From the category archives:

FAQ

June 18, 2009

I had the rate of my upcoming mortgage locked, but the APR presented to me a couple of weeks later was already different (obviously higher!) and proclaimed subject to more changes any time before closing. I mean, how is this possible in the first place?

As many other borrowers, you probably got deceived by the APR’s apparent similarity to the interest rate and assumed that “locking the rate” means locking all the rates involved. Unfortunately for borrowers, that is not the case. The APR does not only include the interest rate and the points, which do get locked, but also [...]

April 28, 2009

My broker says she’ll tell me the price of her service upfront and find me a mortgage at a wholesale price. So she is an upfront mortgage broker, isn’t she?

Did she say she was? Anyway, the promises sound very much like the ones of an upfront broker and the easiest way to find out how much truth there is to them is to go to the official site of The Upfront Mortgage Brokers Association (UMBA), use the search tool and see if your broker’s [...]

February 25, 2009

There is no FICO score in my credit report!

Strange as it may seem, the score should not be there. This is the biggest disappointment about every credit report, no matter how accurate it is there is no indication of the actual credit score (the FICO score) in it. The report you get reflects your credit activities, it does not give you the magic [...]

February 25, 2009

I authorized my partner to use my card in order to improve her credit score so that we can have a better mortgage later when we are ready to buy a home, but the information on the card usage does not even show on her credit report.

It is a recent change: the authorized user information is not taken into account by the three credit score bureaus any more, so no authorized user can build any score this way. Fair Isaac Corporation’s newest FICO scoring model ignores authorized user accounts when calculating Classic FICO credit risk scores. As it is stated on [...]

February 25, 2009

My report is full of delinquent mortgage payments. Well, I admit I’ve skipped a payment once, but how did it turn into so many?

It is a snowball effect. For example, you skip a payment in May. Delinquency. Then you pay your regular monthly amount in June. However, the system of amortizing a mortgage works in such a way that your June amount is used to pay off the May debt, but then there is no money left for [...]

February 25, 2009

I paid my old delinquency expecting to improve my credit score, but the score dropped instead!

Delinquency stays on the record for 7 years, but its negative power declines with time. Its power declines in any case, but the 7-year countdown for removing it from the record may not start until the delinquency is paid. If your delinquency was old, its significance had been weakened with time. When you paid it, [...]

January 23, 2009

How can I make FHA assume responsibility for the flaws in the property discovered after their inspection?

I don’t believe you can. A little consolation is that you are not the only one. The purpose of the FHA house inspection has been misinterpreted by generations of homebuyers all through the years. The FHA only insures your mortgage; it does not guarantee the flawlessness of the property being bought. They do conduct an [...]

January 22, 2009

Can first-time homebuyers get a discount on the upfront FHA insurance premium?

This whole issue was eliminated by the FHA Modernization Act of 2008 (within the Housing and Economic Recovery Act of 2008), or rather suspended for the period starting October 1, 2008 through September 30th, 2009. Before September 30, 2008 first-time homebuyers with credit score below 559 and LTV above 95 were eligible for a reduction [...]

January 21, 2009

What’s the difference between an FHA mortgage insurance and PMI?

The FHA insures only a limited range of mortgages provided by FHA-approved lenders. PMI insurers service mortgages of the conventional market. PMI is required if a homebuyer borrows more than 80% of the property’s purchase price in one loan; the FHA insurance is required for any FHA mortgage, irrespective of the size of the down [...]

January 16, 2009

How much home purchase money can I borrow from the FHA?

The short answer is none. I am serious. The thing is that the FHA does not lend you the money. The so-called FHA mortgages are in fact the FHA-insured mortgages. The FHA insures your mortgage to protect the lender in case you default on your payments. It is sort of like PMI, but the rules [...]

January 15, 2009

I hear the FHA pays the insurance premiums back?

It is certainly true, but not every FHA-insured borrower is eligible for this refund; even those who are, cannot get all the money paid as insurance premiums back Normally, if you are eligible you receive a check or an application within 45 days after you paid off your loan. Your mortgage company sends HUD a [...]

December 6, 2008

My fixed rate mortgage payments keep changing from year to year. Am I missing something?

Each period mortgage payment is in fact a combination of several payments: towards the interest, towards the principal (if the mortgage is not interest-only) and optionally towards PMI and the escrow. With a fixed rate mortgage the interest and the principal parts are usually unchanged unless you make extra payments, but the PMI and/or the [...]

December 6, 2008

How do I know if my escrow works?

The RESPA requires the lender to provide initial and annual escrow account statements. Do make sure you get one. But for the “good to know” feel, it is your proof in any legal procedure should you find out something is wrong with your escrow account. You always need to check with the other party, too [...]

December 6, 2008

How much is an escrow payment?

Before you buy a house, contact the county property appraiser and tax collector to find out how much the fully assessed property taxes will be, as well as an insurance agent for an estimate of how much your homeowner‘s insurance premiums will be. Find out about other payments to be placed in escrow. Sum all [...]

December 6, 2008

Do I always have to agree to have an escrow attached to my mortgage?

Generally speaking, mortgage escrowing is not mandatory. In fact, sub-prime mortgage market offers mortgages without any escrows, which I personally find very weird, because sub-prime borrowers are a lot more likely to have problems paying taxes and insurance. Escrow payments, naturally, make overall monthly mortgage payments higher and thus less attractive to such borrowers. A [...]

December 6, 2008

How can I cancel my mortgage escrow?

You have to buy your way out straight away at closing or any time later. It may not be easy, though. Lenders and servicing agents make pretty good income on escrows, so they will not be eager to let you get away with that easily. You may have to be very insistent, persistent and determined [...]

December 6, 2008

Is there any advantage in escrowing with the lender?

Yes, there certainly is. If everything works as well as it should, the escrow service will save you the personal headache of keeping up with the property tax and insurance payments schedule all through the years of your mortgage. Even the loss of a certain amount to the interest that the lender is going to [...]

October 30, 2008

My mortgage carries a prepayment penalty. Does it mean I can make no extra payments at all without being penalized?

You can make extra payments whenever you feel so, but the amounts will be usually limited to the maximum of 20% of the original loan’s balance per year while the penalty period lasts (usually the first 3 or 5 years). Only amounts above the 20% are penalized. When the prepayment penalty period is over you [...]

October 30, 2008

What is the difference between a hard and a soft prepayment penalty?

A penalty that applies to refinancing only is a soft penalty; a penalty that applies to both refinancing and a home sale is a hard penalty.

October 30, 2008

Should I agree to have a prepayment penalty included into my contract?

If your credit score is not very good, I am afraid, you don’t have very much of a choice here. You are forced to do whatever your lender tells you to in order to get the loan. However, try as hard as you can to avoid the hard penalty . Borrowers with a good credit, [...]

October 30, 2008

How much is an average prepayment penalty?

The concrete amount is individual to each case, of course. It depends on the penalty terms agreed upon in the mortgage contract. Sometimes it is a fixed amount (an equivalent of six months of interest, for instance), or a percentage of the outstanding balance, fixed (around 2%) or regressive. For example, the penalty for prepaying [...]

September 12, 2008

How come my monthly payment has shrunk, while the rate has increased?

I can think of three reasons for that. One of them or any combination of them could result in such an illogical at first glance situation: • You made an extra payment towards the principal some time ago and now it’s taking effect. The balance has become so low, that even a higher rate cannot [...]

August 13, 2008

What is the minimum down payment required to buy a home?

Actually, there is no limit to the size of a down payment. It can even be 0% with certain kinds of mortgages, but you have to be able to qualify for it.  Another tricky part here is the Mortgage Insurance. If your down payment is lower than 20% of the purchase price (or the appraised [...]

August 8, 2008

Is there a way to amortize an interest-only mortgage?

Normally, your monthly payments do not include anything to be paid towards the principal during the interest-only period of your mortgage. On the one hand, it makes these payments lower; on the other hand, when the interest-only period is over you have to face the debt you borrowed years ago in its full size again, [...]

August 6, 2008

How come I have been paying my mortgage for 2 years, but the balance is actually growing?

This very unpleasant situation is called negative amortization. The most likely causes are: i) You have an adjustable rate mortgage with a payment cap that does not allow you to raise your monthly payment enough to match the new interest rate. As a result, your monthly payment is probably high enough to cover the principal [...]

August 6, 2008

How come I have been paying my mortgage for 2 years, but the balance is (practically) unchanged?

The reasons for that can be: i) If your have a conventional fixed-rate or adjustable rate mortgage, and it is really as young as 2 years, it is natural for the balance to reduce insignificantly because of the “leveling” of monthly payments. You can find a more detailed explanation in my article about FRMs; but [...]

August 1, 2008

How to avoid PMI or get rid of it sooner?

A borrower has to pay Private Mortgage Insurance (PMI) only if he cannot make a 20% down payment. So, the ways to avoid the insurance are the ways to find enough cash to be able to pay at least 20% of the price of the property in question. Nowadays, the following options are available: a [...]

July 31, 2008

How can I reduce my monthly payments?

You have to analyze, what exactly your period payment consists of. The two biggest parts are the principal and the interest. In the early years they will very likely be accompanied by PMI. Under other circumstances unchanged, reducing any of these three components will result is a lower monthly payment. First of all, PMI has [...]

July 30, 2008

How risky is a HEL/HELOC?

It is rather risky, I’d say, because it is secured by your home equity. Should you default on your payments, you can lose your home. But the purpose of HELOC is not to deprive you of your property; it is to provide you with some funds when needed. If you make sure that you understand [...]

July 30, 2008

It is true that a biweekly mortgage pays a lot better than a conventional one?

It a sort of is. The main distinction between the two is the number of period payments made within each mortgage year. You may have a conventional mortgage with a period payment due twice a month, which is very close to, but not exactly every other week. With a conventional mortgage you make 12 (months)* [...]

July 29, 2008

ARM Rates Are Skyrocketing! I don’t want to lose my home!

This very unpleasant situation does require a considerable financial effort on your part, but it can be resolved eventually to your advantage. The two most reliable ways are: to make extra payments towards the Principal, or/and refinance into a Fixed Rate Mortgage. How do extra payments help? The amount paid as Interest is a percentage [...]

July 26, 2008

Is there a way to pay my mortgage off sooner?

Yes. Moreover, the sooner you pay off your mortgage, the more cash you save for yourself as never-charged interest. The most reliable way to achieve such a spectacular result is extra payments towards the principal. A mere $20 on top of your regular monthly payment can result in roughly $24,000 of interest savings! The idea [...]