Guide to Buy a Home in New York | Obtaining a Loan
Guide to Buy a Home in New York
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Obtaining a Loan
Obtaining a Loan
If you are like most purchasers, you will likely pay for a large portion of the purchase price for your home by obtaining a loan. Prior to entering into a contract to purchase a home, you should contact a mortgage broker or bank loan officer to obtain pre-approval for financing. Next to finding a home, the loan application process will be the most time-consuming task in purchasing a home. If, prior to signing a contract, you select a loan officer or mortgage broker, complete a loan application and assemble and submit the financial documentation required for the loan package, you will gain the following advantages:
You will know how much you can borrow, so you will not waste time looking at properties you cannot afford.
You will have an advantage over other purchasers when you make an offer, since the seller will know you are qualified to get a loan and can close quickly.
You will be able to close your loan and purchase more quickly because you will already have assembled and submitted the required documents.
There are many loan programs available for financing a home purchase. You should be familiar with the important differences between the various types of loans available to get the one that is best for you. The type of financing you choose will make a big difference in your ability to afford the home you wish to purchase as well with the ultimate financing costs that you will incur.
Co-op Loans versus Mortgage Loans
A purchaser financing the purchase of a co-op apartment will apply for a type of loan specific to co-ops. Co-operative financing is different from other types of housing loans because you do not get a mortgage in the traditional sense of the term. Since you will be buying shares of stock in a corporation that owns the building rather than the real estate itself, you will be pledging to the lender your stock in the co-op corporation and the proprietary lease issued to you at closing as collateral for the loan.
At the closing, you will sign a promissory note, which evidences the debt, and a security agreement, which pledges the shares and the proprietary lease for the apartment as collateral for the repayment of the loan (and gives the lender the right to take back the apartment in a foreclosure action if you fail to repay the loan). Prior to closing, your lender’s attorney will file a lien against the apartment by means of a UCC-1 Financing Statement so that your pledge of the stock and proprietary lease for the loan becomes a matter of public record. A buyer financing the purchase of a condo or a house will obtain a mortgage loan. When you obtain a mortgage loan, the property you are purchasing is pledged to the bank as collateral for the loan. At closing, you will execute a mortgage note that evidences the debt and contains a promise to repay the loan, a mortgage that pledges the condo or house as collateral for the repayment of the loan and other loan documents required by the lender. After the closing, your title company will arrange to record your deed and the mortgage in clerk’s office in the county where the condo or house is located so that your ownership and pledge of collateral is in the public records.
Types of Loans
While there are many loan products available to a home purchaser, the best home mortgage loan is the one you can afford for as long as you plan to own your home. Affordability varies with the types of mortgage loans. In the rush to make an offer on a home, you might not think that you have time to spend sorting through the many options and loan products available. Taking the time to consider the different types of loans, however, can pay great dividends. If you consider only the variables of interest rates and your monthly payment, you could pay thousands of dollars more than you should over the life of your loan.
Examine the various types of loan products available for financing the purchase of a home. Also, be aware that many co-op buildings have limitations on how much you can borrow for the purchase of the residence. Most co-op buildings do not allow a loan in excess of 75 to 80 percent of the purchase price. There are no such restrictions on financing condos or private homes.
Generally, monthly home loan payments will consist of principal (a portion of the debt to be repaid), interest (the fee, based upon a percentage, charged by the lender for lending the money), and in the case of condos and houses, real estate taxes and homeowner’s insurance that are paid in escrow to the lender. The principal amount of the loan that will be repaid is reduced over time with each monthly payment of a portion of the principal financing.
Common Loan Products
Fixed rate loans are the most common loan product. There are, however, five basic loan products, and many variations on each product as descried below:
Fixed Rate Loans. The interest rate is set before you close the loan and remains the same for the entire term of the loan. With each monthly payment, you repay a portion of the original loan amount (the principal) plus interest. With a 30 or 15 year fixed rate loan, the monthly payment will repay the original loan amount completely by the end of the loan term. Loans with a repayment schedule are called amortizing loans. The amount of interest plus the loan repayment is called the debt service repayment.
Adjustable Rate Loans. Also known as adjustable rate mortgages (ARMs), these loans differ from fixed rate loans because the interest rate and the monthly payments move up and down as market interest rates fluctuate. Most ARMs have an initial interest rate period during which the borrower’s interest rate does not change, followed by a much larger period during which the rate changes at preset intervals. Interest rates charged during the initial periods of the loan are generally lower than those on comparable fixed rate mortgages. Most adjustable rate mortgages have fixed rates for the first 3,5,7, or 10 years, followed by rates that adjust annually thereafter. Borrowers will have some protection from exceptional changes in the interest rate because ARMs come with rate camps. These caps limit the amount by which ARM rates can adjust. The most common caps are period rate caps (which limit the amount that an interest rate can rise in any given year) and life time caps (which limit how much the interest rates can rise over the life of the loan).
Interest Only Loans. An interest only loan allows you to pay only the interest on the loan for a set period, often the first 5 or 10 years. You do not have to pay any principal during that time. When the interest only period is up, the interest rate is adjusted to the prevailing market rate, and the monthly payments will increase as you begin to pay the principal over the remaining term of the loan. You always have the option of making more than the minimum payment and having it applied toward the principal. You can use an interest only loan to free the cash that would otherwise go toward paying the principal and invest the cash where it can theoretically bring a better rate of return.
Negative Amortization Loans. A loan that allows negative amortization means that the borrower is allowed to make a monthly mortgage payment that is less than the interest actually owed during that month. The result is that the outstanding balance of the loan is actually increased rather than decreased as with the loan that amortize (reduce) principal.
Home Equity Line of Credit (HELOC). You may be able to obtain a second loan if you want to borrow more than eighty (80%) percent of the purchase price. A HELOC loan may be obtained with your primary lender or with a different lender. The interest rate on a HELOC loan generally changes monthly and is tied to the prime rate.
Source: Keith A. Schuman