What is a “Primary” Residence?

Published on December 20, 2007 in Mortgages. 0 Comments

You may be surprised when your mortgage lender asks you if the property that you are considering will be your primary residence. In fact, this question is a normal part of the loan application process. The reason for this is that a home purchased as a primary residence is eligible for a more favorable interest rate than a home that is purchased as a rental property, an investment, or as a vacation home.

The reason for the more favorable rate is relatively straightforward. History has proven to lenders that homeowners will desperately try to maintain their primary residence if circumstances change, while they may be more likely to let go of an investment property. The lower risk associated to lenders equals a lower interest rate to buyers.

So, is the home your purchasing a primary residence? If you plan on living in the home for at least one year, and plan on moving into the home within one month of closing, then, yes, the home is a primary residence.

What is not a primary residence? The obvious answer is a vacation home. Other homes that would not be considered permanent residences would be homes that you plan on renting, either full time, or during the time that it stands empty, such as if you do extensive traveling.

If you buy a home as an investment, with the thought of sprucing it up, putting some fresh paint on it, maybe planting some shrubs, and selling it quickly, then it is not a primary residence. Even if you live in the home at the time you are doing the work, for all intentions it is an investment property.

What constitutes a primary residence is very straightforward. If you have any additional questions, you should be able to find the answers you need from your mortgage lender, or a Web site.

Does it Matter Who Makes the Mortgage Payment?

Published on December 10, 2007 in Mortgages. 0 Comments

You may be curious if it matters who makes your mortgage payment. While the short answer is that your mortgage lender will take your money from whomever mails in the check, the longer answer is that, yes, indeed, it can matter. If you have a permanent mortgage in place, and are making the regular and timely payments, no one will notice if the checks are coming from you, your husband, or a parent. Problems only arise if you wish to make changes in the loan.

If you want to refinance the loan, to lower the interest rate, or change the length of the loan, you will be subject to the same inquiry that you received when you initially applied for your loan. Of course, if your financial situation has not changed at all, or changed in a positive manner, such as an increase in your salary, or you have paid off additional debt, you are really in an excellent position to negotiate a lower interest rate from your lender.

However, if your financial situation has changed in a negative way, the lender will not necessarily care that you have been making timely payments. For example, if you have lost your job, and your parents are making your mortgage payments, it makes sense that you would like to refinance to lower interest rates, or a longer term, to ease the financial burden on them, and you, as you get back on your feet. However, the lender will look at this as an entirely new loan, with only your ability to repay as their concern. If you do not have the ability to repay the loan, they will not be interested in refinancing it, no matter how generous and supportive your family is. The reason is simple, you are receiving a favor from your family when you receive financial help, but they are certainly under no obligation to repay the loan, and so, as far as the lender is concerned, you could default at any time.

If you truly need to refinance your mortgage, the best option would be to have the person who will be making the payments go in with you as a co-borrower on the loan. This should ease the lenders mind, as this gives the other person a binding obligation to repay the debt.

What Happens When You Skip a Payment?

Published on November 22, 2007 in Loans. 0 Comments

Unfortunately, many people do not understand exactly what happens when they skip a loan payment. It is very easy to be tempted to skip a loan payment, maybe before Christmas when you have a lot of spending to do, or if a medical emergency hits and you are strapped for cash. If you have always been timely before, you know the mortgage lender will not foreclose for one month’s missed payment, so, it won’t hurt, just one time, right?

Skipping a payment is not as simple as it sounds. A mortgage lender will not credit your payment as a skipped payment, to be tacked on at the end of your payment term. Instead, when your next payment is received it will be credited to the past due amount. Therefore, if you do not make another payment for an additional 30 days, you will then be past due for another month. In this case, before you realize it, and maybe without ever realizing it, you have a history of being late every month.

So, what if you cannot make your payment? The first step is to call your lender and seek guidance. If you have always been timely in the past, they may be willing to set up a schedule where you can skip a month, and get back on schedule. If this is not possible, you may be able to work out alternative arrangements, such as paying half the mortgage total, and then paying the other half in two weeks. While the total may still be considered delinquent, you will be on schedule, and will only have one month’s payment marked as late.

The most important things that you can do to keep your credit history in good shape during a time of financial turmoil is to have some cushion in your savings account for emergencies, enough to cover a few months mortgages and living expenses ideally, and notify your lender at the first sign of trouble. Most lenders will be much more inclined to work with you while you are still current. Once you become delinquent, they will be more concerned about you defaulting and may be less inclined to negotiate with you.

Pay Down Debt or Pay More Down?

Published on October 16, 2007 in Mortgages. 0 Comments

When you are shopping for a mortgage, you may have the option of deciding whether you should pay down existing debt or put a larger down payment on the property that you wish to buy. Like many financial matters, there is no clear answer. If you find yourself with a nice amount of money, either from your savings account, selling a previous property, or as a gift from your parents or in-laws, you want to spend it in the way that makes fiscal sense.

If you have several credit cards carrying balances or credit card and other debt equal to or greater than nine percent of your total income, the wisest choice is to pay down your debt. Once your current debt or potential debt gets high enough, lenders become nervous about your ability to take on more debt, and regardless of income, you will be limited in the size of mortgage that you can take on.

If you have a low debt load, perhaps two credit cards, one that carries a balance and one that gets paid off monthly, you will probably not improve your assumed risk situation significantly by using your cash windfall to pay off your credit card debt. In a situation like this, it would make more sense to use your money to increase the amount of down payment that you can offer, which may make it possible to lower your interest rate, buy with fewer points, or eliminate the need to purchase hazard insurance on your mortgage loan.

If you are still not clear on what would be the best choice in your situation, you may want to play around with your numbers. You can run the numbers several different ways, and see which choice makes the most sense for your situation.

Raise Credit Scores By Paying Delinquencies?

Published on October 15, 2007 in Credit. 0 Comments

If you are planning to buy a home in the near future, you will definitely want to get your credit history in order. One of the main causes of a low credit score is delinquencies on credit cards. Lenders are extremely nervous about loaning money to someone whom they view as too casual about repaying their debts, whether they can clearly afford the payments or not. Of course, if you have delinquencies on your account, you need to pay them immediately, and then keep payments up to date, but do not expect this to be a magic bullet for your credit report.

Credit histories are a timeline of your credit adventures. While lenders will appreciate no current delinquencies, they certainly will see the past delinquencies (for up to seven years), and consider those. Do not think that this means you must wait seven years after your last delinquency before applying for a loan; just realize the importance of remaining current on all of your payments.

Once you have all your credit card payments current, you can continue to improve your credit score by keeping them current, and gradually paying off existing debt. It is very beneficial to routinely pay more than the minimum amount of each credit card, and work towards paying most or all of them off totally.

By paying off delinquencies, lowering the existing balances that you are carrying, and having most of your cards paid in full each month, you will, over time raise your credit score. Mortgage lenders will recognize the upward trend in your finances, and be much more willing to acquire your business. Recognize that a credit score is fluid thing, and you are constantly raising or lowering it, depending on your actions each month. Keep this in mind when you are tempted to purchase that new pair of shoes, or pay only the minimum one month.

Stated Income Loan: Lie to Get a Better Rate?

Published on October 8, 2007 in Loans. 0 Comments

Stated income loans are loans in which the borrower is not required to provide full disclosure about their financial matters to the mortgage lender. Instead of full disclosure, they sign off on a form that they make X amount of money. There are a variety of reasons why someone may choose to do this, some honorable, and some not.

Perhaps the best use of a stated income loan is for someone who is self-employed, either by owning his or her own business or freelancing. With no W-2 on file, and a variety of income sources, some able to be backed up by 1099s and others not, it is often hard for a self-employed person to finance a home.

By utilizing a stated income loan, the self-employed individual can simply sign off on their income, and assuming credit worthiness, receive their loan. The greater risk the mortgage lender takes on is offset by the slightly higher interest rate that the borrower will pay. The standards of receiving a stated income loan vary from lender to lender, but most want to see you in a consistent line of work for at least two years, and, of course, have a good credit history with a low debt load.

Other, less honorable reasons for using stated income loans are unfortunately too common. Some may state income higher than what they may actual have, although this is very risky, as a lender can request to see income tax records if you default on the loan, and, potentially, initiate fraud proceedings.

A more common reason that people may choose to go the way of the stated income loan is to eliminate discussion about how they receive their income. If someone wants to enjoy the benefits of receiving a certain income, but does not want to discuss the source, a stated income loan is a way to do this. The most common reason for this would be if a couple, one with a good income but poor credit history, the other with less income and an excellent credit history, were shopping for a loan. By allowing the partner with an excellent credit history to claim the income of the other spouse, the partners can garner a mortgage rate that is favorable while still enjoying the benefits of the larger income. This is not, however, why the stated income loan was developed.

Allow a Friend to Qualify With Your Account?

Published on October 1, 2007 in Mortgages. 0 Comments

Should you allow a friend to qualify for a mortgage by adding their name to your account? Well, no. No matter how honorable your intentions or how trustworthy your friend, this is not a good idea. If your friend needs your help to qualify for a loan, it is because they do not have enough liquid assets available to handle closing, which can be surprisingly expensive.

Mortgage lenders are extremely accurate in the formulas that they have developed regarding income amounts, savings amounts, and other financial figures. If they feel that your friend needs additional savings to make it through closing, they are probably right. So, what happens if you allow your friend to add his or her name to your account and they come up short at closing? Are you going to loan them the money or hold up their ability to close on the loan? As you can see, either one of these situations will potentially end the friendship, not to mention entangle you in a situation that is at best shady, and at worst, illegal.

You could, of course, offer to loan your friend the money needed to make it through closing. Other options include helping your friend set up a savings schedule so that they can save the money themselves, or crunch numbers with them to help them realize how much home they can realistically expect to afford with their current level of savings.

No matter what your decision, do not allow yourself to be bullied or made to feel guilty about a situation that is morally or ethically suspect. One point to consider carefully is how much you should value a friendship with someone who would place you in such a difficult position.

Why is the Loan Rejection Rate Rising?

Published on September 24, 2007 in Loans. 0 Comments

When you look at the increase in percentages of loan rejections over the past several years, it can definitely seem discouraging. However, it is important to remember that these percentages do not reflect what is actually going on in the housing market today. While it is true that as a whole, the percentage of loan rejections are up, the number of people applying for financing is also up, as are the number of people that own their own homes.

There are two main reasons that the loan rejection rate is rising. The first is the growth of sub-prime lenders. These lenders have become much more common over the past several years. Sub-prime lenders specialize in providing financing for people who would not be eligible for a traditional mortgage. These people, due to either income, slow or non- payment of debt, or other reasons, are deemed non-creditworthy by prime, or traditional, mortgage lenders.

The availability of sub-prime loans have made many people, who would otherwise never consider applying for a loan, decide to try. With the increase in total number of loan applicants, many who were reaching for a loan consideration to begin with, it only makes sense that there would be an increase in the rejection rate among this group.

Another reason for the increased rejection rate of loans is the increase in all applicants across the board. Whether using prime or sub-prime lenders, more people than ever are seeing real estate as a worthwhile investment and are anxious to make a home purchase. As the overall number of applicants increase, it only makes sense that more of the applicants will be people who had not considered buying before, due to financial or credit reasons.