Helpful tips for getting a mortgage
Obtain a gift letter
Many first-time homebuyers need help covering that 20% down payment necessary to qualify for a loan. Often times, a family member will cover a majority of this down payment. Be sure to obtain a gift letter from this family member stating that there is no obligation of repayment. This letter will only be used for underwriting purposes and will not get forwarded to the IRS. The letter can look something like this:
To whom it may concern,
I, Billy Bob, have given gift of $20,000 to my son, Joe Bob, for the purpose of purchasing the property located at:
123 Some Street
Some City, TN 54321
I certify that the above gift was given in good faith, and repayment of such gift is not required. The funds given to Joe Bob were not made available from any person or entity with an interest in the sale of the property, including the seller, real estate agent, broker, builder, loan officer or any entity associated with them.
Sincerely,
Billy Bob
[Sign and Date]
Good Faith Estimates
Good Faith Estimates (GFE) attempt to estimate all costs and fees you will incur on your loan. Many of these fees are applied by third parties and cannot be controlled by the lender, so do not be surprised if the fees quoted to you have changed by the time you close on your home. Lenders should always be up to date on the cost of theses fees and should be able to deliver a fairly accurate estimate. If a lender was referred to you, be sure to ask how accurate the GFE was to the actual loan at closing.
Points of interest
"Points" (aka. "Discount Points") in the world of lending are an up front fee paid in exchange for a lower interest rate. A point is usually equal to one percent of the total loan amount. For each point you pay upfront, your interest rate may drop by approximately one eighth of a percent (depending on the lender). For example, a single point on a $200,000 loan would cost $2,000. So lets assume this loan has an interest rate of 6% with no points. The lender might offer you the same loan at 5.875% plus one point or 5.75% plus two points. You would pay $2,000 or $4,000 respectively as an up front fee in excahnge for the lower rate.
More points are better, right?
It depends. It is important to remember that points are a fee: once it is paid, that money is gone. Points do not go towards the equity you own in your home, but rather are a "buy down" method for obtaining a lower interest rate. The down payment, on the other hand, is applied to the actual cost of your house and is something you get back when you sell your home. Generally speaking, points are good if you plan on owning the house for a long time or if you need an immediate tax deduction.
Campare loans by APR
When shopping for a loan, be sure to compare the Annual Percentage Rate (APR) offered by different lenders. The APR includes all interest, points, and fees wrapped into one single rate representing the yearly cost of the loan. Lenders are required to provide you with all fees and costs used to determine the APR. When comparing the loans from multiple lenders, choose the loan with the lowest APR.
Bi-weekly Payments
Ask your lender if he accepts bi-weekly payments (paid every two weeks). If so, make sure the payment is applied immediately, as opposed to being held until the end of the month. Bi-weekly payments are equal to half of your monthly payment, but instead of making 12 monthly payments a year, you make 26 bi-weekly payments a year. In essence, you are making an extra months payment every year, resulting in your loan being paid off at an accelerated rate. This type of payment schedule can save you tens of thousands of dollars over the life of your loan. Use our calculator to see for yourself!
HUD-1 Settlement Form
The Department of Housing and Urban Development (HUD) Settlement Form 1 itemizes all funds and fees associated with a real estate transaction. The HUD-1 form is required by Real Estate Settlement Procedures Act (RESPA) for all standard real estate transactions within the United States, and both parties in a transaction are entitled to a copy of this form at least one day before closing. Be sure read and re-read this form carefully. Make sure everything adds up and is in line with your sales contract! The more people who review the HUD form, the more likely an error will be found.
Yield Spread Premium
The Yield Spread Premium (YSP) can be very confusing, but it is worth the time it takes to understand. YSP is a cash payment made by a lender to a broker for a higher interest rate (higher than the market rate) on a loan. It is esentially a fee paid to the broker for quoting a higher rate to the lender. In theory, this higher rate is used to reduce the closing costs to a borrower, which can be a good thing for many people. But in practice, these fees can easily find their way into the pockets of greedy brokers. A full explanation of YSP is beyond the scope of this page. Take some time to research YSP so that you don't get caught paying more than you should.
Lock down your rate
When shopping around for a loan, be sure to ask your lender to lock in the rate quoted to you. Some lenders will quote you a great rate, and then all of the sudden rates will go up across the nation. When you go to actually get the loan, you may be surprised to find that the rate is higher than what was originally quoted to you. If you expect rates to drop before you actually get the loan, you might take a chance by not locking in the quoted rate.