What
is the difference between pre-qualifying and pre-approval?
A pre-qualification for a
specific loan dollar amount is based on a review of basic
financial information you supply to us. No verification of
this information is performed. The pre-qualification means
that if the information you supplied to us is accurate,
subject to verification of credit, appraisal of the
property, and the lenders underwriting criteria for the
loan amount, you should be able to receive a loan as
described in the pre-qualification letter or document.
This is not a final approval. A pre-qualification
is not a commitment to lend. However, a pre-qualification
letter indicates to you and the seller that in the opinion
of the loan officer you are qualified to purchase the
house you are making an offer on.
Pre-approval
is a step above pre-qualification. Pre-approval involves
verifying your credit, down payment, employment history,
etc. Your loan application is submitted to an underwriter
and a decision is made regarding your loan application. If
your loan is pre-approved, the lender will loan you money
on the basis that you requested subject to: a satisfactory
appraisal (both as to value and type of product); your
financial condition remains as stated on your application
and satisfying any underwriting conditions from the
lender.
Getting your loan pre-approved
allows you to close very quickly when you do find a house.
A pre-approval can help you negotiate a better price with
the seller, since being pre-approved is very close to
having cash in the bank to pay for the house!
|
|
|
What
are credit scores?
A credit score (such as FICO - developed by Fair Isaac
& Co and used by Experian, or BECON – developed and
used by Equifax or EMPIRICA – developed and used by
Trans Union) or credit scoring is a method of determining
the likelihood that a credit user (you) will pay their
bills. Fair Isaac began its pioneering work with credit
scoring in the late 1950’s. Since then scoring has
become widely accepted by lenders as a reliable means of
credit evaluation. A credit score attempts to condense a
borrowers credit history into a single number. Fair, Isaac
& Co. and the credit bureaus do not reveal how these
scores are computed. The Federal Trade Commission has
ruled this practice to be acceptable.
Credit scores are calculated by using scoring models
and mathematical tables that assign points for different
pieces of information that best predict future credit
performance. Developing these models involves studying how
thousands, even millions, of people that have used credit.
Score-model developers find predictive factors in the data
that have proven to indicate future credit performance.
Models can be developed from different sources of data.
Credit-bureau models are developed from information in
consumer credit-bureau reports.
Credit scores
analyze a borrower's credit history considering many
factors such as:
Late payments
The amount of time credit has been established
The amount of credit used versus the amount of
credit available
Length of time at present residence
Employment history
Negative credit information such as bankruptcies,
charge-off’s, collections, etc.
There are really three credit
scores computed by data provided by each of the three
bureaus––Experian, Trans Union and Equifax. Some lenders
use one of these three scores, while other lenders may use
the middle score and still others may use all three.
|
|
|
How
can I increase my score?
While it is difficult to increase your score over the
short run, here are some tips to increase your score over
a period of time.
- Pay your bills on time. Late
payments and collections can have a serious impact on
your score.
- Do not apply for credit frequently.
Having a large number of inquiries on your credit report
can worsen your score.
- Reduce your credit card balances.
If you are "maxed" out on your credit cards,
this will affect your credit score negatively.
- If you have limited credit, obtain
additional credit. Not having sufficient credit can
negatively impact your score. (Normally lenders like to
see you have at least five (5) lines of credit not
including utilities (such as telephone, gas and electric
companies) and oil company credit cards.
|
|
|
What
if there is an error on my credit report?
If you see an error
on your report, to rectify it, you must contact the credit
bureau. The three major bureaus in the U.S., Equifax
(1-800-685-1111), Trans Union (1-800-916-8800) and
Experian (1-888-397-3742) all have procedures for
correcting information promptly. Alternatively, we as your
mortgage company may help you correct this problem as
well. Understand this process takes time, must be done in
writing, and may require proof depending on the nature of
the error.
|
|
|
Why
are interest rates different from day to day and one
source to another?
To understand why mortgage rates change we must
first ask the more general question, "Why do
interest rates change?"
Interest rate movements are based on the simple
concept of supply and demand. If the demand for
credit (loans) increases, so do interest rates.
This is because there are more buyers, so sellers
(those who loan the money) can command a better
price, i.e. higher rates. If the demand for credit
reduces, then so do interest rates. This is
because there are more sellers than buyers, so
buyers can command a lower better price, i.e.
lower rates. When the economy is expanding there
is a higher demand for credit, so rates move
higher, whereas when the economy is slowing the
demand for credit decreases and so do interest
rates.
This
leads to a fundamental concept:
Bad news (i.e. a slowing economy) is
good news for interest rates (i.e. lower rates).
Good news (i.e. a growing economy) is bad news
for interest rates (i.e. higher rates).
|
A major factor driving interest rates is
inflation. Higher inflation is associated with a
growing economy. When the economy grows too
strongly, the Federal Reserve increases interest
rates to slow the economy down and reduce
inflation. Inflation results from prices of goods
and services increasing. When the economy is
strong, there is more demand for goods and
services, so the producers of those goods and
services can increase prices. A strong economy
therefore results in higher real estate prices,
higher rents on apartments and higher mortgage
rates.
Mortgage rates tend to move in the same
direction as interest rates. However, actual
mortgage rates are also based on supply and demand
for mortgages. The supply/demand equation for
mortgage rates may be different from the
supply/demand equation for interest rates. This
might sometimes result in mortgage rates moving
differently from other rates. For example, one
lender may be forced to close additional mortgages
to meet a commitment they have made. This results
in them offering lower rates even though interest
rates may have moved up!
There is an inverse relationship between bond
prices and bond rates. This can be confusing. When
bond prices move up, interest rates move down and
vice versa. This is because bonds tend to have a
fixed price at maturity––typically $1000. If
the price of the bond is currently at $900 and
there are 10 years left on the bond and if
interest rates start moving higher, the price of
the bond starts dropping. The higher interest
rates will cause increased accumulation of
interest over the next 10 years, such that a lower
price (e.g. $880) will result in the same maturity
price, i.e. $1000.
|
|
|
|
Do
I need flood Insurance?
Most lenders will
not lend you money to buy a home in a flood hazard area
unless you pay for flood insurance. Some government loan
programs will not allow you to purchase a home that is
located in a flood hazard area. Your lender may charge you
a fee to check for flood hazards. You will be notified if
flood insurance is required. If a change in flood
insurance maps brings your home within a flood hazard area
after your loan is made, your lender or service may
require you to buy flood insurance at that time.
|
|
|
What
are your rates?
The first
question customers usually ask when calling a
mortgage company or lender is "What are
your rates?" Because of the number of
mortgage programs available and the various rate
and point combinations, most mortgage companies
have rate sheets that are 5-10 pages long.
Getting a rate quote is just a small part of
shopping for a mortgage and usually not the best
way to select a lender. Customer service,
professional staff, convenience, and flexibility
are some of the key attributes to selecting the
best lender for your needs.
In helping you assess a rate, you will need to
provide answers to a few basic questions like:
- What is your
purchase price?
- What loan amount
are you looking for or what loan amount do you
want to finance?
- Do you prefer a
fixed rate or an adjustable rate mortgage?
- How long do you
plan to live in the house?
- How many points
are you willing to pay?
|
The purchase
price or the
value of your home effects the rate because it
effects the size of the loan. For example, Jumbo
Loans, currently over $240,000, have a higher
rate. Similarly, smaller loans have a higher rate
or cost more because it cost the same and takes
the same effort to do $35,000 loan as it does a
$200,000 loan. Lenders and brokers need to make or
charge a certain minimum amount of money to cover
overhead, per loan (transaction) cost and make a
profit.
The type of loan, fixed or variable for
example, affect the rate because they affect the
lenders income & inflation risk. For example,
with a fixed rate loan, if rates go up the lender
could lend out money at a higher rate then they
are currently loaning it to you, and therefore
earn more money. With a variable rate loan since
the rate the lender can charge you changes
regularly their income remains consistent with
their current income opportunities.
Therefore with variable rate loans they give you a
better rate since they know that if rates go up
they can charge you more.
The length of time you will own a house affects
both the type of loan you may want and the amount
of points it may make sense to pay. For example,
if you are going to keep a house for a short
period of time (let’s say 3 years), you may be
better off with a variable rate loan (e.g. a 3/1
ARM – fixed for 3 years and varies once a year
every year there- after until the loan is paid
off). Why? Because typically the 3/1 ARM has a
lower rate associated with it than a 30 year fixed
rate loan and since you will sell the house in 3
years you would not be affected by higher rates
which may exist at that time. On the other hand,
if you expect to live in the house for 30 years
you might be willing to pay some points to receive
a lower interest rate now. The lower interest rate
would save you money every month over the life of
the loan. The total savings in this situation
should be greater than the cost of points, giving
consideration to the amount that the point money
could earn if invested (saved) after taxes.
|
|
|
|
What
happens if my loan gets sold or my lender goes out of
business?
The simple answer is
nothing. You will still have to pay your mortgage. The
terms of your mortgage will not change nor will the
requirement for you to pay on time change. The only thing
that would change is to whom you make out your check.
|
|
|
Does
zero points really mean zero points?
What about no closing costs loans?
The answer is maybe. Remember there are more then one
type of Points (Discount and Origination) not to mention a
Mortgage Broker fee which is expressed as points. Remember
that the lender and broker needs to make a living.
Therefore the more lines on the closing statement or good
faith estimate that says zero the more likely the rate you
are paying is higher than it otherwise would be. Also, it
is often unclear what a lender or broker means by no
closing costs or no point loans. Sometimes the lender or
broker will increase fees to compensate for the lack of
points or a more favorable rate.
|
|
|
Should
I refinance?
Yes, if it saves you
money or converts you out of a mortgage type you don’t
want. The saving money is obvious but not necessarily easy
to calculate.
|
|
|
