| How
does my credit affect my ability to be approved for a mortgage?
Your
credit report is a measure of your ability and willingness to make monthly
payments in a timely manner. A clear report with no late payments or collections
usually results in the best interest rates available. A history of late payments
will probably affect the interest rate you'll pay as well as other aspects
of the loan, such as required down payment and perhaps the type of loan available
to you. If there are consistent derogatory marks on your credit, it may make
it difficult for you to be approved for a mortgage at all. Ask for a
prequalification before shopping for a home. At our expense, and with your
consent, Mortgage Architects will order a triple merged in-file report which
includes all three major credit reporting agencies.
What is a credit score and how is it determined?
Credit
scoring is a scientific assessment of how likely a borrower is to pay back
a loan. The score is based on data available in the borrower's credit report.
It is intended to determine the degree of risk a potential borrower represents
to the lender or investor. It is not a measure of income, assets or bank
accounts, although these along with other factors are still considered by
lenders in the decision to approve applications. Each of the three national
credit data repositories report a credit score, and they are usually different.
The most popular is the Fair Issac Credit Score (known as FICO). FICO scores
range from 450 to 850. The FICO score considers five areas (which are not
given equal weight); payment history, outstanding debt, credit history, inquiries
including new account offerings, and types of credit outstanding. The higher
your score, the more you are considered a good risk and you are usually offered
the lender's best rates. Guidelines on which FICO scores constitutes a good
risk vary from lender to lender.
How much do I need for a down payment?
Down
payment requirements vary significantly depending on the price of the home
and the type of loan you choose. In some cases a down payment of only 3%
is necessary. There are even loans available with no down payments if you
have an excellent credit history. Most conventional, conforming loans (loans
up to $275,000.00) will require a minimum of 5% down. This must be from your
own funds. Veterans can purchase homes with no down payment using their VA
eligibility. Most lenders will require you to purchase private mortgage insurance
(PMI) if you put less than 20% down. If you do not have 20%, consider alternative
financing techniques such as the 80/10/10 or 80/15/5 to reduce the required
down payment and still avoid mortgage insurance.
What are closing costs?
Closing
costs are one-time fees that you must pay to complete the mortgage. These
costs could include discount points, origination fee, title search, recording
fees, filing fees, flood insurance (if your home is in a flood zone), tax
service fee, title insurance, state stamps (in some states) for the note
and mortgage, appraisal fee, as well as other fees. Always request a good
faith estimate from your lender. Some lenders charge additional costs that
others may not. Closing costs on a conventional loan must be paid at the
time of closing when purchasing a home. When refinancing a conventional loan,
closing costs can often be included in the mortgage amount depending on the
loan-to-value. Closing costs on FHA purchases and refinances usually can
be included in the loan amount.
What documentation will I need to apply for a mortgage?
General
information such as name, address, social security numbers, birthdates,
employment, income, assets and liabilities will be necessary to complete
the application. Since most applications are underwritten with computer software,
copies of the following items are usually satisfactory but additional information
may be requested by the lender:
-
Last
year W-2 for each applicant.
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Most
recent pay stub including year to date earnings.
-
Most
recent bank statements and investment account statements.
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Copy
of most recent 401K statement.
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If
refinancing, a copy of your survey. (May reduce closing costs).
-
If
refinancing, a copy of your title insurance owners policy. (May reduce closing
costs).
-
Proof
of homeowners insurance including name and telephone number for the
agent.
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If
purchasing, a copy of the sales contract including all addendums.
-
If
self-employed or paid by commission, last 2 years full tax returns signed
and dated including all schedules and a year-to-date profit and loss statement.
-
If you
filed bankruptcy in the last 10 years, provide a copy of the bankruptcy and
discharge. A written explanation of reason for the bankruptcy is required.
What kind of insurance do I need?
You will
need proof of homeowners insurance. The "Homeowners Policy" should provide
comprehensive coverage for losses due to fire and other losses, as well as
protect you from personal liability. Generally, you will cover the value
of the structure and other outbuildings on the property. Your minimum coverage
should be not less than your loan amount in most cases, and your policy should
also include a "full replacement" clause.
If the house is in a flood zone you will have to provide proof of flood
insurance. The cost of flood insurance depends on the elevation certificate
and the risk of potential loss. Contact your insurance carrier for a quote.
If you have less than 20% equity in the property, you may have to have private
mortgage insurance on conventional loans. On FHA loans, mortgage insurance
is required regardless of equity. Private mortgage insurance is not life
insurance to pay off the mortgage in the event of the death of someone on
the title. It is risk insurance for the lender in the case of default. Mortgage
insurance premiums vary according to equity. Your lender will provide a quote
for the cost of this insurance.
Should I choose a fixed rate or an adjustable rate?
Careful
consideration should be given to the decision to select an adjustable rate
mortgage instead of a fixed rate loan when interest rates are low. How long
you plan on staying in the house is a very important component of this decision.
Before choosing the adjustable rate option (ARM) carefully review the disclosures
associated with the loan. What are the caps on the adjustments? How often
can it adjust? What is the index and the margin? Is it convertible? Are there
any prepayment penalties? These are all questions that require your consideration
prior to making a decision.
Compare the payments on the ARM to those on the fixed rate. You may find
that the lower interest rate on the adjustable mortgage is not significant
enough to warrant accepting that loan over the fixed rate. Look at the
payments… not just the interest rate. Look at the payments in the early
stages of the loan and how they could increase if the caps were exercised.
Remember that this could be a long term decision and if rates have increased
there could be payment shock to your budget.
Should I refinance?
People
refinance their mortgages for a variety of reasons. You could be refinancing
for a lower rate, change from an adjustable rate to a fixed rate, reduce
the loan term or simply extract equity for home improvement, college expenses
or debt consolidation. Whatever the reason for considering a refinance evaluate
your options and ask questions. If you are refinancing just to reduce the
interest rate, calculate recovery period for the closing costs. Look at an
amortization schedule for the new loan compared to where you are now with
the existing mortgage. If you have been in the house for awhile, I suggest
you consider a 25 or 20 year mortgage instead of starting all over again
for 30 years.
If you are extracting equity for expenses or debt consolidation, consider
a second mortgage or home equity loan. Compare the rates, closing costs and
terms of the second mortgage combined with the first mortgage to the costs
of a complete refinance. Ask questions. Get facts. Look at good faith estimates
and truth-in-lending statements before making your decision.
Should I ask for a good faith estimate?
Always.
The good faith estimate is an indication of costs and terms of the mortgage.
The good faith estimate should display all known costs associated with the
refinance or purchase. In addition to the good faith estimate ask for a
truth-in-lending. This will show the annual percentage rate (APR) on the
loan. APR is not just a disclosure of interest rate, but a combination of
interest and some of the costs related to the loan such as points, origination
fees, administrative charges, underwriting fees and other charges associated
with the loan. Ideally, the APR and the interest rate should be close. It
is unlikely they will be the same. A high APR usually indicates higher closing
costs.
If I hear No Points and No Origination Fee will my closing costs vary
by lender?
It is
very possible that closing costs will be different from one lender to another
even though neither quotes points or origination fees. Once again, ask for
and compare the good faith estimates of several companies before making your
decision.
Fees such as "broker fee" or "administration fee" may appear and be a
considerable amount. If you have not specifically asked about such costs,
they may not be volunteered during a telephone inquiry. The good faith estimate
should display the costs and when you go to closing compare the estimate
to the settlement statement.
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