Where do we begin? Get Pre-Qualified
The very first step in finding and purchasing a home, is to talk to a Lender and get PRE-
QUALIFIED. They can usually do this over the phone in 10 minutes, get your
permission to pull your 3-bureau credit report, find out about your income,
employment, assets and liabilities, then come up with an amount that you would
qualify to borrow for a purchase.
After we know this amount, that tells us what price range to look for house in, so you
don't look at homes outside of your budget or ability to qualify for.
We have several very reputable and reasonable Lenders with access to the best
possible loan program that suits your scenario.
If you would like a no-cost, no-obligation consultation, just click "Contact Us," and send
us your name and number, and we will have our Lender contact you and answer any
questions you may have.
PRE-QUALIFICATION
The first step is to get prequalified. What does this mean? This means you talk to a
Lender either in person, or usually on the phone for about 5-10 minutes, where they
gather some basic information from you such as your income, employment, job history,
family & dependents, your assets and liabilities, debts, and most important, your
permission to have your credit report pulled. (Yikes!). This prequalification process is
informal, is usually FREE, usually no documentation is required at this point, and the
Lender is assuming that all the information that you provide is factual and accurate.
The prequalification is NOT a loan commitment nor "loan approval," but is basically
telling you that if all the information you provided is correct, then you can qualify to
borrow a certain amount of money based on that information. Then the next step is to
go in in person with your physical documentation such as W-2's, paystubs, bank
statements, tax returns, and the printed credit report. This is called the "Full-App," or
full Application requiring your signature. Keep in mind that most people inquiring about
a loan usually are told they are prequalified for a certain amount, but then after the
Full-App, that amount is less. This is because most people are either unaware that
their credit scores have past blemishes, or else they are in complete delusion about
what they make, what they owe, and their credit history!
OK, now that we have obtained our credit report and have been prequalified for a
specific loan amount, what types of loans are out there and which one is right for us?
If you would like information about loan prequalification, to to get references for
Lenders, please visit the "contact us" page and send us your information and we will
put you in touch with our highly respected Lenders. All of your information will be kept
private and not sold or given to anyone else.
Your Credit Report
The credit score is called the FICO Score. This stands for Fair Isaac and COmpany.
This was named after the man who developed the concept of credit ratings in the
1950's. It later came into common practice in the 1970's and we have used it ever
since. Everyone has a "Credit Bureau," whether you have open lines of credit currently
or not. Information on your credit report is kept for 7-10 years! There are actually
three credit bureaus: Experian, Equifax, and Transunion. It may have terms such as
"Fair Isaac, FICO Risk or Beacon." Those are the names of each bureau's model.
Experian's report is called a "Fair Isaac model," Equifax's report is called a "Beacon,"
and Tranunion's report is called a "FICO Risk." When your credit is pulled, all three
scores are combined on one report, called a "three-bureau," or a "tri-merge." You will
have all three scores, and each bureau will have a slightly different score than the
others. The middle score is called your "mid-score," and this is the one that Lenders
go by for qualification. You can request a copy of your credit report, but the ones
advertised for free or online are NOT three-bureau reports and usually do NOT contain
a numeric score, and can NOT be used by a Lender for loan qualification; they must pull
their own.
What is a good credit score? Well the national median credit score is probably about
550 to 560. Anything above about 560-580 is considered "fair" and 580 is about the
lowest score a Borrower can have to qualify for 100% financing, which means no down
payment is required! The next level is about 620 which is considered "solid or good."
The median national score is about 660, which means that half the country falls below
660 while half have scores higher than 660. At 620 or higher you are considered an
"'A'-Borrower" or "'A'-Paper!" Below that is called "sub-prime, or B-paper." The next
break is about 640 to 680 which is considered "very good," and anything over 700 or
720 is considered "excellent," meaning Lenders will be fighting over each other to get
your business and you will qualify for the best rates and terms! Conventional loans
with favorable terms usually require scores above 680 to 720. The printed credit
reports say the highest score possible is 850, but we had a sweet senior client who
was never late on a payment and always paid her credit cards down to zero, and she
had a credit score of 926!
What affects your
credit score?
There are 5 primary factors that determine your score, and they are weighted
differently. The 5 factors and the weighing factors are:
- 35% Payment History (More late payments=lower scores)
- 30% Debt Amount (High debt=lower scores/Low debt=higher scores)
- 15% Credit History (Accounts open longer=higher scores)
- 10% Types of Accounts (Mortgages=weigh higher than revolving cards)
- 10% New Accounts (Lots of new accts or inquiries lower your score)
So you see there are a number of factors to be aware of in maintaining a good credit
score. Being 30 days late in installment payments reduces your score. Being 60 days
late affects it more, 90 days late still more, and going to collections affects it severely.
Late mortgage payments reduce it more than a late credit card payment. Another
factor is your debt ratio. This means that if Person A has 20 credit cards and $100,000
of open credit lines and charge cards, but only has total balances owing of $10,000, he
has a 10% debt ratio, simplistically speaking. Now if Person B has only 2 credit cards
with a total limit of $5,000, but has "maxed" his cards and has a $5,000 balance,
Person B will probably have a lower credit rating than Person A because he is living on
his maximum allowed credit and carries about a 100% debt ratio!. Lenders want to
see ratios of about 35% of total credit or less to give you good rates. Other factors
lowering your score are opening too many accounts in a short period of time, and even
having too many inquiries within a certain time, such as when you apply for many
credit cards or loans and your credit report is pulled each time. This too can reduce
your score! Just a few late payments dating back 2-3 years can literally cost you tens
of thousands of dollars in a 30-year mortgage when you can only qualify for rates that
are 1% to 2% more than prime rates because of your credit score! Remember good
credit is everything!
Are "FREE" credit reports worthwhile?
Well that's sort of a trick question. Yes and No are both the answer, depending on
what you want to find out and why. The trick part is that often it is very far from
"free!" Everyone has seen the solicitations for "free" online credit reports. However 3
very important items are omitted:
First, you have to sign up with a credit card and subscribe to a credit-monitoring
service that charges you either a one-time or ongoing fee, and for signing up they will
give you a free copy of your credit report. So the initial copy is free but the service to
get it, is not! After that you will be billed monthly or quarterly often as high as $100
unless you cancel the account!
Second, the credit report will NOT have your credit score, the most vital part of your
credit report; it will be merely the list of your creditors and your payment history! Even
reports that promise your credit score are NOT THE SAME as the scores obtained by a
bona-fide Lender! You will only receive what is called a "Consumer Credit Report," the
scores will vary from a 3-bureau report pulled by a Lender, and this is NOT valid to
obtain a loan!
Third, the free credit report you just ordered is NOT a 3-bureau report, but just one of
the three! The website you visited to get it is providing the service for just ONE of the
bureaus! If you want a credit report with your actual credit score included you must
pay additional fees, and if you want all 3 bureaus included you will be charged still
more fees!
So to answer the question "is it worthwhile?" the answer is YES if you just want to see
who is on your report and your payment history to make sure there is no incorrect
information and if you don't mind paying about $100 for a "free" report; but the
answer is NO if you want a 3-bureau report or want your score, or think you can use it
with a Lender to get qualified for financing!
Here are some websites soliciting "free credit reports" and their affiliations:
How does one contest or correct credit information?
Many Lenders now work in conjunction with Credit Repair Companies. These
companies will do what we all hate to do: fight with credit reporting companies and the
credit bureaus. The fees for these services range from $17.00 per item per credit
bureau (3), up to a few hundred dollars for sending letters contesting derogatory
information, to several hundred dollars for aggressively pursuing derogatory data until
it is corrected. Some companies will even offer a money-back guarantee or guarantee
your score will improve a certain amount in a specified time. Our experience has been
these services are almost always successful in some measure, often getting all
erroneous or derogatory data removed completely within a few months. Most Lenders
have associations with various credit repair companies. If you need to be referred to
one, just let us know.
How to contact the Credit Bureaus directly
Equifax
www.equifax.com
P.O. Box 740241, Atlanta GA 30374-0241. Ph (800) 685-1111 or (770) 612-3200.
For Georgia, Vermont or Massachusetts (800) 548-4548. Maryland (800) 233-7654.
Experian (Formerly TRW)
www.experian.com
P.O. Box 949, Allen TX 75013-0949. (888) 397-3742
Trans Union Corporation
www.transunion.com
TransUnion LLC, Consumer Disclosure Center, P.O. Box 1000 Chester, PA 19022
(800) 916-8800 (800) 682-7654, (714) 680-7292
LOANS AND LENDING
There are numerous types of loans available on the market and different programs
come and go on literal. Loans are just like other products being sold to the public.
Take computes for example: there are hundreds of choices such as hard drive space,
processor speed, software bundles and accompanying hardware. Loans are very
similar in that there is something for everyone, depending on many different types of
situations that Borrowers may have. Some come bundled with terms that may be
good or not-so-good!
What type of loan is best for you?
There are literally hundreds of various types of financing and loan programs available,
ranging from the very simple, to the very complex. If you look in the Real Estate or
Business section of the newspaper every weekend you will usually find a table with
the top 20 local Lenders and their current rates. Rarely will you see the identical rates
and terms for even two of these quotes, let alone several! So why the differences?
Well, the Lending market, just like any other trade is highly competitive, and there just
about as many Lenders competing for your business as there are Realtors! Some offer
reduced rates and fees because they do a higher volume of business, or don't offer as
many services or terms as others. And unfortunately some are less honest and ethical
than others, and seemingly attractive rates and terms are hiding pitfalls such as
fluctuating interest rates, prepayment penalties and "junk fees." So which type of loan
program is best suited to your individual needs? Well that is a complicated question
with an almost infinite number of answers, depending on many factors in the
Borrower's overall scenario. So let's look deeper.
Let's examine some of the various situations that would call for different types of
loans:
Different Borrower Scenarios:
- High income and high credit score
- High income but low credit score
- Low income but high credit score
- Low income and low credit score
- Home-Buyers occupying the house a long time
- Home-Buyers occupying the house a short time
- Investors not occupying rental property for a long term
- Investors not occupying rental property for a short term
- Young people wanting lower payments to start
- Older people wanting lower payments later
- People wanting the lowest monthly payments
- People wanting to pay off the loan as fast as possible
- People paying a higher interest rate to avoid a pre-payment penalty
- People putting 20% down to avoid mortgage insurance premiums
It is important to choose the best loan package that is best designed for your
particular scenario. Choosing the right one will SAVE tens of thousands of dollars plus
up-front loan fees; whereas choosing the wrong one could COST you tens of
thousands of dollars and possibly financial disaster such as foreclosure or bankruptcy!
It pays to shop around and make sure you are getting the right type of loan that fits
your objectives!
Primary Types of Loans:
There are 3 primary types of loans that make up the majority of the mortgage market:
Conventional, FHA and VA.
- Conventional means non-government insured; and is the most secure type of
loan requiring no insurance or guarantees. - FHA stands for Federal Housing Administration, a division of HUD, and means a
Government Insured loan, not a loan originated by the Government.. - VA stands for Veterans Administration. Only Veterans with eligibility may take
advantage of these loans. The primary advantages of VA loans are no down
payment and no mortgage insurance.
Here is a comparison describing how these loans differ:
Loan Limits:
There are different classifications of loans according to the maximum amount borrowed:
FHA loans Just increased to $406,250, varying according to county
VA loans The limits have recently been raised to $359,650!
Conventional loans Up to $359,650
Jumbo loans Over $359,650
Super-Jumbo loans Over $650,000 but may vary according to Lender
Do these loans have various pricing? Yes, usually, and there are two main ways a
Borrower is charged a premium for borrowing more money: either by paying extra
points or adding it to the rate. The premium for a jumbo or super jumbo loan is usually
around an extra 1/8 to 1/2 percent interest above conventional loans.
Loan Categories:
Loans generally fall into two categories: Fixed and Adjustable
Fixed means the interest rate stays exactly the same throughout the entire term of the
loan and never changes.
ARM's, or Adjustable Rate Mortgages MAY or may not fluctuate during the term, and are
specified at the beginning how and when they might adjust.
Other Types of Loans:
In addition to Conventional, FHA and VA loans, there are also many others, with many
different types of interest options, length of terms, fixed rates versus adjustable rates,
and more.
3/1 ARM or "Three-One ARM"
This means that the interest rate is fixed for the first 3 years, which is where the
"three" comes in. Then beginning in the fourth year it becomes an adjustable rate
after that, and may or may not adjust, once per year. This is where the "one" comes
in, indicating the rate will adjust each one year after the fixed period.
5/1 ARM or "Five-One ARM"
This means that the interest rate is fixed for the first 5 years, which is where the "five"
comes in. Then beginning in the sixth year it becomes an adjustable rate after that,
and may or may not adjust, once per year.
7/1 ARM or "Seven-One ARM"
This means that the interest rate is fixed for the first 7 years, which is where the
"seven" comes in. Then beginning in the eighth year it becomes an adjustable rate
after that, and may or may not adjust, once per year.
228 or "Two-Two-Eight" or "Two Twenty Eight"
This means that the interest rate is fixed for the first 2 years, which is where the "two"
comes in. Then beginning in the third year it becomes an adjustable rate after that,
and may or may not adjust, once per year for no more than 2% each year, which is
where the next "two" comes in, for 6 more years for a total of "eight" total years, then
fixed after that.
525 and 526 or "Five-Two-Five" and "Five-Two-Six"
This means that the interest rate starts fixed for the first year, then beginning in the
next year it becomes an adjustable rate after that, and may or may not adjust, up to a
maximum of "five" total percentage points above the start rate for the life of the loan,
once per year for no more than "two" percent in any year, and for a total of "five" or
"six" total years, then fixed after that.
80/20 or "Eighty-Twenty"
This is a term that refers not so much to a type of ARM, in fact it is a fixed rate loan. It
is a term used for 100% financing. It is also called A "1st and a 2nd." The reason it is
called 80/20 is because it is a combination of not one but two separate loans, often
from two different Lenders. The 80 refers to the 1st loan which is 80% of the purchase
price, and the 20 refers to, you guessed it, the 2nd loan of 20% of the purchase price.
You may ask why is it done this way instead of just a 100% loan? Well it's rather
clever actually. Recall from the table above that if there is less than 20% down
payment then there will be an added fee to your mortgage payment called MIP, or
Mortgage Insurance Premium. So by structuring a loan in this manner, the 2nd loan of
20% acts not only as the down payment for people who cannot qualify for 100%
financing, it fulfills the MIP requirement of 20% down, and there is no mortgage
insurance, even though you are borrowing 100% of the purchase price!
Option-ARM
This is a "teaser" type of loan and can be very very dangerous to the Borrower if he is
not completely familiar with the terms of this loan, if he is not disciplined in his finances
and repayment of the loan, or if his future anticipated cashflow scenario does not
become a reality and thereby putting him behind in his repayment.
Characteristics of ARM's
These types of loans start at an interest rate that is lower than the current 30-year
fixed mortgage rate. It is based on the economy and tied to a specified published
rate, called the index. These loans will be evaluated according to the index and the
economy each year, only once per year, and may go up, down or stay the same. As a
safeguard, the interest rate usually cannot go up more than 2% in any given year.
Also there is a specified cap, or ceiling that the rate can never go over, which is usually
about 5% or 6% above what it started at. Also these ARM's always become fixed
again at the end of the adjustment period, which is usually no more than 6 years of
adjusting. So if the rate only adjusted up a total of 2% by the end of those 6 years, it
must stay there for the duration of the loan! On the other hand, if the rate adjusts up
the maximum allowed margin of 2% in each of the first three years, then it cannot go
up any higher than that since it has hit its ceiling already. Most ARM's never hit their
maximum ceiling, nor adjust the full 2% in most years. Over the past few years
mortgage rates have dropped significantly, and ARM's have often adjusted
DOWNWARD, rather than increasing! One small consolation for those whose ARM's
have gone up would be that increasing mortgage rates are an indication of a stronger
economy. Now doesn't that make you feel a lot better?!
The INDEX for ARM's
There are about 12 different indexes for ARM,s but three are the most commonly used.
Many think that the Prime Rate is one of them, but it is generally not for Real Estate
purchase loans. About the only time the Prime Rate is used in a mortgage is for an
"Interest-Only" loan or a line of credit.
Here are the three most common indexes for Adjustable Rate Mortgages:
LIBOR
This stands for London InterBank Offered Rate. Three guesses where this originates!
MTA
This stands for Monthly Treasury Average. It is determined by taking the past 12
months of the CMT, which is the Cost of Maturity Treasury Index, then taking the
average of those 12 months values.
COFI
This stands for Cost of Funds Index, as determined by the 11th Federal Home Loan
Bank District.
Comparison of Fixed and adjustable rate loans:
Zero-Down Payment/Zero-Closing Cost Programs
You may have seen advertisements for homes for sale offering a way for Buyers to get
a loan to purchase the home with no money down and no closing costs, and literally
buy a home with no actual cash. Are these programs for real? YES! Simply put, the
Buyer is essentially financing the down payment and closing costs into the loan,
borrowing that money in addition to the sale price of the home. Originally, these types
of programs could not be used, especially on FHA loans because there is a regulation
that states the Buyer must have at least 3% for a down payment, plus his closing
costs, and that money must be the Buyer's own funds, rather than someone else
contributing it for him. The Lenders required that the Buyer had something of his own
invested in the property. This posed a problem for many Buyers who could qualify to
make the monthly payments, but lacked the funds required to bring to closing.
The solution to this problem is actually very clever! Several programs developed called
things like "The Nehemiah Program," "Neighborhood Gold," and others. Here's how
they work:
[1] The Sellers make a charitable contribution in the amount of the down payment and
closing costs.
[2] The Non-Profit charitable organization such as Neighborhood Gold then gives the
Buyers a "gift" in that amount to purchase the home.
[3] The Buyers now take that gift fund and give it to the Sellers in the form of the
down payment and the closing costs!
Now this clever triangle of funds never actually happens in the form of actual money
prior to closing, and it all happens on paper right at the closing! The Seller gives the
"funds" to the Non-Profit Organization, they then give it to the Buyer, and the Buyer
gives it right back to the Seller! It may seem pointless and redundant to do this but
several very important things are accomplished in this transaction:
The Buyer obtains funds to bring to closing that he did not have, enabling him to
purchase.
The Seller enables the Buyer to qualify to buy his home, plus the amount is tax-
deductable!
The "gift funds" qualify as the Buyer's own money, thereby satisfying the FHA
requirement that the Buyer bring his own funds to closing, that he would not have had
otherwise!
Is this legitimate?
Absolutely! These are R.E.S.P.A. and FHA-approved programs that every FHA-
approved Lender is familiar with and probably writes on a daily basis. However there
has been talk that these programs will soon no longer be acceptable practices by HUD
because of all the turmoil in the Lending market. But as of spring 2008, they still work!
If you would like information about loan pre-qualification, to to get references for
Lenders, please visit the "contact us" page and send us your information and we
will put you in touch with our highly respected Lenders. All of your information will
be kept private and not sold or given to anyone else.
LOANS AND CREDIT INFO
| Northstar Group Realty CRS, GRI co-huds.com 303-257-8000 |
|
|
|
| www.co-huds.com Direct: 303-257-8000 Fax: 720-596-5555 Email: mike1realtor@msn.com |
 |
 |
 |
 |
 |
 |
 |
 |
 |