What does it mean to be an “A,” “B,” “C,” or “D” borrower?

Alphabet Blocks Mortgage lenders typically use the letters of the alphabet to rate borrowers. The letters rank the level of risk the lenders perceivs:

  • "A" signifies prime borrowers, those who always pay bills on time and whose debt-to-income ratio is within acceptable limits;
  • "B" borrowers are those who have been 30 days late on a charge or mortgage payment within the past year;
  • "C" denotes a riskier credit profile, with several 30-day or 60-day late payments; and
  • "D" indicates serious credit problems such as a long-term delinquency or a bankruptcy in the past.

The level of risk determines the interest rate available to the borrower. A borrower with a B, C, or D rating could end up paying a significantly higher interest rate on a mortgage than someone with an A credit rating.

What is a two-step mortgage?

Ballet Slippers Good news. A two-step loan helps a buyer really dance! Although the traditional 30-year mortgage is still the most widely-used home financing, a relatively new variation on the theme is gaining popularity:

  • The two-step mortgage amortizes the loan over 30 years, but generally starts out at a lower rate than a typical 30-year loan.
  • The rate is lower because after the initial period, the interest rate is adjusted to the prevailing rate for the balance of the loan.
  • The initial step is pre-set for a specific period, say 3 to 10 years, and the second step is the remaining time, generally 20 to 27 years.
  • The lower initial rate makes the two-step loan popular with first-time buyers because monthly payments are lower, but it also helps homeowners buy up to their next home.

With our experience, we can give you tips that will help you through the mortgage maze phase of home buying. Call or e-mail us for information specific to your needs.

Can you tell me about recent changes in lending procedures I should know about before I shop for lender?

Russian Dolls Mortgage Help For First-time Buyers

  • An exciting Fannie Mae program may help open the door to home ownership for low- and moderate-income buyers.
  • The Community Home Buyers Program allows for slightly more debt when qualifying for a loan than standard mortgage plans. It raises the percentage of the gross monthly income borrowers may spend on housing payments (mortgage, taxes, insurance, and condominium fees) to 33%, compared to 28% under standard mortgage plans. Total debt payments are increased to 38% under the program, up from 36% in standard mortgage plans.
  • In addition, the Community Home Buyers Program waives the common requirement that borrowers have two months' worth of mortgage payments in savings after closing.
  • There are special requirements to qualify: borrowers must attend a series of home buyer education classes and the borrower's income must not exceed 115% of the median income in the area. For more information, contact Fannie Mae, Public Information Office, 3900 Wisconsin Avenue, NW, Washington, DC 20016 or call (800) 732-6643.

FHA Makes Loans More Accessible To More Buyers

  • Home buyers with an FHA-insured single-family home loan can now finance 100% of the closing costs on the loan. The previous rule allowed home buyers to finance only 57% of the closing costs, adding hundreds of dollars to the up-front cash home buyers needed for settlement.
  • A recent change to FHA set the maximum loan amount in high-cost areas at $625,500 for 2009. FHA's mortgage limit varies by area as it is linked to an area's median home price. To find the limit in your area, go online to entp.hud.gov/idapp/html/hicostlook.cfm.
  • Now borrowers will have to put down 3 1/2% of the loan amount and pay a 1.5% funding fee (which can be financed by the loan).
  • These changes will attract higher-end buyers to FHA loans and make FHA more accessible to those whom the program is primarily intended to serve - prospective buyers who do not qualify for conventional financing. Traditionally, FHA has served buyers who have lower incomes, make smaller down payments, and purchase less-expensive homes.

Lenders Welcome Borrowers With Open Arms

  • Affordable interest rates mean more people can qualify to buy a first home or move up to a bigger home, and lenders are making loans to borrowers with good credit. Recently, best buys have been 15-year and 30-year fixed-rate mortgages. In many cases, the rates for these loans have been just above adjustable rate mortgage (ARM) initial rates, which are low for a short period of time, then rise with the market. Because fixed rates have been so attractive, many current homeowners with ARMs are trading them in for a fixed-rate loan.

Computer Programs Rate Borrowers

  • In recent years, lenders have been replacing traditional underwriter's judgments on an applicant's creditworthiness with a computerized credit rating called credit scoring.
  • Both ways of assessing a potential borrower's ability to pay back the loan - the underwriter's judgments and credit scoring - rely on much the same information: salary history, credit history from credit reporting companies, ratio of debts-to-income, etc. But credit scoring uses a computer program designed to predict who will default on a loan. It assigns a numerical score to each factor and then adds them up. Credit scoring is objective and designed to uncover hidden problems. For this reason, credit-scoring programs may assign more importance to some factors that the underwriters would overlook.

If you are interested in learning more about any of these new lending procedures, call or e-mail us. We’ll be happy to assist you.

How should I go about looking for a mortgage broker?

Microscope In today’s increasingly complex mortgage market, some novice borrowers seek the aid of a mortgage broker to find the most favorable interest rate or best terms. But some unscrupulous practices have cropped up among a few brokers. To avoid being ripped off, follow these guidelines in dealing with a mortgage broker:

  • Request referrals Ask reliable sources among real estate professionals and other knowledgeable acquaintances to recommend a good broker. When seeking referrals, ask whether there is any financial incentive from the broker to the person making the referral.
  • Look for a license Most states have licensing requirements and a banking and regulatory agency that keeps track of brokers who violate state codes.
  • Find out about fees Ask the broker for a list of all fees and how variable costs are calculated before entering into an agreement. Unless you have credit problems, the broker's fees should not be over 2% of the loan amount. Get a schedule of the exact fees a few days before closing. Read all paperwork carefully and check the math.
  • Run a comparison check Before talking to the broker, call some national lenders doing business locally and local banks to find out what the current rates and points are so you will know if the broker's are the best you can get.

How strict are lenders when it comes to credit standing?

Report Card Lenders give some leeway for lateness. Is your credit less than perfect? You may still meet a lender’s guidelines for a mortgage. All credit flaws aren’t equal, and some are overlooked more easily by lenders. The most important items are:

  • All bills are current and have been paid on time for at least two years;
  • Mortgage or rent payments are not more than 30 days late;
  • Installment and credit card payments are not more than 60 days late;
  • Charge-offs are resolved before applying for a loan;
  • Old credit card accounts have been closed out;
  • Any late payments have been explained in writing.

What questions should I ask a potential lender?

Bell If you are a first-time home buyer shopping for a loan, here are ten pertinent questions you should ask every loan officer:

  • What types of financing do you handle? VA? FHA? Conventional? Adjustable Rate?
  • What is the total cost of origination and/or application fees?
  • How much are lender's processing fees? (Document review, underwriting fee, document preparation, tax service, etc.)
  • How many points will be charged?
  • What are the loan's interest rate and annual percentage rate (APR)? APR is a combination of interest rate, points, and other charges divided by the loan's term to give an annualized rate.
  • How long will it take to process the loan?
  • Is there a prepayment penalty? You want to be able to pay off the loan upon sale or refinancing of the property without penalty.
  • Can I lock in my interest rate? What lock-in fees are charged?
  • What is the lender's track record?
  • Will the loan be sold? Who will handle servicing? Some people prefer to deal with lenders who are in town and can handle servicing questions and problems.

We have working relationships with many local lenders and, based on our experiences, we can answer many of your questions. Call or e-mail us for invaluable assistance in selecting a potential lender.

What can you tell me about the debt-to-income ratio lenders use to qualify borrowers?

Abacus Many lenders use two ratios when they decide whether to approve a mortgage. If, for example, the ratios are 28/36, 28% means the lender will allow a mortgage payment (including principal, interest, taxes and insurance) of up to 28% of the borrower’s monthly pre-tax income. The 36% means all loan and credit payments cannot exceed 36% of the borrower’s monthly income.

Call or e-mail us for the answers to your questions. As professionals, we’ve helped people find solutions to all kinds of home-buying dilemmas.