Month: November 2016

Mortgage lenders, like companies that make car and credit card loans, take a risk that the person borrowing their money will be unable to repay it.

While mortgage companies use criteria such as credit scores and down payments to determine the likelihood that the borrower will repay the loan, they also use mortgage insurance (MI) to help offset their risk.

Mortgage insurance is required on conventional (Fannie Mae) loans when the down payment is less than 20%. The premium, which is included in your mortgage payment, is based on your down payment. The larger the down payment, the lower the premium because the risk that you may default is lower for the lender. As you approach the minimum down payment of 3%, premiums will increase, as well as credit score requirements.

There will be MI on most FHA loans, regardless of your down payment. On FHA, there are actually two types of MI: One is called the “upfront premium,” which can either be paid out of pocket or financed. The other type of MI is included in your monthly mortgage payment.

The biggest difference in MI between conventional and FHA programs is the way mortgage insurance is removed. On conventional mortgages, if certain criteria are met, MI can be stopped. With many FHA mortgages, the MI will remain on the loan until it is paid off.

While FHA mortgages can be more costly to obtain, and the monthly payment (which includes MI) will be higher, they are often easier to qualify for than conventional loans.

You’ve provided lots of documentation, including pay stubs, bank statements, and tax returns, to your lender as part of your home search. You’ve found your dream home and signed the contract. So what’s next?

Much documentation was required to prequalify you before you could even start looking for your new home, but don’t consider that chapter closed just yet.

Attorney review

Your first step after signing the contract is asking your attorney to review it. His or her job is to catch things on the contract that may have been missed. These may be items that favor the seller, not the buyer, so this is a step that absolutely should not be skipped.

Home inspection

The second step is a home inspection, which, unlike the appraisal required by your lender, isn’t mandatory. However, it is a good idea and may save you money in future. You have a small window to decide whether to order an inspection, which may be done simultaneously with the appraisal.

Underwriting

Providing all goes well with your attorney, the inspection, and the appraisal, your file moves into underwriting, where your loan is put under great scrutiny for several reasons.

The most important reason is to ensure that the lender has a complete file. Many loans are sold off by the lender shortly after; you may need to provide updated or additional documentation to satisfy the buyer of the loan. You may also need to clarify, in letters of explanation, anything the underwriting process has uncovered that seems unclear. This is typical. The file is also checked for compliance, verifying that you were provided with the correct disclosures in the correct time frame.

Closing, finally

Once the underwriting process is complete, you are ready to go to closing. This is where you and the seller settle the transaction, and the house becomes yours. So congratulations are in order. Finally!