The contract you sign with your builder will include an Advance Schedule which will outline each phase of the building process at which time a payment will be made to the builder. At each advance point, the bank will verify that the appropriate work has been completed and issue a check.
Once you have a signed sales agreement, the appraisal will be ordered by the bank. The appraisal is an evaluation of the property's value and is completed prior to the final loan approval to ensure the loan amount is consistent with the value of the property. The appraiser visits the house and evaluates the site, structure and physical condition of the property. The final appraisal amount also includes an evaluation of recent selling prices of similar homes in the area (often referred to as "comparables"). The process can take up to two weeks.
In order to verify that the value of your home supports the loan amount you request, an appraisal will be ordered by the lender. The appraisal is generally performed by a professional who is familiar with home values in the area and may or may not require an interior inspection of the home. The fee for the appraisal is, commonly passed on to the borrower by the lender. For our comparison purposes, the appraisal fee is a third party fee.
With a bi-weekly loan payment schedule, you make 26 bi-weekly payments vs 12 monthly payments. The bi-weekly payments are for approximately ½ of what the monthly payment would be. This payment structure saves you thousands in interest because you are actually paying down the principal 2 weeks earlier.
When it is not possible for a homeowner to sell their first home prior to purchasing their second, there is the option of obtaining a Bridge Loan. With a Bridge Loan, the lender can combine the money owed on the existing home with the amount required to purchase the new home and create one larger, temporary loan. Once the existing home is sold, the owner applies the proceeds of the sale to the Bridge Loan and the bank will release the mortgage on the original home.
Closing costs are fees that are paid by the home buyer at the time of purchase. A document, called a Good Faith Estimate, is provided to you after you apply that estimated the approximate amount of money you will need at closing. Closing costs usually include the following:
- Private Mortgage Insurance Premium
- Lawyer's Fees
- Title Search
- Mortgage Processing Fee
- Points, if applicable
- Document Preparation Fee
- Appraisal Fee
- Conforming Mortgage
A mortgage loan that conforms to regulatory limits such as loan-to-value ratios, debt-to-income rations, terms and other characteristics. These mortgages are eligible for sale and delivery to Fannie Mae or Freddie Mac. Conforming Mortgages typically have a lower rate than in-house mortgages that are held by the lender.
A construction mortgage is used for the building stage of a home and will be for 80% of the perceived value of the home at the time of completion. The perceived value is calculated by an Appraiser who uses estimated provided by your builder along with an evaluation of recent selling prices of similar homes in the area, often referred to as comparables.
The contract you sign with your builder will include an Advance Schedule which will outline each phase of the building process at which time a payment will be made to the builder. At each advance point, the bank will verify that the appropriate work has been completed and issue a check. Until the construction is complete, the customer only pays interest on the amount of money advanced.
Credit Check/Credit Score
As part of the application process, you will provide permission to the lender to validate the information you have provided and perform a credit check. The credit check is a tool that allows the lender to evaluate your credit regarding outstanding debt and your past history of paying your bills on time. The resulting credit score may impact your approval and the type of mortgage product you can receive.
The down payment is the amount of money you are applying up front towards the purchase price of the home. The usual down payment is between 5% and 20% of the purchase price of the home.
Money for the down payment may come from a variety of sources including your savings or possibly your 401k, a gift or loan from a family member, a grant or loan from a non-profit organization, a loan secured by a marketable asset such as a CD or the cash value of a life insurance policy.
Private Mortgage Insurance is generally required for mortgages with less than 20% down payment. This insurance guarantees that the lender is paid if the buyer fails to pay on their mortgage. The exact amount depends on the amount of the loan and the size of your down payment.
Fixed Rate Loan
The interest rate on the loan is fixed for the entire term of the loan.
Freddie Mac and Fannie Mae
Freddie Mac and Fannie Mae are America's biggest buyers of home mortgage. They were chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing.
Good Faith Estimate
Lists your closing cost. This is provided to give you some idea of the approximate costs you will need to pay at closing. Such costs could include interest adjustments, title insurance, recording fees, points, credit report fees, appraisal fees and settlement fees which are paid to the lawyer or firm who manage settlement.
Home Owners Insurance
Lenders require buyers to purchase homeowner's insurance. This typically protects you against fire, and in some areas, floods. You can also include theft and liability which will cover you is someone where to be injured on your property.
An inspection may be required as a result of something found during the appraisal process. It may also be requested by you, the buyer, to uncover hidden problems or to identify items that you may want the seller to repair before the final contract is signed.
Locking in a Rate
You may be provided with the opportunity to "lock in" a rate, which ensures you receive the rate that is quoted to you at the time of commitment (which is when you are informed of the approval of your loan.) This is often a good option if you feel rates may go up.
Fees that are collected by the lender in exchange for a lower interest rate. Commonly called discount points, each point is equal to 1% of the loan amount. For our comparison purposes, a discount point is considered to be a lender fee. To determine if it is wise to pay discount points to obtain a lower rate, you must compare the up-front cost of the points to the monthly savings that result from obtaining the lower rate.
A Pre-Approval allows you to validate your ability to borrow a certain amount for your mortgage or home equity. During this process, you provide basic information such as cost of home, down payment, and income information. You also provide authority to the bank to verify that your credit is in good standing. At this point, the bank will determine if you qualify for the requested loan amount. This is not final approval. A letter can be printed by you and provided to the Realtor or contractor to assure them that your bank has tentatively approved you for the loan amount.
Private Mortgage Insurance
PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.
PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.
Private Mortgage Insurance Premium
Amount paid by a borrower to a private mortgage insurance company for private mortgage insurance.
Real Estate Taxes
As a homeowner, you will be responsible for paying real estate taxes which are based on the assessed value of your home. The seller can provide this information to you or your realtor.
The term is the length of the loan. It is typically stated in months.
The title search is a step to uncover any possible problems with the legal ownership of the property such as a lien, an unknown heir or faulty land survey. Arrangements for the title search are made by the bank. A one-time fee is paid at closing.
This document provides information about the proposed loan such as the annual percentage rate, total finance charges and total payments. This disclosure is required to be mailed within 3 days of your application.
Variable Rate Loan
The interest rate of the loan is not fixed for the term of the loan. The rate paid for the first 5 years is tied to an index such as the 91-day T-Bill. After the 5 year term, the rate is fixed for the remaining years of the loan.