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- How is my interest rate
determined?
- What are origination and
discount points?
- How much should my closing costs
be?
- How can I view my credit report?
- What is the difference between a
conventional and an FHA loan?
- What is the difference between
20% down and 80-10-10 loans?
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| 1. How is my interest
rate determined? |
Two challenging questions
that surround every loan are-- How does a lender determine my interest
rate? What can I do to ensure I get the best possible rate? To answer
these questions we must consider three criteria points on which a
lender bases their decision.
Credit Rating - The credit score
is the most important point in mortgage lending. For most lenders, a
"grade A" conventional loan is one in which a borrower scored 620+ on
their credit report. The credit score is not the only aspect
considered in lending, however in most cases it is the most crucial.
Lenders will also look for multiple late payment occurrences over the
last two years. Severe late payments can result in a higher interest
rate. Keep in mind on FHA loans, lenders aren't regulated by strict
guidelines and can work with borrowers who have credit scores as low
as 500. Also with FHA loans, lenders review credit discrepancies for
the past 12 months. If late payments have occurred during this time
and borrower explanations are provided, customers with "damaged"
credit are most likely to be approved for this type of loan.
Ratios - Secondly, the borrower's
monthly obligations (this does not include utilities, phone, or items
generally not reported on a credit report) are calculated and reviewed
by lenders. Two ratios are determined, front-end and back-end. For
most lenders, a "grade A" conventional loan is one in which a borrower
has a front-end ratio less than 28% and a back-end ratio less than
36%. For example, a borrower has a gross monthly income of $4,000, a
car payment of $350, a credit card payment of $55, and a new house
payment of $1,000. The calculations are as follows:
$4,000/1,000 = 25% Front-end Ratio
$4,000/1,405 = 35% Back-end Ratio
Down Payment - Thirdly, the lender
factors in the amount of a borrower's initial down payment. The less
money spent on the down payment means a higher interest rate charged
by the lender. Simply stated, more risk for the lender equals a higher
rate for the borrower. Even if a borrower has perfect credit and wants
to put 0% down, their rate will generally be about ½% higher than a
person who puts 10% down. Ask Supreme Lending for details on lenders who accept 0% down
payment loans. After a lender has considered the three points
described above, the borrower's application must pass the
specifications set by an underwriting department for the loan to be
approved. Please contact an Supreme Lending representative for
additional information by contacting Supreme Lending or take a walk through Supreme Lending's Five Steps To A Successful Closing.
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| 2. What are origination
and discount points? |
Lenders generally charge
origination and/or discount points for the following purposes:
A lender will meet with you to determine which loan program is best
suited for your needs. Once all your information is acquired, the
lender will submit your file to an underwriter for final loan
approval. The loan officer will track this information and inform you
of any additional conditions throughout this process. When your loan
closes and funds, the origination amount is paid to the company you
used to obtain your loan. The loan officer generally receives 50% of
the origination as wages for completing the transaction.
Discount points are used to "buy" the interest rate down. Let's assume
you call for a rate and the loan officer tells you that the rate today
is 7% with one origination and zero discounts. What this translates to
is that you have the option to 'buy down" your interest rate with
discount points. This is generally accomplished by paying one point
for each ¼% reduction in the interest rate. If you want a 6.5%
interest rate, you would pay the lender 2% of the loan amount. Assume
the loan amount (not the purchase price) is $150,000 then you would
pay $3,000 in discount points. Remember that all points on
purchases are tax deductible for the year that you complete the
transaction; points on refinances are deductible over the term of the
new note. The discount fee is normally charged as a line item on
your HUD or settlement statement at the time of closing.
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| 3. How much should my
closing costs be? |
Your closing costs depend
on the type of loan you decide is best for you. If you meet the
profile of a non-risk borrower, you normally pay the following amounts
depending on your home state.
- Origination: 1% of the loan amount
- Discount: $0, unless you decide to
"buy" the rate down (refer to FAQ #2)
- Appraisal: $325-$350 depending on
the house size
- Credit Report: $65 for a full 3
bureau credit report (refer to FAQ #4)
- Underwriting: $350 payment to the
end investor for services provided
- Lender: $250 payment to the lender
for services provided
- Flood Certification: $25
certification that your property is not in the 100 yr. flood zone.
- Title Charge: $450 payment to the
title company for closing your loan
- Title Policy: 1% of purchase price
depending on the state (the seller normally pays)
- Recording: $200 payment for filing
fees depending on the state
As you can see there are many fees associated with purchasing or
refinancing a home. Many of these costs are third party charges and
cannot be negotiated by you or the lender. However, often times the
lender will pay some of these fees for you in exchange for a slightly
higher interest rate.
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| 4. How can I view my
credit report? |
An important key point a
loan consultant considers when helping you decide which lender/program
is best for you is to view your credit. For most mortgage companies,
you will need a 3 RMCR (Residential Mortgage Credit Report). This
report generally costs $60-$70 depending on the lender you choose. The
purpose of this report is to pull your credit history from each of the
three major credit-reporting agencies--Equifax, Experian, and Trans
Union. The mortgage company does not make any money on this
transaction. Your lender is required to use outside companies to
acquire your credit report, as they are impartial to the findings on
your credit report. Your account balances and account history on your
report are verified. You will be provided with a "credit score". If
you have a credit score of 620+, you most likely will have more
options to consider with your loan.
Many lenders will use a one-bureau credit report for the initial
consultation regarding your loan interest. The one bureau credit
report generally costs the lender $7-$15. The lender will absorb this
expense in attempt to gain your business with their mortgage company.
This report pulls your credit from one of the three major credit
bureaus to give the lender a "snap-shot" look at your credit history.
We highly recommend that you view your credit report before you chat
with a loan officer to ensure the validity of the information they
present to you. Need A Credit Report? Get the information you need on
one report. Start Here!
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| 5. What is the
difference between conventional and FHA loans? |
| There are many differences
between conventional and FHA loans. In this portion we will outline
some of the major differences for you. Contact an Supreme Lending representative for additional information on conventional and FHA
loans.
To give you an example, let us compare
the difference between a Community Homebuyer loan (similar to FHA, but
falls under the guidelines of a conventional product) and an FHA loan.
* This example is using a purchase price of $100,000 on a 30 year
fixed term.
**Also, please see explanations below this illustration for detailed
analysis.
| |
Conventional |
FHA |
| Minimum Down Payment |
$3,000 |
$3,000 |
| Closing Costs |
$3,000 |
$2,500 |
| Upfront Mortgage Insurance |
-0- |
$1,500 |
| Loan Amount |
$97,000 |
$98,500 |
| Monthly Mortgage
Insurance |
$78.41 |
$41.04 |
| Taxes |
$195 |
$195 |
| Interest Rate |
6.75% |
7.0% |
| Homeowner's Insurance |
$55 |
$55 |
| Principal and Interest |
$629.14 |
$655.32 |
| Total Monthly Payment |
$957.55 |
$946.36 |
There are several differences between
the two loans. On FHA loans, the minimum down payment is 3% and can be
"gift" money. On a conventional loan, the down payment must come from
the borrower's own funds. Additionally, the money on a conventional
loan must be "seasoned" (60 days in the bank) prior to purchasing the
home.
In the previous example, notice the closing costs are generally the
same with the exception of the Upfront Mortgage Insurance required on
the FHA loan. The Upfront Mortgage Insurance is calculated by
multiplying the purchase price times 1.5% and then adding the amount
to the base loan amount ($100,000 x 1.5%) + $97,000 = $98,500 (new
loan amount with upfront MIP rolled into the note). There is NO
upfront mortgage insurance on the conventional loan, but the monthly
factor is slightly higher.
The taxes will be the same on either loan for which you choose. A
common mistake is that people believe is their taxes will vary
depending on the loan they choose. This is simply not true. The
title company who closes the loan submits the taxes directly to the
lender. If you reside in an attorney state, your representation is the
one who orders the tax certificate from the Appraisal district. Taxes
reported to the lender will be included in your monthly loan payment.
There is no mark-up or service charge over and above the actual tax
amount.
Interest rates on FHA loans are generally about .25% higher than on
conventional loans. This percentage difference will vary depending on
the lender you choose. Most importantly, ALWAYS ask to get the lowest
rate.
Homeowner's insurance works the same as taxes. You pay the lender for
your policy amount. The lender will escrow this amount and send it to
your insurance company at the end of the year when renewal is due.
The principal and interest portion of the payment is calculated by
configuring the loan amount (MIP rolled into the balance on FHA) and
term into an amortization schedule to calculate the payment amount.
Depending on the term and interest rate on your note, you will notice
a large disparity between payments. Contact an Supreme Lending
representative for additional information on conventional and FHA
loans by clicking here.
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Lender and see if you are getting the best deal! Start Here!
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| 6. What is the
difference between 20% down and 80-10-10 loans? |
The difference between a
straight 20% and an 80-10-10 loan is that the borrower has an initial
down payment of either 20% or 10% of the purchase price. For example,
the purchase price is $100,000 and you put down 20% ($20,000). The 20%
is required, plus closing costs and escrows.
Using the same purchase price of $100,000 for an 80-10-10 loan, you
put down $10,000 and then ascertain a second lien for $10,000. You
will have two mortgage payments--one payment to the primary lien
holder and another payment to the second lien holder.
In both of loan situations you do not pay mortgage insurance. In
addition, you have the option to escrow your taxes and insurance.
Simply stated, one loan has a greater down payment and less a monthly
payment expense.
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Mortgage Rates? Let us help find you the best competitive
rate! Get a FREE No Obligation
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