Home Borrower's Guide - 7 Terrific Tips
Obtaining a home loan can be intimidating. Unfortunately, many homebuyers do not take the time to research some of the little but weighty intricacies of mortgages. Spending a little time researching the mortgage process can save you tens of thousands of dollars! There are several elements of a loan that should be analyzed. Your choice of a home loan may take some time and effort to research, so begin now by reading this informative Real Estate Report!
Tip #1 - Choosing Your Lender
Some of the biggest misconceptions held by buyers relate to the belief that all lenders, and all mortgages, are pretty much the same. Also, buyers tend to think that the mortgage process doesn’t start until AFTER you find the house you want and negotiate a successful offer. These misunderstandings are not surprising when you realize that the vast majority of buyers only experience the mortgage process once or twice in their lives.
Unfortunately, in this situation, ignorance is certainly not bliss!
If you fail to ask the appropriate questions of your potential lender, you may do serious damage to both your negotiating position and your pocketbook.
Questions you should ask every lender before you shop for a house:
Will you pre-approve me? This is very important. Negotiating is much easier for the buyer when the seller KNOWS, ahead of time, that you will get your mortgage.
How quickly can my loan go through? Again, if the seller knows you can close quickly, this may sway the negotiations in your favor.
Do you carry Adjustable Rate Mortgages? The lower the rate, the more you can qualify for (and Adjustable Rate Mortgages have initial rates lower than fixed mortgages). While you may not opt for this mortgage in the end, knowing it is available is like putting an extra "line of credit" into your pocket.
Do you have Convertible Loans, or loans with a conversion option? If you do find the need to use the Adjustable Rate Mortgage, can you change it to a fixed rate in the future? At what cost?
Do you carry fixed-rate mortgages with 30-year terms? With 15-year terms? This is irrelevant in the mortgage world. However, comparison shopping of items like interest rates, application fees, points and other lender closing costs can yield you substantial savings.
Are you an FHA direct lender? If FHA is an option (and many first-time buyers go FHA), then this is a good question to ask. Sometimes the processing time can really be shortened with a direct lender. Again, this is a good negotiating tool, since it may get you to the closing sooner.
Are you a VA direct lender? For those who qualify, a VA loan can be a wonderful option. Again, dealing with someone who is a direct lender for this type of loan can really streamline the approval process and help you with the seller.
Do your mortgages carry a pre-payment penalty? Pre-payment penalties, which had all but disappeared from the industry, have recently reared their ugly heads again! ASK! And make certain you fully understand the circumstances under which you may trigger that penalty.
Are you a portfolio lender? Some lenders keep the loans they make "in-house," and some sell the loans to other institutions. While it does not impact you (or the terms and conditions of your loan) if it is sold, there is a good reason for asking this question. Portfolio lenders often have more leeway during the approval process and can tolerate past credit problems that others may not want.
Are your fees negotiable? Let the lender know you are comparison shopping. Politely asked, this question will appear to be just one more factor in your decision-making process. If the lender really wants your business, you may be surprised by the answer! In any case, if you don’t ask, you can be certain that no one is going to just offer to drop their fees.
Taking a few minutes to ask these questions of a number of lenders can pay off big time. These benefits may come in the form of a more favorable negotiating position for you with the seller and/or as a direct savings in relation to your loan. In either case, doing your groundwork with lenders is a smart and important way to begin your home buying process.
Tip #2 - Checking Your Credit
Lenders typically look at three credit reports when reviewing mortgage applications, the argument being that three reports may identify credit issues that a single report would miss.
So what steps can you take to make your credit report stronger?
Are there entries which are factually incorrect? If yes, contact the credit reporting agency by certified mail, with a return receipt requested. Lenders have 30 days from receipt to correct or confirm a challenged entry.
Does the report include information regarding someone else? If you are "Fred Smith" and not "Fred Smith, Jr." or some other individual, then the report needs to be corrected.
Late payments are a huge no-no with lenders and can quickly knock down credit scores. Payments are "late" for credit reporting purposes when they are 30 days overdue. Caution: it's possible to have an item which does not show up on a credit report (because it's not 30 days overdue) and yet is late under your agreement with a lender or credit provider. If a payment is overdue, you could face penalties, fees and other problems. The bottom line: always pay bills in full, pay on time and mail early enough to easily make payment deadlines.
What are your debts? Lenders look at real estate, installment debt such as a car payment, revolving accounts such as credit cards and collection claims, in addition to other obligations. Check the numbers to assure they are right.
Is the address information accurate? The wrong address may also mean incorrect credit references.
Is your Social Security number correct? A single wrong digit and the whole credit report is likely to be rife with errors.
How many credit inquires have you made in the past 90 days? In this case, lenders want to know if you have recently extended your credit obligations or opened new accounts. The concern is that maybe the high cash balances that appear on the credit report are really just evidence of increased debts rather than savings and good cash management.
Do you have any delinquent credit accounts? Each credit report will also provide credit scores, a shorthand way to evaluate your overall financial performance. Higher is better, and on most scales anything over 720 should elate lenders.
What to do if you have bad credit? Pay bills on time, reduce debts and build savings. None of this will happen quickly or automatically, but over time your credit report will shape up.
Want more information? One good option works like this: your real estate broker can arrange for you to have your credit report reviewed by an experienced lender.
Tip #3 - All About Lenders Fees
· Administration fees.
· Document fees.
· Application fees.
· Processing fees.
· Underwriting fees.
· Wire fees.
· And--who knows--maybe "fee fi fo fum" fees.
Fees are a by-product of marketplace realities. A 30-year fixed rate mortgage is, well, just a 30-year fixed rate mortgage, and similar loans tend to have similar prices--especially in an era when borrowers can increasingly compare mortgage rates and terms.
Since loan rates are largely similar for like mortgages, lenders need to somehow raise revenues without appearing to have higher loan rates. One approach is to have competitive rates--and also fees.
Lenders may not start turning a profit on a mortgage until well into the loan's second year. Huge up-front costs associated with loan departments, payrolls, rents and other expenses need to be offset, so lenders charge fees during the application process.
Some lenders charge more fees and some charge less. You need to shop around. Just because a lender doesn't charge one particular fee doesn't mean they don't charge another. If a lender tells you they "don't charge" for loan underwriting, that may be true--but they may well charge for something else. One lender may charge $500 for underwriting and processing while another charges nothing--but somehow charges $500 for administration and documentation fees.
Names don't matter. The trick is to ignore fee names and instead concentrate on total costs and when they are paid. Lenders with "low" rates and points may offset those rates with higher fees. Conversely, loans with few if any fees may have slightly higher rates and points.
It doesn't hurt to ask lenders about fees. Simply getting a rate and points quote from a lender may not be enough. Ask them directly about any fees and the purpose and cost of each one.
This is especially important regarding fees that will be waived upon closing. For instance, a lender or broker might charge a $300 "application" fee that will be credited towards your appraisal at closing. If the loan doesn't close because you went elsewhere for a mortgage or for any other reason, you may not get your $300 back. After all, you didn't pay for an "appraisal," you paid for an "application."
Fees can be confusing, so pay less attention to what they're called and more attention to what they cost. And if you don't understand a particular charge, ask. Make sure you know where your money's going.
Tip #4 - Protecting Your Privacy
Feeling relieved, you might be tempted to let down your financial guard at this point. Don't. Your financial identity is more at stake than ever after making a large purchase, especially that of a new home. Credit thieves, unscrupulous individuals or illegal (often underground) rings, target recent home purchasers to appropriate credit card, address and/or driver's license identity.
Once stolen, your personal information can be sold to a variety of recipients including aliens abroad or to individuals who will pay handsomely for another person's credit-strong identity.
Why is closing a new home a potential threat to loss of identity and credit? For several good reasons.
First, you've just completed a major purchase that required a certain level of credit worthiness and, in most cases, won't be making another large credit-based purchase for a while. In other words, you're a credit-worthy person whose guard is down.
Second, the home purchase resulted in having your name and address made public record. If you paid cash for the house, the deed was recorded in the county where the property was located and your name became public record. If you secured a mortgage to purchase the home, the property was placed in your name with a lien created in favor of the lender. Here, too, your name and the legal description of the property becomes public record, listed in the area's newspaper responsible for posting public notification of recorded documents. This is the very reason you are inundated with credit card applications as well as second-mortgage solicitations immediately after closing on a home purchase.
Third, unless you "opted out" with the lender, declining his offer to have your name and financial profile shared with third-party institutions so they can offer products or services to you, your name is now fair game for solicitation. Since the "opt out" choice is a document that's part of the closing papers, it's discounted and often not even read. The consumer can, at any time, change the decision to have his name sold or shared by contacting the mortgage corporation's Compliance Officer.
The guidelines used must adhere to the federal government's Privacy Act, also called Regulation "P."
Observing a few guidelines when it comes to using and concealing your personal identification information helps, too.
· -Don't use any part of your Social Security number, house number or date of birth when creating passwords or PINS (private identification numbers).
· -Memorize all passwords and PINS; never keep them in your wallet, purse, Rolodex or electronic organizer.
· -Shield the keypad when using ATMs or when placing calling card calls.
· -Ask businesses to substitute an alpha-numeric code as a password instead of your mother's maiden name as is usually the case.
· -Get your Social Security number out of circulation and release it only when necessary (i.e. for tax forms, employment records or stock transactions). This includes having your Social Security number deleted from your checks. If a business requests your Social Security number, ask to use an alternate number.
You've worked hard to attain credit-worthiness. Work equally hard to make sure that it, and your personal identification, isn't appropriated and misused.
Tip #5 - Beware of "Best Rate" Guarantees
You want to find the absolute best rate and terms on the planet, but how can you be sure you're getting the best deal? There are literally hundreds of mortgage lenders and brokers, so can any of them guarantee that you'll get the best rates and terms?
Search the Internet and you'll find companies that absolutely guarantee the best deal. Apply with such firms and they will guarantee you that if you find a better deal, they will match it or pay you money if they don't. Hard to beat, right? Maybe.
A "guarantee" can be defined as something that assures a particular outcome. If you want a guarantee that you'll get the best rate, then some lenders will provide one. But step back for a moment and think of another industry that has been using a similar marketing technique for years...the automobile trade.
You've seen and heard them all. "Come to Bob's Motors and we guarantee we'll beat any deal!" or so the pitch goes. But if you ever try to accomplish that at Bob's Motors you may just find that there really are no two cars exactly alike. Or that Fred's Motors has the very same guarantee...how can they do that? If you think about it, it's nearly impossible, isn't it?
Mortgage rate guarantees vary, but there are two essential types: either the lender will pay you a marginal sum if they can't match a given deal or a lender will match the deal AND pay you a marginal fee. Either way, it pays to read the fine print. After all, if many lenders all guarantee the same thing, someone will ultimately lose out.
One popular lender requires that you fax the competitor's offer to them, including the lender or mortgage broker's name and contact information, your federal Truth in Lending papers and a Good Faith Estimate of Settlement charges--all with the same date as when you apply for the new "guaranteed" loan. After verification of the other lenders' data, you'll get your guarantee.
Another approach is to provide the lender with your underwritten approval from the competing lender. This is not a pre-qualification or pre-approval--your loan must have been completely submitted and approved by an underwriter AND it must have the same date as your new loan application with the guaranteeing lender. This is the stage where your closing documents are typically drawn.
There are two problems here.
First, verification of the terms may simply mean the lender called around and got a good faith estimate and rate quote from another mortgage branch, getting different rate and fee quotes than you submitted for the guarantee. Just being off by twenty bucks will kill the deal.
Second, all documents have to have the same exact date as when you apply for the new loan. This can be next to impossible to merely arrange, much less get accomplished.
Think about it for a moment when calling your current lender..."Hi, I'm applying for a mortgage company that will guarantee me the best rate but I need you to correct all your loan papers, disclosures, approval and good faith estimates to have today's date on them...can you do that?" Yeah, that'll happen.
Still other guarantees don't apply unless you close with the promising lender. You'll get the matched rate and terms and you'll also get a couple of hundred bucks for your trouble. Oh, one other thing, this lender asks that you sit by your phone for three hours while they verify the information you faxed to them, under the nightmare described above.
In some cases, of course, it's easy to offer a low rate or to match one. Just provide the low rate--and then raise the points or fees associated with the loan.
Mortgage rate guarantees are nothing more than a marketing tool, just as with any car dealership offer. There's certainly nothing wrong with savvy marketing, and sometimes such offers can be attractive--just be aware of the hoops, traps and exceptions likely to accompany any "best" mortgage-rate promises.
Tip #6 - What You Can Say to Your Lender
First, let's define what "late" means from a mortgage lender's perspective. When you open your credit card statement, you'll see a statement date and a due date. Lenders only really care about anything that is more than thirty days past the due date. If the due date is the 15th of the month and the credit company posted your payment on the 20th of that same month, it's not considered late for credit reporting purposes. However, if your payment is posted more than thirty days past the due date, then you've got a "late" payment which may count against you when applying for a mortgage.
CAUTION! While payments less than 30 days overdue may not show up on credit reports, credit reports should not be the only concern raised by late payments. Late payments can trigger penalties, revised loan terms and contract defaults with creditors. If you borrow, make a point of paying on time and in full.
More and more lenders rely on credit scoring and automated underwriting systems when making a credit decision. However, even these automated systems may still "ask" for a satisfactory explanation of previous credit transgressions.
So what do you say when the lender calls wanting an explanation?
The Truth. Over the years there have been many phone calls from frantic borrowers wanting to know what they should say when asked for a credit explanation. "It's been almost two years since I made a late payment on my department store credit card. I have no clue why it was late, much less remember the circumstances!"
Then explain it that way.
Lenders aren't looking for some outlandish reason your payment was late. No "my dog ate it" tale is required. Usually, a simple answer such as "I thought I had made the payment on time" or "I really can't recall, I've never been late before or since" or even "I forgot" can work.
Just tell the truth and move on. Many times the lender just wants to fulfill an underwriting guideline which requires them to provide a credit explanation along with any derogatory credit entry. That's really about it.
Remember that lenders do not expect perfect credit. People do make mistakes and payments are missed. It happens even to people with great credit--it just doesn't happen often.
Major credit problems such as bankruptcies or foreclosures will require more homework and detail. Sometimes lenders want to ascertain that the bankruptcy or foreclosure was something beyond the borrower's control, something caused by a disability, loss of job and so on. And a lot of times they'll want some third-party verification to verify what caused the financial problems, proof such as medical bills in the event of an extended illness or injury, or evidence that in fact you were indeed laid off and couldn't find work.
But just remember that if ever a lender needs an explanation regarding a credit issue: answer truthfully.
Tip #7 - To Lock or Not to Lock
That is the question. But there is no sure answer because either choice involves some risk. If you lock now and rates fall, you lose. If you don't lock now and rates rise, you also lose.
Alternatively--and here's the good news--you win by locking before rates rise and you also win by not locking in a market where rates are falling.
What to do?
The first step is to understand how the locking process works. In essence, there is no single lock-in "standard"--a "lock-in" with one lender may be radically different from the lock-in program with another. Here are some issues to check:
· What is being locked-in? An interest rate? Or an interest rate and points? Given that "points" are a form of interest, if a rate is locked-in but not points, then the effective rate for the loan can rise before closing if the interest level stays the same--but the number of points increases.
· How long is the lock-in? A typical lock-in lasts 30 days, but longer terms may be available.
· Is there a cost to lock-in? If you pay a fee for a lock-in and borrow at a different rate or from a different lender, then the lock-in fee will be lost. In some cases, lenders collect a lock-in fee and then credit the money to the borrower at closing. In this situation, there is no additional cost to lock-in if you go through with the loan.
· What does the small type say? Some lenders have been known to lock-in rates--unless "market conditions" change; then all bets are off. But ask yourself a question: is there ever a time when "market conditions" do not change? Surely there must be a reason why interest rates change daily if not more often. In this case, the fine print effectively defeats the benefits a borrower wants from a lock-in.
· Is there a "float down" option? In this situation you lock-in a rate--say 7 percent and 1 point--but have a one-time option to lock at a lower rate if interest levels and points fall.
· What happens if you can't close by the end of the lock-in period? Typically, you lose the rate you reserved. This is not unfair because a lender cannot be expected to hold a given rate indefinitely.
· When you lock-in a loan, lenders have one of two choices: They can secure a loan commitment with an investor at the promised rate or they can play the market and hope that by settlement they can get your rate--or better.
But what happens if a lender plays the market and rates go up? The lender loses. The problem is that not all lenders play fair. It doesn't happen often, but some lenders will delay the loan application process past the lock-in period, thus ending their commitment to make the loan.
· -How can you avoid this problem? Consider lenders recommended by your broker. An experienced broker will know which lenders have a good record delivering on commitments.
In general, whether you lock-in or not, it's best to be in continual contact with the lender. Make a point to promptly supply all required paperwork, and keep notes showing when you spoke with the loan officer and what was discussed. Get timed, dated and signed receipts for all paperwork you deliver.
So when should you lock-in? There just isn't a single answer that works for every situation. You need to consider general interest trends--and also that no one can predict future rates. At best, a properly-written lock-in can limit exposure to rising rates--and that's not a bad deal.
For more information regarding lock-in agreements, just call and we can review the features that can best serve your interests.
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