Mortgages 101 »

David Reed (Austin, TX) is a seasoned mortgage banker and a columnist for Realty Times and Mortgage Originator magazine. He is the author of Mortgage Confidential (978-0-8144-7369-6), Your Guide to VA Loans (978-0-8144-7435-8), Who Says You Can’t Buy a Home! (978-0-8144-7340-5), and Your Successful Career as a Mortgage Broker (978-0-8144-7370-2).

Contents

Preface 000

Section I Mortgage Fundamentals 1

Chapter 1 Introduction to Mortgages 0

1.1 What's the difference between buying and renting? 0

1.2 How do I know if it's better to buy a home or continue renting? 00

1.3 How should I search for a house? 00

1.4 When is a good time to buy a home? 00

1.5 What's the difference between being prequalified and preapproved? 00

1.6 What is the preapproval process? 00

1.7 What are loan conditions? 00

1.8 What are Automated Underwriting Systems? 00

1.9 Who uses Automated Underwriting Systems? 00

1.10 If an Automated Underwriting System approves me, does that mean I get the loan? 00

1.11 What are the benefits of getting preapproved? 00

1.12 What are all these terms? 00

1.13 Who are the key people in a typical loan approval process? 00

1.14 What is the 1003? 00

1.15 What are the ten sections of the 1003? 00

1.16 What happens if the information you put on your application is wrong? 00

1.17 What happens after I fill out the 1003? 00

1.18 Are online applications the same as the five-page 1003? 00

1.19 Is an online application safe? Can someone steal my identity? 00

1.20 What happens after I make an offer for a house? 00

Chapter 2 How to Know How Much Home to Buy 000

2.1 How do I know how much I can borrow? 000

2.2 What are debt ratios? 000

2.3 How do I calculate my debt ratios? 000

2.4 How much do debt ratios affect how much I can borrow? 000

2.5 How can lenders approve people with high debt ratios? 000

2.6 Why do lenders use monthly tax and insurance payments in debt ratios? 000

2.7 Why is escrow a requirement for loans with less than 20 percent down? 000

2.8 If I have a choice, are escrows right for me? 000

Chapter 3 Getting Your Finances Together 000

3.1 What will the lender look for when looking at my assets? 000

3.2 How do I document my assets? 000

3.3 How do I document my income? 000

3.4 If I just got my first job, how can I provide a W-2 from last year? 000

3.5 What do you mean by "how you're paid"? 000

3.6 Why do lenders ask for the most recent 30-day paycheck stubs? 000

3.7 If I get paid in cash, how do I document that? 000

3.8 How do I calculate hourly wages? 000

3.9 How do I calculate overtime? 000

3.10 How are bonuses used to figure my income? 000

3.11 How do I figure my income if it is based solely on commissions? 000

3.12 How do I calculate my pay if I have both a salary and a bonus or a commission? 000

3.13 If I can deduct a lot of expenses from my income taxes, does that help gross monthly income? 000

3.14 How do I show expenses on my loan application? 000

3.15 How do I calculate my dividends and interest income? 000

3.16 How do I calculate my income if I own my own business? 000

Chapter 4 Down Payments and How They Impact Your Mortgage 000

4.1 What exactly is a down payment? 000

4.2 What are the risk elements? 000

4.3 How do I know how much to improve another risk element? 000

4.4 What kinds of accounts can I use to fund the down payment? 000

4.5 Can I borrow against my retirement account? 000

4.6 Can my family help me out with a down payment? 000

4.7 What do I do if I don't have a down payment saved? 000

4.8 What is a "seller assisted" DPAP? 000

4.9 How do I know if I qualify for a down payment assistance program? 000

4.10 Is there an ideal amount I should put down on a home? 000

4.11 How much is a mortgage insurance policy? 000

4.12 Can I deduct mortgage insurance from my income taxes? 000

4.13 Can I "borrow" my mortgage insurance? 000

4.14 Will PMI come off of my mortgage automatically? 000

4.15 What about "zero money down" loans? 000

4.16 What is the My Community Mortgage? 000

4.17 How do I buy a house if I need to sell my house for my down payment? 000

4.18 Will I have to qualify with two mortgages? 000

Chapter 5 Getting Your Credit Together 000

5.1 What exactly is credit? 000

5.2 How were credit bureaus established? 000

5.3 What's in my credit report? 000

5.4 What's not in my credit report? 000

5.5 What's the difference between a Chapter 7 and a Chapter 13? 000

5.6 Do lenders view a Chapter 7 or a Chapter 13 more favorably when reviewing a mortgage application? 000

5.7 What's the difference between "good" and "bad" credit? 000

5.8 How do I establish good credit? 000

5.9 I've got great credit. How do I keep it that way? 000

5.10 I cosigned on my brother's car, but he's making the payments. Will this affect my credit? 000

5.11 What should I do first to improve my credit? 000

5.12 What happens if you find a mistake on your report? 000

5.13 Can't I write a letter explaining my side of the story to the credit bureaus? 000

5.14 Can my lender help fix mistakes in my credit history? 000

5.15 What do I need in order to prove something is a mistake on my credit report? 000

5.16 What about mortgage companies that advertise "bad credit, no credit okay"? 000

5.17 What about a cosigner? 000

5.18 Can a seller ask for a copy of my credit report? 000

5.19 What is alternate credit? 000

5.20 I have bad credit and was contacted by a credit counseling company that wants to help reestablish my credit. Can they do that? 000

5.21 Can I erase my old credit report completely and start all over again? 000

5.22 I have great credit, but my spouse has terrible credit. What do I do? 000

5.23 My "ex" has screwed up my credit. What do I do? 000

5.24 How will lenders view our credit report if we're not married? 000

5.25 How long do I have to wait in order to get approved for a mortgage if I declared bankruptcy in the past? 000

5.26 I filed a Chapter 13 bankruptcy and I'm still making the payments. Can I get a mortgage now? 000

Chapter 6 Credit Scores: What They Are, How They Work, and How to Improve Them 000

6.1 What are credit scores? 000

6.2 What makes up a score? 000

6.3 What things in my payment history affect my credit score? 000

6.4 What about my amounts owed? What is most important? 000

6.5 How do I find out what my score is? 000

6.6 How do I get a credit score? 000

6.7 What is the minimum credit score I need to qualify for a mortgage loan? 000

6.8 What if my lender told me I couldn't qualify because my credit score was too low? 000

6.9 How do I know how much to charge and how much to pay off? 000

6.10 What else affects my credit score? 000

6.11 How can I increase my available credit without opening up new accounts? 000

6.12 I've applied at more than one mortgage company. Will all those credit inquiries hurt my score? 000

6.13 How do I fix scores that are artificially low due to mistakes? 000

6.14 If there are several mistakes on my report, do I get them all corrected? How do I know which ones to correct? 000

6.15 I'm a single parent and a minority. Does this status help or hurt my credit score? 000

6.16 How do lenders choose which credit scores to use? 000

6.17 I have great credit scores, but my spouse has low credit scores. What happens? 000

Section II The Right Mortgage 000

Chapter 7 Finding Your Home Loan 000

7.1 What kinds of loans are there? 000

7.2 When would I want a fixed rate? 000

7.3 When would I want an adjustable rate? 000

7.4 How do adjustable rate mortgages work? 000

7.5 Are ARMs only helpful in the very near term? 000

7.6 What exactly is a hybrid loan? 000

7.7 What's a balloon mortgage? 000

7.8 What is a buydown? 000

7.9 Apart from choosing fixed or adjustable rates, what types of loan programs should I consider? 000

7.10 How are limits on conventional loans set? 000

7.11 Who or what are Fannie and Freddie? 000

7.12 What are special commitments? 000

7.13 What exactly is a jumbo mortgage? 000

7.14 Can I prepay my mortgage or pay it off early? 000

7.15 What are prepayment penalties? 000

7.16 Why do lenders have prepayment penalties on some of their loans? 000

7.17 What are VA loans? How do you get them? 000

7.18 Who's eligible for a VA loan? 000

7.19 What is a VA "entitlement"? 000

7.20 How often can I use my VA eligibility? 000

7.21 What is a VA streamline refinance? 000

7.22 Do states have VA loan programs, too? 000

7.23 What about FHA loans? 000

7.24 Who sets FHA loan limits and how much are they? 000

7.25 Is FHA only for first-time home buyers? 000

7.26 When do I choose an FHA loan instead of any other? 000

7.27 Can I use a coborrower to help me qualify for an FHA loans? 000

7.28 Does FHA help me save money on closing costs? 000

7.29 What about first-time home buyer loans? 000

7.30 What does "portfolio lending" mean? 000

7.31 What's the difference between second homes and rental property? 000

7.32 How does the lender know that a property is a second home and not a rental unit? 000

7.33 Can I use rental income to qualify for a mortgage? 000

7.34 Are loan limits for rental properties the same as for primary residences? 000

7.35 What is an interest-only loan? 000

7.36 What is a negative amortization loan? 000

7.37 What is a payment option ARM? 000

7.38 What about seller financing? 000

7.39 How can I rent-to-own or use a lease-purchase to buy a house? 000

7.40 What's a wraparound mortgage? 000

7.41 What is a biweekly loan program? 000

7.42 What is alternative or "Alt" lending? 000

Chapter 8 Loans for Good to Great Credit 000

8.1 What should I look for in a mortgage loan? 000

8.2 So everyone should first try for a conventional loan? 000

8.3 What if my loan isn't a Fannie loan? What if it's a jumbo or a portfolio? 000

8.4 Then how do I manage to find the loan that's right for me? 000

8.5 Should I always try to put as much down as I can? 000

8.6 Do I have a choice in my loan term? 000

8.7 Why are payments higher on a 15-year loan even though the rate is lower? 000

8.8 Won't my loan officer help me find the right mortgage? 000

8.9 What if I can't provide parts of the documentation for the loan? 000

8.10 Why wouldn't I just apply for a "NINA with no job" and forget about all the other hassles of pay stubs and W-2s? 000

8.11 Why would I ever want to apply for any of those loans? 000

8.12 Does the type of property affect the kind of loan I can have? 000

8.13 What types of property can I expect problems with? 000

Chapter 9 Loans for People with Impaired or Damaged Credit 000

9.1 My credit's not so good. Where do I get a mortgage for my situation? 000

9.2 Do I have to put more down with a subprime loan? 000

9.3 What's the matter with subprime loans? 000

9.4 What kind of interest rates can I expect from a subprime loan? 000

9.5 What about prepayment penalties on subprime loans? 000

9.6 How can a hybrid adjust after two years? 000

9.7 Aren't subprime loans more expensive? 000

9.8 Should I just wait until my credit gets better and apply later? 000

9.9 What if the rates are higher when I go to refinance a subprime loan? 000

9.10 What is a predatory loan? 000

9.11 Don't some lenders make a loan hoping they can foreclose on it? 000

9.12 What's the difference between subprime and predatory? 000

9.13 Are subprime loans harder to qualify for now because of past problems in the industry? 000

Chapter 10 Refinancing and Home Equity Loans 000

10.1 Why would I want to refinance my mortgage? 000

10.2 Should I wait until the interest rate is 2 percent lower than my current one to refinance? 000

10.3 What is my rescission period? 000

10.4 How long should I wait to recover closing costs? 000

10.5 Do I have to close my loan within thirty days, or can I wait to see if rates drop further? 000

10.6 Why are there fees on a refinance? 000

10.7 Should I pay points for a refinance? 000

10.8 What about reducing my interest rate and also reducing my loan term? 000

10.9 Why not just pay extra each month instead of refinancing? 000

10.10 What's a cash-out mortgage? 000

10.11 How do I get money out of my property without refinancing? 000

10.12 How do I refinance if I have both a first and a second mortgage? 000

10.13 Which is better, a cash-out refinance or a HELOC? 000

10.14 Why is my loan payoff higher than my principal balance? 000

10.15 My credit has been damaged since I bought the house. Will that hurt me? 000

10.16 How do I get a note modification? 000

10.17 What is a "recast" of my mortgage? 000

10.18 I've heard of a modifiable mortgage. What's that? 000

10.19 What happens when my loan is sold? 000

10.20 What's a reverse mortgage? 000

10.21 Who qualifies for a reverse mortgage? 000

10.22 How much can I get with a reverse mortgage? 000

10.23 Why not do a cash-out refinance instead of a reverse mortgage? 000

10.24 Are the closing costs the same for a reverse mortgage as with a regular mortgage? 000

10.25 What are the rates for reverse mortgages? 000

10.26 I have a current mortgage on my house. Do I get to keep that? 000

10.27 How do I know if a reverse mortgage is right for me? 000

Chapter 11 Construction and Home Improvement Loans 000

11.1 Why would I want to build a home? Why can't I just go out and buy one? 000

11.2 How do construction loans work? 000

11.3 Do I buy a home from a developer, or is it better to start from scratch? 000

11.4 How do I get approved for a construction loan? 000

11.5 How much do I need for a construction loan? 000

11.6 Does the lender approve my builder? 000

11.7 How does the mortgage lender know what the house is worth before it's built? 000

11.8 What if I already own the land? Do I still include that amount in the construction loan? 000

11.9 But what if I don't want a permanent mortgage, but just a construction loan? 000

11.10 What choices do I have for construction loans? 000

11.11 Is a one-time close better than a two-time close? 000

11.12 What if rates drop during my one-time close loan? 000

11.13 What if my builder is financing the construction? 000

11.14 Do I have to use the builder's mortgage company? 000

11.15 What are my options if I just want to build onto my current house? 000

11.16 How can I borrow enough to make major improvements on my home? 000

11.17 What is an FHA 203(k) loan? 000

Section III The Right Lender and Rate 000

Chapter 12 Finding the Best Lender 000

12.1 I've decided on my loan. Now what? 000

12.2 How do I find the best lender? 000

12.3 But where do I get the names of all these lenders in the first place? 000

12.4 How do I know if I can trust these lenders? 000

12.5 Should I use my real estate agent's mortgage company? 000

12.6 I thought all money came from the bank. Doesn't it? 000

12.7 What is a mortgage broker? 000

12.8 Are mortgage brokers more expensive? 000

12.9 Why do mortgage companies use mortgage brokers? 000

12.10 How do mortgage brokers get paid? 000

12.11 How many lenders do mortgage brokers use? 000

12.12 Will the broker keep my lender a secret? 000

12.13 Is a mortgage broker my best choice? 000

12.14 Should I choose a broker or a banker? 000

12.15 What happens if I want to change lenders in the middle of my loan process? 000

Chapter 13 Finding the Best Loan Officer 000

13.1 How do I find the best loan officer? 000

13.2 How do I know if the loan officers my real estate agent suggests are any good? 000

13.3 What if my agent is not a heavy hitter? 000

13.4 Do the best loan officers work with the biggest lenders? 000

13.5 What questions should I ask a potential loan officer? 000

13.6 How do loan officers get trained? 000

13.7 What training or courses do loan officers take? 000

13.8 How do loan officers get paid? 000

13.9 What are market gains? 000

13.10 Are market gains legal? 000

13.11 Do all loan officers charge one percent on every loan? 000

13.12 My loan officer isn’t any good. Can I change loan officers? 000

13.13 Where do I complain about my loan officer? 000

Chapter 14 Finding the Best Interest Rate 000

14.1 Who sets mortgage rates? 000

14.2 How does my loan officer quote rates? 000

14.3 But doesn't the Fed set interest rates? 000

14.4 Are mortgage rates tied to the 30-year treasury and the 10-year treasury? 000

14.5 Who invests in bonds? 000

14.6 Where are rates headed? 000

14.7 What types of economic reports should I pay attention to? 000

14.8 Do I follow all of the economic reports? 000

14.9 When is the best time to get a rate quote? 000

14.10 Can I trust the interest rates in the newspaper? 000

14.11 Why are some lenders so much lower than everyone else? 000

14.12 How do I get a good rate quote from all my competing lenders? 000

14.13 What do I do with my two best quotes? 000

14.14 How do I lock in my mortgage rate? 000

14.15 Does my lock mean I'm approved? 000

14.16 What happens if my rate lock expires and I still haven't closed my loan? 000

14.17 What happens if I lock and rates go down? 000

14.18 Will lenders drag their feet to make a lock expire? 000

Chapter 15 Closing Costs and How to Save on Them 000

15.1 What types of closing costs can I expect? 000

15.2 Why are there so many charges? 000

15.3 Why do lenders charge fees? 000

15.4 On which closing costs can I save and which ones can I forget about? 000

15.5 Are fees for purchases and refinances the same? 000

15.6 How can I save on my appraisal fees? 000

15.7 How can I save on my credit report? 000

15.8 How can I save on title insurance? 000

15.9 What exactly is the good faith estimate? 000

15.10 How do I use a good faith estimate to compare lenders? 000

15.11 What is APR, and does it really work? 000

15.12 How can I get the seller to pay for my closing costs? 000

15.13 What's a "one-fee closing" cost? 000

15.14 Can a lender pay all my fees? 000

Chapter 16 The Internet and Mortgages 000

16.1 How has the Internet helped mortgage lending? 000

16.2 Should I apply for a mortgage online or meet with a loan officer? 000

16.3 How can I use the Internet to find the best mortgage rate? 000

16.4 What about online companies that advertise they will have lenders "bid" on my mortgage loan? 000

16.5 What happens if I choose an online lender but the closing papers are all wrong? 000

16.6 Should I avoid online lenders? 000

16.7 I keep getting e-mails from companies with some very competitive offers. Shouldn't I at least explore them? 000

16.8 Can I get my loan approval online? 000

16.9 Is there any way I can check on rates without contacting a lender? 000

16.10 Can I track my loan approval online? 000

16.11 What are some good Web sites consumers can use to help them? 000

Appendix: Monthly Payment Schedules 000

Glossary 000

Index 000