How Does Alternative Credit Work?

Sometimes buyers will not have a credit score at all (not enough credit).  In these cases, your lender will often use alternative credit to establish credit history.

Alternative credit includes any items you pay on a monthly basis but that does not report to the credit bureaus.  Examples include:

• Childcare
• Rent to own
• Tote the note
• Utilities
• Cable
• Cell phone
• Pager
• Insurance

Normally, your lender will want three good alternative credit lines.  That is three lines that have a 12 month pay history with no 30 day lates.  So if you think you may be in the situation of needing alternative credit, start today on finding three good lines and make sure that all payments are on time.

Mortgage Lingo

Mortgage Lending Lingo:  What does it mean?

Like all industries, the world of mortgage lending has its own language, or terminology.  Below is an overview of many of the terms you will hear during the process of obtaining a loan.

At loan application, you will receive a Good Faith Estimate.  It will include an estimate of your new house payment and a list of the fees.  You can use the terms below to help understand your Goof Faith Estimate.  Keep in mind thought, the taxes and insurance are the estimated portion of your payment.  Ask your real estate consultant for actual property taxes and consult your insurance agent for a more accurate insurance quote.

Adjustable Rate Mortgage (ARM):  Loans with interest rates that are adjusted periodically based on changes in a pre-selected index.  As a result, the interst rate on your loan and the monthly payment will rise and fall with increases and decreases in overall interest rates.  These mortgage loans must specify how their interest rate changes, usually in terms of a relation to a national index such as (but not always) Treasury bill rates.  If interest rates rise, your monthly payments will rise.  An interest rate cap limits the amount by which the interest rate can change; look for this feature when you consider an ARM loan.

Amortization:  the process by which the principal amount of the mortgage is reduced through periodic payments

Annual Percentage Rate (APR):  an interest rate that reflects the cost of a mortgage as a yearly rate; takes into account any points and fees, and is based on the loan going to its full term

Appraisal:  an expert evaluation of the fair market value of the property

Caps:  a limit in the amount that an ARM my change at each adjustment period and over the life of the loan

Conventional loan:  any mortgage loan that does not have government backing

Credit score:  a number which is developed from the information contained in your credit file; a credit score represents your credit risk

Deed of Trust:  instrument that is recorded against a property to secure the mortgage loan.

Down Payment:  the cash payable by the buyer of a property equal to the difference between the sale price and the mortgage loan amount.

Escrow Fee:  A fee paid to the title company for handling all of the moneys related to the close of escrow (your settlement of the purchase).

Escrow Account:  The same word (escrow) is used in a completely different context.  Escrow fee above is paid during closing (for the handling of the contract and disbursement of funds for that transaction).  The Escrow Account here is an account set up for the life of your loan to store your payments of taxes and insurance.  You will be required to pay an entire year of hazard insurance at closing.  In addition, you may be required to put 2 to 3 months of property taxes and 2 to 3 months of property insurance into the escrow account.  Part of your monthly payment will be for taxes and insurance and will go into this account.  These funds will accumulate over time and will be used to pay your yearly property taxes and hazard insurance.

Fixed Rate Mortgage:  a mortgage in which the interest rate remains constant over the life of the loan

Good Faith Estimate:  a written estimate of the closing costs associated with obtaining a particular mortgage loan

HUD-1:  the final settlement statement that is issued by escrow at closing showing the disbursement of all funds taken into escrow

Loan-to value (LTV):  expressed as a percentage:  represents the percentage of your home’s value that is taken up by your mortgage(s); example:  if your home’s value is $350,000 and your mortgage balance is $248,500, your LTV is 71%

Margin:  in an ARM, the spread between the rate of the index and the rate actually charged to the borrower

Mortgage insurance:  an insurance policy paid by the borrower which guarantees the lender that they will be paid back the entire amount of the loan if the borrower defaults

Negative amortization:  the process of adding to the principal balance of a loan when the payments do not fully cover the required interest

P.I.T.I: Principal, Interest, Taxes and Insurance – your total payment.

PMI or MIP (Mortgage Insurance): Depending on the amount of your down payment, you may be required to pay for PMI.  Typically a 20% down payment ensures the lender’s loss will not be substantial in the event of a foreclosure.

Points:  a “point” is equal to 1% of the loan amount

Prepaid Interest: Depending on the time of month your loan closes, the charge may vary from a full month of interest to one day of interest.  Prepaid interest is paid from the day of closing and funding through the end of the month.

Prepayment penalty:  a charge imposed by a mortgage lender on a borrower who want to pay off part or all of a mortgage loan in advance of schedule

Principal:  the face amount of a mortgage loan

Processing Fee: Fee charged by the mortgage compnay to handle the processing steps of your loan application to gather your information for underwriting.  Processing involves building your file of information for your loan.  Processing includes getting the credit report, verification of employment, assets, etc.

Title:  legal evidence of ownership of a property

Title Insurance:  insurance obtained by the buyer of a house to ensure clear title to the property

There’s More to Choosing Your Lender Than Interest Rates…

Choosing a lender for your mortgage loan can be a stressful experience.  There are numerous factors to consider.  The most common way a mortgage lender is chosen is by comparing interest rates and closing costs.  While these items are very important, most people forget that service is equally or more important.  The term service is often over-used and nebulous.  In the mortgage industry, service represents certain standards that I would demand for my clients.  I will recommend several mortgage lenders that have these qualifications.  These standards are such things as competency, reputation, responsiveness and knowledge.  The lender will consult with you about the  best product/program for your individual needs, expedite the process and make it as enjoyable for you as possible.  The mortgage lenders I will recommend will also have current market services such as in-house underwriting, quick loan approval, and a wide selection of programs and often attend closings.  Consistent communication is also a standard that is expected.  Obviously, it is important for the loan officer to provide this high quality service so that we can work together to make this a “WOW” experience for you and so that you will feel compelled to recommend you friends and family members to me for similar “WOW” service.

Simple Ideas For Raising Money For A Down Payment….

1. Have a garage sale.  You’ll be surprised how much money you can raise this way, especially if you’re willing to give up some of the junk you’ve been hoarding for years!
2. Raid your savings.  Even if you’ve been trying to keep a little stashed away, this is important!  If your kids have a savings account, ask them if you could borrow from theirs as well!
3. Borrow from your retirement fund.  Many retirement funds (401K, IRA etc.) have provisions for you to borrow from them for important reasons.  This counts as an important reason!  Check with your plan administrator or your financial advisor about this option!  The nice part about this is that as you repay the your loan, you pay the interest to yourself!
4. Ask your family.  This is probably the hardest thing for some to do, but you might be surprised at how willing a family member would be to help you buy a house, even if they’ve said “no” to you before when you tried to borrow for other things!  If you do this, you’ll need a form from your banker stating this is a gift not a loan.  (yes, you can still repay your family member.  It just can’t be a formal loan!)
5. Sell something.  If you look around your house, you might find items that have pretty good value, but that you haven’t used it in a long time.  An old coin collection; an old musical instrument that no one plays anymore; an extra freezer you don’t really need; a second (or third) car you could do without.  Often, the cash from selling these items can add up quickly!
6. Win the lottery.  Hey, somebody’s gonna win!  Might as well be you!

FHA Financing Advantages/Disadvantages

Advantages

• Low Cash Outlay – The down payment required on FHA loans is usually lower than on conventional loans and the buyer’s closing costs are generally lower on FHA loans than conventional.  The FHA buyers may make a cash investment as low as 0% of the sale price in some instances.
• Favorable Interest Rates – Traditionally, FHA interest rates were lower than conventional rates, but with today’s “floating interest rate” the rate can be negotiated between the buyer and the lender.  Also, 30 year fixed mortgages are widely only available through FHA lenders,when some conventional lenders only want to make adjustable rate mortgages.  FHA’s graduated payment mortgages and adjustable rate mortgages carry lower initial payment rates for the buyer.
• Lower Payments – FHA buyers desiring very low initial mortgage payments may select a graduated payment mortgage plan.  This plan can reduce the buyer’s payment by up to $300 in the first year and reduce the “effective interest” or “payment rate” by 3.5% interest initially.  The buyer’s payments would gradually increase for 5 years and then level out in the sixth year of the loan.  FHA adjustable rate mortgages are also available at 1.5% – 2% below fixed rate mortgages.
• Buyer Can Qualify for Larger Loan Amounts – While the regular FHA qualifying formula is similar to conventional loan qualifications, the FHA graduated payment program allows some buyers to qualify for up to $30,000 larger loan amounts due to the greatly reduced first year payment.  (The buyer is qualified on the first year payment only.)  In addition, FHA had liberalized their traditional income and debt ratios.  Present income rations are 20%, with debt ratios at 41%.  Underwriters are also giving 2% extra income and debt ratios for “Energy Efficient Homes”
• No Prepayment Penalty – FHA loans do not have penalties for paying off all or part of the loan before the scheduled term.  This feature also gives the FHA buyer the opportunity to refinance the loan to lower interest rates if rates decline (with some additional cost involved in refinancing)

Disadvantages

• Some Sellers Fear FHA Appraisals – There are some sellers and real estate sales people who would prefer not to sell their homes to buyers seeking new FHA loans.  This stems from past appraisals, which were lower than the sales price or had extensive repair requirements.  While the appraisals still may be a roadblock in some areas of the U.S., FHA now uses independent “fee” appraisers rather than FHA “staff” appraisers, which has eliminated many of the discrepancies.
• Loan Processing Time – FHA loans generally take about 2 weeks longer to process and close than conventional loans.  Normal FHA processing time is 4 to 6 weeks, compared with 2 to 4 weeks for conventional loans.  However, many FHA lenders are now approved for automatic loan approvals, which can speed up processing substantially.
• FHA Maximum Loan Amounts Too Low – In some areas of the U. S. the housing costs are much greater than FHA’s maximum loan amounts, thereby limiting the use of FHA loans to medium and lower priced housing.  Check with your lender to see what the current limits are in Tarrant and Dallas counties – they are in the area of $160k to $170k