Below you can find the answers to some commonly asked questions.
One of the most common questions we hear is, “Should I wait to save more money for a down-payment so I will have a lower mortgage payment?”The quick answer is “don’t wait”. There are a number of varying factors. The borrower’s purpose and goals are the largest determining factor. Is the purchase for primary usage, a vacation home or as an investment property? The needs of one person are not the same as another borrower. Historically, home values will rise, given enough time.
Even if you are required to pay Mortgage Insurance, acquiring a property in the current mortgage environment should be a paramount goal. Although some might debate this recommendation consider looking at these factors; a) Are your local property values rising at a rate greater than your savings account, b). For the property you are interested could you save the additional down-payment plus the rate of the appreciation in a one year period, c). Would I be able to carry the proposed mortgage at current market interest rates?, d). What is the likely hood of mortgage rates rising over the next 12 months?, e). If mortgage rates rise 1% would the payment of a smaller mortgage amount be significantly lower than a mortgage payment if I purchased today and f). What are my tax implications? (consult your tax advisor).
Each of these factors/questions will vary for every borrower. There is no one answer for every person. There is no one answer for ever area of the country. Appreciation rates vary from area to area. What works in one area might be a failure in another local.
It has become more apparent to many people that the appreciation and tax benefits posed through real estate ownership, is the root to financial wealth. Real Estate had been appreciating at a staggering rate over the past decade only to fall rapidly during the economic crisis. As the economy stabilizes, values will plauteau or begin to marginally increase with some blips.
It had become harder for families to realize the dream of owning a home regardless of the continued efforts of the state & federal government. In late 2004 the percentage of home ownership had risen to almost 69%, but many could not afford the home or town of their dreams. With the collapse of the market, home values became more accessible. There are loans available with low down payment’s and lender paid credits toward closing costs.
The historical national average was for most people stay in a house for 5-7 years. If these are your plans why waste your money on a fully amortizing 30 Year fixed rate loan payment vs. a Adjustable Rate Mortgage or an Interest Only Mortgage (if available). Some people believe because their neighbor or their parents had a fixed rate mortgage they must have one, but you need to look at your goals and needs.
Two River Mortgage & Investment is always available for free consultations. In the end only the borrower can answer which program is more beneficial. Even then, plans change over time.
The old rule of thumb that you need to lower your Interest Rate by 2%, is more or less obsolete. For some people as little as a 1/2% drop in thier loan rate would be sufficient. This is a question with no definative answer. It is all relative. Foer some individuals a month savings of $100 is significant others need the savings to be higher. You must ask yourself if the monthly savings is significant to you.
Interest only home loans offer buyers greater purchasing power,
increased cash flow and usually more liberal underwriting guidelines.
The product is clearly not designed for everyone. The interest only option for the adjustable rate mortgage can be extremely beneficial to the borrower for whom these mortgages are tailored. The mortgage market has a number of programs available to borrowers. We have composed a brief list of some of the products currently available. PLEASE REMEMBER, get the program specifics from any Lender, Banker, or Broker before you place an application. Two lenders might have a very similar program, but the details of the program might differ radically.
|1 MONTH ARM – INTEREST ONLY||Theses mortgages are usually tied to the LIBOR Index. The interest rate on this loan is calculated by adding the current monthly index rate plus the your specific margin. When you compare lenders you need to know the margin more than the start rate. The start rate will only remain constant for one month. The margin will not change throughout the term of the loan. The index value will be adjusted every month. As the LIBOR Index adjusts your interest rate will be adjusted.|
|1 & 3 MONTH OPTION ARM – MTA, LIBOR, CMT, COFI, COSI, CODI||
You NEED TO fully understand these loans before you consider them. They have very flexible underwriting guidelines. You will see these loans advertised as 1% – 2.45%.
This is not the interest rate but the “minimum monthly payment”. The mortgage payments for the first 12 months will be calculated and fixed for 12 months by the “minimum monthly payment”. The “minimum monthly payment” will increase 7.5% per year.
The interest rate on this loan is completely independent from the “minimum monthly payment”. The interest rate will adjust monthly after the initial period (1 or 3 months). Should the index that the loan is tied to increase rapidly the loan has a potential for Negative Amortization. Negative Amortization in when your payments fail to meet a level sufficient to cover a minimum interest payment. If you continued to have the negative amortization you could have a situation where you owe more money than you originally borrowed. Most of these loans have clauses that forbid the borrower from exceeding 110% – 125% of the original loan amount.
These option ARM’s also have an interest only feature, however the interest only feature only applies when the fully indexed (margin plus index) interest only exceeds the “minimum monthly payment”. The borrower will receive a monthly statement that details the payment options as they become available.
|6 MONTH ARM – INTEREST ONLY OPTION||Theses mortgages are usually tied to the LIBOR Index. The interest rate on this loan is calculated by adding the current monthly index rate plus your specific margin. When you compare lenders you need to know the margin more than the start rate. The start rate will only remain constant for six months. The margin will not change throughout the term of the loan. The interest rate will be re-calculated every six months. The re-calculation will cause the interest rate to adjust every six months.|
|3 YEAR ARM – INTEREST ONLY OPTION||The interest rate is fixed for the first three years of the loan term. During years 4 thru 30 the interest rate is adjusted every year based upon the margin plus the index. The margin will not change throughout the term of the loan. Some 3 Year ARM Programs are interest only for only the first 3 years while other programs extend the interest only option for the first five years of the loan. The borrower is required in Years 4 thru 30 or 6 thru 30 to make fully amortizing principal and interest payments based upon the remaining term of the loan.|
|5 YEAR ARM – INTEREST ONLY OPTION||The interest rate is fixed for the first five years of the loan term. During years 6 thru 30 the interest rate is adjusted every year based upon the margin plus the index. The margin will not change throughout the term of the loan. Some 5 Year ARM Programs are interest only for only the first 5 years while other programs extend the interest only option for the first ten years of the loan. The borrower is required in Years 6 thru 30 or 11 thru 30 to make fully amortizing principal and interest payments based upon the remaining term of the loan.|
|7 YEAR ARM – INTEREST ONLY OPTION||The interest rate is fixed for the first seven years of the loan term. During years 8 thru 30 the interest rate is adjusted every year based upon the margin plus the index. The margin will not change throughout the term of the loan. Some 7 Year ARM Programs are interest only for only the first 7 years while other programs extend the interest only option for the first ten years of the loan. The borrower is required in Years 8 thru 30 or 10 thru 30 to make fully amortizing principal and interest payments based upon the remaining term of the loan.|
|30 YEAR FIXED RATE – INTEREST ONLY OPTION||The interest rate is fixed for the first ten years of the loan term. During years 11 thru 30 the loan becomes fully amortizing for the last 20 Years.|
This data was originally compiled in 2000. This is for background purposes and is not to be reproduced or distributed.
Credit Scoring is quite simply a manner of statistically analyzing and grading your credit history. Credit scoring seeks to apply a number to your credit history for the purpose of determining your potential credit risk. The credit score allows a lender to predict the potential performance of any loan made to a borrower.
Credit scores have been in use since the late 1950′s, however they have only become an integral part of the mortgage process since late 1995 and early 1996. This is when the mortgage industry started to utilize the credit scores in an effort to increase the quality of mortgage application approvals.
Each or the three major credit repositories; Equifax, Trans Union (TU) and Experian (TRW) produce their own credit scores. Each credit repository uses a slightly different criteria model, therefore each of the three repositories will present three different credit scores. Many lenders will “pull” (request) a credit report from each repository to acquire the three credit scores and use the middle credit score. If an application contains both a husband and wife or the application has multiple borrowers, often the middle credit score of the lowest rated borrower will be used to determine the credit worthiness of the borrowers. Co-signing on a loan is no longer an absolute positive to the lending criteria.
Credit Model Criteria
Each credit bureau uses different factors for their models. These factors range from 33 variables to over 100 variables. Generally, all of the variables of the model can be broken down into five categories:
- Credit History: This is a snapshot of the short term (12-24 months) payment history and the long term (2yrs – 7yrs) payment history. The short term is more heavily weighted.
- Percentage of current indebtedness: The computer models heavily factor your credit available verses your current outstanding credit balances, as a percentage. Any revolving account with a balance over 40% begins to lower the credit score.
- Age of Accounts: The length of time an account has been open bears weight on the credit score. A borrower with five perfectly performing accounts might have a low score if all the accounts are less than two years old.
- Types of Accounts: The criteria weights the value of accounts from highest to lowest in the following manner; mortgages, auto loans, installment loans to revolving and credit cards.
- Inquires: A large number of inquires on a credit report will have a negative effect. It is a sign the borrower is attempting to acquire debt and it is therefore difficult to determine who has granted the borrower debt and for how much. Inquires are usually removed after a three month period. Each model also allows for shopping for a mortgage.
These are the primary, but not the exclusive factors utilized to determine an individuals credit score.
Credit scores have a range from 400 up to 900 (although most of the mortgage profiles reach a max. score of just over 800). Pre- 2007 collapse, Fair Issac & Co. had reported that Credit Scores below 620 will be seriously delinquent or fall into foreclosure for 1 out of 8 loans granted. Credit Scores between 700-719 will be seriously delinquent or fall into foreclosure only for 1 out of 123 loans granted. Credit Scores above 770 will have only 1 out of 1,292 loans that will be seriously delinquent or fall into foreclosure.
To be a safe risk on a FNMA (Fannie Mae) fully documented mortgage application; the borrower will need a credit score of 620 or higher. In the 2013, the economic environment caused many lenders to have a minimum score of 640. A score above 700 will generally assure that a borrower’s mortgage application will proceed free of most credit problems. Generally, Fannie Mae and Freddie Mac will not accept credit profiles that are below 620 without major compensating factors.
Why does your credit score matter? Loan Level Pricing Adjustments is the simple answer. These are charges to the points or interest rate mandated by Fannie Mae, Freddie Mac and FHA. These fees could be as much as 3 points.
Borrowers with a credit score above 700 will be granted greater flexibility in the underwriting of their file. An underwriter will be more willing to approve an applicant’s file with a “back end ratio” of 43% when the credit score is on the higher end of the range. Many lenders will allow the underwriter to avoid needing a second signature when the borrower has a 700+ credit score.
Caution is the course of action followed by many investors when the credit scores are between 620 and 640. Often other compensating factors are required to build the quality of the file as a whole. Any credit score below 620 would immediately raise a red flag and would most often be cause for loan denial from a program underwritten to Fannie Mae or Freddie Mac guidelines.
Is this a Fad?
Expect credit scoring to remain an important facet of the real estate industry for years to come. The accuracy of credit scoring has been improving with every mortgage payment. The only foreseeable roadblock to the use of credit scoring in the mortgage industry are a few court suits based upon the ground that credit scores discriminate against minorities.
Fannie Mae & Freddie Mac will continue to purchase billions of dollars in mortgages in the secondary market each year. They are two of the largest sources for mortgages in the nation. The underwriting criteria they set forth will set the guidelines for underwriting and will filter down throughout the industry. Even a major lender who retains their own servicing while selling the mortgages as mortgage backed securities are pressured to use the Fannie Mae & Freddie Mac underwriting criteria to maintain the ease of sale of the mortgage loan in the secondary markets.
Can A Borrower whose Credit Score Falls Below 620 Still Aquire a Mortgage?
A borrower whose credit score falls below 620 may still acquire a mortgage. There are very few lenders in this channel after the economic collapse. Many traditional banks and mortgage companies will not lend money to borrowers who have credit scores that are below the 620 level. These borrowers might be better served by seeking mortgage lenders who portfolio their mortgage loans or mortgage bankers who have alternative wholesale lenders that are more receptive to borrowers with credit scores under 620.
Quite often the cause of a low credit score is the result of either excessive debt limits or outstanding judgment’s. If you have credit card debt that exceeds 50% of you credit line, your credit scores will fall. Paying off an outstanding judgment / charge-off / or lien usually will not have an immediate effect on a credit score.
Only time, low debt percentages and clean payment history can help raise your credit score. The time frame will vary from borrower to borrower. For a fee some Credit Companies can re-score a report in a few days. Some mortgage companies have credit programs that will inform you of how to raise your credit scores by paying off certain debts and how many point you could see in the short term.
Some lenders will allow a judgment to be paid prior to closing, while other lenders might want a 6-12 month grace period after a judgment is paid in full.
NOTE: In most situations borrowers cannot close on a mortgage with outstanding
judgments or tax liens. If a judgment is in a monthly repayment program, it must be paid in full.