Simply The Best Loans

Continued—-

Third, your loan officer should tell you what type of loan programs you qualify for and explain their differences so that you can make a proactive decision about the type of loan you want.

Do you want a fixed rate loan?

Do you want a “no down payment” loan?

Will you have to pay PMI (private mortgage insurance)?

Can you use gift money? Is there a prepayment penalty?

Can you make interest-only payments?

These are just some of the many variables loan programs can offer. In providing this information, your loan officer should explain the meaning of each aspect of the loan as well as outlining the pros and cons of each program. Make sure you understand how the program works, what your payments will be now and in the future. If aspects of the loan program can change such as the interest rate, make sure you understand how and when the rate can change. Always ask for details and answers when you don’t understand.

Continued, Part 4, The Underwriting Process–

When applying for a mortgage to buy a house, whether it’s your first or fifth, there is certain information your loan officer should tell you. It doesn’t matter whether you are applying for your mortgage with your local bank or with a mortgage broker, the information you want is the same.

First, your loan officer will have to pull a credit report to accurately qualify you for a mortgage. If you are qualified without having your credit pulled by the loan officer, then your qualification is not necessarily going to mean that you would actually qualify for a loan. In such a situation, the qualification would only mean that your debt to income ratio falls within the lender’s guidelines.

Assuming that the loan officer has pulled a credit report, they should tell you what your credit scores are. Credit scores over 620 are considered acceptable and/or average credit. Credit scores over 720 imply that you have an excellent credit history. Your credit report will also indicate if you have had any late payments, have any accounts in collections or have any judgment outstanding. If you find that any one of these kinds of things showing on your report—don’t panic. Unfortunately, it is becoming more and more common that such items are being reported in error. If this is the case, your loan officer should provide you with all pertinent information from the report so that you can investigate the situation and have it corrected.

For credit issues that need to be addressed (e.g. Collection accounts or outstanding judgments) your loan officer should offer you information for what you need to do in order for your issue to be addressed and pass the underwriting requirements for a loan. (For further information on correcting credit reports and addressing credit issues, see www.protectyourgoodcredit.com)

A complete pre-qualification for a mortgage loan will include a review of your gross monthly income, your monthly debt (total of minimum payments on all accounts, not including rent or current mortgage payment or utilities), and your credit scores. Once completed, your loan officer should provide you with a pre-qualification letter for your real estate agent or for the seller of the home you wish to purchase. Pre-qualification should not be confused with pre-approval. To be pre-approved for a loan, your loan officer must submit a completed loan application and a credit report to a lender for underwriting. The application will either be denied or approved pending certain underwriting conditions being met. Loan commitment is given by the lender only after all conditions are met and the loan is ready to schedule for closing. It is very important to understand these distinctions as both realtors and many loan officers will often use the terms interchangeably despite their specific differences. –Continued in Part II-The Good Faith Estimate.

For some time now, my credit report provider has offered a service to correct and re-score a credit report within 5 to 10 business days. Considering if you attempt to get your report corrected of some error or derogatory credit by trying to work with the credit bureaus themselves, you might get your credit score improvement within 3 to 6 months. That’s a big difference!

For someone in the process of purchasing a home and a 20 point improvement in their score results in a better interest rate, this is a valuable tool. But it isn’t cheap. My report provider charges $30 per credit bureau per tradeline. For instance, if you had a credit card company reporting late payments, but you have the documentation to show that the bill was paid on time and you wanted to have your report corrected, the cost would be $90 to have it corrected and for your report to be re-scored.

A recent client, who was able to provide documentation that two accounts were paid in full and closed, got a 20 point improvement in her credit score which cost her $180. The improvement of her score resulted in a reduction of her interest rate which saved her over $200 per month on her mortgage payment. For my client, those savings were well worth the fee to have the report re-scored quickly.

The downside is the reporting company makes no guarantee that your score will be improved even after going through their re-scoring process. So it is possible that you could spend the $90 per item and it not impact your score enough to make a difference in the terms of your loan.

That’s when you need the assistance of a mortgage professional to help you evaluate ‘the cost versus the benefit’ and whether or not re-scoring is right for you.

In a real estate transaction, earnest money or deposit on the contract for sale is made to a home seller or their representative, usually a real estate agent, to secure an offer to buy the property. It is required for the contract to be valid or ratified. The amount of the deposit is up to the buyer, although in some areas or situations, there are expected standards for the amount.

The earnest money is held in escrow by either the seller or the seller’s representative until closing. At the close of the sale, the money is transferred to the closing agent and deducted from the total amount the buyer must have available to complete the sale.

It is recorded on the settlement statement (HUD-1) under Amounts Paid By or In Behalf of the Borrower and subtracted from the Gross Amount Due from Borrower. Therefore, the borrower is credited with having paid that amount toward the purchase in advance of closing.

Should the terms of the contract for sale not be met by the seller, the earnest money deposit is returned to the buyer. If the terms of the contract for sale are not met by the buyer or he decides to withdraw his offer, the earnest deposit is subject to forfeit.

If you are a first-time home buyer and talk to a realtor, the first question you may be asked is are you “pre-approved” for a mortgage? Within the industry at this time, a great number of regulators, legislators and other agency folks are taking issue with the terms “pre-approval versus pre-qualified” and it is creating confusion for most consumers.

The definitions are really very simple and, if there were a standard within the industry, there would be less confusion.

To begin with, consumers must understand that each state has it’s own regulatory bodies overseeing things such as industry protoccol and terminology. In Virginia, where I am licensed, the regulators are just now working on establishing statewide guidelines for defining “pre-approved versus pre-qualified” and the definitions they are drafting are what I have used since I began to work in the mortgage business. For definitions like these to be universal, they would have to be mandated on a Federal level .

“Pre-qualified” is when a consumer provides the loan officer with specific information and once verified, the loan officer can give the potential borrower a letter stating the loan type, amount and terms the borrower qualifies to receive from a lender. The information provided must include at a minimum name, address, and social security number. It should also include annual earnings, estimated savings and assets and current rental payment, although in some instances, the loan officer may not get this information during the initial contact which is ususally over the phone.

The loan officer will then pull a tri-merge credit report which provides the credit history of the individual(s) from each of the credit bureaus along with their credit scores. After reviewing the credit report and calculating the debt-to-income ratios based on the income and asset information the individual(s) provides, the loan officer can establish how much the individual(s) qualifies to borrow and the general terms of the loan programs for which they qualify.

“Pre-approval” is by definition, a pre-approved loan qualification. This means the individual(s) has provided all the information for a pre-qualification and the loan officer has submitted it to the lender for pre-approval. This process means the lender has reviewed and/or verified certain information provided by the individual(s) and submitted by the loan officer, usually electronically via Fannie Mae’s Desktop Originator or Freddie Mac’s Loan Processor software programs. The lender then provides the loan officer with a conditional approval, meaning that, if the conditions listed on the approval are met, the lender will underwrite the loan.

While a thorough “pre-qualification” is more than adequate for an individual to feel confident they are qualified to begin shopping for a new home, a “pre-approval” does not automatically guarantee that the loan will close. The most important aspect of a transaction, once in progress, is that the conditions remain the same throughout the entire process. If an individual is pre-approved and, for some reason, the income, asset or credit information should change in the middle of the process, it could result in the loan ultimately being denied, even though the lender initially issued a pre-approval. It’s still conditional until all of those items are met to the lender’s satisfaction.

It is important for anyone shopping for a new home to keep in mind that, once the transction is started, they must do everything possible to ensure that nothing in their circumstances change. Don’t go out and buy a new car, don’t take any of the asset money disclosed out of the bank, and don’t change jobs. If something unfortunate, such as an unexpected job loss occurr, inform your loan officer immediately.

Keeping these guidelines in mind as you begin the process of a new home purchase should help reduce the worry and stress of having problems during any part of the transaction.

Believe it or not there are times the interest rate is unimportant when you are getting a loan. Right now everyone is caught up in trying to explain what Greenspan calls the “conundrum”. The National Association of Realtors’ chief economist, David Lereah, is reported as saying,

Not only have mortgage interest rates declined, but an expected rise in the second half the year will be slower than in earlier projections.

With the rate on 30 year fixed mortgages dropping below 5.5%, almost a full percentage point less than this time last year, when would someone purchasing a new home not want to worry about the interest rate?

If you are a first time homebuyer and have been paying premium rental fees, you will save money by purchasing a home no matter if the interest rate is 5.5 or 6.5. Depending on your income and tax bracket, the interest rate would have to hit double digits for you to question whether or not you would experience savings. It is almost always cheaper to own home than to rent, especially if you earn over $40,000 a year and have no dependents.

If you have specific circumstances which make your loan program a niche item, your rate won’t be as low as current market but if it allows you to meet your overall financial goals, then you want to do the loan despite a higher rate.

I tell my clients routinely that they have to look at the big picture of what they are trying to accomplish. If the higher rate program helps them better meet their financial needs, then the rate doesn’t matter.

In the course of qualifying for a loan, residential or commercial, you complete a 1003 (called a ten oh three) Uniform Residential Loan Application. On the application, you give employment history, income and assets, a schedule of real estate that you own and answer some basic disclosure questions.

For the average borrower, this is a straight forward process. For the self-employed, commissioned sales or 1099 consultant, this is a challenging prospect. These borrowers don’t receive a bi-weekly paycheck. Their income can come in bits and pieces, sometimes large lump sums. Underwriters have difficulty fitting these borrowers into their “box” of underwriting perimeters. This used to result in borrower’s being denied loans.

Now we have a variety of options, the most common being Stated Income and/or Stated Asset loans. The other description of these programs is No Income Verification and/or No Asset Verification. These terms mean that when filling out the application, with the help of your loan officer, you will state whatever income or assets you need to meet the debt-to-income ratios the underwriter requires. You don’t have to prove it with check stubs, tax returns or account statements.

When doing a stated loan, you and your loan officer must keep in mind that whatever you state must be realistic for the type employment shown. For instance, it is perfectly reasonable that a seasoned realtor would make $100,000 annually. It is not realistic for a cashier working at Wal-Mart.

Now you’re saying to yourself–what’s the catch? All lenders have different requirements a borrower must meet to qualify for one these programs. As a rule, the strictest criteria is for credit scores. Most lenders require scores of 720 or higher. However, if your scores are not that high, you may still qualify but at a slightly higher interest rate. Since there are hundreds of lenders, that results in even more underwriting options.

Suffice to say that if you are working with a knowledgeable broker and you need one of these type programs, the broker should be able to find a lender whose program fits your needs.

Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent. It is important to note that PMI is an insurance policy for the lender to ensure that they will be paid back the amount of the mortgage in the event you default on your loan. The premium for this insurance is broken into monthly payments and added to your monthly mortgage payment.

PMI isn’t always a bad thing — it can allow you to make a lower down payment and still qualify for a mortgage loan. In past years, without PMI, many of us would not have been able to purchase our first home. Now with a number of lenders, if you have good credit, you can get a loan with a higher than 80% LTV and still not have to pay PMI insurance.

One thing about PMI insurance that has always bothered me is that you, the borrower, are paying for an insurance for the lender guaranteeing that the lender will be paid in full if you default, yet, the lender still gets to foreclose on the property as well. They get paid by the insurance and get the property too! Seems like a double dip to me.

Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is also related to your particular credit history or other individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount annually, according to the Mortgage Bankers Association. On a $200,000 mortgage, you may be paying $1,000 per year for PMI. Nonetheless, I have seen PMI insurance premiums that were considerably more than .5% of the loan amount.

Your best bet to avoid this expense is to either put down the required 20%, ask your loan officer if you qualify for a program that does not have PMI even with higher LTVs, or do a combination loan.

A combination loan means that your loan is broken up into two parts. You have a first mortgage up to 80% LTV and at the same time a second mortgage for the balance up to 100% LTV. This type loan can allow you to make a lower down payment and still avoid PMI.

In some cases a subprime loan is a good way to avoid PMI. If the combine interest rates and payments on a combo are going to be uncomfortably high and you have good credit, you could ask your mortgage broker to look at subprime lenders. Subprime lenders do not charge PMI insurance no matter what the LTV is. Also, to borrowers with high credit scores, subprime lenders offer rates that are competitive to conventional lenders.

Subprime lending is often a two to three year proposition as the loans are usually 2 or 3 year ARMS and after the initial 2 to 3 years the rate adjustments could be too high for comfort. However, some subprime lenders offer excellent fixed rates to borrowers with superior credit and the savings of PMI insurance and/or combined costs of a combo loan can make this a more attractive loan option for those borrowers.

As a full-service mortgage broker, I deal with a broader range of consumers than other loan officers. It is because I am able to offer such a wide variety of programs from multiple lenders versus loan officers that work for just one lender and offer only that lender’s programs.

I also offer my clients as much information and/or assistance I can when helping them choose a specific type of mortgage since I believe this will significantly impact their overall financial picture. I do not attempt to act as a financial advisor. I do try to make sure that whatever type loan they are interested in will support whatever financial goals they tell me they have.

An informed, educated borrower is empowered to make better financial decisions for themselves and their family. Therefore, I work hard to make sure my clients are well-informed of the loan choices and/or options.

I’ve had two recent experiences that have led me to write this article. Both times my clients came to me with very specific ideas about what type of mortgage they wanted. After reviewing their credit and financial picture, I had to recommend against the loan programs they believed they wanted.

Why would I do this………………..especially since both times resulted in my losing the opportunity to make money on the loan?

The answer is simple. It was a bad financial decision for my client. In each case the loan was obtainable for them, the downside in both instances would have resulted in such a financial strain that my clients would have been risking their overall fiscal health.

While it’s not my job to manage my client’s finances, I do believe that I have a responsibility to point out potential pitfalls. If they are considering mortgage options that would leave them extremely vulnerable financially should they have an unexpected loss of income or health, I feel honor-bound to tell them the risks and recommend another course of action.

There are also a lot a loan programs that look good from some particular aspect but overall, if you read the fine print, are very risky to the borrower. I don’t recommend these products to my clients. When they come in to meet with me and ask for them, I recommend against them.

I base my recommendations to my clients on my heartfelt belief that if I wouldn’t buy it, I shouldn’t sell it to you.

Remember, when shopping for anything, the person representing the product is usually very knowledgeable, not only of their product, but of the competition’s products as well. If you’re dealing with an honest professional and you ask the question “would you do this” and their answer is “no”, you probably don’t want to do it either.

Many mortgage companies offer bi-weekly payment plans which are designed to help you budget for your mortgage payment more conveniently and payoff your mortgage early. Any bi-weekly payment plan will help you pay your mortgage off sooner, however, very few bi-weekly payment plans are actually making bi-weekly payments.

What the lender actually does is collect a bi-weekly draft from you but the payment is still applied in a lump sum once a month to your mortgage. This does pay down your principal quicker because it essentially results in one extra payment being made directly to your principal balance each year. You are not, however, getting the benefit of having a payment applied to your mortgage on a bi-weekly basis, even though you have had it deducted from your bank account that way.

This sounds confusing and, in fact, it is. If you are not very savvy about payment schedules, you could read all the information provided by most lenders offering these programs and not realize many of these important facts. Most lenders who offer these programs charge an enrollment fee of $250 or more. In addition, they also charge a processing fee of sometimes as much as $9.50 to $11.50 per draft of your checking/savings account. This can add up to over $500 per year in fees alone. I don’t know about you but, given the choice, I’d rather write checks myself and use that extra $500 to pay down my principal balance.

Don’t get me wrong, these programs will enable you to pay off your mortgage more quickly, but for far less than $500 a year, you can create the same effect and pay the extra money you’re not spending on fees to your mortgage principal.

Unless the your mortgage lender is offering the bi-weekly payment plan for a one time set up fee (which is usually a result of banks charging them a fee to set up automatic draft payment), there is a better option which you can set up yourself.

Tomorrow’s post will tell how to set up bi-weekly payments yourself.