Finance Center
Questions & Answers
How prepared should I be before meeting with a lender?
Lenders will evaluate your ability to pay back your loan based upon information you give them on your loan application. The lender will verify each financial fact on your application, and will be looking for any "red flags" which might affect your ability to repay the loan. Everything you put on your loan application should be truthful and as accurate as possible. However, there are actions that you can legitimately take to present your financial picture in the best possible light.
- Pay off or pay down any credit card debt as much as possible. Credit card debt reduces the amount you can borrow for your home purchase. If you owe $2,000 on your credit card, the lender will assume you have a monthly debt payment of 5% of that amount, or $100 per month payment. Minimize the use of your credit card. Pay off auto and other debt which has over 9 monthly payments left.
- First-time buyers: If you expect to receive a family gift or loan as part of your down payment, be sure it is clear whether the money received from family members is a gift or a loan. If it is a gift, lenders will usually require a "gift letter" from the donor. Lenders will be checking your bank balance for the last three months, and will notice any large increases in your balance during that three month period.
- Start saving even more for your down payment. Remember, there are almost always significant "closing costs" which must be paid at close of escrow, in addition to the down payment. Estimate closing costs at 3% of the purchase price.
- Don't change your line of work . Lenders expect primary earners to be in their jobs at least two years. Change to a job in the same line of work is OK, but this is not the time to make a shift to a different line of work. Do not go from a salaried position to a "self-employed" status! Income figures from self-employment are often averaged over the last two years.
- Hold off on large purchases (autos, appliances. etc.) which may increase your debt or reduce your cash reserves. Postpone these purchases until you have moved into your new home.
What is the typical down payment for purchasing a home?
In a typical transaction, the buyer will put 20% down , and borrow 80% of the selling price. For example, for a home costing $300,000:
Down Payment |
$60,000 |
20% |
Loan |
$240,000 |
80% |
Total |
$300,000 |
100% |
Can I buy a home for less than 20% down?
Yes. Many lenders will lend up to 95% of the purchase price. Some government sponsored programs will allow loans up to 95% of the purchase price.
What does it mean to be "pre-qualified" or "pre-approved" for a loan?
In both cases, the borrower provides the lender with the appropriate financial information, and asks the lender to evaluate the borrower's financial situation before an offer is made upon a specific house. The advantages:
You will know how much you can afford to pay for your new home.
Sellers will regard your offer highly, since there is evidence that you will be able to get the required loan.
- When pre-qualified, the lender gives you a letter stating that (in his opinion, assuming all verifications are satisfactory) you are qualified to borrow a specified amount.
- When pre-approved, the lender actually takes an application, verifies all data, and commits to loan a specified amount, subject to a satisfactory appraisal of the property.
What are the steps in processing a loan?
You will apply for a loan by completing a loan application with a mortgage broker or loan company. There will be a non-refundable loan application fee, usually around $200 to $400.
A mortgage broker represents several lenders, and will submit your application to the lender he believes most appropriate for your situation. Representatives for banks and other lending institutions usually represent only one institution, and will submit your application to that institution. There are advantages to each type.
The lender will verify your statements of assets, liabilities, employment, and salary. The subject property will be appraised. The purpose of these investigations is (1) to assure that you have the income to repay the loan as scheduled, and (2) in the event that you default on the loan, the property is valuable enough to pay off the loan upon its sale.
How long does it take to process a loan?
Usually about 20 to 30 days, although it can take as few as 10 days, or as long as 45 days for some transactions. The actual time depends upon how quickly the lender can process the application, get the appraisal, and obtain verification of employment and bank balances.
What documents will I have to supply?
Your lender will let you know this. You can get a head start by being prepared to provide verification of income (pay stub and recent tax returns), a schedule of your assets (bank account numbers, securities, other real estate, etc.), and a list of your liabilities (credit card statements, auto loans, child support, student loans, and any other debt). If you are self-employed, you may need to supply financial statements or tax returns for your business.
Many lenders sell the loans to investors. The standardized analysis of your application is required so that your loan will be acceptable to investors.
What might delay approval of my loan?
Pay careful attention to your lender's request for information. Be sure you understand all the requests. (It often seems as if the lender needs "just one more document"!)
If you have had credit problems, be prepared to explain exactly what happened, and why a lender should not be fearful of a reoccurrence. If you have had a foreclosure, or been through bankruptcy, the lender will probably want 20% down, re-established credit with a clear credit history for at least two years from the date of discharge of bankruptcy; a salaried income is preferred over self-employed status.
What are "closing costs" and how much are they?
Closing cost are any fees paid by the buyer at the close of escrow. These fees may include "points" on the new loan, escrow fees, recording fees, title insurance, notary fees, and any other costs of processing your loan. In addition, you will be asked to prepay interest charges to cover the partial month in which you close escrow, and the first year's premium of your fire insurance policy. "Impounds" covering the prepayment of a pro-rata share of your property taxes, property insurance, and mortgage insurance (if any) may also be included. Closing costs will vary by area.
When must my down payment and closing costs be paid into escrow?
Your real estate agent will probably be the first to tell you but you could always ask your title or escrow officer. In California , typically funds must be held by the escrow holder at least 24 hours before closing. Often buyers have their savings in a money market account, operating out of state. Funds can be wired to the escrow holder directly. To assure that your purchase will close on time, we recommend that you gather all funds required for closing your escrow into a local bank two weeks ahead of time.
When do my mortgage payments start?
The actual date of your first payment will be included in your closing documents. However, mortgage payments will typically start about 30 days or more after closing. The date is often the first day of the first month falling at least 30 days from close of escrow.
What is the difference between "fixed" and "adjustable" (or "variable") rate loans?
A fixed rate loan has an interest rate that is fixed (remains constant) for the term (duration) of the loan. Payments are also fixed (remain the same) for the term of the loan.
An adjustable rate loan has an interest rate that changes periodically in relation to an index. Payments may increase or decrease from time to time, according to a formula.
How many years will it take to pay off a real estate loan?
The most frequent number of years, or "term" of a loan, is thirty years. Fifteen year loans are also usually available. If you can afford a somewhat higher monthly payment, then you should consider the fifteen year loan. The interest rate is often .5% less than the thirty year note, plus you save fifteen years of payments!
What are "Points"?
Points are a fee paid to obtain a loan, or to lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount. (i.e. 3 points on $100,000 would equal $3,000.) On a purchase, points are prepaid interest. "No point" loans have no initial points; usually the interest rate will be somewhat higher than a loan with points, and may have a pre-payment penalty.
I've heard about ratios. What should they be?
A buyer's ability to afford the payments on a loan is usually judged on three ratios. The allowable percentages may vary between lenders; the following ratio values are typical of most lenders. All ratios are calculated on the basis of gross monthly pre-tax income and monthly payments.
Loan Payment ratio: (principal + interest) divided by gross monthly income.
Maximum ratio value = 28%
Housing expense ratio (PITI): (principal + interest + taxes + insurance) divided by gross monthly income.
Maximum ratio value = 33%
Housing expense + Other monthly debt payments ratio: (PITI + monthly payment on all long term debts) divided by gross monthly income.
Maximum ratio value = 36% to 38%. Note: When lenders have plenty of money to loan, a total ratio of 45% is not unusual for a solid buyer.
