Purchase & Refinance
Q: Before someone considers purchase a home, shouldn’t the
individual decide if it’s the right economic move for him or her?
A: Absolutely. For most people, a home provides not only a physical shelter but also a tax shelter and built-in savings plan. Because mortgage interest and property taxes are tax deductible and equity builds as the real estate appreciates, home ownership usually makes good economic sense.
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Some circumstances might make renting a more logical option. For example, if it is likely that the buyer would need to sell the property soon, purchasing might be unwise, because recouping down payment and closing costs is unlikely. Or if the real estate sales market is sluggish with values rapidly declining, renting might be better bet.
Q: Should buyers always take out a loan just to get tax benefits
when they purchase a home?
A: Certainly not. Buyers must first decide what they want to achieve through home ownership, and then determine what financing options are best for their situations. Following are some of the pros and cons for paying cash versus financing a home.
Benefits for paying cash:
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The cash buyer pays no mortgage payments.
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The person who buys a property with cash pays no mortgage interest.
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The cash buyer doesn’t spend money, time, or effort obtaining a loan.
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The buyer who pays in cash doesn’t need to obtain the property appraisal.
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The cash buyer can take out a loan later.
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Cash can give the buyer greater purchasing power.
Downside of paying cash:
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The cash buyer uses previous cash to buy the home, potentially depleting reserves for other purchases and emergencies.
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No mortgage interest means loss of tax advantages.
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The cash buyer can’t take advantage of tax-deductible closing costs.
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The cash buyer who does not obtain an appraisal could be purchasing an overpriced property.
Q: When a buyer finds a home he or she likes, what kinds of
financing contingency clauses should go in the purchase
agreement?
A: If the purchaser must obtain adequate financing, it’s imperative to make the purchase contingent upon receiving suitable financing. If financing cannot be obtained within the parameters spelled out on the purchase agreement or in the time frame specified, the buyer would not have to complete the sale and, barring other conditions, the earnest money deposit would be returned.
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The buyer should be specific, stating exactly what maximum size loan is needed, the type of loan with a maximum rate of interest, term of the loan, and maximum amount of discount points the buyer will pay.
Q: What does preapproval require?
A: While requirements vary from lender to lender and program to program, lender requires buyers to present verification of income, such as the last two pay stubs, or income tax returns if a buyer is self-employed, the last two bank statements, and verification of other assets, such as brokerage accounts, etc.
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Using this information combined with the credit report and credit scoring, the lender can then commit to make the borrower a mortgage amount based on a certain interest rate. Typically, most lenders will present buyers with preapproval certificates that can be presented to sellers when the offer to purchase is made.
Q: Is it usually tougher for the self-employed buyer to get a
mortgage?
A: It depends on the circumstances and the type of loan desired. Because the self-employed buyer’s cash flow and profitability is often tough to predict, guaranteeing income can be difficult to prove to the lender. Self-employed borrowers, designated as anyone who owns 25 percent or greater interest in the business that employs him or her, are challenged by the mortgage loan process for two reasons:
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Income tax write-offs whittle down the self-employed borrower’s net income. While this is favorable come April 15, it’s a negative factor in qualifying for a mortgage loan.
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Self-employed applicants must provide extensive documentation to the lender. In addition to the standard items a loan applicant must furnish, the self-employed borrower may be required to provide the following:
- Two years of signed copies of complete income tax
returns, a balance sheet for the previous two years,
and a year-to-date profit and loss statement for the
sole proprietor.
- If the business is a corporation, s Corporation or a
partnership, signed copies of the past two years of
federal business income tax returns, with all
schedules attached, a year-to-date profit and loss
statement.
Q: Who is the typical person who buys through VA programs?
A: Although each buyer’s qualification and profile are unique, the following are some typical characteristics. The VA borrower is a veteran who:
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Has never used his or her entitlement, or has purchased previously with partial entitlement remaining.
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Is looking for a zero-down payment loan.
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Requests that the seller pay all of the closing costs.
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Is looking for a loan that has no mortgage insurance premium.
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Wants a loan that has no prepayment penalty.
Q: Can a veteran refinance an existing loan with a new VA loan?
A: Yes. Up to 91 percent loan-to-value of the appraisal amount could be refinanced using a VA loan if equity is being pulled out. (This is 90 percent loan-to-value plus the 1 percent funding fee.)
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The Veteran Administration encourages using an interest rate reduction refinancing loan (IRRRL). The loan must be a VA loan and new rate must be lower than the previous rate. No appraisal or credit check is required and the veteran does not have to currently occupy the property.
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The refinanced loan amount may include the outstanding balance on the existing loan, allowable fees, and closing costs including discount points and funding fees.
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The lender may agree to pay all closing costs for the borrower and set an interest rate high enough to recover the advance of costs.
Q: Is there a difference between lease-option and lease-purchase?
A: Most definitely, yes. A lease-option is a lease with an option to buy, which the optionee is not obligated to exercise. Only if he or she exercises the option to purchase is a sales contract created. A lease-purchase is already a purchase. It is drafted on a purchase and sales agreement and is merely awaiting the fulfillment of a term or condition before it culminates in a closing.
Q: How can I tell if it makes financial sense to refinance my
mortgage?
A: In most cases, it pays to refinance your mortgage if you can lower your interest rate and/or lessen your loan amortization period and you’ll keep the property and the loan long enough to recoup the costs of refinancing. Basically, borrowers tally up the total amount of payments they would make for the remaining time they would own the property, subtract the lower payments they would make under the lesser interest rate, then add back the costs of refinancing, plus any additional income taxes they would pay because of the reduced interest deductions. Take what is saved in payments and deduct what is paid in refinancing and taxes to figure your net gain or loss.
Mortgage Programs
Q: What are the advantages to the borrow of a conventional loan?
A: The advantages are:
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Lenders may be willing to keep the loan in their own lending portfolio, thus allowing more underwriting flexibility.
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Lenders may negotiate or eliminate certain loan fees.
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Lenders may allow comortgagors.
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Lenders may be willing to finance personal property with the real estate loan, such as appliances and/or furniture.
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Appraisals need to meet only the lender’s guidelines or the secondary market’s, instead of the strict appraisal standards of FHA and VA.
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For a borrower who may have difficulty obtaining PMI, the lender may self-insure the loan, increasing the interest rate to compensate for any potential loss.
Q: If a borrower’s loan was sold to Fannie Mae or Freddie Mac,
what kind of qualifying ratios would be required?
A: Qualifying ratio. For owner-occupied, single-family residences, and for second home and investor loans, the housing payment (PITI) can’t exceed 28 percent of the borrower’s gross monthly income, and the total payment including payments from other debts can’t exceed 36 percent of the borrower’s gross monthly income.
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Loan to value ratios. Typically, the maximum loan-to-value (LTV) is 95 percent on single-family residence, 80 percent on second homes, and 70 percent on investor loans.
Q: Does the secondary market (conventional loans) limit making
loans based on the amount of properties held by an owner?
A: The secondary market will allow a borrower to have any number of properties with financing on them as long as the property currently being purchased will be a principal residence.
The borrower can have no more than four properties currently financed if the new property being purchase is a second home or investment property.
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These guidelines apply to all properties held by the borrower, not just those purchased by the secondary market, but do not apply to properties that are free and clear with no outstanding financing.
Q: What are the disadvantages of Adjustable-Rate Mortgage
(ARMs)?
A: The disadvantages are:
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There are no interest rate guarantees because indexes fluctuate with the economy.
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The borrower may overleverage, using an unrealistically low initial teaser rate to get into the loan without being able to make the later, higher payments.
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The loan may contain a negative amortization clause, allowing any shortfall of interest not paid monthly to be added back on to the principal balance.
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The borrower may not fully understand ARMs and not be aware that the lender’s program is using an unfavorable index as a base.
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Convertible ARMs have conversion fees for changing the interest to a fixed rate.
Q: What are the advantages of using FHA financing?
A: The following are among the many advantages FHA loans afford borrowers:
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There is a low down payment requirement.
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Unlike conventional loans, there are no reserve requirements.
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Loan rates are typically lower than for market-rate conventional fixed-rate loans.
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FHA loans have no prepayment penalty when the loan is retired.
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Qualifying guidelines assist the average buyer in the marketplace. Some underwriting guidelines are less restrictive than those of conventional fixed-rate loans.
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The lender is insured against loss for the life of the FHA loan.
Q: Can borrowers who have previously declared bankruptcy
purchase a home using an FHA loan?
A: Yes. In fact, FHA’s evaluation of previous bankrupt borrowers is one of the most liberal in the mortgage lending industry. A lender may allow a bankrupt borrower to secure a mortgage loan if the bankruptcy has been discharged for at least one year and credit has been satisfactorily reestablished, and it appears that the problems surrounding the bankruptcy are unlikely to recur.
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Borrowers who have filed bankruptcy under Chapter 13 must be one year into the payout and have trustee approval to add the debt.
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In either case, borrowers must provide detailed letters of explanation and supporting documentation to the lender.
Q: What are the qualifying income criteria for standard FHA loans?
A: Although the following ratios are guidelines, they are not absolutes. The loan underwriter will carefully weigh each individual situation before making a lending decision.
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Housing ratio. The following monthly expenses should not exceed 20 percent of the borrower’s monthly gross income: PITI including MIP, any homeowner association, any local improvement district or improvement assessments.
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Total debt ratio. The following monthly expenses should not exceed 41 percent of the borrower’s monthly gross income: total mortgage payment, auto payments, installment charges, revolving loans, child support, alimony, or other obligations to run more than 10 months.
Q: Are FHA loans only for low-income borrowers?
A: That’s a common misconception. Although there have been some FHA subsidized programs to assist low-income families, FHA’s mission is to insure lenders on housing loans made to borrowers who do not meet the necessary down payment requirements or other conditions of conventional mortgages. With FHA loans, borrowers still need to meet monthly income guidelines sufficient to support housing obligations. Because the loans are insured by HUD, however, lender is protected against the borrower’s default and can offer more liberal terms and competitive interest.
Q: What are the advantages of using VA financing?
A: The advantages are:
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There is no down payment requirement unless the purchase price of the property is great than the VA appraisal called the Certificate of Reasonable Value (CRV), or if based on the borrower’s qualifications, the lender requires a down payment to make the loan.
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There is no VA limitation on the size of the mortgage.
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Loan rates are typically below market rate when compared to conventional loans.
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A veteran can own more than one property secured by VA loans.
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VA loans have no prepayment penalty.
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Qualifying guidelines are designed to assist the veteran in financing a home; therefore, some guidelines may be more liberal than found in conventional financing.
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Although the VA doesn’t lend money, it acts to guarantee the lender against default on a portion of the loan.
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No mortgage insurance is charged on VA loans.
Underwriting & Processing
Q: What major roadlocks can come up during the underwriting
process?
A: Many problems occur with verifying employment, down payments, and income from such sources as child support and alimony. Borrowers sometimes change their financial pictures while the loan is being processed. Whether pro or con, these changes can invalidate the paperwork done up to that point.
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It may seem bizarre to mention, but after the borrower applies for the loan, he or she should not change jobs or give notice to quit. If loan processing takes more than a month or so, the lender may reverify everything, including employment.
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The same is true with taking on new debt. Just because the application has been taken doesn’t mean that the lender won’t know if the borrower purchased a new washer and dryer suing time payments. A credit inquiry from the appliance dealer will show up on the credit report, and even adding a new small monthly debt may be enough to tip the scales against the loan.
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In short, the rule of thumb for borrowers to follow after application and before closing is simply, don’t change a thing!
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Problem also can occur when verifying the borrower’s funds, called verification of deposit. The lender wants to make sure that the down payment has not been borrowed or gained by illegal means. That means that the lender is likely to verify that the money has been accumulating in an account, usually undisturbed for a minimum of 60 days.
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Funds that mysteriously disappear and reappear may send up a red flag, putting the validity of the funds into question and perhaps causing the lender to deny the loan. So if funds have increased or decreased radically, the borrower should make sure the lender understands the reasons why.
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Any documentation required to verify child support, alimony, and debts incurred in a previous marriage may seem deep and cumbersome, but complying with paperwork requests may make the difference between getting and not getting the loan.
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If anything changes, and that includes changes for the better, the buyer should make sure to notify the lender. Salary increases to become effective within 60 days of loan closing may be considered for qualifying, and a larger down payment can make the buyer stronger in the eyes of the lender.
Q: What could an applicant do to reduce debt in order to qualify for
a mortgage?
A: The following suggestions might assist the buyer in debt relief:
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Pay off a debt. Use cash or other asset to alleviate the debt or sell an asset that has debt against it.
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Pay down a debt. Because the secondary market views long-term debt as anything that can’t be paid off in ten months, the borrower could pay the debt down below that point. Lenders can choose to be more restrictive on what’s considered long-term debts, so check with the lender.
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Refinance a high-rate loan.
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Consolidate your loans. Doing this may allow the borrower to take several high-rate loans and wrap them into one lower-interest rate loan, and even lower the monthly payments by extending the loan term.
Before changing a cash or debt position, the borrower should consult the lender to see how what’s proposed could help or hurt his or her credit profile.
Q: How does Private Mortgage Insurance (PMI) work?
A: PMI companies write insurance protecting approximately the top 20 percent of the mortgage against default, depending on the lender’s and investor’s requirements, the loan-to-value ratio, and the particular loan program involved. Should a default occur, the lender sells the property to liquidate the debt, and is reimbursed by the PMI company for any remaining amount up to the policy value.
Q: Can PMI ever be removed?
A: Federal law requires the lender to remove the private mortgage insurance once the borrower has 22 percent equity and payments are current on the loan. The law also requires that lenders inform consumers of this at the time of loan commitment and on an annual basis.
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Consumers have the option to petition the lender at any point in time to request that PMI be removed. Done on a case-by-case basis, most lenders require that the borrower provide the lender with a fee appraisal showing at least 20 percent equity in the property, the payments must have been made on time, and that the property’s value has remained stable.
Q: Will overtime and bonus income count?
A: Overtime and bonus income may be used to qualify if the borrower has received it for the past two years and will in all likelihood continue to do so. The lender will most likely use an average figure based on the past two-year history.
Q: Does part-time income count?
A: Part-time and seasonal income may be used to qualify if the borrower has worked the job uninterrupted for the past two years and appears likely to continue. Seasonal employment is reviewed the same way, focusing on the rehire for the next season.
Q: How does the lender verify commission income?
A: Commission income is averaged over the previous two years, and the borrower must provide his or her last two years’ tax returns along with recent pay stubs to verify it. A borrower showing income decreases from year to year will need to show significant compensating factors to receive loan approval.
Q: Do retirement and Social Security benefits count as
income?
A: Yes, but it needs to be verified from the source, such as the former employer or Social Security Administration, or through federal tax returns.
Q: How is alimony or child support verified?
A: Alimony and child support must be projected to continue for at least the first three years of the mortgage. The borrow must provide a copy of the divorce decree and evidence that payments have been made for the past 12 months.
Q: Who is eligible for a VA loan?
A: The following guidelines apply:
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Twenty-four months of continuous active service is required for everyone beginning active duty.
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Persons serving in selective reserve/National Guard are eligible if they have six years’ service in the reserves.
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Veterans who were discharged before they served the minimum amount of time may be eligible if they were discharged for the convenience of the government, for a service-connected disability, or hardship.
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Spouses of service personnel missing in action or of prisoners of war may be eligible for one VA home loan if the veteran has been missing in action, captured, or interned in the line of duty for more than 90 days.
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Unmarried surviving spouses, widow or widower of a veteran, may claim VA home loan benefits if the veteran’s death was caused by a service-connected injury or ailment.
Credit profile
Q: If there are three national credit reporting agencies, do they all
report the same information?
A: Each of three major credit reporting agencies are independent companies and may or may not report the same information. That’s why the lender pulls a merged report, combining information from at least two of the three companies when underwriting the mortgage.
All three reporting agencies report information in five categories:
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Identification. This section includes the borrower’s name, address; social security number, employer, date of birth, and spouse’s name (if applicable).
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Credit history. This section lists all open and paid accounts, the current payment history of each creditor reporting to the bureau and prior payment history. By law, adverse information can remain on the report for seven years, bankruptcies can remain for ten years. These negative postings may arbitrarily not come off automatically and their removal should be monitored by the consumer.
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Collection. This section includes any creditors who have turned over an account to a collection agency.
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Public records. All items of public record affecting financial obligations, such as bankruptcies, liens, judgments, divorce decrees, child support adjudications, and so on are included in this section.
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Inquiries. This section notes who has checked the consumer’s credit as far back as 18 to 24 months. Anyone accessing a consumer’s credit without a valid business reason could be in violation of the federal Fair Credit Report Act, fined up to $5,000.00, and imprisoned for one year.
Q: Can a divorce person have a credit report solely in his or
her name, apart from the ex-spouse?
A: Every person has the right to obtain an individual credit history regardless of marital status. Joint liabilities will appear on both spouses’ reports.
Q: Should a divorced person make special arrangements to
ensure that his or her credit rating is not adversely affected by
the change in marital status?
A: It’s especially important to check credit after a divorce making sure obligation are sorted out, creditors are notified, and the report is listed solely in the consumer’s name. ideally, this should be done before the divorce gavel raps, but usually is not.
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Imagine the nightmare created when someone applies for credit after divorce, only to find that the car and corresponding payment awarded to the former spouse is still showing as a joint obligation. Ideally, the former spouse should requalify for that debt and have the posting removed from the other person’s credit report. Again, this is not likely to happen. At the very least, a copy of the divorce decree will be requested by the mortgage lender, showing the allocation of assets and liabilities. This could easily add time to the loan qualifying process.
Q: What major credit areas does the lender evaluate before making
a loan?
A: When it comes to determining an applicant’s creditworthiness, a lender examines the three Cs: Character, Capacity, and Credit.
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Character can be evaluated through objective factors such as length of residency at each address, terms of employment, and a report free of financial judgments, liens, and other adverse matters of public record.
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Capacity is increasingly important these days, because many consumers carry heavy debts and make many minimum payments on those debts. The lender evaluates the amount of debt compared to income, ways the new obligations may change the debt picture, and the borrower’s general economic stability.
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Credit is the third measure. The lender evaluates existing credit relationships including bank loans, credit cards, and so on. The lender pays close attention to limits, how the current balances relate to those limits, and how long those accounts have been active.
Q: How can the lender determine if it’s being fair?
A: Credit scoring electronically gives a numerical weighting to various financial factors like income, debts, and job history, and can help predict the likelihood of mortgage default. While there are several credit scoring models, many lenders used the Fair, Isaac & Co. (FICO) score that ranges from 450 to 850. The lower the score, the higher the risk. Borrower can’t view their credit score when obtaining their own report, but credit scoring is done as an added function when the lender pulls a mortgage credit report from the primary credit reporting agencies.
Q: How does credit scoring work?
A: Credit scoring consider a variety of components. For example, errors on a credit report that haven’t been removed can cost score points. Credit scoring also weighs how much available credit the borrower has used. For example, if account balances are 75 percent or more of the credit limit, it can signal high financial leverage and higher risk to the lender. Because the lender compares the amount of debt the borrower carries compared to the amount of income he or she generates. It’s important to keep available credit reasonable for the borrower’s income level.
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Keeping a large number of accounts with zero balances also can lower the credit score because it increases the potential for someone to live beyond his or her means. That’s why it’s important for the borrower to decide which accounts to keep and close out the rest. In general, the longer the positive credit history, the better the score.
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Open new accounts can lower a score, as can having too many credit inquiries. A score can even be impacted if the borrower transfers a balance to a new lower-interest rate credit card.
Q: If an error is found on the report, how can it be rectified?
A: Some of the greatest credit reporting nightmares come in the form of disputed or improperly reported items. Freeing those errors from your report may e tedious, but it can be accomplished by following these three steps:
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File a consumer dispute form with the reporting bureau, stating that you disagree with the report. By law, they must investigate the complaint in a timely manner, usually in 30 days or less, and report back to the consumer.
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Writer to the creditor as well, pointing out the mistake. If the dispute is resolved, have the creditor send letters to all three credit bureaus, asking that they change the information. By law, the reporting bureau must send a corrected copy of the report to all parties who accessed the report during the time the error appeared.
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File an explanation. If a satisfactory conclusion is not reached with the creditor, the consumer can 0place an explanation on the credit report telling his or her side of the story. This explanation will remain on the report for six months, and the consumer can request the posting be extended for increments of six months.
After correcting an error on a credit report, it’s good to request a copy of the corrected report from the credit reporting agency in approximately 30 days to show that the changes were made.
Q: What errors could consumers expect to find on their credit
report?
A: While errors can be found in a variety of forms, frequent mistakes occur in three areas:
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Misposting due to similar names.
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Multiple entries of the same credit account or previously closed.
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Accounts that are disputed or improperly reported by the creditor.
Q: When is a person’s name likely to be consumed with another’s
in credit reporting, and how can one protect against it?
A: If you’re a junior or senior, or have a common name like Smith, Brown, or Jones, you are likely to have someone else’s credit on your report. While names, addresses, and Social Security numbers are generally used to report credit to the correct name, errors still occur. Upon hearing that someone else’s credit was found on his or her report, a homebuyer might remark, “Well, if it’s good news, I’ll keep it!”. The problem is that an additional account, yours or not, could signal extra debt to the lender, which might not be good news for qualifying.
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To avoid the name mix-up, it’s good to use your full name including spelled-out middle or maiden names, or both, when applying for credit.
Q: Could a buyer have a problem if too many credit inquiries
appear on his or her credit report?
A: As seen with credit scoring, a mortgage lender might be hesitant to make a loan to someone who had an abundance of credit inquiries in the past six months. This could serve as a red flag that the party was denied credit, is accumulating open lines of credit to borrower against or is leveraging assets prior to declaring bankruptcy. This could also indicate that the borrower is checking the credit report repeatedly in anticipation of adverse posting. Nevertheless, the lender may want a written explanation as to why the inquiries occurred.
A: As seen with credit scoring, a mortgage lender might be hesitant to make a loan to someone who had an abundance of credit inquiries in the past six months. This could serve as a red flag that the party was denied credit, is accumulating open lines of credit to borrower against or is leveraging assets prior to declaring bankruptcy. This could also indicate that the borrower is checking the credit report repeatedly in anticipation of adverse posting. Nevertheless, the lender may want a written explanation as to why the inquiries occurred.
Fees & Costs
Q: How does the borrower determine which loan program is most
cost effective, especially where loan costs and fees are
involved?
A: Unlike comparing interest rate differences that are fairly obvious and straightforward, comparing loan costs and fees can get complicated. This is because it’s not just the loan costs that are being compared, but also the loan program terms. The borrower needs to compare financially the two loan programs based on (1) how long he or she anticipates keeping the loan, (2) what the conversion fees might be, and (3) how the rate would adjust if the loan were converted to a fixed rate.
Q: What are no closing cost loans?
A: No closing cost loans are loans in which the lender pays all closing costs. These non-recurring closing costs, such as title and escrow fees, appraisal, and lender’s fees, are one-time fees paid when obtaining the loan, and do not include recurring cost, such as interest, property taxes, and insurance, paid in your monthly payment.
Q: What are discount points and how are they used?
A: One point is equal to 1 percent of the loan amount. Points are used to increase the lender’s financial yield on the loan. Points bridge the gap between the interest rates, allowing the lender to make the loan at a lower interest rate.
Q: If the lender gives the borrower the option of how many points to
pay for a certain rate of interest, what is the best way to decide?
A: The prime factor to consider is the time the borrower will own the property and keep the loan. The following is a formula to help determine the “dollars and sense”: Calculate the difference in the monthly payment amounts and the difference in the cost of the points. Divide the amount paid in points by the amount saved by the lower monthly payment to obtain a ”break-even” mark for holding the property.
Q: Are points tax deductible on mortgage loans?
A: For the purpose of acquiring residential real estate, discount points are tax deductible in the year paid. However, points paid in refinancing are handled differently. Owners who refinance must deduct points over the life of the loan, not all at once.
Q: When would it make sense for the borrower to lock in the
interest rate?
A: Locking in an interest rate means that if interest rates rise during a specific time frame, typically 45 to 60 days, the rate quoted will remain the same. The following are answers to the basic questions one might ask to decide whether it is advantageous to lock in an interest rate:
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If the borrower doesn’t lock in and the rate increases, could he or she still qualify for the loan? Logic dictates that if a bump in the rate will disqualify the borrower, locking in is not only prudent, it’s advised.
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How long is the lock-in and how far away is the closing? A 45-day lock will be useless if closing is projected for 60 days.
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Is there a fee for locking in? This often applies to fees for extended rate lock-ins that extend an interest rate guarantee to 60, 90, or 110 days.
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If rates drop, would the rate-lock float downward? Many lenders use this provision in order to stay competitive when interest rates drop. During times of falling interest rates, loan shoppers should make sure they have this float-down provision.
Q: How does someone buy down an interest rate?
A: Buydowns are prepaid interest used to reduce the interest rate on loan temporarily or permanently. The buyer or other party pays this money at closing, allowing him or her to qualify at the lower interest rate and reduce the monthly payment. Buydowns can bring the interest rate down for a short period, called a temporary buydown), or permanently lower the interest rate for the life of the loan. One of the more familiar approaches is 2-1 buydown, where the interest rate is 2 percent lower than the note rate of the loan for the first year, and 1 percent lower during the second year of the loan, after which it stays at the not rate for the life of the loan.
Q: Is it a good idea to pay higher points to get a lower interest
rate?
A: Paying higher points to secure a lower rate of interest depends on several things. First, how long will the borrower keep the loan on the property? Obviously, paying hefty points up front to secure a lower-than-market interest rate loan won’t be as valuable if the loan and the property will be held for only a short time
Miscellaneous
Q: Sometimes people get a loan through one lender but are
advised after closing to send their payments to a different
company in a different state. Why?
A: Because the loans or their servicing have been purchased by another company. The terms and conditions of the original loan stay the same, just the company and the location to which payments are sent change.
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By law, the original lender must send the borrower a “good-bye letter” at least 15 days before the date of the next payment. This letter should state the name of the new company, its location, and the name and phone number of a contact person or department in case the borrower has questions.
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Under the same time guidelines, the new company is also required to send the borrower a “welcome letter” outlining the same information.
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It is very important that the borrower receive both letters, and that they are on both companies’ letterheads. If a letter is received only from the supposed new servicer, the borrower should call the original lender to verify that the loan was sold.
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If the borrower’s monthly payment is made each month through automatic checking withdrawal or electronic transfers, the borrower will need to cancel the present arrangement and fill out new forms. Often there is a time lag, so the borrower may need to send a check directly to the new company before the new servicer receives the withdrawal. The welcome letter can help determine this.
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If during the loan transition, you send a payment on time but to the wrong company, late fees will be waived for up to 60 days after the loan transfer.
Q: is there a limit as to how many months of cushion the lender
may require in our escrow account for taxes and insurance?
A: Federal law allows the lender to impound no more than one-sixth of the anticipated annual charges as a cushion. The rule of thumb used by lenders is that at least once each year, the balance should fall to a level no greater than the two-month cushion immediately after paying taxes and insurance. Any overage must be automatically returned to the mortgagor/consumer.
Q: Is there a law that requires the lender to respond to inquiries
about our mortgage loan?
A: Yes. The Real Estate Settlement Procedures Act (RESPA) requires that the lender respond to you within 20 business days after receiving your “qualified written request”. This any written correspondence other than a note on your premium notice or payment coupon. Within 60 days after receiving your request, the lender must have corrected any errors found on your account and/or notified you of written clarification regarding the dispute.
Q: If a borrower’s financial position changes after getting the loan,
and he or she falls behind in the payments, what can be done?
A: Contrary to popular belief, lenders really do want to work with delinquent and potentially defaulting borrowers. The cost of foreclosure for the lender can be as high as 20 percent of the remaining principal balance. A delinquent loan on the books as a nonperforming asset continues to cost the lender money. That’s why most lenders see foreclosure as a last, and many times unattractive, resort.
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It’s important that the borrower who is behind on payments does not take a wait-and-see approach. Being proactive and immediately contracting the lender to discuss the situation is imperative: some of the most attractive alternatives are those exercised in the early stages of default.
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The lender will want to know what caused payments to fall behind, whether that cause has been remedied, and how the situation can be reversed. Lenders could assist the borrower by accepting “interest only” payments, partial payments, or deferring payments entirely for several months.
Q: What is the worst that could happen if a borrower gives the
property back to the lender?
A: This situation is called a deed in lieu of foreclosure, also called a friendly foreclosure. This means that the lender agrees to take the property back and the borrower forgoes any equity in the property. But that may not be all that happens.
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While the borrower could negotiate with the lender to waive negative information from being posted to the borrower’s credit report, other parties to the default, such as the PMI company, might make a negative posting to the borrower’s credit.
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Because a deed in lieu of foreclosure can carry major impact for the borrower, giving the property back to the lender or agreeing to a workout program should only be done after consulting with a real estate or tax attorney.