What goes into an escrow account and should I escrow?

When you get a home loan, whether you are buying or refinancing, you have the option to have an escrow account. For a government loan(FHA or VA), you have to open an escrow account.

What goes into an escrow account?

Property Taxes: Take your property taxes for the year, and divide it by 12 for your monthly payment. You will always have an extra 2 months of tax payments in your escrow account. Typically, you will pay the entire year for insurance (this is to protect you from accidentally forgetting a payment, and God forbid something happens to your home and you didn't pay your monthly insurance bill...)

Is it a good idea to start an escrow account?

Well, if you have a FHA or VA loan, you must have an escrow account according to guidelines so your choice has already been made for you.

Now, if you are getting a conventional loan, this is an important decision you need to make. I won't make the decision for you, but I will give you some thoughts on it:

-If you do not decide to start an escrow account, you will have to pay .25% of your home loan when you close. If you have a $100,000 home, that is $250.

-Whoever holds the escrow account invests the extra money into the market and makes money on it. This means that YOU are NOT making money on that money. Is it better to invest your money on your own? Can you make up the difference from that $250 you paid at closing?

-Because you are paying your entire year of insurance, you don't have to worry if your payment is made each month. You have already, in a sense, paid someone to take care of that for you. If you like to have piece of mind, this is something to think about.

-Taxes are not due until the end of the year. If your taxes are $2,000, it could be difficult to come up with that money at the end of the year while you are trying to get through the holidays. It is much easier to come up with $187.50 every month than a lump sum of $2000 at the end of each year.

-When establishing an escrow account, you have to come up with a good amount of money ($1-2000 depending on your taxes and insurance payments). Do you want to save that money at closing?

These are all just things that you need to think about when your lender asks if you want to open an escrow account. Remember that your loan officer is not making money off of your escrows so ask them to help you make the right decision. That is what your loan officer is there for, to HELP YOU!

Why do I pay mortgage insurance on a FHA loan?

A FHA loan is a loan that is insured by the government, or the Federal Housing Administration.


When I pay up to 20%, does mortgage insurance fall off like it would on a conventional loan? NO

You will always, always, always pay for Mortgage Insurance on a FHA loan.

Why is this?

The reason the Federal Housing Administration was founded was to make it easier for the general public to buy homes by lowering the qualifications to get one of these loans. FHA will approve a loan if a borrower only has a FICO of 620. This is looked at as a large risk for the lender, but the government is pushing that lenders get more people into homes because it helps the market. They also only require borrowers to put 3.5% down on their home.

FHA acts as a Mortgage Insurance company for government loans. Because they don't require a high FICO score, they require that mortgage insurance is paid. In the case that a borrower defaults on the loan, FHA will pay money to the lender that is servicing the loan because the customer paid for the mortgage insurance.

The reason lenders feel comfortable lending to people with these low FICO scores is because no matter what, they are guaranteed to be paid if the customer defaults because mortgage insurance has been paid for.

Example 1: Let's say that you have a FICO of 630. You are buying a home that is worth $100,000. You are getting a gift for your down payment of $30,000. The only way you can get a loan is to get a FHA loan because you have a low FICO. However, you have a 30% down payment. Do you have to pay mortgage insurance? YES.

Example 2: You have had the home that you bought in example 1 for a while. You are wanting to refinance because you think that you can get a lower rate. You now have 60% equity in your home. Do you have to pay mortgage insurance to FHA? YES.


Moral of the story is that you will ALWAYS pay mortgage insurance on a FHA loan.

Closing Costs

Recently the Good Faith Estimate changed. What is a good faith estimate? A good faith estimate tells you what your closing costs are when you get a home loan.

When you are closing a loan, you will have to pay some costs to get the loan done. The new Good Faith Estimate does not list the costs out for you. It only tells you the entire amount of your costs.

Here is a list of costs that you have to pay when closing on a loan:

Loan Origination Fee
Appraisal Fee
Credit Report
Processing Fee
Life of Loan Flood Certification
Verification of Employment
Settlement or Closing Fee
Notary Fees
Lender's Coverage
Closing Protection Letter
Courier/Delivery Fee
Recording Fees
Survey Cost

In order to know what you are paying for each of these fees, you will need to ask your loan originator to go through them all with you. It is important to make sure you know what you are paying for so it is important to ask.

What can I afford?

You need to figure out what your income is per month. Then, find your expenses. This is a good form to use: http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH

I'll give you an example as well.

Let's say you make $5000/month. Your expenses are your credit cards for $300/month. You have a car loan of $600/month. You have a student loan payment that is $250/month.

Remember you have to account for taxes. After taxes you only make $3700/month. Then you take your expenses off. That leaves you with $2,550 for the month. If you add on a $900 mortgage, you will have $1650 left over.

Can you still afford to live with $1650 left over for the month? Remember, you still have your phone bill, food bills, water bill, heating bill, electric bill, cable bill, trash bill, etc.

Make sure you really think through what you will have to pay for when you own a home. Set a budget for yourself and your household so that you know if you should be buying a home or not.

Do's and Dont's

Do's and Dont's of getting a loan:

Do:

Shop around for your loan.

Interview lenders and other service providers such as title company, insurance agent, etc.

READ everything before you sign it. (Your lender should explain everything to you, but make sure you fully understand everything before you sign.)

Be honest with your lender about everything that has to do with your loan.

Tell your lender about any credit problems you have had in the past. (It's better to know upfront that you cannot get a loan than to get your hopes up; your lender may be able to counsel you on how to fix any issues with your credit.)

Be wary of offers you receive in the mail or through email for financing. (While we are at it, be wary of the people you hear on the radio talking about how if you have bad credit, you can still get a loan.)

Pay your mortgage on time!!!! Even if there is a dispute. (You don't want to ruin your credit or risk foreclosure for anything.)

If you are having problems paying your mortgage, contact your loan servicer immediately!


DON'T:

Don't sign blank documents. (Have your loan originator put an X through the page if there is anything that you are worried about.)

Don't lie about your income. (Your lender will get pay stubs from you. If you don't know, tell them that you don't know.)

Don't lie about how long you have worked somewhere. (Again, your lender will verify employment.)

Don't overstate your assets. (Your lender will look at bank statements or any other assets you claim that you have.)

Don't change your income tax returns. (Your lender will look at all tax returns for the past 2 years.)

Don't list fake co-borrowers on your loan application. (Every borrower on the app has to have their credit report run. If the person doesn't show up, the lender will find out.)

Don't provide false documentation or permit anyone else to provide false documents about you.




All of this information comes from the US Department of Housing and Urban Development.

How much of a home can I afford?

Why am I paying PMI or MIP and what is it?

What is PMI? Private Mortgage Insurance is insurance provided by non-government insurers that protects lenders against loss if a borrower defaults. PMI is attached to conventional loans.

What is MIP? Mortgage insurance Premiums are fees paid by the borrower to FHA or a private insurer for mortgage insurance. It is attached to government loans such as FHA or VA.

Does mortgage insurance do anything for me? Not really. It is really only there to protect lenders. It is a guarantee for the lender that if you, the borrower, cannot pay the loan, that they will not be out the entire amount of the loan.

Payments can be $55/month for a $100,000 loan or up to $1500/year for a $200,000 loan.

How do I avoid paying mortgage insurance?

On a FHA loan, you can never avoid paying mortgage insurance. On a conventional loan, you don't have to pay mortgage insurance if you have a 20% downpayment. This would free up a lot of money for you to use however you want to. You can pre-pay on your loan so that you decrease your interest payments, you could invest the extra money, or you could use it toward your home so that you increase your equity.

I know it is hard to find 20% of your home to put down. There are other options for you. It is in your best interest to figure out what your goals are and talk to your lender to see if they can find an option that fits your needs.

Fixed Rate Mortgage Vs Adjustable Rate Mortgage

What is better? Fixed Rate Mortgage(FRM) or Adjustable Rate Mortgage(ARM)?

First, what is a FRM? - A FRM is a mortgage in which the interest rate does not change during the life of the loan.

Second, what is an ARM? - An ARM is a mortgage in which the interest rate changes over time based on an index. ARMs usually have a lower rate because they are riskier to the borrower.

What is the better option for me? It really depends on where the market is. If the market has very low rates already, it is usually better to lock in with a FRM to guarantee that rate for the life of the loan. If the rates are rising, you may want to go with an ARM because rates tend to be lower.

The risk in an ARM is that the rates will go up after a period of time. There are different types of ARMs so you can discuss with your lender what the different options are.

The most important thing is to make sure that you are looking at your goals and making sure that your mortgage fits in with your goals.

How to manage your CREDIT SCORE

How do you pay your bills?

This affects 35% of your credit score.

If you have had late payments in the past, it has most likely affected your credit score negatively. If this has happened to you, don't worry. Just focus on getting your payments in on time right now.

If you think that paying the entire balance in full every month will help, you are not necessarily right. You need to make payments, but this doesn't mean paying off your entire credit card every month (although if you don't want to pay any interest, you want to pay it off in full every month.)

How much do you have in available credit?

This affects 30% of your credit score.

This means two things: how much outsanding debt you have (how much you owe to credit cards, car loans, student loans, etc.) and how much credit you have available (if you have 10 credit cards with $10,000 available, you may have $100,000 available in a credit).

Be careful with this. If you are consistantly maxing out your credit cards, you are perceived as a risk. On the other hand, if you don't use your credit at all, you don't have a track history.) People who have the best scores are people that use their credit sparingly and keep their balances low.

How far does my credit history go back?

This affects 15% of your credit score.

The longer you have had a credit line the better. Let's give an example. Let's say you have come into money, and you want to pay one of your lines of credit off. You have a student loan that has been around for 10 years, your car loan has been around for 2 years, and you have a credit card taht you opened 5 years ago. Pay off the car loan first because you have had it the least amount of time. (This is saying all of the interest rates are similar. If you have a higher interest rate on one, always pay that one off first!)

Mix of Credit

This affects 10% of your credit.

You should have a mix of revolving credit (such as a credit card) and installment credit (such as a car loan or a home loan). This shows that the borrower is able to handle a variety of credit.

New Credit Applications

This affects 10% of your credit.

If you have been opening a lot of new credit cards or have a lot of credit applications. If you are shopping around for a loan, this shouldn't affect your credit.

If you are consistantly looking at your credit score (or someone else is) your credit score may go down or if you have missed a payment when shopping around for a loan, your score may go down.


What doesn't affect credit score?

Age, sex, race, Job or length of employment, Income, Education, Marital status, whether you have been turned down for credit, length of time at your current address, whether you own a home or rent, information not contained in your credit report.

Should I be buying a home?

Questions to ask yourself when deciding whether to buy a home or not:

Do you have money for a down payment?
For a conventional loan, you need at least 5% down, and on a FHA, you need 3.5%. There are options for no down payment such as gifts, VA loans (for veteran's), and MHDC loans. For the most part, expect to be paying the down payment.

What is your credit like?
If you have a credit score below 620, you will have a very difficult time finding someone to approve a loan for you. It's not impossible if you want to pay large interest rates and fees.

What are your Debt to Income Ratios?
If your bills are taking up 50% of your gross income(before taxes) every month, you could struggle to pay your mortgage every month.

Do you have job security?
If you have any reason at all to believe that your job could be in jeopardy, you don't want to consider buying a home. Why go into foreclosure and ruin the rest of your credit and be in big trouble later in life? Most rent is cheaper than mortgage payments.

Do you tend to move a lot?
If you get sick of living in one spot all the time, you really don't want to buy a home. If you are buying a home, you want to build equity, and you will never do that by moving from place to place because you will have to get a new loan every time you move.

These are just a few of the questions you should be asking yourself when thinking about buying a home. There are many others such as:

Am I in a stable relationship or is my significant other going to leave me with a mortgage to pay by myself?

Is this going to be a good investment or is the market declining? If so, am I willing to stay in the house long enough to where the market will balance out?

Is it a seller's or a buyer's market? Are you going to pay more than what you think the house is worth?

What do we need for an application?

What do you need to bring in when you are filling out an application for a loan?

Driver's License
Social Security Card
Pay stubs for the last 30 days (If you are paid weekly, we would need 4. If you are paid bimonthly, we would need 2.)
Bank Statements for the past 60 days(or past 2 months)
W2's for the past 2 years
If you are self-employed or have business expenses that are not reimbursed by your company, you will need to bring in federal tax returns for the past 2 years.
If you have rental property, you will need to bring in lease agreements.

The lender will run your credit report and start proceedings to get your loan approved.

Secondary Market

What is the Secondary Market?



Earlier I talked about mortgage bankers selling their loans to the secondary market. You may have asked yourself, what is the secondary market?


The secondary market consists of investors who will buy the loan from the mortgage banker. They will take over the servicing of the loan. They usually consist of banks or financial institutions such as Fannie-Mae and Freddie-Mac.


The way they make money is on the interest differential between what they make in interest on the loan and the interest they pay investors.

Example of this: You are getting a loan with a mortgage bank. Your loan originator(LO) will work with you to decide what kind of loan will be best for you. To get you the best rate, the mortgage banker will have a choice between a variety of lenders from the secondary market. This ensures that you, the borrower, will get a competitive rate. For closing, the mortgage banker will provide funding for your loan. After the loan has been closed, the mortgage banker will sell the loan to lender from the secondary market that they thought had the best rate at the time. The lender from the secondary market will then take over your loan including the servicing of it.

Mortgage Banker/Broker/Portfolio Lender

What is the difference between a Mortgage Banker, Mortgage Broker and Portfolio Lender?

Portfolio Lender: Generally banks and savings and loans institutions. They take in deposits and use them to make mortgage loans for their portfolio. They will hold the loan until it is paid off. They make their profit from the interest differential between what they charge their borrowers and what they pay their depositors.

Ex: You bank with US Bank. You are looking for homes and one day you go to the bank and see that they offer mortgages. This is a portfolio loan.

Mortgage Broker: A company that will take a loan in, and they will find someone(usually a bank) to buy the loan from them. They act as an intermediary between the customer and the banks.

Mortgage Banker: A company that will take a loan and approve it. This company will actually fund the loan at closing, and then once everything has been closed and finished, the company will sell the loan to the secondary market. The nice thing about a mortgage banker is that you know the money will be there at closing.

Mortgage bankers also have options on who they will sell their loans to. This is really nice because if one buyer has a better rate, they can give their customers that rate.



It is always useful to do your homework on what kind of lender to go through. Don't just settle for the first person who decides to approve you.