Preparing for Homeownership - Step Four

Understand The Home Buying Process

Once you have determined that you are ready to buy a home, it is important to educate yourself on how the home buying process works. This section will take you through the home buying process so that you can understand how best to prepare yourself for homeownership.

• Determining How Much You Can Afford To Pay
• Understanding Home Buying Ratios
• Examining Your Credit
• Improving Your Credit Score
• Understanding Trade Lines
• Making Inquiries
• Understanding Public Record And Collection Items
• Checking Your Credit Report
• Borrowing With Poor Credit
• Understanding Mortgage Loans
• Applying For A Loan
• 10 Questions To Ask Your Mortgage Lender
• Understanding Private Mortgage Insurance (PMI)
• Recognizing Predatory Lending Practices

DETERMINING HOW MUCH YOU CAN AFFORD TO PAY

How much of a house payment can you afford? Mortgage lenders will qualify you for the maximum loan amount, according to your income, debt, and prevailing interest rate. However, this may not be the actual amount you want to borrow. Remember that you can always borrow less. Take your projected PITI (principal, interest, taxes, and insurance) and all your other debt payments and calculate what you have left, based on your net income. Do you have extra money left? Or will you be “house poor”?

A mortgage loan officer takes many variables into account when they pre-qualify a prospective homebuyer. Credit score, current salary, employment history, and current debt are major factors in the approval process. However, the homebuyer must be keenly aware that it is he who is paying the mortgage note. Lenders often qualify a homebuyer for a loan amount that exceeds the comfort level of the borrower. It is the homeowner’s responsibility to tell both the lender and the real estate agent that s/he desires to spend less than that amount.

As mentioned in a previous section, you must also understand the difference between what you desire in a home and what you can afford. Once you establish what you can afford, you must familiarize yourself with the particular areas within your local real estate market that are likely to offer houses in your price range.

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UNDERSTANDING HOME BUYING RATIOS

Lenders use two common ratios to determine the maximum home mortgage loan amount they will allow you.

The first ratio lenders use compares your total monthly housing costs with your total monthly gross income. Your expected monthly housing costs, including mortgage principal, interest, taxes and insurance (PITI) should not exceed 28% of your income (although many home loan programs allow up to 35%).

The second ratio lenders use is your debt-to-income ratio. Your total monthly debt, including your expected PITI, credit card, and other loan payments, should not exceed 38% of your gross monthly income. The actual percentages vary by lender and home mortgage loan program, but keep in mind that your goal is to arrange a mortgage that best suits your needs without creating a financial burden.

Your home buying ratios, in combination with your credit score, which is also known also known as a FICO® score, are two of the most important factors lenders consider when you apply for a home mortgage loan. (See the section “Examining Your Credit” for further explanation of FICO scores.) Keep in the mind that taxes and insurance vary from county to county.

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EXAMINING YOUR CREDIT

It is preferable for a homebuyer to have at least four (4) good credit references when qualifying for a loan.

Traditional credit references include:

• Car loans
• Credit cards
• Student loans
• Personal loans

Non-traditional credit references can include:

• Rent payments
• Utility payments
• Phone payments
• Storage payments
• Title loans
• Car insurance payments, etc.

If a homebuyer has poor credit, it is more difficult to qualify for a mortgage. A borrower with good credit means that s/he has:

• No unpaid judgments or liens
• No foreclosures within 10 years
• No bankruptcies within the last two years
• No unpaid collections
• No slow pays or late pays within the six months prior to applying for a mortgage
• No delinquent child support obligations

CREDIT SCORES

During the past several years, credit scores have become increasingly important in determining if a consumer qualifies for a favorable interest rate. Recently, credit scoring has even been used to determine insurance rates. The higher your credit score, the more favorable your insurance rate will be.

Along with checking your credit report, lenders can also access your credit score, which is based, in part,on the information in the report. That score is calculated by a mathematical equation, which evaluates a variety of factors in your credit report. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score identifies your level of future credit risk.

The term FICO refers to a credit scoring system developed by Fair Isaac & Company. The FICO score was developed in the 1950s as a tool lenders can use in determining the creditworthiness of the prospective borrower. It calculates the statistical likelihood that a borrower will or will not pay a debt. FICO scores range from 300 to 890. The higher the score, the more attractive the interest rate the homebuyer will receive. In order for a FICO score to be calculated on your credit report, the report must contain at least one account that has been open for at least six months. In addition, the report must contain at least one account that has been updated in the past six months. This ensures that there is enough information— and
enough recent information— in your report on which to base a score.

ABOUT FICO SCORES

Three major credit reporting agencies, Equifax, Experian, and TransUnion, provide FICO scores to lenders.

FICO scores are believed to provide the best guide to future risk based solely on credit report data. The higher the FICO score, the lower the risk of default. At the same time, no score can predict whether a specific individual will be a “good” or “bad” customer. And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual creditworthiness and interest rate. At least you now have a general idea of how lenders determine how much credit to offer and what interest rate to charge a particular borrower.

OTHER NAMES FOR FICO SCORES

FICO scores have different names at each of the three credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac & Co., and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data. The chart below gives the proprietary name each bureau uses in referring to a credit score.

In general, when people talk about “your score,” they are talking about your current FICO score. However, there is no one score used to make decisions about you. This is true for the following reasons:

• Credit Bureau Scores Are Not The Only Scores Used.
  Many lenders use their own scores, which often will include the FICO score as well as other information about you.
  
• FICO Scores Are Not The Only Credit Bureau Scores.
  Although FICO scores are the most commonly used, there are other credit bureau scores. These credit bureau scores may evaluate your credit report differently than FICO scores. In some cases, a higher score may mean more risk, not less risk, as with FICO scores.
  
• Credit Reporting Agencies May Score Differently.
  The FICO score from each credit reporting agency considers only the data in your credit report at that particular agency. If your current scores from the three credit reporting agencies are different, it is most likely because these agencies each have slightly different information on you.
  
• Your FICO Score Changes Over Time.
  As your data changes at the credit reporting agency, so will any new score based on your credit report. So your FICO score from a month ago is probably not the same score a lender would get from the credit reporting agency today.

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IMPROVING YOUR CREDIT SCORE

Raising your credit score is a bit like losing weight: it takes time, and there is no quick fix. In fact, quickfix efforts can backfire. The best advice is to manage credit responsibly over a period of time. Following are tips that will help you maintain good credit history:

• Pay Your Bills On Time.
  Delinquent payments and collections will have a negative impact on your score.
  
• If You Have Missed Payments, Get Current And Stay Current.
  The longer and more consistently you pay your bills on time, the higher your score will be.
  
• Be Aware That Paying Off A Collection Account Will Not Remove It From Your Credit Report.
  Your history will stay on your report for seven years. However, most lenders require that collection accounts be paid in order to proceed with your mortgage approval process.
  
• If You Are Having Trouble Making Ends Meet, Contact Your Creditors Or See A Legitimate Non-Profit Credit Counselor.
  This will not improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

If you have accounts on which you carry a balance, the following tips will assist you:

• Keep Balances Low On Credit Cards And Other “Revolving Credit.”
  High outstanding debt can affect your score.
  
• Pay Off Debt, Rather Than Moving It Around.
  The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
  
• Don’t Close Unused Credit Cards As A Short-Term Strategy To Raise Your Score.
  
• Don’t Open A Number Of New Credit Cards That You Don’t Need Just To Increase Your Available Credit.
  This approach could backfire and actually lower your score.
  
• If You Have Been Managing Credit For Only A Short Time, Don’t Open Several New Accounts Too Rapidly.
  New accounts will lower your average account age. This will adversely affect your score, particularly if your file contains limited credit information. Additionally, rapid account buildup can look risky, especially if you are a new credit user.

If you are trying to establish or re-establish credit history, the following tips will help you:

• Do Your Rate Shopping For A Given Loan Within A Focused Period Of Time.
  FICO scores distinguish between a search for a single loan and a search for many new credit lines in part by the length of time over which inquiries occur.
  
• Re-Establish Your Credit History If You Have Had Problems.
  Opening new accounts responsibly and paying them off on time will raise your score in the long term.
  
• Request And Check Your Own Credit Report.
  This won’t affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.
  
• Apply For And Open New Credit Accounts Only As Needed.
  Don’t open accounts just to have a better credit mix: it probably won’t raise your score.
  
• Manage Credit Cards Responsibly.
  In general, credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
  
• Be Aware That Closing An Account Doesn’t Make It Go Away.
  A closed account will still show up on your credit report, and it may be included in your score.

Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information. Your social security number, date of birth, and employment information are used to identify you. These factors are not used in scoring. Updates to this information come from information you supply to lenders.

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UNDERSTANDING TRADE LINES

Trade lines are your credit accounts, past and present. Lenders report on each account you have established with them. They report the type of account (bank card, auto loan, mortgage, etc.), the date you opened the account, your credit limit or loan amount, the account balance, and your payment history.

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MAKING INQUIRIES

When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who has accessed your credit report within the last two years. The report you see lists both “voluntary” inquiries, spurred by your own requests for credit, and “involuntary” inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.

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UNDERSTANDING PUBLIC RECORD AND COLLECTION ITEMS

Credit reporting agencies also collect public record information from state and county courts and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens, and judgments.

TRANSUNION PERSONAL CREDIT REPORT

PUBLIC RECORD

The following items obtained from public records appear on your report. You may be required to explain public record items to potential creditors. Any bankruptcy information will remain on your report for 10 years from date of filing. Unpaid tax liens will generally be reported for an indefinite period of time depending on your state of residence. Paid tax liens may be reported 7 years from date of payment. All other public record information, including discharged Chapter 13 Bankruptcy and any accounts containing adverse information may be reported for 7 years.

ADVERSE ACCOUNT INFORMATION SECTION

The following accounts contain information that some creditors may consider to be adverse. Adverse account information may generally be reported for 7 years from the date of first delinquency, depending on your state of residence. The adverse information in these accounts has been printed in <brackets> for your convenience to help you understand your report. They are not bracketed this way for creditors.

SATISFACTORY ACCOUNT INFORMATION SECTION

The following accounts are reported with no adverse information

<Status as of 02/15/2003: Paid as agreed>

REGULAR INQUIRY SECTION

The following companies have received your credit report. Their inquiries remain on your credit report for two years.

Companies that request your credit report must first provide certain information about you. Within the past 90 days, companies that requested your report provided the following information:

ACCOUNT REVIEW INQUIRY SECTION

The companies listed below obtained information from your consumer report for the purpose of an account review or any other business transaction with you. These inquires are not displayed to anyone but you and will not affect the decision of any other creditors or any score.

Credit Bureau’s Name
Bureau Address: 222 1st Avenue
Anytown, USA 99999
1-800-555-5555
Our Business Hours: 6:30 A.M. to 2:30 P.M. Monday thru Friday, except on major holidays.
A. PERSONAL CREDIT SCORE
Your Credit Score: 600
Minimum Score +150
Maximum Score +934
B. FACTOR DESCRIPTION

Factor 1: Collection amounts ever owed are too high. Consumers with collection activity are more likely to have future delinquency; making prompt payments over a longer period of time may improve your score.

Factor 2: Too many serious delinquencies. Your credit report reflects one or more accounts with a delinquent payment history of 90 days or more past due. Making prompt payments over time may improve your credit score.

Factor 3: Average balance of revolving accounts is too high. Lowering your balances on these accounts may improve your credit score

Factor 4: Too many delinquencies. Your credit report reflects delinquent payment history on one or more accounts. Making prompt payments over time may improve your credit score

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CHECKING YOUR CREDIT REPORT

You should make sure the information in your credit report is correct. Not only is your credit score based on this information, but lenders also review this information in making credit decisions. Review your credit report from each credit reporting agency at least once a year and before making a large purchase, like a house or car. If you have been turned down for employment or credit during the last 60 days, you are entitled to one free credit report. To request a copy, contact the credit reporting agencies directly:

• Equifax: (800) 685-1111, www.equifax.com
• Experian (formerly TRW): (888) 397-3742, www.experian.com
• TransUnion: (800) 888-4213, www.transunion.com

If you find an error, the credit reporting agency must investigate and respond to you within 30 days. If you are in the process of applying for a loan, immediately notify your lender of any incorrect information in your report. Your lender will need to reorder your credit report and score once any changes have been made to your credit file. Small errors may have little or no effect on your score. If there are significant errors, however, the lender may disregard the score. You may order your own score on the web at:

(www.MYFICO.com)

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BORROWING WITH POOR CREDIT

There are some lenders (known in the industry as “subprime” lenders) that will provide loans to high-risk borrowers, but they will charge higher interest rates. Before approaching these lenders, you must factor in the cost of these loans. Will these higher interest rate loans prevent you from recovering from financial difficulties? Can you postpone borrowing until you clear up at least some of your credit problems? If you can, you may be able to receive a lower interest rate in the future. Before making your decision, ask a housing counselor to provide you with a cost analysis. As with anything you buy, be sure to shop around for the best terms.

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UNDERSTANDING MORTGAGE LOANS

There are a number of loan products available to low- and moderate-income buyers. The majority of loans that these homebuyers use come from the following sources:

• FHA (insured by Federal Housing Administration, a department of HUD)
• Community Home Buyers
• VA (guaranteed by Veterans Administration)
• Rural Development
• Conventional

FHA LOANS

FHA loans are originated by an FHA-approved mortgage lender and are guaranteed by the Federal Housing Administration division of HUD. Borrowers often have easier access to FHA mortgage loans because historically FHA credit requirements have been more flexible. Borrowers never have direct contact with HUD or FHA, as neither HUD nor FHA loan money. Instead, an FHA loan means that in the event that you were to default on your mortgage loan, FHA would pay off the lender and take possession of the
house. FHA loans typically:

• Have more flexible credit requirements
• Qualify borrowers for an existing home loan using 29% of the borrower’s gross monthly income (“front-end ratio”) and a debt-to-income ratio of 41%, and for new construction loans using a 31% front-end ratio and a debt-to-income ratio of 43%
• Require mortgage insurance, which involves an up-front premium charge as well as ongoing monthly premium payments. The exact charges are based on a percentage of your loan amount (usually 1.50% up front and 0.5% monthly). The up-front premium may be financed in the loan, and the monthly premium is usually included in your total payment (PITI). The monthly mortgage insurance payment will automatically be cancelled when the outstanding principal balance reaches 78% of the original purchase price, provided that the monthly mortgage insurance payments have been made for a minimum of 5 years. If a buyer makes a down payment greater than10% of the purchase price and takes a 15-year mortgage, the monthly mortgage insurance premium isn’t required. However, all FHA loans require the up-front premium. The Federal Housing Administration also insures other types of specific loans, such as loans to Native Americans on trust land or the 203(k) rehabilitation loan for any owner-occupied residence.

COMMUNITY HOME BUYERS

Most local lenders will offer a loan product that is called Community Home Buyers, usually modeled after the Fannie Mae community homebuyer’s product. Most of these loans are targeted toward low- to moderate-income buyers. Typically, these loans have maximum income limits, which are determined by HUD as 80% of median income for the local area. Additionally, these loans usually allow a higher housing ratio because they understand that lower income borrowers need to use a higher percentage of their overall income to pay for housing. They also usually offer some special incentives, such as no mortgage insurance
premium and more flexible credit requirements.

VA LOANS

VA loans are loans guaranteed by the Veterans Administration for qualified veterans. To determine if you are qualified for a VA loan, contact your local VA office for an eligibility certificate. VA loans do not require the borrower to make a down payment. Not unlike FHA and HUD, the Veterans Administration does not loan money. Instead, they guarantee the loan. The guarantee means the lender is protected against loss if the borrower fails to repay the loan. VA loans typically:

• Require no down payment
• Require a funding fee that can range from 1.25% to 3% of the loan amount, depending on whether the borrower is a first-time or subsequent user of benefits.
• Require no mortgage insurance premium When shopping for a VA loan, it is extremely important to choose a lender that knows how to originate VA loans.

RURAL DEVELOPMENT

Rural Development (formerly Farmers Home Administration) is another government entity. In contrast to FHA and VA, however, Rural Development does loan money directly to borrowers, in addition to guaranteeing loans. Their loans are available in communities with a population of 20,000 or fewer people.

Rural Development has a variety of different loan types including rehabilitation loans, leverage loans, and guaranteed loans. Rural Development loans typically:

• Target low- to very low-income families
• Subsidize interest rates to in order to qualify these families for mortgages

CONVENTIONAL LOANS

Conventional loans are loans that are not guaranteed or insured by a government entity. Private investors that provide capital for these loans take the risk. Mortgage loans that are not targeted toward first-time homebuyers are often conventional.

Conventional loans typically:

• Qualify borrowers for a home loan using lower front-end and debt-to-income ratios (typically 26% and 36%, respectively)
• Require the borrower to pay a monthly private mortgage insurance premium for loans with less than 20% down. This premium may be gradually reduced as the principal balance of the loan is paid down, and once the principal balance is 80% or less, the premium may be cancelled.
• Have more stringent credit requirements
• Require more money down—usually a minimum of 5%

MFA LOANS

In 1975, the New Mexico state legislature created the New Mexico Mortgage Finance Authority (MFA) to provide capital for affordable housing. MFA has a number of loan programs that are designed specifically for first-time homebuyers. Each prospective homeowner must meet certain income eligibility criteria, must not have owned a home within the three years prior to applying, and the property cannot exceed certain sales price limits. MFA is similar to FHA, HUD, and the VA in that it does not lend money directly to firsttime homebuyers, nor does it take applications from them or qualify them for loans. MFA has approved many lenders throughout the state to use MFA programs to help first-time homebuyers. A list of eligible
lenders can be found on MFA’s website: www.housingnm.org.

MFA programs include:

• Mortgage$aver Program - Below-market, thirty-year fixed rate mortgage loan for low- to moderateincome first-time homebuyers. Mortgage$aver is available statewide through MFA’s network of lenders.
• Mortgage$aver Plus - Thirty-year fixed rate mortgage loan with a slightly higher interest rate than the Mortgage$aver loan, and a 3.5% grant that can be used for down payment and closing costs.

Mortgage$aver Plus is available statewide through MFA’s network of lenders.

• HELP - Second mortgage loan of up to $4,000 that may be used for down payment and closing cost assistance. HELP loans have an interest rate of 6% and a ten-year term, and they may be used in conjunction with Mortgage$aver. HELP is available statewide through MFA’s network of lenders.
• Payment$aver - Lower-income families in most areas of the state may be eligible for an 8% subsidy for down payment, closing costs, principal reduction and/or interest rate buy-down. Used in conjunction with Mortgage$aver, Payment$aver does not need not to be paid back unless the property is sold or refinanced. After the first five years of living in the home, Payment$aver loans are forgiven at a rate of 20% per year; they are completely forgiven in ten years. Payment$aver is always available
  outside of the cities of Albuquerque and Las Cruces through MFA’s network of lenders.

Usually Payment$aver is also available in Albuquerque and Las Cruces: interested borrowers and lenders should check MFA’s website or contact MFA’s Homeownership Department (505-843-6880 or 800-444-6880) to confirm availability.

• Helping Hand - Provides down payment and closing cost assistance to low-income families in which one person has a disability. The Helping Hand loan is used in conjunction with Mortgage Saver. A maximum amount of $6,000 is available with the Helping Hand program.
• Building Trust - Provides below-market, thirty-year fixed rate loan to Native American families or individuals from federally recognized tribes who have a home-site lease. MFA makes Mortgage$aver loan products available and waives first-time homebuyer requirements.

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APPLYING FOR A LOAN

INCOME

Your income will determine the amount of money you can borrow. Some mortgage lenders will allow you to exceed their standard debt-to-income ratio requirements if you can prove that your current housing cost is more than your projected mortgage payment. In other words, it is riskier for the lender if the borrower’s new mortgage payment will be substantially higher than the amount of monthly rent the borrower is used to paying.

Another factor that affects the amount you can borrow is interest rate. The lower the interest rate, the higher the amount you can borrow. The higher the interest rate, the lower the amount you can borrow. See sample chart below.

Note: Your housing expense, or “front-end” ratio includes property taxes, hazard insurance and mortgage insurance payments (PITI). The principal and interest payment calculations in the above table do not include property taxes and hazard insurance, nor do they include monthly mortgage insurance premiums, which are not generally impacted by interest rates.

EMPLOYMENT & INCOME REQUIREMENTS

You need a minimum two years of employment in the same line of work to count that income when qualifying for a loan. If you receive assistance such as social security, it must have a documented two-year history and projected two-year future (not unlike a job).

The above information is only a basic guideline for mortgage qualification. Every lender will consider “compensating factors” that may offset certain aspects of your situation that may be weaker than what is typically preferred. Compensating factors can include:

• Amount of time at current place of employment and projected duration of employment with current employer

• Part-time job that cannot be used as qualifying income
• Child support income
• Large down payment

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10 QUESTIONS TO ASK YOUR MORTGAGE LENDER

Buying a home for the first time can be overwhelming: REALTORS, builders, and lenders may use terms with which you may not be familiar, and you will be asked to provide a significant amount of personal financial information in order for a lender to determine the right loan for you. Knowing the right questions to ask your mortgage lender will ease the stress, and it may also save you time and money.

1. What are the interest and annual percentage rates on this mortgage?
   To know exactly what you will be paying in interest over the life of the loan, you need to know these rates. These are two of the important figures to obtain.
2. How many discount and origination points will I have to pay to get the loan at this rate?
   A “point” is equal to 1% of the original loan amount. For example, a one point charge on a $100,000 loan equals $1,000. Lenders can charge discount points that act to lower, or “buy down” your interest rate and origination points that serve as compensation to the lender for making you a loan, or “originating” your loan. Find out how many points you will be expected to pay for the loan, which kind of points they will be, and whether they’ll be included in your loan amount or if you’ll be expected to pay cash up front. Also, ask if you have the option to get the loan without paying any discount points, and if so, what your interest rate would be in that case.
3. What closing costs will be charged on this loan, and will you provide the “good faith estimate” of those costs up front?
   Mortgages come with legitimate fees for various services that lenders and other parties involved in the transaction provide. Early on in the process, you will need to find out what you will be charged. The federal laws governing real estate loan transactions require that you are given certain cost estimates in writing fairly early in the process. If your lender doesn’t volunteer the information, be sure to ask. If your lender is reluctant to provide information or clear answers to your questions, you may be better off shopping for a different lender.
4. When can I “lock in” the interest rate, and what will it cost me to do so?
   Because mortgage interest rates can fluctuate daily, you may want to ask your lender about “locking in” a quoted rate for your mortgage. Quite often, the time period between when you first apply for a mortgage and the time you actually close can be several weeks. You may not want to risk letting the rate “float” until the closing date, because it could increase. Be sure to ask the lender if there is any fee for locking in the rate, and whether you can also lock in points. An advantage to locking in your interest rate is that you’ll know exactly what interest rate you’ll receive at closing. The main disadvantage to locking in a rate is that if market rates decrease, then you will be “locked in” at a higher rate than you might have been had you allowed the rate to float. Ask your lender to clearly explain your options to you.
5. Is there a prepayment penalty on this loan?
   The prepayment question is most important for loan shoppers with less-than-perfect credit, primarily because penalties are common in non-conventional or “subprime” loan structures. Even conventional borrowers should ask about any prepayment penalties that may apply. In some cases, borrowers get lower rates by accepting penalties on their loans. Find out the duration of any penalty period and how the fee would be calculated. Some penalties are 1% of the loan amount; others are equal to six months’ worth of interest. Some apply only when you refinance or reduce the principal balance of the loan by more than 20%; others may apply if you sell the house. It may be a good idea to ask the lender for a written copy of any prepayment clause to which you would be subject.
6. What is the minimum down payment required for this loan?
   Depending on the amount of your down payment and its relation to the price of your home, you might be charged different interest rates or quoted different loan terms. Loans made at high loan-to-value, or “LTV” ratios (meaning the borrower has made a small down payment) can cost more than loans with larger down payments. Nevertheless, borrowers with good credit who are willing and able to pay private mortgage insurance (PMI) can get conventional loans with down payments that are much lower than 20 percent.
7. What are the qualifying guidelines for this particular loan?
   The qualifying guidelines can relate to your income, employment, assets, liabilities, and credit history. Some first-time homebuyer programs and government-sponsored loans have easier qualifying guidelines.
8. What documents do I have to provide?
   You will need to provide proof of income and assets to get a mortgage loan. Find out what documents will be required in your particular situation by asking your lender. It’s a good idea to gather and organize your personal financial documents prior to beginning the loan application process. By doing so, you may prevent delays in the process later on.
9. How long will it take to process my application?
   This varies from lender to lender. It often depends on how much business your particular lender is doing and how busy the mortgage loan industry is overall. During periods of peak activity, underwriting departments may back up, appraisals may take longer to obtain, and other bottlenecks may develop. Get a realistic estimate, and use that to figure out if it makes sense to pursue a rate lock and how long it should be.
10. What might delay the approval of my loan?
    If you provide the lender with complete, accurate information, everything should go smoothly. However, there could be a delay if the lender discovers credit problems or if other unforeseen circumstances develop. This is why it is critical to get your credit in order.

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UNDERSTANDING PRIVATE MORTGAGE INSURANCE (PMI)

Private Mortgage Insurance (PMI) protects the lender from the expense of foreclosing on the property if you default. If you buy a house with a conventional mortgage, and you make a down payment of less than 20%, in most cases you will be required to pay for PMI.

The insurance benefits the lender, but the borrower pays for it. The premiums for PMI are added into the borrower’s total monthly mortgage payment.

The cost of PMI varies, depending upon the size of the mortgage and the percentage of the down payment.

If you made a down payment of more than 15%, but less than 20%, you’ll pay about 0.32% of your loan amount annually in PMI premiums. That’s about $40 a month for a $150,000 mortgage.

When you’re buying a house with a conventional mortgage, and you make a down payment of less than 20%, you will probably pay PMI. About the only option you have to avoid paying PMI is to get a “piggyback” or “combo” loan. This means you would have to take out second mortgage that allows you to make a 20% down payment. For example, you would pay 10% cash down, get a first mortgage of 80%, and get a second mortgage of 10%. That second mortgage—the piggyback loan—is always at a higher rate. You’re not paying for PMI, but you’re still making a monthly payment, which will probably be close to the same amount you would pay for PMI.

Many argue that the benefit in obtaining a piggyback or combo loan lies in the fact that the interest you pay on the second mortgage loan is tax deductible: you cannot deduct the cost of PMI from your income taxes. Any borrower considering a piggyback loan is well advised to consult a qualified tax advisor to obtain information that pertains to his or her individual situation.

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RECOGNIZING PREDATORY LENDING PRACTICES

Predatory lenders take advantage of consumers with credit problems and those who fail to safeguard their own financial transactions. These lenders charge extremely high fees and interest rates. A loan from a predatory lender will cost you much more throughout the life of the loan and—in extreme cases—could lead to foreclosure on your home. Predatory lenders take advantage of those borrowers who are not able to secure lending from traditional financial institutions.
In recent years, many observers claim that the incidence of abusive or predatory lending practices has increased. The State of New Mexico has passed legislation to combat predatory lending, but there are still quite a few predatory lenders operating in the state. Remember that you are responsible for protecting your own financial well-being. Do not transact any business with a lender who pressures you sign documents you haven’t read or don’t thoroughly understand. The following are indications that the lender with whom you are dealing may practice predatory lending:

FINANCING EXCESSIVE FEES INTO LOANS

Predatory lenders often finance large fees into loans, stripping thousands of dollars in hard-earned equity and racking up additional interest. Sometimes victims of predatory lending practices find that they have been charged origination fees of as much as 8% of the loan amount, compared to the average 1 - 2% assessed by most lenders. Once the paperwork is signed and the rescission period expires, there is no way to recapture the equity that has been lost. Consequently, borrowers can lose hundreds or even thousands of dollars in equity while receiving little, if any, benefit from the financing structure. The damage is compounded by higher interest rates, as borrowers often pay tremendous interest costs in the years it takes to pay down the fees. Typically, loan fees are kept below 8% in order to stay under the HOEPA fee threshold established by federal law, which would then require additional disclosures to the borrower and additional consumer protections.

CHARGING HIGHER INTEREST RATES

While the higher interest rates charged by legitimate subprime lenders are intended to compensate the lenders for taking a greater credit risk, some borrowers pay higher interest rates unnecessarily. Abusive lenders have been known to charge borrowers with perfect credit interest rates 3 to 6 points higher than market rates if they perceive that an unaware borrower will permit them to do so. Some lenders do not offer lower rates, no matter how good the borrower’s credit might be. For borrowers with imperfect credit, the rates are sometimes higher than is warranted based on industry standards. Predatory lenders are also sometimes hesitant to quote rates in advance.

CHARGING PREPAYMENT PENALTIES

A large percentage of subprime loans have prepayment penalties, compared to less than 2% of conventional prime loans. The penalties are assessed when borrowers pay their loan off early. Early payoffs typically take place as a result of borrowers refinancing or selling their houses. Although contractual agreements vary from lender to lender, oftentimes the penalties can end up costing the borrower hundreds or thousands of dollars.
When a borrower with a prepayment penalty refinances, the amount of the penalty is sometimes financed into the new loan. For borrowers who refinance or sell their houses during the period covered by the prepayment penalty, the penalty functions as an additional and expensive fee on the loan, further depriving them of their equity.
Some lenders argue that prepayment penalties protect them against losses incurred due to frequent turnover of loans. The truth is, however, that a large number of these borrowers refinance within the period covered by the prepayment penalty, and so the lender is entitled to and collects the fee anyway. If a borrower isn’t careful, he or she could pay more in the penalty than they “saved” by refinancing, even if their interest rate was reduced.
Another way predatory lenders might take advantage of a borrower is to combine prepayment penalties with an adjustable rate loan. Borrowers are sold a loan with a seemingly reasonable starting rate that lasts for two or three years but increases dramatically thereafter. When faced with the higher interest rate, these borrowers look to refinance, only to discover they must pay a prepayment penalty.
Often, borrowers are unaware that their loans contain a prepayment penalty. Lenders’ agents simply fail to point it out, or they deliberately mislead borrowers by telling them that they can refinance to a lower rate later and not telling them that by doing so, they will have to pay a penalty. Many borrowers miss this information, as it is buried in the numerous documents they must review and sign during the loan closing process.

A borrower who is not diligent in protecting him- or herself from such practices may find that their financial problems only become worse with time. Once again, it is up to you to know what you are signing before you sign it.

NEGATIVE AMORTIZATION
In a negatively amortized loan, the borrower’s payment does not cover all of the interest due, much less any of the principal of the loan. Consequently, the borrower’s loan balance increases every month and s/he loses, rather than builds, equity. Many borrowers are not aware that they have a negative amortization loan until they call the lender to inquire why their loan balance continues to increase. Predatory lenders use negative amortization to sell the borrower on the low payment, without making it clear that this payment will cause the principal to rise, rather than fall.

AGGRESSIVE AND DECEPTIVE MARKETING
Predatory lenders often employ very aggressive, and sometimes deceptive, marketing campaigns. Their goal is to reach those individuals who, for any number of reasons, would be more likely to agree to apply for a loan. Once they have identified a potential customer, they try to reach them by mailing, phoning, and even visiting them in their homes to encourage them to take out a loan.
One of the most common methods used by predatory lenders is to mail “live” checks to prospective borrowers. These checks are usually for several thousand dollars, and by cashing or depositing them, the borrower is entering into a loan agreement with the lender.
This initial loan is sometimes just an entry point into the financial life of the homeowner. The loan has an artificially high interest rate and monthly payment, so that the predatory lender can offer an opportunity to refinance it, along with other debts, with another loan. The predatory lender’s ultimate goal is to get the homeowner to refinance their first mortgage with them.
While this list of predatory lending practices seems extensive, these are just a few of the methods some lenders use to take advantage of borrowers. When considering any lender or loan product, keep in mind that if something looks too good to be true, it probably is!

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