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Mortgage 101 2017-05-16T15:45:31+00:00

Mortgage 101

Since there are so many components to the mortgage process, we have taken special care to organize the most important qualifying steps, frequently asked questions, lending home buying and mortgage processes below. We realize that that the information contained in this site could literally take you weeks to research and digest, so please feel free to call us at any time for a personal consultation where we can address your specific needs and questions.

1. Mortgage Basics:

What is a mortgage, and who owns my home if I have secured financing to purchase it?
Whether you’re new to the home buying process, or a seasoned investor, I bet you didn’t realize that there are at least 20 top mortgage related terms that you may want to understand prior to speaking with a real estate agent or loan officer.
This section highlights some of the basic math and topics of interest that will help you get started on your home buying and financing journey.

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2. Mortgage Approval Process:

Required down payment, income / employment information and credit standing are a few of the important factors lenders look at when considering a borrower for a mortgage loan approval.
There are several questions that a loan officer needs to ask before a simple pre-approval letter can be issued. But more importantly, there are at least 8 top questions that you should be asking your lender before taking any steps to fill out an application.
Being prepared with the proper documents and personal information will allow you to spend more quality time with your loan officer addressing the important points of your pre-approval and mortgage program options.

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3. Understanding Your Credit:

Your credit picture plays a key role in the mortgage approval process, and it is essential to understand how scores are measured and calculated.
Should you close all cards or keep them open? What if you don’t have any credit history that shows up on a report, is there a way to use cell phone and utility bills?
In this section, you’ll learn the basic rules about preparing your credit standing prior to speaking with a lender for qualification.

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4. Mortgage Payments:

In addition to mortgage rates, there are many other obligations that factor into your overall mortgage payment.
HOA Dues, Hazard Insurance, Home Warranties, Property Taxes…. to name a few.
It helps to be aware of the expenses involved in owning real estate in order to set a monthly budget that is true to your financial goals and expectations.

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5. Mortgage Rates

Mortgage rates can fluctuate several times a day, and are influenced by many factors that are out of the loan officer’s control.
Determining if you’re getting the best deal at any given moment boils down to whether or not you trust that your preferred loan officer is truly looking out for your best interests.
Fortunately, there are economic indicators that impact the typical movement of interest rate markets which you can be aware on a daily basis. When the media reports that the Fed is moving rates down, it always seems that home loan rates go up. What about the points vs no points, and APR?

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6. Mortgage Programs:

It’s amazing how many mortgage programs have been designed to help First-Time Borrowers get financing on new homes.
Before you start shopping for a listing that fits your living needs, it would be extremely beneficial to know what type of lending scenario best fits the type of property or neighborhood you’re looking to buy in.
With regards to a refinance, you may actually qualify for a new government sponsored program that has been designed with current market conditions in mind.

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7. Home Buying Process:

What comes first – the approval or the purchase contract?
Once you have weighed the basic pros and cons of owning a home vs renting, tax benefits and timely market influences, assembling a winning team of real estate and mortgage professionals will help you cover all of your bases. There are also some very important time lines that you’ll need to be aware of, such as appraisal, home inspection and loan approval dates. Can the type of Home Owners Association affect your loan approval? Absolutely. If you’re feeling a little anxious at this point, then that just means you’re actually taking this home buying thing seriously. Don’t worry, we’ll make sure you are kept in the loop throughout the entire home buying process.

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8. Closing Process:

With the right home buying team on your side, the closing process should be a smooth transition from signed documents to closing.
The excitement has been building throughout the entire process from home shopping to mortgage approval; so it’s easy to overlook some important details at the end. Understanding the industry lingo will certainly help you avoid feeling like you’re on a roller-coaster while all the team players come together at the end to perform doc signings, pre-closing conditions…. It also helps to know about all of the fees associated with a new home purchase or refinance. Understanding the difference between the fixed and variable fees will help you set a more accurate budget, which could impact whether or not you get your earnest money back at closing.

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9. Refinance Process:

Properly estimating neighborhood property values and your closing costs will help determine the net benefit of a refinance transaction. Some homeowners just want to know the best approach of finding money to make home improvements, while other borrowers are in a situation where their rate is adjusting. Either way, it’s easy to get caught off guard if you don’t have the essential knowledge about your mortgage refinance options.

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Frequently ASKED Questions

Cross-qualification is imminent in certain markets, especially with bank-owned or short sale properties. Some of the large banks that own homes require any potential home buyer to be qualified with their preferred lender – who is typically a representative of the bank that owns the home. This is one way for the bank to recoup a small portion of their loss on the home from the previous foreclosure or short sale.

In other scenarios, the listing agent/seller prefers to feel safe in knowing the home buyer they’ve selected has a back up plan should their current one fall apart.

There are literally hundreds of moving parts with a real estate purchase transaction that can impact a final approval up until the last minute, and then after the fact in some unfortunate instances.

With the borrower – credit scores, income, employment and residence status can change.

With the property – appraised value, poor inspection report, title transfer / property lien issues, seller cooperation, HOA disclosures.

With the mortgage program – Interest rates can change affecting the DTI ratio, mortgage insurance companies change guidelines or go out of business, new FICO score requirements…. the list can go on.

It’s important to make sure your initial paperwork is reviewed and approved by an underwriter as soon as possible. Stay in close contact with your mortgage approval team throughout the entire process so that they’re aware of any delays or changes in your status that could impact the final approval.

Depending on your mortgage program and final underwritten conditions, you may have to re-submit the most recent 30 days of income and asset documents, as well as have a new credit report pulled.

Worst case scenario, the lender may even require a new appraisal that reflects comparables within a 90 day period.

It’s important to know critical approval / condition expiration dates if your real estate agent is showing you available short sales, foreclosures or other distressed property purchase types that have a potential of dragging a transaction out several months.

Who Pays What?

A Guide To Closing Costs

Seller can generally be expected to pay for:

  • Real Estate Commission
  • Document preparation fee for Deed
  • Document transfer tax ($1.10 per $1,000.00 of sales price)
  • Any City Transfer/Conveyance Tax (according to contract)
  • Any loan fees required by buyers lender
  • Payoff of all loans in seller’s name (or existing loan balance if being assumed by buyer)
  • Interest accrued to lender being paid off, Statement Fee, Reconveyance Fees, and any

Buyer can generally be expected to pay for:

  • Title Insurance premiums
  • Escrow Fee
  • Document preparation (if applicable)
  • Notary Fees
  • Recording charges for all documents in buyer’s names
  • Termite Inspection (according to contract)
  • Tax pro-ration (from date of acquisition)
  • Homeowner’s transfer fee
  • All new loan charges (except those required by lender for seller to pay)
  • Interest on new loan from date of funding to 30 days prior to first payment date
  • Assumption/Change of Records fees for takeover of existing loan
  • Beneficiary Statement Fee for assumption of existing loan
  • Inspection Fees (roofing, property inspection, geological, etc.)
  • Home Warranty (according to contract)
  • City Transfer/Conveyance Tax (according to contract)
  • Fire Insurance Premium for first year

Prepayment Penalties:

  • Termite Inspection (according to contract)
  • Termite Work (according to contract)
  • Home Warranty (according to contract)
  • Any judgments, tax liens, etc. against the seller
  • Recording charges to clear all documents of record against the seller
  • Tax pro-ration (for any taxes unpaid at time of transfer of title)
  • Any unpaid Homeowner’s dues
  • Any bonds or assessments (according to contract)
  • Any and all delinquent taxes
  • Notary Fees

Mortgage Basics

Simply put, a mortgage is a loan secured by real property and paid in installments over a set period of time.
The mortgage secures your promise that the money borrowed for your home will be repaid.

According to Wikipedia

A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

Components of a Mortgage:

Qualifying for a mortgage requires meeting a pre-determined set of guidelines established by a lender, which may include credit history, income, employment and assets.

In addition to personal qualifying factors, a property must also meet certain standards set by lenders before a borrower can obtain a mortgage loan secured by real estate.

On a traditional 30 or 15 years fixed rate mortgage program that involves principal and interest, each payment made is divided into two parts (we’re not including taxes or homeowners insurance as part of this discussion):

The first part of the mortgage payment, which is commonly referred to as principal, goes to paying down the initial amount borrowed.

The second part is the interest paid for the money borrowed to purchase the property.

The amount paid in interest decreases each month, as the amount paid towards the principal balance increases. This apportioning is referred to as amortization.

Other types of mortgage payments available can include options for paying interest only or a teaser rate.

Either way, it is extremely important to have a solid understanding of the full payment and terms before moving forward with a particular option.

Mortgage Programs come in many different types of flavors and colors depending on the down payment and/or monthly budget a borrower has been approved for.

There are also federally insured mortgages, such as FHA or VA loans, which have more flexible qualifying guidelines.

The actual cost of obtaining a mortgage mainly depends on whether or not the borrower is paying points for a lower mortgage rate.  In some cases, there are also other loan processing and underwriting fees associated with the work involved in the transaction.

Fortunately, there are several consumer protection policies implemented by the government to help borrowers understand their options during the initial mortgage pre-qualification process. However, please keep in mind that there may be other closing costs not associated with a mortgage or real estate transaction to be aware of. Appraisal, pre-paid property taxes, insurance and interest, HOA dues and inspections are a few additional out-of-pocket expenses you should budget for.

While mortgage interest rates may change several times a day, there are a few market factors you can pay attention to which may impact your final payment.

Whether you’re shopping for the best rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask a mortgage lender about your specific loan scenario.

Mortgage Approval Process

Whether you’re a First-Time Home Buyer or seasoned investor, the mortgage approval process can be a slightly overwhelming adventure without a proper road map and good team in your corner. Updated program guidelines, mortgage rate questions and down payment requirements are a few of the components you’ll need to be aware of when getting mortgage financing for a purchase or refinance.

While this site is full of useful information, industry terms and calculators that will help you research the mortgage approval process in detail, this particular page was designed to give you a thorough outline of the important components involved in getting qualified for a new mortgage loan.

Mortgage Approval Components:

Mortgage lenders approve borrowers for a loan, which is secured by real estate, based on a standard set of guidelines that are generally determined by the type of loan program.

The following bullets are the main components of a mortgage approval:

Debt-To-Income (DTI) Ratio –

A borrower’s DTI Ratio is a measurement of their income to monthly credit and housing liabilities.

The lower the DTI ratio a borrower has (more income in relation to monthly credit payments), the more confident the lender is about getting paid on time in the future based on the loan terms.

Loan-to-Value (LTV) –

Loan-to-Value, or LTV, is a term lenders use when comparing the difference between the outstanding loan amount and a property’s value.

Certain loan programs require a borrower to invest a larger down payment to avoid mortgage insurance, while some government loan programs were created to help buyers secure financing on a home with 96.5% to 100% LTV Ratios.

EX: A Conventional Loan requires the borrower to purchase mortgage insurance when the LTV is greater than 80%.  To avoid having to pay mortgage insurance, the borrower would have to put 20% down on the purchase of a new property.  On a $100,000 purchase price, 20% down would equal $20,000.

Credit

Credit scores and history are used by lenders as a tool to determine the estimated risk associated with a borrower.

While lenders like to see multiple open lines of credit with a minimum of 24 months reporting history, some loan programs allow borrowers to use alternative forms of credit to qualify for a loan.

Property Types

The type of property, and how you plan on occupying the residence, plays a major role in securing mortgage financing.

Due to some HOA restrictions, government lending mortgage insurance requirements and appraisal policies, it is important that your real estate agent understands the exact details and restrictions of your pre-approval letter before placing any offers on properties.

Mortgage Programs –

Whether you’re looking for 100% financing, low down payment options or want to roll the costs of upgrades into a rehab loan, each mortgage program has its own qualifying guidelines.

There are government insured loan programs, such as FHA, USDA and VA home loans, as well as conventional and jumbo financing.

A mortgage professional will take into consideration your individual LTV, DTI, Credit and Property Type scenario to determine which loan program best fits your needs and goals.

Pre Approval Letter

Getting a mortgage qualification letter prior to looking for a new home with an agent is an essential first step in the home buying process.

Besides providing the home buyer with an idea of their monthly payments, down payment requirements and loan program terms to budget for, a Pre-Approval Letter gives the seller and agents involved a better sense of security and confidence that the purchase contract will be able to close on time.

There is a big difference between a Pre-Approval Letter and a Mortgage Approval Conditions List.

The Pre-Approval Letter is generally issued by a loan officer after credit has been pulled, income and assets questions have been addressed and some of the other initial borrower documents have been previewed. The Pre-Approval Letter is basically a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines.

The Mortgage Approval Conditions List is a bit more detailed, especially since it is usually issued by the underwriter after an entire loan package has been submitted.

Even though questions about gaps in employment, discrepancies on tax returns, bank statement red flags, and other qualifying related details should be addressed before a loan officer issues a Pre-Approval Letter, the final Mortgage Approval Conditions List is where all of those conditions will pop up. In addition to borrower related conditions, there are inspection clarifications, purchase contract updates and appraised value debates that may show up on this list. This will also list prior to doc and funding conditions so that all parties involved can have an idea of the timeline of when things are due.

How Much Can I Afford? – Let’s start with the most commonly asked question about mortgage loans.  Getting a Pre-Approval Letter for a new home purchase is mainly to let everyone involved in the transaction know what type of mortgage money the buyer is approved to borrower from the lender.

The Pre-Approval Letter is based on loan program guidelines pertaining to a borrower’s DTI, LTV, Credit, Property Type and Residence Status.

A complete Pre-Approval Letter should let the borrower know the exact terms of the loan amount, down payment requirements and monthly payment, including principal, interest, taxes, insurance and any additional mortgage insurance premiums.

Keep in mind, one of the most important items to remember when looking into financing is that there is sometimes a difference in the amount a borrower can qualify for vs what’s in their budget for a comfortable and responsible monthly payment.

  1. Loan Amount – Base loan amount and possibly gross loan amount (FHA, VA, USDA)
  2. Status Date and Expiration Date – Most Pre-Approval Letters are good 90 days from when your credit report was run
  3. Mortgage Type – FHA, VA, USDA, Conventional, Jumbo
  4. Term – 40, 30, 20 or 15 year fixed, ARM (Adjustable Rate Mortgage); if ARM, 1, 3, 5, 7 or 10 year initial fixed period; Interest Only
  5. Occupancy – Owner Occupied, Secondary Residence, Investment
  6. Contact Info – Lender’s Name and Address
  7. Conditions – Document and Funding requirements prior to Approval

FAQ About The Mortgage Approval Process

Cross-qualification is imminent in certain markets, especially with bank-owned or short sale properties. Some of the large banks that own homes require any potential home buyer to be qualified with their preferred lender – who is typically a representative of the bank that owns the home. This is one way for the bank to recoup a small portion of their loss on the home from the previous foreclosure or short sale.

In other scenarios, the listing agent/seller prefers to feel safe in knowing the home buyer they’ve selected has a back up plan should their current one fall apart.

There are literally hundreds of moving parts with a real estate purchase transaction that can impact a final approval up until the last minute, and then after the fact in some unfortunate instances.

With the borrower – credit scores, income, employment and residence status can change.

With the property – appraised value, poor inspection report, title transfer / property lien issues, seller cooperation, HOA disclosures.

With the mortgage program – Interest rates can change affecting the DTI ratio, mortgage insurance companies change guidelines or go out of business, new FICO score requirements…. the list can go on.

It’s important to make sure your initial paperwork is reviewed and approved by an underwriter as soon as possible. Stay in close contact with your mortgage approval team throughout the entire process so that they’re aware of any delays or changes in your status that could impact the final approval.

Depending on your mortgage program and final underwritten conditions, you may have to re-submit the most recent 30 days of income and asset documents, as well as have a new credit report pulled.

Worst case scenario, the lender may even require a new appraisal that reflects comparables within a 90 day period.

It’s important to know critical approval / condition expiration dates if your real estate agent is showing you available short sales, foreclosures or other distressed property purchase types that have a potential of dragging a transaction out several months.

Yes, No and Maybe…

If you are in a financial position where you are qualified to afford both your current residence and the proposed payment on your new house, then the simple answer is No!

Qualifying based on your Debt-to-Income ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgages payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.

Understanding Credit

Credit is one of the most important components in the mortgage approval process.
Lenders look at a borrower’s credit score, number of open accounts, payment history, type of credit borrowed and a series of other factors when determining what level of risk to assess to each lending scenario.

Down payment requirements, loan programs, flexibility on income and even interest rates can be impacted by a slight bump in a credit score.

According To Wikipedia:

A credit score in the United States is a number representing the creditworthiness of a person or the likelihood that person will pay his or her debts.

A credit score is primarily based on a statistical analysis of a person’s credit report information, typically from the three major American credit bureaus: Equifax, Experian, and TransUnion.

The Fair Isaac Corporation, known as FICO, created the first credit scoring system in 1958, for American Investments, and the first credit scoring system for a bank credit card in 1970, for American Bank and Trust.

The three credit reporting agencies in the United States of America, Equifax, Experian, and TransUnion, collect data about consumers used to compile credit reports. The credit agencies use FICO software to generate FICO scores, which are sold to lenders. Each individual actually has three credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.

In the United States, a resident is permitted by law to view their credit report once a year at no charge by visiting the website AnnualCreditReport.com. The individual’s “credit score” information is available for an additional fee from each of the three credit reporting agencies. In addition, the Fair Isaac Corporation sells FICO scores directly to consumers using data from Equifax and TransUnion.

A FICO score is between 300 and 850, exhibiting a left-skewed distribution with 60% of scores near the right between 650 and 799.

Once credit has been established and maintained, credit scores are based on five factors to varying degrees: payment history (35%), total amounts owed (30%), length of time (15%), type of credit (10%) and new credit (10%).The largest impact on credit scores is payment history and amount owed, which is why it is important to pay bills on time.Debt should be kept to a minimum and funds should be moved around as little as possible. It may be beneficial to leave all accounts open, even if they have a $0 balance.Different types of credit (ie. mix of credit cards, installment loans and fixed payments) can also be beneficial to a credit score.

However, too many installment loans can negatively affect credit.

Although time is a necessary factor for improving credit scores, this can be controlled by keeping the accounts that are opened during the same time period to a minimum.

By following these guidelines over an extended period of time, credit scores can be maintained and improved in order to improve the borrower’s loan potential and interest rate.

1. Payment History (35%)

It is essential to pay your credit bills on time. Every 30 days late, collection, judgment, or Bankruptcy significantly drops your score.

2. Amount You Owe Compared to Balances (30%)

Your available credit compared to the amount owed. It’s a good rule-of-thumb to be at 40% or less of the available balances

3. Length of Credit History (15%)

Easy rule-of-thumb: the longer your accounts are open, the more positive impact it will have on your overall credit score.  In fact, if you happen to have a card that is over 10 years old with even a little activity, it would probably be a bad idea to close that card.

4. Mix of Credit (10%)

Generally speaking, if you have loans, such as a car loan, as well as open credit cards, it helps prove to creditors that you have experience borrowing money.

5. New Credit Applications (10%)

There is a model that compensates for people shopping rates on home and car loans, but it can hurt your credit score to have multiple reports pulled in a short amount of time.

  • Age
  • Race
  • Sex
  • Employment History
  • Income
  • Marital Status
  • If you’ve been turned down for credit
  • Length of time at current address
  • Whether you own a home or rent
  • Information not contained in your credit report

Establishing Credit:

Several factors can be used to establish credit initially, including bank accounts, employment history, residence history and utility bills.

Although they are not reported directly to credit bureaus, bank account history is important to lenders for first time loans and should be kept in good standing.

While they are also not reported to credit bureaus, utility bills (such as electric, telephone, cable and water) can also show a lender the risk associated with a new borrower.

Credit may be initially established through a bank, in which a credit card is linked to a specific amount of money deposited in the bank.  If the credit card is not kept in good standing, the bank can then take the secured funds for payment.

Initial credit may also be established with a department store credit card (for example), but borrowers should beware of the high interest rates associated with these cards and pay off the balances in full.

8 Questions, Your Lender Should Answer

Simply checking online for today’s posted rate may not lead to your expected outcome due to the many factors that can cause each individual rate and closing cost scenario to fluctuate.

We can preach communication, service and education all day long, but it’s our ultimate goal to earn your trust so that you can be confident in our ability to successfully lead you through this complex mortgage process.

Since mortgage rates can change several times a day, the following questions will help determine whether or not your lender truly knows what to look for so that they can provide you with the best rate once you’re in a position of locking in your loan:

Mortgage interest rates are determined by the pricing of Mortgage Backed Securities or Mortgage Bonds. The media often implies mortgage rates are based off the 10-year Treasury Note, which is incorrect.

While the 10-year Treasury Note has been known to trend in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions.

Mortgage rates may change throughout the day, however they only change on days when the Bond markets are trading securities since mortgage rates are based on Mortgage Bond prices.

Think of a Mortgage Bond’s sales price similar to that of a Stock that trades up and down during the course of a day.

For example – let’s assume the FNMA 30-Year 4.50% coupon is selling for $100.50. The price is 50 basis points lower from the previous day’s closing price of $101.00.

In simple terms, the borrower would have to pay an additional .50% of their loan amount to have the same rate today that they could have locked in the previous day.

Mortgage Bonds are largely affected by various market forces that influence the changing demand for bonds within the market. Some of the key economic factors that have the greatest impact are unemployment percentages, inflationary fears, economic strength and the overall movement of money in and out of the markets.

Like stocks, most fluctuation is caused by consumer and investor emotions.

There are several great subscription based services available to monitor Mortgage Bond pricing.

The key is to make sure the lender is aware they should be monitoring Mortgage Bond pricing, such as the Fannie Mae 30-Year 4.50% coupon… and not the 10-Year Treasury Note or the news media.

It is a common misconception that when the Federal Reserve implements a rate cut it is immediately correlated to a reduction in mortgage rates.

The Federal Reserve policy influences short term rates known as the Fed Funds Rate (“FFR”). Lowering the FFR helps to stimulate the economy and increasing the FFR helps to slow the economy down. Effectively, cutting interest rates (FFR specifically) will cause the stock market to rally, driving money out of bonds and creating potential for inflation.

Mortgage Bond holders need to obtain a higher rate of return on their money if inflation is increasing, thus driving up mortgage rates. With the Federal Reserve Board meeting every six weeks, this is an important question to ask. If your lender does not have a firm understanding of this relationship, they may leave your rate unprotected costing you thousands of dollars over the life of your mortgage.

Conventional, FHA and VA loans can all carry different rates on a 30-Year fixed mortgage. FHA and VA loans are insured by the Federal Government in the event of defaults. Conventional mortgages are insured by private mortgage insurance companies, if insurance is required.

Typically, FHA and VA loans carry a lower rate because the investor views the government backing as less of a risk. While rates are usually different for each program, it may be more important to compare the monthly and overall cost during the life of the loan to determine which program best suits your needs.

An Adjustable Rate Mortgage (ARM) is usually fixed for a specific period of time. The period is typically 6 months, 1 year, 3 years, 5 years or 7 years. The shorter time period the rate is fixed, the lower the interest rate tends to be initially.

This is due to the borrower taking the future risk of increasing interest rates. The only instance where this would not be true is when there is an inverted yield curve where short-term rates are higher than long-term rates.

Mortgage interest rates are based on risk-based pricing. Risk-based pricing allows adjustments to par pricing for risk factors such as; FICO scores, Loan-to-Value percentages, property type (SFR, Condo, 2-4 Units), occupancy (Primary, Vacation or Investment) and mortgage type (Interest Only, Adjustable Rate etc).

This allows the investors who lend their money for mortgages to receive additional compensation for taking additional risk.

If the borrower encounters a financial hardship, are they more likely to make the payment on the home they live in or the one they rent out?

Mortgage Payments

Interest rates are impacted by a borrower’s credit score, loan term, mortgage program and a series of market factors that are outside of our control.

Unfortunately, many advertisers will tease a low interest rate in a marketing campaign for the purpose of creating interest in a specific loan program which may only fit a unique type of qualified borrower.

However, by promoting a lower note rate, with a higher APR, lenders are able to control the flow of the inbound phone call or Internet lead.

Understanding how interest rates work will certainly help relieve a lot of unnecessary anxiety about the home financing process.

While loan programs, credit scores and outside economic factors tend to control mortgage rates, borrowers do have the option of paying more up-front at the time of closing in the form of a discount point or loan origination fee in order to secure a lower interest rate.

Alternatively, borrowers currently have the option of taking a slightly higher rate in exchange for lower closing costs.  This particular rate / closing cost scenario is sometimes referred to as a “No Closing Cost Loan” option, or something similar.

Many people believe that interest rates are set by lenders, but the reality is that mortgage rates are largely determined by what is known as the Secondary Market.

The secondary market is comprised of investors who buy the loans made by banks, brokers, lenders, etc. and then either hold them for their earnings, or bundle them and sell them to other investors.

When the secondary market sells the bundles of mortgages, there are end investors who are willing to pay a certain price for those loans.

Inflation –

According to Wikipedia:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

As inflation increases, or as the expectation of future inflation increases, rates will push higher. The contrary is also true; when inflation declines, rates decrease. Famous economist Milton Friedman said “inflation is always and everywhere a monetary phenomenon.”

Public enemy #1 of all fixed income investments, inflation and the expectation of future inflation is a key indicator of how much investors will pay for mortgage bonds, and therefore how high or low current mortgage rates will be in the open market. When an investor buys a bond, they receive a fixed percentage of the value of that bond as ‘coupon’ payments. With MBS, an investor might buy a bond that pays 5%, which means for every $100 invested, they receive $5 in interest per year, usually divided up over 12 payments. For the buyer of a mortgage bond, that $5 coupon payment is worth more in the first year, because it can buy more today than it can in the future, due to inflation. When the markets read signals of increasing inflation, it tells bond investors that their future coupon payments will be less valuable by the time they receive them. So basically, this causes investors to demand higher rates for any new bonds they invest in.

The Federal Reserve –

As part of its 2008-2010 stimulus effort, the NY Fed spent almost all of its $1.25 trillion budget buying mortgage bonds. Many believe this strategy kept mortgage rates lower over a 15 month period. The lending environment significantly changed between 2008, when the Fed began its mortgage bond purchasing program, and early 2010 when the market was left to survive on its own.

When the MBS purchase program was announced in November 2008, mortgage bonds reacted immediately and dramatically. But at that time, there weren’t any investors willing to take a risk in buying mortgage bonds. The meltdown in the mortgage market and world economies lead many investors to shy away from the risks associated with MBS, which is why the Fed had to step in and basically assume the role as the sole investor of mortgage bonds. However, loan underwriting guidelines drastically tightened up by 2010, which may create a little more confidence in the mortgage bond market.

Unemployment –

Decreasing unemployment will suggest that mortgage rates will rise. Typically, higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices. For example, the unemployment rate in March 2010 was at 9.7%, just slightly below its highest mark in the current economic cycle.

Every month, the BLS releases the Nonfarm Payrolls (aka The Jobs Report) which tallies the number of jobs created or lost in the preceding month. The previous report indicated a loss of 36,000 jobs. Not necessarily a number that will move the needle on the unemployment gauge, but some economists suggest we need about 125,000 new jobs each month just to keep pace with population growth. So that negative 36,000 is more like negative 161,000 jobs short of an improving unemployment picture. One flaw to pay attention to with unemployment rates is that the method of surveying fails to capture part-time workers who desire full-time employment, discouraged job seekers who have taken time off from searching and other would-be workers who are not considered to be part of the labor force.

GDP –

GDP, or Gross Domestic Product, is a measure of the economic output of the country. High levels of GDP growth may signal increasing mortgage rates. The Federal Reserve slashes short-term rates when GDP slows to encourage people and businesses to borrow money. When GDP gets too hot, there might be too much money floating around, and inflation usually picks up. So high GDP ratings warn the market that interest rates will rise to keep inflation concerns in balance.

Spiking GDP with flat/increasing unemployment begs some questions. There are two major indicators that help provide more context:

1. Increases to worker productivity – employers are getting more work out of their current employees to avoid hiring new ones

2. Surges in inventory cycles – when the economy first started contracting, manufacturing slowed down to cut costs, and sales were made by liquidating inventory.

This is like a roller coaster cresting a hill, where one part of the train is going up, the other down. Eventually, the other side catches up, inventories are rebuilt by manufacturing more than is being sold. Both surges can throw off periodic reports of GDP.

Geopolitics –

Unforeseen events related to global conflict, political events, and natural disasters will tend to lower mortgage rates. Anything that the markets didn’t see coming causes uncertainty and panic. And when markets panic, money generally moves to stable investments (bonds), which brings rates lower. Mortgage bonds pick up some of that momentum. Acts of terrorism, tsunamis, earthquakes, and recent sovereign debt crises (Dubai, Greece) are all examples.

 Putting It All Together:

Economic data is reported daily, and some items have a greater tendency to be of concern to the market for mortgage rates. If you are involved in a real estate financing transaction, it’s helpful to be aware of these influences, or to rely upon the advice of a mortgage professional who is already dialed in.

Low rates with a high APR may or may not be the best deal.

Comparing apples to apples is the best way to determine which loan closing cost and rate scenario makes sense for your short and long-term financial goals.

Lower mortgage rates is a common misconception that is perpetuated by the mainstream media when the Fed makes an announcement of lowering rates.

However, when the Fed cuts interest rates, mortgage rates can actually increase.
Fed 101:

According to Wikipedia:

The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States.

This system was conceived by several of the world’s leading bankers in 1910 and enacted in 1913, with the passing of the Federal Reserve Act. The passing of the Federal Reserve Act was largely a response to prior financial panics and bank runs, the most severe of which being the Panic of 1907.

Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure has evolved. Events such as the Great Depression were some of the major factors leading to changes in the system.

Its duties today, according to official Federal Reserve documentation, fall into four general areas:

Conducting the nation’s monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system, and protect the credit rights of consumers.
Maintaining stability of the financial system and containing systemic risk that may arise in financial markets.

The Federal Reserve controls two key interest rates in this country:

1) The Federal Funds Rate

2) The Discount Rate

These are overnight lending rates used by banks when they lend money to each other. When these rates are low, money is cheaper for banks to borrow, and that “cheap” money spreads throughout the economy. The aim of the Federal Reserve in its interest rate policy is to either speed up or slow down the economy. In times of economic downturn, the Federal Reserve will cut rates to help create a boost. Conversely, in times of heavy inflation, the Fed will raise rates to help slow down the economy. That’s it; speed up or slow down….no tricks.

When the credit crisis began to spiral in 2007, the Fed cut rates dramatically in hopes of jump-starting the economy. The Fed keeping rates near zero is an indication that the economy is moving along at a steady pace. If the economy improves to the point where inflation starts to creep up the Fed will begin hiking rates.
The Fed and Mortgage Rates: Mortgage rates are tied to mortgage bonds, which are traded every day on the secondary market just like stocks. Bonds are often considered a safer investment than stocks since they yield a constant rate of return. During times of market turmoil, investors sell their stock holdings and move into bonds (called a “flight to safety” in financial jargon).

Conversely, when the economy is booming, investors move their money away from bonds and into stocks to take advantage of the upswing in the economy. Remember, The Fed cuts interest rates to boost the economy. When investors see this boost, they sell their bond holdings and move into stocks. This movement causes the rates on those bonds to increase naturally as the bonds have to attract new investors with higher rates of return.

As a result, we see mortgage rates increase. So, the next time you hear the Fed cutting interest rates, don’t assume mortgage rates will simply follow suit. The rate cut is simply meant to boost the economy, which moves money from bonds to stocks, and causes mortgage rates to rise.

Real Estate Appraisals

One of the most critical parts of getting a mortgage is the Appraisal. The purpose of an appraisal is to confirm the home value for the lender.
An appraisal is a professional estimate of the value of the property that you are planning to purchase.

According To Wikipedia:

Real estate appraisal, property valuation or land valuation is the practice of developing an opinion of the value of real property, usually its Market Value.

The need for appraisals arises from the heterogeneous nature of property as an investment class: no two properties are identical, and all properties differ from each other in their location – which is one of the most important determinants of their value.

So there cannot exist a centralized Walrasian auction setting for the trading of property assets, as there exists for trade in corporate stock. The absence of a market-based pricing mechanism determines the need for an expert appraisal/valuation of real estate/property.

If the appraiser’s opinion is based on Market Value, then it must also be based on the Highest and Best Use of the real property.

Refinance Process

Refinancing a mortgage is the process of acquiring a new loan to pay off an existing lender.

Calculating the Net Benefit of a Refinance –

Calculating the net benefit of refinancing can be a challenging task if you do not understand what to calculate. We are going to focus on the net benefits of refinancing from the standpoint of lowering your interest rate. Although there are several reasons to refinance, lowering your mortgage rate to save on interest payments over the term of the loan is the most popular.

Calculating the actual savings can be a tricky chore unless you know the difference between cash flow savings and interest savings.

Should I Get A Home Equity Line of Credit or Cash-Out Refi to Make Home Improvements? –

For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out refinance.

A Home Equity Loan is similar to the line of credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed. Both a Line and Loan would hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage.”

Since second mortgages are paid after the first lien holder in the case of default foreclosure or short sale, interest rates are higher in order to justify the risk. Fees, Interest Rate, and Timeline are the three main factors to consider which option to choose in order to pull equity out of a property.

Frequently Asked Questions:

Technically speaking, there are always costs involved with any mortgage transactions.  Appraisal, inspection, underwriting, prepaid taxes, insurance, interest….  the list can go on. However, there is a way to structure a closing cost and interest rate scenario that will decrease the amount of fees, or how a borrower pays them. Basically, the costs to produce the new mortgage are either financed into the loan amount, or covered by the lender in exchange for a slightly higher than market interest rate.

Deciding on the best option involves weighing the difference in cost up-front vs the increased monthly payment over a set period of time.

The rule-of-thumb is 8-12 months, but there may be exceptions.  It’s important to check with your lender at the time of initial application to make sure there aren’t any short-term penalties for refinancing within the first year.

Another thing to consider is the cost of refinancing.  If you’re watching the market and may want to lock in a lower rate in the near future, it may be more cost effective to pay a discount point for a lower rate vs paying for a full refinance a few months later.

Some people say ½%, 1% to never. Every mortgage is different.
You could just compare just the two payments if you wanted to find out your cash flow savings, but the current and proposed loans may have two different amortizations. Let’s say you have a 15 year mortgage currently and you are comparing to a 30 year mortgage.

If everything else is the same (interest rate, loan amount, etc) except for the amortization your interest savings per month would be $0 but, you are going to show a cash flow savings because of the longer amortization.

No, you may choose any company you wish to refinance your mortgage since the new loan will replace the old mortgage.
Sometimes your current company can reduce the documentation that is required, but this usually comes at increased costs and interest rate. Make sure that you check to make sure you’re getting the best deal.
No, you will have to qualify for your new refinance. However certain programs will allow for reduced documentation like the FHA to FHA Streamline.

Mortgage Closing Costs

in addition to the basic mortgage underwriting, processing and origination fees that are charged by a lender, there are several other costs associated with purchasing a new property. Since every player on your real estate home buying team has a stake in your transaction, it’s a good idea to know how to budget for their services.

Common Out of Pocket Expenses:

The items below are common to a Real Estate transaction and you may be required to pay for them up-front: *In most cases the estimated fees for each item have been purposely left out since each scenario is different.

Home Inspection-

This is usually money well spent since the inspector will evaluate many aspects of your new home to ensure all systems are functioning as they are intended to.

Condominium Questionnaire Fees-

This may be required by your lender, and can take up to 30 days to receive.  Fees can range anywhere from $0 to $300 depending on the complex.

Well and Septic Certifications-

If your new home has either of these systems you will want to be sure that they are functioning properly.

Survey-

This document outlines the borders of your property, and the price can vary depending on the size of the lot and if it was actually staked out.  A survey is not a requirement for all purchase transactions.

Appraisal

Depending on your state, loan size, property type, loan program and lender, the appraisal may be required to be paid for up-front by the borrower.  And, in some cases, more than one appraisal may be required, especially if the borrower is switching lenders and using conventional financing.

A typical purchase transaction will involve some, but not necessarily all of these services.  It’s important to discuss any other potential out of pocket expenses with your agent and loan officer, since some of these items may not be included on the initial Good Faith Estimate.

The important thing to realize is that the vendors providing these services will expect to get paid whether or not your transaction closes, and they may ask that you pay when services are rendered.

A combination of just a few of these fees could easily add up to over $1,000 so it is important to have the funds set aside at the start of the process.

Frequently Asked Questions:

An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.

For example, there may be a contingency period for appraisal, loan approval, property inspection or approval of HOA documents. In most cases, the Earnest Money held by the escrow company is credited towards the home buyer’s down payment and/or closing costs. *It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.

In most cases, the buyer is not responsible for covering the cost of their real estate agent. When a home owner hires a real estate agent to list, market and sell their property, they’re also (in most cases) agreeing to compensate the agent representing a buyer. A common myth is that a buyer will get a better price on a property if the seller doesn’t have to pay the typical 3% to a buyer’s agent. However, it’s more expensive to buy an overpriced property, not negotiating properly for the acceptable seller paid closing costs, overlooking important language in the purchase contract, missing potential commercial zoning updates on a nearby lot, or buying a home that has a lawsuit against the HOA.
Mortgage points are fees charged by the lender for services and/or a lower interest rate.

One Mortgage point is equal to one percent of the loan amount. For example, on a $100,000 mortgage $1,000 would be equal to one point. Understanding what points are and how they work can save you thousands of dollars on your mortgage. Borrowers can pay mortgage points to reduce the interest rate charged on their mortgage. The Borrower may also choose to raise the interest rate to reduce the closing costs. This is sometimes called buying up your interest rate. This buy-up strategy is used when the intentions of the borrower is to keep the mortgage for a short period of time. To decide whether or not to buy-up or buy-down your interest rate you must first calculate a breakeven point. The following formula can be used:

Cost of buy down / monthly savings = months to breakeven point. If you plan to keep the mortgage longer than the breakeven point then buying down points may be beneficial to you. For example: $1,000 cost to buy down rate / $100 savings per month = 10 months to breakeven In the above example if you plan to keep the mortgage for more than ten months (the breakeven point) you should buy-down the interest rate. In the above example if you kept the home for five years your savings would be $5,000.

Make sure you consider mortgage points in your strategy when getting a loan. It can save you thousands of dollars.

Yes, they may be tax deductible, but make sure to speak with your tax advisor.
Mortgage points usually are calculated in 1/8 increments. A good rule of thumb to follow on a 30 year fixed rate is for every .25% drop in interest rate it will cost you one mortgage point.
Yes, this strategy is usually used when the borrower is planning to keep the mortgage for a shorter period of time.

Closing Process

The home buying process is full of paperwork, important dates, contracts, market movements and checklists that can even overwhelm seasoned real estate investors.One of the main reasons to make sure you’re working with a professional real estate buying team is the fact that you get to lean on their combined experience to ensure a smooth and painless closing.Some agents and loan officers can close upwards of 20+ transactions a month.  Compared to the 5-7 homes an adult may purchase in his/her lifetime, you can obviously see where it helps to have a few trusted professionals in your corner.

Know The Mortgage Lingo At Closing

The closing process can be argued as the most critical part of a real estate transaction where the most amount of things can go extremely wrong.  This is where that professional team will really prove their value. If all of the initial questions, concerns, documents and contingencies were addressed early in the mortgage approval and home shopping process, then you should feel confident about walking into the closing with all bases covered. However, we’ve listed a few bullets, links and frequently asked questions on this page to help highlight a few important topics you may want to be aware of during the closing process.

Six Prior-To-Closing Conditions That Can Delay Your Escrow:

Even though your lender may have provided a Pre-Approval and/or Mortgage Commitment Letter, there may still be several conditions that could delay a closing. Sometimes buyers and agents let their guard down with the relief of getting closing documents to title, and they forget that there may still be a bunch of work to be done.

Prior-to-Closing conditions are items that an underwriter would require after reviewing your file, which could simply be an updated pay-stub, a letter of explanation of recent credit inquiries or more clarification on information found in a tax return.

Here is a list of a few Prior-to-Closing conditions you should be aware of:

You may have supplied your lender with a mountain of documentation, but make sure you continue to save all of your new paystubs and financial statements as you move through the process. Chances are your lender will want updated documents as you get closer to closing.
If you have had recent inquires on your credit report, a lender may check to see if any new credit has been extended that may not yet actually appear on your report.

An inquiry could be for something minor such as a new cell phone, but can also be something that will impact your ability to qualify for the loan such as a car payment or another loan that you co-signed to help out a family member.

Your lender will be making sure you are still actively employed in the position that is listed on your loan application, and they will do this more than once in the process.

So make sure regular life events, such as maternity leave or a scheduled surgery, have been brought to your loan officer’s attention ahead of time.

Once an underwriter starts to uncover surprises, they may hold a file up for a while to do a bunch of unnecessary digging to find out if there are any other issues that the borrower failed to mention.

Lenders will want to source where every dollar for the transaction is coming from and verify that it has been deposited into your bank account. If funds need to be liquidated from a retirement account or home equity line start the process sooner rather than later.

Sometimes lenders will not release all of the funds immediately after a large deposit so it is important to have these in place well ahead of your closing date. The same applies for Gift Funds-make sure the donor is aware of your time frame and is willing to supply the required documentation to your lender.

Typically, title and judgment searches are performed farther along in the mortgage process because they are not ordered until after you receive your mortgage commitment. These searches could reveal judgments against your name or the sellers along with liens against the property you are buying or selling.

Sometimes, even an old mortgage appears against the property since it was never properly discharged, or if you have a common name items could appear that are really not yours.

Either way, the underwriter and title company will want to be sure that these are cleared up before the closing.

Lenders want to review your policy several days prior to closing to make sure coverage is sufficient and accurately account for it in your monthly payment.

Insurance coverage can sometimes be difficult to obtain depending on your past history with claims, credit, location and type of the property.

Items to Bring to Closing Appointment:

Your real estate agent and/or mortgage loan officer should be providing you with a final list of documents that need signatures or updated verifications, so the general list of items needed at closing is quite basic:

If you are required to bring in a down payment and/or pay for closing costs to finalize the transaction, you’ll need to bring a certified check from a bank.  The escrow company, your agent and loan officer should provide you with a full breakdown of all fees / costs involved in the transaction. While these final numbers may be more accurate than the initial Good Faith Estimated which was provided at the beginning of the application process, there will still be a small buffer amount added by escrow to cover any prepaid interest or other minor changes.

If you don’t have to bring in any funds to close, then you might actually be getting a portion of the Earnest Money Deposit back. Keep in mind, it is important to make sure these funds to close come from the proper sources.

Official Drivers License or State ID card.  Passports will work as well.

Frequently Asked Questions:

The date of your closing is all about how you view the money being applied. Pay now or pay later, but it will always be collected. Let’s first look at how mortgage payments are broken down: When you pay your rent for the month, you are actually paying for the right to live in the house for the upcoming month.

However, your mortgage payment is broken into four separate components; principle, interest, taxes and insurance (PITI). The principle is paid towards the upcoming month, interest is paid towards the previous month and the taxes and insurance are deposited into an impound account. As far as closing on a particular day of the month to save money on interest payments, it depends on the type of loan program you are using.

If you’re more concerned about successfully closing with the least amount of stress, then early to mid month is usually the best time to close.

No, in fact FHA refinances should always close at the end of the month because you are responsible for the entire month’s interest.
Not really, however you can save a couple dollars by closing early in the month, just avoid closing on a Friday because you could be responsible for the interest on two loans over the weekend.

Home Buying Process

It’s obviously important to know how much home you can afford, what type of down payment to budget for, monthly mortgage payment as well as what type of loan program you’ll be using to finance the new property.

Certain mortgage loans have residence type, HOA, appraisal or insurance restrictions that your agent needs to be aware of prior to showing you listings. A personalized strategy session with a trusted mortgage professional should address all of your initial loan approval questions, as well as uncover any potential challenges that can complicate the entire transaction.

The home buying process has many steps, participating parties and potential challenges that can be overcome with the right team on your side.

Your agent, attorney, title company, insurance agent and lender all have important roles to play.

Buying a new home is literally a team sport since there are so many tasks, important timelines, documents and responsibilities that all need special care and attention.

Besides working with a professional team that you trust, it’s important that the individual players have the ability to effectively communicate and execute on important decisions together as well.

Assuming that you’ve already been given a mortgage approval and have a firm understanding of the type of property you are qualified to purchase, your agent will submit your purchase offer to a listing agent or seller.

Once you receive an accepted offer, the due-diligence period starts a series of timelines for final mortgage approval, appraisal, inspections and other requirements which would be spelled out in the terms of the contract.

It comes in from all angles at this point, lenders, processors, insurance agents, sellers, real estate agents…. and the list can go on.
A successful closing requires all of the team players to come together at the same time, with the same agenda, on the same date…. with numbers and figures that match.

Related Home Buying Process Articles:

Renting vs Buying

Buying a home versus renting is a big decision that takes careful consideration.

While there are several biased sources that can make arguments for or against owning a home, we’ve found that most home buyers base their ultimate decision on emotion.

Cost, Qualifying, Freedom, Maintenance and Security are some of the main reasons for renting, as well as owning.

Seven Things Your Agent Should Know About Your Approval

While many experienced real estate agents have a general understanding of the mortgage approval process, there are a few important details that frequently get overlooked which may cause a purchase to be delayed or denied.

New regulation, updated disclosures, appraisal guidelines, mortgage rate pricing premiums, credit score, secondary approval layering, rescission deadlines, property type, HOA insurance requirements, title and property flip rules are just a few of the daily changes that can have a serious impact on a borrower’s home loan financing.

Important Factors To Consider When Purchasing A Foreclosure or Short Sale

Short sales, foreclosures and new construction homes all have caveats that need to be considered when pursuing financing.

If the guidelines and potential pitfalls are not properly understood, you could face delays in closing or potentially even a denied loan.

Property Condition, Timing Challenges, New Construction Appraisal Process… are a few issues that your agent will need to have experience paying attention to in order to ensure a smooth mortgage funding and closing process.

First-Time Home Buyer Credit Checklist

Getting a new mortgage for a First-Time Home Buyer can be a little overwhelming with all of the important details, guidelines and potential speed bumps.

Since there are so many rules and steps to follow, we’ve put together a simple list of Do’s and Don’ts to keep in mind throughout the mortgage approval and closing process.

Consolidating credit cards, paying off collections and multiple inquiries on your credit report are a few things that could have a negative impact on an approval.

Frequently Asked Questions:

Simple economics is the rule of thumb here. Everyone wants to “buy low and sell high,” but the truth of the matter is there is no way that can happen for everyone, every time. Seller’s Market = More buyers than sellers Buyers Market = More sellers than buyers
The Earnest Money Deposit is credited back towards the buyer’s closing costs and/or down payment. Any additional funds are given back to the buyer from the escrow company.
Some mortgage programs require a borrower to get a home inspection if it is mentioned in the purchase contract. Either way, there are several reasons why it is important for a home buyer to have a licensed professional take a closer look at a property before the transaction is finalized.
A Home Owner Association may have the power to determine the color of your home, the number of pets you have and the type of grass you have to plant. They also may have the power to levy assessments, dues and fines. Or, they may be as simple as collecting a few dollars per year to make sure the grass is cut in the common areas.