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Funding the Dream - All About Real Estate Financing
The majority of buyers use a loan to purchase a property, then they base their offer to purchase contingent upon obtaining a loan commitment from a lender. Until the financing is secure, the sale of a property is still pending. Your choice of lenders is endless, but don't allow the variety to intimidate you.
Your purchase agreement should specify all financing contingencies such as the interest rate, origination fees, term, and the type of loan. It also specifies a time period for you to obtain your loan commitment from the lender/. A time period of 30 days following the acceptance of a purchase contract is usually enough time to secure approval from the lender, but in a hot market a longer wait may be required. A completed loan application submitted more than five days after acceptance of the purchase contract stands little chance of being approved within a 30 day period. The most common sources of home purchase financing are mortgage brokers, commercial banks, mortgage banks, savings and loan companies, and credit unions. Ask friends and family who recently purchased or refinanced to recommend their source if they were satisfied. Your real estate agent can give you various rate sheets from various lenders. Major newspapers will usually print a summary of current home loan rates.
Some lenders offer adjustable rate mortgages, also knows as ARMs, while others offer fixed rates. Lenders that offer fixed rate loans usually provide either a 15 or 30 year variety, but usually not both. ARMs usually secure the lowest rates, but only because the interest rate has the power to float around. The interest on a 15 year loan is usually less than on a 30 year loan.
The Annual Percentage Rate, also known as the APR, is the yearly interest rate paid by the owner. When borrowers call lenders for their current rates, lenders will usually quote only the interest rate, not the APR. The APR is usually .5 percent higher than the note rate.
The qualifying ratio is determined by the relationship between the borrowers projected principal, interest, taxes, and insurance (PITI) and their gross income. Lenders like to keep the PITI under 33 percent of the borrowers gross monthly income. Lenders also look at the ratio between the borrowers total debt to income. If a lender tells you they require a 30/36 ratio, this means the PITI figure must not exceed 30%, and the PITI plus long term outstanding debt must not exceed 36% of the income.
Private Mortgage Insurance, also known as PMI, insures the lender against a default on the part of the borrower. PMI is usually required when the borrower is making a cash deposit of less than 20% of the purchase price. PMI premiums usually run about .50 percent of the loan amount. In most cases PMI can be dropped after you have 20% equity in your property.
Mortgage brokers act as intermediaries between borrowers and lenders. They take a loan application, assemble your loan package, shop loans for you, then place your loan with a specific lender. Mortgage brokers have access to a multitude of loan products, and can often arrange financing to under-qualified buyers.
Many lenders will only work with brokers. If you have been turned down by several lenders you may want to enlist in the help of a mortgage broker.
About the Author: Published by Joe and Colleen Lane, Realtors®. The Lane Real Estate Team services Tri City Wa Real Estate, Kennewick Wa Real Estate, Pasco Wa Real Estate, Richland Wa Real Estate, and surrounding Southeastern Washington Communities.