Questions to Expect From Mortgage Lenders

Questions to Expect From Mortgage Lenders
Data Provided By Bankrate

Know what to expect before you apply

Your mortgage lender will want to know a lot about you before approving your loan application, and justifiably so; they and their underwriters want to be assured that you meet their minimum level of creditworthiness before lending you money.

Areas of questioning

Here are the general areas of questioning you can expect from a lender:

1. Employment and income
2. Outstanding debts
3. Cash reserves and assets
4. Down payment
5. Loan purpose
6. Property use
7. Property type

Employment and income

Where do you work?
How much do you make?
How long have you been at your job?
How is your income derived — steady salary or irregular income? If it’s the latter, you may need to provide more details to obtain a favorable interest rate.

Outstanding debts

What recurring debts do you have?
How much do you pay a month for auto loans?
Credit cards? How much of your monthly pretax income do these debts consume?

Cash reserves and assets

How much money do you have in the bank?
How much will be left after you pay your down payment and closing costs?

Down payment

How much money are you putting down?
Is this your own money?
If not, is it a gift from your parents?
A nonprofit agency grant?

Loan purpose

Is this mortgage for a home buy or refinance?
If it’s a refinance, do you want to take cash out at closing to pay off other debts? If so, how much?

Property use

Do you plan to live in the house?
Is it investment property?

Property type

A condominium?
A duplex?

The following responses tend to work in your favor:

• Steady employment (two or more years) with the same employer or in same line of work.
• Low debt: no recent major buys (such as automobiles) and a debt-to-income ratio of 36 percent or less.
• Loan is for straight home purchase (or rate-and-term refinance).
• Property is detached single-family home to be used as primary residence.
• Down payment of at least 5 percent of sales price with your own money.
• You’ll have at least two months’ worth of mortgage payments in the bank after closing.

These responses tend to work against you:

• Self-employed or contract worker.
• High debt: credit cards maxed out, total debt-to-income ratio more than 36 percent.
• Property is a duplex or condominium, to be used as a vacation home or rental.
• No cash left after home buy and closing costs.
• Down payment is 3 percent or less of buy price and money is borrowed.

Ten Questions to Ask Your Lender

Ten Questions to Ask Your Lender
Data Provided By Bankrate

The answer to these queries will help you find the best mortgage

Here are the 10 key questions to ask at application time to help you find the best overall mortgage loan. If you have already selected a lender and are ready to apply, make sure you have the answers to these questions first.

1. What is the interest rate on this mortgage?
2. How many discount and origination points will I pay?
3. What are the closing costs?
4. When can I lock the interest rate and what will it cost me to do so?
5. Is there a prepayment penalty on this loan?
6. What is the minimum down payment required for this loan?
7. What are the qualifying guidelines for this loan?
8. What documents will I have to provide?
9. How long will it take to process my loan application?
10. What might delay approval of my loan?

Once you’ve narrowed the lender field to a short list of finalists, it’s time to compare their offers.

1. What is the interest rate on this mortgage?
To determine exactly what you’ll pay over the term of the loan, you need to know the rate. Rates change quickly, and if your credit is less than perfect, you may not be offered the lender’s lowest figure.
To effectively compare different lenders’ programs, ask for the annual percentage rate (APR) of the mortgage interest, which is generally higher than the initial quoted rate because it includes some fees. But beware: the APR found in advertisements can be misleading. Mortgage lenders don’t always include all the fees they charge in the calculation that determines APR, so customers who use that figure to shop rather than an itemized breakdown of rates, points and fees may end up comparing apples to oranges.

2. How many discount and origination points will I pay?
Lenders may charge prepaid mortgage interest points to lower your interest rate or other points that have no benefit to you at all. Find out how many you’ll be expected to pay and which kind of points they will be.

3. What are the closing costs?
Mortgages come with fees for services provided by lenders and other parties involved in the transaction. You want to know what those fees will be as early as possible. Lenders are required to provide a written good faith estimate of closing costs within three days of receiving a loan application.

4. When can I lock the interest rate and what will it cost me to do so?
Your interest rate might fluctuate between the time you apply and closing. To prevent it from going up, you may want to lock the rate, and even points, for a specified period. Ask your lender if lock fees apply. Also, find out what the experts are expecting rates to do, read Rate Trend Index.

5. Is there a prepayment penalty on this loan?
There may be a prepayment penalty on your loan. Some penalties are 1 percent of the loan amount, others are equal to six months’ interest, some apply only when you refinance or reduce the principal balance by more than 20 percent, and some kick in if you sell your home. Find out the duration of any penalty period and how the penalty is calculated. Some lenders offer lower interest rates to buyers who accept prepayment penalties.

6. What is the minimum down payment required for this loan?
The rate and terms of your loan will be based on a down payment figure, typically 3 to 20 percent of the buy price. If you can put more money down, you may be able to lower your rate and improve your terms; if you come up short, you may be required to get private mortgage insurance (PMI).

7. What are the qualifying guidelines for this loan?
These requirements relate to your income, employment, assets, liabilities and credit history. First-time home buyer programs, VA loans and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans.

8. What documents will I have to provide?
Most lenders will require proof of income and assets before approving your loan, and may require other documents as well. Buyers with excellent credit may qualify for a no-documentation or “no-doc” loan, but they can expect to pay a hefty down payment and higher interest rate.

9. How long will it take to process my loan application?
The answer will depend on several variables. When the loan business is brisk, underwriters get backed up, verification takes longer, appraisals move slower and other bottlenecks develop along the loan pipeline. Lenders may say two weeks, but 45 to 60 days is probably more realistic in most cases. You’ll need their best guess to determine how long to lock in your loan.

10. What might delay approval of my loan?
If you provide the lender with complete, accurate information, the loan process should run smoothly. If the underwriter discovers credit problems, there could be delays. Make sure you notify your lender if you change jobs, increase or decrease your salary, incur additional debt or change marital status between the time you submit an application and the time the loan is funded.

Put these 10 questions to your leading candidates and compare their answers. The results should lead you toward the mortgage lender that is right for you.

Ten Mortgage Mistakes You Can’t Afford

Ten Mortgage Mistakes You Can’t Afford
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Save time and money by following these rules
By Lew Sichelman

Buying a home is complex enough but when it comes to financing, you need to make sure you are as prepared as possible in order to get a loan.
There are a number of mistakes you can make along the way of getting your loan approved. Here are some of the things to avoid to make the process go smoothly.

1.Don’t choose the wrong mortgage: Home loans may no longer be the lifetime obligations they used to be but still — you don’t want to be saddled for even a short period of time with the wrong one. Investigate all of your options, then lay your choices side-by-side and do the math, making sure to compare worst-case scenarios. Be sure to look at initial interest rates, future interest rates and payments (if different), and the possibility, though now rare, of prepayment penalties.

2. Don’t confuse “pre-approved” and “pre-qualified” with a loan commitment: When you are “pre-qualified,” the lender is making an educated guess about how much you can borrow based on information you’ve provided. When you are “pre-approved,” the lender has verified everything you’ve provided and is offering to lend you up to a given amount at current interest rates — under certain conditions. It’s much better to be pre-approved when shopping for a home because both you, your real estate agent and the seller know what you can afford. Whether pre-qualified or pre-approved, final clearance and a check at closing — a loan commitment — are subject to an appraisal satisfactory to the lender, good title, a last-minute credit check, and other verifications. When meeting with lenders, always ask what additional steps will be required to obtain a loan.

3. Don’t have too much credit: Excessive credit is almost as bad as no credit or even bad credit. Even if you pay your bills on time, lenders tend to focus just as much on how much credit you have available to you as they do on timeliness. So being up to your ears in car loans and credit cards is a sure way to be turned down for a mortgage. Postpone any big-ticket purchases until after you buy your house.

4. Don’t lie on your loan application: Exaggerating your income on a mortgage application or putting down other untruths can be a federal offense. Lenders rarely prosecute liars but if they find out later, they can call your loan due and payable. Don’t ever sign your name to a loan application that is not completely filled out, either. Loan officers have been known to stretch the truth to get a client approved, but it’s the borrowers who end up paying the price, often in the form of monthly loan payments they can’t afford.

5. Don’t hide if you can’t make your payments: The worst thing you can do is ignore phone calls and letters from your lender when you are behind on your payments. Lenders have many options at their disposal to help keep borrowers from losing their homes to foreclosure. But they can’t do anything for you unless they can talk to you about your difficulties. Lenders are the enemy only if you give them no other choice.

6. Don’t skip a home inspection: Failing to make your purchase contingent on a satisfactory home inspection could be a costly mistake. Independent home inspectors examine houses from stem to stern. They’ll be able to tell you whether the roof or basement leaks, whether the mechanical systems are in good shape and how long the appliances should last. They can’t report on things they can’t see, but at least their trained eyes are better than yours. So don’t pass just to save $300-$400; that’s money well spent.

7. Don’t hire just any agent to sell your house: All real estate agents are not the same. You want to look for those who specialize in your neighborhood and are top producers. Ask your candidates how they plan to market your house, what you can do to make the place more attractive to prospects and how much you should ask. If you don’t like any of the answers, look elsewhere.

8. Don’t fail to check out a remodeler: Never, ever hire a contractor who knocks on your door or says his prices are good for only a few days. Reputable remodelers don’t solicit door-to-door, and they don’t cut prices just because they happen to be in your neighborhood. Check out a potential contractor thoroughly by calling several of his past clients, your local better business bureau, his bankers and suppliers, and your local consumer affairs agency.

9. Don’t pay too much upfront: If a contractor asks for more than a third of the contract price as a downpayment, chances are something’s wrong. At worst, he’s a scam artist who has no intention of returning after he cashes your check. At best, he’s undercapitalized and can’t afford to purchase materials on his own. Or, in between, he could be using your money to pay workers on another job. Never give a contractor cash, either.

10. Don’t burn your mortgage: It’s a wonderful feeling when you make your last house payment. After all, the place is now yours, all yours. Many people celebrate by holding a mortgage burning party. But they torch the original document. Don’t. Make a copy and burn that instead. Keep all your loan docs in a safe place.

Three Steps to Getting a Mortgage

Three Steps to Getting a Mortgage
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Examine your finances and shop before you apply
By Broderick Perkins

Shopping for a mortgage is the first step toward owning a home and perhaps the most daunting, especially if you are not prepared.

Once a simple task that meant comparing fixed rates from among perhaps a dozen or fewer savings and loan companies, the mortgage hunt today is like finding your way through a maze.

There are dozens of loan types and hundreds of loan programs available through thousands of mortgage brokers, bankers, lenders, finance companies, credit unions and even stock brokerage firms.

Contrary to popular belief, finding a mortgage doesn’t begin with an application.

Education is a better first choice. Mortgage information sources are as vast as the number of mortgages available. Web sites, topical newspaper articles, mortgage books, consumer seminars and workshops, financial planners, real estate agents, mortgage brokers and lenders are all available to assist you along the way.

First, you must determine how your mortgage payment will fit your current budget and, to some extent, your future obligations 15 to 30 years down the road.

If you discover too late that you can’t afford your mortgage, you’ll not only face the possibility of losing the roof over your head, but you could also damage your ability to purchase a home later.

Step 1: Examine your finances

Start by determining how much mortgage you can afford. Lenders are apt to put your loan application in the best light and qualify you for as much as they are willing to lend, which can be more than you can afford or need.

It’s up to you to take stock of your income and expenses, current and projected, to determine what you can comfortably manage each month. Along with your mortgage payment, don’t forget related insurance, taxes, homeowner association dues and any other costs rolled into the mortgage payment.

Step 2: Shopping for a loan

When you are ready to shop for a loan you have two basic types of mortgage stores to shop — direct lenders and mortgage brokers.

Direct lenders have money to lend. They make the final decision on your application. Brokers are intermediaries who, like you, have many lenders from which to choose. Lenders have a limited number of in-house loans available. Brokers can shop many lenders for each lenders’ store of loans. If you have special financing needs and can’t find a lender to suit them, an experienced broker may be able to ferret out the loan you need. Mortgage brokers, however, are paid from the amount you borrow. The amount varies. Mortgage brokers are a lot like real estate agents, make sure to go with someone who is recommended and has been in the business a substantial amount of time. Internet brokers perhaps receive the smallest cut, sometimes none at all, and can prove to be a real bargain.

Don’t just go with the lowest interest rate. There are many other factors that affect the true cost of the loan, inlcuding broker fees, points (each point is one percent of the amount you borrow), prepayment penalties, the loan term, application fees, credit report fee, appraisal and many others.

Step 3: Apply for a loan

The application process is the easy part — provided you’ve gathered documents necessary to prove claims you make on the application.

The application will ask for information about your job tenure, employment stability, income, your assets (property, cars, bank accounts and investments) and your liabilities (auto loans, installment loans, mortgages, credit-card debt, household expenses and others).

The lender will run your credit report to look at your FICO scores, which are very important when it comes to rates and terms you will be offered. You will also likely have to supply additional documentation, including paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, among other information. If the lender deems you creditworthy, it will likely hire a professional appraiser to make sure the value of the home you want to buy is worth your purchase price.

How to Track Down Foreclosure Properties

How to Track Down Foreclosure Properties
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First, find a local agent that specializes in that area

You can also visit our Foreclosure section…

www.bankforeclosureslisting.com

www.bankforeclosedlistings.com

Novices interested in buying foreclosed houses should find a good local agent specializing in that area, says Steve Berges, a seasoned renovator of distressed homes and author of real-estate investing guides including “The Complete Guide to Flipping Properties” (John Wiley & Sons, 2003).

He says many real-estate brokerages have agents who are experts on foreclosed properties. Some of them advertise that skill in local real-estate publications. Agents who work regularly with banks in finding buyers for foreclosed homes should be able to let you know what’s available and guide you through what can be a complicated process. Try to find someone experienced in your market who can recommend an agent.

Another real-estate author, William Bronchick, whose books include “Flipping Properties: Generate Instant Cash Profits in Real Estate” (Dearborn Trade, 2001), suggests finding a local information provider to e-mail you regular reports on notices of default. He pays about $40 a month for one such service covering six counties. There also are national companies that provide such information, but sometimes their information is dated, Mr. Bronchick warns.

A good source of data on repossessed homes being sold by the U.S. government is the Web site of the Department of Housing and Urban Development (www.hud.gov). Information on available homes is updated weekly, HUD says.

Both authors warn that the pursuit of foreclosed properties is highly competitive in some markets and no sure ticket to riches. Berges says he invests in houses only if he is confident he can make at least a 15- to 20-percent return on his money. He wants a wide margin for error because the costs of rehabilitating and selling a house can be hard to predict. That furnace that seemed sound could conk out before you sell the house.

Aside from the cost of buying and fixing the house, you need to add up the likely cost of financing, insurance, taxes and any brokerage commission on your eventual sale of the property, Berges says. “It’s not as cut-and-dried as you might be led to believe,” he says, but it can be very profitable if you get it right.

What is PMI?

What is PMI?
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This insurance policy is a gift to your lender
By Courtney Ronan

If you’re preparing to make the transition from renter to first-time homebuyer, you’ve undoubtedly been told by wide-eyed veterans of the homebuying process (or renters who equate homebuying with certain poverty), “Watch out for that PMI.” PM what? PMI, as in Private Mortgage Insurance. It’s a fact of life for homebuyers who put down less than 20 percent on their homes (and with home prices on the rise, that’s most of us). From the lender’s perspective, PMI is a necessary protection. For homebuyers, it’s not likely to be the deciding factor that causes financial ruin; after all, you’ve got your principal and interest, which can make your PMI look like pocket change.

Nevertheless, first-time buyers often experience trepidation when they see that mortgage payment on paper for the first time, so the addition of a PMI isn’t a welcome sight. In short, the PMI adds a weighty cherry to the top of an already overwhelming sundae.

So how exactly does PMI protect your lender? First, let it be said that PMI was designed strictly for your lender’s protection and not yours. Essentially, there’s nothing in the PMI for you … except a lighter wallet.

The PMI gives lenders incentive to seek out more business—in other words, to find more homebuyers like yourself, many of whom have never bought a home before and, like you, are able to put down the bare minimum 3 percent down payment. In a sense, we can all be grateful for the PMI, because without it, if you didn’t have 20 percent to put down, you’d probably be out of luck.

What lender would take the risk on a 3 percent downer?

A few factors to consider before you jump on the PMI bandwagon: First, it’s not inevitable. Some lenders won’t ask you to pay a PMI, so you’ll want to do some comparison shopping, investigate your alternatives and discuss your options with your Realtor if you’re unsure about the best route to take. If you want to make your PMI premiums tax-deductible, find a lender who will give you the option of including your PMI within the interest rate you’ve agreed to pay for your home loan. But with every pro, of course, there’s a possible con.

If you opt for a conventional loan (versus FHA), such loans will often eliminate your PMI when you’ve achieved 20 percent equity. For first-time buyers, it needs to be stated that it’s going to take you many, many years to reach 20 percent equity. National trends certainly indicate that most of us will move out of our homes long before we reach that mark; five to seven years is the average. But let’s say you remain in your home long enough to reach that 20 percent equity milestone. If you have your PMI premiums included in your loan’s interest rate, your PMI won’t go away once you achieve 20 percent equity.

If you remain consistent with the national trend and either move out of your home within five to seven years or refinance it, including your PMI in your loan interest rate probably makes sense from a tax perspective. One other factor to consider: If you live in a region of the country where property values are skyrocketing and show no signs of slowing down (example: San Francisco or San Jose, Calif.), you’re likely to reach 20 percent equity in a much shorter amount of time than in a market where property values are increasingly more slowly.

Homebuyers who obtained home loans either on or after July 29, 1999, have a loophole: They’re entitled to the immediate cancellation of their PMIs upon their achievement of 22 percent equity. Another safeguard on your side is outlined in the Homeowners’ Protection Act of 1998, which actually enables homeowners to request the cancellation of their PMIs prior to reaching 22 percent equity. Homeowners—with the exception of those with FHA loans, who are not given the opportunity to cancel their PMIs before the entire loan is paid off—may request the cancellation of their PMIs upon reach 20 percent equity.

So while the PMI isn’t a welcome sight each month, you are granted some concessions in exchange for the financial inconvenience. The silver lining of this “necessary evil” is that it allows thousands of renters each year achieve the American Dream of homeownership.

Title Insurance: Who Needs It?

Title Insurance: Who Needs It?
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You do, but make sure you know your options
By Courtney Ronan

During the real estate transaction (especially if you’re a first-time buyer), you’re hit with so many foreign terms, fees and requirements your head spins. One of those strange and unfamiliar costs is title insurance. In most cases, borrowers have no option—either you get title insurance (among other requirements) or you don’t get a loan.

The lender says you need it, you want the loan to go though, so you buy title insurance. Great. So what is title insurance?

When you buy a home you want to make sure that the people selling it actually have full and legal title. The party who conducts closing will check this out by going down to the local property records office to research the history of ownership.

But—and here’s the tricky part—those records down at the property office may be official, but they may also be wrong. It’s also possible that the person who does the title search can make a mistake and also that important information may simply not be recorded.

For instance, maybe a bill against the property was not recorded or some taxes were not been paid. Or, suppose that 40 years ago the property you want to purchase was owned by Smith. Let’s also imagine that Smith was a bigamist with an extra spouse. Will this matter show up on the local property records? Not likely. Does the additional Smith spouse have an ownership claim against the property? That may only be clear after a lot of legal wrangling—and if you lose, you could lose the house.

There may be other odd and bizarre claims as well. Was an owner an alcoholic? Insane? A drug user? Is there a contractor with a claim against the property? Such issues can “cloud” titles and neither lenders nor owners want clouds.

One form of title insurance, “lenders” coverage, is designed to protect (who else?) your lender in case of title problems. “Lenders” coverage is required and generally provides protection up to the original mortgage amount—if you buy a home for $300,000 and get a $250,000 mortgage, then $250,000 is as much coverage as you can get with a lender’s policy. If there’s a claim, the title insurer will fight on your behalf and if there’s a claim the policy will pay off the loan if necessary. This is good news for you because you won’t owe the lender a dime if you lose in court.

But there are also some options.

For instance, you can also get “owners” coverage. This will protect your equity—that $50,000 in the example above not covered by the lender’s policy. And you can often get an “inflation rider” with an owner’s policy—as the value of your home goes up, so does the value of your title coverage.

While title insurance is required by virtually all lenders, there is one big exception: Loans made in Iowa. In Iowa, the state says that attorneys and others who do title work must participate in a title guarantee program. If there’s a title error, the state fund provides coverage.