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 that 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
BEACON – developed and used by Equifax or
EMPIRICA – developed and used by Transunion)
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, Transunion 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.
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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).
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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:
- 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?
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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 slightly
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, the rate the
lender can charge you changes regularly.
Therefore, with variable rate loans,
lenders can give you a better start rate
since they know that if rates go up,
your rate can be raised.
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 start rate than
a 30 year fixed rate loan. Also, if your
house is sold 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 may want to consider
paying 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.
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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 need 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.
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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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