Category Archives: Loans

Do I Need a New Title Policy When I Refinance My Mortgage?

Sandy Gadow

You will not be required to obtain a new Owner’s Title policy when you refinance your mortgage, but you will be required to obtain a new “Lender’s policy” of title insurance, naming the lender as the insured. The Lender’s Policy of title insurance protects the lender for the amount of their mortgage loan. The new policy is required because any number of things could have happened to the property since the time of the last title search. Such events as tax liens, liens for unpaid child support, or mechanic’s liens can occur without the homeowner even being aware these liens exist. You may feel certain that nothing has changed since you originally purchased or refinanced your property, but the lender will have to have assurance from the title company that everything has been done to certify that the loan is fully protected. It is the lender who requires the new loan policy of title insurance and in order for a title company to issue this new policy, a new title search must be performed.

Related Question

How Often Can I Refinance my Mortgage?

You can refinance your mortgage as often as you like, however, many lenders require that you have lived in the property (“seasoned”) the property for at least one year before granting a new loan. Lenders may also require that you hold a loan one year before refinancing to a new loan. You will want to carefully read the “Prepayment Clause” in your mortgage documents, to determine if you will have a penalty to pay if you pay off the old loan before the maturity or due date of the loan.

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You may qualify for a discounted rate or “re-issue” rate on this new title insurance policy if your previous policy was issued in the last 2-5 years. Ask your title company or escrow officer if you qualify.

Why Is My FICO Score So Important in Getting a Mortgage?

Sandy Gadow

Most lenders rely on a credit score, called a “FICO score” to determine a Borrower’s credit worthiness when applying for a mortgage. Your FICO score or number may determine what type of interest rate and loan program you are likely to be offered from any one lender. Each lender may have different guidelines and requirements to fit their individual loan programs. Your FICO score is comprised of a compilation of your credit history from the three major credit reporting bureaus, Equifax, Transunion, and Experian. Since each credit bureau may collect your credit data differently, an average score of the three bureaus is deemed the most accurate. In general terms, a score of 720 or better will mean that your credit risk is very low and you may be offered a preferred low interest rate and several loan program options. A FICO score in the range of 660 to 719 is still acceptable for several different loan programs. A score of 620 to 659 indicates a Borrower shows a higher degree of risk to default on a loan, so different guidelines may apply than for a Borrower with a higher FICO score. Under 619, a Borrower is generally considered a high risk for default. A high risk Borrower may still qualify for a loan, but the interest rate or terms may not be as favorable as of those offered to a low-risk Borrower.

How do I establish credit to qualify for a mortgage?

If you are a young Borrower, or a new Borrower, with little or no credit history you can establish credit by working for two years, paying off something small, like a student loan each month, and get one debit card and pay it off each month.

Most lenders rely on a credit score, called a “FICO score” to determine a Borrower’s credit worthiness when applying for a mortgage. Your FICO score or number may determine what type of interest rate and loan program you are likely to be offered from any one lender. Each lender may have different guidelines and requirements to fit their individual loan programs. Your FICO score is comprised of a compilation of your credit history from the three major credit reporting bureaus, Equifax, Transunion, and Experian. Since each credit bureau may collect your credit data differently, an average score of the three bureaus is deemed the most accurate. In general terms, a score of 720 or better will mean that your credit risk is very low and you may be offered a preferred low interest rate and several loan program options. A FICO score in the range of 660 to 719 is still acceptable for several different loan programs. A score of 620 to 659 indicates a Borrower shows a higher degree of risk to default on a loan, so different guidelines may apply than for a Borrower with a higher FICO score. Under 619, a Borrower is generally considered a high risk for default. A high risk Borrower may still qualify for a loan, but the interest rate or terms may not be as favorable as of those offered to a low-risk Borrower. To order a copy of your FICO score, contact Fair, Isaac Corporation at: www.myfico.com

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To improve your FICO score, avoid opening new charge accounts, buying a car or furniture on time or looking on the internet for low rate credit deals between the time when you receive a loan commitment and the time you close.

Copyright © 2003-4 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Related Question

 

How can the Right of Rescission Protect Me?

Sandy Gadow

The Right of Rescission is a protection given to borrowers under the Truth in Lending Act. This right gives borrowers of certain types of loans the opportunity to cancel their loan within 3 business days of signing the loan documents and qualify to receive a full refund of any monies paid. In your rush to refinance your home or to take out a personal loan, using your home as collateral for the loan, you may have second thoughts or want more time to shop for other financing options. This act gives you extra time to carefully consider your new loan. Sometimes called a “cooling off” period, it allows you those 3 extra days to be certain the loan is exactly what you expected.

In order for the loan to fall under the Right of Rescission protection laws, the loan must be to refinance a loan on your home with a new lender, or a refinance in which you will take cash out, over and above paying off the old or previous mortgage. The right of rescission does not apply in all cases where your home is used as collateral for the loan. You do not have the right of rescission when: you apply for a loan to purchase or build your principal home; you consolidate or refinance with the same lender who already holds the mortgage on your home when no additional funds are borrowed, or when a state agency is the creditor for your loan. If you are increasing the size of your loan, refinancing with a new lender or taking out a loan against your home, you can cancel the entire transaction within the 3 day rescission period. Whether your home is a condominium, a mobile home, or a house boat, as long as it is your principal residence, the right of rescission will apply. The right applies to certain installment loans, in which you borrow a fixed amount and repay the debt on an agreed payment schedule as well as to home equity credit lines.

You have the right to “rescind” or cancel your credit transaction until midnight of the third business day after the loan documents are signed. The mortgage or Deed of Trust will not be recorded until the 3 day waiting period is over. The first day is considered the day you sign the credit contract. You will receive a Truth in Lending disclosure form containing certain important disclosures about the credit contract. These disclosures explain the key terms of the credit being offered: the annual percentage rate; the finance charge; the amount financed; the total of payments; and the payment schedule. You will be given two copies of a notice explaining your right to rescind. For rescission purposes, business days include Saturdays, but not Sundays or legal public holidays.

During this waiting period, your lender will not take any action on your transaction, nor will you receive the proceeds from the loan until after the 3 day period has expired. If you do decide to exercise your right of rescission and cancel the loan, you will be required to notify the lender, in writing, that you are canceling the contract. You may use the form provided by the lender, or by writing a letter or telegram. Whichever form of written notice you use, make sure it is delivered, mailed, or filed for telegraphic transmission before midnight of the third business day. Keep in mind that to qualify, you must follow the written procedures and not just notify the lender by a telephone call or a visit to the lender.

Within 20 calendar days after receipt of the notice of rescission, your lender will be required to return any money or property that was given to anyone in connection with the loan and will be required to take any action necessary to reflect the termination of the security interest.

Related Question

Will the appraisal fee and all title and escrow fees paid also be refunded to me if I rescind my refinance mortgage?

The Federal Truth in Lending Act guarantees your right to a refund of ALL fees you have paid in advance of obtaining the refinance mortgage if you rescind the loan. These fees include the appraisal fee, title search fee, escrow fees, any inspection fees.

Copyright © 2002, 2004 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

How Will My Loan Be Handled in Escrow?

Sandy Gadow

Once you have opened escrow and given the escrow officer the details of your purchase, you will next give the officer the name of the lender who will be financing your purchase. You may not know the name of the lender you will be using for up to 10 to 15 days, but as soon as you have your loan approval, you will notify your escrow or closing agent of the lender’s name and address and your loan number, if it is available. Your escrow officer will contact your lender to begin coordinating the exchange of loan documents and the loan proceeds. It is important that your escrow officer and your lender work closely together. There may be items found in the title search which the lender may require be cleared up before closing. There may be unpaid taxes or judgments, which the lender would require be taken care of. Once you have given the lender all the personal financial documents which they require, it is then up to the escrow or closing agent and the lender to work together to finalize the loan processing.

When you applied for your loan, you will have filled out a loan application form, given the lender any required documents, such as bank statements, income verification statements, perhaps copies of your tax returns, and a copy of the sales agreement. You may have been asked to supply other documentation regarding your income and assets. Once the loan officer has all your pertinent financial information, your loan application will be submitted to the lender’s processing department. During this time, the lender orders a credit report of your personal credit history and an appraisal of the property you will be buying. The lender may send verification forms to your employer, bank and creditors, to verify the information which you supplied on your loan application form. If any further information is needed, you will be notified to supply the missing information.

Once your loan has passed the processing department, it will be sent to the lender’s underwriting department. The underwriting department will review your application, looking closely are your employment history and stability, your income as compared to your outstanding debts, your credit history, and the written appraisal which was performed on the property. Once an approval has been made, your loan will be returned to the processing department. If your loan is approved, you will be notified of the lender’s decision. Your lender will also notify your escrow officer or closing agent of the approval and make a request for any additional title requirements which the lender may have.

The property your are buying may be located in a flood zone, or other hazard area, which would require special title endorsements to the policy of title insurance. The lender will notify your escrow agent as to these special requirements. If you are buying a condominium, your lender will require special condominium endorsements to the title policy. Your lender’s processing department will coordinate with your escrow officer to be sure your lender receives any surveys, pest inspection reports and proof of hazard and flood insurance which are required. You don’t have to worry about any of these details, as your lender and your escrow officer will work together to get the appropriate documents required for closing.

The one thing you should do, is to request a copy of each of the inspection reports and title search reports as they become available. Do not to wait until the last minute to review these reports. Read them over carefully and ask any questions well before your closing date. You may have requested a building inspection be performed on the property. Read it over carefully and be sure you understand everything listed in the report before signing your approval. Although typically a lender will not require a building inspection report, most buyers ask to have one performed. The lender will require a copy of the pest inspection report and clear verification from the pest inspector. Your closing agent will coordinate the proper insurance endorsements with your insurance agent. Your lender will require that they be listed as a “loss payee” on the policy and your insurance agent together with your escrow officer will handle that for you.

The purchase agreement which you signed with the seller will specify who is responsible for the costs at closing. Some costs will be shared between Buyer and Seller, while other costs will be divided between the two parties. Some costs, such as the loan fees and other specific Buyer costs will be the responsibility of the Buyer alone. You will have been given an Estimate of Closings Costs when you applied for your loan, which will spell out the costs associated with your loan. In order that there are no surprises, your closing agent will notify you with the exact amount of money you will need to bring to the closing to cover the down payment and any other funds necessary to close the loan.

Copyright © 2000 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

What Is The Difference Between a Title Theory and a Lien Theory State?

Sandy Gadow

Often a buyer wonders if he is buying property in a state which is considered a “title theory state” or a “lien theory” state. Why would you need to know which custom is practiced in your state?

When financing is involved in a real estate purchase, it is important to understand if you will be subject to the title or lien theory of mortgages. The way in which a state will interpret how mortgage law is followed will be determined by which type of theory is practiced in your state.

Each type of theory has special considerations on who will hold title and how foreclosure proceedings would take place if they were to become necessary. In title theory states, the borrower does not actually keep title to the property during the loan term. The seller gives the buyer/borrower a deed to the property but when the borrower signs the mortgage for the loan the borrower gives the title back to the mortgage holder. The lender then holds title to the property, as security only, until all loan payments have been made. During that time the borrower has the right to possession of the property, and the lender delivers the deed back to the borrower only after the loan obligation has been satisfied.

In a lien theory state, the buyer holds the deed to the property during the mortgage term The buyer promises to make all payments to the lender and the mortgage becomes a lien on the property, but title remains with the buyer. The lender’s lien is removed once the payment of all loan payments have been completed. Foreclosure proceedings in a lien theory state may be more difficult for the lender than in a title theory state, due to the fact that the buyer is holding title to the land and not the lender.

There is another type of mortgage custom which is referred to as the Deed of Trust theory. Under a Deed of Trust, the seller gives title to the buyer, and the buyer then signs a Deed of Trust which makes the lender the beneficiary in the Deed of Trust. A third-party trustee typically holds the title to the property in trust, with the power to foreclose on the buyer if there is a default. The buyer owns the property and has all rights of ownership and possession, subject only to the conditions in the deed of trust. When the loan has been paid off, the lender will give clear the title by way of recording a Deed of Reconveyance. The Deed of Reconveyance removes the lender’s interest in the property.

Some states have modified the title and lien theories, and these states are referred to as “intermediary theory” states. In these states, the title remains with the borrower, but the lender may take back title to the property if the borrower defaults on the loan. Be sure to check with your title officer at the time of your purchase or sale to verify the current practice in your state.

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

What Is The Difference Between A Mortgage And A Deed of Trust?

Sandy Gadow

When a borrower signs a promissory note, he is agreeing to pay the lender a specific amount of money according to certain conditions. In order for the lender to protect his interests, he will require that the borrower sign a mortgage or similar security instrument in favor of the lender. This may be in the form of a mortgage or a deed of trust. Whichever document is used, the purpose of both types of documents is to secure the note and offer protection to the lender.

Depending on where the property is located, state law will determine which type of security instrument must be used. In title theory states, a mortgage is used and it conveys ownership to the lender. A clause in the mortgage provides that title reverts back to the borrower when the loan is paid. In lien theory states, the mortgage creates a lien only on the property and the title remains with the borrower. The lien is removed when all the payments have been made.

Some states are considered modified lien theory states and in these states the title remains with the borrower, but the lender may take title to the property if the borrower defaults.

The basic difference between the mortgage as a security instrument and a Deed of Trust is that in a Deed of Trust there are three parties involved, the borrower, the lender, and a trustee, whereas in a mortgage document there are only two parties involved, the borrower and the lender. In a Deed of Trust, the borrower conveys title to a trustee who will hold title to the property for the benefit of the lender. The title remains in trust until the loan is paid.

Often a title company, escrow company or bank, is listed as the trustee on the Deed of Trust. When the loan has been paid, the trustee will issue a release deed or trustee’s reconveyance deed. This deed of reconveyance should be recorded at the county recorder’s office, to make public notice that the loan has been paid and that the lender’s interest in the property has ended.

Another difference between a mortgage and a deed of trust is the manner in which foreclosure proceedings take place. State law will determine the method of foreclosure which must be used. Generally, the rules when using a Deed of Trust allow for a faster foreclosure time than with a judicial foreclosure required with a mortgage. Under a Deed of Trust, when the borrower defaults on the loan, the lender delivers the Deed of Trust to the trustee, who then is instructed to sell the property.

After proper notices have been posted and rules are followed, the property is sold at a trustee’s sale and the loan is paid. Be careful not to confuse a deed, which conveys title and is evidence of ownership to property, with a Deed of Trust, which is a means of securing a note and providing for foreclosure proceedings.

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Will My Loan Have A Prepayment Penalty?

Sandy Gadow

Prepayment penalties are those charges which a lender imposes if you wish to pay off your loan early. Typically home mortgages are written for 15 or 30 year periods of time. While you may not hold the mortgage for the full term, it is likely that you will probably stay in the property longer than just one or two years.

For this reason, you should carefully read your note and mortgage documents, in particular the prepayment penalty clause to understand conditions which would apply to your loan. The loans which will carry a prepayment penalty often penalize you only for paying off the loan early in the first five years, and thereafter a graduating scale may apply, or there may be no prepayment penalty at all after that initial five year period.

To find out if your loan will have a prepayment penalty you should first look at the type of loan you will be acquiring. Traditional loans with fixed rates of interest usually do carry a prepayment penalty while loans with an adjustable interest rate generally do not carry the prepayment clause. There are some types of home loans which re prohibited by law from charging prepayment penalties. These loans include FHA and VA loans and federally chartered credit union loans. Prepayment penalties are illegal in some states, so you may want to check with your lender or attorney for the laws which apply for your state.

To find out if your loan will have a prepayment penalty, ask your lender when you first apply for your loan. Ask how much the prepayment penalty will be if there is to be one, and for what period of time it will apply.

Prepayment penalties can run between 2 to 4 percent of your loan amount. While you may have no intention of selling your house in the near future, and feel that a prepayment penalty would not really be an issue for you, consider the possibility of your refinancing you loan within the 2 to 5 year period of time. Interest rates may drop and you may want to refinance your loan, in which case the prepayment penalty could become an issue.

It is best to find out all the details about any prepayment penalty which may apply to your loan before you sign your loan documents. Ask questions, and if there is to be a penalty, ask if the lender would consider waiving the prepayment penalty for you. You never know when your circumstances may change and you may want to pay off or refinance your existing mortgage.

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

Escrow Impound Accounts: Do You Have a Choice?

Sandy Gadow

Escrow impound accounts are those accounts which lenders set up to collect “up-front” money from you when you take out a mortgage to cover future expenses such as property taxes and insurance. Lenders like to set up these impound accounts, as they are then certain that the property taxes and insurance will be paid on time, as they will be holding the money and paying these expenses for you. You can typically waive escrows on a conventional loan if your loan-to-value ratio is 80% or less. The key point is to convey to your lender or mortgage broker from the start that you choose to waive the escrow account option.

The lender may charge you an additional 1/4 point for this option to “waive escrows. “This is not an increase in the interest rate, but rather a one-time charge. If your loan is for $l00,000.00, for example, and you are paying no points, you would pay $250.00 for the privilege of waiving the escrow impound account. In the long run it may well be worth it. It is very difficult to get a lender to cancel the escrow impound account once it is in place, and difficult to get the lender to pay out any interest accrued on the money. Only about 14 states have passed legislation which requires the lender to pay interest on your escrow funds held in these accounts.In some states, lenders allow buyers to set up separate accounts into which they place a certain amount of money and then pay the insurance and property taxes themselves.These are called pledge accounts, and they must be set up before you close on the house.

If you change your mind before the close of escrow regarding your escrow account, you can ask the lender to redraw your loan documents, but they will charge you a fee for this and it would delay your closing. It is best to make a decision regarding the escrow account option before you start shopping for a loan.

If you do choose to allow the lender to collect for escrow accounts, keeping track of your escrow money may become difficult. Many loans are sold in the secondary money market and the original lender you contracted with may not be the lender you are dealing with today.You definitely loose control of that money once the lender has collected it from you.

In some cases you may find that the lender did not pay the hazard insurance or property taxes on time and you receive a cancellation notice or penalty assessments. In this case, you would need to contact your lender, sending along a copy of the bill. The lender should pay the penalty for not paying the taxes or insurance on time.

Escrow impound accounts do have their advantage to some borrowers, however, in the case where you do not want to be bothered to plan ahead and save to pay the property taxes and insurance. When the lender collects this money from you each month, you don’t have any worries when these expenses come due.

You may feel that your lender is requiring you to place more money than necessary into the escrow account. Typically, lenders collect a two-month cushion for taxes and insurance. There is a law which governs the lender’s ability to collect escrow money and if you have a specific complaint you can contact the Department of Housing and Urban Development or the State or Federal financial regulators.

Related Questions

Can I cancel my impound account anytime during the life of my loan?

Most lenders will not allow you to cancel the impound account on your existing loan. The only way to get out of your impound account requirement is to refinance your loan with your existing lender or write a new loan with a new lender.

Are lenders required to pay interest on escrow accounts?

Legislation was introduced in Congress in 1992 and 1993 which would have required lenders to pay interest on your escrow monies being held in an escrow account with your lender, but unfortunately this legislation did not pass. Some states do require interest be paid on escrow account funds, so you may want to check your state laws.

What rights do I have in my lender does not pay my property taxes on time from the money they hold in their escrow account on my behalf?

Your best remedy is to send a copy of the bill to your lender. They should be responsible for the penalty for failing to ay the taxes on time, as long as you were current in your mortgage payments. If you lender refuses to pay the penalty, you may have the option of filing a complaint under RESPA guidelines.

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