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Category Archives: FAQs

Does Refinancing Really Make Sense? Calculate It!

Posted on by Posted in FAQs, Homeowners, Rates & Fees, Refinance Leave a comment

Refinancing always sounds like a good deal when you can reduce your interest rates and monthly payment son your mortgage but does it always make sense to refinance your mortgage? Not always, which is why you should do some calculations before hand to make sure it will really benefit you in the short term and long term.

The Short Term
The short term benefit of refinancing is realizing a monthly savings on your mortgage payments. Reducing your interest rate enough to realize a substantial monthly savings can be very attractive to many potential refinance customers but this may be short sighted.

The Long Term
The long term takes into consideration much more than the monthly savings you may realize from refinancing your mortgage. The long term picture should include:

  • Change to your remaining term
  • Change to your mortgage balance
  • Cost of the refinance
  • The time frame you estimate you will continue to own the property

The Calculations
Below you will find a calculator to estimate your savings from refinancing your mortgage. Enter your numbers and find out what your savings might be. After you are done with the calculations we will use some of the figures to analyze your results.

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The Results
If the “Net Savings” was negative then refinancing will not be in your best interest. If your “Net Savings” was positive then refinancing may make sense and we should move on to another quick calculation.

With a positive “Net Savings” we should now calculate your break even point or the point in time where the cost to refinance is made up by your monthly savings. From your results in the calculator take your “Closing Costs” and divide that by your the monthly savings in the “Difference” column on the “Mortgage Payment” column. Here might be an example:
Closing Costs = $5,000
Difference = $133
Break Even = $5,000 / $133 = 37.59 or 38 months

This will help you in making the decision on whether refinancing will make sense based on the time period you expect to continue to own the home. In the example of above, if you planned to sell within about three years (or 36 months) then you will not recoup the cost of refinancing within the time period. If, however, you were planning to move in five years (or 60 months) then you would recoup your costs because after month 38 you will realize savings each month with your reduced payments.

We want to hear from you…
Did you refinance recently? Looking to refinance? What do your calculations show?

Good Faith Estimate Explained

Posted on by Posted in 1st Time Buyers, FAQs, Homeowners, Rates & Fees, RE Agents 1 Comment

The Good Faith Estimate, also known as a GFE, shows the interest rate, term, loan amount, and all settlement costs on a particular loan.

The Good Faith Estimate is divided up into several categories:  The loan fees, the Title and closing fees, prepaid interest and fees and reserves for the borrower’s escrow account.

The 800 section of the GFE are the loan fees, including fees actually collected and retained by the lender as well as fees paid to third parties such as the appraiser. These are the fees you will want to compare with different lenders and brokers.

The 1100 section are the fees charged by the title company.

The 1200 section are third party fees paid to governmental agencies in connection with the loan and real estate purchase.

The 1300 section are fees paid to any necessary third parties, such as inspectors.

The 900 section fees are interest from and including the day of closing to the end of the month, any upfront mortgage insurance required, the first year of homeowners insurance premium that will be paid to the borrower’s insurance company at closing.

On the GFE (Good Faith Estimate) you will notice some letters at the end of line 800: PFC, S, F, POC. PFC means Prepaid finance charge. These are the charges that are associated with calculating APR. S means Seller Paid. These are items that the seller will be paying at closing. The F means FHA allowable. These items are permitted by FHA. Lastly the POC stands for Paid Outside of Close. This means that these items will be paid for, generally, before close.

It is important to keep a copy of the original GFE you are shown, to compare it to the final closing statement before you sign your loan documents.

Items checked as pre paid (PFC) finance charges will affect the final APR of your mortgage.

Federal law requires lenders and brokers to provide a written Good Faith Estimate within three days after taking an application associated with a property from a borrower.

Have each mortgage professional go over the Good Faith Estimates with you. Compare the items line by line. If you notice the cost of any item on a GFE significantly higher or lower than that of the same item on other GFE’s, ask the loan officer to explain the difference. Some dishonest loan officers might “low ball” their settlement costs to gain your business.

Sometimes the fees listed on the Good Faith Estimate can change before closing. Some reasons include-

  • Your mortgage broker may have to submit your loan application to a different lender, either to get a better rate or because the underwriter at the first lender didn’t approve your loan (different lenders have different fees)
  • If your appraisal is sent to appraisal review by the lender, some lenders charge a fee for that
  • If you decide to use a different loan program or a different loan amount
  • If you close earlier or later in the month than estimated
  • If you decide to use a different home owner’s insurance company, policy, or deductible amount

Generally, other fees may vary a little as they are estimates (such as courier fees, which will rise as more packages are sent), but they should be pretty close.

In some states, if there are changes to the initial estimate but before closing, new GFE’s are required to be sent out prior to closing.

A Good Faith Estimate can inform you of the some or all of the costs necessary to complete a real estate transaction, but changes such as title, real estate or lender issues may arise through no fault of your mortgage broker. While your mortgage broker is responsible for giving you a Good Faith Estimate, it is not the responsibility of your mortgage broker to guarantee third party costs.

It is important for borrowers to understand the Good Faith Estimate because the fees listed are what they are being charged to close their loan transaction. Borrowers should have all fees explained to them by their loan officer and to challenge any fees they feel are unnecessary.

The Good Faith Estimate also discloses the interest rate on the loan, the approximate monthly payment and the amount the borrower will need to bring to closing.  Some sellers pay some or all of the borrowers closing costs.  These amounts are also show on a Good Faith Estimate. 

Understand that a Good Faith Estimate (GFE) is just that, only an estimate. Your costs at closing and the monthly payment can vary from the amount on the GFE.

Good Faith Estimate documents with unrealistically low figures are a common tactic used by less scrupulous mortgage companies to “bait and switch” borrowers by locking them into a loan process with the promise of abnormally low rates and fees, only to change the deal at the last moment, often at the closing table itself.  Be sure to check out who you are working with and make sure they are reputable. 

Lending A Hand

What is APR or Annual Percentage Rate?

Posted on by Posted in 1st Time Buyers, FAQs, Free Reports, Homeowners, Rates & Fees, RE Agents 4 Comments

One of the most common incorrectly explained and misunderstood topics within the mortgage business is the definition of APR.  I will do my best to unravel the mystery and explain it in a way that is clear and understandable so that next time you ask your lender about APR, you can correct their explanation about exactly what APR is.

Why is APR Used?

APR is part of the Truth in Lending Act that is one main area of regulation within the mortgage business.  APR was created to provide one number to determine the cost of a mortgage loan for the purpose of understanding the true cost and provide the ability to easily compare mortgage lenders and determine which one provides the lowest cost to you.  Sounds easy, right?  Just check one number on the documentation that mortgage loan officers provide and…BAM…done – you know who is best.  Not quite.

APR VS Note Rate

One of the main misconceptions or misunderstandings surrounding the APR is that some believe it is the note rate, or the rate of interest the lender will actually collect from you, as the borrower.  This is not correct.  APR includes other factors than just the rate that you pay the lender back.  Here are some of the fees that may be included into the APR calculation:

  • Origination Fee
  • Discount Points
  • Prepaid Interest
  • Processing Fee
  • Underwriting Fee
  • Documentation Prep Fee
  • Private Mortgage Insurance

Here is what is funny though – there is no exact rule as to what is and is not included into the APR calculation.  Check out two websites I was reviewing before posting:

Between these sites you can see a wide range of beliefs related to what fees are actually included in the APR.  This is because the Truth in Lending Act does not explicitly state what has to be included.  Here is the wording from the Truth in Lending Act:

  • All items required to be disclosed under section 226.4(a) and (b), except interest or the time-price differential.
    All compensation paid to mortgage brokers.
  • All items listed in section 226.4(c)(7), other than amounts held for future taxes, unless all of the following conditions are met:
    • The charge is reasonable,
    • The creditor receives no direct or indirect compensation in connection with the charge, and
    • The charge is not paid to an affiliate of the creditor.
  • Premiums or other charges, paid at or before closing if paid in cash or financed, for optional credit life, accident, health, or loss-of-income insurance, and other debt-protection or debt cancellation products written in connection with the credit transaction (section 226.32(b)(1)).

This is why the same loan with two different lenders could have two different APR calculations.  Keep this in mind when you are comparing mortgage lenders.

What is the Definition?

So now that we understand that no one knows exactly how to calculate the APR, what is APR, anyway?  Here is the best definition I could find for APR, courtesy of Investopedia:

The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

Here is the formula, found on the FDIC website:

My answer – use a software program.  Probably every mortgage loan officer uses some sort of mortgage software program to calculate the APR for them, to avoid the confusion of how to calculate the number outside of what should included in the calculation.

So Now What?

Now we are totally confused, right?  We don’t know what fees are included, and we don’t know how to calculate it – but, hey, at least you know how confusing it really is and why each lender will likely have a different calculation for you on APR.  Knowledge is power though…now that you know that the APR will vary, you can eliminate this as a viable method for determining the best loan to choose from a, merely, financial point of view.

Outside of the 8 Questions to Ask Your Lender post that I provided to help you in selecting a mortgage lender, when comparing just the financial aspects of a mortgage loan here is what I suggest:

  • Obtain a Good Faith Estimate from each lender on the same day
    • If you get GFEs on different days the rates quoted on the GFEs may be skewed and you will not truly be comparing apples to apples
  • Compare the fees in the 800 line items
    • These are the fees that the lender is charging and are likely to be the only fees that will truly vary at the time of closing
    • Although not all lenders disclose all fees outside of the 800 line items correctly, these fees will be the very close, if not the same, from lender to lender by the time of closing
  • Compare the interest rate
  • Compare the term (length of the loan)
  • Compare the terms
    • Is there a prepayment penalty
    • Is the payment interest only or fully amortizing
    • FHA, VA or Conventional
    • What type of MI
      • Up-front or just monthly

By comparing these items yourself, you will be able to determine the best loan on your own without relying on the APR calculation that no one quite understands.

Hope this helped confuse the confusion about APR. :)

Lending A Hand,

Scott Wynn

Pre-Qualification versus Pre-Approval

Posted on by Posted in 1st Time Buyers, FAQs, Qualifying

Several years ago most people didn’t really care about the difference between a pre-qualification and a pre-approval because there were so many qualified buyers in the home buying market place that if you couldn’t buy a home, there was somebody else who could.  With lender guidelines tightening and the pool of buyers shrinking, the importance of a pre-approval is increasing quickly.  So what is the difference?

Pre-Qualification

When I complete a pre-qualification with my customers, I typically do this over the phone and in about 10 – 15 minutes.  Here is what I ask:

  • Name
  • Social security number
  • Address
  • Employer
  • Length of employment
  • Income
  • Balance in bank accounts
  • Current rent or mortgage payment
  • Comfort range for new payment
  • Time frame to purchase or refinance

After asking these questions, I do some calculations and run a credit report.  During the call I can normally tell someone whether or not I believe that I can get them qualified for a mortgage.  I, and other experienced mortgage lenders, am able to do this due to the knowledge and past experiences I have helping customers obtain mortgage loans.

This is the level of qualification where most customers would stop before they buy a home.  The problem with this level of qualification is that nothing has been documented or proven to the lender.  Someone could tell the lender that they are employed and make $60,000/yr, but when a pay stub is provided the income may only be $45,000 or even worse, they may not even be employed.  The pre-qualification is based entirely on good faith.

Pre-Approval

Pre-approval takes the pre-qualification step to the documentation phase.  All the income, employment and bank information you told the lender about is now documented.  Here is a list of the documentation that a lender will need to complete a pre-approval:

  • Pay check stubs
  • Bank statements
  • W2s
  • Federal Tax Returns
  • Divorce decree
  • Child support/alimony orders

Not everyone will be required to provide these documents, however these are the most common.  In some cases, there is even more documentation that will need to be provided to the lender to complete the pre-approval.

Once the documentation is provided, the lender will then input all of the information into a loan application and run an automated underwriting system which compares the borrower’s information to the guidelines for a mortgage to determine if the borrower is an acceptable risk to provide a mortgage loan.  There are two possible outcomes:  pre-approval or a referral to an underwriter (traditional or manual underwriting).

Traditional/Manual Underwriting

In the case the computer can not approve the loan a person underwriter is able to review the file to determine if there are any circumstances that the computer could not analyze.  The person can take these circumstances into consideration and re-evaluate the risk.  In some cases the underwriter can overturn the computer decision, or sometimes they may agree with the computer risk assessment. 

 

Just about every seller wants to know they are selling their house to someone who is actually qualified to buy the home before they take it off the market.  Be prepared to provide a pre-approval letter from your lender when submitting offers on homes you are interested in purchasing.

Lending a Hand,

Scott Wynn

What is a Good Credit Score?

Posted on by Posted in 1st Time Buyers, Credit, FAQs, Free Reports, Qualifying

You just want to know what a good credit score is.  Probably because you are looking into obtaining a mortgage, or maybe an auto loan.  Did you know credit scores are used in other areas outside of obtaining financing?  Cell phone companies, insurance companies, apartments and sometimes even employers will check your credit to determine you as a risk.  So…..what is a good score, right?

720 is a good score.  So is 680.  Sometimes even 640 is a good score.  It is all relative.  These scores are scores used by mortgage companies and credit reporting agencies.  Some companies have developed their own credit scoring model that delivers an entirely different type of score put in the form of numbers or even letters.  I used to work for a cell phone carrier and when we ran credit for potential customers we would get responses of A, A-, B, B-, C and so on.  Based on the result we would increase the deposit that was required to obtain a cell phone.  Eventually the deposit was so high that many would opt out of getting a cell phone plan and just use the pre-paid phones that are a lot more popular now than when I was selling cell phones.

Anyway, I got off track there for a moment.  A good score is relative because someone might be interested in what is good enough to get a loan, while another person wants to know what the score needs to be to get the best interest rate.  So here are the answers:

What is Good Enough?

Good enough has been a moving target in the mortgage business because of the multiple companies making restrictions on the credit scores.  There are mortgage investors, mortgage insurance companies, and mortgage broker companies.  All of these companies may have individual restrictions on the credit scores they are willing to lend on and all of them must be followed.  Typically, the minimum credit score allowed for A-Paper mortgage financing is around 620.  There are some exceptions.  For example, I recently assisted a customer who had a 545 credit score and I was able to obtain A-Paper mortgage financing.  This is certainly an exception though.

More than the credit score, the actual items on your credit is the most important when determining what is good enough for mortgage financing.  FHA mortgages do not look at the credit score, but rather look at the actual trade lines on the credit report.  For more details on the requirements for FHA financing check out Mortgage Loan Requirements – FHA.

What Score Gets You the Best Rate?

Just like determining what score is good enough, the score that gets you the best rate is also a moving target.  This target moves more often than the minimum score to get a loan.  Here is an example to give you some idea of what impact your score (all other factors being equal) has on the interest rates:

  • 620 = 7.250%
  • 640 = 7.000%
  • 660 = 6.625%
  • 680 = 6.000%
  • 700 = 5.625%
  • 720 = 5.375%
  • 740 = 5.375%
  • 760 = 5.375%
  • 780 = 5.375%
  • 800 = 5.375%
  • 850 = 5.375%

As you can see, when the score was above about 720, the rate stayed consistent, up to the highest score I have seen of 850.

It is All Relative

A good credit score is relative upon what you are looking for and I hope this has given you some insight into what a good score is.  If you have any further questions, please email me and I would be happy to reply to your email in the form of a post.

Lending a Hand,

Scott Wynn

Mortgage Refinance – Does it Make Sense?

Posted on by Posted in FAQs, Free Reports, Refinance

Refinancing is a serious decision that will be based on emotion, money and both short and long term impacts.  Deciding whether or not now is the right time can be a difficult process, especially when you know you can get a lower interest rate.  So how do you go about determining if refinancing makes sense for you?  I hope to help you answer that question, now…

What It Means to Refinance

Everyone knows what refinancing means, but sometimes we don’t consider what the implications of a refinance are.  Refinancing means that you are obtaining a new mortgage to get rid of your old mortgage.  So why would someone want to get a new debt to pay off an old debt?  There are the popular answers such as lowering the rate, reducing the payment, getting cash out or obtaining a fixed rate mortgage instead of an adjustable rate mortgage.  All of these are great reasons, but it doesn’t always make sense to refinance for these reasons, which I will explain a little later.  Other reasons may include removing someone off of the mortgage or paying off a large portion of the principal balance.  No matter the reason for refinancing, considering the short term and long term impacts of the refinance should be considered.

Short Term Impacts

Being a mortgage loan officer, I am naturally drawn to mortgage advertisements I hear on the radio and television about mortgage loan options available to consumers.  The one I probably hear more often than any other is the ability to obtain a no cost mortgage.  The no cost mortgage idea gets people’s attention and entices them to look at the possibility of refinancing when they may not have in the past due to the costs.  I will fill you in on a secret…there is no free mortgage.  You probably already knew that though, didn’t you?  Refinancing requires that new mortgage documents are executed and recorded, which costs money.  Someone will have to pay for it.  Likely there are costs that the mortgage lender incurs to process, underwrite, close and fund the mortgage loan, too.  So what do these advertisers mean when they call it a no cost mortgage?

There are a couple of different ways that mortgage loan officers structure a no cost mortgage.

  1. They include the normal closing costs of the mortgage into the new mortgage loan obtained
  2. The cost of the mortgage is built into the interest rate

When looking into refinancing your mortgage, understand what the closing costs are and how they are being paid.  Knowing the cost will help you in doing some of the calculations I will explain later in this post.

Outside of the costs, consider another short term impact which is what your current mortgage looks like.  Are you an adjustable rate mortgage that is going to adjust in the near future?  Do you have a pre-payment penalty on your mortgage that will need to be paid if you refinance?  Are you on an interest only mortgage and considering refinancing into a principal and interest payment?  All of these items should be considered in the short term when looking to refinance and if you are unsure of what these mean, consult with your mortgage loan officer for assistance.

Long Term Impacts

The payment, interest rate, term and overall financial impact are the long term considerations to be analyzed.  If you choose not to pay for the closing costs, mentioned earlier, at the time of closing then you will need to determine which of the options is being used to pay those costs.  Either way, the monthly payment will be impacted.  Here is an example:

Let’s say you are refinancing your $200,000 mortgage and the cost to refinance that mortgage is $5,000.  You could obtain a new mortgage in the amount of $205,000, and a rate of 6.25%, instead of paying for the costs at closing or you could get a $200,000 mortgage with a higher interest rate, maybe 7%, to cover the costs.  If you are interested in how this works, check out my post on How Mortgage Lenders are Paid.  This will help you in understanding how to increase rates to cover costs.

Another factor that often goes without consideration is the term on your mortgage.  When I help customers decide on whether or not refinancing makes sense, I look at the remaining term on their existing mortgage compared to the new one.  If someone has been paying on their mortgage for 9 years and wants to refinance, realize that you will likely refinance into a 30 year mortgage starting the 30 year clock over.

If the reason for refinancing is to get cash out then make sure you look at what the cash will do to help you with your financial picture.  Sometimes that cash is used to pay off debt.  I once helped a customer refinance their home to get cash out to pay off debt.  By refinancing we saved them thousands of dollars and almost $700 per month, on a $250,000 refinance.  The reason it helped so much is because they had equity in their home that helped to pay off car loans and credit cards.  Ultimately, it made sense for them to do this.  But, they could have just used their credit cards again, after the refinance, and put themselves into the same financial picture they were in before, or even worse.  You will be the only one that has control over whether this will help you long term.

Mathematical Reasoning

Math is normally not what most people consider to be fun, so I will do my best to make this simple, yet effective in assisting you to determine if refinancing makes sense.

  • Break Even Point
    • Determine the point in time in which the refinance will ultimately help you more than the short term hurt
      • If you are going to reduce your payments by $116/mo but it costs $4,273 (just an example) to refinance, just divide the cost ($4,273) by the savings monthly ($116) to get 36.84 – the number of months it requires you to keep the new mortgage before it made sense to refinance
      • If you are getting cash out, consider the amount of savings you have each month in your entire financial picture and not just your mortgage payment (in some cases your mortgage payment will be higher)
  • Short Term vs Long Term
    • With all the scary stuff in the news about the mortgage crisis and foreclosures, many want to get out of their adjustable rate mortgage so they know exactly what their payments will be for the life of the loan
      • If you want to get out of your adjustable rate mortgage, scheduled to adjust in 3 years but currently has a rate of 5.125% compared to 30 year fixed rates of 6.25%, for example, calculate the current payment compared to the potential payment over the 3 year period of time
      • Here is an example:  5.125% payment = $1,104 vs 6.25% payment = $1231 or a difference of $$127/mo, over 3 years is $127 X 36 months = $4,572
      • Add in the closing costs of $4,273 (same example as above) for a total cost of $4,273 + $4,572 = $8,845 – is it worth it to you for the peace of mind to know your payment wont adjust for the next 3 years?
  • Mortgage Term Calculated
    • If you have been paying on your mortgage for 5 years and now you want to refinance to take advantage of a lower rate, consider you are getting a new 30 year fixed mortgage and will paying for 5 years longer than you would have if you did not refinance
      • Current payment may be $1,200 and by refinancing, you could reduce that to $1,100 or save $100 per month
      • Cost to refinance of $4,273 (just an example from above) should be considered
      • 5 years of $1,100 payments = 5 years X 12 months/year X $1,100 = $66,000 more to pay at the end
      • TOTAL savings over 25 years (new 30 year term minus the 5 years you would have saved by not refinancing) = 25 years X 12 months/year X $100 = $30,000
      • TOTAL cost of the refinance over the 30 years = refinance cost of $4,273 + cost of the longer term of $66,000 = $70,273
      • This calculation only works if you intend to stay in the home for the full term of the mortgage, but in this scenario, it would not make sense to refinance

The Moral of the Story

If I had to state what the moral of the story was for this post, it would have to be to pick a great mortgage lender who is going to help you in completing these calculations and look out for your best interest compared to their ability to earn a commission.  For assistance on picking a great mortgage loan officer to assist you with refinancing, check out my post on the 8 Questions to Ask Your Lender.  If you have the right mortgage loan officer in your side, they will complete these calculations, and possibly more, to determine if it makes sense for you to refinance.  If you need a little more help, check out the refinance calculator on my mortgage website.

Lending a Hand,

Scott Wynn

Mortgage Don’ts

Posted on by Posted in 1st Time Buyers, FAQs, Free Reports, Qualifying

I recently received an email from a Lending a Hand reader requesting information on what to avoid throughout the mortgage process to ensure a smooth approval and closing.  Instead of just responding directly, I thought many of the readers could benefit from this question, so I decided to write a post on the Mortgage Don’ts.  Here they are…

Don’t buy or lease a new vehicle.  Mortgage lenders look closely at the debt-to-income ratio, so any changes to your financial situation, especially a large monthly payment like a vehicle, will impact your ability to qualify.  Many people get anxious to fill that new garage they just bought with a new car.  Just wait until after closing if you really want a new car.

Don’t move your money around.  Although it is not impossible to document assets when the funds are transferred from one account to another, it just complicates the process, unnecessarily.  This includes the transfer of gift money.  If you have a relative that is going to provide money as a gift for your home purchase, talk with your lender about the method they would like you to transfer the money.  In some cases there is a very specific process that should be followed.

Don’t change jobs. Part of the verification process and approval process involves documenting your job history and stability.  If you switch jobs, the income that can be documented may change due to the method in which a lender calculates your income.  This is especially true if you change the industry you work in.  It may seem obvious, but this happens all the time – Do not quit your job.  Some believe that once you are “pre-approved” there is no need to worry about any changes since the approval process is done.  The lender has the right, up to the day of closing, to verify all information that the approval was based on.  This includes your employment, income, assets and credit.

Don’t buy new furniture or appliances.  The reason for this don’t is similar to the don’t about buying or leasing a car.  Any changes to your debt can have an impact on your ability to qualify.  If you charge a furniture or appliance purchase on a credit card, the payment must be calculated into your debt ratio and could impact your ability to qualify.  Even the “no interest, no payment” plans will impact your debt ratios, so wait until after you close.  If you plan to pay for those items with cash, it may not impact your debt ratio but it can impact your assets and reserves (the amount of money remaining after the closing of the house).  This, too, can impact your qualifications, so play it safe and wait.

Don’t make changes to your credit.  Changes to your credit can sometimes negatively impact your score, when your intention was to increase your score.  Check out my previous post on how to Quickly Increase Your Credit Score and read the Beware Tip #1.  This example shows how good intentions can result in bad results.  If you would like advice on what, if anything, you should do related to your credit report, check with your mortgage loan officer.

Don’t pack or ship any financial documents.  Important documents like tax returns, W2′s, bank statements, pay check stubs, divorce decrees, DD214, should not be packed with other household items.  Wait until after you close, as there are sometimes unforeseen circumstances that will require those documents.  Duplicate copies can take weeks to obtain.

By following these don’ts you can eliminate a lot of unneeded stress throughout the mortgage processing.  If you are reading this while in the midst of a loan approval and have done one of these don’ts, be sure to tell your lender so they can help in rectifying the situation before it becomes an emergency, possibly impacting your ability to purchase.

Lending a Hand,

Scott Wynn

8 Questions to Ask Your Lender

Posted on by Posted in 1st Time Buyers, FAQs, Free Reports 4 Comments

I was planning to start this post telling you about how important a home purchase and mortgage financing transaction can be, but I think everyone already knows that. Before I jump right into the questions, I want to explain the questions I am suggesting you ask.  Most sites on the Internet suggest asking specific questions about your loan including interest rate or APR, closing costs, term, whether there is a prepayment penalty and so on instead of how to go about selecting the right mortgage loan officer.  The loan officer you select will be the one to help you find the best mortgage program for you that fulfills your needs, so if you select the right loan officer, you will likely not need to worry about the terms of your loan because they have provided the best possible loan for you.  I am not suggesting you don’t ask the loan questions, but by getting the 8 questions below answered you will likely receive a much better mortgage than you would otherwise.

Here are the questions you should ask when deciding on the right mortgage loan officer for you:

#1 – Why Should I Select You as My Mortgage Loan Officer?

Seems like a simple and obvious question, but I can tell you I rarely get this question asked of me.  Let’s take this out of context for a second, and suggest you were going into brain surgery and there were two outcomes – death or success.  Would you want to know the credentials of the brain surgeon working on you?  Would you want to know why they are better than the other brain surgeons in the area, or even the country?  Personally, I would want the best doctor I could get my hands on, despite how much it may cost me.  By asking why you should select that person as your mortgage loan officer, it allows them the opportunity to brag professionally about themselves and put them in the best light possible.  If they don’t have a good answer, your answer should be, “next” – move on to another loan officer who is confident in their ability to provide you with a great mortgage loan.

#2 – How Many Mortgage Loans Have You Closed in the Past Year?

Understanding the volume of their business helps you to understand their level of experience.  If someone has done just three loans over the past year, I would want to understand how they believe they will be able to help me better than someone who does, say, three loans every month or every week.  This may also be a situation where you determine that the loan officer is too busy to take care of your particular needs.  Just because they do three loans every week does not necessarily mean they are not able to meet your needs, but it should be considered and further questions should be asked to make sure they will be there for you when you need them.  Just because someone does three loans per year does not necessarily mean they are not experienced.  In fact, this could be someone who enjoyed a successful career and now does this part time as a sort of retirement.  I wouldn’t mind that sort of situation considering they have a great amount of experience and now have a lot of time to meet your needs, especially if you have a lot for questions or need a lot of time with your loan officer.

#3 – How Long Have You Been in the Mortgage Business?

I remember when I first started doing mortgage loans.  I had a customer who came to me as a referral.  I was very confident they would end up working with me, but I needed to find the best mortgage option I could.  I provided the option to this customer as a 95% jumbo loan with mortgage insurance (the type of loan is not all that relevant, but what I do want you to understand is that this loan was expensive with a higher than average rate and a mortgage insurance premium that did the customer no good).  It was the only loan program that I thought I could offer.  My customer compared me with a friend of his, who was also in the mortgage business, and was told he should get an 80/15/5 to avoid a jumbo loan amount and mortgage insurance.  Why didn’t I think of that?  Lack of experience.  The primary role of a mortgage loan officer, outside of attracting business, is to problem-solve and provide great solutions to customers.  Without the knowledge and experience, a newer loan officer may not be able to provide great solutions for you.

Consider the flip side now…a very experienced loan officer who has been in the business for a while may be a bit cynical about the business and tired of working with customers.  I am not suggesting that all mortgage loan officers who have been in the business for a long time are cynical, but just like any industry, those people do exist.  A newer loan officer may also be hungry enough for business they will look out for you and your interests more than someone who has been doing this for a while.  The newer loan officer is looking to gain your trust for the income your loan will provide but they also realize there is a potential for referrals if they do a great job for you.

#4 – Are You a Mortgage Banker or a Mortgage Broker?

Understanding the difference between a banker and broker and the impact it has on you is important.  Each have their advantages and disadvantages which I will explain now:

  • Mortgage Banker
    • Advantages
      • Direct access (or In-House) to underwriting
      • Niche products available only to the bank they work for
      • Potential the loan officer is on a salary as opposed to commission
      • Possibility for lower interest rates
      • Mortgage funded by the bank they work for at closing
    • Disadvantages
      • Sometimes limited to use that bank’s mortgage options only
      • Potential the loan officer is on a salary as opposed to commission
      • If that bank is unable to fund on your loan, you will not be able to close

I mentioned the salary loan officer in an advantage and disadvantage because it depends on how you look at this.  Some people like working with salary sales people because there is less pressure or “sales”.  Others, like me, do like working with commissioned salespeople because they have something invested in my time and mortgage, which makes me believe they would do more for me than someone on a salary.  This is exactly why you should ask questions and understand how the loan officer will work for you.

  • Mortgage Broker
    • Advantages
      • They can shop around to various companies to find you the best deal
      • Wide range of options outside of one mortgage company
      • Possibility for lower interest rates
      • Ability to place your loan elsewhere if a mortgage company closes
    • Disadvantages
      • Does not have direct access (or in-house) to underwriter (although some brokers have strong relationships with certain mortgage companies to offer special perks)
      • Possibility of no training

Possibility of lower interest rates was shown as an advantage on both sides.  This is because some banks offer lower rates to their in-house loan officers compared to brokers.  Brokers have the ability to lower their commissions or shop for the best rates through various lenders, so there may be occasions where they can offer better rates than a banker.

I want to also elaborate on training because there is always a possibility that the loan officer you work with, despite whether they are a banker or broker.  I believe it is more likely for a broker to open their doors with little to no training as compared to a mortgage banker who likely have a training program for newly hired loan officers on their staff.

Ultimately, understand how your mortgage loan officer works and what options they have to best help you.

#5 – Can You Originate Government Loans?

You may or may not be interested in a government mortgage, but if you work with a mortgage loan officer who does not have access to government mortgage options, you may miss out on an opportunity.  I often talk with customers who have been told that they should not do a VA loan; later to find out they were told this because the loan officer could not do VA loans.  Be aware of whether the loan officer you select can do government mortgages and whether or not you qualify for a government mortgage that may be better suited for you.

#6 – Can You Recommend a Real Estate Agent?

Most loan officers would love to get this question.  Often, a lot of the business that mortgage loan officers get is through referrals from real estate agents.  When they have the opportunity to return the favor, they will jump at the opportunity.  A good mortgage loan officer will be well connected and can provide referrals to real estate agents, CPA’s, home inspectors or many other professions related to the home buying process.

#7 – What is Today’s Interest Rate?

You want to know what the rate is for a mortgage, right?  A good mortgage loan officer will not just provide a quick answer to that question but rather respond in, “It depends.”  The reason the answer depends is because there are so many different factors that go into determining your rate.  The first step to determining the rate is to determine the best loan program, which will take some time and will occur through a conversation between you and a mortgage loan officer.  If a mortgage lender responds with a rate to this question, I would suggest you look for another person.

#8 – Do You Have Access to any Special Programs?

This may not be a need of yours, but here is a list of people that should be concerned with the answer to this question:

  • First time home buyers – see my post on Money for Buying a Home
  • Buyers with limited to no down payment
  • Teachers, Firefighters, Paramedics
  • Buyers purchasing a home that requires repairs or rehab
  • Buyers with disabilities or family members with disabilities

Other special situations may exist, so if you think you may fall into a special circumstance, make sure you ask your lender if they know of any special programs that may be available.

I hope this post has been helpful to you in selecting a loan officer to work with.  If you have any questions, please feel free to email me.

Lending a Hand

Scott Wynn

Mortgage and Divorce

Posted on by Posted in FAQs, Homeowners, Qualifying, Refinance

Finances are a touchy subject when it comes to divorce, but I guess every subject can get touchy during a divorce.  I want to make sure you are aware of the implications of a mortgage when it comes to a divorce and the suggestions I have to protect yourself, on either side.

Who Gets the House(s)?

The first thing you need to do is work out who will keep the house(s).  Sometimes separating couples decide that they will sell the residence and sometimes one party agrees to move, giving up rights to the home to the other.  A good site with information to consider on who is best suited to take the house can be found on Professional Mortgage Matters blog.  Such considerations include who is able to handle the mortgage payment on their own and is the size of the house needed considering the separation.

Once you determine who gets the house, make sure you understand the implications that may have down the road.

Predict the Future

When you decide how to work out the arrangements of the transfer of ownership and/or liability, make sure to consider what may occur in the future.  Typically, a Divorce Decree or Separation Agreement will identify who takes ownership rights of the property and therefore all liabilities are the responsibility of the owner of the home after the divorce is complete.  Seems simple enough, right?

The Separation Agreement or Divorce Decree is merely a civil agreement between the separating spouses.  This agreement does not mean that the other spouse is following through on that agreement and does not override the agreement you made when you purchased the home.  When you purchase a home and obtain a mortgage, both parties agreed to pay back on that mortgage and if it was not paid back as agreed upon, could impact you in several ways:

  • Late Payments – any payments made outside of 30 days will be reported as your credit report as a late payment
  • Short Sale – if the spouse who took ownership of the home agrees to sell the home at a price below the  mortgage balance at the time, the mortgage company may be willing to accept a lower payoff, but would be shown as a short sale on the credit, which is very similar to a foreclosure
  • Foreclosure – payments are not being made and the bank takes the home as the collateral for the mortgage debt
  • Qualifying for New Debt – when qualifying for new debt, such as a home or car, income and debt information is gathered to identify you ability to repay the debt which may not be possible with the mortgage liability on your credit

ALL of these scenarios would impact both people despite what the Divorce Decree or Separation Agreement states.  Typically the spouse that was awarded the house and mortgage will be responsible for all fees and costs associated with the problems that arise from that house and mortgage but that does not mean the person who was released, is released from the original agreement with the mortgage company.

Consider what incidents may occur in the future and work to resolve them prior to signing a separation agreement.

Possible Solutions

There are many solutions that can be considered to work through this issue during a divorce.  Here are a few I thought of:

  • Require that the spouse awarded with the home refinance the property immediately to remove your name from the liability
  • If the refinance can not occur immediately, put a time frame by which the spouse must refinance the property to remove you from liability (maybe 1-5 years)
  • Put in writing that the spouse who took over the mortgage will cooperate to provide documentation to show that they are paying the mortgage debt through their own funds
    • This will, in some cases, allow the underwriters on a new debt to remove the mortgage debt from your financial picture to help you in qualifying

The Disclaimer

I am not an attorney and have based this post on my own divorce as well as experience in the mortgage business.  I am not qualified to provide legal advice and you should consult with an attorney on your own for additional consideration when dealing with mortgage and divorce.  Also seek mortgage advice from a qualified mortgage lender.  Many attorneys are unaware of the implications of mortgage debt after a divorce.  By talking with a mortgage professional you can better understand what would need to be done in the future to avoid problems with qualifying in the future.

Lending a Hand,

Scott Wynn