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Getting prequalified for a loan before you start looking is a great way to start your home-buying journey. A prequalification will provide you with an estimate of what you might be able to borrow.
Myth: If you pay a small amount by the due date, it will be counted as a full payment.
Fact: False! You must pay the minimum amount required by the due date. Otherwise you creditor may report the payment as late.
Myth: If you have a good reason for not paying, it will be overlooked.
Fact: False! Contact your creditor if you experience a crisis, like losing you job or becoming seriously ill. You may receive a grace period or a payment plan from the creditor but never assume such an agreement is automatic.
Myth: Bad debts go away after they are paid.
Fact: False! Because credit reports provide a history of your credit, bad debt charge-offs and late payments can stay on your credit report for seven to ten years. You can, however, provide your own explanation of the situation for inclusion in the report to be received by future creditors.
Myth: You're not responsible for debts on joint accounts or co-signed accounts if they are not your purchases.
Fact: False! Any time you are a joint account owner or co-signer, regardless of whether you've paid your share, both parties can be held completely responsible for the payment. It's important to refinance after a divorce since any late payments on a joint or co-signed account will show up on your credit report.
Myth: It's hard to get a copy of your credit report.
Fact: False! You have the right to see what is in your credit report. A copy of your credit report may be free or may cost you a small amount of money. Call us to find out how you can get a copy of your credit report.
Myth: If you have credit problems, your credit score will not improve for seven years.
Fact: False! You can improve your credit score over a shorter period of time because recent entries to your credit report carry more weight!
Source: Freddie Mac, Don't Borrow Trouble - CreditSmart
A pre-qualification is normally conducted by your mortgage specialist after they have interviewed you and determined, based on the information you've verbally provided them, the dollar amount you can be approved for. Your mortgage specialist will then issue you a pre-qualification letter. Mortgage specialists, however, do not make the final approval, so a pre-qualification is not a commitment to lend.
A pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that you are qualified to purchase the house you are making an offer on.
Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is then submitted to an underwriter and a decision is made regarding your loan. If your loan is pre-approved, you are then issued a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having cash in the bank to pay for the house! It's highly recommended that you get pre-approved before you start looking for a house.
Understand the relationship between rates and points. One point is equal to 1% of the loan amount. The more points you pay, the lower the rate will get. Consult your tax advisor for applicable tax deductions.
Compare different programs. This can become confusing and difficult because there are so many different programs to choose from. This is why it's important to speak with an experienced mortgage specialist who will help you make the best decision for your situation.
If you're like most people, purchasing a home is the biggest investment you'll ever make. If you're considering buying a home, you're likely aware of the complexity of the endeavor. Because of the numerous factors to consider when purchasing a home, it's important to prepare as best you can. Some common home buying principles and caveats are presented here for your consideration. By keeping them in mind, you'll help create a successful and more enjoyable experience. These Top Ten lists are by no means exhaustive. Since your home could cost you 25 to 40 percent of your gross income, it's important to conduct research, ask questions and study the process carefully.
If your question is not answered here, you may submit a question to our staff.
Neither pre-qualified nor pre-approved This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.
Pre-qualified This buyer has met with a mortgage lender and discussed their situation. The buyer has informed the lender regarding their income, expenses, assets and liabilities. The lender may also have seen their credit report. The buyer provided you with a letter from the broker stating an opinion of what the buyer can afford.
Pre-approved This buyer has provided a lender written evidence of income, expenses, assets, liabilities and credit. All information has been verified by a lender. As a result, much of the paperwork for this buyer's loan has been completed. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the lender. You're as certain as possible that this buyer can close.
As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.
The cost of the mortgage, however, shouldn't be your only criterion. Have confidence that the company you select is reputable and will deliver the loan with the terms and costs they promised. If in the final hours of the transaction you determine that the lender has suddenly increased their profit margin at your expense, you won't have time to start again with a different lender. Ask family and friends for referrals. Interview prospective mortgage companies.
If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.
Note: This is a simplified break-even analysis. If you are refinancing, considering switching from an adjustable to a fixed loan, or from a 30-year to a 15-year loan, the analysis becomes much more complex.
Use an equity loan when you need all the money up front - e.g., for home improvements, debt consolidation, etc. Use an equity line when you have a periodic need for money, or need the money for a future event - e.g., children's college tuition in the future.
Effective rate = rate x (100%-tax bracket) For example: If the rate of the home-equity line is 12 percent, and your tax bracket is 30 percent, your effective rate is 12% x (100-30) = 12% x 70 = 8.4%. If your credit card is higher than 8.4 percent, the equity loan is cheaper.
Looking for a home without being pre-approved. When you are pre-approved for a loan you can then provide the seller with a pre-approval letter. As a potential buyer, being pre-approved will give you the best chance of getting your offer accepted.
Making verbal agreements. Always have all agreements with your seller included in your contract. The written agreement will always override any verbal agreement made. Do not expect oral agreements to be enforceable.
Choosing a lender just because they have the lowest rate. The rate is important, but always consider the entire cost of your loan such as, origination and discount points, loan fees, and APR.
Make sure you feel confident that lender you select is reputable and will deliver the loan with the terms and costs they promised. Always ask friends and family for referrals.
Not receiving a Good Faith Estimate. After your lender or broker receives your loan application, you should receive a Good Faith Estimate of fees associated with your transaction. Have your Good Faith Estimate on hand when signing your loan documents, you shouldn't be charged any substantially different fees from those contained on your Good Faith Estimate.
Not getting a rate lock in writing. Always obtain a written statement of your locked rate, including the interest rate, the length of the rate lock, and program details.
Buying a home without professional inspections. Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.
Not shopping for home insurance until you are ready to close. Don't make the mistake of waiting until the last minute to get insurance. Give yourself time to shop around for the best insurance and begin shopping around as soon as you have an acceptance letter.
Signing documents without reading them. Whenever possible, review in advance the documents you'll be signing. It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.
Not allowing for delays in the transaction. We would all love it if every transaction closed on time. But there are times where they can be delayed as much as a week. Prepare yourself for any delays by terminating your lease a week after your closing.
Note: This is a simplified break-even analysis. If you are refinancing considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.
Not getting a written good-faith estimate of closing costs. Within 72 hours of submitting an application, the lender is required by law to disclose completed Good Faith Estimate and Truth In Lending Disclosure forms.
Signing your loan documents without reviewing them. Whenever possible, review in advance the documents you'll be signing. It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.
Getting a second mortgage before you refinance your first mortgage. Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first loan, check with your mortgage company to find out if getting a second will cause your refinance transaction to be turned down.
Getting too large a line of credit. Getting too large a line of credit can result in you being turned down for other loans. Some lenders calculate payments based on your available credit, not the credit used. They see you as having a large potential payment.
An equity line is open - you can get numerous advanced amounts as needed. They are usually accessed through a credit card or checkbook. You can only be charged interest on the outstanding balance. Equity lines are best used when you have periodic needs for money.
Always check the lifecap of your equity line and be prepared to make payments at the highest potential rate.
In some instances, your home-equity loan is not tax deductible. Always check with your accountant for this information.
If you are thinking of getting a home equity line of credit and you plan to refinance your first mortgage, always check with your lender to find out if getting a second loan will result in having your first loan refinanced turned down. A lot of lenders consider the combined loan amounts when refinancing the first mortgage.
People also refinance to consolidate debts and replace high-interest loans with a low-rate mortgage. The debts being consolidated may include credit lines, credit cards, second mortgages, student loans, etc. In many cases, a debt consolidation results in tax savings, because consumer loans are not tax deductible, and a mortgage loan is tax deductible.
Another reason people refinance is to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.
If you are considering refinance, always consult with a Finance of America mortgage specialist to give you the best available options.
Use this rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!
Some lenders use one of these three scores, while other lenders obtain scores from all three bureaus and use the middle score.
If you see an error on your report, report it to the credit bureau. They each have procedures for correcting information promptly.
Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is then submitted to an underwriter and a decision is made regarding your loan. If your loan is pre-approved, you are then issued a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval can help you negotiate a better price with the seller.
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