Mortgage
You can borrow too much or prepare too little. You can misjudge terms or overestimate your credit. With so much at stake, it’s no wonder so much can go wrong.
By Liz Pulliam Weston
Original article in MSN Money in 2002 http://moneycentral.msn.com
Applying for a mortgage can be a daunting experience.
It’s not enough that you’re agreeing to take on the biggest debt of your life, one that represents two to three times your annual income. You’re also confronted with piles of paperwork, flurries of fees and a tidal wave of terms, from amortization to title insurance, whose meaning is fuzzy at best.
“Whether it’s a professor at Stanford or a ditch digger,” said San Francisco mortgage broker Leon Huntting, “most people don’t understand the loan process.”
In this confusing and pressure-filled atmosphere, it’s easy to make some mistakes. Here are some common ones that lenders and mortgage brokers see, and what you can do to prevent them.
Not fixing your credit
Mortgage brokers say they’re confounded at the number of buyers who apply for a mortgage with their fingers crossed, hoping their credit will allow them to qualify for a loan.
Before you even think about applying for a mortgage, obtain copies of your credit report and your FICO credit score. Your FICO score is the three-digit number that’s used in 75% of mortgage-lending decisions. You can order your FICO score on the Web for a fee of $12.95, which includes a copy of your credit report. (See link at left.)
Doing this at least six months in advance should give you plenty of time to challenge any errors on your report and ensure that they’re removed by the time you’re ready to apply for a loan. You can also see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt.
Not looking for first-time home buyers’ programs
These programs, typically sponsored by state, county or city governments, often offer better interest rates and terms than you’ll find among private lenders, said mortgage consultant Diane St. James. Some are tailored for people with damaged credit, while most can help people with little saved for a down payment.
Some of these resources are listed on St. James’ educational Web site, ABC Mortgage Consulting (see link at left). You can also call the housing agencies for your state, county and city to see what they offer.
Not getting pre-approved for a loan
Many first-time borrowers confuse being “pre-qualified” with being “pre-approved.” Pre-qualification is a pretty casual process, where a lender tells you how much money you probably can borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment.
Getting pre-approval, by contrast, is a much more rigorous process and involves actually applying for a loan. You typically submit tax returns, pay stubs and other information. The lender verifies the information and checks your credit. If all goes well, the lender agrees in writing to make the loan.
In a hot or even warm real estate market, the house hunter who is only pre-qualified is a cooked goose. Home sellers and their agents give much more weight to offers being made by buyers who already have a loan lined up.
Borrowing too much money
Many people take out the biggest loan they possibly can, figuring that their incomes will eventually increase enough to make the payments comfortable. But few first-time buyers have any clear idea of how expensive homeownership can be. Not only will you shell out more for mortgage payments than you probably did for rent, but you’ll also need to cover property taxes and homeowners insurance, as well as higher bills for utilities, maintenance and repairs than you faced as a renter.
Lenders are perfectly willing to let you overextend, knowing that you’ll probably forgo vacations, retirement savings and new clothes for the kids rather than default on your mortgage.
“Mortgage money … is way too easy to get,” said Ted Grose, president of the California Association of Mortgage Brokers. “People tend to overbuy … and that can really stress family life. It’s also a formula for foreclosure.”
Instead of going to the edge of affordability, consider limiting your housing costs — mortgage payments, property taxes and homeowners insurance — to 25% or so of your gross income. That’s a much more sustainable level for most people, financial planners say, than the 33% lenders are typically willing to give you.
Not shopping around for rates and terms
Mortgage broker Allen Jackson of Bristol Home Loans in Bellflower, Calif., sees too many borrowers with decent credit getting stuck with loans meant for people with poor credit. So-called “subprime” loans are often more profitable, so less ethical mortgage brokers may push them.
If the borrower doesn’t know what the prevailing interest rates are for someone with their credit standing, Jackson said, they can easily pay thousands of dollars more than they need to. You can see a listing of loan rates by credit score at MyFico.com, and a comprehensive listing of prevailing rates and fees can be found in MSN Money’s Banking area.
Even people with a few dings on their credit can often qualify for better loans than they’re typically offered, said Grose of 1st Mortgage Advisors in Los Angeles. He believes most of the people being shunted into government loan programs, such as Federal Housing Administration (FHA) loans, would pay less if they used mortgages now being offered by private-sector lenders, such as Wells Fargo.
“The FHA loans are more profitable for the broker and they don’t have to disclose their fees,” as they do with many other mortgage loans, Grose said. “My mortgage broker buddies are going to send me hate mail, but it’s true.”
Paying junk fees
Lenders can boost their profits by adding on a variety of fees. Some may be legitimate, some may be inflated and others may be pure fluff. Lenders may charge for “document preparation,” for example, when all that involves typically is having a computer spit out a form. Or they may charge $150 for a credit check that cost them $15.
The time to challenge junk fees is not when you’re about to sign the loan papers. Use a mortgage broker or call a number of lenders to compare their loans. Ask about the interest rate, the “points” charged to get that rate (each point is 1% of the total loan amount) and any other fees the lender charges. Then you can compare terms.
Once you’ve selected a lender, you’ll be given a good-faith estimate of closing costs, which should include any fees being charged. Ask about each fee, and try to negotiate down the ones that seem excessive.
If the lender won’t negotiate, “take that estimate to someone else,” St. James said. “I’ll bet they can beat it.”
Unfortunately, this doesn’t absolutely guarantee you won’t face junk fees when it comes time to sign the loan. Many borrowers complain that they still face higher costs than were originally estimated, and so far the federal government has done little to prevent the practice. You can try challenging junk fees at this point, but most likely you’ll have to bite the bullet and pay the fees to get your loan.
Not planning for closing costs
The day you’re scheduled to get your loan, known as closing, you’ll also be expected to write a check for a number of expenses, which typically include attorney’s fees, taxes, title insurance, prepaid homeowners insurance, points and other lenders’ fees. Together, these are known as closing costs, and the total can be eye-popping: somewhere between 2% to 7% of the selling price of the house.
“Usually, when people see the closing costs, they’re like a deer in the headlights,” said mortgage broker Huntting, who works for Pacific Guarantee Mortgage. “It’s much more than they ever think it’s going to be.”
Plan for closing costs by getting a good-faith estimate from your lender as early in the loan process as possible. Make sure you have the cash on hand (or rather, in your checking account) and that it doesn’t “disappear” before closing because of sloppy bookkeeping or a last-minute emergency.
Not having enough cash on hand after closing
After borrowing too much, and scraping together every last dime for closing costs, many home buyers have nothing left in the bank to pay for anything unforeseen happening –and something unforeseen always happens.
“It costs so much just to move in,” Grose said. “Then the water heater breaks.”
Some people are so tapped out by the process, Jackson said, that they’re not able to make their first mortgage payment on time. That’s why “more and more lenders are requiring [borrowers have] three months’ reserves after closing,” Jackson said.
That’s a smart idea for borrowers, anyway. Having three months’ reserves, which means a fund equal to three months’ worth of expenses, will help you handle the added costs of homeownership with much less stress.
Continue reading about 8 big mortgage mistakes and how to avoid them
Looking to buy a house? Make sure you know what will truly hurt and help your case with lenders — and don’t fall for the misinformation mortgage lenders can spread.
By Liz Pulliam Weston
Original article in MSN Money in 2002: http://moneycentral.msn.com
There’s a lot of misinformation being propagated about what does and doesn’t hurt your credit score, and much of it is coming from sources who should know better: mortgage lenders.
Now, let me say first that I’ve worked with several excellent lenders who really knew their stuff and kept up to date, not only on loan trends but on the information that’s available about credit scoring. That’s important, because the FICO credit score, in its various permutations, is used in three-quarters of all mortgage lending.
But what I heard from several lenders responding to my recent column, “8 big mortgage mistakes and how to avoid them,” was the kind of bad advice that can cost you money and keep you from getting the best loans.
So if your mortgage broker gives you any of the following advice, take a tip from me: Find a new broker.
Closing accounts can help your credit score
No, no, no. For the umpteenth time: Closing accounts can never help your credit score, and may hurt it.
Every time I write this, I get more e-mail from people who say their mortgage lenders told them exactly the opposite. It’s true that having too many open accounts can hurt your score. But once you’ve opened the accounts, you’ve done the damage. You can’t repair it by shutting the account, and you may actually make things worse.
The credit score looks at the difference between your available credit and what you’re using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.
The score also tracks the length of your credit history. Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score.
Rather than closing accounts, pay down your credit card debt. That’s something that actually can and usually will improve your score.
Checking your FICO score can hurt your credit
Unfortunately, I heard this one from a mortgage broker who is otherwise pretty smart. He was confused about which type of inquiries hurt your score and which don’t.
Applying for new credit is generally what hurts your score. Ordering a copy of your own credit report or credit score doesn’t count. Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also aren’t going to hurt you, either — unless you actually take them up on their offers.
If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO score treats multiple inquiries in a 14-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.
For most people, one inquiry will generally knock no more than 5 points off a score (and scores typically run from 300 to 850, so that’s not a big percentage).
Credit counseling will hurt your score as much as a bankruptcy
The current FICO formula ignores any reference to credit counseling that may be in your file. That’s been true for the last three years, after researchers at Fair, Isaac, the company that created the FICO scoring system, noticed that people getting credit counseling didn’t default on their debts any more often than anyone else.
Your ability to get a loan could still be hurt by credit counseling, however. Your current lenders may report you as late, because you’re not paying what you originally owed or because your credit counselor isn’t sending your payments in on time. Late payments do hurt your credit score.
Lenders consider other factors besides credit scores in making their decisions, as well. The factors they look at can vary widely. Most want to know your income, for example. Some want to know how much savings you have or whether you’re a homeowner. Some will find credit counseling disturbing, while others see it as a good sign.
The mortgage lenders who don’t like credit counseling generally treat its enrollees the same as if they had filed for Chapter 13 bankruptcy. Chapter 13 is the kind of bankruptcy that requires a repayment plan and is looked at somewhat more favorably than Chapter 7, which allows you to erase many of your debts. You might still be able to qualify for a loan from one of these lenders, although your interest rates will almost certainly be higher than if you had perfect credit.
If you plan to get a mortgage soon, and you’re not already behind on your debts, it’s probably smart to steer clear of credit counseling. If you’re already in trouble, however, a good credit counseling agency might be able to help you get back on track.
Your FICO isn’t the only score you need to check
This came from lenders who thought the FICO score is offered by only one of the three credit bureaus: Equifax.
In reality, all three of the bureaus offer FICO credit scores using the formula developed by Fair, Isaac, but they each give the scores a different name. At Equifax, the FICO is known as the Beacon credit score. At TransUnion, it’s called Empirica. At Experian, it goes by the unwieldy title of “Experian/Fair, Isaac Risk Model.”
Complicating matters further is that you’ll probably have three different scores from the three different bureaus, largely because the bureaus don’t all share the same data. One bureau may list more accounts for you than another, for example, and the differences (in types of accounts, payment histories, credit limits and balances) will be reflected in the score that bureau computes for you.
Because of those differences, it does make sense to pull and examine your credit reports from all three bureaus before you apply for a big loan like a mortgage. Many mortgage lenders take an average of the scores from the three bureaus, or pick the lowest score, when making their decisions, so fixing errors in all three reports before you shop for a loan is smart.
When it comes to comparing your scores, however, you may be stuck. Equifax is so far the only bureau that makes it easy for consumers to get the same FICO score that lenders see. (You can order your Equifax FICO score on MSN Money here.) The scores typically provided to consumers by Experian and TransUnion aren’t FICO scores, and they’re different from the scores these bureaus provide to lenders.
But the ways you improve your credit score are the same in any case: Correct errors. Pay your bills on time. Pay down your debt. And apply for credit sparingly.
Buying a house in Austin
July 22, 2002
By: Tomer Pintel , Austin, TX.
Well, you decided to buy a house in Austin. Good for you. We’ll try to give you some information about the process.
First, how much house can you afford? Here is a little calculator to help you with that: http://www.calculator.com/pantaserv/finance/howmuch.cgi Property Tax is between 2%-3% in Austin, depending on the neighborhood. Home Insurance rate is about 0.3%. Enter all the rest of the data as you see fit. This is of course only a rough estimate, but it can give you an idea of how much you can spend on a house and still live nicely.
Now you need to choose what kind of a house you want. There are several options for that; each has its advantages and disadvantages for you.
- A new house from the contractor: There is something special about buying a brand new house and if you buy it before it’s finished you might be able to change a few things like colors, tiles and light fixtures. You can also get a good deal on a house that is already finished and not yet sold, you won’t have upgrades but the contractor will lower the price until he finds a buyer. The bad things about buying a new house are extra expanses for blinds, the back yard and a sprinkler system. These can easily cost around $6,000-$10,000.
- A preowned house: In a preowned house what you see is what you get (at least if you look for it). Preowned houses are usually cheaper and they usually come with the yard already done and blinds. Some have a sprinkler system and some don’t. The older the house the bigger the chances for something (or a lot of things) wrong in it. In Austin, the city was built in circles from the center, so in the center you have the oldest houses, while all the new neighborhoods are either in the south near Circle C or in the north near Round Rock. I think that a good compromise is a house not older then 5-7 years and too far from where you work.
After you decide which kind of a house you want, think about it’s layout. Do you want a one story house with a smaller back yard, or a two stories one with a big back yard? If you have (or plan to have) small children, make sure the master bedroom is near the children room or you’ll be running the stairs all day (and night) long. A large yard is fun, but someone has to take care of it. Don’t say you weren’t warned.
How many rooms do you need? Some people like to have a separate living room and a family room, while others like only one. A safe number is a room for each child, a master bedroom and a guest/study/game room. This will give you lots of space and if the family extends, you don’t have to rush and switch houses under pressure.
The next thing to decide is where do you want your house. The things to consider are the commuting time to work, the neighborhood and the schools. Nobody lives east of I-35. Far West is very expensive. Round Rock and Cedar Park have a lot of traffic problems during the rush hours. You need to consider the age of the house when you start searching for the right neighborhood, because most of the neighborhoods will have houses in the same age (give or take a few years). The schools are very important for two reasons: If you have school age children you will want them to go to a good school and for resale value – if the schools are crappy, people with children will not buy the house from you.
After you know what you want it’s time to start searching. There are a few options here as well, and it really depends on how fast and how cheap you want to find your house.
- A Realtor – The realtors in Austin don’t get paid from the buyer, only the seller. The usual amount is 3% from the sale price (if the seller has a realtor too, he pays another 3% to him as well). You might say you don’t care as you don’t pay, but if the sale is without a realtor the price could be 6% lower. For a first time buyer I highly recommend using a realtor, as the realtor sends the proposal, checks all the paper work and knows what to look for. In a new country that is very important and the sale process is very different from Israel’s. A good realtor will tell you all that is wrong with the house (the good things you can see for yourself). He will give you information about the schools near the house and his estimate of how much the house is worth. My realtor done a very nice job, his name is Steve Gardner and his mobile is 748-8820. There is a web site called http://www.erealty.com/ where the seller pays only 1.5% commission and the buyer gets 1% rebate when the sale is done.
- Sale by owner – Some of the time the seller may decide he doesn’t want a realtor in order to save the commission. They usually advertise in the papers and you can recognize the houses by the sign “for sale by owner” if you drive by them.
Getting a Mortgage
You can get pre-approved for a mortgage as soon as you decide how much money you need, give or take a few thousands. It’s better to be pre-approved when you make an offer on a house because the buyers know you are serious and you won’t have last minute problems getting the money.
The process goes like this: First you need to know if you have at least 20% down payment to put on the house. Don’t waste your last dollar on the down payment because you’ll need more for the closing costs (more on that later). I you have the 20%, good for you. It will be much easier getting the money and the rates are lower. If you don’t have the 20%, the APR will be higher and will include some kind of extra insurance on the part below the 20%.
Now, you need to decide what kind of mortgage you want. There are several dozens options but they come down to a few variants:
- 30-year mortgage – you pay the mortgage in monthly payments for 30 years with a fixed annual percentage rate (APR).
- 15-year mortgage – you pay the mortgage in monthly payments for 15 years with a fixed APR. This will make your monthly payments about 50% higher, but you finish in half the time. The APR is usually a little lower for it as well.
- X-1 ARM – The X stands for the number of years the APR is fixed and after that it can change with in a certain limit. The ARM stands for (I think) Adjustable Rate Mortgage. The X is usually 3, 5 or 7. This is a good option if you don’t intend to stay in the house for more then the X years of the ARM, as the APR is about 0.5% lower then the 30-year one.
- Labor ARM – This kind of mortgage is very similar to the ARM and gave us the lower APR we could find at the time.
Always ask for the rates for all 4 variants before you decide.
After you decide how much money you need for the house, call your bank or a mortgage company. I used North American Mortgage Company http://www.namc.com/ to get my mortgage. Tell them you want to be pre-approved for a mortgage, and give them all the details. Ask them for a Letter of Understanding – this will include all the closing costs for the mortgage. After you get pre-approved go to at least two other companies, tell them you are pre-approved with what APR and ask them for the letter of understanding too, so you can compare the different companies. What this will give you, is that only one company will do a credit check on you, not all three (or more). If you decide to go with another company, they will of course do a credit check as well, but for the closing costs and the APR they don’t need it.
There is a weird law in the U.S., which makes buying houses with cash very difficult. What the law says is that you need to have money in a bank account for three months before you can use it to buy a house. This is in order to prevent money laundering by criminals. What it means is that you either have to have the money in a U.S. bank for three months or give the mortgage company some proof that the money is in a bank in Israel, which is not as easy as it sounds because you need the proof in English. What I did was, I came to the mortgage company and showed them over the Internet my account in Israel with the money there. It then took about three months to buy the house so they let me slip by without having to bring anything from my bank in Israel.
If you get money as a present from your parents to buy the house, there is a limit to how much they can give you (I think about $9,000 a parent), and you need them to sign a Gift form and bring it to your mortgage company (they will give you the form).
Closings costs vary widely from company to company, you can easily save about $500 just shopping around. One of elements in the closing costs is the Escrow Account – this is a special account for making your life easier, if a bit expensive. Let me explain: When you pay your monthly payment, some of the money goes to an escrow account. This account will be used by your mortgage company to pay the yearly taxes and insurance on your house. The monthly payments will be as follows: mortgage payment + estimated property tax/12 + property insurance/12. Sound nice but there are a few problems. First, you need to give at closing about two months worth of taxes and insurance which can be a problem if you are tight on cash at closing. Second, each year you need to send the mortgage company the papers with the taxes for them to pay, so it’s not something you can forget about anyway. Third, while the money is sitting in the escrow account, you don’t get any interest on it. If you want to cancel the escrow account, some mortgage companies will ask you for a “fine” in order to do it. Some companies don’t – find a one which doesn’t. If you canceled the escrow account, remember to put aside some money to pay the taxes with on January and you will have to pay a whole year of insurance at closing.
Another thing that is very important is to get a mortgage without penalties for pre-payment. This means that if you get some money and want to put it into the mortgage, you won’t have to pay any fines on it. When you get the papers from the mortgage company a few days before closing, make sure there is no fine for pre-payment or you’ll be screwed.
Well, I hope I didn’t forget anything.
Good Luck,
Tomer Pintel
