1. What is the difference between a pre-approval and pre-qualification?

A pre-approval requires all the steps for a full approval, (such as credit report and income documentation) except for the appraisal and title search. The information is submitted to a lender. The buyer is supplied with a letter from the lender, when approved for a loan.

In pre-qualification, a buyer has talked with the broker or lender and informed them of their income situation and the broker may have seen the credit history. The buyer is provided with a letter from the broker stating an opinion of what the buyer can afford.

2. Can I get a pre-approval before I shop for a house?

Generally this will help you shop for a home in your price range and show sellers that you are likely to have the funds necessary to purchase the home. After a review of your credit and additional information that may be required, we may be able to furnish you with a conditional approval. The conditional approval is subject to a satisfactory title review, appraisal of the property that will secure the loan and no substantial changes prior to the closing in the information that you provided.

3. What factors are considered when a lender evaluates making a loan?

• Credit history
• Delinquent accounts


• Credit card accounts


• Public records, foreclosures, and collection accounts


• Equity and loan-to-value ratios


• Liquid reserves


• Debt-to-income ratio


• Loan purpose, loan type, and term of loan


• Property type


• Number of borrowers


• Self-employed borrowers

4. How does my credit score affect my loan request?

Your credit score plays a significant role when you apply for a loan. Higher scores lead to more loan options and better interest rates. Lower scores may qualify for some mortgage programs, but they are usually at a higher rate, depending on the severity of your credit problems.

5. What is a FICO score?

A FICO is a credit score developed by Fair Isaac & Company. Credit scoring is a method of determining the likelihood that credit users will pay their bills. A credit score attempts to condense a borrowers credit history into a number. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower’s credit history using several factors such as:

• Late payments


• Amount of time credit established


• Amount of credit used versus amount of credit available


• Length of time in present residence


• Employment history


• Negative credit information such as bankruptcies, collections, etc.

6. How can I increase my score?

Increasing your score over a short period of time is difficult, some tips to increase the score over a period of time are:

• Pay your bills timely and consistently. Late payments and collections can adversely impact your score.
  
• Avoid applying for credit frequently. A large number of inquiries can worsen your score.
  
• Reduce your credit card balances. Credit cards balances that are at the limit can have a negative impact.
  
• Keep your spending and debt under control.
  

7. What if I have little or no credit?

Other ways to show credit history:

• Prove good payments through your Utilities Companies
• Verification from landlord of timely payments
• Provide a year’s worth of cancelled checks to validate payments

8. Where can I get a copy of my credit report?

Contact the credit bureaus in order to obtain your credit reports:

Equifax
P. O. Box 740256
Atlanta GA 30374-0256
(800) 685-1111
www.equifax.com

Experian
P.O. Box 2002
Allen TX 75013-2002
(888) 397-3742
www.experian.com

Trans Union
P.O. Box 1000
Chester PA 19022
(800) 888-4213
www.tuc.com

9. How do I ensure that the information on my credit report is correct?

The best way to ensure an up-to-date accurate report is to periodically request copies from the credit bureaus. If there is an error or dispute, report it to the credit bureau. All bureaus have procedures for correcting information promptly.

10. What are common mistakes made in buying or refinancing a house?

Purchasing a home is most likely the biggest investment you will make. It is important to prepare as best you can. Because a home will cost you 25 to 40 percent of your gross income, it’s important to conduct research, ask questions and study the process carefully.

1. Looking for a home without being pre-approved
   As a potential buyer, being pre-approved will give you the best chance of getting your offer accepted.
2. Choosing a lender just because they have the lowest rate
   While rate is important, consider the total cost of your loan including Annual Percentage Rate, loan fees, discount and origination points. When receiving a quote from a lender or broker, insist that the discount points (charged by the lender to reduce the interest rate, a point is 1% of the loan amount) be distinguished from origination points (charged for services rendered in originating the loan).
3. The cost of the mortgage should not be your only concern. 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 the lender has suddenly increased their profit margin at your expense or cannot deliver the rate, you usually do not have time toe start again with a different lender.
4. Refinancing with your existing lender without shopping around
   Your existing lender may not have the best rates or programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender is going to require the same documentation as other companies.
5. Procrastination in delivering required documents
   When your mortgage company requests documents, provide them immediately. Slowing the process can result in delays and cost you money.
6. Taking cash out of your credit line before you refinance your first mortgage
   Many lenders have cash-out seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. This usually results in stricter requirements and can, in some cases, break the deal!
7. Getting a second mortgage before you refinance your first mortgage
   Many mortgage companies look at the combined loan amounts when refinancing the first mortgage. If you plan to refinance your first mortgage, check with your mortgage company to determine if getting a second will cause a turn down of a refinance.
8. Not knowing if a home-equity line of credit/loan has a pre-payment penalty
   A “no fee” home equity loan, can have pre-payment penalties included. You want to avoid such a loan if you are planning to refinance or sell you home in the next three to five years.
9. Not understanding the difference between an equity loan and an equity line
   An equity loan is closed; you get the money up front and make the payments until paid in full – e.g., for home improvements, debt consolidation, etc. An equity line is open; you can get numerous advances for various amounts – e.g., vacation, children’s college tuition, etc.
   Both equity loan and lines you are charged interest on the outstanding principal balance.
10. Not knowing the life cap on your equity line
    Many credit lines have life caps of 18 percent. Be prepared to make payments at the highest potential rate.

11. Should I Refinance?

The common reason for refinancing is to save money. This can be achieved by:

• Obtaining a lower interest rate, which causes the monthly payment to be reduced.


• Reducing the term of the loan, saving money over the life of the loan.

Another reason to refinance is for people to convert their adjustable loan to the stability and security of a fixed rate loan.

Homeowners also refinance to consolidate debts and replace high-interest loans with a low rate mortgage. In many cases, debt consolidation results in tax savings, since consumer loans are not tax deductible, while a mortgage loan is.

Since every situation is different, the answer to “Should I refinance?” is a complex one. If you are refinancing to save money on your monthly payments, the following calculation can be helpful:

• Calculate the total cost of the refinance
• Calculate the monthly savings


• Divide the result of the total cost of refinance by the result of the monthly savings.


• The final result is the “break even” time. If you own your house longer than this, you will save money by refinancing.

Example:
Total cost of refinance - $3,000
Divided by monthly savings - $200
3000/200 = 15 months
If you plan to live in the house longer than 1 year and 3 months, it makes sense to refinance.

12. What is the difference between fixed rate and variable rate mortgages?

A fixed rate mortgage is where the principal and interest payment never change during the life of the loan. An adjustable rate mortgage is where the interest rate can change periodically. The changes in the interest rate are reflective of changes in the market interest rates. The initial rates on adjustables are lower than fixed rate mortgages, but can adjust upward if interest rates go up. There is a predefined cap, which limits how high the interest rate can adjust.

13. How do adjustable rate mortgages work?

There are different types of adjustable rate mortgages, but all have some common features.

One common feature is an interest rate change that occurs after a stipulated number of payments have been made. The interest rate can increase or decrease depending on how the new interest rate is calculated. Typically, the interest rate change is based on a predetermined index value and a margin. If a mortgagor has an interest rate that is pending an adjustment, the new rate will be calculated by adding the current index rate and a margin. For example, the mortgagor current rate is 3.75% with 2% margin; the new rate would be determined by adding the current index rate (4.5% as an example) to the margin. in this example, the new rate would be 6.5%.

The maximum amount that the interest rate can change during any adjustment period is usually fixed. The maximum adjustment is called the cap. Adjustable rate mortgages also have a lifetime cap, preventing the interest rate from exceeding a predetermined rate.

14. What is a conforming loan?

These types of loans meet the guidelines of Fannie Mae (FNMA), the Federal National Mortgage Association, and Freddie Mac (FHLMC), the Federated Home Loan Mortgage Corporation. FNMA and FHLMC are agencies chartered by the federal government, but they are privately owned. They sell billions of dollars of bonds to raise money for mortgages, which are purchased from their approved lenders like banks and mortgage companies, these companies continue to service (collect monthly payments) on the loan. That’s why FNMA and FHLMC are referred to as the secondary market. All loans purchased by FNMA and FHLMC must meet their guidelines; hence, these loans are called conforming loans.

15. What is a jumbo mortgage?

FNMA and FHLMC establish a maximum mortgage amount that they will purchase. A mortgage greater than that amount is called a Jumbo loan. Jumbo loans are usually priced just a little higher than conforming loans because other private lending or secondary market sources are providing the funding.

16. Why do mortgage rates change?

To understand why mortgage rates change we must ask the general question, “Why do interest rates change?” It is important to remember there are many interest rates.

Prime rate: The rate offered to a bank’s best customers.

Treasury bill rates: Treasury bills commonly called T-bills are short-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 3 months, 6 months and 1 year.

Treasury notes: Intermediate-term debt instruments used by the U.S. Government to finance debt, they come in denominations of 2 years, 5years and 10 years.

Treasury bonds: Long-term debt instruments used by the U.S. Government to finance its debt, they come in 30 year denominations.

Federal funds rate: Rates banks charge each other for overnight loans.

Federal discount rate: Rate New York Fed charges to member banks.

Libor: London Interbank Offered Rates. Average London Eurodollar rates.

6 month CD rate: The average rate that you get when you invest in a 6-month CD.

District Cost of Funds: Rate Rate determined by averaging a composite of other rates.

Fannie Mae – Backed Security rates: Fannie Mae pools large quantities of mortgages, creating securities with them, then sells them as Fannie Mae – backed securities. The rates on these securities influence mortgage rates very strongly.

Ginnie Mae – Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sell them as Ginnie Mae – backed securities. The rates on these securities influence FHA and VA mortgage rates.

Interest-rate movements are based on the simple concept of supply and demand. If the demand for loans increase, so do the rates. The reason is there are more buyers, so sellers can command a better price, i.e. higher rates. The reverse is true if the demand for credit decreases. When the economy is expanding, there is a higher demand for credit, so rates move higher. Whereas, when the economy is slowing, the demand for credit decreased and so do interest rates.

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply and demand equation for mortgage rates may be different from the supply and demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates.

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity, typically $1000. If the price of the bond is currently $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

17. What is PMI?

PMI is private mortgage insurance. PMI provides lenders protection when granting home mortgages for more than 80 percent of the property’s market value. PMI partially protects the lender from loss if the borrower fails to make the mortgage payments. The homebuyer usually pays premiums when the purchase transaction is closed, and it continues as part of the homeowner’s monthly payments. When the equity grows to at least 20 percent of the property’s value (due to an increase in the market value of the home and/or the gradual reduction of the mortgage balance), you should ask your lender to cancel the PMI payments.

18. What are escrow accounts and how much do I need in my account?

Escrows accounts are set up for a mortgagor by the mortgagee for the purpose of paying the mortgagor’s taxes, insurance and other payments associated with home ownership. The mortgagee usually collects payments from the mortgagor monthly. The mortgagee is then responsible for timely disbursement of the escrow funds to pay the mortgagor’s bills as they come due.

It is a common practice for the mortgage companies to hold a reserve amount for a mortgagor to assure there are sufficient funds to pay all bills as they come due.

19. What is a qualifying ratio?

In order to get a mortgage loan, you have to meet certain qualifying ratios. With a conventional loan the ratios are 28/36. That means your mortgage payment should represent no more than 28 percent of your gross monthly income. The 36 percent ratio means that your monthly payment plus your monthly debt payments (credit cards and installment debt) can represent no more than 36 percent of your gross monthly income.

20. Can my loan be sold?

Your loan can be sold at any time. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. The secondary market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. So the only thing that changes when a loan is sold is to whom you mail your monthly payment. If your loan is sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments.

21. What happens if my lender goes out of business?

If your lender goes out of business, you are still obligated to make payments. Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender’s going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to a new lender.

22. What is the advantage of using a company like Family and Friends Mortgage instead of a bank?

• Family and Friends Mortgage represents dozens of lenders so we have a greater variety of loan programs from which to chose.
• Since we shop among numerous wholesale lenders who get the advantage of buying larger blocks of funds, we usually have lower interest rates than the bank.
  
• We only get paid if and when the loan closes, so we work harder to get your loan approved and closed.
• Our staff is well trained to give you the highest level of service.

23. Does submitting an Inquiry Worksheet mean that I am committed to getting my loan through you?

No, by submitting an Inquiry Worksheet you have not been charged a fee or committed to utilizing Family and Friends Mortgage in the future. You have only given us permission to review your credit and references.