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YOUR HOME MORTGAGE: WHAT TO LOOK FOR

03/15/2012

   The real estate market is an interesting contradiction in terms.  It is difficult to secure a home mortgage from many banks these days.  I have written before on the difficulties on getting financing in this market.  Nothing has really changed in the last several months.

   On the other hand, rates are at an historical low for the last fifty years.  You can secure a 15-year mortgage on your home for 3.5% or less.  You can go for a 30-year mortgage and pay a rate of 3.7% or 3.8%.

   For those who remember, rates were at 7% or 8% just a few years ago.  Everyone would like to lock into these historically low rates now.

   In an effort to give you an introduction into some of the basic elements of a mortgage, we will explain some of the important elements in completing your financing of your home.

Broker
 
   Of prime importance is the selection of the broker who will find a loan suitable to your needs.  Although mortgages seem like generic loans, there are tens, if not hundreds, of subtle differences between the types of home mortgages available from various different financial institutions.  Based on your particular circumstances, such as the amount sought, ratio of the amount sought versus the value of the real estate, whether the real estate is owner occupied, rented or, a commercial piece of vacant land, and so on, a competent broker will be able to direct you to an appropriate mortgage.  An experienced broker will also be able to advise you as to whether it may be worthwhile to wait until your financial circumstances improve before applying for a mortgage or, whether the interest rates are about to increase and you should “lock in” to a rate as soon as possible.

The Commitment Letter
 
   The Commitment Letter is the bank’s agreement to fund your home purchase or refinance based upon a set of conditions described in the Commitment.  You will likely need a seasoned broker or an attorney to assist you with completing all the conditions.  There will be title questions relating to the ownership of the property.  There will be financial statements that you have to furnish the bank, including pay stubs, if any, and tax returns.  Legal requirements vary from bank to bank and need to be addressed by a local attorney.  You will have 60‑90 days from the issuance of a Commitment to complete the financing.  Otherwise, you may lose that particular Commitment.  Upon every application for a Commitment Letter, a financial institution will pull a credit report from one, two or even all three, national credit reporting bureaus to determine your eligibility for a particular loan.  Each application is marked on your credit report and has an adverse effect on your credit rating.  Therefore, requesting numerous Commitments from different financial institutions without executing the loan, may result in a lower credit score, and higher interest rate for your eventual mortgage.
 
   Although the applicant may be a honest, trustworthy individual, financial institutions generally do not know you personally and they determine whether you are eligible for a particular loan based on certain statistics prepared by their actuaries.  Most importantly, they rely on the applicant’s credit scores.  The credit scores are generated by a plethora of factors.  Notably, the individual’s credit score history and timely payments of outstanding accounts.  This means that if an individual pays all his bills immediately and does not require credit cards or other lines of credit from financial institutions, he will have a lower credit score than an individual who is constantly borrowing money from banks, credit cards and other financial institutions and pays the minimum payment on time.  The financial institutions will look at the applicant’s credit score and his annual income and expenses to determine his financial health.  They will then look at the nature of the loan sought and the amount of equity in the land/property to calculate their exposure in case of the borrower’s default.  Based on these calculations, the banks will decide whether or not to extend the requested mortgage.
 
 
 

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By: Brian J. Markowitz
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By: Brian J. Markowitz
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