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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!
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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.
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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.
I
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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.
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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.
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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.
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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:
I
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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.
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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.
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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.
I
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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.
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