There are five factors
that determine your credit scores. They are listed below in
order of importance, just as an underwriter would look at
your credit report:
Estate Financing FAQ (
Frequently Asked Questions
History: 35% impact. Paying debt on time and in full has
a positive impact. Late payments, judgments and charge-offs have a negative impact. Missing a
larger payment has a more severe impact than missing a
smaller payment. Delinquencies that have occurred in the last two years carry more weight than
Credit Balances: 35% impact. The ratio between
outstanding balance and available credit is what's
important here. Ideally balances should stay below 10 %
of credit limits and rarely higher than 50%. Credit
scores are lowered substantially when balances
exceed credit limits.
History: 15% impact. The key measure for this factor is
the length of time since a particular credit line was
established. The longer you've had the credit,
the more positive this factor impacts your
scores. A seasoned borrower is stronger here.
Credit: 10% impact. A mix of auto loans, credit cards
and mortgages has a more positive effect than credit
cards only. Debts with finance companies and other
"high risk" lenders will have a negative
10% impact. This factor is determined by the number of
inquiries that have been made for credit by the borrower
in the last 6 months. Each hard inquiry can cost from 2
to 50 points on a credit score, but the maximum number
of inquiries that will reduce the score is 10.
Additional inquiries above 10 will have no further
impact on the final score.
important to remember that the computers do not take any
personal factors, including income, into consideration
when calculating your scores. When your credit report is
generated it is simply that day's snapshot of your
activities. Once you begin the loan process DO NOT apply for
any new credit or increase any debts without consulting your lending
professional. Sometimes folks about to buy a new home get excited and buy new cars, new furniture, and the like before
their home loan is finalized. This too often changes their
credit picture and may alter or eliminate their approval.
We compile a
tri-merge credit report which combines the scores provided
by all three credit bureaus. Underwriters use the middle
score of the three to determine credit worthiness, often to
the borrower's advantage.
Do you know
your scores? You need to know what your credit scores are
and what's in your report before you begin shopping. Some
erroneous items may take 2-3 months to get removed.
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Can I use a
buy my next home without having any money to put down?
Although there really are options for
buying homes with no down payment, there are very few options
for people with no money for closing costs or reserves (money
left in the bank after the loan has closed). Zero down
programs are considered "alternative Financing" and
often come with shorter commitments that require you
to refinance in 2 -3 years and pre-payment penalties
that require you to stay in the loan for 2-3 years. Buyers
have access to much better loans if they are able to put 10%,
5%, or even 3% down.
Another consideration is
the market you're looking to buy into. If the real estate
market is a "sellers market" (high demand and low
supply), like we currently have in Seattle, it may be very
difficult to buy with 100% financing as homes often sell for
more than their appraised value. Investors consider the
true value of property to be the selling price or the
appraised value, WHICHEVER IS LESS. If the appraised value
comes in 5% less than the selling price, the investor will
require 5% down for 100% financing.
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What is an
loan and why should I be considering that?
loans are also called "interest first" loans.
With these loans, buyers are responsible to pay only the
interest on the outstanding balance every month. Typically
loans amortize over a given period (i.e. 30 years) and each
payment represents P&I (principal and interest).
Interest-Only loans do not require borrowers to pay principal
reduction as part of their payment for the first 5, 10 or 15
years (depending on the program). After that time the payment
jumps to P&I on the outstanding balance of the remainder
of the term, often at significantly higher payments. Will this
work for you? It depends: How long are you planning to stay in
the property? How long are you going to make the minimum
payment? How will you address the higher payment later on?
Sometimes these programs are exactly the right solution for
the buyer, but often they are used to squeeze someone into
more home than they can afford without a plan for how to
address the payment increases to come. Before moving forward
with this type of loan, be sure you understand all the
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I see advertising for mortgages rates starting at
. Are these loans something I should pursue?
Do not be fooled by
what is too often deceptive advertising. These loans have
interest rates much higher than 3%. What they have is
payment rates that start as low as 1% or higher (hence the
deceptive "if you're paying less than 3% we can save
you money"). These advertisements (often Spammed)
represent Neg-Am loans or Options arms.
are adjustable rate mortgages that have payment rates less
than the interest that is due. Instead of reducing the
debt a little with each payment (amortized loan), the
debt actually grows with each payment (negative-amortized
loan). Obviously these loan should only be used in
situation where the payment must be at the very minimum
for a short period of time and there is plenty of equity
in the home to start. Does that mean nobody should
consider this type of loan? Heavens, no. From time to time
we have had clients where this was the perfect solution
for a short term situation. For example, a client who was
having a home built in another state wanted to reduce the
payments on his current home as low as possible to defray
the cost of his big move. His move was scheduled in less
than 24 months. This was a perfect solution.
These types of
loans should never be considered for "first time
homebuyers" that intend to stay put. The period of
neg-am is typically limited to 3-5 years, and no-one
should have to experience the payment shock at the end of
this period .
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What is an "
and should I be looking for one?
"Options Arms" are called
this because each month borrowers are offered several
options when making their mortgage payment:
3) 30 year
amortized payment, and
4) 15 year
We're going to
focus the answer on the minimum payment because that
is where most people get confused.
payments start out at payment rates as low as 1%, so a
minimum payment on a $500,000 loan might be $1,608.20.
However, the loan itself is an adjustable rate mortgage at
a much higher rate, say 5.85% so the interest due could be
$2,437.50. the difference of $829.30 is called "
interest" or "negative
amortization". In other words, the borrower is now
$829.30 deeper in debt.
payment may start as low as 1%, every year
the payment increases by 7.5%. The $1,608.20 first year
payment goes to $1,728.82 the 2nd year, $1,845.48 the 3rd
year, and so on. Most programs go 5 years before recasting
into a fully amortized loan based on the current rate and
the balance due.
borrower makes the minimum payment every month and
interest rates climb, the amount of "deferred
interest" could reach the limits of the program
(typically 110% of the original balance) and force
recasting before the 5 year time limit. This can come as
quite a shock to folks who did not understand the program
and thought they had found the cheapest mortgage payment
ever. For instance, the example we used earlier would
produce a recast payment of $5,792.73 if the rate on the
arm were to reach it's maximum rate of 12.0% at 110% of
the original loan amount just at the 5 year limit.
Many analyst are concerned that uniformed borrowers will
be forced to walk away from their homes and debts should
rates rise quickly and they continue to make minimum
mean you have to be a fool to get an "Options
Arm"? Quite the contrary. As long as you understand
what it is, how it works, and what it's limitations are,
these types of loans can be very beneficial. For example, a
client of ours has a wife who wanted to return to school.
Although the equity position in their house was very strong,
their mortgage payment would be much harder to make for the
two years she was in school and not earning. We took out
some cash to pay off some of their debts, and reduced
their monthly mortgage payment and other payments by
more than half her salary. After she returns to work they
have the option of converting to a 30 year fixed rate or
refinance the mortgage.
Also I should
point out that although the program I described on the
left is typical of "Options Arms" programs,
there is one investor that
this type of loan and offers some very attractive
improvement, including: more stable indexes, 125% recast
limit, and 10 years of graduated minimum payments instead
If you are
working with a mortgage broker who steers you toward an
"Options Arm", ask him or her to explain
"recasting". If you sense any hesitation, run
away. There are far too many inexperienced loan officers
selling these programs as the "latest &
greatest" solution without really understanding the
loans. And if the loan officer doesn't understand it, how
likely do you think the borrower will understand it?
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What is a Home Equity Line of
HELOC stand for
Home Equity Line of Credit. It is like having a gold or
platinum credit card that is tied to your home. Most HELOCs
are 2nd mortgages used to help buyers without enough funds
for down payment to keep their mortgage below 80%LTV (see
question on having less
than a 20% down payment). For example, if you were
buying a home for $300k and were planning to put
$15,000 down (5%), the balance of $285,000 is 95% of
the value of the home. You could opt for PMI, or you could
do a combo loan with a 1st mortgage of $240,00 (80%LTV) and
2nd mortgage of $45,000 (15%LTV). HELOC's offer
advantages and one big disadvantage. Let's
start with the positive side.
rate 2nd mortgages, HELOCs have a maximum draw amount that
can me used again and again. In the earlier example you
could opt for a HELOC 2nd mortgage. You would draw the full
amount at closing. Your minimum payment every month would be
the interest due on the outstanding balance. No principal
payment is required during the "draw period"
(often 10-15 years). This payment would obviously be less
than a P&I payment on fixed rate mortgage with a 15-20
year payoff. Also, should you follow the advice of your
mortgage consultant, you could pay principal reduction every
month once you become comfortable with your new house
payments. Let's say you reduce the debt on the HELOC to
$30,000 over a five year period. You would have the
remaining $20,000 available to you for home repair or to
reduce your consumer debts without having to apply for it.
the downside? HELOCs are adjustable rate mortgages usually tied to the prime rate. Therefore,
the federal reserve (Alan Greenspan)
raises the discount rate, the prime rate changes.
Depending on what period in our history you study, that
could be a good thing, or a very bad thing. In 2003 the
prime rate changed once, from 4.25 to 4.00 where it
stayed the rest of the year. In 2001 it changed 11 times
and ranged from 4.75 to 9.00. In 1980 it changed 38
times and ranged from 11.25 to 20.00. From 2004 to mid
2005 when mortgage rates stayed relatively flat, the
prime moved from 4.00 to 6.75.
If I dont have
, does that mean I will have to pay PMI?
Not necessarily. This question causes
lots of confusion because the rules have changed over the
years. Many of us go to our folks or trusted older family
member for advice when we first start looking into buying a
home. Unfortunately, often the advice is correct but out of
date. Today there are several alternatives.
First of all, it
helps to understand the historical reasons for 20% down.
Banks track how much it costs to foreclose on real estate. Each year this averages 18-22% of the
value of the home. These costs include legal fees, repairs
(evicted owners rarely leave with everything in good shape),
listing commissions, selling commissions, title fees, escrow
fees, taxes (local, county & state), and the like.
Therefore, whenever mortgages exceed 80% of the value if the
home, the investor is at risk. Today there are several ways
to address that risk:
Private Mortgage Insurance. Mortgage insurance is
a contract that insures the lender against loss caused
by a mortgagor's default on a mortgage. Mortgage insurance
issued by a private company is called "PMI".
Mortgage insurance can also be issued by a government agency
like the FHA and is called MI.
- Lender-Paid Mortgage Insurance. With these programs
investors charge a higher rate to "self insure" against the risk. The advantage for borrowers is that the
interest is tax deductible, where PMI or MI isn't.
- For these programs borrowers have a
1st mortgage that is 80% or less of the value and a 2nd mortgage to close the gap between their down payment and
the balance remaining. For example 5% down combo loans
are referred to as 80/15/5 and 10% down combo loans are
80/10/10. The advantage for borrowers is that they can write
off the interest on both loans. They can also work to pay
the 2nd off faster, leaving them in a comfortable equity
- These are typically loans with a shorter
to a fixed rate, often 2-5 years.
After that time they become Adjustable Rate Mortgages, often
with higher margins that force borrowers to refinance out of
them quickly. Investors manage to the risk and require
pre-payment penalties to prevent borrowers from refinancing
solution is best? It depends. If the borrower doesn't
have much money and weak, but not horrible credit, a FHA
solution can serve them well. FHA requires MI on
mortgages that exceed 80%.
FNMA offers combo loans up to
95% LTV. They require the borrower have strong, clean credit
and enough money in reserves after closing to cover 3-6
months of payments.
Lending and PMI are often better solutions than waiting
until the potential home buyer saves more for their down
hat advantages are offered by
Each offer many
advantages, but let's first put these in
perspective. In the past when you applied for a
mortgage, it was assumed you would go to the local bank or
savings and loan where you keep your savings and checking
accounts. Today, there is a wide range of choices. You
also can apply with a mortgage broker, mortgage banker,
credit union, professional or trade associations that you
belong to, the financial services firm that manages your
mutual fund investment account, state and regional housing
agencies, a private home financing company or even the
Let's begin by
understanding some terms.
provide the funds at the closing table. Although they may
(and usually do) sell the loan to an investor for servicing,
they underwrite and fund the loans themselves. This control
offers flexibility that can avoid delays at closing.
Although some Mortgage Bankers represent only one bank
(usually their namesake), many today are approved to fund
loans for several of the larger banks. Often the best rates
are made available to the Mortgage Bankers or
don't bring their own
funds to the closing table and they don't underwrite their
loans. They establish relationships with a pool of lenders
that approve their loans and provide funds for closing. The
advantage Brokers offer is they can shop many (sometimes
hundreds) of lenders to find the best program or rate
available. Often the more creative programs are only offered
only on a Broker basis.
We at Rainier Mortgage
& PRIVATE LENDING SERVICES are part of the new breed of
we offer our clients both Mortgage
Banking and Mortgage Broker services
. As Mortgage
Bankers we offer competitive rates, confidential one-to-one personal service with
fast approvals in-house underwriting, and local funding. As
Mortgage Brokers we have access to thousands of specialized
mortgage programs for that unique property or solution.
Should I consider using my
for my home loan?
You certainly can, if
they have the right solution for you. Credit Unions will
usually have a very limited number of mortgage offerings.
It's a bit like shopping for a dining room table at your
local Costco warehouse. If they have the exact table you
want, the price will likely be very attractive. If, however,
you need it in another size or color, you're better off at a
place that offers real selection. The strength in credit
unions is their flexibility for loans like emergency loans,
auto loans, RV loans, and the like. For these loans they use
their own funds. When they offer mortgages, it is usually
brokered to very limited list of banks - sometime only one.
If they have the exact loan you need, they will probably
price it well. However, they probably don't have someone
experienced with the more creative or
offerings that can explain your options. Although
they might be worth considering, they should always be
Should I look to a
financing my next home
Banks offer a certain security, some of it illusion created
by their image, some of it very valid. Let's explore these.
Banks spend a
fortune to create and market an image. I worked for a year
with the stagecoach bank. I was very pleased and
impressed with their commitment to teaching ethics to
their employees. They offered a fairly broad spectrum
of products, but it's fair to say that clients either fit
into their programs or they didn't. Some of the competitor
banks made very tight decisions about what kinds of loans
they wanted to do and what kind they left to their
competitors. Several of our current customers work for
Major Banks but prefer our services because of the options
On any given
day one Major Bank's rates are higher or lower than the
other banks for any given product. For example, if
there has been a flood of 30 year fixed loans the rates
may inch up on those and rates for 3/1 ARMS drop in order
to encourage a more well rounded portfolio. As Mortgage
Brokers and Mortgage Bankers we use an online "loan
finder" service that compares the rates from Major
Banks at any given moment. The bank with the best rate for
each product is always changing.
Banks focus more of their business on brokered loans and
have a limited number of retail mortgage loan officers.
Their pricing is usually better through the broker channel
because they want to protect that business. Other Major
Banks focus more on their retail lending but know they
don't have to compete that well in the marketplace because
their loyal clients will choose to use them regardless.
There are two
strategies for you to consider if you are going to use a
Major Bank. The first is to trust that they are offering
rate and the best solution without questioning them
too much. After all, they are your bank and you trust them
with the rest of your money. The second approach is to
shop them to the other Major Banks. That's really the only
way you can know if you have the best solution.
that you find a loan officer who can look at Major
Banks, smaller banks, and any other lending institutions
that have products to match your needs. Provide your
personal data once, to one loan officer that you trust.
Have them research the many alternatives and provide you
options to consider. Demand that they tell you what
options are available, which ones they recommend, and why.
You've got more to do than run from bank to bank to figure
out who has the best solution for your needs.
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