Frequently Asked Questions

When considering whether or not to refinance your home, there are a number of factors to consider. A refinance is a new loan and you will incur closing costs similar to when you took out your original mortgage. I usually use 3% of the mortgage amount for closing costs. Another very important factor is how long you intend to stay in the home, the longer the better for refinancing purposes. 

The way I approach it is I look at the current principle and interest payment with your current mortgage. Then I calculate the principle and interest payment on the new loan. I subtract the new payment from the old payment to get your monthly savings and then divide the monthly savings into the cost to get the new loan with a goal of a payback of 24-months or less. 

For example, let's assume you have a $100,000 mortgage at 7% with a principle and interest payment of $665 a month. You can get a 30 yr fixed rate at 5% and roll your closing costs into the new loan so your balance would be $103,000. Your new monthly payment would be $553 with a monthly savings of $112. Dividing the closing costs by the monthly savings would give you a payback period of 27 months. This would be an option to consider but I would also look at a hybrid ARM (assuming you would be in the home 10 years or less) to get an even lower rate. 

Mortgage points, also known as discount points, are fees paid directly to the lender at closing in order to get a reduced interest rate. This is also called "buying down the rate" which can lower your monthly mortgage payment. Essentially, this is pre-paid interest in exchange for a lower interest rate over the life of your loan. In general, the longer you plan to own the home, the more points help you save on interest over the life of the loan. 

It's important to consider how long it takes to recoup the cost of buying points. This is called the break-even period. To figure it out, divide the cost of the points by how much you save on your monthly payment. The resulting number is lhow long it takes for the monthly payment savings to equal the cost of the points.

Be sure to consult a tax professional, but if you itemize deductions on your Form 1040, Schedule A, you might be able to deduct all of the points paid to obtain the mortgage in the year you acquired the home.  Again, be sure to consult a tax professional to verify this information. 

Should I pay points to lower my interest rate?

To figure out if points would work for you, determine whether you have the cash available to buy points up front, in addition to your down payment, closing costs and reserves. Also consider how long you intend to own the home. 

I look at each transaction on a case-by-case basis and do the calculations so you can make in informed decision on whether or not points are a good option for you. 

What is an APR?

The annual percentage rate (APR) is an interest rate reflecting the cost of a mortgage as a yearly rate. Since an ARR measures the total cost of credit, including certain closing costs, it is not an interest rate. The ARR rate is going to be higher than the quoted interest rate. The APR allows homebuyers to compare different types of mortgages based on the annual cost for each loan. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.

The APR does not affect your monthly payments. Your monthly payments are strictly a function of the quoted interest rate and the length of the loan.

Because APR calculations are effected by the various different fees charged by lenders, a loan with a lower APR is not necessarily a better rate. The best way to compare loans is to ask lenders to provide you with a Loan Estimate or a Fee Worksheet for the same type of program (e.g. 30-year fixed). 

The following fees are generally included in the APR:

• Points - both discount points and origination points
• Pre-paid interest. The interest paid from the date the loan closes to the end of the month.
• Loan-processing fee
• Underwriting fee
• Document-preparation fee
• Private mortgage-insurance
• Escrow fee

The following fees are normally not included in the APR:

• Title or abstract fee
• Borrower Attorney fee
• Home-inspection fees
• Recording fee
• Transfer taxes
• Credit report
• Appraisal fee

What is Pre-Qualified vs. Pre-Approved?

You've probably heard you should get pre-qualified or pre-approved for a mortgage before you start looking at properties. Some people use the terms interchangeably, but there are important differences that every homebuyer should understand. 

Pre-qualification means that the lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount. The problem is that the pre-qualification letter is an approximation - not a commitment - based solely on the information you give the lender and it's evaluation of your financial prospects. It may or may not take into account your current credit report and it does not look past the statements you have made about your income, assets and liabilities. 

A pre-approval letter is a solid commitment - a statement from a lender that you qualify for a specific mortgage amount based upon an approval (usually from an automated underwriting system) and that you have reviewed and received a credit report, pay stubs, tax returns and W-2's, bank statements, 401k's etc. A pre-approval means that your loan is contingent only on a satisfactory appraisal of the property and acceptable title work. 

This makes you as close to a cash buyer as possible and gives you a huge advantage in a competitive market or multiple-offer situation. 

So the moral of this story is take the time and get pre-approved for your mortgage before heading out to look at homes. It will make you a stronger buyer and reduce some of the stress of the homebuying process. 

The good news is that I can get you pre-approved in about 15 minutes after I receive a completed mortgage application. Call me for details!

What does it mean to lock the interest rate?

A mortgage rate lock is an agreement between a borrower and a lender that allows the borrower to lock in the interest rate on a mortgage over a specified time period. If your interest rate is locked, your rate won't change between when you lock the rate and closing, as long as you close within the specified time frame and there are no changes to your application. Rate locks are typically available for 10 to 90 days and sometimes longer. It's important to understand that rates can change daily, even hourly depending upon market conditions. 

A downside, for the borrower, is a mortgage rate lock would prevent them from taking advantage of lower rates that may occur during the lock period, however the lender cannot take advantage of rises in the interest rates either. 

What documents do I need to prepare for my loan application?

Below is a list of documents that are required when you apply for a mortgage. However, every situation is unique and you may be required to provide additional documentation. So, if you are asked for more information, be cooperative and provide the information requested as soon as possible. It will help speed up the application process.

Your Property

• Copy of signed sales contract including all addendums
• Copies of your earnest money and option period checks 
• Names, addresses and telephone numbers of all realtors, builders or attorneys involved
• Copy of Listing Sheet 

Your Income

• Copies of your pay-stubs for the most recent 30-day period with year to date figures
• Copies of your W-2 forms for the past two years
• Copies of your last two years of personal tax returns

If self-employed or receive commission or bonus, interest/dividends, or rental income:

• Provide full tax returns for the last two years PLUS year-to-date Profit and Loss statement (please provide complete tax return including attached schedules and statements. If you have filed an extension, please supply a copy of the extension.)
• K-1's for all partnerships and S-Corporations for the last two years (please double-check your return. Most K-1's are not attached to the 1040.)
• Completed and signed Federal Partnership (1065) and/or Corporate Income Tax Returns (1120) including all schedules, statements and addenda for the last two years. (Required only if your ownership position is 25% or greater.)

If you will use Alimony or Child Support to qualify:

• Provide divorce decree/court order stating amount, as well as, proof of receipt of funds for last year

If you receive Social Security income, Disability or VA benefits:

• Provide award letter from agency or organization

Source of Funds and Down Payment

• Sale of your existing home - provide a copy of the signed sales contract on your current residence and statement or listing agreement if unsold (at closing, you must also provide a settlement/Closing Statement)
• Savings, checking or money market funds - provide copies of bank statements for the last 2 months
• Stocks and bonds - provide copies of your statement from your broker or copies of certificates
• Gifts - If part of your cash to close, let your loan officer know so they can guide you through the verification process
• Based on information appearing on your application and/or your credit report, you may be required to submit additional documentation

Debt or Obligations

• If you are divorced and paying alimony or child support, a certified copy of your divorce decree
• Check or credit card to cover the cost of your appraisal

Credit scoring is a system creditors use to help determine whether to give you credit. Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report. 

The most widely uses credit scores are FICO scores, which were developed by Fair Isaac Company, Inc. A credit score is a number based on the details in the credit report. There are three national credit bureaus - Equifax, Experian and TransUnion - and each assigns a credit score based on the information it collects. Not all creditors report to all three bureaus so the scores will vary. Your score will fall between 350 (high risk) and 850 (low risk).

Because your credit report is an important part of many credit scoring systems, it is very important to make sure it's accurate before you submit a credit application. To get copies of your report, contact the three major credit reporting agencies:

Equifax: (888) 548-7878 
Experian: (888) 397-3742  
Trans Union: (800) 916-8800

Typically these agencies will charge you $15-$16 for a one-time credit report and score from a single bureau, or $30-$40 for credit reports and scores for all three bureaus. 

Beware! All three bureaus offer a free or $1 deal for a credit report and score, but these typically require a credit card number to register and after a "trial" period ends the credit card is automatically charged a monthly fee for credit monitoring. I would advise you to stay away from these programs. 

Under federal law, each consumer is entitled to one free copy of his or her own credit report from each credit bureau every 12 months. Request a report at AnnualCreditReport.com or by calling 877-322-8228. The free reports can be requested from all three companies at the same time, but I would recommend ordering from one company at a time, four months apart for more frequent free credit information.      

It's important to note that repairing bruised credit is a bit like losing weight: it takes time and there is no quick way to fix a credit score. In fact, out of all the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. 

Nevertheless, scoring models generally evaluate the following types of information in your credit report:

• Payment History: Your payment history comprises 35% of the total credit score and themost important factor in calculating credit scores. According to FICO, past long-term behavior is used to forecast future long-term behavior. FICO keeps an eye on both revolving loans - such as credit cards - and installment loans, such as mortgages or auto loans. One of the best ways for borrowers to improve their credit score as a whole is by making consistent, timely payments. 
• Credit Utilization: Credit utilization - the percentage of available credit that has been borrowed - makes up 30% of your total credit score. Since FICO views borrowers who habitually max out credit cards - or who get very close to their credit limits - as people who cannot handle debt responsibly, try to maintain low credit card balances. FICO says people with the best scores tend to have a an average credit utilization ratio of less than 6%, with three accounts carrying balances and less than $3,000 owed on revolving accounts.  
• Length of Credit History: The length of time each account has been open and the length of time since the account's most recent action - is 15% of your credit score. A longer credit history provides more information and offers a better picture of long-term financial behavior. 
• New Credit: New credit accounts for 10% of your total FICO credit score. Many scoring models consider whether you have applied for credit recently by looking at "inquiries" on your credit report when you apply for credit. If you have applied for too many new accounts recently, this could suggest you are in financial trouble by needing significant access to lots of credit. That being said, when you're applying for a mortgage, the government encourages you to shop around so from the time a mortgage company pulls your credit report for the first time, for the next 30 days any subsequent mortgage credit pulls still only count as 1 inquiry.  
• Credit Mix: Credit mix makes up the last 10% of your score. While this is somewhat of a vague catagory, but experts say that repaying a variety of debt products indicates the borrower can handle all sorts of credit. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders. 

Scoring models may be based on more than just information in your credit report. For example, the model may consider information from your credit application as well: your job or occupation, length of employment, or whether you own a home.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It's likely to take some time to improve your score significantly.

A home appraisal is an unbiased estimate of the true (or fair market) value of what a home is worth. All lenders order an appraisal of the property during the mortgage process so that there is an objective way to assess the home's market value and ensure that the amount of the mortgage is appropriate. 

A property's appraised value is influenced by recent sales of similar properties and by current market trends. The home's amenities, the number of bedrooms and bathrooms, floor plan functionality and square footage are also key factors in determining the home's value. The appraiser must do a complete visual inspection of the interior and exterior of the home and note any conditions that adversely affect the home's value, such as needed repairs. 

Typically, appraisers use Fannie Mae's Uniform Residential Appraisal Report for single-family homes. The report asks the appraiser to describe the interior and exterior of the property, the neighborhood and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property's value based on his or her observations. 

The report must include a street map showing the appraised property and comparable sales used; an exterior building sketch; photographs of the home's front, back and street scene; front exterior photographs of each comparable property used; and any other pertinent information - such as market sales data, public land records and public tax records - that the appraiser requires to determine the property's fair market value. Typically, an appraisal costs between $400-$700 dollars and is a borrower expense.                                

Most lenders require Private Mortgage Insurance (PMI) when a home buyer makes a down payment of less than 20% of the home's purchase price - or the mortgage's loan-to-value (LTV) ratio is in excess of 80% (the lesser of the purchase price or the appraised value). There are two types of mortgage insurance: PMI for conventional loans and MIP for government loans. Mortgage insurance insures the mortgage for the lender in the event that the borrower defaults. While MIP has fixed insurance rates, the cost of PMI depends on the borrower's financial background like their credit score, income and the LTV on the mortgage. 

MIP is paid in the form of an up-front fee (usually rolled into the loan) and a monthly fee while PMI is typically paid on a monthly basis. 

While MIP remains in place for the duration of the loan, PMI can be cancelled once the home accrues equity of 20% or when the principal reaches 78% of the original loan amount.  

There is a way to avoid PMI, secure a 80-10-10 loan. It's called 80-10-10 because a bank, mortgage broker, or other institutional lender provides a traditional 80% first mortgage, you get a 10% second mortgage, and make a cash down payment equal to 10% of the home’s purchase price. By using this method, you are no longer obligated to take out PMI on your property.

The same principle applies if you can only afford to make a 5% down, 80-15-5 financing is also available. However, because a smaller cash down payment increases the lender’s risk of default, do not be surprised when you are asked to pay higher loan fees and a higher mortgage interest rate for 80-15-5 than you pay for 80-10-10.

A closing is the final performance of all of the agreements you made with the seller and your lender for the purchase and financing of your new home. Closing involves the simultaneous exchange of documents and funds required to complete the transaction. You pay the purchase price to the seller with a combination of your down payment and the proceeds of your loan. In exchange, the seller gives you a deed and other transfer documents, and clear title to the propety.  

Before closing you will receive a document called the Closing Disclosure. This document has to be delivered at least 3 days prior to your closing date and will outline the terms of your loan and final closing costs. This ensures that there will be no surprises at the closing table.

Usually within 24 hours prior to closing, the buyer(s) should do a final walk-through of the property. The reason for the walk-thru is to verify that all agreed-upon repairs were made, items agreed to remain with the house are there such as drapes, lighting fixtures etc., the seller has vacated the property and that the house in in the order you expected. In Texas, ability of the buyer to conduct the walk-thru is contained in the purchase contract. If there are any problems, you can ask to delay the closing or request that the seller deposit money into an escrow account. You'll also want to make arrangements to transfer the utilities in your name effective the day of closing. 

At closing, the ownership of the property is officially transferred from the seller to you. This may involve you, the seller, real estate agents, your attorney, the lender’s attorney, title or escrow firm representatives and other staff. You can have an attorney represent you if you can't attend the closing meeting, i.e., if you’re out-of-state. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer, or any escrow accounts needing to be set up.

Most of the paperwork for closing or settlement is done by either a law firm hired by the lender or the title company. Most of the documents are standard for Texas and you are strongly advised to consult a real estate attorney.