Real Estate & Construction Law

— Loans —

What steps must I take in order to obtain a loan?

The first step in securing a loan is to complete a loan application. To do so, you’ll usually need the following information:

• Pay stubs for the past 2-3 months
• W-2 forms for the past 2 years
• Information on long-term debts
• Recent bank statements
• Tax returns for the past 2 years
• Proof of any other income
• Address and description of the property you wish to buy, and a Sales contract

During the application process, the lender will order a report on your credit history and a professional appraisal of the property that you want to purchase. The application process typically takes between 1-6 weeks.

How Can You Speed Up the Approval of the Loan?

While the lender has the greatest role in how fast your loan application is processed, there are certain things you can do to speed up its approval. Try to find out what documentation the lender will require from you.

Much of the information required by your lender can be brought with you when you apply for a loan. This may help to get your application moving more quickly through the process. When you first meet with your lender, be sure to bring the following documents:

• The purchase contract for the house (if you don’t have the contract, check with your real estate agent or the seller).
• Your bank account numbers, the address of your bank branch and your latest bank statement, plus pay stubs, W-2 forms, or other proof of employment and salary, to help the lender check your finances.
• If you are self-employed, balance sheets, tax returns for 2-3 previous years, and other information about your business.
• Information about debts, including loan and credit card account numbers and the names and addresses of your creditors.
• Evidence of your mortgage or rental payments, such as canceled checks.
• Certificate of Eligibility from the Veterans Administration if you want a VA-guaranteed loan. Your lender may be able to help you obtain this.

Be sure to respond promptly to your lender’s requests for information while your loan is being processed. It is also a good idea to call the lender and real estate agent from time to time. By calling occasionally, you can check on the status of your application, and offer to help contact others such as employers who may need to provide documents and other information for your loan. It is also helpful to keep notes on your contacts with the lender so that you will have a record of your conversations.

If you believe that the processing of your loan application is being unreasonably delayed, your lawyer may be able to assist you.

Are there any incidental costs associated with a loan?

Yes. When you turn in your application, you’ll be required to pay a loan application fee. This covers the costs of underwriting the loan. This fee sometimes pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.

Are there special mortgages for first time homebuyers?

Yes. Lenders now offer several affordable mortgage options that can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who do not have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have a large amount of long-term debt, or have experienced income irregularities

How do I choose a lender?

Choose your lender carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it’s beneficial when the lender knows home values and conditions in the local area. Do research and ask family, friends, and your real estate agent for recommendations.

How do I choose a loan?

Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.

• Do you expect your finances to changeover the next few years?
• Are you planning to live in this home for a long period of time?
• Are you comfortable with the idea of a changing mortgage payment amount?
• Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?
• Your lender can help you use your answers to questions such as these to decide which loan best fits your needs.

How do I compare loan terms between lenders?

First, devise a checklist for the information from each lending institution. You should include the company’s name and basic information, the type of mortgage, minimum down payment required, interest rate and points, closing costs, loan processing time, and whether prepayment is allowed.

Speak with companies by phone or in person. Be sure to call every lender on the list the same day, as interest rates can fluctuate daily.

In addition to doing your own research, the real estate agent you work with may have access to a database of lender and mortgage options. Though the agent may primarily be affiliated with a particular lending institution, he or she may also be able to suggest a variety of different lender options to you.

How does a lender decide the maximum loan amount that I can afford?

The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to the Federal Housing Authority, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. In addition, the lender considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.

How does the loan to value ratios determine the size of my loan?

The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policy.

What if the lender refuses to grant me loan because of my race?

Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status, or disability, contact HUD’s Office of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).

What is a credit bureau score and how do lenders use them?

A credit bureau score is a number that is based upon your credit history. Your score is used to determine whether or not you will likely repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details.

How can I find out information about my credit history?

There are three major credit-reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it’s important to verify its accuracy. Check your credit report carefully to make certain that there are no mistakes. It’s a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$10, are usually charged to issue credit reports but some states permit citizens to acquire a free one.

How can I improve my score?

There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.

What if I find a mistake in my credit history?

Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders usually understand that legitimate problems sometimes arise.

What is the Federal Housing Administration?

The Federal Housing Administration is an agency within HUD. The agency was established in 1934 to advance opportunities for Americans to own homes. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy a home.

How can the FHA assist me in buying a home?

The FHA works to make homeownership a possibility for more Americans. You do not need perfect credit or a high-paying job to qualify for a loan. The FHA makes loans more accessible by requiring smaller down payments than conventional loans. A FHA down payment could be as little as a few months rent.

How can I obtain a FHA insured loan?

Contact a FHA-approved lender such as a participating Mortgage Company, bank, savings and loan association, or thrift. For more information on the FHA and how you can obtain an FHA loan, visit the HUD web site or call a HUD-approved counseling agency at 1-800-569-4287 or TDD: 1-800-877-8339. In addition, you can find your local HUD office by referring to the Government section in your phone book.

Can I carry debt and still qualify for FHA loans?

Yes. Short-term debt does not count as long as it can be paid off within 10 months. And some regular expenses, like child care costs, are not considered debt. Talk to your lender or real estate agent about meeting the FHA debt-to-income ratio.

Can I exceed this ratio?

You may qualify to exceed the current ratio if you have:

• a large down payment;
• a demonstrated ability to pay more toward your housing expenses;
• substantial cash reserves;
• net worth enough to repay the mortgage regardless of income;
• evidence of acceptable credit history or limited credit use;
• less-than-maximum mortgage terms;
• funds provided by an organization; or
• a decrease in monthly housing expenses.

Can I pay my loan off ahead of schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

Can I qualify for a FHA loan without credit history?

Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.

How much income do I need to qualify for a FHA loan?

There is no minimum income requirement. But you must prove steady income for at least three years, and demonstrate that you’ve consistently paid your bills on time.

Are FHA loans assumable?

Yes. You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is stream- lined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. And you must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.

Can I roll closing costs into my FHA loan?

No. Though you can’t roll closing costs into your FHA loan, you may be able to use the amount you pay for them to help satisfy the down payment requirement. Ask your lender for details.

How can I receive a discount on the FHA initial mortgage insurance premium?

Ask your real estate agent or lender for information on the Homebuyer Education Learning Program (HELP). The HELP is structured to help people begin the home buying process. It covers such topics as budgeting, finding a home, getting a loan, and home maintenance. In most cases, completion of this program may entitle you to a reduction in the initial FHA mortgage insurance premium from 2.25% to 1.75% of the purchase price of your new home.

How does my credit history impact my ability to qualify?

The FHA is generally more flexible than conventional lenders in its qualifying guidelines. The FHA allows you to re-establish credit if:

• Two years have passed since a bankruptcy has been discharged
• All judgments have been paid;
• Any outstanding tax liens have been satisfied or appropriate arrangements have been made to establish a repayment plan with the IRS or state Department of Revenue; and
• Three years have passed since a foreclosure or a deed-in-lieu has been resolved.

What are the steps involved in the FHA loan process?

With the exception of a few additional forms, the FHA loan application process is similar to that of a conventional loan. With new automation measures, FHA loans may be originated more quickly than before. And, if you don’t prefer a face-to-face meeting, you can apply for a FHA loan via mail, telephone, the Internet, or videoconference.

What is a FHA 203(b) loan?

This is the most commonly used FHA program. This loan offers a low down payment, flexible qualifying guidelines, limited lender’s fees, and a maximum loan amount.

What is a FHA 203(k) loan?

This is a loan that enables the homebuyer to finance both the purchase and rehabilitation of a home through a single mortgage. A portion of the loan is used to pay off the seller’s existing mortgage and the remainder is placed in an escrow account and released as rehabilitation is completed. Basic requirements for 203(k) loans are as follows:

• The home must be at least one year old
• The cost of rehabilitation must be at least $5,000, but the total property value including the cost of repairs must fall within the FHA maximum mortgage limit.
• The 203(k) loan must follow many of the 203(b) eligibility requirements.
• Talk to your lender about specific improvement, energy efficiency, and structural guidelines.

What is a Title I loan?

A lender grants a Title I loan, the loan is insured by the FHA. A Title I loan is used to make non-luxury renovations and repairs to a home. It offers a manageable interest rate and repayment schedule. Loans are limited to between $5,000 and 20,000. If the loan amount is under 7,500 a lien is not required against your home. Ask your lender for details.

What is an Energy Efficient Mortgage (EEM)?

An EEM allows a homebuyer to save future money on utility bills. This is done by financing the cost of adding energy-efficiency features to a new or existing home as part of a FHA-insured home purchase. The EEM can be used with both 203(b) and 203(k) loans. Basic guidelines for EEMs are as follows:

• The cost of improvements must be determined by a Home Energy Rating System or by an energy consultant. This cost must be less than the anticipated savings from the improvements.
• One and two-unit new or existing homes are eligible.
• Condominiums are not eligible.
• The improvements financed may be 5% of property value or $4,000, whichever is greater. The total must fall within the FHA loan limit.

What qualifies as income for the FHA?

Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by family all qualify as income sources. Part-time pay, overtime, and bonus pay also count as long as they are steady. Special savings plans-such as those set up by a church or community association may also qualify. Income type is not as important as income steadiness with the FHA.

What is the FHA loan limit?

FHA loan limits vary throughout the country, from $115,200 in low-cost areas to $208,800 in high-cost areas. Because these maximums are linked to the conforming loan limit and average area home prices, FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits.

What other loan products or programs does the FHA offer?

The FHA also insures loans for the purchase or rehabilitation of manufactured housing, condominiums, and cooperatives. It also has special programs for urban areas, disaster victims, and members of the armed forces. Insurance for ARMS is also available from the FHA.

What types of closing costs are associated with FHA insured loans?

Except for the addition of a FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan outlined in Question 63. The FHA requires a single, up-front mortgage insurance premium equal to 2.25% of the mortgage to be paid at closing (or 1.75% if you complete the HELP program- see Question 91). This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for an annual premium – paid monthly – if your mortgage is over 15 years or if you have a 15-year loan with an LTV greater than 90%.

What is the debt-to-income ratio for FHA loans?

The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt. With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing and other debt.

How does the interest rate factor into the mortgage loan?

A lower interest rate allows you to borrow more money with a lower monthly loan payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate lock-in which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.

I have applied for my loan, now what?

It usually takes a lender between 1-6 weeks to complete the evaluation of your application. It is not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified the lender will call you to let you know the outcome of your application. If the loan is approved, a closing date is set up and the lender will review the closing with you. You will be able to move into your new home after closing.

What are my responsibilities during the lending process?

To ensure you won’t fall victim to loan fraud, be sure to follow all of these steps as you apply for a loan:

• Be sure to read and understand everything before you sign.
• Refuse to sign any blank documents.
• Do not buy property for someone else.
• Do not overstate your income.
• Do not overstate how long you have been employed.
• Do not overstate your assets.
• Accurately report your debts.
• Do not change your income tax returns for any reason. Tell the whole truth about gifts. Do not list fake co-borrowers on your loan application.
• Be truthful about your credit problems, past and present.
• Be honest about your intention to occupy the house
• Do not provide false supporting documents.

What is the difference between pre-qualifying and pre-approval?

Pre-qualification is an informal way to see how much you may be able to borrow. You can be pre-qualified over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.

Pre-approval is a lender’s actual commitment to lend to you. It involves assembling financial records and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

What is the difference between pre-qualifying and pre-approval?

Pre-qualification is an informal way to see how much you may be able to borrow. You can be pre-qualified over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.

Pre-approval is a lender’s actual commitment to lend to you. It involves assembling financial records and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

Do I need mortgage insurance? How do I get it?

You need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. The FHA offers several loan programs that may meet your needs. Ask your lender for details.

What is mortgage insurance?

Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. Mortgage insurance is required primarily for borrowers making a down payment of less than 20%.

Is mortgage insurance like home or auto insurance?

Yes. Mortgage insurance requires payment of a premium. Mortgage insurance is for protection against loss, and is used in the event of an emergency. If a borrower can not repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.

What is PMI?

PMI stands for Private Mortgage Insurance or Insurer. These are privately owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI’s usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.