Something that many new potential homeowners are not aware of is that you do not have to go to an actual bank or financial institution to receive a mortgage loan, but can instead go to a specialty mortgage lender to acquire a loan. They may even be able to offer you a better deal than your own bank.
Feel free to ask the real estate agent you are currently working with about potential mortgage lenders, but keep in mind that often real estate agents will receive a commission for referring you to a specific company for their mortgage loans. This does not necessarily mean that their recommendation will be the best mortgage loan for you and your home.
So, once you have made a decision to apply for a mortgage with a particular mortgage lender, what comes next? The first step will usually be to simply give the lender a limited amount of information, usually estimating your current income, bank account information and current debt in order to secure a pre-approval. This will help you in securing a contract on a property. A formal letter will be mailed to you that can be taken with you to give to your real estate agent when signing a contract.
Keep in mind that not all potential homeowners will be pre-approved, so you may have to skip this step and head right to the application process after you have found a home that you want to purchase. The application process can be tedious, as it requires gathering all of your bank statements including savings, checking and any other assets, monthly pay stubs for a given amount of time, verification of address for a given period of time, and documentation of all outstanding debts. If you have other income or debt such as child support, alimony, bankruptcy, or disability payment, this will need to be documented as well.
From here, it should take anywhere from one week to a month for the bank to approve your application. They will also be in contact with the title company and your real estate agent to get the process moving towards the closing of the house. At the same time, you will be expected to secure homeowners insurance and set up an inspection of the property. Some lenders or real estate agents will help in setting up the inspection. You need to insure that all of this paperwork also makes it to the mortgage lender before closing.
As long as all of the paperwork goes through and you have completed all the necessary forms, the closing on the house will usually come within 30-60 days. This will also be contingent on the negotiations you made with the current homeowner.
When negative equity results and current mortgage rates are high, homeowners may have no option but to conduct short sales of their properties. In real estate, a short sale refers to the sale of a property for less than the balance of the loan on the property. Not surprisingly, short sales can be difficult to negotiate with lending institutions. Even when the lender is amenable to the sale and a buyer can be found, the short-sale process involves a lot of time, paperwork, and finessing among lenders, investors, and possibly even insurers.
So what can be done from the beginning to avoid the prospect of an unpleasant short sale? Before taking out a first mortgage or considering mortgage refinance options (if a mortgage already exists), homeowners should take the following precautions:
1. Purchase only as much house as can be afforded, or wait until finances improve. There are a number of free mortgage and refinancing calculators available online that can help buyers determine, with accuracy, the feasibility of a mortgage payment given their current financial health. Failure to perform this basic due diligence could lead to a short-sale disaster down the road.
2. Avoid private mortgage insurance (PMI) by making a large down payment. PMI is costly. Even a low monthly PMI fee could result in thousands of dollars in increased mortgage costs each year. By making a large enough down payment to circumvent PMI (and taking out a mortgage that’s as small as possible), homeowners can keep their balances low. The lower the mortgage, the better.
3. Don’t cash out for more funds than necessary. When a home begins to build equity, it’s tempting to do a cash-out refinance for large expenditures, but a little prudence upfront will pay dividends if the market reverses in the future.
Try to buy a property in a neighborhood whose average home value is appreciating. Of course certain economic factors are out of homeowners’ control; however, buying a home in a neighborhood whose value is depreciating just because it may appreciate at a later date is rarely a wise strategy.
With sound financial planning, homeowners can avoid the dreaded short sale and keep their mortgages right side up.