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Mortgage Tools & Tips

 

Mortgage Tips http://www.coldwellbanker.com/public/learn/mortgage_faq/home.jsp?customerType=Mortgage&customerType=Mortgage&customerType=Mortgage

Mortgage calculator http://www.bankrate.com/brm/popcalc2.asp

Estimate your credit score http://www.bankrate.com/brm/fico/calc.asp

Today’s Interest Rates http://www.coldwellbanker.com/real_estate/Mortgage_Resources

Mortgage Companies (go to mortgage companies page)

How does financing details affect your offer?

How FHA and VA financing affects your offer

Factors that determine loan approval

Loan application checklist

Your fico score

 

 

How Financing Details Affect Your Offer

Most buyers do not have enough cash available to buy a home, so they need to obtain a mortgage to finance the purchase. Since you will probably make your purchase contingent upon obtaining a mortgage, the seller has the right to be informed of your financing plans in order to evaluate them. That is one of the major reasons that financing details are included in your offer.

You will want to provide a pre-approval letter with your offer. This gives your offer more strength because the seller knows that you have the ability to get a mortgage.

 

Interest Rates

Another reason for including financing information in your offer is to protect yourself. If interest rates suddenly become volatile and rise quickly, as sometimes happens, you may looking at a mortgage payment much higher than you anticipated. By putting a maximum acceptable interest rate in the offer, you are protecting yourself from such an occurrence.

At the same time, the seller will probably want to see that you have some flexibility in the financing terms you are willing to accept. If interest rates are currently at eight percent and you indicate this is the highest rate you will accept, you would be able to cancel the contract without penalty if interest rates rose past that point. The seller would suffer because they have lost valuable marketing time and may have made their own plans based on successfully closing the transaction.

Closing Costs and Financing Incentives

There may be times when, as part of your offer, you request the seller to pay all or a portion of your closing costs, or provide some other financial incentive. Such incentives can be especially effective if a buyer is tight on money or pushing their qualifying ratios to the limit. These incentives are called Seller concessions.

Whenever you ask for incentives such as these, you will probably find the seller less willing to negotiate on price. After all, what you are really asking for is to have the seller give you some money to help you buy their house. The seller will automatically deduct the amount of closing costs that the buyer requests in order to evaluate the offer. The end result is that, for a little relief in the beginning, you are willing to pay a little more in the long run. Depending upon the amount you’re requesting the seller to pay for you, you may even have to offer above the listed price. You will need to take into consideration that the Seller is not getting that price for the house, but is getting the offered price less Seller concessions.

Seller Financing

Another occasional request is to have the seller "carry back" a second mortgage to help facilitate your purchase of their home. In cases when the seller does not need all the proceeds from their sale in order to purchase their next home, this is an option. The advantage to the buyer is that by combining your down payment and the second mortgage from the seller, you may be able to avoid paying mortgage insurance and save yourself some money.

If such a carry-back is part of your offer, you should include the terms you wish to pay on such a second mortgage. Keep in mind that your first trust deed lender needs to know this information so they can underwrite your loan, and they have certain minimum requirements. The minimum term of the second mortgage can be five years. The minimum payment can be "interest only." Longer mortgage terms and payments that also include principle are also acceptable.

Cash Offers

If you are one of those rare individuals making a cash offer to buy a home, it makes sense to provide some documentation with your offer that shows you have the funds available. A bank statement would be fine. If you have to liquidate stock or some other asset, your offer should give a timetable on when you will provide proof you have converted the asset to cash.

Other Financing Details in Your Offer

Your offer should also contain information on whether you are obtaining a fixed rate or an adjustable rate mortgage. It should also state whether you are obtaining conventional financing or obtaining a VA or FHA loan.

How FHA and VA Loans Affect Your Offer

Extra Costs to the Seller

If you are obtaining a VA or FHA loan in order to finance your purchase, you must include that information in your offer. This is because government loans place additional financial and performance obligations on the seller.

Non-Allowable Fees

First, VA and FHA loans prohibit buyers from paying certain types of fees that are often charged by lenders, escrow companies, settlement agents, and title companies. They are called "non-allowable" fees. They still get charged anyway, but as the buyer, you are "not allowed" to pay them. The result is that the seller ends up paying them instead of you.

Most of these "non-allowable" fees come from your lender. By the time you are making an offer you should have already been pre-qualified by a loan officer, so you or your real estate agent can ask how much the lender’s non-allowable fees will be. Experienced agents should also have an idea of what non-allowable fees will be charged by the escrow or settlement agent and the title insurance company.

Since these are fees the seller would not pay on an offer with conventional financing, this information must be included in your offer. You should also realize that since the seller will be paying these additional fees, they may be a little less negotiable on the price.

Home appraisal inspections on FHA and VA loans are a little more detailed than on conventional loans (and more expensive). The appraisers are required to perform certain minimum inspections as well as evaluate the market value of the property. Although these inspections are not as detailed as a professional home inspection and should not be considered a substitute, sometimes repairs are required. Recently the regulations have been loosened so there are not as many repairs being required.

These are additional costs the seller would not be obligated to pay for someone obtaining conventional financing, so your offer should include a maximum figure for these repairs. Otherwise the seller is signing the equivalent of a blank check, and they do not want to do that.

At the same time, whatever figure you put in will most likely affect the seller’s willingness to At the At the same time, whatever figure you put in will most likely affect the seller’s willingness to negotiate on price. If you put $500 as an estimate, the seller may be $500 less negotiable on their price. If no repairs are required, you may have been able to get the house for $500 less than what you and the seller agreed on as the price. The solution is to add a clause to your offer that goes something like this. "If required repairs cost less than the maximum amount allowed, the excess will be credited toward buyer’s closing costs."

Factors That Determine Loan Approval

What is your FICO?

A FICO score is a credit score developed by Fair Isaac & Company to help lenders determine the risk involved in lending money to any person applying for a loan. It is widely accepted by lenders as one of the most important components helping determine eligibility as well as specific amounts, rates and terms that can be offered. FICO scores range from 300-850. The higher your score, the less risk involved in lending to you. There are approximately 30 factors that influence your credit rating. Some of these factors, such as your payment history, weigh more heavily on eligibility than others. Every factor’s importance varies by person and can change individually as your credit history lengthens. Also keep in mind your score can change daily as new credit is established or paid down/off. All factors can be grouped into 5 main categories:

Payment History – Do you make your payments on time? Since this determines (on average) 35% of your score, it is certainly in your best interest to make any and all payments on time! Your payment history includes credit cards, car payments, mortgages, student loans and other loan types. Other public records on file, such as a bankruptcy, will be calculated in this group as well. If you have been late on payments bits of additional info, such as how recently these payments were made and how much time elapsed between the due date and pay date, will also factor into your score.

Outstanding Debt – Most people over the age of 18 have debt. The question is how much? All outstanding balances for credit cards, car loans, mortgages, etc. will determine (on average) about 30% of your score. How many of these accounts have balances? For example, if you can possible pay down significantly or pay off credit card debt, you’ll be in much better shape during loan approval. Eliminating some avenues of credit can demonstrate your willingness and ability to responsibly pay back new loans.

Credit History – How long have you been establishing your credit? Specifically, how long have your current accounts been opened and how long as it been since you used each of them? This usually determines approximately 15% of your score. If no credit history exists, you should begin by establishing credit accounts and be sure to keep them spotless. The less history that exists, the less the loan amount you’ll likely be able to obtain.

Pursuit of New Credit – Each time you apply for credit, there is an inquiry into your current credit score. How many inquiries into your credit score are there and how recent were they made? If you recently applied for a VISA card, Nordstrom account and car loan, you may want to hold off applying for a home loan for a few months. Each inquiry may slightly reduce your FICO score and may portray you as someone overindulging in credit. This usually accounts for approximately 10% of your total score.

Types of Credit in Use – How many types of accounts are reported for ATM cards, car loans, credit cards, travel accounts, or any other type of account where payments are being made? This will usually determine approximately 10% of your final score as well.

Once your bank is aware of your FICO score they may or may not choose to share this information with you. Assuming they do share your score with you, it is important to remember the higher the score, the more likely you are to obtain a loan. Also, a higher score directly translates to lower interest rates. Over time with home loans, lower interest rates can play a significant role in the total amount you end of SAVING! See two examples of home loans below and the amount of money you can potentially save while boasting a great FICO score.

Example of a 30 Year Fixed Rate Loan for $150,000

FICO Score

Rate

Monthly Payment

Payment Over 30 Yrs

760-850

5.71

$871

$313,560

700-759

5.93

$892

$321,120

680-699

6.1

$909

$327,240

660-679

6.32

$930

$334,800

640-659

6.75

$973

$350,280

620-639

7.29

$1028

$370,080

As you can see, over a long period of time you would save considerable money if you have a good credit rating upon loan application. For this particular loan, you have the potential to save $56,520 over 30 years. That’s money that could potentially be invested into your retirement, used for vacations, a new car or two, etc. etc. It pays to keep your credit score as high as you are able. For larger loans, the savings potential climbs substantially!

Now, a great FICO score will not be the only determining factor in loan approval. There are additional factors that figure into the approval process as well. Some examples include:

· Income – Your current income will also be a significant determining factor in loan approval. Pay stubs for the previous two months as well as W-2 forms for the previous year will be requested to help determine your ability to repay the loan amount.

· Employment History – Your employment history can tell a lender much about your stability. If you’re constantly switching jobs it could raise a red flag. However, as their may be other factors influencing your employment length (such as a spouse in the military), lenders may choose to ignore this factor.

· Down Payment – Do you have a down payment? How much? Being able to provide a down payment can be extremely useful in the loan approval process. It means the amount borrowed will be less than the total cost to purchase the home. In some cases, depending on the amount of the down payment, your monthly payments can significantly drop. However, you can purchase a home without a down payment.

The important thing to remember is that no matter what your FICO score, employment history or income levels are there are things you can do to help improve your chances of obtaining loan approval. Get referrals to local credit counselors or financial advisors to help optimize your resources fully.

Loan Application Checklist

General:

Picture ID with Social Security Number

 

Payment to cover application fee.

 

Name and complete address of all landlords (past 2 years).

Income:

 

Employment history, including names, addresses, phone numbers, and length of time with that company (past 2 years).

 

Copies of your most recent pay stubs and W-2 form (past 2 years).

 

Verification of other income (social security, child support, retirement).

 

If you are self-employed: Copies of signed tax returns including all schedules (past 2 years), and a signed profit and loss statement of the current year.

 

If you are retired: Tax returns (past 2 years).

 

If you have rental property income: Copies of all lease agreements.

Assets:

 

Copies of all bank statements from checking/savings accounts (past 3 months).

 

Copies of all stock/bond certificates and/or past statements/retirement accounts.

Prepare a list of household items and their values.

 

Copies of title documents for all automobiles, boats, or motorcycles.

 

Face amount, monthly premiums, and cash values of all life insurance policies (Cash value may be used for closing costs or down payments. You need documentation from the carrier indicating cash value).

Creditors:

 

Credit cards (account numbers, current balances, and monthly payments).

 

Installment loans (car, student, etc.) Same details as for credit cards.

 

Mortgage loans (property address, lender with address, account numbers monthly payment and balance owed on all properties presently owned or sold within the last 2 years). Bring proof of sale of properties sold.

 

Childcare expense/support (name, address, phone number).

Other:

 

Bankruptcy bring discharge and schedule of creditors.

 

Adverse credit bring letters of explanation.

 

Divorce bring your Divorce Decrees, property settlements, quitclaim deeds, modifications, etc.

 

VA only bring Form DD214 and Certificate of Eligibility.

 

Retirees bring retirement and/or Social Security Award Letter.

Your Fico Score

Your FICO Score is a critical factor that can affect your mortgage loan, interest rates and its terms.

Fair Isaac Corporation developed mathematical formulas used to produce FICO scores. This score was created to provide mortgage companies, banks and other creditors a measurement of your credit worthiness.

The higher the score, the better your interest rate will be.  If you have marginal credit, select a lender that will help you get a higher credit score over time.