Most people consider themselves to be "smart shoppers", but do they know how to shop for a mortgage? Unfortunately, comparison shopping for mortgages has its own rules and most folks are blissfully unaware -- and that can create a hundred-thousand dollar impact in the wrong circumstance.
Unlike shopping for consumer goods like cell phones or television, financial instruments do not retain their "price" day after day. For example, you cannot purchase stock for the same price tomorrow as today.
In time, consumer goods get less expensive as new models are released and market competitors releases similar products.
Financial instruments do not operate like that -- their prices remain unpredictable. Of course, mortgages fall into the "unpredictable" category.
So, when shopping for a mortgage, there are a few rules to follow to protect your own interest. And, I have also thrown in my 10-to-1 Theory on Locking Loans for good measure.
Rule #1: Be prepared to do your shopping in one day. Because mortgage rates change daily (and sometime twice daily!), you need to be ready to shop and commit in one day. All reputable loan officers will be able to issue you a Good Faith Estimate within 30 minutes of quoting you a rate.
Rule #2: If there is no Good Faith Estimate, there is no offer. Demand a Good Faith Estimate from each loan officer. A GFE details the costs associated with your mortgage and will help you compare mortgage programs. Remember that fees and rates go hand in hand. Typically, lower rates mean higher fees, and higher rates mean lower fees. Your loan officer will typically make adjustments between rates and fees, if you ask.
Rule #3: Make sure you are comparing identical mortgage products and rates. A 30-Year Fixed mortgage interest rate cannot be compared to an ARM product interest rate and vice versa. You would not compare the price of a sit-down dinner to fast-food dinner, even though they are both "dinner". Same concept. You have to compare identical products in order to make a fair comparison.
Rule #4: You can have your credit checked an unlimited amount of times within 14 days, so do it. Your credit scores are only impacted one time for each 14 days when your credit is checked by a registered mortgage lender, regardless of how many times it is pulled. How much do your scores drop? Nobody knows for sure, but the scores will not drop until 30 days after the first credit check and that is for your protection. If a loan officer is telling you not to shop around because your score will drop, you should hang up the phone and never talk to that person again. If they lie to you before you submit your application, what else will they lie to you about?
Rule #5: Do not float. The risk is too great. This is my 10-to-1 Theory. At the end of a mortgage shopping day, you can choose to lock your rate, or not lock and gamble on a lower rate the following day. If rates drop by 0.125%, then you win your bet and maybe you save $30.00 per month. But, if rates go up by 0.125%, you lose your bet and your payment goes up $30.00 per month. That is an awful feeling, if you've been there. The 10-to-1 Theory states that the pain of "losing" $30 per month is equal to the joy of "winning" $300 per month. In short, there are very few good outcomes when you choose not to lock.
Be smart when comparison shopping for mortgages and understand that financial instruments do not operate like digital cameras or mattresses. Prices change daily and your monthly payment is not set in stone until your rate is locked.
Side Note: Some Mortgage Bankers will allow you to lock your interest rates after market hours and some will not. Be sure to ask your loan officer until what time the GFE-quoted rates and fees can be locked.
The credit scoring system became prevalent during the 1980's as a way for lenders to quickly evaluate a potential borrower's creditworthiness. The system was found to accurately predict financial risk over time and started being used in several different industries. Now credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behavior.
Thousands of different credit scoring formulas exist today for various evaluation purposes. Each unique credit scoring system is accurate and correct for its own application. The credit scores you can order online use an algorithm created for consumers that approximates these different formulas. Your online credit score may vary a bit from the score your lender uses, but they should be in the same range.The basic credit scoring formula takes into account several factors from your credit report. The impact of each element fluctuates based your own credit profile:
When you are preparing for a major purchase make sure you check your credit scores and credit reports from all three credit reporting agencies: TransUnion, Equifax and Experian. Looking at your scores and reports a few months before your loan application will help you get a complete picture of your credit health. If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies and avoid new inquiries for a few months to give it a boost.
When you apply for a mortgage and get a barrage of irritating and confusing phone calls from competing lenders before noon the next day, can you turn to the government for help?
The Federal Trade Commission issued its long-awaited answer to that question in mid-March, and it's already attracting criticism. The agency, which has regulatory oversight powers concerning consumer credit, says it lacks the legal authority to crack down on unwanted "trigger list" phone solicitations to consumers who've applied for mortgages within the preceding 12 to 24 hours. Trigger-list pitches to mortgage applicants have become hot issues in recent months as new mortgage volume has declined nationwide in softening housing markets. With fewer people buying homes or refinancing, some lenders have begun investing heavily in leads — the identities and contact information of consumers actively in the market for a loan.
Trigger leads come with much more than phone numbers. Lenders can customize their orders on such leads to provide FICO credit scores of a certain level, open loan balances, credit card debts, estimated home values and the like. When they call to pitch you, in other words, they know a lot about you financially. "Lead generator" companies hawk such lists to lenders at hefty prices on the Internet. The lists are based on consumer information sold by the big three credit bureaus — Equifax, Experian and Trans- Union — following their receipt of an inquiry by a mortgage broker or loan officer.
Say you apply for a new loan with a local mortgage broker. The broker orders a composite credit report of your personal information on file with the three bureaus. That inquiry, in turn, sets off bells at the big credit bureaus. Now they know you're interested in getting a new mortgage, and they know that lenders will pay plenty — thousands of dollars a month in some cases — to find out. Critics argue that trigger lists open the door to bait-and-switch schemes, where lenders dangle falsely discounted rates to pull in unsuspecting customers who've just applied to a local broker and got a higher, fair-market rate quote. Weeks later, the trigger-list marketer can't deliver the low-ball rate, and the borrower is stuck with either higher costs or no loan at all — classic bait and switch. Harry Dinham, president of the National Association of Mortgage Brokers, charges that mass distribution of loan applicants' financial information opens the door to identity theft, with supposedly private data floating far and wide around the Internet.
"This is a big, gaping hole in the system," he said in an interview, "and we'd like to see it shut." Dinham also argued that trigger-list telemarketers' loan deals often do not meet the Fair Credit Reporting Act's criteria for "prescreened" firm offers because the telemarketers lack crucial information necessary to extend a mortgage, such as appraisal and documentation of income and assets. Nor do the lead generators who sell the trigger lists meet the law's strict standards for receiving access to consumers' personal information. Finally, to truly constitute "firm offers of credit," said Dinham, "mortgage offers need to be in writing, so that the consumer can review it, and understand whether there are problems."
Rebecca E. Kuehn, the FTC's assistant director for privacy and identity protection, said, "I've heard the debate (over trigger lists) and I think there are fair points on both sides." However, she said, the fair credit law, which allows firm offers of credit using prescreened lists, does not specifically prohibit telephone offers. Nor does it require lenders to know every last detail of a consumer's credit situation to make a firm offer. It allows some "post-screening" — verification of income and assets, for example.
Kuehn said that even though the FTC lacks statutory authority to ban prescreened telemarketed mortgage offers, it does have enforcement authority against bait-and-switch scams and misuse of consumers' credit information. Consumers who experience such problems connected with trigger-list marketing can file complaints with the FTC online at www.ftc.gov.
Better yet, any consumer can cut off all potential prescreened credit solicitations — whether for mortgages or credit cards — by opting out. That means prohibiting the credit bureaus from ever selling your personal information to lenders for marketing campaigns. You can do that by visiting www.optoutprescreen.com or calling 1-888-5-OPTOUT. Your request, according to the FTC, should be processed within five days, although it may take 60 days before all prescreened offers cease.
Mortgage applicants can also block trigger-list telemarketing pitches by making sure their phone numbers are on the National Do Not Call Registry, which can be accessed at www.donotcall.gov or at 1-888-382-1222.
Applying for a mortgage is stressful under the best of circumstances. Even experienced borrowers feel a little twinge of anxiety at the thought of taking on hundreds of thousands of dollars worth of debt. There are things you can do to reduce the stress. Lists such as this one can be found on all mortgage websites, yet no real estate related site is complete without one. So here’s my list of Do’s and Don’ts.
The mortgage approval process is forgiving of many things, but these items will throw a serious wrench in the works. The following is a list of things that I see most often as a Loan Officer, that derail the process of getting approved for a mortgage loan.
On occasion, you might have to break one of the rules in this list. Life happens and there is just no way to make it a perfect one. When you simply must break one of the rules (with the exceptions of #4 and #5!), let your Loan Officer know about it right away. Let him or her know in advance it at all possible. There are ways to compensate for almost any situation that can arise during the mortgage loan approval process. But it is much easier to anticipate a problem, than it is to pick up pieces after the fact.
Title insurance provides a protection from uncovered claims against the title of the property you are acquiring. Private mortgage insurance (PMI) protects the lender against default. Homeowners insurance packages several types of coverage aimed to protect you from damage or loss to your home.
Title InsuranceTitle insurance provides protection from financial loss due to claims made against the title of the property including legal defense of the title against those claims. This insurance is usually provided after a title search is done to uncover any interests or liens on the property, in order to clear the title of any claims against it. This type of insurance provides protection against past defects, not future faults. The last thing you want is to have purchased a home and then find out their is an existing lien from a third party.
Title insurance is generally required by the lender, paid at closing and requires only a one-time fee to provide title insurance coverage on the property for the life of the loan. The lender will require the amount of your policy to be equal to the purchase price of your home. However, a lender’s title insurance policy only protects the lender against undiscovered title claims. An owner’s title insurance policy will also protect the homeowner against these claims.
Private Mortgage InsurancePMI is usually required when you are trying to get a mortgage with a low down payment (generally less than 20% of the sales price.) Or in other words you’re trying to have a single loan greater than 80% of the purchse price. This insurance is designed to protect the lender from the higher credit risk borrowers. It also benefits the borrower, though, making possible a loan that may otherwise not have been available. Federal law now mandates that lenders automatically drop PMI when the loan-to-value ratio reaches 78%. The borrower may request that the PMI be dropped when the LTV reaches 80% (or 75% if other criteria is met). There are plenty ways around getting private mortgage insurance, one would be breaking the high loan to value into two mortgages.
Homeowners InsuranceHomeowners insurance is designed to protect you from loss due to damage to your home or related property. It is important to know exactly what is included in your policy. Typically, homeowners insurance is a package policy that combines different types of coverage. The most common of these are:
You need to make sure that the policy coverage and the dollar amount of the coverage is sufficient to your needs. Also, realize that some insurance policies are designed to protect the homeowner and some to protect the lender. As a homeowner you need to make sure that you are protected!
Yes, there are certain responsibilities associated with owning a home. Landlords will often argue the benefits of renting, and for obvious reason. If you are renting, you’re helping them make their mortgage payment.
The numbers are staggering if you look at it this way. If you are paying $1,000 per month for an apartment, and you know your rent will increase 5% every year, then over the next five years you will pay your landlord $66,309. If you are currently renting a house, you may be paying much more than that each month. Either way, you gain no equity by shelling out this monthly housing expense and you certainly won’t benefit when the property value goes up!
However, if you were to purchase your own home or condominium, you would be well on your way toward building equity within that same five-year period. By choosing a fixed-rate loan program, you can have the comfort of knowing that your monthly mortgage payment will never go up. In fact, you would have the option of refinancing to a lower interest rate at some point in the future should interest rates drop, and this would cause your monthly mortgage commitment to go down.
In addition to building equity, there are tax advantages that come into play with home ownership. Depending on your tax bracket, owning a home is often less expensive than renting after taxes. Interest payments on a mortgage below $1 million are tax-deductible, and your mortgage consultant should help you evaluate the tax advantages of various loan scenarios, and share this information with your tax consultant to glean feedback on your behalf.
To find the loan program that is right for you, your mortgage advisor will need to evaluate your monthly household income, current assets and savings, as well as any monthly obligations you may have for credit card payments, car payments, child support, etc. These prequalification factors, along with the report of your credit score, will determine how much house you can afford and what interest rate you will pay for financing. It is also important to let your mortgage consultant know what your future goals are, because this will help narrow down which loan option is the best fit for your long-term needs. There are many different types of loan programs available, including “low” and “no” down payment mortgage programs. These types of programs require the borrower to provide less than 3 percent of the loan amount as down payment. FHA lenders rule that the mortgage payment, including principal, interest, taxes and insurance (PITI) should not exceed 31 percent of your gross income, and the PITI plus other long-term debt (car payments, etc.) should not exceed 43 percent of your gross income.
Housing is an expense that takes a big bite out of the monthly budget. If you are a renter and feel that “home” is more than just someplace to hang your hat, think about the advantages of purchasing real estate. It may be time to take the step into building your personal net worth as a home owner.
When Is It Time To Think About Refinancing?
Do you have two loans?
If you bought your home within the last few years with little or no money down then you probably have 2 home loans, 1 home loan with a lower interest rate and 1 home loan with a higher interest rate. When the value of your house increases, you then have the opportunity to combine the two loans into just one loan. Doing this often times lowers your monthly payment.
Do you have a Short Term Fixed loan?
It is widely agreed upon that rates will rise over the next few years. The question is by how much. If you have a loan that is only fixed for 2 years you will have to refinance after 2 years in order to make your loan payment fixed again. Rates are so low for traditional 30 year fixed loans now. Why not get rid of the guessing game and refinance now into a loan that you know will not change.
Do you have high balances on credit cards that never seem to go away?
If you are in the trap of paying only the minimum payment every month it will take many years before you even pay down the balance just a little all the while you are still being charged interest. Oftentimes it makes sense to pull the money out of your house and pay off your high interest debt including credit cards, perhaps cars, and furniture bills. This can help you spend less monthly.
Do you have trouble making your mortgage payment as it is?
Sometimes for whatever reason, we fall behind and it’s difficult to get caught up. If you have equity in your home, it sometimes makes sense to pull cash out of your home so that you can have peace of mind and have some cash put aside in the bank for those unexpected emergencies. If you are late on your mortgage or about to be don’t waste another minute and call me to discuss structuring you a new loan that helps create a better financial picture for you and your family.
Managing your credit can be tricky, even when you're single. Add a new spouse to the mix, and you have to be extra careful to ensure your credit remains in good standing.
Honesty is the best policy
First of all, both you and your spouse should put all your financial records on the table. This includes savings, salaries, investments, real estate, and especially credit. If one of you has a less-than-perfect credit history, it will affect the other as soon as you start applying for credit together and opening joint accounts. In addition, your new joint accounts will appear on both spouses' credit reports in the future, so be sure to pay careful attention to your bills and pay them on time.
Once you've aired your credit laundry, you'll need to decide whether or not to merge all of your financial accounts. Many couples do this because consolidated accounts often make for easier record keeping. Just remember, both of you are responsible for all debt incurred in any joint credit accounts. So, regardless of who's incurring the debt, a missed payment or two on a joint account could negatively affect both of your records.
The same is true in community property states, where virtually any debt entered into during marriage is automatically considered joint. Also, if you miss a payment on an individual account, it could impact your ability to open joint accounts in the future, since both credit histories will be considered.
It's not terms of endearment, but rather terms of your joint accounts
The best way to keep your record clean starts with a solid understanding of the terms of your joint accounts. That means paying close attention to interest rates, credit limits, annual fees, late payment fees and cash advance limits. If you decide to consolidate your accounts, you might want to keep at least one credit account in your own name as a safeguard in the event of an emergency. Not to rain on your nuptial parade, but keeping an individual account can also be a good thing in the event of divorce to reestablish an individual credit history.
When the honeymoon is over
Women who take their husband's surname after getting married need to notify the Social Security Administration, as well as any current creditors. You do not need to notify the credit agencies of a name change - they will automatically update the name on a credit report when creditors report it.
If you plan to have children, you can best prepare yourself now by building a cash reserve to meet the eventual expenses of having a baby. This will help you avoid overextending your credit to meet expenses such as cribs, strollers, diapers, clothes, playpens and toys. Also, building a savings account is also essential for buying a home and being prepared to face such emergencies as severe illness, disability or job layoff. Finally, planning for your retirement early on in your marriage can help make your golden years more comfortable and less stressful.
The key to a successful credit marriage as a couple is to understand that your individual credit behavior affects both you and your partner. To ensure that you are able to quickly get credit at the best possible terms, be sure you both understand all the implications that accompany a joint account.
Home ownership is a great thing for many reasons and the tax benefits of home ownership are unarguably important. Come tax day, your home is one of the main drivers of savings for you. Combined, deductions from mortgage interest, property taxes and points can potentially help save you thousands whether you're buying a new home or refinancing your current one!
Mortgage InterestThe best tax break you get from your home is being able to deduct the interest paid on your mortgage. Why does Uncle Sam allow this? Well, since you also pay property taxes on your house, the taxes must be waived on your mortgage interest payments to avoid double taxation. And the break is a big one because for most homeowners, especially those in the first years of paying back their loan, the vast majority of the monthly payment goes to cover the interest. Plus, you can deduct the interest on any mortgage up to $1 million.
Plus, you get the same breaks on second mortgages and refinances as well. Many people capitalized on the low loan rates and rapidly rising real estate prices in recent years to take out cash when refinancing or get a home equity or line or credit (HELOC) loan. If you have already done so or are thinking about doing so with the current rates near 1-year lows, that interest also is deductible.
However, although equity loans are a great way to make needed repairs, improve your home or even help pay off high-interest, non-deductible debt such as credit cards, this isn't to say that you should think of your home as an endless supply of funds. Loans of $100,000 or less are fully deductible, but the remaining amount of your first mortgage affects the tax breaks you receive. The IRS guideline is that you can deduct the smaller of interest on a $100,000 loan or your home's value less the amount of your existing mortgage. In other words, you can't deduct the interest if the home equity loan and the first mortgage together are more than the value of your home. This could give you a lower deduction if you've really leveraged the appreciation in your home's value. For example, if your existing mortgage balance is $250,000, your home is worth $325,000 and you take out an additional $100,000 loan, you can only deduct the interest you pay on $75,000 of that loan ($325K minus $250K). The interest in the other $25,000 is a nondeductible personal expense.
And not only can you get the breaks on second mortgages, but second homes as well! So if you are in a position to afford a cabin in the woods, a condo by the lake or a home on the range, the mortgage interest you pay on the loan for that property is also fully deductible! And the added bonus? Feel free to rent it out and collect that income as well, as long as you 1) pay taxes on that income, and 2) you spend at least 14 days at the property or more than 10% of the days it was rented out, whichever is greater.
Finally, you may want to go the other direction and perhaps simplify your finances by consolidating your existing home loans into one. This should be a pretty painless process for you. Gather all your current home loan information including account numbers, bank name, initial loan amount, loan date etc. Look at how much equity you have in your home so you can see if refinancing and getting rid of your second mortgage is actually feasible. Finally, go to your mortgage specialist and get an even more specific and accurate picture of the options available to you. And remember: the interest you pay on this new consolidated loan is, of course, deductible!
Property TaxesThe other major deduction every homeowner can claim is property taxes. Although tax rates can vary widely in different areas, this will also be a good chunk of your monthly payment. Although they are not paid each month, but rather once or twice a year, your lender will likely estimate the taxes you'll owe for the year, spread this amount over the 12 months, place them in an escrow account and pay the bills for you when they come due. If the lender handles this, the exact amounts paid will be included on your annual mortgage statement along with your loan interest paid. However, if you handle the property taxes on your own, make sure you set enough aside so you pay these on time. These taxes will be an annual deduction as long as you own your home.
One thing to look out for: If you paid into an escrow account for future taxes and those taxes do not come due in that particular tax year, they are not deductible. Property taxes are only deductible in the year they are actually paid to the property tax collector.
PointsPoints are an up-front fee on a loan that can help you secure a lower rate. One point is equal to 1% of the total loan amount and these fees are also deductible. The wrinkle here is exactly when points are able to be deducted.
Per the IRS, you can deduct the full cost of the points in the year you paid them if...- The loan is to purchase or build your primary residence and secured by that property- Paying points is an established practice in your area- Points are within the typical range charged by lenders- Points are clearly listed on the loan settlement statement and are applied to the loan; the fees cannot be used to pay for property taxes, appraisal fees, lawyer fees, inspections, etc.
In addition to a primary purchase loan, refinance loans are also eligible for tax deduction of points, but the rules differ here. Here, the points must be deducted over the lifetime of the loan. For example, if you paid $1,000 in points for a 30 year refinance loan, you can deduct $33.33 per year for each of the 30 years. The only way to get around this amortization is if you use a cash-out refinance or instead take out a home equity loan to directly improve your home - in this case, points are fully deductible the year you paid them.
What's Not DeductibleWhile the tax breaks for homeowners are extensive, they do have their limits. Here are a few things that are not deductible:
Also, a final point to note: You can take these tax deductions only if you itemize your deductions, rather than using the standard deduction. Make sure to consult your tax advisor to determine how these deductions affect you.
* Source: Internal Revenue Service, United States Department of the Treasury. The tax information contained herein is provided for informational purposes only, and should not be construed as legal or tax advice. You should always consult a qualified tax professional to determine your eligibility for these (and other) deductions.
Your plan should simply identify what your needs are in buying the home and also serve as a 'To Do' list which you can refer to during the process.
Credit
Here is the link to a great article about credit. Written by Malgorzata Wozniacka and Snigdha Sen, it talks about what goes into creating a FICO score and how the score is weighted. It's really a great article and well researched. I get a lot of questions about FICO scores and people most often want to know what they have to do to raise their score. This article gives great insight into the FICO score. The higher the score the better because your FICO score is the most important factor in determining financing options and ultimately interest rates. The higher the rate, the more you'll pay over the life of the loan and over a lifetime of borrowing, bad credit can really make you pay out much more than you have need to. http://www.pbs.org/wgbh/pages/frontline/
shows/credit/more/scores.html