There are many topics that may be helpful to understand during the process of obtaining a loan. By being well-informed about some factors this may help you save money. Here are some topics to look over:
Taxes & Insurance
Taxes and insurance is added to your monthly payment to help you keep current with all payments. This is an option that homeowners have. Taxes and insurance accounts are referred to as impounds or escrow account. When opening a new loan, most mortgage lenders will require reserves of a couple of months. Depending on when the property taxes will be due, the required reserves will vary. Taxes and insurance can be added at any time of the loan term.When refinancing an existing loan that has an impound account, you can either transfer the account over to the new loan or get a refund on the account and start a new impound account.
In most cases, the insurance that the mortgage company places on a property is relatively more expensive than finding your own insurance company. The benefit to lenders placed insurance is that it is combined with your mortgage payment every month. It is always wise to shop around for an insurance company before the loan closing, so you can compare the rates with the lender’s insurance.
Brokers vs Direct Lenders
There are advantages and disadvantages between working with brokers and direct lenders. With brokers, you are able to meet them in person and build a relationship. Brokers will give you the in-person attention that some will want.
Brokers get paid on a percentage of all closing costs and points charged to the borrower. Because of the way their pay structure is designed you must be careful of the points that the broker is charging you. In most situations, brokers will sell you on a low rate but charge high points. Also a broker is the “middle man” in a loan transaction.
Most direct lenders do not get paid based on points or costs. Loan officers from direct lenders will get paid based on units and volume. This way the loan officer and borrower do not have a conflict in interest. Direct lenders are very sensitive to predatory lending. Predatory lending defines as not providing the borrower with the best loan program available to them. Recently the mortgage industry has been highly regulated by the federal government to avoid putting borrowers in situations where they will default in their mortgage payments. In some cases mortgage companies have had their business licenses suspended or even revoked.
Appraisals are needed to accurately determine the loan-to-value of the loan and also inspect the property’s condition. An appraisal report is only good for 90 days and most mortgage companies will require a certified appraiser.
The appraiser obtains an estimated value through the interpretation of the market. The appraiser collects data pertinent to a report, such as the site, amenities and the physical condition of the property. Through considerable research and data collection of both general and specific, the appraiser arrives at the final estimated value.
The three common approaches to arriving at the estimated value, which are derived from the market, are:
Cost Approach: the cost to make the improvements as of the date of the appraisal, minus the Physical Deterioration, the Functional Obsolescence and the Economic Obsolescence. The remainder is added to the Land Value.
Comparison Approach: uses other “bench mark” properties of similar size, quality and location that have been recently sold and compares it to the subject property.
Income Approach: a key principal in determining the value of income producing properties and has little importance in residential type properties. This approach is used to get an objective estimate of what a cautious investor would pay based upon the net income the property produces.
After choosing an appraiser, provide the following information:
The purpose of the appraisal.
The required completion date of the appraisal.
If property listed is for sale, the amount and with whom.
If there is a mortgage, with whom, when it was placed, for how much, type of mortgage [FHA, VA etc.], interest rate, and any other types of financing.
Included personal property, such as appliances.
If it is an income producing property, a breakdown of income and expenses for the previous year or two and a copy of leases.
A copy of deed, survey, purchase agreement or other pertinent papers pertaining to the property.
A copy of current real estate tax bill, statement of special assessments, balance owing and on what [sewer, water, etc.].
The most popular type of credit score is called a “FICO score.” FICO scores range from 300 to 800. Here is a general guide to what the scores mean:
Excellent – scores above 730
Good – 700-729
Needs a closer look – 679-699
Higher risk – 585-699
No credit or limited credit – 500-585
Very high risk – under 500
The Fair Isaac Company uses the formula below to calculate FICO scores:
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
New credit – 10% (new credit means the percentage of your credit that was recently obtained)
Types of credit – 10%
Each time you apply for credit, an inquiry will be marked on your credit reports. A few inquires will not affect your credit rating, but too many inquiries can result in lowering your credit scores. Too many inquiries seem negative because it makes you look desperate to the creditors/lenders. Be responsible when applying for credit.
How Great Credits Help You Save
Having great credit allows you to qualify for prime rates. The differences when you qualify for these floor rates can save you thousands of dollars and in many times lower your mortgage term.
A 30 year $200,000 mortgage with an interest rate of 8.75% has a principal & interest payment of $1573.40 monthly. Now if you were to qualify for today’s 15 year prime rate of 4.25%, a loan amount of $200,000 would have a principal & interest payment of $1504.56. This is $68.84 lower than your current payment and you will pay the loan off in half the time. And to look at it one step further, if you look at the total loan payout for the entire term of the loan, you would save $302,043.60 overall.
This is one reason why your credit is very important. Many homeowners are refinancingall of their debt with their mortgage. This helps in many ways, because you are getting rid of all of the high rate credit cards and consolidating it with your low home mortgage rate. This will create more available credit to you, which is one of the ways to improve your credit scores. Also this reduces chances of you hurting your credit rating by having late payments. When a few years have past and you have been making all of your mortgage payments on time, your credit rating should improve significantly and you should be able to qualify for prime rates.