PREPARING
A LOAN APPLICATION
Bring
income and credit records from your old country;
also balance sheets from your foreign business.
If you have projections for your U.S. business,
include them. If you are on a job, get a letter
of employment from your employer. Obviously,
you will be in a far better position to qualify
for a loan if you have already filed U.S. tax
returns and have established a credit history
in the U.S.A. As mentioned above, lenders may
require a larger down payment and/or charge more
points if you do not have proof of income and
an existing credit rating. Remember, everything
is negotiable in the United States, so be creative
in preparing your loan application. If you do
not have the standard documents that a lender
requests to consider a loan, give the lender reasons
why you will not default on the loan. These reasons
may include projections for your start-up business,
your profession and your reputation for integrity
in your former country.
Please
refer to the Credit
Section of EasywayUSA
for information on how lenders assess and grade
your credit worthiness.
THE
SALES TRANSACTION
A real
estate salesperson can give you “comps”
(comparable prices of housing in an area). This
is based upon square footage, number of bedrooms,
age of home, extras, etc.
The
price is not the only factor that is negotiable
in a sale. The seller may be motivated to provide
you with a second mortgage just to sell the property.
The seller’s and buyer’s real estate
brokers may also be prepared to negotiate their
commissions to get the sale.
THE
DOWN PAYMENT
Most
lenders expect a down payment of 5%, 10% or 20%
of the sale price of a home. As a newcomer without
a credit record, it is unlikely that you will
pay less than 20% of the purchase price. If your
down payment is less than 20% of the appraised
value or sale price, you must arrange private
mortgage insurance (PMI) with your lender. You
will then be able to obtain a mortgage with a
lower down payment because your lender is now
protected against any default on the loan.
PMI charges
vary but are usually about one-half of 1% of the
loan and are paid in monthly installments until
20% of the principal is paid. Some lenders require
PMI throughout the life of the loan, especially
in the case of high-risk borrowers. However,
some lenders will waive the PMI requirement if
the buyer agrees to a higher interest rate. This
may be preferable since the interest is tax-deductible
and PMI payments are not.
THREE
TYPES OF LOANS
In many
countries the government regulates what a lender
can charge a borrower on a home loan. This is
not the case in the United States, where lenders
and borrowers are able to negotiate their own
terms. This competition ensures that the consumer
will be getting the best possible deal from the
market place.
Virtually
all lenders require you to pay points to buy a
loan. One point is 1% of the loan. When seeking
a loan do not be discouraged if you are refused
by a couple of lenders. Different lenders have
different requirements.
There
are three main types of loans available for purchasing
a home:
- Adjustable Rate Mortgages
- Fixed Mortgages
- Convertible Mortgages
ADJUSTABLE
RATE MORTGAGES (ARM)
The
Adjustable Rate Mortgage (ARM) is where the interest
rate and monthly repayments will fluctuate
over the term of the loan.
Understanding
the ARM
The
Index
Most people are familiar with the term "Prime
Overdraft Rate". It is the rate of interest
which banks will lend money to their most favored
clients, usually large corporations. The Prime
Overdraft Rate is an example of an index.
(In ARM loans there are different published indices
that lenders use.) The index will fluctuate over
the life of a loan.
The
Margin
The lender will chage a certain percentage above
the indexing. This is known as the margin.
While the index is a variable factor, the margin,
on the other hand, is a constant. It never changes.
If one borrows money based on an index rate of
8%, with a margin of 2%, the person will start
paying interest at 10%.
The
Cap
The
possibility of the interest rate increasing or
decreasing dramatically is risky to both the lender
and the borrower. So the loan may have a cap.
The cap is the maximum percentage that the loan
may increase or decrease per year or over the
term of the loan. If, for example, there were
a 5% cap, the rate could not increase above 15%
nor go below 5% over the period of the loan or
each year. (There is a big difference between
an annual cap and the term of a loan cap.) The
loan may be fixed at a minimum interest rate but
may be allowed to vary upwards, if the index moves
upwards.
There
may also be a cap on the monthly repayments,
but that could cause your loan debt to increase,
if the installment cap is less than the interest
cap. This results in negative amortization.
Negative
Amortization
This situation may suit someone during the initial
stages of their move to the United States giving
them greater liquidity while the appreciation
in the value of the house will take care of any
negative amortization. On the other hand, a borrower
may wish to avoid increasing the debt over the
life of the loan.
The
Adjustment Interval is how often the rate
of interest will be adjusted during the life of
the loan. The first adjustment may be five months
or three years after the first installment of
the loan repayment. Then, it may be adjusted
once or twice a year.
 If you choose to finance your house purchase through
an Adjustable Rate Mortgage, it is essential that
you compare the different programs that are available
from various lenders. Click
here for a comparison chart that you can use
when making inquiries from different lenders.
Lenders have so many variables in their
loans that it is often difficult to compare.
By creating different loans with different terms
(the points, index, margin, cap and period of
adjustment), it requires careful consideration
to choose the best loan for your needs.
An
Adjustable Rate Mortgage is desirable if interest
rates are dropping because the borrower gets the
benefit of reduced interest rates. On the other
hand if interest rates continue to climb, the
rate of interest on an Adjustable Rate Mortgage
will also continue to climb.
ADJUSTABLE
RATE MORTGAGE (A.R.M.)
COMPARISON CHART
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Name
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Index
Fluctuation
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Margin
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Cap or
Ceiling
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Points
charged to obtain loan
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Remarks
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High
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Low
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Term
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The interest
rate on fixed loans is locked in when obtaining
the mortgage and will remain the same for the
life of the loan.
The
30-year fixed rate is a standard
type of loan. Payments spread out over a 30 year
period will be less than on a shorter-term loan.
You will end up paying more interest, but this
interest is 100% tax-deductible.
The
15-year fixed rate is also popular
because you are paying a lower interest rate,
typically one-quarter to one-half % lower than
on a 30-year fixed mortgage. You will have higher
monthly payments but a smaller portion of your
monthly payment will be tax-deductible since less
will be applied to interest.
The
benefit of a fixed rate mortgage is that you know
at the outset what your monthly payments are going
to be over the entire duration of the loan. If
interest rates increase, the interest rate on
the home remains the same. The disadvantage is
that if interest rates drop, the borrower does
not receive the benefit of a lower interest rate.
Obviously one can refinance the loan, but this
involves the borrower in additional costs.
This
is a loan that starts off as an adjustable rate
mortgage, but enables the borrower at a later
stage to convert it to a fixed rate loan. Some
lenders require a fee for this conversion while
others do not.
Points
A point equals 1% of a mortgage loan. Lenders
charge points as a way to make a profit. Borrowers
pay discount
points to reduce the loan interest rate.
Within limits, points are usually tax deductible.
In addition to the down payment on the property,
you will also pay points to buy the loan.
Closing
Costs
Closing costs are the charges to transfer the
property from the seller to the buyer and to register
the mortgage in the lender’s name. You need
to have enough cash to cover these costs in addition
to your down payment.
ESCROW
The
term “Escrow” is a new term to many
newcomers to the United States. Escrow is the
process whereby the money is paid to the seller,
the property is transferred to the buyer, and
the mortgage is registered. This process is done
by an independent agent. In many eastern states
in the United States attorneys attend to the escrow.
On the West Coast, this process is usually done
by escrow companies. The escrow process also
occurs when a business is sold and transferred.
DEEDS
OF TRUST
In
certain states, the mortgage is referred to as
a deed of trust. It is basically the same as
a mortgage: you owe money and the lender has the
right to your property if you default in payment.
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