An Overview of the Mortgage Application Process

House hunting can be an exhilarating process, as you try to pick that perfect property. Applying for a mortgage, while not quite as exhilarating, does not have to be difficult, if you work with the right lender or broker. Following is an overview of how the mortgage industry works.

An Overview of the Mortgage Application Process

You have a nice chunk of money saved for a down payment. You have started shopping for a home or have found the perfect property.  It is time to enter the world of financing, better known as getting a mortgage. Before entering the this new world, it might help to get an overview of how the mortgage process works.

A mortgage simply is a debt instrument that acts to secure a cash loan to you on a home. In exchange for giving you the money, the lender puts a first lien on the prospective home for the loan amount. If you default, the lender can foreclose and sell the home to recover the debt amount.

In mortgage industry terms, applying for a mortgage is known as originating a loan. To originate the loan, you will first have to find a lender you are comfortable with. Many will find it advisable to use a mortgage broker to shop for the loan that best meets their needs. Different lenders offer different loans and terms. A good mortgage broker can make things that much easier for you.

As part of the mortgage application process, you will fill out a loan application. Depending on the nature of the loan, you probably will also be required to submit documentation supporting your claims of income and so on.

Once your application is submitted, a lender may ask for additional information or documentation. Depending on how the review, known as underwriting, goes, the lender may decline or approve your application. Often, the lender will add a stipulation to the loan that cover issues it is concerned about.

Once you are granted the loan, you will close on the residence you are purchasing or refinancing. Inevitably, your mortgage lender will most likely sell the loan to another entity. To raise cash to issue more home loans, lenders sell their current stock of mortgages on the secondary market.

Your mortgage will be terminated at some point in time. Positive reasons can be the sale of the home, refinancing or simply paying off the balance. Negative reasons can include default or bankruptcy. Regardless, the above represents the basic structure of the mortgage application process and what follows after closing.

Mortgage Refinance Strategies

Strategies if you currently have a first and second mortgage (or home equity line/loan):

Refinancing both your first and second mortgages into one low fixed interest rate, will result in one low monthly payment that could save you thousands in interest charges. By combining both mortgages, you qualify for lower rates than if you refinance each separately. You can see a significant savings on your fixed rate second mortgage, which is often several points higher than your first mortgage rate. If your second mortgage is an adjustable rate line of credit (which is usually tied to the prime rate), you will want to get out of that mortgage while the prime rate is still low. This is an excellent time to make that move.

Strategies to lower your monthly mortgage payment:

You have a couple of options to lower your mortgage payment when refinancing. The first choice is to simply find a new low rate mortgage. Even if you choose the same length for your loan, you will still see a savings in your monthly mortgage bill with a lower interest rate. Adjustable rate mortgages will give you the lowest payments, at least at the beginning of your home loan, but a fixed rate loan will give you the security that they won’t rise in the future.

The other option is to extend your loan term, especially in the case of your second mortgage, which usually is for five to ten years. By consolidating your loans to one thirty year loan, you lengthen your payment schedule for principal, so you have a smaller payment.

Getting the best mortgage:

Once you determine the type of loan and terms you want, do your shopping for a good lender to save even more money on your mortgage refinance. Lenders will vary in how much they charge for closing costs and interest rates. The APR will tell you how loans compare overall, both in terms of rates and closing costs.

If you are planning to move or refinance again in the near future, then be wary of paying high closing costs. Even if they secure you a lower rate, you will only see a savings if you keep the mortgage for several years.

Don’t base your lender decision on posted loan rates. Ask for a personalized loan quote based on your general information. With more accurate numbers, you can make an informed choice as to who has the best financing for you.

Beg, Borrow or Steal, But Make That Mortgage Payment

One of the most common things I hear when a prospective client contacts me for a mortgage refinance is “I just missed a mortgage payment and I want to refinance before it’s too late”. When I ask them about their credit, most of them reply “Oh I pay everything on time, I just got behind this one month on the mortgage”.

It breaks my heart to tell them that in many cases, it already is too late. The reason is simple if you really think about it: If your home is your biggest investment, your greatest potential asset and your largest current liability, there is nothing more important than showing that you are able to make the payment on it every month. If you are in a cash crunch, you’re better off missing or underpaying almost any other payment, such as a credit card bill, even your utility bill, instead of missing or even delaying your mortgage payment, because missing one mortgage payment can cost you tens of thousands of dollars over the years.

When you miss a mortgage payment, your credit score may not go down dramatically. But your mortgage credit quality will take a serious beating, and you’ll carry it around for years. When you start out with a mortgage, regardless of what your FICO credit score is, you are rated an “A”, meaning you make your mortgage payments on time. If you miss a payment, and even if you’re just late enough to qualify as 30 days late, the lateness is recorded and you will become an “A-” or a “B”. Just one mortgage lateness can keep you out of the refinance market for up to two years by automatically locking you out of the lowest payment programs. If it sounds a bit like high school, it is, but this time it’s for keeps. Keep missing or delaying payments, and you’ll quickly see your mortgage quality decline to a “C” or “D”, which could prevent you from refinancing entirely, by eliminating your eligibility from even standard rate programs.

This hurts the most when you refinance or are ready to buy a new house, because you are usually borrowing more money than you were previously, either to pay off bills or make home improvements, or because you’re buying a bigger house. So not only are you moving to a higher balance, but your now derogatory mortgage credit will force you into a high rate. If you need the cash to pay off bills and improve your credit urgently, or to purchase a home in a new area because you are relocating for work, you can wind up in a horrible Catch 22, very often disqualified for financing entirely, or with financing so unaffordable that you would rather not.

So what can you do about this? If you do better with automatic payments, sign up for direct debit payment with your lender, or arrange for your bank to automatically pay your mortgage every month on a specific date far enough ahead of the due dates for your other bills, so you won’t be tempted to pay something else. The day after payday is a great day to do this. And the date should be far enough ahead of your due date that the bill is paid and posted on time. It might hurt that first month, but it will even out once you get used to the new schedule.

No matter what, make sure you satisfy your mortgage payment obligation. Most everything else on your credit report can be repaired or negotiated, but not your mortgage lates. Don’t wind up in a situation where you’re ready to dance but too late to the party. Plan ahead, and as always, protect your financial future today.

Consolidate Bills with Cash-out Mortgage Refinancing and Make Your Monthly Payments Fit Your Budget

Have you seen enough commercials about credit card and other types of debt? Do you feel like all these commercials are directly talking directly to you? Have you finally decided it’s time to take advantage of these offers and get your finances under control? If your goal is to consolidate bills and bring your finances back under your control, a refinance of your mortgage that will allow you to do this is exactly what you need.

If you are paying each month on three or four different credit cards at an interest rate of at least fourteen percent, those monthly minimums will certainly add up. Each of those balances are charged the interest rates each month. When you consolidate bills instead of spreading them out, you are being charged interest on only one amount at what can be a fixed and, usually, lower rate than what your credit cards will charge you.

Several mortgage companies, including our own, offer mortgage refinances that are specifically designed to help you pay off your credit cards and consolidate bills by rolling those bills into your mortgage amount. One of the benefits of getting this type of loan is the fact that you will go from several bills each month coming due at different times to one bill due at the same time each month. In this way, you will only have to keep track of one bill each month and this bill will cover your mortgage as well as your debts. The only other monthly bills that you should have coming in will be your utilities.

In combining all of your debts, you are actually saving money each month. As stated earlier, when you consolidate bills in this way, you will be charged interest on one amount rather than several amounts. Since mortgage loans have lower interest rates than credit cards, you are charged less each month, which leaves more money in your pocket each month. This extra money can be used to pay off extra each month toward your balances or any other way you decide.

Consolidating bills in this way is a decision that will make life easier and give you control again of your finances. Your interest rates will be lower as will your monthly payment. You will save money while paying off your bills and keeping your credit score high. And don’t forget, mortgage interest is tax deductible, while credit card interest is not. So you will be getting a bonus from Uncle Sam as well. Ask your accountant or tax professional for further details.

Cash out Refinance – Things to Know about Refinancing Your Mortgage to Get Cash Out

While there are costs associated with a cash-out mortgage, you should also remember the benefits.

A cash-out mortgage allows you to refinance your mortgage and pull out part of your equity. Before deciding how much to cash to use, be aware of the impact of PMI and equity amounts. However, you may find the benefits of refinancing outweigh the costs.

Cash-Out Mortgage Basics

With a cash-out mortgage, you can refinance for lower rates or to just get part of your equity out. Once the refinancing process is completed, you will end up with a check. You can decide to take up to 85% of your home’s equity in some cases. However, cashing-out a large percent of your home’s value will impact your refinancing rate and might require you to carry private mortgage insurance.

Higher Rates

You may also find yourself paying higher interest rates, at least a quarter percent, for cashing out over 75% of your home’s value. Lenders charge higher rates because there is an increased risk level. Your credit history will also be a factor in the type of financial package you qualify for.

Benefits of Cashing-Out

While there are costs associated with a cash-out mortgage, you should also remember the benefits. You can write off the interest on your taxes (ask your accountant) and you qualify for lower rates than with other types of credit. You can also spread out your payments over a longer period, lessening the monthly financial burden.

Taking out more than 75% of your home’s equity is not necessarily a bad decision. You just need to weigh the financial costs. You may find that in the long-run, tapping into your home equity is better than the other types of credit available to you. You may also discover that the tax benefits offset the slightly higher costs.

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