Why use a Licensed lending agent versus a sales or lenders representative.
It should become evident to you as you scroll and read through this dialogue that there is a difference between consulting and selling. Obtaining a real estate loan is not like purchasing an appliance or an automobile. Being sold a bill of goods when it comes to a real estate loan will be a life changing experience and in most cases result in loss of equity, credit rating and higher payments. Competitiveness is a cliche. The best loan may not always be the best sale which is why a professional licensed consultant or "agent" is the best choice. Applying to a lender, in most cases, means that particular lender is going to want to close their product not someone else's. Choice and knowledge added with competence will always equal a well placed loan.
How do I know when I'm being manipulated?
You know you're being manipulated when the lenders rep or the brokers rep tells you everything you want to hear. Also manipulation happens when you wait until the last minute to obtain your loan. Looking ahead is extremely important. Be proactive. Don't allow anyone to take a credit report. If you haven't gone online to get your own credit score and report then it's time to start. Any experienced lending professional can provide you with a generic quote based on credit score, number of 30 day mortgage lates in the last 12 months, cash reserves if any and present lien information.
What to do when your told; This is the only loan available.
When someone is in this situation then they have been manipulated into thinking the person they're working with is the only person who can fund their loan. Although the particular program may be the only program available the costs can vary based on the greed or lack of greed of the person handling your loan request.
When do I start looking for financing?
You start looking before the walls start to cave in. You are the most vulnerable to unethical lending practices when it's apparent that you are in financial trouble of in dire need of funds. Signs of this are living from month to month with no money in the bank. No cash reserves. Borrowing on credit cards to pay off credit cards.
What documents are should I have ready for my application for a real estate " refi only" loan?
The documents will vary depending on the type of loan you're applying for and the method of qualifying your ability to pay the debt.
The primary items you're gonig to need are:
01. Hazard Insurance declaration page. Flood Insurance declaration page when applicable.
02. Your property tax information
03. Your present mortgage statements
04. W-2 form/s if qualifying on "full doc status"
05. 2 most recent pay stubs for "full doc status"
06. Most recent quarterly statement to IRA-401K accounts "full doc"
07. Last 3 months complete bank statements for all bank accounts
when qualifying on "full doc status"
08. Last 12 months bank statements when qualifying on "lite doc status"
09. Two forms of identification for compliance with The Patriot Act
10. If possible, go online and print out your mortgage history for the last 12 months.
11. Have a copy of your driver's license and Social Security Card on hand.
12. Have a copy of your Green Card on hand ( if applicable ).
What are the typical loan closing chiches?
Don't Worry about it.
It's a done deal.
This is the only deal available.
You can't qualify for anything else.
Don't listen to anyone else.
I (the loan officer) have your best interest in mind.
Your loan will close in 2 weeks so don't make any payments.
What is full documentation?
Full documentation is also called " full doc " in the mortgage business.
Full doc means the borrower must qualify using:
Payroll check stubs
W-2 forms
Any other income verification being used to qualify for the loan
1099 forms
Tax Returns (when income is suspect or borrower is self employed)
Quarterly statements to all retirement account and stock accounts
Last 3 months bank statements
Basically, any income you claim for qualifying must be verified for a minimum of 2 years in the past and must continue for 2 years in the future.
What is stated income qualifying?
Stated income qualifying means exactly what it says. Stated or to state what you make. This type of qualifying allows you to put on the loan application what you earn without having to verify with written documentation. This type of qualifying was originally used by self employed individuals but has gained prominence with wage earners who are making more money in the current year than what they made the previous year. Generally, the borrower must have a much better credit score as the lender is relying on the borrower to tell the truth. The interest rate is generally slightly higher and the loan to value ratio is slightly lower depending on the credit score of the borrower.
What is a " NO DOC " loan?
A " NO DOC " loan is not what it appears to be. There is documentation but there is no income verification and sometimes there is no asset verification. Once again, credit score plays an important role. Generally, a middle credit score ( MCS ) of 660 is required but most of the lenders require a MCS of 720 or higher to obtain the best interest rate. The interest rate is significantly higher than a full documentation loan and the loan to value ratio is significantly less than a full documentation loan. When completing a " NO DOC " loan the income portion of the loan application is left blank. When no asset verification is used then the asset portion of the loan application is left blank also.
What does LTV (loan to value ratio) mean?
Loan to value ratio or "LTV" is the percentage the lender lends of the appraised market value. Another way of putting it is the loan amount divided by the appraised market value. A $75,000 loan divided by a $100,000 appraised value will have a loan to value ratio of 75%. To find out your present loan to value ratio just divide the total liens by the appraised market value. When no appraised market value is available then a fair market value can be obtained from many websites. One of these websites is www.zillow.com
Who orders the appraisal?
The appraisal is always ordered by the mortgage company handling the request. The fee is generally paid for up front by the borrower. The fee can range from $350 to $1,000 depending on the type of residence and location. It's best to get a good faith estimate and truth in lending statement prior to paying for the appraisal as many borrowers have wasted money on an appraisal only to find out the program they were looking for was not available or that they could not qualify for it.
What is negative amortization?
Any time you're paying less than what you are being charged negative amortization exists. Negative amortization merely means your balance increases proportionally to the amount of interest you're not paying. A payment rate of 1% with an interest rate of 8% means that over a 12 month period the balance of the loan will most likely increase at least 7%. This fact is rarely disclosed verbally by all companies, Lenders and Brokers because why would you want your balance to increase so much. Add on a prepayment penalty and a high loan to value ratio and you have the making of a nightmare. This loan has some very good benefits when the interest rate is low but when the interest rate is high and the payment rate is low then financial trouble follows so beware of this type of loan.
What is maximum negative amortization?
This is something anyone who has what is called "An Option ARM" must be concerned about. The maximum negative amortization or how much the balance on your mortgage can go up differs from lender to lender but generally it's between 110% and 125% of the original balance of your mortgage. What does this mean? If you borrow $100,000 then the maximum negative amortization can be 110% of the $100,000 or $110,000 so the maximum negative amortization in this case is $10,000. When you have a payment rate of 1% and an interest rate of 8% then it is possible to reach the maximum negative amortization amount in just a few years. This means you owe more money.
What does recast mean?
Once you reach the maximum negative amortization or maximum increase in mortgage balance that the note allows then the loan is re-cast or re-amortized over the remaining years left in the note. Let's say you borrowed a $100,000 and the maximum negative amortization is 115%. In 3 years the balance on your mortgage has reached its maximum negative amortization of maximum balance of $115,000. The lender will at that time re-amortize the $115,000 over the remaining term of 27 years which means you now have a $115,000 loan on a 27 year term. PAYMENT SHOCK!
What components are in an adjustable rate loan?
The two components of an adjustable rate mortgage are the INDEX and the MARGIN. The margin is fixed for the life of the loan. The index is the part of an adjustable rate loan that adjusts. Typically Indexes adjust on a monthly basis but there are some that adjust daily.
What is a margin?
The margin is one of the two components of an adjustable rate mortgage, also called an "ARM", variable rate mortgage and or a VRM. The margin is the part of the adjustable rate mortgage that is fixed. The margin is set by the lender and is on the form called the note. California loan forms include an adjustable rate ryder which is another form used to disclose to the borrower that the loan they are accepting adjusts. Although the index may possibly change during the lifetime of the mortgage the margin is fixed and cannot be changed.
What is an index?
An index is simply a cost of money. The complicated issue here is which index to obtain a loan with. There are easily 10 indices which can be used. Generally the highest index is what is known as "PRIME RATE". Every time you hear the Federal Reserve it's discount rate you will almost always see a corresponding fluctuation with the PRIME rate. Each bank can set their own prime rate which is another reason this rate is so volatile. The 2nd most volatile index is commonly called LIBOR which stands for the London Interbank Offered Rate. This index is the lowest when when rates are at their bottom but is also the highest when rates are high. This index is preferred by most lenders because generally more years are at higher rates than those that are not.
Other indices to be concerned about are the 10 year treasury, the 1 year treasury, the 30 year treasury, the 11th District Cost of Funds or COFI index, the Certificate of Deposit Index or CODI and there are many others. Generally COFI and CODI are the most stable cost of funds indices over time.
How do you determine your interest rate?
You determine your interest rate by looking at your note. Your note is your promise to pay and will spell out all the details, both good and bad, of the loan you are accepting. Breezing through this most important document may cause a lot of financial suffering in the future. Fixed rate notes are quite easy to determine. There is only one rate. Adjustable rate mortgages, on the other hand, offer complicated forms. Your simply add the margin to the index value at the time of the loan. The problem with California property loans is that the loan documents do not have a separate form showing the current value of the index plus the margin. This being said, before you sign for any loan, ask your broker or lender what the index value is and what the margin is. Since I'm not an attorney I can't say by law, but I can say ethically speaking, the broker or lender is bound to disclose these figures to you upon request. You should also review a chart of the index your loan will be based on so as to prepare for the worst rate. It's easy to prepare for the best. Preparing for the worst allows you to forecast potential financial challenges.
What is a fully indexed rate?
The fully indexed rate is simply the addition of the margin and the index together to get the actual rate of charge. A fully indexed rate is the actual rate charged by the lender. Fully indexed rates are computed for adjustable rate mortgages. There is no fully indexed rate on a fixed rate loan because the loan is fixed and there is not index. It is very important to know the fully indexed rate as most adjustable rate mortgages offer teaser rates or rates below the fully indexed rate as a payment or payment and interest rate for a limited period of time. A 1% option ARM with a 7.5% fully indexed rate will produce a large negative amortization.
What is a life cap rate?
The life cap rate is the maximum interest rate the loan can reach during the course of the loan. Most life caps range from a fixed life cap of 11-12% to a life cap rate of 5% above the initial rate of the loan. A 5 year fixed rate of 6.25% would have a life cap rate of 11.25% so read your note.
What does floor rate mean?
The floor interest rate is the lowest the interest rate can go down. This figure is commonly found in the note. It varies from the start rate to as low as the lender wishes. Generally, prime lenders will have a lower floor rate.
How often do adjustable rate mortgages adjust?
Adjustable rate mortgages typically adjust immediately after their initial fixed rate period then adjust either on a 6 month or 12 month basis. In some cases the loan can adjust on a monthly basis. Loans with a very low payment rate (Option ARM) will tend to adjust on a monthly basis. This is something the consumer must be concerned with as their equity immediately begins to dwindle.
Why don't lenders like to lend in 2nd position behind a negative amortizing loan?
It's not so much that lenders will not lend behind negative amortizing loans it more or less has to do with how they do it. A lender who is loaning money behind a negative amortizing first mortgage will calculate the equity based on the loan already achieving it's maximum negative amortizing balance. An example would be where a client owes $100,000 on an Option Adjustable Rate Mortgage. His house is worth $200,000. The lender will lend up to 80% of the appraised value minus the maximum negative amortizing balance of 125% or $125,000. Instead of the client receiving a $60,000 HELOC he would, instead, receive a $35,000 HELOC even though his balance was $100,000. The lender in this case cannot assume the client will not take advantage of the negative amortizing clause in the first mortgage.
Why do some lenders require bank statements?
Lenders typically require bank statements when it is not obvious that the client qualifies or the client needs more money that a stated income mortgage will provide. The number of months required varies from 6 to 24 but one things must be clear, all of the pages of the bank statements are necessary and the lenders look for NSF returned checks as this is a sign the client may be having financial problems.
What is a sub prime loan?
A Sub Prime loan is simply a loan that, for whatever reason, does not meet conforming guidelines. FNMA-Fannie Mae & FHLMC- Freddie Mac are the two major providers of conforming loans. Sub Prime loans have easier qualification guidelines and typically do not require cash reserves to obtain a loan. Most Sub Prime loans are written for 30 years but have a much lower rate for a shorter fixed period. These fixed rate periods range from 2 to 5 years. Many people have been sold this loan under the guise that the borrower can go out and somehow (miraculously) improve their credit score from 550 to 650 in a two year period. Of course, they were not told how to achieve this so when the fixed period ended their interest rate would increase dramatically so they would once again go and apply for another Sub Prime Loan. The Sub Prime Loan Syndrome will only result in the homeowner eventually losing their home either by having to sell it and move or by losing it in foreclosure. It may take years but it is inevitable unless the Sub Prime Client can gain control of their finances and commit to the discipline necessary to raise their score. Sadly, this is not the norm.
The good news is that FNMA & FHLMC have a limited Sub Prime product that truly helps the homeowner by providing long term fixed rates. There is a trade off though as the only qualifications are on a full documentation basis so self employed or other stated income borrowers are not eligible for this product.
Why am I a sub prime loan when my credit score is 700?
Many Sub Prime loans do have high credit scores and it does surprise me that these borrowers take this type of loan when so many alternative "A" products are available. Some reasons for a high credit score client taking such a loan would be to obtain the maximum loan to value in cash and the ease of qualifying because a high credit score usually means the borrower need not show any income at all but this type of loan is not good for the high credit score borrower as the end result will happen as with the low credit score borrower which is another refinance, a sell or a foreclosure. Sub Prime Loans are not a good method for providing stability with one's finances in the long term.
What is a hybrid option arm?
A HYBRID OPTION ARM offers a fixed rate for a period of time of up to 10 years with the option of paying less than the fixed rate for the same period of time. This loan has the same characteristics of a negative amortizing adjustable rate mortgage as you defer the interest you owe to the balance on the mortgage so as the balance increases your interest assessment increases. This is just another way to help people buy more than they can afford. It is a good and useful tool for someone who has a 5 year plan and understands the risks involved with negative amortization. Here's how it works. The loan is written for 30 or more years. The rate is fixed for 5 to 10 years. The minimum payment is usually 3% below the actual rate of charge so if the interest rate were 7% then the pay rate would be 4%. The pay rate stays the same providing the maximum negative amortization has not been achieved (see negative amortization explanation). Once the maximum negative amortization has been achieved the loan is recast with the total loan (now at 125% of original loan) over the remaining term. This leads to a similar conclusion with Sub Prime Loans where the borrower either refinances, sells or loses their home to foreclosure. Of course there is always the solution of paying the now 125% of original balance over the remaining term of 25 years.
What about reverse mortgages? Could taking out a reverse mortgage be the worst thing you could do?
Reverse mortgages (in my opinion) are about the worst thing people can do when it comes to borrowing money. Here's why:
01. Reverse mortgages do not offer fixed rates. They are adjustatble rate mortgages that negatively amortize.
02. You're charged interest on the negative amortization.
03. Your balance increases over the years that there is nothing left for the heirs.
04. You're still liable for property taxes and insurance. If you become delinquent the balance can become due and payable.
The onoly time a reverse mortgage makes sense is when the owner is in the 80's. It is truly better to sell one's home and move into a rental or a smaller home and use the cash equity interest earning to pay the rent. Also moving into a smaller home or downsizing can make it possible to have a smaller home paid for and cash money in the bank to earn interest.
What is a home equity credit line? (Thank you Paul for this question)
A home equity line of credit or HELOC can basically be described as a credit card using the equity in your home as collateral or security. Generally they work as follows: Your house is worth $250,000 and your 1st mortgage balance is $100,000. The lender, usually a bank, will typically will lend up to 80% LTV (described earlier) meaning that you qualify for a HELOC of $100,000. This is the HELOC limit which similar to a credit card limit. The HELOC limit is the maximum you will be allowed to draw out. When you take out a HELOC most lenders require that you take out an initial draw amount. This initial draw amount usually has a minimum of $10,000 but this initial draw limit may vary from lender to lender. The lender and closing fees can be deducted from the inital draw amount.
What is the interest rate on a HELOC? (Thank you Paul for this question)
The interest rate on a HELOC varies from Prime - 1% to Prime + 5%. Generally, all HELOC's are adjustable rate mortgages and their interest rate is directly influenced by the Federal Reserve as the Prime lending rates that banks charge are based on the Federal Discount Rate the FED charges them for short term lending. Prime Lending rates vary from bank to bank but generally the Wall Street Journal Prime rate is the easiest to follow. Another method of figuring the prime rate is to just add 3% to the Federal Discount Rate. Today 06/27/07 the prime lending rate is 8.25%. The HELOC rate will range from 7.25% to 13.25% depending on the HELOC approval.
With all adjustable rate mortgages, whether 1st or 2nd mortgages, there are three main interest rate categories.
1st category is the floor rate which is the lowest interest rate that the lender will allow the loan to go down to. The floor rate is very important as many lenders use the initial start rate as their floor rate and when interest rates start to decline you may not see as much of a decline because your floor rate is above the actual interest rate so it is imperative that you inquire with the lending company as to what their floor rate is.
2nd category is the life cap rate. This is the maximum that the interest rate can rise. Many institutions have a lifetime cap rate of 18% although this rate is probably not ever going to happen it is important to know what the lifetime cap rate is.
3rd category is the adjusted interest rate. Many HELOCs start out with what is called a teaser rate. This rate is below the actual rate being charged and is only available from 30 to 180 days. This rate can be deceiving because it is below the rate of charge. Most HELOCs adjust monthly but this depends on the Prime Lending Rate. If the Prime Lending Rate is stable for a period of time then the HELOC rate will be stable for that same period of time. There is generally more stability in HELOC rates when interest rates are at their highest as they are in 2007. The monthly adjustment cap on a HELOC is the same as the lifetime cap so, although not likely, it is possible for a HELOC to jump to it's lifetime cap in a single month. I have never seen this scenario play out in the 33 years I've been funding mortgages.
How does a HELOC approval work? (Thank you Paul for this question)
As with all mortgage lending there are three basic laws of approval.
Middle Credit Score (MCS), Loan to Value Ratio and Debt Ratio.
Generally a MCS of 620 is barely sufficient to be considered for a HELOC. Most lenders are looking for a MCS in excess of 660 and only offer their best rates to a MCS of 720 or higher. The lower the score the higher the interest rate. A MCS of 620 could easily see a 13% interest rate where a MCS of 720 could easily see an interest rate of Prime.
Loan to value ratio means equity. The more equity the better the pricing on the HELOC.
Debt Ratio is the ability to pay. Most HELOCs will not approve a debt ratio above 45% unless the credit score is over 720 and the LTV is below 70%.
So it is safe to say that someone who needs a 90% LTV with a 50% debt ratio and a 620 MCS will be denied. Whereas some who needs a 95% LTV with a MCS of 720 and a 40% debt ratio will be approved.
The HELOC best pricing will be offered to those clients who have the highest MCS, the lowest LTV and the lowest DCR (Debt Coverage Ratio)
Credit Score - Loan to Value - Debt Ratio. It used to be called Credit, Capacity and Collateral in the 1970's. The wording has changed but the requirements have not.
What is a debt ratio?
Debt ratio is separated into 2 figures for conventional loan programs & 1 figure for sub prime mortgages. Debt ratio is the percentage of debt payments to gross income of the borrower. These figures are in percentages such as 33% meaning the total total housing or all debt payments cannot exceed 33% of the total gross income of the prospective borrower. Conventional financing, usually for what is called "A" paper, typically separates total housing expense and all other consumer debt expenses. This is why the lenders will usually have a debt ratio figure of 33/38 meaning that 33% is the maximum for housing debt (including taxes, insurance and homeowners dues) and 38% for said housing expense and all other consumer debt. Debt ratios range from a conservative 33%/38% to a straight 55% depending on the type of loan being qualified. There are also programs that are called " NO RATIO " loans. These are loans designed for the higher credit scores. This type of loan does not ask the borrower how much they make. Their credit is excellent and they have significant cash reserves so the lender does not ask.
What are reserves?
The best loan programs require reserves. Reserves are liquid assets. These liquid assets can be in the form of savings, checking accounts, Individual Retirement Accounts, Stocks, 401k, annuities and just about any other for of liquid asset that can be verified. Lenders typically want to see verification of such liquid assets for a minimum of 3 months. Liquid cash reserves are asign to the lenders that the borrower has good control over their financial situation. If you can't save money then the odds are you'll be late on the mortgage payment.
What are liens?
A lien is simply a liability that is recorded on your home or other real estate. Property taxes are liens, state and county assessments are liens. Mortgages are liens. Judgements can be liens. IRS and State Taxes can be liens. There is also something called a "Mechanics Lien" This type of lien is for services provided on your home or real property that you did not pay for. Disputes with contractors, for any result, can result in a mechanics lien. Child support can show up as a lien.
What are impounds?
The word impound is a mortgage industry word. It means that an escrow account has been set up to collect taxes and or insurance that is paid by you when you pay the mortgage payment. This is also called PITI or principal, interest, taxes and insurance. When the loan is closed the lender requires the escrow to insure there is enough money to pay the upcoming taxes and insurance and to indicate on the closing statement the amount of the monthly allotment to be designated for taxes and insurance. The simple method of determining this is to divide the property tax and homeowners insurance and mortgage insurance (if applicable) by 12. This amount is then added to the mortgage payment and the borrower is billed each month for the total amount. Impounds can be initiated or deleted at any time depending on the loan to value ratio of the loan and the documentation required by the loan itself.
How do I figure my prepayment penalty?
The first thing you do is find your note. The note is your promise to pay and that will have the wording in it but most prepayment penalty clauses pretty much read the same. The lender charges you 6 months interest on 80% of the balance and what the heck does this mean? Here's a simple rule to follow. Take your interest rate of 8% and divide it by 2. This figure will be 1/2 of the existing note rate and in our case the figure is 4%. Then take the 4% and multiply is by 80% or to get 32. 4 times 8 is 32. move the decimal to the left one digit and you get 3.2% so an 8% note times 50% equals 4% times 80% equals 3.2%. Multiply your balance by the figure, in our case, of 3.2% and you'll come up with a close figure. Using a $100,000 loan amount times 3.2% means that your prepayment penalty is $3200.
You can also take the loan balance of $100,000 and multiply it by 4% and take 80% of that figure to come up with the same $3200. You don't need to be exact but you need to be aware.
Also, on a negative amortizing mortgage where the balance increases, the prepayment penalty will be higher because the penalty is based on interest rate and loan balance at time of prepayment. All prepayment penalties on 1-4 units for owner occupied single family residences are for 3 years in California.
What is a yield spread premium and how does it affect my interest rate?
YSP's have been around since I've been funding loans or since 1976. All lenders have them. Basically it means the higher a sales representative can sell the interest rate the more the company, be it lender or broker, can earn on the loan. An example of this is conforming loans. The interest rate can go as high as 7.25% or as low as 5.50%. What makes this possible is the price paid to upsell the interest rate or the price to buy down the interest rate. All wholesale rate sheets provide a minimum of 10 different interest rate plans for each type of loan. The large lending institutions do not have to disclose this to you because they actually lend the money but they still earn the YSP. Brokers have to disclose it because brokers are not direct lenders. It is possible for someone to pay as much as 2% over the market on a sub prime loan depending on the lender and the brokers YSP's. It is almost the same with conventional financing so be aware. Presently I make a very small YSP, if any, as I want to present to my prospective clients the best interest rate. This is not the case with many lenders and brokers.
What is a title policy from the lenders perspective?
From a lenders standpoint the title policy guarantees them precedence on the property. Most lenders fund 1st and 2nd mortgages and they need their position to be protected. For this reason there cannot be any liens left unpaid when their loan records or it may or will affect their position on title. Every time you refinance your home you pay for an updated title policy to insure the new lenders position on title. The cost varies from title company to title company.
What is mortgage insurance?
Mortgage insurance is like any other type of insurance. It's protection. It's usually required when the lender loans more than 80% of the market value of the property on residential owner occupied 1-4 units. The cost varies depending on the amount needed as it relates to the loan to value ratio. An 85% loan will be lesser priced than a 100% loan. Pricing can range from .25% to.75% per year and is collected from the loan servicing company when you make your mortgage payment. When calculating an interest rate for the mortgage one must add the mortgage insurance premium.
What to look for in an escrow?
Using a third party escrow is clearly, in my opinion, the best method. I have never liked the thought of a broker-lender or lender handling their own escrows mainly because this business has so many closures and I've had the most difficult task in the past of trying to locate a paid document from a company that no longer existed. I like the check and balance method. I also like using a title company to handle the escrow. I like this because there is less cost. Title companies regularly charge third party escrows a sub escrow fee and escrow companies typically add many more fees to the closing so a $400 escrow quickly becomes a $700 escrow. I also like the fact that the title company, who controls the funding and recording or the transaction, has control of the closing documents as well.
Why are there so many 3rd party fees when I get a loan?
Third party fees are small miscellaneous fees ranging from $15 to $250. They are fees that can total up to $2,000 in come cases but rarely exceed $750. You typically won't find these fees on the initial loan disclosure because most lenders and brokers want to show you the lowest cost possible so you will work with them and regulations regarding these fees is flexible so if the final closing costs are off by less than $1500 regulators will typically not penalize the lender or broker but you should be aware of these fees which is why always have a PRELIMINARY HUD1 faxed to you or emailed to you by the escrow company. The escrow company must be precise on the fees. FAILING to request this form will put you at risk of receiving less cash and paying higher costs. Most people do not review the 50+ pages of the loan documents. They should review the Estimated HUD1, the note and the truth in lending disclosure at the very least.
What is a garbage fee?
Garbage fees are fees charged by the lender or broker-lender or broker for things other than processing. The include warehousing fee, funding fee, application fee, review fee, administration fee, compliance fee, telemarketing fee to name a few. The term garbage fee is a term the lending community has adopted within the industry. This term is never used when discussing the additional fees with the prospective client. These fees are just another way for the company you're working for to make money. There is a distinction between an administration fee charged by a wholesaler and a retailer. The wholesale administration fee typically pays for the internal processing for the actual funding, including the fees charged for the use of their credit line whereas the retailer just pockets the money as additional income.
What is a good faith estimate?
A good faith estimate is an estimate of the closing costs involved necessary to close your loan transaction. It will include all the costs paid to companies to close your transaction, costs paid to liens on title, costs paid to debts to be consolidated and prepaid items which are interest due on the new loan from the date of funding until the end of the estimated current month of funding, escrow impounds for taxes, hazard insurance, flood insurance and mortgage insurance (if applicable). It's a FEDERALLY required disclosure document under the Real Estate Settlement Procedures Act or RESPA. Click on this link to veiw an example of a good faith estimate
When should I receive a good faith estimate?
RESPA requires all lenders, lender-brokers and brokers to provide you with a good faith estimate of settle costs within 72 hours from the time they receive the initial signed loan application. IT"S THE LAW and if you do not receive this form within the required period the lender, lender-broker or broker can be penalized. I provide you with this form by email before you apply for the loan or I include it with the application when I send it out to you. YOU HAVE A RIGHT TO SEE WHAT THE LOAN COSTS WILL BE PRIOR TO YOUR PRECEEDING WITH ANY REAL ESTATE LOAN. Make use of this right.
What is an estimated HUD 1?
An estimated HUD 1 is the preliminary closing or balancing statement which is prepared by the escrow company. This form contains all of the costs, pay offs and cash to the borrower. It is always provided to the borrower at the time of signing of the loan documents. One should request a copy of this form prior to signing loan documents because often there are discrepancies between what the lender or broker says and what the facts are. Having this form in advance protects your knowledge as to what the loan transaction is actually doing. All loans that are handled through an escrow will contain this form. Be sure to ask for it. I always provide it in advance of signing either over the phone or by email.
What is a final HUD 1?
The final HUD 1 is the escrow closing statement you receive from escrow. The loan has funded and recorded and this statement details the finality of the transaction which is all the more reason to get a preliminary HUD 1 before you sign the loan documents as the notary is not obligated to review this form with you. The notary is there for one thing to notarize your signature on documents that require a notarization. The remaining documents do not need to be notarized and if you do not check these papers then you're the one responsible for not receiving the funds you thought you were to or the interest rate you thought you would get. The reason for a rescission period is to allow you to review the loan documents and when there is no rescission period then you really should want to review the loan documents prior to signing. Complaining after the final HUD 1 does you no good at all.
What does truth in lending mean?
I'm not an attorney so I cannot give you the legal explanation. The Truth In Lending Form is a document that details the pertinent transaction facts as they relate to amount borrowed, annual percentage rate, monthly payments and a lot more but what I just described is probably the most important for you to review. This form will tell you if you have a full term fixed rate or a partial term fixed rate or a balloon payment or an option adjustable rate mortgage so read it carefully.
Why is the Annual Percentage Rate different from the Interest Rate on the Note?
The reason the Annual Percentage Rate or A.P.R. is different from the note rate (the interest rate you were quoted) is primarily due to the Federal Government requiring that all fees paid for the loan be included as interest. Simply put the amount of fees paid are amortized over the period of the note and added to the note rate to come up with an APR. I have no clue how this is done as the processing programs do it and handle the calculations. An interesting point on this issue is when the fully indexed interest rate on an adjustable rate loan is lower than the initial fixed rate. When this happens the A.P.R. is distorted as it is calculated on what the fully indexed rate is at the time of the loan. This is why, when interest rates are low on adjustable rate mortgages the A.P.R. can read very low for the 30 year term, not taking into account the fact that the index can increase rapidly. The A.P.R. can also be distorted as being too high when adjustable rate mortgages are at their peak.
What documents should I receive after applying for a real estate loan?
Within 72 hours of allowing your credit report to be taken or within 72 hours after the lender/broker receives your signed loan application you are entitled to receive a good faith estimate of settlement charges (what the loan will cost), truth in lending form (what the payments are and a host of loan disclosure items required by the State and Federal Governments to insure that you are not being taken advantage of.
Most companies do not comply with these statutes and make up for it at time of signing. Borrowers are unaware of the federal and state statutes and in many cases are being controlled by the same people they have chosen to help them. The main reason borrowers experience problems during and after the loan process is mainly due to their inability to demand a knowledgeable account of what's going on. Many of them are like cattle to the slaughter house, in fact there's a term in the mortgage business called " Tag em and Bag em" so be alert.
What documents should I demand to review?
Before you pay for an appraisal you should demand a good faith estimate and truth in lending form. If you're having to demand this form then you should be using someone else. A reputable company will provide this information in advance.
Before you sign loan documents you should demand to see an estimated HUD 1 (estimated closing statement) and verify the loan that you applied for has not changed. Not reviewing closing costs, amount of cash to you and the terms of the loan prior to signing will put you at a disadvantage because it's not the notary's job to explain the loan to you.
What is a rescission period and what does it mean?
A rescission period is a period of time to think and consider what you have done so that you are completely sure that the transaction you signed for is, in fact, the transaction you want. The federal government controls this period for many variety of transactions. For refinance (regardless of position) mortgages on owner occupied single family residences the period is 3 business days after the day the transaction is signed. Sunday and Holidays are not considered business days. Sadly many people trust the lending institution or broker and never review the most important documents and only after their loan is funded do they complain and, at that time, it's too late. Always review the estimated closing statement provided by the escrow company, the truth in lending form, the mortgage deed, the note and any ryders (additions) to the note. These are the most important documents of the mortgage transaction.
Is there a recission period on a purchase?
NO.
Is there a recission period when I refinance a rental property or buy a rental property?
NO.
What about the condition of my home when I apply?
It's not important to clean up one's home from the aspect of normal house cleaning. It is important that the property not have excessive automobiles on the property, especially in yard areas. Broken fences and windows need to be fixed, any type of uncompleted minor improvement such as tiling, painting, carpeting, ceiling work, plumbing, etc, must be completed prior to the appraisal otherwise the appraiser will note the work as needing to be completed. This is called deferred maintenance. Termite damage will also be noted. Lenders want to lend on a property that does not require work to be completed otherwise they will want the work to be completed by a contractor.
What is the approval policy regarding unpermitted additions?
Unpermitted additions are a "Red Flag" for appraisers and lenders because the homeowner runs the risk of having to dismantle or tear down the entire addition. Most unpermitted additions are either old or installed by the homeowner and only they know why they never applied for a permit. The appraiser will only appraiser the permitted structures on the property. A family room, or worse, a bathroom that does not have the property permits will cause the lender to loan a much lesser loan amount and homeowners without permits are generally afraid to apply for the permit after the work has been completed which should indicate the validity of the addition so be careful about unpermitted additions.
What is my home is listed for sale or has been listed for sale within the last 12 months?
Lenders do not like to make loans on properties that have been listed for sale within the prior 12 months of the loan application. They're very strict about this. Taking down the for sale sign is not going to help as the Appraiser is obligated to check the multiple listing services to verify any listing status. If the loan request is for a conforming, alternative "A" product and even a Sub Prime product then the property owner is going to have a difficult time in obtaining a loan. There are some lenders who will not penalize for a listed or previously listed property but there is a trade off which usually mean a lessor loan to value ratio and a higher interest rate.
What are the different types of qualifying aspects to a normal refinance or purchase money loan?
01. "FULL DOC" which means everything is verified and you get the best pricing.
02. "SIVA" which means stated income with verified assets. Pricing is slightly higher.
03. "SISA" which means stated income with stated assets. Pricing is higher than SIVA
04. "NINA" which means no income and no assets are verified. Pricing is higher than SISA
05. "NO RATIO" or "NO DOC" which means virtually nothing is verified but your credit score. Pricing is higher than SISA.
Available 1st Mortgages for credit scores above 620
30 year fixed
30 year fixed with first 5-10 years interest only.
40/30 meaning a 40 year amortization with a balloon payment due in 30 years.
50/30 meaning a 50 year amortization with a balloon payment due in 30 years.
30/15 meaning a 30 year amortization with a balloon payment due in 15 years.
20 year fixed
15 year fixed
10 year fixed
3/1 meaning a 30 year loan with an initial fixed rate for 3 years and converting to a 1 year adjustable thereafter.
5/1 meaning a 30 year loan with an initial fixed rate for 5 years and converting to a 1 year adjustable thereafter.
7/1 meaning a 30 year loan with an initial fixed rate for 7 years and converting to a 1 year adjustable thereafter.
10/1 meaning a 30 year loan with an initial fixed rate for 10 years and converting to a 1 year adjustable thereafter.
Payment option adjustable rate mortgage.
Payment option fixed rate mortgage.
There are more categories. This many categories only drives home the fact that a professional in the real estate finance field should be consulted before obtaining a real estate loan.
What happens to my credit score when I start applying for a mortgage?
I have a 5 page file on my credit scoring page. Please review it but simply put your credit score is very important so it is wise to obtain your 3 bureau report yourself prior to inquiring for a real estate loan. The answer to the question is that your credit score will decrease from 5-15 points for every inquiry with the credit bureaus so you do not want to be shopping around for a prolonged period of time. A competent professional can provide you with a complete quote without a credit report as long as you know your MCS or middle credit score. If you do not know your MCS then you're at a disadvantage as most lenders will not provide you with their three bureau report. Remember Knowledge is Power.
What's the best way to inquire for a mortgage with regards to credit scores and qualifying?
The best way to inquire about a home loan is to control the conversation. I periodically call on the "Big Boys" who advertise on television and the Internet and one thing is clear. Control is either handled by you or them. There are some excellent loan officers in this business but we're rare. Most people you talk to want to control what you will ask and what you will say like : What will win your business today, as if there is some race to victory so be in control. If you can't get your questions answered then call me, I'll answer them.
Know what you want or what you want to talk about. Don't let someone else decide for you in the beginning what's best for you. Many times I put forth 4 or more programs and am asked what I feel is the best but I have put 4 or more programs in front of my clients and only then do they ask my opinion. I never tell my clients what they should take. I only advise them the PROS and CONS of each program and then work with them to make their decision.
Go to the one of the credit bureaus and pay the $40 for a 3 bureau report with credit score. All a professional needs to know is credit score, income qualifier, equity position and cash reserves to give you a quote. Anyone who wants a credit report prior to the quote is controlling you and if you decide to not take their loan then your score has just dropped 5-15 points because of the loan inquiry on your record. You getting your own score from one of the credit bureaus does not reduce your score as you did not apply for credit.
Know how much money you gross annually. Know how much cash reserves you have in the bank. Check with www.zillow.com to get an indication of what your home is worth. Know how much you owe to creditors and what the payments are. REMEMBER KNOWLEDGE IS POWER.
Why is a high credit score significant?
Credit scores are the most significant factor in the credit lending community. Just about everything is computerized and credit scoring is no different. Today, more than ever, lenders are pricing for risk and credit scores below 660 pay a significant to ridiculous amount of interest. It's quite easy to build a high credit score even with collection accounts, tax liens and other old derogatory credit remarks but it takes time and action. Credit scores pretty much depend on these things: Having a lot of credit but not using it. Owing less than 30% of your existing credit. Having credit cards and not personal loans. Paying off small misunderstandings before they lead to collection accounts. Making sure that you keep track of all your credit and pay the credit card 10 days before it is due. Not inquiring for more than 1 or 2 credit accounts during the year. Go to my link on credit scoring to find out more.
What is a balloon payment?
A balloon payment just means that the remaining balance is all due and payable at a pre-determined time specified on the note. Balloon payment means Balance Due.
Are first mortgages assumable?
Generally No although sub prime lenders are usually the last type of lender to call the loan due once title has transferred because their rates are much higher. Any type of change in title unless to a trust can trigger a due on sale or transfer clause in the note. As long as the primary signer stays on the deed the loan will not be called.
What is a due on sale clause?
When you sell or transfer the property the lender wants their money. The balance is due upon sale to a third party, generally, someone who buys the property who is not a spouse.
How do I prepare for a loan?
Think ahead. People are either proactive or reactive. Applying for a loan is always best in a proactive situation. Applying for a loan in a reactive situation will almost always put the borrower in a position of needing the loan too much and therefore reacting with a loan that is not in their best interest. Here are some proactive ways to start:
01. Obtain your own trimerge (3 credit bureau) report online with credit scores.
02. See the section on what documents are needed on this page and have them ready before you start talking to a source of funding.
03. Do not allow a credit report to be taken by the source of funding when you have your own report. Give them the information over the phone but do not give out your social security number until you are ready to proceed with the loan. See my section on credit scoring. Credit inquiries reduce your score.
04. Know what you want.
05. Know what you can afford. Generally, the best lenders want a debt ratio of no more than 40% of your gross income to be allotted for all debt payments. This includes property taxes and insurance. Determine what your gross monthly income is by averaging the last 12 months income and calculate 40% of that amount. Gross income is everything before all deductions including retirement accounts.
06. Start early and look at your credit report. Credit scores below 640 are at a real risk of paying higher rates.
Do I keep making my monthly payments when I apply for a new loan?
What if my property taxes are delinquent at time of loan request?
What if I have unpaid disputed collection accounts?
How does cosigning affect my credit?
How does cosigning affect my ability to refinance my own home?
How does a pending divorce or separation affect my ability to borrow?
What about child support and other non wage earner income?
What are the policies regarding employment and length of employment in the work field?
How does a foreclosure work?
What happens if when the insurance and property taxes are not paid by the property owner?
When does the State of California pursue foreclosure sale for unpaid taxes?
What is a forced insurance policy>
What is a forebearance?
What should I do when I'm delinquent?
What is a short sale?
How does a short sale affect me when I purchase a home?
How does a short sale affect me when I refinance?
What is payment shock?
How do lenders qualify income for wage earners?
How Do lenders qualify income for self employed applicants?
How long does an applicant need to work in the same field of employment?
What is a note?
What is a trust deed?
Why are there so many forms?
What is an appraisal review?
What does cloud on title mean?
How can I get a relative on title to qualify for a future refinance?
How do I get a loan with someone else on title?
The Mello-Roos Community Facilities Act of 1982 authorizes formation of community facilities districts, such as streets and schools through special taxes. Districts can also fund services such as police, fire protection, recreation, library services and flood control. Districts are created by sponsoring local governments and can't be formed without an election. Property owners pay a special tax each year. Municipal bonds can also be sold to pay for projects with high costs.
Mello-Roos or as I call it the Governments legal "Payment Shock". Mello-Roos is deadly and should be thoroughly considered prior to buying a home and don't listen to the home builder or agent. Mello-Roos allows municipalities to place bonds and other taxes on newly developed properties to cover "So-Called" expenses. When you buy a home in a Mello-Roos district plan on your property taxes being double what they would be in a non Mello-Roos distrcit. If you pay $500,000 for a new home, expect to pay as much as $10,000 in property tax and mello-roos assessments and expect them to increase by 2% or more annually. Expect the worse. Don't assume the agent or home builder is telling you the truth. You're the one who will be living in the home and paying the taxes and I'm not sure the foreclosure guidelines are as lenient as the California property tax guidelines are so BEWARE of MELLO-ROOS. You can see I'm not a fan of Mello-Roos.
Why should I have a budget?
