Your Mortgage Knowledge Base

Pre-qualification is a determination of the loan amount you’re likely to receive. It is not a guarantee of approval. To obtain pre-qualification, you usually are interviewed by a licensed loan officer who determines the pre-qualification amount. You will be issued a letter with this information that you can present when making an offer on a home. It’s important to understand that pre-qualification does not imply any obligation from the lender that you will be approved.

Pre-approval is more thorough than pre-qualification. To be pre-approved, you must submit an application and verify your credit and financial history. After you receive your pre-approval certificate, you’re in a stronger position to close earlier and negotiate a better price. It’s highly recommended that you seek pre-approval if you are shopping for a home.

Location is key. Factors like crime rate, public school ratings, daily commute times to surrounding metropolitan areas, as well as the vicinity to local parks, libraries, swimming pools, sport arenas, churches, restaurants and shopping centers are essential in the price valuation of real estate. It’s best to consider the location as much as the condition of a home when you are looking to make a purchase.

• Proof of Income – Find and make copies of your pay stubs.
• Tax Information – Gather your W-2s, 1099s, and tax returns for the last 2 years. If you’re self-employed or an independent contractor, you’ll be required to provide your 1099-MISC information.
• Credit Details – We’ll perform a credit check when you apply.
• Debt Documentation – You’ll be required to provide documentation on your outstanding financial commitments. Gather materials on your current mortgage, car loans, student loans and any other debts.

Points are prepaid interest that you can pay up front. You can pay points to get a lower rate on both fixed rate and adjustable rate mortgages, but the points charged to reduce the rate may vary depending on the type of loan. One point is equal to 1% of the mortgage amount. (Example: $100,000 mortgage amount = $1,000 point)

It depends on your particular situation. Three major factors should be considered when deciding whether to pay points:

1. How much you can afford to pay upfront?
2. How long do you expect to make payments on your mortgage?
3. What is the length of your loan, and how long do you plan to live in the home?

Many people looking for a long-term mortgage opt to pay points to ease their monthly payments. People looking at a mortgage with a shorter term or looking to stay in the home for a shorter period of time often opt to make a larger down payment instead of paying points.

The interest rate isn’t always the most important factor in selecting a mortgage. You want to make sure you’re doing business with a reliable, reputable business. A trustworthy lender will be able to provide all of the details of your loan, including pre-approval, in writing. When shopping for a mortgage provider, don’t forget to ask friends and family members for recommendations. Although online reviews are available, they may not be as thorough as hearing feedback from the people you know. It’s also reasonable that if the people closest to you were happy with their experience, you will be, too.

Also, make sure that you understand the full cost of the loan and that you feel comfortable with all of the terms. For instance, pre-payment penalties, a large down payment requirement, or larger monthly payments may cause the loan to be less than ideal — regardless of the interest rate.

• Form 1003 — The residential loan application — including the attached Fair Lending notice, loan info sheet, and credit authorization. Note: Do not use whiteout on this paperwork. Mistakes should be crossed out and initialed.
• Copies of W-2s or tax returns for the previous 2 years.
• If you own rental units, provide the most recent rental agreement and tax returns for previous 2 years.
• Your last 3 bank statements along with the most recent statements for any mutual funds, IRA/401(k), or stock accounts.
• Settlement agreement and divorce decree (if applicable).
• Letter explaining how you plan to utilize refinance proceeds if you’re seeking a cash-out refinance.
• Non-U.S. citizens must present their Green Card or H-1 or L-1 visa.
• If you’ve filed for bankruptcy, present a schedule of creditors, discharge notice, and filing.
• If you’re applying for a second loan, include the first mortgage note.

These documents may not be all-inclusive, but by having these on hand, you will expedite the application.

After selecting and applying for a loan, the approval process begins. For approval, we must verify your credit, employment history, assets, property value, and anything else required by your particular circumstances.

FICO stands for Fair Isaac Corporation. This company is a pioneer and leader in credit scoring. Your FICO score is a number that tells creditors how likely you are to pay off your debts.

FICO and the credit bureaus do not disclose their exact computation methods. However, most credit scores are calculated through models that assign points to different factors of your credit history to best predict future performance. There are many commonly analyzed factors in your credit history, including:

• Payment history
• Employment history
• How long you have had credit
• How much credit you have used compared to how much you have available
• How long you’ve lived at your current residence
• Negative credit/financial events such as collections, bankruptcies, charge-offs, etc.

• Identifying information — Social Security number, date of birth, employment information (these facts are not determining factors in credit scoring)
• A list of debts — how many credit lines have been opened and closed, types of credit lines, a history of how you’ve paid them, loan limits, and current balances
• Public record information — bills referred to collection agencies, bankruptcies, foreclosures, suits, liens, etc.
• Inquiries made about your creditworthiness during the last two years — voluntary and involuntary inquiries.

Raising a credit score is not always easy and not something that can be done overnight. There are several credit best practices that will raise your rating over time:

• Pay your bills on time. This is extremely important. Collections and late payments can lower your credit scores.
• Reduce your credit balances. Maxed out credit cards will lower your credit score.
• Don’t apply for credit often. This reflects poorly on you and your rating.
• Establish credit history.

Yes, errors and fraud should be reported to both the credit reporting agency that provided the report with the error or fraud, as well as the creditor that provided the erroneous or fraudulent information to the credit reporting agency. At this time, Experian and Equifax are only accepting disputes via their online forms. TransUnion handles disputes by phone, standard mail and an online form. We have provided you with information below to access these agencies per myFICO.com.

Equifax:
https://www.ai.equifax.com/CreditInvestigation/home.action

Experian:
http://www.experian.com/rs/fi4.html

TransUnion:
TransUnion Disputes
2 Baldwin Place, P.O. BOX 1000
Chester, PA 19022
1-800-916-8800
http://www.transunion.com/corporate/personal/creditDisputes.page

Although it may seem intuitive to move money around in accounts to show financial strength, this is actually not advisable. All facets of your income will be considered when applying for a loan. It’s best not to make any financial changes that could alter your eligibility, especially placing money from untraceable sources into your accounts. Additionally, don’t change your employment during the home loan process. Steady employment can be a factor in determining loan qualification. Lastly, large purchases such as cars, appliances or furniture can negatively impact the outcome of the loan.

Interest rates change based on the demands of the market. When a high demand exists for loans, interest rates increase to take advantage of an active market. If demand for mortgages is low, interest rates decrease to entice new customers.

Inflation also has a major impact on mortgage rates. Inflation is associated with a growing economy. As the economy grows, the prices for goods and services increase along with it. This price inflation affects real estate along with everything else, pushing up the price for mortgages.

Lastly, the Federal Reserve has the ability to influence interest rates for the purpose of controlling inflation and employment. It can do this by raising or lowering the discount rate, and indirectly influencing the direction of the Federal funds rate.

Just as the name suggests, this is a loan where you pay no points and no fees upfront. You pay a higher rate and the lender agrees to pay the upfront costs. This is a popular loan for first-time homebuyers with less cash who want to limit the upfront fees they pay. It’s also a popular loan for people looking to refinance. Since there are no fees, there’s no penalty for refinancing whenever interest rates drop, even if you refinance multiple times in a year.

Zero-point/zero-fee loans are particularly useful for people who will not be spending a long time in their home. If you’re looking to move within five years, there’s little downside to this type of loan. However, if you stay in the home for the long term, you’ll eventually end up losing money by paying at a higher rate over a longer period of time.

A mortgage rate lock is a promise to you from the lender to hold a specific combination of an interest rate and points for an agreed upon time (typically 10, 15, 30, 45 or 60 days) until you can close on your home. Locking in a rate protects you from unforeseen interest rate increases that can occur in the days or weeks leading up to closing, but conversely, if the rates fall, you may not be able to take advantage of the lower rates.

Rate locks are dependent on the type of loan program, current interest rates, points, and the length of the lock. To hold a rate for longer periods of time, you usually have to agree to pay higher points or interest rates.

Yes. An active secondary mortgage market exists in which lenders and investors buy and sell pools of mortgages. If another company purchases your mortgage, it assumes all terms and conditions. A new lender cannot change the rate, payments, or any other aspect of the agreement. You will only have to send payments to the new loan servicer.

In this instance, you’re still obligated to make payments. Usually, a lender that goes out of business is forced to sell their mortgages to other lenders. The terms and conditions will not change, but you will have to send payments to the new loan servicer.

Private mortgage insurance (PMI) protects the lender from the costs of foreclosure. You may be obligated to purchase PMI if you can’t make a sufficient down payment of at least 20%. By purchasing PMI, you will have access to a mortgage without having to make a large down payment, and the lender is insured in the event that you default on the loan.

The price of PMI is inversely proportional to the size of your down payment. The larger your down payment, the lower the cost of PMI will be.

Talk to your loan officer before making a large purchase. Moving money around in your accounts or increasing your debt to income ratio could affect your loan.

Talk to your loan officer if there is going to be a change in your employment. It’s best to have steady employment for at least 2 years and verifiable income when applying for a loan.

Inspections are important to understand the condition of the home. They can also be helpful when it comes time to negotiate with the sellers, in terms of lowering the price of the home, or adding service stipulations to the contract.