| ALL ABOUT INTEREST RATES
Research Rates
When shopping for a mortgage be sure to begin by researching
current Wall Street securities. Mortgage rates, for the most
part, rise and fall along with Wall Street securities and are
a reflection of the overall direction of interest rates. It is
of the borrower's best interest to keep an eye on mortgage market
trends and key economic indicators in order to btain the best
interest rates savings.
What is APR?
APR (Annual Percentage Rate) is a tool used to compare loans
across different lenders. It is required by law (The Federal
Truth in Lending law) that mortgage companies disclose the APR
when they advertise a rate. This is designed to represent the
absolute cost of the loan to the borrower, revealed in the form
of a yearly rate. This is a measure taken to prevent lenders
from hiding fees and cost behind the fact that they are advertising
low interest rates.
Meeting with a Lender
In order to determine (in advance) how much you can afford and
an amount of a mortgage for which you can qualify yo should meet
with the mortgage company before you even begin your house hunt.
This step, also known as pre-qualification, can save you both
time and trouble to be certain you are looking in the correct
price range for your budget.
Lock in Your Rate
A rate commitment - rate lock - lock in - is a lender's promise
to hold a certain interest rate and a certain number of points
for you. This is generally for a certain period of time during
the duration of your loan application is being processed. Each
lender is different, but you
may be able to lock in the interest rate and number of points
that you will be charged when you file your application. This
will happen either when you file your application, during the
process of the loan or when the loan is approved, maybe even
later.
The Several Factors That Affect Your Mortgage Rate
* Amount of Loan
* Length of Loan
* Adjustable Rate
* Down Payment
* Lock in Period
* Income Level
* Credit Quality
* Closing Costs
* Discount Points
Both debt-to-income-ratio and quality of credit affect the terms
of your loan through FICO Score. If you have good credit and
your monthly income surpasses your monthly debt obligations,
you will get approved at a lower interest rate. Quite the contrary
if your monthly income just covers your minimum debt obligations.
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Should I Pay Points?
An upfront fee that reduces your monthly interest rate and total
interest due over the life of the loan is called a "point",
which equals 1% of the total loan amount. Another words, a one
point loan will always have a lower interest rate than a no point
loan. In essence, paying points is a trade off between paying
money now versus paying money later.
Depending on how long you are planning on keeping the loan is
the determining factor whether or not the pay points. If you
are planning to keep the loan for at least four years it is suggested
to pay the points up front to ensure that you recoup the costs
through lower monthly payments. If moving in the next four years
is a possibility or refinancing because the market rate is declining,
then it is probably a wise choice to obtain a no point loan.
There are a variety of rate and point combinations for the same
loan product available through lenders. So when making the comparison
of rates through the different lenders, be sure to compare the
associated points and rate combinations of the offered program.
The APR (Annual Percentage Rate) is a tool that lenders use to
compare different terms, offered rates, and points.
Refinance Considerations
There are many things to consider when making your refinancing
decisions. First, if you are planning to live in your house for
at least three to five years it would make sense to pay "points" -
meaning 1% of the loan amount - and closing costs to get the
lowest available rate. Second, even a small rate cut can pay
off in a short amount of time. This is because you can very easily
find a mortgage company that is willing to waive routine refinancing
charges. For example: Legal fees, which can add up to $1,500
- 3,000 and application and appraisal fees. However, you'll have
to be willing to accept a rate that's a little higher than "rock
bottom" in exchange for low or no upfront costs. And lastly,
by adding the points and closing costs to your new mortgage you
can avoid putting down cash and still get a low rate.
Does this mean a lot of extra debt? Maybe not. If you've been
paying on your current mortgage for at least three years then
you've probably already reduced your balance by thousands of
dollars. So you may be able to add your closing costs onto your
new loan with an ending result of a smaller mortgage than your
original one. A benefit of a new lower
rate and a lower monthly payment.
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Get Your Hands on Some Cash
Refinancing for more than the balance remaining on your old
mortgage is another way to make a refinance work for you. This
is known as "cashing out" or "tapping your home
equity" in mortgage speak. You may be able to refinance
without boosting your monthly outlay if you acquire favorable
rates. A good example: at 8.5% - the payment on a $200,000, 30-year
fixed rate mortgage would be $1,538. But at 7.5% - you can borrow
nearly $20,000 more with the same payment.
It would be a wise choice to pay off any higher rate loans you
may have with the extra cash. Like if you have a $15,000 car
loan at $10 and making minimum payments on a $10,000 credit card
payment at 17%. This leaves you with a balance of $680 a month
in total payments. Now let's assume that you've refinanced your
mortgage and you take out an additional $25,000 to pay off your
other two debts. End result: At 7.5%, your additional mortgage
payment (monthly) would only be $175 - so you would be $505 ahead
($680-$175=$505).
Your Credit Report
The purpose of your credit report ti s to provide valuable information
to prospective and current creditors to assist you in making
purchases, manage your personal finances,pay for college educations,
and secure loans. Credit reporting makes it possible for corporations
to benefit the world's economy and for stores to accept checks,
businesses to market their products, and for banks to offer credit
cards.
Only when a lender makes an inquiry will your credit report
be compiled. Information is given by lenders, court records and
you is collected by credit reporting agency's file and put into
a report form for the requester. Monthly updates are sent to
credit reporting agencies by credit grantors. The information
in these updates is about how their customers pay and use their
accounts.
You are entitled to receive a free copy of your credit report
under the Fair Credit Reporting Act.
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Credit Reporting Agencies
Information about you and your credit history is collected by
Credit Reporting Agencies via public records and other reliable
sources. Legally, these agencies make your credit history available
to your current and prospective creditors and employers. It is
not up to the
agency to grant or deny credit.
Credit Report Agency Addresses:
Trans Union
P.O. Box 2000
Chester, PA 19022
1-800-888-4213
Equifax
P.O. Box 105873
Atlanta, GA 30348
1-800-685-1111
Experian
P.O. Box 2002
Allen, TX 75013
1-888-397-3742
Credit Grades
Your loan is often graded by your mortgage company based on
certain credit related items. For example, bankruptcies, payment
history, credit score, and equity position. You are graded with
the highest being an A+ - Good/excellent credit during last 2
to 5 years with no
bankruptcy 2 to 10 years. And the worst being an E - Possible
current bankruptcy, foreclosure and poor payment record with
a a pattern of 30, 60, 90 + late payments.
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Other Credit Factors
Mortgage companies look at other information other than just
your most recent credit score and profile before determining
whether or not to approve your mortgage. The also take into consideration
the following:
* Down Payment Amount
* Mortgage Type
* Income Stability
* Monthly Debts in Relation to Your Income
* Property Type and Value
* Employment History
* Savings Amount and Methods
Know the Score About Your Credit Rating
The importance of keeping tabs on your credit rating is modern
knowledge. A good credit score can make a huge difference on
a monthly mortgage payment and can also mean lower credit card
rates. But who is actually evaluating you? What is considered
a good credit score? Here are some questions and answers to common
questions regarding your
credit rating.
Q: Is the score treated the same for all kinds of loans?
A: Not necessarily. Depending on the loan size and repayment
terms, a mortgage loan will usually require you to have a higher
score score in order to qualify for a better rate than, for example,
a credit card. But the nature of the loan may also play an important
role. Like, a
borrower with a poor credit score applying for a 15 year mortgage
with a 25% down payment may qualify for a better rate than someone
applying for a one year adjustable rate mortgage. Given a particular
score, it is possible to get a prime rate with one lender and
a less favorable with another.
Q: What affects my chances for qualifying for a loan?
A: One component of the credit evaluation is a credit score.
This is especially the case with mortgage and car loans. With
these types of applications, a lender will look beyond your credit
score toward your payment history. Late payments on a credit
report from a small credit card (as opposed to a mortgage) could
work in your favor. Two borrowers both with excellent FICO scores
can get different interest rates because of their existing debt
burdens.
Q: How is a credit score calculated?
A: When making lending decisions, a value is assigned to several
criteria, this a a credit score. This criteria includes the amount
you owe to other creditors other than your mortgage. Scorers
use the information from your credit report and plug it into
formulas that calculate a
value representing the amount of risk you pose to a lender. They
compare this account record to other consumers with similar profiles.
This score (or value) tells lenders if it is wise to extend yo;u
credit.
Q: What can I do to improve my score?
A: It is a good idea to keep up with your credit report at least
once a year by ordering a copy of your credit report and disputing
any inaccuracies. Too many inquiries can have a negative impact.
Late payments will hurt your credit to avoid taking out more
credit than you can handle. Avoid "maxing" your credit
card and try to keep them with low balances. This will improve
your score over a period of time.
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Considering Other Mortgage Programs
There are different types of mortgages to consider when refinancing
your mortgage. Like, a 15-year fixed rate mortgage. With this
type of loan, your mortgage payments are somewhat higher than
a long term loan, but you pay a lot less interest over the life
of the loan and build equity more quickly.
Another option is an adjustable rate mortgage with high or no
limits on interest rate increases. You could switch to a fixed
rate mortgage or even an adjustable rate mortgage that limits
changes in the rated at each adjustment date as well as over
the life of the loan.
If you are not interested in a "floating" interest
rated then get a written statement to guarantee the rate and
the number of points that you will pay at closing. This will "lock" in
that rate which ensures that the mortgage company will not raise
these costs even if the rates increase before you have settled
on the new loan.
The majority of mortgage companies place a limit on the length
of time that they will guarantee an interest rate. You must sign
the loan at that time or lose that particular rate.
Build Home Equity Faster
A good amount of borrowers refinance their loans to shorten
the term of the mortgage. But a shorter term (even with low rates)
means a higher monthly payment. But the benefit with refinancing
is that you will build up equity more quickly and pay less in
interest over the life of the loan.
If you are unable to afford payments on a 15-year mortgage,
then your next best means of building equity is refinancing (for
less than 30 years). You can ask your mortgage broker to customize
your new loan's term to match the remaining years on your old
loan. For example, if you have been paying on your loan for five
years (with a 30-year loan)
then ask for a 25-year loan.
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How to Improve Your Credit
When discussing your options with your mortgage professional,
be sure to tell them if you have had any credit problems. For
the most part, a professional will understand the legitimacy
for credit problems (unemployment, illness, financial difficulties)
and if your problems have been corrected and your current payments
have been on time for at least a year, then your credit may be
considered satisfactory.
Here are four ways to control excess debt:
1. If your credit isn't in too poor of condition, by making
changes in your lifestyle to fit your income, you can reduce
your other expenses. Like taking equity out of your home, selling
your second vehicle, obtaining a loan from a relative, applying
for a no secured signature loan, selling your home and paying
off debts with the proceeds and then renting. Selling family
heirlooms, jewelry and cashing out your 401K/retirement are also
beneficial.
2. If the ones from above are not an option or if your credit is already damaged
then try CCCS (Consumer Credit Counseling Services. CCCS is able to help you
pay off your debt as if you were in Chapter 13 (bankruptcy without having to
file for bankruptcy.
3. You might have to consider claiming Chapter 13 (bankruptcy) if CCCS won't
take you. Chapter 13 will take longer than Chapter 7 but in the long run your
credit will end up better standing. You are allotted five years to pay off
your debts with Chapter 13. The negative side is that the bankruptcy shows
up for the next five years and your credit report shows the bankruptcy for
seven more years after you have finished paying off your debts.
4. Chapter 7 is the best solution for you if you area so far into debt that
you will never be able to repay it. Unfortunately, Chapter 7 is the least desirable
as far as credit is concerned but within six months you are out of bankruptcy
and do not have to repay any debt. The down side of Chapter 7 is that is will
show up on your credit report for the next ten years. This may also make it
harder for you to get financing considering creditors generally frown upon
Chapter 7 bankruptcy.
Let's say your debts are under control now but would like to
improve your bad credit history. At this point, the most important
factor is to make sure your payments are always on time. Use
pre-addressed envelopes enclosed with your statements when mailing
and call the company if you do not receive the statement monthly.
You can also send your payment as early as possible if you carry
a balance. Most companies charge interest daily so the sooner
you send in your payment the less interest you will be responsible
for.
The postmark date does not matter to a creditor, it is the day
your payment is received the matters most. Gibe the post office
five business days to deliver your mail. Late payments - late
fees - higher interest - and/or negative marks on your credit
report!
Open a checking account if you do not already have one, never
send cash, or use a money order and keep the receipt. Remember
to inform your creditors of your new address change if you move.
It is a good idea to make a list of payments and when they are
due. This will help you to keep up with your payments and on
time. Contact your lenders as soon as possible if you think your
monthly payments will be late and arrange a payment schedule.
There could be serious drawbacks from taking money from your
retirement account or tapping the cash value of your life insurance
policy to pay your bills. It is important to get expert advice
before you take any major financial actions.
Credit cards can be a valuable possession to have in the event
of a crisis since they allow you to charge items and pay them
off in monthly payments. However, this can put you in a dangerous
situation if you are not careful and charge more than you can
afford. If credit cards are a necessity for you the choose those
with the lowest interest rates and pay them back as soon as you
can to cut your monthly overall debt payments.
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Credit Profile
A credit profile is a list of what types of credits you use,
whether you've paid your bills on time, and the length of time
your accounts have been open. It is a detailed credit history
as it has been reported to the crediting agencies by the lenders
that have given credit to you. This tells lender how much credit
you have been using and whether you are seeking a new source
of credit. Another words, it is a detailed description of how
you paid back the companies you have borrowed money from and
if you have met other financial obligations.
Here is a list of categories usually listed on a credit profile:
* Inquiries
* Credit Information
* Identifying Information
* Employment Information
* Public Record Information
These are items that should NOT be included on your credit profile:
* Your Income
* Your Race
* Your Political Preference
* Your Religion
* Your Criminal Record
* Your Health
* Your Driving Record
Should I Consolidate My Debt?
By combining your bills into a single source, you will discover
your monthly savings. With a tax deductible consolidation loan,
you can eliminate high interest rate credit card and installment
loans. Consult your tax advisor and they will assist you in figuring
out how long before your savings equal the cost of obtaining
a new consolidation loan. Ask how long it will take to pay off
the loan if consolidated if you are to make a payment equal to
your total monthly payments. Just keep in mind that these calculations
are only estimates. Taking out a home equity loan could increase
the number of monthly payments as well as the total amount paid
when comparing to your current situation.
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Choosing a Loan Program
There is not an easy answer to this question. There are many
factors involved when choosing the right loan for you. For example:
* Are you comfortable with your mortgage payment changing?
* How long do you intend on keeping your house?
* What is your current financial situation like?
* How do you expect your finances to change?
A good example would be an adjustable rate mortgage. It may
get you started with a lower monthly payment than a fixed rate
mortgage but your payments could get higher when the interest
rates change. Or a 15-year fixed rate mortgage, it can save you
many thousands of dollars in interest payments over the life
of the loan, however, your monthly payment will be higher. To
ensure you make the right decisions, discuss your financial plans
and finances with a mortgage professional.
Conventional and Jumbo Loans
Fannie Mae and Freddie Mac are government sponsored entities
(GSEs) that secure conventional loans. This loan can be made
to purchase or refinance a home with the first and second mortgage
on a single family to four family homes.
Generally, Fannie Mae and Freddie Mac first morgtgage - single
family loan limit is $359,650 in 2005. This loan limit is reviewed
once a year and if necessary will change to reflect changes in
the national average price for single family homes. As of January
1, 2005 the loan limit applies to all conventional mortgages.
2005 Conventional Loan Limits
First Mortgages
* One-family loans: $359,650
* Two-family loans: $460,400
* Three-family loans: $555, 500
* Four-family loans: $691,600
Note: First mortgages on properties in the U.S. Virgin Islands,
Guam, Alaska, and Guam are 50 percent higher for first mortgages
on maximum original loan amounts.
Second Mortgages
* $179,825
* $269,725 in the U.S. Virgin Islands, Hawaii and Alaska
Jumbo loans are loans which are larger than the limits set by
Fannie Mae and Freddie Mac. They are not funded by the two government
entities so they usually carry a higher interest rate and other
underwriting requirements. If your purchase or refinance balance
is
above $359,650 a wise approach to lower your overall interest
payments is to use a combination of both first and second trust
money. This is referred to as an 80/10/10, 80/15/5 or 80/20.
Fannie Mae and Freddie Mac have other loan programs for low
to no down payments, not just the common loan structures such
as adjustable rate, fixed rate and balloon loans. Like Community
lending and affordable housing initiatives, home improvement
and reverse mortgages, and construction to permanent.
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Subprime Loans
There is a chance you will not qualify for a conventional loan
or a low down payment loan offered by FHA and VA if you have
bad credit. If this is the case then you may want to consider
a subprime mortgage. Subprime loans generally require a larger
down payment and higher interest rates because of the higher
risk associated with a a borrower that has bad or poor credit.
Study the terms and conditions of a subprime loan to see if
this loan is suited for your personal and financial needs. It
is an option for you to get into the home you want at today's
price. A subprime loan is a good way for you to refinance your
home if you already own it and clean up your credit so that you
are able to ultimately refinance into a lower rate at a later
time. If you do already have a mortgage you can refinance more
than what you owe on the house and get cash back for the equity
that you already have in the home. This cash can be used to clean
up a poor credit history, pay off higher rate credit cards, bankruptcy,
liens and collections or foreclosures.
Subprime loans are generally a short term solution when purchasing
or refinancing that last approximately 2-4 years. This gives
you time to clean up your credit and qualify to refinance in
the future with a lower interest rate.
Fifteen years ago it was a lot harder to obtain a mortgage if
the borrower did not qualify for a VA, FHA or conventional loan.
Because of this, subprime loans were developed to help borrowers
with a higher risk obtain a mortgage. Most borrowers intend on
paying their bills on time and do not intend on acquiring bad
credit. But sometimes unfortunate events take place such as a
family illness or loss of job leading to late or missed payments
or even foreclosure and bankruptcy. Nowadays there are mortgage
companies that take these events into consideration and try to
accommodate the borrower's needs, but with a
price.
Lenders are not going without being compensated for risk and
this is where the interest rate comes into place. If the borrower
appears to be at a higher risk then the interest rate will be
higher for the privilege of borrowing their money. Likewise,
the lower the risk, the lower the interest rate. The borrower's
payment and credit history is the most important factor when
being evaluated for a subprime mortgage. Employment history,
type of property and assets, and debt to income level are additional
factors taken into consideration when determining if, in fact,
the borrower qualifies for a subprime, conventional or government
loan.
FHA Single Family Mortgage Insurance Program
By lowering some of the costs of mortgage loans, moderate income
families are able to become homeowners with the FHA's mortgage
insurance program. Because of this insurance program borrowers
that are otherwise creditworthy and may not meet underwriting
requirements are able to get a loan. The loan company is therefore
protected against loan default on mortgages for the properties
that meet specified minimum requirements which include single
and multifamily properties, some health related facilities, and
manufactured homes.
The successor in the program that helped save homeowners from
default in the 1930's is Section 203(b) which is the centerpiece
of FHA's single family insurance programs. This program helped
to open the suburbs for returning veterans in the 1940's and
1950's and shaped the modern mortgage finance system. FHA One
to Four Family Mortgage Insurance is still and important tool
that can help expand home ownership opportunities for first time
buyers/borrowers who would not ordinarily qualify for conventional
loans with affordable terms. This is also true for those who
live in the under served areas, the Federal Government helps
get loans in those areas where mortgages may be harder to get.
This program insured more than 790,000 homes in 1997 valued at
almost $60 billion. Currently, FHA insures about 7 million loans
valued at nearly $400 billion. FHA's Mutual Mortgage INsurance
Fund protects these obligations which is sustained entirely by
borrower premiums.
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The Important Features of Section 203 (b)
Some fees are limited - Because of FHA rules, limits are put
on some of the fees that mortgage companies may charge in making
a loan. A good example o this would be that the loan origination
fee charged by the mortgage company for the administration cost
of processing the loan may not exceed one percent of the amount
of the mortgage.
Down payment requirements can be low - Conventional mortgage
products frequently require down payments of 10 percent or more
of the purchase price of the home. In contrast, single family
mortgages insured by FHA under Section 203 (b) make it possible
to reduce down payments to as little as three percent. Because
of this, FHA insurance allows the borrower to finance about 97
percent of the total value of the home purchase through their
mortgage (in some cases not all).
Many closing costs can be financed - For the most part, the
borrower is responsible for paying, at the time of purchase,
any closing costs or fees associated with most conventional loans
which is generally 2-3 percent of the price of the home. But
with program, the borrower is allowed to finance many of these
costs which means less of the upfront costs of buying a home.
However, FHA mortgage insurance is not free. The borrower is
responsible to pay an upfront premium (which can be financed)
at the time of purchase as well as monthly premiums (that are
not financed) but that are added to the regular mortgage payment.
HUD sets limits on the amount that may be insured - To assure
that its programs serve low and moderate income borrowers, FHA
has set limits on the dollar value of the mortgage loan.
Who is Eligible for a VA Loan?
Veterans of World War II and later periods are eligible for
VA loan benefits. The had to have served on active duty and were
discharged under conditions other than dishonorable. Veterans
of the following must have at least ninety days active service.
World War II - September 16, 1940 to July 25, 1947. Korean conflict
(June 27, 1950 to January 31, 1955. And Vietnam era August 5,
1964 to May 7, 1975. Those veterans that served only during peacetime
periods and active duty military personnel must have had more
than 180 active service. Veterans must have completed two years
of continuous active duty or the full period for which you were
called in the Gulf War. If you are currently on active duty (not
training) you will be eligible after having served 181 days.
An unremarried spouse of a veteran who died while in service
or from a service connected disability may also be eligible.
Also a spouse of a serviceperson missing in action or a prisoner
of war.
There are other positions in certain United States organizations
like Air Force, Public Service officers, cadets at the United
States Military, Coast Guard Academy, midshipmen at the United
States Naval Academy, officers of National Oceanic & Atmospheric
Administration, and merchant seaman with WW II service that may
also be eligible. Certain United States citizens who served in
the armed forces of a government allied with the United States
in WW II may also qualify.
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Obtaining a VA Loan
VA Appraisal - Certificate of Reasonable Value
The appraiser's estimate of the value of the property to be
purchased is known as the CRV or certificate of reasonable value.
The first step in getting a VA loan is requesting an appraisal
to be assured the loan amount does not exceed the CRV. The buyer,
seller, lender or real estate agent can request the ap;appraisal
by completing VA Form 26-1805 - Request for Determination of
Reasonable Value. VA and HUD/FHA (Department of Housing and Urban
Development/Federal Housing Administration) use the same appraisal
forms. The form can then be sent to the Loan Guaranty Division
at the nearest VA office for processing or a telephone request
can be made to the Loan Guaranty Division of assignment of an
appraiser. Contact your local VA office for information on their
procedures. The appraiser then bills the
requester. In some circumstances the HUD conditional commitment
can be converted to a VA CRV if the property was appraised under
the HUD procedure if the property was appraised recently. The
local VA office will have more information explaining the rules
and process.
Keep in mind that the VA appraisal is not an inspection, they
are simply estimating the value of the house. It is important
to hire professional inspectors to help detect any defects. VA
will guarantee the loan but not the condition of the property.
Application
The VA application process is the same as any other type of
loan. Conventional loans use the same form as HUD/FHA and VA
loans. The lender then checks on your credit report to see that
all of your obligations are being paid and on time and verifies
your income and assets. If the appraised value of the home is
enough to cover the loan and the credit information is accepted,
then the loan will be processed under VA's automatic procedure.
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VA Loan Questions and Answers
Q: How large of a loan can I get?
A: Private lenders guarantee VA loans like mortgage companies,
savings & loans, and banks to eligible veterans for the purchase
of a home to be used as their own personal occupancy. A veteran
must apply to a lender in order to get a loan. Once approved
the VA will guarantee just a portion of it to the lender. The
guaranty is protection for the lender against loss up to the
amount guaranteed. This allows the veteran/borrower more favorable
financing terms. Lenders generally limit VA loans to $359,650.
It is possible for qualified veterans to obtain no down payment
if the loan is under this amount. Since a veteran's basic entitlement
is $36,000, lenders will generally loan up to four times a veteran's
available entitlement without a down payment. This is provided,
of course, the veteran is income and credit qualified and the
property appraises for the asking price.
Q: Can I get a VA loan if I have had a bankruptcy in the last
few years?
A: If a veteran has had a bankruptcy less than three years ago
he/she would generally not be considered a satisfactory credit
risk unless: the bankruptcy was caused by circumstances beyond
the control of the borrower (which would have to be verified)
or the spouse or spouse of the veteran has obtained items on
credit since the bankruptcy and has paid the obligations in a
satisfactory manner for a continued period. A bankruptcy five
years and older may be disregarded if discharged and a bankruptcy
discharged three to five years ago is give some consideration
when underwriting the loan. These are a few of the minimum standards
that mortgage companies must keep when determining a VA loan.
However, 95% of the time companies make a decision to approve
a loan without VA's prior approval. Mortgage companies have stricter
credit standard than those mandated by VA because they have money
at risk in giving you a loan.
Q: May a veteran join with a non veteran who is not his or her
spouse in
obtaining a VA loan?
A: The answer is yes. However, the guarantee is based purely
on the veteran's portion of the loan and not the non veteran's
portion of the loan. Not all mortgage companies are willing to
accept applications for joint loans of this type so you might
have to shop around in this particular situation. Mortgage companies
will submit joint loans to VA for approval before they are made
and will likely require a down payment to cover risk on the non
guaranteed, non veteran's portion of the loan. Even though both
incomes can be used to qualify for the loan, the veteran's income
must be sufficient to repay at least that portion of the loan
related to the veteran's portion of the property and the rest
can be covered by the non veteran's income.
Q: Why do I have to pay a fee for a VA home Loan? Since I paid
a fee for my first loan, why is there a larger fee for my second
loan?
A: The law requires a VA funding fee which is currently two
percent and no down payment loans. This is to enable the veteran
(the borrower) to contribute toward the cost of this benefit
by reducing the cost to taxpayers. There is a three percent funding
fee for second time users who do not make a down payment. The
reason for a higher fee for a second time user is for the simple
fact that these veterans have already had a chance to use this
benefit once meaning they have already had the opportunity to
accumulate equity or save money towards a down payment. If a
second time user makes a down payment of at least five percent
they pay a reduced fee of 1.5 percent, the same as first time
users making the same down payment. With a ten percent down payment
the fee drops to 1.25 percent. The fee may be financed in the
loan so the effect of the funding fee on a veteran's financial
situation is minimized.
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Home Equity Credit Line of Credit (HELOC)
Home equity lines may be a useful source of credit if you need
to borrow money. This is a good way to acquire large amounts
of cash with a fairly low interest rate and provide you with
certain tax advantages unavailable with other kinds of loans.
Keep in mind, your home will be used as collateral for the loan
putting your home at risk if you are late or cannot make your
monthly payments. Some loans have a large final payment (known
as a balloon payment) and may lead you to borrow more money to
pay off this debt. If you do not qualify for refinancing your
home may be in jeopardy! If you decide to sell your home it may
be required that you pay off your credit line at that time. With
easy access to cash through an equity loan, you may find it easier
to borrow money more freely.
But there are other options to investigate when borrowing money
from a lending institution. Like a second mortgage installment
loan. Second mortgage money usually is loaned in a lump sum (these
plans still place an additional mortgage on your home) rather
that writing checks for your advances that are available to you
on an account. Second mortgage loans generally have fixed payment
amounts and fixed interest rates.
Exploring credibleness that do not use your home as collateral
is another option. These loans are available using unsecured
credit liens that let you write checks or using your credit card.
You can also ask the mortgage company about loans for specific
items like college tuition or cars.
Length of a Second Mortgage
Mortgage loans vary in length anywhere from one year to twenty
years. These options can be discussed with your mortgage company
and they can help you to decide which term best suits your personal
and financial needs. For example, if you are borrowing $25,000
to make adjustments to your home, you may not want a loan that
has to be paid off in a couple of years because they monthly
payments will be too high.
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Second Mortgage Payment Calculations
Your mortgage company should be able to tell you in advance
how much your monthly payment will be and specifically what it
will cover. Some loans are interest only on the borrowed amount.
With these loans your monthly payments do not reduce the principal
amount of the loan, meaning, you are required to pay back the
entire borrowed amount at the end of the loan period. These loans
are known as "balloon loans" and if your loan has a "balloon" payment
you should plan ahead on the arrangement of repaying the entire
amount at the end of the loan term. Other loans are monthly payments
on the principal and interest.
With a "home equity line", the mortgage company is
not required to give you an exact amount of the monthly payment
(but must explain how it is figured). There is no set monthly
payment because the borrowed amount will vary and your outstanding
balance will change if you use the line of credit.
Second Mortgage Costs
Most companies charge a fee for lending you money and that fee
is usually a percentage of the loan and is sometimes referred
to as "points." One point per percent of the money
they lend to you. For example, on a $10,000 loan with an eight
point fee, you would pay $800 in "points." Each mortgage
company charges points in different variations so research before
you settle on one company. Try to bargain for a lower fee or
shop around until you find a mortgage company offering a lower
fee and even then it is a must you get the amount of the fee
in writing before you take the loan. Many states regulate the
amount of fees that may be charged on a second mortgage loan
so you can check with the consumer protection office or baking
commissioner in your state to determine what their limit is.
Fixed Rate Mortgages
The most widely used mortgage program is where your monthly
payments for interest and principal never change. Even when property
taxes and homeowner's insurance increases, your monthly payments
will be stable. Fixed rate mortgages are available for 10 years,
15 years, 20 years, and 30 years. There are shorter loans which
are called "biweekly" mortgages - they shorten the
loans by calling for half the monthly payment every two weeks.
You make 26 payments in a year (since there are 52 weeks in a
year) or 13 months" worth, every year.
There are two features of fixed rate fully amortizing loans.
The most distinctive feature is the fact that the interest rate
remains fixed for the life of the loan. The payments remain level
for the life of the loan and are structured to repay the loan
at the end of the loan term. 15 and 30 year mortgages are the
most common fixed rate loans.
A large percentage of the monthly payment is used for paying
the interest during the early amortization period. More of the
monthly payment is applied to the principal as the loan is paid.
It takes 22 1/2 years of level payments to pay half of the original
loan amount
with a typical 30 year fixed rate mortgage.
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Adjustable Rate Mortgages (ARMS)
An adjustable rate loan begins with an interest rate that is
usually lower (2-3 percent) than a comparable fixed rate mortgage.
Because of this you could buy a more expensive home. However,
depending on changing market conditions the interest rates change
on a yearly basis. If the rates go up then your monthly mortgage
payment goes up as well
as if the interest rates drop, so will your payments.
Some mortgages are a combination of aspects from both an adjustable
rate mortgage and a fixed rate mortgage starting at a low fixed
rate for seven to ten years then adjusting to market conditions.
Your mortgage professional will be able to answer all of your
questions
regarding special mortgage programs set up to fit most financial
situations.
Introductory Rate ARM's
Most ARMs (adjustable rate loans) start with a low introductory
rate and is usually good from one month to up to ten years. This
rate could be as low as 5.0 percent below the current market
rate of a fixed loan. Generally, the lower the start rate is
the shorter the time before the loan makes its first adjustment.
Margin
The margin is one of the most important facets of ARMs. The
interest rate that you pay is determined by adding it to the
index. The index and the margin added is known as the fully indexed
rate. Like if the index is currently 5.50% and your loan has
a margin of 2.5% then your fully indexed rate is 8.00%. Margins
on loans generally range from 1.75% to 3.5% depending on the
amount financed and the index in relation to the property value.
Index
When referring to ARMs, the index is the financial instrument
that the loan is "tied" or adjusted to. The most common
are LIBOR (London Interbank Offered Rate), Prime, the 1-Year
Treasury Security, 6-Month Certificate of Deposit (CD), and the
11th District Cost of Funds (COFI). Depending on the conditions
of the financial markets, each of
these indices move up or down.
Payment Caps
Some loans may have a payment cap rather than the interest rate
cap. These loans can lead to deferred interest or negative amortization
by reducing payment shock in a rising interest rate market. The
loans usually cap your annual payment increases to 7.5% of the
previous
payment.
Interim Caps
Interim caps are carried in all adjustable rate loans. It is
standard for most ARMs to have interest rate caps of six months
or a year or some up to three years. Interest rate caps can keep
your interest rate higher than the fully indexed rate if rates
are falling rapidly but are
beneficial in rising interest rate markets.
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Lifetime Caps
Most ARMs have a lifetime interest rate cap or a maximum interest
rate cap. There is generally a higher margin on loans with low
lifetime caps and lower margins on a higher lifetime cap. The
lifetime will vary for each company and loan depending.
Applying for a Mortgage
Step 1: Research
*Start your research process
*Get an idea of what ballpark your loan is in
*Determine an estimate of what you can afford
Step 2: Pre qualify
*Search and compare mortgage lenders
*Once you have settled on a lender set up an appointment
*They can help you to determine what kind of house you can afford
and
the best loan for you
Step 3: Complete Mortgage Application
*Applications are available online
*Sign a release allowing a lender to research a credit check
Step 4: Pre-Approval
*Your information will be confirmed
*Your credit report will be checked
*The loan is approve, subject to appraisal
*Being pre-approved will speed up the process when you find your
home
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Choosing a Mortgage Company
When you begin shopping for a loan you can work with a mortgage
broker who represents many individual lenders or with the lender
directly. Direct lenders have in-house programs and lend with
their own money so they make the final decision on your application.
Along with shopping for a source, you will be shopping for the
total cost of the loan, including the interest rate, points (each
part is one percent of the amount you borrow), fee, prepayment
penalties, the loan term and other items. Brokers are knowledgeable
about many lenders and act as an intermediary between the borrower
and the lender and can help you choose the loan program that
is best for your financial needs. If you have special financing
needs a broker might be a better choice for you.
Steps to Take After Being Denied a Mortgage Loan
Here are a few steps you can take if you are turned down for
a loan:
If you are turned down for a credit, lenders are required by
a federal law (The Equal Credit Opportunity Act) to give you
a written statement. The document must include the specific reasons
why you were denied credit and information on how to obtain those
reasons. If a credit report was used to make the denying decision.
You may request more detailed information if you do not understand
the reasons given for turning down your application. The decisions
involved in determining good or bad credit involves many factors
so it can be hard to understand why it may not have been approved.
It is okay to ask questions since the information you receive
may help you to improve your credit to enable you to qualify
in the future. You may not qualify for something as simple as
not being at your address or job for the required amount of time.
Or you may not meet the creditor's minimum income requirements.
You are entitled to a free copy of your credit report if yo
are denied for a loan because of poor credit. You have sixty
days to request it so order it right away. Read your report carefully
and thoroughly to ensure it is accurate. Check for any errors
and dispute them with the credit report agency if there are any
discrepancies. If this error led to the refection of your application,
ask the credit bureau to send a corrected copy to the lender.
Keep in contact with your lender to determine if the application
can be reevaluated.
Lastly, try again! Each lender has different credit standards
so just because you did not get a loan from one financial institution
it does not mean that you cannot get one at another. Try again
at another company just do not try more than four or five times
within a six month
time period. Too many inquiries leave a bad reflection on your
credit report.
You might want to consider loan programs for low to moderate
income borrowers with lower down payment requirements like FHA
loans or VA loans if your loan application was rejected because
of insufficient income. This may help you to afford the house
you want even though you do not have the funds for closing costs
and the down payment.
If you request the loan amount that is larger than 95% of the
appraised
property value, then it is likely that you will not get the loan.
If
this is the case you can make an additional down payment to cover
the
difference between the appraised values and the purchase price.
Another option is renegotiating with the seller for the purchase
price
to lower the amount which will lower the amount of the loan.
Or if you
feel like the appraiser undervalued the property suggest that
the
lender reexamine the appraisal.
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Low Down Payments and Mortgage Insurance
If the homeowner stops making payments on the loan, mortgage
insurance is used to protect the mortgage company against financial
loss. If the event that the homeowner does not pay his or her
payments, a default occurs and the home goes into foreclosure
and both the homeowner and the mortgage insurer lose. To protect
themselves in this event,
insurance companies usually require insurance on low down payment
loans. The mortgage insurer is then responsible to pay the mortgage
company's claim on the defaulted loan and the homeowner loses
the house and all the money invested into it. This is why is
it very important to not overextend yourself in a loan at the
time of purchase.
Mortgage insurance is available to all of whom offer mortgage
loans to home buyers including mortgage bankers, savings & loans,
and commercial banks. Even though the mortgage insurance is paid
by the borrower (the home buyer), the mortgage insurer works
directly with the mortgage company.
Mortgage insurance and credit life insurance are not the same.
Mortgage life insurance is the type of policy that repays an
outstanding mortgage balance upon the death of the person who
took out the insurance policy.
The Secondary Market
The requirements of investors in the mortgage market drive the
mortgage company's decision to use mortgage insurance. With the
possibilities of losses, major investors require mortgage insurance
on all of the loans made with low down payments.
Federal National Mortgage Association (Fannie Mae), Government
National Mortgage Association (Ginnie Mae), and Federal Home
Loan Mortgage Corporation (Freddie Mac) are primary investors
in home loans. Fannie Mae and Freddie Mac help keep money available
for home across the U.S. by purchasing and selling residential
mortgages. Ginnie Mae, however,
does not actually buy mortgages. Instead, it adds the guarantee
of the full faith and credit of the U.S. Government to mortgage
securities issued by mortgage companies.
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Government Insurance and Private Insurance
Now you have a basic understanding of mortgage insurance, how
it works, and why it is necessary. Now let's look at the basic
kinds of mortgage insurance. There are two ways a low down payment
mortgages can be insured. Through the government or through a
private sector. Mortgages backed by the governments are insured
by the FHA (Federal Housing Administration, FmHA (Farmers Home
Administration, and VA (Veterans Affairs).
VA and FmHA loans are much more targeted than the FHA loan.
The VA program is limited to eligible veterans and reservists
that are qualified. Your mortgage professional will have more
information regarding the specialized qualifications needed before
you apply for the VA loan. The FmHA loan insures for the construction
and purchase of homes in rural areas.
A conventional mortgage is a home loan not guaranteed by the
government including those guaranteed by private mortgage insurers.
Choosing conventional financing is an alternative to a home loan
backed by the government.
Your mortgage professional will play an important role in helping
you to decide which insurance is best for your needs which is
why it is important for you to choose an experienced broker that
specializes in his/her field. Although private and government
insurance are based on the same concept of allowing families
to get into homes with less cash down payment, there are many
differences between the two.
Private mortgage insurance companies make it a policy that home
buyers must make a down payment of at least 5% of the home's
value to be considered. However, there are special programs whereas
the down payment requirement allows the buyer to use a grant
to cover 2% of the 5% down payment required by private mortgage
insurers. This grant or
"
gift" may come from an outside source such as a family member,
organization, friend or community group.
There is a wide variety of home loans available with no preset
limit on the loan amount at private mortgage companies. With
such a wide variety of loans available to the public, home buyers
have the freedom to shop around and find the loan that best suits
their needs. It is a
good idea to meet with companies early in the home buying process
to compare the types of mortgages available and compare price
and terms. Your mortgage professional can handle all of the arrangements
concerning your FHA or private mortgage.
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Foreclosure Tips
Here are some tips on buying a foreclosure property below market
value:
Foreclosure properties can be a good investment or give home
buyers a much more affordable option than traditional properties.
Some web-based services give consumers access to foreclosure
and pre-foreclosure information that was previously available
only to
professional real estate brokers and investors. Now, home buyers
can use these services to identify potential home purchases.
1. Learn about the different types of foreclosure properties
and the
foreclosure process
There are three types of foreclosure properties representing
different stages in the foreclosure process: NTS (notice-of-default)
and NOD (notice of trustee sale), which are both pre-foreclosure
properties and real-estate-owned (REO), a foreclosure property
which has been repurchased by the bank.
2. Secure financing early
The buyer should be pre-qualified before engaging in discussions
with the seller. If the buyer is in a financial position to purchase
the property he or she is in a stronger position to negotiate.
It is better to work with a lender who is experienced in foreclosures
so he
or she can guide the buyer through certain steps.
3. Engage a real estate agent as a "buyer's representative"
Using the right real estate agent will make the whole transaction
easier for the buyer. A "buyer's representative" have
the home buyer's interest at heart and, therefore, will find
the right property and will negotiate the best price for their
client. Look for an agent that is well experienced in foreclosures
and knowledgeable in their abilities to close a deal, and have
access to lenders, attorneys, mortgage and and title professionals.
4. Do your homework
Purchasing foreclosure properties is riskier thank buying traditional
real estate property but offer much higher potential savings.
Before
purchasing a home that has been foreclosed be sure to:
Determine the property value - look at the original purchase
price,
recent comparable property sales, and determine the current value
of
the property.
Identify desirable neighborhoods - identify neighborhoods where
you
would like to live to help minimize the search for your realtor.
Run a legal investing report - Make sure the property is free
from any
tax liens, bankruptcies, or other financial liabilities.
Leverage your timing - know when the property is going to be
auctioned
this gives you more of a bargaining chip when negotiating.
Assess the condition of the property - visit the property, review
pest
and structural reports, ask your realtor's opinion, determine
how
much rehab
budget you'll need, and be sure the property is in acceptable
condition.
Home Buyer Checklist
There are many important factors to consider when choosing a
home.
Here is a checklist that help help you evaluate the neighborhood
as you
choose a new home
Property Address
Asking Price
Real Estate Taxes
The Neighborhood
Near Work Near Schools Near Shopping Near Churches Near Schools
Near Expressways Near Public Transportation Garbage Collection
Street
Lights Sidewalks Streets Well Maintained Parks Near Airport
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