Jan

29

Filed Under Mortgage Q & A 

What is required to qualify for a home loan?

Several factors are involved. The most important are credit score, income, liabilities, job history, assets/down payment amount. Generally a lender will require the most recent 2 years of W-2s (or tax returns for self-employed borrowers), most recent 30 days of pay stubs, and 2 months of most recent asset statements. In a perfect world, having a high credit score, two year job history, low amount of debt, and available liquid assets for a 5% down payment and closing costs is ideal. However, all borrowers are different, and thus the mortgage industry has become very creative. For example, 100% financing is now available for “stated asset, stated income” borrowers—perfect for self-employed borrowers whose income and assets fluctuate. Another example is the “No Doc” loans, allowing borrowers to show no documentation—job history, income, assets, and debt are not disclosed. The only requirement is a credit score meeting guidelines and often a small down payment, such as 5%. The down payment and closing costs in this case are not “sourced”, meaning the lender does not care who paid for them.

I’ve heard of “interest only” loans—what are they?

Interest Only have become very popular as of late. They require the borrower to only pay the interest accrued each month on the principal. The payment is generally based on “simple interest” and thus the payment is generally lower than an amortized payment. An amortized loan (for example: a 30-Year Fixed loan) is where the rate and payment are fixed for 30 years, and is paid in equal monthly payments over a schedule. The payments consist of principal and interest, with the interest portion being the largest component of the payment earlier in the schedule, and as the years progress, principal being the majority of the payment later in the schedule.

To compare the payments, take a $100,000 loan, and assume a 5.75% interest rate on a 5-Year Interest Only Adjustable Rate Mortgage (the rate is fixed for the first 5 years), versus 6% on a 30-Year Fixed loan. The interest only payment would amount to $479 per month, while the amortized payment would amount to $600 per month. Not only would the borrower would qualify for a higher priced home and pay less per month with the interest only payment, the interest only payments would amount to $28,740 over 5 years ($479 X 60 payments), while the amortized payment would amount to $36,000 over 5 years ($600 X 60 payments). Thus, the borrower saved $7,260 with the interest only payments. Furthermore, the borrower would have paid more interest—$29,054 of the $36,000 total—using the amortized loan.

The downside is that no principal is being paid off. However, the interest only payments actually “recast”, meaning that the payment will lower if any extra money is applied towards the principal (recall the simple interest formula mentioned). If the borrower does not opt for paying additional money, the Northeast Florida market has seen steady appreciation in home values for years.

How important is a good credit score for qualifying for a loan?

A good credit score is one of several factors used in determining a buyer’s chances for an approval for a home loan. A credit score, or FICO score as they are known, is a numerical formula derived by three main groups, or bureaus, known as Equifax, TransUnion, and Experian. Anytime someone is extended credit—a bank loan, revolving credit card, etc.—the lender reports the information to the bureaus, and a score is derived. Note that factors such as timely payments, current balances versus overall available credit, the number of recent inquiries, etc. all affect your score. The highest possible score is around the mid-800s. Note also that not all lenders report to all 3 bureaus, and thus scores can and will differ amongst them. A recent report on National Public Radio showed the average credit score for Americans is 676. Depending on other factors such as income and assets, a score under 550 can be a big detriment to getting approved for a loan. In that case, “sub prime” loans offer easier guidelines to approval, but at higher interest rates. The web site www.myfico.com will allow borrowers to check all 3 of their scores as well as provide information on how to improve your score.

What is the difference between APR and the interest rate?
APR - the Annual Percentage Rate will be outlined on your Truth In Lending disclosure - also known as the TIL - that you receive after your application.
The APR is often higher than the quoted interest rate, or note rate.
The APR is different than your note rate, or the rate that you were quoted, because the APR includes, in addition to interest, some of the additional costs of obtaining your financing, such as discount points, pre-paid interest, and the loan processing fee. This is a common practice in mortgage lending.
Simply stated, if there were no costs in obtaining financing, your note rate and the APR would be the same.

What are points?
A point equals one percent of the loan. Points are usually paid at closing. If your loan amount is $100,000…then one point would equal $1,000…one percent. Although points are often quoted in whole numbers, eighths of a point are common—for example, three eighths (.375) would equal $375 on a $100,000 loan.
Discount Points are fees paid by the buyer to the lender to reduce the loan’s interest rate. If you plan to keep the residence for five or more years, it may be worthwhile to pay discount points to reduce your monthly payment and achieve greater savings over the life of the mortgage.
The number of discount points required to buy down your interest rate will vary based on loan type. Consult your HomeBanc mortgage consultant for details on your specific transaction. Generally speaking, points are tax deductible when you are buying a primary residence, however we recommend you consult your tax advisor for information on limitations to tax deductibility.
An origination fee works basically the same way, and often is charged in increments of eighths of a point
Be weary, however, of being charged discount points

What is meant by the term “locking my interest rate”? And then, when and how do I lock my interest rate?
When a lender “locks” your interest rate, this means you are guaranteed a specific interest rate for a specific period of time. That period of time is called the lock period.
The lock guarantees your rate as long as your loan closes and funds prior to the expiration date of your lock. If your closing is delayed beyond your lock expiration date, you could be exposed to higher market rates. It is good advice to lock for a period longer than you need, or a period beyond your actual closing date. This will protect you in case unforeseen circumstances arise.
Typical lock periods are 15, 30, 45 and 60 days. In a stable rate environment, shorter lock periods provide you the potential for a better interest rate. However, the market can be volatile and rates move with market activity, up and down. Let’s look quickly at the four possibilities for rates:
1. Rates can go up slightly
2. Rates can go down;
3. Rates can stay the same, or
4. Rates can go way up.
If you believe rates may go up slightly, you might benefit by waiting to lock because of the shorter lock commitment period. If you believe rates will go down, you would definitely benefit by waiting to lock. If you believe rates will stay the same, you may also do better to wait. Of the four scenarios, you benefit from a longer lock only when rates go up significantly after you lock. For that reason, and generally speaking, we advocate shorter lock periods.
If you have a feeling that rates are going to go up significantly, by all means, call us and let’s lock your rate.
The bottom line is this: HomeBanc works for you and will do exactly what you wish concerning your rate lock. Advice is always readily available, but the final decision is yours.
If you have not locked in when you receive your application, you may notice that the rate on the application is somewhat higher than the market interest rate. You are not committed to that interest rate. Your mortgage consultant has intentionally used a higher rate with which to qualify you in the event that rates do go up prior to locking in.
You are still approved, and we do not have to re-approve you, so you are not exposed to any more paperwork.
Once you have a property under contract, you can then lock your rate by simply requesting a lock term. We will fax or e-mail a confirmation to you and request you sign and return the document within 24 hours.

Once I sign my application, am I committed to borrow the money?
Some people feel like once they have signed the application, they are obligated to borrow. That is absolutely not the case. In fact, none of the documents you have received are contractual until you are actually at closing and sign your note.
All HomeBanc is doing with your application is approving you and putting you in a position to make an offer, purchase a home and close a mortgage loan. You are not obligated for the loan transaction until you sign your closing documents.

What is the Customer Service Satisfaction Guarantee?
HomeBanc Mortgage Corporate is absolutely committed to excellent Customer Service and is one of the few mortgage lenders who provide a 100% Customer Service Satisfaction Guarantee. If, at any time during the loan process, our service does not meet your needs, immediately contact any HomeBanc mortgage representative. We are determined to make it right! If your experience with HomeBanc did not meet your expectations after closing your loan with us, we will gladly refund your application fee.

What is the difference between pre-qualification and pre-approval?
Pre-qualification is a lender’s opinion of your ability to purchase a home, and is based on your income, employment history and available down payment.
Pre-approval is a lender’s underwriting decision that you are qualified, subject to the conditions noted in your pre-approval, and is based upon the lender’s review of your completed application, credit check, appraisal and home inspection.
When it comes to writing an offer for a home, a pre-approval letter contains stronger language to the seller and the listing agent than a pre-qualification. You, the buyer, have the increased negotiating leverage of cash buyer status, because the mortgage is already in place.
A pre-approval can often be a determining factor in winning the contract in a competitive bid situation.
You will receive a conditional pre-approval shortly after applying for your HomeBanc mortgage, and it is made unconditional when you return the financial documentation we request after your application.

Thanks to Donald Ster, M.B.A., a mortgage consultant with HomeBanc Mortgage, resides in Jacksonville, Florida for providing this information. He can be reached at 904-470-2062 or his web-site www.homebanc.com/dster

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