Category Archives: Loans

Know Before You Owe Disclosure Forms

Sandy Gadow

Under the direction of the Consumer Finance Protection Bureau (CFPB), lenders must give borrowers two important disclosure forms called “Know Before You Owe” to help borrowers understand the loan terms and commitment they are about to make. These forms are designed to help consumers “understand their options, choose the deal that’s best for them, and avoid costly surprises at the closing.”

  • The Loan Estimate: This form will be provided to borrowers within three business days after they submit a loan application. It  provides a summary of the key loan terms and estimated loan and closing costs. This form can be helpful for borrowers to use to compare the costs and features of different loan programs.
  • The Closing Disclosure: Consumers will receive this form three business days before closing on a loan. It replaces the out-dated final Truth in Lending statement and the HUD-1 settlement statement, and provides a detailed accounting of the transaction.
  • Comparisons of competing loan offers: The new forms use formatting that clearly breaks down the costs of the loan, such as the interest rate, mortgage insurance costs, and closing costs. As a result, would-be-homebuyers and those refinancing their existing mortgage are better able to distinguish between two different loan offers.
  • Shopping for closing costs: Closing costs are the costs of completing a mortgage transaction, including origination fees, appraisal fees, title insurance, taxes, settlement services, inspections, and homeowner’s insurance. Consumers can save money if they shop around for their own service providers for some of these costs. The CFPB forms plainly outline what closing services a consumer will need and which ones they can shop around for.

Avoid Costly Surprises at the Closing Table

Consumers need to be reasonably sure that the mortgage they signed up for is the one they are getting. The CFPB’s rules curtail “bait and switch” tactics, where the terms change at closing, by implementing several consumer protections:

  • Easier comparisons of the estimated and final terms of the loan: By making the Loan Estimate and Closing Disclosure very similar in format, consumers are better able to compare their estimate with the final terms of the loan.
  • More time to consider choices: By providing the Closing Disclosure three days before closing, consumers can review their final loan terms and costs in an unpressured environment rather
  • than at the closing table. This allows consumers time to confirm whether they are getting what they expected. It also gives consumers time to ask questions and negotiate over changes that have occurred. This is especially true for consumers who are refinancing and can more easily delay the closing of the loan.
  • Limits on closing cost increases: They restrict circumstances in which consumers can be required to pay more for settlement services than the amount stated on their Loan Estimate. Lenders cannot impose new or higher fees on the final loan unless there is a legitimate reason.

The Consumer Financial Protection Bureau is a  federal agency and further information can be found at consumerfinance.gov.

Use Contingencies To Protect Your Right To Cancel a Sale

Sandy Gadow

Kristen and Ben had been looking for the right property to buy for over six months. They finally found a home that seemed to be about perfect, so they put down a deposit and signed a Purchase and Sales Agreement.They were excited to have their property search over with, but they still wondered if they had made the right choice. The house would be the biggest purchase they had ever made, a lot of money was involved, and they  wanted to have an option available if for some reason they changed their mind.

“Contingencies” written into a Purchase Contract are one of the best ways to insure that you will have way to cancel the sale during the contingency period when inspections are made and the issues are either removed or resolved between the Buyer and Seller.

Contingencies will contain a time limit in which to fulfill the task. For example, an inspection contingency may give you 10 days in which to obtain and approve a pest or termite control report, a building inspection unless the property is purchased in “as is” condition.  A contingency clause  may allow 5 to 10 days for you to obtain a written loan commitment. The seller is generally given a certain number of days in which to deliver “marketable title” or a title report to the buyer. You then can review the exceptions listed in this report, and dispute any items which are in question. One common example of a title exception may be an easement. For example. If you plan to add a swimming pool in an area where an easement exists, you will want to be sure this will be possible.

Once a contingency has been approved, both the you and  the Seller sign a document removing that contingency from the purchase contract. This agreement should be given to your closing agent and real estate representative. If the deadline for a contingency arrives, and both parties do not sign off on that contingency, this failure to act serves as acceptance of the contingency. For this reason, it is important to keep a calendar of the dates for removal of each contingency.

Contingencies help prevent problems at closing by eliminating last minute disputes covering inspections, the buyer’s inability to obtain financing, or repair work not being done according to contingency specifications.

  Almost no contract automatically includes a clause that determines what will happen in case of death, since buyers assume your heirs (or the executor) will step up to close the deal. And, if the agreement is “silent” on what happens in case of illness or death, the contract continues to be enforceable, says real estate attorney Sam Tamkin, of Lawproblems.com. 

A default clause describes what happens when a Buyer or Seller defaults under the contract. If the case goes to trial, a judge will decide what remedies are available. Some contracts provide that in case of default, the parties will go to arbitration. Your attorney should review the agreement to see whether everything was done properly. If not, then you may be able to cancel the agreement.

Common Contingencies

  • A financing contingency allows a specified amount of time for the Buyer to obtain a loan commitment and acceptable financing terms. These can be as specific as a designated interest rate or loan term. If not approved exactly as stated, the buyer has the option to cancel.
  • An inspection contingency, depending on your state law, can be written to include property inspections that cover possible structural problems or material defects. It can specify who will pay for necessary repairs, and to what extent each party is willing to pay for those repairs. This can also include termite damage; the presence of radon, lead or asbestos; and whether the property is in a flood or an earthquake zone.
  • Attorney approval means the contract is subject to passing legal scrutiny. That can include an attorney review, title report or any other legal paperwork (such as condominium documents) that relate to the purchase.
  • The sale can subject to the approval of a condominium or co-op board.
  • If you suspect recent remodeling or additions were done on the property, the purchase contract may be reliant on proof that the necessary building permits were obtained and building codes were enforced.

Recently, buyers from out of state made an offer to buy a newly built home. It was ideal, with amenities such as a swimming pool and location on a golf course. The buyers were envisaging decorating and furnishing this beautiful house. Several weeks into the sale process, the buyers realized the home was in a high-crime area, and bulgaries were common in the community. They also found that the morning traffic to go to their places of work would be a nightmare. The closing date was set. Their mortgage had been approved. The couple agonized how they could get out of the purchase without loosing their downpayment money. It seemed impossible

The day before the closing, the buyers noticed a clause in the purchase agreement that stated new palm trees must be planted in the driveway leading up to the

home. In their final inspection, there were no trees planted. They telephoned the seller’s closing agent and said that the deal was off. The builder had failed to live up to the contingency that the trees would be planted before the closing date, no exceptions allowed.

The buyers were refunded their full downpayment. They went on to find  a home in a safer area, with a good commute, and although not a new home, with minor cosmetic work, the house would be perfect.

Facing a Foreclosure? Consider a Short Sale

Sandy Gadow

Lona Hamilton had been struggling to make her mortgage payments for the last year and a half. She had used up all her savings, borrowed from friends and family, and now wondered if she shouldn’t consider putting up her home in a “short sale.”  Her brother, who is a lawyer, advises it, but she loves her small home, and hesitates to make a move. Faced with an imminent foreclosure proceeding, Lona decided to call her lender and tell them she is ready to accept a short sale.

Before Lona makes this final decision, she should realize there are several criteria which must be met in order to qualify for a short sale.

What is a Short Sale?

A short sale occurs when a borrower owes more on his property than the value of the property is worth.  In this type of sale, the lender allows a Buyer to purchase the property for less than the existing mortgage balance.  For example, the existing mortgage on your property is $250,000.00 yet the value of your home or condominium is now $115,000.00.  This is also referred to as an “upside down mortgage.”

Why chose a Short Sale?

You may want to consider a short sale in order to avoid a foreclosure action. A foreclosure on your property is a drastic action and one which will negatively impact your credit history for up to 10 years.  A short sale, on the other hand, will appear on your credit report as Paid in Full for Less Than Agreed or Pre foreclosure in Redemption which will impact your credit score for generally up to only 2 to 3 years time.

How does the process work?

 The Seller (You) lists the home with a real estate agent as a Short Sale property. The agent finds a Buyer who makes an offer for less than the amount of the mortgage. You accept the Buyer’s purchase offer and submit the offer to your lender. If the lender accepts the sale, the transaction will close when the Buyer delivers the funds to the lender. The lender then releases its lien (claim) on the property and delivers a deed to the Buyer.

Will you Qualify for a Short Sale?

The lender will require you to submit a letter of hardship which explains why you are not able to pay the difference between the short sale amount and the mortgage balance due. The statement must include the reason why you have stopped making the monthly mortgage payment, or why you will be stopping in the near future.

Examples of hardship are:

  • Unemployment
    • Divorce
    • Medical Emergency/sudden illness
    • Bankruptcy
    • Death

The lender will generally ask to see a copy of your tax return and /or a financial statement. If the lender discovers you have other assets, such as cash in a savings account, other real estate you own, or stocks, bonds or IRA accounts, the lender may deny the short sale request.

In some instances, a Seller with assets may still be granted a short sale but could be required to pay back the shortfall amount between the Short

Sale and the mortgage balance outstanding.

Will you receive any Money Back at the Closing?  

No, since because a short sale allows you to sell your home for less than the loan amount, you would not receive any money back at closing.

What are the Tax Consequences of a Short Sale?

If the lender agrees to the Short Sale, the lender may have the right to issue you a 1099 for the shorted difference, due to a provision in the IRS code about debt forgiveness. Many situations are exempt from debt forgiveness, according to the Mortgage Forgiveness Debt Relief Act of 2007. If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

More information, including detailed examples can be found in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Qualified principal residence indebtedness can be excluded from income for discharges before January 1, 2026.

How to Use Seller Financing to Your Advantage

Sandy Gadow

Seller financing can be a useful tool to not only the Buyer but also to the seller. With unpredictable loan rates and difficult qualifying criteria, seller financing can bridge the gap for a short-term (3-10 year) period of time.

Two significant advantages to the Seller who offers a convenient and flexible financing package to prospective Buyers is that it makes the property more marketable and defers the Seller’s tax liability on the profits. Not only does the Seller avoid the entire profit tax due in the year of the sale, but the seller earns interest on the portion of the note principal that represents the tax not yet due and payable.

Closing can be faster in Seller-financed properties due to the conventional rule that Borrowers must be given a Closing Disclosure form three days before closing.  If the loan would need to be modified, the three-day waiting rule would start over and and cause further delay.

The mountain of legal disclaimers and paperwork involved in a conventional mortgage can slow the process down, and conventional lenders can — and often do— change their terms days before closing. 

Buyers save on the typical lender costs such as loan origination fees, discount points, mortgage insurance premiums, processing fees, and other added expenses. When the Seller acts as the lender a lower downpayment is possible and is negotiable between the Buyer and Seller— where as most conventional mortgages require a 20% downpayment. Sellers can dictate the qualifying process for the potential Buyer and shorten the typical closing time significantly.

If a seller-financed sale seems appropriate for your circumstances, have a title company check for any outstanding liens or other title issues, and hire a lawyer to prepare the paperwork, including the note, deed of trust, or mortgage documents. Consult with your CPA or tax attorney for the best way to structure the loan to be tailor-made for the your individual financial situation and tax responsibilities.

How Should I Go About Shopping for a Loan?

Sandy Gadow

Consider banks, savings and loan offices and loan brokers: Find out what types of loans are available and ask about interest rates and loan fees. Find out how quickly the lender can make an appraisal of the property. Prepare a form that makes a side-by-side comparison of the terms being offered to you by the various lenders, and think carefully about which loan would be the best for your circumstances.

What information will I need to give the lender when I make an application for a loan?

When you visit your lender, you will be asked to fill out a Uniform Residential Loan Application form. This is a four page document that asks you about your employment, your assets, your liabilities, and your income. It is important to be as truthful and complete as possible on this loan application form. All the information will be verified. Your employer will be called and your bank accounts will be checked. Upon receipt of your completed application, the lender will give you a copy of a government publication called “Settlement Costs: A HUD Guide”. This small pamphlet will explain the closing process and describe the various closings costs which you may incur with your loan. The lender is allowed three business days after receiving your loan application to provide you with this brochure.

What are the other documents that my lender is required to give me when I apply for a loan?

The lender is required to provide you with a “Truth In Lending ” statement which will tell you the APR, or Annual Percentage rate of the loan for which you are applying. The APR will be the percentage rate quoted to you by the lender, PLUS other closings costs, such as any points and other finance charges over the term of the loan. This form must also be given to you within three business days of your loan application. You will also receive a disclosure about Adjustable Rate Mortgages, a Good Faith Estimate of itemized closing costs, various authorization forms giving the lender permission to research your credit, contact your employer, request rental or part mortgage history, and verify all your bank deposits.

Once I have completed my loan application, what else should I take in with me to speed up the loan process?

Together with your loan application, you should take in your last two years tax returns, the last 2 or 3 month’s bank statements, current W-2 forms, any trust agreement or securities account information, and letters of explanation of any credit problems you may have had. The more information you provide the lender at the time of your application, the faster your loan will get processed.

Related Information

Why Your Home Appraisal May Be Lower Than You Think — and What You Can Do About It

Sandy Gadow

With home prices on the rise, it’s easy to assume that property appraisal levels will increase accordingly. But that isn’t always the case.

Quicken Loans recently found in its so-called Home Price Perception Index that home values assigned by appraisers were 1.93 percent lower than what homeowners had estimated in June. For example, if an owner estimates that his or her home is worth $200,000, the appraiser’s value (according to the national study) would come in at $196,140 (1.93 percent or $3,860 less than anticipated).

“Perception is everything,” said Quicken Loans Chief Economist Bob Walters. “That’s why it’s so important for homeowners to realize [that] how they perceive their home’s value could vary widely from how an appraiser views it. If the estimate is lower by just a few percentage points, the buyer could need to bring as much as another several thousand dollars to the table to avoid having to restructure the loan.”

Prudent homeowners may be wise to look at criteria that is similar to what appraisers use and then come up with their own preliminary estimate of value. Any problems that are found can be repaired or remedied before the mortgage application is made and before the start of the subsequent formal appraisal process.

Here are some tips:

  • Look at the recent sales or “comps” in the area, and identify “like-kind” properties that include the amenities that are similar to ones that your home has.
  • There are online services that track the current “for sale” price and the “recently sold” price of homes in your neighborhood, such as Zillow.com and Trulia.com. Ask a realty agent to do a “comparative market analysis” for you of properties sold in the past three to six months. Try to be as complete as possible in your search.
  • Professional appraisers may include only three to five “comparable” properties in their reports, but in reality may have looked at more than half a dozen.
  • Do the best you can to look at the condition of the structural components of the house, including the foundation, roof, electrical and plumbing systems. Check for any obvious signs of cracks, discoloration, or structural issues.
  • Look for water damage around baseboards, ceilings and faucets, and be aware that mold can cause unwanted damage. Include a review of the hot water heater, air-conditioner or heating system, propane or septic tank (if applicable) and appliances.
  • The date of purchase and/or service should be posted to a water heater, or other appliance to help give you an indication of the age or condition of the unit. Many systems have a life span of about 10 years — subject to the level of maintenance provided over time.
  • You could hire a professional to make a formal inspection, but that may cost hundreds of dollars or more depending on the size (square footage) of the house.
  • Compile a list of any improvements or repairs that you’ve made during the past five to 10 years and be prepared to show any permits or invoices that may have been required for the work.
  • Factor in future expansion in the neighborhood, such as parks or community centers, to help your property valuation. Access to a freeway or public transportation could also give your house an advantage on many appraisals.

“Appraisers welcome input from owners to point out recent improvements or repairs or systems upgrades,” said Ken Chitester, director of communications for the Appraisal Institute, a global association of real estate appraisers based in Chicago. “Even attractive landscaping and outdoor improvements such as [fresh paint] will be taken into consideration when determining house value.”

“In general, location, design, age, quality of improvements, building and lot size, view, parking and exterior amenities are the big factors for most single-family homes in D.C.,” said Victor Brown, a principal at Capital Market Appraisal, based in the District.

A report from the company even found that “seasonality” plays a factor in managing expectation for home valuation. For example, the study found that homes in February were appraised lower than they were in the month of September. The report is available to download at www.capitalmarketappraisal.com.

Be aware that if you are considering a Federal Housing Administration-sponsored mortgage, a “health and safety” appraisal performed by an appraiser approved by the Department of Housing and Urban Development will be required in addition to the conventional appraisal.

Additional steps that an FHA appraiser takes will be to look for such isolated items as standing water around the house, defective paint surfaces, rodent or insect infestation, missing doors or unsafe stairs.

Know Before You Owe Disclosure Forms

Sandy Gadow

(Most states require sellers to fill out a disclosure form or disclose material facts about the property. To find your state’s law, speak to your real estate agent or state regulatory agency. You can find the disclosure requirements in your state at www.arello.org look under “resources-Regulatory Agencies”).

New Forms Improve Consumer Understanding, Aid Comparison Shopping, and Help Prevent Surprises

Washington, D.C. – The Consumer Financial Protection Bureau (CFPB) is issuing a rule today requiring easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for a homebuyer. The new “Know Before You Owe” mortgage forms will replace the existing federal disclosures and help consumers understand their options, choose the deal that’s best for them, and avoid costly surprises at the closing table.

“Taking out a mortgage is one of the biggest financial decisions a consumer will ever make. Our new ‘Know Before You Owe’ mortgage forms improve consumer understanding, aid comparison shopping, and help prevent closing table surprises for consumers,” said CFPB Director Richard Cordray. “Today’s rule is an important step toward the consumer having greater control over the mortgage loan process.”

For more than 30 years, federal law has generally required that within three business days after receiving a mortgage application, mortgage lenders must deliver two different, overlapping disclosures to consumers. At the closing stage, federal law again generally requires two forms. All of these forms contain duplicative and sometimes confusing information. The Dodd-Frank Wall Street Reform and Consumer Protection Act recognized the need to simplify and streamline this information for consumers and transferred responsibility for the forms to the CFPB.

Today’s final rule requires that lenders use the CFPB’s new disclosures, puts in place rules about when the new forms are given to the consumer, and limits how the final deal can change from the original loan estimate. The forms are available in English and Spanish.

  • The Loan Estimate: This form will be provided to consumers within three business days after they submit a loan application. It replaces the early Truth in Lending statement and the Good Faith Estimate, and provides a summary of the key loan terms and estimated loan and closing costs. Consumers can use this new form to compare the costs and features of different loans.
  • The Closing Disclosure: Consumers will receive this form three business days before closing on a loan. It replaces the final Truth in Lending statement and the HUD-1 settlement statement, and provides a detailed accounting of the transaction.

The CFPB conducted more than two years of extensive research, testing, and review to find out how to create mortgage disclosures that do what the law intended them to do: disclose information in a way that consumers can understand. A good disclosure helps consumers know if they want to commit to the loan being offered, and it enables them to make meaningful comparisons between loan products for better shopping. The Bureau received feedback from consumer testing, through the Bureau’s website, from a small business review panel, through public comments on the proposed rule, and from other supplemental outreach.

Improved consumer understanding

An extensive study confirmed the benefits of the new CFPB forms. Consumers of all different experience levels, with different loan types – whether focused on buying a home or refinancing – were able to understand CFPB’s new forms better than the current forms. Testing showed that participants who used the CFPB’s new forms were better able to answer questions about a sample loan – a statistically significant improvement of 29 percent. Importantly, they were better able to decide whether they can afford the loan, including the cost of the loan over time. And, specifically, the forms help consumers better understand key information:

  • Risk factors: Because information on the CFPB forms is disclosed in an easy-to-read format, consumers can more easily identify risky loan features. In addition, lenders will have to tell homebuyers about prepayment penalties, larger-than usual periodic payments, and complicated loan structures.
  • Short-term and long-term costs: By putting the important information in a clearer format than the current forms and in plain language, both the Loan Estimate and Closing Disclosure more easily explain the total costs of the loan. This includes an important breakdown of the loan amount, the principal and interest payment, and how it could change, and closing costs.
  • Monthly payments: The CFPB forms state in bold font what a consumer’s monthly principal and interest payments will be. If it is an adjustable-rate loan, the forms say the projected minimum and maximum payments over the life of the loan.

Better comparison shopping

When consumers understand their loan offers, they can better compare competing offers. In testing, the CFPB’s new forms performed better than the current forms when it comes to comparing competing offers by as much as 42 percent. This leads to better consumer choice. The forms enable better:

  • Comparisons of competing loan offers: The new forms use formatting that clearly breaks down the costs of the loan, such as the interest rate, mortgage insurance costs, and closing costs. As a result, would-be-homebuyers and those refinancing their existing mortgage are better able to distinguish between two different loan offers.
  • Shopping for closing costs: Closing costs are the costs of completing a mortgage transaction, including origination fees, appraisal fees, title insurance, taxes, settlement services, inspections, and homeowner’s insurance. Consumers can save money if they shop around for their own service providers for some of these costs. The CFPB forms plainly outline what closing services a consumer will need and which ones they can shop around for.

Avoiding costly surprises at the closing table

With the current forms, consumers can have a hard time comparing their original loan terms to their final loan offer. Consumers need to be reasonably sure that the mortgage they signed up for is the one they are getting. The CFPB’s rules curtail “bait and switch” tactics, where the terms change at closing, by implementing several new consumer protections:

  • Easier comparisons of the estimated and final terms of the loan: By making the Loan Estimate and Closing Disclosure very similar in format, consumers are better able to compare their estimate with the final terms of the loan. In testing, the CFPB’s new forms performed better than the current forms when it comes to comparing estimated and final numbers by as much as 28 percent.
  • More time to consider choices: By providing the Closing Disclosure three days before closing, consumers can review their final loan terms and costs in an unpressured environment rather than at the closing table. This allows consumers time to confirm whether they are getting what they expected. It also gives consumers time to ask questions and negotiate over changes that have occurred. This is especially true for consumers who are refinancing and can more easily delay the closing of the loan.
  • Limits on closing cost increases: Today’s rule restricts circumstances in which consumers can be required to pay more for settlement services than the amount stated on their Loan Estimate. Lenders cannot impose new or higher fees on the final loan unless there is a legitimate reason.

Today’s rule is effective Aug. 1, 2015 and the CFPB is already working with industry and consumers toward effective implementation. As the CFPB continues with “Know Before You Owe,” it will work collaboratively with all, including other government stakeholders, to take a close look at all documents provided at closing.

Today’s rule is a continuation of the CFPB’s efforts to reform the mortgage markets. In January 2013, the CFPB released new rules on mortgage servicing, mortgage loan origination compensation, and the mortgage origination process. Today’s rule and new forms are just one part of the CFPB’s efforts to make the mortgage market work better for consumers, the industry, and the economy as a whole.

A factsheet about the “Know Before You Owe” mortgage disclosures is available at:http://files.consumerfinance.gov/f/201311_cfpb_factsheet_kbyo_mortgage-disclosures.pdf

A factsheet about the testing process the CFPB used to arrive at today’s rule is available at: http://files.consumerfinance.gov/f/201311_cfpb_factsheet_kbyo_testing.pdf

The “Know Before You Owe” mortgage disclosure rule will be available 12 p.m. Wednesday at: http://files.consumerfinance.gov/f/201311_cfpb_final-rule_integrated-mortgage-disclosures.pdf

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov

What is PMI insurance?

Sandy Gadow

PMI or Private Mortgage Insurance insures lenders against losses when they have to foreclose and can only sell their foreclosure properties for less than the loan balances.  Most lenders now require PMI whenever they lend more than 80% of the appraised value of a property.  Some lenders will even lend as much as 95% of appraised value so long as the borrower secures private mortgage insurance.

Mortgage Closing Pain Points: What You Can Do?

Sandy Gadow

A recent study by the Consumer Financial Protection Bureau reported the results of a year-long study to identify the most troublesome aspects of a loan closing.  The CFPB,  in an effort to improve the mortgage closing process for borrowers, asked consumers, lenders and other stakeholders how the process could be made more efficient, streamlined, and less stressful for the borrower. The Bureau identified three major “pain points” in the mortgage closing process.

  • Not enough time to review: Study found that consumers were frustrated by the short amount of time they had to look over their closing documents, often not seeing the paperwork until they arrived at the closing.  Borrowers reported feeling pressured to rush through their paperwork and sign, without anyone asking them if they understood the terms.
  • Overwhelming stack of paperwork: The number of documents can be daunting in a closing. There are forms intended to help borrowers better understand the costs and risks of their mortgage, forms which are a result of the lender\s legal risk assessment and forms which fulfill federal, state and local government requirements. The volume of paperwork can vary from lender to lender, often reaching 30 to 40 documents.
  • Complexity of documents and errors: Many of the closing documents are written in legal terms or full of technical acronyms not known to the average borrower. In the CFPB study, they found many consumers complained that they had very little help from the closing agent, attorney, or mortgage broker attending the closing. Many complained they found errors in the closing documents, which led to delays when the closing agent had to redo the entire closing package.

What You Can Do?

  • Always ask to see your loan documents at least one day in advance of closing. There may be slight adjustments made on the day of closing, but generally all other figures will be the same. If you have any questions at all, ask the closing agent or your mortgage broker for an explanation. If an attorney is assisting in the closing. ask for explanations of each and every document or section you are unclear about.
  • Take your time. It is easy to rush through the process. It may have taken you months to obtain the loan, get the approval, the credit reports, and the documentation you had to provide to the lender. You are ready to close the deal and be done with all the hassle. You may have a closing deadline to worry about It is normal to want to sign as fast as possible and end the painful process. But, the hidden problem lies in the fact that the loan may contain clauses which may apply years later, and which would be unacceptable.  Or, you may find an error which needs correcting. Now is the time ask the questions and fix any problems.
  • Remember, you are in the driver’s seat. Everyone wants the loan to close – the lender, the closing agent, the realtor, and the lawyer.  They may handle closings every day and the documents may be second nature to them, but they know this may be your first closing, or it may be your hundredth, either way, it is your right to understand each and every document you sign. You are paying for their services and you have the right to expect answers.

Copyright © 2014 Sandy Gadow. All Rights Reserved. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

What Is the Best Way to Improve My Credit Score?

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While there is no “best” way to improve your credit score, as each of the three main credit reporting bureaus may give a higher value to one type of action over another, there are several steps you can take, which done together, can potentially raise your score 75 points or more. These steps are not difficult, but they do take planning and perseverance. You don’t necessary have to pay off all your debt, but rather you may need to reposition some debt, while paying down higher balances on other obligations. The reward is great, and can potentially save you thousands of dollars in lower-interest rate loans and time saving qualifying requirements. Most lenders base the interest rate they offer on the FICO score derived from the results found in the borrower’s credit report. The higher the FICO score, in most all cases, the better the interest rate offered. Although determining your FICO score may seem arbitrary and complicated, there are still things you can do to improve your over-all score.

  1. Obtain a free copy of your credit report from www.annualcreditreport.com. You can also call them at 877-322-8228 or write at Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. If you have recently been denied credit, you have the right to request a free credit report from the bureau who reported your bad credit.
  2. Check and repair incorrect information. Look over the report carefully for errors or information which is outdated or not correct. Are there collections or past-due debts which have been paid off? If so, contact the creditor and ask that they send a correction to the credit reporting agencies. Are there items listed in which you perhaps were a co-signor on a credit card, for example with a parent or former spouse? Can these be removed? Are there items listed as open, yet you have closed out those accounts? Are any previous mortgages which have been paid noted as paid in full? Are there any late or delinquent payments which you can dispute? Are there any creditor items which you can write a letter of explanation to be attached to your credit report? If you failed to pay off an account and it went into collection, pay it off as soon as you can. These accounts hurt your score and remain on your report for seven years.
  3. Keep your balances low in relation to your credit limit. Do you have any credit cards in which the balance owing is close to the credit limit on the card? If so, try to pay down this balance. Try to limit the balance owing to no more than 40% – 50% of the credit limit.
  4. Make payments when due. Even if you carry roll over balances on a credit card, be sure to make that payment on or before the due date. Set up an automatic payment for at least the minimum payment. Your credit card company will send you a form to sign up for this feature. This will prevent you from ever being late on a payment. Delinquent payments, even if only a few days late can have a major negative impact on your FICO score.
  5. When possible, pay more than the minimum amount due. Even a payment of $20 or $20 over the minimum due will be helpful.
  6. Pay down any large credit balances.  Paying down a balance is one of the fastest ways to improve your credit score. Can you tap into your savings to pay down or pay off a high interest or high balance card? This step can improve your credit score by up to 100 points by paying off some credit items completely and paying down the balance on others.
  7. When you pay off a credit card, don’t necessarily close it down but rather keep a small balance so that your positive payment history will continue to show up on your credit report. Note that closing an account doesn’t make it go away. A closed account will still show up on your credit report, and may be considered by the score.
  8. Prevent numerous credit report searches. A credit search can be performed on your report without your knowledge. Chose to “op-out” by contacting (www.optoutprescreen.com) and request that unauthorized persons not be allowed to access your credit report. Oftentimes repeated credit searches will lower your over-all FICO score. Your score is not affected when you check your own credit. Credit checks by prospective employers also do not count. These types of inquiries may appear on your credit report, but they are not included in your FICO score.
  9. Payoff or renegotiate bad credit debt. These could include such as medical collections, delinquent credit cards or past-due school fees. Work with the creditor and request a new pay-off figure which they will accept if you pay off the debt in full. If that is not possible, request a lower interest rate and realistic due date. Get any promise to remove bad credit in writing from the creditor.
  10. Only apply for credit cards which you absolutely need. Resist the temptation to take advantage of any offers for credit unless you are sure you need that extra credit. Opening new cards can lower your score and will result in additional credit searches showing up on your report.

Copyright © 2012 Sandy Gadow. All Rights Reserved. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Related Question

Can you give me an example of how a better FICO score will save me money?

Lenders base their lending criteria on your FICO score. The higher the number, the easier it will be for you to obtain credit. “Preferred borrowers” with FICO scores of  720 and higher, may typically pay less in closing costs, and be allowed to provide less documentation than a borrower with a lower credit score. Certain requirements may be waived for the preferred borrower, such as prepayment penalties and required reserves or “escrows” held by the lender.

For example, on a $300,000, fixed rate mortgage, for a 30 year term (rates may vary as to current market conditions):

If your
FICO score is:		 Your interest
rate may be:		 Monthly
payment:
760-850 3.602% $1,364
700-759 3.824% $1,402
680-699 4.001% $1,432
660-679 4.215% $1,470
640-659 4.645% $1,546
620-639 5.191% $1,646

For your individual loan criteria, go to www.myfico.com and select the “Loan Savings Calculator.” You will be asked to specify your loan type, the loan details, and the state in which you are applying for a mortgage. You can then choose your current FICO score range to see the potential savings you will gain from improving your score.

How To Remove Errors on your Credit Report

Contact the credit bureau in writing of your request and the reason why the error or misinformation should be removed. The information may be found on one or all three of the credit reporting bureaus. TransUnion,  Equifax, or Experian.  Clearly identify the item you dispute in your report. Enclose a copy of the report with the item in question circled or highlighted. State the facts and explain why you dispute the information. Request deletion or correction. Send your letter via certified mail, return receipt requested. Keep copies of your letter and any back up evidence.  Further, write the creditor and explain that you are disputing the information they provided to the bureau. Be persistent. This process may take time, but you are allowed to request errors be removed.  Don’t give up until the bureau or creditor complies. An improvement in your credit score will be well worth your efforts.

What makes up a credit score?

A credit score is made up of five components. Payment history (35%), balances carried (30%), credit history (15%), mix of accounts (10%), and inquiries (10%)

Trans Union uses the Emperica Score Fico range
Equifax uses the Beacon Score Fico range
Experian uses the Fair Issac or Fico Score range

TIP
70% of your FICO score is based on the time period two years back from today.  Your score is figured on 7 years worth of data, but anything older than 2 years is only figured in the 30 percentile of the calculation. This is one reason why it is important to keep at least 3 lines of open good credit on all 3 reports.

Why do I need a survey?

Sandy Gadow

While the plat map attached to your preliminary title report will show the boundaries of the property, it will not show where the house is located on the property or whether there are any encroachments on the property (such as a neighbor’s  tree, driveway, or fence).
A plat map is a subdivision map prepared by developers when the tract of land and parcels were first created and will not show which easements on the property could affect legal title.

To make these determinations, you will need a survey.  A survey will show you exactly where the property lines are located and whether there are any building restrictions affecting your rights.  Having this information may be important if you have plans for adding a pool or a fence to the property, for example.  Apart from wanting a survey to determine the location of buildings and easements on the property, you may have plans to divide up the property at a later date.  Let’s say you are buying a house located on several acres of land.  You have determined that local zoning law allows you to split the property into individual parcels or lots.  If you think you may consider splitting the property at some later date, having a survey in hand will help you make those decisions when that time may come.

While surveys tend to be expensive, you can cut the cost down by asking the previous owner if there is an existing survey which you could look at, or asking for the previous surveyor’s name, so you can request that the old survey be up dated. You can also visit the official surveyor in the government land records office in your county, and ask one of the staff to help you with any boundary or easement questions you might have.

Most surveys do not include staking the corners of the property.  If you want this done, be sure to ask for this to be done at the time the survey is performed.

Copyright © 2007 Sandy Gadow. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Can I Modify My Existing Mortgage Instead of Refinancing?

Sandy Gadow

Dear Sandy,
 I chose an adjustable rate mortgage in 2003, interest only, based on the LIBOR index.  The rate has now risen to over 7.5% so I would like to refinance it to get a better interest rate. My neighbor mentioned to me that he just “modified” the loan on his house.  Can I do the same on my type of mortgage?
Michael Young
San Diego, California

Dear Michael,
Your neighbor gave you a good tip, which may work out to your advantage. Your existing lender may agree to “modify” your loan, giving you a better interest rate, but leaving all the other terms of the original mortgage in place.  The closing costs generally will be lower than in obtaining a new loan.  You may avoid having to pay points or origination fees, although you will still have to pay for a new lenders title insurance policy. Generally with a modified loan, a new appraisal is not required.  A lender will perform a “book appraisal”  usually at no extra cost to you.  The lender may offer you several options, such as a fixed rate for 30 years, or a 5/1 or 3/1 ARM (fixed for 3 or 5 years, then reverting to an adjustable rate).  Many times a modification may be the best (and easiest) way to go, but I would caution you to shop and compare options from other lenders before making a decision.  You may be able to find a more favorable interest rate with better terms from a new lender.  Even with the added closing costs, the new refinance loan may work out better than simply modifying the existing mortgage.  If you want to take “cash out” (obtain a larger loan than the existing loan), you generally will have to refinance as if you were taking out a new loan.

Dear Sandy,
I am closing soon on a rental property which I am buying. It is a duplex, with two large units and is fully rented.  Will I have to sign any unusual documents at closing for this investment property as compared to when I bought the house which I live in? Is there anything special I should look for in the documents?
Michael Zimmerman
Raleigh, N.C.

Dear Michael,
The major difference in the closing documents for your rental property will be certain credits which will appear on your closing statement for your portion of any deposits made by the tenants, which may include a pro-rata share of a deposit for damage, keys, or a non-refundable cleaning fee.  You will receive a pro-rata share of any monthly rental income already paid to the seller, depending on the day of the month you close your purchase.  You may also be due a credit for the tenants’ last month’s rent, being held by the current owner. These adjustments would show up on your HUD-1 or final closing statement. You may receive a Bill of Sale for such items as appliances or window coverings.  Be sure it includes all the items which you agreed would be included in the sale.  Prior to closing, be sure you have read thru the leases, because as the new landlord, you will have to honor the provisions in those contracts.  You will also want to be certain you have read and approved any inspection reports, since the property will be held for rental income purposes, you would not want to be faced with large repair bills in the near future.

Dear Sandy,
A friend and I are thinking of investing in some investment properties. We’re looking to buy a house or two and use them as rentals. A real estate agent brought up the fact that we may want to think about other ways to hold title besides joint tenancy or tenants in common.  What are your thoughts on that and what are some of our other options?
Shane Alexander
Sacramento, CA

Dear Shane,
Many people form a partnership or use a limited liability company for their investments in real estate.  Others may choose to set up a corporation or a joint venture.  The main reason for choosing one of these forms of joint ownership is to protect the individual owners from personal liability or to allow investors to participate in the property investment.  Two or more owners can form a partnership by means of an agreement between the partners to take care of business jointly and share in the profits. You can form a general partnership, in which each partner is liable for the debts of the partnership, or you can form a limited partnership, where each limited partner’s liability is limited to the amount of his or her investment.  Holding title in partnership with others allows any number of partners to have an equal or an unequal interest in the property.

Both a corporation and a limited liability company give an owner of the corporation or company protection against third-party lawsuits.  A unique feature about a corporation is that it has the legal aspects of a single person. Land owned by a corporation cannot be attached for personal debts or judgments against any of its shareholders. A creditor can attach only the person’s shares in the corporation. To form a corporation you will have to file certain papers with the state in which you incorporate. Each state has its own requirements regarding the proper legal form for the articles of incorporation, bylaws and shareholders’ agreement. These documents are then filed with the secretary of the state where the corporation is to be located. Whichever type of co-ownership you choose with your friend, I would suggest discussing the pros and cons of each type of ownership with your tax advisor or estate planning attorney. Be sure that your friend, or any future partners, understand as completely as possible the intentions and desires of each person involved. It is often hard to predict what will happen when several people become joint owners of land with all the responsibilities that it entails.

Dear Sandy,
My husband and I have found a small commercial building we would like to buy as a way to start planning for the future.  We already own our home and we both have jobs. Do you think we will have a problem qualifying for a commercial mortgage? Will the closing costs be much more expensive than on our residence?
Amy and Rick Sands
Redmond, California

Dear Amy and Rick,
Assuming that your credit is good and your employment is stable, you probably won’t have a problem qualifying for a mortgage on the commercial building. However, when buying investment property, the lender will want to make certain that the property itself qualifies according to certain criteria.  The lender will ask for a specific type of appraisal, based not only on the property itself, but in view of other comparable commercial rentals in the area.  Lenders generally require a survey of the property be included. Commercial appraisals generally cost more than a home appraisal, and may include reports on the condition of the roof, mechanical systems, or parking lot.  The bank will want to see copies of any existing lease agreements and a cash flow chart of anticipated income and expenses for the property.  The lender may require copies of the existing leases, if the property is currently occupied. As to the loan and closing fees, those will be based on the purchase price and loan amount of the property, as they would have been on your home purchase. You will be required to purchase fire and casualty insurance, with a minimum one year premium paid in full.

Dear Sandy,
I’ve found a perfect little house at a very good price and I am thinking of buying it as an investment. I plan to rent it out for several years. Do you think there will be any problem getting an appraisal since this will be a rental property?  The lender said they are going to require some additional documentation which the appraiser must supply.
Jan Salvador
Connecticut

Dear Jan,
Your lender is probably talking about a Form 1007 (Single Family Rent Survey) and Form 216, (Operating Income Statement), which are rental comparison statements. These forms require the appraiser to look at comparable rentals in your area, and compare those rents to the rent you plan on getting for your property.  The appraiser may charge an additional fee for each of these forms, typically around $75 each. There is usually no problem in obtaining this information, unless at least 3 similar rental properties cannot be found.  In that case, you can ask the lender to make an exception for your loan.  You would explain the circumstances that, let’s say, the appraiser can only find one comparable rental home in the area, and generally, if you qualify for the mortgage in all other respects, the lender will comply with your request and waive the requirement.

Dear Sandy,
I am going to refinance my house shortly and I think I’ve found the perfect loan for my situation. I understand that there will be a three-day “cooling off” period between the time I sign my loan documents to the time in which the loan is put in place. What is this and do I really have the choice of canceling the entire deal during those 3 days?  What if the lender doesn’t give me the proper disclosure notices?
Jeff
Cincinnati, Ohio

Dear Jeff,
The “cooling off” period which you refer to is called the Right of Rescission and it is a protection guaranteed by the Federal Truth in Lending Act.  You really do have the right within the 3 day time limit to cancel the loan, in full, without being obliged to pay any fees or costs associated with the loan. You have to be quite careful that you cancel, or “rescind” the deal within specific time limits.  Unless you waive your right to rescission, you will have until midnight of the third business day after the transaction to cancel the contract. Saturday is counted as a business day, but Sundays or legal holidays are not. If, for example, you sign your loan documents on a Friday, you would have until midnight on the following Tuesday to rescind or cancel the deal.  If your lender fails to give you the proper disclosures or the notice of rescission, you can cancel at any time during the first three years after you sign the loan contract, or before you sell the property, whichever occurs first. If you have any problems, you can file a complaint with the Federal Trade Commission. You can do this on line at www.ftc.gov, or write to them at Federal Trade Commission, Washington, D.C. 20580.

Dear Sandy,
I’ve been reading about “flipping properties” in this current real estate market, and I was wondering if I am better off selling my option to buy a property, before it ever goes to closing, or am I better off closing the deal and then selling about 4 or 5 months later?
Scott Johnanson
Miami, Florida

Dear Scott,
It’s hard to say which investment strategy would be best for you, as you will have to weigh your profit margin in selling your purchase contract option before closing versus the profit you expect could be made by holding onto the property for several months.  You want to consider that when buying any property, you will be obligated to pay closing costs, which can add up to 3-4% of the purchase price. You will be paying title insurance, escrow fees, state and county mandated taxes, hazard insurance, together with mortgage costs (if you will be obtaining financing on the property).  If you obtain a mortgage, you would want to carefully read thru the documents to be sure they did not contain a prepayment penalty for paying off the loan early.  When you sell the property, you will incur closing costs, such as real estate commission fees, pro-rata property taxes, recording fees, and possible attorney fees. If you anticipate your profit will be greater, after paying closing costs and calculating any capital gains tax you would be liable for, in holding onto the property, you may want to choose that option. If you are in doubt, you may want to sell your purchase contract option before closing and take that profit.

Dear Sandy,
I bought a home recently and found that my neighbor has planted a rose bush on the property line.  That was several years ago, and now the bush is hanging way over onto my property. Can I cut the rose bush down?  My neighbor said that he was given permission from the previous owner of my house to plant the bush, and that he will not allow me to trim it in any way. What are my options?
Beverly Smith
Woodland Hills, CA

Dear Beverly,
Since the rose bush is on the property line, you own half the bush together with your neighbor.  You can’t cut the bush down, but you are allowed to trim it back to the property line.  The best option is to come to an agreement with your neighbor, as legal remedies would be costly.  Perhaps your neighbor could construct a wire or wooden support which would force the rose bush to grow in the direction away from your property.

Dear Sandy,
I bought a house several years ago in Las Vegas for $155,000.00 which is now worth over $295,000.00.  I had to buy PMI insurance at closing because I put less than 20% down on the property and got a mortgage for the balance. Why hasn’t my lender canceled the PMI insurance, since I now have over 20% equity in the house? Do I have to request this myself?
Loren Williams
Las Vegas, NV

Dear Loren,
Provided you signed your mortgage on or after July 29, 1999 and your are not delinquent on your mortgage payments, your lender is required to cancel your PMI insurance automatically once you reach 22% equity in your home based on the original property value, not on its current market value.  When making mortgage payments, most of your payment during the first few years goes towards paying finance charges.  It sometimes can take up to 10 or 15 years to pay down a loan to reach the 78% loan value required for automatic termination of PMI insurance.  Since your home has appreciated in market value faster than paying down the mortgage, you can certainly ask your lender to cancel your PMI policy. Your first step would be to contact the loan servicer where you send in your mortgage payments. This may or may not be the lender who gave you the loan originally. The loan servicer will be able to tell you exactly their cancellation procedure and requirements. You probably will be asked to provide a new appraisal on the property, and also to show that you are a good credit risk and have made your mortgage payments on time.  For specific information the Federal Trade Commission publishes free brochures on PMI insurance and your rights under the Homeowners Protection Act of 1998.  You can reach the FTC at www.ftc.gov, or call at 1-877-382-4357.  Any complaint you have with problems with your lender in canceling your PMI insurance, you would also direct to the FTC.

Copyright © 2006 Sandy Gadow. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

How Much Can I Borrow?

Sandy Gadow

Depending on your annual income, cash reserves, credit worthiness, and the appraised value of the property, you may be able to borrow up to 100% of the value of the home.  A typical home mortgage is 80% of the home’s appraised value.  Which loan program fits your needs will also be based on your intended use of the property, whether it will be your personal residence or if you will be using the property for rental or investment purposes.  Lenders typically lend only 70% or 75% of the purchase price for investment or commercial properties. Investment properties may also require additional qualifying criteria and use a different appraisal process.

Why is the appraisal so important?

The amount of money which you can borrow will depend on several factors, but one of the most important is the “LTV” or “Loan to Value” ratio which is based on the appraised value of the property in relation to the amount of money you wish to borrow. A higher appraisal value will normally result in the opportunity for a larger loan amount. For example, most loans are based on a 80% Loan to Value ratio, meaning the lender will loan you 80% of your property’s value.  Keep in mind that this amount may vary for a refinance, an investment property, or based on your credit history or FICO scores.

TIP
Comparables are an important part of the appraiser’s analysis and will be included in the report. You can help the appraiser by supplying all known recent sales in your immediate area,  some which may not yet appear yet in the public records.  In addition, be sure to supply the appraiser with any recent remodeling or major improvements which you have made to the property, and the cost of those changes. Any information on recent improvements in the area, such as new schools, roads, or other community services which will enhance your neighborhood’s value may help the appraiser’s valuation.

What happens to the mortgage if I inherit the property?

Sandy Gadow

If you inherit a property in which there is a mortgage, under the federal law called the Garn-St. Germain Act, you are entitled to take over payments on the existing mortgage. This act prevents a lender from enforcing the “due on sale” clause which may have been in the mortgage which was on the property.

How Do I Get a Copy of My Credit Report?

Sandy Gadow

If you have been denied credit in the past 30 days, you have the right to request a free copy of your credit report. Beginning December 1, 2004 in the Western states, and nationwide in 2005, the three main credit reporting bureaus, Equifax, Experian and TransUnion will be required to give you, upon request, a free copy of your credit report once every 12 months. Once set up in your area, you will be able to obtain your free copy by calling (877) 322-8228, or on the internet at www.annualcreditport.com. If you prefer, you can write to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Georgia 30348-5281. You are assured of your free credit report by the Federal Trade Commission’s ruling last year under the Fair Credit Reporting Act.

To contact the credit bureaus individually:

  1. Experian
    P.O. Box 2106
    Dallas, TX 75002-9506
    (888) 397-3742
    www.experian.com
  2. Equifax Information Services, LLC
    P.O. Box 740241
    Atlanta, Georgia 30374
    (800) 685-1111
    www.equifax.com
  3. TransUnion, LLC
    Consumer Disclosure Center
    P.O. Box 2000
    Chester, PA 19022
    (800) 916-8800
    www.transunion.com

Related Question

What should I look for in my credit report?

Once you have obtained a copy of your credit report from the three main credit reporting bureaus, look for potential problem areas which could impact your over all credit score. Look carefully for inaccurate information, such as late payments which may be reported which are not correct. It is not uncommon for a creditor to show a delinquent credit card payment, for example, when you are know you have paid your bill on time. You should also check the public records section of your report which will show any tax liens, bankruptcies or default judgments which have been levied against you. Check the credit card accounts listed in the report carefully to be sure there are not any accounts which don’t belong to you. If you find errors, you will want to report them as soon as possible. You can learn more about disputing incorrect information at www.ftc.gov/credit.

Copyright © 2004 Sandy Gadow This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

TIP
Consider ordering your free credit reports one at a time. For example, order your report from Experian one month, from Equifax the next month, and TransUnion the following month.

I Am a First time Homebuyer. Is There a Special Loan for Me?

Sandy Gadow

Many lenders participate in the Community Home Buyer’s Program, sponsored by Fannie Mae, which is specifically tailored for the first-time homebuyer. This type of loan provides financing for low-to moderate-income buyers who might not qualify for a loan on traditional criteria. Under this loan program, you do not need to have a credit history and it allows you to show a willingness to pay by presenting paid utility bills, payments to a landlord, and other sources of credit or services.

An important feature of the Community Home Buyer’s Program is the 3/2 option. This means that you can buy a home with only 3% down of your own funds, instead of the usual 5%, and the reaming 2% can be a gift from relatives or borrowed from friends. Other loan requirements, such as your income-to-debt ratios, are relaxed under this program and you are not required to have a specific percentage of the purchase price in reserve or checking account as required for a conventional loan.

The disadvantage of this program is that there are limits on the amount of the loan you may apply for. To qualify for a loan, you must earn no more than the area median income (with exceptions for specified high-cost areas). You may want to check with your local bank to see if it offers this loan program and what the loan limits are for your area. You can learn more from the Fannie Mae Web site, www.homepath.com (or part of www.fanniemae.com).

Related Question

What is difference between the Community Homeowner’s Program and an FHA Loan?

FHA loans are insured by the Federal Housing Administration (FHA) and are made by qualified lenders which have been approved by the Housing and Urban Development (HUD) agency. The minimum cash down payment is 3% of the value of the home and part of this amount can be used for closing costs. Under a convention loan, or the Community Homeowner’s Program, (a Fannie Mae loan program), the 3% downpayment may be used for the purchase price of the home only. Qualifying standards for an FHA loan typically remain more lenient than for a conventional mortgage. One drawback of the FHA mortgage is the size of the loan allowed. FHA limits are currently $172,632 for most areas, and $496,342 for Alaska, guan and Hawaii. One of the biggest differences between the conventional, Community Homeowner’s Program loan and an FHA loan, is the payment of the mortgage insurance premium (PMI). Under the FHA program, an up-front payment of 1.5% of the purchase is required, although it can be added to the loan. Conventional lenders collect the PMI premium monthly. FHA requires that a home qualify under its standards, which might include requirements such as the roof needing to have a certain amount of economic life remaining.

Copyright © 2004 Sandy Gadow This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

How You Close on a Mortgage Is Your Call

Sandy Gadow

By Sandy Gadow
Special to The Washington Post

As the record-setting volume of home purchases and mortgage refinancing continues, many borrowers are becoming concerned about how to make settlement go as smoothly as possible. The right choice of a settlement agent is one way you can speed up your mortgage closing.

The settlement agent is the person who coordinates all the paper-pushing that goes into a closing. Generally, the agent has some sort of connection to a title insurance company.

Closing agents, however, are not all alike. You may have heard that title insurance rates and closing fees can vary from company to company, but you may not be aware of the differences in service you will receive from one company to the next.

Many borrowers also are not aware that they have the right to choose title insurance agents. Under the federal Real Estate Settlement Procedures Act, the seller cannot require you to buy title insurance from a particular title company. The lender may request that you use a title company it finds acceptable, and it likely will recommend some companies, but in most cases you have the choice. The lender usually always agrees with your pick.

This power of choice is a tool you can use to be sure your closing goes as smoothly and quickly as possible. Depending on where you live, you may choose among a title company, an escrow company, a lawyer or a real estate agent. Whichever entity is used, you will want to ask some basic questions before making your choice.

Your choice of closing agent will largely be determined by the state in which you live. In a number of eastern states, a lawyer will probably close your transaction. In the western part of the country, escrow or title companies typically handle closings. In many states, including Virginia and Maryland, as well as the District, there are attorney-assisted closings, title company closings and closings assisted by real estate agents. None of the local jurisdictions require a particular type of closing agent.

Closing is about preparation and service. Expect good service, and ask for it. Making the right choice ahead of time will be the magic key that opens the door to a speedy settlement.

Ask how quickly a title search can be performed. Ask the turnaround time for issuing a title commitment or title report. Ask who will communicate with the lender, appraiser, real estate agent, inspector and lawyer, if one is involved. Some title officers or closing agents don’t have assistants to help them get the reports out quickly. They can become bogged down with files, and yours may be on the bottom of the stack.

Ask if the title company or agent uses a “transaction-management system” or other means of internal or Internet software system to transmit information, or even documents, electronically. Many lenders have what is called “digital document delivery systems,” which means they can transmit your loan documents to your closing agent by way of the computer. The title company can receive your loan documents almost instantaneously. Funds to close escrow can be received electronically.

What this means is that if there is a change to the documents, a last-minute correction or addition, it can be handled within minutes.

When selecting a title company or closing agent, ask if they use this means of rapid document delivery. Ask if they use a system of instant communication for reports and documents. Ask ahead of time what kind of service you can expect.

The five major national title insurance companies are Fidelity National Financial Inc., First American Corp., LandAmerica Financial Group, Old Republic Title Co. and Stewart Title Co. Among them, they issue about 90 percent of the title insurance policies, said James Maher, executive vice president of the Washington-based American Land Title Association. Regional and one-state companies handle the remaining policies, he said.

All the national companies have transaction-management systems in place. This is important because information can be exchanged, approvals obtained and errors corrected almost instantaneously. In some cases, title reports can be read on a hand-held communication device or on cell phones so that most of the parties to the settlement have access to the information. In some cases, home buyers and sellers as well as professional service providers can log in.

Many regional insurers and larger closing agents have their own systems.

If you use a lawyer to handle your closing, you will want to ask how frequently the law office handles title searches, how large the staff is that will process your file and how quickly the closing date can be arranged.

Many law offices do not rely on real estate closings as a primary source of income, but rather as a way to accommodate clients or to generate further business. Be sure your lawyer has the staff available to quickly process your file. Ask if the lawyer will provide the closing documents to you one day before closing.

Many borrowers arrive at a closing only to find the lawyer or closing agent reading through the documents for the first time. Make it clear that you would like your closing documents to have been read and reviewed before you come in for signing. If there are discrepancies, these can be resolved before closing.

Do not be afraid to exercise your power of choice. Even if your lender recommends you use the title company that normally handles its closings, get several quotes on your own.

If you find a closing agent or title company that offers you a savings on title insurance, closing costs, title exam, search or courier fees, let your lender know. They may agree to match those cheaper fees. Get your quotes in writing, and present them to your lender. Your savings could be substantial.

You may be entitled to a discounted rate on your title insurance policy. If the previous title policy was written in the past two to five years, ask if you qualify for a “reissue rate.” Title companies may not offer the discounted rate unless you ask for it. The savings could be 20 percent or more of the original title policy, so be sure to ask.

Compare reissue title rates. Lawyers are not regulated by the state’s insurance agency and may charge a different rate from that of a title company. Similarly, reissue rates may vary from title company to title company.

This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

What Are Fannie Mae Guidelines and Will I Qualify?

Sandy Gadow

Your lender or mortgage broker may refer to “Fannie Mae Guidelines” when asking you for documentation supporting your loan application. They may have explained to you that you must qualify for the loan under those guidelines. What are they and will you qualify?

Fannie Mae is short for the Federal National Mortgage Association. Fannie Mae is the country’s second largest corporation and was established by an act of Congress in 1938. Fannie Mae was created to bring stability back to the housing industry after the depression. In 1968, Congress re-chartered Fannie Mae as a private company. Congress mandated that Fannie Mae operate with private capital, be self-sustaining, and enhance the flow of funds through the secondary market to homebuyers. It operates under a federal charter, which is called the Federal National Mortgage Association Charter Act. This act places certain rights and responsibilities on the company.

Fannie Mae does not directly loan money to you, the “primary” Borrower, but rather loans money in the “secondary market”, or to lending institutions. In short, by lending money to your lender, this frees up capital for your bank so they can go on to make more loans.

In order for Fannie Mae to buy single family home loans from mortgage bankers, savings and loan associations, commercial banks, and other financial institutions, the loans must conform to their set of “Fannie Mae guidelines.” Together with an acceptable credit score, they require certain “debt to income ratios.”  These ratios are calculated as a percentage made up of of your monthly gross income in relation to how much goes toward housing expenses and to servicing such debt as auto loans, credit cards, home loans, and credit lines.  You must be able to prove your employment and document your assets and liabilities (debt). Normally you will be required to verify two years employment. If you have a 25% or greater interest in a business, you would be considered self-employed. An accurate and reliable appraisal will be required. Fannie Mae requires that lenders use an appraiser who is licensed following their guidelines.

Fannie Mae only deals with mortgages made to individuals. A corporation or general partnership would not qualify for a Fannie Mae loan. Fannie Mae will allow a mortgage that has a co-borrower, and that person is not required to take title to the property. The income from the co-borrower will not be accepted for qualifying purposes, unless that person also signs on the promissory note.

Loans made for your principal residence, second home, or an investment property, all may qualify under a Fannie Mae loan program.

Fannie Mae sets loan limits with are linked to the Federal Housing Finance Board’s October single-family price survey. These loan limits are adjusted each year in accordance with the results of this housing survey. For example, the current loan limit for a single family residence is $417,000. (except in Alaska, Hawaii, and U.S. Virgin Islands, which carry a 50% higher limit). Loans made within Fannie Mae loan limit guidelines are termed “Qualifying” or “Conforming” loans. They generally carry lower interest rate levels than “Non-Conforming” or “Jumbo Loans.”

Copyright © 2012 Sandy Gadow This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

Related Questions

How do I calculate my debt to income ratio?

There are two types of ratios which Fannie Mae uses to determine the eligibility of your loan.  The first or “front end” ratio is measured by dividing your proposed total monthly housing expense (principal, interest, taxes and insurance) by your gross monthly income. The second ratio used is your “back end” or total monthly obligation-to-income ratio. The current acceptable standard is 28% for the front end and 45% for the back end. (28/45). You can calculate these ratios yourself to see where you stand.

Your total monthly payments (back end) will include the following:

  • Mortgage payments, including principal, interest, taxes, insurance and association dues.
  • Revolving credit card accounts (include the minimum payment on accounts)
  • Co-signed loans
  • Child support
  • Note: You do not have to include: utilities, telephone, auto insurance or childcare.

What if my debt-to-income ratio is too high?

The following strategies can improve your debt-to-income ratio.

  • Make a larger down payment. By making a larger down payment, your monthly payment will go down and lower your debt to income ratio.
  • Buy down the mortgage rate. Ask about paying extra or “buying down” the interest rate on your mortgage. A lower interest rate will result in a lower monthly payment and reduce your debt ratio.
  • Consider a Co-Signer. A co-signer can add to your income which can help improve your ratio.
  • Renegotiate with the Seller. If the above options are not possible, you can try negotiating with the seller for a reduced sales price.

What is a Jumbo Loan?

A jumbo loan is the same as a non-conforming loan. It is any loan which is made by an institutional lender which exceeds the Fannie Mae or Freddie Mac guidelines for a conforming loan.

TIP

You will save about a half percent in the interest rate on a conventional loan versus a jumbo loan, so if you can stay within the guidelines, it would be worth it.