Information You’ll Need To Provide — Part 1 of Applying For Your Loan

Whether meeting face-to-face or talking on the phone during the initial step with a mortgage professional, they should fully explain and walk you through the application process. It is a simple interview, and most of the information you’ll need can be taken straight from your credit report. The amount you’ll actually need to provide on your own isn’t overwhelming.

There are generally six areas that will be covered:

• Personal Data: Full names, addresses, and Social Security numbers of all borrowers.
• Income: The amount and sources of income for all borrowers.
• Assets: Information on all assets you’ll be using to qualify for the loan. This includes things like checking and savings accounts, stocks and bonds, retirement plans, and other real estate owned.
• Debt & Obligations: Information on all outstanding debt and other financial obligations.
• Credit References: Information concerning loans or debt that have been paid, plus any other references to good credit use.
• Property Information: Specifics on the property you wish to buy, if you’ve chosen one.

Are You Thinking of Moving Up?

Whether you’re ready or not, as life changes, so do your housing needs. Families grow. Careers unfold. Lifestyles shift. One way or another, your circumstances change, and you may find yourself looking for a more comfortable home, one that’s in a new locale, or just a better place for your current living pattern.

Over the years with economic cycles and technology advances, the home financing process has changed, too. That’s why it’s critical you work with an individual that can make moving to your next home easier. Be sure you work with a mortgage professional that is ethical, experienced and aligned with a  lender with rock solid financial stability, have access to a vast menu of home financing options, provide fast approval decisions, low down payment programs, and flexible rate, terms, and closing cost options.

Financing a home is not a once-in-a-lifetime decision, and the financing package you used to buy your first home may not meet your needs the next time around. An experienced mortgage professional will help you find a home financing solution that supports your current and future homeownership goals.

The majority of homeowners purchase multiple homes in their lifetimes. Each time you buy a home, you need to reevaluate your needs and goals. So whether you are trading in your first home for a larger one nearby, relocating for the tenth time, or looking to move to a new area for a lifestyle change, working with the RIGHT mortgage professional makes a HUGE difference.

Pick your lender and Realtor responsibly!

Finding the Right Home - Should I Buy or Build?

One of the first decisions you will have to make in your home search is whether to purchase an existing home or build a new one. Each approach offers unique advantages, and your individual lifestyle, financial goals, and schedule will determine which is best for you.

Common reasons for moving up to a newly built home include:

• New homes are built with new materials and appliances, so they typically require less maintenance than resale homes.
• They often must offer more safety features and fewer health hazards in order to conform to today’s building codes.
• New homes are usually well-insulated due to better windows, more efficient heating and cooling equipment, and greater use of insulation.
• They can be easier to customize than resale homes because you choose many details ranging from floor plans and paint colors to faucets and light fixtures.
• New homes are more likely to be wired with new technologies in mind, such as multiple phone lines, high-speed Internet connections and extra cable outlets.

Existing homes, on the other hand, are attractive to many buyers for the following reasons:

• Older houses and neighborhoods may have more character and charm.
• They typically have more land than newer properties due to changes in land-use patterns.
• The homes are often in older, more convenient metro areas rather than in outlying suburbs.
• They tend to be less expensive than new properties and more likely to include items that may cost extra with a new home, such as blinds, landscaping, built-ins, etc.

Depending on the state, resale homes may have lower property tax rates. If you do decide that a newly built home is best for you, remember that a construction project requires careful planning. To make sure yours goes smoothly, keep a few basic tips in mind:

• Decide which features you want in advance. Consider whether you want to customize the floor plan or even order particular home appliances through the builder.
• Check the builder’s reputation. Your local Better Business Bureau, builders association, and newspaper all provide listings for builders. You can check out prospective builders by visiting their construction sites, getting references from previous clients, talking to real estate agents, or even hiring a general contractor for an assessment.
• Consider signing a written contract. Many homebuyers sign contracts with builders that detail the house model, building options, materials, payment schedules, timing for completion of construction and how to resolve disputes. Consult with your real estate professional and lawyer to help you through the contract and negotiation process.

Once you decide to build a home, we can sit down and develop a personalized financing program to match your needs.

Common-Sense Tips To Help Your Home Sell Quickly

Clipped from NBC’s Today Show, real estate maven Barbara Corcoran talks about preparing your home for sale.  As usual, her remarks are spot-on.

Some highlights from the 5-minute video:

1. Go online and shop for your own home first
2. Empty your home of two-thirds of the “stuff”
3. Keep your home immaculately clean

Corcoran also offers pricing tips that can help get your home sold faster.

Watch the entire interview at MSNBC.

What The Bank of America-Countrywide Merger DOESN’T Mean For Homeowners

For all that’s been said about the proposed Bank of America-Countrywide merger, what’s not getting talked about is how the merger will impact existing Countrywide customers.

The short answer is that it won’t.

A mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party, even if the mortgage is transferred between lenders.

As a homeowner, the only way to “end” the contract is to satisfy the home loan with a full repayment.  That can happen one of three ways:

1. The home is sold and the mortgage is repaid
2. The home is refinanced and the mortgage is repaid
3. The home loan is paid down to $0 balance by the homeowners

Mortgage payment servicers commonly transfer home loans between each other.  This happens on an everyday-basis — not just when there’s a merger, or a closure. 

When mortgages are transferred, HUD requires the former lender to send a 15-day advance notice to its lendee; the new lender is required to send a similar notice.

So, for homeowners that write their mortgage checks to Countrywide every month, it’s possible that the address to which you mail your payment may change, but the terms of your mortgage cannot.

(Image courtesy: The Wall Street Journal Online) 

What’s Your After-Tax Mortgage Rate?

Many homeowners are entitled to two major tax deductions — one for annual interest paid on a home loan, and another for real estate tax bills paid to government.

Calculating your approximate tax credit is basic:

1. Add mortgage interest paid and real estate taxes paid together
2. Find your marginal tax rate
3. Multiple your tax bracket by the sum of Step 1

So, for a homeowner that paid a combined $13,000 in mortgage interest and real estate taxes last year, and who is in the 28% marginal tax bracket, a tax credit of $3,640 may be due from the IRS.

This credit is one reason why some people sometimes refer to “after-tax mortgage rates”.  An after-tax mortgage rate is the adjusted interest rate after the IRS doles out credits and is calculated as follows:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)

The same homeowner with a 6.000% mortgage rate, therefore, has an after-tax mortgage rate of 4.32%.

Because not every homeowner is eligible for mortgage interest and/or real estate tax deductions, and because not every homeowner should claim them, you should consult with your accountant to see how tax credits fit into your tax liability schedules. 

Federal income taxes are highly personal and require the attention of an experienced professional.

Applying For Your Loan - The Home Loan Process — Part 2 of 2

This simple, four-step walk-through to loan closing will help you understand the procedure and give you an idea of what to expect.

1. Processing

When initially meeting with a mortgage professional, they will request and collect the information needed to process your loan. Documentation requirements vary depending on the loan program you apply for, as well as your individual financial and credit profiles. Subject to your overall profile and documentation, your mortgage professional should send you a commitment letter detailing any documentation requirements you’ll need to meet should your loan be approved. At the same time, they will most likely order an appraisal. At this point, you’ll have the option to lock in your interest rates or float it.

Items To Discuss Early In The Process

Floating The Rate: You’ve applied for your loan but you’ve also decided to wait before committing to an interest rate, perhaps because you think interest rates stand a chance of going down in the short-term. Your loan can typically stay in a float status up until 10 days before closing in most cases. During any float period, you can stay up to date on interest rate by signing up for the daily interest rate e-mail available on most mortgage professional Web sites. It’s important to remember, NOT locking in is something of a calculated risk.

Locking In: You and your lender commit to a range of interest rates for a specified period of time - typically up to 180 days for new construction loans. During that period, your interest rate range is protected from increases. If you close your loan during that period, you get the rate range. If you go beyond the lock-in period without closing, you may have to work with the rate ranges available at that time. Locking in is something of a calculated risk.

There are also some reasons why a rate could change even during a lock-in period. For instance, a change in your credit profile could occur, you might decide to change your down payment, or you might change your mind on how many discount points you want to pay.

Whether you decide to lock or float, you’ll be taking a calculated risk. It’s a tough decision, and you’re the only one who can make it. Talk with your mortgage professional to get an idea of what interest rates have been doing recently. You should also find out if there are any economic events coming up that could affect mortgage rates in the short term.

2. Title Insurance

There are two types of title insurance: one protects the lender, the other protects the borrower from claims against your ownership of the property. Such claims might be made by undisclosed spouses, heirs of previous owners, creditors holding liens against previous owners, or other parties. Your lender will most likely require you to purchase a title policy, which will cover their interest in the property.

It’s up to you if you would like to purchase a policy to protect your interest in the home. Your mortgage professional should be able to recommend a title insurance company who can provide you with additional information about the policies available in your area.

3. Homeowners Insurance

As mentioned on other posts, most mortgage lenders require proof that you’ve purchased homeowners insurance at closing.

In the event of a loss such as a fire, tornado, or burglary, homeowners insurance can pay for damages to the home, as well as for costs to repair or replace contents. If you are unable to live in your home as a result of damages, homeowners insurance can cover additional living expenses for a period of time while your home is being repaired. Homeowners insurance can also protect you from loss if someone is injured or their personal belongings are damaged while on your property.

Your Insurance company will be required to provide proof of insurance in time for your closing.

4. Closing

At your closing, you’ll go through all the final steps of securing your new loan. The most important thing to know is that all closing costs must be paid in full at this time. Make sure you work closely with your attorney and any me to find out exactly how much you’ll have to pay at closing. At this juncture, your mortgage professional should work closely with you to make sure no last-second surprises affect your closing.

Previous posts in this “Applying For Your Loan” series:

Are You Inadvertently Merging Your Credit Score With A Stranger?

A 2004 study showed that 4 out of 5 credit reports contained at least one error. 

The errors were of various types with different implications.  A quarter of the errors, for example, were of the “serious” nature; errors that could lead to a credit denial because of a false-reporting delinquency or collection. 

A much larger source of credit scoring errors, though, was related to misreported personal data. 

More than half of the mistakes on credit reports were found to be related to erroneous name spellings, incorrect social security numbers, and/or wrong addresses. 

These types of demographical errors can damage credit scores in not-so-obvious ways:

1. The strong credit report of a “Jr.” may mix with the weak credit report of a “Sr.”, or vice versa
2. Credit accounts demonstrating strong payment histories may be omitted
3. Derogatory credit of like-named people can “merge”

To limit demographical errors, a person should apply for new credit using a consistent form of their name, and then use that form on every new application. 

John A. Smith, Jr., for example, should always apply for credit using the name “John A. Smith, Jr.”. 

Short-cutting an application with “John Smith” can lead to a “mixed” credit report that combines the tradelines of multiple John Smiths.  Especially because there is a John Smith, Sr., who likely lived at the same address at one time, and who may have a similar social security number. 

Credit agencies do not discern between two similar sets of demographic data very well.

In the four years since the original study, it’s not likely that the 80% error rate has improved, but by limiting demographical errors in our own histories, we can reduce the frequency and severity of the problem.

Planning For A “Quick Close”? Now May Not Be A Good Time.

On the backs of surging purchase activity across the country and low mortgage rates, home loan applications have risen to a near four-year high. 

For people with mortgage applications in process, some patience may be required.

In 2006 and 2007, mortgage volume slowed nationwide.  Narrowing mortgage guidelines restricted the number of eligible borrowers and rising mortgage rates made refinancing impractical for many homeowners. 

In a push for profitability, lenders eliminated jobs because fewer applications meant fewer people were needed on staff.

So now, with rates edging near their 2004 lows and with strong demand for home purchases nationwide, mortgage lenders are finding themselves short-staffed. 

Lenders are understaffed to handle the volume of mortgage applications coming in each day.

As a comparison:

• October 2007: 24 hours to review and approve a home loan
• February 2008: As long as 20 days to review and approve a home loan

Some lenders have gone so far as to eliminate the benchmark 30-day rate lock option, replacing it with a 60-day option instead. 

60-day mortgage rates are typically 0.125% higher than comparable 30-day ones.

As a home buyer, home seller, or mortgage refinancer, it’s important to recognize that lenders may not have the capacity to move as quickly as you’d like them to.  To help them move more quickly (and possibly save you money), be prepared and be responsive. 

30-day closings are still possible, but, given today’s demand for mortgage money, they are increasingly rare.

6 Things To Avoid While Waiting For A Mortgage Approval

When buying a home, there are two stages in the home loan approval process.

Stage 1 starts when a homebuyer submits a mortgage application to his loan officer for a pre-approval. 

A pre-approval is a “walk-through” mortgage approval that says — at a given purchase price and downpayment amount — the home loan application will very likely be approved.

Stage 1 ends when the buyer signs a purchase contract on a home.  At this point, the “walk-through” approval is useless because the buyer now needs a real home loan approval from an underwriter and not a loan officer.

Thus begins Stage 2.

During the second phase of the approval process, a mortgage underwriter is reviewing income, assets, credit, job history, and other items, too; the underwriters job is to make sure that the buyer meets the bank’s criteria for lending.

If the loan officer did his job in Stage 1, Stage 2 is just a formality.  And most times, it all goes according to plan.

Occasionally, though, a homebuyer sabotages his own mortgage approval by inadvertently changing his “risk profile”.  It doesn’t happen on purpose, of course — it just happens.

So, consider this a quick primer of what not to do while you’re between Stage 1 and the completion of Stage 2 of the home loan approval process.   Following these pointers will help keep the risk profile consistent.

1. Don’t buy a new car (or take on a larger lease payment)
2. Don’t quit your job or change industries (and certainly don’t switch to a heavily commissioned role)
3. Don’t transfer large sums of money into or out from your bank accounts (and remember that “large” is relative)
4. Don’t miss a payment to a creditor (even if you don’t think you owe it)
5. Don’t open a new credit card (even if you’re getting 10% off your new bedding)
6. Don’t accept a cash gift without talking to your loan officer first (because there’s rules on how to accept them)

There’s other items, too, but this a good start. 

Now, avoiding these mistakes may not be practical for everyone.  Therefore, if you know you’re going to violate a “rule”, check with your loan officer first. 

There are a lot of “gotchas” in mortgage lending and it helps to have professional guidance for your individual questions.

Spreadsheet Formulas: Calculating Home Payments

For a lot of homebuyers, calculating a prospective mortgage payment is an online experience.  For example, a search on Google for “mortgage calculator” returns 39 million options.

Some people, however, prefer to plan on their local hard drive using spreadsheets.  For these people, the hardest part is often figuring out what formulas to use.

Interest Only Payments

Home loans with interest only payments are much more simple to calculate than amortizing loans.

Using the graphic at right as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.

Then, create a third cell and input the following formula that calculates the “Monthly Payment”.  The formula is:

= (Loan Size) * (Interest Rate) / 12

Principal + Interest Payments

For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.

Using the graphic at right as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.

Then, create a fourth cell and input the following formula that calculates the “Monthly Payment”.  The formula is:

= - PMT(Interest Rate/12, Loan Term in Months, Loan Size)

For additional spreadsheet formulas and more in-depth reporting, explore your software’s “Help” feature to see what you can find.

Real Estate Term: Earnest Money

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account. 

This up-front deposit is more commonly known as “earnest money”.

A sales contract’s earnest money requirement will vary from contract to contract.  It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Some factors that can influence earnest money amounts include:

• Market conditions: Stronger markets often call for more earnest money
• Buyer economics: First-time buyers often give less earnest money
• Seller psychology: Skeptical sellers often ask for more earnest money

No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home. 

To this end, earnest money can be forfeited if the buyer later “backs out” of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent. 

This is because most purchase contracts are written with buyer-focused “outs” called “contingencies”. 

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.

When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer’s bottom line at settlement.  If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.

Earnest money customs vary from state to state, city to city, and even locale to locale.  Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts. 

The earnest money you save may be your own.

How Is Housing Doing? It Depends Who You Ask.

Last week, the Office of Federal Housing Enterprise Oversight released its fourth-quarter housing data. 

The OFHEO report color-coded each state according to its annual price changes.  The states shown in red lost value, and everyone else gained.  Overall, the OFHEO measured a 0.8% national increase.

Also hitting the wires yesterday was the Case-Shiller Home Price Index. 

This report focuses on the 20 largest metropolitan statistical areas in the United States and painted a much more grim outlook for housing.  According to Case-Shiller, prices declined 8.9% nationally.

Both reports are imperfect but one notable difference is that the OFHEO report measures all 291 MSAs in the United States and its data showed that two-thirds of them appreciated last year.

Once again, this just reminds us: real estate is a local phenomenon.  Every market is unique with its own price trends, independent from the rest of the country.

Making Your Home Sell Faster With Psychology

When selling a home, understanding a little bit about home buyer psychology can help you move your home more quickly. 

After all, what people perceive helps define how they act.

A recent article from RealEstateJournal.com listed techniques home sellers can use to attract more offers from buyers. 

The tips included:

1. Number Play: $299,999 seems far less expensive than $300,000
2. Connotation: Precise numbers indicate value; Round numbers indicate prestige
3. Simpicity: If you drop the price, make the math easy for the buyer so the savings are obvious

Curiously absent from the piece, however, is the #1 home selling tip that every good real estate agent knows:

To sell your home quickly, price it right.

A “good buy” speaks for itself — no psychology required.

What High Oil Prices Mean To Mortgage Rates

After briefly exceeding its all-time high, oil closed Monday at $102.45. 

Rising energy costs can lead to inflation because American Business eventually passes on its higher costs to American Consumers.

When consumers have to spend more money for the same amount of product, it’s called “inflation”. 

Another way to look at inflation is like an erosion in the value of a dollar.

The presence of inflation causes mortgage rates to rise because mortgage debts are repaid in dollars.  If those dollars are losing their value, the rates tied to those debts have to increase to “cancel out” the erosion.

This is why mortgage rates spiked Monday.  As oil prices rose, the fear of inflation grew larger.

Over the next few weeks, expect mortgage rates to be highly sensitive to oil prices.  As oil prices rise, mortgage rates should, too.  As oil prices fall, mortgage rates should follow.

(Image courtesy: New York Times)

Recession or Inflation? Even Fed Members Don’t Know For Sure.

With Friday’s jobs report looming, mortgage markets are especially skittish about whether the economy is in a recession, or facing inflation.

Four Fed speakers Tuesday did little to quell the debate:

• 9:00 A.M.: Fed Chairman Bernanke stayed on message that foreclosures and falling home values are dragging down the economy.
• 10:00 A.M.: Fed Vice Chairman Kohn said that banks will “face challenges” but will not fail en masse.
• 1:00 P.M.: Federal Reserve Governor Mishkin said that deflation is more concerning to him than inflation
• 1:00 P.M.: Dallas Fed President Fisher said fighting inflation is more important than fighting recession.

Four speeches, four different perspectives. 

The speakers’ mixed messages confused market participants and, as a result, mortgage rates varied wildly from hour to hour.

The confusion was so great that several mortgage lenders had to shut down their rate lock desks on three separate occasions Tuesday to re-price rates to the “new” market.

That’s a highly unusual occurrence and the market’s volatility underscored the uneasiness exiting in mortgage markets lately.  Without a clear picture of where the economy is headed, investors are left to guess (and they’re not very sure of themselves).

Friday’s job report may add some clarity, but until Friday comes, consider locking a mortgage rate if you see one you like – it probably won’t stick around for very long.

The Right Question: “How Much Do I Want To Spend On Housing Each Month?”

One of the most popular questions that home buyers ask real estate and mortgage professionals is “How much home can I afford?”

It’s a normal question to ask, but it’s not the most effective way to plan your finances. 

Banks will almost always approve you for a home loan in excess of your household budget.

The more appropriate question is: “How much do I want to spend on housing each month?” 

By focusing on a home’s payment instead of its list price, home buyers exert more control over their short- and long-term financial goals.  List price is only one piece of the monthly payment puzzle. 

The cost of owning a home month-after-month is the sum of multiple expenses:

1. The mortgage payment
2. The real estate taxes on the property
3. The condo/management fees to an association (if applicable)
4. The cost of homeowner’s insurance
5. The cost of mortgage insurance (if applicable)

In other words, because monthly payments are combination of costs, buying a home based on its list price does very little to help plan a budget.  A home selling for $300,000, for example, may cost a homeowner anywhere from $1,800 to $3,000 monthly.

This is why “How much do I want to spend on housing each month?” is a better starting point than “How much home can I afford?”. 

Home affordability comes from more than just the list price.

Where Presidential Candidates Stand On Matters Of Money

In an election year, voting for a presidential candidate can be a lot like buying a home. 

Both require a fair amount of analysis but — in the end — the decision is still highly emotional.

Using Bankrate.com’s side-by-side candidate comparisons, some of that emotion could be replaced by fact. 

In a gridded format, candidates are pitted head-to-head the following topics:

• Education
• Jobs
• Health Care
• Social Security
• Taxes

The charts can help Americans get a better feel for where the candidates stand with respect to “pocketbook issues” that impact them personally in their businesses, their lives, and in their homes.

Opinions on the issues are current as of January 29, 2008.  As with everything in politics, though, the candidate positions are subject to change.

How Picking Up The Telephone Can Reduce The National Foreclosure Rate

“Foreclosure” is the legal process by which a bank repossesses a home from a borrower and, according to RealtyTrac, 1 out of every 100 homes were in some stage of the foreclosure process in 2007. 

This figure is astounding because foreclosure is expensive to both homeowners and banks.  Both parties have an interest in avoiding foreclosure but the process has to start with the homeowner — banks are just too big to start it themselves.

Every mortgage statement has a 1-800 phone number on it.  If you’re about to fall behind on your mortgage payments, make a phone call first.  When you call the toll-free number, a customer service representative talk about your repayment options, or help you design a work-out plan to get your mortgage back to current.

Banks know that more than 80 percent of all foreclosures result from one of the following:

• Job loss/reduction in salary
• Medical issues
• Divorce
• Death

These are life events that draw compassion from banks.  They understand that bad things can happen to people. 

However, the other 20 percent of foreclosures are the result of an inability to sell, an unwillingness to pay, and budget mismanagement.  These reasons are not as acceptable to the banks.

But when a homeowner fails to forewarn his lender of a missed payment, the lender assumes the worst.  It puts the homeowner in the 20 percent category. This makes a work-out plan much less likely and can quickly lead to foreclosure and a loss of the home.

Lenders want to avoid foreclosure as much as homeowners do.  If you’re a homeowner and you’re facing trouble with your mortgage payment, give your lender a call in advance and try to work it out.

If you never call, you can’t possibly get help.

(Image courtesy: Countrywide Financial)