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Mortgage FAQs
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What is the
difference between pre-qualifying and pre-approval?
 A
pre-qualification for a specific loan dollar
amount is based on a review of basic financial
information you supply to us. No verification of
this information is performed. The pre-qualification
means that if the information you supplied to us is
accurate, subject to verification of credit,
appraisal of the property, and the lenders
underwriting criteria for the loan amount, you
should be able to receive a loan as described in the
pre-qualification letter or document. This is not
a final approval. A pre-qualification is not a
commitment to lend. However, a pre-qualification
letter indicates to you and the seller that in the
opinion of the loan officer you are qualified to
purchase the house you are making an offer on.
Pre-approval
is a step above pre-qualification. Pre-approval
involves verifying your credit, down payment,
employment history, etc. Your loan application is
submitted to an underwriter and a decision is made
regarding your loan application. If your loan is
pre-approved, the lender will loan you money on the
basis that you requested subject to: a satisfactory
appraisal (both as to value and type of product);
your financial condition remains as stated on your
application and satisfying any underwriting
conditions from the lender.
Getting your loan
pre-approved allows you to close very quickly when
you do find a house. A pre-approval can help you
negotiate a better price with the seller, since
being pre-approved is very close to having cash in
the bank to pay for the house!
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What are credit scores?
A credit score
(such as FICO - developed by Fair Isaac & Co and
used by Experian, or BEACON – developed and used by
Equifax or EMPIRICA – developed and used by Trans
Union) or credit scoring is a method of determining
the likelihood that a credit user (you) will pay
their bills. Fair Isaac began its pioneering work
with credit scoring in the late 1950’s. Since then
scoring has become widely accepted by lenders as a
reliable means of credit evaluation. A credit score
attempts to condense a borrowers credit history into
a single number. Fair, Isaac & Co. and the credit
bureaus do not reveal how these scores are computed.
The Federal Trade Commission has ruled this practice
to be acceptable.
Credit scores are
calculated by using scoring models and mathematical
tables that assign points for different pieces of
information that best predict future credit
performance. Developing these models involves
studying how thousands, even millions, of people
that have used credit. Score-model developers find
predictive factors in the data that have proven to
indicate future credit performance. Models can be
developed from different sources of data.
Credit-bureau models are developed from information
in consumer credit-bureau reports.
Credit scores
analyze a borrower's credit history considering many
factors such as:
 | Late payments
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| The amount of
time credit has been established
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| The amount of
credit used versus the amount of credit available
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| Length of time
at present residence |
| Employment
history |
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Negative credit
information such as bankruptcies, charge-off’s,
collections, etc.
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There are really
three credit scores computed by data provided by
each of the three bureaus––Experian, Trans Union and
Equifax. Some lenders use one of these three scores,
while other lenders may use the middle score and
still others may use all three.
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How can I increase my
score?
While it is
difficult to increase your score over the short run,
here are some tips to increase your score over a
period of time.
| Pay your bills
on time. Late payments and collections can have a
serious impact on your score. |
| Do not apply for
credit frequently. Having a large number of
inquiries on your credit report can worsen your
score. |
| Reduce your
credit card balances. If you are "maxed" out on
your credit cards, this will affect your credit
score negatively. |
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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).
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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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How many
points are you willing to pay?
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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 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 than they are currently
loaning it to you, and therefore earn more
money. With a variable rate loan since the rate
the lender can charge you changes regularly
their income remains consistent with their
current income opportunities. Therefore with
variable rate loans they give you a better rate
since they know that if rates go up they can
charge you more.
The length of
time you will own a house affects both the type
of loan you may want and the amount of points it
may make sense to pay. For example, if you are
going to keep a house for a short period of time
(let’s say 3 years), you may be better off with
a variable rate loan (e.g. a 3/1 ARM – fixed for
3 years and varies once a year every year there-
after until the loan is paid off). Why? Because
typically the 3/1 ARM has a lower rate
associated with it than a 30 year fixed rate
loan and since you will sell the house in 3
years you would not be affected by higher rates
which may exist at that time. On the other hand,
if you expect to live in the house for 30 years
you might be willing to pay some points to
receive a lower interest rate now. The lower
interest rate would save you money every month
over the life of the loan. The total savings in
this situation should be greater than the cost
of points, giving consideration to the amount
that the point money could earn if invested
(saved) after taxes.
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What happens if my loan
gets sold or my lender goes out of business?
The simple answer
is nothing. You will still have to pay your
mortgage. The terms of your mortgage will not change
nor will the requirement for you to pay on time
change. The only thing that would change is to whom
you make out your check.
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Does zero points really
mean zero points?
What about no closing costs loans?
The answer is
maybe. Remember there are more then one type of
Points (Discount and Origination) not to mention a
Mortgage Broker fee which is expressed as points.
Remember that the lender and broker needs to make a
living. Therefore the more lines on the closing
statement or good faith estimate that says zero the
more likely the rate you are paying is higher than
it otherwise would be. Also, it is often unclear
what a lender or broker means by no closing costs or
no point loans. Sometimes the lender or broker will
increase fees to compensate for the lack of points
or a more favorable rate.
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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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