Low Down Payment Mortgage

Preparing a Buyer for their First Open House

Before meeting with a Realtor, it is very important to have buyers pre-approved for a mortgage. A pre-approval will identify your buyer's price range, uncover any potential weaknesses, discover any special Grants they may qualify for and clarify which mortgages options are in their best interest.  Each mortgage product varies from the amount of money needed down to the acceptable debt-to-income ratios and it is important to know these factors upfront.   

What is a Pre-Approval ?

A mortgage pre-approval is a written commitment identifying the mortgage amount you qualify for.  Part of the mortgage pre-approval process is to obtain  bank statements, tax returns for the past two years, calculate annual income, and pull a credit report to confirm you meet the Lender’s credit criteria.

When Should I Get Pre-Approved For A Mortgage?

The answer to when you should get pre-approved for mortgage is simple.  Complete this before you contact a Realtor and begin looking at houses. Below are a few key reasons you will be glad you obtained a pre-approval before looking at houses.

Correct inaccuracies on your Credit Report

Did you know there are over 50 credit score models and they are all different? Don’t rely on the credit score you received from a credit card company, department store or even from a recent car purchase. The most common problem we encounter when we pull a credit report is the consumer has no knowledge of a particular item or the payments or amounts owed are reported incorrectly.  Each lender has minimum credit score requirements for every one of their loan products.  So many activities impact your credit score and while you are looking for houses with a Realtor we can help you improve your credit score by fixing any errors or inaccuracies.  It can sometimes take a couple of months for it to get corrected on your report and for your score to be readjusted.  This can happen seamlessly at the same time you are shopping for your home.

 Eliminate Disappointment

Most Realtors will require a pre-approval before even showing you potential properties, but unfortunately some real estate agents will show you houses with no clue whether you can afford a home or not. Top Realtors will strongly agree this is a disservice to you. Why is this a disservice?  The fact of the matter is, you could  “fall in love” with a home, submit a purchase offer, and find out once they speak with a mortgage lender you cannot finance that home due to credit problems or because of other reasons. Being in this situation can understandably leave a buyer upset, heartbroken, and disappointed.  Moreover, you could even lose the Deposit you made on the sales contract!  We work with many professional, reputable Realtors and will gladly introduce you on request.

Understand All Of The Costs To Buying A Home

There are substantial closing costs when buying a home.  It’s not as simple as a 3% to 30% down payment. By getting a pre-approval, you will have a very strong understanding what costs to expect when buying a home.

A Mortgage Professional will help you identify the following:

• Total Loan Amount you qualify for
• Closing Costs and how to get the Seller to pay your Closing Costs!
• Where to find Free Grant Money for the Downpayment
• How to properly document a gift for the Downpayment
• How much you personally need to save

How to Deposit and Document a Downpayment Gift

First time home buyers often receive assistance when buying their first home.  Whether it is hand-me-down sofa from an aunt, help with landscaping and weeding, or even a hand moving, everyone wants to pitch in to make sure a young couple can get their dream home.

A common gift from parents to children is cash assistance with the downpayment.   Parents know if they can assist with getting 20% of downpayment, their children will save on mortgage insurance and interest.  Over the life of a loan, it is truly a gift that keeps giving.   In other situations, even having 3.5% down will help a couple qualify for a home.   Gifts are common, but often given incorrectly.

Before accepting a gift, make sure it will meet the mortgage guidelines.  I know at first, it might seem ungrateful to only accept a gift in a certain form, but it is truly necessary in this case.   Follow the steps below to make sure you gift will be allowed by the Lender:

1. Use a check.  Lenders like to trace back the funds and if you use a money order, it creates an extra step for the generous donor.  No need to create unnecessary stress.
2. Be sure to deposit in person.   Yes, it is easier to snap a picture with your IPhone, but you will need to produce a front and back picture of the check.   The images included with the monthly statements makes this easy for the borrower.   Seeing “image not available” with mobile or ATM deposits become a bigger challenge.
3. Do not co-mingle funds.  When you make this deposit, do not throw in a rebate check, birthday money, ect. on the same deposit slip   You want it to be easy to find this amount and have it match perfectly.
4. Choose the right account to make the deposit.   If you make a deposit to the same account you plan on writing the check for the downpayment, you only have to produce one bank statement.  It is so easy to see the gift deposit and earnest money (downpayment) coming from the same bank statement.   Lenders will appreciate it and so will your printer.   Why make more work if you do not have to?

If you really want to stay ahead of the game or your parent live a few hours away, be sure to get a gift letter signed along with your check.  The Lender WILL ask for this during the process.   A signed and dated letter should state the amount of the gift, the subject property address, the relationship with the buyer, and the fact it was a gift, not a loan.

Why do we have these guidelines?   Lenders want to make sure that a gift is just that – a gift and not a loan from your parents or a cash advance from a credit card.   Lenders are determining whether you are able to pay a mortgage based on your current debt and income.  If you cannot account for the funds being a gift, then it just becomes debt you have to pay back and will factor into their decision whether you can “afford” the mortgage you are applying for.   Just make sure you deposit and document your  downpayment gift properly and it will be a smooth transaction.

Check, Please! Sourcing Money for a Mortgage

It appears in the brave new world of mortgage lending, paper checks have all but disappeared.  They have been relegated to the land of shredded paper or electronic storage.  Banks no longer even keep paper copies.   Great news for the trees, however, this is often bad news for borrowers. When making a large purchase, it is important to keep the associated paperwork in order to meet the lender’s documentation requirements.   We are all aware of that fact since we filed our first tax form.   What makes mortgages different is that not only the paperwork counts, but the “source” as well.

Over the last few months, I have had more and more buyers use money order to pay their earnest money deposit when entering into agreement to purchase a home.   That decision just created another step (or three!) in the loan process.   So, realtor and buyers make sure you save yourselves some time and effort. Please use CHECKS, not money orders.

Borrowers must “source” money orders.  What that means is the Lender not only needs a copy of the original money order and the realtor verifying the deposit, but now they also need a bank statement (or statements!) to show where they withdrew the cash for the money order. Perhaps the buyer withdrew it over three months as a “savings plan”, which means they have to produce three more months of bank statements where the withdrawals match the earnest money amount exactly.

Lenders want to make sure these funds used for the money order are not a gift towards down payment or a cash advance from a credit card.    The gift process creates a different set of paperwork that I will talk about in a separate blog.  So, my advice to buyers and real estate agents:  Please use paper checks and be sure to keep copies to make your loan process smoother.  It will create a better transaction for all.

Sell Homes the Way Buyers Buy

Let’s start with a short quiz to see how well you know the cost of living these days.  Write down how much each of these items cost:

1. Milk

2. Gas

3. Shoes

4. Health Insurance

5. Rent

The answer key is below, so you can scroll down and check and see how you did.  You are now probably wondering why a mortgage broker would be asking about the price of gas. The purpose of this short exercise is to see if your answer are small, affordable, unintimidating numbers.  Chances are they probably are small numbers and you did not add up the total cost over your lifetime, or more pointedly, 30 years. You are probably seeing where I am going with this exercise. It is no different to how your Buyers want to buy a home.

Buyers are often told their home is their largest expense, when in fact it, is usually their best performing investment (that is for a different blog). Based on our experience, when a Buyer learns the monthly cost of a home, that is when they end up buying. Buyers know what they can afford each month.   Sometimes mortgages can end up being less than they are paying in rent or just a few dollars more each month to invest in their future.

At Lord Mortgage our goal is to synergistically help you sell more homes and we have NUMEROUS ways to help you accomplish this. Contact us today and we would love to partner with you on presenting buying options to your buyers that appeal to remain within their budget. The best way for us to accomplish this is to consistently and constantly offer the lowest mortgage rates in PA and helping our Realtor partners show their buyers the affordability of buying a home.

Milk $7,800

Gas $55,380

Shoes $18,600

Health Insurance $36,170

Rent $432,000

Are your Buyers feeling Scrutinized by Lenders?

Buying a home is a more difficult process than it was a few years ago. Real Estate Agents and their Buyers are starting to question all the documentation and paperwork that goes along with the mortgage process.  Some people accept the changes in the process while other still long for the old days where the process was less regulated.  I feel the need to explain the change and communicate what it truly takes to get a mortgage in 2015.

You are probably aware of the reputational damage done to the Nation’s Primary Lenders, Fannie Mae, Freddie Mac, and FHA in 2009.  (For the purpose of this article, we will refer to them collectively as “FFF”) which has resulted some of the new procedures I will discuss in more detail.

To help Buyers understand the process, I need to explain where the money comes from to fund a mortgage.  All funds ultimately come from the FFF.  A Mortgage Broker or a Bank takes an Application and submits the loan file directly to the FFF for an Automated Underwriting (“AU”) The AU is based on Uniform Underwriting Standards that are in place to protect a Borrower from any discrimination. The AU system does not care where the property is located, the borrower’s race, or consider any of the protected classes in Fair Housing, but does follow uniform guidelines for approval.

The system generates the AU findings and the Broker/ Bank then requests Documents from a Borrower based on the AU findings.  We informally call this “Round 1”. We then collect the initial documents from the Borrower and then have them sign over 20 different forms, so we can submit the loan package to an Underwriter.  

Once an Underwriter reviews “Round 1” documents, they issue an Official Approval.  This approval is not final because it is impossible to collect all the documents in the beginning of the process.  Moreover, to prevent material findings, the underwriters will verify assets and employment one last time before the loan is closed.   You would be surprised to learn that some borrowers spend assets on items such as furniture and do not have enough to close a loan or suddenly get laid off in the middle of the loan process.

It is understandable that items such as the Appraisal and Title Insurance are completed after inspection.  There is an order to the process and it is also important to realize it is a continuing, and ever-evolving process.  It is extremely common to receive requests for Letters of Explanation after the underwriting team reviews bank statements. It is impossible for Bank/Brokers to know what will be requested after Phase 1 and need to wait for the first review.

While the Underwriter continues to run reports internally, they will issue a Commitment Letter.  In the industry, we consider this the Formal Approval because FFF is committing to doing the loan.  It also means that the loan passed the fraud test and passed CAIVRS and a Full Factual Credit Report. Borrowers are ready to move into Phase 2.

Phase 2 is normally received by the Borrower with a combination of excitement and nervousness.  Commitment Letters are filled with acronyms and financial lingo.  Normally a Broker / Banker will share the Commitment Letter with a Borrower and Realtor.  However a good Broker/Bank will also explain (in plain language) what items are needed from the Borrower, from the Realtor and which items can be secured through third parties. 

Once Phase 2 items are submitted, is when a Borrower often really feels nervous because each day the closing deadline is getting closer. Phase 3 requests are the questions a Lender has after reviewing the Phase 2 Documents. The FFF requires Letters explaining large deposits and verification of where the money came from or they look for additional debts showing on a Bank Statement that are not listed on a credit report from Phase 1.  These requests can range from a full factual report because of additional real estate the Borrower may own (Not sure how borrower “forget” to mention they own other properties) to another copy of a bank statement because a blank, numbered page was missing on the Phase 2 Documents.  To be fair, the Underwriter cannot confirm a page if blank if they do not have a copy.

So I think we can safely agree it’s the Government’s fault J. Joking aside, what is the intention of these requests from the FFF? Their intention is to protect Investors, Tax Payers and the Borrower.  It is a fact that over 16% of the Applications involve fraud or dishonesty. Fraud can potentially cause damage to Investors and Tax Payers.

If you feel like it is hard to get a mortgage today, you are not alone.  “If someone is saying that it's harder to get a mortgage today than it was at the height of the boom -- when there was no income documentation requirement -- yes, of course it's harder to get a mortgage today than it was at the height of the insanity," says Bob Walters, chief economist at Quicken Loans.  However, that does not mean it is impossible to buy a house in 2015. The current perception that it's "extraordinarily difficult" to get a mortgage, when in reality, “borrowers have no problem getting one when they have stable incomes, some equity or down payment, and decent credit scores” according to Walters.

So why is there a perception that it's so difficult to get a loan?

Borrowers have to jump through more hoops to get a loan these days, says Pava Leyrer, president of Heritage National Mortgage in Grandville, Mich.  "The scrutiny that goes into a mortgage now is much tighter," she says. "There are great-credit borrowers that are having to jump hoops, and it's a matter of how many hoops and whether or not the underwriter lights them on fire or not." Leyrer confirms one common hurdle homebuyers face when getting a loan is when lenders question "unusual" deposits in their accounts. A mere transfer from the borrower's savings to checking account or a cash gift from Grandma can be viewed as a red flag by the lender. That's especially true for loans backed by the Federal Housing Administration, or FHA loans.

Unless it's a direct deposit from your employer, lenders generally want you to show the source of any large deposits to ensure you are not relying solely on gifts or borrowed money to qualify for the loan.  What is considered a large deposit? It depends on your income, but some requests are almost laughable to borrowers who had to prove a $500 birthday check really came from his grandparents.

If you take a bird’s eye view, there is no question borrowers have to provide more documentation these days. While the tight documentation requirements can be a hassle, they don't necessarily prevent the borrower from qualifying for a loan and in my opinion it is more of an inconvenience, as opposed to a true hurdle to getting a mortgage.  My advice is remember applying for a mortgage is a continuous process.   Be organized before you start and finding those documents as they are requested will become less inconvenience and by no means considered a true hurdle to home ownership. 

Overcoming the Down Payment Hurdle

You have heard the same financial advice over and over again to save for a house.  Perhaps you have tried to save, but one “financial emergency” after another keeps cropping up.   After you found your dream home, you decided it is crunch time and you are 100% dedicated to saving up enough money for a down payment. 

Do not despair if it seems overwhelming for just two people…or even one!  There are others willing to help you reach your goals.

Are you a first time homebuyer?  Look for local grants and loans.  For example, Cumberland County provides up to $5,000 in closing cost assistance for qualified first-time homebuyers with a gross household income of less than 80% of the county’s median income.  Not all programs are income based, so do your homework or ask your Mortgage Broker and/or Real Estate Agent for more details on local or state programs. 

Have generous relatives or friends?  They can contribute to your down payment in the form of a gift.   Before you receive the gift, make sure you clear it with your Mortgage Broker so you have the proper paperwork to accompany the funds.  Usually, lenders re

quire a letter signed by the person gifting to the money to confirm it is not just a loan that needs to be paid back as well as copy of the deposit slip.   Getting married?  Consider creating a bank account for down payment gifts in lieu of silverware, towels, and other traditional wedding gifts you might have already accumulated.  There is a special HUD form your broker will need to fill out to setup the account.

Is your 401K worth more as a down payment than its earning potential?  This decision might require a call to your accountant or investment advisor, but consider the tax consequences against the type of loan you can get with more down payment funds.   Some companies and accounts allow penalty-free withdrawal for certain major life events.   For example, some IRAs allow up to $10,000 in penalty-free withdrawal for the purchase of a first home.

Be wise with your nest egg.   Are you hiding that future downpayment money under your mattress?  Or investing to increase its value as you save up for your home? Some couples prefer to put their savings into a CD they can't access until it is time to purchase their home.  It keeps their spending on target with their goals. Moreover, they are earning interest on that money which can also be used towards that goal.  Credit Unions and online banks offer better interest rates and the highest-yield savings accounts.  If you are really planning ahead and have years to save, consider short-term bonds, but make sure you are not paying any commission which would cut into the savings.  Avoid long-term bonds which are more subject to market risk.

No matter the amount of the down payment, you can save enough funds with a little planning and strategy.  Do not be afraid to ask the advice of trusted professionals who can help you reach your home purchasing goals.

The Good, The Bad, and the Truth about Adjustable Rate Mortgages (“ARMs”)

When Borrowers decide to lock in their fixed-rate mortgage, they are guaranteed that rate whether the Lender's interest rates increase or decrease.  I discussed how rates are determined in an earlier blog, Current Interest Rates Mean More House for Buyers  Rates will fluctuate based on the market and Borrowers need to decide when they want to lock in or set their rate.

One of the most common questions I get from Borrowers is "Should I lock in now or float?"   There is no crystal ball to let Lenders or Borrowers know if locking in early is a good decision.  I cannot give a definite answer because a rate can rise or decrease (multiple times!)  from when a Borrower applies for a mortgage until the time they are at the settlement table.  Unless you are in the mortgage industry, you might not realize that rates actually change a few times a day.  It’s similar to the stock market, you can follow the analysts, but no one can predict with 100% accuracy. 

So, what are your options? Outside the US, variable-rates mortgages are the norm, especially in countries such as the UK, Ireland, Canada, and Australia.  The majority of mortgages in the US are fixed rate, however ARMs should be considered by some borrowers

The Good:  Most ARMs provide a cap, so this safeguards or limits the risk to the borrower.  In the end, Lenders want Borrowers to pay back their loan, so there is a limit to how much risk they want the borrower to absorb. Current caps are still much lower than normal fixed mortgage rates were 10 years ago.  Moreover, Borrower’s initial payments will be lower, giving them more buying power and the ability to afford “more house”. 

The Bad: Adjustable rate mortgages or ARMs transfer the interest rate risk from the Lender to the Borrower. The Borrower will benefit if the interest rate falls, but could lose if the interest rates increase.  Borrowers should avoid ARMs if they play on staying in their home 11 years or more or if there is little chance rates will ever drop.  

The Truth:  The risk might be worth it! Overall adjustable rate mortgages are typically less expensive than fixed-rate mortgages. ARMs are a great way to get the house you want now before you can afford higher payments.  Consider this scenario:  You are working at a company what will increase your pay as soon you receive your Master’s Degrees.   You are less than a year ago from getting your degree and need to move for your spouse’s new job.   Instead of getting a small house and then looking for another house after your pay raise, it is more cost-effective to move once and get an ARM.  You know your pay will increase within the next year or so, meaning you can support an increase payments IF rates change in five years. Most ARMs have an initial fixed-rate period during which the borrower’s rate doesn’t change, followed by a period during which the rate changes at present intervals.  Compare the two choices below for a house worth $288,000:

Option 1: 30 year fixed rate Mortgage at 3.625%. Principal and Interest payment $1,313.43

Option 2: 5/1 ARM at 2.625%. Principal and Interest payment $1,156.75

Balance remaining in 5 years:

30 Yr fixed:  $259,408.54

5/1 ARM: $254,865.49

Winner: Principal balance on the 5/1 ARM is $4,543.05 lower

Best part is your monthly payments will have totaled $9,400.80 less for a Net savings of $13,943.85!

I would recommend ARMs for buyers when their income is expected to increase, they are likely moving in 10 years or less, or plan on retiring and paying off home within 10 years.   In reality, ARMs benefits a large segment of the population if you consider the fact that 91% of the mortgages are in place 9 years or less.  Read all the fine print closely to make sure your ARM does not have pre-pay penalties, provides caps on the rate, and the interval rate changes are when you can afford the possibility of a higher payment.  It comes down to being an informed consumer and knowing what your plan is for the next five years.  If you know that, you have the potential to save a lot of interest on your mortgage.   ARMs may seem risky at first glance, but they really can benefit certain Borrowers.   When in doubt, have your Mortgage Broker compare fixed and adjustable rate options so you can see the full picture.  

Overcoming Mortgage Hurdles for the Self-Employed

You might be one of the 9 million people who have decided to become self-employed.  Being self-employed probably introduced taxes and health care coverage challenges.  You have finally settled into your new lifestyle and decided to apply for a mortgage.   Perhaps you cannot provide W2 or traditional predictions of incomes.  There are still a few ways to prepare for a smoother process when you apply for a mortgage.

Self-employed borrowers have a higher hurdle to overcome after stricter mortgage requirements went into effect in 2014.  These borrowers must now provide two years’ worth of tax returns.  The most common complaint from borrowers is that these returns are an unreliable record of their take-home pay.   There are many tax advantages of taking as many deductions as possible, but that does not necessary translate into an advantage when applying for a mortgage.

How can a self-employed borrower overcome this extra challenge?  Organize and prepare BEFORE you apply for a mortgage.  Buying a home is a big decision and it helps to have your taxes aligned with your home buying goals.  Looking ahead means self-employed borrowers should plan on taking fewer deductions the two years before buying a home to boost their overall income.  Yes, it might translate into increased taxes for a short time, but being able to qualify for a mortgage and a better interest rate will be worth the extra time strategizing with your accountant. Moreover, make sure you are showing an increase from year to year.  Lenders might ignore seasonal increases and decreases (landscapers for example) but they do not want to see a constant decline.  Borrowers should focus on their business appearing consistent and not volatile.

For those of you on a time constraint, you might have to consider alternative options. Do you have a spouse or family member whose income is documented by W2s willing to co-sign on the mortgage? You might not be able to qualify for a larger home based on only one income, but applying for a conventional loan would be easier. 

If you are saver, you also have an option of an unconventional loan.  For example, unconventional loans allow qualified borrowers to apply using the deposits recorded in their bank statements.  Just because a loan is unconventional does not mean you are necessarily paying more in interest.  There are numerous options for the self-employed borrower.   A mortgage broker can look at your personal situation and suggest the best option for a loan.  Look for the most up to date rates on www.lordmortgage.com

“Know Before You Owe” Mortgage Rules Coming Soon....

“TRID”  is the less intimidating name for TILA-RESPA Integrated Disclosure Rule which will go into effect October 1, 2015.   This change in the regulations means new forms for mortgage professionals, real estate agents and consumers.   “TILA” or Truth in Lending Act and “RESPA” or Real Estate Settlement Procedure Act of 1974 are the two forms lenders must share with the borrower shortly before or at the time of closing the loan.   The intention of the original Act was to make the process less confusing, but the need enact a new law (TRID) would indicate that wasn’t always the case for consumers  TRID is a chance to correct past mistakes.

Everyone is aware that there are more stringent lending standards in place since 2008 to help consumers not get in over their head when applying for a mortgage.  My first impression of TRID is that it is meant to S-L-O-W down the process.   Certain construction loans, raw land, and “bridge” loans will be subject to TRID, but were previously exempt from required waiting periods from RESPA.  (Bridge loans are used to finance the purchase of a new home using funds from an existing home sale) Expect a longer mortgage cycle for these types of loan after August 1st. 

What exactly is slowing down the loan process? At the start of the mortgage application, there are new forms, such as the Loan Estimate form which will be provided to borrowers no later than three business days after they submit a loan application.   Clearer language and design will make it easier for the borrower to read and truly understand all the costs of the loan. In theory, this requirement will give borrowers more time to examine the costs of the transaction and confirm they truly want to move ahead with the transaction.  In addition to paperwork, the last update to the law (RESPA and TILA) required lenders to also provide applicants with a list of certified homeownership counselors if they are proceeding with a high-cost mortgage.  Realtors will need to wait a longer time period to hear back if a loan was approved for their buyers because of this new waiting period.

Also under the new rules, the borrower must receive the Closing Disclosure no later than three days prior to the date the note is signed aka “closing”.  In the past, the borrower might receive this paperwork the day prior or even the morning of settlement.  TRID will in essence, push the rush for documents from the day prior to closing to three days prior. The rush will be on the folks involved with the closing, not the borrower.   Realtors will have to be familiar with these forms which are replacing HUD-1 and Truth in Lending Disclosures. Working closely with a Mortgage Broker you trust will make sure your closing go smoothly and all required paperwork is sent at the required time interval.  

Writing the Perfect Letter of Explanation

You just received an email from your Loan Officer asking for a Letter of Explanation.   Many borrowers have no idea what should be contained in that letter or even more importantly, why it is required.

Lenders scrutinize every aspect of your financial life when you apply for a loan.  You probably already sent in copies of all your bank documents, taxes, W2s, etc.   Why would they be asking for more information? Underwriters are the people that “approve” the loan for the bank.  They compare their guidelines and your documents to determine if you fit the criteria to borrow the amount you requested.  If something cannot be explained in the loan file, then they will ask for information to fill the gap and complete the loan file.  That information can come in a form of a Letter of Explanation. These letters are then retained in case the Government or another Underwriter has to review the file.  Missing or incomplete files can mean penalties for the banks. 

For example, you provided bank statements for the last year. The Underwriter noticed a large deposit in your saving account in June 2014.   On the bank statement, it is simply listed as a deposit and is not categorized as a normal direct deposit from your company.  When asked, you immediately recognize the large deposit was the money from the personal sale of your boat.  The Loan Officer will then have to confirm it was money from the sale and not money someone had loaned you to help pay for the house.  You need to create a simple “Letter of Explanation” stating this was from the sale of your boat and you no longer have the receipt of sale available. You only need a few sentences to explain this and then most importantly, your signature.

These letters are almost like sworn testimony.  Perhaps you lost the receipt of sale or it got destroyed.  It is hard to replace that receipt, but the bank is willing to “take your word” in the form of a Letter of Explanation.   They can be used not only for deposits, but to describe conflicting addresses, names or employers that appear on your credit report. Letters can also be used to explain the circumstances surrounding late payments or bankruptcies.  What information should be provided? Start with a date and greeting and and introduce the specific issue or incident with as much detailed information as possible.   

April 22, 2015

To Whom It May Concern:

I am writing to explain the deposit of $6,700 in my Hometown Bank Account on 6/3/2014.  I deposited the funds received for the sale of my 2013 Nitro Z Boat to Tom Smith on June 2, 2014. I no longer have a receipt for the sale and the company that transferred the title is no longer in business.   

Sincerely,
Eager Borrower (and spouse name if joint application)  

Be as specific as you can and use actual dates and dollar amounts.  If the letter is describing a late payment or financial issue, describe the steps you have implemented so it won’t happen again.  For instance, you can describe the late payment of medical bills and then follow up by saying this debt has been entirely repaid and you have kept up with all new credit obligations since that illness. 

Understand, Letters of Explanation only help Lenders make decisions for marginal applicants; they are not going to be a replacement for Borrowers with insufficient credit or income to qualify for a loan. In essence, they provide the Lender with a more complete picture.  If you have any concerns about writing these letters, always ask your Loan Officer for guidance.

Looking for an extra 27k? Start by Maximizing this year’s Tax Return!

It’s that time of year again.  We all need to calculate how much we will be getting back from Uncle Sam.  Have you planned what to do with your tax refund?  Are you interested in getting more out of this year’s refund?  If so, be prepared for some shocking numbers. 

Borrowers often overlook the value of extra mortgage payments.  There are a few things you can do to shorten the time until you are debt-free.  Yes, it is possible to own your home sooner by following a basic piece of advice.  Consider putting a portion your tax refund to good use this year by making an extra principal payment on your mortgage.

So, how much can you really save if you pay one extra mortgage payment each year?  Does $27,000 and 4 less years of mortgage payments sound like a good return?   Yes, that would be the savings if you have a home worth $250,000 with monthly payments of $1,190.  (If your house is worth more, you will save even more!) Taking a portion of your tax return each year equal to just one month’s payment would produce a quite a savings for borrowers, even if they are only paying 4% interest on their mortgage.   It might be a small sacrifice each year, but imagine how memorable those last 4 years will be with no mortgage payment in addition to a tax refund! Call today and learn how much you can save by making one extra payment with your income tax return.

APR vs Interest Rates: Which one is more important when shopping for a mortgage?

Everyone has received various credit card offers in the mail that state 0% APR for the first 6 months.  Consumers are conditioned to glance past the disclosure part of the offer in fine print explaining how the APR is calculated and simply recognize that it is a good deal…..at least for the first 6 months.  You might already know "APR" is an abbreviation for annual percentage rate and it indicates how much is being charged to borrow money. However, you might not be 100% sure how the credit card company is calculating each month.  

The interest rate that you are quoted when you apply for the mortgage is the cost you will pay to borrow the money for the home loan.  The APR represents the entire cost of the mortgage, including closing costs, and any other charges to get the loan.   Therefore, the APR is usually higher than the interest rate.  It might be less than one percent higher, but by law, the lenders must have full disclosure to the borrower under the Federal Truth in Lending Act.  It is actually wise to look at the APR, not just the interest rate, when applying for a mortgage.

Why do our law makers want Lenders to disclose this particular number?  APR is the basis for comparing certain costs of loans.  Savvy borrowers should not only compare the interest rates quoted from the Lenders, but focus on the APRs to get a fair comparison of total cost.

The example below will demonstrate just how important the APR is:

Borrower is comparing rates between two Lenders. The current loan balance is $200,000 and the home is worth $250,000. Let’s see how the offers compare: One Lender is offering a rate of 3.625% and the other is 3.75%. He is about to lock with the first Lender when he sees the APR and is wondering why it is higher than the agreed upon interest rate.

Lender 1: 30 year fixed rate mortgage, 3.625% with 1.5 points and $3800 Closing Costs. APR is 3.9. To cover the Closing Costs the new loan amount is $206,500. Based on 3.625% the Principal and Interest payment will be $941.75.

Lender 2: 30 year fixed rate mortgage 3.75% with 0 points and $2400 Closing Costs. APR is 3.84 and the new loan amount is $202,400. Based on 3.75%, even though the rate is HIGHER than the first Lender the Principal and Interest payment will be $923.05. Option two will save the Borrower $6,732 over the term of the mortgage.

By requiring Lenders to disclosure the APR on a loan, Borrowers will get the full picture of costs when comparing the actual APRs.  Reviewing the Good Faith Estimate, a borrower can compare and determine how other loan costs such as points can increase the APR.  Even though the first loan at the lower interest rate seems like a better option at first glance, it will cost MORE over the life of the loan.   If this particular borrower wants to save money, he should go with the second option. Even though the interest rate is technically higher, it is costing him less money for the same loan amount. 

Current Interest Rate Means "More House" for Buyers

Why do Mortgage Brokers and Real Estate agents track mortgage interest rates daily? The difference in just a few percentage points means a family might be looking for their range of affordable houses in two completely different neighborhoods or even zip codes.

If the typical American family makes $60,000 a year and has basic living expenses and a normal amount of debt, they can afford approximately $1,850 a month for their housing payment. (The calculation is based on $2,250 in total expenses, including a car and house payments.)  What does that translate into as far as how much home this family can afford?  Well, the answer depends on the mortgage interest rate at the time of application.  This integral number factors into each monthly payment, which in turn factors into the overall amount of home loan they are allowed to borrow.

How are these rates determined? And how can they change daily?  It is a complex formula based on the secondary market where mortgages are bought and sold.  Mortgage rates most closely follow the 10 Year Treasury Bond, but fluctuates as bond prices changes. The economy is also a factor and if it is slower economy, rates drop which encourages homeowners to buy.   Both Freddie Mac and Fannie Mae are government agencies that try to keep this secondary market stable.

Comparing this same family’s buying power now and in 2000, they could afford much more home now because the rates are lower.  In July 2000, mortgage interest rates were 8.5%, which meant they qualified for a $250,000 home.   If they put 20% down at 8.5%, they would have a $200,000 loan amount.  After taxes and an insurance escrow at $315 month, the payment would be $1852.83 a month.

This same family can now afford a loan for a $400,000 home.  If they put 20% down at 3.75%, they would have a $320,000 loan amount.  After taxes and an insurance escrow at $370 month, the payment would be  $1851.97 a month because rates have dropped. This scenario assumes the same income and debt ratio as the previous example.  You can understand why anyone working in the real estate profession would be tracking these rates closely!  

Lord Mortgage provides daily, live rates so you can predict the best time to buy a home or even refinance your current home.  Add this site to your favorites, so you can also stay ahead of the curve http://www.lordmortgage.com/#!rates/c11su

Shoppers and Well-Meaning Parents Beware of Credit

Many of us do not quite understand how the credit companies come up with a "magic credit score" that determines how much we can borrow and at what rate.   Moreover, borrowers do not realize how important it is to maintain that number in between the time the Loan Office issues that pre-approval letter and the time the borrowers close on their mortgage. 

I have had borrowers no longer qualify for a mortgage because they decided to charge all the furniture they need to buy for their new home.  They got caught up in the moment, not realizing there will be no place to set up all those new leather recliners and matching love seats after their credit score dropped below minimum number needed to qualify for their loan.  Another borrower forgot to mention they loaned their daughter an extra $3,000 for room and board at the beginning of the semester, which depleted one of their savings accounts.

All of these actions affect their creditworthiness.  When you are pre-approved for a mortgage, the approval process is based on a snapshot of your financial situation at that time.  Borrowers provided a bank statement that said they had $5,000 in their savings, which would cover all their closing costs.  After these well-meaning parents loaned their daughter college funds, they no longer have enough liquid assets to cover the out of pocket costs for closing.    The savvy shopper might have gotten a great deal on furniture, but the hidden cost was a decrease in her credit score.

Borrowers must remember to maintain and protect their credit at all cost.  You might feel like you are putting life on hold for a while, but getting the home of your dreams will be worth the short-term sacrifice. 

Are Pre-approvals still necessary in this housing market?

There seems to misconceptions about Pre-approvals. Are they necessary?  How much will they cost me?   Pre-approvals are an essential first step in the home buying process where borrowers provide proof of their income and assets, such as bank account statements, W2s, and pay stubs to a Loan Officer. Loan Officers then issue a pre-approval letter that will let buyers know how much house they can afford.  Pre-approvals take in account any additional closing and settlement costs, down payments, and potential out of pocket expenses so borrowers know how much the loan will cost them at the closing table as well as each subsequent month. While numerous online calculators give a general idea of how much a buyer can afford, they can never take the place of an actual Loan Officer that understands the underwriting process and how those assumptions and calculations can be used during the loan process.  There is no cost to the borrower to get a pre-approval.

Time is of the essence for most Real Estate agents and sellers.  Many of them require buyers to produce pre-approval letters before showing them a home. They do not want to spend their time and efforts on someone who cannot afford to buy their listing.   Buyers feels the same way when setting up showings and driving around to various Open Houses on the weekends.  Pre-approvals make sure both parties are on the same wavelength.  The pre-approval process can save borrowers valuable time, frustration, as well as some gas money! Pre-approvals are a win/win for everyone involved.   

Some Real Estate professionals might ask for next step up from a pre-approval, called a TBD (Property To Be Determined).    Lord Mortgage is able to provide a TBD which is a fully underwritten loan.  If borrowers want this level of buying power, they need to go through the underwriting process which is a more in-depth income and asset verification.   When Real Estate and sellers consider numerous offers on their listing, the fact someone has already received a pre-approval or TBD will definitely factor into their decision.  Remember, there is no-cost to get a pre-approval and it can actually end up paying dividends for time invested at the beginning of the home buying process.