Mortgage & Financing

Looking for a new home can be an exciting time, but you need to be sure to do your homework. Talk to a Mortgage Representative about various lending programs, rates and terms in the marketplace.

• Prequalify for a maximum mortgage amount before you go looking for a home. Don't be afraid of asking questions; the Mortgage Representative is there to assist you.
• Determine which home details are truly needed--4 bedrooms vs 3 bedrooms, parking facilities, fireplace, multiple bathrooms, etc.--and list them in order of importance.
• Location, location, location. Determine how far you would like your daily commute to and from work to be. How close are the schools, and how are they ranked within the state guidelines?
• Learn the makeup of the neighborhood. Are there other families similar to yours, (possibly with children about the same ages of your children), or are the neighbors "empty nesters?"
• How many years are you expecting to remain in the home, and how many years do you expect to remain in the work force? Is there room to grow? Are you anticipating enlarging your family? What resale values do you want to achieve?
• What ever house you select, always obtain a home inspection from a reputable company. Appraisals are not home inspections. This should reveal necessary repairs which may otherwise not be noticeable, (new roof, water damage, etc.).

Generally speaking, the following items are needed to determine your qualifications for a mortgage:

• One month's pay stubs.
• Two years' W-2s.
• Three month's bank statements.
• List of all outstanding debts with names, account numbers and outstanding balances.
• Name, address and telephone number of your landlord for the past two years.
• Your Mortgage Representative can tailor the specific documentation to your particular mortgage application.
• And finally, maintain a listing (diary), of all homes which you've previewed, and list them in the order of acceptability to your needs and requirements.

The Purpose of the Credit Score

The purpose of a credit score is to predict the likelihood that a person will get a 90 day late within the next 24 months. With the FICO model, scores will range from 300 to 850. The top 4 factors that affected the score will be listed under the score. The median credit score is 720. 15% of the population is above 790. 1% of the population is below 500.

• What You Need To Get a Credit Score

  • One open trade line.
  • The tradeline must be 6 months old.
  • The tradeline must be updated by the creditor and sent to the a credit bureau within 6 months.
  • Your Social Security number cannot be associated with suspicious or fraudulent activity.

• Calculation of Credit Score

  There are 10 different profiles that people are put into to score their credit. Eight of those profiles are for those with good credit. Two of those profiles are for those with bad credit (someone who has had a 90 day late). The worst of the 2 bad profiles is for those with public records.

• Factors That Affect Scores

  
  • Payment History
    • Recency
      • 0 - 6 Months - Very Bad
      • 7 - 23 Months - Bad
      • 24 Months - This is when the score will start to improve
    • Frequency
    • Severity
  • Balances
    • Considers balances on revolving accounts not installment loans.
    • Revolving balances greater than 50% of the limit will affect the score adversely.
    • Revolving balances greater than 75% of the limit will severely affect the score adversely.
    • It is generally better to have some small balances than to have all zero balances.
    • American Express has no high balance limit. They report the higher of last month's balance or the current month's balance as the high credit limit.
  • Credit History
    • Length of time someone has had credit.
    • Age of oldest tradeline.
    • Number of new tradelines.
    • The ideal number of tradelines is 3-5 depending on the length of time someone has had credit. Opening new accounts affects the calculation for how long someone has had credit.
    • 1 card for 10 years = 10 year history
    • 1 card 9 years, 1 card 1 year = 5 year history?(Total of 10 years / Total of 2 cards)
  • Type of Credit

    Ideally, there should be a healthy mix of revolving and installment accounts. The credit score will reflect all accounts - open & closed. A home equity line will be treated as an installment account rather than a revolving account in some cases. The high credit limit is a factor. When a home equity line is treated as installment debt, the ratio of balance to limit will not have an adverse affect.

  • Inquiries

    5 - 7 inquiries per year is an acceptable amount. Each inquiry will reduce score between 5 and 15 points, depending on overall credit profile. Some inquiries (such as finance company installment accounts) can reduce score by as much as 20 to 30 points.Promotional inquiries do not hurt score.

• Bankruptcies and Collections

  When there are public records, the score is determined mainly by the recency of the public record.The percentage of tradelines that are part of the bankruptcy affects the score. Scores can improve during bankruptcy if payments are made timely on the other tradelines that are not part of the bankruptcy.Credit scores can go down after a judgment is removed because it shows as recent activity for a public record item. Also, the other credit items could then be more heavily weighed. Suggestion: Pay collections or judgments at closing.To remove collection item from credit report: get a letter from the original creditor stating that the account should never have gone to collections.Even if a debt is assigned to one spouse in a divorce agreement, if the account was originally opened as a joint account it will reflect on the credit reports of each person. To mitigate potential tarnishment of credit, the spouse not responsible according to the divorce agreement should send a letter to the credit bureaus stating the arrangement supported by a copy of the divorce agreement.Bankruptcies will stay on the credit report for 10 years. State tax liens will stay on the credit report for 7 years after they are satisfied. Public records will stay on the credit report for 7 years.

• Establishing Credit History

  A secured credit card is a way to get credit when there is a problem in the credit history. Because of the collateral that is pledged, there is usually not an inquiry to obtain the account.Becoming an authorized user on someone else's card will establish a history for the authorized user. Each party is then liable to have their score affected by the others use of the account.

• Credit Report Companies

  • First American Credco 1-800-255-0792
  • Kroll Factual Data 1-800-929-3400
  • Credit Plus, Inc. 1-800-258-3488

Myth: If you catch up on your late payments, it won't show up on your credit report.
Fact: False! Each time you make a payment late you run the risk of the creditor reporting the late payment to the credit bureau. If you catch up, your credit report must show that you are caught up-but it will also show that you were late. And as a result your credit will suffer.

Myth: If you pay a small amount by the due date, it will be counted as a full payment.
Fact: False! You must pay the minimum amount required by the due date. Otherwise you creditor may report the payment as late.

Myth: If you have a good reason for not paying, it will be overlooked.
Fact: False! Contact your creditor if you experience a crisis, like losing you job or becoming seriously ill. You may receive a grace period or a payment plan from the creditor but never assume such an agreement is automatic.

Myth: Bad debts go away after they are paid.
Fact: False! Because credit reports provide a history of your credit, bad debt charge-offs and late payments can stay on your credit report for seven to ten years. You can, however, provide your own explanation of the situation for inclusion in the report to be received by future creditors.

Myth: You're not responsible for debts on joint accounts or co-signed accounts if they are not your purchases.
Fact: False! Any time you are a joint account owner or co-signer, regardless of whether you've paid your share, both parties can be held completely responsible for the payment. It's important to refinance after a divorce since any late payments on a joint or co-signed account will show up on your credit report.

Myth: It's hard to get a copy of your credit report.
Fact: False! You have the right to see what is in your credit report. A copy of your credit report may be free or may cost you a small amount of money. Call us to find out how you can get a copy of your credit report.

Myth: If you have credit problems, your credit score will not improve for seven years.
Fact: False! You can improve your credit score over a shorter period of time because recent entries to your credit report carry more weight!

Source: Freddie Mac, Don't Borrow Trouble - CreditSmart

Step One - Organize your documents

• Two years W-2 and one month of paystubs or if self-employed, provide two years tax returns (all schedules attached).
• Two months statements for each bank, stock, mutual fund account, and 401k.
• If you own rental real estate , provide all rental agreements and two years tax returns, including Schedule E.
• If divorced, provide a copy of the divorce decree and property settlement agreement (if applicable).
• If you are not a US citizen, provide a copy of your green card, or H-1 or L-1 visa.

Step Two - » Get Qualified

Understand how much you can borrow before you apply for a loan A pre-qualification is normally conducted by your mortgage specialist after he has interviewed you and determined, based on the information you've verbally provided him, the dollar amount you can be approved for. Your mortgage specialist will then issue you a pre-qualification letter. Mortgage specialists, however, do not make the final approval, so a pre-qualification is not a commitment to lend.

A pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that you are qualified to purchase the house you are making an offer on. Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is then submitted to an underwriter and a decision is made regarding your loan. If your loan is pre-approved, you are then issued a pre-approval certificate. 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! It's highly recommended that you get pre-approved before you start looking for a house.

Step Three - Shop Loan Programs and Rates

How long do you plan to keep the property? Factors like when you plan to sell the property can affect the type of loan that fits your needs.

Understand the relationship between rates and points. One point is equal to 1% of the loan amount. The more points you pay, the lower the rate will get. Consult your tax advisor for applicable tax deductions. Compare different programs. This can become confusing and difficult because there are so many different programs to choose from. This is why it's important to speak with an experienced mortgage specialist who will help you make the best decision for your situation.

Step Four - Obtaining Loan Approval

Once you have filled out a loan application, your mortgage specialist will begin the loan approval process immediately by:

• Running your credit
• Verifying your employment
• Verifying the property value
• Verifying your assets

Tips for getting a faster loan approval

• Respond promptly to any requests for additional documents, especially if your rate is locked or you need to close by a certain date.
• Fill out your loan application completely.
• Do not make any major purchases until your loan closes. This can have an adverse affect on your current application.
• Do not transfer money into your account that can not be traced.

Step Five - Closing of Your Loan

Once your loan is approved, you will attend your closing appointment with your title company or attorney. This is where you will be required to sign your final disclosures and pay your closing costs.

• Bring a cashiers check for the payment of closing costs. Personal checks are usually not accepted.
• Review the final disclosures. Check the interest rate, terms and the name and property address for accuracy.
• If refinancing or receiving a home equity loan, federal law requires you are given a 3 day right of rescission before your loan transaction is officially closed.

30-Year Fixed Rate Loan

Payments on 30-year loans are calculated over a period of 30 years and have a fixed interest rate and payment for the life of the loan. If you have limited funds for a down payment or you are a Veteran, ask your loan officer about Gateway Funding's FHA or VA 30-year loan.

15-Year Fixed Rate Loan

Payments on 15-year loans are calculated over a period of 15 years and have a fixed interest rate and payment for the life of the loan. Payments are higher for this loan than the 30-year fixed rate loan, but it builds up equity more quickly.

10/1 ARM

This loan has fixed payments for 10 years and then turns into a 1-year ARM, adjusting every year thereafter. The loan payments are calculated over a period of 30 years.

7/1 Adjustable Rate Mortgage (ARM)

This loan has fixed payments for 7 years and then turns into a 1-year ARM, adjusting every year thereafter. The loan payments are calculated over a period of 30 years.

5/1 ARM

This loan has fixed payments for 5 years and then turns into a 1-year ARM, adjusting every year thereafter. The loan payments are calculated over a period of 30 years. If you have limited funds for a down payment or you are a Veteran, ask your loan officer about Gateway Funding's FHA or VA 5/1 Arm loan.

3/1 ARM

This loan type has fixed payments for the first 3 years and then turns into a 1-year ARM, adjusting every year thereafter. The loan payments are calculated over a period of 30 years. If you have limited funds for a down payment or you are a Veteran, ask your loan officer about Gateway Funding's FHA or VA 3/1 Arm loan.

Loans from Your Uncle Sam

There's more than one way to finance your home purchase – in fact, there are thousands! Understanding who has loan products and how they can help you will make your home-buying process much easier. Learn about the advantages of government-backed Veteran’s Administration (VA) and Federal Housing Administration (FHA) loans. Many first-time buyers choose them because they require little or no down payment for qualified buyers.

Veteran's Administration (VA) Loans

Qualified veterans including Reserves and National Guards, can take out loans with up to 100% financing for loan amounts up to the conforming loan limit (currently $417,000) – with no down payment – and still get flexible underwriting guidelines. Closing costs are regulated. Plus, VA-guaranteed loans are assumable and can be combined with second mortgages and taken on by qualified future buyers. VA loans also don’t have Private Mortgage Insurance (PMI). But the best part might just be that payments are fixed for the entire loan term so you won't have to worry about interest rate increases.

Federal Housing Administration (FHA) Loans

While the Federal Housing Administration (FHA) doesn't technically make loans, it does make getting them easier. The FHA insures loans, which can encourage lenders to offer more favorable terms. That's because the insurance protects lenders against potential losses by paying the lender if a homeowner defaults. And with an FHA loan, down payments can be as low as 3%.

The only requirement is showing sufficient monthly income to pay the mortgage and satisfactory credit, but remember that the FHA charges an upfront Mortgage Insurance Premium similar to Private Mortgage Insurance (PMI). However, this premium can be financed as part of the mortgage, so you don't have to pay it upfront, or paid at Closing. You can also pay a one-time charge (discount points) at closing to help get a lower percentage rate. FHA loans are often assumable too.

With so many loan options, you want to make sure you find the one that best meets your needs. And working with your Gloria Nilson agent and a mortgage consultant will help you understand the different options and make the best choice.

A | B | C | D | E | F | G | H | I | J | L | M | O | P | R | S | T | U | V

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Amenity

a feature of the home or property that serves as a benefit to the buyer but that is not necessary to its use; may be natural (like location, woods, water) or man-made (like swimming pool or garden.)

Amortization

repayment of a mortgage loan through monthly installments of principal and interest; the monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period (for example, 15 or 30 years).

Annual Percentage Rate (APR)

calculated by using a standard formula, the APR shows the cost of a loan; expressed as a yearly interest rate, it includes the interest, points, mortgage insurance, and other fees associated with the loan.

Application

the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.

Appraisal

a document that gives an estimate of a property's fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

Appraiser

a qualified individual who uses his or her experience and knowledge to prepare the appraisal estimate.

ARM

Adjustable Rate Mortgage; a mortgage loan subject to changes in interest rates; when rates change, ARM monthly payments increase or decrease at intervals determined by the lender; the change in monthly-payment amount, however, is usually subject to a cap.

Assessor

a government official who is responsible for determining the value of a property for the purpose of taxation.

Assumable mortgage

a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of a an assumable mortgage.

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Balloon Mortgage

a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10 years); after that time period elapses, the balance is due or is refinanced by the borrower.

Bankruptcy

a federal law whereby a person's assets are turned over to a trustee and used to pay off outstanding debts; this usually occurs when someone owes more than they have the ability to repay.

Borrower

a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.

Building code

based on agreed upon safety standards within a specific area, a building code is a regulation that determines the design, construction, and materials used in building.

Budget

a detailed record of all income earned and spent during a specific period of time.

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Cap

a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Cash reserves

a cash amount sometimes required to be held in reserve in addition to the down payment and closing costs; the amount is determined by the lender.

Certificate of title

a document provided by a qualified source (such as a title company) that shows the property legally belongs to the current owner; before the title is transferred at closing, it should be clear and free of all liens or other claims.

Closing

also known as settlement, this is the time at which the property is formally sold and transferred from the seller to the buyer; it is at this time that the borrower takes on the loan obligation, pays all closing costs, and receives title from the seller.

Closing costs

customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.

Commission

an amount, usually a percentage of the property sales price, that is collected by a real estate professional as a fee for negotiating the transaction.

Condominium

a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex; the owner also shares financial responsibility for common areas.

Conventional loan

a private sector loan, one that is not guaranteed or insured by the U.S. government.

Cooperative (Co-op)

residents purchase stock in a cooperative corporation that owns a structure; each stockholder is then entitled to live in a specific unit of the structure and is responsible for paying a portion of the loan.

Credit history

history of an individual's debt payment; lenders use this information to gauge a potential borrower's ability to repay a loan.

Credit report

a record that lists all past and present debts and the timeliness of their repayment; it documents an individual's credit history.

Credit bureau score

a number representing the possibility a borrower may default; it is based upon credit history and is used to determine ability to qualify for a mortgage loan.

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Debt-to-income ratio

a comparison of gross income to housing and non-housing expenses; with the FHA, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

Deed

the document that transfers ownership of a property.

Default

the inability to pay monthly mortgage payments in a timely manner or to otherwise meet the mortgage terms.

Delinquency

failure of a borrower to make timely mortgage payments under a loan agreement.

Discount point

normally paid at closing and generally calculated to be equivalent to 1% of the total loan amount, discount points are paid to reduce the interest rate on a loan.

Down payment

the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan.

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Earnest money

money put down by a potential buyer to show that he or she is serious about purchasing the home; it becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if the buyer pulls out of the deal.

EEM

Energy Efficient Mortgage; an FHA program that helps homebuyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase.

Equity

an owner's financial interest in a property; calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property.

Escrow account

a separate account into which the lender puts a portion of each monthly mortgage payment; an escrow account provides the funds needed for such expenses as property taxes, homeowners insurance, mortgage insurance, etc.

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Fair Housing Act

a law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fair market value

the hypothetical price that a willing buyer and seller will agree upon when they are acting freely, carefully, and with complete knowledge of the situation.

Fannnie Mae

Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors; by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential home buyers.

FHA

Federal Housing Administration; established in 1934 to advance home ownership opportunities for all Americans; assists home buyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

Fixed-rate mortgage

a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.

Flood insurance

insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.

Foreclosure

a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Freddie Mac

Federal Home Loan Mortgage Corporation (FHLMC); a federally-chartered corporation that purchases residential mortgages, securitizes them, and sells them to investors; this provides lenders with funds for new home buyers.

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Ginnie Mae

Government National Mortgage Association (GNMA); a government-owned corporation overseen by the U.S. Department of Housing and Urban Development, Ginnie Mae pools FHA-insured and VA-guaranteed loans to back securities for private investment; as with Fannie Mae and Freddie Mac, the investment income provides funding that may then be lent to eligible borrowers by lenders.

Good faith estimate

an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

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HELP

Home buyer Education Learning Program; an educational program from the FHA that counsels people about the home buying proceeds; HELP covers topics like budgeting, finding a home, getting a loan, and home maintenance; in most cases, completion of the program may entitle the Home buyer to a reduced initial FHA mortgage insurance premium-from 2.25% to 1.75% of the home purchase price.

Home inspection

an examination of the structure and mechanical systems to determine a home's safety; makes the potential Home buyer aware of any repairs that may be needed.

Home warranty

offers protection for mechanical systems and attached appliances against unexpected repairs not covered by homeowner's insurance; coverage extends over a specific time period and does not cover the home's structure.

Homeowner's insurance

an insurance policy that combines protection against damage to a dwelling and its contents with protection against claims of negligence or inappropriate action that result in someone's injury or property damage.

Housing counseling agency

provides counseling and assistance to individuals on a variety of issues, including loan default, fair housing, and home buying.

HUD

the U.S. Department of Housing and Urban Development; established in 1965, HUD works to create a decent home and suitable living environment for all Americans'; it does this by addressing housing needs, improving and developing American communities, and enforcing fair housing laws.

HUD1 Statement

also knows as the "settlement sheet", it itemizes all closing costs; must be given to the borrower at or before closing.

HVAC

Heating, Ventilation and Air Conditioning; a home's heating and cooling system.

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Index

a measurement used by lenders to determine changes to the Interest rate charged on an adjustable rate mortgage.

Inflation

the number of dollars in circulation exceeds the amount of goods and services available for purchase; inflation results in a decrease in the dollar's value.

Interest

a fee charged for the use of money.

Interest rate

the amount of interest charged on a monthly loan payment; usually expressed as a percentage.

Insurance

protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.

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Judgment

a legal decision; when requiring debt repayment, a judgment may include a property lien that secures the creditor's claim by providing a collateral source.

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Lease purchase

assists low-to-moderate income buyers in purchasing a home by allowing them to lease a home with an option to buy; the rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Lien

a legal claim against property that must be satisfied when the property is sold.

Loan

money borrowed that is usually repaid with interest.

Loan fraud

purposely giving incorrect information on a loan application in order to better qualify for a loan; may result in civil liability or criminal penalties.

Loan-to-value (LTV) ratio

a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.

Lock-in

since interest rates can change frequently, many lenders offer an interest rate lock-in that guarantees a specific interest rate if the loan is closed within a specific time.

Loss mitigation

a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

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Margin

an amount the lender adds to an index to determine the interest rate on an adjustable rate mortgage.

Mortgage

a lien on the property that secures the promise to repay a loan.

Mortgage banker

a company that originates loans and resells them to secondary mortgage lenders like Fannie Mae or Freddie Mac.

Mortgage broker

a firm that originates and processes loans for a number of lenders.

Mortgage insurance

a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price.

Mortgage insurance premium (MIP)

a monthly payment, usually part of the mortgage payment, paid by a borrower for mortgage insurance.

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Offer

indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.

Origination

the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination fee

the charge for originating a loan; is usually calculated in the form of points and paid at closing.

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PITI - Principal, Interest, Taxes, and Insurance

the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner's and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

PMI

Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

Pre-approval

lender commits to lend to a potential borrower; commitment remains as long as the borrower still meets the qualification requirements at the time of purchase.

Pre-qualify

a lender informally determines the maximum amount an individual is eligible to borrow.

Premium

an amount paid on a regular schedule by a policyholder that maintains insurance coverage.

Prepayment

payment of the mortgage loan before the scheduled due date; may be subject to a prepayment penalty.

Principal

the amount borrowed from a lender; doesn't include interest or additional fees.

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Radon

a radioactive gas found in some homes that, if occurring in strong enough concentrations, can cause health problems.

Real estate agent

an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

Realtor

a real estate agent or broker who is a member of the NATIONAL ASSOCIATION OF REALTORS, and it's local and state associations.

Refinancing

paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).

Rehabilitation mortgage

a mortgage that covers the costs of rehabilitating (repairing or improving) a property; some rehabilitation mortgages - like the FHA's 203(k) - allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

RESPA

Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships.

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Settlement

another name for closing.

Subordinate

to place in a rank of lesser importance or to make one claim secondary to another.

Survey

a property diagram that indicates legal boundaries, easements, encroachments, rights of way, improvement locations, etc.

Sweat equity

using labor to build or improve a property as part of the down payment.

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Title insurance

insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for home buyers.

Title search

a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.

Truth-in-lending

a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.

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Underwriting

the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower's credit history and a judgment of the property value.

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VA

Department of Veterans Affairs: a federal agency which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.

If you're like most people, purchasing a home is the biggest investment you'll ever make. If you're considering buying a home, you're likely aware of the complexity of the endeavor. Because of the numerous factors to consider when purchasing a home, it's important to prepare as best you can. Some common home buying principles and caveats are presented here for your consideration. By keeping them in mind, you'll help create a successful and more enjoyable experience. These Top Ten lists are by no means exhaustive. Since your home could cost you 25 to 40 percent of your gross income, it's important to conduct research, ask questions and study the process carefully.

If your question is not answered here, just ask Nelson (on your right).

Top 10 mistakes when buying a house

Top 10 mistakes when refinancing

Top 10 mistakes when getting a home-equity loan

 

The top 10 mistakes when buying a house

1. Looking for a home without being pre-approved

As a potential buyer competing for a property, you'll have a better chance of getting your offer accepted by being as prepared as possible. Consider this hierarchy of preparedness:

• Neither pre-qualified nor pre-approved
• Pre-qualified
• Pre-approved

The benefits available at each level can be easily understood when viewed from the seller's perspective. Imagine you're a seller in receipt of multiple offers to purchase your property. A complete stranger (buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, lets consider the type of buyer you'd prefer to deal with.

Neither pre-qualified nor pre-approved This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.

Pre-qualified This buyer has met with a mortgage lender and discussed their situation. The buyer has informed the lender regarding their income, expenses, assets and liabilities. The lender may also have seen their credit report. The buyer provided you with a letter from the broker stating an opinion of what the buyer can afford.

Pre-approved This buyer has provided a lender written evidence of income, expenses, assets, liabilities and credit. All information has been verified by a lender. As a result, much of the paperwork for this buyer's loan has been completed. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the lender. You're as certain as possible that this buyer can close.

As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.

2. Making verbal agreements

If you're asked to sign a document containing instructions contrary to your verbal agreements-don't! For example, the seller verbally agrees to include the washing machine in the sale, but the written purchase contract excludes it. The written contract will override the verbal contract. More importantly, your state may require that contracts for the sale of real property be in writing. Do not expect oral agreements to be enforceable.

3. Choosing a lender just because they have the lowest rate

While the rate is important, consider the total cost of your loan including the APR, loan fees, discount and origination points. When receiving a quote from a lender, insist that the discount points (charged by the lender to reduce the interest rate) be distinguished from origination points (charged for services rendered in originating the loan).

The cost of the mortgage, however, shouldn't be your only criterion. Have confidence that the company you select is reputable and will deliver the loan with the terms and costs they promised. If in the final hours of the transaction you determine that the lender has suddenly increased their profit margin at your expense, you won't have time to start again with a different lender. Ask family and friends for referrals. Interview prospective mortgage companies.

4. Not getting a written Good Faith Estimate of closing costs

Within three business days after the lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE.

5. Not getting a rate lock in writing

When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and program details.

6. Using a dual agent - i.e., an agent who represents the buyer and the seller in the same transaction.

Buyers and sellers have opposing interests. Sellers want to receive the highest price, buyers want to pay the lowest price. In the standard real estate transaction, the seller pays the real estate commission. When an agent represents both buyer and seller, the agent can tend to negotiate more vigorously on behalf of the seller. As a buyer, you're better off having an agent representing you exclusively. The only time you should consider a dual agent is when you get a price break. In that case, proceed cautiously and do your homework!

7. Buying a home without professional inspections

Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them.

If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.

8. Not shopping for home insurance until you are ready to close

Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and do not have time to shop around.

9. Signing documents without reading them

Whenever possible, review in advance the documents you'll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you'll sign are standard forms and are available for review.) It's unlikely that you'll have sufficient time to read all the documents during the the closing appointment.

10. Not allowing for delays in the transaction

In a perfect world, all real estate transactions are close on time. In the world we live in, transactions are often delayed a week or more. Suppose you asked your landlord to terminate your lease the day your purchase transaction was scheduled to close. A day or two before your scheduled closing date, you discover your transaction is delayed a week. In a perfect world, no one is inconvenienced and your landlord is willing to work with you. More likely, however, your landlord is inconvenienced and angry. Will you be thrown out? Will you have to find interim housing for a week or more? The eviction process takes a little time, so the Sheriff won't immediately remove you, but this type of stress-producing episode can be avoided. How? Terminate your lease one week after your real estate transaction is scheduled to close. That way, if there is a delay in closing your transaction, you have some leeway. This approach might cost a little more, then again, it might not.

The top 10 mistakes when refinancing

1. Refinancing with your existing lender without shopping around

Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.

2. Not doing a break-even analysis

Determine the total cost of the transaction, then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even. Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months.

Note: This is a simplified break-even analysis. If you are refinancing, considering switching from an adjustable to a fixed loan, or from a 30-year to a 15-year loan, the analysis becomes much more complex.

3. Not getting a written Good Faith Estimate of closing costs

Within three business days after the lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE.

4. Paying for an appraisal when you think your home value may be too low

Have the appraisal company prepare a desk review appraisal (typically at no charge) to provide you with a range of possible values. Your mortgage company's appraiser may do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your home.

5. Using the county tax-assessor's value as the market value of your home

Mortgage companies do not use the county tax-assessor's value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.

6. Signing your loan documents without reviewing them

Whenever possible, review in advance the documents you'll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you'll sign are standard forms and are available for review.) It's unlikely that you'll have sufficient time to read all the documents during the the closing appointment.

7. Not providing documents to your mortgage company in timely manner

When your mortgage company asks you for additional documents, provide them immediately. They are doing what's necessary to get your loan approved and closed. Delays in providing documents can result in a costly delays.

8. Not getting a rate lock in writing

When mortgage company tells you they have locked your rate, get a written statement which includes the interest rate, the length of the rate lock and details about the program.

9. Pulling cash out of your credit line before you refinance your first mortgage

Many lenders have cash-out seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. This usually results in stricter requirements and can, in some cases, break the deal!

10. Getting a second mortgage before you refinance your first mortgage

Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting second will cause your refinance transaction to be turned down.

The top 10 mistakes when getting a home-equity loan

1. Not knowing if your loan has a pre-payment penalty clause

If you are getting a "NO FEE" home-equity loan, chances are there's a hefty pre-payment penalty included. You'll want to avoid such a loan if you are planning to sell or refinance in the next three to five years.

2. Getting too large a credit line

When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit - not the used credit. Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans.

3. Not understanding the difference between an equity loan and an equity line

An equity loan is closed - i.e., you get all your money up front and make fixed payments until it is paid in full. An equity line is open - i.e., you can get numerous advances for various amounts as you desire. Most equity lines are accessed through a checkbook or a credit card. For both equity loans and lines, you can only be charged interest on the outstanding principal balance.

Use an equity loan when you need all the money up front - e.g., for home improvements, debt consolidation, etc. Use an equity line when you have a periodic need for money, or need the money for a future event - e.g., children's college tuition in the future.

4. Not checking the lifecap on your equity line

Many credit lines have lifecaps of 18 percent. Be prepared to make payments at the highest potential rate.

5. Getting a home-equity loan from your local bank without shopping around

Many consumers get their equity line from the bank with which they have their checking account. By all means, consider your bank, but shop around before making a commitment.

6. Not getting a written Good Faith Estimate of closing costs

Within three business days after the lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE.

7. Assuming that your home-equity loan is fully tax-deductible

In some instances, your home-equity loan is NOT tax deductible. Do not depend on your mortgage company for information regarding this matter - check with an accountant or CPA.

8. Assuming that a home-equity loan is always cheaper than a car loan or a credit card

Even after deducting interest for income tax purposes, a credit card can be cheaper than a credit line. To find out, compare the effective rate of your home-equity line with the rate on your credit card or auto loan.

Effective rate = rate x (100%-tax bracket) For example: If the rate of the home-equity line is 12 percent, and your tax bracket is 30 percent, your effective rate is 12% x (100-30) = 12% x 70 = 8.4%. If your credit card is higher than 8.4 percent, the equity loan is cheaper.

9. Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future

Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to be turned down.

10. Getting a home-equity line to pay off your credit cards when your spending is out of control

When you pay off your credit cards with an equity line, don't continue to abuse your credit cards.

• What are some common mistakes in buying a house?
• What are some common mistakes in refinancing?
• What is the difference between an equity loan and an equity line?
• Should I refinance?
• What does the term "Buying Down" mean? Should I pay points?
• What is a FICO score?
• What is the difference between pre-qualifying and pre-approval?
• What is a rate lock?
• Can my loan be sold?
• What is PMI? Can I get rid of the PMI on my loan?

What are some common mistakes in buying a house?

If you're like most people, purchasing a home is the biggest investment you'll ever make. There are numerous factors to consider and it's important to be prepared. It's important to research, ask questions and educate yourself on the process.

Looking for a home without being pre-approved. When you are pre-approved for a loan you can then provide the seller with a pre-approval letter. As a potential buyer, being pre-approved will give you the best chance of getting your offer accepted.

Making verbal agreements. Always have all agreements with your seller included in your contract. The written agreement will always override any verbal agreement made. Do not expect oral agreements to be enforceable.

Choosing a lender just because they have the lowest rate. The rate is important, but always consider the entire cost of your loan such as, origination and discount points, loan fees, and APR.

Make sure you feel confident that lender you select is reputable and will deliver the loan with the terms and costs they promised. Always ask friends and family for referrals.

Not receiving a Good Faith Estimate. After your lender or broker receives your loan application, you should receive a Good Faith Estimate of fees associated with your transaction. Have your Good Faith Estimate on hand when signing your loan documents, you shouldn't be charged any substantially different fees from those contained on your Good Faith Estimate.

Not getting a rate lock in writing. Always obtain a written statement of your locked rate, including the interest rate, the length of the rate lock, and program details.

Buying a home without professional inspections. Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.

Not shopping for home insurance until you are ready to close. Don't make the mistake of waiting until the last minute to get insurance. Give yourself time to shop around for the best insurance and begin shopping around as soon as you have an acceptance letter.

Signing documents without reading them. Whenever possible, review in advance the documents you'll be signing. It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.

Not allowing for delays in the transaction. We would all love it if every transaction closed on time. But there are times where they can be delayed as much as a week. Prepare yourself for any delays by terminating your lease a week after your closing.

What are some common mistakes when refinancing?

Not doing a break-even analysis. Determine the total cost of the transaction and calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even. Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In this case you'd refinance if you planned to stay in your home for at least 40 months.

Note: This is a simplified break-even analysis. If you are refinancing considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.

Not getting a written good-faith estimate of closing costs. Within 72 hours of submitting an application, the lender is required by law to disclose completed Good Faith Estimate and Truth In Lending Disclosure forms.

Signing your loan documents without reviewing them. Whenever possible, review in advance the documents you'll be signing. It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.

Getting a second mortgage before you refinance your first mortgage. Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second will cause your refinance transaction to be turned down.

Getting too large a line of credit. Getting too large a line of credit can result in you being turned down for other loans. Some lenders calculate payments based on your available credit, not the credit used. They see you as having a large potential payment.

What is the difference between an equity loan and an equity line?

An equity loan is closed - you will get all of your money up front and make fixed payments until the loan is paid in full. You can only be charged interest on the outstanding principal balance. Equity loans are best used for: home improvements, debt consolidation, etc.

An equity line is open - you can get numerous advanced amounts as needed. They are usually accessed through a credit card or checkbook. You can only be charged interest on the outstanding balance. Equity lines are best used when you have periodic needs for money.

Always check the lifecap of your equity line and be prepared to make payments at the highest potential rate.

In some instances, your home-equity loan is not tax deductible. Always check with your accountant for this information.

If you are thinking of getting a home equity line of credit and you plan to refinance your first mortgage, always check with your lender to find out if getting a second loan will result in having your first loan refinanced turned down. A lot of lenders consider the combined loan amounts when refinancing the first mortgage.

Should I refinance?

The most common reason people refinance is to save money. They are saving money by obtaining a lower interest rate, causing their monthly mortgage payment to be reduced or by reducing the term of the loan, thus saving money over the life of the loan.

People also refinance to consolidate debts and replace high-interest loans with a low-rate mortgage. The debts being consolidated may include credit lines, credit cards, second mortgages, student loans, etc. In many cases, a debt consolidation results in tax savings, because consumer loans are not tax deductible, and a mortgage loan is tax deductible.

Another reason people refinance is to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.

If you are considering refinance, always consult with a Gateway Funding mortgage specialist to give you the best available options.

What does the term "Buying Down" mean?

The term "Buying Down" the rate refers to the paying of discount points to obtain a lower interest rate. A discount point is one percent of the loan. For example, if you were charged one discount point on a $100,000 loan you would pay $1000.

Should I pay discount points?

A simple way of figuring out whether or not you should pay discount points requires an easy mathematical calculation. Divide the difference of the cost of discount points on two loans by the difference in the payment. If you'll be keeping the loan longer than the number of months indicated, the payment of the discount points is mathematically warranted.

Use this rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!

What is a FICO score?

A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. A credit score attempts to condense a borrowers credit history into a single number. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Credit-bureau models are developed from information in consumer credit-bureau reports.

A borrower's credit score is calculated using numerous factors of their credit history

• 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-offs, collections, etc.

The three credit bureaus used are

Equifax	1-800-685-1111
Trans Union	1-800-916-8800
Experian	1-888-397-3742

Some lenders use one of these three scores, while other lenders obtain scores from all three bureaus and use the middle score.

If you see an error on your report, report it to the credit bureau. They each have procedures for correcting information promptly.

What is the difference between pre-qualifying and pre-approval?

A pre-qualification is normally conducted by your mortgage specialist after he has interviewed you and determined, based on the information you've verbally provided him, the dollar amount you can be approved for. Your mortgage specialist will then issue you a pre-qualification letter. Mortgage specialists, however, do not make the final approval, so a pre-qualification is not a commitment to lend.

A pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that you are qualified to purchase the house you are making an offer on.

Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is then submitted to an underwriter and a decision is made regarding your loan. If your loan is pre-approved, you are then issued a pre-approval certificate. 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.

What is a rate lock?

You cannot close a mortgage loan without locking in an interest rate. The longer the length of the lock, the points or the interest rate will become higher. This is because the longer the lock, the greater the risk for the lender offering that lock. After a lock expires, most lenders will let you re-lock at the higher of the original price and the originally locked price. In most cases you will not get a lower rate if rates drop. Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked.

Can my loan be sold?

Yes. Your loan can be sold at any time. They are sold in a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. When a lender buys your loan they assume all of the terms and conditions of the original loan. The only thing that changes when a loan is sold is to whom you will mail your payment. When your loan is sold, your original lender will notify you that your loan has been sold, who your new lender is, along with their contact information.

What is PMI?

PMI stands for Private Mortgage Insurance. PMI is usually required when you buy a house with less than 20% down. Mortgage insurance protects lenders against the costs of foreclosure and is provided by private mortgage insurance companies. It also enables lenders to accept lower down payments than they would normally accept. Without mortgage insurance, you might not be able to buy a home without a 20% down payment. The lower your down payment, the higher your PMI. Your PMI premium is usually added to your monthly mortgage payment.

Can I get rid of the PMI on my loan?

Some lenders may require you pay PMI for one to two years before allowing you to apply to remove it. You can also cancel your PMI by refinancing and obtaining a new loan without PMI. If you are interested in canceling the PMI on your loan, contact your lender.