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Ava Cannon of Jack Lingo REALTOR. Search Rehoboth Beach and Delaware homes.
www.avacannon.com, or email wava@dmv.com

James Begg of Long and Foster. Search Montgomery County, Maryland real estate.
http://jimbegg.lnfre.com

 

Greg Articles

- Credit FAQ
-Why should I buy instead of rent?
-Do declining bond prices cause interest rates to rise?

Credit FAQ

Does my score drop if I apply for new credit?
Looking for new credit can mean higher risk, and most credit scores are affected when multiple inquiries from different industries are pulled within a short period of time.  If you have the same industry pull inquiries within a 30 day period, this is supposed to have NO effect on your credit.  This is to allow you to shop mortgages, cars, etcetera without being penalized.  One inquiry can bring your score down as much as 6 points. 

If you’ve been denied credit from one source, there’s a chance this trend will continue because credit providers use similar criteria in evaluating borrowers. Multiple requests for credit report information (“inquiries”) will appear on your report.  If you’ve been denied credit you may request a copy of your credit report for free and you should take advantage of this to try and correct any misreporting or to try and repair credit before taking out a loan.

If my score is low, will I be able to obtain a loan?
Lenders use a number of factors to make credit decisions, besides your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income... Also they will view your employment history, and your credit history for at least the past 2 years.  Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Why are my scores low even though I’ve never missed a payment?
The most common reason is you are probably carrying too much credit either in the form of too many credit cards, installment loans, or the balance you carry from month to month is too high. Generally, once you carry a balance over 25% of the high credit limit, points may be deducted from your credit score. As the percentage goes higher, more points are deducted. They fear you might be getting too close to your ability to repay and scores will drop to keep you from getting new credit.

Will a poor score haunt me forever?
A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your credit bureau files. Scores change gradually as you change the way you handle credit.   Past credit problems impact your score less as time passes.  

Is credit scoring unfair to minorities?
Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history.

Does credit scoring infringe on my privacy?
Credit scoring evaluates the same information lenders already look at...  the credit bureau report and the application.  A score is simply a numeric summary of that information.  Lenders who use scoring only, ask for less information.  A high credit score may reduce the amount of documentation needed. 

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Why should I buy, instead of rent?

A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you'll enjoy having something that's all yours - a home where your own personal style will tell the world who you are.

Can I become a homebuyer even if I have I've had bad credit, and don't have much for a down-payment?

Answer: If you currently rent your home from a property management company or can verify your rental history through cancelled checks, you may be a good candidate for any number of little or no money down programs. Your credit has probably been screened when you rented your home and the qualification standards are roughly the same.

Should I use a real estate agent? How do I find one?

The biggest misconception is the buyer has to be pay the real estate agent’s fee. This is incorrect, the seller of the property is responsible for this fee. Using a real estate broker is a very good idea. All the details involved in home buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. A real estate agent will be well-acquainted with all the important things you'll want to know about a neighborhood you may be considering...the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. He or she will help you figure the price range you can afford and search the classified ads and multiple listing services for homes you'll want to see. With immediate access to homes as soon as they're put on the market, the broker can save you hours of wasted driving-around time. When it's time to make an offer on a home, the agent can point out ways to structure your deal to save you money. He or she will explain the advantages and disadvantages of different types of mortgages, guide you through the paperwork, and be there to hold your hand and answer last-minute questions when you sign the final papers at closing. And remember, you don't have to pay the agent anything! The payment comes from the home seller - not from the buyer.

How much money will I have to come up with to buy a home?

Answer: Well, that depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money - the deposit you make on the home when you submit your offer, to prove to the seller you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house.

When you make an offer on a home, your real estate agent will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies.

The down payment affects your monthly mortgage payment. However, with loans spread out over 30 years, sometimes you’d have to put down 15-20% to make a large difference in your monthly payment. The option of little or no money down programs are available for people with good and less than perfect credit.

Closing costs - which you will pay at settlement - average 3-4% of the price of your home. These costs cover various fees the lender, settlement agency and the government charge. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise.

How do I know if I can get a loan?

Answer: Use our simple mortgage calculators to see how much mortgage you could pay - that's a good start. If the amount you can afford is significantly less than the cost of homes that interest you, then you might want to wait awhile longer. They will help you evaluate your loan potential. A broker will know what kinds of mortgages the lenders are offering and can help you choose a lender with a program that might be right for you. Another good idea is to get pre-qualified for a loan. That means you go to a lender and apply for a mortgage before you actually start looking for a home. Then you'll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams.

In addition to the mortgage payment, what other costs do I need to consider?

Answer: Well, of course you'll have your monthly utilities. If your utilities have been covered in your rent, this may be new for you. Your real estate agent will be able to help you get information from the seller on how much utilities normally cost. In addition, you might have homeowner association or condo association dues. You'll definitely have property taxes, and you also may have city or county taxes. Taxes normally are rolled into your mortgage payment. Again, your broker will be able to help you anticipate these costs.

So what will my mortgage cover?

Answer: Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you've borrowed; homeowners insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year. Most loans are for 30 years, although 15 year loans are available, too. During the life of the loan, you'll pay far more in interest than you will in principal - sometimes two or three times more! Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments. In the final years, you'll be paying mostly principal.

What do I need to take with me when I apply for a mortgage?

Answer: Good question! If you have everything with you when you visit your lender, you'll save a good deal of time. You should have: 1) social security numbers for both your and your spouse, if both of you are applying for the loan; 2) copies of your checking and savings account statements for the past 2 months; 3) evidence of any other assets like bonds or stocks; 4) 2 recent paycheck stubs detailing your earnings; 5) a list of account numbers and balances due on outstanding loans, such as car loans; 6) copies of your last 2 year’s federal tax returns; 7) the name and address of someone who can verify your employment; 8) the name and telephone number to verify your current housing history Depending on your lender, you may be asked for other information.

I know there are lots of types of mortgages - how do I know which one is best for me?

Answer: You're right - there are many types of mortgages, and the more you know about them before you start, the better. Most people use a fixed-rate mortgage. In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it. Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the LIBOR, based on world markets. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower. Talk to your mortgage broker about the various kinds of loans, before you begin shopping for a mortgage.

When I find the home I want, how much should I offer?

Answer: Again, your real estate agent can help you here. But there are several things you should consider: 1) is the asking price in line with prices of similar homes in the area? 2) Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it? You probably want to get a professional home inspection before you make your offer. Your real estate broker can help you arrange one. 3) How long has the home been on the market? If it's been for sale for awhile, the seller may be more eager to accept a lower offer. 4) How much mortgage will be required? Make sure you really can afford whatever offer you make. 5) How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.

What if my offer is rejected?

Answer: They often are! But don't let that stop you. Now you begin negotiating. Your agent will help you. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn't normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember - don't get so caught up in negotiations that you lose sight of what you really want and can afford!

So what will happen at closing?

Answer: Basically, you'll sit at a table with your agent, the agent for the seller, probably the seller, and a closing agent. The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your agent to make sure you know exactly what you're signing. After all, this is a large amount of money you're committing to pay for a lot of years! Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a "good faith estimate" of how much cash you'll have to supply at closing, and a list of documents you'll need at closing. If you don't get those items, be sure to call your lender BEFORE you go to closing. Don't hesitate to ask questions.

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Do declining bond prices cause interest rates to rise?

No, declining bond prices are higher interest rates.

Suppose on Monday the US Government sells a one-year note at 5%, meaning an investor purchasing a bond today for $1,000,000 would receive $1,050,000 at the end of the year. Let’s suppose further; moments after the sale of these notes is completed, the Government announces because it's deficit is much larger than expected, it will need to raise much more money than it had previously thought. When it enters the market on Tuesday, it must now pay 10% on the otherwise identical note.

Since investors can now earn 10% on the Tuesday note, the price of the Monday note must fall enough so that investors earn 10% on that one as well. This forces the price down to $954,545.

The interest rate on the Monday note when it was sold was 1,050,000 divided by 1,000,000, minus 1, or .05. The interest rate on Tuesday was 1,050,000 divided by 954,545, minus 1, or .10. The investors must now charge a higher interest rate to get the same return on the bond.

“Why are mortgage interest rates today much lower than in the early 1980s?"

The major reason is the taming of inflation.

Economists distinguish between the “nominal” rate of interest and the “real” rate. The “nominal” rate is a quoted rate. The “real” rate is the nominal rate adjusted for inflation. Lenders are concerned primarily with the real rate.

Suppose a lender is willing to lend $100 for a year if he gets back $106. That’s a nominal rate of 6%, and if there is no inflation over the year, the real rate is also 6%. This means that the lender who could buy 100 widgets at the beginning of the year at $1 a widget, could buy 106 at the end.

But suppose lenders expect the price of widgets to rise by 5% over the year. Then at 6% the $106 the lender will have at year-end would buy barely 101 widgets. To maintain a real rate of 6%, the lender must raise the nominal rate by 5% to offset the declining value of principal, and by .3% to offset the declining value of the interest. The adjusted nominal rate is thus 11.3%. With $111.30 at the end of the year, the lender can buy 106 widgets at $1.05 a widget.

“In Surinam, mortgage interest rates are 36% or more. Why are rates so much higher in some countries than in others?”

Rates were as high as they were in Surinam because the inflation rate there was high. Countries with high inflation rates have high interest rates. A second factor affecting mortgage rates between countries is the efficiency of the housing finance system. In most respects, the US system is more efficient than those in most other countries. As a result, mortgage rates to prime borrowers in the US are only 1-1.5% above long-term Government bond yields. In many other countries, the spread is twice as large or more.

“The Fed recently raised rates by .25%, but nothing happened to mortgage interest rates. Doesn’t the Fed control mortgage rates?”

Your sense of nothing happening is based on the stability of mortgage rates after the Fed action. But since the market anticipated this action, whatever impact it had on mortgage rates occurred before the action.

Nonetheless, the impact could have been small because the Fed does not control mortgage rates. The Fed controls the Federal Funds rate at which banks lend to each other overnight, and the discount rate at which Federal Reserve Banks lend to commercial banks for very short periods.

While short-term rates and long-term rates are related, the relationship is loose. It is not unusual a large change in short-term rates is accompanied by a much smaller change in long-term rates. Indeed, because short-term rates are much more volatile than long-term rates, this is more the rule than the exception.

“What interest rates do I look at to best predict the direction mortgage interest rates will take?”

Before the development of secondary mortgage markets, there was an answer to this question. Changes in mortgage rates lagged changes in corporate bond yields by anywhere from 2 to 8 months.

Today, the mortgage market is so thoroughly integrated into the broader capital market there are no leading indicators of mortgage rates. Mortgage rates and bond yields change together.

A large proportion of all mortgages are placed in pools against which mortgage-backed securities (MBS) are issued. MBS’s trade actively in the market and are considered close substitutes for bonds. Any change in bond yields, therefore, is transmitted instantly to the MBS market.

Mortgage loan originators, in turn, base their rates primarily on yields in the MBS market. Originators usually post their rates at about 11am EST, after they see the opening yields on MBS’s in the morning.

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