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Mortgage Blog

Jan 25

5 Steps to Getting Mortgage Ready in 2017

5 Steps to Getting Mortgage Ready in 2017 WMcPherson

 

New Year’s means new goals for many, and buying a house and beginning to gain equity may be one of them. January is a good time to buy, and many young families without school-age children can capitalize on the buyer’s market at this time of year. Here are some things you can focus on for getting a mortgage in 2017.

Check your credit score
Many first time home buyers will have newly established credit showing student loan repayment and beginners’ credit cards. Whether or not knowledgeable about credit scores, you should always check prior to and shopping for a mortgage. Given time and effort, your credit score may improve, and it will be highly effective getting a better mortgage rate and higher approval for a loan. In order to get a Federal Housing Administration (FHA) low down payment advantage of 3.5%, you must have a credit score of 620 or higher.

Determine your price range
Determining your price range will help you to find the right mortgage for you. Your down payment, monthly payment, interest rate, and loan term are all variables that can determine your price range. Having an overall house cost going in is a good idea, and other terms can be determined later, but remember to factor in real estate taxes, homeowners insurance, and any mortgage insurance to determine the overall cost of the home. This is also a good time to your research and home shopping method your areas of interests and their real estate history.

Shop for a mortgage lender
People are going online for services more and more now. Finding a mortgage lender with a reputable website and web presence will help you to find a match. Recently, “quick” loans have become popular as an alternative, but remember that these will incur different costs such as higher interest rates and higher down payments because those lenders are not really taking the time to learn who you are to evaluate your assets. This is why many home buyers prefer to work with a local, established mortgage lender. This is also a great time to determine which type of mortgage you will be shopping for. If you are having trouble finding a good mortgage lender, try going to a realtor first. They will inevitably know people in the business that they can recommend.

Start the pre-approval process
Getting pre-approved with a mortgage lender should be a comfortable process once you have determined the right lender. It will involve going over credit scores, assets, income, employment history, and other elements that will contribute to the pre-approval amount for purchasing a house, as well as the interest rate and term suggestions. Be open to working with the lender, they will be happy to calculate and recalculate new terms until you find an ideal match. Furthermore, ask about rate locks to determine if you can rely on a lender to “lock in” an interest rate before the final mortgage is calculated. Remember that this is not the finite meeting about a mortgage loan.

Get Shopping
Once you are pre-approved and have the confidence of knowing that you can purchase a home at your budget, you should feel eager to start the home buying process. Your realtor will be able to better determine your price range and understand the factors of your pre-approval. Realtors on both sides of the sale will be more open to negotiating to meet your pre-approved budget, as it leads to a quicker home sale and faster resolution for all parties. Remember that pre-approval is not the last meeting that you will have with your mortgage lender, and that there may be flexibility within your pre-approval determined by the cost of the home.

Buying a home may be the largest purchase that you ever make. Being aware of your credit score and income history will go a long way to finding a better mortgage. The New Year is a great time to determine how you can realize your goals of owning a home. Taking the time to meet with a mortgage lender at any point in the buying process will give you the confidence to move forward and to become a homeowner.

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Jul 22

The Insider Secret of a No Closing Cost Mortgage

Mortgage quotes come with options that you may not be aware exist, but definitely need to understand if you want the best mortgage for your unique situation.

The terminology used by mortgage lenders to describe these options is probably foreign to most borrowers – par, above par and below par pricing.

These mortgage terms also come with more consumer friendly names – especially above par pricing and below par pricing. Consider par pricing in golfing terms – if you make a par you are even. You neither pay more or less for the mortgage rate quoted.

When your mortgage rate is above par it means the mortgage rate quoted is yielding additional funds to the lender. In the past that money typically went into a loan officer’s pocket, but those days are long gone.

Mortgage loan originators are paid a flat fee on every loan they originate. It does not and cannot vary based on the mortgage rate charged.

So, how does this above par and below par pricing work and how should you pick and choose when to use it?

Ins and Outs of Above Par (Lender Credit) and Below Par (Discount Points) Pricing

Discount points and lender credits give you options. They represent a tradeoff of out-of-pocket expense at closing or paying more/less on your monthly mortgage payment.

Discount points (below par), lower your interest rate in exchange for an upfront fee.

Lender credits (above par) lower your closing costs in exchange for a higher interest rate.

Points are listed on your Loan Estimate and on your Closing Disclosure on page 2, Section A.

By law, points listed on your Loan Estimate and on your Closing Disclosure must be connected to a discounted interest rate.

The exact amount that your interest rate is reduced depends on the specific lender, the type of mortgage loan and the current state of mortgage market rate pricing.

Sometimes you may get a big reduction in your mortgage rate for each point paid. Other times, the reduction is smaller.

Lender credits (above par pricing) are simply discount points in reverse. You pay a higher interest rate – usually – and the lender gives you money to offset your closing costs. Pay less at the closing table, but more each month. Simple right?

By law, above par pricing must be passed back to the borrower in the form of a lender credit. It also must be clearly disclosed on the loan estimate and closing disclosure forms that every borrower receives – usually multiple times from application to closing.

The same goes for discount points, they must be applied to obtain your mortgage rate and fully disclosed.

Ever heard the talking heads on the radio blabbing about a “no closing cost” refinance? That doesn’t exist, it always cost money to close a mortgage loan – purchase or refinance. Someone is absorbing those costs and it is typically the lender in the form of above par pricing – a lender credit – originating from a higher mortgage rate.

Regardless, it is important to remember what we mentioned earlier – that mortgage rate and discount points – or lender credits – do not affect loan officer compensation. Nobody is pulling the wool over your eyes, it all has to be clearly disclosed at application, when you lock your mortgage rate and prior to closing too.

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Jun 8

Becoming a Homeowner When You Don't Now Qualify For a Mortgage

Lease-to-own contracts (LTOs) and land contracts (LCs) are different legal ways to transfer occupancy of a property from an existing owner who does not want to occupy it to someone else who does, but who cannot qualify now for the financing required to purchase it outright. Both LTOs and LCs offer wannabee owners the right to occupy a house for a period during which they can improve their capacity to qualify for the financing they need to complete the deal.

Note: The LC designation includes what are called “contracts for deed” which are used in the same way. Detailed provisions of both vary from state to state.

The LTO Transaction

With an LTO, the new occupant becomes a tenant and the current owner becomes a landlord who offers the tenant an option to purchase the house within a specified period. The tenant will need a purchase mortgage when the time comes.

As an example, assume a house appraised for $100,000 that cannot be sold outright at that price but the price is acceptable as the option price under an LTO. The renter/buyer has the right to occupy the house with an option to buy anytime within 18 months for $100,000 in exchange for a non-refundable option fee of $1500 and monthly rent of $900 for 18 months. If the wannabe buyer cannot qualify for the mortgage required to exercise the option within the 18 months, her option lapses and she must vacate at the end of the period.

The LTO offers the wannabee homeowner an opportunity to bet on herself. To become a homeowner, she must either improve her credit score, or accumulate the funds required for a down payment on a purchase mortgage, or both.

The LTO offers the seller a chance to obtain a better price than is otherwise available. If it turns out that the buyer cannot complete the transaction, the seller retains the option fee and rent, and recovers the house, perhaps to offer it again to another wannabee owner. If the seller had a mortgage, it would not be affected by an LTO that fizzled.

Price changes that occur during the option period do not benefit the wannabee owner. If the house declines in market value, purchase at the option price becomes less attractive. If the house appreciates in value, purchase at the option price becomes more attractive, but the capacity to make the purchase will not increase. The maximum available mortgage amount will be based on the option price, not the current market value, so that the required down payment will not change.

The LC Transaction

With an LC, the new occupant purchases the property with financing provided by the seller, who becomes a lender. But legal title does not pass until the loan is paid off, which requires the new occupant to refinance.

As an example, under the LC, the wannabe buyer pays $100,000 for the house, including $1500 in cash as a down payment, with the seller providing a loan for $98,500. The monthly payment of $900 covers the principal and interest plus taxes and insurance, with the loan balance of $96,658 after 18 months due at that time. If the wannabe buyer cannot refinance, the owner does not transfer legal title and can take steps to have him evicted.

To wannabee owners, an important difference between LTO and LC deals is that completing the first requires a purchase mortgage while completing the second requires only a refinance of the mortgage granted by the seller. Closing costs are lower on a refinance, and the down payment required is smaller. The $1500 that went into the seller’s pocket as an option fee on the LTO became buyer equity on the LC.

Furthermore, since the equity required on the refinance is based on a current property appraisal, an increase in market value during the 18 months will reduce and could even eliminate the need for the buyer to come up with additional cash. In the example, a lender imposing a 10% equity requirement on refinances would refinance the entire $96,658 balance after 18 months if the market value of the house had risen to $107,500.

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Sep 4

Choosing the Best Type of Mortgage

Mortgage borrowers having to choose between the different types of mortgages face a puzzle, which may be
particularly perplexing today. Interest rates remain low by historical
standards, the spread between fixed and adjustable rates remains large, but
expectations are widespread that all rates will soon increase – unless the
current collapse of stock prices causes rates to drop again. The
challenge to borrowers who must make a type-of-mortgage decision in this
environment is also a challenge to anyone presumptuous enough to offer them advice.

My response to that challenge has been to develop decision rules that indicate the circumstances under which each of
the major mortgage types should be selected. I will illustrate with a
hypothetical mortgage of $405,000 on a $450,000 single-family home to a
high-credit score borrower at the competitive prices posted on my web site on
August 21. The interest rates cited are for loans carrying zero or close to
zero origination fees. The numbers used are designed to provide readers with a
feel for the magnitudes involved, but the decision rules are not dependent on
them.

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Jul 31

Why Small Home Mortgage Loans Are Hard to Find

Providing small mortgage loans at non-subsidized prices
affordable to the borrower has always been a challenge. The core problem is
that the high cost of originating and servicing a mortgage loan is no smaller
for a small loan than for a large one, but the dollar amounts of interest and
origination fees received by the lender are smaller on small
loans. The obvious remedy, charging a higher interest rate or upfront fees on
smaller loans, may make it unaffordable, may be interpreted as “price-gouging”,
and may invite the attention of regulators.

Home mortgage lenders prefer to avoid these problems by setting minimum loan
amounts, which today are generally in the range of $50,000 to
$75,000. Below $50,000, mortgage loans are generally not available. This
is a problem for isolated communities in which home prices are very low, and
also for borrowers anywhere who are looking to refinance small loan balances.

The Problem of the Small Isolated Town

"In my town, we need mortgage loans from $5,000 to
$30,000, and they just aren’t available. Is there anything that can be
done?"

The town is Winters, Texas, population about 3,000. There
are few jobs there or anywhere very close, and median household income is about
$26,000. Houses in Winters sell for less than $60,000.

Mortgage loans are not available in Winters. In part, this is because the town
is so isolated and the demand so small that it can’t support a lending
facility. There are no appraisers, for example; if one is needed the cost will
be double the cost in a larger center because of the time it takes for the
appraiser to get to Winters and back.

The combination of exceptionally high origination costs and
exceptionally small loan amounts is deadly. The best option for residents of
Winters who need funding is an unsecured loan, as discussed below.

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