What is the difference between pre-qualifying and pre-approval?

A pre-qualification is normally issued by a loan officer, who, after interviewing you, determines the dollar value of a loan you can be approved for. However, loan officers do not make the final approval, so a pre-qualification is not a commitment to lend. After the loan officer determines that you pre-qualify, he/she then issues you a pre-qualification letter. This pre-qualification letter is used when you are making an offer on a property. The pre-qualification letter indicates to the seller that you are qualified to purchase the house you are making an offer on.

Pre-approval is a step above pre-qualification. Pre-approval involves verifying your credit, down payment, employment history, etc. Your loan application is submitted to an underwriter and a decision is made regarding your loan application. If your loan is preapproved, you are then issued a pre-approval certificate. Getting your loan pre-approved allows you to close very quickly when you do find a house. A pre-approval can help you negotiate a better price with the seller, since being preapproved is very close to having cash in the bank to pay for the house!

At A to B Home Loans, we obtain SUPER FAST approvals in HOURS using our new automated underwriting system on loans to $3,000,000.

How long should the process take?

This can vary. Every borrower is different. We normally can complete your loan within 21 to 30 days, sometimes less. We can obtain your approval within an hour.

Should I lock my loan?

Locking your interest rate is a very important part of obtaining your loan. No one can tell you with certainty which direction interest rates will move. If you lock your loan you will protected from rising interest rates, but you will also not benefit from any decrease in rate if rates drop. Rate locking is a personal preference based upon your ability to handle the risk involved with market changes.

Why do I need an appraisal on my property?

An appraisal is required on real estate transactions simply because it defines the value of a particular piece of property. In addition, market conditions can change quite frequently so a lender will require an appraisal to determine the value of your property as it stands today before issuing the financing.

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

A fixed rate mortgage is a loan where the principle and interest payment never change during the life of the loan.

A variable or adjustable rate mortgage is a loan where the interest rate can change periodically. The changes in the interest rate are tied into the market rates that exist at the time the rate is subject to change. They usually offer lower interest rates than fixed rate mortgages, but can adjust upward if interest rates go up. There is a pre-define cap which defines how high the interest rate can adjust.

Fixed rate mortgages are beneficial to those who prefer more stability in their lives.

Adjustable rate mortgages are advantageous for those who do not plan to stay in their home for a long time, for those borrowers who do not qualify at higher fixed interest rates.

How do adjustable rate mortgages work?

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

One common feature of adjustable rate mortgages is an interest rate change that occurs after a specified number of payments have been made. The interest rate can increase or decrease depending on how the new interest rate is calculated. Typically, the interest rate change is based upon a predetermined index value and a margin. If a mortgagor currently has an interest rate that is pending adjustment, the new rate would be calculated by adding the current index rate and a margin. For example, if the mortgagor's current rate was 6.000% with a 2.000% margin, the new rate would be determined by adding the current index rate (5.000% as an example) to the margin. In this example the new interest rate would be 7.000%.

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

What are escrow or impound accounts and how much do I need in my escrow account?

Escrows or impounds are payments made by a borrower to a lender for the purpose of paying the borrower's taxes, insurance, and other payments associated with home ownership. The lender is responsible for the timely disbursement of escrow funds to pay the borrower's bills as they come due.

Usually, a mortgage company collects funds for placement into the mortgagor's escrow account with the mortgagor's periodic payment for principal and interest. An escrow account has sufficient funds if there is enough to pay all bills when they come due.

It is common practice for mortgage companies to hold an escrow cushion for a borrower. The cushion is kept by the mortgage company to assure that if the cost of any escrowed item were to increase in the future, there would be sufficient funds to pay all bills as they come due.

What is an Annual Percentage Rate (APR)?

The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires that mortgage companies disclose the APR when they advertise a rate.

Typically the APR is found next to the rate.

Example:

30-year fixed 8% 1 point 8.107% APR

The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan. We provide calculators to calculate your monthly payments as well as your APR.

The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. 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.

If life were easy, then all you would have to do is compare APRs from the lenders/brokers you are working with, pick the easiest one, and you would have the right loan. Right? Wrong!

Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then, delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.

The reason why APRs are confusing is that the rules to compute APR are not clearly defined.

What fees are included in the APR?

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. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
• Loan-processing fee.
• Underwriting fee.
• Document-preparation fee.
• Private mortgage insurance.
• Appraisal fee.
• Credit-report fee.

The following fees are SOMETIMES included in the APR:

• Loan-application fee.
• Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death).

The following fees are normally NOT included in the APR:

• Title or abstract fee.
• Escrow fee.
• Attorney fee.
• Notary fee.
• Document preparation (charged by the closing agent).
• Home inspection fees.
• Recording fee.
• Transfer taxes.

An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!

Calculating APRs on adjustable and balloon loans is even more complex, because the future rates are unknown. The result is even more confusion about how lenders calculate APRs.

Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.

Finally, many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!

Conclusion: Use the APR as a starting point to compare loans. The APR is a result of a complex

calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan.

What is a FICO score?

A FICO score is a credit score developed by the Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s but its uses by lenders became more widely used since 1995. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.

Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower's credit history considering numerous factors such as:

• Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Employment history
• Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are really three FICO scores computed by data provided by each of the three bureaus Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.

How can I increase my score?

It is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.

• Pay your bills on time. Late payments and collections can have a serious impact on your score.
• Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
• Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
• If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.

What if there is an error on my credit report?

If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1 -800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well.