Why do you feel like a criminal when you haven’t done anything wrong?
In the post-Great Recession world, the task of getting a mortgage loan be difficult and complex. There is much to consider when choosing the right loan for you. By avoiding the pitfalls of others and preparing properly for the process, you can make great strides in an outcome that ultimately serves your financial goals.
Wall Street and consumer protection laws have placed myriad new regulations and statues upon lenders in the last several years. As such, it has complicated the landscape of the lending world.
What you will be asked about today to finalized your loan may at times make you feel like you are suspected in some sort of criminal enterprise that has siphoned funds off to the Cayman Islands. Be assured that you are not the only one that is being singled out. (Not that there is comfort here in numbers).
There is no discrimination in the level of scrutiny applied. All lenders are equal opportunity interrogators. Yet, by teaming up with a reputable and experienced local mortgage adviser, you will find an advocate who will safely guide you past the judge and jury.
In this confusing and pressure-filled atmosphere, it’s easy to make some mistakes. Here are some common ones that lenders see, and what you can do to prevent them.
When you apply for a mortgage, the prediction of your credit performance is measured by a numerical score. Although there are slight differences among the systems used by major credit reporting agencies, the FICO model is the most popular.
The FICO scoring system was developed by Fair Isaac and Company, with the goal of filtering out nonrelevant factors, such as race or gender. This single rating score sums up your credit history, projecting the likelihood of meeting future payments and indicating your level of credit risk.
Higher scores indicate a better credit risk. These scores not only may qualify you for a mortgage, but possibly better mortgage rates as well. As with the other major scoring models (BEACON and EMPIRICA), FICO takes into account the statistics available in your credit report.
Each item of data is assigned a weighted value, resulting in a single score that ranges from 300 (low likelihood of repayment) to 850 (high probability of repayment). A typical rating for a homebuyer might fall within the range of 600 to 800. These credit scores particularly evaluate:
As most of these factors cover a timeline of credit history, there is not much you can do to change your score at the time you are applying for a mortgage. However, you can begin to monitor your credit rating, know what your score is and ensure that the history is recorded.
For information and tools to help you, Fair Isaac has created a website (www.myFICO.com) that lets you access your FICO score from all of the three major reporting agencies (Equifax, Experian and TransUnion), along with your credit report. The FICO site and each of these reporting agencies’ sites (wwwequifax.com, wwwexperian.com and www.transunion.com) offer services to help you determine the best way to improve your FICO score.
Since the pricing of many loan programs is tiered based on credit score, when you have access to pertinent information, you will be in a better position to obtain the optimum mortgage available to you. Being conscious of your score will have a direct effect on what interest rate you qualify for. The higher your credit score, the lower your rate and fees.
Raising your credit score is a task that must be accomplished over time. The credit score is an assessment of credit history factors. Therefore, it is generally impossible to change your score during the short period of time you are applying for a loan.
As such, it is important to be aware of the positive and negative variables that affect your rating so that you can improve your credit score before you need to use it as a tool to obtain a loan. You can improve your credit score a little each year (by as much as 50 points) by careful management of your credit obligations.
You would think that cash is king when it comes to purchasing a home. What is interesting to learn is that cash-on-hand and other cash equivalents are disallowed for qualifying.
It is important to understand that to comply with anti-money laundering laws, your lender will be required to source all of your funds for down payment, closing costs and reserves required for your new loan. There is a 60- to 90-day look-back period on all account statements and all funds needed to satisfy this requirement must be documented by the submission of all pages of your account statements. Those statements will be reviewed in detail and an explanation and documentation of the source of any large deposits will be required.
As a general rule of thumb, large deposits can be defined as an amount greater than or equal to 10 percent of the gross monthly household income. So, to save yourself some heartache, place all your funds into your bank accounts in advance and don’t hang on to un-deposited checks.
If you are thinking about getting help from family for the down payment and closing costs and the loan program chosen allows for a gift, you can have your donor actually just hang on to those funds in their own account until the time of the closing.
While they will be required to sign a gift letter and provide a bank statement demonstrating their ability to help out, there is no need to transfer funds to you as the borrower. It is in fact easier for you and the lender for the donor to send or wire funds directly to your escrow officer at the time of closing. This creates an easier paper trail.
Whether you are looking for a first mortgage, adding a second mortgage or trying to refinance an existing mortgage, it is helpful to understand more about the general loan classifications.
Take some time to discuss with a mortgage adviser the differences between fixed and adjustable-rate mortgages. What kind of tradeoffs will you be making to keep your loan fixed for 15, 20, 25 or 30 years? What type of short-term payment savings can be realized with an adjustable rate loan that is fixed for the first few years of the loan – three, five, seven or 10 years?
Get educated on and a deeper understanding of the different classifications of loans and which ones would best fit your potential scenarios.
Loans that adhere to the guidelines set forth by Fannie Mae (from FNMA: Federal National Mortgage Association) Freddie Mac (from FHLMC: Federal Home Lone Mortgage Corp.), two corporations that purchase, package and sell loans that meet their conditions as securities to investors. These are referred to as “A” paper loans. Conforming loans must meet certain guidelines with regard to down payment, loan limits, borrower qualifying criteria and appropriate properties.
A reverse mortgage is designed to help senior homeowners benefit from their equity without having to sell their house or make payments.
The loan is funded through a lump-sum payment, monthly payments or a line of credit. The money received from the loan is not taxable nor is it considered in determining Social Security or Medicare benefits.
The loan does not have to be paid until the homeowner sells the property, moves or dies. The senior homeowner is secure in the home even if the loan term ends or the loan grows beyond the value of the property.
Before you head out to get your heart set on that dream home, it is imperative that you ensure that you are looking for the loan and the house that will be the best fit within your financial abilities.
This is accomplished by obtaining a pre-approval. This should consist of an in-depth review by your mortgage advisers of all your financial documents and should consist of an actual underwriting review by either an automated system or a live underwriter of your application subject to a specific property being found.
This gives you a vote of confidence with both the seller and the lender and tells them that you are a viable homebuyer and that you are working with a professional. It also predetermines guidelines for an appropriate offer when you begin negotiation and tells you how much you could offer.
But even a pre-approval is subject to certain conditions being met, such as obtaining a home appraisal that meets certain date obligations. Also, such changes as a decline in your financial position or rising interest rates could affect the final loan approval.
At the loan closing, you will be required to pay your down payment and other various closing costs and fees. Most of the closing fees are paid by the buyer, but some of the fees are prorated, by date, to the seller and the buyer.
In order to be prepared to pay the closing costs, you will be given a Good Faith Estimate from the lender. The lender is required to disclose to you within three days of your application any and all costs they anticipate so it is important to understand what to expect.
Before you make long-term decisions about the terms of your mortgage, such as locking in an interest rate, you should review the Good Faith Estimate to determine if there are any costs that you don’t understand or that may change your decision. Total closing costs will range from 2 percent to 5 percent of your mortgage amount, depending on the rate chosen.
At times, fees such as an application fee, credit report fee or the appraisal fee may be required with the loan application before the closing. Certain fees vary from lender to lender, but generally, taxes, appraisals, credit reports and title insurance should be comparable for all borrowers.
Sometimes, your fees may be included in the mortgage amount, depending on the terms. But generally, the buyer comes prepared to pay the related fees at the time of the loan closing. Be sure you understand the purpose of all of the closing costs and fees that appear on your Good Faith Estimate that you may be expected to pay such as:
Everyone has encountered financial problems at some point in their life. Mortgage lenders understand this and are trained to determine the best possible loan program and rate for your individual situation.
When you meet with your mortgage adviser, be open and honest with your current situation. This will make it easier for the lender to gauge your situation and provide you the best possible loan.
If you withhold certain information needed for the loan process and the lender finds out later, it could cause difficulties in obtaining your loan and extend the time frame of funding.
The most critical time to avoid mistakes is immediately before you begin the loan process. This is when it counts the most. Failing to avoid the following mistakes can cost you thousands. Months before you apply make sure you:
All of this guidance applies as well to the escrow period – while your loan is being processed for closing. Keep things status quo until after your loan is closed and you are in your home.
Adherence to the tried-and-true Scout motto when it comes to the loan process will ensure as pleasant of an experience as can be expected. Taking time to put your financial house in order before you seek a new roof to put it under will go a long way to increase your level of comfort in the journey.
Ultimately, homeownership is a most worthy cause to pursue in your quest to achieve your part of the American Dream. If done with forethought and care, you will be standing on a solid foundation before you know it – both literally and figuratively.
Nolan Solano is a local financial adviser and veteran mortgage banker with 23 years of lending and financial expertise. He manages two local offices of Opes Advisors located in Vacaville and Napa. He can be reached for comment at 454-2088 or [email protected] and can be found on the Internet at www.local-lender.com.