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How Appraisals Affect Mortgage Loans

October 30th, 2009

So you’re ready to get a home loan or refinance and want to know how large of a mortgage you can get. That depends on several factors, including the home appraisal. The following guide shows how an appraisal affects the amount of your mortgage loan.

What Is an Appraisal?

An appraisal gives an estimate of what a home is worth. When you apply for a home loan the mortgage lender usually orders up an appraisal and chooses the company to do it. The cost of the appraisal is included in your closing costs, and you are entitled to a copy of the appraisal.

If you already have a mortgage and are thinking of refinancing, you can get your own appraisal to get an idea of what your home is worth. But your mortgage lender is under no obligation to use that report.

Declining Home Values

The appraiser does a comparitive market analysis of recent home sales in your area. He or she also looks at the condition of your property and how much it would cost to rebuild it.

Because so many people have seen their home values plummet during this recession, it can be tough for them to get a large enough appraisal to qualify for a mortgage refinance or new home loan. In many cases homeowners are “upside down” on their loans, or owe more on a mortgage than their house is currently worth. If that happens, you may be denied a mortgage loan.

If the house appraises for less than you expected, you may be asked to make a larger down payment. If you’re buying a home the mortgage lender may even ask you to go back to the seller to renegotiate the sale price. 

Reasons Appraisal May Be Low

There are various reasons an appraisal may come in lower than your expected, including:

  •  Your neighborhood may have a lot of foreclosures, which could affect your home value
  • The underwriter could have evaluated the home incorrectly
  • The seller may have overpriced the house
  • The appraiser may not have much experience

You can always appeal an appraisal, but there is no guarantee of it getting changed. If your mortgage lender won’t budge, you may be unable to refinance or obtain the mortgage loan you need to buy a home.

Paying Off a Mortgage Early

October 24th, 2009

The News & Observer has an interesting story about a Pennsylvania home owner who completely paid off his mortgage in 1994, but found out recently that it still showed up as a lien in his county’s records. The poor guy has jumped through a lot of hoops trying to get the matter cleared up even though he has documentation that he paid off the mortgage loan.

Dealing with More Than One Mortgage Lender

What has complicated his efforts to get the case straightened out is that his loan was sold to another mortgage lender. The original mortgage lender said they don’t have records that go back far enough to show he paid off the mortgage.

The homeowner is still struggling to get closure, and his case is a reminder of some things you should do if you plan to pay off your home mortgage early.

Keep Careful Records

Anytime you communicate with your mortgage lender keep careful records of phone calls and mailings. Ask for the name of the individuals you speak with and find out if there is a case number associated with your call.

Pay Off Other Debts First

If you currently have a lot of credit card debt, it makes sense to pay that off first before prepaying on a mortgage. Also, work on building up an emergency savings fund and regularly contribute to a retirement account. Once you’ve accomplished that, direct extra cash to your mortgage.

Be sure to write a note with your payment that explains that you want the extra money applied to the principal. Make sure there is no penalty for prepaying your mortgage loan.

Make Extra Mortgage Payments

While most mortgage lenders offer to set up biweekly payment plans for a fee, you can do this on your own. Just pay half of your monthly mortgage payment every two weeks. This works out to one extra payment a year and reduces the time it takes to pay off your loan, as well as the total interest. Also, use any extra money you get from tax refunds, gifts, or refunds to put toward your mortgage.

Some people argue that it doesn’t make sense to pay off a mortgage loan early because you won’t be able to deduct the mortgage interest. Others say it’s better to keep your money more liquid instead of putting it into a house. But if you want the peace of mind that comes with owning a home free and clear, prepaying your mortgage could work for you.

Credit Scores and Mortgage Rates

October 17th, 2009

When you’re searching for mortgage rates keep in mind that your credit score plays a huge role in mortgage lender quotes. Here are some things to remember about credit scores and mortgage loans.

High Credit Scores Result in Lower Mortgage Rates

You probably already know that having excellent credit means you are offered better deals on mortgage loans and home equity loans. The best scores are above 760, while scores in the low 600s means you’re considered a subprime borrower. Mortgage  lenders consider people with scores below 600 extremely risky, and in today’s mortgage environment they are likely to be denied credit.

How FICO Scores Work

There are different credit scores out there. The three major credit bureaus all have their own proprietary system of determining credit scores. But the FICO score is probably the most widely used by mortgage lenders and other financial institutions. FICO scores are based upon:

  • Your payment history, which makes up about 35% of the score
  • How much your owe, which determines about 30%
  • The length of your credit history, which determines about 15%
  • How much new credit you have opened or applied for, which makes up about 10%
  • Other things such as the types of credit you have, which makes up about 10%

Repairing Credit Scores

If you plan to apply for a mortgage refinancing or a mortgage to purchase a home, spend some cleaning up your credit first. Make monthly bill payments on time, pay down debt, and avoid opening new credit lines. Also, review your credit report to make sure that information is accurate, as well as to delete outdated information such as old liens, judgments, and discharged debt. Bankruptcies should be removed after 10 years.

Dispute Inaccurate Information

Dispute information by calling the credit bureau and by following up with a letter.  Depending upon the outcome of your dispute you may have to contact the actual creditor who reported the information contained in your report. Keep careful notes of all interactions and correspondence with credit bureaus and creditors so you have a complete paper trail.

Fixing your credit can have several positive results that include receiving better loan terms on a mortgage and reducing the amount of deposits that have to be made with utilities.

Should You Buy a Foreclosure?

October 11th, 2009

Nearly 2 million homes have been foreclosed upon this year, according to the Center for Responsible Lending. Although there are bargains to be found for folks who want to purchase a foreclosure, getting involved with such a deal isn’t for everyone. Here are some things to remember.

  1. Get preapproved for a mortgage before you begin shopping around for a foreclosure. That’s because some mortgage lenders won’t underwrite home loans on foreclosed properties. But there are mortgage lenders who allow mortgage loans on foreclosures that are in good condition. If you are fortunate enough to already have a home equity loan, this could also be used to purchase a foreclosure as a vacation home or investment property.
  2. Look for properties on real-estate sites that list properties that are in foreclosure, such as Foreclosure.com or RealtyTrac. You’ll pay a fee for using these sites, but will get a good idea of what type of homes are available in your area. You can also contact banks to see if they will give you a list of bank-owned homes for sale. A bank offering a property for sale may be willing to give you a home mortgage to purchase it.
  3. Unless you are an experienced real-estate investor, avoid trying to purchase a foreclosure on your own. Find a realtor and attorney who have lots of experience with foreclosures. These people should understand local laws concerning foreclosures.
  4. Avoid buying at auction if you are new to foreclosures. You usually won’t be allowed to inspect properties before they to to auction, so you’re taking a big chance purchasing a property this way. Auctioned properties also may have tax liens.
  5. Expect to make repairs on a foreclosure. A lot of foreclosures are damaged by angry homeowners or fall into disrepair from sitting empty for a long time. Go into a foreclosure situation with as much information as you can get. Hire an inspector to give a full evaluation of any property you plan to buy.

Yes, there are people who are getting great bargains by purchasing foreclosed homes. But if you want to buy a home this way don’t let your emotions get in the way. It’s essential that you thoroughly research the different ways you can buy a foreclosure, as well as the process for obtaining a home loan for this purpose. You can search for a mortgage here to get an idea of what type of financing is available for a foreclosure purchase.

10 Things to Consider about Doing a Mortgage Refinance

October 5th, 2009

Current mortgage rates have fallen near record lows, but should you move to do a mortgage refinance? Here are 10 things to consider if you’re thinking about refinancing.

  1. Consider a 15-year mortgage if you have a low balance. Fifteen-year mortgage rates averaged 4.36% last week, the lowest rate since Freddie Mac began tracking the rates.
  2. Consider paying points to get a lower mortgage rate. Generally, you can lower your mortgage rate by about 0.25% for each point you pay.  Each point will equal 1% of the total amount of your mortgage.
  3. Use a loan calculator to figure out what your monthly payments will be after refinancing. A loan calculator also can show the break-even point for recouping fees paid to refinance.
  4. Check out home values in your area before applying to refinance a mortgage. This will keep you from being surprised by a low appraisal during the refinance process. Keep in mind that if you live in an area hit by a lot of foreclosures, it may be difficult to get a high enough appraisal to refinance if you don’t have a lot of home equity.
  5. Don’t apply for a mortgage refinance until after you’ve reviewed your credit report. Make sure all information on your report is accurate. If you have a poor credit history, you may be turned down for refinancing.
  6. Don’t apply for other types of credit before getting approved for a mortgage refinance. Too many credit inquiries or newly opened lines of credit are red flags to mortgage lenders.
  7. Ask mortgage lenders to provide a Truth-in Lending Disclosure and Good Faith Estimate before paying an application fee or a rate lock-in fee. Some lenders may balk at doing this, but anyone who wants your business should be able to give you this information.
  8. Make sure you continue making payments on your current mortgage. You are still responsible for the payments until you close on the refinance.
  9. Comply with the mortgage lender’s request for documentation of income, income taxes, financial statements, etc. Dragging your feet on getting these documents together can delay closing on your home loan.
  10. Just because mortgage rates are low doesn’t mean you should refinance. Talk with an experienced mortgage counselor if you need help deciding whether or not refinancing will help you.

Countdown to Your Mortgage Closing

If you do refinance your mortgage, be patient. Mortgage lenders have been overwhelmed by requests for loan modifications and refinancings so it make take a little longer than you want to get to closing.