Monday, April 1, 2013

Common Mortgage Questions

Mortgages are complicated - Truth.  Buying Real Estate is complicated - Truth. 

But just because something is complicated, doesn't mean it can't be understood.  My suggestion on the Real Estate side of things - find a competent and well versed Realtor in your target market area that works hard for you. 

As far as mortgages go - here are a few of the common mortgage questions:

  1. How does my credit score affect the mortgage?

    • Your credit score affects the ability to get a mortgage in different ways.  For example, with a score between 580 - 620, this typically means there was some type of derogatory credit (i.e. Bankruptcy, Short Sale, Foreclosure, Collection, Late Payments).  This derogatory credit influences the Underwriters (UW) decision to approval the loan.  In some instances, scores between 580 -620 are eligible, but they will require significant areas of strength in the file to overcome the credit hurdel, as well as a solid explanation for why the score is where it is.  Important Note: Financial mismanagement or choosing to not pay on an existing credit obligation is not a solid explanation.
    • Your credit score will also affect the Interest Rate that you may receive on a loan.  Most lenders have "pricing hits" based on the credit score.  They typically go in increments of 20 or 40, depending on the lender.  For example, 620- 640 might have an interest rate at 4.00%, while a score above 740+ might garner a rate of 3.75% or lower.  With a lower score there is more potential risk so the lender will want to mitigate that risk with pricing differences. 
      2.  What's the difference between Origination Fee and Discount Points?
    • The Origination Fee encompasses all the costs associated/charged by the lender for their services.  For example, the processing fee, underwriting fee, document preparation fee, etc. all comprise to give a final origination fee.  In some cases, the lender may even charge 1% of the loan amount just as a cost of doing business.

    • The Discount Point is the charge the borrower (you) choose to pay for a specific rate.  Not all rates are created equal.  To keep it simple, I begin all rate quotes from the "Par" pricing.  This means the borrower pays the customary fees (i.e. uw fee, processing fee, etc.) but they aren't paying anything extra to secure a lower rate.  However, the choice is the borrowers.  They can offer to take a higher interest rate or a lower rate.  The higher rate will include a credit that will offset the customary fees or they can pay more above the customary fees to secure a lower rate.  There are pros and cons to both but we can save that for a later post.
      3.  Can I finance the closing costs in the loan amount when I am buying or refinancing?
    • Another common question with a simple answer when you are buying a new home.  No.  In the "old mortgage world", lenders would allow borrowers to increase their loan amount to cover the costs on a purchase, however, that brings increased risk as the loan amount vs. the value of the home ratio will be higher than a lenders risk tolerance.  You can, however, take a higher rate to offset the costs (see #2 above) or include a seller credit to offset the costs.

    • For refinancing - the answer is yes, in some cases.  If there is enough equity in the property, the lender may allow you to roll the costs into the new loan.  The most basic equity ratio is anything less than 80% will allow the borrower to roll the costs into the new loan.  However, if there isn't enough equity in the property, the answer is then no.
While these are a few of the common questions, there are many more that are asked.  What is the Seller's Owners Title Policy?  Does paying a discount point make sense?  Can I buy a new home if I currently own a home? What is a pre-payment penalty?  What is the escrow for taxes and insurance? What is the least amount of down payment one can contribute to a new purchase?  As the month of April continues I will work to answer a few questions each week in an attempt to let the mortgage process be better understood.

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