Mortgage Blog

Fair, Isaac & Co (FICO) says you are a 640, what does it mean? Your FICO number is a major factor in in your viability as a borrower. It’s based on a scoring system, built by the three major credit bureaus (Equifax, Trans Union, & Experian), that evaluates relative layers of risk in your past credit history. Each of the three bureaus judges you differently, then FICO uses their own algorithm to combine these three reports into one score.

How exactly the score is established is still double secret probation in it’s nature. For the most part though, it does a pretty good job grading your risk level.

FICO scores vary from around 375 to 900 points. The majority of people have a score in the 600’s. FNMA and most lenders consider a 620 or above score as “good” credit. With scores above 680, borrowers begin to qualify for reduced documentation loans at the same rates as regular “good” borrowers get for conventional loans. Borrowers with credit below 620 start to pay higher and higher rates as the score falls. If you score is blow 580, it’s time to start paying your bills on time mister!

The one good thing a borrower with a low score can look forward to is, that FICO’s are heavily weighted towards your most current history. Start paying off those debts, and your score will climb in no time. To get a free copy of your credit score, visit AnnualCreditReport.com

I saw this over at Seattle’s Rain City Real Estate Guide: Been Some Time. This scam combines two of the most evil actions in the history of Man. Credit fraud… and jury duty

You found the house of your dreams, the perfect rate on a loan, and a loan officer that’s saying all the right things. Then, just when you thought it would all sail through, a big ole’ freaking monkey wrench gets thrown into the mix. Believe me, this happens far more than it should. However, you can protect yourself from most unforeseen problems by taking these three proactive steps in arranging the financing of your dream home.

1. Get pre-approved (not pre-qualified) before you start shopping for a home. Up until the advent of automated underwriting, a typical borrower would meet with a loan officer (LO) for an initial interview. The LO would look at your credit, income, and debts, then make an educated guess as to how big a loan you would qualify for. This was called a pre-qualification. The problem is, their opinion of what you qualify for may not jive with the actual decision maker’s (underwriter) judgment. Traditionally, the underwriter didn’t see the loan until well after the contract was signed, the earnest money secured, and your own personal heart strings were tired to the purchase of the home.

Today though, there’s a better way. During the late 90’s lending institutions worked to develop risk modeling software systems called “automated underwriting”. These systems allow your LO to take all that same information from your interview, input it into their lenders web site, and get back a conditional approval in less than a minute. Now, so long as all the information you submitted can be properly verified, the only real variable will be the home itself.

2. Shop around. Tell the real estate agent that you want to speak with two or three different mortgage companies. It may also pay to find at least one on your own. Usually, you will get three very similar offers. Sometimes, you’ll get one offer that is far better or worse than the other two. The odd offer (even if it’s better) is usually the one you should eliminate first.

3. Get it in writing. Never sign something that doesn’t jive with what the LO has promised. If the LO has promised one thing, then asks you to sign something that says different, it’s the signed document that trumps the rest. Insist on both good faith estimates and rate lock agreements in writing.

Rates are moving higher. They have been slowly ticking up for several months and will likely continue to do so. New home sales have cooled, which is easing the rise in mortgage rates.

See the lenderama market update for details.

The Option ARM, named by the industry leader, Washington Mutual, has become a key niche product in the mortgage industry. Unfortunately, it’s the most misrepresented product as well. Forget about what those adds say. The rate is a teaser. It only lasts for 1-3 months. After that, the rate goes up. Many borrowers get confused because the minimum payment does not go up for a year. This is different from the rate however. As soon as the rate goes up, the minimum payment no longer is enough to pay the interest on your loan. Every month you make the minimum payment, your loan amount goes up! Still, this program has many advantages for the right customer.

Option ARMs offer borrowers flexibility when qualifying for a loan, and puts them in control of their monthly finances. This product gives borrowers up to four payment options each month:

Minimum payment: The smallest payment you can make. It does not cover the interest due for the month and you loan amount goes up every time you make this payment. Generally, this payment changes annually and is calculated using the initial interest rate for the first 12 months. After that, the minimum payment is usually recalculated based on the outstanding principal balance, remaining loan term and prevailing interest rate. A payment cap limits how much this payment can increase or decrease each year.

Interest-only payment: Keeps payments manageable and allows you to break even on the loan. You do not pay any of the principal off, but you principal does not go up either.

Fully amortized payment: This is the payment that’s similar to a tradition 30yr loan. It covers the interest and pays down the principal. It’s calculated each month based on the prior month’s interest rate, loan balance and remaining loan term.

15-year payment: This payment let’s you pay off the loan “twice as fast” as the 30yr. In reality, this is a good payment to use when times are good in order to make up for the times when you made the minimum, or interest only payment.

This is a form email I send to my clients at the beginning of our relationship. It helps for new borrowers to be as prepared and informed as possible during what is likely to be their largest financial transaction to date. Hopefully, you will find it informative as well.

Basic Overview of the Loan Process

1. Organize your personal financial documents
2. Be prepared to provide two years W-2 and one month of paystubs If you are salaried ,OR two years tax returns and a YTD profit and loss statement if you are self-employed
3. If you own rental property, rental agreements and two years tax returns may be required.
4. Also be prepared to provide three months bank statements for each bank, stock and mutual fund account.
5. Provide recent copies of any stock brokerage or IRA/401K accounts that you may have.
6. If you are requesting a cash out refinance please provide a letter explaining what you plan to do with the proceeds.
7. Provide a copy of divorce decree if applicable.
8. If you are NOT a US citizen, provide us with a copy of your green card (front & back), or if you are NOT a permanent resident provide us with your H-1 or L-1 visa.

Pre-Qualification vs. Pre-Approval

Getting qualified before you apply for a loan can help you understand how much you can borrow.

When buying a house, you may get pre-qualified or pre-approved. You can typically get pre-qualified over the phone or on the Internet in a few minutes. A pre-qualification is not as beneficial as a pre-approval where you have to go through a more rigorous process which includes verification of your credit, income, assets and liabilities. It is highly recommended that you get pre-approved before you start looking for a house. This will help you:

* Find out the maximum house you can buy, so you don’t waste time looking for properties you can not afford.
* Puts you in a stronger position when you are negotiating with the seller, because the seller knows that your loan is already approved.
* Helps you close quickly, since your loan is already approved.

Get Approved

Once your loan application has been received we will start the loan approval process immediately. This involves verifying your:
* Credit history
* Employment history
* Assets including your bank accounts, stocks, mutual fund and retirement accounts
* Property value

Based on your specific situation, additional documents or verifications may be required. To improve your chances of getting a loan approval:

1. Fill out the loan application completely.
2. Respond promptly to any requests for additional documents. This is especially critical if your rate is locked or if you plan to close by a certain date.
3. Do not make any major purchases. Do not buy a car, furniture or another house till your loan is closed. Anything that causes your debts to increase might have an adverse affect on your current application.
4. Do not move money into your bank accounts unless it can be traced. If you are receiving money from friends, family or other relatives, please contact us.
5. Do not go out of town around the closing date. If you do plan to be out of town when your loan is expected to close, you may sign a power of attorney, to authorize another individual to sign on your behalf.

Closing The Loan

After your loan is approved, you will be required to sign the final loan documents. This will normally take place in front of a notary public. Be prepared to:

1. Bring a cashiers check for your down payment and closing costs if required. Personal checks are normally not accepted.
2. Review the final loan documents. Make sure that the interest rate and loan terms are what you were promised. Also, verify that the name and address on the loan documents are accurate.
3. Sign the loan documents.

Your loan will normally close shortly after you have signed the loan documents. On refinance transactions, federal law requires that you have 3 days to review the documents before your loan transaction can close.

Hi, my name is Todd Carpenter. I’m the creator of a network of mortgage blogs, and a mortgage professional with nearly two decades of divergent experiance in this field. I have worked for Mortgage Brokers, Bankers, Lenders, and Web Designers. Like this blog’s mascott, my career is a mogrel crossbreed of just about every sector of the mortgage industry. In January of 2005, I built lenderama.com a blog written to other mortgage professionals with news, training, and opinions about mortgages. LoanBark! is my effort to bring this same expertese to the consumer.