You are viewing the printer-friendly version of Outside the BoxOutside the BoxEMPLOYMENT QUESTION:During the past 2 years I was unemployed for 3 months and have been with my current employer for only 12 months. I was able to keep all of my obligations covered during the period of unemployment and have a FICO score of 734. Does the unemployment automatically exclude me from qualifying for a mortgage. ANSWER: The time you were unemployed will not exclude you from qualifying for a mortgage. Your FICO is good, and you have been employed for 12 months, which is also in your favor. A few things that a lender will consider are: Are you currently paid a salary or commission? Salary is considered to be more stable, but if you are paid straight commission, the lender will average your income over the last two years and qualify you based on that income amount. Are you in the same line of work as you were before? If so, that will also be in your favor. If you are not, it is still a positive factor that you have been with the same employer for the last year. Your lender may ask you to explain the unemployment circumstances. If you were doing any work (such as consulting) during the time you were not employed, I would definitely mention that to the lender. Also, if you spent the entire time job hunting or on a sabbatical, that is fine too - just make sure the lender knows what you were doing. Other factors that will be considered are the amount you are putting down on the house and the condition of the property. -------------------------------------------------------------------------------- SURVEY QUESTION: My wife and I have applied for a loan to buy a $176,000 home. We're being considered for a loan that requires us to put down 25% ($44,000) with a 7.25% ARM. I've got a full-time job, but a mediocre credit rating (650); my wife has no full-time job but a high credit rating (747). This is why we've had to get an ARM rather than a fixed-rate mortgage. Everything has gone well in our mortgage application process so far, but after the official appraisal and a drive-by double-check, the bank has required a site survey because of possible worries of encroachment. Is this common? In your experience, what do banks use site surveys for? ANSWER: Surveys are very common, and are used to get an accurate measurement of the land that goes with the property you are purchasing. The person who prepares the survey is a licensed land surveyor. The survey shows the location of the land, dimensions of the land, and any improvements. Encroachments are improvements to property that violate another's property or their right to use the property, such as building a fence that is actually on your neighbors property instead of yours, or constructing a building that crosses from your property to another’s property without their permission. -------------------------------------------------------------------------------- INTEREST RATES QUESTION: What is the projection for interest rates in January 2005? My husband and I are thinking of refinancing because rates are so great. However, there is a 2% prepayment penalty we must pay that does not come off until January of 2005. We want an idea of what we should do. ANSWER: The link below will take you to a document that provides some data on forecasts for what is projected to happen with interest rates and mortgage finance through the second quarter of 2005. The bottom line is that rates are expected to go up just slightly (roughly 1/2 of a percent - from 6.00% to 6.50%). http://www.mortgagebankers.org/marketdata/ forecasts/pdffeb2004.pdf A 2.00% prepayment penalty could be a significant amount of money for you to spend - for every $100,000, you would have to pay $2,000. The best way to make your decision is to multiply 2.00% times the amount you would be pre-paying and compare that to the difference in your payment now vs. the payment after you refinance (assume a 6.50% interest rate on the refinance). When refinancing, it is essential to look at the savings on your monthly payment vs. the cost of doing the refinance (in your case, that would involve the cost of the prepayment penalty plus closing costs on the refinance transaction) and then determine how long it will take you to realize the cost of doing the transaction. Let me give you an example: if the refinance itself costs $3,000, and you are saving $300/month, it will take you 10 months to recap the cost of the transaction. Generally speaking, if you can recap your costs within a year, or if you are reducing the interest rate on your mortgage by 2.00% or more, refinancing is a good option. There are other considerations though so even if you do not recap the cost quickly, the refinance may be something that you need or want to do. I would advise that when you refinance, make sure there is no prepayment penalty on the loan. -------------------------------------------------------------------------------- INTERNATIONAL MOVE QUESTION: I am living in Germany, but my girlfriend and I want to live in the United States in about 5-7 years. I want to make a calculation for a home finance. Financing homes is different internationally, so where can I find out about all of the costs, including all extra expenses, due to buy a house? I want to have a checklist so I don't forget a part of costs we have when we are ready to buy. ANSWER: You asked some great questions that will help you prepare for your move and the cost of purchasing a home. I hesitate to quote a dollar amount that you should plan to have saved because home prices as well as closing costs can change a lot over time. When you do make the move, be sure and talk with your lender about citizenship requirements and available loan programs, such as low down payment loans. In the meantime, you can review all of the cosing costs associated in another section of this site. -------------------------------------------------------------------------------- CREDIT QUESTION: I need to know of an agency that helps with improving your credit. I want to buy a home but don't know were to start. ANSWER: I would recommend you work with an organization that is a member of the National Foundation for Credit Counseling. To find a counselor in your area, go to the www.nfcc.org web site. They will want to meet with you face to face and run a credit report. You will want to carefully review the information on the credit report because there could be mistakes that need to be corrected. Going forward, it is important to do the following: Make sure all of your payments are made on time If possible, pay more than the minimum due in order to reduce your balances faster Try not to charge more on your credit cards unless you have an emergency situation Try to save something each month; any amount would be beneficial and will add up much faster than you think! -------------------------------------------------------------------------------- FHA: Is there a penalty for early payment of an FHA mortgage? ANSWER: There is no penalty for pre-payment of an FHA mortgage. Most mortgage loans to not have a pre-payment penalty for early payment of either the entire loan, or for making payments before the due date. In fact, I rarely see mortgage loan programs that do have this type of penalty, but they do exist so it doesn't hurt to ask about pre-payment penalties when you are applying for a loan. If the loan you are applying for does contain a pre-payment penalty, be sure and tell your lender that you want to apply for a loan that does not contain a pre-payment penalty. If the lender does not accommodate your request, find another lender! -------------------------------------------------------------------------------- FIRST TIME BUYER PROGRAMS QUESTION: I recently was approved for a mortgage, but I need help with my downpayment and closing costs. I have read the criteria for a few down payment assistance programs, but each needs the seller to donate some sort of funds. Is there any program out there that can help me? ANSWER: There are many programs available to help a first-time home-buyer purchase a home, and not all require the seller to contribute money. Since you need help with down payment, you are on the right track to try and take advantage of a down payment assistance program. It is likely that there are other programs available in your area that do not require the seller to contribute. I would advise that you call your local housing authority and ask to speak with someone who can give you information about down payment assistance programs that are offered in your area and which lenders offer the programs. These programs vary from community to community, and typically offer some type of assistance with down payment. They may also have guidelines such as a maximum borrower income. Some programs require the down payment funds to be re-paid, while others do not. In addition, you can ask your lender about these other options as well, which make it easier to afford your first home: Allow for lower down payments, therefore requiring less cash to buy a home. Relaxed guidelines for loan approval, such as allowing a higher ratio of payment to income or total debt to income. Use alternative forms of credit if you have not established credit through traditional means such as credit cards and car loans. If you have not established credit, a lender could look at history of utility payments and rent payments to determine your credit-worthiness. Reduced interest rates through bond money programs. Your lender should be aware of any bond money programs that are available in your area. State or local agencies issue bonds and use the proceeds to help qualify loan applications. Home Buyer Education is offered through lenders and mortgage insurance companies. With some of these programs, a lower down payment will be offered after completion of a home buyer education course, which can be offered on line, or in a lenders office. -------------------------------------------------------------------------------- QUESTION: I have a timeshare that is causing me not to get my first mortgage since it went into collections. I now want to purchase my first home. I have been at my job for a while, and combined, my husband and I have an income of 80k. However, we are unable to pay off the timeshare. Our combined credit score is 584. Is there anyway we can get our first home without paying this off in full? ANSWER: Is it possible for you to sell your part of the timeshare? If so, I would do that before trying to purchase a home because most lenders will require that an item that is in collection be paid off prior to approving a loan. You and your husband have some things going for you; your income and length of time on jobs (over two years is good, more is better!) however, you do have some challenges. You didn't mention whether or not you and your husband have been able to accumulate any savings, but if you have been able to do so, that is also a positive factor. Here is what I recommend you do: Go to the Equifax web site and order a 3-IN-1 Credit Report and Credit Score—the cost is $39.95 and well worth the money. You will get a credit report from Equifax, Trans Union, and Experian. You will need to carefully review the credit report and if there are any errors, alert the credit reporting agency who is showing the error on your credit report. Also, you will receive your credit score. Generally, a score below 680 is considered to be riskier than a score of 680 or higher. The credit score and an explanation of the factors that affect your score will be provided to you. Gather up your documentation on your credit issues (such as the timeshare).Your lender will ask you to write a letter explaining the circumstances around the credit problems, so if you start working on that now you will be more prepared when you apply for a loan. Start talking with various lenders about loan programs they have available for people like yourself who have had challenges that resulted in credit that is less than perfect. Many people have been in the same situation as you and your husband, so lenders have responded by coming up with loan programs to meet those special needs. Don't get discouraged! Go ahead and ask your lender to pre-qualify you for a loan so you will know how much house you can afford, then start looking for a home in that price range. When you start looking for a home, make sure you find one that has a good, solid value without a lot of repair work required; a real estate professional will be able to help you with this part. Then, when you apply for the loan, don't be discouraged if the interest rate is not as low as you would like, but do make sure there is no prepayment penalty on the loan—this is very important because if you show the willingness to repay the loan by making your payments on time, you will be establishing good credit. Once your credit is in better shape, you will be able to refinance your loan at a lower interest rate (assuming that interest rates do not rise significantly)—that is why it is so important to make sure you loan does not have a prepayment penalty because you will be paying off the higher interest loan when you refinance to a lower interest loan. Keep your credit squeaky clean. Be sure to pay all of your bills on time and do not accumulate high balances on your credit cards. -------------------------------------------------------------------------------- PROPERTY CONDITIONS AND MORTGAGES QUESTION: Will a bank mortgage a home where only a portion of the home is heated by an oil burner, and a portion is heated by a coal burner? ANSWER: When you apply for a loan, the lender will be able to tell you whether or not the guidelines they use for underwriting your loans will allow a combination of oil burner and coal burner. The lender will have the property appraised by a certified appraiser. The property appraisal is used by the mortgage bank to determine if the value of the home you are purchasing is at least equal to the price you are paying for the home. This is for your protection to make sure you are not paying too much for the house, but also protects the lender by making sure they are not lending an amount that is more than what the property is worth. In addition to determining the value of a home, the property appraisal will also be used to document whether or not the home meets codes and zoning restrictions for the area, and to document if the utilities are adequate. If an oil burner/coal burner combination does not meet code or is not adequate, you may have a problem getting a loan from a mortgage bank. If you do have problems with a mortgage bank, consider talking with someone at the bank where you have your checking account and see if they have any programs that meet your needs. Without knowing where the property is located and what is customary in your area, it's difficult to say if the heating in the home you want to buy is acceptable. -------------------------------------------------------------------------------- CO-SIGNING A MORTGAGE QUESTION: What does it mean for me to co-sign on a mortgage? How do I become responsible? And how will it affect my own purchasing decisions in the future? ANSWER: You are smart to ask the question about co-signing on a mortgage loan before actually doing it. When you are a co-signer on a mortgage loan (or any loan for that matter), you are held responsible for payment on the loan if the primary borrower stops making payments. If the primary borrower stops making payments, and you do not make the payments, then your credit will be negatively affected. This happens because your credit report will show that you did not make the payments, but were responsible since you co-signed the loan. Another factor to consider is that if you are a co-signer on a loan, the debt has to be considered when qualifying you for another loan. For example, if you co-sign a loan and the payment is $500 per month, then you try to buy a home, the $500 payment that you are legally liable for will be counted as a debt in the "total debt to income" ratio calculation. That ratio is used to decide if you have sufficient income to support payment of a mortgage payment plus other recurring debts. -------------------------------------------------------------------------------- UNDERWRITING QUESTION: What are the qualification factors for a mortgage? The obvious ones are income and debt. What debt is considered "good" debt or "bad." What are the things a lender looks for? ANSWER: There are many factors that are considered when underwriting a mortgage loan. The mortgage loan underwriter will look at the borrowers ability to pay (income), willingness to pay (past credit history), and the collateral (property). As an underwriter analyzes each of these risks and this is not a complete list, these are some things that an underwriter will consider prior to approving a mortgage loan: Income: Is the income sufficient to repay the loan? Ratio guidelines of 28% payment to income ratio and 36% total debt to income ratio are standard, but some lenders allow for higher ratios. Is the income stable from month to month and year to year? Has the borrower been on his or her current job and in the same industry for a reasonable amount of time? A minimum of 2 years is the standard guideline, but exceptions can be made. Does the borrower have a good credit score (typically, 680 or higher is considered good)? Does the borrower have late payments, collections, or a bankruptcy? If so, is there an explanation that can be provided for the late payments/collections/bankruptcy? Does the borrower have huge monthly debts to repay? Is the borrower maxed out on credit cards? No available credit left indicates a heavy credit user. Is the property worth what the borrower is paying for it? If not, the lender will be unwilling to loan an amount in excess of the value. Is the property an acceptable type of property, and does it meet coding requirements and zoning restrictions? Is the property comparable to other properties in the area? -------------------------------------------------------------------------------- QUALIFYING FOR A LOAN QUESTION: What are the job requirements for getting a mortgage? We are planning on buying land and building our house in the next year but I am considering switching jobs. Are you required to be at your current job for at least 2 years to qualify for a loan? Or is it just is the same field? ANSWER: Job stability is a factor that a mortgage lender will look at when determining whether or not to approve a loan, and two years at your current job helps, but is not an absolute requirement. If you change jobs but stay in the same line of work, you should not have a problem, especially if the job change is an advancement or increase in income. Other factors a lender will look at are your credit, savings, and the value of the property. -------------------------------------------------------------------------------- NO DOCUMENTATION LOANS QUESTION: What exactly is a "no documentation" loan? ANSWER: A "no documentation" loan means that the lender will not require you to provide any information about your employment, income, or assets. Because the property value and credit of the borrowers are given more weight in a no documentation loan the lender will require a property appraisal and will run a credit report on the borrowers. Also, the interest rates are usually higher, and the down payment requirement is higher for a no documentation loan than on a full documentation loan. The purpose of these requirements is to offset the risk associated with a no documentation loan. There are other limited documentation options as well: Stated Income: your income is stated verbally but no proof is required to support the income. However, the lender can call your employer to verify that you are employed. Stated Assets: your assets are stated verbally but no documentation is required to prove the assets. No Ratio: Ratios (housing to income, and debt to income) are not used for loan qualification -------------------------------------------------------------------------------- NO INCOME VERIFICATION LOAN QUESTION: I need to do a no income verification loan, but I also do not want to put too much down, is it true that I can do both a no doc and have a zero down payment? ANSWER: With Limited/No Doc loans little or no documentation is provided to substantiate the borrower's income and assets. These loans are mostly for self-employed borrowers who have difficulty verifying all of their income, and for service industry employees, such as bartenders, waiters, and hair stylists that have pay which is difficult to determine precisely. These loans may be also used by borrowers who get most of their income from commissions, or by borrowers with very complex income structures. For example, a borrower who has income that is mostly from rental properties and investments may be hesitant to verify all sources of income due to the volumes of paperwork this would require. Because of the risk associated with Limited/No Doc loans, please keep the following in mind: A borrower may have to make a larger down payment. In many cases, the LTV on a Limited/No Doc loan is limited to 70-75%. Some lenders, however, will allow a 90% LTV. That means you would need a minimum down payment of 10% of the sales price or value of the property. Credit standards are higher for Limited/No Doc loans. Borrowers must have maintained a good repayment history within the last two years. Additionally, some lenders will require borrowers to maintain higher bank balances than typical applicants usually must have. The interest rate and fees on a Limited/No Doc loans will be higher, because the loans are considered to be a higher risk than full documentation loans. Expect the interest rate to be about one-half to one percent more than the rates on a regular. Consequently, Limited/No Doc loans should only be used when necessary, not simply to avoid the paperwork requirements of a Full Documentation loan. Limited/No Doc loans are generally classified as "Stated Income", "Stated Assets", "No Income Verification (NIV)", "No Income / No Asset NINA)", "No Ratio", "No Doc". With "Stated Income" loan, the borrower can simply state his income on the application and not have to provide any documentation to prove this stated income. Lenders usually verify that the borrower has assets that logically match the stated income. -------------------------------------------------------------------------------- THE PROCESS QUESTION: How do I go about purchasing a home? ANSWER: The first thing to do is contact a mortgage lender in your area, such as the bank where you have your checking/savings account. Make an appointment to see a mortgage loan officer and ask them to pre-qualify you for a loan. When a lender pre-qualifies you for a loan, they will talk with you about your income and debts, savings, credit, and employment. Based on these factors, they will be able to give you a home price range that you can afford. After you know how much house you can get, ask the lender to put you in contact with a Real Estate Agent. The real estate professional will help you find a home in your price range, and in the area where you want to live. During the pre-qualification, the lender will also be able to discuss any possible issues to overcome (such as a bad credit situation) and will give you some advice on what you can do to rectify the problem. There are many first-time home buyer programs available, so be sure and ask the lender what programs they can offer you. If you do not have much money saved for a down payment, be advised that the American Dream Downpayment Act was signed on December 16th and will be available some time in the Spring of 2004. aa |