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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 BECON – 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
- The amount of time
credit has been established
- The amount of credit
used versus the amount of credit available
- Length of time at
present residence
- Employment history
- Negative credit
information such as bankruptcies, charge-off’s,
collections, etc.
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.
- 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).
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?
- 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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