Sunday, November 8, 2009
Application Denied! That’s the last word you want to hear when applying for a mortgage! Credit scores play a vital role in the mortgage application process. It’s to your benefit to keep your credit score as high as possible. The way you’ve handled your finances in the past will predict how you handle your finances in the future. Generally speaking, the higher your credit scores, the lower your interest rate.
Birth of a Credit Score
A person’s credit score is a computer generated summary calculated at the time of request. It is based on information compiled by the three major credit reporting agencies consisting of your credit history and payment patterns. Credit scores are used to assist lenders in determining whether you will be able to obtain a mortgage loan, and what interest rate they will be able to offer you. Your credit score changes, depending on how you conduct your personal finances. There are many other factors that go into a credit score. Each reporting agency has their own criteria in determining the credit score they report.
The most commonly used credit score is provide by Fair Isaac Corporation AKA FICO® score. Scores can range from 300 (very low) to 850 (very high). Most mortgage lenders consider a credit score above 700 very good. Lenders have loan programs available for borrowers with credit scores as low as 620. A few lenders loan programs accept scores even lower.
Play the Percentages
Different factors play into determine your credit score. The key factors are:
Payment History – 35% - Timely payments on all credit accounts will push your scores up. Late payments or spending past the credit limit will plummet them. Bankruptcies and liens are other major factors that will lower your score.
Total Amount Owed – 30% - What’s owed vs. your available credit. Maxing out credit lines will lower your score. Keeping at least 50% of your available credit open will push your credit score up.
Length of Credit History – 15% - Shows how long you have been using credit and how you’ve managed your finances in the past. The longer the credit account is open and paid as agreed, the higher your credit score will go.
New Credit Accounts -10% - Accounts recently opened and recent credit inquiries. Applying for a lot of credit can lower your score.
Type of Credit Being Used – 10% - Credit accounts such as credit cards, installment loans, mortgages, and other types of credit extended to you. If you have a lot of credit cards, your credit score may go lower.
The best way to go to keep your credit score up is to pay your bills on time, and limit the amount of debt you take on. Your credit report and your credit score communicate how you manage money. With good financial management, you’ll secure a good credit score and smooth sailing when it’s time to acquire a mortgage.
The Top 3 Credit Bureaus
Below are the three major credit reporting agencies and their contact information:
P.O. Box 740241
Atlanta, GA 30374
P.O. Box 9701
Allen, TX 75013
P.O. Box 2000
Chester, PA 19022
Saturday, November 7, 2009
When you’re preparing to purchase a home, the best way to approach the process is to get your mortgage approval settled before you begin your search. By doing this you’ll be able to know what your price range is, and be ready to quickly make on offer on your dream house when you find it.
There are some differences between a pre-qualification vs. pre-approval. Pre-qualifying is an estimate of what you might be able to borrower. A pre-approval is a loan approval that carries with it certain conditions.
1. Provides an estimate of your borrowing ability
2. Based on a summary of information that you provide about your income and assets
3. Usually involve a credit check
4. Completed in a just a few minutes with a qualified mortgage loan officer
5. Most lenders do this free of charge
1. Provides proof to real estate professionals and home sellers that you are conditionally approved for a specific loan amount
2. Based upon completion of a loan application and an underwriter’s verification of your income and assets
3. Includes a credit check
Will take more time than a pre-qualification as it is a much more in depth process
4. You’ll need to provide payroll receipts, bank checking/savings statements, other asset statements (such as IRA, 401(k), brokerage) W-2’s for the two previous years, and tax returns for the two previous years
5. It is conditional and is based on a number of factors such as:
- The home you’re considering to purchase or refinance will need to appraise at the value you estimate it
- Satisfactory title review
- Meeting all the loan program guidelines for the type of loan you want
- You must ensure that no material changes occur in your personal finances like, a decrease in family income, taking on additional debt, lowering of bank checking/savings balances
6. Most lenders will do free of charge
Remember, a pre-qualification is not a comprehensive evaluation therefore it is not guaranteed so it carries far less weight with a real estate professional than a pre-approval.
Sunday, October 25, 2009
Terms You Should Know
Allows the lender to speed up the rate at which your loan comes due or even to demand immediate payment of the entire outstanding balance of the loan should your default on you loan.
Adjustable Rate Mortgage (ARM)
Is a mortgage in which the interest rate is adjusted periodically based on a preselected index. Also sometimes known as the renegotiable rate mortgage, the variable rate mortgage or the Canadian rollover mortgage.
On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years, depending on the index.
Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance.
Annual Percentage Rate (APR)
An interest rate reflecting the cost of a mortgage as a yearly rate. This rate is likely to be higher than the stated note rate or advertised rate on the mortgage, because it takes into account points and other credit costs. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan.
An estimate of the value of property, made by a qualified professional called an "appraiser."
The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan can usually save the buyer money since this is an existing mortgage debt, unlike a new mortgage where closing costs and new, possibly higher, market-rate interest charge will apply.
Balloon (Payment) Mortgage
Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a time specified in the contract.
An individual in the business of assisting in arranging funding or negotiating contracts for a client but who does not loan the money himself. Brokers usually charge a fee or receive a commission for their services.
When the lender and/or the home builder subsidizes the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage may change per year and/or the life of the loan.
Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change.
The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement.
Usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The costs of closing usually are about 3 percent to 6 percent of the mortgage amount.
An agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paperwork or compliance with stated conditions.
A short term interim loan for financing the cost of construction. The lender advances funds to the builder at periodic intervals as the work progresses.
A mortgage not insured by FHA or guarantee by the VA or Farmers Home Administration (FmHA).
The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her net effective income (FHA/VA loans) or gross monthly income (Conventional loans). See Housing Expenses-to-Income Ratio.
Deed of Trust
In many states, this document is used in place of a mortgage to secure the payment of a note.
Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
See Negative Amortization.
Failure to make payments on time. This can lead to foreclosure.
Department of Veterans Affairs (VA)
An independent agency of the federal government which guarantees long-term, low- or no-down payment mortgages to eligible veterans.
Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (e.g. two points on a $100,000 mortgage would cost $2,000).
Money paid to make up the difference between the purchase price and mortgage amount. Down payments usually are 10 percent to 20 percent of the sales price on Conventional loans, and no money down up to 5 percent on FHA and VA loans.
A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.
Equal Credit Opportunity Act (ECOA)
Is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status or receipt of income from public assistance programs.
The difference between the fair market value and current indebtedness, also referred to as the owner's interest.
Refers to a neutral third party who carries out the instructions of both the buyer and seller to handle all the paperwork of settlement or "closing." Escrow may also refer to an account held by the lender into which the homebuyers pays money for tax or insurance payments.
See Federal National Mortgage Association.
Farmers Home Administration (FmHA)
Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.
Federal Home Loan Mortgage Corporation (FHLMC)
Federal Housing Administration (FHA)
A division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standard for underwriting mortgages.
Federal National Mortgage Association (FNMA)
Also known as Fannie Mae. A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are generous enough to handle moderate-priced homes almost anywhere in the country.
FHA Mortgage Insurance
Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to insure the loan with FHA. On a 9.5 percent $75,000 30-year fixed-rate FHA loan, this fee would amount t o either $2,250 at closing or an extra $31 a month for the life of the loan. In addition, FHA mortgage insurance requires an annual fee of 0.5 percent of the current loan amount, the more years the fee must be paid.
A mortgage on which the interest rate is set for the term of the loan.
A legal procedure in which property securing debt is sold by the lender to pay a defaulting borrower's debt.
See Federal Home Loan Mortgage Corporation.
See Government National Mortgage Association.
Government National Mortgage Association (GNMA)
Also known as Ginnie Mae, provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA.
Graduated Payment Mortgage (GPM)
A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it.
Gross Monthly Income
The total amount the borrower earns per month, before any expenses are deducted.
A promise by one party to pay a debt or perform an obligation contracted by another if
A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
Housing Expenses-to-Income Ratio
The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her net effective income (FHA/VA loans) or gross monthly income (Conventional loans).
That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves.
A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one- three-, and five-year U.S. Treasury Security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average Costs-of-Funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down.
Money source for a lender.
A loan which is larger (more than $240,000) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
A claim upon a piece of property for the payment or satisfaction of a debt or obligation.
The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage.
The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate.
The highest price that a buyer would pay and the lowest price a seller would accept on a property. Market value may be different from the price a property could actually be sold for at a given time.
Money paid to insure the mortgage when the down payment is less than 20 percent. See Private Mortgage Insurance or FHA Mortgage Insurance.
The borrower or homeowner.
Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the homebuyers ends up owing more than
Net Effective Income
The borrower's gross income minus federal income tax.
A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender.
The fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of face value of the loan.
Principal, interest, taxes, and insurance. Also called monthly housing expense.
See Discount Points
Power of Attorney
A legal document authorizing one person to act on behalf of another.
Expenses necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments.
A privilege in a mortgage permitting the borrower to make payments in advance of their due date.
Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in 36 states and the District of Columbia.
The amount of debt, not counting interest, left on a loan.
Private Mortgage Insurance (PMI)
In the event that you do not have a 20 percent down payments, lenders will allow a smaller down payment-as low as 5 percent in some cases. With the smaller down payments loans, however, borrowers are usually required to carry private mortgage insurance. Private mortgage insurance will require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount and may require an additional monthly fee depending on your loan's structure. On a $75,000 house with a 10 percent down payments, this would mean either an initial premium payment of $2,025 to $3,375, or an initial premium of $675 to $1,130 combined with a monthly payment of $25 to $30.
A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of Realtors.
The cancellation of a contract. With respect to mortgage refinancing, the law that gives the homeowner three days to cancel a contract in some cases once it is signed if the transaction uses equity in the home as security.
Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records.
Renegotiable Rate Mortgage (RRM)
A loan in which the interest rate is adjusted periodically. See Adjustable Rate Mortgage.
Real Estate Settlement Procedures Act (RESPA)
RESPA is a federal law that allows consumers to review information on known or estimated settlement costs once after application and once prior to or at settlement. The law requires lenders to furnish information after application only.
Reverse Annuity Mortgage (RAM)
A form of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as security.
All the steps and operations a lender perform to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.
See Closing Costs.
Shared Appreciation Mortgage (SAM)
A mortgage in which a borrower receives a below-market interest rate in return for which a lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgages where the borrower shares the monthly principal and interest payments with another party in exchange for a part of the appreciation.
A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any building.
See Balloon Payment Mortgage.
A document that gives evidence of an individual's ownership of property.
A policy, usually issued by a Title Insurance company, which insures a homebuyers against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller.
An examination of municipal records to determine the legal ownership of property. Usually is performed by a title company.
A federal law requiring disclosure of the Annual Percentage Rate to homebuyers shortly after they apply for the loan.
A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10 years), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan, due within 30 days notice at the end of seven or 10 years.
The decision whether to make a loan to a potential homebuyers based on credit, employment, assets, and other factors and the matching of this risk to an appropriate rate and term or loan amount.
A long-term, low-or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.
VA Mortgage Funding Fee
A premium of up to 2 percent (depending on the size of the down payment) paid on a VA-backed loan. On a $75,000 30-year fixed-rate mortgage with no down payment, this would amount to $1,406 either paid at closing or added to the amount financed.
Variable Rate Mortgage (VRM)
See Adjustable Rate Mortgage.
Verification of Deposit (VOD)
A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts.
Verification of Employment
A document signed by the borrower's employer verifying his/her position and salary.
Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or the previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.