Jumbo Mortgage Loans
Mortgage loans that are considered jumbo loans are those that exceed the limits that have been set by the government sponsored agencies, Fannie Mae and Freddie Mac. The Housing and Economic Recovery Act of 2008 changed Fannie Mae’s charter to expand the definition of a conforming mortgage loan. According to provisions of the Housing and Economic Recovery Act of 2008 (HERA), the national loan limit for mortgage loans to be securitized or purchased by the government agencies of FNMA and FHLMC is set based on changes in average home prices over the previous year, but cannot decline from year to year.
Fannie Mae and Freddie Mac each year set the limit on what constitutes a conforming loan, based on the October-to-October changes in mean home price following the terms set by The Federal Housing Finance Agency (FHFA). The Federal Housing Finance Agency (FHFA) has announced that the conforming loan limit will remain $417,000 for 2009 for most areas in the U.S. but specified higher limits in certain cities and counties. The conforming loan limit is the maximum size of loans that Fannie Mae and Freddie Mac can purchase in 2009. The high cost areas are determined by the Federal Housing Finance Agency.
Every year the limit is reset to a new number in the month of January, while the numbers are constantly changing on a yearly basis, one of the most recent updates disclosed that the maximum loan amount is $417,000 for condominiums and single-family homes. Once your loan has exceeded this pre-set limit, you are no longer applying for a standard loan or conforming loan, but rather, you have moved into the jumbo loan category. The 2009 general conforming mortgage loan limits are identical to the 2006, 2007, and 2008 conforming mortgage loan limits.
The reason why some people need a larger home loan does not always mean they are seeking out the biggest and most expensive houses to live in. There are some parts of the country where starter homes can cost more than $500,000. The person who would choose to purchase these more expensive homes may find that a standard, conforming loan will not be sufficient. The mortgage loan often needed to buy these higher priced homes is called a jumbo loan. Jumbo loan applications have risen measurable in recent years due to the rapid increase in housing prices.
Typically there is a slightly higher mortgage rate associated with jumbo loans. Sometimes the definition of higher mortgage rate can be staggering; anywhere from a mortgage rate that is ¼% higher to 1% higher than conforming sized home loans. This is because both Fannie Mae and Freddie Mac only buy mortgage loans that are conforming loan size, to repackage into the secondary market, making the demand for a non-conforming loans or jumbo loans much less. Since these mortgage loans are not securitized by Fannie Mae or Freddie Mac, the less liquid market for jumbo loans leads to a somewhat less uniform set of standards.
Jumbo mortgage loans have many of the same options and attributes that are available on conforming loans. They will however, all have some restrictions. The variety of home loan types is not usually as vast with jumbo mortgage loans but you will certainly find 30 year fixed rate jumbo loans, 15 year fixed rate jumbo loans, adjustable rate jumbo mortgages, and a host of hybrid mortgage loan types. All of these jumbo loan programs will feature slightly higher mortgage rates than if they were compared to national averages. The higher mortgage rates apply to both purchase transactions as well as refinances.
The qualifying requirements for jumbo home loans will also be more stringent. Required credit scores will be higher. Down payment requirements will more restrictive leading to larger down payments and lower loan to values. Financial reserves or funds that are available after the mortgage loan closing costs and down payment will need to be more substantial.
This not to say that jumbo home loans will have extremely high interest rates or a thicket of qualification requirements. It is simply that jumbo home loans have discernibly higher requirements and theta a jumbo home loan borrower should be prepared that in order to borrow much more than the standard mortgage loan borrower they will have a somewhat higher burden during the mortgage underwriting process.
When shopping and comparing jumbo loans, a prospective borrower will want to research and compare as many mortgage lenders as possible and be sure to ask about the jumbo loan mortgage rates to avoid obtaining inaccurate information. There is no point in searching for the mortgage rate and qualifying requirements on a 30 year fixed rate loan only to find out that the information you receive is for a conforming loan amount.
While these mortgage rates on jumbo loans are higher than others, once you look at all of the payment options and how this interest is distributed throughout the life of the loan, you will be able to find the home loan that fits your financial situation best. Just because you have to use a jumbo loan doesn’t mean that you have to pay a jumbo monthly mortgage payment.
Draw on the mortgage calculator to help calculate the monthly payments differences between the varying jumbo loan terms as well as the rate difference between a conforming loan and a jumbo loan to thoroughly evaluate all options. A good source for mortgage calculators can be found at www.selectcalculators.com.
Getting a Mortgage for Home Improvements
If you are sitting in your home pondering a major expansion in the kitchen, finishing the basement, or completing key repairs of the home, a new mortgage is one potential source of funding for such a project. Of course, there are many sources of funding for these undertakings. Cash on hand, credit cards, or even personal loans can be used to help pay for work on your property.
The key advantage of mortgage funds is that the rate you pay on a mortgage is almost always the lowest rate for consumer borrowing. In addition, the interest paid on mortgage debt is generally tax deductible (seek the advice of your financial planner or tax advisor). Furthermore, if a borrower is to take a mortgage to extract equity or cash out of the property, one of the best uses for this cash is improvements that help increase or secure the value of that property.
The three main choices for getting cash out of your property for home improvements are: a cash out refinance, a second mortgage ( including a home equity loan and a home equity line of credit ) and specialty mortgages such as the FHA sponsored 203K loan and FNMA and FHLMC home loans that are periodically introduced to assist with home improvement financing. Since the 203K loans are a seldom used product and specialty loans come in and out of favor, these home loan types will not be covered.
Before discussing the various home loan options it is important how a mortgage lender determines the equity in your home. The equity in your home is the difference between the value or price of the house and the amount of mortgage loans you owe against it. A house that is valued at $200,000.00 with an existing first mortgage balance of $145,000.00 has $55,000.00 in available equity. Though this may seem like a fair amount of equity, a mortgage lender will provide a new home loan for only a percentage of the homes total value not all of the value. If a homeowner in this scenario were to obtain a cash out refinance for 85% loan to value, the amount of money obtained would be approximately $25,000.00. This is calculated by taking 85% of the home’s value or $170,000.00 and then subtracting the existing first mortgage balance to arrive at a lendable equity figure of $25,000.00.
Mortgage refinances are one of the most common methods for obtaining cash for home improvements. Refinance transactions are often 50% or more of all the loans originated across the nation every week with a great deal of variation depending on the level of mortgage rates. A measurable percentage of these refinance transactions are to extract cash from the property. This cash is used for an assortment of purposes; most mortgage lenders will tell you almost legal purpose is acceptable for a cash out refinance.
Fannie Mae and Freddie Mac do not establish rules on the home improvements a borrower may or may not finance with a new mortgage loan. Therefore an existing homeowner can obtain a cash out refinance to finish the basement, do repairs or add a new room to the structure. There are no limitations on the minimum amount or maximum amount of financing that needs to be spent on repairs. If a borrower obtains a cash out refinance to pay for home improvements the main consideration of the mortgage lender is the condition the property is in as well as what the funds will be used for.
Standard conventional home loans are made based on the existing condition of the property. This approach results in a standard new home loan qualifying based on the as is value of the property not the as-completed value. Deferred maintenance is the term mortgage lenders use to describe a property that is in disrepair. Minor deferred maintenance does not often raise any red flags. Significant deferred maintenance will usually have to be addressed by the appraiser when they inspect your property. The appraiser will generally attribute a dollar value to the amount of deferred maintenance.
If a property is presently in disrepair the mortgage lender will not a grant a conventional loan. If the property is going to have a significant structural change the mortgage lender may also be concerned about approving the home loan. Questions may arise as to who is performing the work as well as how and when it will be completed. Oddly, even though the mortgage lender based the decision on the home loan on the existing property condition and value if a new mortgage loan is going to impact the lenders collateral significantly, they will want to make sure precautions are taken such as a licensed contractor is performing the work. The improvements should be performed by contractors who are licensed, registered, or certified or have the highest level of certification required.
Other than the limitations on the loan to value for a cash out refinance the structural changes that may be performed, a mortgage refinance is straight forward and the guidelines are the same as they are for a purchase regarding credit, income and debt ratios.
Home equity loans and second mortgages are also an option and are considered interchangeable terms. These loans are mortgages you get after you already have a mortgage loan on your property. There two distinct different types of home equity loans or second mortgages, the home equity line of credit and the home equity loan.
The home equity loan is generally a fixed rate loan that taken out for a predetermined amount and is disbursed to you at one time. The home equity line of credit is also a predetermined sum of money but instead of getting the money all at once you are given a checkbook to access the available balance of the loan. Most all home equity lines of credit are based on a variable or adjustable rate.
These loans will have similar qualifying standards as first mortgages. The borrower’s income, debt ratios, credit and the amount of the loan relative to the property value or loan to value will be evaluated. When measuring the loan to value for a home equity loan the mortgage lender will add the first mortgage amount plus the propose second mortgage amount and divide that figure by the home’s value to come with a ratio called the CLTV or combined loan to value. If a homeowner has a home valued at $200,000.00 with a first mortgage of $125,000 and requests a home equity loan of $30,000.00 the original loan to value is 63% and the combined loan to value will add the home equity loan and would be 78%.
One of the main disadvantages of home equity loan is the mortgage rate on these home loan products is higher than the mortgage rates found on first mortgages. A second mortgage home loan is considered to be a more risky loan for a mortgage lender or bank. The mortgage lender charges a higher mortgage rate over a home loan that is in first position.
Aside from acquiring the loan you may need, make sure you pay attention to the increased expenses of home remodeling. Get at least three quotes and stay within a budget. Taking cash out of your property for home improvements is generally one of the best uses of the equity, often the cost of home improvements do increase the value of your home on a dollar for dollar basis.
There is an ample supply of mortgage lenders that will offer home improvement loans available. It is up to the homeowner to decide which one is the most suitable for their needs and budget. The first step should be to find out as much as possible about potential mortgage refinancing, home equity loans and the mortgage lenders. Utilize the mortgage calculators to help determine debt ratios, loan to values and monthly mortgage payments. Closely consider important factors such as mortgage rates, and closing costs. Shop and compare home loans carefully before making a long term commitment.
Q. How do I find the best mortgage lender?
A. The most important step in the process of finding the right mortgage lender is to do plenty of research. Unfortunately, most consumers will spend more time shopping and comparing the price of a new television set than they do shopping for a mortgage lender.
When shopping for the best mortgage lender is not only important to shop around and compare mortgage rates and costs, it is equally important to investigate the mortgage lender and their services. It’s important that you find a mortgage lender who will work with you to meet your needs and who you feel comfortable with and gives you a feeling of trust. This will entail comparing rates, services and competence.
It’s not that difficult to choose a good mortgage lender, but you do have to be informed and know what you are looking for in a mortgage lender. In order to shop and compare mortgage lenders, you need to fully understand what you are searching for not what they are selling. In order to understand the product, a prospective home loan borrower has to learn about the mortgage loans available, the average mortgage rates, the costs and the terminology involved in the mortgage loan process. With the knowledge of how the mortgage loan decision making process works, a mortgage shopper can better compare mortgage lenders and question the services and products offered.
Above everything else, do your homework before the application process begins. To find the right mortgage lender a consumer will have to question the mortgage lender and loan officer and this will be difficult to do without some understanding of how a mortgage loan is originated, processes and closed.
Once you, as the potential home loan borrower, understand the mortgage loan types and the process involved, its time to quiz the mortgage lender and mortgage loan officers. The first thing to find out is how knowledgeable the mortgage loan officer is about the home loan options and equally important, how well they explain the process and any potential pitfalls to a smooth home loan closing. The mortgage lender or mortgage loan officer should explain the mortgage rate lock process, the mortgage payments, the loan term, when and if you can refinance again and more.
Which mortgage lender has the best mortgage rate will certainly be a consideration. Of course, it is important to discuss mortgage rates and closing costs. This is a big ticket item and the mortgage rate can have a significant impact on the total costs of the loan. Comparing mortgage rates fortunately is fairly straight forward process.
Go online and check the prevailing mortgage rates in your area for the home loan product you are most interested in. Use these mortgage rates as a starting point to compare the mortgage rates of lenders you call and measure how competitive their mortgage rates really are. Don’t choose a mortgage lender based on mortgage rate alone. Make sure the mortgage lender is competitive with their mortgage rates but be sure to investigate the costs and service as well.
Comparing closing costs can sometimes get fishier. Some mortgage loan officers remain intentionally vague about the total closing costs. Other mortgage lenders employ loan officers that just don’t know that much about what they sell. In these cases it may be wise to move on. A representative of any mortgage lender should be able to explain the mortgage costs with great detail. That means they should explain any origination points, the costs of the appraisal, the title insurance costs, the cost for processing, the credit report, the tax service fee and any other fees the mortgage lender will be charging.
Not only should a good mortgage lender explain these costs, they should be able to explain what they are and why you are being charged the corresponding fee. Once you have chosen your mortgage lender and submitted a home loan application, get a Good Faith Estimate in writing itemizing approximate mortgage costs and fees. Pay close attention to all the figures on the Good Faith Estimate.
You should know, up front, how the mortgage lender will evaluate your application. Have the mortgage lender explain the mortgage loan process and the how they come to approve your home loan request all the way up to how and when they set up the mortgage loan closing or settlement. When you speak with the mortgage lender they should explain the automated underwriting process, the verification process, the documents needed by you to support the down payment and your income as well as how long this process should takes.
While the mortgage lender briefly explains the process, find out how accessible they will be while your home loan application is being evaluated and underwritten. With all the transactions now taking place on line including mortgage origination’s, a face to face application or consultation is not necessary with a mortgage lender but you should at least be able to contact your loan officer by phone or email regularly. Some customers can be annoying but the job as the mortgage loan officer to help you get a home loan. You want to be assured it will be easy for you to monitor the status of your mortgage loan application and be able to ask questions along the way.
A final step should be to ask for references. As good mortgage loan officer should be able to immediately provide references of satisfied customer’s even customers that they are presently working with.
In a nutshell, to choose a good mortgage lender you want to research the products they offer and the mortgage rate, the level of service in handling a home loan application from beginning to end and the reputation of the mortgage lender. Mortgage lenders who understand mortgage rates and costs and the whole loan process are most certainly going to be a very knowledgeable and resourceful mortgage loan officer who has not merely a salesman. Be sure to choose a company that gives helpful advice and that makes you feel comfortable.
Q. What is Private Mortgage Insurance and why do I need It?
A. PMI is an acronym for private mortgage insurance also referred to as simply mortgage insurance. PMI is a type of insurance that covers the lender on the event you default on the loan. It is generally required on loans that have high LTV’s or low down payments. Mortgage lenders will normally require private mortgage insurance on home loans that have a loan to value greater than 80%. The loan to value or LTV is measured by taking the loan amount divided by the property value or for a purchase it can also be measured by taking 100% minus the percentage of the down payment. For example a home loan purchase with 10% down payment has a loan to value of 90% or a home loan that is for $75,000.00 on a home that is appraised at $100,000.00 has a 75% loan to value.
The private mortgage insurance covers the mortgage lender but will have top be paid by the home loan borrower as part of their monthly mortgage payment. Private mortgage insurance was established to help home buyers that had less than 20% for down payment. The insurance company absorbs a portion of mortgage lenders losses in the case of default and foreclosure for those home loans with private mortgage insurance that have less than 20% down. Without the added insurance, the mortgage lender would not make the home loan unless the down payment was at 20% or greater.
The private mortgage insurance cost is a reflection of the mortgage loan amount, the type of mortgage loan and the loan to value. The higher the loan amount is relative to the home’s value or the LTV, the greater the private mortgage insurance cost will be. This may seem fairly obvious, the less equity in the home the more the risk to the mortgage lender and therefore the higher the insurance costs.
Higher private mortgage insurance costs due to larger loan amounts is not necessarily a measure of risk but simply a higher cost since private mortgage insurance is priced as a percentage of the mortgage loan amount.
The mortgage loan type can change the private mortgage insurance costs since some home loans have a slightly higher risk of default. The best example for this is adjustable rate mortgages. A higher loan to value, low down payment, adjustable rate mortgage is more risky than a 30 year fixed rate mortgage loan and therefore has a higher private mortgage insurance cost.
Two avoid private mortgage insurance you have to have a 20% equity in the property. Either 20% or more for a down payment on a purchase or for a refinance, the loan to value can not exceed 80%. Stated another way, the new home loan can not exceed 80% of the property value for either an existing mortgage refinance or home purchase.
Some mortgage lenders allow customers to put down less than 20% to avoid PMI by taking two mortgage loans. This is accomplished by obtaining a first mortgage for 80% of the property’s value and a second mortgage loan for 10% of the property’s value. This is commonly referred to as 80-10-10 loan since the first mortgage is for 80% loan to value, the second represents 10% loan to value and the third 10 represents 10% down payment from the borrower. At one point mortgage lenders also allowed 80/20’s in which the borrower obtained two mortgage loans that together were 100% of the value of the home. The 80/20 is pretty much extinct and the 80-10-10 is very difficult to find.
Mortgage insurance is usually set up as addition to the monthly mortgage payment. A standard monthly mortgage payment includes principal and interest as well as taxes and insurance. The insurance usually refers to the homeowners insurance. A loan with private mortgage insurance will have added insurance charge for the private mortgage insurance costs. A change in private mortgage pricing in the past five years set up to alleviate the tax differences between the tax deductible costs of private mortgage insurance and the interest on second mortgages is something called lender paid PMI.
In these situations the mortgage lender covers the cost of the private mortgage insurance and there is no added costs at the home loan closing or added to the monthly mortgage payment. However, the mortgage lender absorbs this added cost by raising the mortgage rate on the home loan to compensate their costs for the private mortgage insurance. This increase in the mortgage rate to cover additional costs is the same technique used in no point / no closing costs mortgage loans in which the mortgage lender raises the mortgage rate to absorb the mortgage loans’ closing costs.
Q. Should I pay points to get a lower mortgage rate?
A. Paying points may or may not be your best option, depending on what your objective is. Mortgage points, whether they are called discount points or origination points, should make the interest rate on the home loan lower. Generally speaking, the more mortgage points that a loan has, the lower its interest rate should be. Alternatively, you can lower the points paid at closing by accepting a higher mortgage rate.
Most mortgage lenders usually will offer mortgage loans with points and without points. Even when a mortgage lender markets a mortgage rate with points, call the lender and see what the mortgage rate would be without points, sometimes mortgage lenders will not market all their mortgage rate and point options.
Now, some home loans have points attached or charged as a customary method of offering the home loan. FHA loan are the most common example. Most FHA mortgage rates are priced with one point origination fee. It doesn’t mean it is necessary, it’s just customary.
The amount of points you want to or ought to pay, should include evaluating how much cash you have available and the length of time you expect to hold the mortgage. Once you shop and compare mortgage rates and are confident you have the necessary funds to cover the costs of additional points to obtain a desirable and competitive mortgage rate you should compare mortgage rates with points and without. After comparing the mortgage rate difference and the cost differences, the only way that it will be cost effective to take the home loan with points is if you hold the loan long enough to recover the added costs of the points.
As an example, today Bank of America offers a 30 year fixed rate mortgage for a purchase in Illinois with a rate of 5.250% and 1.375 points. The bank also offers a no point option with a mortgage rate of 5.625%. The monthly mortgage payment with points for a $280,000.00 home loan will be $1,546.17. The home loan monthly mortgage payment with zero points is $1,611.84 or a difference of $65.67 per month. Since the cost difference between the two loans is the dollar value of 1.375 points or $3,850.00, the amount of time it takes to cover the costs of paying points will be 58.63 months. The additional points will take almost 5 years to recoup. In this case, it is hard to see the value in paying the points.
A final consideration is the future movement of interest rates. When mortgage rates head lower, refinancing activity increases. If in the above example, mortgage rates drop shortly after closing on the home loan it fairly easy to calculate the cost savings with a new mortgage loan at a lower rate. For instance, if mortgage rates fall to 5.125% on a no point loan, the monthly mortgage payment drops by $87.26. If the closing costs are approximately $2,205.00 (actual data extracted from Bank of America’s web site) the refinance will take 25 months to recoup.
The quandary arises when the loan originally accepted has points. Refinancing that loan means the value of the points are flushed away. The borrower will have paid the original closing costs and the points only to have an opportunity to refinance again without recovering the points already paid. Of course, this is only significant should mortgage rates drop low enough to make refinancing a worthwhile transaction. Guessing the direction of interest rate is certainly a task that is above my pay grade and most every mortgage client I have ever had.
Points paid on a home loan for a refinance can be deducted from your taxes as they are amortized or in increments, 1/30th a year for a 30-year mortgage, for example. Mortgage points paid for a home purchase are a tax deductible expense for that year. Consult a tax advisor for individual situations and details.
Q. When should I lock in the mortgage rate?
A. Nobody can predict the direction of interest rates. But historically, mortgage rates have had a tendency to rise faster than they come down. Once you have completed the mortgage loan application with a mortgage lender to buy a home or refinance your existing mortgage, you may want to lean towards locking in your mortgage rate earlier than later. You can always refinance later if mortgage rates drop again. Of course, every situation is different, so it’s important to consider all of your home loan options. Any future drop in interest rates and mortgage rates may not be significant enough to impact your monthly mortgage payment and make it worthwhile to refinance.
Timing mortgage rates is risky business; a sudden and sharp rise in mortgage rates may lead to a much higher monthly mortgage payment or in cases of tight debt ratios, lead to disqualification for the home loan for excessive debt ratio based on the now higher mortgage rates. For those mortgage applicants who want to time rates, make sure to pay attention to the bond markets. Mortgages are traded just like treasury bonds and the prices and rates are available online. 30 year mortgage rates will closely follow the movement in 10 year Treasuries. 10 year Treasury rates are displayed online, in a number of newspapers as well as on TV. It’s the direction of the 10 year Treasury rate that is important not the absolute value, mortgage rates are priced above Treasury rates. These rates will provide an indicator on the general direction of interest rates including mortgage rate but 10 year Treasuries don’t always follow or lead mortgage rates they are simply a very good indicator of how daily mortgage rates will move.
Mortgage Lenders, Banker, Brokers, Oh My
Shopping for a home mortgage can be a daunting task. Not only do you have to shop the dizzying selection of mortgage loan products with varying mortgage rates and costs, but with the plethora of mortgage companies out there now you have to choose the type of mortgage lender too.
Choosing the mortgage lender by the type of organization should not be a challenge. Each lending institution will certainly have its strengths and weaknesses but the type of organization should not generally be a deciding factor for obtaining a home loan. Different mortgage lender will have differences in the variety the home loan offerings and mortgage rates between lenders and between regions where they operate but the differences in loan types is generally quite small.
There are exceptions to choosing a mortgage lender, for instance, if you are looking for a construction loan, not all lending institutions will be competitive for this type of home loan. Prospective home loan borrowers need to shop and compare loan products between mortgage lenders when the home loan request more specialized but this has little to do with the type of mortgage company itself.
The regional differences in products and the availability of home loan types and prices applies to brokers, bankers, credit unions, savings and loans and other licensed institutions that originate residential mortgages.
The term mortgage lender has usually been reserved for the financial institution that provides the actual funds at the home loan closing. However, since mortgages are frequently transferred, bought and sold in such a quick time frame, whether the institution that originates the loan is in fact the mortgage lender has become insignificant and most all mortgage originating companies are referred to as the mortgage lender.
There are hundreds of mortgage lenders and mortgage brokers available that will prequalify and preapprove a mortgage loan for almost any consumer looking to make a new home purchase or refinance an existing home loan. Major categories of mortgage lenders include:
Banks. A bank, commercial bank or savings and loan may have the largest financial backing and some of the strongest regulations in the mortgage lending marketplace. Banks and savings and loans which are also called thrift institutions were historically the largest traditional mortgage lenders of residential home mortgages. Mortgage brokers began taking a large share of mortgage origination’s starting in the 1980’s but the savings and loans and banks remain a major source of funding for home mortgage loans and for the time, appear to be perceived by consumers as being more reliable and responsible with mortgage lending.
Some banks will sell the home loans they originate shortly after funding the mortgage other banks don’t sell their home loans to other companies after closing. These banks collect the mortgage payments, manage the escrow accounts for taxes and insurance and maintain the relationship for the long term, but this process is becoming less frequent with home loans being bought and sold regularly and the servicing of the home loan either being retained by the bank or sold along with the loan. When home loan product began operating like a commodity and were bought and sold with regularity, the banks position in the mortgage lending market place diminished measurably however, the credit contraction has a brought a resurgence in mortgage origination’s being handled by banks.
Mortgage Bankers. Mortgage bankers often sell their mortgages to large mortgage servicers or to Fannie Mae and Freddie Mac, two major government-sponsored enterprises that specialize in buying residential mortgages from lenders. Mortgage bankers borrow money from banks or pools of investors, underwrite the loans, and sell them to investors for a profit. Mortgage bankers often receive a fee from these investors for servicing the mortgage if the mortgage banker retains the servicing for the home loan they originate. Mortgage servicing includes collecting monthly payments, sending out loan statements, and collecting on late payments.
Mortgage Brokers. A mortgage broker represents a wide assortment of products and can price home loans with great deal of flexibility since they often work with many mortgage lenders. Mortgage brokers do not make the mortgage loan but rather facilitate the process of obtaining a mortgage loan. The mortgage broker processes the mortgage loan request and may shop a home loan application among different mortgage lenders to find desirable home loan terms for the borrower. In exchange, the mortgage lender and/or the home loan borrower pays the broker a fee. This, however, does not necessarily mean that the consumer will get the best mortgage rate and home loan program or the loan officer’s best mortgage rate and loan program.
Credit Unions. Credit unions operate similar to banks but are owned by their members. Credit unions may offer very attractive home loan terms, particularly if they evaluate their entire banking relationship with you. Since they are nonprofit institutions, credit unions may offer attractive mortgage loan rates to their members. Like commercial mortgage lenders, credit unions sell their loans to Fannie Mae and Freddie Mac to maintain access to new sources of funds. The National Credit Union Administration (NCUA) regulates the credit union industry.
Mortgage bankers, credit unions, savings and loans and possibly more companies can offer home mortgages. With the rapid movement of mortgage money it may be a mistake to rely on one type of mortgage institution as being best as opposed to which mortgage company is chosen. Deciding which type of mortgage lender is best will rarely make any difference in the home loan process. Deciding on the mortgage lender or the originator is the important choice. The variability between mortgage companies in any one category of mortgage lender is so small as to make choosing a mortgage company by the type of organization a difficult task.
It is more important to choose a good loan officer and a reputable firm regardless of the organizational structure. Measuring a good mortgage lender or originating company may be a difficult task. During cautious times, more consumers rely on the regulation and size of the banking industry as the number choice for a mortgage loan. The structure of the mortgage lender is not what makes the home loan right but the ability to have ample resources to call upon and a known regulatory body in which to voice a complaint reassures many consumers that applying for a new home loan at a bank is the right choice. Many mortgage lenders have gone out of business, have been sold, or have stopped making certain kinds of loans, leaving their customers stranded and further reinforcing the apparent advantage held by banks.
Given this conclusion it is still essential to compare the mortgage lenders services and history since the services of that branch or that office is what makes the home loan right for any individual consumer.
Once it has been determined that a bank, mortgage lender or mortgage broker is offering the right home loan product at a favorable mortgage rate and overall cost, measuring quality can be difficult attribute to measure until the home loan process is complete. Quality can generally be regarded as prompt, efficient service from the mortgage rate quotes to question and answer sessions regarding the loan applicants’ needs to a trouble free home loan closing. Measuring the quality of those services in advance may be a challenge.
Along with shopping the source for the home loan, a potential home loan borrower will have to shop the total cost of the home loan including the mortgage rate, fees, points prepayment penalties the loan term and a host of other items.
A good starting point to choosing the right mortgage lender is to perform ample research on the home loan program and shop for the mortgage lender over the phone with sufficient knowledge on the types of home loans and how they are processed. Be sure to call more than one mortgage lender and use the online mortgage calculators to help compare mortgage rates and costs. Compare the services by measuring knowledge of the home loan programs, the questions they have for you and ask for references. Be an astute shopper and compare the mortgage loans, the mortgage rates, the closing costs and test the resources and knowledge of those mortgage lenders who are ultimately paid to help you obtain your mortgage loan.
Appraisals for Home Loans
For most all home loans an appraisal is required part of the approval and final underwriting process. An appraisal is a document that gives an estimate of a property’s fair market value. The appraisal is a compilation of data pertaining to the property on sales, physical condition, amenities and cost. After a complete analysis of the data gathered an opinion of value is determined. An appraisal is generally required by a mortgage lender before the mortgage loan approval to ensure that the mortgage loan amount relative to the property value is within the appropriate guidelines for the loan requested. The appraisal is performed by an appraiser who is typically a state-licensed individual trained to render expert opinions concerning property values. Although, the home loan borrower pays for the appraisal, the appraisal will be ordered and delivered to the mortgage lender.
An appraisal on a property for either a purchase or refinance is as important as the borrower’s credit history or debt ratio in obtaining the mortgage loan. The appraisal will be an important factor in determining how much of a mortgage loan a bank or mortgage lender will approve. At times when home prices are down it is common to find an appraised home value that does not support the mortgage loan amount and the home loan is subsequently never approved.
Though there is a significant amount of work to be done to perform the appraisal, the appraisal is still an opinion of value or the act or process of estimating the value. The appraiser does not create value; the appraiser interprets the market to arrive at a value estimate of the home. This opinion or estimate is derived by using three common approaches, all derived from available market data.
Appraisers use these three approaches when establishing the value of a given property:
1. Cost Approach: The cost approach to determining value is to estimate what it would cost to replace or reproduce the improvements as of the date of the appraisal. In this approach the following formula is used to arrive at the property value: Value of the land (vacant), added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
2. Sales Comparison Approach: In the comparison approach to determining value the appraiser identifies comparable properties in the neighborhood of similar size, quality and location, which have recently been sold. Ideally, the properties are close in vicinity (within a 1/2 mile radius of the subject property) and have sold within the last six months. The appraiser then compares the sold properties to the subject property. The factors used in the comparison include square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
3. Income Approach: The income approach to determining value evaluates the potential net income of the property is capitalized to arrive at a property value. This approach is of primary importance to income producing properties and is usually used in conjunction with other valuation methods. For single-family residential mortgages it is given little weight. The process of converting a future income stream into a present value is known as capitalization.
After thorough exercise of the three approaches, a final estimate or opinion of value is established. When evaluating single-family, owner-occupied properties, an appraiser most heavily weights the sales comparison approach. The final appraisal report is often very detailed. Material in the final report will include: legal description, tax information and zoning requirements, a description of the lot dimensions and size, neighborhood improvements and amenities, a thorough home description with size, style, quality of condition, room types and features.
If the mortgage company orders the appraisal in conjunction with your home loan request, the appraiser is responsible only to the mortgage lender. Through federal law you are entitled to a copy of your appraisal. In order to get a copy, you have to request it.
The 40 Year Mortgage
In the past several years the mortgage market has seen a slew of new home loan products come and go. One mortgage loan product that was first lobbed into the fray by sub prime lenders was a 40-year term mortgage. Now that sub prime is tapering off, this term is being used on mainstream loan products. The advantage of the 40-year term mortgage is to make the monthly payments smaller and housing more affordable. While 40-year mortgages increase affordability by reducing the mortgage payment, the reduction is very modest.
Undeniably, the monthly mortgage payment on a 40 year term loan versus that of a 30 year term will be lower and subsequently allow some borrowers who would not normally qualify for a home loan be able to afford one. However, the effect of extending the term of a mortgage payment is smaller the longer the initial term is set at. This means that a change from 20-year term to a 30-year term can have a sizeable percentage change in the monthly mortgage payment. The change from a 30-year term to a 40-year term is not nearly the equivalent drop in relative payment amounts. For example, a 20-year mortgage for $250,000.00 at 6.0% has a principal and interest payment of $1791.08. If this same mortgage loan is placed on a 30 year term the payment drops to $1498.88 or 16%. This same mortgage loan amortized on a 40 year term would have a payment of $1375.53, a reduction $123.35 or only 8%.
Furthermore, the total payments on a 30-year term mortgage for $250,000.00 at 6% would be $535,595.47. The added 10 years on the same home loan amortized over 40 years yields a total payback of $660,256.37. The additional monthly payments add $120,660.90 in total charges for just a 6% reduction in the monthly mortgage payment.
Lastly, we have to factor in different interest mortgage rates. As a rule, mortgage loans do not last more than three to five years. Homeowners generally refinance or sell their homes long before their home loan term is due. Even though the average home loan does not last anywhere near their original terms, mortgage lenders will charge a higher mortgage rate for the longer term home loans. Fifteen-year term mortgages are usually about 1/4% lower in rate than a comparable 30-year tem mortgage. The extension to 40 year leads to roughly the same increase of about a 1/4 % from a comparable 30-year term. Having already calculated that the value of the 40-year term is fairly small, what limited monthly savings did exist is partially eroded with the higher mortgage rate.
The 40-year mortgage has a practical purpose of allowing a small segment of borrowers the ability to afford a larger home loan. The disadvantage of significantly larger repayment and a slow down in equity build up, almost completely erases the benefit this mortgage loan would have for most all borrowers. Before choosing the term on a home loan, whether it is for 15, 30 or 40 year term, home loan applicants should carefully review their budget and check the monthly payment on different mortgage loan terms with the appropriate mortgage rate. The mortgage calculator is a helpful tool for quickly comparing the different costs, the different monthly mortgage payments, the mortgage rates and the total costs over the expected life of the home loan.
Mortgage Loan Refinance Break Even Analysis
Mortgage refinancing is a measurable sector of in mortgage lending. Mortgage refinancing is normally comprises at least 50% of all mortgage loan applications. When you refinance your existing home loan there are many factors to consider in choosing the optimal term, loan amount, and mortgage rate. The best way to measure the costs and benefits from refinancing is to compare all the costs of the existing mortgage and the new mortgage over a future period of time. The decision to refinance should only be made if the long term savings outweigh the initial expenses. One such tool to help make this cost and benefit decision for home loan refinance is a measurement called the break even period.
The break even period is the number of months it takes before the savings from the lower rate of a refinance covers the costs of the new mortgage refinance. In order to find your break even point, you will need to first determine the amount of time it would take for you to cover the amount of money you spend on closing costs. An example of this would be if you spent $2400.00 on closing costs for a new home loan to reduce the monthly mortgage payment by $115, it would take just under 21 months in order to cover the costs of the refinance or reach the break even point. As long you intend to hold the new home loan for a period beyond the break-even point, the new mortgage loan pays for itself.
There are several types of refinancing options available. If you already have an existing mortgage, simply replacing it with a new first mortgage at a lower mortgage rate may be an option for you but many borrowers are adding additional funds to the refinance or doing a cash out refinance to pay off other debt. Measuring the break even point is more difficult in these cases since the debt being paid off with the cash out transaction generally has much lower term left on it.
When existing homeowners are refinancing more debts into the refinance home loan transaction, extra care should be taken to make sure they are receiving a beneficial mortgage with the appropriate mortgage rate and term that matches the debt being paid off. In these situations it is wise to measure the cost of the home loan and review the savings on the debt you are paying off. The break even point on this debt should be measured over a similar time frame or term. Therefore, don’t just add $15,000.00 in credit card debt pay offs to your cash out refinance and calculate how much you are saving over a 30 year mortgage. The calculation on the savings should be performed as if you were to pay this portion off in a much shorter period that would be comparable to the amount of time it would take to pay off the debt the way it is structured now.
Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you. In order to get the best possible refinancing deal, you’ll need to shop around and conduct a detailed cost comparison to see which mortgage offers the greatest financial return.
But what really matters is how long it will take you to break-even on the transaction and whether you plan to stay in your home that long. In other words, make sure you understand, and are comfortable, with the amount of time it will take for your overall savings to compensate for the cost of the refinancing. Use the mortgage calculators to help with the evaluation on process on the home loan closing costs, mortgage payments as well as the break even time period.
Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you. And of course, it is always important to evaluate the mortgage rates and mortgage loan programs that are available. A mortgage refinance is all about the numbers, shop and compare to find the best mortgage that fits your needs.
Mortgage Loans and Loan to Value
LTV, or loan to value, is only one of the factors mortgage lenders use to evaluate or underwrite a home loan. LTV is expressed as a percentage or ratio. The ratio is calculated by dividing the mortgage loan amount by the value of the property. An example of this ratio is if someone was obtaining a $200,000 mortgage loan for a property that is valued at $400,000, the LTV of this transaction is 50%. Mortgage lenders use the loan to value ratio as a significant measure of risk in making a mortgage loan decisions.
The LTV is a very important consideration for the mortgage lender and the mortgage applicant for several different reasons and its risk measure will change with the home loan type and request. As a simple tool to measure risk, the higher the loan to value on a home loan, the riskier the home loan is perceived to be. Loan to value is essentially measuring the amount of equity in a property. This equity is a result of either the down payment amount, a larger down payment would equal more equity, or a reduced balance on a existing mortgage loan for a refinance request or an increase in property value.
Loan to values therefore measure the amount of equity in a property. The greater the equity, whether it be with a large down payment or appreciation when you already own the property, the more committed to the property a borrower generally will be and the larger the cushion there is to absorb losses by the mortgage lender should a borrower default on their home loan. Not only our borrowers more committed when there is more equity in the property, but the lenders loan balance has a greater level of protection should a borrower default. Certainly, 100% loan to value home loan transactions are defaulting at a higher rate than lower loan to value home loan transactions are.
If you are applying for a mortgage to purchase a home, the loan to value is measure of how much money has to be placed as a down payment to buy the property. In order for the mortgage lender to determine the value aspect of the loan to value ratio they will look at the lower of the purchase price, or appraised value of a home, when you are purchasing a new house. If the home appraises for an amount greater than the purchase price, this may make the transaction more desirable for you the borrower, but the mortgage lender will now use the lower sales price figure to determine the mortgage loan underwriting evaluation. Because of this, the mortgage lender will not have to worry about lending more money than the actual property is worth or lending more than you would be willing to purchase the property for or got caught in an over inflated purchase transaction.
The importance of the amount down payment for the borrower can’t be disregarded either. An important item to remember, when a property is purchased, the total down payment you make will have to come from your source of money, borrowed funds are unacceptable. If your down payment is less than 20%, you will need private mortgage insurance (PMI). This is insurance you pay to protect the mortgage lender if you don’t repay your home loan in full. With mortgage insurance coverage an extra premium or fee is included within your monthly mortgage payments. The type of home loan you receive, the insurance company as well as the home’s LTV determines the exact premium amount for the private mortgage insurance. Higher loan to value loans or home loans with smaller down payments will have a higher mortgage insurance payment, adjustable rate mortgages will also have a larger mortgage insurance cost.
When an existing home owner is refinancing their home, the appraised value is what will be used to find the value part of the loan to value equation. The biggest component in calculating your home’s appraisal value is by analyzing past sales of comparable homes that are within one mile of your property and were sold within the past year. Houses for sales or listings do not count towards this amount because they are not finalized sales and their prices can either rise or drop.
Mortgage refinances fall into two categories, cash out refinances and rate and term refinances. A cash out mortgage refinance is when you take out funds with the new home loan for anything other than paying off the existing mortgage and closing costs. A rate and term refinance is for paying off just the mortgages and closing costs. In these cases, the new home loan is changing either with a new mortgage rate or a new loan term. When you have to combine a first and second mortgages within a mortgage refinance transaction, you will want to remember than the second mortgage loan needs to have been open for at least twelve months. If your second loan is not “seasoned” long enough, the mortgage lender will consider the consolidation of the two mortgages as cash out refinance loan, thus you are subject to all LTV guidelines and their associated mortgage rate adjustments.
With all mortgage refinance transaction, you will find that the ratio used with the loan amount to appraised value is will be a big determinant of the home loan approval. This is especially true if the borrower wishes to cash out within the transaction. The typical rule for cash out transaction is a maximum amount of 90% of the appraised value for the entire loan amount, which also includes any cash out. And a 90% cash out refinance is the absolute high end of the approval range, meaning the mortgage lender considers this loan the riskiest loan is less likely to approve such a request.
When your LTV is over 75%, you will usually experience a minimum .125%, or 1/8th of a point, increase within the mortgage rate for every 5% in the LTV. An example of this would be when a person takes 85% cash out mortgage loan; their mortgage rate would generally be .25%, or 1/4th of a point, higher than with a 75% cash out mortgage with established mortgage rates. The main reason for the mortgage rate increase is the increased risk factor on the home loan, there is now less equity in the property.
If you require more than 90% cash out rate, there are lenders that will supply this to you. However, the mortgage rates are generally significantly higher than standard rates with the exception of FHA loans. FHA loans allow 85% cash out LTVs without a significant impact on the mortgage rate.
The lower the ratio between the loan amount to the appraised value, the loan to value, the more likely a mortgage lender will accept the risk of the home loan. The risk considerations will be different in owner occupant versus non-owner or rental situations. Loan to values will be more significant in cash out transactions versus rate and term refinance loan requests. As you compare mortgage lender costs and qualification requirements you will see how loan to value can play a key role in the final outcome.
Mortgage calculators are a great tool to evaluate the loan to value on a home loan. www.selectcalculators.com offers a wide assortment of mortgage calculators to help determine LTV and evaluate home loan products and mortgage rates.
Mortgage Refinance Numbers and Costs
Mortgage refinancing is a home loan process in which one or more existing mortgage loans are paid off and replaced with a new home loan. Shopping around for the right home loan has never been more important to assure a mortgage refinance candidate will get the best financing deal.
The requirements for a refinance have become much more restrictive in 2009. A homeowner’s eligibility for refinancing will still be similar to the mortgage loan underwriting and approval process that an applicant went through when they first obtained the mortgage they are now trying to refinance. A mortgage lender will review and evaluate the borrower’s income and assets, their credit history and credit score, outstanding debts, the appraised value of the property, and the mortgage loan amount requested. Unfortunately, the guidelines to approve these home loans are more stringent regarding the parameters such as credit scores, income, assets and property value. In addition, mortgage costs are running higher.
This makes comparing mortgage loan products, mortgage rates and mortgage loan costs that much more important. Shopping, comparing, and negotiating may save you thousands of dollars. The first step is to begin by getting copy of your credit reports to make sure the information in the report is accurate. Credit report errors or discrepancies are a sure fire way to put a real wrench in the mortgage refinance process. Make sure to correct any mistakes and evaluate how good your current credit profile is.
In order to help evaluate whether a home loan is a good deal or not is worthwhile to have an idea on what to expect for closing costs and refinancing costs. Refinancing fees will vary from mortgage lender to mortgage lender and there will be different costs in different states.
Mortgage lenders are required by federal law to provide a good faith estimate of closing costs within three business days of receiving a mortgage loan application whether it is for a home purchase or refinance. The good faith estimate will provide a detailed approximation of all costs involved in the home loan closing. This document can be very helpful when used to compare costs with different mortgage lenders. Once a mortgage loan is approved and a settlement or closing date is set, the borrower should make sure to get copy of the HUD-1 settlement cost form before the home loan closing takes place.
Here is a list of some of the usual costs and fees that charged on the average mortgage refinance:
Application Fee
Some mortgage lenders and banks charge an application fee at the time of the home loan application. This fee can range from $200.00 to $500.00 and covers the initial costs of processing your home loan request and checking your credit report. If the home loan is denied, you will most likely not be refunded the cost for the mortgage loan application fee. Some mortgage lenders will credit the cost to the closing once the mortgage loan is signed.
Points and Loan Origination Fees
A point is equal to 1 percent of the amount of your mortgage loan. There are two kinds of points you a home loan borrower may pay for the home loan. The first is the mortgage loan discount points, a one-time charge paid to reduce the interest rate of the mortgage loan. The second type of mortgage points are charged by some mortgage lenders as origination fees to earn money on the home loan. The number of mortgage points will vary from mortgage lender to mortgage lender. It is important to review the mortgage points and the mortgage rate between mortgage lenders because the number will often not be directly comparable. As an example one mortgage lender may charge one point for a rate of 5.375% while another mortgage lender will charge 1.5 points for a mortgage rate of 5.25%. The general rule is that mortgage points are fees paid to the mortgage lender or broker for the home loan and are often linked to the interest rate; usually the more points you pay, the lower the rate but this is not always the case. Compare rates and points carefully.
Appraisal Fees
The appraisal fee pays for an appraisal of the home to be performed by an independent licensed appraiser. The appraisal is used to determine the market value of the property, its condition and the overall property market. Some mortgage lenders include the appraisal fee as part of the application fee but many do not. Once the appraisal is completed, you may request a copy of the appraisal and you are legally entitled to that copy even if the home loan is denied. Customary appraisal fees range from $300.00 to $600.00.
Title Search and Title Insurance
A title search and title insurance is used to check and insure the ownership of the property and the existing liens such as other mortgages or judgments on that property. The search fee covers the process of checking these documents and the insurance is to protect the mortgage lender in the event of an error or unknown recorded claim against the property that may very well impact the mortgage lenders security interest or the mortgage loan. If a problem arises, the insurance covers the mortgage lender’s investment in your mortgage. Search fees and insurance vary significantly by state since some state regulates the cost on the title insurance, ranges run from $600.00 to $900.00
Attorney Fees and Closing Fees
The mortgage lender will usually collect the fees paid to the lawyer or title company that conducts the closing for the mortgage lender. Attorney fees on a purchase transaction are a different fee, the attorney fee in a refinance transaction is generally charged in states that require attorneys consummate the home loan transaction otherwise; the title company or other representative handles the mortgage loan closing paperwork. The cost range for these fees is approximately $200.00 to $1,000.00.
Real Estate Taxes and Homeowner’s Insurance Escrow
The mortgage lender will require that the real estate taxes and homeowner’s insurance policy (sometimes referred to as hazard insurance) are paid up to the time of the home loan settlement and that a new escrow is established to disburse future taxes and insurance premiums. The homeowner’s insurance policy protects against physical damage to the house by fire, wind, vandalism, and other causes covered by the policy. The policy insures that the mortgage lender’s investment is still sound even if the home incurs some devastating calamity. The real estate tax escrow insures that the taxes are paid and the property does not become delinquent and subsequently sold for unpaid property or real estate taxes. These charges are technically not closing costs, since they are not charged by the mortgage lender, only collected by the mortgage lender to disburse to the appropriate collecting body. It is difficult to provide a range of costs for the tax and insurance escrow costs since property taxes may range from $1000.00 to $30,000.00.
Private Mortgage Insurance or Mortgage Insurance
These fees may be required on home loans that have less than 20% down payment or over 80% loan to value on a refinance transaction or are insured by federal government housing programs, such as loans insured by the Federal Housing Administration (FHA) or the Rural Development Services (RDS) and loans guaranteed by the Department of Veterans Affairs (VA). If there is not at least 20% equity in the property, mortgage lenders usually require the home owner to have private mortgage insurance to protect the mortgage lender. Insured home loans with private mortgage insurance cover the mortgage lender’s risk that the home owner will not make all the home loan payments. Costs for mortgage insurance have a wide range from 1.75% for FHA loans and 1.25% for VA home loans to .50% on for conventional mortgage loans.
Once you know what each mortgage lender has to offer run the figures the mortgage calculators to see which mortgage loan program and mortgage rates best suits your needs. And don’t forget to negotiate for the best deal that you can. Armed with the right information and a sufficient amount of mortgage comparison shopping, a consumer should be assured they will receive the right home loan with best mortgage rate and lowest costs.
Tips for Avoiding Mortgage Fraud
Mortgage fraud continues to be a major problem for banks, mortgage lenders and consumers. Mortgage fraud is action that is not only investigated by local law enforcement but will be investigated by the Federal Bureau of Investigation as well. In fact, engaging in mortgage fraud can be punishable by up to 30 years in federal prison or $1,000,000 fine, or both. Mortgage fraud scams impact banks and mortgage lenders with loans that default as well the real estate profession, the economy and a significant number of individual homeowners.
Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the FBI recently commented in a press release that, “We will not stand by while real estate professionals and others exploit the financial system for their personal gain. Mortgage fraud – and the foreclosures and boarded up houses that often follow from it – has a real and significant effect on neighborhoods and property values. The FBI is working tirelessly in every part of the country to protect communities and financial institutions from the effects of mortgage fraud.”
For those consumers that are buying a new home, refinancing an existing mortgage, or searching for help to reduce their home loan debt and other debts, they could be a target of mortgage fraud by individuals and mortgage professionals.
Mortgage fraud is defined as a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan. The FBI puts out notices that remind individuals that it is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.
There are two general types of mortgage fraud, fraud used to acquire property and fraud used purely for profit. Mortgage fraud that is used to purchase a home or acquire property usually involves a borrower who is committing fraud on a single home loan transaction. Often, the individual committing fraud is buying the property to occupy it and fully intends to repay the home loan. Though the intentions may not sound bad, the borrower makes misrepresentations about their income or their debts, the value of the home or falsifies data about the down payment. At times mortgage and real estate professionals are involved in assisting the home loan borrower so that they qualify for the mortgage and can purchase or refinance the home.
Fraud that is committed for the motive of turning a profit will involve mortgage or real estate industry professionals. These cases of mortgage fraud generally involve several home loans and can often be for millions of dollars. Mortgage fraud cases with professionals can be much more complex and involve issues as wide spread and complicated as having straw buyers which involves a borrower that assumes the identity of another person, property value that are fraudulently inflated, scam down payments that do not exist or are borrowed and disguised as the borrowers own funds, as well as flagrant misrepresentations including: overstating income, overstating assets, overstating collateral, fictitious employment and other related untrue facts and figures.
Some tips for recognizing and avoiding being part of a mortgage fraud transaction include:
Make sure to read and understand everything you are signing. Speak to another mortgage professional or an attorney if you need something explained. Don’t sign anything you don’t understand at anytime in the purchase, mortgage application or closing process.
Do not sign any home loan documents that contain inaccurate information, such as inflated or inaccurate income, sources of the down payment, incorrect sales price, type and length of your employment, your intent to occupy the property as your primary residence, existing debts, etc.
Don’t sign any mortgage loan documents with information left blank. Blank spaces can be filled in later by other parties to the transaction yet still has your original signature.
Know and understand the terms of the home mortgage. Check your information against the information in the home loan documents to ensure they are accurate and complete.
Do not agree to a price above your asking price. If there are any unusual circumstances regarding the purchase price, take a second look at the transaction and ask for assistance if the arrangement seems unusual. This may be particularly important if you are asked to refund the difference after the closing or if the extra money is to be used for repairs or improvements that you know are unnecessary.
Do not let someone else use your name or social security number to buy a property, especially if he or she offers to pay you for using it.
Deal directly with the mortgage lender or the mortgage broker. Do not let a third party arrange your mortgage loan.
Make sure to get a complete set of the mortgage loan and related closing documents at the time of settlement.
Review the title history to determine if the property has been sold multiple times within a short period. It could mean that this property has been flipped or bought and sold recently and the value can possibly be falsely inflated.
It is always sound advice to get referrals for real estate and mortgage professionals before filling out the mortgage loan application or signing a contract. Check the licenses of the real estate professionals and mortgage lenders involved in the transaction with the local licensing authorities.
Shopping and comparing mortgage loans and mortgage rates involves some work, don’t skimp on the process since the long term costs of a mistake can be significant.