Financing Tips

Most mortgage companies promote the notion that obtaining mortgage financing through them will be quick, easy and efficient. While occasionally this is true, the reality is that, all too often, obtaining mortgage financing can be confusing, time consuming, and yes, even torturous. Rather than perpetuate more marketing "fluff" about lender efficiency, we prefer that you be a fully informed consumer. This means telling you up-front that the process of obtaining mortgage financing is complex, involves the coordinated effort of many people and service providers, and is inherently fraught with pitfalls. Accordingly, we offer the following "real world" tips to help you avoid the pitfalls, and to enable you to properly orient your expectations. At a minimum, our aim is to help you survive the home loan process, but our real goal is for you to achieve a more seamless, and dare we say, a more satisfying mortgage financing experience.

Identify the Loan Program
When speaking with the lender contact person, confirm which loan program you intend to apply for and get a rate quote. Also, be sure to ask about potential adjustments to the rate based on the lender's standard "pricing adjustments" for such things as loan amount, loan to value, debt ratio, purchase vs. refinance, self employment, non-owner occupancy, property type etc. Lastly, be sure to ask whether the loan has a prepayment penalty and if mortgage insurance is required.

Prepayment Penalties
Many loans these days, particularly subprime mortgages and home equity 2nd mortgages have prepayment penalties. Be sure to ask your lender contact person if the loan you are seeking has a prepay penalty. If so, ask how long it remains in effect i.e. 1 year, 2 years, 3 years, etc. Also ask whether it can be bought out up-front, or brought down to a shorter time period, and if so, at what cost. Also, be sure to ask whether the prepay will be waived if the loan is prepaid as the result of a sale of the property as opposed to a refinance - some lenders waive the penalty if it results from a sale. If the loan does have a prepay, remember that California law sets limits on the amount of the penalty. Generally, it amounts to no more than 80% of six months interest. Another thing to keep in mind is that by law you are permitted to prepay up to 20% of the loan's principal balance each year without any penalty. On the other hand, if you intend to keep your loan in place beyond the prepayment period, then you really needn't be concerned about having a prepay penalty written into the loan, since it will probably expire long before you ever retire the loan.

Mortgage Insurance - A Necessary Evil
Many loans which exceed 80% of the value of the property will require mortgage insurance. Mortgage insurance is purchased by you for the benefit of the Lender. You are required to pay the premium each month along with your regular mortgage payment. The purpose of this insurance is to protect the lender in the event you default on the loan. In effect the insurance company steps in and makes the lender whole. The monthly premiums are usually based on a factor of .00625 of the loan amount divided by 12 for loans exceeding 80% up to 90% of value, and .0078 for loans exceeding 90% up to 95% of value. Thus, on a $100,000 loan, the monthly premiums would be $52.00 and $65.00 respectively. The most annoying thing about these premiums is that they are not tax deductible, because they are not mortgage interest, unless of course you are doing FHA financing, in which case the aggregate premium can be added to your loan amount and is essentially financed on a monthly basis. So, be sure to ask the lender contact person about whether the type of mortgage you are seeking requires mortgage insurance (referred to in the biz as MI or PMI for conventional loans and MMI for FHA loans).

Avoiding Mortgage Insurance
If the financing you intend to obtain will exceed 80% of the value of the property, but you want to avoid mortgage insurance, you could consider a piggyback first and second mortgage. Under this scenario, you would obtain an 80% first mortgage (which would not require mortgage insurance) and a concurrent second mortgage, which would be equal in loan amount to the difference between the value of the property minus your downpayment and the 80% 1st mortgage (for example an 80% 1st, 10% 2nd, 10% downpayment). Piggyback 2nd mortgages do not require mortgage insurance. The drawback to this approach is that the rates for the 1st and 2nd mortgages will be higher than the rate on a stand-alone first mortgage with mortgage insurance. However, 100% of the interest on the piggyback 1st and 2nd mortgage will be tax deductible, whereas the mortgage insurance on the stand alone 1st mortgage will not be. Thus, depending upon your tax bracket, the piggyback scenario may actually be cheaper on a net after-tax basis. Best bet, talk to your accountant on this one.

All Properties Are Not Created Equal
It sounds strange, but an often overlooked detail of financing is the type of property being financed. For some reason, lenders often assume that you are intending to finance a single family detached home, and so they quote you a rate based on that type of property. Unfortunately, when the loan is finally submitted for approval, somebody finally reads the preliminary title report and/or the appraisal, and discovers that the property is a condo or a four-plex, anything but a single family detached home. Consequently, the interest rate you were quoted suddenly changes, as does the maximum loan to value that the lender is willing to commit to. To avoid this problem, make sure your lender contact person, and the processor know up-front the type of property you are financing. If you are not quite sure yourself (which is common in purchase transactions), don't assume you know. Instead check with your escrow or title officer, or appraiser, and ask them to confirm the property description contained on the preliminary title report or the appraisal report. Also, be aware that the configuration of the property itself may pose problems. For example, a single family house situated on more than three acres may not be considered a residential property, but a rural property, thereby affecting the loan pricing and/or loan to value. The same thing is true of homes with square footage below 1,000 square feet; condominium complexes with less than a 65% owner occupancy rate; homes which have a mixed commercial use or homes exceeding a certain age.

Confirm Loan Fees
When speaking with the lender contact person, request an itemization of the Lender's customary fees for processing, underwriting, docs, funding, tax service, appraisal, appraisal review, flood certification, courier, etc.

The Loan Processor - Your Best Friend
Once you have made application to the lender, you will be assigned to a loan processor. Your loan processor is the person who will be most crucial to getting your loan through the home loan maze. Try to develop a rapport with this very important person.

Credit Report Disputes
If your credit report contains inaccurate information, you may want to dispute it with the credit repository which is reporting the incorrect information. The credit report that you will receive from us is a three file report - meaning it contains information from Experian (formerly TRW), Transunion, and Equifax (CBI). If there is incorrect information on your report, first identify which of the three repositories is reporting the incorrect information (sometimes it's just one of the three repositories, sometimes two of the three, and sometimes all three). The next step is to contact the repository(s) directly, and to follow their procedures for getting the disputed item(s) removed from your report. The phone numbers for each of the three repositories are as follows:

Experian 800-682-7654 or 800-422-4879
Transunion 800-888-4213
Equifax 800-685-1111

In addition, any adverse items on your credit report will affect your credit scores negatively (for more information on credit scores, see below).

Understand Your Credit Scores
Credit scores are calculated by each credit repository using a software matrix designed by Fair-Isaac Company of Northern California. The matrix analyzes numerous components which comprise your credit profile, such as available credit, number of open accounts, length of credit history, amount of debt, number of derogatory items, number of inquiries and so on. Each of these components is assigned a quantitative risk value and the sum of all the values is formulated into a single score. In most cases, the credit information that each repository has on you will vary among the three repositories. Since a credit score is derived from the information maintained by the repository, and each repository has varying information, it is not uncommon for each repository to calculate a different score. Refer to the back portion of the credit report we provide you to see your credit scores. In general, scores exceeding 680 are considered a very low risk profile; scores from 640 to 679 are considered an acceptable risk; scores of 600-639 are considered a moderate to medium risk, and scores below 600 are considered a higher risk.

More and more lenders use credit scoring to determine your eligibility for financing and the corresponding pricing (known as "risk based" pricing). The score that most lenders focus on is the middle score of the three scores for the primary wage earner. The credit scores of the non-primary age earner (i.e. a spouse or other co-applicant with lesser annual income) are generally ignored. Other lenders may use the "preferred repository" score of the primary wage earner, or may average all three scores. So when talking with your lender contact person, ask if credit scores are a requirement to obtain financing, and if so, which score or scores they concentrate on. One more thing about credit scores, each time your credit report is run, the new inquiry will reduce your scores by one to three points. However, if the report is run by companies within the same industry, i.e., mortgage lenders, within 30 days of each other, all such inquires will only count as one inquiry in relation to reducing your credit scores. So, don't be afraid to allow your report to be run by more than one lender, because the Fair Isaac matrix is designed to recognize when you are comparison shopping. If you have any questions about your credit scores, contact Fair-Isaac Company at (415) 472-2211.

Realistic Time Frame
A realistic time frame for getting your loan processed, approved, and funded is 3-4 weeks for purchases and 2-3 weeks for refinances. Expectations for a funding sooner than that put a great deal of pressure on all parties. So plan ahead and allow ample time to get the loan completed.

Expect Delays
Remember that there are a multitude of people working behind the scenes to get your loan processed, approved, and funded. These include the lender's contact person, the processor, the loan coordinator, the underwriter, the documents person, funder, escrow officer, title officer, real estate agents, couriers, appraiser, and even the termite man. With all these people, you are bound to experience delays, and yes, even some frustration. So try to take a zen-like approach to the process, and realize that mistakes and delays are unfortunately a part of the deal.

Avoid Insurance and HOA Delays
Whenever you obtain financing, the lender will require that there be adequate fire, and in some cases, flood insurance in place prior to funding. In order to avoid funding delays, be sure to get your insurance ordered early on in the process, and make sure that the insurance company forwards copies of the policy to your escrow or title officer as soon as possible. Be prepared to stay on top of them, though, because insurance agents always say they'll get right on it, but they seldom do.

By the same token, if you are financing a home that is part of a homeowner's association, such as a condo or a planned unit development (PUD), be sure to get the escrow/title officer in contact with the Homeowner's Association early on in the process, because there are probably four inches of documents that have to change hands to the satisfaction of the lender, including CC&R's, Bylaws, budgets, owner occupancy certifications, etc.

Consider Credit Approval
If you are seeking financing for the purchase of a home, you may want to consider obtaining a credit approval. Credit approval is a formal underwriting and approval of your loan application by the lender, prior to identifying the property you wish to purchase. The advantage of a credit approval is that when you do finally do locate a property and make an offer, you can do so with no financing contingencies. Sellers really dig this because they know you're for real. Hence, you may be able to negotiate a better deal for yourself, or beat out other competing offers. Be sure to ask your lender contact person about this option.

Never Falsify
The penalties for falsifying loan applications, tax returns and the like include a long-term stay in the gray-bar hotel. So don't even think about it. In this instance, honesty is always the best policy.

The Value of a Good Real Estate Agent (for purchases only)
For the most part, real estate agents are probably the hardest working, yet least appreciated people on the planet. Sure there are crummy agents, but a good agent is worth every dime he earns, and generally every dime he earns is paid by the Seller of the property. So if you don't currently have an agent, or you're thinking of going it alone, let us refer you to an agent in your area. Trust us on this one, you'll be glad you did.

Seller Paid Closing Cost Credits (for purchases only)
During your negotiations for the purchase of a home, you may want to ask the Seller of the property for a closing cost credit. Most of our lenders will allow up to 6% in seller-paid credits for non-recurring costs on loans of less than 90% LTV, and 3% for loans of 90% LTV and higher. If you think you might want to ask for a credit, talk to your real estate agent before you make a purchase offer, so you can include it in your negotiations with the Seller.

Paying Closing Costs from Loan Proceeds (Refinances only)
If you are refinancing your home, the Lender will permit you to pay all non-recurring closing costs from your loan proceeds, provided there are adequate proceeds remaining after payoff of your existing mortgages or other debts which you intend to consolidate. For example, if you are refinancing a $145,000 existing first mortgage, and the costs to obtain a new first mortgage total $1,900. You could make the new first mortgage $146,900. This would enable you to payoff the $145,000 existing mortgage completely, and apply the remaining $1,900 toward your non-recurring costs, thereby eliminating any out of pocket costs at closing. For more information on this, talk to your lender contact person.

Gift Funds
If you are purchasing a home and you intend to use a monetary gift from a family member for the downpayment and/or closing costs be sure to check this out with the lender contact person and your loan processor up front to make sure a gift is permitted. Also be prepared to document the gift in the form of a "gift letter" written by the donor, and proof of the donor's ability to make the gift, which may be required in the form of a bank statement from the donor. Be prepared, though, because most donors don't like having to provide their bank statements.

Seasoning of Funds
For purchases, if your downpayment, closing costs and/or reserve capital is coming from savings, many lenders may require a three month seasoning of those funds in your bank account. If the funds have been in the account less than three months, the lender may request a paper trail to document the source of the funds. If the paper trail leads back to a loan (even if the loan is from your own 401k) it could present a problem relative to your debt ratios. If it leads back to a gift, then you may have to document the gift as described above.

Retirement Accounts Used for Downpayment, Closing Costs & Reserves
If you're planning to use monies from your retirement account to cover your downpayment or closing costs, be aware that you may incur a liquidation penalty (typically a percentage of the amount withdrawn). Consult your plan guide or administrator to know what the liquidation rules are, and/or talk to your accountant. Secondly, if you are "borrowing" against your retirement account to free-up funds, the lender will want to know the details of this "borrowing". Most likely, the lender will add the monthly payment amount associated with the Borrowing (usually an automatic payroll deduction appearing on your paystub) to your monthly debt obligations. This in turn, will affect your qualifying debt ratios which will reduce the amount of loan you qualify for. Thus, if you anticipate borrowing against your retirement plan to offset your downpayment or closing costs, be sure to disclose this to your lender contact person and processor at the time of application, so that there are no last minute surprises. Lastly, most lenders require that you have two to three months of payments in reserve before they'll fund the loan. The good news is that if you have a retirement account such as a pension, IRA, Keogh or 401K, most lenders will recognize those monies as meeting the reserve requirement, without the need to liquidate them. Be aware though, that some lenders will require that the funds be liquidatable within a 30 day period. To determine how quickly funds can be liquidated in your pension account, consult your plan guide or administrator. If you determine that it takes longer than 30 days to liquidate funds, this may not be acceptable to the lender. Therefore, you may have to look for an alternative source of monies to meet the reserve requirements.

Paying Off Debt To Qualify
It's not uncommon to receive a loan approval subject to the requirement that you payoff or pay down certain debts prior to funding. Before agreeing to this, confirm which accounts and what dollar amounts, are to be paid, as well as the corresponding monthly payment amount that will be eliminated. Frequently, lenders base their figures on what they see on their credit report, when in fact these figures may be entirely different from what actually appears on your monthly payment statements. So, if there is a discrepancy, send the lender a copy of your monthly payment statements. Once you've confirmed the appropriate figures, explore whether the lender will allow you to pay down any installment debts to less than 10 months remaining, as opposed to paying them off entirely (lender's typically will not count a debt against you if there are less than 10 payments left). But keep in mind this only applies to installment debts, such as car payments. It does not work for credit cards, nor does it work for auto lease payments. Once you've nailed down the figures, be sure to ask the lender if you can make the payoffs through the escrow or title holder at closing. Most lenders permit this, but some don't. The reason you want to do it this way is that it avoids your paying the debts off prior to closing, only to have your loan not fund, and now you're out the payoff dollars, with no way to recoup them.

Pay Attention to the GFE
GFE stands for Good Faith Estimate. Within three days following receipt of your loan application, the lender, by law, must send you a GFE which will itemize all of the charges in connection with obtaining your financing. Pay attention to the GFE and any revised versions which may follow, as this will tell you what costs will be needed at closing. A little tip though - just prior to closing, contact the escrow or title holder and request an "estimated HUD-1". This is the escrow closing statement, and it will be your most accurate indication of the entire funds needed at closing.

Appraisal Problems
If you encounter appraisal problems, meaning the appraisal comes back too low, or the appraiser identifies problems with the property, your best bet is to talk with the lender contact person, your loan processor, and if need be, the appraiser. The main thing is, appraisal problems are common, so don't freak out. Generally, the appraiser just needs some additional information on comparable sales information in order to revise or complete his report and get things back on track.

Impounds
Some loans, particularly high loan to value loans, require impounds for property taxes and homeowner's insurance. What this means is that you will be required to pay a portion of your annual property taxes and insurance with each monthly mortgage payment. Thus, when the property taxes and insurance come due, the lender pays them for you from your impound account. Other loans do not require impounds, and therefore you will be required to pay your property taxes in two lump sum semi-annual installments directly to the tax collector, and your insurance premium directly to your insurance company once annually. If you don't like surprises in the form of lump sum tax and insurance bills, you can always voluntarily request that an impound account be set up. If you think you may want an impound account, let your processor know up front at the time you submit your application.

Refrain From Credit Card Use
A common mistake made by many borrowers is that after they've made application, and gotten loan approval, they run up a credit card or two, only to discover that the lender has run a back-up credit report prior to funding. Lo and behold, the additional credit card debt has blown the qualifying ratios out of whack, and now the loan approval and funding is in jeopardy. To avoid this pitfall, your best bet is to hold off on any credit purchases until after your loan has funded.

Loan Approval - The Good, The Bad, and The Ugly
The good news is you've just received loan approval. The bad news is that after your initial excitement wears off, you realize that the approval is subject to a laundry list of approval conditions - all of which have to be fulfilled in order to get the loan funded. Don't panic though, because virtually every loan approval is subject to conditions - everything from a request for a current paystub, to a current landlord rating, and everything in between. Just be aware that many of the conditions will seem nit-picky. If so, work with your loan processor to see which conditions can be waived or modified. But at the end of the day, be prepared to produce the requested items, otherwise you won't get funded. Also, a word to the wise, be sure to keep copies of everything you forward to the lender, be it paystubs, tax returns, rental agreements, etc. Because every lender is essentially operating a papermill, and they are notorious for losing things you've already sent or faxed to them.

Locking the Rate
Depending upon the type of financing you apply for, the interest rate on your loan may be automatically locked by the Lender from the date your loan is approved. Automatic locks generally run for 15-30 days from the approval date, which is generally sufficient time for the loan to get funded. In many cases, however, the rate on the loan will float up or down daily even after approval has been obtained, until the loan is locked. Lock policies vary from lender to lender and program to program. Locks may range from 10 day locks to 45 day locks. To determine when is the best time for you to exercise your lock, be sure to talk with the lender contact person and your processor.

Don't Be Afraid to Ask
Home loan financing is a complex and often stressful experience. It may even be one of the most important financial decisions you ever make. So never, never, never be afraid to ask questions, no matter how dumb or inexperienced you may feel. Remember, that like any other discipline, the people involved in lending on a daily basis often forget that the layman is not always familiar with the industry jargon, and doesn't understand what is being said. So again, if you don't understand something, stop and ask.

Interview Checklist
Use the following checklist when initially interviewing the lender contact person.