HELPFUL INFORMATION ON THE MORTGAGE PROCESS
Qualifying for your mortgage
The traditional ratio for affordability is the mortgage payment can be 33% of your income and the total of your mortgage payment plus your monthly debt payments should not exceed 38% of your income. The total mortgage cost will be determined by the interest rate, the term and the amount of points.
Common Loan Types
- Fixed Rate or Adjustable--A fixed rate is where the interest rate remains constant through the life of the mortgage. An adjustable rate mortgage (ARM) will normally have an initial rate lower than the fixed rates but will adjust according to interest rate fluctuations.
Conventional--A conventional mortgage is usually administered through Fannie Mae or Freddie Mac (private corporations regulated by the government).
FHA--A mortgage insured but not funded by the Federal Housing Administration, which is a division of the U.S. Department of Housing and Urban Development, designed for low down payments and good rates.
VA--VA loans are available to buyers with military service. They often offer lower down payment requirements, somewhat more lenient qualifying ratios, and good interest rates.
Why Title Insurance?
The state of Texas regulates the sale of title insurance such that the premiums are based on the sale price of the property and the premiums may not be discounted by the title companies.
Most sellers view the title insurance premium as an unnecessary cost of sale which benefits the buyer only. In fact, providing title insurance to the buyer is equally important to the seller.
Transfer of real estate in the State of Texas must be evidenced by a “deed”. Types of deeds include: quit claim deeds, special warranty deeds and general warranty deeds, as a few of the most common. The TREC Contract forms require the seller to provide the buyer a “general warranty deed”. This type of deed is a unilateral contract, evidencing the seller’s warranty of title to the buyer. The warranty period goes all the way back to the Texas land grants in the 1840’s. In the event a “cloud on title” surfaces at the time of the buyer’s future sale, the buyer has the legal right to sue the seller for breach of warranty of title to the property. Title insurance helps define the seller’s risk with respect to his warranty of title. Accordingly, such insurance is beneficial to both buyer and seller. Sellers benefit considerably when providing title insurance to buyer.
Proration is defined as the act of dividing property taxes, interest, insurance premiums, rental income, etc., between the buyer and the seller proportionately to the time of use or the date of closing. In a typical sale/purchase closing, the item most routinely prorated is the ad valorem taxes for that year. Since ad valorem taxes are paid at the end of the year in which they are due (they can be paid as early as October 1st or as late as January 31st of the next calendar year without penalty in most Texas counties), any closing taking place before October 1st will generally show a charge to the seller from January 1st to the closing date and a credit to the buyer for the same period. Unless negotiated otherwise, this allows the seller to pay taxes for the time that he or she actually had ownership, use and enjoyment of the property. Around October 1st, tax notices will be sent to the new owners for the year. They will be expected to pay taxes (usually through their mortgage company escrow account) for the full year. Taking into account the credit that they received at closing, the new owners actually pay taxes only for the time during which they had ownership, use and enjoyment of the property. Title companies use the best information available when prorating taxes prior to October 1st (when official figures are released by the tax authorities).
This best available information is usually the tax amount paid for the prior year.
In closings that occur after official tax figures are released (generally October 1st), title companies will normally charge each party their pro rata tax amount and pay the taxing authorities directly. This allows title companies to insure that taxes have been paid when issuing their mortgagee title policies.
Loan assumptions usually involve several prorations, such as taxes, interest and escrow accounts. Most hazard insurance companies do not allow existing policies to be assumed. Consequently, the buyers must provide and pay for a new policy at the closing. The seller can cancel his or her policy after the closing and receive a refund of the unearned premium directly from their local insurance agent. A loan assumption closing involving prorations is usually handled in the following manner: The escrow account is purchased by the buyer and credited to the seller. The account must be “sufficient” at the time of transfer (any shortages must be collected from the seller and added to the existing balance). Unless negotiated otherwise, the tax proration is handled in the same way. Interest on the mortgage must also be prorated at the time of closing. Since interest is paid in arrears (a May payment covers April interest), the buyer is usually credited with the interest from the first of the month in which the closing occurs to the closing date; the seller is charged with this same amount. For example, if a closing occurs May 21st, the buyer’s first payment will be due June 1st. The June payment covers interest for the month of May, so the buyer is reimbursed for the time the seller still had ownership and use of the property (from May 1st to May 21st). This discussion assumes that the buyer will take possession of the property at closing. Obviously, if a buyer is allowed to take possession of the property prior to the actual closing, the contract should reflect this fact and stipulate whether or not the proration date is changed accordingly. Whenever the contract contains specific requirements regarding prorations, the title company will follow the instructions of the contract.
Homestead Law in Texas
The “residential homestead” refers to the lot or parcel of land upon which the residence of the family or single adult is located and anything which is a part of that land is subject to the homestead exemption laws of the State of Texas. Those laws primarily provide for the security of a family’s home, shelter, and earning of a livelihood free from the claims of all creditors, save and except the holders of purchase money liens, home equity liens, and liens for improvements, taxes, and federal tax liens.
Reviewing the HUD
- Let’s take a look at the HUD-1 Settlement Statement that RESPA officially endorses for all transactions: new loans, assumptions, all-cash, owner finance, etc.
The first page summarizes the entire financial transaction. The left half of the page is devoted to the buyer. The top portion covers the charges the buyer is facing. The sales price of the subject property is first, followed by closing costs and pro rata taxes (if the closing takes place during the 4th quarter). The bottom portion looks at buyer credits: earnest money, new loan amounts and any taxes.
The right side of the first page is devoted to the seller and is a reversal of the buyer’s side. The top covers credits: the sales price and any pro rata tax credit. The bottom portion covers charges: closing costs, mortgage payoffs, pro rata taxes, repairs, etc.
Page two is simply a detailed breakdown of all buyer and seller closing costs, as summarized on page one. The buyer’s information is in the left column; the seller’s in the right.
The HUD-1 is usually the first document discussed during a closing.
The process of closing involves signing the papers after all of the negotiations, inspections, qualifying, etc. has been completed. It involves signing the commitment papers to the mortgage and will put the title in your name. The closing normally takes place at a Title Company. Primarily, the forms involved will include the Settlement Statement, the contract, loan papers, title insurance, homeowner’s insurance, title or deed, down payment, and the closing costs. All papers should be read carefully and signed as this is the final opportunity to make sure everything related to the purchase of your home is correct.
Have a question about a home or want to talk about selling yours?
Or, if you have any other questions or comments, then feel free to
e-mail or call using any of the information below. You will get a
response as quickly as possible.
Jacqueline Wittmuss, Broker
5611 Hwy 290 West
Austin, TX 78735
For a map to click here.
The information herein has been obtained
from sources believed to be reliable. However, no investigation has
been made to determine the accuracy of such information. No person or
entity should rely on the accuracy of this material without conducting
a thorough, independent investigation of same. JW Properties has no
liability expressed or implied relating to this information.