We’ll help you
open the door.
The Citizens Guide to Home Financing
Lori
Customer
Table of Contents
Before you look The costs of purchasing a home Getting a head start: Pre-approval
Choosing a mortgage Qualifying for a mortgage The home financing process Homeownership and beyond Loan documentation 4
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We’re for homes – and opening the door to possibilities.
We know that there’s a lot of pride and satisfaction that comes with owning your
own home. It’s a long-term investment that’s at the center of your life, giving you
a sense of stability and security.
But we also know that buying a home can sometimes feel a little overwhelming.
Which is why at Citizens, we’ve dedicated ourselves to making home financing
clear and easy to understand. With personal attention and expert guidance at every
step. So you can see your way forward with clarity and confidence.
And that’s helping you borrow better.
We’ll walk you through, step by step.
We’ll guide you through the home financing process, so you can find the home
loan that’s right for you. We’re for sensible lending, clear terms, and manageable
payments. We’re also for being upfront with all the information you need to make
smart, informed decisions about home financing. We want to help you better
understand the mortgage process and the types of financing options available
to you, whether you’re a first-time homebuyer or just haven’t been through the
mortgage process in a while.
If you have questions about the information in this booklet or about home
financing, you can visit the Home Borrowing section of our website
(www.citizensone.com/home-loans.html) or talk with one of our trusted mortgage
loan officers in your area. We’re here to help you along the way to successful
homeownership. It’s never too early to explore your options.
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Before you look.
Financial preparation is the first – and perhaps the most important – step in the
home buying process. And one of the first questions you’ll need to answer is how
much home you can afford. Your Citizens loan officer can tell you how much
financing you may be able to qualify for, but only you can decide how much you
feel comfortable paying each month.
Begin by taking a careful look at your household finances, including your savings,
credit, income and debt. It’s helpful to develop a monthly budget based on your
current income and expenses so you can determine a realistically affordable
mortgage payment. There are many useful tools and calculators available online, or
you can ask your loan officer for assistance.
Documenting your expenses and income will give you a clearer picture of your
financial situation and help you prepare for the home buying process when the time
comes to find a home loan.
The costs of purchasing a home.
Once you’ve taken a look at your monthly expenses, it’s time to consider the actual
costs of purchasing and maintaining a home.
Upfront Costs
Your upfront costs will typically include your down payment, the cost of the home
inspection, your closing costs and moving expenses. You may also be asked by the
property listing agent to put down a deposit, or earnest money, when you sign the
purchase contract. This money will be credited back to your transaction at closing,
but if you back out of the contract, you risk losing your deposit.
Down Payment
enerally, down payment requirements range from 5% to 20% of the cost
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of the house, although some loan programs may offer smaller down payment
requirements. However, for down payments less than 20%, you may also be
required to pay mortgage insurance. If you are able to make a larger down
payment, the initial equity you’ll have in your home will be greater.
Home Inspection
A critical step in the home buying process is a home inspection. This is where
you’ll get a full picture of the home you are considering – any possible defects
or what repairs it may require. The cost of a home inspection may range from
$200 to $900, depending on the rates where you live, but this unbiased
examination of your potential new home is invaluable.
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Closing Costs
Closing costs typically range from 2% to 6% of the loan amount depending on
your area. These costs include fees charged by your state and local governments
for the recording of documents as well as fees associated with origination and
settlement of your mortgage. Some fees, like the cost of the appraisal, may be
charged upfront by a lender before the loan closes.
Moving Costs
There are also costs associated with moving your household. Having
your friends and family help you move can minimize the expense, but be
prepared to pay for other things like the set up of new utilities such as cable
and Internet access.
Ongoing Costs of Homeownership
Homeownership truly does have some wonderful advantages. However, there are
additional costs associated with being a homeowner that you may not incur as a
renter. Be sure to consider these expenses in your monthly budget when deciding if
owning a home is right for you. Your ongoing housing costs may include some or all
of the following:
Monthly Mortgage Payment
Your monthly mortgage payment will typically consist of principal, interest, and
escrow. Escrow is money collected by the lender in order to pay your real estate
taxes, Homeowner’s Hazard Insurance, and if applicable, any flood insurance,
mortgage insurance premiums, homeowner association dues or condo fees.
Real Estate Taxes
A real estate agent or your locality’s tax assessment office should be able
to give you an idea of what the annual real estate tax would be on a home
in your price range. Keep in mind that real estate tax rates and the home’s
assessed value can change from year to year, which could impact how
much escrow you pay. The good news is real estate tax payments are often
tax deductible, so remember to consult a tax advisor to determine your
eligibility.
Homeowner’s Hazard Insurance
Homeowner’s Hazard Insurance coverage is required by all lenders to
protect your home against loss due to legal liability, fire, theft, or natural
causes. Not all types of peril are covered, so make sure you know what
coverage your policy does provide. And, as you would for car insurance,
shop around for the best rates and coverage that is right for you.
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Flood Insurance
Lenders are required by federal law to obtain a flood certification for any
loan secured by residential real estate. If your potential property is located
within an area that the Federal Emergency Management Agency (FEMA)
has determined to be at risk for flooding, you will need to purchase a
separate flood insurance policy. Otherwise, the lender will be prevented
from offering you financing.
Mortgage Insurance
If you make a down payment less than 20%, there’s a pretty good chance
you’ll be required to pay mortgage insurance. This insurance offsets some
of the risk the lender takes on when offering financing with a smaller down
payment and covers a portion of the lender’s loss if a borrower defaults on
the loan. Depending on the mortgage program you choose, your mortgage
insurance premium may be paid to a private company or a government
agency, like the Federal Housing Administration (FHA).
Homeowner Association Dues or Condo Fees
Depending on the home you choose, there may be additional dues or fees
that you are required to pay on a monthly basis. These fees are usually paid
to a condo or neighborhood association to cover the cost of maintaining
common areas or upkeep of amenities, such as a pool, clubhouse, etc.
Each year you’ll receive an escrow analysis statement from your lender that
shows you how much was paid on your behalf for your real estate taxes and
various insurance premiums. At that time, your lender may need to adjust the
escrow portion of your monthly mortgage payment to make sure enough is being
collected to cover any changes to your insurance premiums or real estate taxes.
Utilities and Home Maintenance
Many times home buyers neglect to factor in the costs of local municipality
utilities such as water, garbage removal, gas, and electricity into their budget
planning. Be sure to consider these costs, especially if you are not currently
accustomed to paying for these services.
It also takes time and money to keep a property in top condition. Depending on the
size and age of the house, maintenance costs can add up. When looking for a home
to buy, take note of the age of items like the heating system or roof, as well as any
home inspection results, to better prepare yourself for possible future expense.
Getting a head start: Pre-approval.
Once you’ve determined your potential budget, and before you begin searching for
a home, it’s important to get pre-approved for a mortgage loan. Your Citizens loan
officer is ready to help. It’s a simple process that doesn’t take too long to complete, and
you’ll have peace of mind being one step closer to having your home financing in place.
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During the pre-approval assessment, we’ll ask you to provide some details about
your income and financial status. Your credit report will also be reviewed. Based on
this information, your Citizens loan officer will help you determine how much you
may be qualified to borrow and estimate what your monthly mortgage payments
might be.
You’ll also receive a pre-approval letter, which many sellers require prior to
reviewing an offer. Becoming pre-approved is an indication to a seller that you are
serious about buying a home. In a competitive market, it can give you an advantage
over buyers that are not pre-approved.
Choosing a mortgage.
Selecting the right mortgage is central to the home buying process – that’s why
it’s good to understand your options. Having a basic understanding of the kinds of
mortgages available will make it easier to determine which one best fits your needs.
Your Citizens loan officer will help you through this process.
Types of Mortgage Options
Citizens offers a full range of home loan programs with a variety of rate, term and
cost options. Your loan officer will explain what programs might be available to you
based on the qualities you desire and how much you have to contribute toward the
down payment and closing costs.
Fixed Rate
Just as the name would indicate, fixed-rate mortgages have an interest rate
that doesn’t change over the life of the loan. This type of mortgage offers you
predictable monthly payments of principal and interest, and no matter how high
mortgage interest rates rise, your loan will have the interest rate you locked into
when you got it. Fixed-rate loans are generally well suited to borrowers who plan
on staying in their homes for a longer period of time, who have fixed or slowly
increasing income, or who have a lower tolerance for financial risk.
Adjustable Rate
An adjustable-rate mortgage (ARM) does not have an interest rate that stays
fixed over its lifetime. The interest rate on an ARM starts out fixed for a set
number of years, after which it becomes variable and will go up or down
with the market. This means a borrower’s principal and interest payment
may increase or decrease at various times. ARMs are usually considered by
borrowers who don’t plan on remaining in their home for very long or who
believe rates will go down sufficiently enough to refinance before the fixed
period ends. Because of its risks, the pros and cons of an ARM loan should be
considered thoroughly.
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Fully Amortizing
Borrowers with fully-amortizing mortgages will make both principal and interest
payments over the life of the loan. The principal portion of the payment is
calculated so that the outstanding principal balance will be repaid in full by
the end of the term. A fully-amortizing loan can have either a fixed rate or an
adjustable rate.
Interest Only
With an interest-only loan, borrowers make only monthly payments of interest
for a set number of years before they begin to make principal payments. This
option has its risk, because during the interest-only period, the borrower is not
building any equity in the home unless the house appreciates in value. There’s
also no guarantee that a home will appreciate in value. Once the interest-only
period ends, the monthly payment increases, often substantially, to make sure
the outstanding principal balance is repaid before the loan term ends.
Annual Percentage Rate (APR) Versus Interest Rate
When you shop for a mortgage, make sure you ask lenders for the Annual
Percentage Rate (APR) as well as the interest rate. The interest rate is just the cost
to borrow the money. The APR is the total cost a borrower will pay for the loan and
its origination, including interest, points and fees. This makes it easier for you to
compare your total cost between multiple lenders.
Keep in mind that interest rates fluctuate daily, so when you compare APRs
among several lenders, you must look at APRs that are generated on the same day.
Otherwise, you may not be comparing apples to apples.
Discount Points
Discount points are a one-time fee that a borrower pays to lower the interest rate.
One point is equal to one percent of your loan amount. The more points you elect
to pay, the lower your interest rate will be. Because paying discount points lowers
your interest rate, you could benefit from lower interest payments over the life
of your loan. However, if you don’t plan on staying in your home long enough to
maximize your interest savings, paying discount points may not be the best option.
Talk to your Citizens loan officer to determine how many months you would need
to keep your mortgage to break even if you paid discount points.
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Qualifying for a mortgage.
Each type of mortgage program has its own specific limits and guidelines a lender
must consider when determining whether an applicant is qualified for a loan.
However, all lenders look at the same basic factors: credit history, income, assets,
employment and debt.
They’ll also order an appraisal of the property to make sure the home you want to
purchase is worth at least as much as the amount you would like to borrow.
Credit History
Your credit history tells a lender a lot about how you’ve handled debt in the past.
For this reason, lenders review your credit score and credit report to look
for things like:
• Overall credit experience and length of time having credit
• Payment history track record
• Adverse elements in your credit report, such as:
- Bankruptcies, filed judgments or collections
- A history of late payments
- Credit cards with outstanding balances at the credit limit
Before applying for home financing, it’s always important to get a copy of
your credit report to determine if there are any potential issues that may need
addressing upfront or correcting. By law, the three nationwide credit reporting
companies must provide you a free copy of your credit report every 12 months.
You can visit https://www.annualcreditreport.com or call 877-322-8228 to obtain
a copy from all three companies or contact them individually at:
Equifax
P.O. Box 740241
Atlanta, GA 30374
800-685-1111
www.equifax.com
Experian
P.O. Box 2002
Allen, TX 75013
888-397-3742
www.experian.com
Trans Union
P.O. Box 1000
Chester, PA 19022
800-888-4213
www.transunion.com
Even after you apply for home financing, you’ll want to avoid doing anything that
might negatively impact your credit score or credit report such as opening a new
credit card or charging large amounts. And unless you’re instructed to do so by
your lender, you should also avoid making large payoffs of debt. Since your lender
may pull your credit report at application and just before closing, these actions
could hinder the processing and approval of your loan.
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Employment and Income
When considering your ability to repay a mortgage, lenders will look at whether
you have a stable source of regular income and if it is sufficient to cover the costs
of your new payment and other existing debt.
Employment consistency is certainly a plus. Unless absolutely necessary, it’s best
to avoid changing jobs while buying a home. A lender will ask you to provide a full
two-year employment history, including names, addresses, and phone numbers of
prior employers. You may also need to explain any employment gaps that may
have occurred.
If you are a salaried or hourly worker, you will need to provide your most current
pay stub and two years of W-2s. If you are self-employed or have any other
sources of income, you may be required to provide two years of tax returns with
all schedules. Supplying less than what is requested may have a negative impact on
loan qualification, since this type of income is usually averaged over two years.
Assets
Lenders will also look at the assets you have on hand. Your assets are a good
indication that you have back up resources to make future mortgage payments.
A lender will require you to provide documentation for any assets you declare on
your loan application. Complete documentation is critical to the approval process.
Here are a few helpful tips when it comes to your assets and applying for a
mortgage:
•A
void switching banks or moving money between your accounts. When you
move money around, your assets become harder for a lender to verify.
•A
void cash deposits. Cash deposits are not generally an acceptable source of
funds when purchasing a home because they are very difficult to document.
•B
e sure to have good documentation regarding the source of any large
deposits. The definition of “large” varies and any amount outside of your
regular payroll deposits may be subject to documentation.
•A
void depleting your assets (making major purchases, etc.). Lenders may
request updated asset balances for closing, and if the funds are not available,
this may impact loan approval.
•Y
ou may be asked to submit bank statements for the prior two months with
all pages. It’s important to provide all numbered pages of the statement,
including any blank pages.
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Debt
In order for a lender to responsibly determine whether you can afford a mortgage
payment, you must be able to provide details on your recurring debt payments.
Debt obligations would include any car or truck loan or lease, student loans, credit
cards, child support, etc.
In addition, you’ll need to provide information on any costs associated with the
home you are considering purchasing – Homeowner’s Hazard Insurance and, if
applicable, any homeowner association dues or condo fees.
Qualifying Ratio
So what do lenders do with all of this information? This data is used to calculate
your Debt-to-Income Ratio (DTI). DTI is a comparison of the total of all your
monthly debts, including the new monthly housing costs, to your monthly gross
income. Every mortgage program will have its own guidelines, but most will have a
maximum DTI of 43%.
$3,500 (Monthly Gross Income) x .43 = $1,505 (Total Debt)
This is only an example of how the qualifying ratio works. Your loan officer will be
able to help you determine what products might fit your individual circumstances.
The qualifying ratio helps lenders assess your ability to repay the mortgage.
Lenders will also consider other risk factors, such as your credit score and how
much of your own money you have to invest in the transaction, to ultimately
determine whether to make the loan.
The home financing process.
Now that you understand the basics about mortgages and loan qualification, it’s
time to discuss the home financing process itself. There are several phases along
the path of obtaining a mortgage, but don’t let that overwhelm you. Your loan
officer and the team at Citizens will be with you at every step to guide you and
answer any questions you might have along the way.
Application
When you’ve found the home you want to buy and the seller has accepted your
offer, you’ll need to officially apply for your loan. At this time you’ll complete the
application form and select your mortgage options. You’ll also receive disclosures
that explain the fees and charges you may expect to pay for your loan as well as the
terms you have chosen.
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This is a critical step in the process. If you have any questions about the information
outlined in your disclosures or if there is something you don’t fully understand, you
should talk to your Citizens loan officer before proceeding. We’ll also be here every
step of the way with regular communication throughout the loan process to keep
you updated on the progress of your application.
Processing
Once you’ve decided to move forward with the financing you’ve selected, your
loan officer will collect the information needed to process your loan. An appraisal
will be ordered to determine the fair market value of the property you wish to
purchase. You’ll also be given the option of locking in or floating your interest
rate. Floating means your interest rate will fluctuate with the market during the
processing of your loan. Locking your rate protects you from any possible rate
increases that may occur prior to closing.
Underwriting and Loan Decision
During this phase, the information you gave on your application will be verified.
You may be asked to supply additional back-up documentation to fill in any gaps or
provide explanations for any inconsistencies. After the underwriter has reviewed
everything, you’ll be notified whether your application for a loan was approved.
If your application was not approved for some reason, you’ll receive an explanation
for the denial. Should this happen, your loan officer can work with you to determine
what actions you might consider taking to improve your chances for obtaining
financing in the future.
Pre-Closing
Prior to closing, you’ll receive copies of all appraisals and home valuations
connected with your loan application. You’ll have 3 business days to review and
ask any remaining questions. All parties involved with the completion of the loan
will be contacted to arrange for the closing to take place at a convenient time and
location. The exact closing procedure may vary depending on your location. You’ll
also be notified of the amount of money, as well as any additional documents, you
may need to bring to the closing.
Closing
The last step in the process is also very critical. It’s important to review your closing
documents thoroughly before signing and make sure you are comfortable with all
of the terms. After closing, ownership of the property will be transferred from the
seller to you. A closing agent will coordinate and distribute all of the paperwork and
funds, according to the terms agreed upon by you and the seller.
Congratulations, homeowner!
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Homeownership and beyond.
While buying a home can often seem like a complex process, we know that having
helpful, expert guidance on your side can make all the difference. At Citizens, we’re
ready to be your personal guide. We’re for homes and making the process clear and
easy to understand so you can see your way forward with confidence. Let’s talk –
because it all begins with a conversation.
If after reading this booklet you have questions or need more information, we’re
here with answers. You have a support team at Citizens, and you can count on us to
be there for you from application to closing and beyond.
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Loan documentation.
When you apply for a mortgage, you’ll need to provide personal identification as
well as copies of certain financial documents. Below is a useful listing of some of the
information you may be asked to provide, depending on your circumstances and
the type of mortgage financing you select.
Personal Identification
qV
alid driver’s license, passport or government-issued identification card
q S ocial Security Number or Tax Identification Number
q Divorce decree, if applicable
Employment Information
q Name and address of your employers for the previous two years
Self-employment Information
q One to three years of business income tax returns and all schedules
qP
roof of self-employment for at least two years (business license/proof
of liability insurance/letter from accountant)
qB
usiness financial statements
Credit Information
qL
andlord name, address and phone number for previous two years or
last 12 to 24 months of cancelled rent checks
qM
ost recent credit statements for any auto loans, personal loans,
student loans, etc.
qB
ankruptcy papers, if applicable
Income Information
qM
ost recent pay stubs
qO
ne to three years of W-2 forms
qO
ne to three years of personal income tax returns and all schedules
Asset Information
qM
ost recent bank statements (all pages) to verify deposit accounts
qM
ost recent statements for any investment/retirement income,
if using for qualification
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Property Information
qF
ully-executed Purchase and Sales Agreement for subject property
qN
ame, phone number and address of your Homeowner’s Hazard
Insurance agent
qP
roof of Homeowner’s Hazard Insurance
qV
erification of earnest money deposit on property being purchased
and source of funds (i.e. bank statement)
q Amount
of any homeowner association dues or condo fees for the
new property
If you currently have a mortgage on another property or if you have rental
income on a property, you may also be asked to provide documentation related
to your ownership.
It’s never too early to explore your options,
so speak with us today.
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Mortgages are offered and originated by Citizens Bank, N.A. Citizens One Home Loans is a brand name of Citizens Bank, N.A.
Equal Housing Lender.
HLBR1055K_HGUID
(NMLS ID# 433960). © 2015. All loans are subject to approval.