Financing

Home Mortgage Financing

To prevent foreclosure and repossession, banks must lend to qualified borrowers with a good credit reputation. Home financing always begins with good credit — credit scores represent the borrower's trustworthiness and determine the interest rate on the loan.

Interest Rates

When researching interest rates online, a home buyer may notice the term "with or without points." A point is a fee paid to lower the interest rate and is usually one percent of the principal amount. Most borrowers choose not to pay the additional fee; however, a lower interest rate will reduce the monthly payment and aid in qualifying. Lenders often post interest rate tables and products online — the two most common loan products are:

• Fixed: A fixed interest rate sets the percentage for the life of the loan.
• Adjustable Rate Mortgage (ARM): An ARM usually calls for a fixed interest rate for a specified period of time, then monthly or annually increases or decreases the percentage based on the market index. The initial rate for an ARM loan can begin 0.5–2.0 percent below the average fixed rate product.

When qualifying begins, the lender will ask the borrower to complete a home loan application. Three days after the borrower submits the application, the lender will give the home buyer a Loan Estimate Disclosure that breaks down the home financing — covering the principal amount, interest rate, and estimated monthly payment (including taxes and insurance), along with the down payment and projected closing costs.

Once that is established, the loan will undergo underwriting. An underwriter will review the regulatory guidelines and request documentation from the borrower to qualify them under the terms set in the home financing program, analyzing the borrower's current debt, employment history, savings ability, and liquid assets needed to close the loan. It's wise for the borrower not to change jobs, open new credit lines, or make major purchases during this time, as it may lead to a decline in the loan.

Closing Disclosure

Three days before finalizing the transaction, the borrower will receive a Closing Disclosure reflecting the final costs of financing the mortgage. The figures should correlate with the original Loan Estimate form — if the amounts differ considerably, the borrower has the right to request a corrected form or decline the loan. Under Florida law, the borrower will have three days to review and reject the transaction if the program now requires a prepayment penalty, the interest rate changed, or the loan product converts from a fixed rate to an interest-only loan.

Pre-Approval Letter

Homebuyers looking for an edge in the buying process can request a pre-approval letter from a lender. Generally, a bank will receive a loan application from the client, review their credit report, and possibly input the information through an automatic underwriting system. Although this is not a final approval, the lender is stating that the borrower is a good candidate for a loan. A buyer should not confuse a pre-approval with a pre-qualification — pre-qualification only means the buyer met with a lender, but did not submit documentation to determine their creditworthiness.