It's a new year and time to learn more about the mortgage industry. I am going to concentrate on areas where failure to know and failure to act can cost you money. This is the fifth column of this series and in case you missed any they are "I Didn't Know That - Did You" 9/21/06 , "The Next Seven" 10/18/06, "More things to Know" 11/2/06 and "A Gift of Knowledge For The Holidays" 12/17/06. The series can be read in any order as columns are not built on each other. The more you understand the easier it is for you to procure a mortgage that not only works for you but is as well priced as you can would hope.
We will begin with a look at credit. Credit can cost you if you aren't on top of it at all times.
Do not assume that everything is reported to the credit bureaus correctly and if an institution reports one of your payments incorrectly that they will correct the mistake. It won't happen.
Example. If you make a payment that doesn't fall within the grace period, generally 10 days after the first of the month, or ten days after the due date, you might find that you have a new 30 day late on your credit report. If this late is reported on your mortgage your score can drop 100 points. I just discovered that one of my clients who is currently refinancing with me has a 30 day late in January of 2007. His payment was made but wasn't posted until after the grace period. Please note that today is January 21, 2007, certainly not 30 days late even if the payment hasn't been made at this time. (Of course as I have said is has been made and posted). The lender hasn't corrected the report and won't. Fortunately, we found it and are correcting it.
People assume the only way to have bad credit is too not pay your bills on time. This is not correct. People who pay their bills on time, without ever having a late payment, can have bad credit by having too much credit. If you have a number of accounts with balances that are near the high balance established on your credit report, whether it is correct or not, your score will be lowered even though you haven't been late. The answer is to spread the debt around or, even better, pay it off, but do not let it get any larger, per account, than about half of the high credit limit.
These two occurrences can cost you a better interest rate or force you to qualify "full doc". which means supplying income documentation instead of being able to enjoy the convenience of a stated income loan. Either or both of these needn't happen if you are on top of your credit. Writers note: More and more lenders are pricing their stated income loans better than their full doc loans because of the positive performance history of stated loans for those who have good credit. They are much easier to underwrite and quicker to fund as they do not require tax returns or other income documentation.
People who earn 80% of the median income of their county of residence generally are designated as low to moderate income borrowers and are given special, lower mortgage rates. Another way to qualify as a low to moderate borrower is to live or buy into a low to moderate census tract; then you also qualify for the special rate even if you earn over $100,000 a year or more and even if your loan is going to be over $500,000 or more. You should find out whether you can qualify for these loans. Several years ago, I sold a house that had been on the market for some time that was in one of these tracts and I didn't know. I could have offered special financing and probably would have sold the house much quicker. I won't let that happen again.
Mortgage rates change at least daily and can change as much as three or four times in a given day if the bond market is very active and moving in one direction or another in an exaggerated manner. Borrowers who shop rates can actually be comparing "apples to oranges" if they are not aware of the movements of the market.
Because a mortgage interest rate is made up of so many of the following factors, the borrower's credit score, the loan to value, his earnings and reserves, the type of loan, whether or not it's a purchase or refinance, the type of property, etc., it is very difficult to compare rates. It is also extremely challenging to get a comfort level with your friends or neighbors when the discussion of rates occurs as each borrower is different from the other. If you add to the above qualifications the size of the loan, (conforming, jumbo or super jumbo) and the actual loan program, you can drive yourself crazy with comparison shopping. Try to save yourself the exhaustive and in most cases fruitless exercise of trying to determine the best lender by instead dealing with someone you trust and someone who will explain how the rate process will work in your case.
Should you be one of the lucky ones who has a low interest rate arm, in the three percent or four percent range and have had the loan for several years with more years to go at the same rate, then pay close attention to what I am about to tell you. First of all, I wouldn't refinance the loan one month early if you can help it unless you need to get cash out of the house or if you find that because of your secondary financing, you can actually get a better rate than your blended rate. (The blended rate is what your actual interest rate for both of the loans combined) If you have a prepayment penalty on the loan and you need to refinance for any reason, do not assume that the lender will let you out of the prepayment penalty early (no charge to you) just because they can put the money out at the market rate which is much higher. This will not happen even though it makes immanent sense.
Common sense should never be suspended when you are upset about an item on your credit report. I have so many borrowers who have been dinged by a major department store or other vendor for an item they didn't buy or had returned and then were not given the proper credit only to later see it on their credit report. They steadfastly refuse to take care of it, and therefore, their credit score remains below where it justifiably should be. As difficult as it is to understand what I am going to say--try! Pay the charge and get it off your credit report. By not paying it and having a low score, you are paying for it each and every month. Collectively, over the years, you have probably paid the entire price two or three times.
The scenarios I have covered in this column may seem small and insignificant, but if they are not properly dealt with, they could cost you thousands of dollars. Take the time to review your situation and make sure you aren't one of the examples I have used in this piece. If you do find you relate to one of the examples, take care of the situation immediately and be sure to keep a diligent eye on all the areas I talked about that could jump up and ruin your credit. You do not want to have something added or taken away from your credit report and end up ruining your credit score.
What does it really mean to you? As I have stated in many other columns, you need to have a financial plan which certainly includes actively and regularly reviewing your credit. You need to re-evaluate and update the plan at least twice a year if not more. If you do that, you will find that the surprises that shake up most people won't happen to you.