Mortgage & Lending Information
from Your Portland Realtor
There's a lot of information
out there to help home buyers and home owners refinancing
get a better understanding of lending when buying or
refinancing a home, most of the information you can find on
the web is either far too extensive or confusing for most
people and thus they won't bother to read it, or not nearly
extensive enough and possibly riddled with more ads than
valuable and relevant content. So we created this page on
our website to highlight what every borrower should know in
a straight to the point clear and easy to understand format
linking to pages either on our site or on external sites
that explain certain terms in more depth if want more
information on a given subject. This information changes all
the time so this is meant to be fairly generic and thus
relevant over the years. We are
Portland real
estate agents, not lenders but we have
had multiple lenders review this content for accuracy. For
detailed information relevant to your situation please
contact your lender or we would be happy to refer you to one
we know and trust.
Credit Score
Credit score requirements vary greatly depending on the market
conditions, banking conditions etc. During the boom of 2001-2006 a
low and even "poor" credit score was in some circumstances
acceptable to obtain a subprime loan
if other conditions were met such as at least a few thousand dollars
for a down payment, solid job history
and income levels, good debt
to income ratios etc. A poor credit score is typically below
579, under this score and you're going to have an extremely tough
time getting financed especially in a more typical market. In a boom
market for buyers such as we just had from 2001-2006 obtaining a
loan in this range was doable, but not easily doable. Scores from
580-619 are better but still not great, in this range you can expect
a bit lower down payment requirement, higher
DTI acceptable and less
job stability flexibility than the previous 579 and under range.
Moving into the range of 620-679 are beginning to move into the good
category, but depending on market conditions can still be looked
upon by lenders as a low score. If all else is equal (DTI is ok,
down payment is ok, job history and income level are good) than you
shouldn't have a problem stepping out of a subprime loan and into a
more traditional loan program with competitive rates and low to no
mortgage points.
Negative Items on
Credit Reports
To some extent this could be considered
to be even more important than an overall credit score, in that even
if you have a high credit score if there are derogatory items on
your credit report most of the time you will need to get those
cleaned up BEFORE going through the loan application process. The
long and short of why? Well, if your credit report shows you have
failed to pay someone you owed money to, that raises the risk to the
lender of you not paying the loan back; at least that's how they see
it. If you have no derogatory items on your credit reports from the
three credit reporting agencies
Experian, Transunion &
Equifax, then chances are
you have a fair to good credit score, but the opposite is not always
true. For instance, a
charge off,
repossession etc will definitely lower your credit score, but if
you have 20+ years of perfect credit history and a score of say 790
(really high), then a repossession is not going to bump your score
down to 500, maybe somewhere more around 700, but it will cause an
underwriter to question whether their
institution should lend to you.
Loan to Value Ratio or LTV
This is pretty simple and straight
forward, so I'm not linking to it externally. This is the ratio of
the loan amount compared to the homes appraised value. So, if you're
buying a $300,000 home and you need to have an LTV of 80% then you
need 20% down or $60,000 in the case of a $300,000 home. Typically
80% or lower is what a lender likes to see and traditionally it was
almost a requirement, however in recent times we've seen 100%, even
110% and these loans, usually subprime
loans, are largely what went wrong in the housing market leading
to the bubble bursting in 2006. In the aftermath we're still
commonly seeing 97% LTV's but only with
FHA Loans, the rest are usually looking for at least 10% or more
down so a 90% or lower LTV.
Mortgage Points
Mortgage points or "discount
points" are a good and a bad thing. They can be good when used
to
buy down your interest rate but be sure this makes sense for
your situation by discussing this option with your
mortgage broker/lender. They are bad when your lender is
charging points and you are not getting a discounted interest rate
in return. Although this is extremely unethical, we see lenders
attempt this with buyers every so often, charging "points" for no
apparent reason other than to further line their own pockets at
their clients expense. If a lender try's this with you, find another
lender - PERIOD. If you can't trust them to not take you on points
then you can't trust them.
Debt to Income Ratio or
DTI
Debt to Income Ratio is the ratio of debt to income that you
currently incur. Typically this needs to be below 50%. So for
example if you currently have a $1,500/month house payment, a
$300/month car payment, revolving credit (credit cards) of
$150/month minimum payments then you should be making at least
$4,000/month to have a DTI of less than 50%. If however you are
making $3,000/month your DTI is almost 75% and it would thus be
difficult for you to be approved for a loan. Another commonly used
DTI is in the format of say 31/43, what this means is you can have a
DTI of 31% for housing, and/or a DTI of 43% for housing plus monthly
debt. The debt considered here is not just housing, car loans and
credit cards, taxes & insurance could also be factored in depending
on the loan program being used.
Loan Types: FHA, VA, USDA, Conventional, ARM,
Interest Only, Home Equity & more
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There are many, MANY types of
loans, so we'll only go over the most common ones you are likely
to run across. Right now the one we see the most is FHA as it's
the only loan someone could use to buy a home with only 3% down
(and as of January 1st 2009 it will be 3.5%).
FHA,
or Federal Housing Administration loans are
U.S. Department of Housing and
Urban Development (aka "HUD") federally insured loans
and thus are less risky so to speak for lenders as Uncle Sam is
backing these loans. These loans are a bit messier in terms of
paperwork, requirements etc however in recent years they have
loosened up a bit. A few years back a lot of sellers wouldn't
even look at offers with FHA specified as the loan type due to
the red tape, hoops and seller contributions that had to be made
at the time. Now, they are more widely accepted and thus more
widely used. If you're a first time home buyer with little money
down an FHA insured loan is something your lender will likely
talk to you about. For existing home owners and or 2nd, 3rd
(etc) time home buyers talk to your lender as the requirements
for this change often and may or may not currently qualify.
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V.A. Loans are
U.S. Department of Veterans Affairs
loans specifically for military veterans and can often offer
significant (and often not so significant) discounts for
Veterans when purchasing a home depending on the programs they
are offering at the time. Talk to your lender about these if
your a veteran.
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A
USDA Loan has nothing to do with beef! A USDA loan is
essentially a benefit laden government backed loan from the
U.S. Department of Agriculture
specifically for those buying, renovating, building, moving a
home or preparing land for a home in rural areas. If you are
looking/living in a rural area, be sure to ask your lender about
this type of a loan.
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Interest only loans are exactly what they sound like, you
are paying interest only in your monthly loan payments and are
thus not paying down the principle loan balance at all and in
exchange for that your rate is typically going to be lower than
the going traditional 30 year fixed rates and thus you end up
with a lower payment. These loans are absolutely useful if you
use them properly. For instance in a typical
loan amortization schedule the
first few years of payments are primarily paying down the
interest and not the principle balance, so if you know you are
only going to be in the home for 2-3 years this may be a good
option for you as with a 30 year fixed loan you wouldn't be
paying much principle at all anyway, so why not benefit from a
lower payment? Or if you're planning on refinancing in 2-3 years
the same could be true. Another situation is maybe you expect to
be making significantly more money in a few years. The catches
here are many, A) you really need to be sure of the situation
you are in now and are likely to be in in a few years and B)
often there is a balloon payment schedule for the balance after
X number of years and/or a rate increase to begin paying
principle in X number of years which could jump your rate up
significantly. Be careful using this type of loan, in the right
hands it's a valuable tool, in the wrong (careless) hands it
could be devastating to get caught in the strings of this type
of loan.
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An
ARM, or
Adjustable Rate Mortgage is exactly that, "adjustable rate".
What happens is this, lets say
current interest rates
are 5%, but a lender can get you a loan at 4% or maybe even 3%
for 3 years but it will adjust annually to X amount of or at
then current rates. This would be a 3/1 ARM. The amount it could
adjust each year is usually no more than 1%, but can be more
depending on the loan program. Like interest only loans these
can be useful if you plan to refinance in a few years or sell
the home in a few years (preferably before the rate jumps). But
be aware this loan is the one primarily at fault for the market
bust in 2006! Lots of people used these to buy homes at 100%+
LTV's, their home values dropped and their rates went up and
they could no longer afford the often significantly higher
payments resulting in short
sales and foreclosures
and an eventual market collapse. Use this option wisely!
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Home equity loans. I'm not going to
go into too much detail here, but suffice it to say there are a
lot of different choices here. Loans that give you a lump sum up
front and instant payment that remains steady, or loans that
give you available credit and quite literally a check book to
use to withdraw equity from your home, the more you pull out the
higher your monthly payment goes. Typically these loans are
"2nd's" on a home, that is used in conjunction with a primary
more traditional mortgage and we're largely being used to do
80/20 loans
where a borrower had no down payment and didn't want to pay
mortgage insurance
so they take out a loan as a "1st" or "primary position" loan at
80% LTV, then take out a home equity line of credit or "HELOC"
or a home equity loan to cover the other 20% needed to buy a
home. Additionally these are used for home owners when they want
to renovate/remodel their home and pay for it using the existing
equity they have in their home.
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Last but not least we have the
traditional loans. These are 15 year and 30 year fixed rate
mortgages and the years can vary, 10 year or some loans even at
50 year (though at 50 years you're well into the "is this really
a smart decision" area). These are by far the most common loans
on the market. The rates are usually market, sometimes just
below or above depending on factors such as points, LTV, DTI,
Credit Scores etc. Generally you want to go with the shortest
term you can here and the shorter the term usually the lower the
interest rate.
Subprime Loans
Subprime loans are loans that borrowers with negative status in
terms of credit, job history, income level etc may end up with when
purchasing a home. Generally these loans have higher interest rates,
pre-payment penalties, adjustable
rates, high points and/or any combination of these undesirable
traits loans can have. This does not mean a subprime loan is always
a bad thing, if you can afford to buy a home and have a solid and
stable job owning a home is definitely better than renting in almost
every situation. Get into the home, get whatever challenges you have
resolved that resulted in only qualifying for a subprime loan and
then refinance it later.
Loan Amortization
Loan amortization is simply the
schedule at which the principle balance of a loan is paid over the
term of the loan at a increasing rate and the interest of the loan
is paid at a decreasing rate. As a result in the beginning of the
loan term the interest paid absolutely dwarfs the principle paid,
then roughly little less than half way through a typical loan that
reverses and the principle being paid is ever greater than the
interest being paid until the loan gets to 0 balance at the end of
the term. Bankrate.com has a good loan amortization schedule
calculator here
that shows this amortization schedule for a given loan that you want
to see.
PrePayment
Penalty's
A
prepayment penalty is something you absolutely have to know
about with your loan. On some occasions there may be something in a
particular loan program that makes a pre-payment penalty worth
putting up with (like a lower interest rate) but in most cases only
if you do not intend to pre-pay the loan. These penalties are often
also associated with subprime loans. These penalties range in
details from paying anything over your minimum payments each month,
to a certain amount in a month or a year pre-paid that causes it to
kick in, to complete payoffs of the loan that kicks them into gear,
so know the details if your loan has one. If your loan has one and
there is no benefit to you in exchange (again, lower interest rate?)
try to get it removed from the loan or find another loan program as
you generally should not be stuck with one.
Mortgage Insurance or 80/20 Loans
Mortgage
Insurance, also known as
PMI
(Private Mortgage Insurance), is generally required by a lender
when there is a really high LTV. It's an extra payment on top of
your loan payment that goes to "insure" your loan against
non-payment of the loan. When this is required often doing
"80/20" loans or similar set of loans will drop the requirement
for mortgage insurance. An 80/20 (and there are 85/15's, 90/10's,
70/30's etc with 80/20 being the most common) is a primary first
loan and a secondary well, 2nd loan creating a 100% loan on the home
through two different lenders one in first position and one in
second position. First and second position just refers to the
priority of the loan if/when there is a
short sale, foreclosure,
bankruptcy etc, the first position loan has priority to get paid
over the second position and thus lenders prefer to be first
position lenders and as a result "2nd's" at a higher risk also tend
to be at a higher interest rate.
Down Payment
Really super straight forward; how much
money can you put down on the home? Current requirements with an FHA
loan are 3.5%, outside of FHA currently there are 10% plus loans
available and traditionally you would want 20% minimum down payment
and most money geeks will say you have to do at least 20% down to
minimize your risk if the home drops in value as homes are doing as
of this writing. Down
payment assistance programs are few and far between but they do
pop up from time to time so check with your lender to see if there
is something available that could help.
Locking the Interest Rate
This is something we find buyers are
frequently not properly educated on but is fairly easy to understand
so no links for terms used here.
Interest rates change daily and even hourly, so "locking in the
interest rate" can be crucial when buying a home. The
escrow process of buying a
home most commonly goes on for 30 days, sometimes as short as 1-2
weeks, sometimes as long as 90 days; it all depends on what the
buyer and seller agreed to and what time frame the buyers lender can
perform in to fund the purchase of the home. During this time
interest rates can change drastically effecting a home payment by
even hundreds of dollars a month in some instances so it's important
when you have a good rate you with a payment you are comfortable
with that you lock that rate. Problem is a rate cannot be locked
without a property address so you need to have made an offer on
a home and come to mutual agreement with the seller on a price and
have entered escrow before your lender can lock the rate. Sometimes
we see lenders forget to lock the rates so make sure to ask your
lender to lock it when you have a property in mind and an interest
rate you are comfortable with.
Underwriting
Underwriting
is the process a financial institution uses to basically make sure
you qualify for the home purchase and that the home itself
qualifies. Underwriters check to make sure the information you
provided your lender is accurate, check your previous accounts to
make sure the credit reports are accurate, check job history,
references and information on the property itself (for instance if
the property needs a new sewer an underwriter will decline the loan
on the property). Underwriters are largely pencil pushing
accountants, but they are detail oriented and looking for a reason
to not approve the loan, so be careful, don't give them a reason! In
house underwriting is when a mortgage lender/broker has underwriters
in house that they have access to. This is preferred for a few
reasons. Often something will come up with underwriting in even the
cleanest transactions. When this happens with underwriters that are
not in house, you could be looking at delaying closing for a few
days and might be risking going out of contract of the sale waiting
for them to respond where as in house underwriters typically respond
and resolve issues quickly.
Mortgage Broker,
Mortgage Lender (aka a "Bank") or Credit Union
Whether to use a
mortgage broker, a mortgage lender or a credit union is largely
personal preference and what's good for one person may not work so
well for another. Mortgage brokers have a huge array of "products"
(loan programs) available to them often in house and always from
outside sources and will thus often find a better deal for a client
than a traditional brick and mortar bank can offer. On the flip side
a mortgage lender (aka a bank) and credit unions may have a specific
deal available to their own clients or members in the case of a
credit union that mortgage brokers do not have access to. Check with
both, it doesn't hurt to get multiple opinions on a mortgage from
various sources. Be aware however if you are dealing with someone
that is difficult to get a hold of we highly HIGHLY recommend
finding another lender because if they are hard to get a hold of in
the beginning then when/if there is a lending problem just days or
even hours from closing and your stress level is about to pop. you
will pop if your lender is unreachable. Do yourself a favor and work
with a lender that answers their cell phone day or night and on the
weekends as there are plenty of excellent lenders out there that
work this way.
Appraisal
During the boom market from 2001 - 2006
appraisers worked closely with lenders, probably too close literally
on occasion asking the lender what they need a home to appraise for
and making sure the appraisal came in at the mark. Since the bubble
has burst appraisers have become extremely tough and are no
longer willing to work this way (a good thing for the most part).
Appraisers are used on every loan and can make or break a home
purchase. If you're using an FHA loan program to buy a home the
appraisal is critical because if the home does not appraise for the
sale price the lender will not be able to approve the loan. If
however you have a significant down payment on the home then the
appraisal is less critical to the loans success but you may be a bit
irritated if you agreed to pay say $300,000 for a home that just
appraised for $285,000.
Your Realtors Role
Your Realtor (hopefully us!) should be
a wealth of information for you on this and many other subjects when
buying or selling real estate and should never "fudge" an answer to
a question you have. If your Realtor doesn't know the answer to a
question you've asked they should tell you they do not know, but
they will find out and get back to you ASAP and follow through on
that promise. Your Realtor also should work to coordinate the escrow
process, they should be in regular contact with your lender or if
you're a seller with the buyers lender. It's sad but often we find
we are the only "professionals" in a given transaction that actually
care about keeping in line with contracts, deadlines etc to close
transactions in a professional & timely manner. If you end up stuck
with someone in a transaction be it escrow, lending or otherwise
that is not on the ball and doesn't seem to care at least make sure
you've picked a Realtor that will keep them on track and on the ball
whether they like it or not.
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