6.03-DGetting A Loan

Students will understand the loan process related to home ownership.

What Types of Loans Are Used to Buy Homes?

• Conventional/Traditional- Fixed Rate Mortgage– Rate does not change– 15 year, 30 year most common

• Adjustable Rate Mortgage (ARM) Not Recommended by Mrs. C!– APR can change, payments increase substantially– Lower payments in beginning to help get the dream home– Pay for longer time– May become “upside down” in loan (owe more than home is worth)

• FHA Loan– Lower income, federally insured

• VA Loan– Veterans of military service, federally insured

Tax Benefits of Home Ownership

• Mortgage interest is tax deductible for state and federal income taxes.

• Property taxes are tax deductiblefor state and federal income taxes.• Increase in value not taxed for income tax until sold if no new home

purchased

1. Credit Application2. Documentation3. Processing4. Underwriting5. Closing 6. Funding

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Process of Obtaining Credit

• Form used to provide information needed by a lender to make a decision about granting credit (approving a loan).

• Fill out completely, accurately, & honestly• Requires signature of applicant, which indicates

provided information is true

Credit decision must be based on your ability to repay a loan, Other discrimination is illegal.

Credit Application

Documentation• Creditor will collect

and verify necessary documentation for the extension of credit.– Examples: Bank

statements, credit rating, credit card statements, past W-2’s, etc.

– Verify using phone, mail, physical documents

• Lender/Creditor- business or individual loaning money• Debtor/Borrower- person borrowing money• Information provided by Credit Bureaus – Credit bureaus sell lenders credit information about

credit users such as debt records, payment history, and if any action has been taken to collect overdue bills

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Main Factors Examined for Granting Credit

• Lender builds loan file– Evaluates credit

worthiness• Creditors examine

factors about potential debtors when deciding whether to grant them credit– The C’s of Credit

Worthiness

Processing

• Capacity – Will debtor be able to pay loan back?– How much debt can comfortably be handled?– Considers current income and debt levels

• Character– Honesty to pay debt when due– Earned by paying bills on time and being a trustworthy,

reliable, stable person financially– References – people you have borrowed from in the past

who indicate you paid on time• Capital (money)

– How much you have beyond what you owe– Current available assets that could be used to repay debt

if income was unavailable

Processing – The C’s of Credit Worthiness

• Underwriter or loan officer– Review loan info for soundness, creditworthiness– Make decision about granting credit

• Where does credit info come from?– Consumer Reporting Agencies, Credit

Bureaus– Company that compiles and keeps records on

consumer payment habits.– Used to evaluate creditworthiness

• Examples: Equifax, Experian, and TransUnion

Underwriting

• Meeting by parties to contract to sign and close the deal– Representative explains terms of credit-

usually loan officer– Attorney handles real property closing, e

• Be sure all details are legal to letter of law• federal, state, banking guidelines

– Debtor/creditor sign contract• Contract is binding on signing parties

Closing

• KWYS – know what you’re signing

• READ and UNDERSTAND BEFORE signing any contract

• Don’t be afraid to ask questions!

• Ask a parent/guardian/adult to go with you!

• Contract – legally binding agreement between two parties

Closing

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• Creditor issues money/funds to the debtor for the item purchased

• Example: mortgage company pays seller in full, debtor then pays mortgage company monthly installments to repay the loan

Funding

– Legally binding documents that allow debtors to use credit to obtain goods and services

– Debtors should know the content of the credit contract before signing such as:

• Amount of finance charges• Repairs covered • Add-on features• Reduction of finance charge if contract paid in full prior to ending

date• Receive the copy of the contract• Repossession conditions

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Credit Contract

Steps in Order:1.___credit application

2.___documentation

3.___processing4.___underwriting5.___closing

6.___funding

Description of Activity A. loan officer builds a loan file B. borrower completes form info for lender

to review C. creditor issues money to the debtor D. debtor/creditor sign contract E. creditor collects and verifies information F. loan officer reviews loan for

creditworthiness

Review Steps to Get Loan