What is the difference between pre-qualifying and pre-approval?
 A pre-qualification for a specific loan dollar amount is based on a review
of basic financial information you supply to us. No verification of this information is
performed. The pre-qualification means that if the information you supplied to us is accurate,
subject to verification of credit, appraisal of the property, and the lenders underwriting
criteria for the loan amount, you should be able to receive a loan as described in the
pre-qualification letter or document. This is not a final approval. A pre-qualification
is not a commitment to lend. However, a pre-qualification letter indicates to you and the seller
that in the opinion of the loan officer you are qualified to purchase the house you are making
an offer on.
Pre-approval is a step above pre-qualification.
Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan
application is submitted to an underwriter and a decision is made regarding your loan
application. If your loan is pre-approved, the lender will loan you money on the basis that you
requested subject to: a satisfactory appraisal (both as to value and type of product); your
financial condition remains as stated on your application and satisfying any underwriting
conditions from the lender.
Getting your loan pre-approved allows you to close very quickly
when you do find a house. A pre-approval can help you negotiate a better price with the seller,
since being pre-approved is very close to having cash in the bank to pay for the house!
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What are
credit scores?
A credit score (such as FICO - developed by Fair Isaac & Co
and used by Experian, or BECON - developed and used by Equifax or EMPIRICA - developed and
used by Trans Union) or credit scoring is a method of determining the likelihood that a credit
user (you) will pay their bills. Fair Isaac began its pioneering work with credit scoring in the
late 1950's. Since then scoring has become widely accepted by lenders as a reliable means of
credit evaluation. A credit score attempts to condense a borrowers credit history into a single
number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are
computed. The Federal Trade Commission has ruled this practice to be acceptable.
Credit scores are calculated by using scoring models and
mathematical tables that assign points for different pieces of information that best predict
future credit performance. Developing these models involves studying how thousands, even
millions, of people that have used credit. Score-model developers find predictive factors in the
data that have proven to indicate future credit performance. Models can be developed from
different sources of data. Credit-bureau models are developed from information in consumer
credit-bureau reports.
Credit scores analyze a borrower's credit history considering
many factors such as:
- Late payments
- The amount of time credit has been established
- The amount of credit used versus the amount of credit available
- Length of time at present residence
- Employment history
- Negative credit information such as bankruptcies, charge-off's,
collections, etc.
There are really three credit scores computed by data provided
by each of the three bureaus--Experian, Trans Union and Equifax. Some lenders use one of
these three scores, while other lenders may use the middle score and still others may use all
three.
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How
can I increase my score?
While it is difficult to increase your score over the short
run, here are some tips to increase your score over a period of time.
- Pay your bills on time. Late payments and collections can have a
serious impact on your score.
- Do not apply for credit frequently. Having a large number of
inquiries on your credit report can worsen your score.
- Reduce your credit card balances. If you are "maxed" out
on your credit cards, this will affect your credit score negatively.
- If you have limited credit, obtain additional credit. Not having
sufficient credit can negatively impact your score. (Normally lenders like to see you have at least
five (5) lines of credit not including utilities (such as telephone, gas and electric companies) and
oil company credit cards.
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What if there is an error on my credit report?
If you see an error on your report, to rectify it, you must
contact the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans
Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting
information promptly. Alternatively, we as your mortgage company may help you correct this
problem as well. Understand this process takes time, must be done in writing, and may require
proof depending on the nature of the error.
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Why are interest rates different from day to day and one source to
another?
To understand why mortgage rates change we must first ask the more
general question, "Why do interest rates change?"
Interest rate movements are based on the simple concept of supply
and demand. If the demand for credit (loans) increases, so do interest rates. This is because there
are more buyers, so sellers (those who loan the money) can command a better price, i.e. higher
rates. If the demand for credit reduces, then so do interest rates. This is because there are more
sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy
is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is
slowing the demand for credit decreases and so do interest rates.
This leads to a
fundamental concept:
- Bad news (i.e. a slowing economy) is good news for interest rates
(i.e. lower rates).
- Good news (i.e. a growing economy) is bad news for interest rates
(i.e. higher rates).
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A major factor driving interest rates is inflation. Higher
inflation is associated with a growing economy. When the economy grows too strongly, the Federal
Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results
from prices of goods and services increasing. When the economy is strong, there is more demand for
goods and services, so the producers of those goods and services can increase prices. A strong
economy therefore results in higher real estate prices, higher rents on apartments and higher
mortgage rates.
Mortgage rates tend to move in the same direction as interest
rates. However, actual mortgage rates are also based on supply and demand for mortgages. The
supply/demand equation for mortgage rates may be different from the supply/demand equation for
interest rates. This might sometimes result in mortgage rates moving differently from other rates.
For example, one lender may be forced to close additional mortgages to meet a commitment they have
made. This results in them offering lower rates even though interest rates may have moved up!
There is an inverse relationship between bond prices and bond
rates. This can be confusing. When bond prices move up, interest rates move down and vice versa.
This is because bonds tend to have a fixed price at maturity--typically $1000. If the price of
the bond is currently at $900 and there are 10 years left on the bond and if interest rates start
moving higher, the price of the bond starts dropping. The higher interest rates will cause increased
accumulation of interest over the next 10 years, such that a lower price (e.g. $880) will result in
the same maturity price, i.e. $1000.
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Do I
need flood Insurance?
Most lenders will not lend you money to buy a home in a flood
hazard area unless you pay for flood insurance. Some government loan programs will not allow you
to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to
check for flood hazards. You will be notified if flood insurance is required. If a change in
flood insurance maps brings your home within a flood hazard area after your loan is made, your
lender or service may require you to buy flood insurance at that time.
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What
are your rates?
The first question customers usually ask when calling a mortgage
company or lender is "What are your rates?" Because of the number of mortgage
programs available and the various rate and point combinations, most mortgage companies have rate
sheets that are 5-10 pages long.
Getting a rate quote is just a small part of shopping for a
mortgage and usually not the best way to select a lender. Customer service, professional staff,
convenience, and flexibility are some of the key attributes to selecting the best lender for your
needs.
In helping you assess a rate, you will need to provide answers to a
few basic questions like:
- What is your purchase price?
- What loan amount are you looking for or what loan amount do you want
to finance?
- Do you prefer a fixed rate or an adjustable rate mortgage?
- How long do you plan to live in the house?
- How many points are you willing to pay?
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The purchase price or the value of your home effects the rate
because it effects the size of the loan. For example, Jumbo Loans, currently over $417,000, have a
higher rate. Similarly, smaller loans have a higher rate or cost more because it cost the same and
takes the same effort to do $35,000 loan as it does a $200,000 loan. Lenders and brokers need to
make or charge a certain minimum amount of money to cover overhead, per loan (transaction) cost and
make a profit.
The type of loan, fixed or variable for example, affect the rate
because they affect the lenders income & inflation risk. For example, with a fixed rate loan, if
rates go up the lender could lend out money at a higher rate than they are currently loaning it to
you, and therefore earn more money. With a variable rate loan since the rate the lender can charge
you changes regularly their income remains consistent with their current income opportunities.
Therefore with variable rate loans they give you a better rate since they know that if rates go up
they can charge you more.
The length of time you will own a house affects both the type of
loan you may want and the amount of points it may make sense to pay. For example, if you are going
to keep a house for a short period of time (let's say 3 years), you may be better off with a
variable rate loan (e.g. a 3/1 ARM - fixed for 3 years and varies once a year every year there-
after until the loan is paid off). Why? Because typically the 3/1 ARM has a lower rate associated
with it than a 30 year fixed rate loan and since you will sell the house in 3 years you would not be
affected by higher rates which may exist at that time. On the other hand, if you expect to live in
the house for 30 years you might be willing to pay some points to receive a lower interest rate now.
The lower interest rate would save you money every month over the life of the loan. The total
savings in this situation should be greater than the cost of points, giving consideration to the
amount that the point money could earn if invested (saved) after taxes.
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What happens if my loan gets sold or my lender goes out of business?
The simple answer is nothing. You will still have to pay your
mortgage. The terms of your mortgage will not change nor will the requirement for you to pay on
time change. The only thing that would change is to whom you make out your check.
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Does zero points really mean zero points?
What about no closing costs loans?
The answer is maybe. Remember there are more then one type of
Points (Discount and Origination) not to mention a Mortgage Broker fee which is expressed as
points. Remember that the lender and broker needs to make a living. Therefore the more lines on
the closing statement or good faith estimate that says zero the more likely the rate you are
paying is higher than it otherwise would be. Also, it is often unclear what a lender or broker
means by no closing costs or no point loans. Sometimes the lender or broker will increase fees
to compensate for the lack of points or a more favorable rate.
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Should I
refinance?
Yes, if it saves you money or converts you out of a mortgage
type you don't want. The saving money is obvious but not necessarily easy to calculate.
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