Dargan Real Estate - Myrtle Beach, SC

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mortgage lending

What You Need to Know About Mortgage Closing Costs

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Homebuyers are often shocked to learn the number of costs included with the closing of a loan. The bulk of mortgage closing costs are related to third party charges accrued by the lender and passed on to the borrower.  Because all fees (mortgage fees included) are settled at the closing table, they are all referred to as closing costs.

On average, closing costs account for 2-5% of the home’s sale price (this percentage can vary drastically depending on the circumstances) and usually include the following:

  1. Obtaining a credit report
  2. Evaluation of the property to be purchased and the borrower
  3. Title search and title insurance
  4. Loan origination fees (the processing of paperwork)
  5. Home inspections and appraisals
  6. Escrow deposit
  7. Documenting the transaction in city/county records

The homebuyer almost always pays the majority of closing costs. Sometimes lenders will advertise mortgage loans without closing fees, but buyers should be leery of such advertisements. If a bank is offering a loan without fees, borrowers should be aware that fees are likely included in the structure of the mortgage.

It’s important for buyers to be aware of the amount of closing costs they will be expected to pay because it affects the amount needed to purchase the home. Lenders are required by the federal government to provide an estimate (Good Faith Estimate or GFE) of the closing costs once the homebuyer applies for a loan. GFE laws state that the final settlement cannot deviate from the estimate given by more than 105% (or not at all on certain loan products).

One tip on how to determine the individual costs from the sum total of the closing cost is to have your lender add up the lender costs (which are the costs he/she estimates on page 2 of the GFE form), as well as provide you with the loan interest rate for which you are qualified. This is a great way to determine which lender is offering the best deal.

For example: If Lender A estimates their lender costs will be $5000 for a 45-day loan lock at 3%, find out how much Lender B estimates for a 45-day loan lock at 3% for your specific credit profile and compare the two estimates.

To read more about mortgage lending and the new regulations that will take effect on January 1, 2014, consumerfinance.gov is a great resource.

Advice & Tips: Repairing Bad Credit

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Unfortunately, there’s not an easy fix for bad credit. Repairing negative credit history takes time and patience, but there are several ways to get a jump start on the process.

Step 1: Check Your Credit Report

You are entitled to a free credit report each year and can request a copy at annualcreditreport.com. It’s important to obtain a report that pulls information from all three credit bureaus (Equifax, TransUnion, and Experian) because they can all indicate a different credit score. Creditors aren’t required to report to all three bureaus, and typically only report to the bureau with which they subscribe.

It’s essential to check your credit report each year to ensure it reflects accurate information. Be sure to check for erroneous late payments, and verify the information listed under the “amounts owed” field is correct. If you discover an error, dispute it with the credit bureau and reporting agency as soon as possible.

In addition to obtaining your annual credit report, you can also obtain credit scores year round at creditkarma.com. They typically aren’t scores used by lenders but should give you a general overview of your credit report’s current status.

Step 2: Set Up Payment Reminders

Making payments in a timely fashion is one of the largest contributions you can make to your credit score. Some financial institutions offer payment reminders via online banking, e-mail, and text alerts. Automatic payments can be set up if you have a really difficult time keeping up with due dates. But, keep in mind, this method doesn’t help instill a sense of money management with creditors because automatic payments only deduct the minimum payment due.

Step 3: Reduce Amounts Owed

Easier said than done, right? It’s worth the hard work and sacrifice because it’s far more satisfying to pay off debt completely than it is to improve your credit score.

A great debt reduction method:

Stop using credit cards.

Determine the amounts owed on each account you have open, as well as the interest rates associated with those accounts. Establish  a payment plan, and apply the majority of funds allotted for debt payments toward the highest interest accounts first.  Continue to pay the minimum amount due on your other accounts. Once the account with the highest interest rate is paid off, move on to the account with the second highest interest rate. Continue paying off debt using this method until all accounts have a zero balance.

Tip: Change payment due dates on several accounts if a large number are due around the same time.

Credit Score Facts

– Your payment history accounts for 35% of your calculated credit score.

– Paying off a debt will not remove it from your report; it stays there for 7 years.

– Delinquent payments–even one day late–majorly impact your FICO score.

– Amounts owed account for 30% of your calculated credit score.

– Keep balances low. Pay off debt rather than transferring or moving it around to other accounts.

– Don’t open new cards you don’t need just to increase your credit limit; it could backfire and lower your score instead.

– Don’t open multiple accounts within short time frames. A flood of new accounts look especially risky if you’re a new credit user. Apply for and open new accounts only as needed.

– In general, credit cards and installment loans will rebuild your credit score. An individual who doesn’t have any credit cards tends to be a higher risk than an individual who has credit cards and manages them responsibly.

– Adding an installment loan (personal, auto, mortgage, student), if you don’t already have one, shows you’re responsible with both major types of credit. If you choose to add an installment loan, make sure it reports to all three credit bureaus. You can find the best deals at a local bank or credit union.

Made a bad decision once or twice?
Most creditors look for patterns of payment rather than focusing on one-time or rare occurrences. So, don’t panic if you’ve had one or two slips in the past.

If you want to learn more about rebuilding your credit–radio host, Dave Ramsey, offers a lot of great advice on many different financial topics.

Mortgage Options

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There are several different options available in the world of mortgage loans. Selecting the best option for your home buying needs is an important decision because it is likely to effect your budget for many years.

Listed below is a quick breakdown of several mortgage loan options and what you can expect of them.

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Fixed Rate Mortgages

Advantages: predictable monthly payments, easy to budget, available in a variety of term options

Disadvantages: higher interest rates, harder to obtain with poor credit

By and large, fixed rate mortgages are the most popular and account for nearly 75{8a4f45d74d514e6dd6794b8c6dd875260e3343c96bf403696e21fc128bbedf7b} of all loans. They usually span over 10, 15, or 30 years but can also span 5, 20, 40, or 50 years.

The interest rate of a fixed mortgage stays the same for the entire duration of the loan which allows the benefit of a predictable monthly payment. These mortgages rates are easier to budget because they never change. Also, if interest rates are really high when you take out the loan, you can refinance the loan when the rates go down.

Adjustable or Variable Rate Mortgages

Advantages: lower interest rates with higher loan amounts, provide flexibility

Disadvantages: risky, unpredictable

Types

One Year Adjustable Rate Mortgage (also known as Adjustable Rate Mortgages or ARMs)

The interest rates on an adjustable mortgage change after a fixed period of time. They are much riskier than fixed rate mortgages because the payments can change dramatically. On the flip side, the buyer usually qualifies for a higher loan amount which allows the purchase of a more valuable property.

Hybrid Adjustable Rate Mortgages

Hybrid adjustable mortgages combine the qualities of both a fixed mortgage rate and an adjustable mortgage rate. The initial interest rate is fixed for a set period of time at the beginning of the loan and is followed by an adjustable rate for the remainder.

Types of Hybrid ARMs

10/1 Adjustable Rate Mortgage – fixed for the first 10 years; rate adjusts each year after the fixed rate period

5/5 and 5/1 Adjustable Mortgages – fixed for the first 5 years; rate adjusts every 5 years or every year after the fixed rate period

3/3 and 3/1 Adjustable Mortgages – fixed for the first 3 years; rate adjusts every 3 years or every year after fixed rate period

2-Step Mortgage – fixed for a designated time period and adjusts to a different fixed rate for the remainder of the loan

 

Balloon Mortgage

This mortgage option is for a much shorter term and offers a much lower payment than a fixed rate mortgage.

Features: shorter terms (usually five to seven years); homeowner makes monthly payments at a set interest rate for the duration of the loan term and pays off the rest of the principal, takes on a new mortgage, or sells the home at the end of the fixed period

Advantages: lower interest rates, lower monthly payments, larger loan amounts

Disadvantages: extremely risky, large financial obligation at the end of the loan’s life, must refinance mortgage if unable to pay the principal when the term ends and could face unaffordable terms if interest rates have risen or credit has deteriorated since the loan was issued

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Find out more about the different types of loans available by contacting a trusted mortgage advisor.

What do mortgage lenders look for on loan applications?

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One of the best ways of staying ahead of the game is to know the expectations of your opponent. The same holds true for staying ahead of the “lending game.” By knowing what types of things lenders look for when determining creditworthiness, you can presume the outcome and plan accordingly.

Payment History

Some experts suggest that previous payment history can account for nearly 35% of your total creditworthiness. That’s HUGE! Lenders want to know you not only have the ability to pay off your loan but that you will. Experts also suggest that having a favorable payment history can offset other negatives elsewhere.

Length of Credit History

Although there isn’t much you can do about your age, you can begin borrowing at an earlier one. You should never borrow money you don’t need. However–if it makes sense to take out a small car loan or credit card, you can greatly increase your credit score in two years by making loyal payments.

How Much Credit You’re Using

In the eyes of a lender, nearing your maximum credit limit is always a big no-no. Some experts suggest only utilizing 30% of your available limit. In other words, it’s more favorable to utilize three separate credit cards at 30% than to have one completely maxed out.

Proof of Income

If you have a personal freelance or contracting business but don’t file a 1040 at tax time, expect to have a short conversation with lenders. These types of businesses are widely accepted today, but being conservative and having a “W-2” pay-stub will appear more favorable than self-employed.

Mix of Credit

Having a mix of credit (car loan, credit cards, personal lines of credit, etc.) is also pleasing to lenders. It’s indicative of someone with a long and stable credit history.

Collateral

Assets significantly offset a lender’s fear of risk. Having a cushioned 401(k) helps too. Even if they can’t pursue the money, they know it gives you options other than defaulting on your loan.

Recent Credit Efforts

A huge red flag goes up when you’ve recently taken out several different lines of credit. Lenders will question if you can realistically make the mortgage payment if you just financed a new and expensive sports car too.

The Initial Mortgage Meeting: What To Take With You

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One of the biggest financial transactions you’ll ever make in life is buying a home. It’s important to know every option available in order to fully maximize your investment.

After you’ve decided which financial institution will be handling your mortgage, it’s a good idea to set up a meeting with one of their mortgage advisors. He or she can help you determine the type of mortgage that best suits your personal needs, in addition to calculate how much money you can borrow.

You should take documents that reflect your income and the amount you spend on average each month with you. This information will more than likely be verified later through credit checks (when you officially apply for a mortgage loan), but having bank statements or wage slips with you will help the mortgage advisor determine how much you can comfortably borrow. You may not need the maximum amount you are able to borrow, but this figure is often helpful when looking at potential properties.

It’s also extremely helpful to fill out a monthly budget plan prior to the meeting. You may be fairly certain how much money you spend, in relation to the money you bring in, but a monthly budget can shed light on areas you may have overlooked or failed to factor into your equation. It’s important to consider the new mortgage payment amount, as well as any potential increases to your monthly bills, if upsizing, to calculate an appropriate amount you can afford.

A meeting with a mortgage advisor is also the perfect opportunity to learn more about the mortgage lending process and what types of deals may be available to you. It’s important to consider every factor to determine which type of mortgage is best for you. Take your time, ask a lot of questions, and decide when YOU feel comfortable.