The Mortgage and What you Need to Do to Prepare for a Loan

	The Mortgage and What You Need to do to Prepare for a Loan

		A Mortgage is a method of using property as security for the payment of a loan; a mortgage is, in effect, a lien attached to the property. Typically, loan documents describe the amount being loaned, at what interest rate, and repayment terms. The mortgage pledges the property as security in case of default and describes the process that will be used to foreclose on the property if you stop paying the interest and principal as described in the loan documents. Your payments to the mortgage company will contain principal and interest as described in the loan documents, and may also contain payments towards taxes and insurance that will be deposited into an escrow account -- the mortgage company may pay your taxes and insurance from this escrow amount.
	Qualifying for a Mortgage In general, all lenders look at basically the same things when deciding whether to approve a loan. To help in the decision to loan, lenders will look at four basic areas: Capacity - Income Your capability to repay the loan is represented by your total income derived from your primary job, second job, overtime, commission, bonuses, benefit payments, etc. To be counted, you will need to show income at these levels for at least two years, and that you are likely to continue receiving the same income. Character - Credit History Credit history is important under the assumption that past history is a good predictor of the future. Your credit score, which represents a prediction of both your willingness and ability to repay the loan, is very important. Most lenders will expect that your most recent 12-month credit history show no more than two late payments. They will also expect you to pay off all judgments and collections that show on the report. If you do not have a credit history, many lenders will allow you to show canceled checks and paid receipts to provide documentation that you pay obligations on time. Capital - Savings A lender will want to see that you have the assets and capital to fulfill current obligations as well as the new mortgage. You should have enough in savings to fund your down payment, and several months in reserve to cover anticipated monthly mortgage payments. Collateral - Property A lender will examine the property you will be purchasing with the loan because it will be serving as collateral for the loan. The lender will require an appraisal to verify the value of the property in comparison with similar properties sold in the area.
		Qualifying Ratios Many loan program are 29/41% which means your mortgage payments may not exceed 29% of your gross monthly income and your total debt payments (including the proposed mortgage) may not exceed 41% of your gross monthly income. Most mortgages are bundled with other loans (collateralized) and sold on the secondary mortgage market to pension funds, insurance companies, or other institutional investors in the form of mortgage backed securities. These institutional investors, as well as agencies that guarantee residential loans such as Ginnie Mae (VA, FHA) , Freddie Mac, or Fannie Mae, will each have different requirements for borrowers, such as minimum credit rating, minimum asset ratio, minimum income ratios, etc.
	Insurance There are several different types of insurance associated with the purchase of properties. Hazard Insurance - protects against financial loss on property as a result of fire, wind, or other natural disasters. Lenders will require Hazard Insurance to protect their collateral, the property being purchased. Flood Insurance - Many insurers in the US do not provide flood insurance in accordance to the risk factors established in some portions of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort. The US Geological Survey has identified areas of the country that are prone to flood and a flood certificate may be required by the lender to verify whether the property is in a flood plain. Mortgage Insurance - protects the lender against financial loss of the borrower fails to repay the loan, and is usually required when the down payment is less than 20% of the homes purchase price. Private Mortgage Insurance (PMI) associated with conventional loans Mortgage Insurance Premium (MIP) associated with FHA/HUD loand Funding Fee is associated with VA loans	.
		Participants in a Mortgage Creditor (mortgagee, lender, primary servicer) provided the funds to make the loan secured by the mortgage; the lender will provide documents to the Title and Abstract company performing the closing for signature as well as wire funds to the closer's escrow account -- a delay in the receipt of either may delay closing. Debtor (mortgagor, borrower, obligor) received the money from the loan, who must meet the conditions of the mortgage or run the risk of foreclosure Typical employees of the Abstract and Title company that acts as an intermediary receiving and disbursing funds and securing signatures on appropriate documents: Abstractor - the person who brings the Abstract up to date for the seller Attorney - the person who provides an opinion that the buyer can receive clear title to the land, Conveyancer - the person responsible for the legal work required to transfer title from buyer to seller and recording the mortgage. Closer - the person who coordinates the closing process, making sure the appropriate disclosures are made, the proper documents are signed, and disburses funds to the appropriate parties.
	Mortgage Broker vs. Mortgage Banker A Mortgage Broker acts as an intermediary who sources mortgage loans on behalf of individuals or businesses. A Mortgage broker is typically a non-bank financial institution. The primary source of revenue for the broker is the origination fee. A mortgage broker may not have resources to immediately fund a loan at closing. A Mortgage Bank specializes in originating and/or servicing mortgage loans, and will have a loan officer that works directly for the bank (the source of funds). Mortgage banks are typically affiliates of commercial banks that are regulated by one or more federal agencies such as Federal Deposit Insurance Corporation (FDIC) , Federal Reserve, or Comptroller of the Currency, Office of Thrift Supervision, or the National Credit Union Administration. Commercial banks accept deposits and have those deposits insured by the FDIC up to $100,000. The primary sources of revenue for the bank are origination fees and loan servicing fees. Loans may be funded at closing from internal resources (the loan is said to be warehoused until enough loans have been bundled to be sold on the secondary market) These resources may be in the form of invested capital or from short-term loans obtained from the Commercial Paper Market. Banks also have the option of tapping the Federal Funds from the Federal Reserve. Both the mortgage broker and the mortgage bank will ultimately sell their loans on the secondary mortgage market. Residential loans are said to be "conforming" if they meet the requirements of being guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, among the requirements being a limit of $417,000 for single-family. Non-conforming loans (also called "conventional" loans) are loans that are either residential loans that are not guaranteed or are commercial loans sold as Commercial Mortgage Backed Securities.
		The early January 2008 announcement that Bank of America would purchase Countrywide (the country's largest mortgage lender) signaled a landmark in the country's attempt to come to grips with the sub-prime lending problems. Originally a national bank that recently converted its charter to a federal thrift, the problems at Countrywide surfaced when the it became apparent that of Countrywide's $32.47 billion in home-equity loans, $26.84 billion were adjustable rate mortgages. Additionally, $10 billion in loans on the books were sub-prime and not insurable by Fannie Mae, Freddie Mac or Ginnie Mae. Foreclosures at Countrywide doubled to 1.44% of unpaid principal in December from 0.7% a year earlier, and overdue loans increased to 7.2% from 4.6%. Bank of America is offering the equivalent of $4 billion in an all stock transaction (through options and preferred stock they already own the equivalent of 16% of the company on a fully diluted basis.) Book value for Countrywide is close to $12 billion. Federal approval will need to be obtained for the merger because Bank of America already controls an estimated 9.88% of total banking deposits, federal law currently limits a bank to owning a maximum of 10% of national mergers after a merger. The loophole is that thrifts are not counted in the 10%. In March of 2007, Countrywide converted its charger from a bank to a federal thrift. Sources: Damian Paletta, Valerie Bauerlein & James R. Hagerty, "Countrywide Seeks Rescue Deal" Wall Street Journal, 1-11-08, p A1 Valerie Bauerlein & James R. Hagerty, "Behind Bank of America's Big Gamble" Wall Street Journal, 1-12-08 p A1
	Source: Some information for this page was derived by documents developed by Wells Fargo Home Mortgage and its affiliate in Oklahoma, Santa Fe Mortgage.