Having worked in the mortgage industry for some time I have come across some pretty informed borrowers, and they usually get the best deals. Rarely do uninformed borrowers get the "best deal", if they are working with reputable lenders they more than likely get a good deal. However, the difference between a good deal and your best deal could be many thousands of dollars over the life of a loan. For this reason I decided to put a list of things you should know before you go.
This being said, the list will be minimal due to the fact if I make it too large or complicated most people will glaze over this material. Then they would find their selves in the same predicament of waiting for the lender to tell you these things and hoping they are correct. The list is:
1) Credit Scores - You should know all three of your credit scores AND have a fully tri-merged report outlining all of your creditors. Check each and every entry on this report for accuracy, should you find errors you should immediately dispute them with the bureaus and the creditor. You see all over this website, and others, get a free credit report here. The truth is the only free credit report comes from www.annualcreditreport.com this is a free service that will in most cases mail you a report. This report is different than the ones a lender sees. It only list the people on the bureau and how they report, no scores. You should PAY for a fully tri-merged report with scores. It will cost you abut $35 bucks and is worth every penny. If you want you can apply to a credit management system and they will give you this free report too. One of the best can be found here.
2) Documentation Type (Doc Type) - You should know what documentation you are prepared to provide. This distinction is the first thing a loan officer is going to determine when filling out your application and BEFORE he gives you a rate or closing cost. Lenders require that you PROVE: income, assets, employment, length of self employment, reserve assets, housing/ rental history, proof of insurance, collections are paid. Be prepared to show proof of anything that you dispute on your bureau with either a letter from the reporting party or undisputable proof that you are right. If you are unable to prove these things you may still get the loan....but the price is going up.
The documentation type falls into these categories:
There are three main types of light-doc/no-doc mortgages.
Stated-income mortgages tend to be for people who work but don't draw regular wages or salary from an employer. That includes self-employed people or those who make a living off commissions or tips. Stated-income mortgages are for people who make the money they say they make, but that amount doesn't show up on the bottom line of their income taxes. Expect to pay .5% - 1.5% premium over full doc loans.
No-ratio loans are often the right call for wealthy people with complex financial lives, retirees who live off investments and people whose lives are in flux because of divorce, recent death of a spouse, or career change. Expect to pay .5% - 1.5% premium over full doc loans.
Stated Income Stated Assets Are for borrowers that do not wish to share or can not share proof of income and proof of reserves in the bank. Expect to pay .5% - 1.5% premium over full doc loans.
No-doc or NINA (no income/no asset verification) mortgages are for creditworthy people who want maximum privacy and can afford to pay for it. Expect to pay 1% - 2.5% premium over full doc loans.
3) Loan To Value (LTV or CLTV) This is a measurement of how far into the value of the home you expect the lender loan. For example a $100,000 house with an $80,000 loan amount is 80% loan to value or LTV. We get this value by dividing the PRESENT value or sales price by the ACTUAL loan amount (PV/ LA = LTV). When you begin to go over 80% loan to value you are asking the lender to bear more risk, be prepared to pay more in the long run should you refinance or purchase above this LTV. Foreclosures happen most often on homes with less than 20% equity, and the banks know this.
If you go over the 80% threshold on a conforming loan you will be made to carry mortgage insurance, otherwise known as PMI, MI. This is to protect the investor should they have to foreclose. There are ways around this such as doing a combination of loans with a conforming first and a non-conforming second mortgage, however the second mortgage always comes in at a higher rate thus costing you more for the loan. Know what LTV loan you are asking for before you go.
4) Debt to Income Ratio (DTI) - This is where your credit bureau you bought earlier comes into play. Lenders will determine your ability to pay by your debt to income ratio. This is simply the amount of payments that show on your bureau plus the payment of the loan you are applying for divided by your GROSS income. (DEBTS + CURRENT PAYMENT / GROSS INCOME = DTI). Only use the minimum payment that you are required to pay and in most cases you can ignore payments with less than 10 payments remaining.
In times past FHA set the standard for allowable DTI Ratios they are currently at 33% & 44%. These ratios are called a Front Ratio and a back ratio. The front ratio is simply a percentage derived from dividing your mortgage payment (PITI) by your Gross Income. EXAMPLE - $1000 payment / $4000 gross income gives us a 25% Front Ratio. The back ration is simply the same formula we stated earlier. EXAMPLE $2000 total debts divided by $4000 total income yields a 50% DTI Back end ration.
The back end ratio is used most commonly in non-conforming and conventional mortgages. I have seen borrowers with a 75% back end ratio get approved with other factors being present such as plenty of liquid assets, job time, low LTV and so on. So if your ratio looks a little high you may be ok as long as the other pieces of the pie look good. If not, you may be looking at a stated documentation loan.
5) The Three C's - The 3 C's of credit comprise your entire financial life and stand for Character, Capacity and Collateral. You should look at these things as an underwriter would, because these are ultimately what the underwriter has to prove a case for before she signs off on your loan.
Character is the most important of the three C's. The underwriter will rank the importance of each of your current and past debts when measuring your capacity. Beginning with the most important credit, the mortgage, followed by installment loans, such as a car or personal loan, revolving loans, such as credit cards, and then all other loans. A mortgage lender is primarily going to be concerned with whether or not we have made our mortgage / rental payments on time, and then he or she will consider the other loans. Look at yourself as she would and give yourself a letter grade A-F.
The second C of credit, Capacity, is a measure of how much income we have versus how much debt we have. As discussed earlier, debt is broken down into two categories. First, the mortgage loan size and resulting payments and second, all other debts and their resulting payments. In general lenders allow mortgage borrowers to use between 28% and 35% of their gross-pretax income for mortgage payments and 33% to 45% for all debts including the mortgage. Give yourself a letter grade here objectively A-F.
The third C of credit, Collateral, is a measure of the size of your down-payment in the event of a purchase, and in the event of a refinance, it is the amount of equity you have in our home. It also calls into reason the over-all condition and desirability of the collateral. For Example a home worth $250,000 in the middle of a subdivision is a good collateral risk should the lender need to foreclose. However that same house set miles away from other homes of similar value, or surrounded by homes of lessor vale would call into question the ability to sell this collateral should foreclosure happen. Give yourself a letter grade from A-F on this as well.
Now average these letter Grades together and this will give you a good picture of how your loan application will be viewed and why you may be asked to pay a premium over other borrowers.
This material is, by no means, the whole picture when trying to price a mortgage. However if you know the answers to these questions before you go you will be a better informed customer, know what questions to ask and as we said in the beginning. "The best informed customers always seem to get the best deal".
Aubrey Clark - Editor