Introduction

Buying a home may be the most exciting, confusing and stressful financial transaction you ever undertake. Even if you have done it several times you can still find the process complicated and intimidating, particularly when it comes to getting a mortgage loan. Countless loan documents, unfamiliar terminology and uncertainty serve to temper the joy of buying a new home. As soon as the sales contract is signed, obtaining the financing for the purchase becomes paramount for all but a very few buyers. If you understand the steps required to qualify for a mortgage loan, however, much of the stress can be avoided. The following explanation of the loan application process is intended to help you through the complexities of obtaining a mortgage loan.

The Loan Application Interview

Prior to the advent of Internet lending, once you had selected a lender, the next step would probably have been a meeting with a loan officer or other lender representative, whose job was to begin the collection of information the lender needed to approve the loan. Now, you can fill out an application on-line at your convenience. You'll still have a contact person at our office to answer your questions. They will explain the types of mortgage loans available to you, the interest rates and fees for each type and the qualification requirements. If you have any problems with the on-line application, your loan officer will help you complete it.

The total cost of a mortgage loan consists of the interest rate on the loan, origination fees, discount points, and miscellaneous other charges. One point is equal to one percent of the amount of the loan and is usually collected at the loan closing, or settlement. The interest rate affects the amount of the monthly payment, while points affect the amount of cash you must have at closing.

We offer a range of interest rate/point combinations to meet your needs. In general, the higher the interest rate, the lower the points. For example, if the current market provides for an 6.5 percent interest rate with 2 points, a 7.5 percent rate may be offered at no points. If you are a first-time home buyer, the larger monthly payments on the 7.5 percent loan may be easier to handle than the 2 points that will require additional cash at settlement. If you are a corporate transferee, however, your company's relocation policy may pay all or part of origination costs and the lower rate will have more appeal. The loan officer is prepared to explain all of your options to you.

When discussing the terms of the loan, make sure you understand how and when the rate and fees on the loan are going to be set. Most lenders will quote a rate and fee at the time the application is taken and then will guarantee, or "lock" the rate quote for a specified length of time. A rate lock protects you from rising interest rates while the loan is being processed, but it also typically commits you to close the loan at the rate and the fee even if rates decline prior to closing. Lock periods may run from 10 to 60 days, with longer periods available in some cases at an additional fee. The lock period must be long enough to get you through the estimated closing date. A 30-day lock affords you no protection if closing is at least 60 days away.

You may have the option to let the rate "float," getting the final rate and fees set nearer the settlement date. If you believe rates are declining and are willing to run the risk that interest rates could rise during the processing of your loan, you may select this alternative. Before you take a floating rate, make sure that the rise in interest rates will not create a problem for you because you have insufficient income to cover the higher mortgage payments. In either case, make sure you understand exactly the terms of the lock-in agreement.

Completing The Loan Application

The full loan application asks for information on the property you are buying or refinancing, terms of the purchase contract and the employment and financial history of all loan applicants, including your spouse and/or other co-borrowers.

You can complete the loan application process much more easily and accurately if you prepare for it ahead of time. A great deal of detail will be asked about your personal finances, including bank account numbers and balances, current loan amounts and payments, and credit card account numbers. However, our on-line applications are much less detailed than traditional written ones. You will want to be thorough and precise in your answers, so it will be to your benefit to assemble this kind of information before the speaking with the loan officer. The following is a summary of the major kinds of information required on the loan application, the documents that may be needed and the questions that you should be prepared to answer.

Details of Purchase Contract and the Property

Because the property is security for the loan, the lender will have an appraisal made of the property, and you need to have the following information available:

A complete copy of the sales contract, including any addendum's, signed by all parties, showing the full names of the sellers and buyers as they will appear on the new deed, the amount of earnest money deposit and who is responsible for closing costs, origination fees, etc.

If the house is to be built, or is still under construction, a set of plans and specifications.

The complete mailing address of the property, its age and its full legal description.

Name, address and telephone number of the real estate agent and/or the seller of the property who will assist the appraiser in obtaining access to the property.

All of this information should be in the purchase contract. If not, consult the Realtor or the seller.

Personal Information

The loan officer will want the social security numbers of you and your spouse (or other co-borrowers), age, number of years of schooling, your marital status, number and ages of dependents and your current address and telephone number. If you have lived at your current address less than 2 years, be prepared to furnish former addresses for up to seven years. You will also be asked to detail your current housing expenses, including rent or mortgage payments, real estate taxes and insurance (your mortgage payment may include tax and insurance funds). You will need the name and address of your landlord(s) or mortgage lender(s) for the past two years.

Employment History and Sources of Income

Your ability to make the regular payments on the mortgage and to afford the costs associated with owning a home are primary considerations is the lender's loan approval process and should be your primary concern. Required information includes:

At least two years employment history with employer's name and address, your job title or position, length of time on the job, salary, bonuses, commissions and average overtime pay.

Recent paycheck stubs and Federal W-2 forms for two years (some lenders may require full Federal tax returns).

If you are self-employed, full tax returns and financial statements for 2 years, plus a profit and loss statement for the current year to date.

A written explanation if there are gaps in your employment record, because of circumstances such as illness or layoffs, or for any other reason. The loan officer will have you sign a Verification of Employment (VOE) form. This will be sent to your employer to verify your employment and earnings. One will be sent to previous employers if you have been on the job less than two years. Many lenders now use a general authorization form which allows them to verify employment and other financial information on the application.

If you are relying on income from other sources, such as rental property, social security or disability payments, child support, etc., you must provide adequate proof of the source. Appropriate documents could include canceled checks, copies of leases, certification of benefits, divorce decrees and similar evidence.

Personal Assets

A detailed listing of your personal assets is required on the loan application form. You will need to have the following information available to complete the form:

All bank accounts, both checking and savings, and money market accounts, with the name and address of the institution, name(s) on the accounts, account numbers and current account balances. Usually this information is taken from monthly or quarterly statements (see below).

- Recent bank statements for at least two months.

- Current market value of stocks, bonds, CDs and other investments.

- Vested interest in all retirement funds.

- Face amount and cash value of life insurance policies in force.

- Make, model, year and value of automobiles owned.

- Address and market value of all real estate owned along with the amount of rents   collected, the mortgage on the property and the monthly mortgage payments (a profit and loss statement will be required for investment properties).

-Value of other personal property such as furniture.

As with the Verification of Employment, the loan officer will have you sign Verifications of Deposit (VOD) for each of the institutions (or a general authorization) where you have savings or checking accounts. Differences between the account balances reported by the institution and the balance you give for the loan application have to be reconciled, so be sure you have your correct current balances.

The lender will look for the source of funds with which you will make the down payment and pay closing costs and fees. Gifts from a relative, church, municipality or non-profit organization may sometimes be used, but must be verified in writing. If you are providing less than 5 percent of the sales price, the donor must be a relative and must provide a letter stating the donor's relationship to you, the amount of the gift and the fact that no repayment is expected.

Personal Indebtedness

Liabilities are usually taken directly from your credit report.

If you have had credit problems, you should inform the lender. Lenders recognize that unemployment, illness, marital problems or other financial difficulties can temporarily impair your credit rating. Provide a written explanation of the circumstances regarding the problem to be included with the loan application. The lender must consider such a written explanation as part of the underwriting analysis. If the problem has been corrected and your payments have been made on time for a year or more, your credit will probably be judged as satisfactory. Chronic late payments, judgments or loan defaults, however, severely damage your credit standing and may change the type of loan programs available or the rates charged. Almost anyone can get a loan - it's just a matter of the price.

If you have been through bankruptcy or foreclosure proceedings within the past seven years, be prepared to give full details and copies of applicable documents regarding them.

You will also be asked to explain the details if you are obligated to pay alimony, child support or separate maintenance. Such obligations are treated like debt payments by most lenders and will be part of the underwriting analysis.

Additional Information

You will be asked to sign a section of the loan application form which contains your certification that the information you have provided is correct to the best of your knowledge; your promise to advise the lender of any material changes in the information; and your consent to (1) verification of the application data, (2) submission of account history to credit reporting agencies, and (3) transfer of the loan or loan servicing to successors to the original lender.

The last part of the application form requests information on the race and gender of the applicants. The Federal Government uses this data to monitor lenders' compliance with fair housing and equal credit opportunity laws. Providing this information is strictly voluntary on your part and has no effect on your loan application. The lender, however, is required by federal law to request the information.

Because of the particular circumstances surrounding a loan application, the lender may require additional information or documentation regarding you or the property after the application has been submitted for approval. Loan officers make every effort to collect all data at the outset, but cannot foresee every eventuality. Requests for additional information are not necessarily bad omens and your primary concern should be in responding promptly with the information.

When you have completed your application, you will be asked to pay in advance for the appraisal and credit report. You can give us your credit card number on line or phone it in to us.

After the on-line application is completed, you can see an analysis of the information that will give you a good idea whether or not you qualify for the loan based on income alone. This is not an approval, however. Preliminary approvals are usually issued within 48 hours or less. Final approvals are only issued by our underwriters after all documents and information have been received and verified.

After The Loan Application - What Next?

After the loan application has been completed, it will be turned over to the our loan processing department and then to the underwriter, where the decision to approve or reject the loan will be made. Loan processors send out the Verifications of Employment and Deposit and order the credit report, property appraisal and other documents. The time it takes to receive these documents affects the length of time required for approval of the loan. If you are transferring from out of the local community, it may take longer to receive the credit and employment information. Processing times vary from one lender to another, but the loan officer should be able to give an idea of the processing time for your application.

Within three business days after completing the application, the lender must provide you with a Good Faith Estimate of the anticipated closing costs. It will show costs associated with the loan settlement, such as origination fees, mortgage insurance, title insurance, escrow reserves and hazard insurance.

Within the same three days you will also receive a Truth-in-Lending Disclosure statement. This statement shows, among other things, the estimated monthly payment. The total cost of all finance charges on your loan is also shown, stated as an Annual Percentage Rate (APR). The APR represents the dollar amount of finance charges you pay either up front or over the life of the loan, converted to an annual interest rate. Since the APR includes origination fees and other charges as well as interest on the mortgage loan, the APR is usually higher than the interest rate on the loan.

After the lender has approved the loan, you will usually receive a commitment letter which sets out the terms of the loan and the length of time for which those terms are offered. If the loan does not close within the specified commitment period, the terms are subject to change. You usually must accept the commitment by returning a signed copy to the lender within five to ten days and may have to pay part or all of the origination fees at this time. The commitment may contain conditions that you will still have to satisfy, so you should read it carefully.

In cases where closing is scheduled soon after approval, the lender may give you verbal approval instead of a commitment letter. This is not unusual, but make sure you understand the terms of the approval.

Once the commitment letter or approval has been received, you are assured the financing you need to complete the purchase of your home and you need to turn your attention to completing the details required for settlement.

Reducing The Anxiety of Waiting

For many home buyers, the period of time between the submission of the loan application and receipt of the commitment letter is one of uncertainty and concern. Requests for additional information, unexpected delays and lack of communication all serve to increase the tension. There are a number of things that both you and the lender can do to reduce the stress.

Keep in mind that the lender wants to make the loan. Loan underwriters are looking for ways to approve loans, not reject them. If you have come to the interview with the loan officer fully prepared and have provided good documentation, you have done a great deal to assure prompt processing of your application and approval of your loan.

You and the lender need to make sure that lines of communication are kept open. Your contact person may be the loan officer, but often it might be someone in the lender's loan processing department who can tell you the status of your application. Remember, however, that it may take several weeks to process the application and frequent inquiries from you prior to that time will not speed things up.

You should be accessible if the lender needs additional information or documents during processing. If you are from out of town, use your real estate agent as a contact if necessary. Quick response to lender requests helps keep the process on schedule. In order to protect both you and the lender, mortgage loans require much more paperwork and legal documentation than an automobile or other installment loan, and lenders do not ask for more than is absolutely necessary.

Obtaining a mortgage loan need not be an ordeal that dampens the thrill of acquiring a new home. If you understand the lending process and are prepared to do your part, it simply becomes a key step in owning a home.

What Happens After You Apply For A Mortgage?

Scientists who study and measure human behavior find that buying a home is one of the most stressful experiences of our lives. Contributing significantly to this anxiety is waiting for the mortgage to be approved. Much of the homebuyers' unease results from not knowing what is going on. You know credit checks and verifications of employment are taking place-but what makes the difference between getting or not getting that loan, and how long does it take? This page can dispel at least some of that anxiety by detailing the steps the lender takes in making the loan decision-process called "underwriting."

Are You a Good Risk?

Just as wise stock market investors carefully research the companies in which they plan to buy stock, careful mortgage lenders investigate the financial background of each loan applicant. In lending the prospective homebuyer the money to buy the home, the lender assumes a long-term risk. The assumption is that the borrower is going to eventually repay the loan and in the meantime make the loan payments on time.

Once all the information is collected and eligibility is established, the lender decides whether to extend the homebuyer credit. In other words, lenders analyze the risk of lending (making the investment), and match it to an appropriate interest rate and loan term.

There are no established, industry-wide standards for underwriting, though most lenders follow standards set by government-related agencies, private mortgage insurers, private mortgage investors or institutional investors. The vast majority of mortgage lenders attempt to approve a loan application if at all prudently possible, but to approve a loan that will become delinquent serves no one's best interest. The burden falls on the lender to establish that an applicant is qualified.

The Initial Interview

The process usually begins with an interview where the prospective borrowers and a representative of the lender sit down to discuss the potential loan. Increasingly, however, lenders are not requiring a face-to-face meeting and accept a completed application by mail. Many lenders today will even qualify you for a loan before you begin to shop for a home. Many lenders advertise this service in the local newspaper, but any lender can provide it. Knowing approximately how much money you are qualified to borrow can save you time and prevent disappointment when you are looking at houses.

When going to see a lender for an initial interview, you should take:

- Purchase contract for the house if you have one.

- Certificate of Eligibility from the Veterans Administration (VA) if you want a VA loan. (Note: - - If you do not have one, the lender will obtain the information for you from your service records.

- Bank account numbers and the address of your bank branch. This will save the lender time in checking your credit.

- Credit card bills for the past several billing periods.

- Pay stubs, W2 forms or other proof of employment and salary.

- If you are self-employed, you should be able to present balance sheets, tax returns and other information about your business.

The important document that gets the whole process rolling is the loan application. It asks in-depth questions concerning you, your income, assets and liabilities, your credit, and your legal history, as well as a description of the property you wish to buy. The lender will verify the information you provide on the application before making the decision whether to extend the loan.

Applicants usually will know after the initial interview if they are qualified for the type and size of loan they want. Lenders try to let the borrower know as quickly as possible if they really are not qualified for the size of loan that they request.

Consumer Safeguards

The initial interview sets in motion some important consumer safeguards. The Truth-in-Lending disclosure requirements provide the applicant with an estimated yearly cost for the loan - the Annual Percentage Rate (APR). The other important disclosure that follows from the Real Estate Settlement Procedures Act (RESPA), a federal law. This requires lenders to provide homebuyers with information on known and estimated closing costs.

The initial interview also starts a clock that will allow applicants to know whether or not they have been approved in about 30 to 60 days from the submission of a completed application. If the loan is denied, the lender must disclose the specific reason (s) for the rejection.

Is Your Income Sufficient?

Following the initial interview, or loan application, the first step the lender takes is to verify your employment or income. This is done by mailing employment and income forms to current and past employers, and it will help the lender determine how much debt you can successfully take on.

Income Requirements

A general rule is that you can qualify for a loan of up to twice the family's income (i.e. a family with income of $30,000 a year usually can qualify for a mortgage of up to $60,000). Often, the amount you earn may not be as important as how you earn it. Bonuses and commissions can vary greatly from year to year, and lenders are reluctant to depend on them if they make up a large percentage of your income. There are similar problems when a large portion of your salary is based on overtime pay, and you rely on it to qualify for the loan. In the case of bonuses and commissions, the lender will want to verify your bonus and commission status back two or three years to get a better idea of what you earn from those sources on average. In the case of overtime, the lender will establish whether the work is expected to continue and whether or not the amount of overtime income is reasonable for the extra work. After establishing these points, the mortgage lender will make a decision as to how much to allow for these additional sources of income.

If you are self-employed, you should plan on producing a balance sheet, profit and loss statements and copies of your federal income tax returns for the past two or three years. Tax returns may also be required to verify other income claims, such as when income from securities is a major source for mortgage payments.

Income/Expense Standards

Lenders use a set of general standards (income/expense ratios which show how much income is used for various expenses) to test the application for qualification. These standards are based on what experience shows a homeowner can spend to own the home and also take care of other long-term financial obligations, though lenders use their own discretion in making the final decision.

Lenders generally say that housing expenses (including mortgage payments, insurance, taxes and special assessments) should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. For Federal Housing Administration (FHA) loans, this figure is not to exceed 29 percent of the homebuyer's gross monthly income. With loans guaranteed by the Department of Veteran's Affairs (VA), lenders measure prospective homebuyers with Residual Income, or the monthly income minus expenses. The remainder is then measured against geographical and family size data to qualify the borrower.

Your lender will work out these figures for you when you sit down to discuss the mortgage you want.

Debt

Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future. These expenses should not exceed 33 percent to 36 percent of the homeowner's gross monthly income. FHA-insured mortgage lenders define long-term debt as monthly expenses extending 12 months or more into the future, and look for these expenses plus housing expenses not to exceed 41 percent of the homeowner's gross monthly income.

Is Your Credit Good?

Before extending credit, lenders will want to examine the risk of not getting the money back. To do this lenders will look at four crucial aspects of your credit history when you apply for a mortgage:

- History of past credit - what were the size and terms of past loans?

- Type of Credit - have you obtained real estate, auto, personal or other installment loans in the past?

- Attitude toward credit - are active accounts current , and is there any recent bankruptcy or judgment?

- Lapses in employment or debt repayment - how many unexplained lapses are there, and for how long?

From the information uncovered by these four questions, lenders can develop a fair idea of just how you will handle your responsibilities once you have signed the contract for repaying the loan. However, lenders cannot examine everything when putting together a credit history. They have two extremely important limitations on credit information gathering.

Credit Information Safeguards

The first limitation is the Fair Credit Reporting Act, which was designed to ensure fair and accurate consumer credit reporting. The Fair Credit Reporting Act stipulates that lenders must certify the purpose for which the information is sought and use it for no other purpose. The Act also prohibits reports based on subjective information from neighbors and others concerning character, general reputation and other personal aspects. Certain other credit information, such as bankruptcy more than seven years before, is also prohibited unless the principal involved in the action was $50,000 or more.

The second consumer safeguard limiting the credit information lenders can use to make a mortgage decision is the Equal Credit Opportunity Act (ECOA). ECOA prohibits discrimination in lending based on race, color, national origin, sex, marital status, age (provided the applicant may legally contract), and the fact that all or part of the applicant's income comes from a public assistance program.

Lender's are also prohibited by law from asking:

- questions concerning the applicant's spouse, unless

the spouse will be contractually liable,

the spouse's income will be used to qualify,

the applicants live in a community property state, or

the applicant will use child support, alimony or separate maintenance payments from a spouse or former spouse to qualify.

-questions concerning future parenting plans (although the lender may ask the ages and current number of children the applicant has).

Can You Make The Down Payment?

Lenders expect homebuyers to have enough money available to make the down payment of between 10 and 20 percent of the asking price for the house-though FHA and VA loans require smaller down payment (0 to 5 percent) and to pay their share of the closing costs (3 percent to 6 percent of the loan amount). If, however, you cannot come up with a 20 percent down payment, a lender can make you a loan for as little as 5 percent down. They will, however, require you to carry private mortgage insurance for conventional (not FHA or VA loans), for which you will pay a premium for the first year and an additional monthly fee in subsequent years.

Sources on which prospective homebuyers may draw for the down payment and the closing costs include savings, stocks/bonds, Individual Retirement Accounts (IRAs), pension funds, real state holdings, life insurance policies, mutual funds or employee savings plans.

Homebuyers may also rely on another source of funding for the down payment-a gift, or money given by a parent or other relative that need not be repaid. a person may give another person up to $10,000 per year without either party being taxed. A married couple, therefore, could give a child or spouse as much as $40,000 for a down payment tax-free. Remember, however, that if you use gift money for a down payment, you will need to present a letter so stating and signed by both the giver(s) and the receiver( s) to your lender.

Mortgage lenders send a form to the homebuyer's savings institution(s) to verify the amount available for purchasing the house, as well as the amount of outstanding loans with that institution.

Is The House You Are Buying Worth The Price?

Mortgage lenders also examine the real estate being purchased to make sure that, in case of foreclosure, the lender has a salable property. The property's acceptability is established by an independent appraisal.

The appraiser looks not only at what the home is worth today, but how the neighborhood's dynamics will affect the property value in the future. The three main points the appraiser checks are:

1) Physical security of the property.

age, structural soundness, landscaping, etc. 

2) The kind of neighborhood, surrounding houses, access to transportation, commercial development nearby, etc. Local government's plans for the area.

3) How zoning and taxes will affect the property in the years to come.

Do I Get The Loan?

Your lender has made all the checks. Your income, credit, assets, property and all necessary documentation have been scrutinized. Now comes the big decision.

If the lender's decision is to extend the credit, you will be notified, usually through a commitment letter. The mortgage lender can approve the homebuyer for the entire amount asked for, or a lesser amount based on the borrower's qualifications. The commitment terms relating to interest rate and/or discount points may be firm at the time of commitment or conditioned on the market rate at the time of closing. If the decision is not to extend the credit, the lender has 30 days from the acceptance of the completed application to notify the prospective homebuyer. This notification must also include the reason(s) for the rejection.

If the loan is eligible for government insurance or guaranty, written agreements stating so are issued. These can be either an FHA or Firm Commitment or VA Certificate of Commitment. Conventional loans (not FHA or VA) receive an application for private mortgage insurance if the down payment is less than 20 percent of the purchase price.

By now you should feel a bit more at ease about what happens after you apply for a mortgage. If you have a good credit rating, it will speak for itself. Also, it is up to the lender to prevent homebuyers from over-extending themselves to the point of losing their homes. Prudent underwriters should prevent this from occurring.

Certainly there will always be some anxiety associated with applying for a mortgage, but if you understand the process, waiting for approval will be far less worrisome.

Managing Your Mortgage

Introduction

Acquiring your first home, or a larger one to meet growing family needs, usually focuses all of your attention on accumulating the down payment and qualifying for the financing on the property you have selected. There is a sense of relief when the loan is finally closed and you have settled in the house. It will not take long, however, before you will have to face the financial responsibilities that home ownership imposes.

If you are a first-time home buyer, many of the problems that you simply turned over to the landlord (or your parents) are now yours to fix and pay for. If you have moved from a small house into a larger one, you may find the expenses of maintaining the property have grown along with its size. In either case, careful planning and budgeting are essential in order to guard against financial problems in the future.

Your home is a major investment and you have a great deal to lose if you default on your mortgage payments or fail to maintain the property. Planning for unexpected situations as well as the routine costs of owning a home can help you avoid foreclosure or bankruptcy when emergencies arise.

Be Prepared For Homeownership

The expenses of owning a home go beyond the monthly mortgage and utility payments, and can create financial difficulties, particularly for first-time home buyers who have minimal cash reserves. Mechanical failures in the plumbing, electrical and heating systems seem to occur at the worst possible times, but have to be repaired. If you have purchased an older home, complete replacement of water heaters, furnaces or kitchen appliances may be needed. You should have drawn up a budget before beginning your search for a home, making allowances for such expenditures. If you did not, it is time that you begin to accumulate adequate reserves to deal with such emergencies.

In a newer property, your immediate expenses may be confined to landscaping, interior decoration and furnishings. Under normal conditions, mechanical items and appliances will be under warranty for six months to a year and will not require major expenditures, but may need minor repairs.

In an older property, replacement of major items can be very expensive. You should have determined the age of the furnace, hot water heater, air conditioning system, kitchen appliances and the roof. Your home inspector's report probably noted the ages o f these major items. If they are older then half their expected useful life, you will need to plan for the costs of the replacement.

Set up a budget and plan for both regular maintenance and major repairs. Establish an emergency fund for repairs and appliance replacement. Know what sources of financing are open to you when a major item such as the roof or heating system has to be rep laced. These are things that can cost thousands of dollars and you may have to finance them through a home equity loan, a second mortgage or an installment loan. Determine which kind of loan you are likely to qualify for, the pros and cons of the alternatives and have a plan for dealing with a major expense.

Your budget should also include a reserve for making your mortgage payments in the event of illness or loss of income in the future.

Planning For The Unexpected

While over-obligating yourself or unexpected repair bills may jeopardize your ability to keep up your house payments, the primary causes of foreclosure and bankruptcy are unanticipated personal crisis. More homeowners lose their homes because of illness, loss of employment or marital problems than all other reasons combined.

None of us factor these things into our plans for the future, but you should know about some of your alternatives if you find yourself in such a position. It is much easier to look at alternatives and plan an effective course of action before you are in trouble and in a state of anxiety and stress.

Sometimes you can see the trouble coming before financial problems begin. An advance notice of a layoff means the family income will be severely cut back or eliminated in the near future. A major medical operation or property repair bill may be more than you can afford to repay, even with a short term loan. You have to address the situation as soon as possible or risk losing your home.

There can be a number of local sources that can help you get over the hump. Churches and civic groups may have assistance programs or may know what is available. Non-profit organizations, particularly housing assistance groups or counseling agencies, may manage special assistance programs. State and local housing agencies are also places to inquire to help.

If Your Mortgage Becomes Delinquent

The day of the month on which your mortgage payment is due, usually the first day of the month, is set out in the mortgage note. Your payment is considered late of the lender receives it after the due date, and the lender usually will charge a late payment fee when the money is not received within 15 days of the due date (the timing and amount of late charges may vary from lender to lender). Payments made, including any late charges assessed, before the next payment due date will be accepted by the lender, but if you owe two or more mortgage payments, your home is in serious jeopardy. Unless specific arrangements are made with your lender, you must remit all payments and late charges before the money will be accepted and the loan considered current.

When three or more mortgage loan payments are due and unpaid, the loan may be given to the lender's attorney and foreclosure proceedings initiated. The entire balance of the loan may be due and payable immediately. In addition to the loan payments due, you are liable for legal fees incurred by the lender. At this point, you are in serious danger of losing your home.

What To Do When You Default On Your Mortgage

No lender wants to foreclose on a mortgage. Foreclosure costs them more money than they can make back from the foreclosure sale. Therefore, lenders do not foreclose in order to make money, but only reluctantly as a way of limiting losses on a defaulted loan. This is why, if you get behind on your mortgage payments, your lender will work with you to devise a practical plan to cure the default and bring the loan current. In order to do so, however, you must stay in communication with your lender and be honest in evaluating your financial situation.

The willingness of the lender to work with you to get past your current problems will depend heavily on your past payment record. If it shows consistently timely payments and no serious defaults, you will find the lender much more receptive than if you have a record of unexplained chronic late payments.

If you are falling behind in your payments, or know that you are likely to in the immediate future, there are some steps that you should take before talking with the lender about alternative payment arrangements.

First, you need to prepare a monthly list of your income and expenses, using realistic figures based on your current financial situation. You will also need to put together a complete financial disclosure package, showing your assets and liabilities, including all debts and monthly payments and when they are due. Pay stubs, unemployment check stubs or other proof of current income should be in the package, along with two years' tax returns. Get an estimate of the value of your property. You can usually get a local real estate broker to give you an idea of the current market value, free of charge. Finally, prepare a written explanation of your situation for the lender and offer any plan or suggestion you may have on how you can bring the loan current.

Mortgage Loan Workout Plans

A loan workout plan is an agreement between you and your lender that sets out the steps to be taken to cure the delinquency and prevent loss of your home. It may be written or oral and will have specific deadlines which you must meet in order to avoid foreclosure. Therefore, it must be based on very realistic estimates of your ability to meet the plan schedule.

The nature of the workout plan will depend upon the seriousness of the default, whether your financial problems are short-term or your payment ability has been impaired for the foreseeable future, your prospects for obtaining funds to cure the default and the current value of your property.

If the default is caused by a very temporary condition and is likely to be cured within 30 to 60 days, the lender may consider granting you temporary indulgence. Some examples of cases where this approach would be considered are where the house ha s been sold but the sale has not settled or where an insurance settlement is pending. It is usually possible to determine a date certain for curing the default. The lender will want documented evidence, such as the sale contract, before granting indulgence.

If you have suffered a temporary loss of income but can demonstrate that it has returned to previous levels, you may structure a repayment plan to bring the loan current. This type of workout arrangement requires your normal mortgage payments be made as scheduled, plus an additional amount that will cure the delinquency in no more than 12 to 24 months. In some cases the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of workout agreement.

In some circumstances, it may be impossible for you to make any payments at all for some period of time. If you have had a good record with the lender, a "forbearance plan" will allow you to suspend payments or make reduced payments for a specified length of time. The forbearance plan will be in writing, have a definite term and spell out the method of ending the delinquency. In most cases the length of the plan will not exceed 18 months and will stipulate commencement of foreclosure action if you default on the agreement.

Any workout agreement is a last-ditch effort by you and your lender to avoid foreclosure and keep you in your home. It is not a substitute for good budgeting and financial planning on your part and will probably not be available if your payment record has not been consistently good up to the present time. Lenders will work closely with good borrowers who are having a period of real emergency and hardship, but are not inclined to cooperate with those who demonstrate little financial discipline.

Mortgage Escrow Accounts?

Mortgage escrow accounts have been in the news lately and seem to be greatly misunderstood by many consumers. The original idea behind mortgage escrow accounts was to protect the interests of homeowners and they have been serving that purpose for more than 50 years.

The History of Escrows

Mortgage escrow accounts came into being more than 50 years ago. In the 1930's, many Americans were losing their homes in foreclosures because of late tax payments. To help ease the burden on homeowners who had to come up with large, lump sum payments at tax time, lenders agreed to take on the responsibility by collecting smaller monthly sums from homeowners along with their mortgage payment. In 1934, the government mandated that lenders manage escrows on all FHA insured mortgages. This then became the standard practice for all mortgages.

Why Mortgage Escrows?

Mortgage escrow accounts ensure that homeowners' property taxes, fire and hazard insurance premiums, mortgage insurance premiums and other escrow items are paid in a timely fashion. They are a guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes.

Who's Protecting The Homeowner?

Escrowing is governed by the Real Estate Settlement Procedures Act of 1974 (RESPA), administered by the U.S. Department of Housing and Urban Development (HUD). Lenders must manage their escrow accounts in compliance with this federal law and with the interpretations set out by HUD.

In addition, the 1990 Housing Bill recently signed into law by the President, requires lenders to issue itemized statements of escrow accounts to borrowers on an annual basis. While many lenders are already providing homeowners with regular statements of their escrow accounts, the new law should ensure that every lender follows this practice.

Who Should You Talk To?

Escrowing as practiced by the nation's lenders protects both the borrower and the lender. Borrowers who have questions or concerns about their escrow accounts should talk to their lenders immediately. Consumers who know the purpose of escrows and are aware of the benefits they provide are the best insurance against misunderstandings between borrowers and lenders or misleading information from any source.

What Escrows Do For Homebuyers

1. Guarantee that bills are paid on time.

The most obvious advantage of escrows is that they automatically budget the borrower's tax and insurance responsibilities over the course of a year. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year. If there is ever a fire in the home, or if the basement floods causing damage, the homeowner is assured that the home is protected by up-to-date insurance.

2. Unexpected increases are taken care of.

Because of escrows, homeowners also do not need to worry about calculating unexpected increases in their taxes or insurance premiums. It is the responsibility of the lender to allow for possible increases in these payments.

Even when there are not enough funds in a mortgage escrow account to meet increased tax or insurance payments, the lender typically covers the bill without charging interest to the borrower. It is very common for lenders to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner. It is estimated that in 1989 alone, lenders advanced more than $600 million to homeowners who then avoided the penalties and risks of not paying their taxes and insurance on time.

3. Mortgages have lower rates and down payments because of escrows.

Escrows protect the interests of investors in home mortgage loans. By making home mortgages more attractive and secure as investments, escrowing has led to a healthier mortgage market. As a result, loans with better terms and lower down payments are available to homebuyers.

4. Local governments save money.

Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection. Rather than working with millions of homeowners, municipalities need only collect from a few hundred lenders.

How Does The Lender Come Up With My Payment?

The law is very specific in setting limits on the amount that the lender may collect. the lender may require a monthly payment of 1/12 of the total amount of estimated taxes, insurance premiums and other charges reasonably anticipated to be paid. Plus, the lender may collect an additional balance of not more than 1/6 of the estimated annual payments. If the lender determines there will be or is a deficiency in the escrow accounts, the law permits the lender to require additional monthly deposits to avoid or eliminate the deficiency.

What Happens When My Loan Is Transferred?

When the servicing of your loan transferred to another lender, the new lender takes on the responsibility of managing your escrow account. At that time, the new lender may examine your escrow account to make sure that the funds being collected are sufficient to cover all payments that are to be made. If the new lender feels that the amount collected must be adjusted, you will be notified of the change in your monthly payment.

For more information, contact the Mortgage Bankers Association of America, Consumer Affairs Division, 1125 15th Street, N.W., Washington, D.C. 20005

Closing Your Mortgage Loan

Introduction

Once your application for a mortgage loan has been approved and you have received a commitment letter from the lender, the final step before you can call the house your own is the closing, or settlement, of the purchase transaction and mortgage loan. Even though you have signed purchase agreement and your loan request has been approved, you have no rights to the property, including access, until the legal title to the property is transferred to you and loan is closed. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time.

At closing, you will sign the mortgage loan documents, the seller will execute the deed to the property, funds will be collected and disbursed and the closing agent will record the necessary instruments to give you legal ownership of the property. Settlement of a mortgage loan is a legal process, so specific procedures and requirements will vary according to state and local laws, but a general description of closing practices can help you through the process.

Between Commitment and Closing

As soon as you receive firm approval from the lender who is making your mortgage loan, you should confirm the actual date of loan closing. An estimated closing date was probably specified in the sale contract, but a firm date needs to be set by you, the seller of the property and your lender. You want to make sure that settlement will take place before your loan commitment expires and before any rate lock agreement (guaranteed terms of the loan) expires. The settlement date also has to allow adequate time to assemble all of the required documentation. If repairs or maintenance on the property are a part of the lender's commitment, there must be time to complete them. The real estate agents involved in the sale transaction and the lender are often the best people to coordinate the closing arrangements. Most lenders require at last 3 to 5 days advance notice of the closing date in order to prepare the loan documents and get them to the closing agent.

There are standard documents and exhibits that are commonly required for a loan closing, regardless of jurisdiction. Some of these will be your responsibility and others will be the responsibility of the seller. The following documents are typically required for closing.

Title Insurance Policy

Every lender will require title insurance. The company issuing the title insurance policy will have researched legal records to make sure that you are receiving clear title, or ownership, to the property. Their title search has established that the seller of the property is the legal owner, and that there are no claims, or liens, against the property. The title company offers both a lender's policy and an owner's policy. You will have to pay for a lender's policy and it is advisable for you to have an owner's policy as well. For a small additional premium, it will protect you up to the full value of the property if fraud, a lien or faulty title is discovered after closing.

Homeowner's Insurance

The lender will require you to have homeowners insurance on the property at least in the amount of the replacement cost of the property. You should make sure the policy covers the value of the property and contents in the event they are destroyed by fire or storm. You must pay for the policy and have it at closing. You are free to select the insurance carrier, but the lender will require the company to meet rating standards and be rated by a recognized insurance rating agency.

Termite Inspection and Certification

In many areas of the country, the property must be inspected for termites and the inspection is required in the purchase contract. In some parts of the country, this may be called a "wood infestation" report. The report is required on all FHA and VA loans as well as many conventional loans.

Survey or Plot Plan

Your lender may require a survey of the property, showing the property boundaries, the location of the improvements, any easements for utilities or street right-of-way and any encroachments on the boundaries by fences or buildings. Encroachments can be minor, such as a fence, or may be serious and have to be corrected before closing. In some areas, an addendum to the title policy eliminates the need for a survey.

Water and Sewer Certification

If the property is not served by public water and sewer facilities, you will need local government certification of the private water source and sanitary sewer facility. Properties with well and septic water sources are usually governed by county codes and standards.

Flood Insurance

If the lender or the appraiser determines that the property is located within a defined flood plain, you will want, and the lender will require, a flood insurance policy. The policy must remain in force for the life of the loan.

Certificate of Occupancy or Building Code Compliance Letter

If your home is new construction, you will have to have a Certificate of Occupancy, usually from the city or county, before you can close the loan and move in. The builder will obtain the certificate from the appropriate authority. Many local governments require an inspection when a home is sold to see if the property conforms to local building codes. Code violations may require repairs or replacement of structural or mechanical elements. The responsibility for ordering the inspection and paying for any required repairs should be spelled out in the purchase contract.

Other Documentation

Additional documentation required for closing will be set out in the commitment letter from the lender and will depend upon terms of the sale, peculiarities of the property and local ordinances and custom. Examples would include private road maintenance agreements if the street in front of your property is not maintained by a municipality or proof of sale of your previous home if that was a condition of approval of your loan.

Within 24 hours prior to the actual closing, your and your real estate agent should make a final inspection of the property to make sure any required repairs have been completed, all property described in the sale contract, such as kitchen appliances, carpeting and draperies are present and that no recent fire or storm damage has occurred. In most cases, the lender will make a similar inspection before closing.

The Loan Closing

The actual loan closing procedure, including who conducts the closing and who is present, depends upon local law and custom and lender practices. Some states require that you be represented by an attorney, others do not. Even if it is not required by law, you may want to have an attorney, review the closing documents.

Some lenders will close the loan in their offices, some will use title or escrow companies and some will send their instructions and documents to their attorney or yours to conduct the closing. As soon as you receive your commitment letter from the lender, you should determine who is responsible for closing arrangements.

The actual closing is conducted by a closing agent who may be an employee of the lender or the title company, or it may be an attorney representing you or the lender. The lender and seller, or their representatives, and the real estate agents may or may not be at the actual closing. It is not unusual for the parties to the transaction to complete their roles without ever meeting face to face.

The closing agent will have received instructions from the lender on how the loan is to be documented and the funds disbursed, and will have collected all of the necessary exhibits from you, the seller and the lender. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly disbursed and accounted for when the closing is completed.

You typically need to come to the closing with a certified check for the closing costs, including the balance of the down payment. You can get the exact figure a day or two prior to the closing from lender or the closing agent. You should also bring the homeowners insurance policy and proof of payment if it has not been delivered earlier.

For the most part, your role at closing is to review and sign the numerous documents associated with a mortgage loan. The closing agent should explain the nature and purpose of each one and give you and/or your attorney an opportunity to check them before signing. A brief description of the major documents may help you understand their purpose and significance.

Settlement Statement - HUD-1 Form

This form is required by Federal law and is prepared by the closing agent. It provides the details of the sale transaction including the sale price, amount of financing, loan fees and charges, proration of real estate taxes, amounts due to and from buyer and seller and funds due to third parties such as the selling real estate agent. It must be signed by both buyer and seller and becomes a part of the lender's permanent loan file.

Some of your charges on the HUD-1 may have already been paid, such as credit report and appraisal fees. They will be noted as P.O.C. (paid outside the closing). You will usually be charged interest on the loan from the date of settlement until the first day of the next month and your first payment will be due on the first day of the month and your first will be due on the first of the following month. Make sure you know exactly when your first and subsequent payments are due and what the penalties are for being late.

If your loan is greater than 80 percent of the value of the property, you will probably have to pay for mortgage insurance that protects the lender in case you default. One year's premium will usually run between .5 percent to .75 percent of the loan amount.

In addition to your monthly payments on the loan, most lenders will require you to maintain an "escrow", or "impound," account for real estate taxes and insurance. Current law permits a lender to collect 1/6th (2 months) of the estimated annual real estate taxes and insurance payments at closing. Additionally, real estate taxes for the current year will be pro-rated between you and the seller and paid at closing. After closing, you will remit 1/12 of the annual amount with each monthly payment. Tax and insurance bills should be sent to the lender who will pay them out of the escrow funds collected.

Truth-in-Lending Statement

This form is also required by Federal law. You were given an initial TIL shortly after you completed the loan application. If no changes have taken place since that time, the lender need not provide one at closing. If, however there are significant charges, you must receive a corrected TIL no later than settlement.

The Mortgage Note

The mortgage note is legal evidence of your indebtedness and your formal promise to repay the debt. It sets out the amount and terms of the loan and also recites the penalties and steps the lender can take if you fail your payments on time.

The Mortgage or Deed of Trust

This is the "security instrument" which gives the lender a claim against your house if you fail to live up to the terms of the mortgage note. It recites the legal rights and obligations of both you and the lender and gives the lender the right to take the property by foreclosure if you default on the loan. The mortgage or deed of trust will be recorded, providing public notice of the lender's claim (lien) on the property.

Miscellaneous Documents

There will be a number of documents or affidavits that you will be asked to sign at closing. Some are lender requirements (e.g. a statement that you intend to occupy the properties your primary residence), or are required by state or Federal law. These instruments should not be taken lightly. Some provide for criminal penalties for false information, and some may give the lender the right to call your loan, which means the entire loan amount becomes immediately due and payable. When everything has been signed and the closing agent is satisfied that all of the instructions for closing have been complied with in full, you become the owner and are given the keys to the property.