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A: Why use a Connecticut Mortgage Broker?
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1. What Can You Afford
How does the process work when applying for a CT mortgage?
When you decide to buy a property for the first time or when you make a decision to ‘trade up’, one of the first questions you are probably asking yourself is ‘how much can I afford to borrow?’.
Before finding a realtor, the first thing you will need to do is to get pre-qualified or pre-approved. The process of deciding how much you can afford to spend and becoming pre-qualified are linked together. We can help you with this question by asking you for some basic information about your finances and circumstances and completing a standard loan application form for you. After we have made some credit enquiries, based on the information you have provided to us, we will be able to advise you on the amount of money you can comfortably borrow and the maximum amount above which you will have difficulty in getting a loan.
Pre-qualified relates to the amount of money we as CT mortgage brokers indicate that you can comfortably borrow. Pre-approved is when we have arranged for a CT mortgage lender to actually lend you up to a maximum amount subject to certain conditions. Those conditions usually require that you provide evidence of your earnings and financial assets, savings etc, as stated on the application form and that the property you are buying is at least worth the amount you are paying for it.
Lets just say a little more about how much you can afford to borrow, as it’s important. Many borrowers are consumed by the quest to gain the lowest possible interest rate as determined by the constant advertising of CT mortgage rates in the media around them. But these advertised rates are referred to as ‘teaser’ rates by we CT mortgage bankers. Only about ten per cent of the population of America are eligible for these rates. That’s not because these are the only people with a credit score good enough to qualify for those rates, it’s because the equation is far more complicated than that, too complicated for advertising.
The Uniform Residential Loan Application, a standard application form used across the whole of America, is one of the best ways to evaluate your financial position and to determine your likely borrowing ability and resultant interest rates. It’s about more than just your credit score, it’s about how often you have been late in making payments in the recent past and what type of payment you were late in making. Missing a CT mortgage payment is more serious than missing a store card payment, at least to a CT mortgage banker.
The purpose of reviewing your credit history is simply to predict your ability and willingness to make timely payments on a Connecticut home loan. The guidelines call for a review of your last seven years of credit history for major defaults (derogatories) and the past two years for minor defaults. When we complete these Connecticut home loan applications we will ask you for an explanation to any defaults and for any related documentation you may have. We may need to present a written explanation to the potential lender to support your application for a Connecticut home loan.
You may have a foreclosure or bankruptcy in your past but provided your credit has been good since that event, we still have lenders that are prepared to accept your application, again with supporting documentation.
Credit scores range from 300 to 850 and the underwriter determines that the higher your score, the less likely you are to be late in making payments under the loan. Your credit score is only used to determine if you are likely to be late on your payments, up to 90 days in fact, it is not a guide as to whether you will default under the loan.
The interest rate you pay on a CT mortgage is also determined by how much you will be borrowing in relation to the total value of the property. If you are a first time buyer, it is not really practical in today’s Connecticut market, to try to save up the standard 20% down payment. The amount you would need to save would be too high in most cases and in recent years Connecticut property prices have been rising faster than anyone can reasonably be expected to save, especially if you are already paying rent. We have many ways to help first time buyers purchase their first Connecticut home, many with Connecticut home loans of up to 100% of the purchase price, using methods which do not require expensive non-tax deductible Private CT Mortgage Insurance (PMI).
Conventional lending history has required that a buyer make at least a 20% down payment and finance up to 80% of the value of the home. With less that 20% of your own money in the home, you represent a higher risk to the lender. So the lender can demand that you purchase PMI, an insurance policy that will protect the lender against loss in case of foreclosure. This insurance is expensive and generally the lower the percentage of down payment the higher the insurance premium factor. It can also be a problem to terminate this insurance once your home appreciates in value such that the original CT mortgage is no-longer greater than 80% of the home’s current value. An alternative is to use two CT mortgages at the same time (sometimes called a piggy-back loan) with the second CT mortgage attracting a higher rate of interest in recognition of the higher risk to the lender. This second loan can often be switched to a lower interest rate Connecticut home equity loan after a short period of time, depending on the lender and any early repayment penalties. In any event, it is psychologically easier to pay down a smaller loan more quickly as one can see the reduction in principal more easily.
The amount of savings that you have will need to be taken into consideration as this will effect your borrowing ability. Even if you are hoping to arrange a 100% CT mortgage, you will still need funds to cover the closing costs. You can often get help with your closing costs from the seller by agreeing a ‘seller’s contribution’. This contribution can be six per cent of the total purchase price of a single family home for some lenders.
The type of home you are purchasing will also effect you borrowing ability and your interest rate. Single family homes typically attract lower rates of interest and higher LTVs (lower down payments) than do multi-family homes for example.
The value of a property is defined as being the lower of two numbers. It is either the amount you have agreed to pay for the property or the appraised value of the property, whichever is the lesser. It may be nice to get an appraisal which is higher than your purchase price but it will not help you to be able to borrow more money on that home, not once the property has been advertised for sale or you have agreed a purchase price.
Your resultant interest rate is also determined by how much of your total gross income (before tax) will be needed to make repayments on all your debts, including your CT mortgage. CT mortgage lenders do not like you to exceed 50% of your total gross income in servicing these debts. Borrower’s who stay around 36% will often get more favorable interest rates, usually half a per cent less, because ‘conforming’ CT mortgages can easily be traded in the secondary market.
There can be compensating factors when you are asking for a Connecticut home loan with monthly repayments that would exceed the maximum allowed percentage of gross income. You may be prepared to make a larger down payment or show that you can afford to commit a greater amount of income for housing expense. You may be able to show a potential for increased earnings due to advanced education or on-the-job training. Some of our borrowers have a high net worth showing that they have the ability to pay off the loan. Perhaps you have child support payments that will end in a few years but whatever the compensating factors, we can help you to document these on your application.
A conforming CT mortgage is a CT mortgage that can be sold in the secondary market to Fannie Mae or Freddie Mac. It is a CT mortgage that is for less than $333,700, on a property that is 100% residential. The borrower must be an individual, not a corporation, trust, church or other similar entity. The borrower’s employment must generally reflect two years in the borrower’s field of work for the income to be counted. Down payments must be verified if it represents 2% or more of the purchase price. There are many other regulations and rules for conforming loans.
If you don’t choose to work with us, you need to know that any additional income that you might receive which is tax paid or tax free should be ‘grossed up’ (add 25% for the tax) as though you had paid tax on that amount. If you don’t do this then the amount you can borrow will be less and your debt to income ration will be higher; you will be borrowing less money for more interest. Examples of tax paid income would be dividends from certain types of tax free investments like municipal bonds and money relating to alimony and child support.
If your total monthly debt is above 50% of the gross monthly income, then it is often possible to pay points to reduce the interest rate on the loan. A point is one per cent of the total CT mortgage amount requested, referred to as a point in CT mortgage banking so as not to be confused with interest rates. Paying one point on a 30 year fixed rate CT mortgage can reduce your annual interest rate by 0.125% per year for the life of the loan. On a 30 year CT mortgage, it would take about seven years before you would start to benefit from the points paid up front at the loan closing.
If you are thinking of paying points to reduce your interest rate over the life of the load, remember that the main reason lenders are prepared to offer long term fixed rate CT mortgages is because the average life of a CT mortgage is only about three years. You would be best advised to consult with a CT mortgage specialist before deciding on the loan product that you will use. There are many different loan products which have been developed for the many different types of borrowers and circumstances of their loans. By paying points, for example, you can reduce the monthly interest payments on a CT mortgage and bring your total monthly debt to income ratio back down to below the 50% threshold. We can advise you as to whether you are better to pay points or to try to repay some of your existing debt, it will depend on your particular circumstances.
Interest rates are also influenced by the size of the CT mortgage loan. All those rates you see advertised are for loans of less than $333,700 in total and the borrower’s financial circumstances must fit a number of rigid guide lines. These loans are then easy to sell to other investors through Fannie Mae and Freddie Mac into the secondary market.
Interest rates can be influenced by the size of your total net assets, your remaining assets after subtracting all your liabilities. This is not one of the most important considerations but it is still a factor in determining maximum loan size. You may already own additional properties like a vacation home or an investment property. If these are not mortgaged or have a very low LTV, then they will also have a strong influence on your total borrowing ability.
Let’s just say a little bit more about the different CT mortgage products and their uses. If you are self-employed or earn a significant amount of your yearly income from bonus payments or commissions, a 30 year fixed rate CT mortgage would be a bad choice. A better choice would be an interest only loan product to reduce your monthly payments to the minimum. You can then repay portions of the principal as future lump sums and the CT mortgage lender will recalculate your minimum monthly payments (recast) at regular intervals.
If you are starting a new business, the income should grow over time with effort and often the early profits will need to be reinvested for growth. You might be starting a new business practice where the client base will grow rapidly from start-up. By using a loan product whereby you initially agree to pay even less than the monthly interest on the outstanding balance, you can often borrow a greater amount than you would otherwise qualify (called a negative amortization loan or neg-am CT mortgage). Of course, at some stage in the future, you will be required to catch up this interest short fall and start to pay down the principal. At that time of course, you could always refinance.
Many business owners and self-employed borrowers have seasonally related income; their earnings can be greater at certain times of the year than at others. If you fit this category of borrower then a payment option CT mortgage would be a good choice. Under these loan instruments you can choose how much you pay each month above a minimum agreed amount. Of course you will still be required to catch up at some future stage if you don’t maintain a reasonably positive payment schedule, but using such a loan will enable you to keep a good credit rating regardless of short term cash flow.
If you are a first time buyer, it is not likely that you will stay in the first home that you buy for more than five years. This period is based on national studies and is a good statistic to keep in mind. Even in a rising interest rate market, a 5/1 ARM product is a better loan instrument for a first time buyer. When a lender is only speculating on interest rates over a five year period it is much easier, and therefore cheaper, to quote this short term fixed rate than for a 30 year period.
You are now ready to start looking at homes and will need a realtor to show you what homes are available in your chosen area and at what prices. Most realtors will not want to show you any homes at all unless they are certain that you can afford to buy them. If you were to make an offer on a home and the owner accepts that offer, then the realtor would want to know that you would be able to find the necessary money to be able to complete that purchase. It is worth noting that many realtors today will not accept pre-qualification statements produced from the internet. The reason is that the process is more complex than can reasonably be expected from an automated system unless programmed with a lot of different scenarios and constantly being updated with market variable information.
A key factor in determining how much you can afford to borrow for a home is related to the property tax rate of the town, the mil rate. The reason the mil rate is so important in the pre-qualification process is because your total monthly debt repayments, as a percentage of your gross income, have to include your property tax and hazard insurance with a CT mortgage, not just the principal and interest amounts. Given that mil rates can vary substantially between one town and another in Connecticut, an affordable home in one town can be out of your reach in another. So, pre-qualification is about more than just credit scores!
The process outlined above assumes that your profile fits the more usual parameters of a CT mortgage application. We encourage you to answer as many of our online questions as possible so that we have the information we need to get started quickly. If you are self-employed for example, or own your own business, you may prefer to apply for a CT mortgage on a stated income basis (one where you don’t have to provide evidence of monthly income). This is not because you don’t have any income. All CT mortgage bankers will require proof of earnings or income in one form or another before agreeing to give you a loan. The reason you may prefer to apply for a CT mortgage on a stated income basis is because it’s not worth your time and effort in furnishing the required information just to save half a per cent or less on the interest rate – as a business owner, your time may be more valuable to you?
You may have had a prior bankruptcy in your credit history. This does not prevent you from borrowing again under certain terms and conditions, but it does prevent any automation of the lending process; there are too many variables to consider in making a correct representation to a CT mortgage loan underwriter. For example, a Chapter 7 bankruptcy is more complicated to underwrite than a Chapter 13, because the latter is discharged after you make the payments and the judgment would then have been three to five years ago.
Every application for a CT mortgage in Connecticut starts with a standard application form. This form, the Uniform Residential Loan Application, was created to give CT mortgage underwriters, standard information in connection with any Connecticut home loan. This standard information enables over 70 per cent of all CT mortgages to be traded in a secondary market, which improves liquidity. You, as the borrower, can save as much as half a percent on a ‘conforming’ Connecticut home loan.
We work with over thirty lenders today and they fall broadly into two categories, CT mortgage banks and institutional or portfolio lenders. CT mortgage banks form the majority and they will only enter into a CT mortgage obligation (agree to lend you money for a house) if they already know that they will be able to sell that into the secondary investment market. They will have what they call ‘warehousing lines of credit’ which give them the liquidity (the short term money) to be able to lend to you quickly in time for your closing. They will then turn around and sell that Connecticut home loan, bundled with others, to investors in that secondary market. This is where Fannie Mae and Freddie Mac come into the picture. The other group of lenders, the portfolio lenders, are like the banks of yesterday, where they will keep the CT mortgage in their own ‘portfolio’ of investments. They may be linked to pension trusts and other forms of investment trusts so they have good reason to want to invest in your Connecticut home loan and use your monthly interest payments to directly fund their own investors. The investors will clearly be looking for stable monthly income from their savings.
The advantage to you of working with Acorn Home Mortgage, is that we can identify the right lender(s) for your particular circumstance. Many of our lenders do not work directly with borrowers but prefer to use Acorn Home Mortgage as a partner to identify potential borrowers in whom they would have an interest. Because these portfolio lenders don’t want to sell your Connecticut home loan in a secondary market, they can be more flexible in their minimum requirements to agree to a Connecticut home loan. These lenders are able to exercise the more usually characteristics of bankers in understanding their borrowers and granting exceptions based on proven mitigating circumstances.
Our more conforming CT mortgage banks, selling your loan into the secondary market, tend to have their own direct marketing arms as well and partnering with us as an additional source of potential borrowers. Whether we select regular CT mortgage banks or institutional (portfolio) lenders, or a combination of both in looking for your best rate, these lenders pay us for the work we do. For the majority of CT mortgages that we arrange, there should be no fees that you have to pay to us. The reason for this is that we arrange CT mortgages in what is often referred to as the ‘wholesale’ market; we deal in volume as a CT mortgage broker and therefore get lower rates as a result and can often pass these savings on to you. From a CT mortgage bank’s position, we are an extension of their own marketing and administrative efforts, saving them costs while doing some of their job for them.
So, you are now out with your realtor, trying to identify a suitable home to buy. We can help you with recommendations for local realtors. As a local Connecticut CT mortgage broker, we have developed relationships with a number of realtors that we consider to be particularly good for certain locations and types of property. Ask us for guidance if you are not currently working with a realtor and don’t know whom to select.
The whole process outlined above can be completed in less than 24 hours. All you need to do it to answer a few basic questions on one of our secure application forms and press submit. We will contact you as per your instructions to us and issue a pre-qualification or pre-approval as required, for you to present to a realtor. Many Connecticut CT mortgage bank loan approval processes today are automated so we only have to submit your application, once we have prepared it for you. Do not use the same pre-approval for presentation to a seller if requested, we will give you a different pre-approval for a seller because the seller only needs to know that you can afford to buy their home, not how much you have been approved to borrow.
Once you have identified a suitable home, you will need to be able to persuade the seller to accept your offer. Many times realtors will refer to first time buyers, and buyers that do not need to sell their current homes as a precondition to purchasing a new home, as ‘cash’ buyers. They are not strictly ‘cash’ buyers as they most likely will still be applying for a CT mortgage. But these ‘cash’ buyers are more attractive to potential sellers as they are more likely to complete the sales process; the seller may even accept a lower offer from these types of buyers. If you are ‘trading up’ and therefore have a home to sell at the same time, we might be able to help you with these problems, so please contact us before putting your current home on the market. We can also help you with a listing agent for the sale of your current home. If you are confident that your current home will sell without much difficulty and your seller is reluctant to accept your offer subject to the sale of your current home, then you may be able to use the equity in your current home to help purchase the new home. You will need to talk to us at an early stage though so that we have time to structure such a transaction.
When a seller accepts your offer and agrees to the sale of the home to you, the seller will enter into a contract with you, a binder. A cash deposit will typically be required usually representing about one per cent of the total purchase price, earnest money. These contracts will usually state that you have five businesses days to consult with a CT mortgage specialist to determine if you are eligible for the required Connecticut home loan. If you fail to complete this process within the stated period, then you risk losing your earnest money if you find that you are unable to get a CT mortgage offer. This is why it is better for you to be working with a CT mortgage broker before even starting to look at potential homes.
Once a seller accepts your offer then we need to be notified as soon as possible with a copy of the binder or at least the location of the new home. Assuming that you are already working with us, we will resubmit your application to the selected lender for pre-approval against that address. The Connecticut home loan offer will be subject to acceptable documents from you regarding your financial standing and position and a satisfactory appraisal of the current market value of the property. These property appraisals are conducted by licensed appraisers as instructed by us on your behalf.
It is important to select the right appraiser for the location and type of property to ensure that the appraiser is able to correctly ascertain its value. Appraisals are based on comparable properties which have sold within a pre-defined area, usually less than a mile, from the home you are buying. Again, remember previously, where we told you that for a CT mortgage, the value of the property is defined as being the lesser of either the purchase price or the appraised value. As long as the property is valued at (appraises) at least the purchase price, then any pre-approval for a CT mortgage will still be valid. Additional value in a home as assessed by the appraiser, while ‘nice’, will not actually change the amount of money you can borrow against the home.
Selecting the right attorney to represent you in a home purchase is also important. You should always use an attorney specializing in residential property purchase and sale, and if possible, local in the community of the home you wish to purchase. While it is often nice to use a friend or family member who is qualified as a lawyer, the property conveyance market contains many rules, regulations and irregularities best left in the hands of a specialist. We can help you with recommendations for real estate attorneys should you need any guidance.
CT mortgage underwriters can ask for a wide variety of documents from you to support the information given in the standard application, the Uniform Residential Loan Application (1003). Your personal circumstances will dictate what documents will be required but these are the minimum Connecticut CT mortgage loan documents required for a standard conforming Connecticut home loan.
Verification of Employment (VOE) – required for all employers in the last two years. Today this can often be shortened to require the last two or three pay stubs showing at least 30 days of income history and two years original W2 forms. The Connecticut home loan processor will phone your employer to verify your employment status.
Verification of Deposit (VOD) – required to ascertain sufficient funds for closing. Again the last two or three bank statements prior to contract are acceptable plus supporting statements covering any investments or 401Ks. All large deposits must be traced back to acceptable sources.
A completed, signed contract of sale.
The original ‘handwritten’ Uniform Residential Loan Application and a signed ‘final’ Uniform Residential Loan Application – by ‘handwritten’ they don’t really mean handwritten, most are printed off the computer today but they mean the first application, before any required changes have been made.
Acceptable Credit Report (Residential CT mortgage Credit Report or 3-Repository Merged Report)
The documents must be no more than 90 days old when the Connecticut home loan is underwritten and no more than 120 days old when the Connecticut home loan closes. The only exception to this is for new construction which can then be 180 days old.
Sometimes we will add additional disclosures and statements for you, to help the underwriter understand any unusual circumstances. Our job as CT mortgage bankers is to help the CT mortgage underwriter to make a positive decision in your favor, at the most advantageous interest rates available. The more information you give to an underwriter, the easier you make the underwriter’s job. Over the years we have been able to develop strong relationships with a large number of CT mortgage lenders and to understand their different ‘ideal borrower’ profiles. We know where to place your Connecticut home loan and how to present your application, in short, we close Connecticut home loans.
When all is said and done, don’t you think it would be much easier for you to leave it in our capable hands? After all, we’re local and we love the CT mortgage industry; we’re all CT mortgage bankers at Acorn Home Mortgage and think of nothing else all day. We’ll get you the best possible rate because that’s the challenge for we CT mortgage bankers, that’s why we do it. But we’ll also work hard to find a way to get you into that home you’ve just got to have! If this wasn’t what it was all about for us, the job would be boring. You can make the job fun for us by giving us a challenge!
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