Escrow: What It Is and How It Works

To “escrow” funds in real estate means to place funds in the hands of a third party by means of a legal agreement until certain conditions have been met. In real estate, escrow is used in two different ways.

In a home purchase, an escrow account is used to protect deposit monies until the fulfillment of the terms of a purchase contract. The earnest money deposit is held in an escrow account until closing, at which time it will be applied to the down payment for the buyer. If the sale were to fail because of buyer default, the down payment funds are likely going to be released from the escrow account to the seller as damages. Sometimes an escrow account will retain some funds after closing until certain conditions are met by buyer or seller.

In lending, escrow accounts are used to hold funds for payment of taxes and insurance by the borrower. Some low-down-payment loans require escrow accounts to ensure payment of these obligations, while some borrowers simply prefer to pay into these accounts on a monthly basis to insure timely payment when due. The lender will incorporate the projected taxes and insurance into your monthly payment and, when received, will set the required amounts aside in your escrow account. The taxes and insurance amounts will adjust when tax assessments and insurance rates change. Escrow accounts do not contain funds for HOA dues or supplemental taxes.

Escrow accounts can be managed by escrow companies, escrow agents or mortgage servicers. The disadvantages of escrow accounts will be higher monthly payments and occasional incorrect estimates of what needs to be held in escrow, resulting in fluctuating monthly mortgage payments.

Call or email me, and I will show you your loan options and determine if having taxes and insurance escrowed is right for you.

Do You Want to Buy a House? Here’s How to Prepare

Preparing to buy a home begins the moment you make the decision to become a homeowner. It may take weeks, months or years to ready your financial status so that you can sign your first purchase offer. To help ensure your eventual success, here are five steps to follow.

Getting your credit in order should be the first thing you do. Pay off student loans and credit cards. Your credit score will go up, and lenders will look favorably at a lower debt-to-income ratio for qualifying. The better your credit score, the better the rate and terms of your loan.

Start saving as early as possible for a down payment. The higher the percentage of the purchase price that you can put down, the more favorable your loan terms will be. Once you pay off your debts, more money can be allocated towards your down payment.

Perform a personal expense audit so you can pinpoint where you can save. It will also help you budget for your housing expenses once you close. Your new-home budget should include maintenance costs and utilities in addition to the mortgage, taxes and insurance. Having reserves will make it easier to qualify for your loan.

Plan for closing costs when you start setting aside down payment funds. Expect your closing costs to be 3% to 5% of the loan amount.

Please contact me for a personal review of your financial status so I can help you prepare to buy a home. I am always here to help, and I am just a phone call or email away.

What Types of Mortgages Are There?

There are several kinds of mortgage loans to satisfy diverse borrower needs. The type of mortgage that works for you will be dependent on how long you expect to own the home, your down payment funds and what you qualify for.

Fixed-rate mortgages make up the majority of loans originated and work well for long-term home ownership. The interest rate and monthly payments are fixed for the term of the loan. There are 10-, 15-, 20- and 30-year terms.

The adjustable-rate mortgage (ARM) is a flexible loan because the interest rate you pay may go up or down. The initial rate is usually lower than that of a fixed-rate mortgage.

After a period of low fixed monthly payments, the ongoing monthly interest rate will be based on a fixed margin added to a fluctuating cost-of-funds index. Borrowers seek this kind of loan for shorter-term home ownership because of the lower initial rates.

Conventional loans are not offered or secured by any government entity. Banks or mortgage companies usually make these loans with 20% down but will originate the loans with less than 20% down with added mortgage insurance.

FHA, VA and USDA loans are government-guaranteed loans with specific requirements for eligibility and typically have lower interest rates than conventional loans.

A loan can be a closed or open mortgage, depending on if there is a prepayment penalty for early payoff. The closed mortgage bears penalties if paid off or refinanced prior to its term.

Contact me, and together, we can determine which of these loan programs works best for your situation. I am always here to help, and I am just a call or email away.

What You Need to Know about Getting Pre-Approved

Having loan pre-approval from a lender means you are eligible to buy a home or condo in a certain price range.

Get started by compiling your W-2s or 1099s, pay stubs, tax returns, bank statements and monthly expenses. A lender-generated credit report will also be part of your loan package.

A lender will guide you through the steps and show you what kind of loans there are and how the amount of down payment affects what type of loan works best for you.

Your monthly payments and any required mortgage insurance will be influenced by how much you put down. If you know what your loan and associated fees will cost you, you will be better prepared for closing.

Getting pre-approved will help you refine what kind of property best fits your monthly budget. The lender will factor in all the monthly costs of owning a home and see if the debt-to-income ratio qualifies you to buy.

If you are thinking about a condo, be aware that condo association dues will increase your monthly housing debt, possibly making a single-family home more affordable.

Different loan products have different costs, which can affect the amount of total funds you will need to close a sale. Origination fees vary the most and are usually a percentage of the loan amount. Your lender can create different scenarios to see what works best for you.

There are easy-to-understand worksheets for the pre-approval process. Call me for an appointment and we can go over all these steps and prepare you for your next home purchase.

Mortgage Costs Associated with Buying a Home

Buying a home with the help of a loan comes with other costs. The costs associated with financing a home should be part of your budget. These mortgage fees come under the umbrella of your closing costs and are typical of most loans. You can expect to pay 2% to 5% of your loan amount in closing costs.

There will be fees that you pay directly to the lender. The loan origination fee and any discount points to bring the interest rate down are usually percentages of the loan amount. The lender will also require a loan processing fee, an underwriting fee, a cost for document recordings and fees for any wired funds. Application and credit report fees are included as well. If your loan is an FHA loan, then you will be charged an up-front mortgage insurance premium.

Depending on what an individual state requires, there will be a fee for a lender’s title insurance policy, which insures any defects that may not have shown up in a title search and is also a cost to you. This may be in addition to the cost of a homeowner’s title insurance policy if the seller is not paying for it.

Third-party closing costs may include an appraisal fee, the cost of a survey, attorney fees and a charge for a title company representative to supervise the closing and title transfer.

At closing, there may be additional charges associated with prorations for property taxes, homeowners and mortgage insurance and HOA fees. The lender may also require you to deposit funds into a reserve or escrow account to cover upcoming taxes and insurance.

Call or email me to get an idea of exact costs in your area or for a specific price range, and let’s find the loan that works best for you.

Here Are the Ins and Outs of Lender Overlays

Lending and underwriting guidelines set forth by Fannie Mae, Freddie Mac and FHA are what they consider acceptable qualifying factors for successful loan origination for lenders. These guidelines are based on historical profiles where loan repayments were made without default and those where repayment was least likely to occur over the term of the loan.

Lenders may view the underwriting parameters as being not stringent enough and will impose more strict qualifying requirements called overlays. For example, where HUD requires a minimum 580 FICO credit score with a 3.5% down payment to qualify for a FHA loan, a lender may bridge the loan repayment risk with an overlay FICO requirement of 620.

Another typical overlay might be the borrower requirement to pay off all outstanding debts prior to loan commitment, even though it is not an FHA underwriting condition. An increase in Fannie Mae, Freddie Mac or FHA recommended debt-to-income ratios is also a possible overlay imposed by a lender.

Even though a borrower may qualify for a loan under the parameters created by these programs, a final loan commitment will always be subject to what the lender overlays require. If the borrower can’t qualify with one lender, it doesn’t mean the loan cannot be approved through another lender.

As your lending partner, you have my assurance that I will make every effort to make a home purchase a reality for you. I am always here to help. Call or email me for an appointment to start the process.

Thinking of Buying a Home? Start Lining Up Financing Now

Your number one priority before you begin your new home search is to meet with a mortgage professional to determine what you are qualified to buy. In a competitive seller’s market and with rising interest rates, you want to be preapproved and know what price point you should target in your search.

Even if you feel that your credit score is high enough to get the loan of your choice, be prepared to provide documentation that attests to your creditworthiness. You will need to show us, your mortgage consultant, everything that verifies your income and assets. If you constantly stay on top of your personal documents, then lining up your financing at any given time should be much easier.

We will look at your debts and may recommend that you pay off or pay down some debts even though you have been timely in your payments. Lower debt will improve your debt ratios. Since this may take some months to accomplish, it is important to start the loan process as soon as you can.

By enduring this preapproval process, you can narrow your home search to homes that you can comfortably afford. A successful preapproval gives you a written letter that you can give to your real estate agent showing that you are a qualified buyer and in what price range. Many agents don’t want to spend time taking prospects around to homes unless they produce preapproval letters.

This information should help you make the decision as to whether or not you are ready to start house hunting. A call or email is all we need to get things in motion for you and get your financing in order so you can be a strong buyer. We’re always here to help.

The History of How 30-Year Mortgages Came to Be

The 30-year mortgage has roots as far back as the 1920s. During this era, a home purchase was financed as a five-year loan with a 50% down payment and a balloon payment at the end of the five years. Since most borrowers wanted to remain in their homes, they had to keep refinancing the loan balance into another five-year loan until it could ultimately be paid off.

These loan terms made it difficult for most people to buy homes because it was hard to come up with 50% down. Fortunately, the advent of the Great Depression in the 1930s motivated the creation of 30-year mortgages because it was felt that buyers could better afford the payments that 30-year mortgages created and that younger buyers could pay off the mortgages before they retired. The 30-year mortgage increased homeownership because more people could qualify to buy homes.

As time has evolved, so have mortgage offerings. Even though people move more often today, the 30-year mortgage is still the loan of choice because the payments are more affordable. For those seeking to pay off their mortgages in a shorter period of time, there are 15- and 20-year options. While the interest rates are lower over the life of these loans, the payments will be higher.

As your mortgage professionals, we can review your financial status and present to you your mortgage choices to determine which loan best fits your needs. Call or email us today.

4 Home-Buying Myths You Should Know About

There are several home-buying myths that have often dissuaded potential home buyers from looking for homes. Being aware of these myths will make you more confident in your ability to purchase a home.

1. You can get a loan with less than 20% down. FHA, VA, USDA and other government-sponsored programs will originate loans with as little as zero down. You can also receive gifted funds from relatives or friends to increase the amount of your down payment to help you qualify.

2. Having a low credit score doesn’t necessarily disqualify you from getting a loan. Increasing your down payment to 10% with a credit score as low as 500 may allow you to get an FHA loan. The larger the down payment, the less risky your loan will be for lenders. A cosigner will also reduce how risky the lender perceives you if your credit score is low. Be sure to check your credit report for any correctable errors that may be influencing your score.

3. You don’t get your loan just because you have been preapproved. Once you get an accepted offer, followed by an appraisal and more documents to your lender, you still won’t have the loan. The loan is yours when underwriting gives the final approval, you sign the loan documents and the sale closes.

4. It’s not all about the interest rate. Compare different rates with the loan terms and up-front fees. Big up-front fees may cost you more than the difference in interest between loans. The annual percentage rate (APR) will be the determining factor in what loan may be best.

You can be assured that your best interests will be first and foremost when it’s time to begin the loan process. Call or email us, and we will put together a loan program with the interest rate and terms that work best for you.

What Documents Do I Need for a Mortgage Preapproval?

The first step to home buying is to connect with a lender and get preapproved for a loan. It is a time-consuming and challenging process due to the amount of documentation that we will require to get you preapproved.

Your diligence in providing us what we will need will pay off when it comes time to submit a purchase offer. Real estate agents always encourage including a mortgage preapproval letter to add strength to the offer. Once you have an accepted offer on a home, satisfying your loan contingency will then be much easier.

For most conventional and FHA loans, here are several of the documents that you will need to submit for a preapproval: a state or federally issued ID, proof of income in the form of pay stubs or W-2s, your two most recent federal tax returns, the last two statements for bank and investment accounts, any settlement statement of a recent home sale, a gift letter for any down payment assistance, any marriage settlement agreements and a letter of explanation for any questionable items on your credit history.

For self-employed home buyers, we will also request two years of 1099s and company tax returns, two months of profit-and-loss statements, a balance sheet and your current business license.

As your lender, our goal is to keep the mortgage preapproval process as streamlined as possible. We can guide you in the document-gathering process to make sure you have what you need. Call or email us today. We are always here and ready to help.