We already know that the home buying process on Martha's Vineyard is a complicated process; and shopping for the right home is the fun part. It is the financing and closing the sale that is the most mysterious and stressful for the buyer. Therefore, I want to address the process and unravel some of the mystery. But first, this is important....

The Office of Consumer Affairs and Business Regulation announced that the Nationwide Mortgage Licensing System and Registry (NMLS), operated by state financial regulators including the Massachusetts Division of Banks, launched the "NMLS Consumer Access" resource. There hope is that it will help protect mortgage shoppers from unscrupulous loan originators.

NMLS Consumer Access is a fully searchable single-source consumer access website that allows the public to verify state-licensed mortgage lenders, brokers and individuals currently licensed through NMLS. Future updates to NMLS Consumer Access will provide a record of applicable disciplinary actions taken against a licensee by any jurisdiction in the country.

The NMLS Consumer Access website was launched in January 2010 and the NMLS Resource Center, claims the website will bring greater transparency to the mortgage industry and compliance with provisions of the SAFE Act.

The database of companies and individuals will be updated nightly and will tell consumers whether the person they're working with has had their license suspended or revoked in any state, and will list any aliases the individual has used since the age of 18. It will also seek to discover whether that person is engaged in other sidelines and what that person's license status is in other jurisdictions.

You can download a .PDF pamphlet of Information about NMLS Consumer Access prepared by the NMLS Resource Center.

Okay, now let's get back to the Financing Process.

PRE-QUALIFICATION:
A mistake that most inexperienced buyers make is they fail to find out exactly how much home they can afford. This affects almost every aspect of buying a new home - including how the Offer To Purchase is constructed. Any real estate agent who is willing to put you in their car and drive you around to look at property before, at the very least, you are pre-qualified is doing the Buyer a disservice and wasting their own time as well. It makes no sense to start showing a buyer real estate without knowing if that buyer can afford the homes they are looking at. Therefore, it is generally recommended that the first thing a buyer needs to do before even contacting a real estate agent is pre-qualify themselves so they know exactly how much they can afford to spend for their dream home, and how much cash they will need for a down payment. Pre-qualification acts as a dry run for the loan application process. The mortgage lender will use details you provide about your credit, income, assets and debts to arrive at an estimate of how much of a mortgage you can afford. The whole process may take only minutes and there is usually no charge to the buyer. The pre-qualification is non-binding to the lender because the information you provide has not been verified. However, it serves as a good indication to the lender of your general creditworthiness. Pre-qualification is an easy process and can be done either on-line or with the assistance of a lending agent. Items considered when pre-qualifying for a mortgage loan are employment history, credit history and FICO (credit rating) score, and monthly income and expenses.

This also simplifies the pre-approval process which is the next step. In many cases, the buyer will be pleasantly surprised because they may have under-estimated their buying power.

PRE-APPROVAL vs. PRE-QUALIFICATION:
You may be wondering what the difference is between pre-approval and pre-qualification. Pre-approval takes pre-qualification one-step further. The lender will actually contact your employer, your bank and others to verify your income, assets, debts and credit history, and then issue you a letter stating that your mortgage is approved for a certain amount within a certain timeframe. You may be charged a small fee to cover the cost of your credit reports and your application. This fee is often refunded at the time of closing. I always ask my clients to get pre-approved when they’re getting serious about making a purchase, because in today’s market a pre-qual letter carries very little weight with savy sellers. In my experience over the years I have encountered some sellers who require a prospective buyer to be pre-approved as a requirement for allowing them to preview their property. I have also encountered sellers who will not even consider an Offer to Purchase unless a pre-approval letter accompanies that Offer to Purchase. So, why not be prepared and have that pre-approval at the ready.

I realize being in the position of a borrower and having to present all of your personal financial information to a stranger might be a sensitive subject. Jack Guttentag, The Mortgage Professor, has developed a free pre-qualification tool. “It is designed to let you see where you stand,” he says. “And it will offer [links] that give information on remedying your weaknesses.” SplitRock Real Estate can assist you in getting pre-qualified or pre-approved.

LOAN APPLICATION:
The first step in applying for a loan is to understand the mortgage programs that you may qualify for, its advantages and disadvantages, so make a list of any questions you may have (i.e. Why choose a Fixed Rate Mortgage over an Adjustable Rate Mortgage?) Depending upon the economic climate at the time you are applying for a loan, you may want to lock-in the interest rate or float the loan's interest rate. Locking-in the rate means that the lender usually commits to the mortgage interest rate and terms (points and fees) at the time the loan application is submitted. Buyers who opt to "float the loan" believe interest rates and terms may become more favorable between the time (weeks or months) of the application and the closing. This means that the buyer can lock-in the interest rate anytime between the loan application date and closing. As you can imagine, this is a gamble because you take the risk that interest rates may rise instead of drop. In addition, the terms may not be the same, thereby increasing the mortgage payment. The next thing you want to think about is if you want to pay additional points to lower your interest rate. Each point is one (1%) percent of the mortgage loan payable in cash at closing.

Read my article "Locking in the Rate" here.

The following list itemizes most of the documentation you will need for your loan application:

WHAT DO I HAVE TO DO TO MAINTAIN MY LOAN APPROVAL?
Just because you have been approved for a loan doesn't mean that your financing is secure. The mortgage lender will most likely make a second credit check just prior to closing because the mortgage loan is only conditionally approved. The lender reserves the right to re-verify credit, income, assets and employment at any time prior to closing and may cancel the loan if there are any adverse changes to your qualification status. Red flags can disqualify you for the approved mortgage program. A red flag is any inquiry made regarding your credit worthiness. If you decide to purchase a big ticket item - like that Porsche roadster or sailboat you have wanted - prior to closing, you are risking a red flag showing up on your credit report. Another thing you do not want to do is move your money around --- leave your bank and investment accounts alone until after the closing. Do not close accounts or change banks. A large withdrawal or deposit to any accounts will trigger a red flag. If a red flag is triggered, you may be asked to produce a paper trail tracking large withdrawals and/or deposits. Although your employment status also affects your credit worthiness, a change of jobs for salaried employees to one of equal or higher pay will not trigger a red flag. However, commissioned sales people should not change jobs prior to closing on their mortgage loan. Mortgage lenders typically average your commissions over the last two years to determine income. Changing employers eliminates the two-year commission history and places uncertainty on your income status. The bottom line is not to make any changes without first talking with your mortgage lender.

PRE-PAYMENT PENALTY:
Okay, you have your loan and you closed on your Martha's Vineyard property on time with no problems so you are one happy camper. You have been enjoying your dream home for a few years but lower interest rates have you thinking about refinancing your loan. However, you failed to read the part in your loan agreement that addressed a pre-payment penalty. What can you do --- nothing! If it was in the agreement when you accepted the loan, you have to pay. But, what is a pre-payment penalty and why is it part of some lending agreements? I explained earlier the how and why of paying points as part of the loan package.

Anyway, the reason for including a pre-payment penalty clause is because the lender is trying to protect themselves from making a cheap loan, usually an Adjustable Rate Mortgage (ARM) that the borrower intends to pay off or refinanced in a few months. Massachusetts allows a lender to charge a pre-payment penalty but it must be clearly spelled out in the loan document.

Prepayment penalties are rarely waived, but most mortgage lenders allow borrowers to pay off a maximum of 20% of their loan balance each year which could be advantageous should they sell your home early or in time they want to refinance. A prepayment penalty can be 80% of six months interest, and it can vary too. That six months interest is the interest-only portion of the loan. As I am sure you understand, the penalty lessens the longer the loan is held. Note: FHA loans have no prepayment penalties.

There are two types of prepay penalties: “Soft” and “Hard” prepayment penalties. With a soft prepayment penalty the borrower can sell their home at any time without a penalty. However, if the borrower wants to refinance the loan, they will be subject to a prepayment penalty. Conversely, a hard prepayment penalty commits the borrower to a penalty whether they sell their home OR refinance their loan. The borrower has no options; they are between a rock and a hard place should they have a need to sell their home quickly. They will pay the penalty.

Why do we have prepayment penalties. Well, for one banks are in the business of making money and loans make them money, and pre-payment penalties exist as a deterrent to what the financial market calls "refinance churning".

In summary, it is important first to decide upon the mortgage product that best suits your needs. Ask the lender if the loan includes a pre-payment penalty for early payoff. After the details of the pre-payment penalty are explained, you can decide if the terms are agreeable to you.