Real Estate Help Library Getting a Loan Buying

Important Notes:

I am not a lender, financial advisor, or lawyer, and this article is not intended to be anything other than an overview of basic financing, where to find lenders, the pros and cons of each, and what kinds of documents you’ll need to prepare ahead of time.

Types of Loans

Conventional

These are the kinds of loans you typically think when you think of getting a mortgage. They are even called conventional as they are the most common sort of financing. If you walk into your bank, credit union, or mortgage broker’s office to get a loan, these are typically going to be conventional loans. Most commonly they are 15 or 30 year fixed rate interest loans, although they do offer some other types of loans such as Adjustable Rates and Bridge Loans.

Increasingly, people are turning to online lenders to finance the transaction. Although we always encourage everyone to shop around to find a good rate and someone who will be attentive to their transaction, we want to turn your attention to 2 provisions in the purchase contract that are unique to Arizona:

Section 2a, line 69 says ” an AAR Pre-Qualification is attached” so the lender will need to provide this document that is specific to Arizona (and available on AAR’s public website https://www.aaronline.com/manage-risk/sample-forms/residential-resale-transaction-forms/)

And also section 2e lines 87-89

“Buyer shall deliver to seller the LSU (loan status update) within 10 days of contract acceptance and upon seller request”

This document is also available on AAR public website ( go here and click “Loan Status Update (fillable)) so, if the lender is out of state, you will need to provide it to them and have them fill it out about 10 days after the contract is begun. Although rarely a big issue, the seller can send a cure  notice over this item if not delivered.

For these reasons, if using an out of state lender, please make them aware of these provisions ahead of time and if they are unable or unwilling to agree with the purchase contract provisions, we recommend using a different lender.

Government backed

FHA loans are loans backed by the federal government. FHA does not actually issue these loans, instead they insure them so that banks are more willing to lend to people that may not meet income and credit criteria of traditional loans. These programs are designed to help increase the base of home-ownership and encourage lenders to finance more Americans. There are maximum loan amounts that are not the same as conventional loans. Generally, they carry lower down payment and income requirements.

They do, however, carry some extra fees, such as

Upfront Mortgage Insurance Premium: You will need to pay a base price of the home upfront

Mortgage Insurance Premium: an annual fee that is divided monthly and added to your monthly mortgage payment. You keep paying this fee until the LTV (loan to value) is less than 80%.

VA Loans

Veterans Administration loans are for veterans who have served active duty (90 days consecutive in wartime or 180 days consecutive in peacetime.

VA loans typically have excellent rates and allow up to 100% LTV ratios. The homes must be move-in ready (i.e. not fixer-uppers) and will be used as primary residence (not investment properties).

They also have strict requirements that the sellers must pay most of the closing costs.

What do I need to get a loan?

In order to apply for a loan to buy a home in Arizona, you generally need just a form of identification and you can start filling out  a loan application. However, you will need to gather certain items that they will be asking for after the initial approval to have ready for when the lender asks for them. These items will include, but are not limited to:

  • Pay stubs for at least 12 months
  • Mortgage or rent payments
  • Tax returns
  • Credit card statements
  • Bank statements
  • Investments

Generally speaking, you will need to prove all the information you enter on the loan application, such as where your income is coming from, where it is going (they will need to verify your debt: income ratio), where your down payment is coming from, your legal presence in the United States, and whether or not you will be using the home as your primary residence.

What happens after you apply?

Once the loan application is filled out, the bank will provide you with a Pre-Qualification based on the information you have entered. The accuracy of this is only as good as the information you have put into it. For that reason, it is best for all parties involved to be as truthful and as accurate as possible when you are filling out an application. Nobody wants the deal to fall apart at the last minute!

How Much Mortgage Payment Do You Want?

After you have a pre-qualification, you can start making offers on homes that are within the budget set by the pre-qualification. Banks will generally not give you an “upper limit” (nor should they), rather they will ask you what price home you are looking at, and qualify you based on your stated income and debt repayments.

If you want to know how much home you can afford, please read this article on Zero-based budgeting, which will help you calculate how much you earn, how much you spend, and based on that information, how much you will be able to fit in your budget for a house payment. You should do that although the federal limits on debt:income ratios were abolished, most banks still have guidelines that cap your debt:income at around 45%.

To calculate this before going to a bank follow the following formula:

Debts

Write down all your debts, including:

  • Car loans
  • Student loans
  • Credit card minimum repayments
  • Child support
  • Phone/ Cable Bills
  • Any other debt that reports to credit reporting agencies

And add all of them together. If you only pay yearly, divide the number by 12 to get a monthly amount for all debts combined. Don’t include rent, as this will be going away presumably when you buy the house and replaced by your mortgage payment.

Let’s say your total debts/ month are $1000.

 

Income

Write down all your income sources including:

  • W-2 jobs (normal employment)
  • Side jobs (independent contractor/ gig jobs)
  • Investments
  • Rent repayments (if you have rental properties)
  • Any other verifiable income

And add all those together. If they are irregular, be prepared to show 3-6 months of verifiable, regular income, and also be prepared for banks to err on the low side of those months. They want to know you can make your payment every month!

Let’s say all your income every month is $6000.

 

Take your debt, and divide by your income.

Your current debt ($1000) divided by your current income ($6000) is ~17%.

 

If you want to know the max banks will lend at (which is not recomended to max out but still good to know) figure out your total payment at 45% DTI.

Your current income ($6000) x 0.45= $2700/ month.

Max debt ($2700) – current debt ($1000)= $ 1700 left in budget. That means that $1700 must be your PITI

What is PITI

Principal and Interest: This is the amount you pay every month to mortgage company. Every month you pay the same amount, and initially you pay mostly interest, and over time, you pay more and more principal.

Tax: This is primarily county and any other special assessments levied against the property. This data is public and can be found on the County Assessor’s website, or your agent will provide it for every property. Typically between 1-2% of the homes value, paid 2x/ year. However, most banks will collect this amount monthly, and pay your taxes for you.

Insurance: All mortgaged properties are required to have homeowner’s insurance. This protects both you and the bank in case of a catastrophic event to the property. The banks require it because they need the property to collateralize the loan. If the home burns down, you aren’t likely to make payments, and they have nothing to foreclose on! Other types of insurance vary based on where the property is located, such as flood insurance if the property is in a flood plain.

Closing Costs/ Origination Fees

If the purchase price of the home is $200,000, you will usually need slightly more than that to actually close the property. We go over closing costs in detail in this article, but here is an outline of other typical closing costs you can expect.

Lender Fees

These fees are paid to the lender essentially for making the loan. If you have not asked for any assistance in closing costs in the seller concessions, you will be responsible for all these fees. These fees vary from lender to lender, and you should ask the bank to tell you up front what the closing costs are going to be. They will not be able to give you an exact number, but they will be close. The fees include

  • origination fees
  • appraisal fees
  • credit report fees
  • underwriting fees
  • prepaid mortgage insurance
  • points payments if you are buying down your rate
  • homeowner’s insurance (they always collect 15 months)

Title/ Escrow Fees

These fees are paid to the title/ escrow company. Some go to the company themselves, and other to county and various recording fees. Unless otherwise specified in the purchase contract as seller concessions to closing cost assistance, they are paid by the buyer on top of the purchase price of the home. They include:

  • Title Insurance- paid by seller according to AZ law
  • Lender’s policy- usually required for financed offers
  • Environmental protection fees
  • Escrow fees (usually split evenly between buyer and seller)
  • Closing protection letter
  • Recording fee (split between buyer and seller)

Other fees

These will be whatever remaining fees are left to be paid. They include

  • HOA Fees (whether prepaid or prorated)
  • HOA transfer fees (split according to HOA Addendum)
  • Special Assessments (split according to purchase contract or HOA addendum)
  • HOA Disclosure fees (paid by seller according to AZ law)
  • Any other fees not covered by one of the other sections

Comparing Loans

When looking at multiple loans, it can be difficult to compare the loans to each other. They have different rates and fees, and then there’s something called APR.

APR: Stands for Annualized Percentage Rate. By federal law this must be included on the closing disclosure and some other documents the bank is required to provide for a mortgage. What this means is they take all the financing charges, add them up and divide them by a certain number of years (usually the first 10 of the loan) to arrive at an Annualized Percentage Rate. This number can be compared between companies to help you decide what is the best long-term solution for yourself.

Summary

Once you know how much you can (or want) to budget for a home, then it is time to explore your options for mortgages listed in this article and elsewhere on the site. We don’t endorse any particular lender or option, and encourage you to explore all your options before committing to an particular lender!

You should definitely find out, before making an offer, how much cash you will actually need to close th deal. On top of your down payment, you will need to pay the fees listed above, especially if you are financing the offer. If you are short on cash, you can always ask for seller concessions to help cover the costs, but this will make your offer less desirable since it obviously just means less cash in the seller’s pocket and they are paying to help you finance your own loan.

Once you’ve chosen a property to make an offer on, you should be able to get from your agent a fairly accurate assessment of how much you will actually need to close. The agent will be able to contact title to put together an estimate of closing costs, and the bank should be able to give a good estimate of origination fees, getting you to within a few hundred dollars of the total.

Good Luck and Happy Buying!

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