In some ways, the most important part of buying a home is determining how to finance the purchase price. Financing, rather than house features, neighborhoods, property styles, etc, is the first step to take when considering a move. There are several options today that home buyers can choose from, and understanding these options is critical.
> Preferred Mortgage Lenders
> Advantage of Pre-Qualifying
> How is Your Credit Score
> Types of Mortgage Lenders
> Mortgage Loan Programs
> Seller Financing
The mortgage specialists below have taken good care of the clients and friends of Hillstrom Real Estate, and would be pleased to talk about your situation and how they can be of service.
>>Back to Top
Finding a desirable house and then hoping that a bank will lend enough money to buy it is the backwards approach to buying a house.
The correct process is the reverse of this.
Buyers are urged to obtain pre-qualification letters from reputable lenders doing business in their areas before starting intense searches for houses. This approach saves valuable time and might even save heartbreaks should buyers fall in love with houses they cannot buy.
Lenders consider these items when pre-qualifying for mortgage loans:
• Employment History
• Credit History and Scores
• Monthly Income and Expenses
A buyer's price range is determined as follows:
$XXX,XXX = The loan amount the buyer can borrow
PLUS $XXX,XXX = The cash a buyer has for down payment and closing
Equals $XXX,XXX = The price house for which the buyer is qualified.
Pre-qualification does more than direct buyers to their correct price ranges. It is assurance to sellers that buyers are financially able to obtain mortgages to complete the transactions. It makes the buyers' offers much stronger and more desirable to sellers.
Lenders can help buyers work out bad credit, debt consolidation, and other problems that hurt their ability to borrow. When these issues are resolved and pre-qualification letters are issued, buyers are able to sail forth into the real estate market with the realization that financing will not hold them back from purchasing homes.
We, at Hillstrom Real Estate, can help buyers make preliminary estimates of their borrowing ability. But our estimates are never as accurate as lenders' estimates because lenders are the experts in this field, and they have broad ranges of loan programs available that have differing qualification requirements. We ask all our buyers to let us help them obtain a pre-qualification lender at the start of searching for homes.
Call or email us for a list of some of the excellent loan officers and mortgage companies in the metropolitan Maryland/Washington D.C./Virginia area.
>> Back to top
When buyers apply for mortgages their ability to pay can be reduced to single numbers. All the years they have been making mortgage, car, and credit card payments this information is analyzed and narrowed down into single indicators of whether they are likely to meet their future obligations.
All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use slightly different systems to arrive at scores. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian. Equifax's model is called BEACON, while TransUnion uses EMPIRICA. While each of the models considers a range of data available in your credit report, the primary factors are:
• Credit History - How long have you had credit?
• Payment History - Do you pay your bills on time?
• Credit Card Balances - How much do you owe on how many accounts?
• Credit Inquiries - How many times have you had your credit checked?
Each of these, and other items, are assigned a value and a weight. The results are totaled and distilled into a single number. FICO scores range from 300 to 800 – the higher being better. Typical home buyers likely find their scores falling between 600 and 800.
FICO scores are used for more than just determining whether or not buyers qualify for mortgages. Higher scores indicate buyers are a better credit risk, and thus may qualify for better mortgage rates.
There are things buyers can do about improving FICO scores. It is important for buyers to know their FICO scores and to ensure that their credit histories are correct. Conveniently, Fair Isaac created a web site that lets people do just that - see myFICO Credit Scores.
The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. For more information about this government act visit http://www.ftc.gov/bcp/conline/pubs/credit/freereports.htm.
Only one website is authorized to fill orders for the free annual credit report you are entitled to under law – www.AnnualCreditReport.com .
For a reasonable fee buyers can quickly get their FICO scores from all three reporting agencies, along with their credit reports. Also available is some helpful information and tools that help buyers analyze what actions might have had the greatest impact on their FICO scores. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.
Armed with this information, buyers are informed consumers and better positioned to obtain the most favorable mortgages available to them.
>>Back to Top
Different types of companies lend money for mortgages. The following types are listed to help buyers in their searches for loans to buy houses.
Mortgage Bankers typically originate loans and then sell these loans to the secondary mortgage market shortly after funding. (Mortgage bankers may or may not sell the servicing of the loan.) Often mortgage bankers have attractive loan programs and rates.
Portfolio Lenders make loans with the institutions' own funds and keep the loans on the institutions' books rather than immediately selling them to the secondary mortgage market. Many institutions engage in mortgage banking as well as portfolio lending.
Since portfolio lenders fund the loans with their own money, they are not confined to Freddie Mac/Fannie Mae guidelines. After portfolio loans have reached their one year anniversary dates without late payments, they are considered seasoned and may be sold to the secondary mortgage market even if they do not meet Freddie Mac/Fannie Mae guidelines.
If portfolio loans are sold to the secondary mortgage market, the portfolio lenders may continue to service the loan.
Direct Lenders fund their own loans. Direct lenders usually fall into the category of mortgage bankers or portfolio lenders.
Correspondents act on behalf of one or several lenders (sponsors) throughout the origination and closing. Loans are usually underwritten by the sponsors. Correspondents acts as lenders' agents. Correspondents may also service the loans for the lenders.
Mortgage Brokers work as intermediaries between lenders and borrowers. Mortgage brokers have access to a number of lenders and often offer the most variety in loan programs. Brokers assist borrowers in filling out loan applications, obtaining credit reports and appraisals, selecting loan programs and finding lenders to fund the loans. In general, brokers do not make the decision to extend the loan and do not fund the loan.
Mortgage brokers may be paid by the borrowers or the lenders. Payments to the brokers are typically included in the closing costs as either fees or points.
Wholesale Lenders underwrite and fund mortgage loans. Wholesale lenders may also service loan payments and ensure the loans' compliance with underwriting guidelines.
Banks, Credit Unions and Savings & Loans use funds gathered from their customers through checking, savings and certificates of deposit to make mortgage loans. The institutions may hold the loans in their portfolio or sell them to a secondary mortgage market.
>>Back to Top
Conventional Loans - The only security guarantee is the value of the property.
Conventional loans that follow the terms and conditions established by the guidelines of Fannie Mae and Freddie Mac.
• Fixed-Rate Mortgage
The interest rate and the principal payments remain fixed throughout the loan. Keep in mind your monthly escrow account payment could vary from year-to-year as taxes and insurance rates change.
• Variable or Adjustable-Rate Mortgage
The interest rate on the loan fluctuates over the period of the loan. Periodic adjustments to the interest rate are made based on changes to a defined index. The loan's interest rate is determined by adding a fixed number of points to the defined index.
• Balloon Loan
Short term, fixed-rate mortgage that has monthly payments usually based on a 30-year amortization schedule and a lump sum payment due at the end of term, usually 3, 5 or 7 years. The interest rate on balloon loans is usually less than a 15- or 30-year fixed-rate mortgage.
• Piggyback Loan
A second mortgage that closes with the first. Often the first mortgage is for 80% of the purchase price and the "piggyback" is for 10%. The home buyer covers the remaining 10% with their down payment. (Some lenders will write a second mortgage of 15% or even 20% of the purchase price.)
• Housing Finance Agencies
These agencies offer special loan programs to low- and moderate-income buyers, buyers interested in rehabilitating a home in a targeted area, and other groups as defined by the agency. Working through a housing finance agency, you can receive a below market interest rate, down payment assistance and other incentives.
Jumbo and Non-Conforming Loans
Loans above the maximum amount established by the guidelines of Fannie Mae and Freddie Mac. Often the interest rate charged for a jumbo or non-conforming loan is higher than that of a conforming loan.
• B/C Loans
Loans for borrowers who cannot meet the credit guidelines established by Fannie Mae and Freddie Mac. The purpose is to offer temporary financing to someone whose credit history disqualifies them for a conforming loan (including someone who has recently filed for bankruptcy, foreclosure or late payment on their credit report). Typically the interest rates run higher and vary depending upon the individual credit situation.
• FHA Loans
The Federal Housing Authority (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), plays a significant role in helping low- to moderate-income families qualify for mortgages. FHA assists first-time buyers and others who would not qualify for a conventional loan, by providing mortgage insurance to private lenders. Interest rates for an FHA loan are usually the going market rate, while the down payment requirements for an FHA loan are lower than conventional loans. The required down payment can be as low as 3.5 percent and the closing costs can be included in the mortgage amount.
• VA Loans
VA Loans are guaranteed by the U.S. Department of Veterans Affairs. Service persons and veterans can qualify for a VA Loan, which usually offers a competitive fixed interest rate, no down payment and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.
• RHS Loan Programs
The Rural Housing Service (RHS), which is part of the U.S. Department of Agriculture, guarantees loans from private lenders to help low- to moderate income families qualify for mortgages.
>>Back to Top
Sellers have the option of financing their buyers’ purchases with the equity that sellers have in their houses. It is wise for sellers to obtain legal advice to set up such a private mortgage.
Carrying a First Mortgage
Sellers whose loans are paid off or who have very little loan remaining are in the position to be the mortgagors for the buyers of their houses – if the sellers are in the financial position to do this. Sellers who do this for buyers should be just as hard nosed about the buyers’ qualifications as a lender would be and/or make greater demands, such as higher interest rates, if the buyers are marginal.
Carrying a Second Mortgage
In the case of "carrying back a second mortgage", sellers loan to buyers part of their equity. In this scenario, buyers finance the bigger part of the mortgages with traditional lenders and they finance the remaining, smaller amounts with the sellers. Typically buyers would pay a slightly higher interest rate on loans financed by sellers as a second mortgage.
The following are some thoughts for sellers to consider in carrying financing for their buyers
The Purchase Price
Sellers probably should stick to their asking prices if they carry back financing for buyers. This is such a big favor to give to buyers that it is unreasonable to give them another big favor of a lower price. Buyers would be real nervy to ask for both. (Always allowing for special circumstances.)
The Down Payment
Like a lender, sellers should see the buyers’ down payment as a commitment to pay their debts, and as motivation to protect the properties. Therefore, the larger the down payment, the better for sellers.
The Interest Rate
Sellers are justified in offering an interest rate comparable to the rate asked by lenders at the time of contract.
The Buyer's Credit & Income
Like a lender, sellers would do well to obtain a credit report on the buyers for whom they will hold financing in order to feel assured that their buyers are people who pay their debts. Additionally, sellers need to know the buyers’ incomes and sources of income to determine if the buyers’ salaries are sufficient to make mortgage payments.
Most mortgages are amortized on a 30-year schedule even if they have balloon payments. This computation makes the payments in line with payments in general.
A common practice for seller financing is to have the full amount of the loan due on a certain date shorter than the 30-year amortization period. Usually the balloon payment is due in 5-15 years. This gives sellers a profitable short-term investment with the provision that the principal investments will be recouped in any of those time periods.
Escrow for Tax and Insurance
Lenders typically require borrowers to pay 1/12 of their annual taxes and insurance costs as escrow payments due with the mortgage payments. Then the lenders pay annual tax and insurance payments when due. While this adds time and hassle to the seller-financer, it also protects sellers from the unfortunate situation of having the houses they are financing burn down with no insurance to replace them, or the houses being claimed by the government for lack of real estate tax payments.
Lender's Title Insurance
It is wise to require the buyer to obtain title insurance on the property.
Closing the Sale
Both buyers and sellers will be responsible for paying the usual closing costs. Sellers will require that their buyers pay all the costs associated with setting up the seller take-back mortgage financing.
>>Back to Top