Protecting your most important assets is an
important step in creating a solid personal financial plan. The right insurance
policies will go a long way toward helping you safeguard your earning power and
your possessions. In this article, we'll show you five policies that you shouldn't
do without. (To find out about some insurance basics, see Understand Your
Insurance Contract.) TUTORIAL: Intro To Insurance Long-Term Disability
Insurance The prospect of long-term disability is so frightening that some
people simply choose to ignore it. While we all hope that, "nothing will
happen to me," relying on hope to protect your future earning power is
simply not a good idea. Instead, choose a disability policy that provides
enough coverage to enable you to continue your current lifestyle, even if you
can no longer continue working. (Protecting Your Income Source provides a
closer look at this important topic.) Life Insurance Life insurance protects
the people that are financially dependent on you. If your parents, spouse,
children or other loved ones would face financial hardship if you died, life
insurance should be high on your list of required insurance policies. Think
about how much you earn each year (and the number of years you plan to remain
employed), and purchase a policy that will replace that income in the event of
your untimely demise. Factor in the cost of burial, too, as the unexpected cost
is a burden for many families. (For a more detailed look at the types of
coverage available and factors involved in choosing the right coverage for your
situation, read Buying Life Insurance: Term Versus Permanent and How Much Life
Insurance Should You Carry?) Health Insurance The soaring cost of medical care
is reason enough to make health insurance a necessity. Even a simple visit to
the family doctor can result in a hefty bill. More serious injuries, that
result in a hospital stay, can generate a bill that tops the price of a
one-week stay at a luxury resort. Injuries that require surgery can quickly
rack up five-figure costs. Although the ever-increasing cost of health
insurance is a financial burden, for just about everyone, the potential cost of
not having coverage is much higher. (For more insight, see Fighting The High
Costs Of Healthcare.) Homeowners Insurance Replacing your home is an
expensive proposition. Having the right homeowners insurance can make the process less difficult. When shopping for a policy, look for one that covers replacement of the structure and the contents in addition to the cost of living somewhere else while your home is repaired. (To keep reading on this subject, see Insurance Tips For Homeowners.) Keep in mind that the cost of rebuilding doesn't need to include the cost of the land, since you already own it. Depending on the age of your home, and the amenities that it contains, the cost to replace it could be more or less than the price you paid for it. To get an accurate estimate, find out how much local builders charge per square foot and multiply that number by the amount of space you will need to replace. Don't forget to factor in the cost of upgrades and special features. Also, be sure the policy provides adequate coverage for the cost of any liability for injuries that might occur on your property. Automobile Insurance Some level of automobile insurance is required by law in most places. Even if you are not required to have it, and you are driving an old clunker that has been paid off for years, automobile insurance is something you shouldn't skip. If you are involved in an accident, and someone is injured or their property is damaged, you could be subject to a lawsuit that could possibly cost you everything you own. Accidents happen quickly and the results are often tragic. Having no automobile insurance or purchasing only the minimum required coverage saves you only a tiny amount of money, and puts everything else that you own at risk. (To learn more, see Shopping For Car Insurance.) *Bonus Tip For Business Owners: In addition to the policies listed above, business owners need business insurance. Liability coverage in a litigation-happy society could be the difference between a long, prosperous endeavor and a trip to bankruptcy court. Shop Carefully Insurance policies come in a wide variety of shapes and sizes and boast many different features, benefits and prices. Shop carefully, read the policies and talk to the agent to be certain that you understand the coverage and the cost. Make sure the policies that you purchase are adequate for your needs, and don't sign on the dotted line until you are happy with the purchase.
expensive proposition. Having the right homeowners insurance can make the process less difficult. When shopping for a policy, look for one that covers replacement of the structure and the contents in addition to the cost of living somewhere else while your home is repaired. (To keep reading on this subject, see Insurance Tips For Homeowners.) Keep in mind that the cost of rebuilding doesn't need to include the cost of the land, since you already own it. Depending on the age of your home, and the amenities that it contains, the cost to replace it could be more or less than the price you paid for it. To get an accurate estimate, find out how much local builders charge per square foot and multiply that number by the amount of space you will need to replace. Don't forget to factor in the cost of upgrades and special features. Also, be sure the policy provides adequate coverage for the cost of any liability for injuries that might occur on your property. Automobile Insurance Some level of automobile insurance is required by law in most places. Even if you are not required to have it, and you are driving an old clunker that has been paid off for years, automobile insurance is something you shouldn't skip. If you are involved in an accident, and someone is injured or their property is damaged, you could be subject to a lawsuit that could possibly cost you everything you own. Accidents happen quickly and the results are often tragic. Having no automobile insurance or purchasing only the minimum required coverage saves you only a tiny amount of money, and puts everything else that you own at risk. (To learn more, see Shopping For Car Insurance.) *Bonus Tip For Business Owners: In addition to the policies listed above, business owners need business insurance. Liability coverage in a litigation-happy society could be the difference between a long, prosperous endeavor and a trip to bankruptcy court. Shop Carefully Insurance policies come in a wide variety of shapes and sizes and boast many different features, benefits and prices. Shop carefully, read the policies and talk to the agent to be certain that you understand the coverage and the cost. Make sure the policies that you purchase are adequate for your needs, and don't sign on the dotted line until you are happy with the purchase.
The second thing you’ll want to know is that
listings on big real estate portals are not always up-to-date. Multiple Listing
Services (MLS), used by real estate agents, reflect the most up-to-date inventory.
Lastly, for whatever technical reason, portals
don’t show 100% of the available inventory. Furthermore, agents
may know about homes that are coming on the market before the
listings are made public. It’s good to have a professional with his or her ear
on the ground in the market where you want to buy.
Real estate shopping engines are great for:
·
Searching
by location using map-based queries
·
Getting
ideas about neighborhoods that fall in your price range
·
Putting
together a list of properties you want to see in person
They are not as good at:
·
Predicting
a precise and final sales price
·
Showing
all listings in the market
·
Revealing
listings that will hit the market soon
Make an Offer
When you’ve visited properties with your agent and
picked out the home you want, it’s time to make an offer. Your real estate
agent will know the ins-and-outs of how to structure it. It will
include contingencies(or conditions) that must be satisfied
before the deal is complete. Here are a few common ones:
·
Appraisal must
come in close to the loan amount, not lower
·
Home
inspection does not find issues with property
·
Borrower
is approved for loan
In fact, HUD mandates a VA Escape Clause on every
purchase offer.
It is expressly agreed that, notwithstanding any
other provisions of this contract, the purchaser shall not incur any penalty by
forfeiture of earnest money or otherwise or be obligated to complete the
purchase of the property described herein, if the contract purchase price or
cost exceeds the reasonable value of the property established by the Department
of Veterans Affairs.
Contingencies protect you and your earnest money, a deposit that tells the seller you’re a
committed buyer. Typical earnest money deposits are 1% to 2% of the sale price.
The funds are released from escrow and applied to your down payment at closing.
With terms of the deal approved by both
parties, the purchase agreement (a binding
offer) is signed by the seller and buyer. At this point, you can move forward
to finalize the loan.
3. Mortgage Loan Application Process
Applying for a Mortgage
A few documents are needed to get a loan file
through underwriting. Some of the information will be gathered online or over
the phone. A lot of it will already be stated on some documents you’ll provide,
like employer address which can be found on a pay stub. While the list looks
long, it won’t take much effort to round them up. The lists below will
help you keep track. Your loan officer will also indicate which items
will not be needed and also help you prioritize which
items to send in first.
Employment
·
Name of
current employer, phone and street address
·
Length of
time at current employer
·
Position/title
·
Salary
including overtime, bonuses or commissions
Income
·
Two years
of W-2s
·
Profit
& Loss statement if self-employed
·
Pensions,
Social Security
·
Public
assistance
·
Child
support
·
Alimony
Assets
·
Bank
accounts (savings, checking, brokerage accounts)
·
Real
property
·
Investments
(stocks, bonds, retirement accounts)
·
Proceeds
from sale of current home
·
Gifted
funds from relatives (e.g. down payment gift for FHA loan)
Debts
·
Current
mortgage
·
Liens
·
Alimony
·
Child
support
·
Car loans
·
Credit
cards
·
Real
property
Property Information
Your real estate agent will be able to grab some of
the harder-to-find items such as property taxes.
·
Street
address
·
Expected
sales price
·
Type of
home (single family residence, condo, etc.)
·
Size of
property
·
Real
estate taxes (annual)
·
Homeowner’s
association dues (HOA)
·
Estimated
closing date
Financial Blemishes
Be prepared to explain any missteps in your
financial background. It’s good to have dates, amounts and causes for any of
the following:
·
Bankruptcies
·
Collections
·
Foreclosures
·
Delinquencies
Type of Mortgage
·
Fixed or
adjustable
·
Forward
or reverse
·
Conventional
·
Government
insured: VA, FHA, USDA
·
Jumbo
VA Certificate of Eligibility (COE)
If you are applying for a VA loan you will need
proof of your military service. The VA can provide a Certificate of Eligibility
(COE). Your lender will be able to pull it for you. If you want to get it
yourself, you can do so via the eBenefits website.
Loan Estimate
All the documentation from above is pulled together
to produce the Loan Estimate. The Loan Estimatedescribes
the terms and predicts the costs associated with your loan. By law, you must
receive it within three days of your application.
The Loan Estimate includes closing costs, the
interest rate and monthly payments (principal, interest, taxes and
insurance). A notification is included if interest rates can change
in the future, as would be the case with Adjustable Rate Loans (ARMs). It also
includes information about any special features such as pre-payment penalties
or if the loan balance can ever increase in spite of you paying on time (called
negative amortization).
At this stage, you’re not yet approved nor denied a
loan. A loan estimate is simply a statement of the terms and estimated
fees in plain English. It’s like getting an estimate for car repairs; no
one has picked up a wrench yet, you’re just getting a sense of the work that
will be done and how much it’ll cost.
Quick note: Most types of loans — but not all — use the Loan
Estimate at the application stage. Some loan products, like reverse mortgages,
still use two older forms – the Good Faith Estimate (GFE) and Truth-in-Lending
(TIL) disclosure.
You can get a sneak peek of what Loan Estimates look
like plus an even more detailed explanation of each section of it on the
Consumer Financial Protection Bureau (CFPB) website.
Ready to apply? Contact us to get
started.
4. Mortgage Loan Processing
Opening the File
Loan processors gather documentation about the
borrower and property, review all information in the loan file and assemble an
orderly and complete package for the underwriter. They’ll open the file
and get the following wheels in motion:
·
Order
credit report (if not already pulled for a pre-approval)
·
Start
verifying employment (VOE) and bank deposits (VOD)
·
Order
property inspection if required
·
Order
property appraisal
·
Order
title search
5. Mortgage Loan Underwriting
The underwriter is the key decision-maker. They
closely evaluate all the documentation prepared by the loan processor in the
loan package. They cross check to see if the borrower and property match the
eligibility requirements of the loan product for which the borrower applied.
For example, for a VA loan, the
underwriter will verify the borrower’s military service.
Underwriters review at the borrower’s credit
history and their capacity to repay the loan. The collateral (the property) is
also weighed into the decision. They verify information and double check for
accuracy. They’ll sniff out any red flags that indicate potential fraud.
Underwriting Decision
With everything reviewed, the underwriter
approves or rejects the loan. Sometimes underwriters approve the loan with
conditions. For example, they might ask for a written explanation of borrower’s
credit history, such as late payments or collections.
Lock Interest Rate
At some point after initial approval and before
closing, the interest rate for your loan is locked. Interest rates trade
up and down every day that bond markets are open for business. You and your
loan officer will choose the time to make the commitment.
Pre-Closing
Title insurance is ordered before the
closing meeting so that you can walk away with the keys to your new home, ready
to move in. This is also the time to make sure that all the offer contingencies have been satisfied. Once any
conditions are satisfied, the closing is scheduled.
6. Mortgage Closing Process
Documents (everyone in the mortgage industry calls
them loan docs) are drawn, meaning they are printed out and
sent to the title company (or attorney’s office) where the closing meeting
takes place. You can expect a big stack of
papers.
One of the documents worth calling attention to is
the Closing Disclosure. It should look somewhat familiar.
Think of it as the companion to one the first documents you received in the
mortgage loan process, theLoan Estimate. The
Loan Estimate gave you the expected costs.
The Closing Disclosure confirms those
costs. In fact, the two should match up closely.
Laws prevent them from differing too much.
Three-Day Review Period
You have the right to review the Closing
Disclosure three days prior to the closing
meeting. This quite period gives you a chance to review all of the terms of the
loan. In most cases, you’ll compare the Loan Estimate to the Closing Disclosure
but in some cases, you’ll compare the GFE to the HUD-1 Settlement Statement.
At this stage, you’re like a space ship on the
launching pad. The countdown has begun. Most of the time, everything goes as
planned. Small things in the loan docs are allowed to change, like typos.
However, bigger changes reset the three-day review period. Continuing
with the space launch metaphor, the “countdown” would start over if:
·
The APR
on the loan changes by more than 1/8th of a percent (most fixed loans) or 1/4th
of a percent (most adjustable rate loans).
·
A
pre-payment penalty is added to the mortgage.
·
There’s a
change of loan products (e.g. change from a fixed rate loan to an adjustable
rate loan).
Final Walk-Through
You have the right to a final walk-through of
property 24 hours before your closing meeting. You can make sure the seller has
vacated property. You can make sure any contractually stipulated
repairs are complete.
Closing Meeting
The closing is the moment for which you’ve been
waiting. It’s time to sign a bunch of documents and complete your purchase or
refinance. Some docs seal the deal between you and the lender. Other docs
seal the deal between you and the seller (if it’s a purchase transaction).
Please bring two official forms of identification
such as a driver’s license and passport to the closing.
If closing costs are not rolled into the loan
amount, talk to your loan officer about how you will transfer funds either
electronically or via cashier’s check. Closing costs include settlement fees (the cost of doing the loan) plus
any pre-paid expenses (put in an escrow account) for
homeowner’s insurance, mortgage insurance and taxes.
A checkbook will come in handy for any small
differences in the estimated balance owed and the final amount.
The closing meeting will take a couple hours, and
there’s a lot of paperwork. Your hand will be tired when it’s all over.
Key Closing Documents
·
Closing
Disclosure (or
HUD-1 and TIL in some cases) – a summary of loan terms, monthly payments and
closing costs.
·
Promissory
Note –
as it sounds, it’s the promise that you’ll repay the loan. It shows the loan
amount and terms of the loan and the lender’s recourse if you fail to make
payments.
·
Deed
of Trust –
secures the note above and gives the lender a claim against the home if you
fail to live up to the terms.
·
Certificate
of Occupancy –
if the house is newly constructed, this is the legal document you’ll need to
move in.
TIP: Be sure to read all documents. And ask questions!
Lastly, don’t sign any forms with blank lines or space.
When everything is signed, your participation
in the closing meeting is done. Congrats! The very last closing items
happen in the background; the title company will complete the recording and
funding.
Right of Rescission
Federal law provides an opt-out or cancellation of
some types of mortgage transactions called a Right of Rescission.
You have until midnight of the third business day
after signing the closing docs to rescind (cancel) the following:
·
A
refinance transaction on an owner-occupied home
·
Reverse
mortgages
Purchase transactions do not have this feature.
SUMMARY:
There you have it, the six distinct phases of the
mortgage loan process! Hopefully, you feel a little more educated about each
step and feel more comfortable about what to expect along the way.