, and credit history.

• Steady employment -
  • You will be asked to supply at least two years of employment history (more if you've held your current job for less than two years) and be prepared to explain any gaps. A lender wants to make sure you have a history of stable employment. The past is a good predictor of the future.
• Your credit history -
  • Your credit report will show the lender if you've paid your bills on time, missed payments, and how much current debt you have including credit cards and long term loans. You'll have to supply a written explanation of any late or missed payments. If you've never taken out a loan or had any credit cards you won't have a credit history. You can compile your own by showing that you pay your rent, phone bills, utilities, etc. on time. This is called a non-traditional credit history.
• Your credit score -
  • Some credit reports will contain a credit score. This score is determined by comparing your payment history and current credit accounts with statistical models. The higher the score the better the credit risk.
• Other debts you have to pay -
  • What debts do you currently hold? Do you owe money for a car loan, credit cards, or other loans? What are the amounts available on open lines of credit such as credit cards or home equity loans? The more you owe, the less you will be able to borrow.
• Too many loan applications -
  • Your credit report will show how many loans you have applied for in the past 12 months. If you have applied at financial institutions that don't show up as current loans on your report, the lender will assume you were denied. That will bring up questions as to "Why?"

A lender will use all of this information along with your household's gross income to determine your ability to repay the mortgage. The guide is called the 28/36 percent ratio and compares your debt to your income. You can typically borrow no more than you can pay with 28% of your gross monthly income. Add another 8% of additional monthly debt to the 28% used for the mortgage and you come to 36% - the combined limit. Anything in excess of that will decrease the amount you will be able to borrow.

Preparing For Your Loan Application

To help you prepare for your mortgage loan application, 1st Source has prepared a check list of documents and information you'll need to take with you when you meet with your lender. This information is used to verify your income, assets, and debt. Preparation before hand makes the process easier, and increases your chances of being approved.

Be sure to bring:

• Copies of the purchase and sales agreements
• Pay stubs for the past 30 days
• W2 forms for the past 2 years
• If you're paid on commission, copies of 2 years' signed tax returns including all schedules
• If you're self-employed, the past 2 years' signed tax returns (personal and business) including all schedules and a signed year-to-date Profit and Loss Statement
• Bank statements for the past 3 months
• Divorce Decree, if applicable
• If you receive alimony or child support, you'll need documentation verifying the past 12 months support you've received
• Proof of additional income such as dividends, interest, child support, or income from a rental property.
• Bankruptcy, if applicable:
  • Notice of Discharge
  • Schedule of Debts
• If you are receiving a gift from parents or relatives for the down payment, you'll need a signed gift letter. The letter must state that the money is truly a gift and no repayment is required.
• Credit explanations, if applicable
• Your checkbook

1st Source Bank will be happy to provide you with their easy to use Mortgage Loan Workbook that walks you through the information gathering process. If you're interested in obtaining a copy of this work book, contact us securely online and we'll be happy to mail you one.

Meeting the Lender

Once you've gathered all of the required documentation it's time to make an appointment with a potential lender. Most lenders will be more than happy to work around your schedule, and the meeting will probably take 1 to 1 ½ hours. Again, your preparation has a direct bearing on the length of the meeting and the time it takes to process the application. Missing information will need to be submitted and may delay getting a loan decision. Some lenders will ask applicants to pay for the appraisal and credit report when the application is completed so bring your checkbook.

During the appointment you will have the opportunity to ask questions about all aspects of the process including terms, types of mortgages, the appraisal, and anything else that needs clarification. The lender should explain the different types of loans, current interest rates, and offer you advice on what may be best for you. After the application process is completed it may take several days before you're notified concerning the approval. When you are approved, you will receive an approval letter you can show to Realtors and prospective buyers letting them know you are a serious shopper with approved financing.

Some banks use automated systems that decrease the amount of time it takes to review and approve a loan. 1st Source Bank uses a system like this that streamlines the application process and often delivers your answer in as little as 15 minutes.

If you're interested in setting up an appointment with a 1st Source lender, contact us securely online to complete an application.

Mortgage Types and Interest Rates

The best mortgage for your particular needs can depend on several factors. Are you a first time home buyer? Do you plan on living in the home for many years or will you be moving in two or three? How much down payment can you afford? What are the current interest rates? You have a wide choice of financing options available to you. Some choices are yours to make and others are based on your specific circumstances.

• Fixed-rate 30 year - This is probably the most common and easiest to qualify for because it keeps the payments fairly low. The closer you get to retirement though, the more you may want to consider a 15 year fixed rate mortgage.
  
  
• Adjustable-rate mortgage - Also referred to as an "ARM," the adjustable rate can be attractive to people who don't plan to keep the house very long or are confident their income will increase in the coming years. Your lender can adjust the interest rate on the mortgage once or twice a year although there is a cap restricting how much it can be raised at one time.



• Low down payments - Historically, the standard down payment for mortgages has been 20%. Today many lenders realize how difficult it can be to come up with such a large amount of cash and will help buyers with special loan programs.
  
  
  • FHA - The Federal Housing Administration insures this mortgage. The required down payment is usually 5% and can go as low as 3%. FHA offers all types of loan programs, such as a fixed rate, adjustable rate, or a buy down mortgage. In addition, FHA allows all of your down payment to be a gift from a family member, relative, or non-profit organization, and allows up to 6% of your closing costs to be paid by the home seller.
  
  
  
  • VA - This mortgage is guaranteed by the Department of Veteran's Affairs and is available only to veterans. These loans are often made without any down payment at all, and frequently offer lower interest rates than ordinarily available with other kinds of loans. Aside from the veteran's certificate of eligibility and the VA-assigned appraisal, the application process is not much different than any other type of mortgage loan.
  
  
  
• Getting the best interest rate - One way to get a better interest rate is to pay what are known as "points." A point (short for discount points) is prepaid interest assessed at the time of closing by the lender. Each point is equal to 1% of the loan amount and a portion is tax deductible that year.



• Lock in - While you're in the process of shopping for a home and mortgage, interest rates can change. Ask your mortgage lender if you can "lock in" to the current rate being offered. It's good to lock in when rates are rising, but not when they're dropping. The lock-in lasts for a specified period and will expire if you haven't closed before then.

What to Expect After Meeting With Your Lender

When buying a home much of a homebuyers' unease results from not knowing what's going on. After you meet with your lender and apply for a loan, you know credit checks and verifications of employment will be taking place. But you might wonder what else you can expect after this meeting. Here are some things you can anticipate:

• Remember that financial institutions are in the business of making loans, not denying them. Your financial institution should let you know if you qualify for a loan within a few days. However, if your financial institution utilizes an automatic underwriting system when taking a loan application, similar to the one 1st Source Bank uses, you may be able to find out if you're approved within 15 minutes after your application is taken.
  
  
• After meeting with your lender you should know what financing options are best suited to meet your needs and circumstances. You should also know the size of a down payment you'll need, and if any additional documentation is required to complete your loan application.
  
  
• Your mortgage lender is required to provide you with a Good Faith Estimate within three days after you apply for a mortgage. Most lenders will give this to you at the end of your initial loan application meeting. The Good Faith Estimate is a written estimate stating all closing costs along with the annual percentage rate (APR) of your mortgage. It's important that you review this estimate. If there are charges listed that the lender previously agreed to waive, point them out. Remember - this is an estimate and in the end some costs may turn out to be higher or lower. In addition to the Good Faith Estimate, you also should receive an information booklet, "Settlement Costs -- a HUD Guide."
  
  
• After your loan has been approved, your lender should give you names and telephone numbers of individuals you will need to communicate with while your loan is processed and prepared for closing. In some cases you will only work with the individual who took your application, while some institutions have you interact with a number of different individuals.
  
  
• After you have been approved, your lender should let you know about the special perks they provide for their mortgage customers. As a 1st Source customer you're eligible for free Homeowner's Checking, automatic debit of your payment from your checking account, installment loan discounts, and telephone or Internet balance inquiries

If Your Loan Application is Denied

Once you've presented all of the information requested by the mortgage lender, all that's left to do is sit back and wait for notification. When the news finally comes, and if your loan request has been denied, your first question will be "why?" Here are the primary reasons mortgages are denied and what might be done to correct the situation.

• Low appraisal -
  • The lender's appraisal may be lower than the agreed upon selling price. You might be able to renegotiate the price with the seller or, if the low appraisal reflects structural problems with the home, get the owner to agree to fix them. If the owner isn't cooperative, you may want to look for a new house.
• Poor credit rating -
  • If your request is denied because of a poor credit history, you should obtain a copy of the report and challenge any errors it may contain. If the report is accurate, you may have no choice but to work on correcting the problems before you can apply again. If you used a non-traditional credit history (payments to landlords, utility companies, etc.), you may be able to approach a nonprofit housing group to help you present this information in a more positive light.
• Insufficient funds -
  • This means the lender requires a larger down payment than you're able to come up with. You might try to get the seller to finance a second mortgage to reduce the amount of down payment needed. Another option is a Lease-Purchase Mortgage Loan. This is a "rent with option to buy" plan that allows a portion of the "rent" payment to be accumulated for the down payment while the rest goes to cover the house payments.
• Insufficient income -
  • In this case, the formulas the lender uses for qualification have shown that you simply don't earn enough to afford the mortgage payments. If there are extenuating circumstances, point them out to the loan officer. If you are in line for a raise at work, ask the lender if a letter from your employer would help.

Whatever you do, don't give up. Make plans to correct any problems and pursue your dream. There are credit and housing organizations that can help you with your plans for home ownership. Remember, there are also programs that can help the low to moderate-income homebuyer. These alternative approaches may aid you in overcoming some common hurdles and obtain quality, affordable housing. Ask your lender if you qualify for any of these programs.

These programs include:

• Community home buyer's programs
• Housing finance agency programs
• Subsidized second mortgages
• Lease-purchase mortgage loans
• Community home improvement mortgage loans
• Community land trust mortgage loans

Finally, if you feel you're being discriminated against for any reason, you are protected under the Equal Credit Opportunity and the Fair Housing Acts. Report your concerns to the U.S Department of Housing and Urban Development (HUD) or the financial institution's regulator. It will be listed on the denial form.