Home financing 101

WHAT IS A MORTGAGE?

mortgage is a loan that a lender or bank gives you to help you finance the purchase of a house.

Your mortgage payment is a regularly scheduled payment that includes the principal, interest, taxes and insurance payments you owe for your home.

WHAT IS A LENDER?

Simply put, a lender is a financial institution that gives you money either directly or through a third-party to fund your loan, with the expectation that the funds will be repaid. Repayment will include the payment of the loan itself, plus any interest or fees.

HOW CAN A LENDER HELP? 

In addition to helping you obtain that pre-approval letter that sellers often require, a lender can help you set realistic expectations, get a sense of what fees will be involved in the buying process, and jumpstart the paperwork you’ll need to complete the loan.

HOW SHOULD I CHOOSE A LENDER? 

You don’t need to use a bank with whom you currently have an account. Various types of financial institutions grant mortgages. Shop around by talking to different lenders to get a feel for the person who will be helping you, the interest rates, and the specifics of the loan(s) they can offer you. 

WILL LOOKING AT DIFFERENT LENDERS HURT MY CREDIT SCORE?

An inquiry with a lender typically has a small, but negative, impact on your credit score. But don’t worry – your hunt for the perfect lender won’t hurt it! Within a 30-day window, multiple credit checks from financial institutions are recorded on your credit report as a single inquiry.

WHAT TYPE OF LOANS SHOULD I CONSIDER?

There are many different loans available. Once you choose a lender, talk to them about which would be best for you. Different loans will have different down payment options and requirements. Below is an overview of some of the most common types of loans:

Types of loans commonly used in NWA

JUMBO LOANS

A jumbo loan jumbo mortgage) are designed to help buyers purchase high dollar or luxury properties where the amount to be financed exceeds the limits set by the Federal Housing Financing Agency (FHFA). Therefore, these loans can not be guaranteed or secured by Fannie Mae or Freddie Mac and have unique underwriting requirements and tax implications. 

CONSTRUCTION LOANS

Construction loans area method of financing used when buyers wish to build a new construction home. Borrowers can borrow the funds they need to pay for construction and then convert the loan balance into a permanent mortgage when construction is complete, or take out two separate loans (one to pay for the construction and the second as a mortgage to pay off the construction debt). 

Parts of a mortgage payment

The four main components of a mortgage payments are the principal, interest, taxes and insurance (PITI). 

Principal – the money applied from each payment to the total sum that was borrowed from the bank.

Interest – a fee paid to the bank as a charge for taking out a loan. Interest fees are calculated as a percentage rate of the amount borrowed. Interest rates are often determined by economic conditions and a borrower’s risk to the bank. Interest rates can be fixed or adjustable. 

Taxes – fees paid toward funding public services. The amount paid is based on the value of the property and includes both property and county taxes. These fees may fluctuate. 

Insurance

Property/Home Insurance – fees collected to pay for an insurance policy to help protect your home against damages. 

Private Mortgage Insurance (PMI) – a (possible) fee required by a lender to minimize the bank’s risk. This fee is often applied to loans where the borrower’s down payment is less than 20% of the purchase price.  

Mortgage calculator

The mortgage approval process

Let’s take the confusion out of the mortgage approval process. 

A typical home loan will move through the following 5 major steps and usually takes 14-45 days to complete.

1. PRE-APPROVAL
 
The mortgage pre-approval (also called a pre-qualification or “pre-qual”) is done “pre” (i.e. before) shopping for a home!

There are multiple loan options available, each with its own set of requirements, fees, closing costs, points, and interest rates. Your chosen mortgage professional will help you evaluate the most suitable mortgage programs for you. If you qualify for more than one type of loan, you should get pre-approved separately for each.

At this stage your lender is looking at your ability to repay a loan. Lenders assess candidates on a case by case basis by reviewing factors, such as your current employment, employment history, income, assets, debts, credit reports, credit score, and how you plan to use the property.

Once your lender has evaluated your financial situation, they will let you know how much they are willing to lend you, (i.e. your home shopping fund), and you will receive a pre-approval letter to accompany any offer you make on a home. This letter is important as it lets the Seller know that you have the ability to obtain funds for the amount you are offering them.

2. APPLICATION

Once you have a home under contract your real estate agent will send a copy of Real Estate Contract to your lender and you will have 3 days to formally apply, or make application, for the mortgage loan. This is the true start to the loan process.

Many lenders will use a standard form for application known as the Uniform Residential Loan Application (URLA). This form will ask you for information about the property you wish to buy, the type of loan you plan to use, and additional personal and financial information about you.

Within 3 days of applying for the loan you will receive a verified Loan Estimate (LE); this is a three-page document outlining the terms of the requested mortgage loan. The LE is honored for 10 days and will detail your estimated interest rate, monthly payments, closing costs, taxes, insurance, and penalties.

If you choose to accept the terms of the Loan Estimate, your application will move to the next step.

3. PROCESSING

This is the step where all previous information and documentation collected about you and the property is Verified! Verified! Verified!

The Processor will order a credit report (if it has not already been done) and collect supporting documentation from you for the file. 

Be prepared to provide items such as bank statements, tax records, employments letters, pay stubs, and W2’s (to name just a few) as they seek to verify your income, employment, assets, and debts. 

The Processor will also check for potential risky issues with the desired property by ordering a title report and appraisal. 

The home appraisal is used to determine the value of the property and insure the bank is making a good investment by not lending more than what the bank considers the property to be worth.  

Once all required documentation is collected, the complete package is then sent to underwriting.

Gather These Documents…

Be prepared to provide the following documents to your lender for loan approval:

 

Personal Tax Returns – last 2 years

Business Tax Returns – last 2 years (for self-employed borrowers)

W-2’s or 1099’s – last 2 years

Pay Stubs – last 2 pay periods

Bank Statements – last 2 months

Copy of Driver’s License

Social Security Benefits Letter (if applicable)

Retirement Account Statement – last 2 months (if applicable)

Copy of Current Mortgage Statement (if applicable)

Copy of Trust Documents (if property will be in the name of a Trust)

Name & Contact of Insurance Agent

 

Info provided by Holly Wheeler, Grand Savings Bank

4. UNDERWRITING

The underwriter ultimately decides if the loan is approved or not. They evaluate the complete package, double check that all loan documentation is accounted for, make sure everything complies with the associated loan guidelines, and eventually determines if the amount of risk the bank would assume with the loan is acceptable or not.

Risk is reduced by the underwriter’s confidence in:

  1. your ability to make your monthly payments.
  2. your track record of paying your debts in the past.
  3. the home’s market value based on the appraisal.

If the underwriter sees major issues, the loan may be rejected outright or received conditional approval until further documentation can be collected and evaluated.

If all requirements are met and the loan is deemed acceptable, the underwriter will pronounce the loan “clear to close,” which mean the loan can move to closing and be funded.

5. CLOSING

At least 3 business days before closing you will receive a Closing Disclosure. This is a standardized 5- page form outlining the final details of the loan you selected.  It will include your loan terms, monthly payments, and the fees and closing costs you are required to pay. Now is the time to compare the stated terms and details to those you previously received on the Loan Estimate (Step 2) and ask any questions before getting to the closing table. 

The closing date is specified on your Real Estate Contract. The loan documents, or “loan docs”, are sent to the title company chosen to handle the closing for you to sign.

After the loan docs are signed, they are returned to the lender who reviews them for a final time and grants funding of the mortgage loan. The funds are then disbursed accordingly and the mortgage note and deed of trust are recorded at the county recorders office.

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Appraisals

An appraisal is a report that determines the value of a piece of property, as well as the evidence to support the price. Appraisals are conducted by licensed appraisers and can be ordered by a homeowner at any time if they wish to know what their home is currently worth. 

However, appraisals are most often ordered as part of the lending process. An appraisal is conducted to assure the bank that they are making a wise investment by giving the buyer a mortgage note for the price of the home in question. 

THE APPRAISAL PROCESS

The appraisal process will vary based on the type of loan being requested. The following graphics will familiarize you with what to expect. 

Closing costs

Closing costs refer to the money you pay at the closing of your real estate transaction. They are the fees you’ve accrued throughout the buying and selling process and are paid in addition to the purchase price or pay off of the home. These expenses can vary considerably from one transaction to the next.

BUYER CLOSING COSTS

As a buyer you can approximate your closing costs to be between 2% to 5% of the property’s purchase price. 

Common buyer closing costs include:

  • Credit report fees 
  • Loan origination fees 
  • Inspection fees 
  • Discount points
  • Appraisal fees 
  • Lender’s title insurance
  • Title search fees
  • Escrow deposits
  • Recording fees
  • Underwriting fees

SELLER CLOSING COSTS

As a seller you can approximate your closing costs to be a little over 6% of the property’s purchase price. You are typically responsible for paying the real estate agent commissions, and it’s not uncommon for sellers to pay part of the buyer’s closing costs too.

Some sellers decide to sell their homes For Sale by Owner to reduce the amount of money owed to commissions.

Common seller closing costs include:

  • Broker commissions
  • Transfer taxes and recording fees
  • Title insurance premiums
  • Prorated taxes and HOA dues
  • Home warranty premiums
  • Termite policy fees

NWA property taxes & assessment

Real estate ownership means you will have yearly property taxes and assessments to pay, in addition to your mortgage if you have one.

 

PROPERTY TAXES

Property taxes are used to help support schools, cities, roads, jails and other county expenses. These taxes are governed by state law but assessed and collected by the county. You’ll pay your property taxes at the county Collector’s office.

The amount of property tax you’ll owe is calculated by applying a certain tax rate, known as a millage rate, to the assessed value of your property.

MILLAGE RATES

Millage rates depend on the location of your property. Your millage rate will be applied to every $1000 of your property’s assessed value to determine your property taxes. You can find your specific millage rate on these charts for Washington and Benton Counties.

An average millage rate for NWA is $50.

ASSESSED VALUE

The assessed value of your property is determined by the county Assessor’s office, who appraises and determines its fair market value. The appraised value is then used to determine your property’s assessed value. The full assessed value of property in Arkansas is 20% of its market value.

Your home will be reappraised, and therefore reassessed, every 5 years.

LET’S SAY YOU WANT TO CALCULATE THE PROPERTY TAX FOR A HOME VALUED AT $100,000 WITH A 50 MILLAGE RATE

The assessed value will be 20% of the market value.

$100,000 x 20% = $20,000

You will need to apply the millage rate to every $1000 of assessed value. So, divide the assessed value by $1000:

$20,000 / $1000 = 20

And then multiply the result by the millage rate ($50 in this case)

20 x $50 = $1000

The annual property tax for this property is $1,000.

In general, taxes are about 1% of the value of your home, car, and other items you may own.

Some properties may be subject to other direct or special assessments and/or may qualify for homestead tax credits and disabled veteran tax exemptions. Find out more here.

 

Or visit one of the following sites:

Benton County Collector’s Office: https://bentoncountyar.gov/collector/

Benton County Assessor’s Office: https://bentoncountyar.gov/assessor/

Washington County Collector’s Office: https://www.co.washington.ar.us/government/departments-a-e/collector

Washington County Assessor’s Office: https://www.co.washington.ar.us/government/departments-a-e/assessor

Alternative purchasing options

ARE THERE OTHER WAYS TO BUY A HOME?

Of course. A new mortgage loan is not required to buy a house. However, while sellers understandably love cash offers, many sellers in NWA are reluctant to agree to alternative types of financing when selling their homes. 

Some alternative purchase options include:

Cash:

Cash is king. Using cash to purchase a home is often perceived by sellers as the strongest form of buying power because it eliminates the need to make the sale of their home contingent on a bank’s approval process and often eliminates the need for an appraisal too. Furthermore, if all parties are in agreement, cash purchases can close in just a few days rather than the 30-45 days it takes to close a buyer securing a mortgage.

When making an offer to buy a home with cash you will want to include a proof of funds letter from your bank with any offer you make on a home.

Seller Financing:

Rather than getting a loan from the bank, you receive a loan from the person selling the house. After executing a promissory note, you send your monthly mortgage payments directly to the seller who gets to earn interest on your loan.

Lease to Own:

A lease-to-purchase agreement combines elements of a traditional lease with the option to purchase the property within a specified period of time at an agreed-upon price.

1031 Tax Exchange:

A 1031 exchange allows an investor to sell a property and reinvest thier proceeds from the sale into the purchase of a new (like-kind) property without paying capital gains taxes.