Frequently Asked Questions
1. What should I do to prepare for a new home purchase?
Answer: If you’re like most people, purchasing a home is the biggest investment you’ll ever make. Some common home-buying principles and suggestions are presented here for your consideration. The information contained herein is presented as a primer and will not cover every issue you encounter in a purchase transaction. It’s important to conduct research, ask lots of questions and consult with experienced professionals.
Your first step before submitting an offer to purchase should be to obtain pre-approval by a lender. As a potential buyer competing for a home, you’ll have a better chance of getting your offer accepted by being as prepared as possible. Consider this hierarchy of buyer preparedness:
Offers are submitted and:
- The buyer is not pre-qualified or pre-approved
- Buyer is Pre-qualified
- Buyer is Pre-approved
Imagine you’re a seller in receipt of multiple purchase offers. 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 or talked to a mortgage loan officer and discussed their situation. The buyer has shared information about their employment, income, assets and liabilities. The loan officer may or may not have seen their credit report. The buyer then presents a “pre-qualification” letter stating an opinion of affordability and potential loan qualification.
Pre-approved
This buyer has completed a loan application and provided written evidence of income, assets, liabilities and authorized a credit report. 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.
2. What should I look for when choosing a lender for my mortgage?
Answer: While the rate being offered 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 or broker, 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). A below market or low interest rate quote may indicate some hidden loan fees or other requirements, such as a prepayment penalty, a short 15 day rate lock or requiring a bigger down payment. Make sure the rate quoted is for your specific loan request. You can also request a sample Good Faith Estimate of Settlement Costs as part of your lender research. While a Good Faith Estimate is required following your commitment to apply for financing, this estimate can be prepared in advance at your request, with no obligation to you or the lender to proceed with a loan application.
The rate and cost of the mortgage, however, shouldn’t be your only criterion. Select a reputable company which will deliver the loan as promised. Insist on a written pre-approval from the lender. If in the final hours of the transaction you find 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, friends or your real estate agent for referrals, and interview several prospective mortgage companies.
3. What happens after I apply for a loan?
Answer: Within three business days after the broker or lender obtains your loan application, you must receive a written statement of fees associated with the transaction. This statement is referred to as a Good Faith Estimate of Settlement Costs (“GFE”). This is required by law and describes closing costs, cash due at close, proposed loan amount and payments. (If you do not receive a GFE within 3 business days of your application, you should seriously question the legitimacy of your transaction and the nature of the organization you are working with.) Following initial disclosures, and the exchange of paperwork between you and your lender, a preliminary approval is obtained. A satisfactory appraisal is required supporting the value of the home for at least the purchase price. Other conditions may be required by the lender which need to be satisfied prior to closing.
4. Should I refinance my current mortgage?
Answer: The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways:
- By obtaining a lower interest rate that promotes a lower monthly mortgage payment.
- By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total interest paid during the life of the loan can be reduced significantly.
Homeowners also refinance to convert their adjustable loan to a fixed loan. The main reason for doing this is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable rate loans tend to be more popular when fixed rates are higher, or your intended occupancy is less than 15 or 30 years.
A third reason for homeowners to refinance is to obtain “cash back” from the loan proceeds in order to consolidate debts and/or replace high-rate loans with a lower-rate mortgage. The debts for consolidation may include second mortgages, credit lines, student loans, credit cards, etc. In many cases, debt consolidation results in tax savings, since consumer loans are not tax deductible, while mortgage interest is usually tax deductible.
The answer to the question, “Should I refinance?” is a complex one, since every situation is different and no two homeowners are in the exact same situation. The conventional wisdom of refinancing only when you can save 2 percent on your rate is old hat. If you are refinancing to lower your monthly payments, the following calculation should be considered:
- Calculate the total cost of the refinance–example: $3,000
- Calculate the monthly savings–example: $100/month
- Divide the total cost by the monthly savings (ex: $3,000 divided by $100/month = 30 months or 2.5 years). This represents your refinance “break-even”period. If you plan to live in the home for at least 2.5-3 years, then the refinance might make sense.
Of course, you might be giving up $3000 in equity and/or using other assets to fund the closing costs, so the above calculation does not take into consider loss of equity or earnings on those assets.
You should discuss these options with an experienced mortgage professional and tax advisor in order to determine the best option for your specific situation.
5. What are “points” and should I pay them?
Answer: There are two different types of points:
- Discount points – typically paid to “discount” or lower the interest rate
- Origination fee – can also be considered a “point” and typically paid to cover the origination of the loan … 1 point = 1% of the amount borrowed
The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:
- Calculate the cost of the point(s). Example: 1 point on a $100,000 loan is $1,000.
- Calculate the monthly savings on the loan as a result of obtaining a lower interest rate by paying the point: Example: $50 per month.
- Divide the cost of the point by the monthly savings to determine the number of months to break even (“cost to return”). In the above example, the cost to return is 20 months. If you plan to keep the home for longer than 20 months (slightly less than 2 years), then it might make sense to pay the point.
Note: the above calculation does not take into account the tax advantages of points. When you are buying a home, the points you pay should be tax-deductible, so you may realize some tax savings for that year. On the other hand, when you get a lower rate, your tax deduction is reduced! Again, please consult with your tax advisor if you have any questions about your individual tax benefits. It is important to note that in the case of a refinance, the points are NOT 100% tax-deductible that year. Rather, the points are amortized over the life of the loan, resulting in no meaningful tax benefit.
6. What is a FICO score?
Answer: A FICO score is a credit score developed by Fair Isaac & Co. This scoring system is a method of determining the likelihood that credit users will pay their bills. Credit scoring has become widely accepted by lenders as a reliable means of credit evaluation.
Credit scores analyze a borrower’s credit history considering numerous factors, examples of which include:
- Manner of payment on obligations
- 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
- Negative credit information such as bankruptcies, charge-offs, collections, etc.
Your credit score will largely determine your loan qualification and the final interest rate you receive from your lender. It is helpful to know what your FICO score is prior to entering into any loan transaction and negotiating terms with your lender. Every consumer has the right to a free credit report once a year. There are many sources for obtaining your free credit report, such as myfico.com and other internet sources.
If you are planning to buy or refinance a home, the credit report is incorporated into the loan application process, for a nominal fee (usually $20 or less). If you are shopping lenders, do NOT allow your credit report to be obtained until you have made a decision to apply with a specific lender. Multiple inquiries on your credit report may have a negative impact on your score.
7. How can I improve my credit score?
Answer: 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. Wherever possible, use on-line and auto pay for recurring debt payments.
- 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.
If you see an error on your report, report it to 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, your mortgage company may help you correct this problem as well.
