We are very excited about our new radios show that airs on Saturday and Sunday mornings at 10:00 am. The show is driven by our listeners who want their mortgage questions answered. We interview industry veterans on all sorts of industry related topics. In order to make the show better, we need you questions and feedback. Make it a great day! George
How can a fully approved loan get denied for funding after the borrower has signed loan docs?
Simple, the underwriter pulls an updated credit report to verify that there hasn’t been any new activity since original approval was issued, and the new findings kill the loan.
This generally won’t happen in a 30 day time-frame, but borrowers should anticipate a new credit report being pulled if the time from an original credit report to funding is more than 60 days.
Purchase transactions involving short sales or foreclosures tend to drag on for several months, so this approval / denial scenario is common.
It’s An Ugly Cycle:
- First-Time Home Buyer receives an approval
- Thinks everything is OK
- Makes a credit impacting decision (new car, furniture, run up credit card balance)
- Funder pulls new credit report and denies the loan
In the hopes of stemming the senseless slaughter of perfectly acceptable approvals, we’ve developed a “Ten credit do’s and don’ts” list to help ensure a smoother loan process.
These tips don’t encompass everything a borrower can do prior to and after the Pre-Approval process, however they’re a good representation of the things most likely to help and hurt an approval.
Ten Credit Do’s and Don’ts:
DO continue making your mortgage or rent payments
Remember, you’re trying to buy or refinance your home – one of the first things a lender looks for is responsible payment patterns on your current housing situation.
Even if you plan on closing in the middle of the month, or if you’ve already given notice, continue paying that rent until you’ve signed your final loan documents.
It’s always better to be safe than sorry.
DO stay current on all accounts
Much like the first item, the same goes for your other types of accounts (student loans, credit cards, etc).
Nothing can derail a loan approval faster than a late payment coming in the middle of the loan process.
DON’T make a major purchase (car, boat, big-screen TV, etc…)
This one gets borrowers in trouble more than any other item.
A simple tip: wait until the loan is closed before buying that new car, boat, or TV.
DON’T buy any furniture
This is similar to the previous, but deserves it’s own category as it gets many borrowers in trouble (especially First-Time Home Buyers).
Remember, you’ll have plenty of time to decorate your new home (or spend on your line of credit) AFTER the loan closes.
DON’T open a new credit card
Opening a new credit card dings your credit by adding an additional inquiry to your score, and it may change the mix of credit types within your report (i.e. credit cards, student loans, etc).
Both of these can have a negative impact on your score, and could result in a denial if things are already tight.
DON’T close any credit card accounts
The reverse of the previous item is also true. Closing accounts can have a negative impact on your score (for one – it decreases your capacity which accounts for 30% of your score).
DON’T open a new cell phone account
Cell phone companies pull your credit when you open a new account. If you’re on the border credit-wise, that inquiry could drop your score enough to impact your rate or cause a denial.
DON’T consolidate your debt onto 1 or 2 cards
We’ve already established that additional credit inquiries will hurt your score, but consolidating your credit will also diminish your capacity (the amount of credit you have available), resulting in another hit to your credit.
DON’T pay off collections
Sometimes a lender will require you to pay of a collection prior to closing your loan; other times they will not.
The best rule of thumb is to only pay off collections if absolutely necessary to ensure a loan approval. Otherwise, needlessly paying off collections could have a negative impact on your score.
Consult your loan professional prior to paying off any accounts.
DON’T take out a new loan
This goes for car loans, student loans, additional credit cards, lines of credit, and any other type of loan.
Taking out a new loan can have a negative impact on your credit, but also looks bad to underwriters and investors alike.
Just remember the simple tip: wait until AFTER the loan closes for any major purchases, loans, consolidations, and new accounts.
Related Credit / Identity Articles:
Although every situation is unique, it is not uncommon for homebuyers to qualify for a mortgage on a new home while still living in their primary residence.
Perhaps you are outgrowing your current house, or have been forced to relocate due to a job transfer? Regardless of the motivation for keeping one property while purchasing another, let’s address this question with the mortgage approval in mind:
So, Do I Have To Sell?
Yes. No. Maybe. It depends.
Welcome to the wonderful world of mortgage lending. Only in this industry can one simple question elicit four answers…and all of them may be right.
If you are in a financial position where you qualify to afford both your current residence and the proposed payment on your new house, then the simple answer is Yes!
Qualifying based on your Debt-to-Income Ratio is one thing, but remember to budget for the additional expenses of maintaining multiple properties. Everything from mortgage payments, increased property taxes and hazard insurance to unexpected repairs should be factored into your final decision.
What If I Rent My Current Property?
This scenario presents the “maybe” and the “it depends” answers to the question.
If you’re not quite qualified to carry both mortgages, you may have to rent the other property in order to offset the mortgage payment.
In that scenario, the lender will typically only count 75% of the monthly rent you are proposing to receive.
So if you are going to receive $1000 a month in rent and your current payment is $1500, the lender is going to factor in an additional $750 of monthly liabilities in your overall Debt-to-Income Ratios.
Another detail that can present a huge hurdle is the reserve requirement and equity ratio most lenders have. In some cases, if you are going to rent out your current home, you will need to have at least 25% equity in order to offset your payment with the proposed rent you will receive.
Without that hefty amount of equity, you will have to qualify to afford BOTH mortgage payments. You will also need some significant cash in the bank.
Generally, lenders will require six months reserve on the old property, as well as six month reserves on the new property.
For example, if you have a $1500 payment on your old house and are buying a home with a $2000 monthly payment, you will need over $21,000 in the bank.
Keep in mind, this reserve requirement is incremental to your down payment on the new property.
What If I Can’t Qualify Based On Both Mortgage Payments?
This answer is pretty straightforward, and doesn’t require a financial calculator to figure out.
If you are in this situation, then you will have to sell your current home before buying a new one.
If you aren’t sure of the value of the home or how your local market is performing, give us a ring and we’ll happily refer you to a great real estate agent that is in tune with property values in your neighborhood.
As you can tell, purchasing one home while living in another can be a very complicated transaction. Please feel free to contact us anytime so we can review your specific situation and suggest the proper action plan.
Related Articles – Mortgage Approval Process:
- Basic Mortgage Terms
- How Much Can I Afford?
- Common Documents Required For A Mortgage Pre-Approval
- Top 8 Questions To Ask Your Lender During Application Process
- What’s The Difference Between An Investment Property, Second Home and Primary Residence?
- Seven Items Real Estate Agents Need To Know About Your Mortgage Approval
A mortgage is generally the largest debt most homeowners have to manage. It’s a good idea to give your personal real estate finance portfolio a check-up at least once a year.
Since there are many reasons a homeowner may choose to refinance, we’ll take a look at the four most common.
1. Mortgage Rates Drop:
Typically, the most common reason that homeowners refinance their mortgage is to secure a lower interest rate. Interest rate and loan amount determines the total cost that a borrower will pay. The lower the interest rate, the less the overall cost will be. Interest is calculated on a daily basis and usually paid back to the lender on a monthly basis.
2. Lower Payments:
Lowering a mortgage payment can be achieved by lowering the mortgage rate, lengthening the loan term, combining two or more loans or removing mortgage insurance.
3. New Mortgage Program:
Refinancing an Adjustable Rate Mortgage (ARM) to a new Fixed Rate Mortgage (FRM), combining a first and second mortgage or paying off a balloon loan are three possible reasons to explore a refinance.
4. Debt Consolidation:
If there is sufficient equity, sometimes paying off consumer debt by combining all debts into one lower monthly mortgage payment can significantly reduce the short-term deficits in a budget. However, it’s important to keep in mind the total cost of that debt by adding it into a 30 year mortgage payment.
Frequently Asked Refinance Questions:
Q: Do I have to refinance with my current mortgage company?
No, you may choose any company to refinance your mortgage since the new loan will replace the existing mortgage.
Q: Is it easier to refinance with my current mortgage company?
It is possible your current mortgage company may require less documentation, but this could add additional cost or a higher interest rate. Do your homework and shop around to make sure you’re getting the best deal.
Q: Will I automatically qualify if I’ve never made any late payments?
No, you will have to qualify for your new refinance. However, certain programs will allow for reduced documentation like a FHA to FHA Streamline Refinance.
Related Article – Refinance Process:
- Refinance Process Overview
- Mortgage Approval Process
- Calculating The Net Benefit Of A Refinance
- Should I Refinance Or Get A Home Equity Loan To Make Improvements?
- What Do Appraisers Look For When Determining A Property’s Value?
- Understanding The Difference Between Appraised Value vs Neighborhood Listing Comps
- Five Myths About Home Values
How much mortgage money can I qualify to borrow?
This is typically the number one question mortgage professionals are asked by new clients.
Of critical importance when considering mortgage financing: There is sometimes a difference between what a client ***can*** borrow and what they ***should*** borrow.
In other words, what makes for a comfortable long-term mortgage payment?
The Quick Answer:
If we’re simply considering the financial math, lenders will calculate your Debt-to-Income Ratio and generally allow for 28-31% of your gross income to be used for the new house payment with up to 43% of your gross income to be used for all consumer related debts combined.
Sample Mortgage Scenario:
Let’s use a gross monthly income of $3000 and a qualifying factor of 30% Debt-to-Income Ratio:
$3000 multiplied by .3 (30%) = $900 max monthly mortgage payment
“Ballparking” a Qualifying Loan Amount:
Simple step: We use a safe average of $7 per month in payment for every $1000 in purchase price so…
Step 1) $900 a month divided by $7 = $128.50
Step 2) $128.50 multiplied by 1000 = $128,500 loan amount.
Remember, these are average ratios and guidelines set by most lenders for common mortgage programs.
Keep in mind, while most consumer debts are listed on a credit report, there are some additional monthly liabilities that may contribute to the overall qualifying percentages as well.
Regardless of how your personal income and credit scenarios factor in, it is important to consider your overall budget when trying to determine how much of a mortgage you should qualify for.
Other items to consider in your monthly budget:
1. Confirm all debts are taken into account
2. Any private notes or family loans
3. Short-term expenses – medical, auto repairs, travel, emergencies
4. Plan on additional expenses for the home such as water, electric, maintenance, etc…
5. Keep a cushion for savings and financial planning
Related Articles – Mortgage Approval Process:
Simply checking online for today’s posted rate may not lead to your expected outcome due to the many factors that can cause each individual rate and closing cost scenario to fluctuate.
We can preach communication, service and education all day long, but it’s our ultimate goal to earn your trust so that you can be confident in our ability to successfully lead you through this complex mortgage process.
Since mortgage rates can change several times a day, the following questions will help determine whether or not your lender truly knows what to look for so that they can provide you with the best rate once you’re in a position of locking in your loan:
Who determines mortgage rates, and what are they tied to?
Mortgage interest rates are determined by the pricing of Mortgage Backed Securities or Mortgage Bonds. The media often implies mortgage rates are based off the 10-year Treasury Note, which is incorrect.
While the 10-year Treasury Note has been known to trend in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions.
How often do mortgage rates change?
Mortgage rates may change throughout the day, however they only change on days when the Bond markets are trading securities since mortgage rates are based on Mortgage Bond prices.
Think of a Mortgage Bond’s sales price similar to that of a Stock that trades up and down during the course of a day.
For example – let’s assume the FNMA 30-Year 4.50% coupon is selling for $100.50. The price is 50 basis points lower from the previous day’s closing price of $101.00.
In simple terms, the borrower would have to pay an additional .50% of their loan amount to have the same rate today that they could have locked in the previous day.
Mortgage Bonds are largely affected by various market forces that influence the changing demand for bonds within the market. Some of the key economic factors that have the greatest impact are unemployment percentages, inflationary fears, economic strength and the overall movement of money in and out of the markets.
Like stocks, most fluctuation is caused by consumer and investor emotions.
What do you use to monitor mortgage rates?
There are several great subscription based services available to monitor Mortgage Bond pricing.
The key is to make sure the lender is aware they should be monitoring Mortgage Bond pricing, such as the Fannie Mae 30-Year 4.50% coupon… and not the 10-Year Treasury Note or the news media.
It is a common misconception that when the Federal Reserve implements a rate cut it is immediately correlated to a reduction in mortgage rates.
The Federal Reserve policy influences short term rates known as the Fed Funds Rate (“FFR”). Lowering the FFR helps to stimulate the economy and increasing the FFR helps to slow the economy down. Effectively, cutting interest rates (FFR specifically) will cause the stock market to rally, driving money out of bonds and creating potential for inflation.
Mortgage Bond holders need to obtain a higher rate of return on their money if inflation is increasing, thus driving up mortgage rates. With the Federal Reserve Board meeting every six weeks, this is an important question to ask. If your lender does not have a firm understanding of this relationship, they may leave your rate unprotected costing you thousands of dollars over the life of your mortgage.
Do different programs have different interest rates?
Conventional, FHA and VA loans can all carry different rates on a 30-Year fixed mortgage. FHA and VA loans are insured by the Federal Government in the event of defaults. Conventional mortgages are insured by private mortgage insurance companies, if insurance is required.
Typically, FHA and VA loans carry a lower rate because the investor views the government backing as less of a risk. While rates are usually different for each program, it may be more important to compare the monthly and overall cost during the life of the loan to determine which program best suits your needs.
Why is an Adjustable Rate Mortgage (ARM) rate lower than a fixed rate mortgage?
An Adjustable Rate Mortgage (ARM) is usually fixed for a specific period of time. The period is typically 6 months, 1 year, 3 years, 5 years or 7 years. The shorter time period the rate is fixed, the lower the interest rate tends to be initially.
This is due to the borrower taking the future risk of increasing interest rates. The only instance where this would not be true is when there is an inverted yield curve where short-term rates are higher than long-term rates.
Why are rates higher for different property residence types?
Mortgage interest rates are based on risk-based pricing. Risk-based pricing allows adjustments to par pricing for risk factors such as; FICO scores, Loan-to-Value percentages, property type (SFR, Condo, 2-4 Units), occupancy (Primary, Vacation or Investment) and mortgage type (Interest Only, Adjustable Rate etc).
This allows the investors who lend their money for mortgages to receive additional compensation for taking additional risk.
If the borrower encounters a financial hardship, are they more likely to make the payment on the home they live in or the one they rent out?
Related Mortgage Rate Video:
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Most people are surprised to learn what appraisers actually look at when determining the value of a real estate property.
A common misconception homeowners generally have is that the value of their home is determined after the appraiser has completed their physical property inspection.
However, the appraiser actually already has a good idea of the property’s value by the time they have scheduled an appointment to stop by the property.
The good news is that you don’t have to worry so much about pushing back an appointment a few days just to “clean things up” in order to help influence the value of your property.
While a clean house will certainly make it easier for the appraiser to notice improvements, the only time you should be concerned about “clutter” is if it is damaging to the dwelling.
The Key Components Addressed In An Appraisal
Location, view, topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features…
Quality of construction, finish work, fixed appliances and any defining features
Age, deterioration, renovations, upgrades, added features
Health & Safety:
Structural integrity, code compliance
Above grade and below grade improvements
Is the property conforming to the neighborhood?
Is the property functional as built – style and use?
Garages, Carports, Shops, etc..
Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.
When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.
Be sure to have all carbon monoxide and smoke detectors in working condition.
Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.
If you’re interested in what specifically appraisers are looking for, here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.
Related Update on HVCC:
Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.
This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans originated on or after May 1, 2009.